As filed with the Securities and Exchange Commission
on February 12, 1999
Registration No. 333-40265; 811-08481
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Post-Effective Amendment No. 1 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 2 [X]
(Check appropriate box or boxes)
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NATIONS ANNUITY TRUST
(Exact Name of Registrant as specified in Charter)
111 Center Street
Little Rock, Arkansas 72201
(Address of Principal Executive Offices, including Zip Code)
--------------------------
Registrant's Telephone Number, including Area Code: (800) 321-7854
Richard H. Blank, Jr.
c/o Stephens Inc.
111 Center Street
Little Rock, Arkansas 72201
(Name and Address of Agent for Service)
With copies to:
Robert M. Kurucza, Esq. Carl Frischling, Esq.
Marco E. Adelfio, Esq. Kramer, Levin, Naftalis & Frankel
Morrison & Foerster LLP 919 3rd Avenue
2000 Pennsylvania Ave., N.W. New York, New York 10022
Suite 5500
Washington, D.C. 20006
It is proposed that this filing will become effective (check appropriate box):
<TABLE>
<CAPTION>
<S> <C>
|_| Immediately upon filing pursuant to Rule 485(b); or |_| on (date) pursuant to Rule 485(b), or
|X| 60 days after filing pursuant to Rule 485(a), or |_| on (date) pursuant to Rule 485(a)(1)
|_| 75 days after filing pursuant to paragraph (a)(2) |_| on (date) pursuant to paragraph (a)(2) of Rule 485
</TABLE>
<PAGE>
EXPLANATORY NOTE
This Post-Effective Amendment No. 1 to the Registration Statement of
Nations Annuity Trust (the "Trust") is being provided to comply with the new
filing requirements on Form N-1A.
<PAGE>
[outside front cover]
(logo)
Nations Annuity Trust
Prospectus
May 1, 1999
Equity Portfolios
Nations Value Portfolio
Nations International Growth Portfolio
Nations Disciplined Equity Portfolio
Nations Marsico Focused Equities Portfolio
Nations Marsico Growth & Income Portfolio
Managed Index Portfolios
Nations Managed Index Portfolio
Nations Managed SmallCap Index Portfolio
Balanced Portfolio
Nations Balanced Assets Portfolio
The Securities and Exchange Commission has not reviewed
any of these portfolios for their investment merit, and
does not guarantee that the information in this
prospectus is accurate or complete. It's a criminal
offense to say otherwise about any mutual fund
prospectus.
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NOT FDIC - INSURED May lose value No bank guarantee
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NF-96698-5/99
Page 1
<PAGE>
[pages 2 & 3 - introductory spread]
About this prospectus
Terms used in this prospectus
Some of the terms we've used in this prospectus may be new
to you. You'll find brief definitions of the words that
appear in italics in Terms used in this prospectus, which
begins on page o.
This prospectus tells you about the eight Nations Annuity
Trust portfolios. It's designed to help you choose
investments for your variable annuity contract or variable
life insurance policy.
You'll find a discussion of each portfolio's investments,
strategies and risks in the portfolio descriptions that
start on page 4.
All of the portfolios, except Nations Balanced Assets
Portfolio, focus on long-term growth by investing primarily
in equity securities. Equities have the potential to earn
higher returns than other kinds of investments, but there's
also the risk that you'll lose money, or you may not earn
as much as you expect.
This makes these portfolios best suited for longer-term
investment goals, like retirement, and as part of a
balanced portfolio. They may also help protect against a
loss of buying power that inflation can create over time.
The portfolios may not be suitable for people who are
uncomfortable with the risks associated with equity
securities, who have short-term investment goals, or who
are looking for a regular stream of income. The Balanced
Portfolio invests in a mix of equity, fixed income and
money market securities
If you have any questions about the portfolios, please call
us at 1-800-765-2668 or contact your investment
representative. You'll find more about how your variable
annuity contract or variable life insurance policy works in
the accompanying prospectus.
Page 2
<PAGE>
[pages 2 & 3 - introductory spread]
What's inside
About the portfolios
NationsBanc Advisors, Inc. (NBAI) is the investment adviser
to all of the portfolios. NBAI and Nations Annuity Trust
have engaged investment sub-advisers to provide day-to-day
portfolio management for the portfolios. You'll find more
about NBAI and the sub-advisers on page o.
The Equity Portfolios range from broadly diversified to
more specialized portfolios that invest primarily in equity
securities of companies in the U.S. or in different
countries around the world.
The Managed Index Portfolios are designed to match the
characteristics of a specific market index like the
Standard & Poor's 500 Composite Stock Price Index (S&P
500).
The Balanced Portfolio invests in a mix of equity, fixed
income and money market securities
About your investment
Equity Portfolios
Nations Value Portfolio.........................00
Sub-adviser: TradeStreet Investment Associates,
Inc.
Nations International Growth Portfolio..........00
Sub-adviser: Gartmore Global Partners
Nations Disciplined Equity Portfolio............00
Sub-adviser: TradeStreet Investment Associates,
Inc.
Nations Marsico Focused Equities Portfolio......00
Sub-adviser: Marsico Capital Management, LLC
Nations Marsico Growth & Income Portfolio.......00
Sub-adviser: Marsico Capital Management, LLC
Managed Index Portfolios
Nations Managed Index Portfolio.................00
Sub-adviser: TradeStreet Investment Associates,
Inc.
Nations Managed SmallCap Index Portfolio........00
Sub-adviser: TradeStreet Investment Associates,
Inc.
Balanced Portfolio
Nations Balanced Assets Portfolio...............00
Sub-adviser: TradeStreet Investment Associates,
Inc.
Other things to consider........................00
How the portfolios are managed..................00
Information for investors.......................00
Financial highlights............................00
Terms used in this prospectus...................00
Where to find more information..................00
Page 3
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[page 4 and continuing on following pages]
Portfolio profiles
Nations Value Portfolio
Investment objective
This portfolio seeks growth of capital by investing in
companies that are believed to be undervalued.
About the sub-adviser
TradeStreet Investment Associates, Inc. (TradeStreet) is
this portfolio's sub-adviser. TradeStreet's Value
Management Team makes the day-to-day investment decisions
for the portfolio. You'll find more about TradeStreet on
page o.
Principal investment strategies
The portfolio normally invests at least 65% of its assets
in common stocks of U.S. companies. It generally invests in
companies in a broad range of industries with market
capitalizations of at least $1 billion and daily trading
volumes of at least $3 million. The portfolio also may
invest up to 10% of its assets in other kinds of
securities, which are described in its Statement of
Additional Information.
What is value investing?
Value investing means looking for "undervalued"
companies--quality companies that may be out of favor and
selling at a "bargain price," but that have good potential
to increase in value.
The management team uses fundamental analysis to help
decide whether the stock price of a company may be lower
than the company's true value, and then looks for things
that could trigger a rise in price, like a new product
line, new pricing or a change in management. This trigger
is often called a "catalyst."
The management team uses fundamental analysis to look for
stocks of companies that it believes are undervalued. When
selecting investments, the management team looks at:
o the quality of the company
o the company's projected earnings and dividends
o the stock's price-to-earnings (P/E) ratio relative to
other stocks in the same industry or economic sector. The
team believes that companies with lower price-to-earnings
ratios are more likely to provide better opportunities
for capital appreciation
o the stock's potential to provide total return
o the value of the stock relative to the overall stock
market
The team also looks for a "catalyst" for improved earnings.
This could be a new product, new management or a new sales
channel, among other things.
The team tries to provide above-average returns while
trying to avoid above-average risks.
The management team may use various strategies to decide
the amount of capital gains distributed to shareholders.
For example, the team:
o may limit the number of buy and sell transactions it
makes
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o will try to sell shares that have the lowest tax burden
to the shareholder
o may offset capital gains by selling securities to realize
a capital loss
While the portfolio tries to reduce its capital gain
distributions, it will not be able to completely avoid
making taxable distributions. The effectiveness of these
strategies may be reduced or eliminated by changes in tax
laws and regulations, or by court decisions.
Things you should know about this portfolio Nations Value
Portfolio generally is affected by the following risks:
o investment strategy risk - The management team chooses
stocks that it believes are undervalued, with the
expectation that they will rise in value. There is a risk
that the value of these investments will fall or will not
rise as high as the team expects.
o stock market risk - The value of the stocks the portfolio
holds, like the stock market in general, can rise or fall
over short as well as long periods.
You'll find more about other risks of investing in this
portfolio on page o.
A look at the portfolio's performance
Looking at past performance can give you an idea of a
portfolio's volatility from year to year and its average
returns over time. Performance will vary based on many
factors, including market conditions, the composition of
the portfolio's holdings and the portfolio's expenses. A
portfolio's past performance is no guarantee of how it will
perform in the future.
Average annual total return
as of December 31, 1998
Since inception
1 year 5 years 10 years (o,o, 19o)
Nations Value Portfolio o.oo% o.oo% o.oo% o.oo%
S&P 500 o.oo% o.oo% o.oo% o.oo%
The S&P 500 (Standard & Poor's 500 Composite Stock Price
Index) is an index of 500 common stocks chosen by Standard
& Poor's on a statistical basis.
Page 5
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Nations International Growth Portfolio
Investment objective
This portfolio seeks long-term capital growth by investing
primarily in equity securities of companies domiciled in
countries outside the United States and listed on major
stock exchanges primarily in Europe and the Pacific Basin.
About the sub-adviser
Gartmore Global Partners (Gartmore) is this portfolio's
sub-adviser. Brian O'Neill, the principal senior investment
manager of the Gartmore Global Portfolio Team, makes the
day-to-day investment decisions for the portfolio. You'll
find more about Gartmore on page o.
Principal investment strategies
The portfolio normally invests at least 65% of its assets
in foreign companies of any size listed on major exchanges
in Europe and the Pacific Basin. These securities include
common stocks, preferred stocks and convertible securities,
such as warrants, rights and convertible debt.
The portfolio may invest up to 35% of its assets in
securities of issuers located in developing countries in
the Asia-Pacific region, Africa, Latin America and Eastern
Europe. The portfolio also may invest up to 10% of its
assets in other kinds of securities, which are described in
its Statement of Additional Information.
Why invest internationally?
Today, more than half of the world's available investment
opportunities are beyond U.S. borders. Investing
internationally lets you diversify your portfolio in
markets around the world.
Investing internationally can also reduce the risks
associated with a portfolio of purely domestic investments,
because foreign economies can have different market cycles,
and are affected by different factors than the U.S.
economy.
Investing internationally involves special risks not
associated with investing in the U.S. stock market, which
you need to be aware of before you invest.
The portfolio will generally hold 50 to 80 securities
invested in approximately 10 industry sectors within 15 to
20 stock markets.
The portfolio manager uses a "bottom-up" approach to
selecting securities, looking for companies with:
o high quality and sustainable earnings
o high growth potential over a two-year investment horizon
o quality management teams
o the ability to finance growth internally
o strong financial results
The manager follows strict guidelines for selling
securities. Stocks are sold if:
o their price target has changed
o a fundamental change has affected the company's prospects
o the manager changes the portfolio's country allocation
o the manager changes allocations to individual countries
based on his review of stock markets and economies
Throughout the investment process, the manager balances the
portfolio's emphasis on growth companies with a sensitivity
to
Page 6
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securities' prices.
Things you should know about this portfolio
Nations International Growth Portfolio generally is
affected by the following risks:
o foreign investment risk - Foreign investments may be
riskier than U.S. investments because of political and
economic conditions, changes in currency exchange rates,
foreign controls on investment, inability to sell
securities and lack of financial information. Withholding
taxes may apply to some foreign investments.
o investment strategy risk - The manager chooses stocks he
believes have the potential for high growth. There is a
risk that the value of these investments will fall or
will not rise as high as the manager expects.
o stock market risk - The value of the stocks the portfolio
holds, like the stock market in general, can rise or fall
over short as well as long periods.
You'll find more about other risks of investing in this
portfolio on page o.
A look at the portfolio's performance
Looking at past performance can give you an idea of a
portfolio's volatility from year to year and its average
returns over time. Performance will vary based on many
factors, including market conditions, the composition of
the portfolio's holdings and the portfolio's expenses. A
portfolio's past performance is no guarantee of how it will
perform in the future.
Average annual total return
as of December 31, 1998
Since inception
1 year 5 years 10 years (o,o, 19o)
Nations International
Growth Portfolio o.oo% o.oo% o.oo% o.oo%
MSCI EAFE Index o.oo% o.oo% o.oo% o.oo%
The MSCI EAFE (Morgan Stanley Capital International Europe,
Australasia and Far East) Index is an index of over 1,100
stocks from 21 developed markets in Europe, Australia, New
Zealand and Asia. The index reflects the relative size of
each market.
Page 7
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Nations Disciplined Equity Portfolio
Investment objective
This portfolio seeks growth of capital by investing in
companies that are expected to produce significant
increases in earnings per share.
About the sub-adviser
TradeStreet is this portfolio's sub-adviser. TradeStreet's
Structured Products Management Team makes the day-to-day
investment decisions for the portfolio. You'll find more
about TradeStreet on page o.
Principal investment strategies
The portfolio normally invests at least 65% of its assets
in common stocks of large and medium-sized U.S. companies.
These companies typically have a market capitalization of
$1 billion or more. The portfolio may invest up to 20% of
its assets in foreign securities. The portfolio may also
invest smaller percentages of its assets in other kinds of
securities, which are described in its Statement of
Additional Information.
Why use a computer modeling system?
The management team uses a computer modeling system to try
to achieve higher returns than a market index. The system
ranks stocks based on earnings momentum and valuation,
which helps the team choose stocks that are expected to
generate the highest return.
The management team's objective is to provide investors
with higher long-term capital appreciation than that of the
securities in the S&P 500, an index of 500 common stocks
chosen by S&P on a statistical basis. The team tries to
maintain a broadly diversified portfolio of securities that
ranks in the top quartile of its quantitative model for
earnings momentum and in the top third of the model on a
valuation basis.
When selecting investments, the team looks for attractively
priced securities with increasing earnings. It uses
quantitative analysis to:
o identify companies with improving profit potential and
increasing earnings
o identify companies with favorable P/E ratios
o identify companies with positive earnings trends. In
general, these companies tend to experience favorable
trends in their stock prices
o rank the attractiveness of equity securities based on a
"multi-factor" valuation model, a computer modeling
system that takes into account value measures like book
value, earnings yield and cash flow to measure a stock's
intrinsic worth compared with its market price. The model
also considers growth measures like price momentum and
the size and rate of earnings growth to compare a stock
with others in the same industry
The management team may use various strategies to try to
reduce
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the amount of capital gains it distributes to shareholders.
For example, the team:
o may limit the number of buy and sell transactions it
makes
o will try to sell shares that have the lowest tax burden
to the shareholder
o may offset capital gains by selling securities to realize
a capital loss
While the portfolio tries to reduce its capital gain
distributions, it will not be able to completely avoid
making taxable distributions. The effectiveness of these
strategies may be reduced or eliminated by changes in tax
laws and regulations, or by court decisions.
Things you should know about this portfolio
Nations Disciplined Equity Portfolio generally is affected
by the following risks:
o investment strategy risk - The team uses a quantitative
approach to select investments it believes are
attractively valued and whose earnings per share are
likely to increase. There is a risk that the value of
these investments will fall or will not rise as high as
the team expects.
o stock market risk - The value of the stocks the portfolio
holds, like the stock market in general, can rise or fall
over short as well as long periods.
o foreign investment risk - While the portfolio may only
invest up to 20% of its assets in foreign securities, it
can be affected by the risks of foreign investing.
Foreign investments may be riskier than U.S. investments
because of political and economic conditions, changes in
currency exchange rates, foreign controls on investment,
inability to sell securities and lack of financial
information. Withholding taxes may also apply to some
foreign investments.
You'll find more about other risks of investing in this
portfolio on page o.
A look at the portfolio's performance
Looking at past performance can give you an idea of a
portfolio's volatility from year to year and its average
returns over time. Performance will vary based on many
factors, including market conditions, the composition of
the portfolio's holdings and the portfolio's expenses. A
portfolio's past performance is no guarantee of how it will
perform in the future.
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Average annual total return
as of December 31, 1998
Since inception
1 year 5 years 10 years (o,o, 19o)
Nations Disciplined o.oo% o.oo% o.oo% o.oo%
Equity Portfolio
S&P 500 o.oo% o.oo% o.oo% o.oo%
The S&P 500 (Standard & Poor's 500 Composite Stock Price
Index) is an index of 500 common stocks chosen by Standard
& Poor's on a statistical basis.
Page 10
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Nations Marsico Focused Equities Portfolio
Investment objective
This portfolio seeks long-term growth of capital.
About the sub-adviser
Marsico Capital Management, LLC (Marsico Capital
Management) is this portfolio's sub-adviser. Thomas F.
Marsico makes the day-to-day investment decisions for the
portfolio. You'll find more about Marsico Capital
Management on page o.
Principal investment strategies
This portfolio normally invests at least 65% of its assets
in common stocks of large companies. The portfolio
generally holds a core position of 20 to 30 common stocks.
It may invest up to 25% of its assets in foreign
securities. The portfolio may also invest smaller
percentages of its assets in other kinds of securities,
which are described in its Statement of Additional
Information.
What is focused investing?
Focused investing means concentrating a portfolio's
investments on the stocks of a small number of companies
with earnings that have the potential to grow quickly.
Nations Marsico Focused Equities Portfolio focuses on
large, established and well-known U.S. companies.
Because a focused portfolio holds fewer investments than
other kinds of portfolios, it may earn higher returns when
one of its investments performs well. When one of its
investments performs poorly, however, a focused portfolio
can have greater price swings than more diversified
portfolios.
The manager looks for companies with earnings growth
potential that may not be recognized by other investors,
focusing on companies that have a combination of four
characteristics:
o change - The manager believes that extraordinary growth
comes from products, markets and technologies that are
experiencing change.
o franchise - The manager looks for companies with strong
brand franchises that can take advantage of a changing
global environment.
o global reach - The manager selects securities anywhere in
the world. The manager believes that by investing
globally, the portfolio can take advantage of other
investment opportunities. Not limiting itself to the
markets of a single country can also help the portfolio
to reduce risk.
o themes - The manager looks for companies that are moving
with the major social, economic and cultural shifts
taking place in the world.
Once the manager identifies an investment opportunity, he
uses a disciplined analytical process to assess its
potential as an investment. This process includes a
"top-down" analysis that takes into account economic
factors like interest rates, inflation, the regulatory
environment, the industry and global competition. The
process also includes a "bottom-up" analysis that considers
individual company characteristics like commitment to
research, market franchise and quality of management.
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Things you should know about this portfolio
Nations Marsico Focused Equities Portfolio generally is
affected by the following risks:
o investment strategy risk - This portfolio is considered
to be "non-diversified" because it may hold fewer
securities than other kinds of equity portfolios. This
increases the risk that its value could go down if one or
more of its investments performs poorly. The value of
this portfolio tends to have greater price swings than
the value of more diversified equity portfolios. The
portfolio may become a diversified portfolio by limiting
the investments in which more than 5% of its total assets
are invested. There also is a risk that the value of the
portfolio's investments will fall or will not rise as
high as the manager expects.
o stock market risk - The value of the stocks the portfolio
holds, like the stock market in general, can rise or fall
over short as well as long periods.
o foreign investment risk - Foreign investments may be
riskier than U.S. investments because of political and
economic conditions, changes in currency exchange rates,
foreign controls on investment, inability to sell
securities and lack of financial information. Withholding
taxes may apply to some foreign investments.
You'll find more about other risks of investing in this
portfolio on page o.
A look at the portfolio's performance
Looking at past performance can give you an idea of a
portfolio's volatility from year to year and its average
returns over time. Performance will vary based on many
factors, including market conditions, the composition of
the portfolio's holdings and the portfolio's expenses. A
portfolio's past performance is no guarantee of how it will
perform in the future.
Average annual total return
as of December 31, 1998
Since inception
1 year 5 years 10 years (o,o, 19o)
Nations Marsico
Focused Equities o.oo% o.oo% o.oo% o.oo%
Portfolio
S&P 500 o.oo% o.oo% o.oo% o.oo%
The S&P 500 (Standard & Poor's 500 Composite Stock Price
Index) is an index of 500 common stocks chosen by Standard
& Poor's on a statistical basis.
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Performance of other funds managed by Thomas Marsico
The table below shows you how a similar fund managed by
Thomas Marsico performed in the past.
The Janus Twenty Fund has investment objectives, policies
and strategies that are very similar to Nations Marsico
Focused Equities Portfolio. Mr. Marsico managed the Janus
Twenty Fund from January 31, 1988 through August 11, 1997.
He had full discretionary authority for selecting
investments for that fund, which had approximately $6
billion in net assets on August 11, 1997.
The table shows the returns for the Janus Twenty Fund
compared with the S&P 500 for the period ending August 7,
1997. The returns reflect deductions of fees and expenses,
except for any account level charges, and assume all
dividends and distributions have been reinvested.
Average annual total returns
as of August 7, 1997
Janus Twenty Fund S&P 500
(%) (%)
one year 48.21 46.41
three years 32.07 30.63
five years 20.02 20.98
during the period of
Mr. Marsico's management
(January 31, 1988 to
August 7, 1997) 23.38 18.20
This information is designed to demonstrate the
historical track record of Mr. Marsico. It does not
indicate how the portfolio has performed or will
perform in the future.
Performance will vary based on many factors, including
market conditions, the composition of a portfolio's
holdings and the portfolio's expenses.
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Nations Marsico Growth & Income Portfolio
Investment objective
This portfolio seeks long-term growth of capital with a
limited emphasis on income.
About the sub-adviser
Marsico Capital Management is this portfolio's sub-adviser.
Thomas F. Marsico makes the day-to-day investment decisions
for the portfolio. You'll find more about Marsico Capital
Management on page o.
Principal investment strategies
The portfolio normally invests up to 75% of its assets in
equity securities that have growth potential and at least
25% of its assets in equity and fixed income securities
that have income potential. The portfolio generally holds
35 to 50 securities and emphasizes large-capitalization
common stocks.
Worth noting
While this portfolio invests in a wide range of companies
and industries, it holds fewer securities than a typical
equity portfolio. That means it may earn higher returns
when one of its investments performs well. It also means,
however, that when one of its investments performs poorly,
the portfolio could have greater price swings than other
kinds of portfolios.
The manager may shift assets between growth and income
securities based on his analysis of market, financial and
economic conditions, and will emphasize growth securities
if he believes they will provide better returns than the
yields available or expected on income-producing
securities. If he believes it appropriate to do so, the
manager also may reduce investments in growth securities to
25% of the portfolio's assets.
Since income is a part of the portfolio's investment
objective, the manager may consider a company's anticipated
dividends when selecting equity securities. The manager may
also find opportunities for capital growth from fixed
income securities because of expected changes in interest
rates, credit rating, currency exchange rates or other
factors. The portfolio is not, however, designed to produce
a consistent level of income.
The portfolio may hold up to 25% of its assets in foreign
securities. The portfolio may also invest smaller
percentages of its assets in other kinds of securities,
which are described in its Statement of Additional
Information.
When selecting investments, the manager looks for companies
with earnings growth potential that other investors may not
recognize. The manager focuses on companies that have a
combination of four characteristics:
o change - The manager believes that extraordinary growth
comes from products, markets and technologies that are
experiencing change.
o franchise - The manager looks for companies with strong
brand franchises that can take advantage of a changing
global environment.
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o global reach - The manager selects securities anywhere in
the world. The manager believes that by investing
globally, the portfolio can take advantage of other
investment opportunities. Not limiting itself to the
markets of a single country can also help the portfolio
to reduce risk.
o themes - The manager looks for companies that are moving
with the major social, economic and cultural shifts
taking place in the world.
Once the manager identifies an investment opportunity, he
uses a disciplined analytical process to assess its
potential as an investment. This process includes a
"top-down" analysis that takes into account economic
factors like interest rates, inflation, the regulatory
environment, the industry and global competition. This
process also includes a "bottom-up" analysis that considers
individual company characteristics like commitment to
research, market franchise and quality of management.
Things you should know about this portfolio
Nations Marsico Growth & Income Portfolio generally is
affected by the following risks:
o investment strategy risk - The manager uses an investment
strategy that tries to identify equities with growth or
income potential. There is a risk that the value of these
investments will fall or will not rise as high as the
manager expects.
o stock market risk - The value of the stocks the portfolio
holds, like the stock market in general, can rise or fall
over short as well as long periods.
o interest rate risk - The prices of the portfolio's fixed
income securities will tend to fall when interest rates
rise and to rise when interest rates fall. In general,
fixed income securities with longer terms tend to fall
more in value when interest rates rise than fixed income
securities with shorter terms.
o credit risk - The portfolio could lose money if the
issuer of a fixed income security is unable to pay or
repay principal interest when it's due. Credit risk
generally applies to fixed income securities that are not
backed by the U.S. government. Fixed income securities
that are given the lowest investment grade rating are
more speculative in nature than securities with higher
ratings, they tend to be more sensitive to credit risk,
particularly during a downturn in the economy.
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<PAGE>
o foreign investment risk - Foreign investments may be
riskier than U.S. investments because of political and
economic conditions, changes in currency exchange rates,
foreign controls on investment, inability to sell
securities and lack of financial information. Withholding
taxes may apply to some foreign investments.
You'll find more about other risks of investing in this
portfolio on page o.
A look at the portfolio's performance
Looking at past performance can give you an idea of a
portfolio's volatility from year to year and its average
returns over time. Performance will vary based on many
factors, including market conditions, the composition of
the portfolio's holdings and the portfolio's expenses. A
portfolio's past performance is no guarantee of how it will
perform in the future.
Average annual total return
as of December 31, 1998
Since inception
1 year 5 years 10 years (o,o, 19o)
Nations Marsico
Growth & Income o.oo% o.oo% o.oo% o.oo%
Portfolio
S&P 500 o.oo% o.oo% o.oo% o.oo%
The S&P 500 (Standard & Poor's 500 Composite Stock Price
Index) is an index of 500 common stocks chosen by Standard
& Poor's on a statistical basis.
Performance of other funds managed by Thomas Marsico
The table below shows you how a similar fund managed by
Thomas Marsico performed in the past.
The Janus Growth and Income Fund has investment objectives,
policies and strategies that are very similar to Nations
Marsico Growth & Income Portfolio. Mr. Marsico managed the
Janus Growth and Income Fund from is inception on May 31,
1991 through August 11, 1997. He had full discretionary
authority for selecting investments for that fund, which
had approximately $1.7 billion in net assets on August 11,
1997.
The table shows the returns for the Janus Growth and Income
Fund compared with the S&P 500 for the period ending August
7, 1997. The returns reflect deductions of fees and
expenses,
Page 16
<PAGE>
except for any account level charges, and assume all
dividends and distributions have been reinvested.
Average annual total returns
as of August 7, 1997
Janus Growth
and Income
Fund S&P 500
(%) (%)
one year 47.77 46.41
three years 31.13 30.63
five years 21.16 20.98
during the period of
Mr. Marsico's management
(May 31, 1991 to
August 7, 1997) 21.19 18.59
This information is designed to demonstrate the
historical track record of Mr. Marsico. It does not
indicate how the portfolio has performed or will
perform in the future.
Performance will vary based on many factors, including
market conditions, the composition of a portfolio's
holdings and the portfolio's expenses.
Page 17
<PAGE>
Nations Managed Index Portfolio
Investment objective
This portfolio seeks, over the long term, to provide a
total return that (before fees and expenses) exceeds the
total return of the Standard & Poor's 500 Composite Stock
Price Index.
About the sub-adviser
TradeStreet is this portfolio's sub-adviser. TradeStreet's
Structured Products Management Team makes the day-to-day
investment decisions for the portfolio. You'll find more
about TradeStreet on page o.
Principal investment strategies
The portfolio normally invests at least 80% of its assets
in common stocks that are included in the S&P 500. The S&P
500 (Standard & Poor's 500 Composite Stock Price Index) is
an index of 500 common stocks chosen by Standard & Poor's
on a statistical basis.
What is managed index investing?
A managed index fund combines the benefits of traditional
index funds-- low costs and low portfolio turnover-- with
active management.
With a managed index fund, the portfolio manager starts
with the stocks of a specific market index-- in this case,
the S&P 500-- and then tries to achieve higher returns than
the index by emphasizing stocks in the index that are
expected to generate the highest returns, and not investing
in stocks that are expected to perform poorly.
There is no assurance that active management will result in
a higher return than the index.
The management team tries to build a portfolio that matches
the industry and risk characteristics of the S&P 500. The
team will vary the portfolio's holdings to try to provide
higher returns than the S&P 500 while reducing the risk of
underperforming the index over time. The portfolio usually
holds 300 to 400 of the stocks listed on the index. The
portfolio may also invest up to 10% of its assets in other
kinds of securities, which are described in its Statement
of Additional Information.
When selecting investments for the portfolio, the
management team starts with the stocks included in the S&P
500. The team uses quantitative analysis to:
o Rank the attractiveness of each stock based on a
"multi-factor" valuation model, which takes into account
value measures like book value, earnings yield and cash
flow to measure a stock's intrinsic worth versus its
market price. The model also considers growth measures
like price momentum and the size and rate of earnings
growth when comparing a stock with others in the same
industry.
o Measure the rate of earnings growth of each stock. Each
stock is assigned a ranking from 1 to 10 (best to worst).
The team will hold a slightly higher percentage of an
attractive stock than the index and hold a lower
percentage-- or none-- of a less attractive stock.
The portfolio may invest in financial futures traded on
U.S. exchanges.
The management team tries to control costs when it buys and
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<PAGE>
sells securities for the portfolio by using computerized
systems called "crossing networks" that allow it to try to
make trades at better prices and reduced commission rates.
The management team uses various strategies to try to
reduce the amount of capital gains distributed to
shareholders. For example, the team may:
o try to sell shares of a security with the highest cost
for tax purposes first, before selling other shares of
the same security. The management team will only use this
strategy when it is in the best interests of the
portfolio to do so and may sell other shares when
appropriate.
o may offset capital gains by selling securities to realize
a capital loss. This will reduce capital gains
distributions.
o will try to keep portfolio turnover low, which helps to
defer the realization of capital gains.
While the portfolio tries to reduce its capital gain
distributions, it will not be able to completely avoid
making taxable distributions. The effectiveness of these
strategies may be reduced or eliminated by changes in tax
laws and regulations, or by court decisions.
Things you should know about this portfolio
The Managed Index Portfolio generally is affected by the
following risks:
o investment strategy risk - The team chooses stocks that
it believes have the potential for higher growth than the
S&P 500. There is a risk that the value of these
investments will fall or will not rise as high as the
team expects.
o stock market risk - The value of the stocks the portfolio
holds, like the stock market in general, can rise or fall
over short as well as long periods.
o futures risk - This portfolio may use futures contracts
periodically to manage liquidity. There is always a risk
that this technique could reduce returns, increase costs
or increase the portfolio's volatility.
You'll find more about other risks of investing in this
portfolio on page o.
A look at the portfolio's performance
Looking at past performance can give you an idea of a
portfolio's volatility from year to year and its average
returns
Page 19
<PAGE>
over time. Performance will vary based on many factors,
including market conditions, the composition of the
portfolio's holdings and the portfolio's expenses. A
portfolio's past performance is no guarantee of how it will
perform in the future.
Average annual total return
as of December 31, 1998
Since inception
1 year 5 years 10 years (o,o, 19o)
Nations Managed Index o.oo% o.oo% o.oo% o.oo%
Portfolio
S&P 500 o.oo% o.oo% o.oo% o.oo%
The S&P 500 (Standard & Poor's 500 Composite Stock Price
Index) is an index of 500 common stocks chosen by Standard
& Poor's on a statistical basis.
Performance of other index funds managed by TradeStreet
The table below shows you how a similar index fund and a
composite of accounts managed by TradeStreet performed in
the past.
Nations Managed Index Fund and Enhanced S&P 500 Index
Composite (the composite) have investment objectives,
policies and strategies that are similar to Nations Managed
Index Portfolio.
The table shows the returns for Nations Managed Index Fund
and the composite compared with the S&P 500 and the Lipper
S&P 500 Index Funds Average for the periods ending December
31, 1998. The Lipper S&P 500 Index Funds Average measures
the average performance of mutual funds with similar
objectives monitored by Lipper Analytical Services, Inc.
during the periods shown. The returns reflect deductions of
fees and expenses, except for any account level charges,
and assume all dividends and distributions have been
reinvested.
Average annual total returns
as of December 31, 1998
Lipper
Nations Enhanced S&P 500
Managed Index S&P 500 Index Funds
Fund Index Composite S&P 500 Index Average
(%) (%) (%) (%)
one year o.oo o.oo o.oo o.oo
three years - o.oo o.oo o.oo
five years - o.oo o.oo o.oo
since inception
(July 31, 1996) o.oo o.oo o.oo o.oo
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<PAGE>
Annual total returns
as of December 31, 1998
Lipper
Nations Enhanced S&P 500
Managed Index S&P 500 Index Funds
Fund Index Composite S&P 500 Index Average
Year (%) (%) (%) (%)
1998 o.oo o.oo o.oo o.oo
1997 33.46 33.42 33.23 32.61
1996 - 24.12 23.08 22.30
1995 - 37.84 37.45 36.82
1994 - 0.69 1.31 0.90
1993 - 10.52 9.99 9.52
1992 - 5.55 7.64 7.12
1991 - 30.86 30.56 29.65
1990 - -1.52 -3.15 -3.57
1989 - 34.28 31.55 30.58
This information is designed to demonstrate the historical track record of
TradeStreet. It does not indicate how the portfolio has performed or will
perform in the future.
Performance will vary based on many factors, including market conditions, the
composition of the portfolio's holdings and the portfolio's expenses.
The composite includes accounts and commingled funds
managed by TradeStreet. NationsBank's Investment Management
Division managed the composite before TradeStreet was
formed in 1995. The accounts and commingled funds do not
pay the same expenses that mutual funds must pay and are
not subject to the diversification rules, tax restrictions
and investment limits under the Investment Company Act of
1940 (1940 Act) or Subchapter M of the Internal Revenue
Code. Returns could have been lower if the composite had
been subject to these expenses and regulations. The returns
of the composite do not reflect the returns of any
particular account of TradeStreet.
Page 21
<PAGE>
Nations Managed SmallCap Index Portfolio
Investment objective
This portfolio seeks, over the long term, to provide a
total return that (before fees and expenses) exceeds the
total return of the Standard & Poor's SmallCap Index (S&P
600).
About the sub-adviser
TradeStreet is this portfolio's sub-adviser. TradeStreet's
Structured Products Management Team makes the day-to-day
investment decisions for the portfolio. You'll find more
about TradeStreet on page o.
Principal investment strategies
The portfolio normally invests at least 80% of its assets
in common stocks that are included in the S&P 600. The S&P
600 is designed to be a benchmark of the performance of
small capitalization stocks. It includes 600 U.S. stocks
chosen by S&P based on market size, liquidity and industry
group.
What is managed index investing?
A managed index fund combines the benefits of traditional
index funds-- low costs and low portfolio turnover-- with
active management.
With a managed index fund, the portfolio manager starts
with the stocks of a specific market index-- in this case,
the S&P 600-- and then tries to achieve higher returns than
the index by emphasizing stocks in the index that are
expected to generate the highest returns, and not investing
in stocks that are expected to perform poorly.
There is no assurance that active management will result in
a higher return than the index. Since this portfolio
invests in smaller companies, there are special risks that
you need to be aware of before you invest.
The management team tries to build a portfolio that matches
the industry and risk characteristics of the S&P 600. The
team may vary the portfolio's holdings to try to provide
higher returns than the S&P 600 while reducing the risk of
underperforming the index over time. The portfolio usually
holds 400 to 500 of the stocks listed on the index. The
portfolio may also invest up to 10% of its assets in other
kinds of securities, which are described in its Statement
of Additional Information.
When selecting investments for the portfolio, the
management team starts with the stocks included in the S&P
600. It uses quantitative analysis to:
o Rank the attractiveness of each stock based on a
"multi-factor" valuation model, which takes into account
value measures like book value, earnings yield and cash
flow to measure a stock's intrinsic worth versus its
market price. The model also considers momentum measures
like price momentum and the size and rate of earnings
growth to compare a stock with others in the same
industry.
o Measure the rate of earnings growth of each stock. Each
stock is assigned a ranking from 1 to 10 (best to worst).
The team will hold a slightly higher percentage of an
attractive stock than the index and hold a lower
percentage-- or none-- of a less attractive stock.
The portfolio may invest in financial futures traded on
U.S. exchanges.
The management team tries to control costs when it buys and
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<PAGE>
sells securities for the portfolio by using computerized
systems called "crossing networks" that allow it to try to
make trades at better prices and reduced commission rates.
The management team uses various strategies to try to
reduce the amount of capital gains distributed to
shareholders. For example, the team may:
o try to sell shares of a security with the highest cost
for tax purposes first, before selling other shares of
the same security. The management team will only use this
strategy when it is in the best interests of the
portfolio to do so and may sell other shares when
appropriate
o may offset capital gains by selling securities to realize
a capital loss. This will reduce capital gains
distributions
o will try to keep portfolio turnover low, which helps to
defer the realization of capital gains
While the portfolio tries to reduce its capital gain
distributions, it will not be able to completely avoid
making taxable distributions. The effectiveness of these
strategies may be reduced or eliminated by changes in tax
laws and regulations, or by court decisions.
Things you should know about this portfolio
Nations Managed SmallCap Index Portfolio generally is
affected by the following risks:
o investment strategy risk - The team chooses stocks that
it believes have the potential for higher growth than the
S&P 600. There is a risk that the value of these
investments will fall or will not rise as high as the
team expects. Smaller companies also tend to have greater
price swings than stocks of larger companies for many
reasons, for example, because they trade less frequently
and in lower volumes.
o stock market risk - The value of the stocks the portfolio
holds, like the stock market in general, can rise or fall
over short as well as long periods.
o futures risk - This portfolio may use futures contracts
to manage liquidity. There is always a risk that this
technique could reduce returns, increase costs or
increase the portfolio's volatility.
You'll find more about other risks of investing in this
portfolio on page o.
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<PAGE>
A look at the portfolio's performance
Looking at past performance can give you an idea of a
portfolio's volatility from year to year and its average
returns over time. Performance will vary based on many
factors, including market conditions, the composition of
the portfolio's holdings and the portfolio's expenses. A
portfolio's past performance is no guarantee of how it will
perform in the future.
Average annual total return
as of December 31, 1998
Since inception
1 year 5 years 10 years (o,o, 19o)
Nations Managed o.oo% o.oo% o.oo% o.oo%
SmallCap Index Portfolio
S&P 600 o.oo% o.oo% o.oo% o.oo%
The S&P 600 (Standard & Poor's SmallCap 600) Index is an
index of 600 U.S. stocks chosen by S&P based on market
size, liquidity and industry group. The S&P 600 is designed
to be a benchmark of the performance of small
capitalization stocks.
Performance of other index funds managed by TradeStreet
The table below shows you how a similar index fund and a
composite of accounts managed by TradeStreet performed in
the past.
Nations Managed SmallCap Index Fund and Enhanced Small Cap
Index Composite (the composite) have investment objectives,
policies and strategies that are similar to Nations Managed
SmallCap Index
Portfolio.
The table shows the returns for Nations Managed SmallCap
Index Fund and the composite compared with the S&P 600 for
the periods ending December 31, 1998. The returns reflect
deductions of fees and expenses, except for any account
level charges, and assume all dividends and distributions
have been reinvested.
Average annual total returns
as of December 31, 1998
Nations Enhanced
Managed Small Cap
SmallCap Index Index
Fund Composite S&P 600
(%) (%) (%)
one year o.oo o.oo o.oo
three years - o.oo o.oo
five years - o.oo o.oo
since inception
(October 15, 1996) o.oo o.oo o.oo
Page 24
<PAGE>
Annual total returns
as of December 31, 1998
Nations Enhanced
Managed Small Cap
SmallCap Index Index
Fund Composite S&P 600
Year (%) (%) (%)
1998 o.oo o.oo o.oo
1997 o.oo o.oo o.oo
1996 - o.oo o.oo
1995 - o.oo o.oo
1994 - o.oo o.oo
1993 - o.oo o.oo
1992 - o.oo o.oo
1991 - o.oo o.oo
1990 - o.oo o.oo
1989 - o.oo o.oo
This information is designed to demonstrate the historical
track record of TradeStreet. It does not indicate how the
portfolio has performed or will perform in the future.
Performance will vary based on many factors, including
market conditions, the composition of the portfolio's
holdings and the portfolio's expenses.
The composite includes accounts and commingled funds
managed by TradeStreet. NationsBank managed the composite
before TradeStreet was formed in 1995. The accounts and
commingled funds do not pay the same expenses that mutual
funds must pay and are not subject to the diversification
rules, tax restrictions and investment limits under the
1940 Act or Subchapter M of the Internal Revenue Code.
Returns could have been lower if the composite had been
subject to these expenses and regulations. The returns of
the composite do not reflect the returns of any particular
account of TradeStreet.
Page 25
<PAGE>
Nations Balanced Assets Portfolio
Investment objective
This portfolio seeks total return by investing in equity
and fixed income securities.
About the sub-adviser
TradeStreet is this portfolio's sub-adviser. TradeStreet's
Value Management Team makes the day-to-day investment
decisions for the portfolio. You'll find more about
TradeStreet on page o.
Principal investment strategies
This portfolio invests in a mix of equity, fixed income and
money market securities.
Equity securities the portfolio buys are principally common
stock of companies believed to be seasoned and financially
strong.
Fixed income securities, which normally make up at least
25% of the portfolio, are principally bonds, notes and
mortgage-backed and asset-backed securities issued by U.S.
companies and government entities.
What is asset allocation? Asset allocation is the process
of dividing a portfolio's investments into a mix of equity,
fixed income and money market securities.
Each of these "asset classes" has different risk and return
characteristics. Combining them in one portfolio can help
reduce risk and increase returns because at least one asset
class has the potential to be a stronger performer
regardless of market conditions.
Balanced portfolios like this one can take care of the
asset mix for you in a single investment.
Money market securities are principally cash equivalents.
The portfolio may also invest up to 10% of its assets in
other kinds of securities, which are described in its
Statement of Additional Information.
The management team uses asset allocation as its principal
investment strategy. The team allocates assets among the
three asset classes based on its assessment of the expected
risk and returns of each class. The team will evaluate:
o current economic and financial market conditions in the
U.S. and abroad
o current interest rate trends
o earnings and dividend prospects for common stocks
o the overall stability of financial market
The team may change the portfolio's asset allocation to try
to increase returns and reduce risk.
The team selects individual investments using the following
process:
o Within the equity portion of the portfolio, the team uses
fundamental research and valuation analysis.
o Within the fixed income portion of the portfolio, the
team selects securities rated investment grade at the
time of
Page 26
<PAGE>
investment. The team may choose unrated securities if it
believes they are of similar quality to rated securities at
the time of investment.
o Within the money market portion of the portfolio, the
team chooses high-quality securities primarily to provide
liquidity.
The management team may use various tax strategies to try
to reduce the amount of capital gains distributed to
shareholders. For example, the team:
o may limit the number of buy and sell transactions it
makes
o will try to sell shares that have the lowest tax burden
to the shareholder
o may offset capital gains by selling securities to realize
a capital loss
While the portfolio tries to reduce its capital gain
distributions, it will not be able to completely avoid
making taxable distributions. The effectiveness of these
strategies may be reduced or eliminated by changes in tax
laws and regulations, or by court decisions.
Things you should know about this portfolio
Nations Balanced Assets Portfolio generally is affected by
the following risks:
o investment strategy risk - The team uses an asset
allocation strategy to try to achieve the highest total
return. There is a risk that the mix of investments will
not produce the returns the team expects.
o stock market risk - The value of the stocks the portfolio
holds, like the stock market in general, can rise or fall
over short as well as long periods.
o interest rate risk - The prices of the portfolio's fixed
income securities will tend to fall when interest rates
rise. In general, fixed income securities with longer
terms tend to fall more in value when interest rates rise
than fixed income securities with shorter terms.
o credit risk - The portfolio could lose money if the
issuer of a fixed income security is unable to pay
interest or repay principal when it's due. Credit risk
generally applies to fixed income securities that are not
backed by the U.S. government. Fixed income securities
that are given the lowest investment grade rating are
more speculative in nature than securities with higher
ratings, they tend to be more sensitive to credit risk,
particularly during a downturn in the economy.
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<PAGE>
You'll find more about other risks of investing in this
portfolio on page o.
A look at the portfolio's performance
Looking at past performance can give you an idea of a
portfolio's volatility from year to year and its average
returns over time. Performance will vary based on many
factors, including market conditions, the composition of
the portfolio's holdings and the portfolio's expenses. A
portfolio's past performance is no guarantee of how it will
perform in the future.
Average annual total return
as of December 31, 1998
Since inception
1 year 5 years 10 years (o,o, 19o)
Nations Balanced o.oo% o.oo% o.oo% o.oo%
Assets Portfolio
S&P 500 o.oo% o.oo% o.oo% o.oo%
Lehman Aggregate
Bond Index o.oo% o.oo% o.oo% o.oo%
The S&P 500 (Standard & Poor's 500 Composite Stock Price
Index) is an index of 500 common stocks chosen by Standard
& Poor's on a statistical basis.
The Lehman Aggregate Bond Index is an index of fixed
income securities issued by the U.S. government and
. its agencies, and by corporations.
Page 28
<PAGE>
Other things to consider
You'll find specific information about each portfolio's
principal investments, strategies and risks in the
descriptions starting on page o. The following are some
other risks and things you should consider before you
choose investments for your annuity contract or life
insurance policy:
o general risk -Your investment in these portfolios is not
a bank deposit and is not insured or guaranteed by
NationsBank, N.A. (NationsBank), Bank of America National
Trust and Savings Association (Bank of America), the
Federal Deposit Insurance Corporation or any other
government agency. Your investment may lose money.
Affiliates of NationsBank and Bank of America are paid
for the services they provide to the portfolios.
o foreign investment risk - While all of the portfolios may
invest some of their assets in foreign securities, only
Nations International Growth Portfolio can invest more
than 25% of its assets in foreign securities.
Portfolios that invest in foreign securities may be
affected by changes in currency exchange rates and the
costs of converting currencies; foreign government
controls on foreign investment, repatriation of capital,
and currency and exchange; foreign taxes; inadequate
supervision and regulation of some foreign markets;
volatility from a lack of liquidity; different settlement
practices or delayed settlements in some markets;
difficulty getting complete or accurate information about
foreign companies; less strict accounting, auditing and
financial reporting standards than those in the U.S.;
political, economic or social instability; and difficulty
enforcing legal rights outside the U.S.
Securities issued by companies in developing or emerging
market countries, like those in Eastern Europe, the
Pacific Basin and the Far East, may be more sensitive to
the risks of foreign investing. In particular, these
countries may experience instability resulting from rapid
social, political and economic development. Many of these
countries are dependent on international trade, which
makes them sensitive to world
Page 29
<PAGE>
commodity prices and economic downturns in other
countries. Some emerging countries have a higher risk of
currency devaluation, and some countries may experience
long periods of high inflation or rapid changes in
inflation rates.
o Changing investment objectives and policies-The
investment objective and certain investment policies of
any portfolio can be changed without shareholder
approval. Other investment policies may be changed only
with shareholder approval.
o Holding other kinds of investments - The portfolios may
hold investments that aren't part of their principal
investment strategies. Please refer to the Statement of
Additional Information for more information.
o Investing defensively - A portfolio may temporarily hold
investments that are not part of its investment objective
or its principal investment strategies to try to protect
it against losses during a market or economic downturn or
because of political or other conditions. A portfolio may
not achieve its investment objective while it is
investing defensively.
o Portfolio turnover - A portfolio that replaces -- or
turns over-- more than 100% of its securities in a year
may have higher brokerage costs than a portfolio that is
trading less frequently. This may also result in larger
distributions of capital gains to shareholders. All of
the portfolios generally buy securities for capital
appreciation, investment income, or both and do not
engage in short-term trading. The annual portfolio
turnover rate for the Managed Index Portfolios is
expected to be no more than 25%.
o Preparing for the year 2000 - The year 2000 is an issue
for organizations, companies and entities around the
world that rely on computer systems to process
date-related information. Computer systems that cannot
read a four-digit year may not be able to calculate and
process information on or after January 1, 2000. All of
the portfolios' primary service providers have confirmed
that they have been working to make the necessary changes
to their systems, and that they expect them to be adapted
in time. There is no guarantee, however, that their
computer systems will ready by the year 2000. If their
computer systems are not ready in time, there could be a
negative effect on portfolio operations.
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<PAGE>
A portfolio's performance could also be affected if
securities it holds decrease in value because of year 2000
issues.
How the portfolios are managed
NationsBanc Advisors,
Inc.
One NationsBank Plaza
Charlotte, North Carolina
28255
Investment adviser
NationsBanc Advisors, Inc. is the investment adviser to
Nations Annuity Trust portfolios and to over 60 investment
company portfolios. Nations Annuity Trust is a series of
mutual funds that provides the underlying investments for
certain variable annuity contracts and variable life
insurance polices.
NBAI is a registered investment adviser. It's a
wholly-owned subsidiary of NationsBank, which is owned by
BankAmerica Corporation. Nations Annuity Trust pays NBAI an
annual fee for its investment advisory services. The fee is
calculated daily on the average net assets of each
portfolio and is paid monthly. NBAI uses part of this money
to pay investment sub-advisers for the services they
provide.
To help keep costs low, NBAI has voluntarily decided to
currently waive or reimburse some expenses. There is no
assurance that NBAI will continue to waive or reimburse
these expenses.
The following chart shows the maximum advisory fees NBAI
can receive, along with the actual advisory fees it
received during the portfolios' last fiscal period [March
27, 1998] to December 31, 1998), after waivers and
reimbursements:
<TABLE>
<CAPTION>
Annual investment advisory fee,
as a % of average daily net
assets
Maximum Actual fee paid
advisory fee last fiscal year
<S> <C> <C>
Nations Value Portfolio o.oo o.oo
Nations International Growth Portfolio o.oo o.oo
Nations Disciplined Equity Portfolio o.oo o.oo
Nations Marsico Focused Equities Portfolio o.oo o.oo
Nations Marsico Growth & Income Portfolio o.oo o.oo
Nations Managed Index Portfolio o.oo o.oo
Nations Managed SmallCap Index Portfolio o.oo o.oo
Nations Balanced Assets Portfolio o.oo o.oo
</TABLE>
Page 31
<PAGE>
Investment sub-advisers
NBAI and Nations Annuity Trust have engaged investment
sub-advisers to provide day-to-day portfolio management for
the portfolios. These sub-advisers function under the
supervision of the Board of Trustees of Nations Annuity
Trust and the NBAI Investment Policy Committee.
TradeStreet
Investment
Associates, Inc.
One NationsBank
Plaza
Charlotte, North
Carolina
28255
TradeStreet Investment Associates, Inc.
TradeStreet is an investment management firm serving the
institutional market. Its management expertise spans all
major domestic asset classes. TradeStreet is a registered
investment adviser and a wholly-owned subsidiary of
NationsBank.
Currently managing more than $o billion, TradeStreet's
Product Management Group averages 13 years of investment
expertise. Their team management process uses a team
approach. The teams have access to the latest analytic
technology and expertise. TradeStreet services more than
140 institutional clients and is sub-adviser to [48] mutual
funds.
TradeStreet is the investment sub-adviser to:
o Nations Value Portfolio
o Nations Disciplined Equity Portfolio
o Nations Managed Index Portfolio
o Nations Managed SmallCap Index Portfolio
o Nations Balanced Assets Portfolio
TradeStreet's Value Management Team manages Nations Value
Portfolio and Nations Balanced Assets Portfolio.
TradeStreet's Structured Products Management Team manages
Nations Disciplined Equity Portfolio, Nations Managed Index
Portfolio and Nations SmallCap Index Portfolio.
Gartmore Global
Partners
One NationsBank Plaza
Charlotte, North
Carolina
28255
Gartmore Global Partners
Gartmore is a global asset manager dedicated to serving the
needs of U.S. based investors. Gartmore was formed in 1995
as a registered investment adviser and manages more than $o
billion in assets.
Gartmore is a joint venture structured as a 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
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<PAGE>
UK holding company for a leading UK-based international
fund management group of companies.
Gartmore follows a growth philosophy, which is reflected in
its disciplined active management of market allocation and
stock selection.
Gartmore is the investment sub-adviser to:
o Nations International Growth Portfolio
This portfolio is managed by Brian O'Neill, the principal
senior investment manager of the Gartmore Global Portfolio
Team at Gartmore Global Partners. He has managed the
portfolio since its inception. Before joining Gartmore in
1981, Mr. O'Neill was a Plaza fund manager in global
equities at Antony Gibbs & Sons and an investment analyst
at Royal Insurance. He graduated from Glasgow University in
1969 with a MA Honors degree in Political Economy.
Marsico Capital
Management, LLC
1200 17th Street
Suite 1300
Denver, CO
80202
Marsico Capital Management, LLC
Marsico Capital Management, LLC is a full service
investment advisory firm founded by Thomas F. Marsico in
September 1997. Marsico is focused exclusively on the
interests of its investors. The firm specializes in large
capitalization stocks and currently has $o billion in
assets under management.
Marsico Capital is the investment sub-adviser to:
o Nations Marsico Focused Equities Portfolio
o Nations Marsico Growth & Income Portfolio
These portfolios are managed by Thomas F. Marsico, Chairman
and Chief Executive Officer of Marsico Capital Management.
He manages the investment programs for the portfolios and
is primarily responsible for their day-to-day management.
Before forming the company, Mr. Marsico was an executive
vice president and portfolio manager at Janus Capital
Corporation. He has 20 years of experience as a securities
analyst and portfolio manager.
Stephens Inc.
111 Center Street
Little Rock,
Arkansas
72201
Other service providers
The portfolios are co-administered and sponsored by
Stephens Inc., a registered broker/dealer. Stephens is also
the exclusive distributor of the portfolios' shares.
Stephens may pay service fees to investment representatives
who assist investors in buying shares of the portfolios.
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NBAI is also co-administrator of the portfolios, and
assists in overseeing the administrative operations of the
portfolios. NBAI and Stephens receive a combined monthly
fee from the portfolios for their services, based on the
indicated annual rate of the average daily net assets of
the portfolios as well as certain out of pocket expenses as
follows:
Fixed Income Portfolios 0.22%
International Portfolios 0.22%
Domestic Equity Portfolios 0.23%
For more information about service fees, please see
Shareholder servicing and distribution fees.
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About your investment
Information for investors
Nations Annuity Trust portfolios are available only to
owners of variable annuity contracts or variable life
insurance policies. Please refer to the prospectus that
describes your annuity contract or life insurance policy
for information about how to buy, sell and transfer your
investment among shares of the portfolios.
How share prices are calculated
The price of each portfolio's shares -- called its net
asset value per share -- is used for all transactions
involving buying, selling, transferring or reinvesting
shares.
Net asset value per share is calculated using a two step
process. First, the portfolio's net asset value is
calculated by determining the value of the portfolio's
assets and then subtracting its liabilities. Next, this
number is divided by the number of shares that investors
are holding.
This calculation is carried out at the close of regular
trading on the New York Stock Exchange (typically 4:00 p.m.
Eastern time), every day that the exchange is open. We call
this a business day.
Valuing securities in a portfolio
The value of a portfolio's assets is based on the total
market value of all of the securities it holds. The prices
reported on stock exchanges and securities markets around
the world are usually used to value securities in a
portfolio. If prices are not readily available, the price
of a security will be based on its fair market value. The
procedures followed in making this calculation have been
approved by Nations Annuity Trust's Board of Trustees.
Amortized cost, which approximates market value, is the
method used to value short-term investments maturing in 60
days or less.
The power of
compounding
Reinvesting your
dividends buys you
more shares of a
portfolio--
Distributions
The portfolios distribute dividends from net investment
income once a year. They may also distribute any net
realized capital gains, including short-term capital gains,
at least once a year.
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<PAGE>
which lets you take
advantage of the potential
for compound growth.
Putting the money you
earn back into your
investment means it, in
turn, may earn even more
money. Over time, the
power of compounding
may significantly increase
the value of your
investment.
Dividends are paid based on the number of shares the
portfolio holds on the day before the dividend is declared.
Shares are eligible to receive dividends up to and
including the day before they are sold.
Dividends are reinvested in additional shares of the same
portfolio, unless an investor has chosen to receive payment
in cash. All distributions of net realized capital gains
are paid in cash. Cash payments are made within five
business days after the end of the month or quarter in
which the distribution was made.
Each time a distribution is made, the net asset value per
share of the portfolio is reduced by the amount of the
distribution.
Shareholder servicing and distribution fees
The portfolios may pay a fee to banks, broker/dealers,
insurance companies and other investment representatives,
to help cover their costs for selling shares and providing
services to investors.
The fee -- called a shareholder servicing and/or
distribution fee -- is deducted monthly from the assets of
the portfolios. It is calculated daily at an annual rate of
up to 0.25% of the average net asset value of shares held
in variable annuity contracts or variable life insurance
policies owned by customers of investment representatives.
Over time, this fee will increase the cost of your
investment, and may cost you more than other kinds of sales
charges.
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<PAGE>
Financial highlights
The financial highlights table is designed to help you
understand how the portfolios have performed for the past
five years. Certain information reflects financial results
for a single portfolio share. The total investment return
line indicates how much an investment in the portfolio
would have earned, assuming all dividends and distributions
had been reinvested.
This information has been audited by PricewaterhouseCoopers
LLP. You'll find the auditor's report and Nations Annuity
Trust's financial statements in the Statement of Additional
Information. Please see the back cover to find out how you
can get a copy.
[financial highlights tables for each portfolio here]
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<PAGE>
Terms used in this prospectus
Asset-backed security - a debt security that gives you a
share in a pool of assets that is backed by loan paper,
accounts receivable or other assets, including mortgages,
generally issued by banks, credit card companies or other
lenders. Some securities may be issued or guaranteed by the
U.S. government or by any of its agencies, authorities or
instrumentalities. Asset-backed securities make periodic
payments, which may be interest or a combination of
interest and a portion of the principal of the underlying
assets.
Capital gain (capital loss) - the difference between the
purchase price of a security and its selling price. You
realize a capital gain (or loss) when you sell a security
for more (or less) than you paid for it.
Common stock - an equity security that represents part
ownership in a company. Common stock allows you to vote at
shareholder meetings and to share in the company's profits
by receiving dividends.
Convertible debt - a debt security that can be exchanged
for common stock (or another type of security) at a
specified rate and date.
Convertible security - a security that can be exchanged for
common stock (or another type of security) at a specified
rate and date. Convertible securities include convertible
debt, rights and warrants.
Debt security - when you invest in a debt security, you are
lending your money to a government or company (the issuer)
to help pay for their operations or major projects. The
issuer pays interest at a specified rate on a specified
date or dates, and repays the principal when the security
matures. Short-term debt securities include money market
instruments such as treasury bills. Long-term debt
securities include fixed income securities such as
government and corporate bonds, and mortgage-backed and
asset-backed securities.
Equity security - an investment that gives you part
ownership in a company. Equity securities (or "equities")
include common
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<PAGE>
and preferred stock, rights and warrants.
Fixed income security - an intermediate to long-term debt
security that matures in more than one year.
Foreign security - a debt or equity security issued by a
foreign government or corporation.
Fundamental analysis - an analysis of a company's balance
sheet, income statements and other company-specific
information to determine whether its stock is overvalued or
undervalued at the current market price.
Futures contract - a contract to buy or sell an asset or an
index of securities at a specified price on a specified
date. The price is set through a futures exchange.
Investment grade - a medium to high credit rating that's
given to a debt security based on the issuer's ability to
pay interest and repay principal on time. A debt security
that has not been rated, but is believed to be of
comparable quality, may also be considered investment
grade. Please see the Statement of Additional Information
for more information about credit ratings.
Lehman Aggregate Bond Index - an index of fixed income
securities issued by the U.S. government and its agencies,
and by corporations.
Liquidity - a measurement of how easily a security can be
bought or sold at a price that is close to its market
value.
Money market security - a short-term debt security that
matures in one year or less. Money market instruments
include U.S. Treasury obligations, U.S. government
obligations, certificates of deposit, bankers' acceptances,
commercial paper, repurchase agreements and municipal
securities.
Mortgage-backed security - a debt security that gives you a
share in (or is backed by) a pool of residential mortgages
issued by the U.S. government or by financial institutions.
The underlying mortgages may be guaranteed by the U.S.
government or one of its agencies, authorities or
instrumentalities. Mortgage-backed securities make monthly
payments, which are a combination of interest and a portion
of the principal of the underlying
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<PAGE>
mortgages.
MSCI EAFE Index - Morgan Stanley Capital International
Europe, Australasia and Far East Index, an index of over
1,100 stocks from 21 developed markets in Europe,
Australia, New Zealand and Asia. The index reflects the
relative size of
each market.
Municipal debt security - a debt security issued by state
or local governments or governmental authorities to pay for
public projects and services. General obligations are
backed by the issuer's full taxing and revenue-raising
powers. Revenue securities depend on the income earned by a
specific project or authority, like road or bridge tolls,
user fees for water or revenues from a utility. Interest
income is exempt from federal income taxes and is generally
exempt from state taxes if you live in the state that
issued the security. If you live in the municipality that
issued the security, interest income may also be exempt
from local taxes.
Preferred stock - an equity security that gives you part
ownership in a company. Preferred stock generally pays a
fixed annual dividend. If the company goes bankrupt,
preferred shareholders generally receive their share of the
company's remaining assets before common shareholders and
after bondholders and other creditors.
Price-to-earnings ratio (P/E ratio) - the current price of
a share divided by its actual or estimated earnings per
share. The P/E ratio is one measure of the value of a
company.
Quantitative analysis - an analysis of financial
information about a company or security, and
company-specific information, to identify securities that
have the potential for growth or are otherwise suitable for
a portfolio to buy.
Right - a temporary privilege allowing investors who
already own a common stock to buy additional shares
directly from the company at a specified price or formula.
S&P 500(1) - Standard & Poor's 500 Composite Stock Price
Index, an index of 500 common stocks chosen by S&P on a
statistical basis.
S&P 600(1)- Standard & Poor's SmallCap 600 Index, is
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<PAGE>
designed to be a benchmark of the performance of small
capitalization stocks. It includes 600 U.S. stocks chosen
by S&P based on market size, liquidity and industry group.
U.S. government obligation - a debt security issued
or guaranteed by the U.S. government or any of its
agencies, authorities or instrumentalities. Direct
obligations are issued by the U.S. Treasury.
Warrant - a certificate that gives you the right to buy
common shares at a specified price within a specified
period of time.
(1) S&P has not reviewed any stock included in the S&P 500
or S&P 600 for its investment merit. S&P determines and
calculates the indexes independently of the portfolios and
is not a sponsor or affiliate of the portfolios. S&P gives
no information and makes no statements about the
suitability of investing in the portfolios or the ability
of the indexes to track stock market performance. S&P makes
no guarantees about the indexes, any data included in them
and the suitability of the indexes or their data for any
purpose. "Standard and Poor's," "S+P 500" and "S+P 600" are
trademarks of the McGraw-Hill Companies, Inc.
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<PAGE>
[outside back cover]
(logo)
Nations Annuity Trust
Where to find more information
Nations Annuity Trust
portfolios are available only
to owners of variable annuity
contracts or variable life
insurance policies issued by
participating life insurance
companies, including
Hartford Life Insurance
Company.
Please refer to the
prospectus that describes
your annuity contract or life
insurance policy for
information about how to
buy, sell and transfer your
investment among shares of
the portfolios.
You'll find more information about Nations Annuity Trust
portfolios in the following documents:
Annual and semi-annual reports
The annual and semi-annual reports contain information
about portfolio investments and performance, the financial
statements and the auditor's reports. The annual report
also includes a discussion about the market conditions and
investment strategies that had a significant effect on each
portfolio's performance during the period the report
covers.
Statement of Additional Information (SAI)
The SAI contains additional information about the
portfolios and their policies. The SAI is legally part of
this prospectus (it's incorporated by reference). A copy
has been filed with the Securities and Exchange Commission.
You can obtain a free copy of these documents by contacting
Nations Annuity Trust:
By telephone: 1-800-765-2668
By mail:
Nations Annuity Trust
c/o Stephens Inc.
One NationsBank Plaza
33rd Floor
Charlotte, NC 28255
On the Internet: www.nationsbank.com/nationsfund
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<PAGE>
If you prefer, you can write or call the Securities and
Exchange Commission's (SEC's) Public Reference Room and ask
them to mail you copies of these documents. They'll charge
you a fee for this service. You can also download them from
the SEC's website or visit the Public Reference Section and
copy the documents while you're there.
Public Reference Section of the SEC
Washington, DC 20549-6009
1-800-SEC-0330
http://www.sec.gov
SEC file number 811-04305
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<PAGE>
NATIONS ANNUITY TRUST
Statement of Additional Information
Nations Balanced Assets Portfolio
Nations Disciplined Equity Portfolio
Nations International Growth Portfolio
Nations Managed Index Portfolio
Nations Managed SmallCap Index Portfolio
Nations Marsico Focused Equities Portfolio
Nations Marsico Growth & Income Portfolio
Nations Value Portfolio
May 1, 1999
This Statement of Additional Information ("SAI") provides supplementary
information pertaining to the shares representing interests in the above listed
eight investment portfolios (individually, a "Portfolio" and collectively, the
"Portfolios") of Nations Annuity Trust (the "Trust"). This SAI is not a
prospectus, and should be read only in conjunction with the current Prospectus
for the aforementioned Portfolios in which one is interested, dated May 1,
1999 ("Prospectus"). All terms used in this SAI that are defined in the
Prospectus will have the same meanings assigned in the Prospectus. Copies of the
Prospectus may be obtained by writing the Trust c/o Stephens Inc., One
NationsBank Plaza, 33rd Floor, Charlotte, North Carolina 28255, or by calling
the Trust at (800) 321-7854.
<PAGE>
TABLE OF CONTENTS
Page
NATIONS ANNUITY TRUST HISTORY ................................. 1
DESCRIPTION OF THE TRUST AND THE INVESTMENTS AND
RISKS OF ITS PORTFOLIOS........................................ 1
General................................................... 2
Investment Limitations.................................... 2
Permissible Portfolio Investments......................... 4
Asset-Backed Securities................................... 6
Commercial Instruments.................................... 9
Combined Transactions..................................... 10
Convertible Securities.................................... 10
Corporate Debt Securities................................. 11
Custodial Receipts........................................ 11
Currency Swaps............................................ 11
Delayed Delivery Transactions ............................ 12
Dollar Roll Transactions ................................. 12
Equity Swap Contracts .................................... 12
Foreign Currency Transactions ............................ 13
Futures, Options and Other Derivative
Instruments .......................................... 14
Risk Factors Associated with Futures and Options
Transactions ......................................... 20
Guaranteed Investment Contracts........................... 22
Interest Rate Transactions ............................... 23
Lower Rated Debt Securities............................... 23
Options on Currencies..................................... 25
Other Investment Companies................................ 25
Real Estate Investment Trusts............................. 25
Repurchase Agreements..................................... 25
Reverse Repurchase Agreements............................. 25
Securities Lending........................................ 26
Short Sales............................................... 26
Special Situations........................................ 26
Stripped Securities....................................... 26
U.S. and Foreign Bank Obligations......................... 27
U.S. Government Obligations............................... 28
Use of Segregated and Other Special Accounts.............. 28
Variable- and Floating-Rate Instruments .................. 29
Warrants.................................................. 29
When-Issued Purchases and Forward Commitments ........... 29
Portfolio Turnover........................................ 30
Investment Risks.......................................... 30
MANAGEMENT OF THE TRUST........................................ 32
Nations Funds Retirement Plan............................. 36
Nations Fund Deferred Compensation Plan................... 36
Shareholder and Trustee Liability......................... 37
INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY,
TRANSFER AGENCY AND SHAREHOLDER SERVICING
AGREEMENTS .................................................... 38
Investment Adviser and Sub-Advisors....................... 38
i
<PAGE>
Administrator and Co-Administrator........................ 41
Custodian and Transfer Agent.............................. 42
Shareholder Servicing and Distribution Plan............... 42
Expenses.................................................. 42
Distributor............................................... 43
Independent Accountant and Reports........................ 44
Counsel................................................... 44
PORTFOLIO TRANSACTIONS AND BROKERAGE........................... 44
General Brokerage Policy.................................. 44
Section 28(e) Standards................................... 47
PURCHASE, REDEMPTION AND PRICING OF SHARES..................... 48
Purchases................................................. 48
Redemptions............................................... 49
Net Asset Value Determination............................. 49
DESCRIPTION OF SHARES.......................................... 50
Description of Shares of the Trust........................ 50
ADDITIONAL INFORMATION CONCERNING TAXES........................ 51
General................................................... 51
Excise Tax................................................ 52
Taxation of Portfolio Investments......................... 52
Taxation of a Separate Account of a Participating
Insurance Company..................................... 53
Federal Income Tax Rates.................................. 54
Other Matters............................................. 54
ADDITIONAL INFORMATION ON PERFORMANCE.......................... 54
Yield Calculations........................................ 55
Total Return Calculations................................. 55
MISCELLANEOUS.................................................. 56
Certain Record Holders.................................... 56
SCHEDULE A - Description of Ratings............................ A-1
ii
<PAGE>
NATIONS ANNUITY TRUST HISTORY
The Portfolios are members of the Nations Funds family, which consists of
Nations Annuity Trust (the "Trust"), Nations Fund Trust, Nations Fund, Inc.,
Nations Fund Portfolios, Inc., Nations Institutional Reserves and Nations
LifeGoal Funds, Inc. The Nations Funds family currently has more than [ ]
distinct investment portfolios and total assets in excess of $[ ] billion.
Nations Annuity Trust was organized as a Delaware business trust on
November 24, 1997. Nations Annuity Trust's fiscal year end is December 31.
DESCRIPTION OF THE TRUST AND THE INVESTMENTS AND RISKS OF ITS PORTFOLIOS
The Trust is an open-end, management investment company. The rules and
regulations of the United States Securities and Exchange Commission (the "SEC")
require all mutual funds to furnish prospective investors with certain
information concerning the activities of the mutual fund being considered for
investment. This information about the Trust is also included in the
corresponding Prospectus.
The Trust currently consists of eight different investment portfolios,
Nations Balanced Assets Portfolio, Nations Disciplined Equity Portfolio, Nations
International Growth Portfolio, Nations Managed Index Portfolio, Nations Managed
SmallCap Index Portfolio, Nations Marsico Focused Equities Portfolio, Nations
Marsico Growth & Income Portfolio and Nations Value Portfolio (each a
"Portfolio" and collectively the "Portfolios"). All the Portfolios are
diversified, with the exception of Nations Marsico Focused Equities Portfolio.
Each share of the Trust is without par value, represents an equal
proportionate interest in the related fund with other shares of the same class,
and is entitled to such dividends and distributions out of the income earned on
the assets belonging to such fund as are declared in the discretion of the
Trust's Board of Trustees. The Trust's Declaration of Trust authorizes the Board
of Trustees to classify or reclassify any class of shares into one or more
series of shares.
Shareholders are entitled to one vote for each full share held and a
proportionate fractional vote for each fractional share held. Shareholders of
each Portfolio of the Trust will vote in the aggregate and not by Portfolio, and
shareholders of each Portfolio will vote in the aggregate and not by class
except as otherwise expressly required by law or when the Board of Trustees
determines that the matter to be voted on affects only the interests of
shareholders of a particular Portfolio or class. See the SAI for examples of
when the Investment Company Act of 1940 (the "1940 Act") requires voting by
Portfolio.
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<PAGE>
The Trust does not presently intend to hold annual meetings except as
required by the 1940 Act. Shareholders will have the right to remove Trustees.
The Trust's By-Laws provide that special meetings of shareholders shall be
called at the written request of the shareholders entitled to vote at least 10%
of the outstanding shares of the Trust entitled to be voted at such meeting.
Individual holders of Contracts are not the "shareholders" of or "investors" in
the Portfolios. The Participating Insurance Companies and their separate
accounts are deemed the shareholders or investors. However, it is anticipated
that the Participating Insurance Companies will pass through voting rights to
the holders of Contracts. For a discussion of voting rights of holders of
Contracts, please see the accompanying prospectuses for the Participating
Insurance Companies.
The Prospectus relating to these Portfolios may be obtained without charge
by written request to the Trust, c/o Stephens, Inc., One NationsBank Plaza, 33rd
Floor, Charlotte, NC 28255. Participating Insurance Companies also may call
toll-free at (800) 321-7854.
NationsBanc Advisors, Inc. ("NBAI") is the investment adviser to the
Portfolios. TradeStreet Investment Associates, Inc. ("TradeStreet") is
investment sub-adviser to all of the Portfolios except Nations Marsico Focused
Equities Portfolio and Nations Marsico Growth & Income Portfolio, which are
sub-advised by Marsico Capital Management, LLC ("Marsico Capital"), and Nations
International Growth Portfolio. Gartmore Global Partners ("Gartmore") serves as
investment sub-adviser to Nations International Growth Portfolio. As used
herein, "Adviser" shall mean NBAI, TradeStreet, Gartmore, and/or Marsico Capital
as the context may require.
This SAI is intended to furnish Participating Insurance Companies with
additional information concerning the Trust and the Portfolios. Some of the
information required to be in this SAI is also included in the Portfolios'
current Prospectus, and, in order to avoid repetition, reference will be made to
sections of the Prospectus. Additionally, the Prospectus and this SAI omit
certain information contained in the registration statement filed with the SEC.
Copies of the registration statement, including items omitted from the
Prospectus and this SAI, may be obtained from the SEC by paying the charges
prescribed under its rules and regulations. No investment in the Portfolios
should be made without first reading the Prospectus.
General
Information concerning each Portfolio's investment objective is set forth
in the Prospectus. There can be no assurance that the Portfolios will achieve
their objectives. The principal features of the Portfolios' principal investment
strategies and the primary risks associated with those investment strategies are
discussed in the Prospectus. The values of the securities in which the
Portfolios invest fluctuate based upon interest rates, foreign currency rates,
the financial stability of the issuer and market factors.
2
<PAGE>
The Portfolios are dollar-denominated mutual funds and therefore
consideration is given to hedging part or all of the Portfolios 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).
Pursuant to one of the Trust's fundamental investment restrictions, the
Trust does not have authority to purchase any securities which would cause more
than 25% of the value of any Portfolio's total assets, at the time of such
purchase, to be invested in the securities of one or more issuers conducting
their principal business activities in the same industry, provided that, there
is no limitation with respect to investments in obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities. The position of the
staff of the SEC is that the exclusion with respect to banks may only be applied
to domestic banks. For this purpose, the staff also takes the position that
United States branches of foreign banks and foreign branches of domestic banks
may, if certain conditions are met, be treated as "domestic banks." The Trust
currently intends to consider only obligations of "domestic banks" to be within
the exclusion with respect to banks. For this purpose, "domestic banks" will be
construed by the Trust to include: (a) United States branches of foreign banks,
to the extent they are subject to the same regulation as United States banks;
and (b) foreign branches of domestic banks with respect to which the domestic
bank would be unconditionally liable in the event that the foreign branch failed
to pay on its instruments for any reason.
Investment Limitations
The most significant investment restrictions applicable to the Portfolios'
investment programs are set forth below:
Each Portfolio may not:
1. Purchase any securities which would cause 25% or more of the value of the
Portfolio's total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal activities in the
same industry, provided that this limitation does not apply to investments in
obligations issued or guaranteed by the U.S. Government or its agencies and
instrumentalities.
3
<PAGE>
2. 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.
3. Each Portfolio (except Nations Marsico Focused Equities Portfolio) may not
purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities) 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.
Nations Marsico Focused Equities Portfolio may not purchase securities of any
one issuer (other than securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities) if, immediately after such purchase, more
than 25% of the value of the Portfolio's total assets would be invested in the
securities of one issuer, and with respect to 50% of the Portfolio's total
assets, more than 5% of its assets would be invested in the securities of one
issuer.
Nations International Growth Portfolio may not borrow money except as a
temporary measure and then only in amounts not exceeding 5% of the value of the
Portfolio's total assets or from banks or in connection with reverse repurchase
agreements provided that immediately after such borrowing, all borrowings of the
Portfolio do not exceed one-third of the Portfolio's total assets and no
purchases of portfolio instruments will be made while the Portfolio has
borrowings outstanding in an amount exceeding 5% of its total assets.
The investment objective and policies of each Portfolio, unless otherwise
specified, are non-fundamental and may be changed without shareholder approval.
If the investment objective or policies of a Portfolio change, shareholders
should consider whether the Portfolio remains an appropriate investment in light
of their current position and needs.
Additionally, as a matter of fundamental policy which may not be changed
without a majority vote of a Portfolio's shareholders (as that term is defined
under the heading "Investment Advisory, Administration, Custody, Transfer Agency
and Shareholder Servicing Agreements" in this SAI) each Portfolio will not:
4
<PAGE>
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
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 short sales against the
box.) For purposes of this restriction, the deposit or payment by the
Portfolio of initial or maintenance margin in 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 Portfolio's
ability to invest in securities issued by other registered investment
companies.
4. Invest in real estate or real estate limited partnership interests. (A
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 a company engaging in whole or in part in such
activities, enter into futures contracts and related options, engage in
transactions on a when-issued or forward commitment basis, and enter into
forward currency contracts in accordance with its investment policies.
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In addition, certain non-fundamental investment restrictions which may be
changed by a majority vote of the Board of Trustees at any time and without
approval of the shareholders, are also applicable to the Portfolios, including
the following:
1. No Portfolio will purchase securities of a company for the purpose of
exercising control.
2. No Portfolio will invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements, time deposits and
Guaranteed Investment Contracts ("GICs") with maturities in excess of
seven days, illiquid restricted securities, and other securities which are
not readily marketable. For purposes of this restriction, illiquid
securities shall not include securities which may be resold under
Rule 144A and Section 4(2) of the Securities Act of 1933 that the Board of
Trustees, or its delegate, determines to be liquid, based upon the trading
markets for the specific security.
3. No Portfolio 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 a 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.
4. No Portfolio will invest in securities of other investment companies,
except as they may be acquired as part of a merger, consolidation or
acquisition of assets and except to the extent otherwise permitted by the
1940 Act.
For purposes of the foregoing limitations, any limitation that involves a
maximum percentage shall not be considered violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition or
encumbrance of securities, or assets of, or borrowings on behalf of, a
Portfolio.
Permissible Portfolio Investments
In addition to the principal investment strategy, which is outlined in the
Portfolios' prospectus, each Portfolio also may invest in other types of
securities in percentages of less than 10% of its total assets (unless otherwise
indicated, e.g., most Portfolios may invest in money market instruments without
limit during temporary defensive periods). These types of securities are listed
below for each portfolio and then are described in more detail after this
sub-section.
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The Equity Portfolios
Nations Value Portfolio: In addition to the types of securities described
in the Prospectus, the Portfolio may invest in: U.S. Treasury bills, notes and
bonds and other instruments issued directly by the U.S. Government ("U.S.
Treasury Obligations"), other obligations issued or guaranteed as to payment of
principal and interest by the U.S. Government, its agencies and
instrumentalities (together with U.S. Treasury Obligations, "U.S. Government
Obligations"); investment grade debt securities of domestic companies; various
money market instruments and repurchase agreements.
Nations International Growth Portfolio: In addition to the types of
securities described in the Prospectus, the Portfolio may invest in: debt
securities rated in the top two categories by a nationally recognized
statistical rating organization ("NRSRO"), or if unrated, determined by the
Adviser to be of comparable quality. Standard & Poor's ("S&P"), Moody's Investor
Services, Inc. ("Moody's"), Duff & Phelps Credit Rating Co. ("D&P"), Fitch
Investors Service, Inc. ("Fitch"), IBCA Limited or its affiliate IBCA Inc.
(collectively "IBCA") or Thomson BankWatch, Inc. ("BankWatch") are the six
nationally recognized statistical rating organizations ("NRSROs"). For temporary
defensive purposes, the Portfolio may invest up to 100% of its assets in debt
and equity securities of U.S. issuers. Debt securities in which the Portfolio
may invest include short-term and intermediate-term obligations of corporations,
foreign governments and international organizations (such as the International
Bank for Reconstruction and Development (the "World Bank")), including money
market instruments. The Portfolio also may invest in options, futures contracts
on securities, securities indexes and foreign currencies, securities lending,
forward foreign exchange contracts and repurchase agreements. The Portfolio may
invest in American Depository Receipts ("ADRs"), Global Depository Receipts
("GDRs"), European Depository Receipts ("EDRs") and American Depository Shares
("ADSs").
Nations Disciplined Equity Portfolio: In addition to the types of
securities described in the Prospectus, the Portfolio may invest in: a broad
range of equity and debt instruments, including preferred stocks, securities
(debt and preferred stock) convertible into common stock, warrants and rights to
purchase common stocks, options, U.S. government and corporate debt securities
and various money market instruments. The Portfolio's investments in debt
securities, including convertible securities, will be limited to securities
rated investment grade (e.g., securities rated in one of the top four investment
categories by an NRSRO or, if not rated, are of equivalent quality as determined
by the Adviser). For temporary defensive purposes if market conditions warrant,
the Portfolio may invest without limitation in preferred stocks, investment
grade debt instruments, money market instruments and repurchase agreements.
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Nations Marsico Focused Equities Portfolio and Nations Marsico Growth &
Income Portfolio: In addition to the types of securities described in the
Prospectus, these Portfolios may invest in: preferred stock, warrants,
convertible securities and debt securities; zero coupon, pay- in-kind and step
coupon securities, and may invest without limit in indexed/structured
securities. The Portfolios also may invest its assets in high-yield/high-risk
securities, such as lower grade debt securities. The Portfolios also may
purchase high-grade commercial paper, certificates of deposit, and repurchase
agreements, and may invest in short-term debt securities as a means of receiving
a return on idle cash.
When the Adviser believes that market conditions are not favorable for
profitable investing or when the Adviser is otherwise unable to locate favorable
investment opportunities, the Portfolios may hold cash or cash equivalents and
invest without limit in U.S. Government Obligations and short-term debt
securities or money market instruments if the Adviser determines that a
temporary defensive position is advisable or to meet anticipated redemption
requests. In other words, the Portfolios do not always stay fully invested in
stocks and bonds. The Portfolios also may use options, futures, forward currency
contracts and other types of derivatives for hedging purposes or for non-hedging
purposes such as seeking to enhance return. The Portfolios also may purchase
securities on a when-issued, delayed delivery or forward commitment basis.
General: Each Equity Portfolio discussed above also may invest in certain
specified derivative securities including: exchange-traded options;
over-the-counter options executed with primary dealers, including long calls and
puts and covered calls to enhance return; and U.S. and foreign exchange-traded
financial futures approved by the Commodity Futures Trading Commission ("CFTC")
and options thereon for market exposure risk management. Each Equity Portfolio
may lend its portfolio securities to qualified institutional investors and may
invest in repurchase agreements, restricted, private placement and other
illiquid securities. Each Equity Portfolio also may invest in real estate
investment trust securities. In addition, each Equity Portfolio may invest in
securities issued by other investment companies, consistent with the Portfolio's
investment objective and policies and repurchase agreements. Nations
International Growth Portfolio, Nations Marsico Focused Equities Portfolio and
Nations Marsico Growth & Income Portfolio may invest in forward foreign exchange
contracts.
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The Index Portfolios
Nations Managed Index Portfolio and Nations Managed SmallCap Index Portfolio: In
addition to the types of securities described in the Prospectus, the Portfolios
may invest in: high-quality short-term debt securities and money market
instruments to meet redemption requests. If the Adviser believes that market
conditions warrant a temporary defensive posture, the Portfolios may invest
without limitation in high-quality short-term debt securities and money market
instruments, domestic and foreign commercial paper, certificates of deposit,
bankers' acceptances and time deposits, U.S. Government Obligations and
repurchase agreements. The Portfolios also may invest in certain specified
derivative securities including: exchange-traded options; over-the-counter
options executed with primary dealers, including long calls and puts and covered
calls to enhance return; and U.S. exchange-traded financial futures approved by
the CFTC and options thereon for market exposure risk management. The Portfolios
may lend its portfolio securities to qualified institutional investors and may
invest in repurchase agreements, restricted, private placement and other
illiquid securities. In addition, the Portfolios may invest in securities issued
by other investment companies, consistent with such Portfolios' investment
objective and policies.
In addition, when consistent with such Portfolios' respective investment
objective, the Portfolios will employ various techniques to manage capital gain
distributions. These techniques include utilizing a share identification
methodology whereby the Portfolio will specifically identify each lot of shares
of portfolio securities that it holds, which will allow the Portfolios to sell
first those specific shares with the highest tax basis in order to reduce the
amount of recognized capital gains as compared with a sale of identical
portfolio securities, if any, with a lower tax basis. A Portfolio will sell
first those shares with the highest tax basis only when it is in the best
interest of the Portfolio to do so, and reserves the right to sell other shares
when appropriate. In addition, the Portfolios may, at times, sell portfolio
securities in order to realize capital losses. Such capital losses would be used
to offset realized capital gains thereby reducing capital gain distributions.
Additionally, the Adviser will, consistent with the portfolio construction
process discussed above, employ a low portfolio turnover strategy designed to
defer the realization of capital gains.
Equity mutual funds, like other investors in equity securities, incur
transaction (brokerage) costs in connection with the purchase and sale of
portfolio securities. For some funds, these costs can have a material negative
impact on performance. With respect to the Portfolios, the Adviser will attempt
to minimize these transaction costs by utilizing program trades and computerized
exchanges called "crossing networks" which allow institutions to execute trades
at the midpoint of the bid/ask spread and at a reduced commission rate.
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Balanced Portfolio
Nations Balanced Assets Portfolio: In addition to the types of securities
described in the Prospectus, the Portfolio may invest in: foreign securities,
certain specified derivative securities, including: interest rate swaps, caps
and floors for hedging purposes; exchange-traded options; over-the-counter
options executed with primary dealers, including long calls and puts and covered
calls to enhance return; and CFTC-approved U.S. and foreign exchange-traded
financial futures and options thereon for market exposure risk-management. The
Portfolio may lend its portfolio securities to qualified institutional investors
and may invest in repurchase agreements, restricted, private placement and other
illiquid securities. The Portfolio may engage in reverse repurchase agreements
and dollar roll transactions. Additionally, the Portfolio may purchase
securities issued by other investment companies, consistent with the Portfolio's
investment objective and policies. The Portfolio also may invest in instruments
issued by trusts or certain partnerships including pass-through certificates
representing participations in, or debt investments backed by, the securities
and other assets owned by such trusts and partnerships.
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 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.
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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 Portfolio may
invest may include those issued or guaranteed by Ginnie Mae, Fannie Mae or
Freddie Mac. 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
Portfolio.
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.
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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.
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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolios.
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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.
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.
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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 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.
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. Investments by a Portfolio in
commercial paper will consist of issues rated in a manner consistent with such
Portfolio's investment policies and objectives. In addition, the Portfolios 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 Portfolios 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. Variable-rate instruments acquired by a Portfolio will be rated
at a level consistent with such Portfolio'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 Portfolio, a Portfolio 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 Portfolio to dispose of an instrument if the
issuer defaulted on its payment obligation or during periods when a Portfolio is
not entitled to exercise its demand rights, and a Portfolio could, for these or
other reasons, suffer a loss. A Portfolio 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.
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Certain Portfolios 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 Portfolio 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 Portfolio will be exposed to a risk of loss if the
borrower defaults. Loan participations also may be purchased by the Portfolio
when the borrowing company is already in default. In purchasing a loan
participation, the Portfolio may have less protection under the federal
securities laws than it has in purchasing traditional types of securities. The
Portfolio'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 Portfolios 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 best interest of a Portfolio to do so and
where underlying hedging strategies are permitted by a Portfolio'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 Portfolios 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 Portfolio will be
rated in the top two categories by an 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 Portfolio 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.
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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 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 Portfolios 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 Portfolio may
also invest in corporate debt securities of foreign issuers.
The corporate debt securities in which the Portfolios 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 Portfolios will be rated in the
top two categories by a NRSRO. Corporate debt securities that are not rated may
be purchased by such Portfolios if they are determined by the Adviser to be of
comparable quality under the direction of the Board of Trustees of the Trust. If
the rating of any corporate debt security held by a Portfolio 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.
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Custodial Receipts
Certain Portfolios also may 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 Portfolios 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 Portfolio 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 Portfolio's borrowing restrictions. The net amount of the
excess, if any, of the Portfolio'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
Portfolio's custodian. The Portfolio 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.
Delayed Delivery Transactions
In a delayed delivery transaction, the Portfolio relies on the other party to
complete the transaction. If the transaction is not completed, the Portfolio 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 Portfolio would not pay for such securities or start earning
interest on them until they are delivered. However, when a Portfolio 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 Portfolio'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 Portfolio's total assets, including the value of when-issued
and delayed delivery securities held by the Portfolio, exceed its net assets.
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Dollar Roll Transactions
Certain Portfolios may enter into "dollar roll" transactions, which
consist of the sale by a Portfolio 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 Portfolio 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 Portfolio agrees to buy a security on
a future date. If the broker/dealer to whom a Portfolio sells the security
becomes insolvent, the Portfolio'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 Portfolio is required to repurchase
may be worth less than the security that the Portfolio originally held, and the
return earned by the Portfolio 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 Portfolio's right to
purchase from the counterparty might be restricted. Additionally, the value of
such securities may change adversely before the Portfolio is able to purchase
them. Similarly, the Portfolio 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 Portfolio, the security
that the Portfolio is required to buy under the dollar roll may be worth less
than an identical security. Finally, there can be no assurance that the
Portfolio's use of the cash that it receives from a dollar roll will provide a
return that exceeds borrowing costs.
Equity Swap Contracts
Certain Portfolios 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 Portfolio 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
Portfolio 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 Portfolio on any Equity Swap Contract should be the gain or loss
on the notional amount plus dividends on the stocks comprising the S&P 500 Index
less the interest paid by the Portfolio on the notional amount. A Portfolio will
only enter into Equity Swap Contracts on a net basis, i.e., the two parties'
obligations are netted out, with the Portfolio 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.
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If there is a default by the counterparty to an Equity Swap Contract, a
Portfolio 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 Portfolio will succeed in pursuing
contractual remedies. A Portfolio thus assumes the risk that it may be delayed
in or prevented from obtaining payments owed to it pursuant to Equity Swap
Contracts. A Portfolio will closely monitor the credit of Equity Swap Contract
counterparties in order to minimize this risk.
Certain Portfolios may from time to time enter into the opposite side of
Equity Swap Contracts (i.e., where a Portfolio is obligated to pay the increase
(net of interest) or receive the decrease (plus interest) on the contract to
reduce the amount of the Portfolio's equity market exposure consistent with the
Portfolio's objective. These positions are sometimes referred to as Reverse
Equity Swap Contracts.
Equity Swap Contracts will not be used to leverage a Portfolio. A
Portfolio 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 Portfolio 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 Portfolio owns would exceed
15% of the Portfolio's total assets.
The Adviser does not believe that a Portfolio's obligations under Equity
Swap Contracts or Reverse Equity Swap Contracts are senior securities and,
accordingly, the Portfolio will not treat them as being subject to its borrowing
restrictions. However, the net amount of the excess, if any, of a Portfolio'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 Portfolio's custodian.
Foreign Currency Transactions
Certain Portfolios 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 Portfolio may purchase
or sell forward foreign currency exchange contracts ("forward contracts") to
attempt to minimize the risk to the Portfolio from adverse changes in the
relationship between the U.S. dollar and foreign currencies. A Portfolio 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 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.
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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
Portfolio 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 Portfolio's
portfolio securities or in foreign exchange rates, or prevent loss if the prices
of these securities should decline.
A Portfolio 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 Portfolio'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 Portfolio 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
Portfolio 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.
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The Portfolio'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 Portfolio'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 Portfolio's commitments with respect to such contracts. As an alternative to
segregating all or part of such securities, the Portfolio may purchase a call
option permitting the Portfolio 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 Portfolio may purchase a put option permitting the Portfolio 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 Portfolios 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 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.
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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 Portfolio will incur brokerage fees when it purchases and sells
futures contracts. At the time such a purchase or sale is made, a Portfolio 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 Portfolio 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 Portfolios may enter into transactions
in futures contracts for the purpose of hedging a relevant portion of their
portfolios. A Portfolio 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 Portfolio. For example, a Portfolio 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 Portfolio may
realize gains on its futures position, which should offset all or part of the
decline in value of fixed income fund securities. A Portfolio could protect
against such decline by selling fixed income securities, but such a strategy
would involve higher transaction costs than the sale of futures contracts and,
if interest rates again declined, the Portfolio would be unable to take
advantage of the resulting market advance without purchases of additional
securities.
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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 Portfolios, which hold or intend to acquire long-term debt
securities, is to protect a Portfolio from fluctuations in interest rates
without actually buying or selling long-term debt securities. For example, if
long-term bonds are held by a Portfolio, and interest rates were expected to
increase, the Portfolio 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 Portfolio. If interest rates did
increase, the value of the debt securities in the Portfolio would decline, but
the value of the futures contracts to the Portfolio would increase at
approximately the same rate thereby keeping the net asset value of the Portfolio
from declining as much as it otherwise would have. When a Portfolio is not fully
invested and a decline in interest rates is anticipated, which would increase
the cost of fixed income securities that the Portfolio 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
Portfolio 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 Portfolio 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 Portfolio 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 Portfolio'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 Portfolio to act in anticipation
of such an interest rate decline without having to sell its portfolio
securities. To the extent a Portfolio enters into futures contracts for this
purpose, the segregated assets maintained by a Portfolio will consist of cash,
cash equivalents or high quality debt securities of the Portfolio 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 Portfolio with respect to such futures contracts.
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Stock Index Futures Contracts. Certain Portfolios 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 Portfolio 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 Portfolio may purchase stock index futures contracts in
order to protect against anticipated increases in the cost of securities to be
acquired.
In addition, a Portfolio may utilize stock index futures contracts in
anticipation of changes in the composition of its portfolio. For example, in the
event that a Portfolio 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 Portfolio's futures positions would be closed out. A
Portfolio may also sell futures contracts in connection with this strategy, in
order to 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. 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. Certain Portfolios may purchase put options on futures contracts in
which such Portfolios 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 Portfolio would write
options on these futures contracts primarily for the purpose of terminating
existing positions.
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Options on Stock Index Futures Contracts, Options on Stock Indices and
Options on Equity Securities. Certain Portfolios 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio would receive a fee, or a "premium," for the writing
of the option. For example, where the Portfolio 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
Portfolio 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
Portfolio could sustain a loss on the transaction that may not be offset by the
premium received. In addition, a Portfolio may be required to forego the benefit
of an intervening increase or decline in value of the underlying security.
Options and Futures Strategies. The Adviser may seek to increase the
current return of certain Portfolios 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 Portfolio or an increase in the price of
securities that it plans to purchase for the Portfolio. Expenses and losses
incurred as a result of such hedging strategies will reduce the Portfolio's
current return. A Portfolio'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 Portfolio'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
Portfolio will not make these investments.
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The ability of a Portfolio 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 Portfolio will be able to utilize these instruments
effectively for the purposes stated below. Furthermore, a Portfolio's ability to
engage in options and futures transactions may be limited by tax considerations.
Although a Portfolio 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 Portfolio will not engage in options and futures transactions
for leveraging purposes.
Writing Covered Options on Securities. Certain Portfolios 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 Portfolio give the
holder the right to buy the underlying securities from a Portfolio at a stated
exercise price; put options give the holder the right to sell the underlying
security to the Portfolio at a stated price.
A Portfolio may write only covered options, which means that, so long as
the Portfolio 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
Portfolio 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 Portfolio may also write combinations of covered puts
and calls on the same underlying security.
A Portfolio will receive a premium from writing a put or call option,
which increases the Portfolio'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 Portfolio 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 Portfolio 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 market value plus the amount of the premium received,
unless the security subsequently appreciates in value.
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A Portfolio 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 Portfolio 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
Portfolio.
Purchasing Put and Call Options on Securities. A Portfolio 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 Portfolio, 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 Portfolio 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 Portfolio 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 Portfolio, 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 Portfolio 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 Portfolio 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.
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If the Adviser expects general stock market prices to rise, a Portfolio
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 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
Portfolio'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 Portfolio 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 Portfolio may also be expected to decline, but that
decrease would be offset in part by the increase in the value of the Portfolio's
position in such put option or futures contract.
Purchase and Sale of Interest Rate Futures. A Portfolio 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 Portfolio 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 Portfolio will
fall, thus reducing the net asset value of the Portfolio. 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 Portfolio 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
Portfolio'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
Portfolio's investments that are being hedged. While a Portfolio 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 Portfolio may purchase and write call and put options on non-U.S.
stock index and interest rate futures contracts. A Portfolio 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
Portfolio 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 Portfolio intends to purchase.
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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
Portfolio may buy or sell currency futures contracts and related options. If a
fall in exchange rates for a particular currency is anticipated, a Portfolio 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 Portfolio 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 Portfolio 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 Portfolio will be covered.
A currency futures contract sale creates an obligation by a Portfolio, 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 Portfolio, 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 Portfolio will write (sell) only covered put and call options on
currency futures. This means that a Portfolio 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 Portfolio 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 Portfolio 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 Portfolio falls below 100% of the market value
of the call written by the Portfolio, a Portfolio will so segregate an amount of
cash, Treasury bills or other high grade short-term obligations equal in value
to the difference. Alternatively, a Portfolio 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 Portfolio. In the case of put options on currency
futures written by the Portfolio, the Portfolio 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 Portfolio 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 Portfolio falls below 100% of the market value of
the put options written by the Portfolio, a Portfolio will so segregate an
amount of cash, Treasury bills or other high grade short-term obligations equal
in value to the difference.
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If other methods of providing appropriate cover are developed, a Portfolio
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 Portfolio 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 Portfolio's assets. The
Adviser intends to limit a Portfolio's writing of over-the-counter options in
accordance with the following procedure. Each Portfolio 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
Portfolio has in place with such primary dealers will provide that the Portfolio
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 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 Portfolio 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
Portfolio 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 Portfolio's ability to terminate options and futures positions
at times when its the Adviser deems it desirable to do so. Although a Portfolio
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 Portfolio will be able to effect closing transactions at any
particular time or at an acceptable price. A Portfolio 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
Portfolio may purchase and sell options in the over-the-counter market. A
Portfolio'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 Portfolio.
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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 Portfolio 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
Portfolios' futures and options transactions.
Risk of Imperfect Correlation. A Portfolio'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 Portfolio'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 Portfolio might not be successful and the Portfolio 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 Portfolio'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 securities. A Portfolio would,
however, effect transactions in such futures or options only for hedging
purposes.
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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 Portfolio will
not be able to establish hedging positions, or that any hedging strategy adopted
will be insufficient to completely protect the Portfolio.
A Portfolio 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 Portfolio'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 Portfolio 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 Portfolio 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 Portfolio, which could require the Portfolio 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
Portfolio's ability effectively to hedge its securities, or the relevant portion
thereof.
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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 general direction of
interest rates is incorrect, a Portfolio's overall performance may be poorer
than if it had not entered into any such contract. For example, if a Portfolio
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 Portfolio 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 Portfolio 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 Portfolios' investments.
Regulations on the Use of Futures and Options Contracts. Regulations of
the CFTC require that the Portfolios 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
Portfolio, 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 Portfolio, and accrued profits on such positions.
In addition, a Portfolio 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 Portfolio's total assets.
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When a Portfolio purchases a futures contract, an amount of cash or cash
equivalents or high quality debt securities will be segregated with the
Portfolio'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 Portfolios' ability to engage in the hedging transactions described
herein may be limited by the current federal income tax requirement that a
Portfolio 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
Portfolios 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 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 Portfolio may
make cash contributions to a deposit fund of the insurance company's general or
separate accounts. The insurance company then credits to a Portfolio 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.
A Portfolio 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 Portfolio 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.
Interest Rate Transactions
Among the strategic transactions into which certain Portfolios may enter
are interest rate swaps and the purchase or sale of related caps and floors. The
Portfolios 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 Portfolio
anticipates purchasing at a later date. A Portfolio 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 Portfolio may be obligated to pay.
Interest rate swaps involve the exchange by a Portfolio 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.
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A Portfolio 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 Portfolio 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
Portfolio 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 Portfolio 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 S&P or Moody's or has an equivalent rating from an NRSRO
or is determined to be of equivalent credit quality by the Adviser. If there is
a default by the counterparty, the Portfolio 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 Portfolio 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 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 Portfolio'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 Portfolio's portfolio, with a commensurate
effect on the value of the Portfolio's shares. Therefore, an investment in the
Portfolio should not be considered as a complete investment program and may not
be appropriate for all investors.
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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 Portfolio'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 Portfolio 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 Portfolio'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 Portfolio. If an issuer exercises these rights during periods of
declining interest rates, a Portfolio may have to replace the security with a
lower yielding security, thus resulting in a decreased return to a Portfolio.
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.
Options on Currencies
Certain Portfolios may purchase and sell options on currencies to hedge
the value of securities the Portfolio holds or intends to buy. Options on
foreign currencies may be traded on U.S. and foreign exchanges or
over-the-counter.
Other Investment Companies
In seeking to attain their investment objectives, certain Portfolios may
invest in securities issued by other investment companies within the limits
prescribed by the 1940 Act. Each Portfolio 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 Portfolio or by
the Company as a whole. As a shareholder of another investment company, a
Portfolio 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 Portfolio bears
in connection with its own operations.
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.
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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 of 1986, as amended (the "Code").
Repurchase Agreements
The repurchase price under any repurchase agreements described in the
Prospectuses generally equals the price paid by a Portfolio 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 a Company's custodian in a
segregated account or in the Federal Reserve/Treasury book-entry system.
Repurchase agreements are considered to be loans by such Company under the 1940
Act.
Reverse Repurchase Agreements
At the time a Portfolio 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 Portfolios 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
Portfolios' 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 Portfolios' obligation to repurchase the securities. Reverse repurchase
agreements are speculative techniques involving leverage, and are subject to
asset coverage requirements if the Portfolios do not establish and maintain a
segregated account (as described above). In addition, some or all of the
proceeds received by a Portfolio 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 Portfolios 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 Portfolios' asset coverage and other factors at the time
of a reverse repurchase, the Portfolios may not establish a segregated account
when the Adviser believes it is not in the best interests of the Portfolios to
do so. In this case, such reverse repurchase agreements will be considered
borrowings subject to the asset coverage described above.
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Securities Lending
To increase return on portfolio securities, certain Portfolios 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 Portfolio involved exceeds 33% of
the value of its total assets which may include cash collateral received for
securities loaned. 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 Portfolio is able
to terminate the securities loan upon notice of not more than five business days
and thereby secure the return to the Portfolio of securities identical to the
transferred securities upon termination of the loan.
Short Sales
Certain Portfolios may from time to time enter into short sales
transactions. A Portfolio will not make short sales of securities nor maintain a
short position unless at all times when a short position is open, such Portfolio
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 "against the box." Such short sales will be
used by a Portfolio for the purpose of deferring recognition of gain or loss for
federal income tax purposes.
Special Situations
Certain Portfolios 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.
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<PAGE>
Stripped Securities
Certain Portfolios 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 Portfolio 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 Portfolio 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 Trust's Board of Trustees 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 Portfolio's per share net asset
value.
Although stripped securities may not pay interest to holders prior to
maturity, Federal income tax regulations require a Portfolio 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
Portfolio. To the extent that any shareholders in the Portfolio elect to receive
their dividends in cash rather than reinvest such dividends in additional
Portfolio shares, cash to make these distributions will have to be provided from
the assets of the Portfolio or other sources such as proceeds of sales of
Portfolio shares and/or sales of portfolio securities. In such cases, the
Portfolio 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.
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<PAGE>
U.S. and Foreign Bank Obligations
These obligations include negotiable certificates of deposit, banker's
acceptances and fixed time deposits. Each Portfolio limits its investments in
domestic bank obligations to banks having total assets in excess of $1 billion
and subject to regulation by the U.S. Government. Each Portfolio 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 Portfolio 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 Portfolio, 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 Portfolio's right to transfer a beneficial
interest in the deposit to a third party.
Each Portfolio 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
established by the Trust's Board of Trustees, are of an investment quality
comparable to obligations of domestic banks which may be purchased by a
Portfolio. 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 Portfolio 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 Portfolio will limit its investment in
securities of foreign banks to not more than 20% of total assets at the time of
investment.
Each Portfolio 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 Portfolio.
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<PAGE>
U.S. Government Obligations
Each Portfolio may invest in U.S. Government obligations. Examples of the
types of U.S. Government obligations that may be held by the Portfolios 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 Portfolioing 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
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
Portfolio to provide cash, securities or currencies to complete such
transactions will entail that Portfolio 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
Portfolio will require the Portfolio 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 Portfolio to have portfolio securities that correlate
with the index. A put option written by a Portfolio also will require that
Portfolio to have available assets sufficient to purchase the securities the
Portfolio would be obligated to buy if the put is exercised.
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<PAGE>
A forward foreign currency contract that obligates a Portfolio to provide
currencies will require the Portfolio to hold currencies or liquid securities
denominated in a foreign currency which will equal the Portfolio'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 Portfolio 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 Portfolio could own securities substantially
replicating the movement of the particular index.
In the case of a futures contract, a Portfolio 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 Portfolio to
deposit margin to the extent necessary to meet the Portfolio's commitments.
In lieu of such assets, such transactions may be covered by other means
consistent with applicable regulatory policies. A Portfolio may enter into
off-setting 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 Portfolio 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 Portfolio. Moreover, instead of segregating assets if a
Portfolio 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
Certain Portfolios may purchase variable-rate and floating rate
obligations. 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. 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
Portfolio can recover payment of principal as specified in the instrument.
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<PAGE>
The variable- and-floating rate demand instruments that the Portfolios may
purchase include participations in Municipal Securities purchased from and owned
by financial institutions, primarily banks. Participation interests provide a
Portfolio 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
Portfolios. 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
Certain Portfolios 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 Portfolio may agree to purchase securities on a when-issued basis or
enter into a forward commitment to purchase securities. When a Portfolio 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 Portfolio 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 Portfolio's commitment.
Because a Portfolio will segregate cash or liquid assets to satisfy its purchase
commitments in the manner described, the Portfolio'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 Portfolio's
custodian will hold the portfolio securities themselves in a segregated account
while the commitment is outstanding.
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<PAGE>
A Portfolio 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 Portfolio may dispose of or renegotiate a commitment after it is entered into,
and may sell securities it has committed to purchase before those securities are
delivered to the Portfolio on the settlement date. In these cases the Portfolio
may realize a capital gain or loss.
When a Portfolio 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 Portfolio'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 Portfolio
starting on the date the Portfolio agrees to purchase the securities. The
Portfolio 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 Portfolio
makes a forward commitment to sell securities it owns, the proceeds to be
received upon settlement are included in the Portfolio's assets. Fluctuations in
the value of the underlying securities are not reflected in the Portfolio's net
asset value as long as the commitment remains in effect.
Portfolio Turnover
Generally, the Equity Portfolios, the Index Portfolios and the Balanced
Portfolio will purchase portfolio securities for capital appreciation or
investment income, or both, and not for short-term trading profits. If a
Portfolio's annual portfolio turnover rate exceeds 100%, it may result in higher
brokerage costs and possible tax consequences for the Portfolio and its
shareholders. While it is not possible to exactly predict annual portfolio
turnover rates, it is expected that under normal market conditions, the annual
portfolio turnover rate will not exceed the following: Nations Value Portfolio
- -- 50%; Nations International Growth Portfolio -- 100%; Nations Disciplined
Equity Portfolio -- 125%; Nations Marsico Focused Equities Portfolio -- 100%;
Nations Marsico Growth & Income Portfolio -- 100%; Nations Managed Index
Portfolio -- 25%; Nations Managed SmallCap Index Portfolio -- 25%; and Nations
Balanced Assets Portfolio -- 175%.
Investment Risks
In addition to the risks identified in certain of the securities
descriptions above, there also are general investment risks associated with an
investment in any of the Portfolios.
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Investments by a Portfolio in common stocks and other equity securities
are subject to stock market risks. The value of the stocks that the Portfolio
holds, like the broader stock market, may decline over short or even extended
periods. The U.S. stock market tends to be cyclical, with periods when stock
prices generally rise and periods when prices generally decline. As of the date
of this Prospectus, the stock market, as measured by the S&P 500 Index and other
commonly used indexes, was trading at or close to record levels. There can be no
guarantee that these levels will continue.
Nations Marsico Focused Equities Portfolio, as a non-diversified fund, may
invest in fewer issuers than diversified funds such as Nations Marsico Growth &
Income Portfolio. Therefore, appreciation or depreciation of an investment in a
single issuer could have a greater impact on the Portfolio's net asset value.
The Portfolio reserves the right to become a diversified fund by limiting the
investments in which more than 5% of its total assets are invested.
The value of a Portfolio's investments in debt securities, including U.S.
Government Obligations, will tend to decrease when interest rates rise and
increase when interest rates fall. In general, longer-term debt instruments tend
to fluctuate in value more than shorter-term debt instruments in response to
interest rate movements. In addition, debt securities that are not backed by the
United States Government are subject to credit risk, which is the risk that the
issuer may not be able to pay principal and/or interest when due. In addition,
obligations with the lowest investment grade rating (e.g., "BBB" by Standard &
Poor's Corporation ("S&P") or "Baa" by Moody's Investors Service, Inc.
("Moody's")) have speculative characteristics and changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade debt
obligations. Subsequent to its purchase by the Portfolio, an issue of securities
may cease to be rated or its rating may be reduced below the minimum rating
required for purchase by the Portfolio. The Adviser will consider such an event
in determining whether the Portfolio should continue to hold the obligation.
Unrated obligations may be acquired by the Portfolio if they are determined by
the Adviser to be of comparable quality at the time of purchase to rated
obligations that may be acquired.
Certain of the Portfolios' investments constitute derivative securities,
which are securities whose value is derived, at least in part, from an
underlying index or reference rate. There are certain types of derivative
securities that can, under certain circumstances, significantly increase a
purchaser's exposure to market or other risks. The Adviser, however, only
purchases derivative securities in circumstances where it believes such
purchases are consistent with such Portfolio's investment objective and do not
unduly increase the Portfolio's exposure to market or other risks. For
additional risk information regarding the Portfolios' investments in particular
instruments, see "Appendix A -- Portfolio Securities."
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<PAGE>
Certain of the Portfolios may invest in securities of smaller and newer
issuers. Investments in such companies may present greater opportunities for
capital appreciation because of high potential earnings growth, but also present
greater risks than investments in more established companies with longer
operating histories and greater financial capacity.
SPECIAL RISK CONSIDERATIONS RELEVANT TO AN INVESTMENT IN NATIONS
INTERNATIONAL GROWTH PORTFOLIO: Investors should understand and consider
carefully the special risks involved in foreign investing.
Investors in Nations International Growth Portfolio should be aware that
the Portfolio may, from time to time, invest up to 35% of its total assets in
securities of companies located in Eastern Europe. Economic and political
reforms in this region are still in their infancy. As a result, investment in
such countries would be highly speculative and could result in losses to the
Portfolio and, thus, to its shareholders.
Moreover, investing in securities denominated in foreign currencies and
utilization of forward foreign currency exchange contracts and other currency
hedging techniques involve certain considerations comprising both opportunities
and risks not typically associated with investing in U.S. dollar-denominated
securities. Additionally, changes in the value of foreign currencies can
significantly affect the Portfolio's share price. General economic and political
factors in the various world markets also can impact the Portfolio's share
price.
The expenses to individual investors of investing directly in foreign
securities are very high relative to similar costs for investing in U.S.
securities. While the Portfolio offers a more efficient way for individual
investors to participate in foreign markets, their expenses, including custodial
fees, are also higher than the typical domestic equity mutual fund.
Risks unique to international investing include: (1) restrictions on
foreign investment and repatriation of capital; (2) fluctuations in currency
exchange rates; (3) costs of converting foreign currency into U.S. dollars and
U.S. dollars into foreign currencies; (4) greater price volatility and less
liquidity; (5) settlement practices, including delays, which may differ from
those customary in United States markets; (6) exposure to political and economic
risks, including the risk of nationalization, expropriation of assets and war;
(7) possible imposition of foreign taxes and exchange control and currency
restrictions; (8) lack of uniform accounting, auditing and financial reporting
standards; (9) less governmental supervision of securities markets, brokers and
issuers of securities; (10) less financial information available to investors;
and (11) difficulty in enforcing legal rights outside the United States. These
risks often are heightened for investments in emerging or developing countries.
See "Appendix A" for additional discussion of the risks associated with an
investment in Nations International Growth Portfolio.
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SPECIAL RISK CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE INDEX
PORTFOLIOS: The techniques employed by the Adviser to seek to manage capital
gain distributions will generally only have the effect of deferring the
realization of capital gains. For example, to the extent that the capital gains
recognized on a sale of portfolio securities arise from the sale of
specifically-identified securities with a higher tax basis, subsequent sales of
the same portfolio securities will be calculated by reference to the lower tax
basis securities that remain in the portfolio. Under this scenario, an investor
who purchases shares of an Index Portfolio after the first sale could receive
capital gain distributions that are higher than the distributions that would
have been received if this methodology had not been used. Therefore, certain
investors actually could be disadvantaged by the techniques employed by the
Portfolios to seek to manage capital gain distributions, depending on the timing
of their purchase of Portfolio shares. Even if there are no subsequent sales,
upon a redemption or exchange of Portfolio shares an investor will have to
recognize gain to the extent that the net asset value of Portfolio shares at
such time exceeds such investor's tax basis in his or her Portfolio shares.
The various techniques employed by the Portfolios to manage capital gain
distributions may result in the accumulation of substantial unrealized gains in
the Portfolios. Moreover, the realization of capital gains is not entirely
within a Portfolio's control because it is at least partly dependent on
shareholder purchase and redemption activity. Capital gain distributions may
vary considerably from year to year.
MANAGEMENT OF THE TRUST
The business and affairs of Nations Annuity Trust are managed under the
direction of its Board of Trustees. The Trust's SAI contains the names of and
general background information concerning each Trustee of the Trust.
The Trust and the Adviser have adopted codes of ethics which contain
policies on personal securities transactions by "access persons," including
portfolio managers and investment analysts. These policies substantially 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.
The Trustees and Executive Officers of the Trust 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 Trustees who are "interested persons" of the Trust (as defined in the 1940
Act) are indicated by an asterisk(*).
48
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<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS
POSITION WITH AND CURRENT
NAME ADDRESS AND AGE THE TRUST DIRECTORSHIPS
- -------------------- --------- -------------
<S> <C> <C>
Edmund L. Benson, III, 61 Trustee Director, President and Treasurer, Saunders
Saunders & Benson, Inc. & Benson, Inc. (Insurance); Trustee, Nations
728 East Main Street Institutional Reserves, Nations Fund Trust
Suite 400 and Nations Annuity Trust; Director, Nations
Richmond, VA 23219 Fund, Inc., Nations LifeGoal Funds, Inc.,
and Nations Fund Portfolios, Inc.
James Ermer, 56 Trustee Senior Vice President- Finance, CSX
13705 Hickory Nut Point Corporation (transportation and natural
Midlothian, VA 23112 resources); Director, National Mine Service;
Director, Lawyers Title Corporation;
Trustee, Nations Institutional Reserves,
Nations Fund Trust and Nations Annuity
Trust; Director, Nations Fund, Inc., Nations
LifeGoal Funds, Inc., and Nations Fund
Portfolios, Inc.
William H. Grigg, 66 Trustee Chairman Emeritus, Duke Power Co., since
Duke Power Co. July, 1997; April 1994 to July 1997,
422 South Church Street Chairman and Chief Executive Officer;
PB04G November 1991 to April 1994, Vice Chairman,
Charlotte, NC 28242-0001 from April 1988 to November 1991, Executive
Vice 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, Nations Fund
Trust and Nations Annuity Trust.
49
<PAGE>
Thomas F. Keller, 67 Trustee R.J. Reynolds Industries Professor of
Fuqua School of Business Business Administration and former Dean,
P.O. Box 90120 Fuqua School of Business, Duke University;
Duke University Director, LADD Furniture, Inc.; Director,
Durham, NC 27708 Wendy's International Inc., American
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, Nations
Annuity Trust, the Mentor Funds, Mentor
Institutional Trust, Cash Resource Trust.
Carl E. Mundy, Jr., 63 Trustee Commandant, United States Marine Corps, from
9308 Ludgate Drive July 1991 to July 1995; Director, Nations
Alexandria, VA 22309 Fund, Inc., Nations LifeGoal Funds, Inc.,
and Nations Fund Portfolios, Inc.; Trustee,
Nations Institutional Reserves, Nations Fund
Trust and Nations Annuity Trust.
James B. Sommers*, 59 Trustee President, NationsBank Trust, from January
237 Cherokee Road 1992 to September 1996; Executive Vice
Charlotte, NC 28207 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, Nations Fund Trust and Nations
Annuity Trust.
A. Max Walker*, 76 President, Financial consultant; Formerly, President,
4580 Windsor Gate Court Trustee and A. Max Walker, Inc.; Director and Chairman
Atlanta, GA 30342 Chairman of the of the Board, Hatteras Income Securities,
Board 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, Nations Fund Trust
and Nations Annuity Trust.
50
<PAGE>
Charles B. Walker, 60 Trustee Since 1989, Director, Executive Vice
Ethyl Corporation President, Chief Financial Officer and
330 South Fourth Street Treasurer, Ethyl Corporation (chemicals,
Richmond, VA 23219 plastics, and aluminum manufacturing); 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,
Nations Fund Trust and Nations Annuity
Trust.
Thomas S. Word, Jr.*, 60 Trustee Partner, McGuire Woods Battle & Boothe
McGuire, Woods, Battle & Boothe (law); Director, Vaughan Bassett Furniture
One James Center Trust, Director VB Williams Furniture Trust,
Richmond, VA 23219 Inc.; Director, Nations Fund, Inc., Nations
LifeGoal Funds, Inc., and Nations Fund
Portfolios Inc.; Trustee, Nations
Institutional Reserves, Nations Fund Trust
and Nations Annuity Trust.
Richard H. Blank, Jr., 42 Secretary and Treasurer Since 1994, Vice President of Mutual Fund
Stephens Inc. Services, Stephens Inc. 1990 to 1994,
Manager Mutual Portfolio Services, Stephens
Inc.; Secretary and Treasurer, Nations
Institutional Reserves, Nations Fund Trust,
Nations Annuity 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, 46 Assistant Secretary Corporate Syndicate Associate, Stephens Inc.
Stephens Inc.
James E. Banks, 42 Assistant Secretary Since 1993, Attorney, Stephens Inc.;
Stephens Inc. Associate Corporate Counsel, Federated
Investors; from 1991 to 1993, Staff
Attorney, Securities and Exchange Commission
from 1988 to 1991
Steven Levy, 33 Assistant Treasurer Since 1997, Vice President of Fund
First Data Investor Services Accounting, First Data Investor Services
Group, Inc. (formerly, The Group, Inc.; Prior to 1997, Investment
Shareholder Services Group, Operations Manager, Franklin Templeton Group
Inc.) and Assistant Vice President of Fund
One Exchange Place Accounting, Scudder Stevens and Clark, Inc.
Boston, MA 02109
</TABLE>
51
<PAGE>
Mr. Blank serves as Treasurer to certain other investment companies for
which First Data Investors Services Group, Inc. (the "Co-Administrator"), or its
affiliates serve as Sponsor, Distributor, Administrator and/or Adviser.
Each Trustee of the Trust is also a Trustee of Nations Fund Trust and
Nations Institutional Reserves and a Director of Nations Fund, Inc., Nations
Fund Portfolios, Inc., and Nations LifeGoal Funds, Inc. each a registered
investment company that is part of the Nations Funds family. Richard H.
Blank, Jr., Steven Levy, Michael W. Nolte, Louise P. Newcomb and James E. Banks.
Jr. also are Officers of Nations Fund Trust, Nations Institutional Reserves,
Nations Fund Portfolios, Inc., Nations Fund, Inc. and Nations LifeGoal Funds,
Inc.
Each Trustee receives (i) an annual retainer of $1,000 ($3,000 for the
Chairman of the Board) plus $500 for each Portfolio of the Trust, plus (ii) a
fee of $1,000 for attendance at each "in-person" meeting of the Board of
Trustees (or committee thereof). All Trustees receive reimbursements for
expenses related to their attendance at meetings of the Board of Trustees.
Officers receive no direct remuneration in such capacity from the Trust. No
person who is an Officer, Trustee, or employee of NationsBank or its affiliates
serves as an Officer, Trustee or employee of the Trust. As of the date of this
SAI, the Trustees and Officers of the Trust as a group owned less than 1% of the
outstanding shares of each of the Portfolios.
The Trust has adopted a Code of Ethics which, among other things,
prohibits each access person of the Trust, 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
Portfolio, or (ii) was being purchased or sold by a Portfolio. For purposes of
the Code of Ethics, an access person means (i) a Trustee or Officer of the
Trust, (ii) any employee of the Trust (or any Trust in a control relationship
with the Trust) 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 Trust, and (iii) any natural person in a control
relationship with the Trust who obtains information concerning recommendations
made to the Trust 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 Trust
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 Trust's
access persons, other than its "disinterested" Trustees, submit reports to the
Trust's designated compliance person regarding transactions involving securities
which are eligible for purchase by a Portfolio.
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<PAGE>
Nations Funds Retirement Plan
Under the terms of the Nations Funds Retirement Plan for Eligible Trustees
(the "Retirement Plan"), each Trustee may be entitled to certain benefits upon
retirement from the Board of Trustees. Pursuant to the Retirement Plan, the
normal retirement date is the date on which the eligible Trustee has attained
age 65 and has completed at least five years of continuous service with one or
more of the open-end investment companies advised by the Adviser. If a Trustee
retires before reaching age 65, no benefits are payable. Each eligible Trustee
is entitled to receive an annual benefit from the Portfolios commencing on the
first day of the calendar quarter coincident with or next following his/her date
of retirement equal to 5% of the aggregate Trustee's fees payable by the
Portfolios during the calendar year in which the Trustee's retirement occurs
multiplied by the number of years of service (not in excess of ten years of
service), completed with respect to any of the Portfolios. Such benefit is
payable to each eligible Trustee in quarterly installments for a period of no
more than five years. If an eligible Trustee dies after attaining age 65, the
Trustee's surviving spouse (if any) will be entitled to receive 50% of the
benefits that would have been paid (or would have continued to have been paid)
to the Trustee if he or she had not died. The Retirement Plan is unfunded. The
benefits owed to each Trustee are unsecured and subject to the general creditors
of the Portfolios.
Nations Funds Deferred Compensation Plan
Under the terms of the Nations Funds Deferred Compensation Plan for
Eligible Trustees (the "Deferred Compensation Plan"), each Trustee may elect, on
an annual basis, to defer all or any portion of the annual board fees (including
the annual retainer and all attendance fees) payable to the Trustee for that
calendar year. An application was submitted to and approved by the SEC to permit
deferring trustees to elect to tie the rate of return on fees deferred pursuant
to the Deferred Compensation Plan to one or more of certain investment
Portfolios. Distributions from the deferring Trustees' deferral accounts will be
paid in cash, in generally equal quarterly installments over a period of five
years beginning on the date the deferring Trustee's retirement benefits commence
under the Retirement Plan. The Board of Trustees, in its sole discretion, may
accelerate or extend such payments after a Trustee's termination of service. If
a deferring Trustee dies prior to the commencement of the distribution of
amounts in his or her deferral account, the balance of the deferral account will
be distributed to his/her designated beneficiary in a lump sum as soon as
practicable after the Trustee's death. If a deferring Trustee dies after the
commencement of such distribution, but prior to the complete distribution of his
or her deferral account, the balance of the amounts credited to his or her
deferral account will be distributed to the designated beneficiary over the
remaining period during which such amounts were distributable to the Trustee.
Amounts payable under the Deferred Compensation Plan are not funded or secured
in any way and deferring Trustees have the status of unsecured creditors of the
Portfolios from which they are deferring compensation.
53
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Total
Aggregate Benefits Accrued Annual Compensation
Compensation as Part of Benefits from Registrant
Name of Person from the Portfolio Upon and Portfolio
Position (1) Trust (2) Expenses Retirement Complex (3)(4)
------------ --------- -------- ---------- --------------
<S> <C> <C> <C> <C>
Edmund L. Benson, III, $XX
Trustee $XX $XX $XX (50% Def'd)
James Ermer
Trustee XX XX XX XX
William H. Grigg XX
Trustee XX XX XX (100% Def'd)
Thomas F. Keller XX
Trustee XX XX XX (100% Def'd)
Carl E. Mundy, Jr.
Trustee XX XX XX XX
James Sommers
Trustee XX XX XX XX
A. Max Walker
Chairman of the Board XX XX XX XX
Charles B. Walker
Trustee XX XX XX XX
Thomas S. Word XX
Trustee XX XX XX (100% Def'd)
$XX $XX $XX $XX
</TABLE>
54
<PAGE>
(1) All Trustees receive reimbursements for expenses related to their
attendance at meetings of the Board of Trustees. Officers of the Trust receive
no direct remuneration in such capacity from the Trust.
(2) Each Trustee receives (i) an annual retainer of $1,000 ($3,000 for the
Chairman of the Board) plus $500 for each Portfolio of the Trust, plus (ii) a
fee of $1,000 for attendance at each "in-person" meeting of the Board of
Trustees (or Committee thereof) and $500 for attendance at each other meeting of
the Board of Trustees (or Committee thereof).
(3) Messrs. Grigg, Keller and A.M. Walker receive compensation from nine
investment companies, including the Trust, that are deemed to be part of the
Nations Funds "fund complex," as that term is defined under Rule 14a-101 of the
Securities Exchange Act of 1934, as amended. Messrs. Benson, Ermer, C. Walker,
Mundy and Word receive compensation from six investment companies, including the
Trust, deemed to be part of the fund complex.
(4) Total compensation amounts include deferred compensation (including
interest) payable to or accrued for the following Trustees: Edmund L. Benson,
III ($XX); William H. Grigg ($XX); Thomas F. Keller ($XX); and Thomas S. Word
($XX).
Shareholder and Trustee Liability
Under Delaware law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Trust. However, the Trust's Declaration of Trust provides that shareholders
shall not be subject to any personal liability for the acts or obligations of
the Trust, and that every note, bond, contract, order, or other undertaking made
by the Trust shall contain a provision to the effect that the shareholders are
not personally liable thereunder. The Declaration of Trust provides for
indemnification out of the Trust property of any shareholder held personally
liable solely by reason of his being or having been a shareholder and not
because of his acts or omissions or some other reason. The Declaration of Trust
also provides that the Trust shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of the Trust and
shall satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Trust itself would be unable to meet its obligations.
55
<PAGE>
The Declaration of Trust states further that no Trustee, Officer, or Agent
of the Trust shall be personally liable for, or on account of, any contract,
debt, tort, claim, damage, judgment or decree arising out of or connected with
the administration or preservation of the Trust estate or the conduct of any
business of the Trust; nor shall any Trustee be personally liable to any person
for any action or failure to act except by reason of his own bad faith, willful
misfeasance, gross negligence, or reckless disregard of his duties as Trustee.
The Declaration of Trust also provides that all persons having any claim against
the Trustees or the Trust shall look solely to the Trust property for payment.
With the exceptions stated, the Declaration of Trust provides that a
Trustee is entitled to be indemnified against all liabilities and expenses
reasonably incurred by him or her in connection with the defense or disposition
of any proceeding in which he or she may be involved or with which he/she may be
threatened by reason of his or her being or having been a Trustee, and that the
Trustees have the power, but not the duty, to indemnify Officers and employees
of the Trust unless any such person would not be entitled to indemnification had
he or she been a Trustee.
INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY,
TRANSFER AGENCY AND SHAREHOLDER SERVICING AGREEMENTS
Investment Advisers and Sub-Advisers
NBAI serves as investment adviser to the Portfolios of the Trust, pursuant
to an Investment Advisory Agreement. Pursuant to an Investment Sub-Advisory
Agreement entered into with the Trust, TradeStreet serves as investment
sub-adviser to the Portfolios of the Trust except Nations International Growth
Portfolio, Nations Marsico Focused Equities Portfolio and Nations Marsico Growth
& Income Portfolio. Marsico serves as investment sub-adviser to Nations Marsico
Focused Equities Portfolio and Nations Marsico Growth & Income Portfolio and
Gartmore serves as investment sub-adviser to Nations International Growth
Portfolio pursuant to respective Sub-Advisory Agreements entered into with the
Trust. All such agreements are effective as of February 25, 1998 for a period of
two years from such date.
For the services provided and expenses assumed pursuant to the Investment
Advisory Agreement, NBAI is entitled to receive advisory fees, computed daily
and paid monthly, at the annual rates of:
56
<PAGE>
Portfolio Percentage of Average Daily Net Assets
--------- --------------------------------------
Nations Balanced Assets Portfolio .75%
Nations Disciplined Equity Portfolio .75%
Nations International Growth Portfolio .90%
Nations Managed Index Portfolio .50%
Nations Managed SmallCap Index Portfolio .50%
Nations Marsico Focused Equities Portfolio .85%
Nations Marsico Growth & Income Portfolio .85%
Nations Value Portfolio .75%
For the services provided pursuant to the Sub-Advisory Agreement,
TradeStreet is entitled to receive from NBAI sub-advisory fees, computed daily
and paid monthly, at the annual rates of:
Portfolio Percentage of Average Daily Net Assets
--------- --------------------------------------
Nations Balanced Assets Portfolio .25%
Nations Disciplined Equity Portfolio .25%
Nations Managed Index Portfolio .10%
Nations Managed SmallCap Index Portfolio .10%
Nations Value Portfolio .25%
For the services provided pursuant to the Sub-Advisory Agreement, Gartmore
is entitled to receive from NBAI sub-advisory fees, computed daily and paid
monthly at the annual rate of:
<TABLE>
<CAPTION>
<S> <C>
Portfolio Percentage of Average Daily Net Assets
Nations International Growth Portfolio .70%
</TABLE>
For the services provided pursuant to the Sub-Advisory Agreement, Marsico
is entitled to receive from NBAI sub-advisory fees, computed daily and paid
monthly at the annual rate of:
<TABLE>
<CAPTION>
<S> <C>
Portfolio Percentage of Average Daily Net Assets
Nations Marsico Focused Equities Portfolio .45%
Nations Marsico Growth & Income Portfolio .45%
</TABLE>
57
<PAGE>
NBAI also serves as the investment adviser to Nations Fund, Inc., Nations Fund
Trust, Nations Fund Portfolios, Inc., Nations Institutional Reserves and Nations
LifeGoal Funds, Inc., 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
investment sub-adviser to Nations Fund, Inc., Nations Fund Trust, Nations Life
Goal Funds, Inc., 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. Gartmore serves as investment
sub-adviser to Nations Fund Portfolios, Inc. and additionally, serves as
investment sub-adviser to Nations International Equity Fund, part of Nations
Fund, Inc. Marsico Capital serves as investment sub-adviser to Nations Marsico
Focused Equities Fund and Nations Marsico Growth & Income Fund, part of Nations
Fund Trust.
NBAI and TradeStreet are each wholly owned subsidiaries of Nations Bank,
N.A. ("NationsBank"), which in turn is a wholly owned banking subsidiary of
BankAmerica Corporation, a bank holding trust 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 ("Gartmore plc"). National Westminster Bank plc and
affiliated parties (collectively, "NatWest") 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 Management, LLC is located at 1200 17th Street, Suite 1300, Denver, CO
80202.
Since 1874, NationsBank and its predecessors have been managing money for
foundations, universities, corporations, institutions and individuals. Today,
NationsBank affiliates collectively manage in excess of $xx billion, including
more than $xx billion in mutual fund assets. It is a company dedicated to a goal
of providing responsible investment management and superior service. NationsBank
is recognized for its sound investment approaches, which place it among the
nation's foremost financial institutions. NationsBank and its affiliate
organizations make available a wide range of financial services to over xx
million customer households through over xx banking and investment centers.
58
<PAGE>
Pursuant to the terms of the Investment Advisory Agreement and
Sub-Advisory Agreements (at times, the "Advisory Agreements") with NBAI,
TradeStreet, Gartmore and Marsico Capital, respectively, subject at all times to
the control of the Trust's Board of Trustees and in conformance with the stated
policies of each of the Trust, NBAI, TradeStreet, Gartmore and Marsico Capital
each selects and manages the investments of the Portfolios. Each such advisory
entity obtains and evaluates economic, statistical and financial information to
formulate and implement investment policies for the respective Portfolios.
The Advisory Agreements each provide that in the absence of willful
misfeasance, bad faith, negligence or reckless disregard of obligations or
duties thereunder on the part of NBAI or TradeStreet, Gartmore or Marsico
Capital, respectively, or any of their respective Officers, Directors, employees
or agents, shall not be subject to liability to the Trust or to any shareholder
of the Trust 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.
The Investment Advisory Agreement with NBAI shall become effective with
respect to a Portfolio when approved in accordance with the 1940 Act, and if so
approved shall continue in effect for an initial term of two years, and shall
thereafter continue from year to year, provided that such continuation of the
Agreement is specifically approved at least annually by (a) (i) the Trust's
Board of Trustees, or (ii) the vote of "a majority of the outstanding voting
securities" of a Portfolio (as defined in Section 2(a)(42) of the 1940 Act), and
(b) the affirmative vote of a majority of the Trustees 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 Trustees of the Trust), by votes cast in person
at a meeting specifically called for such purpose. The respective Investment
Advisory Agreement will terminate automatically in the event of its assignment,
and is terminable with respect to a Portfolio at any time without penalty by the
Trust (by vote of the Board of Trustees or by vote of a majority of the
outstanding voting securities of the Portfolio) or by NBAI on 60 days' written
notice.
The Sub-Advisory Agreement with TradeStreet shall become effective with
respect to the respective Portfolios when approved in accordance with the 1940
Act, and if so approved shall continue in effect for an initial term of two
years, and shall thereafter continue from year to year, provided that such
continuation of the Agreement is specifically approved at least annually by (a)
(i) the Trust's Board of Trustees, or (ii) the vote of "a majority of the
outstanding voting securities" of a Portfolio (as defined in Section 2(a)(42) of
the 1940 Act), and (b) the affirmative vote of a majority of the Trustees 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 Trustees of the Trust), by
votes cast in person at a meeting specifically called for such purpose. The
Sub-Advisory Agreement will terminate automatically in the event of its
assignment, and is terminable with respect to a Portfolio at any time without
penalty by the Trust (by vote of the Board of Trustees or by vote of a majority
of the outstanding voting securities of the Portfolio), or by NBAI, or by
TradeStreet on 60 days' written notice.
59
<PAGE>
The Sub-Advisory Agreement with Gartmore with respect to Nations
International Growth Portfolio shall become effective with respect to Nations
International Growth Portfolio when approved in accordance with the 1940 Act,
and if so approved shall continue in effect for an initial term of two years,
and shall thereafter continue from year to year, provided such continuance is
specifically approved at least annually by (a) (i) the Trust's Board of
Trustees, or (ii) the vote of "a majority of the outstanding voting securities"
of a Portfolio (as defined in Section 2(a)(42) of the 1940 Act), and (b) the
affirmative vote of a majority of the Trustees 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 Trustees of the Trust), by votes cast in person at
a meeting specifically called for such purpose. The Portfolio, NBAI or Gartmore
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 Sub-Advisory Agreement with Marsico Capital with respect to Nations
Marsico Focused Equities Portfolio and Nations Marsico Growth & Income Portfolio
when approved in accordance with the 1940 Act, and if so approved shall continue
in effect for an initial term of two years, and shall thereafter continue from
year to year, provided such continuance is specifically approved at least
annually by (a) (i) the Trust's Board of Trustees, or (ii) the vote of "a
majority of the outstanding voting securities" of a Portfolio (as defined in
Section 2(a)(42) of the 1940 Act), and (b) the affirmative vote of a majority of
the Trustees 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 Trustees of
the Trust), by votes cast in person at a meeting specifically called for such
purpose. The respective Portfolios, NBAI or Marsico Capital may terminate the
Sub-Advisory Agreement, on 60 days' written notice without penalty. The Advisory
Agreement terminates automatically in the event of its "assignment," as defined
in the 1940 Act.
NBAI, TradeStreet, Gartmore or Marsico Capital may waive a portion of
their fees; however, any such waiver may be discontinued at any time. As
discussed under the caption "Expenses," NBAI, TradeStreet, Gartmore and Marsico
Capital will be required to reduce their fees from the Portfolios, in direct
proportion to the fees payable by the Portfolios to NBAI, TradeStreet, Gartmore,
Marsico Capital and the Administrator, if the expenses of the Portfolios exceed
the applicable expense limitation of any state in which the Portfolios' shares
are registered or qualified for sale.
In addition, the Adviser may pay out of its own assets, amounts to certain
broker/dealers in connection with the provision of administrative and/or
distribution related services to shareholders.
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<PAGE>
The Advisory and Sub-Advisory Agreements were approved by the Board of
Trustees, including a majority of Trustees who are not parties to such
Agreements or "interest persons" at the December 9, 1997 Special Board Meeting.
Administrator and Co-Administrator
Stephens Inc. ("Stephens"), 111 Center Street, Suite 300, Little Rock, AR
72201, serves as Co-Administrator of the Trust with NBAI (each of NBAI and
Stephens are "Co-Administrators"). The Bank of New York ("BNY"), 90 Washington
Street, New York, New York 10286, serves as Sub-Administrator (the
"Sub-Administrator") for the Trust.
The Co-Administrators and Sub-Administrator serve under a co-administration
agreement ("Co-Administration Agreement") and sub-administration agreement
("Sub-Administration Agreement"), respectively, each of which was approved by
the Board of Trustees on December __, 1998 for a period of two years. The
Co-Administrators are entitled to receive, as compensation for their services
rendered under the Co-Administration Agreement, a combined fee, computed daily
and paid monthly, at the annual rate of 0.12% of the average daily net assets of
Nations International Growth Portfolio; and 0.13% of the average daily net
assets of the other Portfolios. For providing Sub-Administration services, BNY
is entitled to receive a monthly fee from Stephens and/or NBAI based on an
annual rate of [0.xx%] of the Portfolios' average daily net assets.
Pursuant to the Co-Administration Agreements, the Co-Administrators have
agreed to, among other things, (i) maintain office facilities for the
Portfolios, (ii) furnish statistical and research data, data processing,
clerical, and internal executive and administrative services to each Portfolio,
(iii) furnish corporate secretarial services to each Portfolio, including
coordinating the preparation and distribution of materials for Board of Trustees
meetings, (iv) coordinate the provision of legal advice to the Trust with
respect to regulatory matters, (v) coordinate the preparation of reports to each
Portfolio's shareholders and the SEC, including annual and semi-annual reports,
(vi) coordinate the provision of services to each Portfolio by the
Sub-Administrator, the Transfer Agent and the Custodian, and (vii) generally
assist in all aspects of each Portfolio's operations. Additionally, the
Co-Administrators are authorized to receive, the fees payable to the
Sub-Administrator by each Portfolio for its services rendered under the
Sub-Administration Agreement.
Pursuant to the Sub-Administration Agreement, the Sub-Administrator has
agreed to assist in supervising various aspects of the Portfolios'
administrative operations including:
61
<PAGE>
[insert]
The Co-Administration Agreement and Sub-Administration Agreement may be
terminated by a vote of a majority of the Board of Trustees or by each
respective Co-Administrator, or the Sub-Administrator, on 60 days' written
notice without penalty. The Co-Administration Agreement or Sub-Administration
are not assignable without the written consent of the other party. Furthermore,
the Co-Administration Agreement and Sub-Administration Agreement provide that
the Co-Administrators or Sub-Administrator, respectively, shall not be liable to
the Portfolios or to their shareholders except in the case of the
Co-Administrators' or Sub-Administrator's, respectively, willful misfeasance,
bad faith, gross negligence or reckless disregard of duty.
Custodian and Transfer Agent
First Data, a wholly owned subsidiary of First Data Corporation, which is
located at One Exchange Place, Boston, Massachusetts 02109, acts as Transfer
Agent for the Trust's shares. Under the transfer agency agreement, the Transfer
Agent maintains the shareholder account records for the Trust, handles certain
communications between shareholders and the Trust, and distributes dividends and
distributions payable by the Trust to shareholders, and produces statements with
respect to account activity for the Trust and its shareholders, for these
services. The Transfer Agent receives a monthly fee computed on the basis of the
number of shareholder accounts that it maintains for the Trust during the month
and is reimbursed for out-of-pocket expenses.
BNY serves as Custodian for each Portfolio. As Custodian, BNY maintains
custody of such Portfolios' securities, cash and other property, delivers
securities against payment upon sale and pays for securities against delivery
upon purchase, makes payments on behalf of such Portfolios for payments of
dividends, distributions and redemptions, endorses and collects on behalf of
such Portfolios all checks, and receives all dividends and other distributions
made on securities owned by such Portfolios. For such services, BNY is entitled
to receive, in addition to out-of-pocket expenses, fees, payable at the rate of
[xx].
Shareholder Servicing and Distribution Plan
The Portfolios have adopted a Shareholder Servicing and Distribution Plan
(the "Servicing and Distribution Plan") pursuant to Rule 12b-1 under the 1940
Act under which the Portfolios may pay banks, broker/dealers, Participating
Insurance Companies (as defined in the Prospectus) or other financial
institutions that have entered into a Sales Support Agreement with the
Distributor ("Selling Agents") or a Shareholder Servicing Agreement with the
Trust ("Servicing Agents") (together with Selling Agents ("Agents")) for certain
expenses that are incurred by the Agents in connection with sales support and
shareholder support services that are provided by the Agents. Payments under the
Servicing and Distribution Plan will be calculated daily and paid monthly at a
rate not exceeding 0.25% (on an annualized basis) of the average daily net asset
value of the Shares beneficially owned through the ownership of Contracts by
customers with whom the Agents have a relationship. Under the Servicing and
Distribution Plan, the shareholder services provided by Servicing Agents may
include general shareholder liaison services, processing purchases and
redemption requests; processing dividend and distribution payments; providing
sales information periodically to customers, including information showing their
Contracts' positions in the Portfolios; providing sub-accounting; responding to
inquiries from customers; arranging for bank wires; and providing such other
similar services as may be reasonably requested. Under the Servicing and
Distribution Plan, the Trust may make payments in connection with any activity
which is primarily intended to result in the sale of the Shares, 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, supplemental payments
to the Trust's Distributor and the cost of administering this Servicing and
Distribution Plan, as well as the shareholder servicing activities described
above.
62
<PAGE>
Expenses
Stephens, as Co-Administrator, furnishes, without additional cost to the
Trust, the services of the Treasurer and Secretary of the Trust and such other
personnel (other than the personnel of the Adviser) as are required for the
proper conduct of the Trust'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 Trust's shares and the costs of any other promotional or sales
literature.
The Trust pays or causes to be paid all other expenses of the Trust,
including, without limitation: the fees of the Adviser, Co-Administrator and
Sub-Administrator; the charges and expenses of any registrar, any Custodian or
depository appointed by the Trust for the safekeeping of its cash, portfolio
securities and other property, and any Transfer Agent, dividend or accounting
agent or agents appointed by the Trust; brokerage commissions chargeable to the
Trust in connection with portfolio securities transactions to which the Trust is
a party; all taxes, including securities issuance and transfer taxes; corporate
fees payable by the Trust to federal, state or other governmental agencies; all
costs and expenses in connection with the registration and maintenance of
registration of the Trust and its shares with the SEC and various states 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 Trust (including supplements thereto) and periodic
reports and of printing and distributing such prospectuses and statements of
additional information (including supplements thereto) to the Trust's
shareholders; all expenses of shareholders' and Trustees' meetings and of
preparing, printing and mailing proxy statements and reports to shareholders;
fees and travel expenses of Trustees or Trustee 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 Trust's shares; fees and expenses of legal counsel and of
independent auditors in connection with any matter relating to the Trust;
membership dues of industry associations; interest payable on Trust borrowings;
postage and long-distance telephone charges; insurance premiums on property or
personnel (including officers and Trustees) of the Trust 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 Trust's operation unless otherwise explicitly
assumed by the Adviser, the Administrator or Co-Administrator.
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Expenses of the Trust which are not directly attributable to the
operations of any Portfolio are pro-rated among all Portfolios of the Trust
based upon the relative net assets of each Portfolio.
The Advisory Agreement, the Sub-Advisory Agreements, and the
Co-Administration Agreement require NBAI, TradeStreet, Gartmore, and the
Co-Administrators to reduce their fees to the extent required to satisfy any
expense limitations which may be imposed by the securities laws or regulations
thereunder of any state in which a Portfolio's shares are registered or
qualified for sale, as such limitations may be raised or lowered from time to
time, and the aggregate of all such investment advisory, sub-advisory, and
administration fees shall be reduced by the amount of such excess. The amount of
any such reduction to be borne by NBAI, TradeStreet, Gartmore or the
Administrator shall be deducted from the monthly investment advisory and
administration fees otherwise payable to NBAI, TradeStreet, Gartmore, and the
Co-Administrators during such fiscal year. If required pursuant to such state
securities regulations, NBAI, TradeStreet, Gartmore, and the Co-Administrators
will reimburse the Trust no later than the last day of the first month of the
next succeeding fiscal year, for any such annual operating expenses (after
reduction of all investment advisory and administration fees in excess of such
limitation).
Distributor
Stephens Inc. (the "Distributor") serves as the principal underwriter and
distributor of the shares of the Portfolios.
Pursuant to a distribution agreement (the "Distribution Agreement"), the
Distributor, as agent, sells shares of the Portfolios on a continuous basis and
transmits purchase and redemption orders that its receives to the Trust or the
Transfer Agent. 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 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, however, may be reimbursed for
all or a portion of such expenses to the extent permitted by the Distribution
Agreement adopted by the Trust 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 Trustees or a vote
of the majority (as defined in the 1940 Act) of the outstanding voting
securities of the Portfolio and (ii) a majority of the Trustees 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 Trustees, the vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the Portfolio, or by the Distributor.
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Independent Accountant and Reports
At least semi-annually, the Trust will furnish shareholders of the
Portfolios with a list of the investments held in the Portfolios and financial
statements for the Portfolios. The annual financial statements will be audited
by the Trust's independent accountant. The Board of Trustees has selected Price
Waterhouse, LLP, 160 Federal Street, Boston, Massachusetts, 02110 as the Trust's
independent accountant to audit the Trust's books and review the Trust's tax
returns.
The Annual Reports, when available, 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 Trust. Their
address is 2000 Pennsylvania Avenue, N.W., Washington, D.C. 20006.
Morrison & Foerster LLP, counsel to the Trust and special counsel to
NationsBank has advised the Trust and NationsBank that NationsBank and its
affiliates may perform the services contemplated by the Investment Advisory
Agreement and this Prospectus without violation of the Glass-Steagall Act. Such
counsel has pointed out, however, that there are no controlling judicial or
administrative interpretations or decisions and that future judicial or
administrative interpretations of, or decisions relating to, present federal or
state statutes, including the Glass-Steagall Act, and regulations relating to
the permissible activities of banks and their subsidiaries or affiliates, as
well as future changes in such federal or state statutes, regulations and
judicial or administrative decisions or interpretations, could prevent such
entities from continuing to perform, in whole or in part, such services. If any
such entity were prohibited from performing any of such services, it is expected
that new agreements would be proposed or entered into with another entity or
entities qualified to perform such services.
PORTFOLIO TRANSACTIONS AND BROKERAGE
General Brokerage Policy
Subject to policies established by the Board of Trustees of the Trust, the
Adviser is responsible for decisions to buy and sell securities for each
Portfolio, for the selection of broker/dealers, for the execution of each
Portfolio's securities transactions, and for the allocation of brokerage fees in
connection with such transactions. The Adviser's primary consideration in
effecting a security transaction is to obtain the best net price and the most
favorable execution of the order. While the Adviser generally seeks reasonably
competitive commission rates, a Portfolio does not necessarily pay the lowest
commission or spread available. Purchases and sales of securities on a
securities exchange are effected through brokers who charge a negotiated
commission for their services. Orders may be directed to any broker to the
extent and in the manner permitted by applicable law.
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In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without stated
commissions, although the price of a security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
that includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
In placing orders for securities of a Portfolio, the Adviser is required
to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Adviser will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable in the circumstances. In seeking
such execution, the Adviser will use its best judgment in evaluating the terms
of a transaction, and will give consideration to various relevant factors,
including, without limitation, the size and type of the transaction, the nature
and character of the market for the security, the confidentiality, speed and
certainty of effective execution required for the transaction, the general
execution and operational capabilities of the broker-dealer, the reputation,
reliability, experience and financial condition of the firm, the value and
quality of the services rendered by the firm in this and other transactions and
the reasonableness of the spread or commission, if any.
While the Adviser generally seeks reasonably competitive spreads or
commissions, a Portfolio will not necessarily be paying the lowest spread or
commission available. Within the framework of this policy, the Adviser will
consider research and investment services provided by brokers or dealers who
effect or are parties to portfolio transactions of a Portfolio, the Adviser or
its other clients. Such research and investment services are those which
brokerage houses customarily provide to institutional investors and include
statistical and economic data and research reports on particular companies and
industries. Such services are used by the Adviser in connection with all of its
investment activities, and some of such services obtained in connection with the
execution of transactions for a Portfolio may be used in managing other
investment accounts. Conversely, brokers furnishing such services may be
selected for the execution of transactions of such other accounts, whose
aggregate assets are far larger than those of a Portfolio. Services furnished by
such brokers may be used by the Adviser in providing investment advisory and
investment management services for the Trust.
Commission rates are established pursuant to negotiations with the broker
based on the quality and quantity of execution services provided by the broker
in the light of generally prevailing rates. The allocation of orders among
brokers and the commission rates paid are reviewed periodically by the Trustees
of the Trust. On exchanges on which commissions are negotiated, the cost of
transactions may vary among different brokers. Transactions on foreign stock
exchanges involve payment of brokerage commissions which are generally fixed.
Transactions in both foreign and domestic over-the-counter markets are generally
principal transactions with dealers, and the costs of such transactions involve
dealer spreads rather than brokerage commissions. With respect to
over-the-counter transactions, the Adviser, where possible, will deal directly
with dealers who make a market in the securities involved except in those
circumstances in which better prices and execution are available elsewhere.
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In certain instances there may be securities which are suitable for more
than one Portfolio as well as for one or more of the other clients of the
Adviser. Investment decisions for each Portfolio and for the Adviser's other
clients are made with the goal of achieving their respective investment
objectives. It may happen that a particular security is bought or sold for only
one client even though it may be held by, or bought or sold for, other clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security in a particular transaction as far
as a Portfolio is concerned. The Trust believes that over time its ability to
participate in volume transactions will produce superior executions for the
Portfolios.
The portfolio turnover rate for each Portfolio is calculated by dividing
the lesser of purchases or sales of portfolio securities for the reporting
period by the monthly average value of the portfolio securities owned during the
reporting period. The calculation excludes all securities, including options,
whose maturities or expiration dates at the time of acquisition are one year or
less. Portfolio turnover may vary greatly from year to year as well as within a
particular year, and may be affected by cash requirements for redemption of
shares and by requirements which enable the Portfolios to receive favorable tax
treatment. Portfolio turnover will not be a limiting factor in making portfolio
decisions.
The Portfolios may participate, if and when practicable, in bidding for
the purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group. A
Portfolio will engage in this practice, however, only when the Adviser, in its
sole discretion, believes such practice to be otherwise in the Portfolio's
interests.
The Trust will not execute portfolio transactions through, purchase or
sell portfolio securities from or to the Distributor, the Adviser, the
Administrator, the Co-Administrator, or their respective affiliates acting as
principal (including repurchase and reverse repurchase agreements), except to
the extent permitted by the SEC. In addition, the Trust will not give preference
to correspondents of NationsBank N.A. ("NationsBank") or its affiliates with
respect to such transactions or securities. (However, the Adviser is authorized
to allocate purchase and sale orders for portfolio securities to certain
financial institutions, including, in the case of agency transactions, financial
institutions which are affiliated with NationsBank or its affiliates, and to
take into account the sale of Portfolio shares if the Adviser believes that the
quality of the transaction and the commission are comparable to what they would
be with other qualified brokerage firms.) In addition, a Portfolio will not
purchase securities during the existence of any underwriting or selling group
relating thereto of which the Distributor, the Adviser, Administrator, the
Co-Administrator, or any of their affiliates, is a member, except to the extent
permitted by the SEC. Under certain circumstances, the Portfolios may be at a
disadvantage because of these limitations in comparison with other investment
companies which have similar investment objectives but are not subject to such
limitations.
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Under the 1940 Act, persons affiliated with the Trust are prohibited from
dealing with the Trust as a principal in the purchase and sale of securities
unless an exemptive order allowing such transactions is obtained from the SEC.
Each of the Portfolios may purchase securities from underwriting syndicates of
which NationsBank or any of its affiliates is a member under certain conditions,
in accordance with the provisions of a rule adopted under the 1940 Act and any
restrictions imposed by the Board of Governors of the Federal Reserve System.
Investment decisions for each Portfolio are made independently from those
for the Trust's other investment portfolios and other investment companies and
accounts advised or managed by the Adviser. Such other investment portfolios,
investment companies and accounts may also invest in the same securities as the
Portfolios. When a purchase or sale of the same security is made, at
substantially the same time, on behalf of one or more of the Portfolios and
another investment portfolio, investment company or account, the transaction
will be averaged as to price and available investments allocated as to amount,
in a manner which the Adviser believes to be equitable to each Portfolio and
such other investment portfolio, investment company or account. In some
instances, this investment procedure may adversely affect the price paid or
received by a Portfolio or the size of the position obtained or sold by the
Portfolio. To the extent permitted by law, the Adviser may aggregate the
securities to be sold or purchased for the Portfolios with those to be sold or
purchased for other investment portfolios, investment companies or accounts in
executing transactions.
The Adviser may from time to time determine target levels of commission
business to transact with various brokers on behalf of its clients (including
the Trust) over a certain time period. The target levels will be determined
based upon the following factors, among others: (1) the execution services
provided by the broker; (2) the research services provided by the broker; and
(3) the broker's attitude toward and interest in mutual funds in general and in
the Trust and other mutual funds advised by the Adviser in particular. No
specific formula will be used in connection with any of the foregoing
considerations in determining the target levels. However, if a broker has
indicated a certain level of desired commissions in return for certain research
services provided by the broker, this factor will be taken into consideration by
the Adviser.
Subject to the overall objective of obtaining best price and execution for
a Portfolio, the Adviser may also consider sales of shares of such Portfolio and
of the other mutual funds managed or advised by the Adviser as a factor in the
selection of broker/dealers to execute portfolio transactions for the
Portfolios.
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The Adviser will seek, whenever possible, to recapture for the benefit of
a Portfolio any commission, fees, brokerage or similar payments paid by such
Portfolio on portfolio transactions. Normally, the only fees which may be
recaptured are the soliciting dealer fees on the tender of an account's
portfolio securities in a tender or exchange offer.
The Portfolios are not under any obligation to deal with any broker or
group of brokers in the execution of transactions in portfolio securities.
Brokers who provide supplemental investment research to the Adviser may receive
orders for transactions by a Portfolio. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Adviser under its agreements with each Portfolio and the expenses of the Adviser
will not necessarily be reduced as a result of the receipt of such supplemental
information. Certain research services furnished by broker/dealers may be useful
to the Adviser in connection with its services to other advisory clients,
including other investment companies which it advises. Also, a Portfolio may pay
a higher price for securities or higher commissions in recognition of research
services furnished by broker/dealers.
The Adviser and its affiliates manage several other investment accounts,
some of which may have investment objectives similar to those of one or more of
the Portfolios. It is possible that, at times, identical securities will be
appropriate for investment by one or more of the Portfolios and by one or more
of such investment accounts. The position of each account, however, in the
securities of the same issuer may vary and the length of time that each account
may choose to hold its investment in the securities of the same issuer may
likewise vary. The timing and amount of purchase by each account will also be
determined by its cash position. If the purchase or sale of securities
consistent with the investment policies of a Portfolio and one or more of these
accounts is considered at or about the same time, transactions in such
securities will be allocated among the accounts in a manner deemed equitable by
the Adviser. The Adviser may combine such transactions, in accordance with
applicable laws and regulations, in order to obtain the best net price and most
favorable execution. Simultaneous transactions could, however, adversely affect
the ability of a Portfolio to obtain or dispose of the full amount of a security
which it seeks to purchase or sell.
In some cases the procedure for allocating securities transactions among
the various investment accounts advised by the Adviser and its affiliates could
have an adverse effect on the price or amount of securities available to a
Portfolio. In making such allocations, the main factors considered by the
Adviser are the respective investment objectives and policies of such advisory
clients, the relative size of holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held and the judgments of the persons responsible for recommending the
investment.
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Section 28(e) Standards
Under Section 28(e) of the Securities Exchange Act of 1934, the Adviser
shall not be "deemed to have acted unlawfully or to have breached its fiduciary
duty" solely because under certain circumstances it has caused the account to
pay a higher commission than the lowest available. To obtain the benefit of
Section 28(e), an adviser must make a good faith determination that the
commissions paid are "reasonable in relation to the value of the brokerage and
research services provided ...viewed in terms of either that particular
transaction or its overall responsibilities with respect to the accounts as to
which it exercises investment discretion and that the services provided by a
broker provide an adviser with lawful and appropriate assistance in the
performance of its investment decision making responsibilities." Accordingly,
the price paid by a Portfolio in any transaction may be less favorable than that
available from another broker/dealer if the difference is reasonably justified
by other aspects of the portfolio execution services offered.
Broker/dealers utilized by the Adviser may furnish statistical, research
and other information or services which are deemed by the Adviser to be
beneficial to the Portfolios' investment programs. Research services received
from brokers supplement the Adviser's own research and may include the following
types of information: statistical and background information on industry groups
and individual companies; forecasts and interpretations with respect to U.S. and
foreign economies, securities, markets, specific industry groups and individual
companies; information on political developments; portfolio management
strategies; performance information on securities and information concerning
prices of securities; and information supplied by specialized services to the
Adviser and to the Trust's Trustees with respect to the performance, investment
activities, fees and expenses of other mutual funds. Such information may be
communicated electronically, orally or in written form. Research services may
also include providing equipment used to communicate research information,
arranging meetings with management of the Trust and providing access to
consultants who supply research information.
The outside research assistance is useful to the Adviser since the brokers
utilized by the Adviser, as a group, tend to follow a broader universe of
securities and other matters than the Adviser's staff can follow. In addition,
this research provides the Adviser with a diverse perspective on financial
markets. Research services which are provided to the Adviser by brokers are
available for the benefit of all accounts managed or advised by the Adviser. In
some cases, the research services are available only from the broker providing
such services. In other cases, the research services may be obtainable from
alternative sources in return for cash payments. The Adviser is of the opinion
that because the broker research supplements rather than replaces its research,
the receipt of such research does not tend to decrease its expenses, but tends
to improve the quality of its investment advice. However, to the extent that the
Adviser would have purchased any such research services had such services not
been provided by brokers, the expenses of such services to the Adviser could be
considered to have been reduced accordingly. Certain research services furnished
by broker/dealers may be useful to the Adviser with clients other than the
Portfolios. Similarly, any research services received by the Adviser through the
placement of portfolio transactions of other clients may be of value to the
Adviser in fulfilling its obligations to the Portfolios. The Adviser is of the
opinion that this material is beneficial in supplementing its research and
analysis; and, therefore, it may benefit the Trust by improving the quality of
the Adviser's investment advice. The advisory fees paid by the Trust are not
reduced because the Adviser receives such services.
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Some broker/dealers may indicate that the provision of research services
is dependent upon the generation of certain specified levels of commissions and
underwriting concessions by the Adviser's clients, including the Portfolios.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Purchases
Portfolio shares are made available to serve as the underlying investment
vehicles for variable annuity and variable life insurance separate accounts
issued by Participating Insurance Companies. Shares of the Portfolios are sold
at net asset value without the imposition of a sales charge. The separate
accounts of the Participating Insurance Companies place orders to purchase and
redeem shares of the Portfolios based on, among other things, the amount of
premium payments to be invested and the amount of surrender and transfer
requests to be effected on that day pursuant to the contracts.
Although this Prospectus discusses the Portfolios being made available to serve
as the underlying investment vehicles for variable life insurance separate
accounts, it is not presently contemplated that the Portfolios will accept such
investments. In addition, in no instance will the Portfolios be made available
to life insurance separate accounts without the Trust having received any
necessary SEC consents or approvals. It is conceivable that in the future it may
be disadvantageous for variable annuity separate accounts and variable life
insurance separate accounts to invest in the Portfolios simultaneously. Although
the Trust and the Portfolios do not currently foresee any such disadvantages
either to variable annuity contract owners or variable life insurance policy
owners, the Trust's Board of Trustees intends to monitor events in order to
identify any material conflicts between such contract owners and policy owners
and to determine what action, if any, should be taken in response thereto. If
the Board of Trustees were to conclude that separate funds should be established
for variable life and variable annuity separate accounts, the variable life and
variable annuity contract holders would not bear any expenses attendant to the
establishment of such separate funds.
Purchases of the Portfolios may be effected on days on which the New York Stock
Exchange (the "Exchange") is open for business (a "Business Day").
The Trust and Stephens reserve the right to reject any purchase order. The
issuance of Shares is recorded on the books of the Trust, and share certificates
are not issued.
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EFFECTIVE TIME OF PURCHASES: Purchase orders for Shares in the Portfolios that
are received by Stephens or by the Transfer Agent before the close of regular
trading hours on the Exchange (currently 4:00 p.m., Eastern time) on any
Business Day are priced according to the net asset value determined on that day
but are not executed until 4:00 p.m., Eastern time, on the Business Day on which
immediately available funds in payment of the purchase price are received by the
Portfolio's Custodian.
Redemptions
Redemption proceeds are normally remitted in Federal funds wired to the
redeeming Participating Insurance Company within three Business Days following
receipt of the order. It is the responsibility of Stephens to transmit orders it
receives to the Trust. No charge for wiring redemption payments is imposed by
the Trust. Redemption orders are effected at the net asset value per share next
determined after acceptance of the order by Stephens or by the Transfer Agent.
The Trust may redeem shares involuntarily or make payment for redemption in
readily marketable securities or other property under certain circumstances in
accordance with the 1940 Act.
Net Asset Value Determination
Shares of each Portfolio are sold at their respective net asset value next
determined after the receipt of the purchase order, Participating Insurance
Companies may at any time redeem all or a portion of their shares at the next
determined net asset value following receipt of a redemption order.
The net asset value per share of each of the Portfolios is determined at
the times and in the manner described in the Prospectus.
A security listed or traded on an exchange is valued at its last sales
price on the exchange where the security is principally traded or, lacking any
sales on a particular day, the security is valued at the mean between the
closing bid and asked prices on that day. Each security traded in the
over-the-counter market (but not including securities reported on the Nasdaq
National Market System) is valued at the mean between the last bid and asked
prices based upon quotes furnished by market makers for such securities. Each
security reported on the Nasdaq National Market System is valued at the last
sales price on the valuation date.
Securities for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the supervision of
the Trust's Officers in a manner specifically authorized by the Board of
Trustees of the Trust. Short-term obligations having 60 days or less to maturity
are valued at amortized cost, which approximates market value.
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Generally, trading in foreign securities, as well as U.S. Government
securities, money market instruments and repurchase agreements, is substantially
completed each day at various times prior to the close of the New York Stock
Exchange. The values of such securities used in computing the net asset value of
the shares of a Portfolio are determined as of such times. Foreign currency
exchange rates are also generally determined prior to the close of the New York
Stock Exchange. Occasionally, events affecting the value of such securities and
such exchange rates 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 Trustees.
For purposes of determining the net asset value per share of the
International Growth Portfolio, all assets and liabilities of the International
Growth Portfolio initially expressed in foreign currencies will be converted
into U.S. dollars at the mean between the bid and ask prices of such currencies
against U.S. dollars quoted by a major bank that is a regular participant in the
foreign exchange market, or on the basis of a pricing service that takes into
account the quotes provided by a number of such major banks.
The Trust may redeem shares involuntarily to reimburse the Portfolios for
any loss sustained by reason of the failure of a shareholder to make full
payment for shares purchased by the shareholder, or to collect any charge
relating to a transaction effected for the benefit of a shareholder which is
applicable to shares as provided in the Prospectus from time to time. The Trust
also may make payment for redemptions in readily marketable securities or other
property if it is appropriate to do so in light of the Trust's responsibilities
under the 1940 Act.
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 Portfolio of the Trust not reasonably
practicable. The Exchange is closed for business on New Years Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Veterans Day, Thanksgiving Day and Christmas Day. The Federal Reserve
Bank observes the following holidays: New Years Day, Martin Luther King, Jr.
Day, Presidents' Day, Memorial Day, Independence Day, Labor Day, Columbus Day,
Thanksgiving Day and Christmas Day.
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DESCRIPTION OF SHARES
Description of Shares of the Trust
Nations Annuity Trust, an open-end, management investment company, was
organized as a Delaware business trust on November 24, 1997. As of the date of
this SAI, the Trust's Board of Trustees has authorized the issuance of eight
Portfolios, each representing an unlimited number of beneficial interests --
Nations Balanced Assets Portfolio, Nations Disciplined Equity Portfolio, Nations
International Growth Portfolio, Nations Managed Index Portfolio, Nations Managed
SmallCap Index Portfolio, Nations Marsico Focused Equities Portfolio, Nations
Marsico Growth & Income Portfolio and Nations Value Portfolio -- and the Board
of Trustees may, in the future, authorize the creation of additional investment
portfolios or classes of shares.
The Board of Trustees may classify or reclassify any unissued shares of a
Trust into shares of any class, classes or 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 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.
All shares of a Portfolio have equal voting rights and will be voted in
the aggregate, and not by series, except where voting by a series is required by
law or where the matter involved only affects one series. For example, a change
in a Portfolio's fundamental investment policy would be voted upon only by
shareholders of the Portfolio involved. Additionally, approval of an advisory
contract is a matter to be determined separately by Portfolio. Approval by the
shareholders of one Portfolio is effective as to that Portfolio whether or not
sufficient votes are received from the shareholders of the other Portfolios to
approve the proposal as to those Portfolios. As used in the Prospectus and in
this SAI, the term "majority," when referring to approvals to be obtained from
shareholders of the Portfolio, means the vote of the lesser of (i) 67% of the
shares of the Portfolio represented at a meeting if the shareholders of more
than 50% of the outstanding interests of the Portfolio are present in person or
by proxy, or (ii) more than 50% of the outstanding shares of the Portfolio. The
term "majority," when referring to the approvals to be obtained from
shareholders of Nations Annuity Trust as a whole, means the vote of the lesser
of (i) 67% of the Trust's shares represented at a meeting if the shareholders of
more than 50% of the Trust's outstanding shares are present in person or by
proxy, or (ii) more than 50% of the Trust's outstanding shares. Shareholders are
entitled to one vote for each full share held and fractional votes for
fractional shares held.
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The Trust may dispense with an annual meeting of shareholders in any year
in which it is not required to elect Trustees under the 1940 Act. However, the
Trust has undertaken to hold a special meeting of its shareholders for the
purpose of voting on the question of removal of a Trustee, or Trustees, if
requested in writing by the shareholders of at least 10% of the Trust's
outstanding voting shares, and to assist in communicating with other
shareholders as required by Section 16(c) of the 1940 Act.
Each share of a Portfolio represents an equal proportional interest in the
Portfolio with each other share and is entitled to such dividends and
distributions out of the income earned on the assets belonging to the Portfolio,
as are declared in the discretion of the Trustees. In the event of the
liquidation or dissolution of Nations Annuity Trust, shareholders of a Portfolio
are entitled to receive the assets attributable to the Portfolio that are
available for distribution, and a distribution of any general assets not
attributable to a particular Portfolio that are available for distribution in
such manner and on such basis as the Trustees in their sole discretion may
determine.
Shareholders are not entitled to any preemptive rights. All shares, when
issued, will be fully paid and non-assessable by the Trust.
Net income for dividend purposes consists of (i) interest accrued and
original issue discount earned on the Portfolio's assets, (ii) plus the
amortization of market discount and minus the amortization of market premium on
such assets, (iii) less accrued expenses directly attributable to the Portfolio
and the general expenses of Nations Funds prorated to the Portfolio on the basis
of its relative net assets.
ADDITIONAL INFORMATION CONCERNING TAXES
The following information supplements and should be read in conjunction
with the Prospectus section entitled "About Your Investment--Tax Information."
The Prospectus of the Portfolios generally describes generally the tax treatment
of the Portfolios and their shareholders. This section of the SAI includes
additional information concerning Federal income taxes.
General
The Trust intends to qualify each Portfolio as a regulated investment
company under Subchapter M of the Code as long as such qualification is in the
best interest of the Portfolio's shareholders. Each Portfolio will be treated as
a separate entity for Federal income tax purposes and thus the provisions of the
Code applicable to regulated investment companies will generally be applied
separately to each Portfolio, rather than to the Trust as a whole. In addition,
net capital gain, net investment income, and operating expenses will be
determined separately for each Portfolio. As a regulated investment company,
each Portfolio will not be subject to Federal income tax on its net investment
income and net capital gain distributed to its shareholders.
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Qualification as a regulated investment company under the Code requires,
among other things, that (a) each 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 regulated investment company'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; and (b) the 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 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 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 Portfolio controls and which are
determined to be engaged in the same or similar trades or businesses.
The Portfolios must also 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.
Although a Portfolio must ordinarily make such distributions during the taxable
year in which it realized the net investment income, in certain circumstances,
the Portfolio may make such distributions in the following taxable year.
Furthermore, distributions declared to a shareholder of record in a day 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 Portfolios intend to pay out substantially all of their net
investment income and any net realized capital gains for each year.
Excise Tax
A 4% nondeductible excise tax will be imposed on each Portfolio to the
extent it does not meet certain minimum distribution requirements by the end of
each calendar year. Each Portfolio intends to actually or be deemed to
distribute substantially all of its net investment income and net capital gain
by the end of each calendar year and, thus, expects not to be subject to the
excise tax.
Taxation of Portfolio Investments
Except as provided herein, gains and losses on the sale of portfolio
securities by a Portfolio will generally 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 Portfolio for more than one year at the time of
disposition of the securities.
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Gains recognized on the disposition of a debt obligation (including
tax-exempt obligations purchased after April 30, 1993) purchased by a Portfolio
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 Portfolio held the debt obligation.
If an option granted by the Fund lapses or is terminated through a closing
transaction, such as a repurchase by the Fund of the option from its holder, the
Fund 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 Fund 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 the Fund pursuant to the exercise of a call option written by it,
the Fund 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 Portfolio pursuant to the exercise of a put option written by
it, such Portfolio will subtract the premium received from its cost basis in the
securities purchased.
The amount of any gain or loss realized by a Portfolio 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, will generally be treated as
long-term capital gain or loss, and the remainder 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 Portfolio will generally recognize
ordinary income or loss to the extent gain or loss realized on the disposition
of portfolio debt 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, will generally be treated as ordinary
income or loss. The Portfolios will attempt to monitor Section 988 transactions,
where applicable, to avoid adverse 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.
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If a Portfolio enters into a "constructive sale" of any appreciated
position in stock, a partnership interest, or certain debt instruments, the
Portfolio must recognize gain (but not loss) with respect to that position. For
this purpose, a constructive sale occurs when the Portfolio 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 Portfolio purchases shares in a "passive foreign investment company"
("PFIC"), the Portfolio may be subject to Federal income tax and an interest
charge imposed by the IRS upon certain distributions from the PFIC or the
Portfolio's disposition of its PFIC shares. If a Portfolio invests in a PFIC,
the Portfolio intends to make an available election to mark-to-market its
interest in PFIC shares. Under the election, the 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
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
Portfolio as ordinary income (or loss) notwithstanding any distributions by the
PFIC, the Portfolio will not be subject to Federal income tax or the interest
charge with respect to its interest in the PFIC.
Income and dividends received by the Portfolios from sources within
foreign countries may be subject to withholding and other taxes imposed by such
countries.
Taxation of a Separate Account of a Participating Insurance Company
Under the Code, the investments of a segregated asset account, such as the
separate accounts of the Participating Insurance Companies, must be "adequately
diversified" in order for the holders of the variable annuity contracts or
variable life insurance policies underlying the account to receive the
tax-deferred or tax-free treatment on such annuities or policies generally
afforded holders of annuities or life insurance policies.
In general, the investments of a segregated asset account are considered
"adequately diversified" only if (i) no more than 55% of the value of the total
assets of the account is represented by any one investment; (ii) no more than
70% of the value of the total assets of the account is represented by any two
investments; (iii) no more than 80% of the value of the total assets of the
account is represented by any three investments; and (iv) no more than 90% of
the value of the total assets of the account is represented by any four
investments. In general, all securities of the same issuer are treated as a
single investment. However, Treasury Regulations provide a "look-through rule"
with respect to a segregated asset account's investments in a regulated
investment company for purposes of the applicable diversification requirements,
provided certain conditions are satisfied by the regulated investment company.
In particular, if the beneficial interests in the regulated investment company
are held by one or more segregated asset accounts of one or more insurance
companies, and if public access to such regulated investment company is
available exclusively through the purchase of a variable contract, then a
segregated asset account's beneficial interest in the regulated investment
company is not treated as a single investment. Instead, a pro rata portion of
each asset of the regulated investment company is treated as an asset of the
segregated asset account.
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Each Portfolio intends to satisfy the relevant conditions at all times,
thereby enabling the investment of the corresponding separate accounts to
qualify as "adequately diversified" investments. Accordingly, each separate
account of the Participating Insurance Companies will be able to treat its
interests in a Portfolio as ownership of a pro rata portion of each asset of the
Portfolio, such that holders of the variable annuity contracts or variable life
insurance policies underlying the separate account will be subject to the
favorable Federal income tax treatment under the Code.
For information concerning the Federal income tax consequences for the
holders of variable annuity contracts and variable rate insurance policies, such
holders should consult the prospectus used in connection with the issuance of
their particular contracts or policies and should consult their own tax
advisors.
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 28%;
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.
Other Matters
Investors should be aware that the investments to be made by the Portfolio
may involve sophisticated tax rules that may result in income or gain
recognition by the Portfolio without corresponding current cash receipts.
Although the Portfolio will seek to avoid significant noncash income, such
noncash income could be recognized by the Portfolio, in which case the Portfolio
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 Portfolio. 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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ADDITIONAL INFORMATION ON PERFORMANCE
Yield information and other performance information for the Trust's
Portfolios may be obtained by calling the Trust at (800) 321-7854.
From time to time the Portfolios may advertise total return and yield. BOTH
TOTAL RETURN AND YIELD FIGURES ARE BASED ON HISTORICAL DATA AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE. The "total return" may be calculated on an
average annual total return basis or an aggregate total return basis. Average
annual total return refers to the average annual compounded rates of return over
one-, five-, and ten-year periods or the life of a Portfolio (as stated in the
Portfolio's advertisement) that would equate an initial amount invested at the
beginning of a stated period to the ending redeemable value of the investment,
assuming the reinvestment of all dividend and capital gain distributions.
Aggregate total return reflects the total percentage change in the value of the
investment over the measuring period, again assuming the reinvestment of all
dividends and capital gain distributions. Total return may also be presented for
other periods.
"Yield" is calculated by dividing the annualized net investment income per share
during a recent 30-day (or one month) period by the maximum public offering
price per share on the last day of that period.
Total return and yield figures quoted for the Portfolios include the effect of
deducting each Portfolio's expenses, but may not include charges and expenses
attributable to any particular insurance product. Since you can only purchase
shares of the Portfolios through an insurance product, you should carefully
review the prospectus of the insurance product you have chosen for information
on relevant charges and expenses. Excluding these charges from quotations of the
Portfolio's performance has the effect of increasing the performance quoted.
Investment performance, which will vary, is based on many factors, including
market conditions, the composition of a Portfolio's securities and a Portfolio's
operating expenses as well as the charges and fees imposed by the separate
accounts. Investment performance also often reflects the risks associated with
such Portfolio's investment objective and policies. These factors should be
considered when comparing a Portfolio's investment results to those of other
mutual funds and other investment vehicles. Since yields fluctuate, yield data
cannot necessarily be used to compare an investment in a Portfolio with bank
deposits, savings accounts, and similar investment alternatives which often
provide an agreed-upon or guaranteed fixed yield for a stated period of time.
Any Portfolio advertising will be accompanied by performance information of the
related Participating Insurance Company's separate account which fund the
Contract and by an explanation that Portfolio performance information does not
reflect separate account fees and charges.
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Yield Calculations
The yield of the 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. The
Trust's yield figures are 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 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 Portfolio may differ from the rate of
distributions a Portfolio paid over the same period or the rate of income
reported in the Portfolio's 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 Portfolios' average annual and
cumulative total return figures are computed in accordance with the standardized
methods prescribed by the SEC.
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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.
This calculation, (i) assumes all dividends and distributions are
reinvested at net asset value on the appropriate reinvestment dates, 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, 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.
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Each Portfolio 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 Portfolios
also may compare the performance and yield of a class or series of shares to
those of other 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 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 Portfolio.
Any given performance comparison should not be considered representative
of a Portfolio's performance for any future period.
MISCELLANEOUS
Certain Record Holders
As of the date of this SAI, Stephens owned of record more than 25% of the
outstanding shares of the Trust acting as sponsor and may be deemed a
controlling person of the Trust under the 1940 Act.
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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. Debt rated BB has less
near-term vulnerability to default than other speculative issues. However,
it faces major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to inadequate capacity
to meet timely interest and principal payments. Debt rated B has a greater
vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial, or
economic conditions will likely impair capacity or willingness to pay
interest and repay principal.
To provide more detailed indications of credit quality, the AA, A and BBB,
BB and B ratings may be modified by the addition of a plus or minus sign to show
relative standing within these major rating categories.
A-1
<PAGE>
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.
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 that 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 - Bonds that 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.
A-2
<PAGE>
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 Aal, A1 or Baal,
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.
A-3
<PAGE>
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 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 - Indicates 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 - Indicates satisfactory capacity to pay principal and interest.
A-4
<PAGE>
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 portfolios, 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 trust
fundamentals are sound. Although ongoing portfolioing 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 two highest rating categories used by Fitch
for short-term obligations each of which denotes that the securities are
investment grade:
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.
A-5
<PAGE>
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 trust and operating subsidiaries. BankWatch ratings do not
constitute a recommendation to buy or sell securities of any of these trust.
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-6
<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.
Long-term debt ratings may include a plus (+) or minus (-) sign to
indicate where within a category the issue is placed.
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-7
<PAGE>
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 two highest short-term debt ratings used by
IBCA:
A1+ - When issues possess a particularly strong credit feature, a
rating of A1+ is assigned.
A1 - Obligations supported by the highest capacity for timely
repayment.
A2 - Obligations supported by a good capacity for timely repayment.
A-8
<PAGE>
NATIONS ANNUITY TRUST
FILE NOS. 333-40265; 811-08481
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Statement of Assets and Liabilities of Nations Annuity Trust at February 13,
1998
(b) Exhibits
Exhibit
Number Description
------ -----------
(1) Amended and Restated Declaration of Trust, incorporated by
reference to Pre- Effective Amendment No. 1, filed on February
20, 1998.
(2) Amended and Restated By-Laws, incorporated by reference to
Pre-Effective Amendment No. 1, filed on February 20, 1998.
(3) None.
(4) N/A
(5)(a) Investment Advisory Agreement between NationsBanc Advisors, Inc.
("NBAI") and the Registrant, incorporated by reference to
Pre-Effective Amendment No. 1, filed on February 20, 1998.
(5)(b) Sub-Advisory Agreement among NBAI, TradeStreet Investment
Associates, Inc. ("TradeStreet") and the Registrant, incorporated
by reference to Pre- Effective Amendment No. 1, filed on February
20, 1998.
(5)(c) Sub-Advisory Agreement among NBAI, Gartmore Global Partners
("Gartmore") and the Registrant, incorporated by reference to
Pre-Effective Amendment No. 1, filed on February 20, 1998.
(5)(d) Sub-Advisory Agreement among NBAI, Marsico Capital Management, LLC
("Marsico"), and the Registrant, incorporated by reference to
Pre-Effective Amendment No. 1, filed on February 20, 1998.
1
<PAGE>
(6)(a) Distribution Agreement between Stephens Inc. ("Stephens") and the
Registrant for all classes of shares of Nations Annuity Trust,
incorporated by reference to Pre-Effective Amendment No. 1, filed
on February 20, 1998.
(6)(b) Sales Support Agreement, incorporated by reference to
Pre-Effective Amendment No. 1, filed on February 20, 1998.
(6)(c) Shareholder Servicing Agreement, incorporated by reference to
Pre-Effective Amendment No. 1, filed on February 20, 1998.
(6)(d) Participation Agreement with Hartford Life Insurance Company,
incorporated by reference to Pre-Effective Amendment No. 1, filed
on February 20, 1998.
(7) Deferred Compensation Plan, to be filed by amendment.
(8)(a) Custody and Agreement among The Bank of New York ("BNY") and the
Registrant, filed herwith.
(8)(b) Global Custody Agreement between BONY and the Registrant, on
behalf of Nations International Growth Portfolio, incorporated by
reference to Pre- Effective Amendment No. 1, filed on February 20,
1998.
(9)(a) Administration Agreement between Stephens and the Registrant,
incorporated by reference to Pre-Effective Amendment No. 1, filed
on February 20, 1998.
(9)(b) Co-Administration Agreement between First Data Investor Services
Group, Inc. ("First Data") and the Registrant, incorporated by
reference to Pre- Effective Amendment No. 1, filed on February 20,
1998.
(9)(c) Sub-Administration Agreement among NBAI, Stephens and the
Registrant, incorporated by reference to Pre-Effective Amendment
No. 1, filed on February 20, 1998.
(9)(d) Transfer Agency and Services Agreement, between First Data and the
Registrant ncorporated by reference to Pre-Effective Amendment No.
1, filed on February 20, 1998.
(10) Opinion and Consent of Counsel, filed herewith.
2
<PAGE>
(11) N/A
(12) N/A
(13) Investment Letter, incorporated by reference to Pre-Effective
Amendment No. 1, filed on February 20, 1998.
(14) N/A
(15) Shareholder Servicing and Distribution Plan, incorporated by
reference to Pre-Effective Amendment No. 1, filed on February 20,
1998.
(16) Schedule for Computation of Performance Quotations, to be filed
by Amendment.
(17) N/A
(18) N/A
(19) Powers of Attorney for Edmund Benson, James Ermer, William H.
Grigg, Thomas Keller, A. Max Walker, Charles B. Walker, Thomas S.
Word, Richard H. Rose, and Carl Mundy, Jr., are incorporated by
reference to the Registration Statement on Form N-1A, filed on
November 14, 1997.
Item 25. Persons Controlled By or Under Common Control with Registrant
No person is controlled by or under common control with the Registrant.
Item 27. Indemnification
Article V of the Registrant's Declaration of Trust limits the liability
and, in certain instances, provides for mandatory indemnification of the
Registrant's Trustees, officers, employees, agents and holders of
beneficial interests in the Trust. In addition, the Trustees are empowered
under Section 3.9 of the Registrant's Declaration of Trust to obtain such
insurance policies as they deem necessary. Indemnification of Registrant's
administrator, principal underwriter, custodian, and transfer agent is
provided for, respectively, in the:
1. Administration Agreement with Stephens;
2. Co-Administration Agreement with First Data;
3. Distribution Agreement with Stephens;
4. Custody Agreement with BNY;
5. Global Custody Agreement with BNY; and
6. Transfer Agency and Services Agreement with First Data.
3
<PAGE>
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended, may be permitted to Trustees, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission ("SEC") such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such Trustee, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
(a) To the knowledge of the Registrant, none of the directors or officers
of NBAI, the adviser to the Registrant's portfolios, or TradeStreet, Gartmore or
Marsico, the investment sub-advisers, except those set forth below, are or have
been, at any time during the past two calendar years, engaged in any other
business, profession, vocation or employment of a substantial nature, except
that certain directors and officers also hold various positions with, and engage
in business for, the company that owns all the outstanding stock (other than
directors' qualifying shares) of NBAI, TradeStreet, Gartmore or Marsico,
respectively, or other subsidiaries of NationsBank Corporation.
(b) NBAI performs investment advisory services for the Registrant and
certain other customers. NBAI is a wholly owned subsidiary of NationsBank, N.A.
("NationsBank"), which in turn is a wholly owned banking subsidiary of
NationsBank Corporation. Information with respect to each director and officer
of the investment adviser is incorporated by reference to Form ADV filed by NBAI
with the SEC pursuant to the Investment Advisers Act of 1940, as amended (the
"Advisers Act") (file no. 801-49874).
(c) TradeStreet performs investment sub-advisory services for the
Registrant and certain other customers. TradeStreet is a wholly owned subsidiary
of NationsBank, which in turn is a wholly owned banking subsidiary of
NationsBank Corporation. Information with respect to each director and officer
of the investment sub-adviser is incorporated by reference to Form ADV filed by
TradeStreet with the SEC pursuant to the Advisers Act (file no. 801-50372).
4
<PAGE>
(d) Marsico performs investment sub-advisory services for the Registrant
and certain other customers. NationsBank has an option to purchase up to 50% of
Marsico. Information with respect to each director and officer of the investment
sub-adviser is incorporated by reference to Form ADV filed by Marsico with the
SEC pursuant to the Advisers Act (file no. 801-54914).
(e) Gartmore performs investment sub-advisory services for the Registrant
and certain other customers. Gartmore is a joint venture structured as a 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 UK Company which is the holding company for a
leading UK based international fund management group of companies. Information
with respect to each director and officer of the investment sub-adviser is
incorporated by reference to Form ADV filed by Gartmore with the SEC pursuant to
the Advisers Act (file no. 801-48811).
Item 29. Principal Underwriter
(a) Stephens, distributor for the Registrant, does not presently act as
investment adviser for any other registered investment companies, but does act
as principal underwriter for Nations Fund Trust, Nations Fund, Inc., Nations
Fund Portfolios, Inc., Nations Institutional Reserves, Nations LifeGoal Fund,
Inc., the Overland Express Funds, Inc., Stagecoach Inc., Stagecoach Funds, Inc.
and Stagecoach Trust, and is the exclusive placement agent for Master Investment
Trust, Managed Series Investment Trust, Life & Annuity Trust and Master
Investment Portfolio, all of which are registered open-end management investment
companies, and has acted as principal underwriter for the Liberty Term Trust,
Inc., Nations Government Income Term Trust 2003, Inc., Nations Government Income
Term Trust 2004, Inc. and the Managed Balanced Target Maturity Fund, Inc.,
closed-end management investment companies.
(b) Information with respect to each director and officer of the principal
underwriter is incorporated by reference to Form ADV filed by Stephens Inc. with
the SEC pursuant to the Investment Company Act of 1940, as amended (the "1940
Act") (file #501-15510).
(c) Not applicable.
Item 30. Location of Accounts and Records
(1) NBAI, One NationsBank Plaza, Charlotte, North Carolina 28255 (records
relating to its function as Investment Adviser).
5
<PAGE>
(2) TradeStreet, One NationsBank Plaza, Charlotte, North Carolina 28255
(records relating to its function as Sub-Adviser).
(3) Gartmore, One NationsBank Plaza, Charlotte, NC 28255 (records relating
to its function as Sub-Adviser).
(4) Marsico, 1200 17th Street, Suite 1300, Denver, CO 80202 (records
relating to its function as Sub-Advisor).
(5) Stephens, 111 Center Street, Little Rock, Arkansas 72201 (records
relating to its function as Distributor).
(6) Stephens, 111 Center Street, Little Rock, Arkansas 72201 (records
relating to its function as Administrator).
(7) First Data, One Exchange Place, Boston, Massachusetts 02109 (records
relating to its function as Co-Administrator and Transfer Agent).
(8) NationsBank Texas, 1401 Elm Street, Dallas, Texas 75202 (records
relating to its function as Custodian).
(9) BNY, 90 Washington Street, New York, New York 10286 (records relating
to its function as Custodian, for Nations International Growth
Portfolio, and Sub-Custodian)
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) N/A
(b) Registrant undertakes to call a meeting for the purpose of voting upon
the question or removal of a Trustee or Trustees when requested in
writing to do so by the holders of at least 10% of a Portfolio's
outstanding shares of beneficial interest and in connection with such
meeting to comply with the provisions of Section 16(c) of the 1940 Act,
relating to shareholder communications.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's most recent annual report to
shareholder upon request and without charge.
6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1233 and the
Investment Company Act of 1240, the Registrant has duly caused this
Post-Effective Amendment No. 1 to the Registration Statement on Form N1-A to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Little Rock, State of Arkansas on the 12th day of February, 1299.
NATIONS ANNUITY TRUST
By: *
-----------------------------
A. Max Walker
President and Chairman
of the Board of Trustees
By: /s/ Richard H. Blank, Jr.
-----------------------------
Richard H. Blank, Jr.
*Attorney-in-Fact
Pursuant to the requirements of the Securities Act of 1233, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
SIGNATURES TITLE DATE
---------- ----- ----
* President and Chairman February 12, 1999
- ------------------------- of the Board of Trustees
(A. Max Walker) (Principal Executive Officer)
/s/Richard H. Blank, Jr. Secretary and Treasurer February 12, 1999
- ------------------------- (Principal Financial and
(Richard H. Blank, Jr.) Accounting Officer)
* Trustee February 12, 1999
- -------------------------
(Edmund L. Benson, III)
* Trustee February 12, 1999
- -------------------------
(James Ermer)
<PAGE>
* Trustee February 12, 1999
- -------------------------
(William H. Grigg)
* Trustee February 12, 1999
- -------------------------
(Thomas F. Keller)
* Trustee February 12, 1999
- -------------------------
(Carl E. Mundy, Jr.)
* Trustee February 12, 1999
- -------------------------
(Charles B. Walker)
* Trustee February 12, 1999
- -------------------------
(Thomas S. Word)
* Trustee February 12, 1999
- -------------------------
(James B. Sommers)
/s/ Richard H. Blank, Jr.
- -----------------------------
Richard H. Blank, Jr.
<PAGE>
NATIONS ANNUITY TRUST
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
EX-99.B8(a) Custody Agreement
EX-99.B10 Opinion and Consent of Counsel
EX-99.B8(a)
CUSTODY AGREEMENT
THIS AGREEMENT is made as of the 19th day of October, 1998 by and
between The Bank of New York, a New York corporation authorized to do a banking
business ("Custodian"), and Nations Annuity Trust, a Delaware business trust
(the "Trust").
W I T N E S S E T H
WHEREAS, the Trust is a registered open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Trust desires to retain Custodian to serve as custodian
for the Trust, on behalf of its portfolios listed on Schedule I (individually a
"Portfolio" and collectively the "Portfolios") and to provide the services
described herein, and Custodian is willing to serve and to provide such
services; and
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, the Trust and Custodian hereby agree as follows:
1. Appointment. The Trust hereby appoints Custodian to act as custodian of
its portfolio securities, cash and other property on the terms set forth in this
Agreement. Custodian accepts such appointment and agrees to furnish the services
herein set forth in return for the compensation as provided in Paragraph 23
hereof. Custodian agrees to comply with all relevant provisions of the 1940 Act
and applicable rules and regulations thereunder.
The Trust may from time to time issue separate series or classes, and
classify and reclassify shares of any such series or class. The Trust shall
promptly specify to Custodian in writing such series or classes, or any
reclassification and thereafter Custodian shall identify to each such series or
class Property, as hereinafter defined, belonging to such series or class, and
such reports, confirmations and notices to the Trust as are called for under
this Agreement shall identify the series or class to which such report,
confirmation or notice pertains.
2. Delivery of Documents. The Trust has furnished Custodian with copies
properly certified or authenticated of each of the following:
1
<PAGE>
(a) votes of the Trust's Board of Trustees authorizing the
appointment of Custodian as custodian of portfolio securities, cash and other
property of the Trust, respectively, and approving and consenting to this
Agreement;
(b) schedules identifying and containing the signatures of all of
the Trust's officers and any other persons authorized to issue Oral Instructions
and to sign Written Instructions, as hereinafter defined, on behalf of the
Portfolios of the Trust;
(c) the Trust's current Registration Statement on Form N-1A under
the 1940 Act and the Securities Act of 1933, as amended (the "1933 Act"), as
filed with the Securities and Exchange Commission (the "SEC"), relating to
shares of beneficial interest of the Trust, without par value (the "Shares");
(d) the current prospectuses and statement of additional information
of each of the Portfolios, including all amendments and supplements thereto (the
"Prospectuses"); and
(e) a copy of the opinion of counsel for the Trust, filed with the
SEC as part of the Trust's current registration statement.
The Trust will furnish Custodian from time to time with copies,
properly certified or authenticated, of all amendments of or supplements to any
of the foregoing, if any.
3. Definitions.
(a) "Authorized Person". As used in this Agreement, the term
"Authorized Person" means any of the Trust's officers, and any other person,
whether or not any such person is an officer or employee of the Trust, duly
authorized by the Board of Trustees of the Trust to give Oral and Written
Instructions to Custodian on behalf of the Trust and listed on a schedule
provided to Custodian pursuant to Section 2 of this Agreement. Authorized
Persons duly authorized by the Board of Trustees of the Trust to buy and sell
foreign currency on a spot and forward basis and options to buy and sell foreign
currency are denoted by an asterisk thereon.
(b) "Book-Entry System". As used in this Agreement, the term
"Book-Entry System" means the Federal Reserve/Treasury book-entry system for
United States and federal agency securities, its successor or successors and its
nominee or nominees and any book-entry system maintained by a clearing agency
registered with the SEC under Section 17A of the Securities Exchange Act of 1934
(the "1934 Act").
2
<PAGE>
(c) "Composite Currency Unit". Shall mean the European Currency Unit
or any other composite unit consisting of the aggregate of specified amounts of
specified Currencies as such unit may be constituted from time to time.
(d) "Currency". Shall mean money denominated in a lawful currency of
any country or the European Currency Unit.
(e) "FX Transaction". Shall mean any transaction for the purchase by
one party of an agreed amount in one Currency against the sale by it to the
other party of an agreed amount in another Currency.
(f) "Instructions". Shall mean instruction communications
transmitted by appropriately safeguarded (whether by password protection or
other means) electronic or telecommunications media including but not limited to
S.W.I.F.T., LASER, computer-to-computer interface, dedicated transmission line
and tested telex.
(g) "Oral Instructions". As used in this Agreement, the term "Oral
Instructions" means oral instructions actually received by Custodian from an
Authorized Person or from a person reasonably believed by Custodian to be an
Authorized Person.
(h) "Officer's Certificate". The term "Officer's Certificate" as
used in this Agreement means instructions delivered by hand, mail, tested
telegram, cable, telex, or facsimile sending device, and actually received by
Custodian signed or reasonably believed by Custodian to be signed by two
officers of the Trust listed on a schedule provided to Custodian pursuant to
Section 2 of this Agreement.
(i) "Property". The term "Property", as used in this Agreement,
means:
(i) any and all securities and other property of the Trust
which the Trust may from time to time deliver to Custodian, as applicable, or
which Custodian may from time to time hold for the Trust;
(ii) all income in respect of any securities or other property
described in immediately preceding clause (i);
(iii) all proceeds of sales of any of such securities or other
property described in preceding clause (i) actually received by Custodian; and
(iv) proceeds of the sale of Shares received by Custodian from
time to time from or on behalf of the Trust.
3
<PAGE>
(j) "Securities Depository". As used in this Agreement, the term
"Securities Depository" shall mean The Depository Trust Company, a clearing
agency registered with the SEC or its successor or successors and its nominee or
nominees; and shall also mean any other registered clearing agency, its
successor or successors specifically identified in a certified copy of a
resolution of the Trust's Board of Trustees approving deposits by Custodian
therein.
(k) "Written Instructions". As used in this Agreement, "Written
Instructions" means instructions delivered by hand, mail, tested telegram,
cable, telex, or facsimile sending device, and actually received by Custodian,
signed or reasonably believed by Custodian to be signed by an appropriate number
of Authorized Person(s), and the term Written Instructions shall also include
Instructions, except that Instructions need not be signed or reasonably believed
to be signed by any Authorized Person(s) where such Instructions are transmitted
by Software pursuant to Paragraph 26A. A fax receipt or comparable confirmation
of transmission of any Written Instructions shall be deemed evidence of actual
receipt by Custodian.
4. Delivery and Registration of the Property. The Trust shall deliver or
cause to be delivered to Custodian all securities and all monies owned by the
Portfolios, including cash received for the issuance of Shares, at any time
during the period of this Agreement, except for securities and monies to be
delivered to any sub-custodian appointed, with approval of the Trust, by
Custodian pursuant to Paragraphs 7, 27, or 28(g) hereof. Custodian will not be
responsible for such securities and such monies until actually received by it.
All securities delivered to Custodian or any such sub-custodian (other than in
bearer form) shall be registered in the name of the Portfolio or in the name of
a nominee of a Portfolio or in the name of Custodian or any nominee of Custodian
(with or without indication of fiduciary status) or in the name of any
sub-custodian or any nominee of such sub-custodian appointed, with approval of
the Trust, pursuant to Paragraphs 7, 27, or 28(g) hereof or shall be properly
endorsed and in form for transfer satisfactory to Custodian.
5. Voting and Other Rights. With respect to all securities, however
registered, it is understood that the voting and other rights and powers shall
be exercised by the Trust. Custodian's only duty with respect to such rights
shall be to mail to the Trust within two (2) business days following receipt by
Custodian any documents received by Custodian as custodian, including notices of
corporate action, proxies, proxy soliciting materials and offering circulars,
with any elections or proxies for securities registered in a nominee name
executed by such nominee. In addition, Custodian shall provide notice of
Custodian's receipt of such documents by electronic means (e.g., posting notice
on LASER), as agreed between the parties. Where warrants, options, tenders or
other securities have fixed expiration dates, the Trust understands that in
order for Custodian to act, Custodian must receive the Trust's instructions at
its offices in New York, addressed as Custodian may from time to time request,
by no later than noon (New York City time) at least one (1) business day prior
to the last scheduled date to act with respect thereto (or such earlier date or
time as Custodian may reasonably notify the Trust). Absent Custodian's timely
receipt of such instructions, such instructions will expire without liability to
Custodian. Custodian shall have no duty to forward to the Trust any annual,
quarterly or special reports issued by companies whose securities are held by
Custodian hereunder.
4
<PAGE>
6. Receipt and Disbursement of Money.
(a) Custodian shall open and maintain a custody account for each
Portfolio of the Trust, subject only to draft or order by Custodian acting
pursuant to the terms of this Agreement, and, subject to Paragraphs 7, 27, or
28(g) hereof, shall hold in such account, subject to the provisions hereof, all
cash received by it from or for the Portfolios. Custodian shall make payments of
cash to, or for the account of, each Portfolio from such cash only: (i) for the
purchase of securities for the Portfolios as provided in Paragraph 14 hereof;
(ii) upon receipt of an Officer's Certificate for the payment of dividends or
other distributions on or with respect to Shares, or for the payment of
interest, taxes, administration, distribution or advisory fees or expenses which
are to be borne by the Portfolios under the terms of this Agreement and, with
respect to each Portfolio, and under the terms of any investment advisory
agreements, administration agreements or distribution agreements; (iii) upon
receipt of Written Instructions for payments in connection with the conversion,
exchange or surrender of securities owned or subscribed to by the Portfolios and
held by or to be delivered to Custodian; (iv) to a sub-custodian pursuant to
Paragraphs 7, 27, or 28(g) hereof; (v) for the redemption of Shares; or (vi)
upon receipt of an Officer's Certificate for other corporate purposes.
(b) Custodian is hereby authorized to endorse and collect all
checks, drafts or other orders for the payment of money received as Custodian
for the Portfolios.
7. Receipt of Securities.
(a) Except as provided by Paragraphs 7(c), 8, 27, or 28(g) hereof,
and except as otherwise directed by Oral or Written Instructions described in
Paragraph 11 hereof, Custodian shall hold and physically segregate in a separate
account with respect to each Portfolio, identifiable from those of any other
person, all securities and non-cash property received by it for the Portfolios.
All such securities and non-cash property are to be held or disposed of by
Custodian for each Portfolio pursuant to the terms of this Agreement. In the
absence of Written Instructions accompanied by a certified resolution
authorizing the specific transaction by the Trust's Board of Trustees, and
subject to Paragraph 25 hereof, Custodian shall have no power or authority to
withdraw, deliver, assign, hypothecate, pledge or otherwise dispose of any such
securities and investments, except in accordance with the express terms provided
for in this Agreement. In no case may any trustee, officer, employee or agent of
the Trust withdraw any securities. In connection with its duties under this
Paragraph 7(a), Custodian may enter into sub-custodian agreements with other
banks or trust companies for the receipt of certain securities and cash to be
held by Custodian for the account of a Portfolio pursuant to this Agreement,
provided Custodian obtains the prior written approval of the Trust to any such
sub-custody arrangement. Custodian will provide the Trust with a copy of each
sub-custodian agreement it executes pursuant to this Paragraph 7(a). Custodian
shall be liable for acts or omissions of any such sub-custodian selected by it
pursuant to this Paragraph 7(a), under the standards of care provided for
herein, except for any such sub-custodian engaged at the specific direction of
the Portfolios. Notwithstanding anything herein to the contrary, this Paragraph
7(a) shall not apply to Custodian's engagement of foreign sub-custodians, which
shall instead be governed by Paragraph 27 hereof.
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(b) Promptly after the close of business on each day, Custodian
shall furnish the Trust with confirmations and a summary of all transfers to or
from the account of each Portfolio during said day. Where securities are
transferred to the account of any Portfolio established at a Securities
Depository or the Book Entry System pursuant to Paragraph 8 herein, Custodian
shall also, by book-entry or otherwise, identify as belonging to such Portfolio
the quantity of securities in a fungible bulk of securities registered in the
name of Custodian (or its nominee) or shown in Custodian's account on the books
of a Securities Depository or the Book-Entry System. At least monthly and from
time to time, Custodian shall furnish the Trust with a detailed statement of the
Property held for each Portfolio under this Agreement.
(c) Notwithstanding any provision elsewhere contained herein,
Custodian shall not be required to obtain possession of any instrument or
certificate representing any futures contract, any option, or any futures
contract option until after it shall have determined, or shall have received an
Officer's Certificate from the Trust stating that any such instruments or
certificates are available. The Trust shall deliver to Custodian such an
Officer's Certificate no later than the business day preceding the availability
of any such instrument or certificate. Prior to such availability, Custodian
shall comply with the 1940 Act in connection with the purchase, sale,
settlement, closing out or writing of futures contracts, options, or futures
contract options by making payments or deliveries specified in such Officer's
Certificates or Written Instructions received by Custodian in connection with
any such purchase, sale, writing, settlement or closing out upon its receipt
from a broker, dealer, or futures commission merchant of a statement or
confirmation reasonably believed by Custodian to be in the form customarily used
by brokers, dealers, or future commission merchants with respect to such futures
contracts, options, or futures contract options, as the case may be, confirming
that the same is held by such broker, dealer or futures commission merchant, in
book-entry form or otherwise, in the name of Custodian (or any nominee of
Custodian) as Custodian for the Portfolio, provided, however, that
notwithstanding the foregoing, and subject to Paragraph 13(b) hereof, payments
to or deliveries from any margin account, and payments with respect to future
contracts, options, or future contract options to which a margin account
relates, shall be made in accordance with the terms and conditions of the
Trust's relevant margin account agreement. Whenever any such instruments or
certificates are available, Custodian shall, notwithstanding any provision in
this Agreement to the contrary, make payment for any futures contract, option,
or futures contract option for which such instruments or such certificates are
available against the delivery to Custodian of such instrument or such
certificate, and deliver any futures contract, option or futures contract option
for which such instruments or such certificates are available only against
receipt by Custodian of payment therefor. Any such instrument or certificate
delivered to Custodian shall be held by Custodian hereunder in accordance with,
and subject to, the provisions of this Agreement.
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8. Use of Securities Depository or the Book-Entry System. The Trust shall
deliver to Custodian a certified vote of the Board of Trustees of the Trust
approving, authorizing and instructing Custodian on a continuous and ongoing
basis until instructed to the contrary by Written Instructions: (i) to deposit
in a Securities Depository or the Book-Entry System all securities of the
Portfolios held hereunder eligible for deposit therein, and (ii) to utilize a
Securities Depository or the Book-Entry System to the extent possible in
connection with the performance of its duties hereunder, including without
limitation, settlements of purchases and sales of securities by the Portfolios,
and deliveries and returns of securities loaned, subject to repurchase
agreements or used as collateral in connection with borrowings. Without limiting
the generality of such use, the following provisions shall apply thereto:
(a) Securities and any cash of the Portfolios deposited by Custodian
in a Securities Depository or the Book-Entry System will at all times be
segregated from any assets and cash controlled by Custodian in other than a
fiduciary or custodian capacity. Subject to Paragraph 28(m) hereof, Custodian
and its sub-custodians, if any, will pay out money only upon receipt of
securities and will deliver securities only upon receipt of money, absent
Written Instructions to the contrary.
(b) All books and records maintained by Custodian that relate to the
Portfolios' participation in a Securities Depository or the Book-Entry System
will at all times during Custodian's regular business hours be open to
inspection by the Trust's duly authorized employees or agents and the Trust's
independent auditors in accordance with applicable regulations, it being
understood, however, that such records may be kept in an off site Custodian
storage location and the Trust will be furnished with all information in respect
of the services rendered to it as it may require.
(c) Custodian will provide the Trust with copies of any report
obtained by Custodian on the system of internal accounting control of the
Securities Depository or Book-Entry System promptly after receipt of such a
report by Custodian. Custodian will also provide the Trust with such reports on
its own system of internal control as the Trust may reasonably request from time
to time.
9. Instructions Consistent With the Charter, Etc. Unless otherwise
provided in this Agreement, Custodian shall act only upon Officer's
Certificates, Oral Instructions and/or Written Instructions. Custodian may
assume that any Officer's Certificate, Oral Instructions or Written Instructions
received hereunder are not in any way inconsistent with any provision of the
Declaration of Trust or By-Laws or any vote of the Trust's Board of Trustees, or
any committee thereof. Custodian shall be entitled to rely upon any Oral
Instructions or Written Instructions actually received by Custodian pursuant to
this Agreement, and upon any certificate, oral instructions, or written
instructions reasonably believed by Custodian to be an Officer's Certificate,
Oral Instructions or Written Instructions. The Trust agrees to forward to
Custodian, Written Instructions confirming Oral Instructions in such manner that
the Written Instructions are received by Custodian at the close of business of
the same day that such Oral Instructions are given to Custodian. The Trust
agrees that the fact that such confirming Written Instructions are not received
by Custodian shall in no way affect the validity of any of the transactions
authorized by the Trust by giving Oral Instructions, and that Custodian's
records with respect to the content of Oral Instructions shall be controlling.
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10. Transactions Not Requiring Instructions. Custodian is authorized to
take the following action without Oral Instructions, Written Instructions, or an
Officer's Certificate:
(a) Collection of Income and Other Payments. Custodian shall
subject to Paragraph 28(f) hereof:
(i) Collect and receive for the account of any Portfolio, all
income and other payments and distributions, including (without limitation)
stock dividends, rights, warrants and similar items, included or to be included
in the Property of any Portfolio, and promptly advise the Trust of such receipt
and shall credit such income, as collected, to such Portfolio of the Trust. From
time to time, Custodian may elect, but shall not be so obligated, to credit the
account with interest, dividends or principal payments on payable or contractual
settlement date, in anticipation of receiving same from a payor, central
depository, Securities Depository, broker or other agent employed by the Trust
or Custodian. Any such crediting and posting shall be at the Trust's sole risk,
and Custodian shall be authorized to reverse (A) any such advance posting in the
event it does not receive good funds from any such payor, central depository,
Securities Depository, broker or agent, and (B) any other payment or crediting,
including, without limitation, payments made by check or draft, in the event it
does not receive good funds or final payment;
(ii) With respect to securities of foreign issue, and subject
to Paragraph 27 hereof, effect collection of dividends, interest and other
income, and to promptly transmit to the Trust all reports, written information
or notices actually received by Custodian as Custodian, including notices of any
call for redemption, offer of exchange, right of subscription, reorganization,
or other proceedings affecting such securities, or any default in payments due
thereon. It is understood, however, that Custodian shall be under no
responsibility for any failure or delay in effecting such collections or giving
such notice with respect to securities of foreign issue, regardless of whether
or not the relevant information is published in any financial service available
to it unless such failure or delay is due to Custodian's own negligence.
Collections of income in foreign currency are, to the extent possible, to be
converted into United States dollars unless otherwise instructed in writing, and
in effecting such conversion Custodian may use such methods or agencies as it
may see fit, including the facilities of its own foreign division at customary
rates. All risk and expenses incident to such collection and conversion are for
the account of the Portfolios and Custodian shall have no responsibility for
fluctuations in exchange rates affecting any such conversions;
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(iii) Endorse and deposit for collection in the name of the
Trust and each of its Portfolios, checks, drafts, or other orders for the
payment of money on the same day as received;
(iv) Receive and hold for the account of each of the
Portfolio's securities received by the Portfolios as a result of a stock
dividend, share split-up or reorganization, recapitalization, readjustment or
other rearrangement or distribution of rights or similar securities issued with
respect to any portfolio securities of the Portfolios held by Custodian
hereunder;
(v) Present for payment and collect the amount payable upon
all securities which may mature or be called, redeemed or retired, or otherwise
become payable on the date such securities become payable, but, with respect to
calls, early redemptions, or early retirements, only if Custodian either: (i)
receives a written notice of the same, or (ii) notice of the same appears in one
or more of the publications then listed in Appendix A hereto, which Appendix may
be amended to add other publications at any time by Custodian without prior
notice to or consent from the Trust and which may be amended to delete a
publication with the prior notice and consent from the Trust;
(vi) Subject to Paragraphs 28(e) and (f) hereof, take any
action which may be necessary and proper in connection with the collection and
receipt of such income and other payments and the endorsement for collection of
checks, drafts and other negotiable instructions; and
(vii) With respect to domestic securities, to exchange
securities in temporary form for securities in definitive form, to effect an
exchange of the shares where the par value of stock is changed, and to surrender
securities at maturity or when advised by the Trust or the investment adviser to
the Trust of an earlier call for redemption, against payment therefor in
accordance with accepted industry practice. When fractional shares of stock of a
declaring corporation are received as a stock distribution, Custodian is
authorized to sell the fraction received and credit the Trust's account. Unless
specifically instructed to the contrary in writing, Custodian is authorized to
exchange securities in bearer form for securities in registered form. If any
Property registered in the name of a nominee of Custodian is called for partial
redemption by the issuer of such Property, Custodian is authorized to allot the
called portion to the respective beneficial holders of the Property in such
manner deemed to be fair and equitable by Custodian in its reasonable
discretion.
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(b) Miscellaneous Transactions. Custodian is authorized to deliver
or cause to be delivered Property against payment or other consideration or
written receipt therefor in the following cases:
(i) for examination by a broker selling for the account of the
Trust in accordance with street delivery custom;
(ii) for the exchange for interim receipts or temporary
securities for definitive securities;
(iii) for transfer of securities into the name of the
Portfolios or Custodian or a nominee of either, or for exchange of securities
for a different number of bonds, certificates, or other evidence, representing
the same aggregate face amount or number of units bearing the same interest
rate, maturity date and call provisions, if any; provided that, in any such
case, the new securities are to be delivered to Custodian.
11. Transactions Requiring Instructions. Upon receipt of Oral or Written
Instructions, and not otherwise, Custodian, directly or through the use of a
Securities Depository or the Book-Entry System, shall:
(a) execute and deliver to such persons as may be designated in such
Oral or Written Instructions, proxies, consents, authorizations, and any other
instruments whereby the authority of the Portfolios as owners of any securities
may be exercised;
(b) deliver any securities held for any Portfolio against receipt of
other securities or cash issued or paid in connection with the liquidation,
reorganization, refinancing, merger, consolidation or recapitalization of any
corporation, or the exercise of any conversion privilege;
(c) deliver any securities held for any Portfolio to any protective
committee, reorganization committee or other person in connection with the
reorganization, refinancing, merger, consolidation, recapitalization or sale of
assets of any corporation, against receipt of such certificates or deposit,
interim receipts or other instruments or documents as may be issued to it to
evidence such delivery;
(d) make such transfers or exchanges of the assets of any Portfolio
and take such other steps as shall be stated in said instructions to be for the
purposes of effectuating any duly authorized plan of liquidation,
reorganization, merger, consolidation or recapitalization of the Portfolios;
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(e) subject to Paragraph 25(b) hereof, release securities belonging
to any Portfolio to any bank or trust company for the purpose of pledge or
hypothecation to secure any loan incurred by such Portfolio; provided, however,
that securities shall be released only upon payment to Custodian of the monies
borrowed, except that in cases where additional collateral is required to secure
a borrowing already made, subject to proper prior authorization, further
securities may be released for that purpose; and pay such loan upon redelivery
to it of the securities pledged or hypothecated therefor and upon surrender of
the note or notes evidencing the loan;
(f) deliver any securities held for any Portfolio upon the exercise
of a covered call option written by such Portfolio on such securities;
(g) release and deliver securities owned by a Portfolio in
connection with any repurchase agreement entered into on behalf of such
Portfolio, but subject to Paragraph 28(m) hereof, only on receipt of payment
therefor; and pay out monies of such Portfolio in connection with such
repurchase agreements, but only upon the delivery of the securities;
(h) otherwise transfer, exchange or deliver securities in accordance
with Oral or Written Instructions specifying the purpose of such transfer,
including without limitation, loans of securities, short sales, or reverse
repurchase agreements, and subject to Paragraph 7(a) hereof.
12. Segregated Accounts. Custodian shall upon receipt of Written or Oral
Instructions establish and maintain a segregated account or accounts on its
records for and on behalf of any Portfolio, into which account or accounts shall
be credited, but only pursuant to an Officer's Certificate or Written
Instructions specifying the particular securities and/or amount of cash, cash
and/or securities, including securities in the Book-Entry System: (i) for the
purposes of compliance by the Portfolios and the Trust with the procedures
required by a securities or option exchange, (ii) for the purpose of compliance
by the Portfolios and the Trust with the 1940 Act and Release No. 10666 or any
subsequent release or releases of the SEC relating to the maintenance of
segregated accounts by registered investment companies, and (iii) for other
proper corporate purposes.
13. Dividends and Distributions.
(a) The Trust shall furnish Custodian with appropriate evidence of
action by the Trust's Board of Trustees declaring and authorizing the payment of
any dividends and distributions. Upon receipt by Custodian of an Officer's
Certificate with respect to dividends and distributions declared by the Trust's
Board of Trustees and payable to shareholders of any Portfolio who are entitled
to receive cash for fractional shares and those who have elected in the proper
manner to receive their distributions on dividends in cash, and in conformance
with procedures mutually agreed upon by Custodian and the Trust, and the Trust's
administrator or transfer agent, Custodian shall pay to the Portfolio's transfer
agent, as agent for the shareholders, an amount equal to the amount indicated in
said Officer's Certificate as payable by the Portfolio to such shareholders for
distribution in cash by the transfer agent to such shareholders.
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(b) Custodian may enter into separate custodial agreements with
various futures commission merchants ("FCMs") that the Trust uses (each an "FCM
Agreement"), pursuant to which the Portfolios' margin deposits in any
transactions involving futures contracts and options on futures contracts will
be held by Custodian in accounts (each an "FCM Account") subject to the
disposition by the FCM involved in such contracts in accordance with the
customer contract between the FCM and the Trust ("FCM Contract"), SEC rules
governing such segregated accounts, Commodity Futures Trading Commission
("CFTC") rules and the rules of the applicable commodities exchange. Such FCM
Agreements shall only be entered into by Custodian upon receipt by Custodian of
Written Instructions from the Trust which state that: (i) an FCM Contract has
been entered into; (ii) the Trust is in compliance with all the rules and
regulations of the CFTC; and (iii) the FCM Agreement is acceptable to the Trust.
Transfers of initial margin shall be made into an FCM Account only upon Written
Instructions; transfers of premium and variation margin may be made into an FCM
Account pursuant to Oral Instructions. Transfers of funds from an FCM Account to
the FCM for which Custodian holds such an account may only occur in accordance
with the terms of the FCM Agreement.
14. Purchase of Securities. Promptly after each purchase of securities by
the Trust on behalf of any Portfolio, the Trust shall deliver to Custodian Oral
or Written Instructions specifying with respect to each such purchase: (a) the
name of the issuer and the title of the securities; (b) the number of shares of
the principal amount purchased and accrued interest, if any; (c) the dates of
purchase and settlement; (d) the purchase price per unit; (e) the total amount
payable upon such purchase; (f) the name of the person from whom or the broker
through whom the purchase was made; and (g) the Portfolio for which the purchase
was made. Custodian shall upon receipt of securities purchased by or for the
Trust pay out of the monies held for the account of the Trust the total amount
payable to the person from whom or the broker through whom the purchase was
made, provided that the same conforms to the total amount payable as set forth
in such Oral or Written Instructions.
15. Sales of Securities. Promptly after each sale of securities by the
Portfolios or the Trust shall deliver to Custodian Oral or Written Instructions,
specifying with respect to each such sale: (a) the name of the issuer and the
title of the security; (b) the number of shares or principal amount sold, and
accrued interest, if any; (c) the dates of sale; (d) the sale price per unit;
(e) the total amount payable to the Trust upon such sale; (f) the name of the
broker through whom or the person to whom the sale was made; and (g) the
Portfolio for which the sale was made. Custodian shall, subject to Paragraph
28(m) hereof, deliver the securities against payment of the total amount payable
to the Trust upon such sale, provided that the same conforms to the total amount
payable as set forth in such Oral and Written Instructions.
16. Records. The books and records pertaining to the Portfolios and the
Trust which are in the possession of Custodian shall be the property of the
Trust. Such books and records shall be prepared and maintained as required by
the 1940 Act and other applicable securities laws and rules and regulations. The
SEC, the Trust, or the Trust's authorized representatives, shall have access to
such books and records at all times during Custodian's normal business hours.
Upon the reasonable request of the Trust, copies of any such books and records
shall be provided by Custodian to the Trust or the Trust's authorized
representative, and the Trust shall reimburse Custodian reasonable expenses for
providing such copies. Upon reasonable request of the Trust, Custodian shall
provide in hard copy, tape or on micro-film, or such other medium as agreed to
among the Trust and Custodian, and any books and records maintained by
Custodian.
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17. Reports.
(a) Custodian shall furnish the Trust the following reports:
(i) such periodic and special reports as the Trust may
reasonably request from time to time;
(ii) a monthly statement summarizing all transactions and
entries for the account of each Portfolio;
(iii) a monthly report of portfolio securities belonging to
each Portfolio showing the adjusted average cost of each issue and market
value at the end of such month;
(iv) a monthly report of the cash account of each Portfolio
showing disbursements;
(v) the reports to be furnished to the Trust pursuant to
Rule 17f-4 under the 1940 Act; and
(vi) such other information as may be agreed upon from time to
time between the Trust and Custodian.
(b) Subject to Paragraphs 5 and 27(g) hereof, Custodian shall
transmit promptly to the Trust any proxy statement, proxy materials, notice of a
call or conversion or similar communications actually received by Custodian as
custodian of the Property.
(c) Custodian shall report as the market value at the end of each
month the last closing bid, offer or sale price to the extent, and as the same,
is furnished to Custodian by a pricing or similar service utilized or subscribed
to by Custodian. Custodian shall not be responsible for, have any liability with
respect to, or be under any duty to inquire into, nor deemed to make any
assurances with respect to, the accuracy or completeness of such information,
even if The Bank of New York in performing services for others, including
services similar to those performed hereunder, receives different valuations of
the same or different securities of the same issuer.
18. Cooperation with Accountants. Custodian shall cooperate with the
Trust's independent certified public accountants and shall take all reasonable
action in the performance of its obligations under this Agreement, to assure
that the necessary information is made available to such accountants.
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19. Confidentiality. Custodian agrees on behalf of itself and its
employees to treat all record and other information relative to the Trust, its
prior, present or potential shareholders, its service providers and its prior,
present or potential customers, as confidential information, and to protect and
safeguard the same to the extent required by applicable law, provided, however,
that Custodian may make such disclosure as required by applicable law,
regulation, court order, decrees or legal process and upon receipt of any of the
foregoing requiring such disclosure, Custodian's only obligation shall be to
notify the Trust thereof. Custodian further agrees not to otherwise use such
records and information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior notification to and
approval in writing by the Trust.
20. Equipment Failures. In the event of equipment failures beyond
Custodian's control, Custodian shall take reasonable steps to minimize service
interruptions but shall not have any further liability with respect thereto.
Notwithstanding the foregoing, Custodian shall maintain sufficient back up
electronic data processing equipment to enable Custodian to fulfill its
obligations under this Agreement consistent with standard industry practices.
21. Right to Receive Advice.
(a) Advice of Portfolio. If Custodian shall be in doubt as to any
action to be taken or omitted by it, either may request, and shall receive, from
the Trust clarification or advice, including Oral or Written Instructions.
(b) Advice of Counsel. If Custodian shall be in doubt as to any
question of law involved in any action to be taken or omitted by Custodian, it
may request at its option advice from its own counsel, at its own expense, or
advice from the Trust's counsel.
(c) Conflicting Advice. In case of conflict between directions,
advice or Oral or Written Instructions received by Custodian pursuant to
subparagraph (a)of this paragraph and advice received by Custodian pursuant to
subparagraph (b) of this paragraph, Custodian shall be entitled to rely on and
follow the advice received pursuant to subparagraph (b) alone.
(d) Protection of Custodian. Custodian shall be protected in any
action or inaction which it takes or omits to take in reliance on any
directions, advice or Oral or Written Instructions received pursuant to
subparagraphs (a) or (b) of this section which it, after receipt of any such
directions, advice or Oral or Written Instructions, in good faith reasonably
believes to be consistent with such directions, advice or Oral or Written
Instructions, as the case may be. Nothing in this Paragraph 21 shall be
construed as imposing upon Custodian any obligation: (i) to seek such
directions, advice or Oral or Written Instructions, or (ii) to act in accordance
with such directions, advice or Oral or Written Instructions when received,
unless, under the terms or another provision of this Agreement, the same is a
condition to Custodian's properly taking or omitting to take such action.
Nothing in this Paragraph 21(d) shall excuse Custodian when an action or
omission on the part of Custodian constitutes willful misfeasance or bad faith,
or negligence or reckless disregard by Custodian of its duties under this
Agreement.
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22. Compliance with Governmental Rules and Regulations. Custodian
undertakes to comply with the laws, rules and regulations of governmental
authorities having jurisdiction over Custodian and its express duties hereunder.
23. Compensation. As compensation for the services rendered by Custodian
during the term of this Agreement, the Trust shall pay to Custodian, in addition
to reimbursement of its out-of-pocket expenses, such compensation as may be
agreed upon from time to time in writing by the Trust and Custodian as set forth
in Schedule III.
24. Indemnification. The Trust agrees to indemnify Custodian against, and
hold harmless from all taxes, charges, expenses (including reasonable fees and
expenses of counsel), assessments, claims, losses, demands and liabilities
whatsoever (including, without limitation, liabilities arising under the 1933
Act, the 1934 Act and the 1940 Act, and any state and foreign securities laws,
all as currently in effect or as may be amended from time to time) and expenses,
including without limitation, reasonable attorney's fees and disbursements,
howsoever arising or incurred because of or in connection with this Agreement,
except for such liability, claim, loss, demand, charge, expense, tax or
assessment arising out of Custodian's, or such nominees', willful misconduct or
negligence or reckless disregard of its duties under this Agreement. For the
purposes of this Agreement, including, without limitation, for purposes of
Paragraphs 24 and 28, neither Custodian's acceptance of Instructions in
accordance with Paragraph 26A nor Custodian's use of Foreign Sub-Custodians
pursuant to agreements that do not permit actual examination by independent
public accountants, nor the denial of examination by any Foreign Sub-Custodian,
as defined in Paragraph 27, shall, in and of itself, constitute, or be deemed to
constitute, a breach by Custodian of this Agreement or negligence, willful
misconduct, or reckless disregard of its duties by Custodian, provided the
relevant agreement between Custodian and a Foreign Sub-Custodian satisfies the
requirements of Rule 17f-5.
25. Overdrafts or Indebtedness.
(a) Custodian shall advance funds under this Agreement with respect
to any Portfolio which results in an overdraft because the moneys held by
Custodian in the separate account for such Portfolio shall be insufficient to
pay the total amount payable upon a purchase of securities by such Portfolio, as
set forth in an Officer's Certificate or Oral or Written Instructions, or which
results in an overdraft in the separate account of such Portfolio for some other
reason, or if the Trust is for any other reason indebted to Custodian, including
any indebtedness to The Bank of New York under the Trust's Cash Management and
Related Services Agreement, (except a borrowing for investment or for temporary
or emergency purposes using securities as collateral pursuant to a separate
agreement and subject to the provisions of Paragraph 25(b) hereof), such
overdraft or indebtedness shall be deemed to be a loan made by Custodian to the
Trust for such Portfolio payable on demand and shall bear interest from the date
incurred at a rate per annum (based on a 360-day year for the actual number of
days involved) equal to the overdraft rate specified in Schedule III to this
Agreement. In addition, the Trust hereby agrees that Custodian shall have a
continuing lien, security entitlement and security interest in and to any
property at any time held by it for the benefit of such Portfolio or in which
the Portfolio may have an interest which is then in Custodian's possession or
control or in possession or control of any third party acting on Custodian's
behalf. The Trust authorizes Custodian, in its sole discretion, at any time to
charge any such overdraft or indebtedness together with interest due thereon
against any balance of account standing to such Portfolio's credit on
Custodian's books. In addition, the Trust hereby covenants that on each Business
Day on which either it intends to enter a Reverse Repurchase Agreement and/or
otherwise borrow from a third party, or which next succeeds a Business Day on
which at the close of business the Trust had outstanding a Reverse Repurchase
Agreement or such a borrowing, it shall prior to 1:00 p.m., New York City time,
advise Custodian, in writing, of each such borrowing, shall specify the
Portfolio to which the same relates, and shall not incur any indebtedness not so
specified other than from Custodian.
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(b) The Trust will cause to be delivered to Custodian by any bank
(including, if the borrowing is pursuant to a separate agreement, Custodian)
from which it borrows money for investment or for temporary or emergency
purposes using securities held by Custodian hereunder as collateral for such
borrowings, a notice or undertaking in the form currently employed by such bank
setting forth the amount which such bank will loan to the Trust against delivery
of a stated amount of collateral. The Trust shall promptly deliver to Custodian
Written Instruction specifying with respect to each such borrowing: (a) the
Portfolio to which such borrowing relates; (b) the name of the bank; (c) the
amount and terms of the borrowing, which may be set forth by incorporating by
reference an attached promissory note, duly endorsed by the Portfolio, or other
loan agreement; (d) the time and date, if known, on which the loan is to be
entered into; (e) the date on which the loan becomes due and payable; (f) the
total amount payable to the Portfolio on the borrowing date; (g) the market
value of securities to be delivered as collateral for such loan, including the
name of the issuer, the title and the number of shares or the principal amount
of any particular securities and (h) a statement specifying whether such loan is
for investment purposes or for temporary or emergency purposes and that such
loan is in conformance with the 1940 Act and the Portfolio's prospectus.
Custodian shall deliver on the borrowing date specified in Written Instructions
the specified collateral and the executed promissory note, if any, against
delivery by the lending bank of the total amount of the loan payable, provided
that the same conforms to the total amount payable as set forth in such Written
Instructions. Custodian may, at the option of the lending bank, keep such
collateral in its possession, but such collateral shall be subject to all rights
therein given the lending bank by virtue of any promissory note or loan
agreement. Custodian shall deliver such securities as additional collateral as
may be specified in Written Instructions to collateralize further any
transaction described in this Paragraph 25(b). The Trust shall cause all
securities released from collateral status to be returned directly to Custodian,
and Custodian shall receive from time to time such return of collateral as may
be tendered to it. In the event that the Trust fails to specify in Written
Instructions the Portfolio, the name of the issuer, the title and number of
shares or the principal amount of any particular securities to be delivered as
collateral by Custodian, Custodian shall not be under any obligation to deliver
any securities.
26A. Instructions.
(a) It is understood and agreed that Custodian may, from time to
time, provide software to the Trust for purposes of enabling a Portfolio to
transmit Instructions to Custodian (the "Software"). Such Software has been
designed to include password protection or other features to restrict the use of
the Software to Authorized Persons; provided, however, that the Custodian makes
no warranty or representations of any kind with respect to such protections or
features, express or implied, including, but not limited to, any implied
warranties of merchantability or fitness for a particular purpose. The Trust and
the Custodian shall use commercially reasonable efforts to develop other
mechanisms (i) to enable the Trust to restrict the use of the Software to
Authorized Persons, (ii) to identify transmissions from a terminal other than an
authorized terminal, and (iii) for the prompt and accurate transmission of
Instructions by Authorized Persons to Custodian. It is further understood and
agreed that Custodian may provide specialized hardware or other equipment to
enable the Trust and the Portfolios to utilize the Software. With respect to any
such Software, Custodian grants to the Trust and its service providers a
personal, nontransferable and nonexclusive license to use the Software solely
for the purpose of transmitting Instructions to, and receiving communications
from, Custodian in connection with its account(s). The Trust and its service
providers agree not to sell, reproduce, lease or otherwise provide, directly or
indirectly, the Software or any portion thereof to any third party without the
prior written consent of Custodian. At no time shall the Trust be obligated to
use the Software to transmit Instructions to Custodian.
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(b) The Trust shall obtain and maintain at its own cost and expense
all equipment and services, including but not limited to communications
services, necessary for it to utilize the Software and transmit Instructions to
Custodian; provided, however, that the parties acknowledge and agree that if any
specialized equipment is necessary to enable the Trust to utilize the Software,
Custodian shall, at its own expense, provide and maintain such equipment.
(c) The Trust acknowledges that the Software, all data bases made
available to the Trust by utilizing the Software (other than data bases relating
solely to the assets of the Portfolios and transactions with respect thereto),
and any proprietary data, processes, information and documentation (other than
those which are or become part of the public domain or are legally required to
be made available to the public) (collectively, the "Information"), are the
exclusive and confidential property of Custodian. The Trust shall keep the
Information confidential by using the same care and discretion that the Trust
uses with respect to its own confidential property and trade secrets and shall
neither make nor permit any disclosure without the prior written consent of
Custodian. Upon termination of this Agreement or the Software license granted
hereunder for any reason, the Trust shall return to Custodian all copies of the
Information which are in its possession or under its control or which the Trust
distributed to third parties.
(d) Custodian reserves the right to modify the Software from time to
time upon reasonable prior notice and the Trust shall, if it desires in its sole
discretion to continue to use the Software, install new releases of the Software
as Custodian may direct. The Trust agrees not to modify or attempt to modify the
Software without Custodian's prior written consent. The Trust acknowledges that
any modifications to the Software, whether by the Trust or Custodian and whether
with or without Custodian's consent, shall become the property of Custodian.
(e) Where the method for transmitting Instructions by the Trust
involves an automatic systems acknowledgment to the Trust by Custodian of its
receipt of such Instructions, including any transmission of Instructions using
the Software, then (i) if an acknowledgment is not actually received by the
Trust, Custodian shall not be deemed to have received any such Instructions, and
(ii) if an acknowledgment is actually received by the Trust, the Custodian shall
be deemed to have received such Instructions and shall be responsible for any
error, omission, interruption or delay in connection with the transmission of
such Instructions; provided, however, that the Trust shall promptly review all
acknowledgments actually received and notify the Custodian in the event of any
apparent discrepancy.
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(f) (i) The Trust agrees that where it delivers to Custodian
Instructions hereunder using the Software, it shall be the Trust's sole
responsibility to ensure that only persons duly authorized by the Trust and the
correct number of such persons transmit such Instructions to Custodian and the
Trust will cause all such persons to treat applicable use and authorization
codes, passwords and authentication keys with extreme care, and authorizes
Custodian to act in accordance with and rely upon Instructions received by it
pursuant hereto using the Software.
(ii) The Trust hereby represents, acknowledges and agrees that it is
fully informed of the protections and risks associated with the various methods
of transmitting Instructions to Custodian and that there may be more secure
methods of transmitting Instructions to Custodian than the method(s) selected by
the Trust.
(iii) With respect to all Oral Instructions and all Written
Instructions other than Instructions delivered to Custodian using the Software
provided by Custodian, Custodian shall exercise all commercially reasonable
efforts to form a reasonable belief that each such instruction has been given by
an Authorized Person and, where required, signed by an appropriate number of
Authorized Person(s).
(g) The Trust shall notify Custodian of any errors, omissions or
interruptions in, or delay or unavailability of, its ability to send
Instructions using the Software provided by Custodian as promptly as
practicable, and in any event within 24 hours after the earliest of (i)
discovery thereof, (ii) the business day on which discovery should have occurred
through the exercise of reasonable care and (iii) in the case of any error, the
date of actual receipt of the earliest notice which reflects such error, it
being agreed that discovery and receipt of notice may only occur on a business
day. Custodian shall, as promptly as practicable, and in any event within 24
hours after the earliest of (i) discovery thereof, (ii) the business day on
which discovery should have occurred through the exercise of reasonable care and
(iii) in the case of any error, the date of actual receipt of the earliest
notice which reflects such error, it being agreed that discovery and receipt of
notice may only occur on a business day, advise the Trust whenever Custodian
learns or reasonably should have learned, of any errors, omissions or
interruption in, or delay or unavailability of, the Trust's ability to send
Instructions using the Software provided by Custodian.
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26B. FX Transactions
(a) Whenever a Portfolio shall enter into an FX Transaction, the
Portfolio shall promptly deliver to Custodian a Certificate or Oral Instructions
specifying with respect to such FX Transaction: (a) the Series to which such FX
Transaction is specifically allocated; (b) the type and amount of Currency to be
purchased by the Portfolio; (c) the type and amount of Currency to be sold by
the Portfolio; (d) the date on which the Currency to be purchased is to be
delivered; (e) the date on which the Currency to be sold is to be delivered; and
(f) the name of the person from whom or through whom such Currencies are to be
purchased and sold. Unless otherwise instructed by a Certificate or Oral
Instructions, Custodian shall deliver, or shall instruct a Foreign Sub-Custodian
to deliver, the Currency to be sold on the date on which such delivery is to be
made, as set forth in the Certificate, and shall receive, or instruct a Foreign
Sub-Custodian to receive, the Currency to be purchased on the date as set forth
in the Certificate.
(b) Where the Currency to be sold is to be delivered on the same day
as the Currency to be purchased, as specified in the Certificate or Oral
Instructions, Custodian or a Foreign Sub-Custodian may arrange for such
deliveries and receipts to be made in accordance with the customs prevailing
from time to time among brokers or dealers in Currencies, and such receipt and
delivery may not be completed simultaneously. The Portfolio assumes all
responsibility and liability for all credit risks involved in connection with
such receipts and deliveries, which responsibility and liability shall continue
until the Currency to be received by the Portfolio has been received in full.
(c) Any foreign exchange transaction effected by Custodian in
connection with this Agreement may be entered with Custodian, any office, branch
or subsidiary of The Bank of New York, or any Foreign Sub-Custodian (as defined
below) acting as principal or otherwise through customary banking channels. The
Portfolio may issue a standing Certificate with respect to foreign exchange
transactions but Custodian may establish rules or limitations concerning any
foreign exchange facility made available to the Portfolio. The Portfolio shall
bear all risks of investing in securities or holding Currency. Without limiting
the foregoing, the Portfolio shall bear the risks that rules or procedures
imposed by a Foreign Sub-Custodian or foreign depositories, exchange controls,
asset freezes or other laws, rules, regulations or orders shall prohibit or
impose burdens or costs on the transfer to, by or for the account of the
Portfolio of securities or any cash held outside the Portfolio's jurisdiction or
denominated in Currency other than its home jurisdiction or the conversion of
cash from one Currency into another Currency. Custodian shall not be obligated
to substitute another Currency for a Currency (including a Currency that is a
component of a Composite Currency Unit) whose transferability, convertibility or
availability has been affected by such law, regulation, rule or procedure.
Neither Custodian nor any Foreign Sub-Custodian shall be liable to the Portfolio
for any loss resulting from any of the foregoing events.
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27. Duties of Custodian with Respect to Property of any Portfolio Held
Outside of the United States.
(a) Custodian is authorized and instructed to employ, as
sub-custodian for each Portfolio's foreign securities and other assets, the
foreign banking institutions and foreign securities depositories and clearing
agencies selected from time to time by Custodian as the Foreign Custody Manager
appointed by the Trust's Board of Trustees ("Foreign Sub-Custodians") to carry
out their respective responsibilities in accordance with the terms of the
sub-custodian agreement between each such Foreign Sub-Custodian and Custodian
(each such agreement, a "Foreign Sub-Custodian Agreement"). Upon receipt of an
Officer's Certificate, the Trust may designate any additional foreign
sub-custodian with which Custodian has an agreement for such entity to act as
Custodian's agent, as its sub-custodian and any such additional foreign
sub-custodian shall be deemed a Foreign Sub-Custodian hereunder. Upon receipt of
an Officer's Certificate, Custodian shall cease using any one or more Foreign
Sub-Custodians for the Portfolio's assets.
(b) Each Foreign Sub-Custodian Agreement shall be substantially in
the form delivered to the Trust herewith and will not be amended in a way that
materially adversely affects the Trust without the Trust's prior written
consent.
(c) Custodian shall identify on its books as belonging to each
Portfolio the Foreign Securities of such Portfolio held by each Foreign
Sub-Custodian. At the election of the Trust, it shall be entitled to be
subrogated to any claims by the Trust or any Portfolio against a Foreign
Sub-Custodian as a consequence of any loss, damage, cost, expense, liability or
claim sustained or incurred by the Trust or any Portfolio if and to the extent
that the Trust or such Portfolio has been made whole by Custodian for any such
loss, damage, cost, expense, liability or claim.
(d) Upon request of the Trust, Custodian will, consistent with the
terms of the applicable Foreign Sub-Custodian Agreement, use reasonable efforts
to arrange for the independent accountants of the Trust to be afforded access to
the books and records of any Foreign Sub-Custodian insofar as such books and
records relate to the performance of such Foreign Sub-Custodian under its
agreement with Custodian on behalf of the Trust.
(e) Custodian will supply to the Trust from time to time, as
mutually agreed upon, statements in respect of the securities and other assets
of each Portfolio held by Foreign Sub-Custodians, including but not limited to,
an identification of entities having possession of each Portfolio's Foreign
Securities and other assets, and advices or notifications of any transfers of
Foreign Securities to or from each custodial account maintained by a Foreign
Sub-Custodian for Custodian on behalf of the Portfolio.
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(f) Custodian agrees that it will use reasonable care in monitoring
compliance by each Foreign Sub-Custodian with the terms of the relevant Foreign
Sub-Custodian Agreement and that if it learns of any breach of such Foreign
Sub-Custodian Agreement believed by Custodian to have a material adverse effect
on the Trust or any Portfolio it will promptly notify the Trust in writing of
such breach. Custodian also agrees to use reasonable and diligent efforts to
enforce its rights under the relevant Foreign Sub-Custodian Agreement.
(g) Custodian shall transmit promptly to the Trust all notices,
reports or other written information received pertaining to the Portfolios'
Foreign Securities, including without limitation, notices of corporate action,
proxies and proxy solicitation materials.
(h) Notwithstanding any provision of this Agreement to the contrary,
settlement and payment for securities received for the account of the Trust or
any Portfolio and delivery of securities maintained for the account of the Trust
or any Portfolio may be effected in accordance with the customary or established
securities trading or securities processing practices and procedures in the
jurisdiction or market in which the transaction occurs, including, without
limitation, delivery of securities to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities from such purchaser
or dealer.
(i) With respect to any losses or damages arising out of or relating
to any actions or omissions of any Foreign Sub-Custodian, the sole
responsibility and liability of Custodian shall be to take all appropriate and
reasonable action at the Trust's expense to recover such loss or damage from the
Foreign Sub-Custodian. It is expressly understood and agreed that Custodian's
sole responsibility and liability shall be limited to amounts so recovered from
the Foreign Sub-Custodian.
28. Concerning Custodian.
(a) (i) Custodian shall exercise care and diligence and act in good
faith and use all commercially reasonable efforts in the performance of its
duties hereunder. Custodian shall be responsible to the Trust for its own
failure or the failure of any sub-custodian that it shall appoint (other than a
foreign sub-custodian referred to in Paragraph 27 or a sub-custodian appointed
by Custodian at the specific direction of the Trust) or that of its employees or
agents, to perform its duties, obligations or responsibilities in accordance
with this Agreement, but only to the extent that such failure results from acts
or omissions that constitute willful misfeasance, bad faith or negligence on the
part of Custodian, or on the part of its employees or agents, or reckless
disregard of such duties, obligations and responsibilities.
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(ii) Without limiting the generality of the foregoing or any
other provision of this Agreement, in no event shall Custodian be liable to the
Portfolio or any third party nor, except as otherwise provided in this
subparagraph for special, indirect or consequential damages or lost profits or
loss of business, arising under or in connection with this Agreement, even if
previously informed of the possibility of such damages and regardless of the
form of action. Custodian may, with respect to questions of law arising under
any FCM Agreement, apply for and obtain the advice and opinion of counsel to the
Trust at the expense of the Trust, or of its own counsel at its own expense, and
shall be fully protected with respect to anything done or omitted by it in good
faith in conformity with such advice or opinion. Custodian shall be liable to
the Trust for any loss or damage resulting from the use of the Book-Entry System
or any Securities Depository arising by reason of any negligence or willful
misconduct on the part of Custodian or any of its employees or agents.
(iii) Custodian's liability pursuant to the last sentence of
subparagraph (a)(i) shall include, but not be limited to, reimbursing the Trust
for court-ordered damage awards, fines, penalties, and judicially-approved
settlements (and attorney's fees and disbursements relating thereto) arising out
of or in connection with the conduct giving rise to such liability.
(iv) If the Trust receives notice of the commencement of any
action, suit, or proceeding (an "Action"), or notice that any Action may be
commenced, for which Custodian may be liable to the Trust pursuant to this
Paragraph 28, the Trust shall give notice to Custodian of the commencement of
the Action or of the possibility that an Action will be commenced. Any omission
to notify Custodian will not relieve Custodian from any liability which it may
have under this Paragraph, except to the extent the failure to notify Custodian
prejudices the rights of Custodian. Custodian will be entitled at its sole
expense and liability, to exercise full control of the defense, compromise or
settlement of any such Action, provided that Custodian: (1) notifies the Trust
in writing of Custodian's intention to assume such defense; and (2) retains
legal counsel reasonably satisfactory to the Trust to conduct the defense of
such Action. If Custodian advises the Trust that it does not wish to exercise
full control of any defense, compromise or settlement of any Action, Custodian
shall be responsible for the fees and expenses of counsel selected by the Trust,
in addition to any other amounts for which Custodian may be liable pursuant to
this Paragraph 28. The other person will cooperate with the person assuming the
defense, compromise or settlement of any Action in accordance with this
Paragraph in any manner that such person reasonably may request. If Custodian so
assumes the defense of any such Action, the Trust will have the right to employ
a separate counsel and to participate in (but not control) the defense,
compromise or settlement of the Action, but the fees and expenses of such
counsel will be at the expense of the Trust unless: (a) Custodian has agreed to
pay such fees and expenses, (b) any relief other than the payment of money
damages is sought against the Trust, or (c) the Trust has been advised by its
counsel that there may be one or more defenses available to it which are
different from or additional to those available to Custodian and that a conflict
of interest therefore exists, and in any such case that portion of the fees and
expenses of such separate counsel that are reasonably related to matters for
which Custodian is liable pursuant to this Paragraph will be paid by Custodian.
The Trust will not settle or compromise any such Action for which Custodian is
liable pursuant to this Paragraph without the prior written consent of
Custodian, unless Custodian has failed, after reasonable notice, to undertake
control of such Action in the manner provided in this Paragraph. Custodian will
not settle or compromise any such Action in which any relief other than the
payment of money damages is sought against the Trust without the consent of the
Trust, such consent not to be unreasonably withheld. In the event that Custodian
intends to settle or compromise any Action in which solely money damages are
sought, Custodian shall give the Trust fifteen (15) business days prior written
notice.
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(b) Without limiting the generality of the foregoing, Custodian
shall be under no obligation to inquire into, and shall not be liable for:
(i) the validity of the issue of any securities purchased,
sold, or written by or for the Trust or any Portfolio, the legality of the
purchase, sale or writing thereof, or the propriety of the amount paid or
received therefor;
(ii) the legality of the sale or redemption of any Shares, or
the propriety of the amount to be received or paid therefor;
(iii) the legality of the declaration or payment of any
dividend by the Trust;
(iv) the legality of any borrowing by the Trust using
securities as collateral;
(v) the legality of any loan of portfolio securities, or under
any duty or obligation to see to it that any cash collateral delivered to it by
a broker, dealer, or financial institution or held by it at any time as a result
of such loan of portfolio securities is adequate collateral for or against any
loss Custodian, the Trust or any Portfolio might sustain as a result of such
loan. Custodian specifically, but not by way of limitation, shall not be under
any duty or obligation periodically to check or notify the Trust or any
Portfolio that the amount of such cash collateral held by Custodian for the
Trust is sufficient collateral for the Trust, but such duty or obligation shall
be the sole responsibility of the Trust. In addition, Custodian shall be under
no duty or obligation to see that any broker, dealer or financial institution to
which portfolio securities are lent makes payment to it of any dividends or
interest which are payable to or for the account of the Trust during the period
of such loan or at the termination of such loan, provided, however, that
Custodian shall promptly notify the Trust in the event that such dividends or
interest are not paid and received when due; or
(vi) the sufficiency or value of any amounts of money and/or
securities held in any segregated account described in Paragraph 12(a) hereof in
connection with transactions by the Portfolios, or whether such segregated
account provides the compliance intended to be achieved. In addition, Custodian
shall not be under any duty or obligation to see that any broker, dealer, FCM or
Clearing Member makes payment to the Portfolio of any variation margin payment
or similar payment which the Portfolio may be entitled to receive from such
broker, dealer, FCM or Clearing Member, to see that any payment received by
Custodian from any broker, dealer, FCM or Clearing Member is the amount the
Trust is entitled to receive, or to notify the Trust or a Portfolio of
Custodian's receipt or non-receipt of any such payment.
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(c) Custodian shall not be liable for, or considered to be
sub-custodian or custodian of, any money, whether or not represented by any
check, draft, or other instrument for the payment of money, received by
Custodian on behalf of the Trust until Custodian actually receives and collects
such money directly or by the final crediting of the account representing the
Portfolio's interest at the Book-Entry System or a Securities Depository.
(d) Custodian shall not have any responsibility or be liable for
ascertaining or acting upon any calls, conversions, exchange offers, tenders,
interest rate changes or similar matters relating to securities held in a
Securities Depository, unless Custodian shall have actually received timely
notice from such Securities Depository. In no event shall Custodian have any
responsibility or liability for the failure of any Securities Depository to
collect, or for the late collection or late crediting by a Securities Depository
of any amount payable upon securities deposited in a Securities Depository which
may mature or be redeemed, retired, called or otherwise become payable. Upon
receipt of Written Instructions from the Trust of an overdue amount on
securities held in a Securities Depository Custodian shall make a claim against
a Securities Depository on behalf of the Trust, except that Custodian shall not
be under any obligation to appear in, prosecute or defend any action suit or
proceeding in respect to any securities held by a Securities Depository which in
its opinion may involve it in expense or liability, unless indemnity
satisfactory to it against all expense and liability be furnished as often as
may be required.
(e) Custodian shall not be under any duty or obligation to take
action to effect collection of any amount due to the Trust from a transfer agent
of the Trust nor to take any action to effect payment or distribution by the
transfer agent of the Trust of any amount paid by Custodian to the transfer
agent of the Trust in accordance with this Agreement.
(f) Custodian shall not be under any duty or obligation to take
action to effect collection of any amount, if the securities upon which such
amount is payable are in default, or if payment is refused after due demand or
presentation, unless and until: (i) it shall be directed to take such action by
Written Instructions, and (ii) it shall be assured to its reasonable
satisfaction of reimbursement of its costs and expenses in connection with any
such action.
(g) Custodian may in addition to the employment of Foreign
Sub-Custodians pursuant to Paragraphs 7 and 27, hereof appoint one or more
banking institutions as Depository or Depositories, as a sub-custodian or as
sub-custodians, or as a co-custodian or as co-custodians, including, but not
limited to, banking institutions located in foreign countries, of securities and
moneys at any time owned by the Portfolios, upon such terms and conditions as
may be approved in an Officer's Certificate or contained in an agreement
executed by Custodian and the Trust and the appointed institution.
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(h) Custodian shall not be under any duty or obligation: (i) to
ascertain whether any securities at any time delivered to, or held by it or by
any Foreign Sub-Custodian, for the account of the Trust and specifically
allocated to a Portfolio are such as properly may be held by the Trust or such
Portfolio under the provisions of its Prospectus, or (ii) to ascertain whether
any transactions by the Portfolio, whether or not involving Custodian, are such
transactions as may properly be engaged in by the Portfolio.
(i) Custodian shall charge its compensation and any expenses with
respect to the Portfolios of the Trust incurred by Custodian in the performance
of its duties under this Agreement only against the money of the Portfolio or
Portfolios of the Trust from which such compensation or expenses is actually due
and payable, and under no circumstances shall any compensation or expenses due
to Custodian be considered to be a joint, or joint and several, obligation of
the Portfolios of the Trust. To the extent that Custodian is entitled to recover
from the Trust any loss, damage, liability or expense (including counsel fees)
under this Agreement, Custodian shall charge the amount due in respect of such
loss, damage, liability or expense (including counsel fees) only against the
money held by it for the Portfolio or Portfolios of the Trust that is/are
identified by the Trust in an Officer's Certificate, unless and until the Trust
instructs Custodian by an Officer's Certificate to charge against money held by
it for the account of a Portfolio such Portfolio's pro rata share (based on such
Portfolio's net asset value at the time of the charge in proportion to the
aggregate net asset value of all Portfolios at that time) of the amount of such
loss, damage, liability or expense (including counsel fees).
(j) Custodian shall be entitled to rely upon any Officer's
Certificate, Written Instructions, notice or other instrument in writing
received by Custodian and reasonably believed by Custodian, to be an Officer's
Certificate or Written Instructions. Custodian shall be entitled to rely upon
any Oral Instructions actually received by Custodian. The Trust agrees to
forward to Custodian Written Instructions confirming such Oral Instructions in
such manner so that such Written Instructions are received by Custodian, whether
by hand delivery, telecopier or other similar device, or otherwise, by the close
of business of the same day that such Oral Instructions are received by
Custodian. The Trust agrees that the fact that such confirming instructions are
not received, or that contrary instructions are received, by Custodian shall in
no way affect the validity of the transactions or enforceability of the
transactions hereby authorized by the Trust. The Trust agrees that Custodian
shall not incur any liability to the Trust in acting upon Oral Instructions
given to Custodian hereunder concerning such transactions provided such
instructions reasonably appear to have been received from an Authorized Person.
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(k) Custodian shall be entitled to rely upon any instrument,
instruction or notice received by it and reasonably believed by it to be given
in accordance with the terms and conditions of any FCM Agreement. Without
limiting the generality of the foregoing, Custodian shall not be under any duty
to inquire into, and Custodian shall not be liable for, the accuracy of any
statements or representations contained in any such instrument or other notice
including, without limitation, any specification of any amount to be paid to a
broker, dealer, futures commission merchant or clearing member.
(l) Custodian shall provide the Trust with any report obtained by
Custodian on the system of internal accounting control of the Book-Entry System,
any Securities Depository utilized hereunder the Depository or the Options
Clearing Corporation, and with such reports on its own systems of internal
accounting control as the Trust may reasonably request from time to time.
(m) Subject to the foregoing provisions of this Agreement,
including, without limitation, those contained in Paragraph 27 hereof, Custodian
may deliver and receive securities, and receipts with respect to such
securities, and arrange for payments to be made and received by Custodian in
accordance with the customs prevailing from time to time among brokers or
dealers in such securities. When Custodian is instructed to deliver securities
against payment, delivery of such securities and receipt of payment therefor may
not be completed simultaneously. The Portfolio assumes all responsibility and
liability for all credit risks involved in connection with Custodian's delivery
of securities pursuant to proper instructions of the Portfolio, which
responsibility and liability shall continue until final payment in full has been
received by Custodian.
(n) Custodian shall not have any duties or responsibilities
whatsoever except such duties and responsibilities as are specifically set forth
in this Agreement, and no covenant or obligation shall be implied in this
Agreement against Custodian.
29. Termination. Any of the parties hereto may terminate this Agreement by
giving to the other parties a notice in writing specifying the date of such
termination, which shall be not less than ninety (90) days after the date of
giving of such notice. Upon the date set forth in such notice this Agreement
shall terminate, and Custodian shall on that date deliver directly to the Trust
or a successor custodian designated by the Trust all securities and moneys then
owned by the Trust and held by Custodian, after deducting all fees, expenses and
other amounts for the payment or reimbursement of which it shall then be
entitled; provided, however, that transaction fees and expenses payable by the
Trust in connection with a deconversion to a successor custodian shall be
limited to Custodian's actual direct cost.
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30. Notices. All notices and other communications (collectively referred
to as "Notice" or "Notices" in this paragraph) hereunder shall be in writing or
by confirm in telegram, cable, telex, or facsimile sending device. Notices shall
be addressed: (a) if to Custodian, at Custodian's address, 90 Washington Street,
22nd Floor, New York, New York 10286, Attention: Frank Ajosa; (b) if to the
Trust, at the address of the Trust, 111 Center Street, Little Rock, Arkansas
72201, Attention: Richard H. Blank, Jr., Secretary; or (c) if to none of the
foregoing, at such other address as shall have been notified to the sender of
any such Notice or other communication. Notice shall be deemed to have been
given when actually received by the other party. All postage, cable, telegram,
telex and facsimile sending device charges arising from the sending of a Notice
hereunder shall be paid by the sender.
31. Further Actions. Each party agrees to perform such further acts and
execute such further documents as it deems necessary to effectuate the purposes
hereof.
32. Amendments. This Agreement or any part hereof may be changed or waived
only by an instrument in writing signed by the party against which enforcement
of such change or waiver is sought.
33. Miscellaneous.
(a) The Trust agrees that Custodian may be a counterparty in any
purchase or sale of foreign currency by or for the Trust on a spot or forward
basis, and on any option to buy or sell foreign currency.
(b) This Agreement embodies the entire Agreement and understanding
between the parties hereto, and supersedes all prior agreements and
understandings relating to the subject matter hereof. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction or
effect. This Agreement shall be deemed to be a contract made in New York and
governed by New York law. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors.
34. Release. The names "Nations Annuity Trust" and "Trustees of Nations
Annuity Trust" refer respectively to the Trust created and the Trustees, as
trustees but not individually or personally, acting from time to time under a
Declaration of Trust and Certificate of Trust dated November 24, 1997, which is
hereby referred to and a copy of which is on file at the office of the Secretary
of the State of Delaware and at the principal office of the Trust. The
obligations of "Nations Annuity Trust" entered into in the name or on behalf
thereof by any of the Trustees, representatives or agents are made not
individually, but in such capacities, and are not binding upon any of the
Trustees, Shareholders, or representatives of the Trust personally, but bind
only the Trust Property (as defined in the Declaration of Trust), and all
persons dealing with any class of Shares of the Trust Property, and all persons
dealing with any class of Shares of the Trust must look solely to the Trust
Property belonging to such class for the enforcement of any claims against the
Trust.
35. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original.
27
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the day and year first above
written.
NATIONS ANNUITY TRUST
By: _______________________________
Richard H. Blank, Jr.
Secretary
THE BANK OF NEW YORK
By: _______________________________
Stephen E. Grunston
Vice President
28
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SCHEDULE I
The Custody Agreement between Nations Annuity Trust, and Sub-Custodian
applies to the following Portfolios of the Trust:
Nations Annuity Balanced Assets Portfolio
Nations Annuity Disciplined Equity Portfolio
Nations Annuity Managed Index Portfolio
Nations Annuity Managed SmallCap Index Portfolio
Nations Annuity Marsico Focused Equities Portfolio
Nations Annuity Marsico Growth & Income Portfolio
Nations Annuity International Growth Portfolio
Nations Annuity Value Portfolio
29
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SCHEDULE II
I, Ira Rosner, a Vice President with THE BANK OF NEW YORK do hereby designate
the following publications:
The Bond Buyer
Depository Trust Company Services
Financial Daily Card Service
JJ Kenney Municipal Bond Service
London Financial Times
Standard & Poor's Called Bond Record
Wall Street Journal
30
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SCHEDULE III
Domestic Custodian Fee Schedule
For
Nations Annuity Trust
Safekeeping/Income Collection/Reporting DTC-ID Affirmation
All Systems Development and Usage Charges
3/4ths of one basis point per annum on the aggregate net assets of
all Nations' Non-Money Market Funds up to $10 billion.
1/2 of a basis point on the excess.
Security Transaction Charges/Paydowns
$ 5 Paydowns
$ 7 DTC/FRB/PTC
$15 Physicals, options and futures
$40 Euro C/D's
Other Charges
$ 5 Bank official checks
$ 2 Money transfers in/out of the Fund's custodian account not related
to securities transactions.
Earnings Credits on Balances/Interest on Overdrafts
Earnings credits are provided to each Fund on 80% of the daily balance in the
domestic custodian account computed at the 90-day T-bill rate on the day of the
balance.
Overdrafts, excluding bank errors, will cause a reduction of earnings credits
daily, computed at 1% above the average Federal Funds rate on the day of the
overdraft.
Credits and debits will be accumulated daily and offset monthly against the
Bank's domestic custodian fees. To the extent a net debit is accumulated, each
Fund will be billed for the expense. To the extent a net earnings credit is
generated, such excess earnings credit can be carried forward to the next
succeeding month. However, no earnings credit will be carried forward after
year-end.
Out-of-Pocket Expenses
None.
Billing Cycle
The above fees are billed monthly.
31
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SCHEDULE IV
OVERDRAFT RATE
32
EXHIBIT 99.B10
[MORRISON & FOERSTER LLP LETTERHEAD]
February 12, 1999
Nations Annuity Trust
111 Center Street
Little Rock, Arkansas 72201
Re: Shares of Beneficial Interest of Nations Annuity Trust
Ladies and Gentlemen:
We refer to Post-Effective Amendment No. 1 to the Registration Statement
on Form N-1A (SEC File Nos. 333-40265; 811-08481) (the "Registration Statement")
of Nations Annuity Trust (the "Trust") relating to the registration of an
indefinite number of Shares of Beneficial Interest of the Trust's eight
portfolios; namely, Nations Balanced Assets Portfolio, Nations Disciplined
Equity Portfolio, Nations International Growth Portfolio, Nations Managed Index
Portfolio, Nations Managed SmallCap Index Portfolio, Nations Marsico Focused
Equities Portfolio, Nations Marsico Growth & Income Portfolio and Nations Value
Portfolio (collectively, the "Shares").
We have been requested by the Trust to furnish this opinion as Exhibit 10
to the Registration Statement.
We have examined such records, documents, instruments, and certificates of
public officials and of the Trust, made such inquiries of the Trust, and
examined such questions of law as we have deemed necessary for the purpose of
rendering the opinion set forth herein. We have examined documents relating to
the organization of the Trust and the authorization for registration and sale of
Shares of each of the Portfolios. We have assumed the genuineness of all
signatures and the authenticity of all items submitted to us as originals and
the conformity with originals of all items submitted to us as copies.
Based upon and subject to the foregoing, we are of the opinion that:
<PAGE>
Nations Annuity Trust
February 12, 1999
Page Two
The issuance and sale of the Shares by the Trust have been duly and
validly authorized by all appropriate action, and assuming delivery of the
Shares by sale or in accord with the Trust's dividend reinvestment plan in
accordance with the description set forth in the Registration Statement, as
amended, the Shares will be validly issued, fully paid and nonassessable.
We consent to the inclusion of this opinion as an exhibit to the
Registration Statement.
In addition, we hereby consent to the use of our name and to the reference
to our Firm under the heading "Counsel" in the Statement of Additional
Information and the description of advice rendered by our Firm under the heading
"How The Portfolios Are Managed" in the Prospectus, which is included as part of
the Registration Statement.
Very truly yours,
/S/ MORRISON & FOERSTER LLP
MORRISON & FOERSTER LLP
