NATIONS LIFEGOAL FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
NATIONS LIFEGOAL GROWTH PORTFOLIO
NATIONS LIFEGOAL BALANCED GROWTH PORTFOLIO
NATIONS LIFEGOAL INCOME AND GROWTH PORTFOLIO
INVESTOR A, INVESTOR B, INVESTOR C SHARES AND PRIMARY A AND PRIMARY B SHARES
AUGUST 1, 1998
This Statement of Additional Information ("SAI") provides supplementary
information pertaining to shares representing interests in the above listed
three investment portfolios of Nations LifeGoal Funds, Inc. (individually, a
"LifeGoal Portfolio" and collectively, the "LifeGoal Portfolios"). This SAI is
not a prospectus and should be read only in conjunction with the current
prospectuses for the aforementioned LifeGoal Portfolios related to the class or
series of shares in which one is interested, dated August 1, 1998, for the
Investor A, Investor B, Investor C, Primary A and Primary B Shares (each a
"Prospectus"). All terms used in this SAI that are defined in the Prospectuses
will have the same meanings assigned in the Prospectuses. Copies of these
Prospectuses may be obtained without charge by writing Nations Funds c/o
Stephens Inc., One NationsBank Plaza, 33rd Floor, Charlotte, North Carolina
28255, or by calling Nations Funds at 1-800-982-2271.
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TABLE OF CONTENTS
Page
INTRODUCTION ......................................................... 1
ADDITIONAL INFORMATION ON LIFEGOAL PORTFOLIO INVESTMENTS
General ......................................................... 1
Fundamental Investment Limitations .............................. 2
ADDITIONAL INFORMATION ON UNDERLYING NATIONS
FUNDS' INVESTMENTS ................................................... 4
General ......................................................... 4
Asset-Backed Securities ......................................... 4
Borrowings ...................................................... 7
Commercial Instruments .......................................... 8
Combined Transactions ........................................... 9
Convertible Securities .......................................... 9
Corporate Debt Securities ....................................... 10
Custodial Receipts .............................................. 10
Currency Swaps .................................................. 10
Delayed Delivery Transactions ................................... 11
Dollar Roll Transactions ........................................ 11
Equity Swap Transactions ........................................ 12
Foreign Currency Transactions ................................... 13
Futures, Options and Other Derivative
Instruments ................................................... 14
Guaranteed Investment Contracts ................................ 24
Interest Rate Transactions ..................................... 24
Lower Rated Debt Securities ..................................... 25
Other Investment Companies ...................................... 26
Real Estate Investment Trusts ................................... 27
Repurchase Agreements ........................................... 27
Reverse Repurchase Agreements ................................... 27
Securities Lending .............................................. 28
Short Sales ..................................................... 28
Special Situations .............................................. 28
Stripped Securities ............................................. 28
U.S. and Foreign Bank Obligations ............................... 29
U.S. Government Obligations ..................................... 30
Use of Segregated and Other Special Accounts .................... 30
Variable- and Floating-Rate Instruments ......................... 31
Warrants ........................................................ 32
When-Issued Purchases and Forward Commitments ................... 32
NET ASSET VALUE ...................................................... 33
Purchases and Redemptions ....................................... 33
Investment Strategy ............................................. 33
Expense Ratios for Underlying Nations Funds (Primary A Shares) .. 33
Net Asset Value Determination ................................... 35
Exchanges ....................................................... 35
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DESCRIPTION OF SHARES ................................................ 36
Dividends and Distributions ..................................... 36
ADDITIONAL INFORMATION CONCERNING TAXES .............................. 36
General ......................................................... 37
Excise Tax ...................................................... 38
Taxation of Investments of a Regulated Investment Company ....... 38
Capital Gain Distributions ...................................... 39
Disposition of Fund Shares ...................................... 40
Federal Income Tax Rates ........................................ 40
Backup Withholding .............................................. 40
Corporate Shareholders and Dividends Received Deduction ......... 41
Foreign Shareholders ............................................ 41
New Regulations ................................................. 42
Foreign Taxes ................................................... 42
Tax-Deferred Plans .............................................. 42
Other Matters ................................................... 42
DIRECTORS AND OFFICERS OF LIFEGOAL PORTFOLIOS ........................ 42
Directors, Trustees and Officers of Underlying Nations Funds .... 45
Compensation Table .............................................. 46
SECURITY HOLDERS ..................................................... 48
INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY,
TRANSFER AGENCY, SHAREHOLDER SERVICING, SHAREHOLDER
ADMINISTRATION AND DISTRIBUTION AGREEMENTS ........................... 51
The Company and Its Common Stock ................................ 51
Investment Advisory Arrangements of the LifeGoal Portfolios ..... 51
Investment Advisory Arrangements of the Underlying Nations Funds 54
Investment Styles ............................................... 58
Administrator and Co-Administrator .............................. 64
Distributor ..................................................... 65
Distribution Plans and Shareholder Servicing
Arrangements for Investor Shares .............................. 66
Investor A Shares ......................................... 66
Investor B Shares ......................................... 67
Investor C Shares ......................................... 68
Information Applicable to Investor A,
Investor B and Investor C Shares .............................. 70
Shareholder Administration Plan
(Primary B Shares) ........................................... 71
Expenses ........................................................ 73
Transfer Agents and Custodians .................................. 74
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INDEPENDENT ACCOUNTANT AND REPORTS ................................... 74
COUNSEL .............................................................. 74
ADDITIONAL INFORMATION ON PERFORMANCE ................................ 74
Yield Calculations .............................................. 75
Total Return Calculations ....................................... 75
SCHEDULE A - Description of Ratings .................................. A-1
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INTRODUCTION
Nations LifeGoal Funds, Inc. (the "Company") is a diversified open-end
management investment company. The rules and regulations of the Securities and
Exchange Commission (the "SEC") require all mutual funds to furnish prospective
investors certain information concerning the activities of the mutual fund being
considered for investment. This information about the Company is included in
various Prospectuses. The Prospectuses relate to the shares of LifeGoal Growth
Portfolio, LifeGoal Balanced Growth Portfolio and LifeGoal Income and Growth
Portfolio (each a "LifeGoal Portfolio" and collectively, the "LifeGoal
Portfolios"). The Primary A and Primary B Shares are collectively referred to
herein as "Primary Shares" and the Investor A, Investor B and Investor C Shares
are collectively referred to as "Investor Shares." NationsBanc Advisors, Inc.
("NBAI") is the investment adviser to the LifeGoal Portfolios. TradeStreet
Investment Associates, Inc. ("TradeStreet") is investment sub-adviser. As used
herein the "Adviser" shall mean NBAI and/or TradeStreet as the context may
require.
Each LifeGoal Portfolio may (i) own more than 3% of the total outstanding
stock of a registered investment company which is a member of the Nations Funds
Family, (ii) invest more than 5% of its assets in any one such investment
company, and (iii) invest more than 10% of it assets, collectively, in
registered investment companies which are members of the Nations Funds Family.
Each LifeGoal Portfolio will concentrate more than 25% of its assets in the
mutual fund industry. However, each of the underlying mutual funds in which the
LifeGoal Portfolios will invest will not concentrate 25% or more of its total
assets in any one industry.
This SAI is intended to furnish prospective investors with additional
information concerning the Company and the LifeGoal Portfolios. Some of the
information required to be in this SAI is also included in the LifeGoal
Portfolios current Prospectuses, and, in order to avoid repetition, this SAI
will reference sections of the Prospectuses. Additionally, the Prospectuses and
this SAI omit certain information contained in "Part C" of the registration
statement filed with the SEC. Copies of the registration statement, including
items omitted from the Prospectuses and this SAI, may be obtained from the SEC.
ADDITIONAL INFORMATION ON THE LIFEGOAL PORTFOLIO INVESTMENTS
GENERAL
Information concerning each LifeGoal Portfolio's investment objective is
set forth in each of the Prospectuses under the headings "Prospectus Summary"
and "How Objectives Are Pursued". There can be no assurance that the LifeGoal
Funds will achieve their objectives. The principal features of the LifeGoal
Funds' investment programs and the primary risks associated with those
investment programs are discussed in the Prospectuses under the heading "How
Objectives Are Pursued." The principal features and certain risks of the
underlying Nations Funds are discussed in the Prospectuses under the heading
"Description of Underlying Nations Funds."
Under extraordinary circumstances, the LifeGoal Portfolios may invest 100%
of their assets in Nations Prime Fund. Such circumstances that would prompt a
shift in the allocation of assets for defensive purposes by the Adviser include
concerns about a precipitous decline in the net asset value of any of the
underlying Nations Funds or similar volatility in the Nasdaq National Market,
New York Stock Exchange or American Stock Exchange. The designation of
circumstances as sufficiently extraordinary to permit this defensive investing
is within the Adviser's discretion.
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Although each LifeGoal Portfolio intends to invest substantially all of its
assets in underlying Nations Funds, each LifeGoal Portfolio reserves the right
to invest assets not so invested in government securities, repurchase agreements
and money market instruments.
FUNDAMENTAL INVESTMENT LIMITATIONS
Each LifeGoal Portfolio is subject to a number of investment limitations.
The following investment limitations are matters of fundamental policy and may
not be changed without the affirmative vote of the holders of a majority of the
LifeGoal Fund's outstanding shares.
Under the Investment Company Act of 1940, as amended ("1940 Act"), such
approval requires the affirmative vote, at a meeting of shareholders of a
LifeGoal Portfolio, of (i) at least 67% of the shares of the LifeGoal Portfolio
present at the meeting, if the holders of more than 50% of the outstanding
shares of the LifeGoal Portfolio are present in person or by represented proxy;
or (ii) more than 50% of the outstanding shares of the LifeGoal Portfolio,
whichever is less.
The LifeGoal Portfolios may not:
1. Borrow money or issue senior securities as defined in the 1940 Act except
that (a) a Portfolio may borrow money from banks for temporary or emergency
purposes in amounts up to one-third of the value of such Portfolio's total
assets at the time of borrowing, provided that borrowings in excess of 5% of
the value of such Portfolio's total assets will be repaid prior to the
purchase of additional portfolio securities by such Portfolio, (b) a Portfolio
may enter into commitments to purchase securities in accordance with the
Portfolio's investment program, including delayed delivery and when- issued
securities, which commitments may be considered the issuance of senior
securities, and (c) a Portfolio may issue multiple classes of shares in
accordance with SEC regulations or exemptions under the 1940 Act. The purchase
or sale of futures contracts and related options shall not be considered to
involve the borrowing of money or issuance of senior securities.
2. Purchase any securities on margin (except for such short-term credits as
are necessary for the clearance of purchases and sales of portfolio
securities) or sell any securities short (except against the box.) For
purposes of this restriction, the deposit or payment by the Portfolio of
initial or maintenance margin connection with futures contracts and related
options and options on securities is not considered to be the purchase of a
security on margin.
3. Underwrite securities issued by any other person, except to the extent that
the purchase of securities and the later disposition of such securities in
accordance with the Portfolio's investment program may be deemed an
underwriting. This restriction shall not limit a Fund's ability to invest in
securities issued by other registered investment companies.
4. Invest in real estate or real estate limited partnership interests. (Each
Portfolio may, however, purchase and sell securities secured by real estate or
interests therein or issued by issuers which invest in real estate or
interests therein.) This restriction does not apply to real estate limited
partnerships listed on a national stock exchange (e.g., the New York Stock
Exchange).
5. Purchase or sell commodity contracts except that each Portfolio may, to the
extent appropriate under its investment policies, purchase publicly traded
securities of companies engaging in whole or in part in such activities, may
enter into futures contracts and related options, may engage in transactions
on a when-issued or forward commitment basis, and may enter into forward
currency contracts in accordance with its investment policies.
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6. Make loans, except that a Portfolio may purchase and hold debt instruments
(whether such instruments are part of a public offering or privately placed),
may enter into repurchase agreements and may lend portfolio securities in
accordance with its investment policies.
7. The LifeGoal Portfolios will be diversified and each Portfolio may not
purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or
securities of other investment companies) if, immediately after such purchase,
more than 5% of the value of such Portfolio's total assets would be invested
in the securities of such issuer, except that up to 25% of the value of the
Portfolio's total assets may be invested without regard to these limitations
and with respect to 75% of such Portfolio's assets, such Portfolio will not
hold more than 10% of the voting securities of any issuer.
8. Each LifeGoal Portfolio will concentrate its investments in the securities
of other investment companies.
In addition, certain non-fundamental investment restrictions are also
applicable to the LifeGoal Portfolio, including the following:
1. No Portfolio of the Company will purchase or retain the securities of any
issuer if the officers, or directors of the Company, its advisers, or managers
owning beneficially more than one half of one percent of the securities of
each issuer together own beneficially more than five percent of such
securities.
2. No Portfolio of the Company will purchase securities of unseasoned issuers,
including their predecessors, that have been in operation for less than three
years, if by reason thereof the value of such Portfolio's investment in such
classes of securities would exceed 5% of such Portfolio's total assets. For
purposes of this limitation, issuers include predecessors, sponsors,
controlling persons, general partners, guarantors and originators of
underlying assets which have less than three years of continuous operation or
relevant business experience.
3. No Portfolio will purchase puts, calls, straddles, spreads and any
combination thereof if by reason thereof the value of its aggregate investment
in such classes of securities will exceed 5% of its total assets except that:
(a) this restriction shall not apply to standby commitments, (b) this
restriction shall not apply to a Portfolio's transactions in futures contracts
and related options, and (c) a Portfolio may obtain short-term credit as may
be necessary for the clearance of purchases and sales of portfolio securities.
4. No Portfolio will invest in warrants, valued at the lower of cost or
market, in excess of 5% of the value of such Portfolio's assets, and no more
than 2% of the value of the Portfolio's net assets may be invested in warrants
that are not listed on principal domestic or foreign exchanges (for purposes
of this undertaking, warrants acquired by a Portfolio in units or attached to
securities will be deemed to have no value).
5. No Portfolio of the Company will purchase securities of companies for the
purpose of exercising control.
6. No Portfolio of the Company will invest more than 15% of the value of its
net assets in illiquid securities, including repurchase agreements with
remaining maturities in excess of seven days, time deposits with maturities in
excess of seven days, restricted securities, and other securities which are
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not readily marketable. For purposes of this restriction, illiquid securities
shall not include securities which may be resold under Rule 144A under the
Securities Act of 1933 that the Board of Directors, or its delegate,
determines to be liquid, based upon the trading markets for the specific
security.
7. No Portfolio of the Company will mortgage, pledge or hypothecate any assets
except to secure permitted borrowings and then only in an amount up to
one-third of the value of the Portfolio's total assets at the time of
borrowing. For purposes of this limitation, collateral arrangements with
respect to the writing of options, futures contracts, options on futures
contracts, and collateral arrangements with respect to initial and variation
margin are not considered to be a mortgage, pledge or hypothecation of assets.
8. No Portfolio of the Company will purchase oil, gas or mineral leases or
other interests (a Portfolio may, however, purchase and sell the securities of
companies engaged in the exploration, development, production, refining,
transporting and marketing of oil, gas or minerals).
Notwithstanding the foregoing restrictions, the underlying mutual funds in
which LifeGoal Portfolios may invest have adopted their own investment
restrictions which may be more or less restrictive than those listed above,
thereby allowing a LifeGoal Portfolio to participate in certain investment
strategies indirectly that are prohibited under the fundamental and non-
fundamental investment restrictions listed above and in a LifeGoal Portfolio
Prospectus. The investment restrictions of these underlying mutual funds are set
forth in their respective statements of additional information.
ADDITIONAL INFORMATION ON UNDERLYING NATIONS FUNDS' INVESTMENTS
GENERAL
Information concerning the investment objective and policies of each
underlying Nations Fund is set forth in each of their prospectuses under the
headings "Objectives," "How Objectives Are Pursued," and "Appendix A" and their
respective SAIs. As is the case with the LifeGoal Portfolios, there can be no
assurance that the underlying Nations Funds will achieve their objectives. The
principal features of the Nations Funds' investment programs and the primary
risks associated with those investment programs are discussed in their
prospectuses under the heading "How Objectives Are Pursued" and "Appendix A."
ASSET-BACKED SECURITIES
IN GENERAL. Asset-backed securities arise through the grouping by
governmental, government-related, and private organizations of loans,
receivables, or other assets originated by various lenders. Asset-backed
securities consist of both mortgage- and non-mortgage-backed securities.
Interests in pools of these assets may differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal paid at maturity or specified call dates. Conversely,
asset-backed securities provide periodic payments which may consist of both
interest and principal payments.
The life of an asset-backed security varies depending upon rate of the
prepayment of the underlying debt instruments. The rate of such prepayments will
be a function of current market interest rates, and other economic and
demographic factors. For example, falling interest rates generally result in an
increase in the rate of prepayments of mortgage loans while rising interest
rates generally decrease the rate of prepayments. An acceleration in prepayments
in response to sharply falling interest rates will
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shorten the security's average maturity and limit the potential appreciation in
the security's value relative to a conventional debt security. Consequently,
asset- backed securities may not be as effective in locking in high, long-term
yields. Conversely, in periods of sharply rising rates, prepayments are
generally slow, increasing the security's average life and its potential for
price depreciation.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent an
ownership interest in a pool of mortgage loans.
Mortgage pass-through securities may represent participation interests in
pools of residential mortgage loans originated by U.S. governmental or private
lenders and guaranteed, to the extent provided in such securities, by the U.S.
Government or one of its agencies, authorities or instrumentalities. Such
securities, which are ownership interests in the underlying mortgage loans,
differ from conventional debt securities, which provide for periodic payment of
interest in fixed amounts (usually semi-annually) and principal payments at
maturity or on specified call dates. Mortgage pass-through securities provide
for monthly payments that are a "pass-through" of the monthly interest and
principal payments (including any prepayments) made by the individual borrowers
on the pooled mortgage loans, net of any fees paid to the guarantor of such
securities and the servicer of the underlying mortgage loans.
The guaranteed mortgage pass-through securities in which a Fund may invest
may include those issued or guaranteed by GNMA, FNMA and FHLMC. Such
Certificates are mortgage-backed securities which represent a partial ownership
interest in a pool of mortgage loans issued by lenders such as mortgage bankers,
commercial banks and savings and loan associations. Such mortgage loans may have
fixed or adjustable rates of interest.
The average life of a mortgage-backed security is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities. Prepayments of principal by mortgagors and mortgage foreclosures
will usually result in the return of the greater part of principal invested far
in advance of the maturity of the mortgages in the pool.
The yield which will be earned on mortgage-backed securities may vary from
their coupon rates for the following reasons: (i) Certificates may be issued at
a premium or discount, rather than at par; (ii) Certificates may trade in the
secondary market at a premium or discount after issuance; (iii) interest is
earned and compounded monthly, which has the effect of raising the effective
yield earned on the Certificates; and (iv) the actual yield of each Certificate
is affected by the prepayment of mortgages included in the mortgage pool
underlying the Certificates and the rate at which principal so prepaid is
reinvested. In addition, prepayment of mortgages included in the mortgage pool
underlying a GNMA Certificate purchased at a premium may result in a loss to the
Fund.
Mortgage-backed securities issued by private issuers, whether or not such
obligations are subject to guarantees by the private issuer, may entail greater
risk than obligations directly or indirectly guaranteed by the U.S. Government.
Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities (collateral
collectively hereinafter referred to as "Mortgage Assets"). Multi-class
pass-through securities are interests in a trust composed of Mortgage Assets and
all references herein to CMOs will include multi-class pass-through securities.
Payments of principal of and interest on the Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distribution on the multi-class pass-through securities.
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Moreover, principal prepayments on the Mortgage Assets may cause the CMOs
to be retired substantially earlier than their stated maturities or final
distribution dates, resulting in a loss of all or part of the premium if any has
been paid. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semiannual basis.
The principal and interest payments on the Mortgage Assets may be allocated
among the various classes of CMOs in several ways. Typically, payments of
principal, including any prepayments, on the underlying mortgages are applied to
the classes in the order of their respective stated maturities or final
distribution dates, so that no payment of principal is made on CMOs of a class
until all CMOs of other classes having earlier stated maturities or final
distribution dates have been paid in full.
Stripped mortgage-backed securities ("SMBS") are derivative multi-class
mortgage securities. A Fund will only invest in SMBS that are obligations backed
by the full faith and credit of the U.S. Government. SMBS are usually structured
with two classes that receive different proportions of the interest and
principal distributions from a pool of mortgage assets. A Fund will only invest
in SMBS whose mortgage assets are U.S. Government obligations.
A common type of SMBS will be structured so that one class receives some of
the interest and most of the principal from the mortgage assets, while the other
class receives most of the interest and the remainder of the principal. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, a Fund may fail to fully recoup its initial investment in these
securities. The market value of any class which consists primarily or entirely
of principal payments generally is unusually volatile in response to changes in
interest rates.
The average life of mortgage-backed securities varies with the maturities
of the underlying mortgage instruments. The average life is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities as the result of mortgage prepayments, mortgage refinancings, or
foreclosures. The rate of mortgage prepayments, and hence the average life of
the certificates, will be a function of the level of interest rates, general
economic conditions, the location and age of the mortgage and other social and
demographic conditions. Such prepayments are passed through to the registered
holder with the regular monthly payments of principal and interest and have the
effect of reducing future payments. Estimated average life will be determined by
the Adviser and used for the purpose of determining the average weighted
maturity and duration of the Funds.
NON-MORTGAGE ASSET-BACKED SECURITIES. Non-mortgage asset-backed securities
include interests in pools of receivables, such as motor vehicle installment
purchase obligations and credit card receivables. Such securities are generally
issued as pass-through certificates, which represent undivided fractional
ownership interests in the underlying pools of assets. Such securities also may
be debt instruments, which are also known as collateralized obligations and are
generally issued as the debt of a special purpose entity organized solely for
the purpose of owning such assets and issuing such debt. Such securities also
may include instruments issued by certain trusts, partnerships or other special
purpose issuers, including pass-through certificates representing participations
in, or debt instruments backed by, the securities and other assets owned by such
issuers.
Non-mortgage-backed securities are not issued or guaranteed by the U.S.
Government or its agencies or instrumentalities; however, the payment of
principal and interest on such obligations may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution (such as a bank or insurance company) unaffiliated with
the issuers of such securities.
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The purchase of non-mortgage-backed securities raises considerations
peculiar to the financing of the instruments underlying such securities. For
example, most organizations that issue asset-backed securities relating to motor
vehicle installment purchase obligations perfect their interests in their
respective obligations only by filing a financing statement and by having the
servicer of the obligations, which is usually the originator, take custody
thereof. In such circumstances, if the servicer were to sell the same
obligations to another party, in violation of its duty not to do so, there is a
risk that such party could acquire an interest in the obligations superior to
that of the holders of the Asset-backed Securities. Also, although most such
obligations grant a security interest in the motor vehicle being financed, in
most states the security interest in a motor vehicle must be noted on the
certificate of title to perfect such security interest against competing claims
of other parties. Due to the larger number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the obligations
underlying the Asset-backed Securities, usually is not amended to reflect the
assignment of the seller's security interest for the benefit of the holders of
the Asset-backed Securities. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on those securities. In addition, various state and Federal laws give
the motor vehicle owner the right to assert against the holder of the owner's
obligation certain defenses such owner would have against the seller of the
motor vehicle. The assertion of such defenses could reduce payments on the
related Asset-backed Securities. Insofar as credit card receivables are
concerned, credit card holders are entitled to the protection of a number of
state and Federal consumer credit laws, many of which give such holders the
right to set off certain amounts against balances owed on the credit card,
thereby reducing the amounts paid on such receivables. In addition, unlike most
other Asset-backed Securities, credit card receivables are unsecured obligations
of the card holder.
The development of non-mortgage-backed securities is at an early stage
compared to mortgage-backed securities. While the market for Asset-backed
Securities is becoming increasingly liquid, the market for mortgage-backed
securities issued by certain private organizations and non-mortgage-backed
securities is not as well developed. As stated above, the Adviser, as adviser to
each Fund, intends to limit its purchases of mortgage-backed securities issued
by certain private organizations and non-mortgage-backed securities to
securities that are readily marketable at the time of purchase.
BORROWINGS
NFT, NFI and NFP participate in an uncommitted line of credit provided by
The Bank of New York under a line of credit agreement (the "Agreement").
Advances under the Agreement are taken primarily for temporary or emergency
purposes, including the meeting of redemption requests that otherwise might
require the untimely disposition of securities. Interest on borrowings is
payable at the federal funds rate plus .50% on an annualized basis. The
Agreement requires, among other things, that each participating Fund maintain a
ratio of no less than 4 to 1 net assets (not including funds borrowed pursuant
to the Agreement) to the aggregate amount of indebtedness pursuant to the
Agreement. Specific borrowings by a Fund under the Agreement over the last
fiscal year, if any, can by found in the Funds' Annual Reports for the year
ended March 31, 1998.
COMMERCIAL INSTRUMENTS
Commercial Instruments consist of short-term U.S. dollar-denominated
obligations issued by domestic corporations or issued in the U.S. by foreign
corporations and foreign commercial banks. The Nations Prime Fund will limit
purchases of commercial instruments to instruments which: (a) if rated by at
least two Nationally Rated Statistical Rating Organizations ("NRSROs"), are
rated in the highest rating category for short-term debt obligations given by
such organizations, or if only rated by one such organization, are rated in the
highest rating category for short-term debt obligations given by such
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organization; or (b) if not rated, are (i) comparable in priority and security
to a class of short-term instruments of the same issuer that has such rating(s),
or (ii) of comparable quality to such instruments as determined by NFI's Board
of Directors on the advice of the Adviser.
Investments by a Fund in commercial paper will consist of issues rated in a
manner consistent with such Fund's investment policies and objectives. In
addition, the Funds may acquire unrated commercial paper and corporate bonds
that are determined by the Adviser at the time of purchase to be of comparable
quality to rated instruments that may be acquired by such Funds as previously
described.
Variable-rate master demand notes are unsecured instruments that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate. While some of these notes are not rated by credit rating
agencies, issuers of variable rate master demand notes must satisfy the Adviser
that similar criteria to that set forth above with respect to the issuers of
commercial paper purchasable by the Nations Prime Fund are met. Variable-rate
instruments acquired by a Fund will be rated at a level consistent with such
Fund's investment objective and policies of high quality as determined by a
major rating agency or, if not rated, will be of comparable quality as
determined by the Adviser. See also the discussion of variable- and
floating-rate instruments in this SAI.
Variable- and floating-rate instruments are unsecured instruments that
permit the indebtedness thereunder to vary. While there may be no active
secondary market with respect to a particular variable or floating rate
instrument purchased by a Fund, a Fund may, from time to time as specified in
the instrument, demand payment of the principal or may resell the instrument to
a third party. The absence of an active secondary market, however, could make it
difficult for a Fund to dispose of an instrument if the issuer defaulted on its
payment obligation or during periods when a Fund is not entitled to exercise its
demand rights, and a Fund could, for these or other reasons, suffer a loss. A
Fund may invest in variable and floating rate instruments only when the Adviser
deems the investment to involve minimal credit risk. If such instruments are not
rated, the Adviser will consider the earning power, cash flows, and other
liquidity ratios of the issuers of such instruments and will continuously
monitor their financial status to meet payment on demand. In determining average
weighted portfolio maturity, an instrument will be deemed to have a maturity
equal to the longer of the period remaining to the next interest rate adjustment
or the demand notice period specified in the instrument.
Certain Funds also may purchase short-term participation interests in loans
extended by banks to companies, provided that both such banks and such companies
meet the quality standards set forth above. In purchasing a loan participation
or assignment, the Fund acquires some or all of the interest of a bank or other
lending institution in a loan to a corporate borrower. Many such loans are
secured and most impose restrictive covenants which must be met by the borrower
and which are generally more stringent than the covenants available in publicly
traded debt securities. However, interests in some loans may not be secured, and
the Fund will be exposed to a risk of loss if the borrower defaults. Loan
participations also may be purchased by the Fund when the borrowing company is
already in default. In purchasing a loan participation, the Fund may have less
protection under the federal securities laws than it has in purchasing
traditional types of securities. The Fund's ability to assert its rights against
the borrower will also depend on the particular terms of the loan agreement
among the parties.
COMBINED TRANSACTIONS
Certain Funds may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple forward foreign
currency exchange contracts and any combination of futures, options and forward
foreign currency exchange contracts ("component" transactions), instead of a
single transaction, as part of a single hedging strategy when, in the opinion of
the Adviser, it is in the
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best interest of a Fund to do so and where underlying hedging strategies are
permitted by a Fund's investment policies. A combined transaction, while part of
a single hedging strategy, may contain elements of risk that are present in each
of its component transactions. (See above for the risk characteristics of
certain transactions.)
CONVERTIBLE SECURITIES
Certain Funds may invest in convertible securities, such as bonds, notes,
debentures, preferred stocks and other securities that may be converted into
common stock. All convertible securities purchased by the Fund will be rated in
the top two categories by an Nationally Recognized Statistical Rating
Organization ("NRSRO") or, if unrated, determined by the Adviser to be of
comparable quality. Investments in convertible securities can provide income
through interest and dividend payments, as well as, an opportunity for capital
appreciation by virtue of their conversion or exchange features.
The convertible securities in which a Fund may invest include fixed-income
and zero coupon debt securities, and preferred stock that may be converted or
exchanged at a stated or determinable exchange ratio into underlying shares of
common stock. The exchange ratio for any particular convertible security may be
adjusted from time to time due to stock splits, dividends, spin-offs, other
corporate distributions or scheduled changes in the exchange ratio. Convertible
debt securities and convertible preferred stocks, until converted, have general
characteristics similar to both debt and equity securities. Although to a lesser
extent than with debt securities, generally, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of the conversion
exchange feature, the market value of convertible securities typically changes
as the market value of the underlying common stock changes, and, therefore, also
tends to follow movements in the general market for equity securities. A unique
feature of convertible securities is that as the market price of the underlying
common stock declines, convertible securities tend to trade increasingly on a
yield basis, and so may not experience market value declines to the same extent
as the underlying common stock. When the market price of the underlying common
stock increases, the price of a convertible security tends to rise as a
reflection of the value of the underlying common stock, although typically not
as much as the price of the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
As debt securities, convertible securities are investments which provide
for a stream of income or, in the case of zero coupon securities, accretion of
income with generally higher yields than common stocks. Of course, like all debt
securities, there can be no assurance of income or principal payments because
the issuers of the convertible securities may default on their obligations.
Convertible securities generally offer lower yields than non-convertible
securities of similar quality because of their conversion exchange features.
Convertible securities generally are subordinated to other similar debt
securities but not to non-convertible securities of the same issuer. Convertible
bonds, as corporate debt obligations, are senior in right of payment to all
equity securities, and convertible preferred stock is senior to common stock, of
the same issuer. However, convertible bonds and convertible preferred stock
typically have lower coupon rates than similar non-convertible securities.
Convertible securities may be issued as fixed income obligations that pay
current income or as zero coupon notes and bonds, including Liquid Yield Option
Notes ("LYONs"). Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation because
increases (or decreases) in the market value of such securities closely follow
the movements in the market value of the underlying common stock. Zero coupon
convertible securities generally are expected to be less volatile
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than the underlying common stocks because they usually are issued with short
maturities (15 years or less) and are issued with options and/or redemption
features exercisable by the holder of the obligation entitling the holder to
redeem the obligation and receive a defined cash payment.
CORPORATE DEBT SECURITIES
Certain Funds may invest in corporate debt securities of domestic issuers
of all types and maturities, such as bonds, debentures, notes and commercial
paper. Corporate debt securities may involve equity features, such as conversion
or exchange rights or warrants for the acquisition of stock of the same or a
different issuer, participation based on revenue, sales or profit, or the
purchase of common stock or warrants in a unit transaction (where corporate debt
obligations and common stock are offered as a unit). Each Fund may also invest
in corporate debt securities of foreign issuers.
The corporate debt securities in which the Funds will invest will be rated
investment grade by at least one NRSRO (E.G., BBB or above by Standard & Poor's
Corporation ("S&P") or Baa or above by Moody's Investors Services, Inc.
("Moody's")). Commercial paper purchased by the Funds will be rated in the top
two categories by a NRSRO. Corporate debt securities that are not rated may be
purchased by such Funds if they are determined by the Adviser to be of
comparable quality under the direction of the Board of Directors of the Company.
If the rating of any corporate debt security held by a Fund falls below such
ratings or if the Adviser determines that an unrated corporate debt security is
no longer of comparable quality, then such security shall be disposed of in an
orderly manner as quickly as possible. A description of these ratings is
attached as Schedule A to this Statement of Additional Information.
CUSTODIAL RECEIPTS
Certain Funds may also acquire custodial receipts that evidence ownership
of future interest payments, principal payments or both on certain U.S.
Government notes or bonds. Such notes and bonds are held in custody by a bank on
behalf of the owners. These custodial receipts are known by various names,
including "Treasury Receipts," "Treasury Investors Growth Receipts" and
"Certificates of Accrual on Treasury Securities." Although custodial receipts
are not considered U.S. Government securities, they are indirectly issued or
guaranteed as to principal and interest by the U.S. Government, its agencies,
authorities or instrumentalities. Custodial receipts will be treated as illiquid
securities.
CURRENCY SWAPS
Certain Funds also may enter into currency swaps for hedging purposes and
to seek to increase total return. In as much as swaps are entered into for good
faith hedging purposes or are offset by a segregated account as described below,
the Fund and the Adviser believe that swaps do not constitute senior securities
as defined in the 1940 Act and, accordingly, will not treat them as being
subject to the Fund's borrowing restrictions. The net amount of the excess, if
any, of the Fund's obligations over its entitlement with respect to each
currency swap will be accrued on a daily basis and an amount of cash or liquid
high grade debt securities (i.e., securities rated in one of the top three
ratings categories by an NRSRO, or, if unrated, deemed by the Adviser to be of
comparable credit quality) having an aggregate net asset value at least equal to
such accrued excess will be maintained in a segregated account by the Fund's
custodian. The Fund will not enter into any currency swap unless the credit
quality of the unsecured senior debt or the claims-paying ability of the other
party thereto is considered to be investment grade by the Adviser.
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DELAYED DELIVERY TRANSACTIONS
In a delayed delivery transaction, the Fund relies on the other party to
complete the transaction. If the transaction is not completed, the Fund may miss
a price or yield considered to be advantageous. In delayed delivery
transactions, delivery of the securities occurs beyond normal settlement
periods, but a Fund would not pay for such securities or start earning interest
on them until they are delivered. However, when a Fund purchases securities on
such a delayed delivery basis, it immediately assumes the risk of ownership,
including the risk of price fluctuation. Failure by a counterparty to deliver a
security purchased on a delayed delivery basis may result in a loss or missed
opportunity to make an alternative investment. Depending upon market conditions,
a Fund's delayed delivery purchase commitments could cause its net asset value
to be more volatile, because such securities may increase the amount by which
the Fund's total assets, including the value of when-issued and delayed delivery
securities held by the Fund, exceed its net assets.
DOLLAR ROLL TRANSACTIONS
Certain Funds may enter into "dollar roll" transactions, which consist of
the sale by a Fund to a bank or broker/dealer (the "counterparty") of GNMA
certificates or other mortgage-backed securities together with a commitment to
purchase from the counterparty similar, but not identical, securities at a
future date, at the same price. The counterparty receives all principal and
interest payments, including prepayments, made on the security while it is the
holder. A Fund receives a fee from the counterparty as consideration for
entering into the commitment to purchase. Dollar rolls may be renewed over a
period of several months with a different repurchase price and a cash settlement
made at each renewal without physical delivery of securities. Moreover, the
transaction may be preceded by a firm commitment agreement pursuant to which the
Fund agrees to buy a security on a future date. If the broker/dealer to whom a
Fund sells the security becomes insolvent, the Fund's right to purchase or
repurchase the security may be restricted; the value of the security may change
adversely over the term of the dollar roll; the security that the Fund is
required to repurchase may be worth less than the security that the Fund
originally held, and the return earned by the Fund with the proceeds of a dollar
roll may not exceed transaction costs.
The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Fund's right to purchase
from the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Fund is able to purchase them.
Similarly, the Fund may be required to purchase securities in connection with a
dollar roll at a higher price than may otherwise be available on the open
market. Since, as noted above, the counterparty is required to deliver a
similar, but not identical security to the Fund, the security that the Fund is
required to buy under the dollar roll may be worth less than an identical
security. Finally, there can be no assurance that the Fund's use of the cash
that it receives from a dollar roll will provide a return that exceeds borrowing
costs.
EQUITY SWAP CONTRACTS
Certain Funds may from time to time enter into equity swap contracts. The
counterparty to an equity swap contract will typically be a bank, investment
banking firm or broker/dealer. For example, the counterparty will generally
agree to pay a Fund the amount, if any, by which the notional amount of the
Equity Swap Contract would have increased in value had it been invested in the
stocks comprising the S&P 500 Index in proportion to the composition of the
Index, plus the dividends that would have been received on those stocks. A Fund
will agree to pay to the counterparty a floating rate of interest (typically the
London Inter Bank Offered Rate) on the notional amount of the Equity Swap
Contract plus the amount, if any, by which that notional amount would have
decreased in value had it been invested in such stocks. Therefore, the return to
a Fund on any Equity Swap Contract should be the gain or loss on
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the notional amount plus dividends on the stocks comprising the S&P 500 Index
less the interest paid by the Fund on the notional amount. A Fund will only
enter into Equity Swap Contracts on a net basis, i.e., the two parties'
obligations are netted out, with the Fund paying or receiving, as the case may
be, only the net amount of any payments. Payments under the Equity Swap
Contracts may be made at the conclusion of the contract or periodically during
its term.
If there is a default by the counterparty to an Equity Swap Contract, a
Fund will be limited to contractual remedies pursuant to the agreements related
to the transaction. There is no assurance that Equity Swap Contract
counterparties will be able to meet their obligations pursuant to Equity Swap
Contracts or that, in the event of default, a Fund will succeed in pursuing
contractual remedies. A Fund thus assumes the risk that it may be delayed in or
prevented from obtaining payments owed to it pursuant to Equity Swap Contracts.
A Fund will closely monitor the credit of Equity Swap Contract counterparties in
order to minimize this risk.
Certain Funds may from time to time enter into the opposite side of Equity
Swap Contracts (i.e., where a Fund is obligated to pay the increase (net of
interest) or receive the decrease (plus interest) on the contract to reduce the
amount of the Fund's equity market exposure consistent with the Fund's
objective. These positions are sometimes referred to as Reverse Equity Swap
Contracts.
Equity Swap Contracts will not be used to leverage a Fund. A Fund will not
enter into any Equity Swap Contract or Reverse Equity Swap Contract unless, at
the time of entering into such transaction, the unsecured senior debt of the
counterparty is rated at least A by Moody's or S&P. Since the SEC considers
Equity Swap Contracts and Reverse Equity Swap Contracts to be illiquid
securities, a Fund will not invest in Equity Swap Contracts or Reverse Equity
Swap Contracts if the total value of such investments together with that of all
other illiquid securities which a Fund owns would exceed 15% of the Fund's total
assets.
The Adviser does not believe that a Fund's obligations under Equity Swap
Contracts or Reverse Equity Swap Contracts are senior securities and,
accordingly, the Fund will not treat them as being subject to its borrowing
restrictions. However, the net amount of the excess, if any, of a Fund's
obligations over its respective entitlements with respect to each Equity Swap
Contract and each Reverse Equity Swap Contract will be accrued on a daily basis
and an amount of cash, U.S. Government securities or other liquid high quality
debt securities having an aggregate market value at least equal to the accrued
excess will be maintained in a segregated account by the Fund's custodian.
FOREIGN CURRENCY TRANSACTIONS
As described in the Prospectuses, certain Funds may invest in foreign
currency transactions. Foreign securities involve currency risks. The U.S.
dollar value of a foreign security tends to decrease when the value of the U.S.
dollar rises against the foreign currency in which the security is denominated,
and tends to increase when the value of the U.S. dollar falls against such
currency. A Fund may purchase or sell forward foreign currency exchange
contracts ("forward contracts") to attempt to minimize the risk to the Fund from
adverse changes in the relationship between the U.S. dollar and foreign
currencies. A Fund may also purchase and sell foreign currency futures contracts
and related options (see "Purchase and Sale of Currency Futures Contracts and
Related Options"). A forward contract is an obligation to
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purchase or sell a specific currency for an agreed price at a future date that
is individually negotiated and privately traded by currency traders and their
customers.
Forward foreign currency exchange contracts establish an exchange rate at a
future date. These contracts are transferable in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward foreign currency exchange contract generally has no deposit
requirement, and is traded at a net price without commission. A Fund will direct
its custodian to segregate high grade liquid assets in an amount at least equal
to its obligations under each forward foreign currency exchange contract.
Neither spot transactions nor forward foreign currency exchange contracts
eliminate fluctuations in the prices of a Fund's portfolio securities or in
foreign exchange rates, or prevent loss if the prices of these securities should
decline.
A Fund may enter into a forward contract, for example, when it enters into
a contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of the security (a
"transaction hedge"). In addition, when the Adviser believes that a foreign
currency may suffer a substantial decline against the U.S. dollar, it may enter
into a forward sale contract to sell an amount of that foreign currency
approximating the value of some or all of the Fund's securities denominated in
such foreign currency, or when the Adviser believes that the U.S. dollar may
suffer a substantial decline against the foreign currency, it may enter into a
forward purchase contract to buy that foreign currency for a fixed dollar amount
(a "position hedge").
A Fund may, however, enter into a forward contract to sell a different
foreign currency for a fixed U.S. dollar amount where the Adviser believes that
the U.S. dollar value of the currency to be sold pursuant to the forward
contract will fall whenever there is a decline in the U.S. dollar value of the
currency in which the fund securities are denominated (a "cross-hedge").
Foreign currency hedging transactions are an attempt to protect a Fund
against changes in foreign currency exchange rates between the trade and
settlement dates of specific securities transactions or changes in foreign
currency exchange rates that would adversely affect a portfolio position or an
anticipated portfolio position. Although these transactions tend to minimize the
risk of loss due to a decline in the value of the hedged currency, at the same
time they tend to limit any potential gain that might be realized should the
value of the hedged currency increase. The precise matching of the forward
contract amount and the value of the securities involved will not generally be
possible because the future value of these securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and date it matures.
The Fund's custodian will segregate cash, U.S. Government securities or
other high-quality debt securities having a value equal to the aggregate amount
of the Fund's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the segregated securities
declines, additional cash or securities will be segregated on a daily basis so
that the value of the segregated securities will equal the amount of the Fund's
commitments with respect to such contracts. As an alternative to segregating all
or part of such securities, the Fund may purchase a call option permitting the
Fund to purchase the amount of foreign currency being hedged by a forward sale
contract at a price no higher than the forward contract price or the Fund may
purchase a put option permitting the Fund to sell the amount of foreign currency
subject to a forward purchase contract at a price as high or higher than the
forward contract price.
The Funds are dollar-denominated mutual funds and therefore consideration
is given to hedging part or all of the portfolio back to U.S. dollars from
international currencies. All decisions to hedge are based upon an analysis of
the relative value of the U.S. dollar on an international purchasing power
parity
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basis (purchasing power parity is a method for determining the relative
purchasing power of different currencies by comparing the amount of each
currency required to purchase a typical bundle of goods and services to domestic
markets) and an estimation of short-term interest rate differentials (which
affect both the direction of currency movements and also the cost of hedging).
FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS
FUTURES CONTRACTS IN GENERAL. A futures contract is an agreement between
two parties for the future delivery of fixed income securities or equity
securities or for the payment or acceptance of a cash settlement in the case of
futures contracts on an index of fixed income or equity securities. A "sale" of
a futures contract means the contractual obligation to deliver the securities at
a specified price on a specified date, or to make the cash settlement called for
by the contract. Futures contracts have been designed by exchanges which have
been designated "contract markets" by the Commodity Futures Trading Commission
("CFTC") and must be executed through a brokerage firm, known as a futures
commission merchant, which is a member of the relevant contract market. Futures
contracts trade on these markets, and the exchanges, through their clearing
organizations, guarantee that the contracts will be performed as between the
clearing members of the exchange. Presently, futures contracts are based on such
debt securities as long-term U.S. Treasury Bonds, Treasury Notes, GNMA modified
pass-through mortgage-backed securities, three-month U.S. Treasury Bills, bank
certificates of deposit, and on indices of municipal, corporate and government
bonds.
While futures contracts based on securities do provide for the delivery and
acceptance of securities, such deliveries and acceptances are seldom made.
Generally, a futures contract is terminated by entering into an offsetting
transaction. A Fund will incur brokerage fees when it purchases and sells
futures contracts. At the time such a purchase or sale is made, a Fund must
provide cash or money market securities as a deposit known as "margin." The
initial deposit required will vary, but may be as low as 2% or less of a
contract's face value. Daily thereafter, the futures contract is valued through
a process known as "marking to market," and a Fund that engages in futures
transactions may receive or be required to pay "variation margin" as the futures
contract becomes more or less valuable. At the time of delivery of securities
pursuant to a futures contract based on securities, adjustments are made to
recognize differences in value arising from the delivery of securities with a
different interest rate than the specific security that provides the standard
for the contract. In some (but not many) cases, securities called for by a
futures contract may not have been issued when the contract was written.
Futures contracts on indices of securities are settled through the making
and acceptance of cash settlements based on changes in value of the underlying
rate or index between the time the contract is entered into and the time it is
liquidated.
FUTURES CONTRACTS ON FIXED INCOME SECURITIES AND RELATED INDICES. As noted
in their respective Prospectuses, certain Funds may enter into transactions in
futures contracts for the purpose of hedging a relevant portion of their
portfolios. A Fund may enter into transactions in futures contracts that are
based on U.S. Government obligations, including any index of government
obligations that may be available for trading. Such transactions will be entered
into where movements in the value of the securities or index underlying a
futures contract can be expected to correlate closely with movements in the
value of securities held in a Fund. For example, a Fund may sell futures
contracts in anticipation of a general rise in the level of interest rates,
which would result in a decline in the value of its fixed income securities. If
the expected rise in interest rates occurs, the Fund may realize gains on its
futures position, which should offset all or part of the decline in value of
fixed income fund securities. A Fund could protect against such decline by
selling fixed income securities, but such a strategy would involve higher
transaction
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costs than the sale of futures contracts and, if interest rates again declined,
the Fund would be unable to take advantage of the resulting market advance
without purchases of additional securities.
The purpose of the purchase or sale of a futures contract on government
securities and indices of government securities, in the case of the
above-referenced Funds, which hold or intend to acquire long-term debt
securities, is to protect a Fund from fluctuations in interest rates without
actually buying or selling long-term debt securities. For example, if long-term
bonds are held by a Fund, and interest rates were expected to increase, the Fund
might enter into futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling an equivalent value of the long-term
bonds held by the Fund. If interest rates did increase, the value of the debt
securities in the Fund would decline, but the value of the futures contracts to
the Fund would increase at approximately the same rate thereby keeping the net
asset value of the Fund from declining as much as it otherwise would have. When
a Fund is not fully invested and a decline in interest rates is anticipated,
which would increase the cost of fixed income securities that the Fund intends
to acquire, it may purchase futures contracts. In the event that the projected
decline in interest rates occurs, the increased cost of the securities acquired
by the Fund should be offset, in whole or part, by gains on the futures
contracts by entering into offsetting transactions on the contract market on
which the initial purchase was effected. In a substantial majority of
transactions involving futures contracts on fixed income securities, a Fund will
purchase the securities upon termination of the long futures positions, but
under unusual market conditions, a long futures position may be terminated
without a corresponding purchase of securities.
Similarly, when it is expected that interest rates may decline, futures
contracts on fixed income securities and indices of government securities may be
purchased for the purpose of hedging against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of such futures
contracts should be similar to that of long-term bonds, a Fund could take
advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Fund's cash reserves could then be used to
buy long-term bonds in the cash market. Similar results could be accomplished by
selling bonds with long maturities and investing in bonds with short maturities
when interest rates are expected to increase. However, since the futures market
is more liquid than the cash market, the use of these futures contracts as an
investment technique allows a Fund to act in anticipation of such an interest
rate decline without having to sell its portfolio securities. To the extent a
Fund enters into futures contracts for this purpose, the segregated assets
maintained by a Fund will consist of cash, cash equivalents or high quality debt
securities of the Fund in an amount equal to the difference between the
fluctuating market value of such futures contract and the aggregate value of the
initial deposit and variation margin payments made by the Fund with respect to
such futures contracts.
STOCK INDEX FUTURES CONTRACTS. As described in the Prospectuses, certain
Funds may sell stock index futures contracts in order to offset a decrease in
market value of its securities that might otherwise result from a market
decline. A Fund may do so either to hedge the value of its portfolio as a whole,
or to protect against declines, occurring prior to sales of securities, in the
value of securities to be sold. Conversely, a Fund may purchase stock index
futures contracts in order to protect against anticipated increases in the cost
of securities to be acquired.
In addition, a Fund may utilize stock index futures contracts in
anticipation of changes in the composition of its portfolio. For example, in the
event that a Fund expects to narrow the range of industry groups represented in
its portfolio, it may, prior to making purchases of the actual securities,
establish a long futures position based on a more restricted index, such as an
index comprised of securities of a particular industry group. As such securities
are acquired, a Fund's futures positions would be closed out. A Fund may also
sell futures contracts in connection with this strategy, in order to
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protect against the possibility that the value of the securities to be sold as
part of the restructuring of its portfolio will decline prior to the time of
sale.
OPTIONS ON FUTURES CONTRACTS. As described in the Prospectuses, an option
on a futures contract gives the purchaser (the "holder") the right, but not the
obligation, to purchase a position in the underlying futures contract (i.e., a
purchase of such futures contract) in the case of an option to purchase (a
"call" option), or a "short" position in the underlying futures contract (i.e.,
a sale of such futures contract) in the case of an option to sell (a "put"
option), at a fixed price (the "strike price") up to a stated expiration date.
The holder pays a non-refundable purchase price for the option, known as the
"premium." The maximum amount of risk the purchase of the option assumes is
equal to the premium plus related transaction costs, although this entire amount
may be lost. Upon exercise of the option by the holder, the exchange clearing
corporation establishes a corresponding long position in the case of a put
option. In the event that an option is exercised, the parties will be subject to
all the risks associated with the trading of futures contracts, such as payment
of variation margin deposits. In addition, the writer of an option on a futures
contract, unlike the holder, is subject to initial and variation margin
requirements on the option position.
OPTIONS ON FUTURES CONTRACTS ON FIXED INCOME SECURITIES AND RELATED
INDICES. As described in the Prospectuses, certain Funds may purchase put
options on futures contracts in which such Funds are permitted to invest for the
purpose of hedging a relevant portion of their portfolios against an anticipated
decline in the values of portfolio securities resulting from increases in
interest rates, and may purchase call options on such futures contracts as a
hedge against an interest rate decline when they are not fully invested. A Fund
would write options on these futures contracts primarily for the purpose of
terminating existing positions.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS, OPTIONS ON STOCK INDICES AND
OPTIONS ON EQUITY SECURITIES. As described in the Prospectuses, certain Funds
may purchase put options on stock index futures contracts, stock indices or
equity securities for the purpose of hedging the relevant portion of their
portfolio securities against an anticipated market-wide decline or against
declines in the values of individual portfolio securities, and they may purchase
call options on such futures contracts as a hedge against a market advance when
they are not fully invested. A Fund would write options on such futures
contracts primarily for the purpose of terminating existing positions. In
general, options on stock indices will be employed in lieu of options on stock
index futures contracts only where they present an opportunity to hedge at lower
cost. With respect to options on equity securities, a Fund may, under certain
circumstances, purchase a combination of call options on such securities and
U.S. Treasury bills. The Adviser believes that such a combination may more
closely parallel movements in the value of the security underlying the call
option than would the option itself.
Further, while a Fund generally would not write options on individual
portfolio securities, it may do so under limited circumstances known as
"targeted sales" and "targeted buys," which involve the writing of call or put
options in an attempt to purchase or sell portfolio securities at specific
desired prices. A Fund would receive a fee, or a "premium," for the writing of
the option. For example, where the Fund seeks to sell portfolio securities at a
"targeted" price, it may write a call option at that price. In the event that
the market rises above the exercise price, it would receive its "targeted"
price, upon the exercise of the option, as well as the premium income. Also,
where it seeks to buy portfolio securities at a "targeted" price, it may write a
put option at that price for which it will receive the premium income. In the
event that the market declines below the exercise price, a Fund would pay its
"targeted" price upon the exercise of the option. In the event that the market
does not move in the direction or to the extent anticipated, however, the
targeted sale or buy might not be successful and a Fund could sustain a loss on
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the transaction that may not be offset by the premium received. In addition, a
Fund may be required to forego the benefit of an intervening increase or decline
in value of the underlying security.
OPTIONS AND FUTURES STRATEGIES. As described in the Prospectuses, the
Adviser may seek to increase the current return of certain Funds by writing
covered call or put options. In addition, through the writing and purchase of
options and the purchase and sale of U.S. and certain foreign stock index
futures contracts, interest rate futures contracts, foreign currency futures
contracts and related options on such futures contracts, the Adviser may at
times seek to hedge against a decline in the value of securities included in the
Fund or an increase in the price of securities that it plans to purchase for the
Fund. Expenses and losses incurred as a result of such hedging strategies will
reduce the Fund's current return. A Fund's investment in foreign stock index
futures contracts and foreign interest rate futures contracts, and related
options on such futures contracts, are limited to only those contracts and
related options that have been approved by the CFTC for investment by U.S.
investors. Additionally, with respect to a Fund's investment in foreign options,
unless such options are specifically authorized for investment by order of the
CFTC or meet the definition of trade options as set forth in CFTC Rule 32.4, a
Fund will not make these investments.
The ability of a Fund to engage in the options and futures strategies
described below will depend on the availability of liquid markets in such
instruments. Markets in options and futures with respect to stock indices,
foreign government securities and foreign currencies are relatively new and
still developing. It is impossible to predict the amount of trading interest
that may exist in various types of options or futures. Therefore, no assurance
can be given that a Fund will be able to utilize these instruments effectively
for the purposes stated below. Furthermore, a Fund's ability to engage in
options and futures transactions may be limited by tax considerations. Although
a Fund will only engage in options and futures transactions for limited
purposes, these activities will involve certain risks which are described below
under "Risk Factors Associated with Futures and Options Transactions." A Fund
will not engage in options and futures transactions for leveraging purposes.
WRITING COVERED OPTIONS ON SECURITIES. Certain Funds may write covered call
options and covered put options on securities in which it is permitted to invest
from time to time as the Adviser determines is appropriate in seeking to attain
its objective. Call options written by a Fund give the holder the right to buy
the underlying securities from a Fund at a stated exercise price; put options
give the holder the right to sell the underlying security to the Fund at a
stated price.
A Fund may write only covered options, which means that, so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, a Fund will
maintain in a separate account cash or short-term U.S. Government securities
with a value equal to or greater than the exercise price of the underlying
securities. A Fund may also write combinations of covered puts and calls on the
same underlying security.
A Fund will receive a premium from writing a put or call option, which
increases the Fund's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price of the underlying security to the
exercise price of the option, the term of the option and the volatility of the
market price of the underlying security. By writing a call option, a Fund limits
its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, the Fund assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then current market
value, resulting in a potential capital loss if the purchase price exceeds the
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market value plus the amount of the premium received, unless the security
subsequently appreciates in value.
A Fund may terminate an option that it has written prior to its expiration
by entering into a closing purchase transaction in which it purchases an option
having the same terms as the option written. A Fund will realize a profit or
loss from such transaction if the cost of such transaction is less or more than
the premium received from the writing of the option. In the case of a put
option, any loss so incurred may be partially or entirely offset by the premium
received from a simultaneous or subsequent sale of a different put option.
Because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the repurchase of a call option is likely to be offset in whole or in part
by unrealized appreciation of the underlying security owned by a Fund.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES. A Fund may purchase put
options to protect its portfolio holdings in an underlying security against a
decline in market value. Such hedge protection is provided during the life of
the put option since a Fund, as holder of the put option, is able to sell the
underlying security at the put exercise price regardless of any decline in the
underlying security's market price. In order for a put option to be profitable,
the market price of the underlying security must decline sufficiently below the
exercise price to cover the premium and transaction costs. By using put options
in this manner, a Fund will reduce any profit it might otherwise have realized
in its underlying security by the premium paid for the put option and by
transaction costs.
A Fund may also purchase call options to hedge against an increase in
prices of securities that it wants ultimately to buy. Such hedge protection is
provided during the life of the call option since the Fund, as holder of the
call option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, a Fund will reduce any
profit it might have realized had it bought the underlying security at the time
it purchased the call option by the premium paid for the call option and by
transaction costs.
PURCHASE AND SALE OF OPTIONS AND FUTURES ON STOCK INDICES. A Fund may
purchase and sell options on non-U.S. stock indices and stock index futures as a
hedge against movements in the equity markets.
Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specific price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of that stock index is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option expressed in dollars multiplied by a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike options on specific securities, all settlements
of options on stock indices are in cash and gain or loss depends on general
movements in the stocks included in the index rather than price movements in
particular stocks. A stock index futures contract is an agreement in which one
party agrees to deliver to the other an amount of cash equal to a specific
amount multiplied by the difference between the value of a specific stock index
at the close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of securities is made.
If the Adviser expects general stock market prices to rise, a Fund might
purchase a call option on a stock index or a futures contract on that index as a
hedge against an increase in prices of particular
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equity securities it wants ultimately to buy. If in fact the stock index does
rise, the price of the particular equity securities intended to be purchased may
also increase, but that increase would be offset in part by the increase in the
value of a Fund's index option or futures contract resulting from the increase
in the index. If, on the other hand, the Adviser expects general stock market
prices to decline, a Fund might purchase a put option or sell a futures contract
on the index. If that index does in fact decline, the value of some or all of
the equity securities in a Fund may also be expected to decline, but that
decrease would be offset in part by the increase in the value of the Fund's
position in such put option or futures contract.
PURCHASE AND SALE OF INTEREST RATE FUTURES. A Fund may purchase and sell
interest rate futures contracts on foreign government securities including, but
not limited to, debt securities of the governments and central banks of France,
Germany, Denmark and Japan for the purpose of hedging fixed income and interest
sensitive securities against the adverse effects of anticipated movements in
interest rates.
A Fund may sell interest rate futures contracts in anticipation of an
increase in the general level of interest rates. Generally, as interest rates
rise, the market value of the fixed income securities held by a Fund will fall,
thus reducing the net asset value of the Fund. This interest rate risk can be
reduced without employing futures as a hedge by selling long-term fixed income
securities and either reinvesting the proceeds in securities with shorter
maturities or by holding assets in cash. This strategy, however, entails
increased transaction costs to a Fund in the form of dealer spreads and
brokerage commissions.
The sale of interest rate futures contracts provides an alternative means
of hedging against rising interest rates. As rates increase, the value of a
Fund's short position in the futures contracts will also tend to increase, thus
offsetting all or a portion of the depreciation in the market value of a Fund's
investments that are being hedged. While a Fund will incur commission expenses
in selling and closing out futures positions (which is done by taking an
opposite position which operates to terminate the position in the futures
contract), commissions on futures transactions are lower than transaction costs
incurred in the purchase and sale of portfolio securities.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS AND INTEREST RATE FUTURES
CONTRACTS. A Fund may purchase and write call and put options on non-U.S. stock
index and interest rate futures contracts. A Fund may use such options on
futures contracts in connection with its hedging strategies in lieu of
purchasing and writing options directly on the underlying securities or stock
indices or purchasing and selling the underlying futures. For example, a Fund
may purchase put options or write call options on stock index futures, or
interest rate futures, rather than selling futures contracts, in anticipation of
a decline in general stock market prices or rise in interest rates,
respectively, or purchase call options or write put options on stock index or
interest rate futures, rather than purchasing such futures, to hedge against
possible increases in the price of equity securities or debt securities,
respectively, which the Fund intends to purchase.
PURCHASE AND SALE OF CURRENCY FUTURES CONTRACTS AND RELATED OPTIONS. In
order to hedge its portfolio and to protect it against possible variations in
foreign exchange rates pending the settlement of securities transactions, a Fund
may buy or sell currency futures contracts and related options. If a fall in
exchange rates for a particular currency is anticipated, a Fund may sell a
currency futures contract or a call option thereon or purchase a put option on
such futures contract as a hedge. If it is anticipated that exchange rates will
rise, a Fund may purchase a currency futures contract or a call option thereon
or sell (write) a put option to protect against an increase in the price of
securities denominated in a particular currency a Fund intends to purchase.
These futures contracts and related options thereon will be used only as a hedge
against anticipated currency rate changes, and all options on currency futures
written by a Fund will be covered.
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A currency futures contract sale creates an obligation by a Fund, as
seller, to deliver the amount of currency called for in the contract at a
specified future time for a special price. A currency futures contract purchase
creates an obligation by a Fund, as purchaser, to take delivery of an amount of
currency at a specified future time at a specified price. Although the terms of
currency futures contracts specify actual delivery or receipt, in most instances
the contracts are closed out before the settlement date without the making or
taking of delivery of the currency. Closing out of a currency futures contract
is effected by entering into an offsetting purchase or sale transaction. Unlike
a currency futures contract, which requires the parties to buy and sell currency
on a set date, an option on a currency futures contract entitles its holder to
decide on or before a future date whether to enter into such a contract. If the
holder decides not to enter into the contract, the premium paid for the option
is fixed at the point of sale.
The Fund will write (sell) only covered put and call options on currency
futures. This means that a Fund will provide for its obligations upon exercise
of the option by segregating sufficient cash or short-term obligations or by
holding an offsetting position in the option or underlying currency future, or a
combination of the foregoing. A Fund will, so long as it is obligated as the
writer of a call option on currency futures, own on a contract-for-contract
basis an equal long position in currency futures with the same delivery date or
a call option on stock index futures with the difference, if any, between the
market value of the call written and the market value of the call or long
currency futures purchased maintained by a Fund in cash, Treasury bills, or
other high grade short-term obligations in a segregated account with its
custodian. If at the close of business on any day the market value of the call
purchased by a Fund falls below 100% of the market value of the call written by
the Fund, a Fund will so segregate an amount of cash, Treasury bills or other
high grade short-term obligations equal in value to the difference.
Alternatively, a Fund may cover the call option through segregating with the
custodian an amount of the particular foreign currency equal to the amount of
foreign currency per futures contract option times the number of options written
by a Fund. In the case of put options on currency futures written by the Fund,
the Fund will hold the aggregate exercise price in cash, Treasury bills, or
other high grade short-term obligations in a segregated account with its
custodian, or own put options on currency futures or short currency futures,
with the difference, if any, between the market value of the put written and the
market value of the puts purchased or the currency futures sold maintained by a
Fund in cash, Treasury bills or other high grade short-term obligations in a
segregated account with its custodian. If at the close of business on any day
the market value of the put options purchased or the currency futures by a Fund
falls below 100% of the market value of the put options written by the Fund, a
Fund will so segregate an amount of cash, Treasury bills or other high grade
short-term obligations equal in value to the difference.
If other methods of providing appropriate cover are developed, a Fund
reserves the right to employ them to the extent consistent with applicable
regulatory and exchange requirements. In connection with transactions in stock
index options, stock index futures, interest rate futures, foreign currency
futures and related options on such futures, a Fund will be required to deposit
as "initial margin" an amount of cash or short-term government securities equal
to from 5% to 8% of the contract amount. Thereafter, subsequent payments
(referred to as "variation margin") are made to and from the broker to reflect
changes in the value of the futures contract.
LIMITATIONS ON PURCHASE OF OPTIONS. The staff of the SEC has taken the
position that purchased over-the-counter options and assets used to cover
written over-the-counter options are illiquid and, therefore, together with
other illiquid securities, cannot exceed 15% of a Fund's assets. The Adviser
intends to limit a Fund's writing of over-the-counter options in accordance with
the following procedure. Each Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts which a Fund has in place with
such primary dealers will provide that the Fund has the absolute right to
repurchase an option it writes at any time at a price which represents the fair
market value, as determined in good faith through negotiation
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between the parties, but which in no event will exceed a price determined
pursuant to a formula in the contract. Although the specific formula may vary
between contracts with different primary dealers, the formula will generally be
based on a multiple of the premium received by a Fund for writing the option,
plus the amount, if any, of the option's intrinsic value (i.e., the amount that
the option is in-the-money). The formula also may include a factor to account
for the difference between the price of the security and the strike price of the
option if the option is written out-of-the-money. A Fund will treat all or a
part of the formula price as illiquid for purposes of the 15% test imposed by
the SEC staff.
RISK FACTORS ASSOCIATED WITH FUTURES AND OPTIONS TRANSACTIONS
The effective use of options and futures strategies depends on, among other
things, a Fund's ability to terminate options and futures positions at times
when its the Adviser deems it desirable to do so. Although a Fund will not enter
into an option or futures position unless the Adviser believes that a liquid
secondary market exists for such option or future, there is no assurance that a
Fund will be able to effect closing transactions at any particular time or at an
acceptable price. A Fund generally expects that its options and futures
transactions will be conducted on recognized U.S. and foreign securities and
commodity exchanges. In certain instances, however, a Fund may purchase and sell
options in the over-the-counter market. A Fund's ability to terminate option
positions established in the over-the-counter market may be more limited than in
the case of exchange-traded options and may also involve the risk that
securities dealers participating in such transactions would fail to meet their
obligations to the Fund.
Options and futures markets can be highly volatile and transactions of this
type carry a high risk of loss. Moreover, a relatively small adverse market
movement with respect to these types of transactions may result not only in loss
of the original investment but also in unquantifiable further loss exceeding any
margin deposited.
The use of options and futures involves the risk of imperfect correlation
between movements in options and futures prices and movements in the price of
securities which are the subject of the hedge. Such correlation, particularly
with respect to options on stock indices and stock index futures, is imperfect,
and such risk increases as the composition of a Fund diverges from the
composition of the relevant index. The successful use of these strategies also
depends on the ability of the Adviser to correctly forecast interest rate
movements, currency rate movements and general stock market price movements.
In addition to certain risk factors described above, the following sets
forth certain information regarding the potential risks associated with the
Funds' futures and options transactions.
RISK OF IMPERFECT CORRELATION. A Fund's ability effectively to hedge all or
a portion of its portfolio through transactions in futures, options on futures
or options on stock indices depends on the degree to which movements in the
value of the securities or index underlying such hedging instrument correlate
with movements in the value of the relevant portion of the Fund's securities. If
the values of the securities being hedged do not move in the same amount or
direction as the underlying security or index, the hedging strategy for a Fund
might not be successful and the Fund could sustain losses on its hedging
transactions which would not be offset by gains on its portfolio. It is also
possible that there may be a negative correlation between the security or index
underlying a futures or option contract and the portfolio securities being
hedged, which could result in losses both on the hedging transaction and the
fund securities. In such instances, a Fund's overall return could be less than
if the hedging transactions had not been undertaken. Stock index futures or
options based on a narrower index of securities may present greater risk than
options or futures based on a broad market index, as a narrower index is more
susceptible to rapid and extreme fluctuations resulting from changes in the
value of a small number of
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securities. A Fund would, however, effect transactions in such futures or
options only for hedging purposes.
The trading of futures and options on indices involves the additional risk
of imperfect correlation between movements in the futures or option price and
the value of the underlying index. The anticipated spread between the prices may
be distorted due to differences in the nature of the markets, such as
differences in margin requirements, the liquidity of such markets and the
participation of speculators in the futures and options market. The purchase of
an option on a futures contract also involves the risk that changes in the value
of underlying futures contract will not be fully reflected in the value of the
option purchased. The risk of imperfect correlation, however, generally tends to
diminish as the maturity date of the futures contract or termination date of the
option approaches. The risk incurred in purchasing an option on a futures
contract is limited to the amount of the premium plus related transaction costs,
although it may be necessary under certain circumstances to exercise the option
and enter into the underlying futures contract in order to realize a profit.
Under certain extreme market conditions, it is possible that a Fund will not be
able to establish hedging positions, or that any hedging strategy adopted will
be insufficient to completely protect the Fund.
A Fund will purchase or sell futures contracts or options only if, in the
Adviser's judgment, there is expected to be a sufficient degree of correlation
between movements in the value of such instruments and changes in the value of
the relevant portion of the Fund's portfolio for the hedge to be effective.
There can be no assurance that the Adviser's judgment will be accurate.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET. The ordinary spreads between
prices in the cash and futures markets, due to differences in the natures of
those markets, are subject to distortions. First, all participants in the
futures market are subject to initial deposit and variation margin requirements.
This could require a Fund to post additional cash or cash equivalents as the
value of the position fluctuates. Further, rather than meeting additional
variation margin requirements, investors may close futures contracts through
offsetting transactions which could distort the normal relationship between the
cash and futures markets. Second, the liquidity of the futures or options market
may be lacking. Prior to exercise or expiration, a futures or option position
may be terminated only by entering into a closing purchase or sale transaction,
which requires a secondary market on the exchange on which the position was
originally established. While a Fund will establish a futures or option position
only if there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular futures or option
contract at any specific time. In such event, it may not be possible to close
out a position held by a Fund, which could require the Fund to purchase or sell
the instrument underlying the position, make or receive a cash settlement, or
meet ongoing variation margin requirements. The inability to close out futures
or option positions also could have an adverse impact on a Fund's ability
effectively to hedge its securities, or the relevant portion thereof.
The liquidity of a secondary market in a futures contract or an option on a
futures contract may be adversely affected by "daily price fluctuation limits"
established by the exchanges, which limit the amount of fluctuation in the price
of a contract during a single trading day and prohibit trading beyond such
limits once they have been reached. The trading of futures and options contracts
also is subject to the risk of trading halts, suspensions, exchange or clearing
house equipment failures, government intervention, insolvency of the brokerage
firm or clearing house or other disruptions of normal trading activity, which
could at times make it difficult or impossible to liquidate existing positions
or to recover excess variation margin payments.
RISK OF PREDICTING INTEREST RATE MOVEMENTS. Investments in futures
contracts on fixed income securities and related indices involve the risk that
if the Adviser's investment judgment concerning the
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general direction of interest rates is incorrect, a Fund's overall performance
may be poorer than if it had not entered into any such contract. For example, if
a Fund has been hedged against the possibility of an increase in interest rates
which would adversely affect the price of bonds held in its portfolio and
interest rates decrease instead, the Fund will lose part or all of the benefit
of the increased value of its bonds which have been hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
a Fund has insufficient cash, it may have to sell bonds from its portfolio to
meet daily variation margin requirements, possibly at a time when it may be
disadvantageous to do so. Such sale of bonds may be, but will not necessarily
be, at increased prices which reflect the rising market.
TRADING AND POSITION LIMITS. Each contract market on which futures and
option contracts are traded has established a number of limitations governing
the maximum number of positions which may be held by a trader, whether acting
alone or in concert with others. The Adviser does not believe that these trading
and position limits will have an adverse impact on the hedging strategies
regarding the Funds' investments.
REGULATIONS ON THE USE OF FUTURES AND OPTIONS CONTRACTS. Regulations of the
CFTC require that the Funds enter into transactions in futures contracts and
options thereon for hedging purposes only, in order to assure that they are not
deemed to be a "commodity pool" under such regulations. In particular, CFTC
regulations require that all short futures positions be entered into for the
purpose of hedging the value of investment securities held by a Fund, and that
all long futures positions either constitute bona fide hedging transactions, as
defined in such regulations, or have a total value not in excess of an amount
determined by reference to certain cash and securities positions maintained for
the Fund, and accrued profits on such positions. In addition, a Fund may not
purchase or sell such instruments if, immediately thereafter, the sum of the
amount of initial margin deposits on its existing futures positions and premiums
paid for options on futures contracts would exceed 5% of the market value of the
Fund's total assets.
When a Fund purchases a futures contract, an amount of cash or cash
equivalents or high quality debt securities will be segregated with the Fund's
custodian so that the amount so segregated, plus the initial deposit and
variation margin held in the account of its broker, will at all times equal the
value of the futures contract, thereby insuring that the use of such futures is
unleveraged.
The Funds' ability to engage in the hedging transactions described herein
may be limited by the current federal income tax requirement that a Fund derive
less than 30% of its gross income from the sale or other disposition of stock or
securities held for less than three months. The Funds may also further limit
their ability to engage in such transactions in response to the policies and
concerns of various Federal and state regulatory agencies. Such policies may be
changed by vote of the Board of Directors/Trustees.
GUARANTEED INVESTMENT CONTRACTS
Guaranteed investment contracts, investment contracts or funding agreements
(each referred to as a "GIC") are investment instruments issued by highly rated
insurance companies. Pursuant to such contracts, a Fund may make cash
contributions to a deposit fund of the insurance company's general or separate
accounts. The insurance company then credits to a Fund guaranteed interest. The
insurance company may assess periodic charges against a GIC for expense and
service costs allocable to it, and the charges will be deducted from the value
of the deposit fund. The purchase price paid for a GIC generally becomes part of
the general assets of the issuer, and the contract is paid from the general
assets of the issuer.
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A Fund will only purchase GICs from issuers which, at the time of purchase,
meet quality and credit standards established by the Adviser. Generally, GICs
are not assignable or transferable without the permission of the issuing
insurance companies, and an active secondary market in GICs does not currently
exist. Also, a Fund may not receive the principal amount of a GIC from the
insurance company on seven days' notice or less, at which point the GIC may be
considered to be an illiquid investment.
A Money Market Fund will acquire GlCs so that they, together with other
instruments in such Fund's portfolio which are not readily marketable, will not
exceed applicable limitations on such Fund's investments in illiquid securities.
A Money Market Fund will restrict its investments in GlCs to those having a term
of 397 days or less. In determining average weighted portfolio maturity, a GIC
will be deemed to have a maturity equal to the period of time remaining under
the next readjustment of the guaranteed interest rate.
INTEREST RATE TRANSACTIONS
Among the strategic transactions into which certain Funds may enter are
interest rate swaps and the purchase or sale of related caps and floors. The
Funds expect to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio, to protect
against currency fluctuations, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. A Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by a Fund
with another party of their respective commitments to pay or receive interest,
e.g. an exchange of floating rate payments for fixed rate payments with respect
to a notional amount of principal. A currency swap is an agreement to exchange
cash flows on a notional amount of two or more currencies based on the relative
value differential among them and an index swap is an agreement to swap cash
flows on a notional amount based on changes in the values of the reference
indices. The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount.
A Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. In as much as these swaps, caps and
floors are entered into for good faith hedging purposes, the Adviser and the
Fund believe such obligations do not constitute senior securities under the 1940
Act and, accordingly, will not treat them as being subject to its borrowing
restrictions. A Fund will not enter into any swap, cap and floor transaction
unless, at the time of entering into such transaction, the unsecured long-term
debt of the counterparty, combined with any credit enhancements, is rated at
least "A" by Standard & Poor's Corporation or Moody's Investors Service, Inc. or
has an equivalent rating from a Nationally Recognized Statistical Rating
Organization ("NRSRO") or is determined to be of equivalent credit quality by
the Adviser. If there is a default by the counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps and floors are more recent innovations for which
standardized documentation has not yet been fully developed and, accordingly,
they are less liquid than swaps.
With respect to swaps, a Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or
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liquid high grade securities having a value equal to the accrued excess. Caps
and floors require segregation of assets with a value equal to the Fund's net
obligation, if any.
LOWER RATED DEBT SECURITIES
The yields on lower rated debt and comparable unrated fixed-income
securities generally are higher than the yields available on higher-rated
securities. However, investments in lower rated debt and comparable unrated
securities generally involve greater volatility of price and risk of loss of
income and principal, including the probability of default by or bankruptcy of
the issuers of such securities. Lower rated debt and comparable unrated
securities (a) will likely have some quality and protective characteristics
that, in the judgment of the rating organization, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (b) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. Accordingly,
it is possible that these types of factors could, in certain instances, reduce
the value of securities held in a Fund's portfolio, with a commensurate effect
on the value of the Fund's shares. Therefore, an investment in the Fund should
not be considered as a complete investment program and may not be appropriate
for all investors.
The market prices of lower rated securities may fluctuate more than higher
rated securities and may decline significantly in periods of general economic
difficulty which may follow periods of rising interest rates. During an economic
downturn or a prolonged period of rising interest rates, the ability of issuers
of lower quality debt to service their payment obligations, meet projected
goals, or obtain additional financing may be impaired.
Since the risk of default is higher for lower rated securities, the Adviser
will try to minimize the risks inherent in investing in lower rated debt
securities by engaging in credit analysis, diversification, and attention to
current developments and trends affecting interest rates and economic
conditions. The Adviser will attempt to identify those issuers of high-yielding
securities whose financial condition is adequate to meet future obligations,
have improved, or are expected to improve in the future.
Unrated securities are not necessarily of lower quality than rated
securities, but they may not be attractive to as may buyers. Each Fund's
policies regarding lower rated debt securities is not fundamental and may be
changed at any time without shareholder approval.
While the market values of lower rated debt and comparable unrated
securities tend to react less to fluctuations in interest rate levels than the
market values of higher-rated securities, the market values of certain lower
rated debt and comparable unrated securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
higher- rated securities. In addition, lower rated debt securities and
comparable unrated securities generally present a higher degree of credit risk.
Issuers of lower rated debt and comparable unrated securities often are highly
leveraged and may not have more traditional methods of financing available to
them so that their ability to service their debt obligations during an economic
downturn or during sustained periods of rising interest rates may be impaired.
The risk of loss due to default by such issuers is significantly greater because
lower rated debt and comparable unrated securities generally are unsecured and
frequently are subordinated to the prior payment of senior indebtedness. A Fund
may incur additional expenses to the extent that it is required to seek recovery
upon a default in the payment of principal or interest on its portfolio
holdings. The existence of limited markets for lower rated debt and comparable
unrated securities may diminish a Fund's ability to (a) obtain accurate market
quotations for purposes of valuing such securities and calculating its net asset
value and (b) sell the securities at fair value either to meet redemption
requests or to respond to changes in the economy or in financial markets.
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Fixed-income securities, including lower rated debt securities and
comparable unrated securities, frequently have call or buy-back features that
permit their issuers to call or repurchase the securities from their holders,
such as a Fund. If an issuer exercises these rights during periods of declining
interest rates, a Fund may have to replace the security with a lower yielding
security, thus resulting in a decreased return to a Fund.
The market for certain lower rated debt and comparable unrated securities
is relatively new and has not weathered a major economic recession. The effect
that such a recession might have on such securities is not known. Any such
recession, however, could disrupt severely the market for such securities and
adversely affect the value of such securities. Any such economic downturn also
could adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon.
OTHER INVESTMENT COMPANIES
In seeking to attain their investment objectives, the Funds may invest in
securities issued by other investment companies within the limits prescribed by
the 1940 Act. Each Fund currently intends to limit its investments so that, as
determined immediately after a securities purchase is made: (a) not more than 5%
of the value of its total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
and (c) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund or by the Company as a whole. As a shareholder
of another investment company, a Fund would bear, along with other shareholders,
its pro rata portion of the other investment company's expenses, including
Advisory fees. These expenses would be in addition to the Advisory and other
expenses that a Fund bears in connection with its own operations. The Adviser
has agreed to remit to the respective investing Fund fees payable to it under
its respective Investment Advisory Agreement with an affiliated money market
Fund to the extent such fees are based upon the investing Fund's assets invested
in shares of the affiliated money market fund.
REAL ESTATE INVESTMENT TRUSTS
A real estate investment trust ("REIT") is a managed portfolio of real
estate investments which may include office buildings, apartment complexes,
hotels and shopping malls. An Equity REIT holds equity positions in real estate,
and it seeks to provide its shareholders with income from the leasing of its
properties, and with capital gains from any sales of properties. A Mortgage REIT
specializes in lending money to developers of properties, and passes any
interest income it may earn to its shareholders.
REITs may be affected by changes in the value of the underlying property
owned or financed by the REIT, while Mortgage REITs also may be affected by the
quality of credit extended. Both Equity and Mortgage REITs are dependent upon
management skill and may not be diversified. REITs also may be subject to heavy
cash flow dependency, defaults by borrowers, self-liquidation, and the
possibility of failing to qualify for tax-free pass-through of income under the
Internal Revenue Code or 1986, as amended.
REPURCHASE AGREEMENTS
The repurchase price under the repurchase agreements described in the
Prospectuses generally equals the price paid by a Fund plus interest negotiated
on the basis of current short-term rates (which may be more or less than the
rate on the securities underlying the repurchase agreement). Securities subject
to repurchase agreements will be held by the Trust's custodian, or a
sub-custodian, in a
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segregated account or in the Federal Reserve/Treasury book-entry system.
Repurchase agreements are considered to be loans by the Trust under the 1940
Act.
REVERSE REPURCHASE AGREEMENTS
At the time a Fund enters into a reverse repurchase agreement, it may
establish a segregated account with its custodian bank in which it will maintain
cash, U.S. Government securities or other liquid high grade debt obligations
equal in value to its obligations in respect of reverse repurchase agreements.
Reverse repurchase agreements involve the risk that the market value of the
securities the Funds are obligated to repurchase under the agreement may decline
below the repurchase price. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, the Funds' use
of proceeds of the agreement may be restricted pending a determination by the
other party, or its trustee or receiver, whether to enforce the Funds'
obligation to repurchase the securities. Reverse repurchase agreements are
speculative techniques involving leverage, and are subject to asset coverage
requirements if the Funds do not establish and maintain a segregated account (as
described above). In addition, some or all of the proceeds received by a Fund
from the sale of a portfolio instrument may be applied to the purchase of a
repurchase agreement. To the extent the proceeds are used in this fashion and a
common broker/dealer is the counterparty on both the reverse repurchase
agreement and the repurchase agreement, the arrangement might be recharacterized
as a swap transaction. Under the requirements of the 1940 Act, the Funds are
required to maintain an asset coverage (including the proceeds of the
borrowings) of at least 300% of all borrowings. Depending on market conditions,
the Funds' asset coverage and other factors at the time of a reverse repurchase,
the Funds may not establish a segregated account when the Adviser believes it is
not in the best interests of the Funds to do so. In this case, such reverse
repurchase agreements will be considered borrowings subject to the asset
coverage described above.
SECURITIES LENDING
To increase return on portfolio securities, certain of the Funds may lend
their portfolio securities to broker/dealers and other institutional investors
pursuant to agreements requiring that the loans be continuously secured by
collateral equal at all times in value to at least the market value of the
securities loaned. Collateral for such loans may include cash, securities of the
U.S. Government, its agencies or instrumentalities, an irrevocable letter of
credit issued by (i) a U.S. bank that has total assets exceeding $1 billion and
that is a member of the Federal Deposit Insurance Corporation, or (ii) a foreign
bank that is one of the 75 largest foreign commercial banks in terms of total
assets, or any combination thereof. Such loans will not be made if, as a result,
the aggregate of all outstanding loans of the Fund involved exceeds 33% of the
value of its total assets. There may be risks of delay in receiving additional
collateral or in recovering the securities loaned or even a loss of rights in
the collateral should the borrower of the securities fail financially. However,
loans are made only to borrowers deemed by the Adviser to be of good standing
and when, in its judgment, the income to be earned from the loan justifies the
attendant risks. Pursuant to the securities loan agreement a Fund is able to
terminate the securities loan upon notice of not more than five business days
and thereby secure the return to the Fund of securities identical to the
transferred securities upon termination of the loan.
SHORT SALES
As described in the Prospectuses, certain Funds may from time to time enter
into short sales transactions. A Fund will not make short sales of securities
nor maintain a short position unless at all times when a short position is open,
such Fund owns an equal amount of such securities or securities convertible into
or exchangeable, without payment of any further consideration, for securities of
the same issue as, and equal in amount to, the securities sold short. This is a
technique known as selling short
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"against the box." Such short sales will be used by a Fund for the purpose of
deferring recognition of gain or loss for federal income tax purposes.
SPECIAL SITUATIONS
As described in the Prospectuses, certain Funds may invest in "special
situations." A special situation arises when, in the opinion of the Adviser, the
securities of a particular company will, within a reasonably estimable period of
time, be accorded market recognition at an appreciated value solely by reason of
a development applicable to that company, and regardless of general business
conditions or movements of the market as a whole. Developments creating special
situations might include, among others: liquidations, reorganizations,
recapitalizations, mergers, material litigation, technical breakthroughs and new
management or management policies. Although large and well known companies may
be involved, special situations more often involve comparatively small or
unseasoned companies. Investments in unseasoned companies and special situations
often involve much greater risk than is inherent in ordinary investment
securities.
STRIPPED SECURITIES
Certain of the Funds may purchase stripped securities issued or guaranteed
by the U.S. Government, where the principal and interest components are traded
independently under the Separate Trading of Registered Interest and Principal of
Securities program ("STRIPS"). Under STRIPS, the principal and interest
components are individually numbered and separately issued by the U.S. Treasury
at the request of depository financial institutions, which then trade the
component parts independently.
In addition, the Fund may purchase stripped mortgage-backed securities
("SMBS") issued by the U.S. Government (or a U.S. Government agency or
instrumentality) or by private issuers such as banks and other institutions. If
the underlying obligations experience greater than anticipated prepayments of
principal, the Fund may fail to fully recover its initial investment. The market
value of the class consisting entirely of principal payments can be extremely
volatile in response to changes in interest rates. The yields on a class of SMBS
that receives all or most of the interest are generally higher than prevailing
market yields on other mortgage-backed obligations because their cash flow
patterns are also volatile and there is a greater risk that the initial
investment will not be full recovered. SMBS issued by the U.S. Government (or a
U.S. Government agency or instrumentality) may be considered liquid under
guidelines established by the Company's Board of Directors if they can be
disposed of promptly in the ordinary course of business at a value reasonably
close to that used in the calculation of the Fund's per share net asset value.
Although stripped securities may not pay interest to holders prior to
maturity, Federal income tax regulations require a Fund to recognize as interest
income a portion of the bond's discount each year. This income must then be
distributed to shareholders along with other income earned by the Fund. To the
extent that any shareholders in the Fund elect to receive their dividends in
cash rather than reinvest such dividends in additional Fund shares, cash to make
these distributions will have to be provided from the assets of the Fund or
other sources such as proceeds of sales of Fund shares and/or sales of portfolio
securities. In such cases, the Fund will not be able to purchase additional
income producing securities with cash used to make such distributions and its
current income may ultimately be reduced as a result.
U.S. AND FOREIGN BANK OBLIGATIONS
These obligations include negotiable certificates of deposit, banker's
acceptances and fixed time deposits. Each Fund limits its investments in
domestic bank obligations to banks having total assets in
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excess of $1 billion and subject to regulation by the U.S. Government. Each Fund
may also invest in certificates of deposit issued by members of the Federal
Deposit Insurance Corporation ("FDIC") having total assets of less than $1
billion, provided that the Fund will at no time own more than $100,000 principal
amount of certificates of deposit (or any higher principal amount which in the
future may be fully covered by FDIC insurance) of any one of those issuers.
Fixed time deposits are obligations which are payable at a stated maturity date
and bear a fixed rate of interest. Generally, fixed time deposits may be
withdrawn on demand by a Fund, but they may be subject to early withdrawal
penalties which vary depending upon market conditions and the remaining maturity
of the obligation. Although fixed time deposits do not have a market, there are
no contractual restrictions on a Fund's right to transfer a beneficial interest
in the deposit to a third party.
Each Fund limits its investments in foreign bank obligations (I.E.,
obligations of foreign branches and subsidiaries of domestic banks, and domestic
and foreign branches and agencies of foreign banks) to obligations of banks
which at the time of investment are branches or subsidiaries of domestic banks
which meet the criteria in the preceding paragraphs or are branches or agencies
of foreign banks which (i) have more than $10 billion, or the equivalent in
other currencies, in total assets; (ii) in terms of assets are among the 75
largest foreign banks in the world; (iii) have branches or agencies in the
United States; and (iv) in the opinion of the Adviser, pursuant to the criteria
established by the Board of Directors of the Company, are of an investment
quality comparable to obligations of domestic banks which may be purchased by a
Fund. These obligations may be general obligations of the parent bank in
addition to the issuing branch or subsidiary, but the parent bank's obligations
may be limited by the terms of the specific obligation or by governmental
regulation. Each Fund also limits its investments in foreign bank obligations to
banks, branches and subsidiaries located in Western Europe (United Kingdom,
France, Germany, Belgium, The Netherlands, Italy and Switzerland), Scandinavia
(Denmark and Sweden), Australia, Japan, the Cayman Islands, the Bahamas and
Canada. Each Fund will limit its investment in securities of foreign banks to
not more than 20% of total assets at the time of investment.
Each Fund may also make interest-bearing savings deposits in commercial and
savings banks in amounts not in excess of 5% of the total assets of the Fund.
U.S. GOVERNMENT OBLIGATIONS
Each Fund may invest in U.S. Government obligations. Examples of the types
of U.S. Government obligations that may be held by the Funds include, in
addition to U.S. Treasury bonds, notes and bills, the obligations of the Federal
Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage Association,
Federal National Mortgage Association, General Services Administration, Student
Loan Marketing Association, Central Bank for Cooperatives, Federal Home Loan
Mortgage Corporation, Federal Intermediate Credit Banks, Tennessee Valley
Authority, Resolution Funding Corporation and Maritime Administration.
Obligations guaranteed as to principal or interest by the U.S. Government, its
agencies, authorities or instrumentalities are deemed to include: (a) securities
for which the payment of principal and interest is backed by an irrevocable
letter of credit issued by the U.S. Government, its agencies, authorities or
instrumentalities and (b) participations in loans made to foreign governments or
their agencies that are so guaranteed. The secondary market for certain of these
participations is limited. If such participations are illiquid they will not be
purchased.
U.S. Government obligations include principal and interest components of
securities issued or guaranteed by the U.S. Treasury if the components are
traded independently under the Separate Trading of Registered Interest and
Principal of Securities program. Obligations issued or guaranteed as to
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<PAGE>
principal or interest by the U.S. Government, its agencies, authorities or
instrumentalities may also be acquired in the form of custodial receipts. These
receipts evidence ownership of future interest payments, principal payments or
both on certain notes or bonds issued by the U.S. Government, its agencies,
authorities or instrumentalities.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Options, futures and forward foreign currency contracts that obligate a
Fund to provide cash, securities or currencies to complete such transactions
will entail that Fund to either segregate assets in an account with, or on the
books of, the Company's custodian, or otherwise "covering" the transaction as
described below. For example, a call option written by a Fund will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or liquid assets
sufficient to meet the obligation by purchasing and delivering the securities if
the call is exercised. A call option written on an index will require that Fund
to have portfolio securities that correlate with the index. A put option written
by a Fund also will require that Fund to have available assets sufficient to
purchase the securities the Fund would be obligated to buy if the put is
exercised.
A forward foreign currency contract that obligates a Fund to provide
currencies will require the Fund to hold currencies or liquid securities
denominated in a foreign currency which will equal the Fund's obligations. Such
a contract requiring the purchase of currencies also requires segregation.
Unless a segregated account consists of the securities, cash or currencies
that are the subject of the obligation, a Fund will hold cash, U.S. Government
securities and other high grade liquid debt obligations in a segregated account.
These assets cannot be transferred while the obligation is outstanding unless
replaced with other suitable assets. In the case of an index-based transaction,
a Fund could own securities substantially replicating the movement of the
particular index.
In the case of a futures contract, a Fund must deposit initial margin and
variation margin, as often as daily, if the position moves adversely, sufficient
to meet its obligation to purchase or provide securities or currencies, or to
pay the amount owed at the expiration of an index-based futures contract.
Similarly, options on futures contracts require a Fund to deposit margin to the
extent necessary to meet the Fund's commitments.
In lieu of such assets, such transactions may be covered by other means
consistent with applicable regulatory policies. A Fund may enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and hedging
transactions. For example, a Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by that Fund. Moreover, instead of segregating assets if a Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Of course, the off-setting transaction must terminate at the time
of or after the primary transaction.
VARIABLE- AND FLOATING-RATE INSTRUMENTS
The Funds may purchase variable-rate and floating rate obligations as
described in the Prospectuses. If such instrument is not rated, the Adviser will
consider the earning power, cash flows, and other liquidity ratios of the
issuers and guarantors of such obligations and, if the obligation is subject to
a demand feature, will monitor their financial status to meet payment on demand.
In determining average weighted portfolio maturity, a variable-rate demand
instrument issued or guaranteed by the U.S.
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Government or an agency or instrumentality thereof will be deemed to have a
maturity equal to the period remaining until the obligations next interest rate
adjustment. Other variable-rate obligations will be deemed to have a maturity
equal to the longer of the period remaining to the next interest rate adjustment
or the time a Fund can recover payment of principal as specified in the
instrument. Variable-rate demand notes held by a Money Market Fund may have
maturities of more than 397 days, provided (i) the Fund is entitled to payment
principal on not more than 30 days' notice, or at specified intervals not
exceeding 397 days (upon not more than 30 days' notice), and (ii) the rate of
interest on such note is adjusted automatically at periodic intervals which may
extend up to 397 days.
The variable- and-floating rate demand instruments that the Funds may
purchase include participations in Municipal Securities purchased from and owned
by financial institutions, primarily banks. Participation interests provide a
Fund with a specified undivided interest (up to 100%) in the underlying
obligation and the right to demand payment of the unpaid principal balance plus
accrued interest on the participation interest from the institution upon a
specified number of days' notice, not to exceed 30 days. Each participation
interest is backed by an irrevocable letter of credit or guarantee of a bank
that the Adviser has determined meets the prescribed quality standards for the
Funds. The bank typically retains fees out of the interest paid on the
obligation for servicing the obligation, providing the letter of credit, and
issuing the repurchase commitment.
WARRANTS
The Funds are permitted to invest in warrants. Warrants are privileges
issued by corporations enabling the owner to subscribe to and purchase a
specified number of shares of the corporation at a specified price during a
specified period of time. The prices of warrants do not necessarily correlate
with the prices of the underlying securities. The purchase of warrants involves
the risk that the purchaser could lose the purchase value of the warrant if the
right to subscribe to additional shares is not exercised prior to the warrant's
expiration. Also, the purchase of warrants involves the risk that the effective
price paid for the warrant added to the subscription price of the related
security may exceed the value of the subscribed security's market price such as
when there is no movement in the level of the underlying security.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS
A Fund may agree to purchase securities on a when-issued basis or enter
into a forward commitment to purchase securities. When a Fund engages in these
transactions, its custodian will segregate cash, U.S. government securities or
other high quality debt obligations equal to the amount of the commitment.
Normally, the custodian will segregate portfolio securities to satisfy a
purchase commitment, and in such a case a Fund may be required subsequently to
segregate additional assets in order to ensure that the value of the segregated
assets remains equal to the amount of the Fund's commitment. Because a Fund will
segregate cash or liquid assets to satisfy its purchase commitments in the
manner described, the Fund's liquidity and ability to manage its portfolio might
be adversely affected in the event its commitments to purchase when-issued
securities ever exceeded 25% of the value of its assets. In the case of a
forward commitment to sell portfolio securities, the Fund's custodian will hold
the portfolio securities themselves in a segregated account while the commitment
is outstanding.
A Fund will make commitments to purchase securities on a when-issued basis
or to purchase or sell securities on a forward commitment basis only with the
intention of completing the transaction and actually purchasing or selling the
securities. If deemed advisable as a matter of investment strategy, however, a
Fund may dispose of or renegotiate a commitment after it is entered into, and
may sell
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securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date. In these cases the Fund may realize a capital
gain or loss.
When a Fund engages in when-issued and forward commitment transactions, it
relies on the other party to consummate the trade. Failure of such party to do
so may result in the Fund's incurring a loss or missing an opportunity to obtain
a price considered to be advantageous.
The value of the securities underlying a when-issued purchase or a forward
commitment to purchase securities, and any subsequent fluctuations in their
value, is taken into account when determining the net asset value of a Fund
starting on the date the Fund agrees to purchase the securities. The Fund does
not earn dividends on the securities it has committed to purchase until they are
paid for and delivered on the settlement date. When the Fund makes a forward
commitment to sell securities it owns, the proceeds to be received upon
settlement are included in the Fund's assets. Fluctuations in the value of the
underlying securities are not reflected in the Fund's net asset value as long as
the commitment remains in effect.
NET ASSET VALUE
PURCHASES AND REDEMPTIONS
See "How To Buy Shares" and "How To Redeem Shares" in the Prospectuses for
a complete description of the manner in which Shares of the various classes of
the LifeGoal Portfolios may be purchased and redeemed.
The LifeGoal Portfolios are available for a variety of retirement plans,
including IRAs, that allow investors to shelter some of their income from taxes.
Investors should contact the LifeGoal Portfolios or their Selling Agents for
details concerning retirement plans.
The right of redemption may be suspended or the date of payment postponed
when (a) trading on the New York Stock Exchange is restricted, as determined by
applicable rules and regulations of the SEC, (b) the New York Stock Exchange is
closed for other than customary weekend and holiday closings, (c) the SEC has by
order permitted such suspension, or (d) an emergency as determined by the SEC
exists making disposal of portfolio securities or the valuation of the net
assets of a LifeGoal Portfolio of the Company not reasonably practicable.
INVESTMENT STRATEGY
Investing the same dollar amount at regular intervals is an investment
strategy known as Dollar Cost Averaging. Using this strategy, investors purchase
a greater number of shares when a LifeGoal Portfolio's price is low and fewer
shares when the price is high. As a result, the average purchase price for
shares will be less than their average cost. Dollar Cost Averaging does not
provide assurance of making a profit or any guarantee against loss in
continually declining markets. Investors should evaluate whether they are able
to make regular investments through periods of declining price levels before
deciding to use this investment technique.
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EXPENSE RATIOS FOR UNDERLYING NATIONS FUNDS (PRIMARY A SHARES)
The following table provides the annualized expense ratios for Primary A Shares
of each of the selected underlying Nations Funds for its fiscal period ended
March 31, 1998.
(after fee (before fee
waivers and/or waivers and/or
expense expense
reimbursements) reimbursements)
--------------- ---------------
Nations Disciplined Equity Fund .98% .98%
Nations Capital Growth Fund .95% .95%
Nations Value Fund .95% .95%
Nations Small Company Growth Fund .95% 1.26%
Nations Marsico Focused Equities Fund 1.52% 1.52%
Nations Marsico Growth & Income Fund 1.52% 1.97%
Nations Equity Income Fund .86% .86%
Nations Managed Index Fund .50% .80%
Nations Emerging Growth Fund .98% .98%
Nations Managed SmallCap Index Fund .52% 1.02%
Nations International Equity Fund 1.14% 1.14%
Nations International Value Fund 1.12% 1.22%
Nations Pacific Growth Fund 1.37% 1.37%
Nations Emerging Markets Fund 1.57% 1.57%
Nations Prime Fund .30% .35%
Nations Strategic Fixed Income Fund .72% .83%
Nations Diversified Income Fund .73% .83%
Nations Short-Intermediate Government Fund .61% .81%
Nations Short-Term Income Fund .56% .86%
The following table provides the expected expense ratios for Primary A Shares of
each of the selected underlying Nations Funds appearing in each of the
underlyings Funds' prospectuses dated August 1, 1998.
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(after fee (before fee
waivers and/or waivers and/or
expense expense
reimbursements) reimbursements)
--------------- ---------------
Nations Disciplined Equity Fund .98% .98%
Nations Capital Growth Fund .95% .95%
Nations Value Fund .94% .95%
Nations Small Company Growth Fund .95% 1.26%
Nations Marsico Focused Equities Fund 1.25% 1.52%
Nations Marsico Growth & Income Fund 1.25% 1.97%
Nations Equity Income Fund .86% .86%
Nations Managed Index Fund .50% .80%
Nations Emerging Growth Fund .98% .98%
Nations Managed SmallCap Index Fund .50% 1.03%
Nations International Equity Fund 1.14% 1.14%
Nations International Value Fund 1.12% 1.22%
Nations Pacific Growth Fund 1.37% 1.37%
Nations Emerging Markets Fund 1.57% 1.57%
Nations Prime Fund .30% .35%
Nations Strategic Fixed Income Fund .70% .83%
Nations Diversified Income Fund .73% .83%
Nations Short-Intermediate Government Fund .61% .81%
Nations Short-Term Income Fund .56% .86%
NET ASSET VALUE DETERMINATION
Shares of the common stock of each class of shares of each LifeGoal
Portfolio that are offered by the Prospectuses are sold at their respective net
asset value next determined after the receipt of the purchase order.
Shareholders may at any time redeem all or a portion of their shares at net
asset value next determined following receipt of a redemption order, less any
contingent deferred sales charge applicable to Investor C Shares.
The net asset value per share of each of the LifeGoal Portfolios is
determined at the times and in the manner described in the Prospectuses.
Portfolio securities of a LifeGoal Portfolio for which market quotations
are not readily available, if any, are valued at fair value as determined in
good faith by or under the supervision of the Company's officers in a manner
specifically authorized by the Board of Directors of the Company. Short-term
obligations having 60 days or less to maturity are valued at amortized cost,
which approximates market value.
Generally, trading in U.S. Government securities and money market
instruments is substantially completed each day at various times prior to the
close of the New York Stock Exchange. The values of such securities, if any,
used in computing the net asset value of the shares of a Portfolio are
determined as of such times. Occasionally, events affecting the value of such
securities may occur between the times at which they are determined and the
close of the New York Stock Exchange, which will not be reflected in the
computation of net asset value. If during such periods events occur which
materially affect the value of such securities, the securities will be valued at
their fair market value as determined in good faith by the directors.
EXCHANGES
By use of the exchange privilege, the holder of Investor Shares and/or
Primary Shares authorizes the transfer agent or the shareholder's financial
institution to rely on telephonic instructions from any
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person representing himself to be the investor and reasonably believed to be
genuine. The transfer agent's or a financial institution's records of such
instructions are binding. Exchanges are taxable transactions for federal income
tax purposes; therefore, a shareholder will realize a capital gain or loss
depending on whether the Investor Shares and/or Primary Shares being exchanged
have a value which is more or less than their adjusted cost basis.
The Company may limit the number of times the exchange privilege may be
exercised by a shareholder within a specified period of time. Also, the exchange
privilege may be terminated or revised at any time by the Company upon such
notice as may be required by applicable regulatory agencies (presently sixty
days for termination or material revision), provided that the exchange privilege
may be terminated or materially revised without notice under certain unusual
circumstances.
The Prospectuses for the Investor Shares and Primary Shares of each
LifeGoal Portfolio describe the exchange privileges available to holders of such
Investor Shares and Primary Shares, respectively.
DESCRIPTION OF SHARES
DIVIDENDS AND DISTRIBUTIONS
Each LifeGoal Portfolio anticipates distributing substantially all of its
investment company taxable income for each taxable year. Such distributions will
be taxable to shareholders as ordinary income and treated as dividends for
federal income tax purposes.
A LifeGoal Portfolio may either retain or distribute to shareholders its
net capital gain for each taxable year. Each LifeGoal Portfolio currently
intends to distribute any such amounts. If net capital gain is distributed and
designated as a capital gain dividend, it will be taxable to shareholders as
long-term capital gain, regardless of the length of time the shareholder has
held his/her Shares or whether such gain was recognized by the LifeGoal
Portfolio prior to the date on which the shareholder acquired his/her shares.
Conversely, if a LifeGoal Portfolio elects to retain its net capital gain, the
LifeGoal Portfolio will be taxed thereon (except to the extent of any available
capital loss carryovers) at the applicable corporate tax rate. If a Portfolio
elects to retain its net capital gain, it is expected that the LifeGoal
Portfolio also will elect to have shareholders treated as if each received a
distribution of his or her pro rata share of such gain, with the result that
each shareholder will be required to report his or her pro rata share of such
gain on his or her tax return as long-term capital gain, will receive a
refundable tax credit for his or her share of tax paid by the LifeGoal Portfolio
on the gain and will increase the basis for his or her Shares by an amount equal
to the deemed distribution less the tax credit.
Dividends and distributions from net investment income, for each LifeGoal
Portfolio are declared and paid quarterly, and capital gains distributions are
declared and paid annually. The Investor A, Investor B, Investor C and Primary B
Shares of the LifeGoal Portfolios accrue additional expense, not borne by the
Primary A Shares, as a result of the applicable Rule 12b-1 Plan, Shareholder
Servicing Plan and/or Shareholder Administration Plan. Consequently, a separate
calculation is made to arrive at the net asset value per share and dividends of
each class of shares of the LifeGoal Portfolios.
Net investment income for the LifeGoal Portfolios for dividend purposes
consists of (i) interest accrued and original issue discount earned on a
LifeGoal Portfolio's assets, (ii) less accrued expenses directly attributable to
the LifeGoal Portfolio and the general expenses of the Company prorated to a
LifeGoal Portfolio on the basis of its relative net assets, plus dividend or
distribution income on a LifeGoal Portfolio's assets.
35
<PAGE>
ADDITIONAL INFORMATION CONCERNING TAXES
The following information supplements and should be read in conjunction
with the Prospectus section entitled "How Dividends and Distributions Are Made;
Tax Information." The Prospectus of each LifeGoal Portfolio describes generally
the tax treatment of distributions by the LifeGoal Portfolios. This section of
the SAI includes additional information concerning Federal income taxes.
GENERAL
Each LifeGoal Portfolio intends to qualify as a regulated investment
company under Subchapter M of the Code, as long as such qualification is in the
best interest of the LifeGoal Portfolio's shareholders. Each LifeGoal Portfolio
will be treated as a separate entity for Federal income tax purposes. Thus, the
provisions of the Code applicable to regulated investment companies generally
will be applied to each LifeGoal Portfolio, rather than to the Company as a
whole. In addition, net capital gains, net investment income, and operating
expenses will be determined separately for each LifeGoal Portfolio. As a
regulated investment company, each LifeGoal Portfolio will not be taxed on its
net investment income and capital gains distributed to its shareholders.
Qualification as a regulated investment company under the Code requires,
among other things, that each LifeGoal Portfolio derive at least 90% of its
annual gross income from dividends, interest, certain payments with respect to
securities loans, gains from the sale or other disposition of stock or
securities or foreign currencies (to the extent such currency gains are directly
related to the LifeGoal Portfolio's principal business of investing in stock or
securities) and 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. In addition, the Code requires that
each LifeGoal Portfolio diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the
LifeGoal Portfolio's assets is represented by cash, government securities and
other securities limited in respect of any one issuer to an amount not greater
than 5% of the LifeGoal Portfolio's assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than U.S. Government
obligations and the securities of other regulated investment companies), or in
two or more issuers which the LifeGoal Portfolio controls and which are
determined to be engaged in the same or similar trades or businesses.
The LifeGoal Portfolios also must distribute or be deemed to distribute to
their shareholders at least 90% of their net investment income (which, for this
purpose, includes net short-term capital gains) earned in each taxable year. In
general, these distributions must actually or be deemed to be made in the
taxable year. However, in certain circumstances, such distributions may be made
in the 12 months following the taxable year. Furthermore, distributions declared
in October, November or December of one taxable year and paid by January 31 of
the following taxable year will be treated as paid by December 31 of the first
taxable year. The LifeGoal Portfolios intend to pay out substantially all of
their net investment income and net realized capital gains (if any) for each
year.
In addition, a regulated investment company must, in general, derive less
than 30% of its gross income from the sale or other disposition of securities or
options thereon held for less than three months. However, this restriction has
been repealed with respect to a regulated investment company's taxable years
beginning after August 5, 1997.
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<PAGE>
As described above, the Code permits a LifeGoal Portfolio to invest greater
than 25% of the value of its assets in the securities of other regulated
investment companies, such as a Nations Fund. In this regard, each Nations Fund
also must meet the requirements set forth above for regulated investment
companies. Failure of a Nations Fund to qualify could cause a LifeGoal Portfolio
investing therein to fail to qualify as a regulated investment company.
EXCISE TAX
A 4% nondeductible excise tax will be imposed on each LifeGoal Portfolio
(other than to the extent of its tax-exempt interest income) to the extent it
does not meet certain minimum distribution requirements by the end of each
calendar year. Each LifeGoal Portfolio intends to actually or be deemed to
distribute substantially all of its net investment income and net capital gains
by the end of each calendar year and, thus, expects not to be subject to the
excise tax.
TAXATION OF INVESTMENTS OF A REGULATED INVESTMENT COMPANY
Although the LifeGoal Portfolios may invest directly in portfolio
securities, the LifeGoal Portfolios intends to invest primarily in the
securities of an underlying Nations Fund. The following discussion regarding
investments of a regulated investment company therefore applies equally to
investments made by a LifeGoal Portfolio, and to investments made by a Nations
Fund.
Except as provided herein, gains and losses on the sale of portfolio
securities by a regulated investment company generally will be capital gains and
losses. Such gains and losses will ordinarily be long-term capital gains and
losses if the securities have been held by the regulated investment company for
more than one year at the time of disposition of the securities.
Gains recognized on the disposition of a debt obligation (including
tax-exempt obligations purchased after April 30, 1993) purchased by a regulated
investment company at a market discount (generally at a price less than its
principal amount) will be treated as ordinary income to the extent of the
portion of market discount which accrued, but was not previously recognized
pursuant to an available election, during the term the regulated investment
company held the debt obligation.
If an option granted by a regulated investment company lapses or is
terminated through a closing transaction, such as a repurchase by the regulated
investment company of the option from its holder, the regulated investment
company will realize a short-term capital gain or loss, depending on whether the
premium income is greater or less than the amount paid by the regulated
investment company in the closing transaction. Some realized capital losses may
be deferred if they result from a position which is part of a "straddle,"
discussed below. If securities are sold by a regulated investment company
pursuant to the exercise of a call option written by it, the regulated
investment company will add the premium received to the sale price of the
securities delivered in determining the amount of gain or loss on the sale. If
securities are purchased by a regulated investment company pursuant to the
exercise of a put option written by it, such regulated investment company will
subtract the premium received from its cost basis in the securities purchased.
The amount of any gain or loss realized by a regulated investment company
on closing out a regulated futures contract will generally result in a realized
capital gain or loss for Federal income tax purposes. Regulated futures
contracts held at the end of each fiscal year will be required to be "marked to
market" for Federal income tax purposes pursuant to Section 1256 of the Code. In
this regard, they will be deemed to have been sold at market value. Sixty
percent (60%) of any net gain or loss recognized on these deemed sales, and
sixty percent (60%) of any net realized gain or loss from any actual sales,
37
<PAGE>
generally will be treated as long-term capital gain or loss, and the remaining
forty percent (40%) of deemed and actual sales will be treated as short-term
capital gain or loss. Transactions that qualify as designated hedges are
excepted from the "mark-to-market" rule and the "60%/40%" rule.
Under Section 988 of the Code, a regulated investment company will
generally recognize ordinary income or loss to the extent gain or loss realized
on the disposition of portfolio securities is attributable to changes in foreign
currency exchange rates. In addition, gain or loss realized on the disposition
of a foreign currency forward contract, futures contract, option or similar
financial instrument, or of foreign currency itself, generally will be treated
as ordinary income or loss. The LifeGoal Portfolios will attempt to monitor
Section 988 transactions, where applicable, to avoid adverse Federal tax impact.
Offsetting positions held by a regulated investment company involving
certain financial forward, futures or options contracts may be considered, for
tax purposes, to constitute "straddles." "Straddles" are defined to include
"offsetting positions" in actively traded personal property. The tax treatment
of "straddles" is governed by Section 1092 of the Code which, in certain
circumstances, overrides or modifies the provisions of Section 1256. If a
regulated investment company were treated as entering into "straddles" by
engaging in certain financial forward, futures or option contracts, such
straddles could be characterized as "mixed straddles" if the futures, forwards,
or options comprising a part of such straddles were governed by Section 1256 of
the Code. The regulated investment company may make one or more elections with
respect to "mixed straddles." Depending upon which election is made, if any, the
results with respect to the regulated investment company may differ. Generally,
to the extent the straddle rules apply to positions established by the regulated
investment company, losses realized by the regulated investment company may be
deferred to the extent of unrealized gain in any offsetting positions. Moreover,
as a result of the straddle and the conversion transaction rules, short-term
capital loss on straddle positions may be recharacterized as long-term capital
loss, and long-term capital gain may be characterized as short-term capital gain
or ordinary income.
If a regulated investment company enters into a "constructive sale" of any
appreciated position in stock, a partnership interest, or certain debt
instruments, the regulated investment company must recognize gain (but not loss)
with respect to that position. For this purpose, a constructive sale occurs when
the regulated investment company enters into one of the following transactions
with respect to the same or substantially identical property: (i) a short sale;
(ii) an offsetting notional principal contract; or (iii) a futures or forward
contract.
If a regulated investment company purchases shares in a "passive foreign
investment company" ("PFIC"), the regulated investment company may be subject to
Federal income tax and an interest charge imposed by the Internal Revenue
Service ("IRS") upon certain distributions from the PFIC or the regulated
investment company's disposition of its PFIC shares. If a LifeGoal Portfolio
invests in a PFIC, the LifeGoal Portfolio intends to make an available election
to mark-to-market its interest in PFIC shares. Under the election, the LifeGoal
Portfolio will be treated as recognizing at the end of each taxable year the
difference, if any, between the fair market value of its interest in the PFIC
shares and its basis in such shares. In some circumstances, the recognition of
loss may be suspended. The LifeGoal Portfolio will adjust its basis in the PFIC
shares by the amount of income (or loss) recognized. Although such income (or
loss) will be taxable to the LifeGoal Portfolio as ordinary income (or loss)
notwithstanding any distributions by the PFIC, the LifeGoal Portfolio will not
be subject to Federal income tax or the interest charge with respect to its
interest in the PFIC under the election.
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CAPITAL GAIN DISTRIBUTIONS
Distributions which are designated by a LifeGoal Portfolio as capital gain
distributions will be taxed to shareholders as long-term term capital gain (to
the extent such dividends do exceed the LifeGoal Portfolio's actual net capital
gains for the taxable year), regardless of how long a shareholder has held
LifeGoal Portfolio shares. Such distributions will be designated as capital gain
distributions in a written notice mailed by the LifeGoal Portfolio to its
shareholders not later than 60 days after the close of the LifeGoal Portfolio's
taxable year.
DISPOSITION OF FUND SHARES
A disposition of LifeGoal Portfolio shares pursuant to a redemption
(including a redemption in-kind) or an exchange ordinarily will result in a
taxable capital gain or loss, depending on the amount received for the shares
(or are deemed to receive in the case of an exchange) and the cost of the
shares.
If a shareholder exchanges or otherwise disposes of LifeGoal Portfolio
shares within 90 days of having acquired such shares and if, as a result of
having acquired those shares, the shareholder subsequently pays a reduced sales
charge on a new purchase of shares of the LifeGoal Portfolio or a different
regulated investment company, the sales charge previously incurred acquiring the
LifeGoal Portfolio's shares shall not be taken into account (to the extent such
previous sales charges do not exceed the reduction in sales charges on the new
purchase) for the purpose of determining the amount of gain or loss on the
disposition, but will be treated as having been incurred in the acquisition of
such other shares. Also, any loss realized on a redemption or exchange of shares
of the LifeGoal Portfolio will be disallowed to the extent that substantially
identical shares are acquired within the 61-day period beginning 30 days before
and ending 30 days after the shares are disposed of.
If a shareholder receives a designated capital gain distribution (to be
treated by the shareholder as a long-term capital gain) with respect to any
LifeGoal Portfolio share and such LifeGoal Portfolio share is held for six
months or less, then (unless otherwise disallowed) any loss on the sale or
exchange of that LifeGoal Portfolio share will be treated as a long-term capital
loss to the extent of the designated capital gain distribution. In addition, if
a shareholder holds LifeGoal Portfolio shares for six months or less, any loss
on the sale or exchange of those shares will be disallowed to the extent of the
amount of exempt-interest dividends received with respect to the shares. The
Treasury Department is authorized to issue regulations reducing the six-month
holding requirement to a period of not less than the greater of 31 days or the
period between regular dividend distributions where a LifeGoal Portfolio
regularly distributes at least 90% of its net tax-exempt interest, if any. No
such regulations have been issued as of the date of this SAI. The loss
disallowance rules described in this paragraph do not apply to losses realized
under a periodic redemption plan.
FEDERAL INCOME TAX RATES
As of the printing of this SAI, the maximum individual tax rate applicable
to ordinary income is 39.6% (marginal tax rates may be higher for some
individuals to reduce or eliminate the benefit of exemptions and deductions);
the maximum individual marginal tax rate applicable to net capital gain is 20%;
and the maximum corporate tax rate applicable to ordinary income and net capital
gain is 35% (marginal tax rates may be higher for some corporations to reduce or
eliminate the benefit of lower marginal income tax rates). Naturally, the amount
of tax payable by an individual or corporation will be affected by a combination
of tax laws covering, for example, deductions, credits, deferrals, exemptions,
sources of income and other matters.
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<PAGE>
BACKUP WITHHOLDING
The Company may be required to withhold, subject to certain exemptions, at
a rate of 31% ("backup withholding") on dividends, capital gain distributions,
and redemption proceeds (including proceeds from exchanges and redemptions
in-kind) paid or credited to an individual LifeGoal Portfolio shareholder, if
the shareholder fails to certify that the Taxpayer Identification Number ("TIN")
provided is correct and that the shareholder is not subject to backup
withholding, or if the IRS notifies the Company that the shareholder's TIN is
incorrect or that the shareholder is subject to backup withholding. Such tax
withheld does not constitute any additional tax imposed on the shareholder, and
may be claimed as a tax payment on the shareholder's federal income tax return.
An investor must provide a valid TIN upon opening or reopening an account.
Failure to furnish a valid TIN to the Company also could subject the investor to
penalties imposed by the IRS.
CORPORATE SHAREHOLDERS AND DIVIDENDS RECEIVED DEDUCTION
Corporate shareholders of the LifeGoal Portfolios may be eligible for the
dividends-received deduction on dividends distributed out of a LifeGoal
Portfolio's net investment income attributable to dividends received from
domestic corporations, which, if received directly by the corporate shareholder,
would qualify for such deduction. A distribution by a LifeGoal Portfolio
attributable to dividends of a domestic corporation will only qualify for the
dividends-received deduction if (i) the corporate shareholder generally holds
the LifeGoal Portfolio shares upon which the distribution is made for at least
46 days during the 90 day period beginning 45 days prior to the date upon which
the shareholder becomes entitled to the distribution; and (ii) the LifeGoal
Portfolio generally holds the shares of the domestic corporation producing the
dividend income for at least 46 days during the 90 day period beginning 45 days
prior to the date upon which the LifeGoal Portfolio becomes entitled to such
dividend income.
To the extent a LifeGoal Portfolio receives from a regulated investment
company dividends designated by such regulated investment company as other than
capital gains dividends, corporate shareholders of the LifeGoal Portfolio also
may be eligible for the dividends-received deduction. Like the requirements
described above, a distribution by a regulated investment company attributable
to dividends of a domestic corporation will only qualify for the
dividends-received deduction if (i) the corporate shareholder generally holds
the LifeGoal Portfolio shares upon which the distribution is made for at least
46 days during the 90 day period beginning 45 days prior to the date upon which
the shareholder becomes entitled to the distribution; (ii) the LifeGoal
Portfolio generally holds the shares of the regulated investment company
producing the dividend income for at least 46 days during the 90 day period
beginning 45 days prior to the date upon which the LifeGoal Portfolio becomes
entitled to such dividend income; and (iii) the regulated investment company
generally holds the shares of the domestic corporation producing the dividend
income for at least 46 days during the 90 day period beginning 45 days prior to
the date upon which the regulated investment company becomes entitled to such
dividend income.
FOREIGN SHAREHOLDERS
Under the Code, distributions of net investment income by a LifeGoal
Portfolio to a nonresident alien individual, foreign trust (I.E., trust which a
U.S. court is able to exercise primary supervision over administration of that
trust and one or more U.S. persons have authority to control substantial
decisions of that trust), foreign estate (I.E., the income of which is not
subject to U.S. tax regardless of source), foreign corporation, or foreign
partnership (a "foreign shareholder") will be subject to U.S. withholding tax
(at a rate of 30% or a lower treaty rate, if applicable). Withholding will not
apply if a dividend paid
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by the LifeGoal Portfolio to a foreign shareholder is "effectively connected"
with a U.S. trade or business (or, if an income tax treaty applies, is
attributable to a U.S. permanent establishment of the foreign shareholder), in
which case the reporting and withholding requirements applicable to U.S. persons
will apply. Distributions of capital gains are generally not subject to tax
withholding.
NEW REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the backup withholding,
U.S. income tax withholding and information reporting rules applicable to
foreign shareholders. The New Regulations will generally be effective for
payments made after December 31, 1999, subject to certain transition rules.
Among other things, the New Regulations will permit the LifeGoal Portfolios to
estimate the portion of their distributions qualifying as capital gain
distributions for purposes of determining the portion of such distributions paid
to foreign shareholders which will be subject to U.S. income tax withholding.
Prospective investors are urged to consult their own tax advisors regarding the
New Regulations.
FOREIGN TAXES
Income and dividends received by a LifeGoal Portfolio from foreign
securities and gains realized by the LifeGoal Portfolio on the disposition of
foreign securities may be subject to withholding and other taxes imposed by
foreign countries. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. Although in some circumstances a
regulated investment company can elect to "pass through" foreign tax credits to
its shareholders, the LifeGoal Portfolios do not expect to be eligible to make
such an election.
TAX-DEFERRED PLANS
The shares of the LifeGoal Portfolios are available for a variety of
tax-deferred retirement and other plans, including Individual Retirement
Accounts ("IRA"), Simplified Employee Pension Plans ("SEP-IRA"), Savings
Incentive Match Plans for Employees ("SIMPLE plans"), Roth IRAs, and Education
IRAs, which permit investors to defer some of their income from taxes. Investors
should contact their selling agents for details concerning retirement plans.
OTHER MATTERS
Investors should be aware that the investments to be made by the LifeGoal
Portfolios may involve sophisticated tax rules that may result in income or gain
recognition by the LifeGoal Portfolios without corresponding current cash
receipts. Although the LifeGoal Portfolios will seek to avoid significant
noncash income, such noncash income could be recognized by the LifeGoal
Portfolios, in which case the LifeGoal Portfolios may distribute cash derived
from other sources in order to meet the minimum distribution requirements
described above.
The foregoing discussion and the discussions in the Prospectus applicable
to each shareholder address only some of the Federal tax considerations
generally affecting investments in the LifeGoal Portfolios. Each investor is
urged to consult his or her tax advisor regarding specific questions as to
Federal, state, local or foreign taxes.
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DIRECTORS AND OFFICERS OF THE LIFEGOAL PORTFOLIOS
The directors and executive officers of the Company and their principal
occupations during the last five years are set forth below. The address of each,
unless otherwise indicated, is 111 Center Street, Little Rock, Arkansas 72201.
Those Directors who are "interested persons" of the Company (as defined in the
1940 Act) are indicated by an asterisk (*).
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
NAME ADDRESS AND AGE THE COMPANIES AND CURRENT DIRECTORSHIPS
- -------------------- ------------- -------------------------
<S> <C> <C>
Edmund L. Benson, III, 61 Director/Trustee Director, President and Treasurer, Saunders & Benson,
Saunders & Benson, Inc. Inc. (Insurance); Trustee, Nations Institutional
728 East Main Street Reserves and Nations Fund Trust, Director, Nations
Suite 400 Fund, Inc., Nations LifeGoal Funds, Inc., and Nations
Richmond, VA 23219 Fund Portfolios, Inc.
James Ermer, 55 Director/Trustee Senior Vice President- Finance, CSX Corporation
13705 Hickory Nut Point (transportation and natural resources); Director,
Midlothian, VA 23112 National Mine Service; Director, Lawyers Title
Corporation; Trustee, Nations Institutional Reserves
and Nations Fund Trust; Director, Nations Fund,
Inc., Nations LifeGoal Funds, Inc., and Nations Fund
Portfolios, Inc.
William H. Grigg, 65 Director /Trustee Chairman Emeritus, Duke Power Co., since July, 1997;
Duke Power Co. April 1994 to July 1997, Chairman and Chief Executive
422 South Church Street Officer; November 1991 to April 1994, Vice Chairman,
PB04G from April 1988 to November 1991, Executive Vice
Charlotte, NC 28242-0001 President -- Customer Group, Director, Coltec
Industries, Hatteras Income Securities, Inc.,
Nations Government Income Term Trust 2003, Inc.,
Nations Government Income Term Trust 2004, Inc.,
Nations Balanced Target Maturity Fund, Inc., Nations
Fund, Inc., Nations LifeGoal Funds, Inc. and Nations
Fund Portfolios, Inc.; Trustee, Nations
Institutional Reserves and Nations Fund Trust.
Thomas F. Keller, 66 Director/Trustee R.J. Reynolds Industries Professor of Business
Fuqua School of Business Administration and former Dean, Fuqua School of
P.O. Box 90120 Business, Duke University; Director, LADD Furniture,
Duke University Inc.; Director, Wendy's International Inc., American
Durham, NC 27708 Business Products, Dimon Inc., Biogen, Inc., Hatteras
Income Securities, Inc., Nations Government Income
Term Trust 2003, Inc., Nations Government Income
Term Trust 2004, Inc., Nations Balanced Target
Maturity Fund, Inc., Nations Fund, Inc., Nations
LifeGoal Funds, Inc., and Nations Fund Portfolios,
Inc.; Trustee, Nations Institutional Reserves,
Nations Fund Trust, the Mentor Funds, Mentor
Institutional Trust, Cash Resource Trust.
Carl E. Mundy, Jr., 63 Director/Trustee Commandant, United States Marine Corps, from July 1991
9308 Ludgate Drive to July 1995; Commanding General, Marine Forces
Alexandria, VA 22309 Atlantic, from June 1990 to June 1991; Director,
Nations Fund, Inc., Nations LifeGoal Funds, Inc.,
and Nations Fund Portfolios, Inc.; Trustee, Nations
Institutional Reserves and Nations Fund Trust.
James B. Sommers*, 59 Director/Trustee President, NationsBank Trust, from January 1992 to
September 1996; Executive Vice President, NationsBank
Corporation, from January 1992 to May 1997; Principal,
Bainbridge & Associates; Partner, Villa LLC; Chairman,
Central Piedmont Community College Foundation; Trustee,
Central Piedmont Community College; Board of
Commissioners, Charlotte/Mecklenberg Hospital
Authority; Director, Nations Fund, Inc., Nations Fund
Portfolios, Inc. and Nations LifeGoal Funds, Inc.;
Trustee, Nations Institutional Reserves and Nations
Fund Trust.
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A. Max Walker*, 76 President, Director/Trustee Financial consultant; Formerly, President, A. Max
4580 Windsor Gate Court and Chairman of the Board Walker, Inc.; Director and Chairman of the Board,
Atlanta, GA 30342 Hatteras Income Securities, Inc., Nations Government
Income Term Trust 2003, Inc., Nations Government
Income Term Trust 2004, Inc., Nations Balanced
Target Maturity Fund, Inc., Nations Fund, Inc.,
Nations LifeGoal Funds, Inc., and Nations Fund
Portfolios. Inc.; President and Chairman of the
Board of Trustees, Nations Institutional Reserves
and Nations Fund Trust.
Charles B. Walker, 59 Director/Trustee Since 1989, Director, Executive Vice President, Chief
Ethyl Corporation Financial Officer and Treasurer, Ethyl Corporation
330 South Fourth Street (chemicals, plastics, and aluminum manufacturing);
Richmond, VA 23219 since 1994, Vice Chairman, Ethyl Corporation and Vice
Chairman, Chief Financial Officer and Treasurer,
Albemarle Corporation, Director, Nations Fund, Inc.,
Nations LifeGoal Funds, Inc, and Nations Fund
Portfolios, Inc.; Trustee, Nations Institutional
Reserves and Nations Fund Trust.
Thomas S. Word, Jr.*, 60 Director/Trustee Partner, McGuire Woods Battle & Boothe (law);
McGuire, Woods, Battle & Boothe Director, Vaughan Bassett Furniture Company, Director VB
One James Center Williams Furniture Company, Inc.; Director,
Richmond, VA 23219 Nations Fund, Inc., Nations LifeGoal Funds, Inc., and
Nations Fund Portfolios, Inc.; Trustee, Nations
Institutional Reserves and Nations Fund Trust.
Richard H. Blank, Jr., 41 Secretary Since 1994, Vice President of Mutual Fund Services,
Stephens Inc. Stephens Inc. 1990 to 1994, Manager Mutual Fund
Services, Stephens Inc. 1983 to 1990, Associate in
Corporate Finance Department, Stephens Inc.; Secretary,
Nations Institutional Reserves, Nations Fund Trust,
Nations Fund, Inc., Nations LifeGoal Funds, Inc., and
Nations Fund Portfolios, Inc.
Michael W. Nolte, 37 Assistant Secretary Associate, Financial Services Group of Stephens Inc.
Stephens Inc.
Louise P. Newcomb, 45 Assistant Secretary Corporate Syndicate Associate, Stephens Inc.
Stephens Inc.
James E. Banks, 42 Assistant Secretary Since 1993, Attorney, Stephens Inc.; Associate
Stephens Inc. Corporate Counsel, Federated Investors; from 1991 to
1993, Staff Attorney, Securities and Exchange
Commission from 1988 to 1991
Richard H. Rose, 43 Treasurer Since 1994, Vice President, Division Manager, First
First Data Investor Services Group, Inc. Data Investor Services Group, Inc. since 1988, Senior
One Exchange Place Vice President, The Boston Company Advisors. Inc.;
Boston, MA 02109 Treasurer, Nations Institutional Reserves, Nations Fund
Trust, Nations Fund, Inc., Nations LifeGoal Funds,
Inc., and Nations Fund Portfolios, Inc.
Steven Levy, 33 Assistant Treasurer Since 1997, Vice President of Fund Accounting, First
Data Investor Services Group, Inc.; Prior to 1997,
Investment Operations Manager, Franklin Templeton Group
and Assistant Vice President of Fund Accounting,
Scudder Stevens and Clark, Inc.
</TABLE>
Mr. Rose serves as Treasurer to certain other investment companies for
which First Data Investor Services Group, Inc. or its affiliates serve as
sponsor, distributor, administrator and/or investment adviser. Mr. Blank serves
as Secretary, Treasurer, and Chief Operating Officer to other investment
companies for which Stephens Inc. serves as administrator.
Each Director of the Company is also a Director of Nations Fund, Inc. and
Nations Fund Portfolios, Inc. and a Trustee of Nations Fund Trust and Nations
Institutional Reserves, each a registered
43
<PAGE>
investment company that is part of the Nations Funds Family. Richard H. Blank,
Jr., Richard H. Rose, , Steven Levy, Michael W. Nolte, Louise P. Newcomb and
James E. Banks, Jr. are also officers of Nations Fund, Inc., Nations Fund Trust,
Nations Fund Portfolios, Inc., Nations LifeGoal Funds, Inc. and Nations
Institutional Reserves.
As of the date of this SAI, the directors and officers of the Company as a
group owned less than 1% of the outstanding shares of each of the LifeGoal
Portfolios.
The Company has adopted a Code of Ethics which, among other things,
prohibits each access person of the Company from purchasing or selling
securities when such person knows or should have known that, at the time of the
transaction, the security (i) was being considered for purchase or sale by a
LifeGoal Portfolio, or (ii) was being purchased or sold by a LifeGoal Portfolio.
For purposes of the Code of Ethics, an access person means (i) a Director or
officer of the Company, (ii) any employee of the Company (or any company in a
control relationship with the Company) who, in the course of his/her regular
duties, obtains information about, or makes recommendations with respect to, the
purchase or sale of securities by the Company, and (iii) any natural person in a
control relationship with the Company who obtains information concerning
recommendations made to the Company regarding the purchase or sale of
securities. Portfolio managers and other persons who assist in the investment
process are subject to additional restrictions, including a requirement that
they disgorge to the Company any profits realized on short-term trading (i.e.,
the purchase/sale or sale/purchase of securities within any 60-day period). The
above restrictions do not apply to purchases or sales of certain types of
securities, including mutual fund shares, money market instruments and certain
U.S. Government securities. To facilitate enforcement, the Code of Ethics
generally requires that the Company's access persons, other than its
"disinterested" Directors, submit reports to the Company's designated compliance
person regarding transactions involving securities which are eligible for
purchase by a Fund.
The Directors and officers of the LifeGoal Portfolios will receive
compensation from the LifeGoal Portfolios as follows: an annual retainer of
$1,000 ($3,000 for the Chairman of the Board), plus $500 per portfolio, and
meeting fees of $1,000 for in-person meetings and $500 for telephone meetings.
The Compensation Table below sets forth their aggregate compensation in such
capacity.
DIRECTORS, TRUSTEES AND OFFICERS OF UNDERLYING NATIONS FUNDS
The directors, trustees and officers of the underlying Nations Funds in
which the LifeGoal Portfolios invest are identical to the persons above-named
under the heading "Directors And Officers of the LifeGoal Portfolios".
44
<PAGE>
COMPENSATION TABLE
TOTAL
COMPENSATION
FROM
REGISTRANT
AGGREGATE AND FUND
NAME OF PERSON/ COMPENSATION FROM COMPLEX PAID
POSITION (1) REGISTRANT (2) TO DIRECTORS (3)(4)
------------ -------------- -------------------
Edmund L. Benson, III $7,000.00 $86,201.07
Director
James Ermer $7,000.00 $59,000.00
Director
William H. Grigg $7,000.00 $117,533.68
Director
Thomas F. Keller $7,000.00 $116,115.17
Director
A. Max Walker $9,000.00 $89,000.00
Chairman of the Board
Charles B. Walker $7,000.00 $59,000.00
Director
Thomas S. Word $7,000.00 $109,255.23
Director
Carl E. Mundy, Jr., $6,000.00 $54,000.00
Director
James B. Sommers $4,875.00 $43,875.00
Director
---------- ----------
Totals: $61,875.00 $733,980.15
(1) All Directors receive reimbursements for expenses related to their
attendance at meetings of the Board of Directors. Officers of the Company
receive no direct remuneration in such capacity from the Company.
(2) For current fiscal year and includes estimated future payments. Each
Director receives (i) an annual retainer of $1,000 ($3,000 for the Chairman of
the Board) plus $500 for each LifeGoal Portfolio, plus (ii) a fee of $1,000 for
attendance at each "in-person" meeting of the Board of Directors (or committee
thereof) and $500 for attendance at each other meeting of the Board of
Directors (or Committee thereof).
(3) Messrs. Grigg, Keller and A.M. Walker receive compensation from nine
investment companies, that are deemed to be part of the Nations Fund "fund
complex," as that term is defined under Item 22(a)(1)(v) of Schedule 14A of the
Securities Exchange Act of 1934, as amended. Messrs. Benson, Ermer, C. Walker,
Mundy and Word receive compensation from five investment companies deemed to be
part of the Nations Funds complex.
45
<PAGE>
(4) Total compensation amounts include deferred compensation (including
interest) from other investment companies in the Nations Funds complex, payable
to or accrued for the following Directors: Edmund L. Benson, III ($53,201.00);
William H. Grigg ($94,534.00); Thomas F. Keller ($93,115.00); and Thomas S.
Word ($102,255.00). The LifeGoal Directors are not eligible for deferred
compensation from the Company.
46
<PAGE>
SECURITY HOLDERS
The name, address and percentage of ownership of each person who is known
by the Registrant to have owned of record or beneficially five percent or more
of any of the LifeGoal Portfolios as of August, 1998 is:
<TABLE>
<CAPTION>
LIFEGOAL GROWTH PORTFOLIO
-------------------------
<S> <C> <C> <C>
Sidney C Adger TTEE for Investor A Tucker S. Zengerle and Investor C
Hawaiian Marine Imports Inc 8.7706% Lynda S. Zengerle JTWROS 5.8899%
Employee Profit Sharing Plan 5108 Moorland Lane
1234 N Post Oak Rd Ste 130 Bethesda, MD 20814-6118
Houston, TX 77055
Steinberg Marital Trust Investor A Dean Witter Reynolds Cust for Investor C
5177 Richmond #530 5.2824% Leonard M. King 5.267%
Houston, TX 77056 IRA Rollover Dated 12/11/97
1412 Cap'n Sams Road
John's Island, SC 29455
Fannie Steinberg Family Trust Investor C NationsBank of Texas TTEE Primary A
5177 Richmond #530 25.9842% NB 401K Plan 81.8327%
Houston, TX 77056 U/A DTD 01/01/1983
PO Box 2518
Houston, TX 77252-2518
Steinberg Marital Trust Investor C NationsBank of Texas NA Primary A
5177 Richmond #530 9.1001% Attn: Adrian Castillo 8.6487%
Houston, TX 77056 1401 Elm Street 11th Floor
Dallas, TX 75202-2911
Council R. Renfrow TTEE FBO Investor C BNY Cust IRA FBO Primary B
Coastal Finance Company 40l(k) Plan 8.5496% Frank W. Timpa 99.7922%
PO Box 1216 PO Box 612
807 Arendell Street Fort Myers, FL 33902-0000
Morehead City, NC 28557
Jasson G. Zengerle and Investor C Nationalbank of South Carolina Investor B
Lynda S. Zengerle JTWROS 6.4069% TTEE 6.5701%
5108 Moorland Lane Elsie A. Holton Charitable
Bethesda, MD 20814-6118 Remainder Trust DTD 9-10-97
PO Box 1299
Charleston, SC 29402-1299
LIFEGOAL BALANCED GROWTH PORTFOLIO
----------------------------------
H Kenneth Armstrong and Investor A NationsBank of Texas TTEE Primary A
Larry A Ceppos TTEED FBO 6.382% NB 401K Plan 15.2187%
Armstrong Donohue & Ceppos U/A DTD 01/01/1983
401 (K) & Profit Sharing Plan PO Box 2518
204 Monroe St Suite 101 Houston, TX 77252-2518
Rockville, MD 20850
47
<PAGE>
Teeter Realty Co. Inc. Investor C BNY Cust Rollover IRA FBO Primary B
207 S Broad Street 38.5156% Michael Cardelino 84.2472%
Mooresville, NC 28115 1712 Flatwood Drive
Flower Mound, TX 75028
Richard M. Wood and Investor C BNY Cust SEP IRA FBO Primary B
Freda Wood JTTEN 27.3018% Ronald E. Ross 15.1662%
4349 Oakwood Cl 4004 New Town Road
Little River, SC 29566 Waxhaw, NC 28173-9759
Donald R. Atkins and Investor C Dorothy A. Rosenberg and Investor B
David R. Morgan TTEES 10.5366% Dorothy R. Oberreuter JTTEN 5.8986%
Lyndon Steel 40lK Profit Sharing Pl 2707 Wrexham Court
1947 Union Cross Road Herndon, VA 20171-2405
Winston Salem, NC 27107
E. Larry Fonts TTEE FBO Investor C Dean Witter Reynolds Cust for Investor B
Central Dallas Association 9.4569% Robert W. Crawford 5.8202
Profit Sharing Plan IRA STD/Rollover DTD 01/05/98
1201 Elm Street Suite 5310 13204 Trails End Court
Dallas, TX 75270 Manassas, VA 20112-5504
James Hightower Art Hightower and Investor C Dean Witter Reynolds Cust for Investor B
William Hightower TTEES FBO 5.8483% Rufus A. Cambell 5.6647%
Hightower Construction Co Inc. IRA STD/Rollover DTD 01/12/98
40lK Profit Sharing Plan 219 Catoctin Circle, NE
PO Box 1369 Leesburg, VA 20176-2410
Goose Creek, SC 29445
Barnett Bank NA TTEE-Barnett Primary A Jack Overcash Investor B
Employees Savings & Thrift Plan 82.2962% Highway 21 North Box 539 5.4351%
U/A DTD 12/31/1984-LFG BLD GR FD Mooresville, NC 28115
Attn: Mut FD Dept M/C F19-100-03-01
PO Box 40200
Jacksonville, FA 32203-0200
LIFEGOAL INCOME & GROWTH PORTFOLIO
----------------------------------
BNY Cust for Investor A NationsBank Of Texas NA Primary A
Charles L W Haw 35.1113% Attn: Adrian Castillo 34.8608%
Sep IRA Plan 1401 Elm St 11th Floor
2031 W 56th St Dallas, TX 75202-2911
Mission Hills, KS 66208
BNY Cust Rollover IRA FBO Investor A Barnett Bank NA TTEE - Barnett Primary A
Marietta J Tomlin 7.8553% Best Plan-- Nations Lifegoal Inc & 12.1639%
2392 Ashebury Ct Gro UAD 12/31/84
Buford, GA 30519 Attn: Mut FD Dept M/C Fl9-100-03-01
PO Box 40200
Jacksonville, FL 32203-0200
48
<PAGE>
BNY Cust FBO Marsha L Brewer Investor A Stephens Inc Primary B
Sep IRA Plan 6.9925% Attn: Cindy Cole 100%
9907 Floyd St 111 Center St
Overland Park, KS 66212 Little Rock, AR 72201
Donald A Atkins and Investor C Roy L Rivers And Rebecca Griffin Investor B
David R Morgan TTEES 57.01% Frambes JTTEN 6.8231%
Lyndon Steel 401K Profit Sharing Pl 322 Rivers Rd
1947 Union Cross RD Fayetteville, GA 30214-3121
Winston Salem, NC 27107
E Larry Fonts TTEE FBO Investor C Dean Witter Reynolds Cust for Investor B
Central Dallas Association 18.0338% Carolyn B Stewart 6.2488%
Profit Sharing Plan IRA Rollover Dated 11/24/95
1201 Elm Street Suite 5310 #3 Harrow Pl
Dallas, TX 75270 Greensboro, NC 27455
James Hightower Art Hightower and Investor C Dean Witter Reynolds Cust for Investor B
Willam Hightower TTEES FBO 16.7592% Robert Goodman 5.9285
Hightower Construction Co Inc IRA Rollover Dated 10/31/97
401K Profit Sharing Plan 103 56th Place SE
PO Box 1369 Washington DC 20019-6571
Goose Creek, SC 29445
BNY Cust FBO Investor C Dean Witter Reynolds Cust For Investor B
William T Ledford 5.2451% Betty L Thomas 5.8169%
SAR/SEP IRA IRA Standard Dated 02/20/96
5519 Dallas High Shoals Rd 5532 Margaret Wallace Rd
Dallas, NC 28034 Matthewsm NC 28105/2113
NationsBank Of Texas TTEE Primary A Dean Witter Reynolds Cust for Investor B
NB 401K Plan 49.9572% George H Kirby Sr 5.3624%
U/A DTD 01/01/1983 IRA STD/Rollover DTD 03/06/98
PO Box 2518 12309 Caldwell Rd
Houston, TX 77252-2518 Charlotte, NC 28213
</TABLE>
49
<PAGE>
INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY,
TRANSFER AGENCY, SHAREHOLDER SERVICING AND
DISTRIBUTION AGREEMENTS
THE COMPANY AND ITS COMMON STOCK
The Company is a diversified open-end management investment company
organized as a corporation under the laws of the State of Maryland on July 3,
1996. The Company offers shares of common stock which represent interests in one
of three separate LifeGoal Portfolios. This SAI relates to the following
LifeGoal Portfolios of the Company: LifeGoal Growth Portfolio, LifeGoal Balanced
Growth Portfolio and LifeGoal Income and Growth Portfolio. Each LifeGoal
Portfolio offers the following separate classes of shares: Primary A Shares,
Primary B Shares, Investor A Shares, Investor B and Investor C Shares. Shares of
each LifeGoal Portfolio of the Company are redeemable at the net asset value
(less, in the case of Investor B and Investor C Shares, any applicable
contingent deferred sales charge ("CDSC")) thereof at the option of the holders
thereof or in certain circumstances at the option of the Company. For
information concerning the methods of redemption and the rights of share
ownership, consult the Prospectuses under the captions "How To Buy Shares," "How
To Redeem Shares" and "Organization And History."
As used in this SAI and in the Prospectuses, the term "majority of the
outstanding shares" of the Company, a particular LifeGoal Portfolio or a
particular class of shares of a LifeGoal Portfolio means, respectively, the vote
of the lesser of (i) 67% or more of the shares of the Company, LifeGoal
Portfolio or class (as appropriate) present at a meeting of shareholders, if the
holders of more than 50% of the outstanding shares entitled to vote, are present
or represented by proxy, or (ii) more than 50% of the outstanding shares of the
Company, LifeGoal Portfolio or class.
The Board of Directors may classify or reclassify any unissued shares of
the Company into shares of any class, classes or LifeGoal Portfolio in addition
to those already authorized by setting or changing in any one or more respects,
from time to time, prior to the issuance of such shares, the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or terms or conditions of redemption, of such shares
and, pursuant to such classification or reclassification to increase or decrease
the number of authorized shares of any LifeGoal Portfolio or class. Any such
classification or reclassification will comply with the provisions of the 1940
Act. Fractional shares shall have the same rights as full shares to the extent
of their proportionate interest.
INVESTMENT ADVISORY ARRANGEMENTS OF THE LIFEGOAL PORTFOLIOS
NBAI serves as investment adviser to the LifeGoal Portfolios pursuant to an
Investment Advisory Agreement. NBAI is a wholly owned subsidiary of NationsBank,
N.A. ("NationsBank"), which in turn is a wholly owned banking subsidiary of
NationsBank Corporation, a bank holding company organized as a North Carolina
corporation. NBAI has its principal offices at One NationsBank Plaza, Charlotte,
North Carolina 28255.
NBAI also serves as investment adviser to Nations Fund, Inc., Nations Fund
Portfolios, Inc., Nations Fund Trust, Nations LifeGoal Funds, Inc., Nations
Annuity Trust and Nations Institutional Reserves, each a registered investment
company that is part of the Nations Funds Family. In addition, NBAI serves as
the investment adviser to Hatteras Income Securities, Inc., Nations Government
Income Term Trust 2003, Inc., Nations Government Income Term Trust 2004, Inc.
and Nations Balanced Target
50
<PAGE>
Maturity Fund, Inc., each a closed-end diversified management investment company
traded on the New York Stock Exchange.
The Investment Advisory Agreement was approved by the Company's Board of
Directors at the October 11, 1996 Meeting of the Board of Directors and by the
initial shareholder. It provides that NBAI may delegate its duties to a
sub-adviser. The Investment Advisory Agreement provides that in the absence of
willful misfeasance, bad faith, negligence or reckless disregard of obligations
or duties thereunder on the part of NBAI, or any of its officers, directors,
employees or agents, NBAI shall not be subject to liability to the Company or to
any shareholder of the Company for any act or omission in the course of, or
connected with, rendering services thereunder or for any losses that may be
sustained in the purchase, holding or sale of any security. NBAI will receive
fees for providing advisory services at the annual rate of .25% of the average
daily value of each LifeGoal Portfolio's net assets during the preceding month.
NBAI also has agreed to absorb all other expenses of the LifeGoal Portfolios
(except taxes, brokerage fees and commissions, extraordinary expenses, and any
applicable Rule 12b-1 fees, shareholder servicing fees and/or shareholder
administration fees). NBAI also is compensated for providing advisory services
to the underlying Nations Funds in which the LifeGoal Portfolios invest. The
Investment Advisory Agreement shall become effective with respect to a LifeGoal
Portfolio if and when approved by the Directors of the Company, and if so
approved, shall thereafter continue from year to year, provided that such
continuation of the Agreement is specifically approved at least annually by (a)
(i) the Company's Board of Directors or (ii) the vote of "a majority of the
outstanding voting securities" of a LifeGoal Portfolio (as defined in Section
2(a)(42) of the 1940 Act), and (b) the affirmative vote of a majority of the
Company's Directors who are not parties to such Agreement or "interested
persons" (as defined in the 1940 Act) of a party to such Agreement (other than
as Directors of the Company), by votes cast in person at a meeting specifically
called for such purpose. The Investment Advisory Agreement will terminate
automatically in the event of its assignment, and is terminable with respect to
a LifeGoal Portfolio at any time without penalty by the Company (by vote of the
Board of Directors or by vote of a majority of the outstanding voting securities
of a LifeGoal Portfolio) or by NBAI on 60 days' written notice.
The dollar amount of investment advisory fees paid by each LifeGoal
Portfolio of the Company to NBAI and the dollar amount of advisory fees
voluntarily reduced by NBAI for the Company's fiscal period ended March 31, 1998
were as follows:
<TABLE>
<CAPTION>
Advisory
Net Fees Expenses
Advisory Voluntarily Reimbursed
Fees Waived by Adviser
---- ------ ----------
<S> <C> <C> <C>
LifeGoal Growth Portfolio $10,146 $0 $0
LifeGoal Balanced Growth Portfolio 8,202 0
LifeGoal Income and Growth Portfolio 2,167 0 0
</TABLE>
The dollar amount of investment advisory fees paid by each LifeGoal
Portfolio of the Company to NBAI and the dollar amount of advisory fees
voluntarily reduced by NBAI for the Company's fiscal period ended March 31, 1997
were as follows:
51
<PAGE>
<TABLE>
<CAPTION>
Advisory
Net Fees Expenses
Advisory Voluntarily Reimbursed
Fees Waived by Adviser
---- ------ ----------
<S> <C> <C> <C>
LifeGoal Growth Portfolio $510 $0 $0
LifeGoal Balanced Growth Portfolio 551 0 0
LifeGoal Income and Growth Portfolio 91 0 0
</TABLE>
TradeStreet, with principal offices at One NationsBank Plaza, Charlotte,
North Carolina serves as investment sub-adviser to the LifeGoal Portfolios.
TradeStreet is a wholly owned subsidiary of NationsBank. TradeStreet provides
investment management services to individuals, corporations and institutions.
The Sub-Advisory Agreement was approved by the Company's Board of Directors
on October 11, 1996 and by the initial shareholder. It provides that
TradeStreet, subject to the supervision of NBAI and the Board of Directors of
the Company, will be primarily responsible for managing the assets of each
LifeGoal Portfolio. TradeStreet will receive fees for providing such services at
the annual rate of .05% of the average daily value of each LifeGoal Portfolio's
net assets during the preceding month. TradeStreet is also compensated for
providing sub-advisory services to most of the underlying Nations Funds in which
the LifeGoal Portfolio invest. The Sub-Advisory Agreement will continue in
effect for an initial term of two years from its effective date and continues in
effect from year to year thereafter only if such continuance is specifically
approved at least annually by the Company's Board of Directors and the
affirmative vote of a majority of the directors who are not parties to the
Sub-Advisory Agreement or "interested persons" of any such party by votes cast
in person at a meeting called for such purpose. The respective LifeGoal
Portfolios, NBAI or TradeStreet may terminate the Sub-Advisory Agreement, on 60
days' written notice without penalty. The Sub-Advisory Agreement terminates
automatically in the event of its "assignment," as defined in the 1940 Act.
The dollar amount of investment advisory fees paid by NBAI on behalf of
each LifeGoal Portfolio to TradeStreet, as sub-adviser, and the dollar amount of
advisory fees voluntarily reduced by TradeStreet for the Company's fiscal year
ended March 31, 1998 from commencement of operations were as follows:
<TABLE>
<CAPTION>
Advisory
Net Fees Expenses
Advisory Voluntarily Reimbursed
Fees Waived by Adviser
---- ------ ----------
<S> <C> <C> <C>
LifeGoal Growth Portfolio $2,031 $0 $0
LifeGoal Balanced Growth Portfolio 1,641 0 0
LifeGoal Income and Growth Portfolio 434 0 0
</TABLE>
The dollar amount of investment advisory fees paid by NBAI on behalf of
each LifeGoal Portfolio to TradeStreet, as sub-adviser, and the dollar amount of
advisory fees voluntarily reduced by TradeStreet for the Company's fiscal year
ended March 31, 1997 from commencement of operations were as follows:
52
<PAGE>
<TABLE>
<CAPTION>
Advisory
Net Fees Expenses
Advisory Voluntarily Reimbursed
Fees Waived by Adviser
---- ------ ----------
<S> <C> <C> <C>
LifeGoal Growth Portfolio $110 $0 $0
LifeGoal Balanced Growth Portfolio 119 0 0
LifeGoal Income and Growth Portfolio 20 0 0
</TABLE>
Each Adviser has adopted a code of ethics which contain policies on
personal securities transactions by "access persons," including portfolio
managers and investment analysts. These codes comply in all material respects
with the recommendations set forth in the May 9, 1994 Report of the Advisory
Group on Personal Investing of the Investment Company Institute.
INVESTMENT ADVISORY ARRANGEMENTS OF THE UNDERLYING NATIONS FUNDS
NBAI serves as investment adviser to all of the underlying Funds, pursuant
to Investment Advisory Agreements dated January 1, 1996, and amended thereafter.
Brandes serves as investment sub-adviser to the Nations International Value
Fund, pursuant to an Investment Sub-Advisory Agreement dated as of April 8,
1998. Gartmore serves as investment sub-adviser to the Nations Pacific Growth
Fund, Nations Emerging Markets Fund and Nations International Equity Fund,
pursuant to Investment Sub-Advisory Agreements dated January 1, 1996, and
amended thereafter. Marsico Capital serves as investment sub-adviser to the
Nations Marsico Focused Equities Fund and Nations Marsico Growth & Income Fund,
pursuant to an Investment Sub-Advisory Agreement, dated December 31, 1997.
TradeStreet serves as investment sub-adviser to all the other underlying Funds,
pursuant to Investment Sub-Advisory Agreements, dated January 1, 1996, and
amended thereafter.
NBAI also serves as the investment adviser to the portfolios of Nations
Fund Trust, Nations Fund, Inc., Nations Fund Portfolios, Inc., Nations
Institutional Reserves, Nations Annuity Trust, each a registered investment
company that is part of the Nations Funds Family. In addition, NBAI serves as
the investment advisor to Hatteras Income Securities, Inc., Nations Government
Income Term Trust 2003, Inc., Nations Government Income Term Trust 2004, Inc.
and Nations Balanced Target Maturity Fund, Inc., each a closed-end diversified
management investment company traded on the New York Stock Exchange. TradeStreet
also serves as the sub-investment adviser to Nations Institutional Reserves,
Nations Annuity Trust, Hatteras Income Securities, Inc., Nations Government
Income Term Trust 2003, Inc., Nations Government Income Term Trust 2004, Inc.
and Nations Balanced Target Maturity Fund, Inc.
NBAI and TradeStreet are each wholly owned subsidiaries of NationsBank,
which in turn is a wholly owned banking subsidiary of NationsBank Corporation, a
bank holding company organized as a North Carolina corporation. Gartmore is a
joint venture structured as a Delaware general partnership between NB Partner
Corp., a wholly owned subsidiary of NationsBank and Gartmore U.S. Limited, an
indirect wholly owned subsidiary of Gartmore Investment Management plc, a
publicly listed U.K. company. National Westminster Bank plc and affiliated
parties own 100% of the equity of Gartmore plc. Gartmore is a registered
investment adviser in the United States and a member of the Investment
Management Regulatory Organization Limited, a U.K. regulatory authority. The
respective principal offices of NBAI, TradeStreet and Gartmore are located at
One NationsBank Plaza, Charlotte, N.C. 28255. Marsico Capital is located at 1200
17th Street, Suite 1300, Denver, CO 80202. NationsBank has an option to purchase
up to 50% of Marsico Capital.
53
<PAGE>
Brandes Investment Partners, Inc. owns a controlling interest in Brandes
Investment Partners, L.P. and serves as its General Partner. Charles Brandes
is the controlling shareholder of Brandes Investment Partners, Inc. The
principal offices of Brandes are located at 12750 High Bluff Drive, San Diego,
CA 92130.
Thomas F. Marsico is Chairman and Chief Executive Officer of Marsico
Capital and has voting control of the company. Prior to forming Marsico Capital
in September 1997, Mr. Marsico had 18 years of experience as a securities
analyst/portfolio manager.
For the services provided and expenses assumed pursuant to various
Investment Advisory Agreements, NBAI is entitled to receive advisory fees,
computed daily and paid monthly, at the annual rates of: .25% of the first $250
million of the combined average daily net assets of Nations Prime Fund, plus
.20% of the combined average daily net assets of such Fund in excess of $250
million; .60% of the average daily net assets of each of the Nations
Short-Intermediate Government Fund, Nations Short-Term Income Fund, Nations
Diversified Income Fund and Nations Strategic Fixed Income Fund; .75% of the
average daily net assets of each of Nations Value Fund, Nations Capital Growth
Fund, Nations Emerging Growth Fund and Nations Disciplined Equity Fund; .85% of
the average daily net assets of Nations Marsico Growth & Income Fund and Nations
Marsico Focused Equities Fund; .75% of the first $100 million of the Nations
Equity Income Fund's average daily net assets, plus .70% of the Nations Equity
Income Fund's average daily net assets in excess of $100 million and up to $250
million, plus .60% of the Fund's average daily net assets in excess of $250
million; .90% of the average daily net assets of Nations International Equity
Fund and Nations Pacific Growth Fund; 1.10% of the average daily net assets of
Nations Emerging Markets Fund; 1.00% of the average daily net assets of Nations
Small Company Growth Fund and Nations International Value Fund; and .50% of the
average daily net assets of Naitons Managed Index Fund and Nations Managed
SmallCap Index Fund.
For the services provided and expenses assumed pursuant to sub-advisory
agreements, TradeStreet is entitled to receive from NBAI sub-advisory fees
computed daily and paid monthly, at the annual rates of .055% of Nations Prime
Fund's average daily net assets; .20% of Nations Equity Income Fund's average
daily net assets; .25% of Nations Small Company Growth Fund's, Nations Value
Fund's, Nations Capital Growth Fund's, Nations Emerging Growth Fund's and
Nations Disciplined Equity Fund's average daily net assets; .15% of Nations
Short-Intermediate Government Fund's, Nations Short-Term Income Fund's, Nations
Diversified Income Fund's, and Nations Strategic Fixed Income Fund's average
daily net assets; and .10% of Nations Managed Index Fund's and Nations Managed
Small Cap Index Fund's average daily net assets.
For services provided and expenses assumed pursuant to a sub-advisory
agreement, Gartmore Global Partners is entitled to receive from NBAI
sub-advisory fees, computed daily and paid monthly at the annual rates of .70%
of Nations International Equity Fund's and Nations Pacific Growth Fund's average
daily net assets; and .85% of Nations Emerging Markets Fund's average daily net
assets.
For services provided and expenses assumed pursuant to a sub-advisory
agreement, Brandes is entitled to receive from NBAI sub-advisory fees, computed
daily and paid monthly at the annual rate of .50% of Nations International Value
Fund's average daily net assets.
For services provided and expenses assumed pursuant to a sub-advisory
agreement, Marsico Capital is entitled to receive from NBAI sub-advisory fees,
computed daily and paid monthly at the annual rates of .45% of Nations Marsico
Focused Equities Fund's and Nations Marsico Growth & Income Fund's average daily
net assets.
54
<PAGE>
From time to time, NBAI (and/or TradeStreet, Gartmore, Brandes or Marsico
Capital) may waive or reimburse (either voluntarily or pursuant to applicable
state limitations) advisory fees or expenses payable by a Fund.
For the fiscal period from April 1, 1997 to March 31, 1998, after waivers,
Nations Fund Trust paid NBAI under the investment advisory agreement, advisory
fees at the indicated rates of the following Funds' average daily net assets:
Nations Value Fund -- .75%, Nations Capital Growth Fund -- .75%, Nations
Emerging Growth Fund -- .75%, Nations Disciplined Equity Fund -- .75%, Nations
Managed Index Fund -- .22%, Nations Managed SmallCap Index Fund -- .00%, Nations
Short-Intermediate Government Fund -- .40%, Nations Short-Term Income Fund --
.30%, Nations Diversified Income Fund -- .50%, Nations Strategic Fixed Income
Fund -- .48%.
For the fiscal period from December 31, 1997 to March 31, 1998, after
waivers, Nations Fund Trust paid NBAI under the investment advisory agreement,
advisory fees at the indicated rates of the following Funds' average daily net
assets: Nations Marsico Focused Equities Fund -- .85% and Nations Marsico
Growth & Income Fund -- .00%.
For the fiscal period from April 1, 1997 to March 31, 1998, after waivers,
Nations Fund, Inc. paid NBAI under the investment advisory agreement, advisory
fees at the indicated rates of the following Funds' average daily net assets:
Nations Prime Fund -- .17%, Nations Equity Income Fund -- .64%, Nations
International Equity Fund -- .90%, and Nations Small Company Growth Fund --
.70%.
For the fiscal period April 1, 1997 to March 31, 1998, after waivers,
Nations Portfolios paid NBAI under the investment advisory agreement, advisory
fees at the indicated rates of the following Funds' average daily net assets:
Nations Emerging Markets Fund -- 1.10% and Nations Pacific Growth Fund -- .90%.
For the fiscal period from December 1, 1997 to May 15, 1998, after waivers,
the Emerald Funds paid Barnett Capital Advisors, Inc. ("Barnett"), under a
previous investment advisory agreement, advisory fees of .90% of the Nations
International Value Fund's average daily net assets (formally called the Emerald
International Equity Fund).
For the fiscal period from April 1, 1997 to March 31, 1998, after waivers,
NBAI paid TradeStreet under the investment sub-advisory agreements, sub-advisory
fees at the indicated rates of the following Funds' average daily net assets:
Nations Value Fund -- .25%, Nations Capital Growth Fund -- .25%, Nations
Emerging Growth Fund -- .25%, Nations Disciplined Equity Fund -- .25%, Nations
Managed Index Fund -- .10%, Nations Managed SmallCap Index Fund -- .10%, Nations
Short-Intermediate Government Fund -- .15%, Nations Short-Term Income Fund --
.15%, Nations Diversified Income Fund -- .15%, Nations Strategic Fixed Income
Fund -- .15%, Nations Prime Fund .055%, Nations Equity Income Fund -- .20%, and
Nations Small Company Growth Fund -- .25%.
For the fiscal period from April 1, 1997 to March 31, 1998, after waivers,
NBAI paid Gartmore under the investment sub-advisory agreements, sub-advisory
fees at the indicated rates of the following Funds' average daily net assets:
Nations Emerging Markets Fund -- .85%, Nations Pacific Growth Fund -- .70%, and
Nations International Equity Fund -- .70%.
For the fiscal period from December 1, 1997 to May 15, 1998, after waivers,
Barnett paid Brandes, under a previous investment sub-advisory agreement,
sub-advisory fees of .50% of the Nations International Value Fund.
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For the fiscal period from December 31, 1997 to March 31, 1998, after
waivers, NBAI paid Marsico Capital under the investment sub-advisory agreement,
sub-advisory fees at the indicated rates of the following Funds' average daily
net assets: Nations Marsico Focused Equities Fund -- .45% and Nations Marsico
Growth & Income Fund -- .45%.
The Taxable Money Market Management Team of TradeStreet is responsible for
the day-to-day management of Nations Prime Fund.
The Fixed Income Management Team of TradeStreet is responsible for the
day-to-day management of Nations Short-Intermediate Government Fund, Nations
Short-Term Income Fund, Nations Diversified Income Fund and Nations Strategic
Fixed Income Fund.
The Structured Products Management Team of TradeStreet is responsible for
the day-to-day management of Nations Managed Index Fund and Nations Managed
SmallCap Index Fund and Nations Disciplined Equity Fund.
The Value Management Team of TradeStreet is responsible for the day-to-day
management of Nations Value Fund and Nations Equity Income Fund.
The Core Growth Management Team of TradeStreet is responsible for the
day-to-day management of Nations Capital Growth Fund.
The Strategic Growth Management Team of TradeStreet is responsible for the
day-to-day management of Nations Emerging Growth Fund and Nations Small Company
Growth Fund.
Philip Ehrmann is Co-Portfolio Manager of Nations International Equity Fund,
responsible for the Fund's investments in developing countries (since June
1998). Mr. Ehrmann is also Principal Portfolio Manager of Nations Emerging
Markets Fund (since 1995) and is Head of the Gartmore Emerging Markets Team.
Prior to joining Gartmore in 1995, Mr. Ehrmann was the Director of Emerging
Markets for Invesco in London. He began his career in 1981 as an institutional
stockbroker with Rowe & Pitman Inc. and also spent a brief period with
Prudential Bache Securities as an institutional salesman before joining Invesco
in 1984. Mr. Ehrmann graduated from the London School of Economics with a degree
in Economics, Industry and Trade.
Seok Teoh is Co-Portfolio Manager of Nations International Equity Fund,
responsible for the Fund's investments in Asia (since June 1998). Ms. Teoh is
also Principal Portfolio Manager of Nations Pacific Growth Fund (since that
Fund's inception in June 1995). She has been with Gartmore since 1990 as the
London based manager of its Far East Team. Previously Ms. Teoh managed four
equity funds for Rothschild Asset Management in Tokyo and in Singapore. She was
also responsible for Singaporean and Malaysian equity sales at Overseas Union
Bank Securities in Singapore. Ms. Teoh, who is native to Singapore, is fluent in
Mandarin and Cantonese and received an Economics degree from the University of
Durham.
Mark Fawcett is Co-Portfolio Manager of Nations International Equity Fund,
responsible for the Fund's investments in Japan (since June 1998). He is also
Senior Investment Manager for the Gartmore Japanese Equities team. Mr. Fawcett
joined Gartmore as an investment manager on the Japanese Equity Team in 1991 and
has specific responsibility for large stock research. Before joining Gartmore in
Tokyo he worked on the Far East desk of Provident Mutual, a major London-based
Life Assurance company, managing funds invested in Japan. Mr. Fawcett graduated
from Oxford University in 1986 with an honours degree in Mathematics and
Philosophy.
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Stephens Jones is Co-Portfolio Manager of Nations International Equity Fund,
responsible for the fund's investments in Europe (since June 1998). He is also
the Head of Gartmore European Equities. Mr. Jones joined Gartmore as a senior
investment manager in the European Equities Team in 1994 and was appointed Head
of the European Equity Team in 1995. He began his career at the Prudential in
1984, spending a year as a business analyst before becoming the personal
assistant to the Group Chief Executive. In 1987, he became a European equities
investment manager focusing primarily on France, Belgium and Switzerland. Mr.
Jones graduated from Manchester University in 1984 with an honours degree in
Economics.
Stephen Watson is Co-Portfolio Manager for Nations International Equity
Fund, responsible for allocating the Fund's assets among the various regions in
which it invests, as well as determining the Fund's investments in regions not
covered by the other Co-Portfolio Managers (since June 1998). Mr. Watson had
been the sole Portfolio Manager of the Fund since February 1995. He joined
Gartmore as a Global Fund Manager in 1993 and currently holds the position of
Chief Investment Officer of Gartmore Global Partners and is a member of
Gartmore's Global Policy Group. Previously, Mr. Watson was a director and global
fund manager with James Capel Fund Managers, London, as well as Client Services
Manager for international clients. From 1980 to 1987 he was with Capel-Cure
Myers in their Portfolio Management Division. He began his career in 1976 when
he joined the investment division at Samuel Motagu. Mr. Watson is a member of
the Securities Institute.
Brandes' Investment Committee is responsible for the day-to-day management
of Nations International Value Fund.
Thomas F. Marsico is the Chief Executive Officer of Marsico Capital and has
been the Portfolio Manager of both Nations Marsico Focused Equities Fund and
Nations Marsico Growth & Income Fund since each Fund's respective inception.
Prior to forming Marsico Capital, Mr. Marsico was a portfolio manager with Janus
Funds for 11 years and was responsible for the day-to-day management of Janus
Twenty Fund and Janus Growth and Income Fund. Overall, Mr. Marsico had 18 years
of experience as a securities analyst/portfolio manager before becoming the
Portfolio Manager of Nations Marsico Focused Equities Fund and Nations Marsico
Growth & Income Fund.
INVESTMENT STYLES
When you invest in any LifeGoal Portfolio, you can be assured that the
underlying Funds are managed according to a disciplined investment style; one
that remains constant regardless of particular styles coming in and out of
favor. The Adviser believes this structured approach to managing portfolio
securities may provide such Funds with consistent performance over time. The
Adviser uses various investment strategies during the process of managing the
Funds. These strategies have been categorized into investment styles which
include (i) the Small Company Growth Style; (ii) the Equity Income Style; (iii)
the International Equity Style; (iv) the Fixed Income Style; (v) the Growth
Style, and (vi) the Value Style. Investment Styles described below relate to the
Nations Small Company Growth, Nations Diversified Income, Nations International
Equity, Nations Short-Intermediate Government, Nations Short-Term Income,
Nations Strategic Fixed Income, Nations Capital Growth, Nations Emerging Growth,
and Nations Value Funds.
SMALL COMPANY GROWTH STYLE. The Small Company Growth Fund is managed by the
Adviser using the Small Company Growth Style. The Small Company Growth Style
investment philosophy is premised on the belief that a diversified portfolio of
stocks with an above average yield can provide long-term returns, higher than
that of the S&P 500 Index (the "S&P 500") and with less volatility.
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This style utilizes a "low volatility" approach to stock selection,
focusing on tested factors of fundamental stock valuation. Volatility is reduced
through selecting stocks with Beta Coefficient ("Beta") of less than 1.0 (Beta
is a measurement of volatility relative to the stock market as a whole, which
has a Beta of 1.0). Small Company Growth Style seeks to maintain a yield on the
portfolio of at least 50% higher than the dividend yield for the S&P 500. The
Adviser reduces risk by investing in both common stocks and convertible
securities.
The Small Company Growth Style stock selection process begins with a team
of in-house research specialists aided by a computerized screening process.
Starting with a 5000 company universe, stocks must first pass a rigorous
screening process that selects companies with a yield one-third less than the
S&P 500 and market capitalization of less than $1 billion. Often stocks with
below average yields grow faster than those with average yields. Therefore, over
time, a portfolio may earn more income by purchasing stocks with below average
yields. Stocks are then ranked relative to other stocks within their industry.
A more sophisticated screening process is then applied to the universe.
Each company is ranked based on the following factor weightings: (i) market
style analyzes correlations between crucial stock characteristics (price/book
ratios, dividends yields, and return on assets) and price performance; (ii)
insider trading looks at filings with the SEC and evaluates them by title, date,
transaction size and historical performance; (iii) earnings expectations
evaluates changes in annual earnings estimates and quarterly earnings surprises,
and (iv) price momentum monitors relative price strength with short term under
performance. The final portfolio of approximately 75 to 130 issues is
constructed by the TradeStreet's Strategic Growth Management Team working
closely with in-house industry specialists, as well as expert Wall Street
sources.
EQUITY INCOME STYLE. The Equity Income Fund is managed by the Adviser using
the Equity Income Style. The Equity Income Style investment philosophy is
premised on the belief that a diversified portfolio of stocks with an above
average yield can provide long-term returns, higher than that of the S&P 500
Index (the "S&P 500") and with less volatility.
This style utilizes a "low volatility" approach to stock selection, focusing
on tested factors of fundamental stock valuation. Volatility is reduced through
selecting stocks with Beta Coefficient ("Beta") of less than 1.0 (Beta is a
measurement of volatility relative to the stock market as a whole, which has a
Beta of 1.0). The Equity Income Style seeks to maintain a yield on the portfolio
of at least 50% higher than the dividend yield for the S&P 500. The Adviser
reduces risk by investing in both common stocks and convertible securities.
The Equity Income Style stock selection process begins with a team of
in-house research specialists aided by a computerized screening process.
Starting with a 2000 company universe, stocks must first pass a rigorous
screening process that selects companies with a yield only one-third less than
the S&P 500 and market capitalization greater than $500 million. Often stocks
with below average yields grow faster than those with average yields. Therefore,
over time, a portfolio may earn more income by purchasing stocks with below
average yields. Stocks are then ranked relative to other stocks within their
industry.
A more sophisticated screening process is then applied to the universe. Each
company is ranked based on the following factor weightings: (i) market style
analyzes correlation's between crucial stock characteristics (price/book ratios,
dividends yields, and return on assets) and price performance; (ii) Insider
Trading looks at filings with the SEC and evaluates them by title, date,
transaction size and historical performance; (iii) Earnings Expectations
evaluates changes in annual earnings estimates and
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quarterly earnings surprises, and (iv) Price Momentum monitors relative price
strength with short term under performance. The final portfolio of approximately
70 issues is constructed by the Adviser's Value Management Team working closely
with in-house industry specialists, as well as outside sources.
INTERNATIONAL EQUITY STYLE. The International Equity Fund is managed by the
Adviser using the International Equity Style. The International Equity Style
investment philosophy is premised on the belief that a diversified portfolio of
equity securities of established, non-United States issuers can provide
long-term growth of capital and income.
This style focuses on the country selection process by utilizing macro
economics forecasts to identify areas of the world which will exhibit relatively
strong growth within the context of a modest inflation and low interest rate
environment. The political factors and market liquidity constraints which can
affect stock market valuations are also taken into consideration by the Adviser
prior to making stock selections.
The stock selection process begins with the elimination of equity securities
with a market capitalization of less than $250 million. The next step in the
process is the ranking of each country and industry sector by relative
price/earnings ratio using an historical range of not less than ten years from
an universe of approximately 1000 stocks. In addition to the relative historical
price/earnings ratio the portfolio managers also employ a fundamental analysis
of growth opportunities, management and future direction of these stocks.
The International Equity Fund is a dollar-denominated mutual fund and
therefore, consideration is given to hedging part or all of the portfolio back
to U.S. dollars from international currencies. All decisions to hedge are based
upon an analysis of the relative value of the U.S. dollar on an international
purchasing power parity basis (purchasing power parity is a method for
determining the relative purchasing power of different currencies by comparing
the amount of each currency required to purchase a typical bundle of goods and
services to domestic markets) and an estimation of short-term interest rate
differentials (which affect both the direction of currency movements and also
the cost of hedging).
FIXED INCOME STYLE. The Diversified Income, Short-Intermediate Government,
Short-Term Income, and Strategic Fixed Income are managed by the Adviser using
the Fixed Income Style. The Fixed Income Style investment philosophy is premised
on the belief that a well diversified portfolio of fixed income securities that
emphasizes a combination of investments strategies will capture relative value
in the bond market.
In order to pursue this goal, the Fixed Income Style includes certain
biases. The Adviser reduces the risk by investing in many different issuers.
This is done by setting a maximum percentage permitted of any single issuer in
any portfolio. Focus on high credit quality is the second bias. Holdings are
concentrated in the upper end of the quality spectrum. Securities of less than
the highest quality are used only when the team of credit analysts support the
conclusion that the quality will remain stable or improve, and that it offers
attractive potential in expected return. The third bias is to de-emphasize
interest rate forecasts. The performance of a portfolio therefore is not held
hostage to the accuracy of a rate forecast.
This philosophy attempts to achieve consistent results while minimizing
risk. Five strategies are also utilized by the Adviser to meet this objective.
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Sector Spread Anomalies: When sectors of the bond market are over or under
valued, the allocation in the portfolios is adjusted accordingly. Such decisions
are made based on a sound analysis of historical bond values as well as a review
of current market conditions and its impact on future values.
Yield Curve Anomalies: Unusual shapes in the yield curve or the degree of
steeples in the yield curve provide opportunities to outperform fixed income
indices. Such opportunities are reviewed by our specialists for return
enhancement under a variety of possible interest rate shifts before they are
implemented.
Coupon/Quality Opportunities: High or low coupon securities may represent
investment value based on supply and demand conditions for bonds. There are also
times when upgrading or downgrading of the credit quality of a bond can enhance
a portfolio's return. Funds hold lower quality bonds only when the expected
reward is substantial compared to the potential risks, and credit analysis
supports the conclusion that the credit quality is stable or improving.
Security Analysis: A full staff of credit analysts is dedicated to
supporting fixed income credit decisions. This staff gains additional support
from a substantial equity research team when analyzing bonds from corporate
issuers.
Duration Management: The duration (price volatility of a bond in relation
to interest rate movements) of the portfolios may be altered by 10% shorter or
longer than the portfolios normal benchmark. Changes in duration are made
infrequently and only when they are supported by economic expectations and an
assessment of value.
A final portfolio consists of securities that have been selected by
TradeStreet's Municipal Fixed Income Management Team and Fixed Income Management
Team, as the case may be, in-house industry specialists and outside sources all
working together.
GROWTH STYLE. The Capital Growth and Emerging Growth Funds are managed by
the Adviser using the Growth Style. The Growth Equity Style investment
philosophy seeks companies with superior growth prospects selling at reasonable
prices that, over time, should outperform the market.
Emphasis is placed on a "value adjusted for growth" stock selection
process. Essential to this style is the Adviser's belief that absolute valuation
does not capture the powerful effects of inflation. Therefore, relative
price/earnings ranges of stocks going back 5 years are examined rather than
static absolute price/earnings ratio.
Inflation causes the market price/earnings ratio of a stock to expand or
contract. Investors are willing to pay a higher price for stock in a company in
periods of low inflation. The inverse is also true. The premium paid for growth
will increase as inflation declines and decreases as inflation rises.
The stock selection process begins with a universe of financially strong
companies. The selection process selects companies with a market capitalization
greater than $500 million (large, established companies) and a strong price
momentum (growth in share price over the last 18 months). This results in a
universe of approximately 750 companies.
These 750 companies are the universe from which the Adviser's industry
specialists make their final decision for inclusion in an investment portfolio.
In accordance with the Growth Style, the CoreGrowth Management Team (with
respect to Capital Growth Fund) and the Strategy Growth Management Team (with
respect to Growth Fund) those stocks among the universe with the lowest
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price/earnings ratio and are in industries with above average earnings growth
potential. The final portfolio of stocks is then constructed by the Adviser, who
works closely with the in-house industry specialists, as well as expert Wall
Street sources.
In summary, the Growth Equity Style seeks to produce a diverse portfolio of
large capitalization growth stocks, that over time, should outperform the
market.
VALUE STYLE. The Value Fund is managed by the Adviser using the Value
Style. The Value Style investment philosophy is premised on the belief that a
well diversified portfolio of undervalued companies exhibiting low
price/earnings ratios will over time outperform the market while incurring lower
than market risk.
This style utilizes a "bottom-up" approach to stock selection, focusing on
well proven factors of fundamental valuation. A low price/earnings ratio and
above market dividend yield are two of the biases which reduce market risk. A
catalyst for earnings improvement is also one of this Style's requirements as it
assists with the "timing" of the purchase of a particular company.
Stock selection process begins with a team of 10 in-house research
specialists aided by a computerized screening model. Starting with approximately
a 2,000 company universe, stocks must first pass a rigorous screening process
that selects only those companies that possess strong financial quality and a
market capitalization greater than $500 million. This results in a universe of
approximately 900 companies, representing all of the 54 major U.S. industries
and approximately 10 economic sectors.
A more sophisticated screening process is then applied to the 900 company
universe. The companies are then ranked based on the following factor
weightings:
The top one-third, or approximately 300 companies, result in the final
universe from which the industry specialists make initial selections for a Fund.
To insure adherence to the discipline, price objectives (buy and sell prices)
are set for each company purchased, based on sound fundamental analysis. A final
diversified portfolio of approximately 65 issues is constructed by the Value
Management Team working closely with in-house industry specialists, as well as
outside sources.
In summary, the low price/earnings ratio, value discipline seeks to produce
a well diversified portfolio of high quality companies, that over time, should
outperform the market, thereby adding value while incurring below-market risk.
DISCIPLINED EQUITY STYLE. The Disciplined Equity Fund is managed by the
Adviser using the Disciplined Equity Style. The Disciplined Equity Style
investment philosophy seeks to identify companies which offer future near-term
earnings momentum.
The Adviser pursues this investment philosophy through the use of a
proprietary computerized tracking system (the "Alpha Model") which monitors the
earnings per share estimates of approximately 3,000 Wall Street analysts, and
through conventional security analysis. In utilizing the computerized tracking
system, the Adviser identifies companies with respect to which there has been a
change in the consensus analyst estimate of earnings per share. The Adviser
believes that such a change often signifies the beginning of a trend for the
company, rather than an isolated occurrence, and that such trend ultimately will
be reflected in the share price of the company. The Adviser then buys or sells
stocks for the Fund based on the results of this analysis.
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In selecting stocks pursuant to the Disciplined Equity Style, the Adviser
also uses conventional security analysis techniques. Starting with a universe of
approximately 2,000 companies with large market capitalization's, the Adviser
eliminates stocks that have relatively low trading activity, as well as stocks
of companies of poor credit quality and those which, in the opinion of the
Adviser, are overpriced. From the available pool of stocks that meet all of the
criteria, approximately 40 to 50 are selected for inclusion in the Fund's
portfolio.
Other strategies have been categorized into investment styles which consist
of the Emerging Markets and Pacific Growth Funds Style and the Global Government
Income Fund Style. These styles are described below.
EMERGING MARKETS AND PACIFIC GROWTH FUNDS STYLE. The Emerging Markets and
Pacific Growth Funds utilize an investment philosophy that is best characterized
as growth at a reasonable price. This philosophy is applied as appropriate for
each specific region or market in which the Funds invest, with input from the
asset allocation process. This implies a combination of bottom-up stock
selection with risk controlled allocation. For the Emerging Markets Fund the
integration of active stock selection with country allocation is necessary to
optimize the Fund's risk/return characteristics, as emerging markets are fast
changing. The ability to move freely between markets to take advantage of
improving or deteriorating economic fundamentals is important in the pursuit of
an active management style. Therefore emphasis is placed on the larger more
liquid securities available in the markets in which it invests.
The research for the Emerging Markets Fund focuses on over twenty-five
countries. While many of the countries within this universe share regional
characteristics that influence their capital markets, they each possess unique
political economic and developmental elements. The investable universe is
researched to assess factors such as: (1) political risk; (2) economic growth;
(3) trade balances and (4) stock market value. Country allocations are then made
within previously established risk control guidelines to prevent undue
concentration. The allocations are actively reviewed for market movement and/or
changes in fundamentals.
Stock selection is driven by fundamental research. As a first step, the
Adviser creates a screened universe of approximately 800 small-to
large-capitalization companies. The initial screen focuses on several criteria,
with earnings growth, financial resources and marketability being the most
critical. Companies producing consistently above average earnings growth rates
are featured, as are those with strong balance sheets or producing high levels
of free cash flow. Securities that exhibit very low levels of trading are
eliminated.
Approximately 500 companies evolve from the process as potential
candidates, and are subject to further fundamental analysis. Company visits are
made to verify the corporate and industry factors that have created a record of
growth, and to assess whether these factors are sustainable. Earnings models are
created, which are related to historic and projected levels of valuation in
order to generate expected returns across the universe of emerging market
securities. A preferred list of approximately 80 to 100 stocks in 15 or more
countries are then chosen for inclusion in the Fund. Fund holdings are actively
reviewed to assess whether expected return targets are being met and to confirm
that a company's fundamentals have not changed.
**For the Pacific Growth Fund, local contacts, fundamental research and
seasoned judgment are vital components in capturing attractive issues and
regional growth in the Pacific Basin and Far East. The Fund's investment process
is driven by fundamental research for both macroeconomic factors and stock
analysis with a focus on economic trends, market valuations, and performance
momentum.
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Overall, research is concentrated on a screened universe of approximately 600
companies. Quantitative and qualitative screens, are essential elements of the
research process.
Approximately 250 companies will evolve from the process as potential
candidates and will be subject to more stringent analysis seeking to identify:
(1) above-average earnings growth over the medium term; (2) solid financials;
(3) positive cash flow and (4) strength and depth of management.
At this stage company visits are made. These visits are a critical part of
the selection process. Special effort is expended in visiting competitors,
suppliers and customers of the companies in which we are interested. Of
particular importance is a thorough understanding of the management's criteria
for measuring their success in achieving strategic objectives; their motivation,
stability, and succession plan; and critically, their recognition of the need to
create value for external shareholders. A preferred list of approximately 80
Pacific Basin stocks will result and will be chosen for investment in the Fund.
Fund holdings are actively reviewed to assess whether expected return targets
are being met and to confirm that a company's fundamentals have not changed.
The Fund utilizes a twelve month rolling earnings forecasts to generate
country return forecasts. The forecast is based on the assessment of
macro-economic, political and local market factors as well as the composite of
the individual company earnings forecasts. Country allocations are then made
within previously established risk control guidelines to prevent undue
concentration by country. The portfolio is rigorously analyzed in final
screening to monitor industry and sector exposures to prevent undue
concentration, and to consider market influence factors such as political
changes, market rotation or liquidity flows.
ADMINISTRATOR AND CO-ADMINISTRATOR
The Company has retained Stephens Inc. ("Administrator") as the
administrator and First Data Investors Services Group, Inc. (the "Co-
Administrator") as the co-administrator of the LifeGoal Portfolios.
The Administrator and Co-Administrator serve under an administration
agreement ("Administration Agreement") and co-administration agreement
("Co-Administration Agreement"), respectively, each of which was approved by the
Board of Directors on July 10, 1996. The Administrator receives, as compensation
for its services rendered under the Administration Agreement and as agent for
the Co-Administrator for the services it provides under the Co-Administration
Agreement, an administrative fee of $10,000 per year per LifeGoal Portfolio,
which will be absorbed by NBAI.
Pursuant to the Administration Agreement, the Administrator has agreed to,
among other things, (i) maintain office facilities for the LifeGoal Portfolios,
(ii) furnish statistical and research data, data processing, clerical, and
internal executive and administrative services to the Company, (iii) furnish
corporate secretarial services to the Company, including coordinating the
preparation and distribution of materials for Board of Directors meetings, (iv)
coordinate the provision of legal advice to the Company with respect to
regulatory matters, (v) coordinate the preparation of reports to the Company's
shareholders and the SEC, including annual and semi-annual reports, (vi)
coordinate the provision of services to the Company by the Co-Administrator, the
Transfer Agents and the Custodians, and (vii) generally assist in all aspects of
the Company's operations. Additionally, the Administrator is authorized to
receive, as agent for the Co-Administrator, the fees payable to the
Co-Administrator by the Company for its services rendered under the
Co-Administration Agreement. The Administrator bears all expenses incurred in
connection with the performance of its services.
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Pursuant to the Co-Administration Agreement, the Co-Administrator has
agreed to, among other things, (i) provide accounting and bookkeeping services
for the LifeGoal Portfolios, (ii) compute each Portfolio's net asset value and
net income, (iii) accumulate information required for the Company's reports to
shareholders and the SEC, (iv) prepare and file the Company's federal and state
tax returns, (v) perform monthly compliance testing for the Company, and (vi)
prepare and furnish the Company monthly broker security transaction summaries
and transaction listings and performance information. The Co-Administrator bears
all expenses incurred in connection with the performance of its services.
The Administration Agreement and the Co-Administration Agreement may be
terminated by a vote of a majority of the Board of Directors, or by the
Administrator or Co-Administrator, respectively, on 60 days' written notice
without penalty. The Administration Agreement and Co-Administration Agreement
are not assignable without the written consent of the non-assigning party.
Furthermore, the Administration Agreement and the Co-Administration Agreement
provide that the Administrator and Co-Administrator, respectively, shall not be
liable to the LifeGoal Portfolios or to their shareholders except in the case of
the Administrator's or Co-Administrator's respective willful misfeasance, bad
faith, gross negligence or reckless disregard of duty.
Stephens received no compensation from the LifeGoal Portfolios for serving
as Administrator for the periods ended March 31, 1998 and March 31, 1997.
The dollar amount of combined Co-Administration fees paid to First Data for
the periods ended March 31, 1998 and March 31, 1997 was as follows:
Net
Co-Administration Co-Administration Fees
Fees Voluntarily Waived
--------- ------------------
LifeGoal Growth Portfolio $ 4,959 $0
LifeGoal Balanced Growth Portfolio 4,959 0
LifeGoal Income and Growth Portfolio 4,959 0
DISTRIBUTOR
Stephens Inc. (the "Distributor") serves as the principal underwriter and
distributor of the shares of the LifeGoal Portfolios.
At a meeting held on July 10, 1996, the Board of Directors selected
Stephens Inc. as Distributor, and approved a distribution agreement
("Distribution Agreement") with the Distributor. Pursuant to the Distribution
Agreement, the Distributor, as agent, sells shares of the LifeGoal Portfolios on
a continuous basis and transmits purchase and redemption orders that its
receives to the Company or the Transfer Agent (as defined under the caption
"Transfer Agents and Custodian"). Additionally, the Distributor has agreed to
use appropriate efforts to solicit orders for the sale of shares and to
undertake such advertising and promotion as it believes appropriate in
connection with such solicitation. Pursuant to the Distribution Agreement, the
Distributor, at its own expense, finances those activities which are primarily
intended to result in the sale of shares of the LifeGoal Portfolios, including,
but not limited to, advertising, compensation of underwriters, dealers and sales
personnel, the printing of prospectuses to other than existing shareholders, and
the printing and mailing of sales literature. The Distributor,
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however, may be reimbursed for all or a portion of such expenses to the extent
permitted by a distribution plan adopted by the Company pursuant to Rule 12b-1
under the 1940 Act.
The Distribution Agreement will continue year to year as long as such
continuance is approved at least annually by (i) the Board of Directors or a
vote of the majority (as defined in the 1940 Act) of the outstanding voting
securities of a LifeGoal Portfolio and (ii) a majority of the directors who are
not parties to the Distribution Agreement or "interested persons" of any such
party by a vote cast in person at a meeting called for such purpose. The
Distribution Agreement is not assignable and is terminable with respect to a
Portfolio, without penalty, on 60 days' notice by the Board of Directors, the
vote of a majority (as defined in the 1940 Act) of the outstanding voting
securities of such LifeGoal Portfolio, or by the Distributor.
DISTRIBUTION PLANS AND SHAREHOLDER SERVICING ARRANGEMENTS FOR INVESTOR SHARES
INVESTOR A SHARES
The Company has adopted a Shareholder Servicing and Distribution Plan (the
"Investor A Plan") pursuant to Rule 12b-1 under the 1940 Act with respect to
each LifeGoal Portfolio's Investor A Shares. The Investor A Plan provides that
each LifeGoal Portfolio may pay the Distributor or banks, broker/dealers or
other financial institutions that offer shares of the Fund and that have entered
into a Sales Support Agreement with the Distributor ("Selling Agents") or a
Shareholder Servicing Agreement with the Company ("Servicing Agents"), up to
0.25% (on an annualized basis) of the average daily net asset value of such
LifeGoal Portfolio.
Payments under the Investor A Plan may be made to the Distributor for
reimbursements of distribution-related expenses actually incurred by the
Distributor, including, but not limited to, expenses of organizing and
conducting sales seminars, printing of prospectuses and statements of additional
information (and supplements thereto) and reports for other than existing
shareholders, preparation and distribution of advertising material and sales
literature and costs of administering the Investor A Plan, or to Servicing
Agents that have entered into a Shareholder Servicing Agreement with the Company
for providing shareholder support services to their customers ("Customers")
which hold of record or beneficially Investor A Shares of a Fund. Such
shareholder support services provided by Servicing Agents to holders of Investor
A Shares of the LifeGoal Portfolios may include (i) aggregating and processing
purchase and redemption requests for Investor A Shares from their Customers and
transmitting promptly net purchase and redemption orders to the Company's
distributor or transfer agent; (ii) providing their Customers with a service
that invests the assets of their accounts in Investor A Shares pursuant to
specific or pre-authorized instructions; (iii) processing dividend and
distribution payments from the Company on behalf of their Customers; (iv)
providing information periodically to their Customers showing their positions in
Investor A Shares; (v) arranging for bank wires; (vi) responding to their
Customers' inquiries concerning their investment in Investor A Shares; (vii)
providing subaccounting with respect to Investor A Shares beneficially owned by
their Customers or the information necessary for subaccounting; (viii) if
required by law, forwarding shareholder communications from the Company (such as
proxies, shareholder reports, annual and semi-annual financial statements and
dividend, distribution and tax notices) to their Customers; (ix) forwarding to
their Customers proxy statements and proxies containing any proposals regarding
the Shareholder Servicing Agreement; (x) providing general shareholder liaison
services; and (xi) providing such other similar services as the Company may
reasonably request to the extent the Selling Agent is permitted to do so under
applicable statutes, rules or regulations.
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Expenses incurred by the Distributor pursuant to the Investor A Plan in any
given year may exceed the sum of the fees received under the Investor A Plan.
Any such excess may be recovered by the Distributor in future years so long as
the Investor A Plan is in effect. If the Investor A Plan were terminated or not
continued, a LifeGoal Portfolio would not be contractually obligated to pay the
Distributor for any expenses not previously reimbursed by the LifeGoal
Portfolio.
For the fiscal periods ended March 31, 1998 and March 31, 1997, no 12b-1
fees or CDSC's were paid to the Distributor in connection with Investor A Shares
of the Portfolios.
INVESTOR B SHARES
The Directors of the Company have approved a Distribution Plan in
accordance with Rule 12b-1 under the 1940 Act for the Investor B Shares of the
LifeGoal Portfolios (the "Investor B Plan"). Pursuant to the Investor B Plan,
each Portfolio may pay the Distributor for certain expenses that are incurred in
connection with the distribution of shares. Payments under the Investor B Plan
will be calculated daily and paid monthly at a rate set from time to time by the
Board of Directors provided that the annual rate may not exceed 0.75% of the
average daily net asset value of Investor B Shares of a Portfolio. Payments to
the Distributor pursuant to the Investor B Plan will be used (i) to compensate
Selling Agents for providing sales support assistance relating to Investor B
Shares, (ii) for promotional activities intended to result in the sale of
Investor B Shares such as to pay for the preparation, printing and distribution
of prospectuses to other than current shareholders, and (iii) to compensate
Selling Agents for providing sales support services with respect to their
Customers who are, from time to time, beneficial and record holders of Investor
B Shares. Currently, substantially all fees paid pursuant to the Investor B Plan
are paid to compensate Selling Agents for providing the services described in
(i) and (iii) above, with any remaining amounts being used by the Distributor to
partially defray other expenses incurred by the Distributor in distributing
Investor B Shares. Fees received by the Distributor pursuant to the Investor B
Plan will not be used to pay any interest expenses, carrying charges or other
financing costs (except to the extent permitted by the SEC) and will not be used
to pay any general and administrative expenses of the Distributor.
Pursuant to the Investor B Plan, the Distributor may enter into Sales
Support Agreements with Selling Agents for providing sales support services to
their Customers who are the record or beneficial owners of Investor B Shares of
the LifeGoal Portfolios. Such Selling Agents will be compensated at the annual
rate of up to 0.75% of the average daily net asset value of the Investor B
Shares of the LifeGoal Portfolios held of record or beneficially by such
Customers. The sales support services provided by Selling Agents may include
providing distribution assistance and promotional activities intended to result
in the sales of shares such as paying for the preparation, printing and
distribution of prospectuses to other than current shareholders.
Fees paid pursuant to the Investor B Plan are accrued daily and paid
monthly, and are charged as expenses of the relevant shares of a LifeGoal
Portfolio as accrued. Expenses incurred by the Distributor pursuant to the
Investor B Plan in any given year may exceed the sum of the fees received under
the Investor B Plan and payments received pursuant to contingent deferred sales
charges. Any such excess may be recovered by the Distributor in future years so
long as the Investor B Plan is in effect. If the Investor B Plan were terminated
or not continued, a LifeGoal Portfolio would not be contractually obligated to
pay the Distributor for any expenses not previously reimbursed by the LifeGoal
Portfolio or recovered through contingent deferred sales charges.
In addition, the Directors have approved a Shareholder Servicing Plan
("Servicing Plan") with respect to the Investor B Shares of the LifeGoal
Portfolios (the "Investor B Servicing Plan"). Pursuant to the
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Investor B Servicing Plan, each LifeGoal Portfolio may pay banks, broker/dealers
or other financial institutions that have entered into a Shareholder Servicing
Agreement with Nations Fund ("Servicing Agents") for certain expenses that are
incurred by the Servicing Agents in connection with shareholder support services
that are provided by the Servicing Agents. Payments under the Investor B
Servicing Plan will be calculated daily and paid monthly at a rate set from time
to time by the Board of Directors, provided that the annual rate may not exceed
0.25% of the average daily net asset value of the LifeGoal Portfolios' Investor
B Shares. The shareholder services provided by the Servicing Agents may include
(i) aggregating and processing purchase and redemption requests for such
Investor B Shares from Customers and transmitting promptly net purchase and
redemption orders to the Company's distributor or transfer agent; (ii) providing
Customers with a service that invests the assets of their accounts in such
Investor B Shares pursuant to specific or pre-authorized instructions; (iii)
processing dividend and distribution payments from the Company on behalf of
Customers; (iv) providing information periodically to Customers showing their
positions in such Investor B Shares; (v) arranging for bank wires; (vi)
responding to Customers' inquiries concerning their investment in such Investor
B Shares; (vii) providing subaccounting with respect to such Investor B Shares
beneficially owned by Customers or providing the information necessary for
subaccounting; (viii) if required by law, forwarding shareholder communications
from the Company (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to Customers;
(ix) forwarding to Customers proxy statements and proxies containing any
proposals regarding the Shareholder Servicing Agreement; (x) providing general
shareholder liaison services; and (xi) providing such other similar services as
the Company may reasonably request to the extent the Servicing Agent is
permitted to do so under applicable statutes, rules or regulations.
For the fiscal periods ended March 31, 1998 and March 31, 1997, no 12b-1
fees or CDSC's were paid to the Distributor in connection with Investor B Shares
of the Portfolios.
INVESTOR C SHARES
The Directors of the Company have approved a Distribution Plan in
accordance with Rule 12b-1 under the 1940 Act for the Investor C Shares of the
LifeGoal Portfolios (the "Investor C Plan"). Pursuant to the Investor C Plan,
each Portfolio may pay the Distributor for certain expenses that are incurred in
connection with the distribution of shares. Payments under the Investor C Plan
will be calculated daily and paid monthly at a rate set from time to time by the
Board of Directors provided that the annual rate may not exceed 0.75% of the
average daily net asset value of Investor C Shares of a Portfolio. Payments to
the Distributor pursuant to the Investor C Plan will be used (i) to compensate
Selling Agents for providing sales support assistance relating to Investor C
Shares, (ii) for promotional activities intended to result in the sale of
Investor C Shares such as to pay for the preparation, printing and distribution
of prospectuses to other than current shareholders, and (iii) to compensate
Selling Agents for providing sales support services with respect to their
Customers who are, from time to time, beneficial and record holders of Investor
C Shares. Currently, substantially all fees paid pursuant to the Investor C Plan
are paid to compensate Selling Agents for providing the services described in
(i) and (iii) above, with any remaining amounts being used by the Distributor to
partially defray other expenses incurred by the Distributor in distributing
Investor C Shares. Fees received by the Distributor pursuant to the Investor C
Plan will not be used to pay any interest expenses, carrying charges or other
financing costs (except to the extent permitted by the SEC) and will not be used
to pay any general and administrative expenses of the Distributor.
Pursuant to the Investor C Plan, the Distributor may enter into Sales
Support Agreements with Selling Agents for providing sales support services to
their Customers who are the record or beneficial owners of Investor C Shares of
the LifeGoal Portfolios. Such Selling Agents will be compensated at the
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annual rate of up to 0.75% of the average daily net asset value of the Investor
C Shares of the LifeGoal Portfolios held of record or beneficially by such
Customers. The sales support services provided by Selling Agents may include
providing distribution assistance and promotional activities intended to result
in the sales of shares such as paying for the preparation, printing and
distribution of prospectuses to other than current shareholders.
Fees paid pursuant to the Investor C Plan are accrued daily and paid
monthly, and are charged as expenses of the relevant shares of a Fund as
accrued. Expenses incurred by the Distributor pursuant to the Investor C Plan in
any given year may exceed the sum of the fees received under the Investor C Plan
and payments received pursuant to contingent deferred sales charges. Any such
excess may be recovered by the Distributor in future years so long as the
Investor C Plan is in effect. If the Investor C Plan were terminated or not
continued, a LifeGoal Portfolio would not be contractually obligated to pay the
Distributor for any expenses not previously reimbursed by the LifeGoal Portfolio
or recovered through contingent deferred sales charges.
In addition, the Directors have approved a Shareholder Servicing Plan
("Servicing Plan") with respect to the Investor C Shares of the LifeGoal
Portfolios (the "Investor C Servicing Plan"). Pursuant to the Investor C
Servicing Plan, each LifeGoal Portfolio may pay banks, broker/dealers or other
financial institutions that have entered into a Shareholder Servicing Agreement
with Nations Fund ("Servicing Agents") for certain expenses that are incurred by
the Servicing Agents in connection with shareholder support services that are
provided by the Servicing Agents. Payments under the Investor C Servicing Plan
will be calculated daily and paid monthly at a rate set from time to time by the
Board of Directors, provided that the annual rate may not exceed 0.25% of the
average daily net asset value of the LifeGoal Portfolios' Investor C Shares. The
shareholder services provided by the Servicing Agents may include (i)
aggregating and processing purchase and redemption requests for such Investor C
Shares from Customers and transmitting promptly net purchase and redemption
orders to the Company's distributor or transfer agent; (ii) providing Customers
with a service that invests the assets of their accounts in such Investor C
Shares pursuant to specific or pre-authorized instructions; (iii) processing
dividend and distribution payments from the Company on behalf of Customers; (iv)
providing information periodically to Customers showing their positions in such
Investor C Shares; (v) arranging for bank wires; (vi) responding to Customers'
inquiries concerning their investment in such Investor C Shares; (vii) providing
subaccounting with respect to such Investor C Shares beneficially owned by
Customers or providing the information necessary for subaccounting; (viii) if
required by law, forwarding shareholder communications from the Company (such as
proxies, shareholder reports, annual and semi-annual financial statements and
dividend, distribution and tax notices) to Customers; (ix) forwarding to
Customers proxy statements and proxies containing any proposals regarding the
Shareholder Servicing Agreement; (x) providing general shareholder liaison
services; and (xi) providing such other similar services as the Company may
reasonably request to the extent the Servicing Agent is permitted to do so under
applicable statutes, rules or regulations.
For the fiscal periods ended March 31, 1997 and March 31, 1998, no 12b-1
fees or CDSC's were paid to the Distributor in connection with Investor C Shares
of the Portfolios.
INFORMATION APPLICABLE TO INVESTOR A, INVESTOR B AND INVESTOR C SHARES
The Investor A Plan, the Investor B Plan, the Investor B Servicing Plan,
the Investor C Plan and the Investor C Servicing Plan, (each a "Plan" and
collectively the "Plans") may only be used for the purposes specified above and
as stated in each such Plan. Compensation payable to Selling Agents or Servicing
Agents for shareholder support services under the Plans is subject to, among
other things, the National Association of Securities Dealers, Inc.'s ("NASD")
Conduct Rules governing receipt by NASD
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members of shareholder servicing plan fees from registered investment companies
(the "NASD Servicing Plan Rule"), which became effective on July 7, 1993. Such
compensation shall only be paid for services determined to be permissible under
the NASD Servicing Plan Rule.
Each Plan requires the officers of the Company or the Distributor to
provide the Board of Directors at least quarterly with a written report of the
amounts expended pursuant to the Plan and the purposes for which such
expenditures were made. The Board of Directors reviews these reports in
connection with their decisions with respect to the Plans.
As required by Rule 12b-1 under the 1940 Act, each Plan was approved by the
Board of Directors, including a majority of the directors who are not
"interested persons" (as defined in the 1940 Act) of the Company and who have no
direct or indirect financial interest in the operation of the Plan or in any
agreements related to the Plan ("Qualified Directors") on July 10, 1996 (except
for the Investor B Plan and Investor B Servicing Plan, approved on June 4,
1997). The Plans continue in effect as long as such continuance is specifically
approved at least annually by the Board of Directors, including a majority of
the Qualified Directors.
In approving the Plans in accordance with the requirements of Rule 12b-1,
the directors considered various factors and determined that there is a
reasonable likelihood that each Plan will benefit the respective Investor A,
Investor B or Investor C Shares and the holders of such shares. The Plans have
been approved by the initial shareholder.
Each Plan may be terminated with respect to its shares by vote of a
majority of the Qualified Directors or by vote of a majority of holders of its
outstanding voting securities. Any change in a Plan that would increase
materially the distribution expenses paid by the Investor A, Investor B or
Investor C Shares requires shareholder approval; otherwise, each Plan may be
amended by the directors, including a majority of the Qualified Directors, by
vote cast in person at a meeting called for the purpose of voting upon such
amendment. The Investor B Servicing Plan and Investor C Servicing Plan may be
terminated by a vote of a majority of the Qualified Directors. As long as a Plan
is in effect, the selection or nomination of the Qualified Directors is
committed to the discretion of the Qualified Directors.
Conflict of interest restrictions may apply to the receipt by Selling,
and/or Servicing Agents of compensation from Nations Fund in connection with the
investment of fiduciary assets in Investor Shares. Selling and/or Servicing
Agents, including banks regulated by the Comptroller of the Currency, the
Federal Reserve Board, or the Federal Deposit Insurance Corporation, and
investment advisers and other money managers subject to the jurisdiction of the
SEC or the Department of Labor, are urged to consult their legal advisers before
investing such assets in Investor Shares.
SHAREHOLDER ADMINISTRATION PLAN (PRIMARY B SHARES)
As stated in the Prospectus describing the Primary B Shares, the Company
has a separate Shareholder Administration Plan (the "Administration Plan") with
respect to such shares. Pursuant to the Administration Plan, the Company may
enter into agreements ("Administration Agreements") with broker/dealers, banks
and other financial institutions that are dealers of record or holders of record
or which have a servicing relationship with the beneficial owners of Primary B
Shares ("Servicing Agents"). The Administration Plan provides that pursuant to
the Administration Agreements, Servicing Agents shall provide the shareholder
support services as set forth therein to their Customers who may from time to
time own of record or beneficially Primary B Shares in consideration for the
payment of up to 0.60% (on an annualized basis) of the net asset value of such
shares. Such services may include: (i) aggregating and processing purchase,
exchange and redemption requests for Primary B Shares from
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Customers and transmitting promptly net purchase and redemption orders with the
Distributor or the transfer agents; (ii) providing Customers with a service that
invests the assets of their accounts in Primary B Shares pursuant to specific or
pre-authorized instructions; (iii) processing dividend and distribution payments
from the Company on behalf of Customers; (iv) providing information periodically
to Customers showing their positions in Primary B Shares; (v) arranging for bank
wires; (vi) responding to Customer inquiries concerning their investment in
Primary B Shares; (vii) providing sub-accounting with respect to Primary B
Shares beneficially owned by Customers or the information necessary for
sub-accounting; (viii) if required by law, forwarding shareholder communications
(such as proxies, shareholder reports annual and semi-annual financial
statements and dividend, distribution and tax notices) to Customers; (ix)
forwarding to Customers proxy statements and proxies containing any proposals
regarding an Administration Agreement; (x) employee benefit plan recordkeeping,
administration, custody and trustee services; (xi) general shareholder liaison
services; and (xii) providing such other similar services as may reasonably be
requested to the extent permitted under applicable statutes, rules, or
regulations.
The Administration Plan also provides that in no event may the portion of
the shareholder administration fee that constitutes a "service fee," as the term
is defined in the NASD Servicing Plan Rule, exceed 0.25% of the average daily
net asset value of the Primary B Shares of a Portfolio. In addition, to the
extent any portion of the fees payable under the Plan is deemed to be for
services primarily intended to result in the sale of LifeGoal Portfolio Primary
B Shares, such fees are deemed approved and may be paid under the Administration
Plan. Accordingly, the Administration Plan has been approved and will be
operated pursuant to Rule 12b-1 under the 1940 Act. Such Plan shall continue in
effect as long as the Board of Directors, including a majority of the Qualified
Directors, specifically approves the Plan at least annually.
FEES PAID PURSUANT TO SHAREHOLDER SERVICING/DISTRIBUTION PLANS
INVESTOR A SHARES
<TABLE>
<CAPTION>
NET FEES PAID
NET FEES PAID (SHAREHOLDER
(12B-1 SERVICING NET
COMPONENT) COMPONENT) FEES
FUND YEAR ENDED 3/31/98 YEAR ENDED 3/31/98 PAID
---- ------------------ ------------------ ----
<S> <C> <C> <C>
Lifegoal Growth Portfolio $3,180 $ 0 $3,180
LifeGoal Balanced Growth Portfolio 875 0 875
LifeGoal Income and Growth Portfolio 350 0 350
</TABLE>
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<PAGE>
FEES PAID PURSUANT TO DISTRIBUTION PLANS
INVESTOR B SHARES
<TABLE>
<CAPTION>
NET FEES PAID
NET FEES PAID (SHAREHOLDER
(12B-1 SERVICING NET
COMPONENT) COMPONENT) FEES
FUND YEAR ENDED 3/31/98 YEAR ENDED 3/31/98 PAID
---- ------------------ ------------------ ----
<S> <C> <C> <C>
Lifegoal Growth Portfolio $13,382 $ 4,461 $17,843
LifeGoal Balanced Growth Portfolio 7,138 2,380 9,518
LifeGoal Income and Growth Portfolio 1,762 588 2,350
FEES PAID PURSUANT TO DISTRIBUTION PLANS
INVESTOR C SHARES
NET FEES PAID
NET FEES PAID (SHAREHOLDER
(12B-1 SERVICING NET
COMPONENT) COMPONENT) FEES
FUND YEAR ENDED 3/31/98 YEAR ENDED 3/31/98 PAID
---- ------------------ ------------------ ----
Lifegoal Growth Portfolio $1,185 $ 395 $1,580
LifeGoal Balanced Growth Portfolio 3,458 1,153 4,610
LifeGoal Income and Growth Portfolio 257 86 343
</TABLE>
FEES PAID PURSUANT TO THE ADMINISTRATION PLAN
PRIMARY B SHARES
NET ADMIN NET ADMIN
FEES PAID FEES WAIVED
--------- -----------
Lifegoal Growth Portfolio $15 $ 0
LifeGoal Balanced Growth Portfolio 70 0
LifeGoal Income and Growth Portfolio 0 0
EXPENSES
The Administrator and/or Co-Administrator furnishes, without additional
cost to the Company, the services of the Treasurer and Secretary of the Company
and such other personnel (other than the personnel of the Adviser or
Sub-Adviser) as are required for the proper conduct of the Company's affairs.
The Distributor bears the incremental expenses of printing and distributing
prospectuses used by the Distributor or furnished by the Distributor to
investors in connection with the public offering of the Company's Shares and the
costs of any other promotional or sales literature, except that to the extent
permitted under the Plans relating to the Investor A, Investor B and Investor C
Shares of each LifeGoal Portfolio, sales-related expenses incurred by the
Distributor may be reimbursed by the Company.
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The Company pays, or causes to be paid, all other expenses of the Company,
including without limitation: the fees of the Adviser, the Sub-Adviser, the
Administrator and Co-Administrator; the charges and expenses of any registrar,
any custodian or depository appointed by the Company for the safekeeping of its
cash, fund securities and other property, and any stock transfer, dividend or
accounting agent or agents appointed by the Company; brokerage commissions
chargeable to the Company in connection with fund securities transactions to
which the Company is a party; all taxes, including securities issuance and
transfer taxes; corporate fees payable by the Company to federal, state or other
governmental agencies; all costs and expenses in connection with the
registration and maintenance of registration of the Company and its shares with
the SEC and other jurisdictions (including filing fees, legal fees and
disbursements of counsel); the costs and expenses of typesetting prospectuses
and statements of additional information of the Company (including supplements
thereto) and periodic reports and of printing and distributing such prospectuses
and statements of additional information (including supplements thereto) to the
Company's shareholders; all expenses of shareholders' and directors' meetings
and of preparing, printing and mailing proxy statements and reports to
shareholders; fees and travel expenses of directors or director members of any
advisory board or committee; all expenses incident to the payment of any
dividend or distribution, whether in shares or cash; charges and expenses of any
outside service used for pricing of the Company's shares; fees and expenses of
legal counsel and of independent auditors in connection with any matter relative
to the Company; membership dues of industry associations; interest payable on
Company borrowings; postage and long-distance telephone charges; insurance
premiums on property or personnel (including officers and directors) of the
Company which inure to its benefit; extraordinary expenses (including, but not
limited to, legal claims and liabilities and litigation costs and any
indemnification related thereto); and all other charges and costs of the
Company's operation unless otherwise explicitly assumed by the Adviser (and/or
the Sub-Adviser), the Administrator or Co-Administrator. The Adviser, under its
investment advisory agreement with the LifeGoal Portfolios, has agreed to absorb
all expenses of the LifeGoal Portfolios, included those listed above, except for
taxes, brokerage fees and commissions, extraordinary expenses and any applicable
Rule 12b-1 fees, shareholder servicing fees and/or shareholder administration
fees.
Expenses of the Company which are not directly attributable to the
operations of any class of shares of LifeGoal Portfolio are pro-rated among all
classes of shares of LifeGoal Portfolios of the Company based upon the relative
net assets of each class or LifeGoal Portfolio. Expenses of the Company which
are not directly attributable to a specific class of shares but are directly
attributable to a specific LifeGoal Portfolio are prorated among all the classes
of shares of such LifeGoal Portfolio based upon the relative net assets of each
such class of shares. Expenses of the Company which are directly attributable to
a class of shares are charged against the income available for distribution as
dividends to such class of shares.
TRANSFER AGENTS AND CUSTODIANS
First Data Investors Services Group, Inc., a wholly owned subsidiary of
First Data Corporation, is located at One Exchange Place, 53 State Street,
Boston, Massachusetts 02109, and serves as transfer agent (the "Transfer Agent")
for the Company's Primary Shares and Investor Shares. Under a transfer agency
agreement, the Transfer Agent maintains shareholder account records for the
Company, handles certain communications between shareholders and the Company,
distributes dividends and distributions payable by the Company to shareholders,
produces statements with respect to account activity for the Company and its
shareholders for these services.
NationsBank serves as custodian (the "Custodian") for the portfolio
securities (and for shares of underlying Nations Funds) and cash of the LifeGoal
Portfolios. Except with respect to shares of underlying NationsFunds, the
Custodian maintains custody of the LifeGoal Portfolios' securities, cash
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and other property, delivers securities against payment upon sale and pays for
securities against delivery upon purchase, makes payments on behalf of the
LifeGoal Portfolios for payments of dividends, distributions and redemptions,
endorses and collects on behalf of the LifeGoal Portfolios all checks, and
receives all dividends and other distributions made on securities owned by the
LifeGoal Portfolios. The Company maintains direct custody of the LifeGoal
Portfolios' shares of underlying Nations Funds.
INDEPENDENT ACCOUNTANT AND REPORTS
The Board of Directors has selected PricewaterhouseCoopers LLP, 160 Federal
Street, Boston, Massachusetts 02110 as the Company's independent accountant to
audit the Company's books and review the Company's tax returns for the LifeGoal
Portfolios' fiscal years ending on and after March 31, 1999.
The Annual Report for the fiscal period ended March 31, 1998, is hereby
incorporated by reference in this SAI. The Annual Report will be sent free of
charge with this SAI to any shareholder who requests this SAI.
COUNSEL
Morrison & Foerster LLP serves as legal counsel to the Company. Its
address is 2000 Pennsylvania Avenue, N.W., Washington, D.C. 20006.
ADDITIONAL INFORMATION ON PERFORMANCE
Yield information and other performance information for the Company's
LifeGoal Portfolios may be obtained by calling the Company at (800) 321-7854.
From time to time, the yield and total return of a LifeGoal Portfolio's
Investor Shares and Primary Shares may be quoted in advertisements, shareholder
reports, and other communications to shareholders. Each LifeGoal Portfolio of
the Company also may quote information obtained from the Investment Company
Institute, national financial publications, trade journals and other industry
sources in its advertising materials and sales literature. Performance
information is available by calling 1-800-321-7854 with respect to Investor
Shares and 1-800-621-2192 with respect to Primary Shares.
The international investment philosophy of certain of the underlying Nation
Funds is based on the premise that significant opportunities exist outside of
the United States. In fact, two-thirds of the world's investment opportunities
are outside of the United States and foreign stock markets have consistently
outperformed the U.S. stock market. Adding foreign stocks to a domestic
portfolio can help reduce risk and lower portfolio volatility because world
markets do not move in sync. From time to time, the LifeGoal Portfolios might
point out these opportunities and the differences that exist through investing
in overseas countries in marketing materials that reference underlying Nations
Funds.
YIELD CALCULATIONS
The yield of the Primary Shares and Investor Shares of the LifeGoal
Portfolios is a measure of the net investment income per share (as defined)
earned over a 30-day period expressed as a percentage of the maximum offering
price of a share of such classes at the end of the period. Yield figures are
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determined by dividing the net investment income per share earned during the
specified 30-day period by the maximum offering price per share on the last day
of the period, according to the following formula:
Yield = 2[(a-b + 1)6 1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = average daily number of shares outstanding during the period
that were entitled to receive dividends
d = maximum offering price per share on the last day of the period
For purposes of yield quotation, income is calculated in accordance with
standardized methods applicable to all stock and bond mutual funds. In general,
interest income is reduced with respect to bonds trading at a premium over their
par value by subtracting a portion of the premium from income on a daily basis,
and is increased with respect to bonds trading at a discount by adding a portion
of the discount to daily income. Capital gains and losses are excluded from the
calculation.
Income calculated for the purposes of calculating a LifeGoal Portfolio's
yield differs from income as determined for other accounting purposes. Because
of the different accounting methods used, and because of the compounding assumed
in yield calculations, the yield quoted for a LifeGoal Portfolio may differ from
the rate of distributions a LifeGoal Portfolio paid over the same period or the
rate of income reported in the LifeGoal Portfolios' financial statements.
TOTAL RETURN CALCULATIONS
Total return measures both the net investment income generated by, and the
effect of any realized or unrealized appreciation or depreciation of the
underlying investments in a Portfolio. The LifeGoal Portfolios' average annual
and cumulative total return figures are computed in accordance with the
standardized methods prescribed by the SEC.
Average annual total return figures are computed by determining the average
annual compounded rates of return over the periods indicated in the
advertisement, sales literature or shareholders' report that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period
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This calculation (i) assumes all dividends and distributions are reinvested
at net asset value on the appropriate reinvestment dates as described in the
Prospectuses, and (ii) deducts (a) the maximum sales charge from the
hypothetical initial $1,000 investment, and (b) all recurring fees, such as
advisory and administrative fees, charged as expenses to all shareholder
accounts.
Cumulative total return is computed by finding the cumulative compounded
rate of return over the period indicated in the advertisement that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
CTR = (ERV-P) 100
P
Where: CTR = Cumulative total return
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period
P = initial payment of $1,000.
This calculation (i) assumes all dividends and distributions are reinvested
at net asset value on the appropriate reinvestment dates as described in the
Prospectuses, and (ii) deducts (a) the maximum sales charge from the
hypothetical initial $1,000 investment, and (b) all recurring fees, such as
advisory and administrative fees, charged as expenses to all shareholder
accounts.
For the year ended March 31, 1998, and since the Portfolios' inception, the
average annual total return for the LifeGoal Portfolios was as follows:
Note: Earliest inception date for the LifeGoal Portfolios is October 15, 1996
and therefore five and ten year numbers are not available.
AVERAGE ANNUAL RETURNS
1 Year
(as of Since
3/31/98) Inception
Including Including
Sales Sales
LifeGoal Portfolio/Class Charges Charges
------- -------
75
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a) Growth Portfolio
Primary A Shares 29.80% 21.28%
Primary B Shares n/a 6.24%
Investor A Shares 29.68% 21.16%
Investor B Shares n/a 3.55%
Investor C Shares 28.89% 20.62%
b) Balanced Growth Portfolio
Primary A Shares 21.74% 15.13%
Primary B Shares n/a 9.24%
Investor A Shares 21.76% 15.12%
Investor B Shares n/a 4.70%
Investor C Shares 21.10% 14.68%
c) Income and Growth
Portfolio
Primary A Shares 13.56% 11.03%
Primary B Shares n/a n/a
Investor A Shares 13.38% 10.87%
Investor B Shares n/a 0.33%
Investor C Shares 12.83% 10.51%
For the period ended March 31, 1998, the aggregate total return for each
LifeGoal Portfolio of the Company was:
Note: Earliest inception date for the LifeGoal Portfolios is October 15, 1996
and therefore five and ten year numbers are not available.
Inception Inception
Through Through
3/31/98 3/31/98
Without Including
Sales Sales
Charges Charges
------- -------
d) Growth Portfolio
Primary A Shares 32.52%
Primary B Shares 6.24%
Investor A Shares 32.34%
Investor B Shares 8.55% 3.55%
Investor C Shares 31.48%
e) Balanced Growth Portfolio
Primary A Shares 22.84%
Primary B Shares 9.24%
Investor A Shares 22.81%
Investor B Shares 9.70% 4.70%
Investor C Shares 22.13%%
f) Income and Growth Portfolio
Primary A Shares 16.50%
Primary B Shares n/a
76
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Investor A Shares 16.25%
Investor B Shares 5.33% 0.33%
Investor C Shares 15.70%
The Primary Shares and Investor Shares of the LifeGoal Portfolios also may
quote their distribution rates, which express the historical amount of income
dividends paid to their shareholders during a three-month period as a percentage
of the maximum offering price per share on the last day of such period.
The performance figures of the LifeGoal Portfolios as described above will
vary from time to time depending upon market and economic conditions, the
composition of their portfolios and operating expenses. These factors should be
considered when comparing the performance figures of the LifeGoal Portfolios
with those of other investment companies and investment vehicles.
The LifeGoal Portfolios may quote information obtained from the Investment
Company Institute, national financial publications, trade journals and other
industry sources in its advertising and sales literature. In addition, the
LifeGoal Portfolios may compare the performance and yield of a class or series
of shares to those of other mutual funds with similar investment objectives and
to other relevant indices or to rankings prepared by independent services or
other financial or industry publications that monitor the performance of mutual
funds. For example, the performance and yield of a class of shares in a LifeGoal
Portfolio may be compared to data prepared by Lipper Analytical Services, Inc.
Performance and yield data as reported in national financial publications such
as Money Magazine, Forbes, Barron's, The Wall Street Journal, and The New York
Times, or in publications of a local or regional nature, also may be used in
comparing the performance of a class of shares in a LifeGoal Portfolio.
77
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SCHEDULE A
DESCRIPTION OF RATINGS
The following summarizes the highest six ratings used by Standard & Poor's
Corporation ("S&P") for corporate and municipal bonds. The first four ratings
denote investment grade securities.
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay interest and repay
principal.
AA - Debt rated AA is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in a small
degree.
A - Debt rated A has a 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 - Debt rated BBB is 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 for those in
higher-rated categories.
BB, B - Bonds rated BB and B are regarded, on balance as predominantly
speculative with respect to capacity to pay interest and repay principal
in accordance with the terms of the obligation. BB represents the lowest
degree of speculation and B a higher degree of speculation. While such
bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposure to adverse
conditions.
To provide more detailed indications of credit quality, the AA, A and BBB
ratings may be modified by the addition of a plus or minus sign to show relative
standing within these major rating categories. The following summarizes the
highest six ratings used by Moody's Investors Service, Inc. ("Moody's") for
corporate and municipal bonds. The first four denote investment grade
securities.
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A - Bonds that are rated A possess many favorable investment attributes
and are to be considered upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
A-1
<PAGE>
Baa - Bonds that are rated Baa are considered 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. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not as
well safeguarded during both good times and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B - Bond which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Moody's applies numerical modifiers (1, 2 and 3) with respect to corporate
bonds rated Aa through B. The modifier 1 indicates that the bond being
rated ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates that the
bond ranks in the lower end of its generic rating category. With regard to
municipal bonds, those bonds in the Aa, A and Baa groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1 or Baa1, respectively. The following summarizes the
highest four ratings used by Duff & Phelps Credit Rating Co. ("D&P") for
bonds, each of which denotes that the securities are investment grade.
AAA - Bonds that are rated AAA are of the highest credit quality. The risk
factors are considered to be negligible, being only slightly more than for
risk-free U.S. Treasury debt.
AA - Bonds that are rated AA are of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
A - Bonds that are rated A have protection factors which are average but
adequate. However, risk factors are more variable and greater in periods
of economic stress.
BBB - Bonds that are rated BBB have below average protection factors but
still are considered sufficient for prudent investment. Considerable
variability in risk exists during economic cycles.
To provide more detailed indications of credit quality, the AA, A and BBB
ratings may modified by the addition of a plus or minus sign to show relative
standing within these major categories. The following summarizes the highest
four ratings used by Fitch Investors Service, Inc. ("Fitch") for bonds, each of
which denotes that the securities are investment grade:
AAA - Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly
A-2
<PAGE>
vulnerable to foreseeable future developments, short-term debt of these
issuers is generally rated F-1+.
A - Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to
be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
To provide more detailed indications of credit quality, the AA, A and BBB
ratings may be modified by the addition of a plus or minus sign to show relative
standing within these major rating categories.
The following summarizes the two highest ratings used by Moody's for short-term
municipal notes and variable-rate demand obligations:
MIG-1/VMIG-1 -- Obligations bearing these designations are of the best
quality, enjoying strong protection from established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2 -- Obligations bearing these designations are of high
quality, with ample margins of protection although not so large as in the
preceding group.
The following summarizes the two highest ratings used by S&P for short-term
municipal notes:
SP-1 -- Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics are
given a "plus" (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest.
The three highest rating categories of D&P for short-term debt, each of which
denotes that the securities are investment grade, are D-1, D-2, and D-3. D&P
employs three designations, D-1+, D-1 and D-1-, within the highest rating
category. D-1+ indicates highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of LifeGoal Funds, is judged to be "outstanding, and safety is just
below risk-free U.S. Treasury short-term obligations." D-1 indicates very high
certainty of timely payment. Liquidity factors are excellent and supported by
good fundamental protection factors. Risk factors are considered to be minor.
D-1 indicates high certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2 indicates good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small. D-3 indicates satisfactory liquidity and other protection factors which
qualify the issue as investment grade. Risk factors are larger and subject to
more variation. Nevertheless, timely payment is expected.
The following summarizes the three highest rating categories used by Fitch for
short-term obligations, each of which denotes that the securities are investment
grade:
A-3
<PAGE>
F-1+ securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 securities possess very strong credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in degree
than issues rated F-1+.
F-2 securities possess good credit quality. Issues carrying this rating
have a satisfactory degree of assurance for timely payment, but the margin
of safety is not as great as for issues assigned the F-1+ and F-1 ratings.
Commercial paper rated A-1 by S&P indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted A-1+. Capacity for timely payment on
commercial paper rated A-2 is satisfactory, but the relative degree of safety is
not as high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated Prime-1 (or related supporting institutions) are considered to
have a superior capacity for repayment of senior short-term promissory
obligations. Issuers rated Prime-2 (or related supporting institutions) are
considered to have a strong capacity for repayment of senior short-term
promissory obligations. This will normally be evidenced by many of the
characteristics of issuers rated Prime-1, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
For commercial paper, D&P uses the short-term debt ratings described above.
For commercial paper, Fitch uses the short-term debt ratings described above.
Thomson BankWatch, Inc. ("BankWatch") ratings are based upon a qualitative and
quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries. BankWatch ratings do not
constitute a recommendation to buy or sell securities of any of these companies.
Further, BankWatch does not suggest specific investment criteria for individual
clients.
BankWatch long-term ratings apply to specific issues of long-term debt and
preferred stock. The long-term ratings specifically assess the likelihood of
untimely payment of principal or interest over the term to maturity of the rated
instrument. The following are the four investment grade ratings used by
BankWatch for long-term debt:
AAA - The highest category; indicates ability to repay principal and
interest on a timely basis is extremely high.
AA - The second highest category; indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk
versus issues rated in the highest category.
A - The third highest category; indicates the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with
higher ratings.
A-4
<PAGE>
BBB - The lowest investment grade category; indicates an acceptable
capacity to repay principal and interest. Issues rated "BBB" are, however,
more vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
The BankWatch short-term ratings apply to commercial paper, other senior
short-term obligations and deposit obligations of the entities to which the
rating has been assigned. The BankWatch short-term ratings specifically assess
the likelihood of an untimely payment of principal or interest.
TBW-1 The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
TBW-3 The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external)
than obligations with higher ratings, capacity to service principal
and interest in a timely fashion is considered adequate.
TBW-4 The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
The following summarizes the four highest long-term debt ratings used by IBCA
Limited and its affiliate, IBCA Inc. (collectively, "IBCA"):
AAA - Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly.
AA - Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions
may increase investment risk albeit not very significantly.
A - Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may
lead to increased investment risk.
BBB - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest
is adequate, although adverse changes in business, economic or financial
conditions are more likely to lead to increased investment risk than for
obligations in other categories.
A plus or minus sign may be appended to a rating below AAA to denote relative
status within major rating categories.
The following summarizes the three highest short-term debt ratings used by IBCA:
A-5
<PAGE>
A-1+ Where issues possess a particularly strong credit feature.
A-1 Obligations supported by the highest capacity for timely repayment.
A-2 Obligations supported by a good capacity for timely repayment.
A-6
<PAGE>
