EXHIBIT 17.(vi)
BB&T VARIABLE INSURANCE FUNDS
3435 Stelzer Road
Columbus, Ohio 43219-3035
1-800-228-1872
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2006
This Statement of Additional Information ("SAI") describes six diversified
investment portfolios (the "Funds") of BB&T Variable Insurance Funds, a
Massachusetts business trust (the "Trust"). The Funds are the:
- BB&T Large Cap VIF (formerly the Large Cap Value VIF);
- BB&T Capital Manager Equity VIF;
- BB&T Large Cap Growth VIF;
- BB&T Mid Cap Growth VIF;
- BB&T Special Opportunities Equity VIF; and
- BB&T Total Return Bond VIF.
The Trust offers an indefinite number of transferable units of interest
("Shares") of each Fund. Shares of the Funds may be sold to segregated asset
accounts ("Separate Accounts") of insurance companies to serve as the investment
medium for variable life insurance policies and variable annuity contracts
("Variable Contracts") issued by the insurance companies. Shares of the Funds
also may be sold to qualified pension and retirement plans, certain insurance
companies, and the investment adviser or administrator of the Funds. The
Separate Accounts invest in Shares of the Funds in accordance with allocation
instructions received from owners of the Variable Contracts ("Variable Contract
Owners").
This SAI is not a Prospectus and is authorized for distribution only when
preceded or accompanied by a Prospectus of the Funds, dated May 1, 2006, as
supplemented from time to time. This SAI contains more detailed information than
that set forth in Prospectuses and should be read in conjunction with the
Prospectuses. Copies of the Prospectuses may be obtained by writing the Trust at
3435 Stelzer Road, Columbus, Ohio 43219-3035, or by telephoning the toll free
number set forth above.
TABLE OF CONTENTS
INVESTMENT OBJECTIVES AND POLICIES........................................ 3
Additional Information on the Capital Manager Equity VIF's Investment
Policies............................................................ 3
Additional Information on Portfolio Instruments........................ 3
Bank Obligations....................................................... 3
Commercial Paper....................................................... 4
Variable Amount Master Demand Notes.................................... 4
Short-Term Obligations................................................. 4
Corporate Debt Securities.............................................. 4
Short-Term Trading..................................................... 5
Foreign Investments.................................................... 5
Money Market Funds..................................................... 7
Standard & Poor's Depositary Receipts and Other Exchange-Traded Funds.. 7
U.S. Government Obligations............................................ 8
Options Trading........................................................ 8
Supranational Organizational Obligations............................... 9
When-Issued and Delayed-Delivery Securities............................ 9
Mortgage-Related and Asset-Backed Securities........................... 10
Bond Options........................................................... 11
Restricted Securities.................................................. 11
Non-Investment Grade Debt Securities................................... 11
Investments in Municipal Securities.................................... 12
Investment Companies................................................... 12
Lending of Portfolio Securities........................................ 12
Convertible Securities................................................. 12
Repurchase Agreements.................................................. 13
Reverse Repurchase Agreements and Dollar Roll Agreements............... 13
Futures Contracts...................................................... 14
Foreign Currency Transactions.......................................... 14
Foreign Currency Options............................................... 15
Foreign Currency Futures Transactions.................................. 15
INVESTMENT RESTRICTIONS................................................... 16
Portfolio Turnover..................................................... 17
NET ASSET VALUE........................................................... 17
Valuation of the Funds................................................. 18
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................ 18
MANAGEMENT OF THE TRUST................................................... 19
Management Information................................................. 19
Board of Trustees...................................................... 21
Securities Ownership................................................... 22
Trustee Compensation................................................... 22
Investment Adviser..................................................... 24
Investment Sub-Advisers................................................ 25
Proxy Voting Policies and Procedures................................... 31
BB&T Asset Management's Proxy Voting Policies and Procedures........... 31
Sterling Capital's Proxy Policy and Voting Procedures.................. 33
Portfolio Transactions................................................. 39
Federal Banking Law.................................................... 41
Administrator.......................................................... 41
Sub-Administrator...................................................... 42
Expenses............................................................... 42
Custodian, Transfer Agent and Fund Accounting Services................. 42
Independent Registered Public Accounting Firm.......................... 43
Legal Counsel.......................................................... 43
Code of Ethics......................................................... 43
ADDITIONAL INFORMATION.................................................... 43
Description of Shares.................................................. 43
Vote of a Majority of the Outstanding Shares........................... 44
Shareholder and Trustee Liability...................................... 44
Disclosure of Portfolio Holdings....................................... 44
Additional Tax Information............................................. 45
Miscellaneous.......................................................... 51
FINANCIAL STATEMENTS...................................................... 51
APPENDIX.................................................................. 52
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The Trust is an open-end management investment company which currently offers
multiple separate portfolios, each with different investment objectives. This
SAI contains information about the following six diversified Funds which, along
with the "Underlying Funds" described below, are advised by BB&T Asset
Management, Inc. ("BB&T Asset Management" or "Adviser"): the BB&T Large Cap VIF
(the "Large Cap VIF"), the BB&T Capital Manager Equity VIF (the "Capital Manager
Equity VIF"), the BB&T Large Cap Growth VIF (the "Large Cap Growth VIF"), BB&T
Mid Cap Growth VIF (the "Mid Cap Growth VIF"), the BB&T Special Opportunities
Equity VIF (the "Special Opportunities Equity VIF") with Scott & Stringfellow,
Inc. (a "Sub-Adviser") serving as the sub-adviser, and the BB&T Total Return
Bond VIF (the "Total Return Bond VIF") with Sterling Capital Management LLC
(also a "Sub-Adviser") serving as the sub-adviser.
Much of the information contained in this SAI expands upon subjects discussed in
the Prospectuses of the Funds described above. Capitalized terms not defined
herein are defined in such Prospectuses. No investment in a Fund should be made
without first reading the Fund's Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
Certain Funds have non-fundamental investment policies obligating such a Fund to
commit, under normal market conditions, at least 80% of its assets to particular
types of investments suggested by the Fund's name. For purposes of such an
investment policy, "assets" includes the Fund's net assets, as well as any
amounts borrowed for investment purposes. The following information supplements
the investment objectives and policies of the Funds as set forth in the
Prospectus.
ADDITIONAL INFORMATION ON THE CAPITAL MANAGER EQUITY VIF'S INVESTMENT POLICIES
The Capital Manager Equity VIF seeks its investment objective by investing in a
diversified portfolio of one or more of the following funds (the "Underlying
Funds"), all of which are series of the BB&T Funds, an affiliated open-end
management investment company: BB&T Equity Index Fund, the BB&T Large Cap Growth
Fund, the BB&T Large Cap Fund, the BB&T Mid Cap Growth Fund, the BB&T Mid Cap
Value Fund, the BB&T Small Cap Fund, the BB&T International Equity Fund, the
BB&T Short U.S. Government Fund (the "BB&T Short Fund"), the BB&T Intermediate
U.S. Government Fund, the BB&T Total Return Bond Fund, the BB&T Prime Money
Market Fund and the BB&T U.S. Treasury Money Market Fund (the "BB&T U.S.
Treasury Fund"). Accordingly, the investment performance of the BB&T Capital
Manager Equity VIF is directly related to the performance of the Underlying
Funds, which may engage in the investment techniques described below. In
addition to shares of the Underlying Funds, for temporary cash management
purposes, the BB&T Capital Manager Equity VIF may invest in short-term
obligations (with maturities of 12 months or less) consisting of commercial
paper (including variable amount master demand notes) and obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities. These
investments are described below under "Additional Information on Portfolio
Instruments."
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
The following policies supplement the investment objectives and policies of the
Funds and the Underlying Funds as set forth in the Prospectuses.
The BB&T Equity Index Fund, the BB&T Large Cap Growth Fund, the BB&T Large Cap
Fund, the BB&T Mid Cap Growth Fund, the BB&T Mid Cap Value Fund, the BB&T Small
Cap Fund, and the BB&T International Equity Fund (each, an "Underlying Fund" as
defined above) are also referred to herein as the "BB&T Stock Funds."
Bank Obligations. The Funds and the Underlying Funds (except the BB&T U.S.
Treasury Fund) may invest in bank obligations consisting of bankers'
acceptances, certificates of deposit, and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange typically drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Bankers' acceptances invested in by
the Funds and the Underlying Funds will be those guaranteed by domestic and
foreign banks having, at the time of investment, capital, surplus, and undivided
profits in excess of $100,000,000 (as of the date of their most recently
published financial statements).
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or a savings and loan association for a definite
period of time and earning a specified return. Certificates of deposit and time
deposits will be those of domestic and foreign banks and savings and loan
associations, if (a) at the time of investment the depository institution has
capital, surplus, and undivided profits in excess of $100,000,000 (as of the
date of its most recently published financial statements), or (b) the
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principal amount of the instrument is insured in full by the Federal Deposit
Insurance Corporation.
Commercial Paper. Commercial paper consists of unsecured promissory notes issued
by corporations. Except as noted below with respect to variable amount master
demand notes, issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
The Funds and the Underlying Funds (except for the BB&T U.S. Treasury Fund), may
invest in short-term promissory notes (including variable amount master demand
notes) issued by corporations and other entities, such as municipalities, rated
at the time of purchase within the two highest categories assigned by a
nationally recognized statistical rating organization ("NRSRO") (e.g., A-2 or
better by Standard & Poor's Ratings Services ("S&P"), Prime-2 or better by
Moody's Investors Service, Inc. ("Moody's") or F-2 or better by Fitch Investors
Services ("Fitch")) or, if not rated, determined to be of comparable quality to
instruments that are so rated. Note, however, that neither the Large Cap Growth
VIF nor the underlying BB&T Total Return Bond Fund may invest in short-term
promissory notes issued by municipalities. The Large Cap VIF and the BB&T Large
Cap Fund may also invest in Canadian Commercial Paper, which is commercial paper
issued by a Canadian corporation or a Canadian counterpart of a U.S.
corporation, and in Europaper, which is U.S. dollar denominated commercial paper
of a foreign issuer.
Variable Amount Master Demand Notes. Variable amount master demand notes, in
which the Funds and the Underlying Funds (except for the BB&T U.S. Treasury
Fund), may invest, are unsecured demand notes that permit the indebtedness
thereunder to vary and provide for periodic adjustments in the interest rate
according to the terms of the instrument. Because master demand notes are direct
lending arrangements between a Fund or Underlying Fund and the issuer, they are
not normally traded. Although there is no secondary market in the notes, a Fund
or Underlying Fund may demand payment of principal and accrued interest at any
time. While the notes are not typically rated by credit rating agencies, issuers
of variable amount master demand notes (which are normally manufacturing,
retail, financial, and other business concerns) must satisfy the same criteria
as set forth above for commercial paper. BB&T and the Sub-Advisers will consider
the earning power, cash flow, and other liquidity ratios of the issuers of such
notes and will continuously monitor their financial status and ability to meet
payment on demand. In determining dollar weighted average portfolio maturity, a
variable amount master demand note will be deemed to have a maturity equal to
the longer of the period of time remaining until the next interest rate
adjustment or the period of time remaining until the principal amount can be
recovered from the issuer through demand. The period of time remaining until the
principal amount can be recovered under a variable amount master demand note
shall not exceed seven days.
Short-Term Obligations. The Funds and the Underlying Funds (except the BB&T U.S.
Treasury Fund) may invest in high quality, short-term obligations (with
maturities of 12 months or less) such as domestic and foreign commercial paper
(including variable amount master demand notes), bankers' acceptances,
certificates of deposit, demand and time deposits of domestic and foreign
branches of U.S. banks and foreign banks, and repurchase agreements, in order to
acquire interest income combined with liquidity. Such investments will be
limited to those obligations which, at the time of purchase (i) possess one of
the two highest short-term ratings from NRSROs, or (ii) do not possess a rating
(i.e., are unrated) but are determined to be of comparable quality to rated
instruments eligible for purchase. Under normal market conditions, the Large Cap
VIF, the Mid Cap Growth VIF, the Large Cap Growth VIF, the Capital Manager
Equity VIF, and the Underlying Funds will limit their investment in short-term
obligations to 20% of their total assets. For temporary defensive purposes,
these investments may constitute 100% of a Fund's or Underlying Fund's portfolio
and, in such circumstances, will constitute a temporary suspension of its
attempts to achieve its investment objective.
Corporate Debt Securities. The Funds may invest in U.S. dollar-denominated debt
obligations issued or guaranteed by U.S. corporations or U.S. commercial banks,
U.S. dollar-denominated obligations of foreign issuers and debt obligations of
foreign issuers denominated in foreign currencies. Such debt obligations
include, among others, bonds, notes, debentures and variable rate demand notes.
In choosing corporate debt securities on behalf of a Fund, BB&T and the
Sub-Advisers may consider (i) general economic and financial conditions; (ii)
the specific issuer's (a) business and management, (b) cash flow, (c) earnings
coverage of interest and dividends, (d) ability to operate under adverse
economic conditions, (e) fair market value of assets, and (f) in the case of
foreign issuers, unique political, economic or social conditions applicable to
such issuer's country; and, (iii) other considerations deemed appropriate.
As with other fixed-income securities, medium-grade securities are subject to
credit risk and market risk. Market risk relates to changes in a security's
value as a result of changes in interest rates. Credit risk relates to the
ability of the issuer to make payments of principal and interest.
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Medium-grade securities are generally subject to greater credit risk than
comparable higher-rated securities because issuers are more vulnerable to
economic downturns, higher interest rates or adverse issuer-specific
developments. In addition, the prices of medium-grade securities are generally
subject to greater market risk and therefore react more sharply to changes in
interest rates. The value and liquidity of medium-grade securities may be
diminished by adverse publicity and investor perceptions.
Because certain medium-grade securities are traded only in markets where the
number of potential purchasers and sellers, if any, is limited, the ability of
the Fund to sell such securities at their fair market value either to meet
redemption requests or to respond to changes in the financial markets may be
limited.
Particular types of medium-grade securities may present special concerns. The
prices of payment-in-kind or zero-coupon securities may react more strongly to
changes in interest rates than the prices of other medium-grade securities. Some
medium-grade securities in which a Fund may invest may be subject to redemption
or call provisions that may limit increases in market value that might otherwise
result from lower interest rates while increasing the risk that a Fund may be
required to reinvest redemption or call proceeds during a period of relatively
low interest rates.
The credit ratings issued by NRSROs are subject to various limitations. For
example, while such ratings evaluate credit risk, they ordinarily do not
evaluate the market risk of Medium Grade Securities. In certain circumstances,
the ratings may not reflect in a timely fashion adverse developments affecting
an issuer.
After purchase, a security may cease to be rated or its rating may be reduced
below the minimum required for purchase by a Fund. Neither event will require a
sale of such security. However, BB&T Asset Management or the Sub-Advisers will
consider such event in its determination of whether a Fund should continue to
hold the security. A security which has had its rating downgraded or revoked may
be subject to greater risk to principal and income, and often involve greater
volatility of price, than securities in the higher rating categories. Such
securities are also subject to greater credit risks (including, without
limitation, the possibility of default by or bankruptcy of the issuers of such
securities) than securities in higher rating categories.
Short-Term Trading. In order to generate income, the Funds and the Underlying
Funds (except the BB&T U.S. Treasury Fund and BB&T Prime Money Market Fund) may
engage in the technique of short-term trading. Such trading involves the selling
of securities held for a short time, ranging from several months to less than a
day. The object of such short-term trading is to increase the potential for
capital appreciation and/or income of the Large Cap VIF or an Underlying Fund in
order to take advantage of what its adviser or sub-adviser believes are changes
in market, industry or individual company conditions or outlook. Any such
trading would increase the portfolio turnover rate of the Large Cap VIF or
Underlying Fund and its transaction costs.
Foreign Investments. The Funds and the BB&T Stock Funds, may invest in foreign
securities through the purchase of American Depositary Receipts ("ADRs") or the
purchase of securities on domestic or foreign securities exchanges. However,
each of the Funds and the BB&T Stock Funds will not do so if immediately after a
purchase and as a result of the purchase the total value of such foreign
securities owned by such Fund or Underlying Fund would exceed 25% of the value
of its total assets.
From time to time the BB&T International Equity Fund may invest more than 25% of
its total assets in the securities of issuers located in Japan, France, Germany,
and the United Kingdom. Investments of 25% of more of the BB&T International
Equity Fund's total assets in these or any other country will make this
Underlying Fund's performance more dependent upon the political and economic
circumstances of a particular country than a mutual fund that is more widely
diversified among issuers in different countries. For example, in the past,
events in the Japanese economy as well as social developments and natural
disasters have affected Japanese securities and currency markets, and have
periodically disrupted the relationship of the Japanese yen with other
currencies and with the U.S. dollar.
Investment in foreign securities is subject to special investment risks that
differ in some respects from those related to investments in securities of U.S.
domestic issuers. Such risks include political, social or economic instability
in the country of the issuer, the difficulty of predicting international trade
patterns, the possibility of the imposition of exchange controls, expropriation,
limits on removal of currency or other assets, nationalization of assets,
foreign withholding and income taxation, and foreign trading practices
(including higher trading commissions, custodial charges and delayed
settlements). Such securities may be subject to greater fluctuations in price
than securities issued by U.S. corporations or issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. The markets on which such
securities trade may have less volume and liquidity, and may be more volatile
than securities markets in the U.S. In addition, there may be less publicly
available information about a foreign company than about a U.S. domiciled
company. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
U.S. domestic companies. There is generally less government regulation of
securities exchanges,
5
brokers and listed companies abroad than in the U.S. Confiscatory taxation or
diplomatic developments could also affect investment in those countries. In
addition, foreign branches of U.S. banks, foreign banks and foreign issuers may
be subject to less stringent reserve requirements and to different accounting,
auditing, reporting, and recordkeeping standards than those applicable to
domestic branches of U.S. banks and U.S. domestic issuers.
Because foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies, there may be less publicly available information
about a foreign company than about a U.S. company. Volume and liquidity in most
foreign bond markets are less than in the U.S., and securities of many foreign
companies are less liquid and more volatile than securities of comparable U.S.
companies. Fixed commissions on foreign securities exchanges are generally
higher than negotiated commissions on U.S. exchanges, although an Underlying
Fund will endeavor to achieve the most favorable net results on portfolio
transactions. There is generally less government supervision and regulation of
securities exchanges, brokers, dealers and listed companies than in the U.S.,
thus increasing the risk of delayed settlements of portfolio transactions or
loss of certificates for portfolio securities.
Foreign markets also have different clearance and settlement procedures, and in
certain markets, there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Such delays in settlement could result in temporary periods
when a portion of the assets of an Underlying Fund investing in foreign markets
is uninvested and no return is earned thereon. The inability of such an
Underlying Fund to make intended security purchases due to settlement problems
could cause an Underlying Fund to miss attractive investment opportunities.
Losses to an Underlying Fund due to subsequent declines in the value of
portfolio securities, or losses arising out of an inability to fulfill a
contract to sell such securities, could result in potential liability to the
Underlying Fund. In addition, with respect to certain foreign countries, there
is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments which could affect the
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
The BB&T International Equity Fund may invest its assets in countries with
emerging economies or securities markets. Political and economic structures in
many of these countries may be undergoing significant evolution and rapid
development, and these countries may lack the social, political and economic
stability characteristics of more developed countries. Some of these countries
may have in the past failed to recognize private property rights and have at
time nationalized or expropriated the assets of private companies. As a result,
the risks described above, including the risks of nationalization or
expropriation of assets, may be heightened. In addition, unanticipated political
or social developments may affect the value of investments in these countries
and the availability to the BB&T International Equity Fund of additional
investments in emerging market countries. The small size and inexperience of the
securities markets in certain of these countries and the limited volume of
trading in securities in these countries may make investments in the countries
illiquid and more volatile than investments in Japan or most Western European
countries. There may be little financial or accounting information available
with respect to issuers located in certain emerging market countries, and it may
be difficult as a result to assess the value or prospects of an investment in
such issuers. The BB&T International Equity Fund intends to limit its investment
in countries with emerging economies or securities markets to 20% of its total
assets.
In many instances, foreign debt securities may provide higher yields than
securities of domestic issuers which have similar maturities and quality. Under
certain market conditions these investments may be less liquid than the
securities of U.S. corporations and are certainly less liquid than securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. Finally, in the event of a default of any such foreign debt
obligations, it may be more difficult to obtain or to enforce a judgment against
the issuers of such securities.
If a security is denominated in foreign currency, the value of the security to
an Underlying Fund will be affected by changes in currency exchange rates and in
exchange control regulations, and costs will be incurred in connection with
conversions between currencies. Currency risks generally increase in lesser
developed markets. Exchange rate movements can be large and can endure for
extended periods of time, affecting either favorably or unfavorably the value of
an Underlying Fund's assets. The value of the assets of an Underlying Fund as
measured in U.S. dollars may be affected favorably or unfavorably by changes in
foreign currency exchange rates and exchange control regulations.
A change in the value of any foreign currency against the U.S. dollar will
result in a corresponding change in the U.S. dollar value of securities
denominated in that currency. Such changes will also affect the income and
distributions to Shareholders of a Fund or an Underlying Fund investing in
foreign markets. In addition, although an Underlying Fund will receive income on
foreign securities in such currencies, it will be required to compute and
distribute income in U.S. dollars. Therefore, if the exchange rate for any such
6
currency declines materially after income has been accrued and translated into
U.S. dollars, an Underlying Fund could be required to liquidate portfolio
securities to make required distributions. Similarly, if an exchange rate
declines between the time an Underlying Fund incurs expenses in U.S. dollars and
the time such expenses are paid, the amount of such currency required to be
converted into U.S. dollars in order to pay such expenses in U.S. dollars will
be greater.
For many foreign securities, U.S. dollar denominated ADRs, which are traded in
the United States on exchanges or over-the-counter, are issued by domestic
banks. ADRs represent the right to receive securities of foreign issuers
deposited in a domestic bank or a correspondent bank. ADRs do not eliminate all
the risk inherent in investing in the securities of foreign issuers' stock.
However, by investing in ADRs rather than directly in foreign issuers' stock, an
Underlying Fund can avoid currency risks during the settlement period for either
purchase or sales.
In general, there is a large, liquid market in the United States for many ADRs.
The information available for ADRs is subject to the accounting, auditing and
financial reporting standards of the domestic market or exchange on which they
are traded, which standards are more uniform and more exacting than those to
which many foreign issuers may be subject. Certain ADRs, typically those
denominated as unsponsored, require the holders thereof to bear most of the
costs of such facilities, while issuers of sponsored facilities normally pay
more of the costs thereof. The depository of an unsponsored facility frequently
is under no obligation to distribute shareholder communications received from
the issuer of the deposited securities or to pass through the voting rights to
facility holders with respect to the deposited securities, whereas the
depository of a sponsored facility typically distributes shareholder
communications and passes through the voting rights.
The Large Cap Growth VIF, the Mid Cap Growth VIF, and the BB&T International
Equity Fund may invest in both sponsored and unsponsored ADRs, and the BB&T
International Equity Fund may invest in European Depositary Receipts ("EDRs"),
Global Depositary Receipts ("GDRs") and other similar global instruments. EDRs,
which are sometimes referred to as Continental Depositary Receipts, are receipts
issued in Europe, typically by foreign banks and trust companies, that evidence
ownership of either foreign or domestic underlying securities. GDRs are
depositary receipts structured like global debt issues to facilitate trading on
an international basis. Unsponsored ADR, EDR, and GDR programs are organized
independently and without the cooperation of the issuer of the underlying
securities. As a result, available information concerning the issuers may not be
as current as for sponsored ADRs, EDRs, and GDRs, and the prices of unsponsored
depositary receipts may be more volatile than if such instruments were sponsored
by the issuer.
Money Market Funds. The Funds and each of the Underlying Funds (except for the
BB&T U.S. Treasury Fund) may invest up to 5% of the value of its total assets in
the securities of any one money market fund (including shares of certain
affiliated money market funds pursuant to an order from the Securities and
Exchange Commission), provided that no more than 10% of such Fund's or
Underlying Fund's total assets may be invested in the securities of money market
funds in the aggregate. In addition, the BB&T International Equity Fund may
purchase shares of investment companies investing primarily in foreign
securities, including so-called "country funds," which have portfolios
consisting exclusively of securities of issuers located in one country.
In order to avoid the imposition of additional fees as a result of investments
by the Funds and the Underlying Funds (except for the BB&T U.S. Treasury Fund)
in shares of affiliated money market funds, BB&T, BISYS Fund Services ("BISYS"),
and their affiliates will not retain any portion of their usual service fees
that are attributable to investments in shares of the affiliated money market
funds. No sales charges, contingent deferred sales charges, 12b-1 fees, or other
underwriting or distribution fees will be incurred in connection with their
investments in the affiliated money market funds. The Funds and the Underlying
Funds will vote their shares of each of the affiliated money market funds in
proportion to the vote by all other shareholders of such fund. Moreover, neither
the Funds nor any Underlying Fund may own more than 3% of the outstanding shares
of a single affiliated money market fund.
Standard & Poor's Depositary Receipts and Other Exchange-Traded Funds. The Large
Cap VIF, Large Cap Growth VIF, the Mid Cap Growth VIF, Special Opportunities
Equity VIF and the BB&T Stock Funds may invest in Standard & Poor's Depositary
Receipts ("SPDRs"). SPDRs represent interests in trusts sponsored by a
subsidiary of the American Stock Exchange, Inc. and are structured to provide
investors proportionate undivided interests in a securities portfolio
constituting substantially all the common stocks (in substantially the same
weighting) as the component common stocks of a particular Standard & Poor's
Index ("S&P Index"), such as the S&P 500. SPDRs are not redeemable, but are
exchange traded. SPDRs represent interests in an investment company that is not
actively managed, and instead holds securities in an effort to track the
performance of the pertinent S&P Index and not for the purpose of selecting
securities that are considered superior investments. The results of SPDRs will
not replicate exactly the performance of the pertinent S&P Index due to
reductions in the SPDRs' performance attributable to transaction and other
expenses, including fees to service providers, borne by the SPDRs. SPDRs
distribute dividends on a quarterly basis. The Large Cap VIF, the Large Cap
Growth VIF, the Mid Cap Growth VIF or an Underlying Fund must limit investments
in an SPDR to 5% of its
7
total assets and 3% of the outstanding voting securities of the SPDR issuer.
Moreover, the Large Cap VIF, the Large Cap Growth VIF, the Mid Cap Growth VIF's
or Underlying Fund's investments in SPDRs, when aggregated with all other
investments in investment companies, may not exceed 10% of the total assets a
Fund or the Underlying Fund.
The Special Opportunities Equity VIF may also invest in NASDAQ-100 Index
Tracking Stock ("NASDAQ 100s") and Dow Jones DIAMONDS ("Diamonds"), which are
interests in a unit investment trust ("UIT") that may be obtained from the UIT
or purchased in the secondary market. NASDAQ 100s and DIAMONDS are listed on the
American Stock Exchange. The Special Opportunities Equity VIF must limit
investments in SPDR, NASDAQ 100s and DIAMONDS to 5% of its total assets and 3%
of the outstanding voting securities of the Index-Based Investment issuer.
Moreover, the Special Opportunities Equity VIF, investments in SPDR, NASDAQ 100s
and DIAMONDS when aggregated with all other investments in investment companies,
may not exceed 10% of the total assets a Fund.
U.S. Government Obligations. The BB&T U.S. Treasury Fund may invest in U.S.
Government securities to the extent that they are obligations issued or
guaranteed by the U.S. Treasury. The Funds and each of the other Underlying
Funds may invest in obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities, including bills, notes and bonds issued by the
U.S. Treasury, as well as "stripped" U.S. Treasury obligations such as Treasury
Receipts issued by the U.S. Treasury representing either future interest or
principal payments. Stripped securities are issued at a discount to their "face
value," and may exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal and interest are returned to
investors. The stripped Treasury obligations in which the Funds and Underlying
Funds may invest do not include Certificates of Accrual on Treasury Securities
("CATS") or Treasury Income Growth Receipts ("TIGRs").
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as the Government National Mortgage Association ("GNMA"), are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Federal National Mortgage Association ("FNMA"), are supported by the right of
the issuer to borrow from the Treasury; others, such as those of the Student
Loan Marketing Association ("SLMA"), are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; still
others, such as those of the Federal Farm Credit Bank, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law. Each Fund or
Underlying Fund will invest in the obligations of such agencies or
instrumentalities only when BB&T Asset Management or a Sub-Adviser believes that
the credit risk with respect thereto is minimal.
The Funds and the Underlying Funds (except the BB&T Capital Manager Equity, BB&T
U.S. Treasury Fund and the BB&T International Equity Fund) may also invest in
"zero coupon" U.S. Government securities. These securities tend to be more
volatile than other types of U.S. Government securities. Zero coupon securities
are debt instruments that do not pay current interest and are typically sold at
prices greatly discounted from par value. The return on a zero coupon
obligation, when held to maturity, equals the difference between the par value
and the original purchase price.
Options Trading. The Funds and the BB&T Stock Funds may purchase put and call
options on securities. The BB&T International Equity Fund also may purchase put
and call options on foreign currencies, subject to its applicable investment
policies, for the purposes of hedging against market risks related to its
portfolio securities and adverse movements in exchange rates between currencies,
respectively. The Funds may also engage in writing covered call options (options
on securities or currencies owned by the Funds or the BB&T Stock Funds). A call
option gives the purchaser the right to buy, and a writer has the obligation to
sell, the underlying security or foreign currency at the stated exercise price
at any time prior to the expiration of the option, regardless of the market
price or exchange rate of the security or foreign currency, as the case may be.
The premium paid to the writer is consideration for undertaking the obligations
under the option contract. A put option gives the purchaser the right to sell
the underlying security or foreign currency at the stated exercise price at any
time prior to the expiration date of the option, regardless of the market price
or exchange rate of the security or foreign currency, as the case may be. Put
and call options will be valued at the last sale price, or in the absence of
such a price, at the mean between bid and asked price.
When a portfolio security or currency subject to a call option is sold, a Fund
or an Underlying Fund will effect a "closing purchase transaction" -- the
purchase of a call option on the same security or currency with the same
exercise price and expiration date as the call option which the Fund or
Underlying Fund previously has written. If the Fund or Underlying Fund is unable
to effect a closing purchase transaction, it will not be able to sell the
underlying security or currency until the option expires or the Fund or
Underlying Fund delivers the underlying security or currency upon exercise. In
addition, upon the exercise of a call option by the holder thereof, the Fund or
Underlying Fund will forego the potential benefit represented by market
appreciation over the exercise price. Under normal conditions, it is not
expected that the Funds or an Underlying Fund will cause the underlying value of
portfolio securities and/or currencies subject to such options to exceed 25% of
its total assets.
8
When a Fund or an Underlying Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by the Fund or Underlying
Fund is included in the liability section of its statement of assets and
liabilities as a deferred credit. The amount of the deferred credit will be
subsequently marked-to-market to reflect the current value of the option
written. The current value of the traded option is the last sale price or, in
the absence of a sale, the average of the closing bid and asked prices. If an
option expires on the stipulated expiration date, or if a Fund or Underlying
Fund enters into a closing purchase transaction, it will realize a gain (or a
loss if the cost of a closing purchase transaction exceeds the net premium
received when the option is sold) and the deferred credit related to such option
will be eliminated. If an option is exercised, a Fund or Underlying Fund may
deliver the underlying security in the open market. In either event, the
proceeds of the sale will be increased by the net premium originally received a
Fund or Underlying Fund will realize a gain or loss.
The Funds and the BB&T Stock Funds also may purchase index put and call options
and write covered index options. Index options (or options on securities
indices) are similar in many respects to options on securities except that an
index option gives the holder the right to receive, upon exercise, cash instead
of securities, if the closing level of the securities index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option.
Because index options are settled in cash, a call writer cannot determine the
amount of its settlement obligations in advance and, unlike call writing on
specific securities, cannot provide in advance for, or cover, its potential
settlement obligations by acquiring and holding the underlying securities. The
Funds and the BB&T Stock Funds will segregate assets or otherwise cover index
options that would require it to pay cash upon exercise.
Supranational Organizational Obligations. The Funds may purchase debt securities
of supranational organizations such as the European Coal and Steel Community,
the European Economic Community and the World Bank, which are chartered to
promote economic development.
When-Issued and Delayed-Delivery Securities. The Funds and Underlying Funds
(except the BB&T U.S. Treasury Fund) may purchase securities on a "when-issued"
or "delayed-delivery" basis (i.e., for delivery beyond the normal settlement
date at a stated price and yield). In addition, the BB&T Special Opportunities
Equity VIF, BB&T Large Cap Growth VIF, the Large Cap VIF, the Mid Cap Growth
VIF, the BB&T Small Cap Fund, the BB&T International Equity Fund, the BB&T Mid
Cap Growth Fund, the BB&T Mid Cap Value Fund, and the BB&T Prime Money Market
Fund, may sell securities on a "forward commitment" basis. The Funds and
Underlying Funds will engage in when-issued and delayed-delivery transactions
only for the purpose of acquiring portfolio securities consistent with its
investment objective and policies, not for investment leverage. When-issued
securities involve a risk that the yield obtained in the transaction will be
less than that available in the market when delivery takes place. The Funds and
Underlying Funds will not pay for such securities or start earning interest on
them until they are received.
When a Fund or Underlying Fund agrees to purchase securities on a "when-issued"
or "delayed-delivery" basis, its custodian will segregate cash or liquid
securities equal to the amount of the commitment. Normally, the custodian will
set aside securities to satisfy the purchase commitment, and in such a case, a
Fund or Underlying Fund may be required subsequently to segregate additional
assets in order to assure that the value of the segregated assets remains equal
to the amount of its commitment It may be expected that the Fund or Underlying
Fund investing in securities on a when-issued or delayed delivery basis, net
assets will fluctuate to a greater degree when it sets aside securities to cover
such purchase commitments than when it sets aside cash. In addition, because the
Fund or Underlying Fund will set aside cash or liquid securities to satisfy its
purchase commitments in the manner described above, its liquidity and the
ability of its investment adviser to manage it might be affected in the event
its commitments to purchase "when-issued" or "delayed-delivery" securities ever
exceeded 25% of the value of its assets. Under normal market conditions,
however, the Fund's or Underlying Fund's commitment to purchase "when-issued" or
"delayed-delivery" securities will not exceed 25% of the value of the Fund's or
Underlying Fund's total assets.
When a Fund or Underlying Fund engages in "when-issued" or "delayed-delivery"
transactions, it relies on the seller to consummate the trade. Failure of the
seller to do so may result in a Fund or Underlying Fund incurring a loss or
missing the opportunity to obtain a price or yield considered to be
advantageous.
9
Mortgage-Related and Asset-Backed Securities. Investments in these and other
derivative securities will not be made for purposes of leverage or speculation,
but rather primarily for conventional investment or hedging purposes, liquidity,
flexibility and to capitalize on market inefficiencies. Each Fund or Underlying
Fund may, consistent with its investment objective and policies, invest in
mortgage-related securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities. In addition, each may invest in mortgage-related
securities issued by nongovernmental entities, provided, however, that to the
extent a Fund or Underlying Fund purchases mortgage-related securities from such
issuers which may, solely for purposes of the Investment Company Act of 1940, as
amended ("1940 Act"), be deemed to be investment companies, a Fund or Underlying
Fund's investment in such securities will be subject to the limitations on its
investment in investment company securities.
Mortgage-related securities, for purposes of the Funds' Prospectuses and this
SAI, represent pools of mortgage loans assembled for sale to investors by
various governmental agencies such as GNMA and government-related organizations
such as FNMA and the Federal Home Loan Mortgage Corporation ("FHLMC"), as well
as by nongovernmental issuers such as commercial banks, savings and loan
institutions, mortgage bankers and private mortgage insurance companies.
Although certain mortgage-related securities are guaranteed by a third party or
otherwise similarly secured, the market value of the security, which may
fluctuate, is not so secured. If a Fund or Underlying Fund purchases a
mortgage-related security at a premium, that portion may be lost if there is a
decline in the market value of the security whether resulting from changes in
interest rates or prepayments in the underlying mortgage collateral. As with
other interest-bearing securities, the prices of such securities are inversely
affected by changes in interest rates. However, though the value of a
mortgage-related security may decline when interest rates rise, the converse is
not necessarily true, since in periods of declining interest rates the mortgages
underlying the securities are prone to prepayment, thereby shortening the
average life of the security and shortening the period of time over which income
at the higher rate is received. When interest rates are rising, though, the rate
of prepayment tends to decrease, thereby lengthening the period of time over
which income at the lower rate is received. For these and other reasons, a
mortgage-related security's average maturity may be shortened or lengthened as a
result of interest rate fluctuations and, therefore, it is not possible to
predict accurately the security's return. In addition, regular payments received
in respect of mortgage-related securities include both interest and principal.
No assurance can be given as to the return the Funds or Underlying Funds will
receive when these amounts are reinvested.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage related securities
and among the securities that they issue. Mortgage-related securities issued by
GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-related securities issued by FNMA include FNMA
Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of FNMA and are not backed by or entitled to
the full faith and credit of the United States. FNMA is a government-sponsored
organization owned entirely by private stockholders. Fannie Maes are guaranteed
as to the timely payment of the principal and interest by FNMA. Mortgage-related
securities issued by FHLMC include FHLMC Mortgage Participation Certificates
(also known as "Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of
the United States, created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Banks and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to the timely payment of interest, which is guaranteed by
FHLMC. FHLMC guarantees either ultimate collection or the timely payment of all
principal payments on the underlying mortgage loans. When FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
The Funds and each Underlying Fund (except the BB&T Capital Manager Equity Fund,
BB&T U.S. Treasury Fund, the BB&T International Equity Fund, and the BB&T Prime
Money Market Fund) may invest in Collateralized Mortgage Obligation ("CMOs").
CMOs may include stripped mortgage securities. Such securities are derivative
multi-class mortgage securities issued by agencies or instrumentalities of the
U.S. Government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. Stripped
mortgage securities are usually structured with two classes that receive
different proportions of the interest and principal distributions on a pool of
mortgage assets. A common type of stripped mortgage security will have one class
receiving all of the interest from the mortgage assets (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on the securities' yield to maturity. Generally,
the market value of the PO class is unusually volatile in response to changes in
interest rates. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Fund or Underlying Fund may fail to
fully recoup its initial investment in these securities even if the security is
rated in the highest rating category.
10
Like mortgages underlying mortgage-backed securities, automobile sales contracts
or credit card receivables underlying asset-backed securities are subject to
prepayment, which may reduce the overall return to certificate holders.
Nevertheless, principal prepayment rates tend not to vary much with interest
rates, and the short-term nature of the underlying car loans or other
receivables tends to dampen the impact of any change in the prepayment level.
Certificate holders may also experience delays in prepayment on the certificates
if the full amounts due on underlying sales contracts or receivables are not
realized because of unanticipated legal or administrative costs of enforcing the
contracts or because of depreciation or damage to the collateral (usually
automobiles) securing certain contracts, or other factors. In certain market
conditions, asset-backed securities may experience volatile fluctuations in
value and periods of illiquidity. If consistent with its investment objective
and policies, a Fund or Underlying Fund may invest in other asset-backed
securities that may be developed in the future.
Bond Options. The Total Return Bond VIF may purchase put and call options and
write covered put and call options on securities in which that Fund may invest
directly, and that are traded on registered domestic securities exchanges or
that result from separate, privately negotiated transactions with primary U.S.
Government securities dealers recognized by the Board of Governors of the
Federal Reserve System (i.e., over-the-counter (OTC) options).
Restricted Securities. "Section 4(2) securities" are securities which are issued
in reliance on the "private placement" exemption from registration which is
afforded by section 4(2) of the Securities Act of 1933 (the "1933 Act"). The
BB&T Prime Money Market Fund will not purchase section 4(2) securities which
have not been determined to be liquid in excess of 10% of its net assets. The
Funds and the Underlying BB&T Funds (other than the BB&T U.S. Treasury Fund)
will not purchase section 4(2) securities which have not been determined to be
liquid in excess of 15% of its net assets. Section 4(2) securities are
restricted as to disposition under the federal securities laws, and generally
are sold to institutional investors such as the Funds or Underlying Funds which
agree that they are purchasing the securities for investment and not with a view
to public distribution. Any resale must also generally be made in an exempt
transaction. Section 4(2) securities are normally resold to other institutional
investors through or with the assistance of the issuer or investment dealers who
make a market in such section 4(2) securities, thus providing liquidity. BB&T,
the Sub-Advisers and each sub-adviser to an Underlying BB&T Fund has been
delegated the day-to-day authority to determine whether a particular issue of
section 4(2) securities, including those eligible for resale under Rule 144A
under the 1933 Act, should be treated as liquid. Rule 144A provides a
safe-harbor exemption from the registration requirements of the 1933 Act for
resales to "qualified institutional buyers" as defined in Rule 144A. With the
exception of registered broker-dealers, a qualified institutional buyer must
generally own and invest on a discretionary basis at least $100 million in
securities.
BB&T Asset Management or the Sub-Advisers may deem section 4(2) securities
liquid if it believes that, based on the trading markets for such security, such
security can be disposed of within seven days in the ordinary course of business
at approximately the amount at which the Funds or Underlying Fund has valued the
security. In making such determination, the following factors, among others, may
be deemed relevant: (i) the credit quality of the issuer; (ii) the frequency of
trades and quotes for the security; (iii) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers; (iv)
dealer undertakings to make a market in the security; and (v) the nature of the
security and the nature of market-place trades.
Treatment of section 4(2) securities as liquid could have the effect of
decreasing the level of the Large Cap VIF's or Underlying Fund's liquidity to
the extent that qualified institutional buyers become, for a time, uninterested
in purchasing these securities.
Non-Investment Grade Debt Securities. The Funds may invest in debt securities
rated below investment grade, also known as junk bonds. These securities are
regarded as predominately speculative. Securities rated below investment grade
generally provide a higher yield than higher rated securities of similar
maturity, but are not subject to a great degree of risk that the issue may not
be able to make principal and interest payments. Issuers of these securities may
not be as strong financially as those issuing higher rated securities. Such high
yield issuers may include smaller, less creditworthy companies or highly
indebted firms.
The value of high yield securities may fluctuate more than the value of higher
rated securities, since high yield securities tend to reflect short-term
corporate and market developments to a greater extent than higher rated
securities. Thus, periods of economic uncertainty and change can result in the
increased volatility of market prices of high yield bonds and of the Fund's net
asset value. Additional risks of high yield securities include limited liquidity
and secondary market support. As a result, the prices of high yield securities
may decline rapidly in the event that a significant number of holders decide to
sell. Issuers of high yield securities also are more vulnerable to real or
perceived economic changes, political changes or adverse developments specific
to the issuer. A projection of an economic downturn, for example, could cause
the price of these securities to decline because a recession could lessen the
ability of a highly leveraged company to make principal and interest payments on
its debt securities. In the event of a default, a Fund would experience a
decline in the value of its investment. In addition, a long-term track record on
bond default rates, such as that for investment grade corporate bonds, does not
exist for the high yield market. It may be that future default rates on
high-yield bonds will be more widespread and higher than in the past, especially
during periods of deteriorating economic conditions.
11
The market prices of debt securities generally fluctuate with changes in
interest rates so that these Funds' net asset values can be expected to decrease
as long-term interest rates rise and to increase as long-term rates fall. The
market prices of high yield securities structured as zero coupon or pay-in-kind
securities are generally affected to a greater extent by interest rate changes
and tend to be more volatile than securities which pay interest periodically.
Credit quality in the high yield market can change suddenly and unexpectedly,
and even recently-issued credit ratings may not fully reflect the actual risks
posed by a particular high-yield security. The Total Return Bond VIF will limit
its investments in non-investment grade securities to 25% of its total assets.
Subject to SEC restrictions, a Fund may invest in such securities by investing
in investment companies that primarily invest in non-investment grade
securities.
Investments in Municipal Securities. The Total Return Bond VIF may, when deemed
appropriate by BB&T and consistent with the investment objective of the Fund,
invest in obligations of state and local governmental issuers which carry
taxable yields that are comparable to yields of other fixed income instruments
of comparable quality, or which BB&T believes offer the potential for capital
appreciation. Municipal obligations may include bonds which may be categorized
as either "general obligation" or "revenue" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue bonds are secured by the net
revenue derived from a particular facility or group of facilities or, in some
cases, the proceeds of a special excise or other specific revenue source, but
not by the general taxing power of the issuer.
The Total Return Bond VIF may also invest in municipal notes rated at least
MIG-1 by Moody's or SP-1 by S&P. Municipal notes will consist of tax
anticipation notes, bond anticipation notes, revenue anticipation notes and
construction loan notes. Notes sold as interim financing in anticipation of
collection of taxes, a bond sale or receipt of other revenues are usually
general obligations of the issuer.
The Fund also may invest in municipal commercial paper, provided such commercial
paper is rated at least "Prime-1" by Moody's or "A-1" by S&P or, if unrated, is
of comparable investment quality as determined by BB&T.
The Total Return Bond VIF may also invest in taxable municipal obligations.
Taxable municipal obligations are typically issued by municipalities or their
agencies for purposes which do not qualify for federal tax exemption, but do
qualify for state and local tax exemption ("Taxable Municipal Obligations").
These debt obligations are issued to finance the cost of buying, building or
improving various projects, such as sporting facilities, health care facilities,
housing projects, electric, water and sewer utilities, and colleges or
universities. Generally, payments on these debt obligations depend on the
revenues generated by the projects, excise taxes or state appropriations, or the
debt obligations can be backed by the government's taxing power. Due to federal
taxation, Taxable Municipal Obligations offer yields more comparable to other
taxable sectors such as corporate bonds or agency bonds than to other municipal
obligations. These debt obligations are federally taxable to individuals but may
be exempt from state and local taxes.
Investment Companies. The Funds may invest in securities issued by other
investment companies, including, but not limited to, money market investment
companies, within the limits prescribed by the 1940 Act, and also may invest in
other types of pooled investment vehicles. As a shareholder of another
investment company or pooled investment vehicle, a Fund would bear, along with
other shareholders, its pro rata portion of the expenses of such other
investment company or pooled investment vehicle, including advisory fees. These
expenses would be in addition to the advisory and other expenses that a Fund
bears directly in connection with its own operations, and may represent a
duplication of fees to Shareholders of a Fund.
Lending of Portfolio Securities. In order to generate additional income the
Funds and Underlying Funds may, from time to time, lend portfolio securities to
broker-dealers, banks or institutional borrowers of securities. The Funds and
Underlying Funds must receive 100% collateral in the form of cash or U.S.
Government securities. This collateral must be valued daily, and should the
market value of the loaned securities increase, the borrower must furnish
additional collateral to the lender. During the time portfolio securities are on
loan, the borrower pays the lender any dividends or interest paid on such
securities. Loans are subject to termination by the lender or the borrower at
any time. While the Funds and Underlying Funds do not have the right to vote
securities on loan, each intends to terminate the loan and regain the right to
vote if that is considered important with respect to the investment. In the
event the borrower defaults on its obligation to a Fund or Underlying Fund, it
could experience delays in recovering its securities and possible capital
losses. The Funds and Underlying Funds will only enter into loan arrangements
with broker-dealers, banks or other institutions determined to be creditworthy
under guidelines established by the relevant Board of Trustees that permit a
Fund or Underlying Fund to loan up to 33 1/3% of the value of its total assets.
Convertible Securities. The Funds and Underlying Funds (except the BB&T Prime
Money Market Fund, the BB&T U.S. Treasury Fund, the BB&T Short Fund, and the
BB&T Intermediate Fund) may invest in convertible securities. Convertible
securities are fixed
12
income securities that may be exchanged or converted into a predetermined number
of the issuer's underlying common stock at the option of the holder during a
specified time period. Convertible securities may take the form of convertible
preferred stock, convertible bonds or debentures, units consisting of "usable"
bonds and warrants or a combination of the features of several of these
securities. The Funds and Underlying Funds will invest in convertible securities
that are rated "BBB" or "Baa" or higher.
Securities rated "BB" or "Ba" or lower either have speculative characteristics
or are speculative with respect to capacity to pay interest and repay principal
in accordance with the terms of the obligations. There is no lower limit with
respect to rating categories for convertible securities in which the Large Cap
VIF may invest. Corporate debt obligations are "investment grade" if they are
rated "BBB" or higher by S&P or "Baa" or higher by Moody's or, if unrated, are
determined to be of comparable quality. Debt obligations that are not determined
to be investment grade are high yield, high risk bonds, typically subject to
greater market fluctuations and greater risk of loss of income and principal due
to an issuer's default. To a greater extent than investment grade securities,
lower rated securities tend to reflect short-term corporate, economic and market
developments, as well as investor perceptions of the issuer's credit quality.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The market prices of debt securities also generally fluctuate with changes in
interest rates. In addition, the secondary trading market for high yield
securities may be less liquid than the market for higher grade securities. In
addition, lower rated securities may be more difficult to dispose of or to value
than high-rated, lower-yielding securities.
Convertible bonds and convertible preferred stocks are fixed income securities
that generally retain the investment characteristics of fixed income securities
until they have been converted but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed income of a bond
or the dividend preference of a preferred stock until the holder elects to
exercise the conversion privilege. Usable bonds are corporate bonds that can be
used in whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock.
When owned as part of a unit along with warrants, which are options to buy the
common stock, they function as convertible bonds, except that the warrants
generally will expire before the bond's maturity. Convertible securities are
senior to equity securities, and, therefore, have a claim to assets of the
corporation prior to the holders of common stock in the case of liquidation.
However, convertible securities are generally subordinated to similar
non-convertible securities of the same company. The interest income and
dividends from convertible bonds and preferred stocks provide a stream of income
with generally higher yields than common stocks, but lower than non-convertible
securities of similar quality.
A Fund will exchange or convert the convertible securities held in its portfolio
into shares of the underlying common stock in instances in which, in the opinion
of the adviser, or sub-adviser, the investment characteristics of the underlying
common shares will assist the Fund in achieving its investment objective.
Otherwise, a Fund will hold or trade the convertible securities. In selecting
convertible securities for the Fund, the adviser or sub-adviser evaluates the
investment characteristics of the convertible security as a fixed income
instrument, and the investment potential of the underlying equity security for
capital appreciation. In evaluating these matters with respect to a particular
convertible security, the adviser or sub-adviser may consider numerous factors,
including the economic and political outlook, the value of the security relative
to other investment alternatives, trends in the determinants of the issuer's
profits, and the issuer's management capability and practices.
As with all fixed income securities, the market values of convertible securities
tend to increase when interest rates decline and, conversely, tend to decline
when interest rates increase.
Repurchase Agreements. Securities held by the Funds and Underlying Funds may be
subject to repurchase agreements. Under the terms of a repurchase agreement, a
Fund or Underlying Fund would acquire securities from member banks of the
Federal Deposit Insurance Corporation and registered broker-dealers that BB&T
Asset Management or a Sub-Adviser deems creditworthy, subject to the seller's
agreement to repurchase such securities at a mutually agreed-upon date and
price, which includes interest negotiated on the basis of current short-term
rates. The seller under a repurchase agreement will be required to maintain at
all times the value of collateral held pursuant to the agreement at not less
than the repurchase price (including accrued interest). If the seller were to
default on its repurchase obligation or become insolvent, a Fund or Underlying
Fund holding such obligation would suffer a loss to the extent that the proceeds
from a sale of the underlying portfolio securities were less than the repurchase
price under the agreement. Securities subject to repurchase agreements will be
held by a Fund's or Underlying Fund's custodian or another qualified custodian,
as appropriate, or in the Federal Reserve/Treasury book-entry system.
Reverse Repurchase Agreements and Dollar Roll Agreements. The Funds and
Underlying Funds may also enter into reverse repurchase agreements and dollar
roll agreements in accordance with applicable investment restrictions. Pursuant
to such reverse repurchase agreements, a Fund or Underlying Fund would sell
certain of its securities to financial institutions such as banks and
13
broker-dealers, and agree to repurchase them, or substantially similar
securities in the case of a dollar roll agreement, at a mutually agreed upon
date and price. A dollar roll agreement is analogous to a reverse repurchase
agreement, with a Fund or Underlying Fund selling mortgage-backed securities for
delivery in the current month and simultaneously contracting to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. At the time a Fund or Underlying Fund enters into a reverse
repurchase agreement or dollar roll agreement, it will place in a segregated
custodial account assets such as U.S. Government securities or other liquid
securities consistent with its investment restrictions having a value equal to
the repurchase price (including accrued interest), and will subsequently
continually monitor the account to ensure that such equivalent value is
maintained at all times. Reverse repurchase agreements and dollar roll
agreements involve the risk that the market value of securities to be purchased
by a Fund or Underlying Fund may decline below the price at which it is
obligated to repurchase the securities, or that the other party may default on
its obligation, so that a Fund or Underlying Fund is delayed or prevented from
completing the transaction.
Futures Contracts. The Funds and Underlying Funds (other than the U.S. Treasury
Money Market Fund and the Prime Money Market Fund) may invest in futures
contracts and options thereon (interest rate futures contracts or index futures
contracts, as applicable). The value of a Fund's contracts may approach, but
will not exceed, 100% of the Fund's total net assets.
The Funds or Underlying Funds may engage in such futures contracts in an effort
to hedge against market risks and to manage its cash position, but not for
leveraging purposes. This investment technique is designed primarily to hedge
against anticipated future changes in market conditions or foreign exchange
rates which otherwise might adversely affect the value of securities which a
Fund or Underlying Fund holds or intends to purchase. For example, when interest
rates are expected to rise or market values of portfolio securities are expected
to fall, the Funds or Underlying Funds can seek through the sale of futures
contracts to offset a decline in the value of its portfolio securities. When
interest rates are expected to fall or market values are expected to rise, a
Fund or Underlying Fund, through the purchase of such contracts, can attempt to
secure better rates or prices than might later be available in the market when
it effects anticipated purchases.
The acquisition of put and call options on futures contracts will, respectively,
give the Funds or Underlying Funds the right (but not the obligation), for a
specified price, to sell or to purchase the underlying futures contract, upon
exercise of the option, at any time during the option period.
Futures transactions involve brokerage costs and require the Funds or Underlying
Funds to segregate liquid assets, such as cash, U.S. Government securities or
other liquid securities to cover its obligation under such contracts. A Fund or
an Underlying Fund may lose the expected benefit of futures transactions if
interest rates, securities prices or foreign exchange rates move in an
unanticipated manner. Such unanticipated changes may also result in poorer
overall performance than if the Funds or Underlying Funds had not entered into
any futures transactions. In addition, the value of a Fund's or Underlying
Fund's futures positions may not prove to be perfectly or even highly correlated
with the value of its portfolio securities and foreign currencies, limiting the
Fund's or Underlying Fund's ability to hedge effectively against interest rate,
foreign exchange rate and/or market risk and giving rise to additional risks.
There is no assurance of liquidity in the secondary market for purposes of
closing out futures positions.
Pursuant to claims for exemption filed with the Commodity Futures Trading
Commission ("CFTC") and/or the National Futures Association on behalf of the
Funds and the Adviser, the Funds and the Adviser are not deemed to be a
"commodity pool" or "commodity pool operator" under the Commodity Exchange Act
and are not subject to registration or regulation as such under the Commodity
Exchange Act. By virtue of changes to CFTC regulations, the substantive
limitations set forth in the Funds' exemption filing with respect to their use
of futures contracts are no longer applicable.
Foreign Currency Transactions. The value of the assets of the BB&T International
Equity Fund, as measured in U.S. dollars, may be affected favorably or
unfavorably by changes in foreign currency exchange rates and exchange control
regulations, and the Underlying Fund may incur costs in connection with
conversions between various currencies. The BB&T International Equity Fund will
conduct foreign currency exchange transactions either on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market, or
through forward contracts to purchase or sell foreign currencies. A forward
foreign currency exchange contract ("forward currency contract") involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These forward currency
contracts are traded directly between currency traders (usually large commercial
banks) and their customers. The BB&T International Equity Fund may enter into
forward currency contracts in order to hedge against adverse movements in
exchange rates between currencies.
14
By entering into a forward currency contract in U.S. dollars for the purchase or
sale of the amount of foreign currency involved in an underlying security
transaction, the BB&T International Equity Fund is able to protect itself
against a possible loss between trade and settlement dates resulting from an
adverse change in the relationship between the U.S. dollar and such foreign
currency. However, this tends to limit potential gains which might result from a
positive change in such currency relationships. The BB&T International Equity
Fund may also hedge foreign currency exchange rate risk by engaging in a
currency financial futures and options transactions, which are described below.
The forecasting of short-term currency market movements is extremely difficult
and whether such a short-term hedging strategy will be successful is highly
uncertain.
It is impossible to forecast with precision the market value of portfolio
securities at the expiration of a forward currency contract. Accordingly, it may
be necessary for the BB&T International Equity Fund to purchase additional
currency on the spot market if the market value of the security is less than the
amount of foreign currency such Underlying Fund is obligated to deliver when a
decision is made to sell the security and make delivery of the foreign currency
in settlement of a forward contract. Conversely, it may be necessary to sell on
the spot market some of the foreign currency received upon the sale of the
portfolio security if its market value exceeds the amount of foreign currency
such Underlying Fund is obligated to deliver.
If the BB&T International Equity Fund retains the portfolio security and engages
in an offsetting transaction, it will incur a gain or a loss to the extent that
there has been movement in forward currency contract prices. If the BB&T
International Equity Fund engages in an offsetting transaction, it may
subsequently enter into a new forward currency contract to sell the foreign
currency. Although such contracts tend to minimize the risk of loss due to a
decline in the value of the hedged currency, they also tend to limit any
potential gain which might result should the value of such currency increase.
The BB&T International Equity Fund will have to convert their holdings of
foreign currencies into U.S. dollars from time to time. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies.
The BB&T International Equity Fund's custodian bank segregates cash or liquid
securities in an amount not less than the value of the Underlying Fund's total
assets committed to forward currency contracts entered into for the purchase of
a foreign security. If the value of the securities segregated declines,
additional cash or securities are added so that the segregated amount is not
less than the amount of the Underlying Fund's commitments with respect to such
contracts. The BB&T International Equity Fund generally does not enter into a
forward contract with a term longer than one year.
Foreign Currency Options. A foreign currency option provides the BB&T
International Equity Fund, as the option buyer, with the right to buy or sell a
stated amount of foreign currency at the exercise price at a specified date or
during the option period. A call option gives its owner the right, but not the
obligation, to buy the currency, while a put option gives its owner the right,
but not the obligation, to sell the currency. The option seller (writer) is
obligated to fulfill the terms of the option sold if it is exercised. However,
either seller or buyer may close its position during the option period in the
secondary market for such options any time prior to expiration.
A call rises in value if the underlying currency appreciates. Conversely, a put
rises in value if the underlying currency depreciates. While purchasing a
foreign currency option can protect the BB&T International Equity Fund against
an adverse movement in the value of a foreign currency, it does not limit the
gain which might result from a favorable movement in the value of such currency.
For example, if the BB&T International Equity Fund was holding securities
denominated in an appreciating foreign currency and had purchased a foreign
currency put to hedge against a decline in the value of the currency, it would
not have to exercise its put.
Similarly, if the BB&T International Equity Fund has entered into a contract to
purchase a security denominated in a foreign currency and had purchased a
foreign currency call to hedge against a rise in the value of the currency but
instead the currency had depreciated in value between the date of purchase and
the settlement date, the BB&T International Equity Fund would not have to
exercise its call but could acquire in the spot market the amount of foreign
currency needed for settlement.
Foreign Currency Futures Transactions. As part of its financial futures
transactions, the BB&T International Equity Fund may use foreign currency
futures contracts and options on such futures contracts. Through the purchase or
sale of such contracts, an Underlying Fund may be able to achieve many of the
same objectives as through forward foreign currency exchange contracts more
effectively and possibly at a lower cost.
Unlike forward foreign currency exchange contracts, foreign currency futures
contracts and options on foreign currency futures contracts are standardized as
to amount and delivery period and may be traded on boards of trade and
commodities exchanges or directly with a dealer which makes a market in such
contracts and options. It is anticipated that such contracts may provide greater
liquidity and lower cost than forward foreign currency exchange contracts.
15
INVESTMENT RESTRICTIONS
The following investment restrictions may be changed with respect to a
particular Fund only by a vote of a majority of the outstanding Shares of that
Fund (as defined under "ADDITIONAL INFORMATION -- Vote of a Majority of the
Outstanding Shares" in this SAI). Unless expressly designated as fundamental,
all policies and procedures of the Funds may be changed by the Board of Trustees
without shareholder approval.
None of the Funds will:
1. Purchase any securities which would cause more than 25% of the value of
the Fund's total assets at the time of purchase to be invested in securities of
one or more issuers conducting their principal business activities in the same
industry, provided that: (a) there is no limitation with respect to obligations
issued or guaranteed by the U.S. Government or its agencies or instrumentalities
and repurchase agreements secured by obligations of the U.S. Government or its
agencies or instrumentalities; (b) wholly owned finance companies will be
considered to be in the industries of their parents if their activities are
primarily related to financing the activities of their parents; (c) the Capital
Manager Equity VIF may invest more than 25% of its total assets in investment
companies, or portfolios thereof, that are Underlying Funds of such Fund; and
(d) utilities will be divided according to their services. For example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry;
2. Purchase securities of any one issuer, other than obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities, if,
immediately after such purchase, more than 5% of the value of the Fund's total
assets would be invested in such issuer, or the Fund would hold more than 10% of
the outstanding voting securities of the issuer, except that 25% or less of the
value of a Fund's total assets may be invested without regard to such
limitations. There is no limit to the percentage of assets that may be invested
in U.S. Treasury bills, notes, or other obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities. There is no limit to the
percentage of assets that the Capital Manager Equity VIF may invest in any
investment company;
3. Borrow money or issue senior securities, except that a Fund may borrow
from banks or brokers, in amounts up to 10% of the value of its total assets at
the time of such borrowing. A Fund will not purchase securities while its
borrowings exceed 5% of its total assets;
4. Make loans, except that a Fund may purchase or hold debt instruments and
lend portfolio securities (in an amount not to exceed one-third of its total
assets), in accordance with its investment objective and policies, make time
deposits with financial institutions and enter into repurchase agreements;
5. Underwrite the securities issued by other persons, except to the extent
that a Fund may be deemed to be an underwriter under certain securities laws in
the disposition of "restricted securities";
6. Purchase or sell commodities or commodities contracts, except to the
extent disclosed in the current Prospectus of the Fund; and
7. Purchase or sell real estate (although investments in marketable
securities of companies engaged in such activities and securities secured by
real estate or interests therein, or in Underlying Funds investing in such
securities, are not prohibited by this restriction).
The following additional investment restrictions are not fundamental policies
and therefore may be changed without the vote of a majority of the outstanding
Shares of a Fund. None of the Funds may:
1. Engage in any short sales (except for short sales "against the box");
2. Purchase securities of other investment companies, except (a) in
connection with a merger, consolidation, acquisition or reorganization, (b) to
the extent permitted by the 1940 Act or pursuant to any exemptions therefrom,
and (c) as consistent with the investment policies of the Capital Manager Equity
VIF;
3. Mortgage or hypothecate the Fund's assets in excess of one-third of the
Fund's total assets; and
4. Purchase or otherwise acquire any securities if, as a result, more than
15% of the Fund's net assets would be invested in securities that are illiquid.
16
If any percentage restriction described above is satisfied at the time of
purchase, a later increase or decrease in such percentage resulting from a
change in net asset value will not constitute a violation of such restriction.
However, should a change in net asset value or other external events cause a
Fund's investments in illiquid securities to exceed the limitation set forth in
such Fund's Prospectus, that Fund will act to cause the aggregate amount of
illiquid securities to come within such limit as soon as reasonably practicable.
In such an event, however, that Fund would not be required to liquidate any
portfolio securities where the Fund would suffer a loss on the sale of such
securities.
Due to the investment policies of the Capital Manager Equity VIF, this Fund will
concentrate more than 25% of its total assets in the investment company
industry. However, no Underlying Fund in which such Fund invests (except the
Prime Money Market Fund) may concentrate more than 25% of its total assets in
any one industry.
PORTFOLIO TURNOVER
The portfolio turnover rate of the Capital Manager Equity VIF is expected to be
low, as such Fund will purchase or sell shares of the Underlying Funds, to (i)
accommodate purchases and sales of such Fund's Shares, and (ii) change the
percentage of its assets invested in each Underlying Fund in which it invests in
response to market conditions.
The portfolio turnover rate for each of the Funds is calculated by dividing the
lesser of a Fund's purchases or sales of portfolio securities for the year by
the monthly average value of the securities. The Securities and Exchange
Commission requires that the calculation exclude all securities whose remaining
maturities at the time of acquisition are one year or less.
For the fiscal years ended December 31, 2005, the portfolio turnover rates
for each of the Funds with a full year of operations in the subject fiscal years
were as follows:
FUND 2005 (%)
---- --------
Capital Manager Equity VIF 3.24
Large Cap VIF 21.76
Large Cap Growth VIF 91.61
Mid Cap Growth VIF 113.04
Special Opportunities Equity VIF 42.15
Total Return Bond VIF 196.66
Changes may be made in a Fund's portfolio consistent with the investment
objective and policies of the Fund whenever such changes are believed to be in
the best interests of the Fund and its Shareholders. The portfolio turnover
rates for all of the Funds may vary greatly from year to year as well as within
a particular year, and may be affected by cash requirements for redemptions of
Shares. High portfolio turnover rates will generally result in higher
transaction costs to a Fund, including brokerage commissions. Each Fund will be
managed without regard to its portfolio turnover rate. The portfolio turnover
rate for the Total Return Bond VIF increased from 37% (for the period July 22,
2004 to December 31, 2004) to 197% (for the fiscal year January 1, 2005 through
December 31, 2005). Sterling Capital Management LLC began acting as sub-adviser
to the Total Return Bond VIF in July 2004 and reviewed the portfolio holdings at
that time. Greater than normal turnover resulted from a realignment of portfolio
holdings. In addition, the BB&T Total Return Bond VIF is actively managed, so
there is no guarantee that the portfolio turnover rate will be lower in future
periods.
NET ASSET VALUE
The net asset value of each Fund is determined and the Shares of each Fund are
priced as of the close of the New York Stock Exchange, Inc. ("NYSE") (generally
4:00 p.m. Eastern Time) on each Business Day of the Trust (other than a day on
which there are insufficient changes in the value of a Fund's portfolio
securities to materially affect the Fund's net asset value or a day on which no
Shares of the Fund are tendered for redemption and no order to purchase any
Shares is received). A "Business Day" is a day on which
17
the NYSE is open for trading. Currently, the NYSE is closed on the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
VALUATION OF THE FUNDS
Portfolio securities, the principal market for which is a securities exchange,
generally will be valued at the closing price on that exchange on the day of
computation, or, absent such a price, by reference to the latest available bid
prices in the principal market in which such securities are normally traded.
Portfolio securities, the principal market for which is not a securities
exchange, generally will be valued at their latest bid quotations in such
principal market. For NASDAQ/NMS traded securities, market value may also be
determined on the basis of the Nasdaq Official Closing Price (NOCP) instead of
the closing price. Foreign securities generally are valued based on quotations
from the primary market in which they are traded and are translated from the
local currency into U.S. dollars using current exchange rates. The value of
foreign securities may be affected significantly on a day that the NYSE is
closed and an investor is unable to purchase or redeem Shares. Shares of
investment companies are valued at the most recently calculated net asset value.
Closed end mutual funds are valued at their market values based upon the latest
available sales price or, absent such a price, by reference to the latest
available bid prices in the principal market in which such securities are
normally traded. Short-term securities are valued at either amortized cost or
original cost plus accrued interest, which approximates current value.
All other assets and securities, including securities for which market
quotations are not readily available, will be valued at their fair market value
as determined in good faith under the general supervision of the Board of
Trustees. If a significant market event impacting the value of a portfolio
security occurs subsequent to the close of trading in the security, but prior to
the calculation of a Fund's net asset value per share, market quotations for
that security may not be readily available. If the impact of such a significant
market event materially affects the net asset value per share of a Fund, an
affected portfolio security will be valued at fair market value as determined in
good faith under the general supervision of the Board of Trustees.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Shares of each Fund are sold on a continuous basis. The public offering
price of Shares of the Funds is their net asset value per Share.
The Trust may suspend the right of redemption or postpone the date of payment
for Shares during any period when (a) trading on the NYSE is restricted by
applicable rules and regulations of the Securities and Exchange Commission, (b)
the NYSE is closed for other than customary weekend and holiday closings, (c)
the Securities and Exchange Commission has by order permitted such suspension,
or (d) an emergency exists as a result of which (i) disposal by the Trust of
securities owned by it is not reasonably practical or (ii) it is not reasonably
practical for the Trust to determine the fair market value of its net assets.
Shares may be redeemed without charge on any day that net asset value is
calculated. All redemption orders are effected at the net asset value per Share
next determined after receipt of a redemption request. Payment for Shares
redeemed normally will be made within seven days.
The Trust intends to pay cash for all Shares redeemed, but under abnormal
conditions which make payment in cash unwise, payment may be made wholly or
partly in portfolio securities at their then market value equal to the
redemption price. In such cases, a Shareholder may incur brokerage costs in
converting such securities to cash.
Variable Contract Owners do not deal directly with the Funds to purchase,
redeem, or exchange Shares, and Variable Contract Owners should refer to the
prospectus for the applicable Separate Account for information on the allocation
of premiums and on transfers of accumulated value among sub-accounts of the
pertinent Separate Account that invests in the Funds.
Each Fund reserves the right to discontinue offering Shares at any time, or to
cease investment operations entirely.
18
MANAGEMENT OF THE TRUST
MANAGEMENT INFORMATION
The names of the Trustees, their addresses, ages, positions, principal
occupation(s) during the past five years, number of portfolios in the fund
complex overseen, and other directorships held by each Trustee and executive
officer who is an "interested person" (as defined in the 1940 Act) and each
non-interested Trustee are set forth below:
Trustees
NUMBER OF
PORTFOLIOS
TERM OF IN FUND OTHER
NAME, ADDRESS, AND POSITION(s) OFFICE AND PRINCIPAL COMPLEX TRUSTEESHIPS
DATE OF BIRTH HELD WITH LENGTH OF OCCUPATION(s) DURING OVERSEEN BY HELD BY
NON-INTERESTED TRUSTEES TRUST TIME SERVED PAST 5 YEARS TRUSTEE** TRUSTEE
----------------------- ------------ --------------- -------------------------- ----------- ------------
Thomas W. Lambeth Trustee and Indefinite, From January 2001 to 30 None
700 Yorkshire Road Chairman of 02/05 - Present present, Senior Fellow,
Winston-Salem, NC 27106 the Board of Z. Smith Reynolds
Birthdate: 01/35 Trustees Foundation; from 1978 to
Age: 71 January 2001, Executive
Director, Z. Smith
Reynolds Foundation.
Drew T. Kagan Trustee Indefinite, From December 2003 to 30 None
Montecito Advisors, Inc. 02/05 - Present present, President and
810 N. Jefferson St., Director, Montecito
Suite 101. Advisors, Inc.; from
Lewisburg, WV 24901 March 1996 to December
Birthdate: 02/48 2003, President,
Age: 58 Investment Affiliate, Inc.
Laura C. Bingham Trustee Indefinite, From July 1998 to 30 None
Peace College 02/05 - Present present, President of
Office of the President Peace College.
15 East Peace Street
Raleigh, NC 27604-1194
Birthdate: 11/56
Age: 49
Douglas R. Van Scoy Trustee Indefinite Retired; From 30 None
841 Middle St 02/05 - present November 1974 to
Sullivans Island, SC 26481 July 2001, Deputy
19
Birthdate: 11/43 Director of Private
Age: 62 Client Group and
Senior Executive
Vice President of
Smith Barney
(investment banking).
James L. Roberts Trustee Indefinite Retired; From 30 None
207 Highland Terrace 02/05 - January 1999 to
Breckenridge, CO 80424 present December 2003,
Birthdate: 11/42 President, CEO and
Age: 63 Director, Covest
Bancshares, Inc.
Interested Trustee
*Kenneth L. Miller, Jr. Trustee Indefinite, From August 1997 to 30 Chairman of
Board
200 W. Second Street, 02/05 - present, Executive of BB&T Asset
16th Floor Present Vice President, Management
Winston-Salem, NC 27101 Branch Banking and
Birthdate: 09/46 Trust Company;
Age: 59 employee of Branch
Banking and Trust
Company since 1982
* Mr. Miller is an "interested trustee" because he serves as a director of
BB&T Asset Management, the investment adviser to the each of the series of
BB&T Variable Insurance Funds. Branch Banking and Trust Company is the
parent of the investment adviser.
** The Fund Complex consists of the Trust and the BB&T Funds.
The Trustees receive fees and are reimbursed for expenses in connection
with each meeting of the Board of Trustees they attend. However, no officer or
employee of BISYS Fund Services LP, BISYS Fund Services Ohio, Inc. or Branch
Banking and Trust Company receives any compensation from BB&T Funds for acting
as a Trustee.
Mr. Ruehle serves as Chief Compliance Officer. The Chief Compliance
Officer's compensation is reviewed and approved by the Board and paid by BISYS,
subject to a Compliance Services Agreement between BISYS and the Trust ("CS
Agreement"). The fee paid pursuant to the CS Agreement by the Funds is not
indicative of the total compensation received by Mr. Ruehle.
Officers
POSITION(S) TERM OF OFFICE
NAME, ADDRESS, AND HELD WITH AND LENGTH OF
DATE OF BIRTH TRUST TIME SERVED PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
------------------ ---------------- --------------- ------------------------------------------------
Keith F. Karlawish President Indefinite, From May 2002 to present, President,
Birthdate: 08/64 02/05 - Present BB&T Asset Management, Inc.; from
Age: 41 1996 to 2002, Senior Vice President
and Director of Fixed Income, BB&T
Asset Management, Inc.
James T. Gillespie Vice Indefinite, From March 2005 to present, Vice President and
Birthdate: 11/66 President 02/05 - Present Manager of Mutual Fund Administration,
Age: 39 BB&T Asset Management, Inc.; From February
1992 to February 2005, employee of BISYS
Fund Services
20
E.G. Purcell, III Vice Indefinite, From 1995 to present, Senior Vice President,
Birthdate: 01/55 President 02/05 - Present BB&T Asset Management, Inc. and its
Age: 51 Predecessors
Rodney L. Ruehle Chief Compliance Indefinite, Employee of BISYS Fund Services Limited
Birthdate: 04/68 Officer 02/06 - Present Partnership since August 1995.
Age: 38
Troy A. Sheets Treasurer Indefinite, From April 2002 to present, Vice President,
Birthdate: 05/71 02/05 - Present of BISYS Fund Services; from
Age: 34 September 1993 to April 2002,
employee of KPMG LLP
Todd Miller Vice President Indefinite, From June 2005 to present, Mutual Fund
Birthdate: 09/71 08/05 - Present Administrator, BB&T Asset Management; from May
Age: 34 2001 to May 2005, Manager, BISYS Fund Services
David Bunstine Secretary Indefnite, From December 1987 to present, Vice President,
Birthdate 07/65 05/05 - Present BISYS Fund Services
Age: 40
Alaina V. Metz Assistant Indefinite, From June 1995 to present, Vice President,
Birthdate: 04/67 Secretary 02/05 - Present BISYS Fund Services
Age: 39
Christopher E. Sabato Assistant Indefinite From February 1993 to present,
Birthdate: 12/68 Treasurer 02/05 - Present Vice President, BISYS Fund Services
Age: 37
For interested Trustees and officers, positions held with affiliated persons or
principal underwriters of the Trust are listed in the following table:
POSITIONS HELD WITH AFFILIATED PERSONS OR PRINCIPAL
NAME UNDERWRITERS OF THE TRUST
---- ---------------------------------------------------------------
Keith F. Karlawish BB&T Asset Management, Inc., President
Kenneth L. Miller BB&T Corporation, Executive Vice President
BB&T Asset Management, Inc., Chairman of the Board of Directors
James T. Gillespie BB&T Asset Management, Inc., Vice President
Rodney L. Ruehle BISYS Fund Services, Vice President, CCO Services
Troy A. Sheets BISYS Fund Services, Vice President
Alaina V. Metz BISYS Fund Services, Vice President
Christopher E. Sabato BISYS Fund Services, Vice President
E.G. Purcell, III BB&T Asset Management, Inc., Senior Vice President
C. David Bunstine BISYS Fund Services, Vice President
Todd Miller BB&T Asset Management, Inc., Mutual Funds Administrator
BOARD OF TRUSTEES
Overall responsibility for management of the Trust rests with its Board of
Trustees, who are elected by the Shareholders of the Trust. The Trustees elect
the officers of the Trust to supervise actively its day-to-day operations.
Audit Committee
The purposes of the Audit Committee are to oversee the Trust's accounting and
financial reporting policies and practices; to oversee the quality and
objectivity of the Trust's financial statements and the independent audit
thereof; to consider the selection of independent public accountants for the
Trust and the scope of the audit; and to act as a liaison between the Trust's
independent public accounting firm and the full Board of Trustees. Messrs.
Kagan, Lambeth, Roberts, Van Scoy and Ms. Bingham serve on this
21
Committee; Mr. Kagan serves as chair of the committee. For the fiscal year ended
December 31, 2005, there were three (3) meetings of the Audit Committee.
Nominating Committee
The purpose of the Nominating Committee is to recommend qualified candidates to
the Board in the event that a position is vacated or created. Messrs. Kagan,
Lambeth, Roberts, Van Scoy and Ms. Bingham serve on this committee; Mr. Lambeth
serves as chair of the committee. The Committee will consider nominees
recommended by shareholders. Recommendations should be submitted to the
Nominating Committee in care of BB&T Variable Insurance Funds. For the fiscal
year ended December 31, 2005, the Nominating Committee did not meet.
SECURITIES OWNERSHIP
Listed below for each Trustee is a dollar range of securities beneficially owned
in the Funds together with the aggregate dollar range of equity securities in
all registered investment companies overseen by each Trustee that are in the
same family of investment companies as the Trust, as of December 31, 2005.
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN ALL
REGISTERED INVESTMENT
COMPANIES OVERSEEN BY
DOLLAR RANGE OF EQUITY TRUSTEE IN FAMILY OF INVESTMENT
NAME OF TRUSTEE SECURITIES IN THE TRUST COMPANIES
--------------- ----------------------- -------------------------------
Thomas W. Lambeth None $1 - $10,000
Robert W. Stewart* None > $100,000
Drew T. Kagan None > $100,000
Laura C. Bingham None $10,001 - $50,000
Douglas R. Van Scoy None $50,001 - $100,000
James L. Roberts None >$100,000
Kenneth L. Miller, Jr. None >$100,000
----------
* Mr. Stewart retired as a trustee of the BB&T Funds on May 21, 2005.
As of April 2, 2006, the Trustees and officers of the Trust, as a group, owned
Variable Contracts that entitled them to give voting instructions with respect
to less than one percent of the Shares of any portfolio of the Trust.
COMPENSATION TABLE**
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL COMPENSATION FROM
COMPENSATION FROM BENEFITS ACCRUED AS ANNUAL BENEFITS BB&T FUNDS PAID TO
NAME OF PERSON, POSITION THE FUNDS PART OF FUND EXPENSES UPON RETIREMENT TRUSTEE
------------------------ ----------------- --------------------- --------------- ------------------
Thomas W. Lambeth $28,000 None None $28,000
Trustee
Robert W. Stewart* $16,000 None None $16,000
Trustee
Kenneth L. Miller None None None None
Trustee
Drew T. Kagan $39,000 None None $39,000
Trustee
Laura C. Bingham $30,000 None None $30,000
Trustee
Douglas R. Van Scoy $30,000 None None $30,000
Trustee
James L. Roberts $29,000 None None $29,000
Trustee
22
* Figures are for calendar year ended December 31, 2004. Mr. Stewart retired
as a trustee of the BB&T Funds on May 21, 2005.
** Figures are for the Funds' fiscal year ended December 31, 2005. BB&T
Variable Insurance Funds includes six separate series. The trustee
compensation figures noted above represent amounts received by the Trustees
for their service to both the BB&T Variable Insurance Funds and the BB&T
Funds.
No non-interested Trustee (or an immediate family member thereof) had any direct
or indirect interest, the value of which exceeds $60,000, in the Advisor or any
entity controlling, controlled by or under common control with the Advisor of
the Trust (no including registered investment companies). Set forth in the table
below is information regarding each non-interested Trustee's (and his immediate
family members') share ownership in securities of the Advisor of the Trust, and
any entity controlling, controlled by or under common control with the Advisor
of the Trust (not including registered investment companies).
NAME OF
OWNERS AND
RELATIONSHIPS TITLE OF VALUE OF PERCENT OF
NAME OF TRUSTEE TO TRUSTEE COMPANY CLASS SECURITIES CLASS
--------------- ------------- ------- -------- ---------- ----------
Thomas W. Lambeth None None None None None
Robert W. Stewart* None None None None None
Drew T. Kagan None None None None None
Laura C. Bingham None None None None None
Douglas R. Van Scoy None None None None None
James L. Roberts None None None None None
Kenneth L. Miller None None None None None
----------
* Mr. Stewart retired as a trustee of the BB&T Funds on May 21, 2005.
No non-interested Trustee or immediate family member has during the two most
recently completed calendar years had: (i) any material interest, direct or
indirect, in any transaction or series of similar transactions, in which the
amount involved exceeds $60,000; (ii) any securities interest in the principal
underwriter of the Trust or the Investment Adviser or their affiliates (other
than the Trust); or (iii) any direct or indirect relationship of any nature, in
which the amount involved exceeds $60,000, with:
- the Funds;
- an officer of the Funds;
- an investment company, or person that would be an investment company but
for the exclusions provided by sections 3(c)(1) and 3(c)(7) of the 1940
Act, having the same investment adviser or principal underwriter as the
Funds or having an investment adviser or principal underwriter that
directly or indirectly controls, is controlled by, or is under common
control with the Investment Adviser or principal underwriter of the Funds;
- an officer of an investment company, or a person that would be an
investment company but for the exclusions provided by sections 3(c)(1) and
3(c)(7) of the 1940 Act, having the same investment adviser or principal
underwriter as the Funds or having an investment adviser or principal
underwriter that directly or indirectly controls, is controlled by, or is
under common control with the Investment Adviser or principal underwriter
of the Funds;
- the Investment Adviser or principal underwriter of the Funds,
- an officer of the Investment Adviser or principal underwriter of the Funds;
- a person directly or indirectly controlling, controlled by, or under common
control with the Investment Adviser or principal underwriter of the Funds;
or
- an officer of a person directly or indirectly controlling, controlled by,
or under common control with the Investment Adviser
23
or principal underwriter of the Funds.
The officers of BB&T Variable Insurance Funds receive no compensation directly
from BB&T Variable Insurance Funds for performing the duties of their offices.
BB&T Asset Management, Inc. receives fees from BB&T Variable Insurance Funds for
acting as Administrator and BISYS Fund Services Ohio, Inc. receives fees from
BB&T Variable Insurance Funds for acting as Transfer Agent and for providing
fund accounting services to BB&T Variable Insurance Funds. In addition, BISYS
Fund Services Ohio, Inc. receives fees from the Administrator for acting as
Sub-Administrator.
INVESTMENT ADVISER
BB&T Asset Management, Inc. ("BB&T Asset Management" or "Adviser"), 434
Fayetteville Street, Raleigh, N.C. 27601, is the investment adviser of the Fund.
BB&T Asset Management is a separate wholly-owned subsidiary of BB&T Corporation,
the predecessor investment adviser of the Large Cap VIF (formerly the Growth and
Income Fund). BB&T Corporation recently reorganized its investment advisory
division as BB&T Asset Management, which has replaced BB&T Corporation as the
investment advisor to the Fund. Management and investment advisory personnel of
BB&T Corporation that formerly provided investment management services to the
Fund now do so as the personnel of BB&T Asset Management. Through its portfolio
management team, BB&T Asset Management makes the day-to-day investment decisions
for the Fund and continuously reviews, supervises and administers the Fund's
investment program.
BB&T Corporation is a bank holding company that is a North Carolina corporation
headquartered in Winston-Salem, North Carolina. As of December 31, 2005, BB&T
Corporation had assets of approximately $109.1 billion. BB&T Corporation
operates over 1,400 banking offices in Alabama, Florida, Georgia, Indiana,
Kentucky, Tennessee, West Virginia, North Carolina, South Carolina, Virginia,
Maryland and Washington, D.C., providing a broad range of financial services to
individuals and businesses. In addition to general commercial, mortgage and
retail banking services, BB&T Corporation also provides trust, investment,
insurance and travel services. BB&T Corporation has provided investment
management services through its Trust and Investment Services Division since
1912. BB&T Asset Management employs an experienced staff of professional
portfolio managers and traders who use a disciplined investment process that
focuses on maximization of risk-adjusted investment returns.
Under the Investment Advisory Agreement, BB&T Asset Management has agreed to
provide investment advisory services for each of the Funds as described in the
Prospectuses. For the services provided and expenses assumed pursuant to the
Investment Advisory Agreement, BB&T Asset Management is entitled to a fee,
computed daily and paid monthly, at the following annual rates, calculated as a
percentage of the average daily net assets of each Fund: 0.74% for the Large Cap
VIF, 0.25% for the Capital Manager Equity VIF, 0.74% for the Large Cap Growth
VIF, 0.74% for the Mid Cap Growth VIF, 0.80% for the Special Opportunities
Equity VIF, and 0.60% for the Total Return Bond VIF.
Unless sooner terminated, the Investment Advisory Agreement continues in effect
until September 30, 2006 and thereafter for successive one-year periods if such
continuance is approved at least annually by the Board of Trustees or by vote of
a majority of the outstanding Shares of such Fund and a majority of the Trustees
who are not parties to the Investment Advisory Agreement or interested persons
(as defined in the 1940 Act) of any party to the Investment Advisory Agreement
by votes cast in person at a meeting called for such purpose. The Investment
Advisory Agreement is terminable as to a particular Fund at any time on 60 days'
written notice without penalty by the Trustees, by vote of a majority of the
outstanding Shares of that Fund, or by BB&T Asset Management. The Investment
Advisory Agreement also terminates automatically in the event of any assignment,
as defined in the 1940 Act.
24
For the fiscal year ended December 31, 2005, the Adviser received the
following investment advisory fees:
INVESTMENT ADVISOR FEES PAID/WAIVED FOR THE YEAR ENDED DECEMBER 31, 2005
DECEMBER 31, 2005
-------------------
PAID WAIVED
-------- --------
Large Cap VIF .................. $595,521 $235,503
Capital Manager Equity VIF ..... $ 8,406 $ 58,964
Large Cap Growth VIF ........... $ 90,369 $ 78,732
Mid Cap Growth VIF ............. $144,050 $109,799
Special Opportunities
Equity VIF .................. $216,096 --
Total Return Bond VIF .......... $ 82,135 $ 20,342
----------
The Investment Advisory Agreement provides that BB&T Asset Management shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Trust in connection with the performance of its duties, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith, or gross negligence on the part of BB&T Asset Management in the
performance of its duties, or from reckless disregard of its duties and
obligations thereunder.
From time to time, advertisements, supplemental sales literature, and
information furnished to present or prospective Shareholders of the Fund may
include descriptions of BB&T Asset Management including, but not limited to, (i)
descriptions of BB&T Asset Management's operations; (ii) descriptions of certain
personnel and their functions; and (iii) statistics and rankings related to BB&T
Asset Management's operations.
INVESTMENT SUB-ADVISERS
TOTAL RETURN BOND VIF. Investment sub-advisory and management services are
provided to the BB&T Total Return Bond VIF by Sterling Capital Management LLC
("Sterling Capital" or a "Sub-Adviser"), an affiliate of BB&T Asset Management,
pursuant to a Sub-Advisory Agreement ("Sub-Advisory Agreement") dated as of July
18, 2005, between BB&T Asset Management and Sterling Capital.
In consideration for the services provided and expenses assumed under the
Sterling Capital Investment Sub-Advisory Agreement, BB&T Asset Management has
agreed to pay Sterling Capital a fee, computed daily and paid monthly, at an
annual rate of 0.25% of the average daily net assets of the Total Return Bond
VIF. For the fiscal year ended December 31, 2005, BB&T Asset Management paid
$5,336 to Sterling Capital for sub-advisory services to the Total Return Bond
VIF.
The Sub-Advisory Agreement will continue in effect until October 31, 2006 and
thereafter will continue from year to year if such continuance is approved at
least annually by BB&T Variable Insurance Funds' Board of Trustees or by a vote
of the holders of a majority of the outstanding Shares of the Fund (as defined
under "GENERAL INFORMATION - Miscellaneous"). The Sub-Advisory Agreement is
terminable at any time without penalty, by the Trustees, by vote of the holders
of a majority of the outstanding Shares of the Fund, or on 60 days' written
notice by Sterling Capital or by BB&T Asset Management. The Sub-Advisory
Agreement also terminates automatically in the event of any assignment, as
defined in the 1940 Act. BB&T Asset Management will bear the sole responsibility
for the payment of the sub-advisory fee to Sterling Capital.
The Sub-Advisory Agreement provides that Sterling Capital shall not be liable
for any error of judgment or mistake of law or for any loss suffered by BB&T
Asset Management, the Trust or the Fund in connection with the performance of
its duties, except that Sterling Capital shall be liable to BB&T Asset
Management for a loss resulting from a breach of fiduciary duty with respect to
the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of Sterling Capital in
the performance of its duties or from reckless disregard by it of its
obligations or duties thereunder. From time to time, advertisements,
supplemental sales literature and information furnished to present or
prospective Variable Contract Owners may include descriptions of Sterling
Capital including, but not limited to, (i) descriptions of Sterling Capital's
operations; (ii) descriptions of certain personnel and their functions; and
(iii) statistics and rankings relating to the Sterling Capital's operations.
25
BB&T Asset Management or Sterling Capital may pay, out of its own assets and at
no cost to the Funds, amounts to broker-dealers, insurance companies or other
financial intermediaries in connection with the provision of administrative
services and/or with the distribution of the Funds' Shares. Investors may be
able to obtain more information about these payments and services from insurance
companies, or their broker or other financial intermediaries and should so
inquire if they would like additional information.
SPECIAL OPPORTUNITIES EQUITY VIF. Subject to the general supervision of the
Trust's Board of Trustees and in accordance with the Fund's investment objective
and restrictions, investment sub-advisory services are provided to the Special
Opportunities Equity VIF by Scott & Stringfellow, Inc. ("Scott & Stringfellow"
or a "Sub-Adviser"), 909 E. Main Street, Richmond, Virginia 23219, a wholly
owned subsidiary of BB&T Corporation, pursuant to a sub-advisory agreement (the
"Sub-Advisory Agreement") with BB&T Asset Management dated April 22, 2005.
Scott & Stringfellow makes the day-to-day investment decisions for the Fund and
continuously reviews, supervises and administers the Fund's investment program,
subject to the general supervision of the Board of Trustees and BB&T Asset
Management in accordance with the Fund's investment objective, policies and
restrictions.
Under the Investment Sub-Advisory Agreement with BB&T Asset Management, Scott &
Stringfellow has agreed to provide investment advisory services for the Special
Opportunities Equity VIF as described in the Prospectus describing that Fund.
For its services and expenses incurred under the Investment Sub-Advisory
Agreement, Scott & Stringfellow is entitled to a fee payable by BB&T Asset
Management. The fee is computed daily and paid monthly at an annual rate of
0.40% of the Fund's average daily net assets or such lower fee as may be agreed
upon in writing by BB&T Asset Management and Scott & Stringfellow; provided that
if BB&T Asset Management waives some or all of its investment advisory fee,
Scott & Stringfellow shall waive its fee so that it shall receive no more than
seventy-five percent (75%) of the net investment advisory fee paid to BB&T Asset
Management. For the fiscal year ended December 31, 2005, BB&T Asset Management
paid $97,172 to Scott & Stringfellow for sub-advisory services to the Special
Opportunities Equity VIF.
Unless sooner terminated, the Sub-Advisory Agreement shall continue with respect
to the Fund for an initial term of two years, and thereafter for successive
one-year periods if such continuance is approved at least annually by the Board
of Trustees of the Trust or by vote of the holders of a majority of the
outstanding voting Shares of the Fund and a majority of the Trustees who are not
parties to the Sub-Advisory Agreement or interested persons (as defined in the
1940 Act) of any party to the Sub-Advisory Agreement by vote cast in person at a
meeting called for such purpose. The Sub-Advisory Agreement may be terminated
with respect to a Fund by the Trust at any time without the payment of any
penalty by the Board of Trustees of the Trust, by vote of the holders of a
majority of the outstanding voting securities of the Fund, or by BB&T Asset
Management or Scott & Stringfellow on 60 days' written notice. The Sub-Advisory
Agreement will also immediately terminate in the event of its assignment, as
defined in the 1940 Act.
The Sub-Advisory Agreement provides that Scott & Stringfellow shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
BB&T Asset Management, the Trust or the Fund in connection with the performance
of its duties, except that Scott & Stringfellow shall be liable to BB&T Asset
Management for a loss resulting from a breach of fiduciary duty with respect to
the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of Scott & Stringfellow
in the performance of its duties or from reckless disregard by it of its
obligations or duties thereunder. From time to time, advertisements,
supplemental sales literature and information furnished to present or
prospective Variable Contract Owners may include descriptions of Scott &
Stringfellow including, but not limited to, (i) descriptions of Scott &
Stringfellow's operations; (ii) descriptions of certain personnel and their
functions; and (iii) statistics and rankings relating to Scott & Stringfellow's
operations.
BB&T Asset Management or Scott & Stringfellow may pay, out of its own assets and
at no cost to the Funds, amounts to broker-dealers, insurance companies or other
financial intermediaries in connection with the provision of administrative
services and/or with the distribution of the Funds' Shares. Investors may be
able to obtain more information about these payments and services from insurance
companies, or their broker or other financial intermediaries and should so
inquire if they would like additional information.
PORTFOLIO MANAGERS
The portfolio managers identified under "Management of the Fund" in each
Prospectus are responsible for the day-to-day management of the Funds. Each
portfolio manager also has responsibility for the day-to-day management of
accounts other than the Fund(s) for which he or she serves as portfolio manager.
Information regarding these accounts is set forth below.
26
NUMBER OF OTHER ACCOUNTS MANAGED AND ASSETS BY ACCOUNT TYPE
AS OF DECEMBER 31, 2005*
OTHER POOLED
OTHER REGISTERED INVESTMENT
PORTFOLIO MANAGER INVESTMENT COMPANIES VEHICLES OTHER ACCOUNTS
----------------- ---------------------- ------------ ---------------------
Ronald T. Rimkus Number: 6 Number: None Number: 3
Assets: $939.8 million Assets: $0 Assets: $16 million
Jeffrey J. Schappe Number: 4 Number: None Number: None
Assets: $296.7 million Assets: $0 Assets: $0
David Nolan Number: 2 Number: None Number: None
Assets: $188 million Assets: $0 Assets: $0
George F. Shipp Number: 2 Number: None Number: 1904
Assets: $290 million Assets: $0 Assets: $591 million
David M. Ralston Number: None Number: None Number: None
Assets: $0 Assets: $0 Assets: $0
Robert Millikan Number: 6 Number: None Number: 8
Assets: $309.1 million Assets: $0 Assets: $64.2 million
Will Gholston Number: 4 Number: None Number: 8
Assets: $296.7 million Assets: $0 Assets: $64.2 million
* If an account has a co-manager, the total number of accounts and assets has
been allocated to each respective manager. Therefore, some accounts and
assets have been counted more than once.
As indicated in the table above, portfolio managers may manage multiple
accounts. These accounts may include, among others, mutual funds or separately
managed accounts (i.e., institutions such as pension funds, colleges and
universities, foundations, endowments, and high net-worth families).
As of December 31, 2005, the following portfolio managers managed the following
numbers of accounts in each of the indicated categories, having the indicated
total assets, with respect to which the advisory fee is based on the performance
of the account.
27
PERFORMANCE BASED ADVISORY FEES
NUMBER OF OTHER ACCOUNTS MANAGED AND ASSETS BY ACCOUNT TYPE
AS OF DECEMBER 31, 2005
OTHER POOLED
OTHER REGISTERED INVESTMENT OTHER
PORTFOLIO MANAGER INVESTMENT COMPANIES VEHICLES ACCOUNTS
----------------- -------------------- ------------ ---------------------
Ronald T. Rimkus Number: None Number: None Number: None
Assets: $0 Assets: $0 Assets: $0
Jeffrey J. Schappe Number: None Number: None Number: None
Assets: $0 Assets: $0 Assets: $0
David Nolan Number: None Number: None Number: None
Assets: $0 Assets: $0 Assets: $0
George F. Shipp Number: None Number: None Number: None
Assets: $0 Assets: $0 Assets: $0
David M. Ralston Number: None Number: None Number: None
Assets: $0 Assets: $0 Assets: $
Robert Millikan Number: None Number: None Number: None
Assets: $0 Assets: $0 Assets: $0
Will Gholston Number: None Number: None Number: None
Assets: $0 Assets: $0 Assets: $0
CONFLICTS OF INTEREST
The management of the fund and other accounts could result in potential
conflicts of interest if the fund and other accounts have different objectives,
benchmarks and fees because the portfolio manager and his team must allocate
time and investment expertise across multiple accounts, including the fund.
Consequently, portfolio managers may purchase (or sell) securities for one
portfolio and not another portfolio. The Adviser has adopted brokerage and trade
allocation policies and procedures which it believes are reasonably designed to
address any potential conflicts associated with managing accounts for multiple
clients.
28
The management of personal accounts by a portfolio manager may also give rise to
potential conflicts of interest. The Adviser has adopted a Code of Ethics that
governs such personal trading.
BB&T ASSET MANAGEMENT
A potential conflict of interest may arise as a result of the portfolio
manager's management of a number of accounts with varying investment guidelines.
Often, an investment opportunity may be suitable for both the Fund and the
Managed Accounts, but may not be available in sufficient quantities for both the
Fund and the Managed Accounts to participate fully. Similarly, there may be
limited opportunity to sell an investment held by the Fund and another Managed
Account. BB&T Asset Management has adopted policies and procedures reasonably
designed to allocate investment opportunities on a fair and equitable basis over
time. BB&T Asset Management has also adopted a Code of Ethics that governs
personal trading and which is reasonably designed to address potential conflicts
of interest that may arise in connection with a portfolio manager's management
of personal accounts.
STERLING CAPITAL
Sterling Capital manages portfolios for multiple institutional and individual
clients. All portfolios are managed as separate accounts, including mutual fund
portfolios. Each portfolio has its own set of investment objectives and
investment policies that may differ from those of the Fund. The portfolio
managers make investment decisions for each portfolio based on the investment
objectives and policies and other relevant investment considerations applicable
to that portfolio. Accordingly, an individual portfolio may contain different
securities than other portfolios, and investment decisions may be made in other
accounts that are different than the decisions made for the BB&T Total Return
Bond VIF. As an example, the portfolio manager may decide to buy a security in
one or more portfolios, while selling the same security in other portfolios
based on the different objectives, restrictions, and cash flows in the
portfolios. In addition, some of these portfolios have fee structures, including
performance fees, which are or have the potential to be higher than the fees
paid by the Fund to Sterling Capital. Because performance fees are tied to
performance, the incentives associated with any given portfolio may be higher or
lower than those associated with other accounts managed by the firm.
Sterling Capital's objective is to meet its fiduciary obligation to treat all
clients fairly. To help accomplish this objective and to address the potential
conflicts discussed above, Sterling Capital has adopted and implemented policies
and procedures, including brokerage and trade allocation policies and
procedures. Sterling Capital's compliance procedures include actively monitoring
compliance with investment policies, trade allocation, and Code of Ethics
requirements. In addition, Sterling Capital's senior management team reviews the
performance of portfolio managers and analysts.
SCOTT & STRINGFELLOW
Scott & Stringfellow also manages portfolios for multiple institutional and
individual clients. All portfolios are managed as separate accounts, including
mutual fund portfolios. Each portfolio has its own set of investment objectives
and investment policies that may differ from those of the Fund. The portfolio
managers make investment decisions for each portfolio based on the investment
objectives and policies and other relevant investment considerations applicable
to that portfolio. Accordingly, an individual portfolio may contain different
securities than other portfolios, and investment decisions may be made in other
accounts that are different than the decisions made for the BB&T Special
Opportunities Equity VIF. As an example, the portfolio manager may decide to buy
a security in one or more portfolios, while selling the same security in other
portfolios based on the different objectives, restrictions, and cash flows in
the portfolios.
PORTFOLIO MANAGER COMPENSATION
BB&T ASSET MANAGEMENT
BB&T Asset Management utilizes the following incentive compensation plan for
Portfolio Managers:
Portfolio Management compensation is based on both fixed and variable
components. The fixed component is determined at the commencement of employment
and subject to annual review. Variable compensation is divided into two parts.
The first variable component is calculated based
29
on pretax one-year and three-year fund performance (by asset class). The
performance figures are ranked against a universe of approved peer
funds/indexes, and measured on a relative percentile basis. The second variable
component, a discretionary bonus pool, is determined based on various factors as
determined by executive management. The factors include active support and
promotion of funds marketing through various channels, management of personnel
and other subjective criteria. All variable compensation is paid annually at
plan year-end.
For investment professionals other than portfolio managers, such as investment
analysts, a similar fixed compensation component is received. The variable
component is calculated based on performance categories, designed to recognize
meaningful performance to the team. The incentive plan is paid annually, based
on plan year-end. As with the portfolio managers, BB&T Asset Management seeks to
utilize the incentive compensation to investment analysts as a retention tool.
STERLING CAPITAL
Sterling Capital has an incentive compensation plan linking all employees to
performance standards for portfolio management, marketing, and client service.
The plan is based on the individual meeting or exceeding their individual
performance goals. Performance goals for investment professionals are based on
market indices and manager universes. Each member of the investment team
receives a fixed base salary plus variable bonus compensation. The bonus is
based on the individual's performance contribution to the portfolio and on the
group's overall pre-tax performance versus a universe of managers.
The benchmark by which the performance of the BB&T Total Return Bond VIF is
measured for the purposes of compensation is the Lehman Brothers Aggregate Bond
Index.
SCOTT & STRINGFELLOW
Each portfolio manager is compensated using a salary plus bonus structure. The
salary is fixed and subject to annual review for increase or decrease. Bonuses
are computed based on assets under management, which is believed to create an
indirect tie to performance, as poor portfolio management performance could
result in an outflow of assets, and consistent positive portfolio performance
could stimulate asset inflows. Computed bonus amounts can be adjusted based on
annual performance appraisal of each individual's work.
SECURITIES OWNERSHIP
The following table discloses the dollar range of equity securities of each of
the Funds beneficially owned by the portfolio managers as of December 31, 2005:
NAME OF DOLLAR RANGE OF EQUITY
PORTFOLIO MANAGER SECURITIES IN EACH FUND
----------------- -----------------------
Ronald T. Rimkus None
Jeffrey J. Schappe None
David Nolan* None*
George F. Shipp** None**
David M. Ralston None
Robert Millikan None
Will Gholston None
30
* Although the Portfolio Manager does not have an investment in this variable
insurance portfolio, the Portfolio Manager does hold between $10,001 and
$50,000 in the BB&T Mid Cap Growth Fund, the retail mutual fund that has
the same investment strategy as the Mid Cap Growth VIF.
** Although the Portfolio Manager does not have an investment in this variable
insurance portfolio, the Portfolio Manager does hold between $10,001 and
$50,000 in the BB&T Special Opportunities Equity Fund, the retail mutual
fund that has the same investment strategy as the Special Opportunities
Equity VIF.
PROXY VOTING POLICIES AND PROCEDURES
The Board of Trustees has adopted proxy voting policies and procedures for the
Trust ("Trust Proxy Voting Policies and Procedures") with respect to voting
proxies relating to the portfolio securities held by the Funds. The Board of
Trustees has delegated the authority to vote proxies related to portfolio
securities of each of the Funds to the Adviser, which in turn delegated proxy
voting authority for the Special Opportunities Equity VIF to Scott &
Stringfellow and for the Total Return Bond VIF to Sterling Capital. Under this
authority, the Adviser and Sub-Advisers are required to vote proxies related to
the portfolio securities in the best interests of the Funds. The Trust Proxy
Voting Policies and Procedures require that the Board of Trustees annually
review the policies, procedures and other guidelines for voting proxies for the
Adviser and the Sub-Advisers. The Proxy Voting Policies and Procedures also
require the Adviser and the Sub-Advisers to report annually with respect to all
proxies it has received for action. With respect to proxies identified as
involving a conflict of interest, the Adviser or a Sub-Adviser will submit a
report indicating the nature of the conflict and how it was resolved.
Under the Trust Proxy Voting Policies and Procedures, the Board of Trustees will
provide the Trust's consent to vote in matters where the Adviser or Sub-Adviser
seeks such consent because of a conflict of interest that arises in connection
with a particular vote, or for other reasons.
BB&T ASSET MANAGEMENT's PROXY VOTING POLICIES AND PROCEDURES
The Adviser and Sub-Advisers have implemented written Proxy Policies and
Procedures that describe how the Adviser or Sub-Advisers will vote proxies
relating to certain proposals. The Proxy Voting Policies and Procedures are
designed to reasonably ensure that proxies are voted prudently and in the best
interest of their advisory clients for whom they have voting authority,
including the Funds, as appropriate.
Scott & Stringfellow is a wholly owned subsidiary of BB&T Corporation, the
parent of BB&T Asset Management, and will use BB&T's Proxy Voting Policy and
Procedures.
Proxy Committee
With respect to clients' securities for which BB&T Asset Management has
responsibility for voting proxies, the Proxy Committee of BB&T Asset Management
will monitor corporate actions, make voting decisions, ensure proxies are
submitted timely, and make determinations regarding actual or potential
conflicts of interests. The Proxy Committee may elect to engage (or terminate)
the services of a third party provider to perform or assist with one or more of
these functions. BB&T Asset Management has engaged Institutional Shareholder
Services ("ISS") to monitor corporate actions, make voting recommendations,
ensure proxies are submitted timely, and maintain the records.
Except as provided below, to the extent that any member of the Proxy Committee
reviews a given ISS recommendation and determines that the best interests of the
BB&T Asset Management clients who hold the proxies would likely be better served
by rejecting the ISS recommendation, then the member shall promptly notify the
Proxy Committee, which shall then review the issue and determine, based on the
principles set forth below, whether to accept or reject the ISS recommendation.
If the Proxy Committee chooses to reject the ISS recommendation, it shall
instruct ISS to vote the proxies accordingly and shall forward to the Director
of Compliance originals or copies of all documents that memorialize the basis
for the decision and all documents created by the Proxy Committee or by any
other area or employee of BB&T Asset Management that were material to making the
decision.
Proxies Will Be Voted In Accordance With The Clients' Best Interests
It is BB&T Asset Management's policy that all proxies for clients' securities be
voted strictly in accordance with the best interests of the clients' accounts.
The key element underlying any evaluation of the interests of a client in a
proposal, election, or issue presented
31
to a shareholder vote is the effect, if any, the proposal, election, or issue
could have on the current or future value of the investment.
Proxy Voting Determination Guidelines
BB&T Asset Management relies on ISS's voting policies and judgments, which BB&T
Asset Management has found to be sound and well regarded. Nevertheless, BB&T
Asset Management reserves the right to reject any given ISS recommendation,
except as provided below. In determining whether to reject an ISS
recommendation, BB&T Asset Management will be guided by its Proxy Voting
Policies and Procedures.
Generally, BB&T Asset Management will support company managements which, in its
opinion, have the intent and ability to maximize shareholder wealth over the
long term. Long term shareholder value need not be sacrificed in favor of short
term gains. Proposals that diminish the rights of shareholders or diminish
management or board accountability to the shareholders will typically be
opposed. However, reasonable measures that provide the board or management with
flexibility for negotiation during unsolicited takeover attempts might be
supported provided that such measures do not deter every potential acquisition.
Likewise, compensation plans that appear excessive relative to comparable
companies' compensation packages and/or appear unreasonable in light of the
performance of the issuer will typically be opposed. Matters involving social
issues or corporate responsibility will be evaluated principally based on their
likely impact on the economic value of the issuer.
Conflicts of Interests
In some circumstances, an issuer's proxies may present an actual or potential
conflict of interests between BB&T Asset Management and a client account holding
securities of the issuer. It is BB&T Asset Management's policy that all proxies
for a client's securities be voted strictly in accordance with the best
interests of the client's account. Nevertheless, BB&T Asset Management also
employs additional safeguards in situations potentially involving a material
conflict of interests.
BB&T Corporation Stock
BB&T Asset Management is a wholly-owned subsidiary of BB&T Corporation, which is
an issuer of equity securities. If a client's account holds BB&T Corporation
common stock and the client has authorized BB&T Asset Management to vote proxies
on the client's behalf, then a potential conflict of interests exists with
respect to BB&T Asset Management's ability to vote proxies for such stock
because BB&T Asset Management and its employees are controlled (directly or
indirectly) by BB&T Corporation and its management. Such management will often
have a stake in, or an opinion regarding, the subject of a shareholder vote. As
a result, to the extent that BB&T Asset Management is authorized to vote proxies
on behalf of its clients who hold shares of BB&T Corporation common stock, BB&T
Asset Management will rely exclusively upon the recommendations made by ISS with
respect to BB&T Corporation proxies and will not consider rejecting such
recommendations.
Other Material Conflicts of Interests
The Proxy Committee will compile, maintain, and update a list of issuers with
which BB&T Asset Management or its affiliates have such a relationship that
proxies presented with respect to such issuers may give rise to a material
conflict of interests. Examples may include issuers for which BB&T Asset
Management manages a pension or employee benefits plan or for which a BB&T
affiliate is known by the Proxy Committee to provide brokerage, underwriting,
insurance, or banking services. To the extent that BB&T Asset Management
receives proxies from such issuers for clients who have authorized BB&T Asset
Management to vote their proxies, the Proxy Committee will examine the proxy
solicitations and assess the potential conflict in order to determine what
procedures to employ with respect to the proxy. Likewise, the Proxy Committee
will make such an examination and determination with respect to other proxy
solicitations that may give rise to a material conflict of interests, such as
where BB&T Asset Management or one or more of its executives or directors has a
business or personal relationship with a proponent of a proxy proposal, a
participant in a proxy contest, a corporate director, or a candidate for a
directorship. Depending on the circumstances, the Proxy Committee may:
(a) Cause the proxies to be voted according to ordinary guidelines and
procedures if it determines that the proxies do not present a material conflict
of interests and documents its reasons for making that determination and
delivers such documentation to the Director of Compliance; or
(b) Where the client is a Underlying Fund, BB&T Asset Management must disclose
the material conflict of interests to that Fund's board of trustees (or a
committee of the board) and obtain the board's (or committee's) consent or
direction to vote the proxies; and/or
32
(c) Rely exclusively upon the recommendation made by ISS and not consider
rejecting such recommendation if the Proxy Committee determines that a material
conflict of interests exists and documents that determination and delivers such
documentation to the Director of Compliance.
STERLING CAPITAL'S PROXY POLICY AND VOTING PROCEDURES
STERLING CAPITAL MANAGEMENT LLC
Proxy Policy & Voting Procedures
(Effective October, 1989)
(Revised September, 2004)
I. VOTING POLICY AND GUIDELINES
Sterling Capital Management LLC ("SCM") believes it has a fiduciary obligation
to vote its clients' proxies in favor of the economic interest of shareholders.
Our fiduciary responsibility includes protecting and enhancing the economic
interests of the plan participants in the ERISA accounts we manage. The
following guidelines have been established to assist us in evaluating relevant
facts and circumstances which will enable us to vote in a manner consistent with
our fiduciary responsibility.
ROUTINE MANAGEMENT PROPOSALS
Election of Directors Case by Case
We believe that the structure and functioning of its board of directors are
critical to the economic success of every company therefore treat board
related issues in a separate section, below.
Appointment of Auditors Approve
Fix Auditor Remuneration Approve
Approval of Audited Financial Statements Approve
Set/Eliminate Dividends Approve
Grant Board Authority to Repurchase Shares Approve
Approve Stock Splits or Reverse Stock Splits Approve
Change Name of Corporation Approve
Eliminate Preemptive Rights
Preemptive rights give current shareholders the opportunity to maintain
their current percentage ownership through any subsequent equity offerings.
These provisions are no longer common in the U.S., and can restrict
management's ability to raise new capital.
We generally approve the elimination of preemptive rights, but will oppose
the elimination of limited preemptive rights, e.g., on proposed issues
representing more than an acceptable level of dilution.
Employee Stock Purchase Plan Approve
33
Establish 401(k) Plan Approve
BOARD OF DIRECTORS
We support measures which encourage and enable boards to fulfill their
primary responsibility to represent the economic interests of shareholders.
While we may take into consideration the specific needs of companies that
are in early rapid growth phases, closely held, or in severe financial
difficulties, we view strong independent boards as a key protection for
shareholder value.
Election of Directors Case by Case
We support management in most elections. However, we will withhold approval
if the board gives evidence of acting contrary to the best economic
interests of shareholders. We will also withhold approval of individual
director/managers whose remuneration appears to be blatantly excessive and
exploitative of the shareholders.
Classified Board of Directors/Staggered Terms Oppose
A classified board of directors is one that is divided generally into three
classes, each of which is elected for a three-year term, but on a staggered
schedule. At each annual meeting therefore, one-third of the directors
would be subject to reelection.
Our belief is that all directors should be subject to reelection on an
annual basis to discourage entrenchment, and we will most frequently vote
against classification and for management and shareholder proposals to
eliminate classification of the board.
Occasionally, proposals to classify a board of directors will contain a
clause stipulating that directors may be removed only for cause. We will
oppose these proposals.
Confidential Voting Approve
Confidential voting is most often proposed by shareholders as a means of
eliminating undue management pressure on shareholders regarding their vote
on proxy issues.
Cumulative Voting for Directors Case by Case
Cumulative voting allocates one vote for each share of stock held times the
number of directors subject to election. A shareholder may cumulate his/her
votes and cast all of them in favor of a single candidate, or split them
among any combination of candidates. Cumulative voting enables minority
shareholders to secure board representation.
We generally support cumulative voting proposals. However, we may withhold
approval of proposals that further the candidacy of minority shareholders
whose interests do not coincide with our fiduciary responsibility.
Director Compensation Case by Case
We believe that compensation for independent outside directors should be
structured to align the interests of the directors with those of
shareholders, whom they have been elected to represent. To this end, we
have a preference toward compensation packages which are based on the
company's performance and which include stock and stock options.
Independent Board Committees Approve
We believe that a board's nominating, compensation and audit committees
should consist entirely of independent outside directors in order to avoid
conflict of interests. We will therefore normally approve reasonable
shareholder proposals to that effect; an example of an unreasonable request
would be a case where a board consists of only two or three directors.
Majority Independent Board Composition Approve
We will generally support shareholder proposals requesting that the board
consist of majority independent outside directors, as we believe that an
independent board faces fewer conflicts and is best prepared to protect
shareholder interests.
Separation of Chairman and CEO Positions Case by Case
We will support shareholder proposals requesting that the positions of
chairman and CEO be separated if the board is composed of less than a
majority independent directors.
34
CORPORATE GOVERNANCE
Adjourn Meeting to solicit Additional Votes Oppose
Additional solicitation is costly and could result in coercive pressure on
shareholders, who usually have sufficient information in the proxy
materials to make an informed decision prior to the original meeting date.
Anti-Greenmail Provision Approve
Eliminate Shareholders' Right to Call Special Meeting Oppose
Increase in Authorized Shares Case by Case
We approve proposals for increases of up to 100%. We will consider larger
increases if a need is demonstrated. We may apply a stricter standard if
the company has no stated use for the additional shares and/or has
previously authorized shares still available for issue. Additionally,
proposals which include shares with unequal voting rights may warrant
opposition.
Indemnification of Directors and Officers Approve
We support the protection of directors and officers against frivolous and
potentially ruinous legal actions, in the belief that failure to do so
might severely limit a company's ability to attract and retain competent
leadership. We will support proposals to provide indemnification which is
limited to coverage of legal expenses.
Liability Insurance of Directors and Officers Approve
Proposals regarding liability insurance for directors and officers often
appear separately from indemnification proposals. We will generally support
insurance against liability for acts committed in an individual's capacity
as a director or officer of a company. However, we withhold approval of
proposals which cover breaches of the duty of loyalty, acts or omissions
not in good faith or which involve intentional misconduct or knowing
violation of law, willful or negligent conduct in connection with the
payment of an unlawful dividend, or any transaction from which the director
derived an improper personal benefit.
Prohibit Shareholder Action Outside Meetings Oppose
Reincorporate Case by Case
Proposals to reincorporate in another state are most frequently motivated
by considerations of anti-takeover protections or cost savings. Where cost
savings are the sole issue, we will favor reincorporation.
In cases where there are significant differences in anti-takeover
protections, we will vote in favor of reincorporation only if shareholder
discretion is not diminished by the change. As state corporation laws are
continuously evolving, such determination requires case by case analysis.
Change of Location of Corporate Headquarters Case by Case
Changes in location of headquarters must have clear economic benefits. Changing
the physical location of headquarters to meet the personal geographic or
lifestyle preferences of senior executives will be opposed.
Require more than simple majority vote to pass proposals. Oppose
ANTI-TAKEOVER
Blank Check Preferred Case by Case
These proposals are for authorization of a class of preferred stock in
which voting rights are not established in advance, but are left to the
discretion of the board of directors on a when issued basis. The authority
is generally viewed as affording the board the ability to place a block of
stock with an investor sympathetic to management, thereby foiling a
takeover bid without reference to a shareholder vote. However, in some
cases it may be used to provide management with the flexibility to
consummate beneficial acquisitions, combinations or financings.
We oppose these proposals as a transfer of authority from shareholders to
the board and a possible entrenchment device. However, if there are few or
no other anti-takeover measures on the books and the company appears to
have a legitimate
35
financing motive for requesting the authority, or has used blank check
preferred stock for past financings, we will approve the proposal.
Differential Voting Power Oppose
Authorize a class of common having superior voting rights over the existing
common or entitled to elect a majority of the board.
Poison Pill Plans Oppose
Also known as "shareholder rights plans," involve call options to purchase
securities in a target firm on favorable terms. The options are exercisable
only under certain circumstances, usually hostile tender offers. These
plans are not subject to shareholder vote. However, the shares required to
fund the plan must be authorized. Since these shares are generally blank
check preferred, we oppose them.
Therefore, these proposals generally only appear on the proxy as
shareholder proposals requesting that existing plans be put to a vote. The
vote is non-binding. We vote in favor of shareholder proposals to rescind
poison pills.
Our policy is to examine these plans individually. Most plans are opposed,
however. We approve most plans which include a "permitted bid" feature.
Permitted bid features have appeared in some Canadian poison pill plans.
They require shareholder ratification of the pill, stipulate a sunset
provision whereby the pill expires unless it is renewed and specify that an
all cash bid for all shares that includes a fairness opinion and evidence
of financing does not trigger the pill, but forces a special meeting at
which the offer is put to a shareholder vote.
Stakeholder Provision Oppose
Stakeholder provisions introduce the concept that the board may consider
the interests of constituencies other than shareholders in the evaluation
of takeover offers.
We believe that this concept is inconsistent with public ownership of
corporations.
MANAGEMENT COMPENSATION
Golden Parachutes Case by Case
Golden parachutes provide for compensation to management in the event of a
change in control. We view this as encouragement to management to consider
proposals which might be beneficial to shareholders, but we are very
sensitive to excess or abuse.
Pay-for-Performance Plans Approve
The Omnibus Budget Reconciliation Act requires companies to link executive
compensation exceeding $1 million to preset performance goals and submit
the plans for shareholder approval in order for such compensation to
qualify for federal tax deductions. The law further requires that such
plans be administered by a compensation committee comprised solely of
outside directors. Because the primary objective of such proposals is to
preserve the deductibility of such compensation, we are biased toward
approval in order to preserve net income. However, proposals which
authorize excessive dilution or provide executives extraordinary windfalls
will be opposed. Moreover, when an objectionable plan is coupled with poor
performance, we will consider withholding votes from compensation committee
members.
OPTION PLANS
We support option plans which provide incentive to directors, managers and
other employees by aligning their economic interests with those of the
shareholders while limiting the transfer of wealth out of the company.
Option plan evaluations are therefore based on the total cost to
shareholders and give effect to the incentive aspects of the plan. We are
wary of over-dilution or not-insignificant shareholder wealth transfer.
MERGERS, ASSET SALES & CAPITAL RESTRUCTURINGS
In reviewing merger and asset sale proposals, our primary concern is with
the best economic interests of shareholders. This does not necessarily
indicate that we will vote in favor of all proposals which provide a market
premium relative to pre-announcement prices. Due to the subjective nature
of the value of individual proposals, transaction-specific characteristics
or
36
conditions may prevail. Factors affecting the voting decision will likely
include transaction consideration relative to intrinsic value, strategic
reason for transaction, board approval/transaction history, and financial
advisors' fairness opinions.
OTHER SHAREHOLDER PROPOSALS
For those shareholder-proposed issues that are not covered specifically
elsewhere.
Shareholder Proposal Requesting a Yearly Report on Director
Attendance at Meetings Approve
Shareholder Proposal Requesting a Minimum Stock Ownership by
Directors Oppose
Shareholder Proposal to Compensate Directors in Stock Approve
SOCIAL ISSUES
We receive proxies containing shareholder proposals which address social
issues which are varied and tend to shift from year to year. However, our
philosophy in reviewing social proposals is consistent; that is, we vote in
all cases in the best economic interests of our clients.
II. PROCEDURES
A. Instructions to Bank/Broker Custodians
All custodian banks/brokers are to be notified that all proxy voting
materials should be forwarded to SCM upon receipt unless client has other
instructions. This notification typically occurs at the time the account is
opened at the custodian.
B. SCM Administrative Responsibilities for Proxy Voting
All proxy materials from custodian will be directed to Eric Ladley in
Operations. Cathy will delegate and oversee the proxy voting process to a
pool of persons, known as Proxy Administrators, who will in turn process
and vote all proxies.
(1) Upon receipt of proxy materials, the Proxy Administrator will create a
file with the Portfolio Company name and meeting date on the tab. All
proxies and related materials for this particular Portfolio Company will
then be placed in this file until ready to be voted on.
(2) The Proxy Administrator will look to see if the Portfolio Company is
listed on the "Business Relationship List," which is a listing of all
companies with whom SCM has a client or supplier relationship. If the
Portfolio Company is not listed on the Business Relationship List, then
steps (3)-(8) below in this Section B are to be executed. If the Portfolio
Company is listed on the Business Relationship List, then the Proxy
Administrator will execute the process provided in Section C (Treatment of
SCM Conflicts of Interest) and steps (3)-(8) below in this Section B will
not be executed.
(3) The Proxy Administrator will then forward a copy of the proxy and an
annual report to the appropriate member of the Proxy Committee for
instructions, with a request to return by a specific date, along with a
"Proxy Instruction Form" noting the items to be voted on and the voting
deadline. It will continue to be the Proxy Administrator's responsibility
to make sure all proxies are voted on time.
(4) When the Proxy Committee member completes his/her review of the proxy
statement, he/she will complete the "Proxy Instruction Form" which
instructs how to vote and briefly identifies reasons for voting against
management, if applicable. This form will be given to the Proxy
Administrator who will then vote the proxy.
(5) Each proxy is then cross-referenced to make sure the shares we are
voting on are the actual shares we own for that client.
(6) All proxies received from the same company for all clients will be
voted as the original without review by the Proxy Committee member unless
specific client circumstances require otherwise.
37
(7) After the proxy is voted, all Proxy Instruction Forms will be
maintained in a separate file.
(8) Copies of each proxy are kept in the above mentioned folder along with
a copy of the annual report, Proxy Instruction Form, and other notes
related to each company vote.
C. Treatment of SCM Conflicts of Interest
Occasionally, SCM may have a material business relationship with a Portfolio
Company that could create a conflict of interest with respect to the voting of a
proxy for such Portfolio Company. The following procedures are designed to hand
over the proxy voting responsibility to our clients in the event that such
potential conflicts of interest arise in a particular proxy vote.
(1) As noted in Section B (SCM Administrative Responsibilities for Proxy
Voting), upon receipt of proxy materials, the Proxy Administrator will
determine if the Portfolio Company is listed on the Business Relationship
List. If the Portfolio Company is listed on the Business Relationship List,
then the Proxy Administrator will execute the process provided in steps
(2)-(4) below in this Section C.
(2) After determining that a Portfolio Company is listed on the Business
Relationship List, the Proxy Administrator will give the proxy materials to
Patrick Rau, who will determine if the proxy should be voted by our
clients. If (1) the relationship is not material or (2) if the issue to be
voted on is not a "case-by-case" issue as provided in Part I of this
document (Voting Policy and Guidelines), then Mr. Rau will return the proxy
materials to the Proxy Administrator, who will then follow the normal proxy
voting procedures in Section B (SCM Administrative Responsibilities for
Proxy Voting), steps (3)-(8).
(3) If (1) the relationship is material and (2) if the issue to be voted on
is a "case-by-case" issue as provided in Part I of this document (Voting
Policy and Guidelines), then Mr. Rau will return the proxy materials to the
Proxy Administrator, who will then mail the proxy ballot to each client,
along with a cover letter explaining the conflict of interest situation.
The client will then vote its own proxy ballot and SCM will not have any
involvement in the voting of that ballot. The Proxy Administrator will make
an entry in the proxy voting database that indicates that the particular
proxy ballot in question was voted by the client due to a conflict of
interest with a SCM business relationship.
(4) For purposes of determining materiality, a relationship is "material"
if it represents at least 1% of SCM revenues in the case of a client
relationship and at least 1% of SCM expenses in the case of a supplier
relationship.
D. Treatment of Personal Conflicts of Interest
From time to time, individuals on the Proxy Committee may have personal
relationships with people connected to the Portfolio Company, including (a)
individual members of the board of directors, (b) candidates for the board of
directors, (c) proponents of proxy proposals, and (d) participants in proxy
contests. Such relationships could create a conflict of interest with respect to
the voting of a proxy. The following procedures are designed to hand over the
proxy voting responsibility to a different member of the Proxy Committee in the
event that such conflicts of interest arise in a particular proxy vote.
(1) Upon receiving proxy materials from the Proxy Administrator, the member
of the Proxy Committee who receives such materials shall determine whether
a personal relationship exists between such member and the following people
connected with the Portfolio Company: (a) individual members of the board
of directors, (b) candidates for the board of directors, (c) proponents of
proxy proposals, and (d) participants in proxy contests. In the event that
such a personal relationship exists, the Proxy Committee member shall
return the proxy materials to Patrick Rau, who shall deliver the materials
to a different Proxy Committee member for voting.
III. THE PROXY COMMITTEE
The Proxy Committee will consist of Brian Walton, Ed Brea, Bob Bridges, Tim
Beyer, Patrick Rau, Will Thompson, Mary Weeks Fountain and Raleigh Shoemaker,
any of whom may act on a proxy issue. Dave Ralston will be the advisory member
and may substitute as necessary.
PROXY VOTING POLICIES AND PROCEDURES
38
To the extent that BB&T Asset Management is authorized to vote proxies on behalf
of its clients who hold shares or interests in any BB&T Fund, BB&T Asset
Management will rely exclusively upon the recommendations made by ISS with
respect to such BB&T fund proxies and will not consider rejecting such
recommendations.
The Funds will be required to file new SEC Form N-PX with their complete proxy
voting records for the 12 months ended June 30th, no later than August 31st of
each year. The first filing of Form N-PX will be made no later than August 31,
2006 for the 12-month period ending June 30, 2006. Once filed, the form will be
available without charge: (1) from the Funds, upon request by calling
1-800-228-1872; and (2) on the SEC's web site at http://www.sec.gov.
PORTFOLIO TRANSACTIONS
BB&T Asset Management and the Sub-Advisers determine, subject to the general
supervision of the Board of Trustees and in accordance with each Fund's
investment objective and restrictions, which securities are to be purchased and
sold by a Fund, and which brokers or dealers are to be eligible to execute such
Fund's portfolio transactions.
Purchases and sales of portfolio securities which are debt securities usually
are principal transactions in which portfolio securities are normally purchased
directly from the issuer or from an underwriter or market maker for the
securities. Purchases from underwriters of portfolio securities generally
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers serving as market makers may include the spread between
the bid and asked price. Transactions on stock exchanges involve the payment of
negotiated brokerage commissions. Transactions in the over-the-counter market
are generally principal transactions with dealers. With respect to the
over-the-counter market, the Trust, where possible, will deal directly with
dealers who make a market in the securities involved except in those
circumstances where better price and execution are available elsewhere.
Unless otherwise directed by the Board of Trustees, allocation of transactions,
including their frequency, to various brokers and dealers is determined by BB&T
Asset Management or a Sub-Adviser in its best judgment and in a manner deemed
fair and reasonable to Shareholders. In selecting a broker or dealer, BB&T Asset
Management and the Sub-Adviser evaluates a wide range of criteria, including the
commission rate or dealer mark-up, execution capability, the broker's/dealer's
positioning and distribution capabilities, back office efficiency, ability to
handle difficult trades, financial stability, reputation, prior performance,
and, in the case of brokerage commissions, research. The primary consideration
is the broker's ability to provide "best execution," which is the best overall
qualitative execution of a Fund's brokerage transactions, so that the total
costs or proceeds to the Fund are the most favorable under the circumstances.
Subject to this consideration, brokers and dealers who provide supplemental
investment research to BB&T Asset Management or a Sub-Adviser may receive orders
for transactions on behalf of the Trust. Research may include brokers' analyses
of specific securities, performance and technical statistics, and information
databases. It may also include maintenance research, which is the information
that keeps BB&T Asset Management or a Sub-Adviser informed concerning overall
economic, market, political and legal trends. Under some circumstances, BB&T
Asset Management's or a Sub-Adviser's evaluation of research and other broker
selection criteria may result in one or a few brokers executing a substantial
percentage of a Fund's trades. This might occur, for example, where a broker can
provide best execution at a cost that is reasonable in relation to its services
and the broker offers unique or superior research facilities, special knowledge
or expertise in a Fund's relevant markets, or access to proprietary information
about companies that are a majority of a Fund's investments.
Research information so received is in addition to and not in lieu of services
required to be performed by BB&T Asset Management or a Sub-Adviser and does not
reduce the fees payable to BB&T Asset Management or the Sub-Adviser by the
Trust. Such information may be useful to BB&T Asset Management or a Sub-Adviser
in serving both the Trust and other clients and, conversely, supplemental
information obtained by the placement of business of other clients may be useful
in carrying out its obligations to the Trust. While BB&T Asset Management or the
Sub-Advisers generally seek competitive commissions, the Trust may not
necessarily pay the lowest commission available on each brokerage transaction
for reasons discussed above.
During the fiscal year ended December 31, 2005, the Funds listed below paid the
following aggregate brokerage commissions:
FISCAL YEAR ENDED
DECEMBER 31, 2005
--------------------------------------
AGGREGATE DIRECTED
BROKERAGE AGGREGATE BROKERAGE
COMMISSION TRANSACTIONS COMMISSION
---------- ------------ ----------
Large Cap VIF....................... $49,462 $49,891,135 --
39
Large Cap Growth VIF................ $42,688 $42,756,255 --
Mid Cap Growth VIF.................. $91,691 $80,241,807 --
Special Opportunities Equity VIF.... $51,224 $25,577,476 --
For the fiscal year ended December 31, 2005, the Funds paid $34,355 in
commissions to Scott & Stringfellow, a wholly-owned subsidiary of BB&T
Corporation, for transactions effected on behalf of the Special Opportunities
Equity VIF. The Funds paid no brokerage commissions to Scott & Stringfellow for
the fiscal years ended December 31, 2004 and December 31, 2003. For the fiscal
year ended December 31, 2005, the aggregate percentage of the Special
Opportunities Equity VIF's total brokerage commissions paid to Scott &
Stringfellow was 67.0%, and the percentage of the Funds' aggregate dollar amount
of transactions involving commissions effected through Scott & Stringfellow was
76.7%.
To the extent permitted by applicable rules and regulations, either BB&T Asset
Management or the Sub-Advisers may execute portfolio transactions on behalf of
the Funds through affiliates. As required by Rule 17e-1 under the 1940 Act, the
Funds have adopted procedures which provide that commissions paid to such
affiliate must be fair and reasonable compared to the commission, fees or other
remuneration paid to other brokers in connection with comparable transactions.
The procedures also provide that the Board will review reports of such
affiliated brokerage transactions in connection with the foregoing standard.
Investment decisions for each Fund are made independently from those for the
other Funds or any other portfolio, investment company or account managed by
BB&T Asset Management or a Sub-Adviser. Any such other portfolio, investment
company or account may also invest in the same securities as the Trust. When a
purchase or sale of the same security is made at substantially the same time on
behalf of a Fund and another Fund, portfolio, investment company or account, the
transaction will be averaged as to price and available investments will be
allocated as to amount in a manner which BB&T Asset Management or a Sub-Adviser
believes to be equitable to the Fund(s) and such other portfolio, investment
company or account. In some instances, this investment procedure may adversely
affect the price paid or received by a Fund or the size of the position obtained
by a Fund. To the extent permitted by law, BB&T Asset Management or a
Sub-Adviser may aggregate the securities to be sold or purchased for a Fund with
those to be sold or purchased for the other Funds or for other portfolio,
investment companies or accounts in order to obtain best execution. In making
investment recommendations for the Trust, BB&T Asset Management or a Sub-Adviser
will not inquire or take into consideration whether an issuer of securities
proposed for purchase or sale by the Trust is a customer of BB&T Asset
Management, a Sub-Adviser or BISYS, their parents or their subsidiaries or
affiliates and, in dealing with its customers, BB&T Asset Management or a
Sub-Adviser, their parents, subsidiaries, and affiliates will not inquire or
take into consideration whether securities of such customers are held by the
Trust.
40
FEDERAL BANKING LAW
The Gramm-Leach-Bliley Act of 1999 repealed certain provisions of the
Glass-Steagall Act that had previously restricted the ability of banks and their
affiliates to engage in certain mutual fund activities. Nevertheless, BB&T Asset
Management's activities remain subject to, and may be limited by, applicable
federal banking law and regulations. BB&T Asset Management believes that it
possesses the legal authority to perform the services for the Funds contemplated
by the Prospectus, this SAI, and the Investment Advisory Agreement without
violation of applicable statutes and regulations. If future changes in these
laws and regulations were to limit the ability of BB&T Asset Management to
perform these services, the Board of Trustees would review the Trust's
relationship with BB&T Asset Management and consider taking all action necessary
in the circumstances, which could include recommending to Shareholders the
selection of another qualified advisor or, if that course of action appeared
impractical, that the Funds be liquidated.
ADMINISTRATOR
BB&T Asset Management, Inc. ("BB&T Asset Management" or "Administrator"), 434
Fayetteville Street, Raleigh, NC 27601, serves as general manager and
administrator to the Trust pursuant to a Management and Administration Agreement
dated April 22, 2005 (the "Administration Agreement"). The Administrator assists
in supervising all operations of each Fund (other than those performed by BB&T
Ohio as fund accountant and dividend disbursing agent, and by the Trust's
custodians). The Administrator provides financial services to institutional
clients.
Under the Administration Agreement, the Administrator has agreed to maintain
office facilities for the Trust; furnish statistical and research data, clerical
and certain bookkeeping services and stationery and office supplies; prepare the
periodic reports to the Securities and Exchange Commission on Form N-SAR or any
replacement forms therefor; compile data for, prepare for execution by the Funds
and file certain federal and state tax returns and required tax filings; prepare
compliance filings pursuant to state laws with the advice of the Trust's
counsel; keep and maintain the financial accounts and records of the Funds,
including calculation of daily expense accruals; and generally assist in all
aspects of the Trust's operations other than those performed by the Investment
Advisers under the Investment Advisory Agreements by the fund accountant and
dividend disbursing agent, and by the Trust's custodians. Under the
Administration Agreement, the Administrator may delegate all or any part of its
responsibilities thereunder.
The Administrator receives a fee from each Fund for its services as
Administrator and expenses assumed pursuant to the Administration Agreement,
calculated daily and paid periodically. The Trust shall pay to the Administrator
compensation that is due only on its assets, but calculated taking into account
the assets also of BB&T Funds (the "Combined Assets"). The fee paid to the
Administrator shall be equal to the lesser of (a) the amount calculated at the
annual rate of twelve one-hundredths of one percent (0.12%) of the average daily
net Combined Assets up to $5 billion, and at the annual rate of eight
one-hundredths of one percent (0.08%) of the average daily net Combined Assets
over $5 billion, or (b) such other fee as may from time to time be agreed upon
by the Trust and the Administrator. The Administrator may voluntarily reduce all
or a portion of its fee with respect to any Fund in order to increase the net
income of one or more of the Funds available for distribution as dividends.
For its services as administrator and expenses assumed pursuant to the
Administration Agreement, the Administrator received the following fees:
FISCAL YEAR ENDED
DECEMBER 31, 2005
---------------------
ADDITIONAL
AMOUNT
PAID WAIVED
-------- ----------
Large Cap VIF ...................... $104,249 $54,844
Capital Manager Equity VIF ......... $ 5,893 $21,023
Large Cap Growth VIF ............... $ 32,198 --
Mid Cap Growth VIF ................. $ 47,981 --
Special Opportunities Equity VIF ... $ 37,239 --
Total Return Bond VIF .............. $ 23,928 --
The Administration Agreement is terminable with respect to a particular Fund
upon mutual agreement of the parties to the
41
Administration Agreement, upon notice given at least 60 days prior to the
expiration of the Agreement's then-current term, and for cause (as defined in
the Administration Agreement) by the party alleging cause, on no less than 60
days' written notice by the Board of Trustees or by the Administrator.
The Administration Agreement provides that the Administrator shall not be liable
for any error of judgment or mistake of law or any loss suffered by the Trust in
connection with the matters to which the Administration Agreement relates,
except a loss resulting from willful misfeasance, bad faith, or gross negligence
in the performance of its duties, or from the reckless disregard by the
Administrator of its obligations and duties thereunder.
SUB-ADMINISTRATOR
BISYS Fund Services Ohio, Inc. ("BISYS Ohio" or "Sub-Administrator"), 3435
Stelzer Road, Columbus, Ohio 43219-3035, serves as sub-administrator to the
Trust pursuant to a Sub-Administration Agreement dated April 22, 2005 (the
"Sub-Administration Agreement"). Under the Sub-Administration Agreement, the
Sub-Administrator has agreed to assume many of the Administrator's duties, for
which BISYS Ohio receives a fee, paid by the Administrator, calculated at an
annual rate of five one-hundredths of one percent (0.05%) of the average daily
net assets of BB&T Variable Insurance Funds and BB&T Funds up to $5 billion, and
at the annual rate of three one-hundredths of one percent (0.03%) of the average
daily net assets of BB&T Variable Insurance Funds and BB&T Funds over $5
billion.
EXPENSES
BB&T Asset Management bears all expenses in connection with the performance of
its services other than the cost of securities (including brokerage commissions)
purchased for the Funds. The Funds will bear the following expenses relating to
their operations: taxes, interest, fees of the Trustees of the Trust, Securities
and Exchange Commission fees, outside auditing and legal expenses, advisory and
administration fees, fees and out-of-pocket expenses of the custodians and fund
accountant, certain insurance premiums, costs of maintenance of the Trust's
existence, costs of Shareholders' reports and meetings, and any extraordinary
expenses incurred in the Funds' operations. Any expense reimbursements will be
estimated daily and reconciled and paid on a monthly basis. Fees imposed upon
customer accounts for cash management services are not included within Trust
expenses for purposes of any such expense limitation.
CUSTODIAN, TRANSFER AGENT AND FUND ACCOUNTING SERVICES
US Bank NA, US Bank Center, 425 Walnut Street, Cincinnati, Ohio 45202, serves as
custodian to the Trust with respect to the Funds pursuant to a Custody Agreement
dated as of April 22, 2005. The custodian's responsibilities include
safeguarding and controlling the Funds' cash and securities, handling the
receipt and delivery of securities, and collecting interest and dividends on
such Funds' investments. US Bank NA receives a fee, calculated daily and paid
monthly, on an annual basis equal to 0.01% of the net assets of each fund, for
its services as custodian.
BISYS Ohio serves as transfer agent and dividend disbursing agent for the Funds
pursuant to an agreement dated as of April 22, 2005. Under this agreement, BISYS
Ohio performs the following services, among others: maintenance of Shareholder
records for each of the Trust's Shareholders of record; processing Shareholder
purchase and redemption orders; processing transfers and exchanges of Shares on
the Shareholder files and records; processing dividend payments and
reinvestments; and assistance in the mailing of Shareholder reports and proxy
solicitation materials.
In addition, BISYS Ohio provides certain fund accounting services to the Trust
pursuant to a Fund Accounting Agreement dated April 22, 2005. Under the Fund
Accounting Agreement, BISYS Ohio maintains the accounting books and records for
the Funds, including journals containing an itemized daily record of all
purchases and sales of portfolio securities, all receipts and disbursements of
cash and all other debits and credits, general and auxiliary ledgers reflecting
all asset, liability, reserve, capital, income and expense accounts, including
interest accrued and interest received, and other required separate ledger
accounts; maintains a monthly trial balance of all ledger accounts; performs
certain accounting services for the Funds, including calculation of the daily
net asset value per Share, calculation of the dividend and capital gain
distributions, if any, and of yield, reconciliation of cash movements with
custodians, affirmation to custodians of portfolio trades and cash settlements,
verification and reconciliation with custodians of daily trade activity;
provides certain reports; obtains dealer quotations, prices from a pricing
service or matrix prices on all portfolio securities in order to mark the
portfolio to the market; and prepares an interim balance sheet, statement of
income and expense, and statement of changes in net assets for the Funds.
42
BISYS Ohio receives a fee, computed daily and paid periodically, at an annual
rate equal to 0.01% on the aggregate net assets of all Funds for its services as
transfer agent and, for its services as fund accountant, BISYS Ohio receives a
fee, computed daily and paid periodically, at an annual rate equal to 0.01% on
the aggregate net assets of all Funds.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The firm of KPMG LLP, 191 W. Nationwide Blvd., Suite 500, Columbus, Ohio 43215,
serves as the independent registered public accounting firm for the Funds. Its
services comprise auditing the Funds' financial statements and advising the
Funds as to certain accounting and tax matters.
LEGAL COUNSEL
Ropes & Gray LLP, One Metro Center, 700 12th St., N.W., Washington, D.C.
20005-3948, is counsel to the Trust and has passed upon the legality of the
Shares offered hereby.
CODE OF ETHICS
The Trust, BB&T Asset Management, the Sub-Advisers and BISYS each have adopted a
code of ethics under Rule 17j-1 of the Investment Company Act of 1940, which is
designed to prevent affiliated persons of the Trust, BB&T Asset Management, the
Sub-Advisers and BISYS from engaging in deceptive, manipulative, or fraudulent
activities in connection with securities held or to be acquired by the Funds
(which may also be held by persons subject to a code). There can be no assurance
that the codes will be effective in preventing such activities.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES
The Trust is a Massachusetts business trust that was organized on November 8,
2004. The Trust's Declaration of Trust was filed with the Secretary of the
Commonwealth of Massachusetts on the same date. The Declaration of Trust
authorizes the Board of Trustees to issue an unlimited number of Shares, which
are units of beneficial interest, without par value. The Trust's Declaration of
Trust authorizes the Board of Trustees to divide or redivide any unissued Shares
of the Trust into one or more additional series or classes by setting or
changing in any one or more respects their respective preferences, conversion or
other rights, voting power, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption.
Shares have no subscription or preemptive rights and only such conversion or
exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectuses and this SAI, the Trust's
Shares will be fully paid and non-assessable by the Trust. In the event of a
liquidation or dissolution of the Trust, Shareholders of a Fund are entitled to
receive the assets available for distribution belonging to that Fund, and a
proportionate distribution, based upon the relative asset values of the
respective series, of any general assets not belonging to any particular series
which are available for distribution.
Each Share represents an equal proportionate interest in the Fund with other
Shares of the Fund, and is entitled to such dividends and distributions out of
the income earned on the assets belonging to the Fund as are declared at the
discretion of the Trustees. Shares are without par value. Shareholders are
entitled to one vote for each dollar of value invested and a proportionate
fractional vote for any fraction of a dollar invested. Shareholders will vote in
the aggregate and not by portfolio except as otherwise expressly required by
law.
An annual or special meeting of Shareholders to conduct necessary business is
not required by the Trust's Declaration of Trust, the 1940 Act or other
authority except, under certain circumstances, to elect Trustees, amend the
Declaration of Trust, approve an investment advisory agreement and to satisfy
certain other requirements. To the extent that such a meeting is not required,
the Trust may elect not to have an annual or special meeting.
The Trust will call a special meeting of Shareholders for purposes of
considering the removal of one or more Trustees upon written request therefor
from Shareholders holding not less than 10% of the outstanding votes of the
Trust. At such a meeting, a quorum of Shareholders (constituting a majority of
votes attributable to all outstanding Shares of the Trust), by majority vote,
has the power to remove one or more Trustees. In accordance with current laws,
it is anticipated that an insurance company issuing a variable contract that
participates in the Fund will request voting instructions from variable contract
owners and will vote shares or other voting
43
interests in the separate account in proportion of the voting instructions
received.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding Shares of each Fund
affected by the matter. For purposes of determining whether the approval of a
majority of the outstanding Shares of a Fund will be required in connection with
a matter, a Fund will be deemed to be affected by a matter unless it is clear
that the interests of each Fund in the matter are identical, or that the matter
does not affect any interest of the Fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change in investment policy submitted to
Shareholders would be effectively acted upon with respect to a series only if
approved by a majority of the outstanding Shares of such Fund. However, Rule
18f-2 also provides that the ratification of independent public accountants, the
approval of principal underwriting contracts, and the election of Trustees may
be effectively acted upon by Shareholders of the Trust voting without regard to
Fund.
VOTE OF A MAJORITY OF THE OUTSTANDING SHARES
As used in the Funds' Prospectuses and the SAI, "vote of a majority of the
outstanding Shares of the Trust or the Fund" means the affirmative vote, at an
annual or special meeting of Shareholders duly called, of the lesser of (a) 67%
or more of the votes of Shareholders of the Trust or the Fund present at such
meeting at which the holders of more than 50% of the votes attributable to the
Shareholders of record of the Trust or the Fund are represented in person or by
proxy, or (b) the holders of more than 50% of the outstanding votes of
Shareholders of the Trust or the Fund.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, holders of units of interest in a business trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. However, the Trust's Declaration of Trust provides
that Shareholders shall not be subject to any personal liability for the
obligations of the Trust. The Declaration of Trust provides for indemnification
out of the trust property of any Shareholder held personally liable solely by
reason of his or her being or having been a Shareholder. The Declaration of
Trust also provides that the Trust shall, upon request, reimburse any
Shareholder for all legal and other expenses reasonably incurred in the defense
of any claim made against the Shareholder for any act or obligation of the
Trust, and shall satisfy any judgment thereon. Thus, the risk of a Shareholder
incurring financial loss on account of Shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations.
The Declaration of Trust states further that no Trustee, officer, or agent of
the Trust shall be personally liable in connection with the administration or
preservation of the assets of the Trust or the conduct of the Trust's business;
nor shall any Trustee, officer, or agent be personally liable to any person for
any action or failure to act except for his own bad faith, willful misfeasance,
gross negligence, or reckless disregard of his duties. The Declaration of Trust
also provides that all persons having any claim against the Trustees or the
Trust shall look solely to the assets of the Trust for payment.
DISCLOSURE OF PORTFOLIO HOLDINGS
Information regarding portfolio holdings may be made available to third parties
in the following circumstances:
- Through disclosure in a Fund's latest annual or semi-annual report or Form
N-Q;
- In marketing and other materials, provided that the information regarding
portfolio holdings contained therein is at least fifteen days old; or
- When a Fund has a legitimate business purpose for doing so (see example
below), and either the recipients are subject to a confidentiality
agreement or the Board has determined that the policies of the recipient
are adequate to protect the information that is disclosed. Such disclosures
will be authorized by the Fund's Chief Executive Officer or Chief Financial
Officer and will be reported periodically to the Board.
When it has been determined that a legitimate business purpose exists for the
disclosure of portfolio holdings, the disclosure is considered to be in the best
interests of shareholders, and conflicts of interest between the Fund's
shareholders, investment adviser, principal underwriter, or any affiliated
person of the Funds, are addressed through the imposition of a duty of
confidentiality on the recipient of the information.
Examples of instances in which a legitimate business purpose exists for the
selective disclosure of portfolio securities include: for due diligence purposes
to an investment adviser that is in merger or acquisition talks with the Fund's
adviser, to a newly hired investment adviser or sub-adviser prior to commencing
its duties, and to a performance reporting bureau or rating agency for use in
developing a
44
rating.
It is the policy of the Fund to not disclose material information about its
portfolio holdings, trading strategies implemented or to be implemented, or
pending transactions to third parties other than the Fund's service providers.
The Fund's service providers are prohibited from disclosing to other third
parties material information about the Fund's portfolio holdings, trading
strategies implemented or to be implemented, or pending transactions. However,
the Fund may provide information regarding its portfolio holdings to its service
providers where relevant to duties to be performed for the Fund. The Board of
Trustees has determined that disclosure under such circumstances is in the best
interests of shareholders because it is necessary to the Fund's operation, and
it is subject to a confidentiality requirement. Such service providers include
fund accountants (currently, BISYS Ohio), administrators (currently, BB&T Asset
Management, Inc.), sub-administrators (currently, BISYS Ohio), investment
advisers and sub-advisers (currently, BB&T Asset Management, Inc., Scott &
Stringfellow, Inc, and Sterling Capital Management, LLC), custodians (currently,
US Bank NA), independent public accountants (currently, KPMG LLP), and attorneys
(currently, Ropes & Gray LLP).
In no event shall information regarding the Fund's portfolio holdings be
disclosed for compensation.
The frequency with which information regarding the Fund's portfolio holdings
will be disclosed, as well as the lag time associated with such disclosure, will
vary depending on such factors as the circumstances of the disclosure and the
reason therefor.
Other than the service provider arrangements discussed above, the Fund does not
have in place any ongoing arrangements to provide information regarding
portfolio holdings to any person.
ADDITIONAL TAX INFORMATION
The following discussion summarizes certain U.S. federal tax considerations
concerning the ownership of shares in the Funds by insurance company separate
accounts for purposes of funding variable life insurance policies and variable
annuity contracts (as well as by certain other investors). This discussion does
not purport to be complete or to deal with all aspects of federal income
taxation that may be relevant. It deals with only the status of the Funds as
regulated investment companies under subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code") and the application of the diversification
rules of Section 817(h) of the Code. This discussion is based upon present
provisions of the Code, the regulations promulgated thereunder, and judicial and
administrative ruling authorities, all of which are subject to change, which
change may be retroactive. Prospective investors should consult their own tax
advisors with regard to the federal, state, local and foreign tax aspects of an
investment in the Fund.
Because the shareholders of the Funds will be insurance company separate
accounts (and certain other investors), no attempt is made herein to describe
the federal tax considerations at the shareholder level. The discussion below is
generally based on the assumption that the shares of each Fund will be respected
as owned by insurance company separate accounts. If this is not the case, the
person or persons determined to own the Fund shares will be currently taxed on
Fund distributions, and on the proceeds of any redemption of Fund shares, under
the Code.
For information concerning the federal tax consequences to a holder of a
variable life insurance policy or a variable annuity contract, please refer to
the prospectus for the relevant variable insurance contract.
Each Fund intends to qualify annually and to elect to be treated as a regulated
investment company under Subchapter M of the Code. If a Fund so qualifies, it
generally will not be subject to federal income taxes to the extent that it
distributes on a timely basis its investment company taxable income and its net
capital gains.
To qualify to be taxed as a regulated investment company, each Fund generally
must, among other things: (i) derive in each taxable year at least 90% of its
gross income from dividends, interest, payments with respect to securities
loans, and gains from the sale or other disposition of stock, securities or
foreign currencies, or other income (including but not limited to gains from
options, futures, or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; (ii) diversify its holdings
so that, at the end of each quarter of the taxable year (a) at least 50% of the
market value of the Fund's total assets is represented by cash, cash items
(including receivables), U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
of any one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (b) not more than 25% of the
value of its total assets is invested (x) in the securities (other than U.S.
Government securities or the securities of other regulated investment companies)
of any one issuer or of two or more issuers which the Fund controls and which
are engaged in the same, similar, or related trades or businesses or (y) in the
securities of one or more qualified publicly traded partnerships (as defined
below); and (iii) distribute with respect to each taxable year at least 90% of
the sum of its investment company taxable income (which includes, among other
items, dividends, interest, and net short-term capital gains in excess of any
net long-term capital losses) and its net tax-exempt interest
45
income, for such year.
In general, for purposes of the 90% gross income requirement described in clause
(i) above, income derived from a partnership will be treated as qualifying
income only to the extent such income is attributable to items of income of the
partnership which would be qualifying income if realized by the regulated
investment company. However, 100% of the net income derived from an interest in
a "qualified publicly traded partnership" (defined as a partnership (a)
interests in which are traded on an established securities market or readily
tradable on a secondary market or the substantial equivalent thereof and (b)
that derives less than 90% of its income from the qualifying income described in
clause (i) above) will be treated as qualifying income. In addition, although in
general the passive loss rules of the Code do not apply to regulated investment
companies, such rules do apply to a regulated investment company with respect to
items attributable to an interest in a qualified publicly traded partnership.
Finally, for purposes of clause (ii) above, the term "outstanding voting
securities of such issuer" will include the equity securities of a qualified
publicly traded partnership.
As a regulated investment company, each Fund generally will not be subject to
U.S. federal income tax on its investment company taxable income and net capital
gains (any net long-term capital gains in excess of the sum of net short-term
capital losses and capital loss carryovers from prior years), if any, that it
distributes to Shareholders. Each Fund intends to distribute to its
Shareholders, at least annually, all or substantially all of its investment
company taxable income and any net capital gains. Amounts not distributed by a
Fund on a timely basis in accordance with a calendar year distribution
requirement may be subject to a nondeductible 4% excise tax. To avoid the tax,
each Fund may be required to distribute (or be deemed to have distributed)
during each calendar year, (i) at least 98% of its ordinary income (not taking
into account any capital gains or losses) for the calendar year, (ii) at least
98% of its capital gains in excess of its capital losses for the twelve month
period ending on October 31 of the calendar year (adjusted for certain ordinary
losses), and (iii) all ordinary income and capital gains for previous years that
were not distributed during such years. The excise tax generally does not apply
to any regulated investment company whose shareholders are solely either
tax-exempt pension trusts or separate accounts of life insurance companies
funding variable contracts. Although the Funds believe they are not subject to
the excise tax, each Fund intends to make its distributions in accordance with
the calendar year distribution requirement. A distribution will be treated as
paid on December 31 of the calendar year if it is declared by a Fund during
October, November, or December of that year to Shareholders of record on a date
in such a month and paid by the Fund during January of the following calendar
year. Such distributions will be taxable to any taxable Shareholders for the
calendar year in which the distributions are declared, rather than the calendar
year in which the distributions are actually received.
If a Fund were to fail to qualify for treatment as a regulated investment
company for any taxable year, (1) it would be taxed as an ordinary corporation
on its taxable income for that year without being able to deduct the
distributions it makes to its shareholders, and (2) each insurance company
separate account invested in the Fund would fail to satisfy the diversification
requirements of Section 817(h) of the Code, described below, with the result
that the contracts supported by that account would no longer be eligible for tax
deferral. All distributions from earnings and profits, including any
distributions of net tax-exempt income and net long-term capital gains, would be
taxable to shareholders as ordinary income. In addition, the Fund could be
required to recognize unrealized gains, pay substantial taxes and interest and
make substantial distributions before requalifying for treatment as a regulated
investment company.
Each Fund also intends to comply with the separate diversification requirements
imposed by Section 817(h) of the Code and the regulations thereunder on certain
insurance company separate accounts. These requirements, which are in addition
to the diversification requirements imposed on a Fund by the 1940 Act and
Subchapter M of the Code, place certain limitations on assets of each insurance
company separate account used to fund variable contracts. Because Section 817(h)
and those regulations treat the assets of a Fund as assets of the related
separate account, these regulations are imposed on the assets of the Fund.
Specifically, the regulations provide that, after a one year start-up period or
except as permitted by the "safe harbor" described below, as of the end of each
calendar quarter or within 30 days thereafter no more than 55% of the total
assets of a Fund may be represented by any one investment, no more than 70% by
any two investments, no more than 80% by any three investments and no more than
90% by any four investments. For this purpose, all securities of the same issuer
are considered a single investment, and each U.S. Government agency and
instrumentality is considered a separate issuer. Section 817(h) provides, as a
safe harbor, that a separate account will be treated as being adequately
diversified if the diversification requirements under Subchapter M are satisfied
and no more than 55% of the value of the account's total assets is attributable
to cash and cash items (including receivables), U.S. Government securities and
securities of other regulated investment companies. Failure by a Fund to both
qualify as a regulated investment company and satisfy the Section 817(h)
requirements would generally cause the variable contracts to lose their
favorable tax status and require a contract holder to include in ordinary income
any income accrued under the contracts for the current and all prior taxable
years. Under certain circumstances described in the applicable Treasury
regulations, inadvertent failure to satisfy the applicable diversification
requirements may be corrected, but such a correction would require a payment to
the Internal Revenue Service (the "IRS") based on the tax contract holders would
have incurred if they were treated as receiving the income on the contract for
the period during which the diversification requirements were not satisfied. Any
such failure may also result in adverse tax consequences for the insurance
company issuing the contracts.
46
The IRS has indicated that a degree of investor control over the investment
options underlying variable contracts may interfere with the tax-deferred
treatment described above. The Treasury Department has issued rulings addressing
the circumstances in which a variable contract owner's control of the
investments of the separate account may cause the contract owner, rather than
the insurance company, to be treated as the owner of the assets held by the
separate account, and is likely to issue additional rulings in the future. If
the contract owner is considered the owner of the securities underlying the
separate account, income and gains produced by those securities would be
included currently in the contract owner's gross income. A contract holder's
control of the investments of the separate accounts in this case is similar to,
but different in certain respects from, those described by the IRS in rulings.
The Funds generally have objectives and strategies that are not materially
narrower than the investment strategies described in more recent IRS rulings in
which strategies, such as large company stocks, international stocks, small
company stocks, mortgage-based securities, telecommunications stocks and
financial services stocks, were held not to constitute sufficient control over
individual investment decisions so as to cause ownership of such investments to
be attributable to contract owners. The regulations proposed by the Treasury
Department in the summer of 2004 relating to Section 817(h) and current
published IRS guidance do not directly speak to the strategies such as those
reflected in the Fund, described above. However, the IRS and the Treasury
Department may in the future provide further guidance as to what it deems to
constitute an impermissible level of "investor control" over a separate
account's investments in funds such as the Fund, and such guidance could affect
the treatment of the Fund described herein, including retroactively.
In the event that additional rules or regulations are adopted, there can be no
assurance that a given Fund will be able to operate as currently described, or
that the Trust will not have to change a Fund's investment objective or
investment policies. A Fund's investment objective and the investment policies
of a Fund may be modified as necessary to prevent any such prospective rules and
regulations from causing Variable Contract Owners to be considered the owners of
the Shares of a Fund.
Under Treasury Regulations, if a shareholder recognizes a loss on a disposition
of a Fund's shares of $2 million or more for an individual shareholder or $10
million or more for a corporate shareholder (including, for example, an
insurance company holding a separate account), the shareholder must file with
the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio
securities are in many cases excepted from this reporting, requirement, but
under current guidance, shareholders of a regulated investment company are not
excepted. This filing requirement applies even though, as a practical matter,
any such loss would not, for example, reduce the taxable income of an insurance
company. Future guidance may extend the current exception from this reporting
requirement to shareholders of most or all regulated investment companies.
If a Fund invests in shares of a passive foreign investment company, the Fund
may be subject to U.S. federal income tax on a portion of an "excess
distribution" from, or of the gain from the sale of part or all of the shares
in, such company. In addition, an interest charge may be imposed with respect to
deferred taxes arising from such distributions or gains. A Fund may, however, be
able to elect alternative tax treatment for such investments that would avoid
this unfavorable result.
Under the Code, gains or losses attributable to fluctuations in foreign currency
exchange rates which occur between the time a Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time that Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain futures contracts, forward contracts, and options,
gains or losses attributable to fluctuations in the value of foreign currency
between the date of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "Section 988" gains or losses, may increase or
decrease the amount of a Fund's investment company taxable income to be
distributed to its Shareholders as ordinary income.
Distributions
Distributions of any investment company taxable income (which includes among
other items, dividends, interest, and any net realized short-term capital gains
in excess of net realized long-term capital losses) are treated as ordinary
income for tax purposes in the hands of a Shareholder. Net capital gains (the
excess of any net long-term capital gains over net short term capital losses)
will, to the extent distributed, be treated as long-term capital gains in the
hands of a Shareholder regardless of the length of time the Shareholder may have
held the Shares.
Hedging Transactions
The diversification requirements applicable to each Fund's assets may limit the
extent to which a Fund will be able to engage in
47
transactions in options, futures contracts, or forward contracts.
Other Taxes
Distributions may also be subject to additional state, foreign and local taxes,
depending on each Shareholder's situation. Shareholders are advised to consult
their own tax advisers with respect to the particular tax consequences to them
of an investment in a Fund.
48
The following table indicates the name, address and percentage of ownership of
each person who owns of record or is known by Variable Insurance Funds, the
predecessor to the Funds of the Trust, to own beneficially 5% or more of any
Class of the outstanding shares of Variable Insurance Funds as of April 3, 2006:
PERCENT OF THE CLASS
TOTAL ASSETS HELD
FUND/CLASS BY THE SHAREHOLDER
---------- --------------------
CAP MANAGER EQUITY FUND VIF
WILBRANCH CO 55.88%
PO BOX 2887
ATTN J MICHAEL POLLOCK
WILSON NC 278941847
HARTFORD LIFE 34.86%
200 HOPMEADOW ST
ATTN DAVID TEN-BROECK
SIMSBURY CT 06070
NATIONWIDE INSURANCE COMPANY 6.62%
NWVA9
PO BOX 182029
COLUMBUS OH 432182029
LARGE CAP VIF
HARTFORD LIFE 70.83%
200 HOPMEADOW ST
ATTN DAVID TEN-BROECK
SIMSBURY CT 06070
WILBRANCH CO 25.41%
PO BOX 2887
ATTN J MICHAEL POLLOCK
WILSON NC 278941847
LARGE CAP GROWTH VIF
HARTFORD LIFE 48.46%
200 HOPMEADOW ST
ATTN DAVID TEN-BROECK
SIMSBURY CT 06070
WILBRANCH CO 44.18%
49
PO BOX 2887
ATTN J MICHAEL POLLOCK
WILSON NC 278941847
NATIONWIDE INSURANCE COMPANY 7.13%
NWVA9
PO BOX 182029
COLUMBUS OH 432182029
MID CAP GROWTH VIF
HARTFORD LIFE 51.65%
200 HOPMEADOW ST
ATTN DAVID TEN-BROECK
SIMSBURY CT 06070
WILBRANCH CO 39.19%
PO BOX 2887
ATTN J MICHAEL POLLOCK
WILSON NC 278941847
NATIONWIDE INSURANCE COMPANY 7.99%
NWVA9
PO BOX 182029
COLUMBUS OH 432182029
SPECIAL OPPORTUNITY EQUITY VIF
WILBRANCH CO 59.02%
PO BOX 2887
ATTN J MICHAEL POLLOCK
WILSON NC 278941847
HARTFORD LIFE 38.61%
200 HOPMEADOW ST
ATTN DAVID TEN-BROECK
SIMSBURY CT 06070
TOTAL RETURN BOND VIF
WILBRANCH CO 80.78%
PO BOX 2887
ATTN J MICHAEL POLLOCK
WILSON NC 278941847
HARTFORD LIFE 15.86%
200 HOPMEADOW ST
ATTN DAVID TEN-BROECK
SIMSBURY CT 06070
50
MISCELLANEOUS
Individual Trustees are elected by the Shareholders and, subject to removal by a
majority of the Board of Trustees present at a meeting of the Trustees (a quorum
being present), serve for a term lasting until the next meeting of Shareholders
at which Trustees are elected and until the election and qualification of his or
her successor. Such meetings are not required to be held at any specific
intervals. In accordance with current laws, it is anticipated that an insurance
company issuing a Variable Contract that participates in the Funds will request
voting instructions from variable contract owners and will vote shares or other
voting interests in the Separate Account in proportion of the voting
instructions received.
The Trust is registered with the Securities and Exchange Commission as a
management investment company. Such registration does not involve supervision by
the Securities and Exchange Commission of the management or policies of the
Trust.
The Prospectuses and this SAI omit certain of the information contained in the
Registration Statement filed with the Securities and Exchange Commission. Copies
of such information may be obtained from the Securities and Exchange Commission
upon payment of the prescribed fee.
The Prospectuses and this SAI are not an offering of the securities herein
described in any state in which such offering may not lawfully be made. No
salesman, dealer, or other person is authorized to give any information or make
any representation other than those contained in the Prospectuses and this SAI.
FINANCIAL STATEMENTS
Audited financial statements as of December 31, 2005 are incorporated by
reference to the Annual Report to Shareholders, dated as of December 31, 2005,
which has previously been sent to Shareholders of each Fund pursuant to the 1940
Act and previously filed with the Securities and Exchange Commission. A copy of
the Annual Report and the Funds' latest Semi-Annual Report may be obtained
without charge by contacting the Sub-Administrator at 3435 Stelzer Road,
Columbus, Ohio 43219 or by telephoning toll-free at (800) 228-1872.
51
APPENDIX
DESCRIPTION OF BOND RATINGS
DESCRIPTION OF MOODY'S BOND RATINGS:
Excerpts from Moody's description of its bond ratings are listed as follows: Aaa
- judged to be the best quality and they carry the smallest degree of investment
risk; Aa - judged to be of high quality by all standards - together with the Aaa
group, they comprise what are generally known as high-grade bonds; A - possess
many favorable investment attributes and are to be considered as "upper medium
grade obligations"; Baa - considered to be medium grade obligations, i.e., they
are neither highly protected nor poorly secured -interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time;
Ba - judged to have speculative elements, their future cannot be considered as
well assured; B - generally lack characteristics of the desirable investment;
Caa - are of poor standing - such issues may be in default or there may be
present elements of danger with respect to principal or interest; Ca -
speculative in a high degree, often in default; C - lowest rated class of bonds,
regarded as having extremely poor prospects.
Moody's also supplies numerical indicators 1, 2 and 3 to rating categories. The
modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and modifier 3 indicates
a ranking toward the lower end of the category.
DESCRIPTION OF S&P's BOND RATINGS:
Excerpts from S&P's description of its bond ratings are listed as follows: AAA -
highest grade obligations, in which capacity to pay interest and repay principal
is extremely strong; AA - has a very strong capacity to pay interest and repay
principal, and differs from AAA issues only in a small degree; A - has a strong
capacity to pay interest and repay principal, although they are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories; BBB - regarded as having an
adequate capacity to pay interest and repay principal; whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories. This
group is the lowest which qualifies for commercial bank investment. BB, B, CCC,
CC, C - predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with terms of the obligations; BB indicates the
highest grade and C the lowest within the speculative rating categories. D -
interest or principal payments are in default.
S&P applies indicators "+," no character, and "-" to its rating categories. The
indicators show relative standing within the major rating categories.
DESCRIPTION OF MOODY's COMMERCIAL PAPER RATINGS:
Excerpts from Moody's commercial paper ratings are listed as follows: PRIME - 1
- issuers (or supporting institutions) have a superior ability for repayment of
senior short-term promissory obligations; PRIME - 2 - issuers (or supporting
institutions) have a strong ability for repayment of senior short-term
promissory obligations; PRIME - 3 - issuers (or supporting institutions) have an
acceptable ability for repayment of senior short-term promissory obligations;
NOT PRIME - issuers do not fall within any of the Prime categories.
DESCRIPTION OF S&P's RATINGS FOR CORPORATE AND MUNICIPAL BONDS:
INVESTMENT GRADE RATINGS: AAA - the highest rating assigned by S&P, capacity to
pay interest and repay principal is extremely strong; AA - has a very strong
capacity to pay interest and repay principal and differs from the highest rated
issues only in a small degree; A - has strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories; BBB - regarded as having an adequate capacity to pay interest and
repay principal - whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
SPECULATIVE GRADE RATINGS: BB, B, CCC, CC, C - debt rated in these categories is
regarded as having predominantly speculative characteristics with respect to
capacity to pay interest and repay principal - while such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions; CI -
52
reserved for income bonds on which no interest is being paid; D -in default, and
payment of interest and/or repayment of principal is in arrears. PLUS (+) OR
MINUS (-) - the ratings from "AA" to "CCC" may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
DESCRIPTION OF S&P's RATINGS FOR SHORT-TERM CORPORATE DEMAND OBLIGATIONS AND
COMMERCIAL PAPER:
An S&P commercial paper rating is a current assessment of the likelihood of
timely repayment of debt having an original maturity of no more than 365 days.
Excerpts from S&P's description of its commercial paper ratings are listed as
follows: A-1 - the degree of safety regarding timely payment is strong - those
issues determined to possess extremely strong safety characteristics will be
denoted with a plus (+) designation; A-2 - capacity for timely payment is
satisfactory - however, the relative degree of safety is not as high as for
issues designated "A-1;" A-3 - has adequate capacity for timely payment -
however, is more vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations; B - regarded as having only
speculative capacity for timely payment; C - a doubtful capacity for payment; D
- in payment default - the "D" rating category is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S&P believes that such payments will be made
during such grace period.
53