As filed with the Securities and Exchange Commission
on April 28, 2000
Registration No. 333-40265; 811-08481
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Post-Effective Amendment No. 5 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 6 [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:
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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
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It is proposed that this filing will become effective (check appropriate box):
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[X] Immediately upon filing pursuant to Rule 485(b); or [ ] on (date) pursuant to Rule 485(b), or
[ ] 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
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EXPLANATORY NOTE
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This Post-Effective Amendment No. 5 to the Registration Statement of
Nations Annuity Trust (the "Trust") is being filed for the purpose of filing
updated financial information and other non-material changes.
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NATIONS ANNUITY TRUST
CROSS REFERENCE SHEET
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Part A
Item No. Prospectus
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1. Front and Back Cover Pages................................ Front and Back Cover Pages
2. Risk/Return Summary: Investments, Risks,
and Performance .......................................... About this Prospectus
3. Risk/Return Summary: Fee Table............................ Not Applicable
4. Investment Objectives, Principal Investment
Strategies, and Related Risks............................. About the Equity Portfolios; About
the Managed Index Portfolios; About
the Balanced Portfolio; About the
International Portfolio; Other
Important Information
5. Management's Discussion of Fund Performance............... Not Applicable
6. Management, Organization, and
Capital Structure......................................... How the Portfolios are Managed;
About Your Investment: Information
for Investors
7. Shareholder Information................................... About Your Investment: Information
for Investors
8. Distribution Arrangements................................. About Your Investment: Information
for Investors
9. Financial Highlights Information.......................... About Your Investment: Financial
Highlights
Part B
Item No.
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10. Cover Page and Table of Contents.......................... Cover Page and Table of Contents
11. Fund History.............................................. Introduction
12. Description of the Fund and
Its Investments and Risks................................. Additional Information on Portfolio
Investments
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13. Management of the Fund.................................... Trustees And Officers; Investment
Advisory, Administration, Custody Transfer
Agency, Shareholder Servicing and
Distribution Agreements
14. Control Persons and Principal
Holders of Securities..................................... Not Applicable
15. Investment Advisory and Other Services.................... Investment Advisory,
Administration, Custody, Transfer Agency,
Shareholder Servicing And Distribution
Agreements
16. Brokerage Allocation and Other Practices.................. Portfolio Transactions and
Brokerage--General Brokerage Policy
17. Capital Stock and Other
Securities ............................................... Description Of Shares;
Investment Advisory, Administration,
Custody, Transfer Custody, Transfer
Agency, Shareholder Servicing And
Distribution Agreements
18. Purchase, Redemption and Pricing
of Shares................................................. Net Asset Value -- Purchases
And Redemptions; Distributor
19. Taxation of the Fund...................................... Additional Information Concerning
Taxes
20. Underwriters.............................................. Investment Advisory,
Administration Custody, Transfer Agency
Shareholder Servicing And Distribution
Agreements; Distributor
21. Calculation of Performance Data........................... Additional Information on
Performance
22. Financial Statements...................................... Independent Accountant and
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Reports
Part C
Item No. Other Information
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Information required to be included in
Part C is set forth under the appropriate
Item, so numbered, in Part C of this
Document
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NATIONS ANNUITY TRUST
PROSPECTUS
MAY 1, 2000
Equity Portfolios
NATIONS VALUE PORTFOLIO
NATIONS AGGRESSIVE GROWTH PORTFOLIO
NATIONS MARSICO FOCUSED EQUITIES PORTFOLIO
NATIONS MARSICO GROWTH & INCOME PORTFOLIO
International Portfolio
NATIONS INTERNATIONAL GROWTH PORTFOLIO
Index Portfolios
NATIONS MANAGED INDEX PORTFOLIO
NATIONS SMALLCAP INDEX PORTFOLIO
Balanced Portfolio
NATIONS BALANCED ASSETS PORTFOLIO
THE SECURITIES AND EXCHANGE COMMISSION (SEC) HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NOT FDIC
INSURED
MAY LOSE VALUE
NO BANK GUARANTEE
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AN OVERVIEW OF THE PORTFOLIOS
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[GRAPHIC APPEARS HERE]
TERMS USED IN THIS PROSPECTUS
IN THIS PROSPECTUS, WE, US AND OUR REFER TO THE NATIONS FUNDS
FAMILY (NATIONS FUNDS). SOME OTHER IMPORTANT TERMS WE'VE USED MAY
BE NEW TO YOU. THESE ARE PRINTED IN ITALICS WHERE THEY FIRST
APPEAR IN A SECTION AND ARE DESCRIBED IN TERMS USED IN THIS
PROSPECTUS.
[GRAPHIC APPEARS HERE]
YOU'LL FIND TERMS USED
IN THIS PROSPECTUS ON
PAGE 39.
YOUR INVESTMENT IN THESE PORTFOLIOS IS NOT A BANK DEPOSIT AND IS
NOT INSURED OR GUARANTEED BY BANK OF AMERICA, N. A. (BANK OF
AMERICA), THE FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) OR ANY
OTHER GOVERNMENT AGENCY. YOUR INVESTMENT MAY LOSE MONEY.
AFFILIATES OF BANK OF AMERICA ARE PAID FOR THE SERVICES THEY
PROVIDE TO THE PORTFOLIOS.
This booklet, which is called a prospectus, tells you about eight Nations
Annuity Trust Portfolios. The Portfolios are the underlying investment
vehicles for certain variable annuity and/or variable life insurance separate
accounts issued by participating life insurance companies, including Hartford
Life Insurance Company. Please read it carefully, because it contains
information that's designed to help you make informed investment decisions.
ABOUT THE PORTFOLIOS
Each group of Portfolios has a different investment focus:
o Equity portfolios invest primarily in EQUITY SECURITIES of U.S. companies
o International portfolios invest primarily in equity securities of
companies outside the United States
o Index portfolios are intended to match the industry and risk
characteristics of a specific stock market index, like the S&P 500, by
investing primarily in equity securities that are included in the index
o Nations Balanced Assets Portfolio invests in a mix of equity and FIXED
INCOME SECURITIES, as well as MONEY MARKET INSTRUMENTS
The Portfolios also have different risk/return characteristics because they
invest in different kinds of securities.
Equity securities have the potential to provide you with higher returns than
many other kinds of investments, but they also tend to have the highest risk.
FOREIGN SECURITIES also involve special risks not associated with investing in
the U.S. stock market, which you need to be aware of before you invest.
In every case, there's a risk that you'll lose money or you may not earn as
much as you expect.
ARE THESE PORTFOLIOS RIGHT FOR YOU?
Not every Portfolio is right for every investor. When you're choosing a
Portfolio to invest in, you should consider things like your investment goals,
how much risk you can accept and how long you're planning to hold your
investment.
The Equity, International and Index Portfolios all focus on long-term growth.
They may be suitable for you if:
o you have longer-term investment goals
o they're part of a balanced portfolio
o you want to try to protect your portfolio against a loss of buying power
that inflation can cause over time
2
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They may not be suitable for you if:
o you're not prepared to accept or are unable to bear the risks associated
with equity securities, including foreign securities
o you have short-term investment goals
o you're looking for a regular stream of income
Nations Balanced Assets Portfolio invests in a mix of equity and fixed income
securities, as well as money market instruments. It may be suitable for you
if:
o you're looking for both long-term growth and income
o you want a diversified portfolio in a single mutual fund
It may not be suitable for you if:
o you're not prepared to accept or are unable to bear the risks associated
with equity and fixed income securities
o you have short-term investment goals
o you're looking for a regular stream of income
You'll find a discussion of each Portfolio's principal investments, strategies
and risks in the portfolio descriptions that start on page 5.
FOR MORE INFORMATION
If you have any questions about the Portfolios, please call us at
1.800.321.7854 or contact your investment professional.
You'll find more information about the Portfolios in the Statement of
Additional Information (SAI). The SAI includes more detailed information about
each Portfolio's investments, policies, performance and management, among
other things. Please turn to the back cover to find out how you can get a
copy.
3
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WHAT'S INSIDE
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BANC OF AMERICA ADVISORS, INC.
BANC OF AMERICA ADVISORS, INC. (BAAI) IS THE INVESTMENT ADVISER TO
EACH OF THE PORTFOLIOS. BAAI IS RESPONSIBLE FOR THE OVERALL
MANAGEMENT AND SUPERVISION OF THE INVESTMENT MANAGEMENT OF EACH
PORTFOLIO. BAAI AND NATIONS FUNDS HAVE ENGAGED SUB-ADVISERS, WHICH
ARE RESPONSIBLE FOR THE DAY-TO-DAY INVESTMENT DECISIONS FOR EACH
OF THE PORTFOLIOS.
[GRAPHIC APPEARS HERE]
YOU'LL FIND MORE ABOUT
BAAI AND THE SUB-ADVISERS
STARTING ON PAGE 28.
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[GRAPHIC APPEARS HERE] About the Portfolios
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Equity Portfolios
NATIONS VALUE PORTFOLIO 5
Sub-adviser: Banc of America Capital Management, Inc.
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NATIONS AGGRESSIVE GROWTH PORTFOLIO 7
Sub-adviser: Banc of America Capital Management, Inc.
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NATIONS MARSICO FOCUSED EQUITIES PORTFOLIO 9
Sub-adviser: Marsico Capital Management, LLC
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NATIONS MARSICO GROWTH & INCOME PORTFOLIO 12
Sub-adviser: Marsico Capital Management, LLC
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International Portfolio
NATIONS INTERNATIONAL GROWTH PORTFOLIO 15
Sub-adviser: Gartmore Global Partners
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Index Portfolios
NATIONS MANAGED INDEX PORTFOLIO 18
Sub-adviser: Banc of America Capital Management, Inc.
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NATIONS SMALLCAP INDEX PORTFOLIO 21
Sub-adviser: Banc of America Capital Management, Inc.
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Balanced Portfolio
NATIONS BALANCED ASSETS PORTFOLIO 24
Sub-adviser: Banc of America Capital Management, Inc.
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OTHER IMPORTANT INFORMATION 27
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HOW THE PORTFOLIOS ARE MANAGED 28
[GRAPHIC APPEARS HERE] About your investment
INFORMATION FOR INVESTORS
Buying, selling and transfering shares 33
How selling and servicing agents are paid 34
Distributions and taxes 35
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FINANCIAL HIGHLIGHTS 36
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TERMS USED IN THIS PROSPECTUS 39
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WHERE TO FIND MORE INFORMATION BACK COVER
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4
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ABOUT THE EQUITY PORTFOLIOS
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[GRAPHIC APPEARS HERE]
ABOUT THE SUB-ADVISER
BANC OF AMERICA CAPITAL MANAGEMENT, INC. (BACAP) IS THIS
PORTFOLIO'S SUB-ADVISER. BACAP'S VALUE STRATEGIES TEAM MAKES THE
DAY-TO-DAY INVESTMENT DECISIONS FOR THE PORTFOLIO.
[GRAPHIC APPEARS HERE]
YOU'LL FIND MORE ABOUT
BACAP ON PAGE 29.
[GRAPHIC APPEARS HERE]
WHAT IS VALUE INVESTING?
VALUE INVESTING MEANS LOOKING FOR QUALITY COMPANIES THAT MAY BE
CURRENTLY OUT OF FAVOR BUT THAT HAVE GOOD POTENTIAL TO INCREASE IN
VALUE.
THE MANAGEMENT TEAM USES FUNDAMENTAL ANALYSIS TO HELP DECIDE
WHETHER THE CURRENT 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."
Nations Value Portfolio
[GRAPHIC APPEARS HERE]
INVESTMENT OBJECTIVE
This Portfolio seeks growth of capital by investing in companies that are
believed to be undervalued.
[GRAPHIC APPEARS HERE]
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 may also invest in securities that aren't part of its principal
investment strategies, but it won't hold more than 10% of its assets in any one
type of these securities. These securities are described in the SAI.
The management team uses FUNDAMENTAL ANALYSIS to identify stocks of companies
that it believes are undervalued, looking at, among other things:
o the quality of the company
o the company's projected earnings and dividends
o the stock's PRICE-TO-EARNINGS RATIO relative to other stocks in the same
industry or economic sector. The team believes that companies with lower
price-to-earnings ratios are generally 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, for
example, a new product, new management or a new sales channel.
The management team may use various strategies, consistent with the Portfolio's
investment objective, 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 on shareholders
o may offset capital gains by selling securities to realize a CAPITAL LOSS
While the Portfolio tries to manage its capital gain distributions, it will not
be able to completely avoid making taxable distributions. These strategies also
may be affected by changes in tax laws and regulations, or by court decisions.
The team may sell a security when its price reaches the target set by the team,
there is a deterioration in the company's financial situation, when the team
believes other investments are more attractive, or for other reasons.
5
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[GRAPHIC APPEARS HERE]
YOU'LL FIND MORE ABOUT
OTHER RISKS OF INVESTING IN
THIS PORTFOLIO STARTING ON
PAGE 27 AND IN THE SAI.
[GRAPHIC APPEARS HERE]
MANY THINGS AFFECT A PORTFOLIO'S PERFORMANCE, INCLUDING MARKET CONDITIONS, THE
COMPOSITION OF THE PORTFOLIO'S HOLDINGS, AND PORTFOLIO EXPENSES.
[GRAPHIC APPEARS HERE]
RISKS AND OTHER THINGS TO CONSIDER
Nations Value Portfolio has 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 not rise as high as the team
expects, or will fall.
o STOCK MARKET RISK - The value of the stocks the Portfolio holds can be
affected by changes in U.S. or foreign economies and financial markets, and
the companies that issue the stocks, among other things. Stock prices can rise
or fall over short as well as long periods. In general, stock markets tend to
move in cycles, with periods of rising prices and periods of falling prices.
As of the date of this prospectus, the stock markets, as measured by the S&P
500 and other commonly used indices, were trading at or close to record
levels. There can be no guarantee that these levels will continue.
[GRAPHIC APPEARS HERE]
A LOOK AT THE PORTFOLIO'S PERFORMANCE
The following bar chart and table show you how the Portfolio has performed in
the past, and can help you understand the risks of investing in the Portfolio. A
PORTFOLIO'S PAST PERFORMANCE IS NO GUARANTEE OF HOW IT WILL PERFORM IN THE
FUTURE.
YEAR BY YEAR TOTAL RETURN (%) AS OF DECEMBER 31 EACH YEAR
The bar chart shows you how the performance of the Portfolio has varied from
year to year. These returns do not reflect deductions of sales charges or
account fees, if any, and would be lower if they did.
[BAR CHART APPEARS BELOW WITH THE FOLLOWING INFORMATION:]
1998 4.48%*
1999 2.50%
*Return is from inception (3-26-98) to 12-31-98.
BEST AND WORST QUARTERLY RETURNS DURING THIS PERIOD
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Best: 4th quarter 1998: 19.00%
Worst: 3rd quarter 1998: -11.67%
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AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1999
The table shows the Portfolio's average annual total return for each period,
compared with the S&P 500 and the S&P 500/BARRA VALUE INDEX. The S&P 500 is an
unmanaged index of 500 widely held common stocks. The S&P 500/BARRA Value Index
is an unmanaged index of a group of stocks from the S&P 500 that have low
price-to-book ratios relative to the S&P 500 as a whole. These indexes are
weighted by market capitalization and are not available for investment.
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Since
1 year inception
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Nations Value Portfolio 2.50% 3.96%
S&P 500 21.04% 19.50%
S&P 500/BARRA Value Index 12.72% 8.78%
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6
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ABOUT THE EQUITY PORTFOLIOS
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[GRAPHIC APPEARS HERE]
ABOUT THE SUB-ADVISER
BACAP IS THIS PORTFOLIO'S SUB-ADVISER. BACAP'S GROWTH STRATEGIES
TEAM MAKES THE DAY-TO-DAY INVESTMENT DECISIONS FOR THE PORTFOLIO.
[GRAPHIC APPEARS HERE]
YOU'LL FIND MORE ABOUT
BACAP ON PAGE 29.
[GRAPHIC APPEARS HERE]
WHAT IS THE PORTFOLIO'S BENCHMARK?
AS AN AGGRESSIVE GROWTH FUND, NATIONS AGGRESSIVE GROWTH PORTFOLIO
MEASURES ITS PERFORMANCE AGAINST THE RUSSELL 1000 GROWTH INDEX.
Nations Aggressive Growth Portfolio
[GRAPHIC APPEARS HERE]
INVESTMENT OBJECTIVE
This Portfolio seeks capital appreciation.
[GRAPHIC APPEARS HERE]
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio normally invests at least 65% of its assets in COMMON STOCKS of
large and medium-sized U.S. companies.
The Portfolio may also invest in securities that aren't part of its principal
investment strategies, but it won't hold more than 10% of its assets in any one
type of these securities. These securities are described in the SAI.
The Portfolio was formerly named Nations Disciplined Equity Portfolio and
operated under a different investment objective and principal investment
strategies from its inception until April 30, 2000.
The management team uses a combination of FUNDAMENTAL and QUANTITATIVE ANALYSIS
to help construct a portfolio of 50 to 75 securities of companies diversified
across industry sectors. The team's investment process begins with a review of
all major U.S. companies with a market capitalization of $500 million or more
with the goal of discovering potential industry leaders.
When selecting investments, the team looks for securities it believes are
attractively priced with increasing earnings. It uses QUANTITATIVE ANALYSIS,
which is an analysis of a company's financial information, and FUNDAMENTAL
ANALYSIS to:
o identify companies with above-average growth potential, a strong
competitive position and effective management strategies; and
o identify companies presenting tactical opportunities, such as companies
likely to experience cyclical profit recovery or exhibiting structural
change
The management team may use various strategies, consistent with the Portfolio's
investment objective, to try to reduce the amount of CAPITAL GAINS it
distributes to shareholders. For example, the team:
o will focus on long-term investments to try and limit the number of buy
and sell transactions
o will try to sell securities that have the lowest tax burden on
shareholders
o may offset capital gains by selling securities to realize a CAPITAL LOSS
o will invest primarily in securities with lower DIVIDEND YIELDS
o may use options instead of selling securities
While the Portfolio tries to manage capital gain distributions, it will not be
able to completely avoid making taxable distributions. These strategies also may
be affected by changes in tax laws and regulations, or by court decisions.
The team may sell a security when it forecasts a decline in industry
profitability, it believes a company's competitive position erodes
significantly, management strategies prove ineffective or a company's price
exceeds a reasonable value.
7
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[GRAPHIC APPEARS HERE]
YOU'LL FIND MORE ABOUT
OTHER RISKS OF INVESTING IN
THIS PORTFOLIO STARTING ON
PAGE 27 AND IN THE SAI.
[GRAPHIC APPEARS HERE]
MANY THINGS AFFECT A PORTFOLIO'S PERFORMANCE, INCLUDING MARKET
CONDITIONS, THE COMPOSITION OF THE PORTFOLIO'S HOLDINGS, AND
PORTFOLIO EXPENSES.
PRIOR TO MAY 1, 2000, THE PORTFOLIO HAD A DIFFERENT INVESTMENT
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES.
[GRAPHIC APPEARS HERE]
RISKS AND OTHER THINGS TO CONSIDER
Nations Aggressive Growth Portfolio has the following risks:
o INVESTMENT STRATEGY RISK -- The team uses quantitative and fundamental
analysis to select securities it believes are attractively priced with
increased earnings. There is a risk that the value of these investments will
not rise as high as the team expects, or will fall.
o STOCK MARKET RISK -- The value of the stocks the Portfolio holds can be
affected by changes in the U.S. or foreign economies and financial markets,
and the companies that issue the stocks, among other things. Stock prices can
rise or fall over short as well as long periods. In general, stock markets
tend to move in cycles, with periods of rising prices and periods of falling
prices. As of the date of this prospectus, the markets, as measured by the S&P
500 and other commonly used indices, were trading at or close to record
levels. There can be no guarantee that these levels will continue.
[GRAPHIC APPEARS HERE]
A LOOK AT THE PORTFOLIO'S PERFORMANCE
The following bar chart and table show you how the Portfolio has performed in
the past, and can help you understand the risks of investing in the Portfolio. A
PORTFOLIO'S PAST PERFORMANCE IS NO GUARANTEE OF HOW IT WILL PERFORM IN THE
FUTURE.
YEAR BY YEAR TOTAL RETURN (%) AS OF DECEMBER 31 EACH YEAR
The bar chart shows you how the performance of the Portfolio has varied from
year to year. These returns do not reflect deductions of sales charges or
account fees, if any, and would be lower if they did.
[BAR CHART APPEARS BELOW WITH THE FOLLOWING INFORMATION:]
1998 6.44%*
1999 9.75%
*Return is from inception (3-26-98) to 12-31-98.
BEST AND WORST QUARTERLY RETURNS DURING THIS PERIOD
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Best: 4th quarter 1998: 23.48%
Worst: 3rd quarter 1998: -15.07%
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AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1999
The table shows the Portfolio's average annual total return for each period,
compared with the S&P 500, an unmanaged index of 500 widely held common stocks,
weighted by market capitalization. The index is not available for investment.
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Since
1 year inception
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Nations Aggressive Growth Portfolio 9.75% 9.20%
S&P 500 21.04% 19.50%
</TABLE>
8
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ABOUT THE EQUITY PORTFOLIOS
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[GRAPHIC APPEARS HERE]
ABOUT THE SUB-ADVISER
MARSICO CAPITAL MANAGEMENT, LLC (MARSICO CAPITAL) IS THIS
PORTFOLIO'S SUB-ADVISER. THOMAS F. MARSICO IS THE PORTFOLIO
MANAGER AND MAKES THE DAY-TO-DAY INVESTMENT DECISIONS FOR THE
PORTFOLIO.
[GRAPHIC APPEARS HERE]
YOU'LL FIND MORE ABOUT
MARSICO CAPITAL AND
MR. MARSICO ON PAGE 29.
[GRAPHIC APPEARS HERE]
WHAT IS A FOCUSED PORTFOLIO?
A FOCUSED PORTFOLIO INVESTS IN A SMALL NUMBER OF COMPANIES WITH
EARNINGS THAT ARE BELIEVED TO HAVE THE POTENTIAL TO GROW
SIGNIFICANTLY. THIS PORTFOLIO FOCUSES ON LARGE, ESTABLISHED AND
WELL-KNOWN U.S. COMPANIES.
BECAUSE A FOCUSED PORTFOLIO HOLDS FEWER INVESTMENTS THAN OTHER
KINDS OF PORTFOLIOS, IT CAN HAVE GREATER PRICE SWINGS THAN MORE
DIVERSIFIED PORTFOLIOS. IT MAY EARN RELATIVELY HIGHER RETURNS WHEN
ONE OF ITS INVESTMENTS PERFORMS WELL, OR RELATIVELY LOWER RETURNS
WHEN AN INVESTMENT PERFORMS POORLY.
Nations Marsico Focused Equities Portfolio
[GRAPHIC APPEARS HERE]
INVESTMENT OBJECTIVE
This Portfolio seeks long-term growth of capital.
[GRAPHIC APPEARS HERE]
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio normally invests at least 65% of its assets in COMMON STOCKS of
large companies. The Portfolio, which is NON-DIVERSIFIED, 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 in securities that aren't part of its principal
investment strategies, but it won't hold more than 10% of its assets in any one
type of these securities. These securities are described in the SAI.
Marsico Capital looks for companies with earnings growth potential that may not
be recognized by other investors, focusing on companies that have some of the
following characteristics:
o products, markets or technologies in flux that can result in
extraordinary growth
o strong brand franchises that can take advantage of a changing global
environment
o global reach that allows the company to generate sales and earnings both
in the United States and abroad. This can give the company added growth
potential and also means the company may be less affected by changes in
local markets
o movement with, not against, the major social, economic and cultural
shifts taking place in the world
Once an investment opportunity is identified, Marsico Capital 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 of a company's financial
situation, as well as individual company characteristics like commitment to
research, market franchise and quality of management.
Marsico Capital may sell a security when it believes there is a deterioration in
the company's financial situation, the security is overvalued, when there is a
negative development in the company's competitive, regulatory or economic
environment, or for other reasons.
9
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[GRAPHIC APPEARS HERE]
YOU'LL FIND MORE ABOUT
OTHER RISKS OF INVESTING IN
THIS PORTFOLIO STARTING ON
PAGE 27 AND IN THE SAI.
[GRAPHIC APPEARS HERE]
RISKS AND OTHER THINGS TO CONSIDER
Nations Marsico Focused Equities Portfolio has the following risks:
o INVESTMENT STRATEGY RISK - There is a risk that the value of the Portfolio's
investments will not rise as high as Marsico Capital expects, or will fall.
o HOLDING FEWER INVESTMENTS - This Portfolio is considered to be non-diversified
because it may hold fewer investments than other kinds of equity funds. This
increases the risk that its value could go down significantly if even only one
of its investments performs poorly. The value of this Portfolio will tend to
have greater price swings than the value of more diversified equity funds. The
Portfolio may become a diversified portfolio by limiting the investments in
which more than 5% of its total assets are invested.
o STOCK MARKET RISK - The value of the stocks the Portfolio holds can be
affected by changes in U.S. or foreign economies and financial markets, and
the companies that issue the stocks, among other things. Stock prices can rise
or fall over short as well as long periods. In general, stock markets tend to
move in cycles, with periods of rising prices and periods of falling prices.
As of the date of this prospectus, the stock markets, as measured by the S&P
500 and other commonly used indices, were trading at or close to record
levels. There can be no guarantee that these levels will continue.
o FOREIGN INVESTMENT RISK - Because the Portfolio may invest up to 25% 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, risk of imposition of punitive withholding
and other taxes, changes in currency exchange rates, the implementation of the
Euro, foreign controls on investment, difficulties selling some securities and
lack of or limited financial information.
10
<PAGE>
[GRAPHIC APPEARS HERE]
MANY THINGS AFFECT A PORTFOLIO'S PERFORMANCE, INCLUDING MARKET
CONDITIONS, THE COMPOSITION OF THE PORTFOLIO'S HOLDINGS, AND
PORTFOLIO EXPENSES.
[GRAPHIC APPEARS HERE]
A LOOK AT THE PORTFOLIO'S PERFORMANCE
The following bar chart and table show you how the Portfolio has performed in
the past, and can help you understand the risks of investing in the Portfolio. A
PORTFOLIO'S PAST PERFORMANCE IS NO GUARANTEE OF HOW IT WILL PERFORM IN THE
FUTURE.
YEAR BY YEAR TOTAL RETURN (%) AS OF DECEMBER 31 EACH YEAR The bar chart shows
you how the performance of the Portfolio has varied from year to year. These
returns do not reflect deductions of sales charges or account fees, and would be
lower if they did.
[BAR CHART APPEARS BELOW WITH THE FOLLOWING INFORMATION:]
1998 30.16%*
1999 53.28%
*Return is from inception (3-26-98) to 12-31-98.
BEST AND WORST QUARTERLY RETURNS DURING THIS PERIOD
<TABLE>
<S> <C>
Best: 4th quarter 1999: 32.37%
Worst: 3rd quarter 1998: -7.06%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1999
The table shows the Portfolio's average annual total return for each period,
compared with the S&P 500, an unmanaged index of 500 widely held common stocks,
weighted by market capitalization. The S&P 500 is not available for investment.
<TABLE>
<CAPTION>
Since
1 year inception
<S> <C> <C>
Nations Marsico Focused Equities Portfolio 53.28% 47.83%
S&P 500 21.04% 19.50%
</TABLE>
11
<PAGE>
ABOUT THE EQUITY PORTFOLIOS
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
ABOUT THE SUB-ADVISER
MARSICO CAPITAL IS THIS PORTFOLIO'S SUB-ADVISER. THOMAS F. MARSICO
IS THE PORTFOLIO MANAGER AND MAKES THE DAY-TO-DAY INVESTMENT
DECISIONS FOR THE PORTFOLIO.
[GRAPHIC APPEARS HERE]
YOU'LL FIND MORE ABOUT
MARSICO CAPITAL AND
MR. MARSICO ON PAGE 29.
[GRAPHIC APPEARS HERE]
WHY INVEST IN A GROWTH
AND INCOME PORTFOLIO?
GROWTH AND INCOME PORTFOLIOS CAN INVEST IN A MIX OF EQUITY AND
FIXED INCOME SECURITIES. THIS CAN HELP REDUCE VOLATILITY AND
PROVIDE THE PORTFOLIO WITH THE FLEXIBILITY TO SHIFT AMONG
SECURITIES THAT OFFER THE POTENTIAL FOR HIGHER RETURNS.
WHILE THIS PORTFOLIO INVESTS IN A WIDE RANGE OF COMPANIES AND
INDUSTRIES, IT HOLDS FEWER INVESTMENTS THAN OTHER KINDS OF
PORTFOLIOS. THIS MEANS IT CAN HAVE GREATER PRICE SWINGS THAN MORE
DIVERSIFIED PORTFOLIOS. IT ALSO MEANS IT MAY HAVE RELATIVELY
HIGHER RETURNS WHEN ONE OF ITS INVESTMENTS PERFORMS WELL, OR
RELATIVELY LOWER RETURNS WHEN AN INVESTMENT PERFORMS POORLY.
Nations Marsico Growth & Income Portfolio
[GRAPHIC APPEARS HERE]
INVESTMENT OBJECTIVE
This Portfolio seeks long-term growth of capital with a limited emphasis on
income.
[GRAPHIC APPEARS HERE]
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests primarily in EQUITY SECURITIES of large capitalization
companies that are selected for their growth potential. It invests at least 25%
of its assets in securities that are believed to have income potential, and
generally holds 35 to 50 securities. It may hold up to 25% of its assets in
FOREIGN SECURITIES.
Marsico Capital may shift assets between growth and income securities based on
its assessment of market, financial and economic conditions. The Portfolio,
however, is not designed to produce a consistent level of income.
The Portfolio may also invest in securities that aren't part of its principal
investment strategies, but it won't hold more than 10% of its assets in any one
type of these securities. These securities are described in the SAI.
Marsico Capital looks for companies with earnings growth potential that may not
be recognized by other investors, focusing on companies that have some of the
following characteristics:
o products, markets or technologies in flux that can result in
extraordinary growth
o strong brand franchises that can take advantage of a changing global
environment
o global reach that allows the company to generate sales and earnings both
in the United States and abroad. This can give the company added growth
potential and also means the company may be less affected by changes in
local markets
o movement with, not against, the major social, economic and cultural
shifts taking place in the world
Once an investment opportunity is identified, Marsico Capital 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 of a company's financial
situation, as well as individual company characteristics like commitment to
research, market franchise and quality of management.
Marsico Capital may sell a security when it believes there is a deterioration in
the company's financial situation, the security is overvalued, when there is a
negative development in the company's competitive, regulatory or economic
environment, or for other reasons.
12
<PAGE>
[GRAPHIC APPEARS HERE]
YOU'LL FIND MORE ABOUT
OTHER RISKS OF INVESTING IN
THIS PORTFOLIO STARTING ON
PAGE 27 AND IN THE SAI.
[GRAPHIC APPEARS HERE]
RISKS AND OTHER THINGS TO CONSIDER
Nations Marsico Growth & Income Portfolio has the following risks:
o INVESTMENT STRATEGY RISK - Marsico Capital 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 not rise as high as Marsico Capital
expects, or will fall.
o STOCK MARKET RISK - The value of the stocks the Portfolio holds can be
affected by changes in U.S. or foreign economies and financial markets, and
the companies that issue the stocks, among other things. Stock prices can rise
or fall over short as well as long periods. In general, stock markets tend to
move in cycles, with periods of rising prices and periods of falling prices.
As of the date of this prospectus, the stock markets, as measured by the S&P
500 and other commonly used indices, were trading at or close to record
levels. There can be no guarantee that these levels will continue.
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 interest or repay principal when it's due. Credit
risk usually applies to most fixed income securities, but is generally not a
factor for U.S. GOVERNMENT OBLIGATIONS.
o FOREIGN INVESTMENT RISK - Because the Portfolio may invest up to 25% 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, risk of imposition of punitive withholding
and other taxes, changes in currency exchange rates, the implementation of the
Euro, foreign controls on investment, difficulties selling some securities and
lack of or limited financial information. Withholding taxes also may apply to
some foreign investments.
13
<PAGE>
[GRAPHIC APPEARS HERE]
MANY THINGS AFFECT A PORTFOLIO'S PERFORMANCE, INCLUDING MARKET
CONDITIONS, THE COMPOSITION OF THE PORTFOLIO'S HOLDINGS, AND
PORTFOLIO EXPENSES.
[GRAPHIC APPEARS HERE]
A LOOK AT THE PORTFOLIO'S PERFORMANCE
The following bar chart and table show you how the Portfolio has performed in
the past, and can help you understand the risks of investing in the Portfolio. A
PORTFOLIO'S PAST PERFORMANCE IS NO GUARANTEE OF HOW IT WILL PERFORM IN THE
FUTURE.
YEAR BY YEAR TOTAL RETURN (%) AS OF DECEMBER 31 EACH YEAR
The bar chart shows you how the performance of the Portfolio has varied from
year to year. These returns do not reflect deductions of sales charges or
account fees, if any, and would be lower if they did.
[BAR CHART APPEARS BELOW WITH THE FOLLOWING INFORMATION:]
1998 21.80%*
1999 55.10%
*Return is from inception (3-26-98) to 12-31-98.
BEST AND WORST QUARTERLY RETURNS DURING THIS PERIOD
<TABLE>
<S> <C>
Best: 4th quarter 1999: 36.77%
Worst: 3rd quarter 1998: -11.62%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1999
The table shows the Portfolio's average annual total return for each period,
compared with the S&P 500, an unmanaged index of 500 widely held COMMON STOCKS,
weighted by market capitalization. The index is not available for investment.
<TABLE>
<CAPTION>
Since
1 year inception
<S> <C> <C>
Nations Marsico Growth & Income Portfolio 55.10% 43.33%
S&P 500 21.04% 19.50%
</TABLE>
14
<PAGE>
ABOUT THE INTERNATIONAL PORTFOLIO
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
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.
[GRAPHIC APPEARS HERE]
YOU'LL FIND MORE ABOUT
GARTMORE ON PAGE 31.
[GRAPHIC APPEARS HERE]
WHAT IS AN INTERNATIONAL
GROWTH PORTFOLIO?
INTERNATIONAL GROWTH PORTFOLIOS INVEST IN COMPANIES AROUND THE
WORLD THAT HAVE THE POTENTIAL FOR SIGNIFICANT INCREASES IN REVENUE
OR EARNINGS. THESE ARE TYPICALLY COMPANIES THAT ARE DEVELOPING OR
APPLYING NEW TECHNOLOGIES, PRODUCTS OR SERVICES IN STRONG INDUSTRY
SECTORS.
THE PORTFOLIO MANAGER FOR THIS PORTFOLIO LOOKS FOR COMPANIES WITH
EARNINGS GROWTH THAT IS EXPECTED TO BE HIGHER THAN OTHER INVESTORS
BELIEVE, AND THEN SELLS THESE INVESTMENTS WHEN GROWTH MAY BE LOWER
THAN OTHERS EXPECT.
Nations International Growth Portfolio
[GRAPHIC APPEARS HERE]
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.
[GRAPHIC APPEARS HERE]
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio normally invests at least 65% of its assets in foreign companies
listed on major exchanges in Europe and the Pacific Basin. These companies can
be of any size.
The Portfolio invests in 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 and Pacific regions, Africa, Latin
America and Eastern Europe.
The Portfolio may also invest in securities that aren't part of its principal
investment strategies, but it won't hold more than 10% of its assets in any one
type of these securities. These securities are described in the SAI.
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
Throughout the investment process, the portfolio manager balances the
Portfolio's emphasis on growth companies with a sensitivity to securities
prices.
The portfolio manager may sell a security when its price reaches the target set
by the portfolio manager, when there is a deterioration in the growth prospects
of the company or its industry, when the portfolio manager believes other
investments are more attractive, or for other reasons.
15
<PAGE>
[GRAPHIC APPEARS HERE]
YOU'LL FIND MORE ABOUT
OTHER RISKS OF INVESTING IN
THIS PORTFOLIO STARTING ON
PAGE 27 AND IN THE SAI.
[GRAPHIC APPEARS HERE]
RISKS AND OTHER THINGS TO CONSIDER
Nations International Growth Portfolio has the following risks:
o INVESTMENT STRATEGY RISK - The portfolio manager chooses stocks believed to
have the potential for high growth. There is a risk that the value of these
investments will not rise as high as the portfolio manager expects, or will
fall.
o FOREIGN INVESTMENT RISK - Foreign investments may be riskier than U.S.
investments because of political and economic conditions, risk of imposition
of punitive withholding and other taxes, changes in currency exchange rates,
the implementation of the Euro, foreign controls on investment, difficulties
selling some securities and lack of or limited financial information.
Withholding taxes may also apply to some foreign investments.
o STOCK MARKET RISK - The value of the stocks the Portfolio holds can be
affected by changes in U.S. or foreign economies and financial markets, and
the companies that issue the stocks, among other things. Stock prices can rise
or fall over short as well as long periods. In general, stock markets tend to
move in cycles, with periods of rising prices and periods of falling prices.
16
<PAGE>
[GRAPHIC APPEARS HERE]
MANY THINGS AFFECT A PORTFOLIO'S PERFORMANCE, INCLUDING MARKET
CONDITIONS, THE COMPOSITION OF THE PORTFOLIO'S HOLDINGS, AND
PORTFOLIO EXPENSES.
[GRAPHIC APPEARS HERE]
A LOOK AT THE PORTFOLIO'S PERFORMANCE
The following bar chart and table show you how the Portfolio has performed in
the past, and can help you understand the risks of investing in the Portfolio. A
PORTFOLIO'S PAST PERFORMANCE IS NO GUARANTEE OF HOW IT WILL PERFORM IN THE
FUTURE.
YEAR BY YEAR TOTAL RETURN (%) AS OF DECEMBER 31 EACH YEAR The bar chart shows
you how the performance of the Portfolio has varied from year to year. These
returns do not reflect deductions of sales charges or account fees, if any, and
would be lower if they did.
[BAR CHART APPEARS BELOW WITH THE FOLLOWING INFORMATION:]
1998 3.11%*
1999 43.05%
*Return is from inception (3-26-98) to 12-31-98.
BEST AND WORST QUARTERLY RETURNS DURING THIS PERIOD
<TABLE>
<S> <C>
Best: 4th quarter 1999: 28.55%
Worst: 3rd quarter 1998: -14.52%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1999
The table shows the Portfolio's average annual total return for each period
compared with the MSCI EAFE INDEX (Morgan Stanley Capital International Europe,
Australasia and Far East Index), and 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.
<TABLE>
<CAPTION>
Since
1 year inception
<S> <C> <C>
Nations International Growth Portfolio 43.05% 24.60%
MSCI EAFE 27.30% 17.93%
</TABLE>
17
<PAGE>
ABOUT THE INDEX PORTFOLIOS
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
ABOUT THE SUB-ADVISER
BACAP IS THIS PORTFOLIO'S SUB-ADVISER. BACAP'S QUANTITATIVE
STRATEGIES TEAM MAKES THE DAY-TO-DAY INVESTMENT DECISIONS FOR THE
PORTFOLIO.
[GRAPHIC APPEARS HERE]
YOU'LL FIND MORE ABOUT
BACAP ON PAGE 29.
[GRAPHIC APPEARS HERE]
WHAT IS A MANAGED INDEX
PORTFOLIO?
A MANAGED INDEX PORTFOLIO COMBINES THE BENEFITS OF TRADITIONAL
INDEX FUNDS -- RELATIVELY LOW COSTS AND LOW PORTFOLIO
TURNOVER -- WITH ACTIVE MANAGEMENT.
WITH A MANAGED INDEX PORTFOLIO, 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.
THERE IS NO ASSURANCE THAT ACTIVE MANAGEMENT WILL RESULT IN A
HIGHER RETURN THAN THE INDEX.
Nations Managed Index Portfolio
[GRAPHIC APPEARS HERE]
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 (S&P 500).
[GRAPHIC APPEARS HERE]
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 is an unmanaged index of 500 widely
held common stocks, and is not available for investment.
The management team tries to maintain a portfolio that matches the industry and
risk characteristics of the S&P 500. The team will, from time to time, vary the
number and percentages of the Portfolio's holdings to try to provide higher
returns than the S&P 500 and to reduce the risk of underperforming the index
over time. The Portfolio usually holds 300 to 400 of the stocks included in the
index. The Portfolio may invest in financial futures traded on U.S. exchanges.
The Portfolio may also invest in securities that aren't part of its principal
investment strategies, but it won't hold more than 10% of its assets in any one
type of these securities. These securities are described in the SAI.
When selecting investments for the Portfolio, the management team starts with
the stocks included in the S&P 500. It uses QUANTITATIVE ANALYSIS, which is an
analysis of a company's financial information, 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 attractively ranked stock than the index and hold
a lower percentage -- or none -- of a less attractively ranked stock
The management team tries to control costs when it buys and 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, consistent with the Portfolio's
investment objective, to try to reduce the amount of CAPITAL GAINS distributed
to shareholders. For example, the team:
o may 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
18
<PAGE>
[GRAPHIC APPEARS HERE]
YOU'LL FIND MORE ABOUT
OTHER RISKS OF INVESTING IN
THIS PORTFOLIO STARTING ON
PAGE 27 AND IN THE SAI.
team will only use this strategy when it is in the best interest 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 may 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 manage its capital gain distributions, it will not
be able to completely avoid making taxable distributions. These strategies may
also be affected by changes in tax laws and regulations, or by court decisions.
The team may sell a stock when it believes other stocks in the index are more
attractive investments, when the stock is removed from the index, or for other
reasons.
[GRAPHIC APPEARS HERE]
RISKS AND OTHER THINGS TO CONSIDER
Nations Managed Index Portfolio has 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 not rise as high as the team expects, or will fall.
o STOCK MARKET RISK - The value of the stocks the Portfolio holds can be
affected by changes in U.S. or foreign economies and financial markets, and
the companies that issue the stocks, among other things. Stock prices can rise
or fall over short as well as long periods. In general, stock markets tend to
move in cycles, with periods of rising prices and periods of falling prices.
As of the date of this prospectus, the stock markets, as measured by the S&P
500 and other commonly used indices, were trading at or close to record
levels. There can be no guarantee that these levels will continue.
o FUTURES RISK - This Portfolio may use FUTURES CONTRACTS periodically to manage
LIQUIDITY. There is a risk that this could result in losses, reduce returns,
increase transaction costs or increase the Portfolio's volatility.
19
<PAGE>
[GRAPHIC APPEARS HERE]
MANY THINGS AFFECT A PORTFOLIO'S PERFORMANCE, INCLUDING MARKET
CONDITIONS, THE COMPOSITION OF THE PORTFOLIO'S HOLDINGS, AND
PORTFOLIO EXPENSES.
[GRAPHIC APPEARS HERE]
A LOOK AT THE PORTFOLIO'S PERFORMANCE
The following bar chart and table show you how the Portfolio has performed in
the past, and can help you understand the risks of investing in the Portfolio. A
PORTFOLIO'S PAST PERFORMANCE IS NO GUARANTEE OF HOW IT WILL PERFORM IN THE
FUTURE.
YEAR BY YEAR TOTAL RETURN (%) AS OF DECEMBER 31 EACH YEAR
The bar chart shows you how the performance of the Portfolio has varied from
year to year. These returns do not reflect deductions of sales charges or
account fees, if any, and would be lower if they did.
[BAR CHART APPEARS BELOW WITH THE FOLLOWING INFORMATION:]
1998 11.39%*
1999 18.27%
*Return is from inception (3-26-98) to 12-31-98.
BEST AND WORST QUARTERLY RETURNS DURING THIS PERIOD
<TABLE>
<S> <C>
Best: 4th quarter 1998: 20.16%
Worst: 3rd quarter 1998: -10.17%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1999
The table shows the Portfolio's average annual total return for each period,
compared with the S&P 500, an unmanaged index of 500 widely held common stocks,
weighted by market capitalization. The index is not available for investment.
<TABLE>
<CAPTION>
Since
1 year inception
<S> <C> <C>
Nations Managed Index Portfolio 18.27% 16.88%
S&P 500 21.04% 19.50%
</TABLE>
20
<PAGE>
ABOUT THE INDEX PORTFOLIOS
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
ABOUT THE SUB-ADVISER
BACAP IS THIS PORTFOLIO'S SUB-ADVISER. BACAP'S QUANTITATIVE
STRATEGIES TEAM MAKES THE DAY-TO-DAY INVESTMENT DECISIONS FOR THE
PORTFOLIO.
[GRAPHIC APPEARS HERE]
YOU'LL FIND MORE ABOUT
BACAP ON PAGE 29.
[GRAPHIC APPEARS HERE]
WHAT IS AN INDEX PORTFOLIO?
INDEX PORTFOLIOS USE A "PASSIVE" OR "INDEXING" INVESTMENT
APPROACH, WHICH ATTEMPTS TO DUPLICATE THE PERFORMANCE OF A
SPECIFIC MARKET INDEX.
CORRELATION MEASURES HOW CLOSELY A PORTFOLIO'S RETURNS MATCH THOSE
OF AN INDEX. A PERFECT CORRELATION OF 1.0 MEANS THAT THE NET ASSET
VALUE OF THE PORTFOLIO INCREASES OR DECREASES IN EXACT PROPORTION
TO CHANGES IN THE INDEX.
Nations SmallCap Index Portfolio
[GRAPHIC APPEARS HERE]
INVESTMENT OBJECTIVE
This Portfolio seeks investment results that (before fees and expenses)
correspond to the total return of the Standard & Poor's SmallCap 600 Index (S&P
SMALLCAP 600).
[GRAPHIC APPEARS HERE]
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio normally invests at least 80% of its assets in COMMON STOCKS that
are included in the S&P SmallCap 600. The S&P SmallCap 600 is an unmanaged index
of 600 common stocks weighted by market capitalization. It is not available for
investment.
The Portfolio may buy stock index futures and other financial futures as
substitutes for the underlying securities in the S&P SmallCap 600.
The Portfolio may also invest in securities that aren't part of its principal
investment strategies, but it won't hold more than 10% of its assets in any one
type of these securities. These securities are described in the SAI.
The Portfolio, formerly named Nations Managed SmallCap Index Portfolio, operated
under a different investment objective and principal investment strategies prior
to May 1, 2000.
Different common stocks have different weightings in the S&P SmallCap 600,
depending on the amount of stock outstanding and the stock's current price. In
trying to match the performance of the S&P SmallCap 600, the management team
will try to allocate the Portfolio's portfolio among common stocks in
approximately the same weightings as the S&P SmallCap 600, beginning with the
most heavily weighted stocks that make up a larger portion of the value of the
S&P SmallCap 600.
The team generally will try to match the composition of the S&P SmallCap 600 as
closely as possible. The team starts with the stocks that make up a larger
portion of the value of the S&P SmallCap 600. It may not always invest in stocks
that make up the smaller percentages because it may be more difficult and costly
to make relatively small transactions. The team may remove a stock from the
Portfolio's holdings or not invest in a stock if it believes that the stock is
not liquid enough, or for other reasons. The team can substitute stocks that are
not included in the S&P SmallCap 600, if it believes these stocks have similar
characteristics.
The Portfolio tries to achieve a correlation of at least 0.95 with the S&P
SmallCap 600 on an annual basis (before fees and expenses). The Portfolio's
ability to track the S&P SmallCap 600 is affected by transaction costs and other
expenses, changes in the composition of the S&P SmallCap 600, changes in the
number of shares issued by the companies represented in the S&P SmallCap 600,
and by the timing and amount of shareholder purchases and redemptions, among
other things.
21
<PAGE>
[GRAPHIC APPEARS HERE]
YOU'LL FIND MORE ABOUT
OTHER RISKS OF INVESTING IN
THIS PORTFOLIO STARTING ON
PAGE 27 AND IN THE SAI.
Equity Portfolios, like other investors in EQUITY SECURITIES, incur transaction
costs, such as brokerage costs, when they buy and sell securities. The
management team tries to minimize these costs for the Portfolio by using program
trades and CROSSING NETWORKS.
The team may sell a stock when its percentage weighting in the index is reduced,
when the stock is removed from the index, or for other reasons.
[GRAPHIC APPEARS HERE]
RISKS AND OTHER THINGS TO CONSIDER
Nations SmallCap Index Portfolio has the following risks:
o INVESTMENT STRATEGY RISK - This Portfolio tries to match (before fees and
expenses) the returns of the S&P 600, and is not actively managed. There is no
assurance that the returns of the Portfolio will match the returns of the S&P
600. The value of the Portfolio will rise and fall with the performance of the
S&P 600.
o SMALL COMPANY RISK - Stocks of smaller companies tend to have greater price
swings than stocks of larger companies because they trade less frequently and
in lower volumes. These securities may have a higher potential for gains but
also carry more risk.
o STOCK MARKET RISK - The value of the stocks the Portfolio holds can be
affected by changes in U.S. or foreign economies and financial markets, and
the companies that issue the stocks, among other things. Stock prices can rise
or fall over short as well as long periods. In general, stock markets tend to
move in cycles, with periods of rising prices and periods of falling prices.
As of the date of this prospectus, the stock markets, as measured by the S&P
500 and other commonly used indices, were trading at or close to record
levels. There can be no guarantee that these levels will continue.
o FUTURES RISK - This Portfolio may use FUTURES CONTRACTS as a substitute for
the securities included in the index. There is a risk that this could result
in losses, reduce returns, increase transaction costs or increase the
Portfolio's volatility.
22
<PAGE>
[GRAPHIC APPEARS HERE]
MANY THINGS AFFECT A PORTFOLIO'S PERFORMANCE, INCLUDING MARKET
CONDITIONS, THE COMPOSITION OF THE PORTFOLIO'S HOLDINGS, AND
PORTFOLIO EXPENSES.
PRIOR TO MAY 1, 2000, THE PORTFOLIO HAD A DIFFERENT INVESTMENT
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES.
[GRAPHIC APPEARS HERE]
A LOOK AT THE PORTFOLIO'S PERFORMANCE
The following bar chart and table show you how the Portfolio has performed in
the past, and can help you understand the risks of investing in the Portfolio. A
PORTFOLIO'S PAST PERFORMANCE IS NO GUARANTEE OF HOW IT WILL PERFORM IN THE
FUTURE.
YEAR BY YEAR TOTAL RETURN (%) AS OF DECEMBER 31 EACH YEAR
The bar chart shows you how the performance of the Portfolio has varied from
year to year. These returns do not reflect deductions of sales charges or
account fees, if any, and would be lower if they did.
[BAR CHART APPEARS BELOW WITH THE FOLLOWING INFORMATION:]
1998 -9.35%*
1999 5.92%
*Return is from inception (3-26-98) to 12-31-98.
BEST AND WORST QUARTERLY RETURNS DURING THIS PERIOD
<TABLE>
<S> <C>
Best: 4th quarter 1998: 15.92%
Worst: 3rd quarter 1998: -19.79%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1999
The table shows the Portfolio's average annual total return for each period,
compared with the S&P SmallCap 600, an unmanaged index of 600 common stocks,
weighted by market capitalization. The index is not available for investment.
<TABLE>
<CAPTION>
Since
1 year inception
<S> <C> <C>
Nations SmallCap Index Portfolio 5.92% -2.27%
S&P SmallCap 600 12.41% -0.07%
</TABLE>
23
<PAGE>
ABOUT THE BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
ABOUT THE SUB-ADVISER
BACAP IS THIS PORTFOLIO'S SUB-ADVISER. BACAP'S INVESTMENT
STRATEGIES TEAM MAKES THE DAY-TO-DAY INVESTMENT DECISIONS FOR THE
EQUITY PORTION OF THE PORTFOLIO. ITS FIXED INCOME MANAGEMENT TEAM
MAKES THE DAY-TO-DAY INVESTMENT DECISIONS FOR THE FIXED INCOME AND
MONEY MARKET PORTIONS OF THE PORTFOLIO.
[GRAPHIC APPEARS HERE]
YOU'LL FIND MORE ABOUT
BACAP ON PAGE 29.
[GRAPHIC APPEARS HERE]
WHAT IS A BALANCED PORTFOLIO?
A BALANCED PORTFOLIO INVESTS IN A MIX OF EQUITY AND FIXED INCOME
SECURITIES, AND MONEY MARKET INSTRUMENTS.
EACH OF THESE "ASSET CLASSES" HAS DIFFERENT RISK/RETURN
CHARACTERISTICS. COMBINING THEM IN ONE PORTFOLIO CAN HELP REDUCE
RISK AND INCREASE RETURNS BECAUSE AT LEAST ONE ASSET CLASS SHOULD
HAVE THE POTENTIAL TO BE A STRONGER PERFORMER REGARDLESS OF MARKET
CONDITIONS.
BALANCED PORTFOLIOS LIKE THIS ONE CAN PROVIDE A DIVERSIFIED ASSET
MIX FOR YOU IN A SINGLE INVESTMENT.
Nations Balanced Assets Portfolio
[GRAPHIC APPEARS HERE]
INVESTMENT OBJECTIVE
This Portfolio seeks total return by investing in EQUITY and FIXED INCOME
SECURITIES.
[GRAPHIC APPEARS HERE]
PRINCIPAL INVESTMENT STRATEGIES
This Portfolio invests in a mix of equity and fixed income securities, as well
as MONEY MARKET INSTRUMENTS.
Equity securities the Portfolio invests in are primarily COMMON STOCK of
established companies believed to be financially strong.
Fixed income securities normally make up at least 25% of the Portfolio's assets.
Fixed income securities the Portfolio invests in are primarily bonds, notes and
MORTGAGE-BACKED and ASSET-BACKED SECURITIES issued by U.S. companies and
government entities.
Money market instruments the Portfolio invests in are primarily CASH
EQUIVALENTS, including U.S. GOVERNMENT OBLIGATIONS, COMMERCIAL PAPER and other
short-term, interest-bearing instruments.
The Portfolio may also invest in securities that aren't part of its principal
investment strategies, but it won't hold more than 10% of its assets in any one
type of these securities. These securities are described in the SAI.
The management team uses asset allocation as its primary investment approach.
The team allocates assets among the three asset classes based on its assessment
of the expected risks and returns of each class. The team evaluates:
o current economic and financial market conditions, including trends in
interest rates, in the United States and abroad
o earnings and dividend prospects for common stocks
o the overall stability of financial markets
The team may change the Portfolio's asset allocation to try to increase returns
and reduce risk.
The team identifies individual investments using the following process:
o For the equity portion of the Portfolio, the team evaluates the overall
economy, industry conditions, and the financial condition and management
of each company, using a process called FUNDAMENTAL ANALYSIS.
o For the fixed income portion of the Portfolio, the team looks for
securities rated INVESTMENT GRADE at the time of investment. The team may
choose unrated securities if it believes they are of comparable quality
to investment grade securities at the time of investment.
o For the money market portion of the Portfolio, the team chooses
high-quality securities primarily to provide LIQUIDITY.
24
<PAGE>
[GRAPHIC APPEARS HERE]
YOU'LL FIND MORE ABOUT
OTHER RISKS OF INVESTING IN
THIS PORTFOLIO STARTING ON
PAGE 27 AND IN THE SAI.
The management team may use various tax strategies, consistent with the
Portfolio's investment objective, 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 on shareholders
o may offset capital gains by selling securities to realize a CAPITAL LOSS
While the Portfolio tries to manage its capital gain distributions, it will not
be able to completely avoid making taxable distributions. These strategies may
also be affected by changes in tax laws and regulations, or by court decisions.
The team may sell a security when the Portfolio's asset allocation changes,
there is a deterioration in the issuer's financial situation, when the team
believes other investments are more attractive, or for other reasons.
[GRAPHIC APPEARS HERE]
RISKS AND OTHER THINGS TO CONSIDER
Nations Balanced Assets Portfolio has 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, or will fall in
value.
o STOCK MARKET RISK - The value of the stocks the Portfolio holds can be
affected by changes in U.S. or foreign economies and financial markets, and
the companies that issue the stocks, among other things. Stock prices can rise
or fall over short as well as long periods. In general, stock markets tend to
move in cycles, with periods of rising prices and periods of falling prices.
As of the date of this prospectus, the stock markets, as measured by the S&P
500 and other commonly used indices, were trading at or close to record
levels. There can be no guarantee that these levels will continue.
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 usually applies to most fixed income securities, but is generally not a
factor for U.S. government obligations.
o PREPAYMENT AND EXTENSION RISK - The value of the Portfolio's mortgage-backed
securities can fall if the owners of the underlying mortgages pay off their
mortgages sooner than expected, which could happen when interest rates fall,
or later than expected, which could happen when interest rates rise. If the
underlying mortgages are paid off sooner than expected, the portfolio may have
to reinvest this money in mortgage-backed securities that have lower yields.
25
<PAGE>
[GRAPHIC APPEARS HERE]
MANY THINGS AFFECT A PORTFOLIO'S PERFORMANCE, INCLUDING MARKET
CONDITIONS, THE COMPOSITION OF THE PORTFOLIO'S HOLDINGS, AND
PORTFOLIO EXPENSES.
[GRAPHIC APPEARS HERE]
A LOOK AT THE PORTFOLIO'S PERFORMANCE
The following bar chart and table show you how the Portfolio has performed in
the past, and can help you understand the risks of investing in the Portfolio. A
PORTFOLIO'S PAST PERFORMANCE IS NO GUARANTEE OF HOW IT WILL PERFORM IN THE
FUTURE.
YEAR BY YEAR TOTAL RETURN (%) AS OF DECEMBER 31 EACH YEAR
The bar chart shows you how the performance of the Portfolio has varied from
year to year. These returns do not reflect deductions of sales charges or
account fees, if any, and would be lower if they did.
[BAR CHART APPEARS BELOW WITH THE FOLLOWING INFORMATION:]
1998 -2.23%*
1999 1.44%
*Return is from inception (3-26-98) to 12-31-98.
BEST AND WORST QUARTERLY RETURNS DURING THIS PERIOD
<TABLE>
<S> <C>
Best: 4th quarter 1998: 9.86%
Worst: 3rd quarter 1998: -9.09%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1999
The table shows the Portfolio's average annual total return for each period,
compared with the S&P 500, the S&P 500/BARRA VALUE INDEX, and the LEHMAN
AGGREGATE BOND INDEX. The S&P 500 is an unmanaged index of 500 widely held
common stocks, weighted by market capitalization. The S&P 500/BARRA Value Index
is an unmanaged index of a group of stocks from the S&P 500 that have low
price-to-book ratios relative to the S&P 500 as a whole. It is weighted by
market capitalization. The Lehman Aggregate Bond Index is an index of fixed
income securities issued by the U.S. government and its agencies, and by
corporations. These indexes are not available for investment.
<TABLE>
<CAPTION>
Since
1 year inception
<S> <C> <C>
Nations Balanced Assets Portfolio 1.44% -0.47%
S&P 500 21.04% 19.50%
S&P 500/BARRA Value Index 12.72% 8.78%
Lehman Aggregate Bond Index -0.82% 3.47%
</TABLE>
26
<PAGE>
[GRAPHIC APPEARS HERE]
Other important information
You'll find specific information about each Portfolio's principal investments,
strategies and risks in the descriptions starting on page 5. The following are
some other risks and information you should consider before you invest:
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 SAI for more information. The portfolio managers or management
team can also choose not to invest in specific securities described in
this prospectus and in the SAI.
o FOREIGN INVESTMENT RISK - Portfolios that invest in FOREIGN SECURITIES
may be affected by changes in currency exchange rates and the costs of
converting currencies; the implementation of the Euro; foreign government
controls on foreign investment, repatriation of capital, and currency and
exchange; foreign taxes; inadequate supervision and regulation of some
foreign markets; difficulty selling some investments which may increase
volatility; 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.
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 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 investments in a year is considered to trade frequently.
Frequent trading can mean higher brokerage and other transaction costs,
which could reduce the Portfolio's returns. The Portfolios generally buy
securities for capital appreciation, investment income, or both, and
don't engage in short-term trading. The annual portfolio turnover rate
for the Index portfolios is expected to be no more than 25%. You'll find
the portfolio turnover rate for the other Portfolios in FINANCIAL
HIGHLIGHTS.
27
<PAGE>
[GRAPHIC APPEARS HERE]
BANC OF AMERICA ADVISORS, INC.
ONE BANK OF AMERICA PLAZA
CHARLOTTE, NORTH CAROLINA 28255
[GRAPHIC APPEARS HERE]
How the Portfolios are managed
INVESTMENT ADVISER
BAAI is the investment adviser to over 60 mutual fund portfolios in the Nations
Funds family, including the Nations Annuity Trust Portfolios. Nations Annuity
Trust is a series of mutual funds that provides underlying investment
alternatives for variable annuity contracts and variable life insurance
policies.
BAAI is a registered investment adviser. It's a wholly-owned subsidiary of Bank
of America, which is owned by Bank of America Corporation. Nations Annuity Trust
pays BAAI an annual fee for its investment advisory services. The fee is
calculated daily based on the average net assets of each Portfolio and is paid
monthly. BAAI uses part of this money to pay investment sub-advisers for the
services they provide to each Portfolio.
BAAI has agreed to waive fees and/or reimburse expenses for certain Portfolios
until May 1, 2001. You'll find a discussion of any waiver and/or reimbursement
in the Fee Table Summary section of the preceding Nations Variable Annuity
prospectus. There is no assurance that BAAI will continue to waive and/or
reimburse any fees and/or expenses after this date.
The following chart shows the maximum advisory fees BAAI can receive.
ANNUAL INVESTMENT ADVISORY FEE, AS A % OF AVERAGE DAILY NET ASSETS
<TABLE>
<CAPTION>
Maximum
advisory
fee
<S> <C>
Nations Value Portfolio .65%
Nations Aggressive Growth Portfolio .65%
Nations Marsico Focused Equities Portfolio .75%
Nations Marsico Growth & Income Portfolio .75%
Nations International Growth Portfolio .80%
Nations Managed Index Portfolio .40%
Nations SmallCap Index Portfolio .40%
Nations Balanced Assets Portfolio .65%
</TABLE>
INVESTMENT SUB-ADVISERS
Nations Annuity Trust and BAAI have engaged investment sub-advisers to provide
day-to-day portfolio management for the Portfolios. These sub-advisers function
under the supervision of BAAI and the Board of Trustees of Nations Annuity
Trust.
28
<PAGE>
[GRAPHIC APPEARS HERE]
BANC OF AMERICA CAPITAL
MANAGEMENT, INC.
ONE BANK OF AMERICA PLAZA
CHARLOTTE, NORTH CAROLINA 28255
[GRAPHIC APPEARS HERE]
MARSICO CAPITAL
MANAGEMENT, LLC
1200 17TH STREET
SUITE 1300
DENVER, COLORADO 80202
BANC OF AMERICA CAPITAL MANAGEMENT, INC.
BACAP, the successor to TradeStreet Investment Associates, Inc., is a registered
investment adviser and a wholly-owned subsidiary of Bank of America. Its
management expertise covers all major domestic asset classes, including EQUITY
and FIXED INCOME SECURITIES, and MONEY MARKET INSTRUMENTS.
Currently managing more than $90 billion, BACAP has over 200 institutional
clients and is sub-adviser to more than 50 mutual funds in the Nations Funds
Family. BACAP generally uses a team approach to investment management. Each team
has access to the latest technology and analytical resources.
BACAP is the investment sub-adviser to the Portfolios shown in the table below.
The table also tells you which internal BACAP asset management team is
responsible for making the day-to-day investment decisions for each Portfolio.
<TABLE>
<CAPTION>
Portfolio BACAP Team
<S> <C>
Nations Value Portfolio Value Strategies Team
Nations Aggressive Growth Portfolio Growth Strategies Team
Nations Managed Index Portfolio Quantitative Strategies Team
Nations SmallCap Index Portfolio Quantitative Strategies Team
Nations Balanced Assets Portfolio Investment Strategies Team
for the equity portion of the portfolio
Fixed Income Management Team
for the fixed income and money market
portions of the portfolio
</TABLE>
MARSICO CAPITAL MANAGEMENT, LLC
Marsico Capital is a full service investment advisory firm founded by Thomas F.
Marsico in September 1997. It is a registered investment adviser, specializing
in large capitalization stocks, and currently has over $6.5 billion in assets
under management.
Marsico Management Holdings, LLC, a wholly-owned subsidiary of Bank of America
Corporation, indirectly owns 50% of the equity of Marsico Capital.
Marsico Capital is the investment sub-adviser to:
o Nations Marsico Focused Equities Portfolio
o Nations Marsico Growth & Income Portfolio
THOMAS F. MARSICO, Chairman and Chief Executive Officer of Marsico Capital, is
the portfolio manager responsible for making the day-to-day investment decisions
for these portfolios. Mr. Marsico was an executive vice president and portfolio
manager at Janus Capital Corporation from 1988 until he formed Marsico Capital
in September 1997. He has more than 20 years of experience as a securities
analyst and portfolio manager.
29
<PAGE>
PERFORMANCE OF OTHER EQUITY FUNDS MANAGED BY THOMAS MARSICO
Nations Marsico Focused Equities Portfolio and Nations Marsico Growth & Income
Portfolio have been in operation since March 27, 1998, so they have a relatively
short performance history. The tables below are designed to show you how similar
equity funds managed by Thomas Marsico performed in the past.
The Janus Twenty Fund has an investment objective, policies and strategies that
are substantially 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 below shows the returns for the Janus Twenty Fund compared with the
S&P 500 for the periods ending August 7, 1997. The returns reflect deductions of
fees and expenses, and assume all dividends and distributions have been
reinvested.
AVERAGE ANNUAL TOTAL RETURNS AS OF AUGUST 7, 1997
<TABLE>
<CAPTION>
Janus Twenty
Fund (%) S&P 500 (%)
<S> <C> <C>
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
</TABLE>
This information is designed to show 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 the Portfolio's holdings and the portfolio's expenses.
The Janus Growth and Income Fund has an investment objective, policies and
strategies that are substantially similar to Nations Marsico Growth & Income
Portfolio. Mr. Marsico managed the Janus Growth and Income Fund from its
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.
30
<PAGE>
[GRAPHIC APPEARS HERE]
GARTMORE GLOBAL PARTNERS
ONE BANK OF AMERICA PLAZA
CHARLOTTE, NORTH CAROLINA 28255
The table below 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, and assume all dividends and distributions have
been reinvested.
AVERAGE ANNUAL TOTAL RETURNS AS OF AUGUST 7, 1997
<TABLE>
<CAPTION>
Janus
Growth and
Income Fund (%) S&P 500 (%)
<S> <C> <C>
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
</TABLE>
This information is designed to show 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 the Portfolio's holdings and the portfolio's expenses.
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 $1 billion in assets.
Gartmore is a general partnership between indirect subsidiaries of Asset
Management Holdings plc, presently owned by Royal Bank of Scotland. Royal Bank
of Scotland has announced the sale of Asset Management Holdings plc, a UK
holding company of the Gartmore group of companies, on or about June 30, 2000,
to Nationwide Mutual Insurance Company at which point Gartmore would become an
indirect wholly owned subsidiary of Nationwide Mutual Insurance Company.
Gartmore follows a growth philosophy, which is reflected in its active
management of market allocation and stock selection.
Gartmore is the investment sub-adviser to Nations International Growth
Portfolio.
BRIAN O'NEILL, the principal senior investment manager of the Gartmore Global
Portfolio Team at Gartmore Global Partners, manages this portfolio. He has
managed the portfolio since its inception. Before joining Gartmore in 1981, Mr.
O'Neill was a 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.
31
<PAGE>
[GRAPHIC APPEARS HERE]
STEPHENS INC.
111 CENTER STREET
LITTLE ROCK, ARKANSAS 72201
[GRAPHIC APPEARS HERE]
PFPC INC.
400 BELLEVUE PARKWAY
WILMINGTON, DELAWARE 19809
OTHER SERVICE PROVIDERS
The Portfolios are distributed and co-administered by Stephens Inc., a
registered broker/dealer. Stephens may pay commissions, distribution (12b-1) and
shareholder servicing fees, and/or other compensation to companies for selling
shares and providing services to investors.
BAAI is also co-administrator of the Portfolios, and assists in overseeing the
administrative operations of the Portfolios. The Portfolios pay BAAI and
Stephens a combined fee for their services, plus certain out-of-pocket expenses.
The fee is calculated as an annual percentage of the average daily net assets of
the Portfolios and is paid monthly, as follows:
<TABLE>
<S> <C>
Domestic Equity Portfolios 0.23%
International Portfolios 0.22%
</TABLE>
PFPC Inc. ("PFPC") is the transfer agent for the Portfolios' shares. Its
responsibilities include processing purchases, sales and exchanges, calculating
and paying distributions, keeping shareholder records, preparing account
statements and providing customer service.
32
<PAGE>
ABOUT YOUR INVESTMENT
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
WE'VE USED THE TERM, INVESTMENT PROFESSIONAL, TO REFER TO THE
PERSON WHO HAS ASSISTED YOU WITH BUYING THE PORTFOLIOS. SELLING
AGENT OR SERVICING AGENT (SOMETIMES REFERRED TO AS A SELLING
AGENT) MEANS THE COMPANY THAT EMPLOYS YOUR INVESTMENT
PROFESSIONAL. SELLING AGENTS INCLUDE BANKS, BROKERAGE FIRMS,
MUTUAL FUND DEALERS, PARTICIPATING LIFE INSURANCE COMPANIES, AND
OTHER FINANCIAL INSTITUTIONS, INCLUDING AFFILIATES OF BANK OF
AMERICA.
WHEN YOU SELL SHARES OF A MUTUAL FUND, THE FUND IS EFFECTIVELY
"BUYING" THEM BACK FROM YOU. THIS IS CALLED A REDEMPTION.
[GRAPHIC APPEARS HERE]
A BUSINESS DAY IS ANY DAY THAT THE NEW YORK STOCK EXCHANGE (NYSE)
IS OPEN. A BUSINESS DAY ENDS AT THE CLOSE OF REGULAR TRADING ON THE
NYSE, USUALLY AT 4:00 P.M. EASTERN TIME. IF THE NYSE CLOSES EARLY,
THE BUSINESS DAY ENDS AS OF THE TIME THE NYSE CLOSES.
THE NYSE IS CLOSED ON WEEKENDS AND ON THE FOLLOWING NATIONAL
HOLIDAYS: NEW YEAR'S DAY, MARTIN LUTHER KING, JR. DAY, PRESIDENTS'
DAY, GOOD FRIDAY, MEMORIAL DAY, INDEPENDENCE DAY, LABOR DAY,
THANKSGIVING DAY AND CHRISTMAS DAY.
[GRAPHIC APPEARS HERE]
Buying, selling and transfering shares
Nations Annuity Trust Portfolios are available only to owners of variable
annuity contracts and/or variable life insurance policies. Please refer to the
prospectus that describes your annuity contract and/or life insurance policy for
information about how to buy, sell and transfer your investment among shares of
the Portfolios.
HOW SHARES ARE PRICED
All transactions are based on the price of a Portfolio's shares -- or its net
asset value. We calculate net asset value per share for each Portfolio at the
end of each business day. First, we calculate the net asset value for each
Portfolio by determining the value of the Portfolio's assets and then
subtracting its liabilities. Next, we divide this amount by the number of shares
that investors are holding in the Portfolio.
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 aren't readily available, or the value of a security has been materially
affected by events occurring after a foreign exchange closes, we'll base the
price of a security on its fair market value. When a Portfolio uses fair value
to price securities it may value those securities higher or lower than another
portfolio that uses market quotations to price the same securities. We use the
amortized cost method, which approximates market value, to value short-term
investments maturing in 60 days or less. International markets may be open on
days when U.S. markets are closed. The value of foreign securities owned by a
portfolio could change on days when Portfolio shares may not be bought or sold.
33
<PAGE>
[GRAPHIC APPEARS HERE]
THE FINANCIAL INSTITUTION OR INTERMEDIARY THAT BUYS SHARES FOR YOU
IS ALSO SOMETIMES REFERRED TO AS A SELLING AGENT.
THE DISTRIBUTION FEE IS OFTEN REFERRED TO AS A "12B-1" FEE BECAUSE
IT'S PAID THROUGH A PLAN APPROVED UNDER RULE 12B-1 UNDER THE 1940
ACT.
YOUR SELLING AGENT MAY CHARGE OTHER FEES RELATED TO SERVICES
PROVIDED TO YOUR ACCOUNT.
[GRAPHIC APPEARS HERE]
How selling and servicing agents are paid
Selling and servicing agents usually receive compensation based on your
investment in the Portfolios. Selling agents typically pay a portion of the
compensation they receive to their investment professionals.
DISTRIBUTION (12B-1) AND SHAREHOLDER SERVICING FEES
Stephens and/or selling and servicing agents are compensated for selling shares
and providing services to investors under a combined distribution and
shareholder servicing plan.
Stephens and/or selling and servicing agents may receive a maximum combined
annual distribution (12b-1) and shareholder servicing fee of 0.25% for selling
shares and providing services to holders of variable annuity contracts and/or
variable life insurance policies with whom the selling and servicing agents have
a relationship.
Fees are calculated daily and deducted monthly. Because these fees are paid out
of the Portfolios' assets on an ongoing basis they will increase the cost of
your investment over time, and may cost you more than any sales charges you may
pay.
The Portfolios pay these fees to Stephens and/or to eligible selling and
servicing agents for as long as the plan continues. We may reduce or discontinue
payments at any time.
OTHER COMPENSATION
Selling and servicing agents may also receive:
o a bonus, incentive or other compensation relating to the sale, promotion
and marketing of the Portfolios
o additional amounts on all sales of shares:
o up to 1.00% of the offering price per share
o non-cash compensation like trips to sales seminars or vacation
destinations, tickets to sporting events, theater or other entertainment,
opportunities to participate in golf or other outings and gift
certificates for meals or merchandise
This compensation, which is not paid by the Portfolios, is discretionary and may
be available only to selected selling and servicing agents. For example,
Stephens sometimes sponsors promotions involving Banc of America Investment
Services, Inc., an affiliate of BAAI, and certain other selling or servicing
agents. Selected selling or servicing agents also may receive compensation for
opening or servicing a minimum number of accounts.
BAAI also may pay amounts from its own assets to Stephens or to selling or
servicing agents for services they provide.
34
<PAGE>
[GRAPHIC APPEARS HERE]
THIS INFORMATION IS A SUMMARY OF HOW FEDERAL INCOME TAXES MAY
AFFECT YOUR INVESTMENT IN THE PORTFOLIOS. IT IS NOT INTENDED AS A
SUBSTITUTE FOR CAREFUL TAX PLANNING. YOU SHOULD CONSULT WITH YOUR
OWN TAX ADVISOR ABOUT YOUR SITUATION, INCLUDING ANY FOREIGN, STATE
AND LOCAL TAXES THAT MAY APPLY.
[GRAPHIC APPEARS HERE]
FOR MORE INFORMATION ABOUT TAXES, PLEASE SEE THE SAI.
[GRAPHIC APPEARS HERE]
Distributions and taxes
ABOUT DISTRIBUTIONS
A mutual fund can make money two ways:
o It can earn income. Examples are interest paid on bonds and dividends
paid on COMMON STOCKS.
o A portfolio can also have CAPITAL GAIN if the value of its investments
increases. If a portfolio sells an investment at a gain, the gain is
realized. If a portfolio continues to hold the investment, any gain is
unrealized.
A mutual fund is not subject to income tax as long as it distributes its net
investment income and realized capital gains to its shareholders. The Portfolios
intend to pay out a sufficient amount of their income and capital gain to their
shareholders so the portfolios won't have to pay any income tax. When a
Portfolio makes this kind of a payment, it's split equally among all shares, and
is called a distribution.
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.
A distribution is paid based on the number of shares you hold on the record
date, which is usually the day before the distribution is declared. Shares are
eligible to receive distributions from the TRADE DATE of the purchase up to and
including the day before the shares are sold.
Each time a distribution is made, the net asset value per share of the Portfolio
is reduced by the amount of the distribution.We'll automatically reinvest
distributions in additional shares of the same Portfolio.
HOW TAXES AFFECT YOUR INVESTMENT
Shares of each Portfolio are only offered to you through a variable annuity
contract or variable insurance policy of a participating insurance company. As
discussed in the prospectus for your variable annuity contract or variable
insurance policy, your contract or policy may qualify for favorable tax
treatment.
As long as your variable annuity contract or variable insurance policy maintains
favorable tax treatment, you will only be taxed on your investment in a
Portfolio through such contract or policy, regardless of the transfer of
Portfolio shares or the Portfolio's distributions of net investment income and
realized capital gains. In order to qualify for such treatment, among other
things, the "separate accounts" of participating insurance companies, which
maintain and invest net proceeds from the variable annuity contracts and
variable insurance policies, must be "adequately diversified." Each Portfolio
intends to operate in such a manner so that a separate account investing in
Portfolio shares on behalf of a holder of a variable annuity contract or
variable insurance policy will be "adequately diversified."
35
<PAGE>
[GRAPHIC APPEARS HERE]
Financial highlights
The financial highlights table is designed to help you understand how the
Portfolios have performed since their inception. 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 financial information has been audited by PricewaterhouseCoopers LLP. The
independent accountant's report and Nations Annuity Trust's financial statements
are incorporated by reference into the SAI. Please see the back cover to find
out how you can get a copy.
36
<PAGE>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
International International
Growth Portfolio Growth Portfolio
Year ended Period ended
12/31/99** 12/31/98*
<S> <C> <C>
Net asset value, beginning of period $ 10.28 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income/(loss) 0.06 0.06
Net realized and unrealized gain/(loss) on investments 4.35 0.25
Net increase/(decrease) in net asset value from
operations 4.41 0.31
LESS DISTRIBUTIONS:
Dividends from net investment income ( 0.05) ( 0.03)(a)
Dividends from net realized capital gains ( 0.29) --
Total dividends and distributions ( 0.34) ( 0.03)(a)
Net asset value, end of period $ 14.35 $ 10.28
TOTAL RETURN+ 43.05% 3.11%
========================================================= ======= ========
RATIO TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $5,898 $2,310
Ratio of operating expenses to average net assets 1.25% 1.25%++
Ratio of net investment income to average net assets 0.43% 1.09%++
Portfolio turnover rate 24% 16%
Ratio of operating expenses to average net assets
without waivers and/or expense reimbursements 2.64% 4.09%++
<CAPTION>
Focused Focused
Equities Portfolio Equities Portfolio
Year ended Period ended
12/31/99** 12/31/98*
<S> <C> <C>
Net asset value, beginning of period $ 13.00 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income/(loss) ( 0.03) 0.02
Net realized and unrealized gain/(loss) on investments 6.90 3.00
Net increase/(decrease) in net asset value from
operations 6.87 3.02
LESS DISTRIBUTIONS:
Dividends from net investment income -- ( 0.02)(a)
Dividends from net realized capital gains ( 0.16) --
Total dividends and distributions ( 0.16) ( 0.02)(a)
Net asset value, end of period $ 19.71 $ 13.00
TOTAL RETURN+ 53.28% 30.16%
========================================================= ======== ========
RATIO TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $113,115 $24,521
Ratio of operating expenses to average net assets 1.10%(b) 1.10%(b)++
Ratio of net investment income to average net assets ( 0.17)% 0.33%++
Portfolio turnover rate 134% 236%
Ratio of operating expenses to average net assets
without waivers and/or expense reimbursements 1.38%(b) 1.94%(b)++
</TABLE>
* Portfolio commenced operations on March 27, 1998. Shares were offered to the
public on April 6, 1998.
** Per share net investment income has been calculated using the monthly
average shares method.
+ Total return represents aggregate total return for the period indicated and
assumes reinvestment of all distributions.
++ Annualized.
(a) Includes distributions in excess of net investment income or from net
realized gains that amounted to less than $0.01 per share.
(b) The effect of the custodial expense offset on the operating expense ratio,
with and without waivers and/or expense reimbursements, was less than 0.01%.
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
SmallCap SmallCap
Index Portfolio*** Index Portfolio***
Year ended Period ended
12/31/99** 12/31/98*
<S> <C> <C>
Net asset value, beginning of period $ 9.03 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.01 0.03
Net realized and unrealized gain/(loss) on investments 0.52 ( 0.97)
Net increase/(decrease) in net asset value from
operations 0.53 ( 0.94)
LESS DISTRIBUTIONS:
Dividends from net investment income (0.01) ( 0.03)(a)
Dividends from net realized capital gains -- --
Total dividends and distributions (0.01) ( 0.03)(a)
Net asset value, end of period $ 9.55 $ 9.03
TOTAL RETURN+ 5.92% ( 9.35)%
========================================================= ======= =======
RATIO TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $7,187 $6,098
Ratio of operating expenses to average net assets 0.75% 0.75%(b)++
Ratio of net investment income to average net assets 0.14% 0.49%++
Portfolio turnover rate 55% 44%
Ratio of operating expenses to average net assets
without waivers and/or expense reimbursements 1.21% 1.70%(b)++
<CAPTION>
Aggressive Aggressive
Growth Portfolio**** Growth Portfolio****
Year ended Period ended
12/31/99** 12/31/98*
<S> <C> <C>
Net asset value, beginning of period $ 10.62 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.02 0.02
Net realized and unrealized gain/(loss) on investments 1.02 0.62
Net increase/(decrease) in net asset value from
operations 1.04 0.64
LESS DISTRIBUTIONS:
Dividends from net investment income ( 0.03) ( 0.02)(a)
Dividends from net realized capital gains -- --
Total dividends and distributions ( 0.03) ( 0.02)(a)
Net asset value, end of period $ 11.63 $ 10.62
TOTAL RETURN+ 9.75% 6.44%
======================================================== ======= =======
RATIO TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $7,684 $4,796
Ratio of operating expenses to average net assets 1.00%(b)(c) 1.00%(b)++
Ratio of net investment income to average net assets 0.22% 0.44%++
Portfolio turnover rate 50% 40%
Ratio of operating expenses to average net assets
without waivers and/or expense reimbursements 1.81%(b) 2.41%(b)++
</TABLE>
* Portfolio commenced operations on March 27, 1998. Shares were offered to
the public on April 6, 1998.
** Per share net investment income has been calculated using the monthly
average shares method.
*** Prior to May 1, 2000, Nations SmallCap Index Portfolio was known as Nations
Managed SmallCap Index Portfolio.
**** Prior to May 1, 2000, Nations Aggressive Growth Portfolio was known as
Nations Disciplined Equity Portfolio.
+ Total return represents aggregate total return for the period indicated and
assumes reinvestment of all distributions.
++ Annualized.
(a) Includes distributions in excess of net investment income or from net
realized gains that amounted to less than $0.01 per share.
(b) The effect of the custodial expense offset on the operating expense ratio,
with and without waivers and/or expense reimbursements, was less than
0.01%.
(c) The effect of interest expense on the operating expense ratio was less than
0.01%.
37
<PAGE>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Growth & Income
Portfolio
Year ended
12/31/99**
<S> <C>
Net asset value, beginning of period $ 12.16
INCOME FROM INVESTMENT OPERATIONS:
Net investment income/(loss) ( 0.03)
Net realized and unrealized gain/(loss) on investments 6.73
Net increase/(decrease) in net asset value from
operations 6.70
LESS DISTRIBUTIONS:
Dividends from net investment income --
Dividends from net realized capital gains --
Total dividends and distributions --
Net asset value, end of period $ 18.86
TOTAL RETURN+ 55.10%
========================================================= =======
RATIO TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $64,049
Ratio of operating expenses to average net assets 1.10%(b)
Ratio of net investment income to average net assets ( 0.20)%
Portfolio turnover rate 110%
Ratio of operating expenses to average net assets
without waivers and/or expense reimbursements 1.41%(b)
<CAPTION>
Growth & Income Managed Index Managed Index
Portfolio Portfolio Portfolio
Period ended Year ended Period ended
12/31/98* 12/31/99** 12/31/98*
<S> <C> <C> <C>
Net asset value, beginning of period $ 10.00 $ 11.06 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income/(loss) 0.02 0.08 0.06
Net realized and unrealized gain/(loss) on investments 2.16 1.95 1.07
Net increase/(decrease) in net asset value from
operations 2.18 2.03 1.13
LESS DISTRIBUTIONS:
Dividends from net investment income ( 0.02)(a) ( 0.06) ( 0.07)(a)
Dividends from net realized capital gains -- -- --
Total dividends and distributions ( 0.02)(a) ( 0.06) ( 0.07)(a)
Net asset value, end of period $ 12.16 $ 13.03 $ 11.06
TOTAL RETURN+ 21.80% 18.27% 11.39%
========================================================= ======== ======= =======
RATIO TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $15,576 $20,680 $9,931
Ratio of operating expenses to average net assets 1.10%(b)++ 0.75%(b) 0.75%(b)++
Ratio of net investment income to average net assets 0.40%++ 0.64% 1.04%++
Portfolio turnover rate 184% 76% 16%
Ratio of operating expenses to average net assets
without waivers and/or expense reimbursements 1.99%(b)++ 1.07%(b) 1.62%(b)++
</TABLE>
* Portfolio commenced operations on March 27, 1998. Shares were offered to the
public on April 6, 1998.
** Per share net investment income has been calculated using the monthly
average shares method.
+ Total return represents aggregate total return for the period indicated and
assumes reinvestment of all distributions.
++ Annualized.
(a) Includes distributions in excess of net investment income or from net
realized gains that amounted to less than $0.01 per share.
(b) The effect of the custodial expense offset on the operating expense ratio,
with and without waivers and/or expense reimbursements, was less than 0.01%.
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Value
Portfolio
Year ended
12/31/99**
<S> <C>
Net asset value, beginning of period $ 10.41
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.07
Net realized and unrealized gain/(loss) on investments 0.19
Net increase/(decrease) in net asset value from
operations 0.26
LESS DISTRIBUTIONS:
Dividends from net investment income ( 0.06)
Dividends from net realized capital gains --
Total dividends and distributions ( 0.06)
Net asset value, end of period $ 10.61
TOTAL RETURN+ 2.50%
========================================================= =======
RATIO TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $10,645
Ratio of operating expenses to average net assets 1.00%(b)
Ratio of net investment income to average net assets 0.67%
Portfolio turnover rate 82%
Ratio of operating expenses to average net assets
without waivers and/or expense reimbursements 1.68%(b)
<CAPTION>
Value Balanced Assets Balanced Assets
Portfolio Portfolio Portfolio
Period ended Year ended Period ended
12/31/98* 12/31/99** 12/31/98*
<S> <C> <C> <C>
Net asset value, beginning of period $ 10.00 $ 9.68 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.04 0.20 0.09
Net realized and unrealized gain/(loss) on investments 0.41 (0.06) ( 0.31)
Net increase/(decrease) in net asset value from
operations 0.45 0.14 ( 0.22)
LESS DISTRIBUTIONS:
Dividends from net investment income ( 0.04)(a) (0.17) ( 0.10)(a)
Dividends from net realized capital gains -- -- --
Total dividends and distributions ( 0.04)(a) (0.17) ( 0.10)(a)
Net asset value, end of period $ 10.41 $ 9.65 $ 9.68
TOTAL RETURN+ 4.48% 1.44% ( 2.23)%
========================================================= ======= ======= =======
RATIO TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $5,645 $6,548 $3,823
Ratio of operating expenses to average net assets 1.00%(b)++ 1.00%(b) 1.00%(b)++
Ratio of net investment income to average net assets 0.83%++ 2.01% 2.36%++
Portfolio turnover rate 27% 75% 94%
Ratio of operating expenses to average net assets
without waivers and/or expense reimbursements 2.32%(b)++ 1.79%(b) 2.71%(b)++
</TABLE>
* Portfolio commenced operations on March 27, 1998. Shares were offered to the
public on April 6, 1998.
** Per share net investment income has been calculated using the monthly
average shares method.
+ Total return represents aggregate total return for the period indicated and
assumes reinvestment of all distributions.
++ Annualized.
(a) Includes distributions in excess of net investment income or from net
realized gains that amounted to less than $0.01 per share.
(b) The effect of the custodial expense offset on the operating expense ratio,
with and without waivers and/or expense reimbursements, was less than 0.01%.
38
<PAGE>
[GRAPHIC APPEARS HERE]
Terms used in this prospectus
ASSET-BACKED SECURITY - a debt security that gives you an interest in a pool of
assets that is collateralized or "backed" by one or more kinds of assets,
including real property, receivables or mortgages, generally issued by banks,
credit card companies or other lenders. Some securities may be issued or
guaranteed by the U.S. government or its agencies, authorities or
instrumentalities. Asset-backed securities typically make periodic payments,
which may be interest or a combination of interest and a portion of the
principal of the underlying assets.
AVERAGE DOLLAR-WEIGHTED MATURITY - the average length of time until the debt
securities held by a Fund reach maturity. In general, the longer the average
dollar-weighted maturity, the more a Fund's share price will fluctuate in
response to changes in interest rates.
BANK OBLIGATION - a money market instrument issued by a bank, including
certificates of deposit, time deposits and bankers' acceptances.
CAPITAL GAIN OR LOSS - the difference between the purchase price of a security
and its selling price. You realize a capital gain when you sell a security for
more than you paid for it. You realize a capital loss when you sell a security
for less than you paid for it.
CASH EQUIVALENTS - short-term, interest-bearing instruments, including
obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities, bank obligations, asset-backed securities, foreign government
securities and commercial paper issued by U.S. and foreign issuers which, at the
time of investment, is rated at least Prime-2 by Moody's Investor Services, Inc.
(Moody's), A-2 by S&P, or F-1 by Fitch IBCA (Fitch).
COLLATERALIZED MORTGAGE OBLIGATION (CMO) - a debt security that is backed by
real estate mortgages. CMO payment obligations are covered by interest and/or
principal payments from a pool of mortgages. In addition, the underlying assets
of a CMO are typically separated into classes, called tranches, based on
maturity. Each tranche pays a different rate of interest. CMOs are not generally
issued by the U.S. government, its agencies or instrumentalities.
COMMERCIAL PAPER - a money market instrument issued by a large company.
COMMON STOCK - a security that represents part equity ownership in a company.
Common stock typically 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) on a specified basis and date.
CONVERTIBLE SECURITY - a security that can be exchanged for common stock (or
another type of security) at a specified rate. Convertible securities include
convertible debt, rights and warrants.
39
<PAGE>
CORPORATE OBLIGATION - a money market instrument issued by a corporation or
commercial bank.
CROSSING NETWORKS - an electronic system where anonymous parties can match buy
and sell transactions. These transactions don't affect the market, and
transaction costs are extremely low.
CS FIRST BOSTON HIGH YIELD INDEX - the Credit Suisse First Boston Global High
Yield Index is an unmanaged, trader priced portfolio constructed to mirror the
high yield debt market. The index is not available for investment.
DEBT SECURITY - when you invest in a debt security, you are typically lending
your money to a governmental body or company (the issuer) to help fund 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.
DEPOSITARY RECEIPTS - evidence of the deposit of a security with a custodian
bank. American Depositary Receipts (ADRs), for example, are certificates
traded in U.S. markets representing an interest of a foreign company. They
were created to make it possible for foreign issuers to meet U.S. security
registration requirements. Other examples include ADSs, GDRs and EDRs.
DIVIDEND YIELD - rate of return of dividends paid on a common or preferred
stock. It equals the amount of the annual dividend on a stock expressed as a
percentage of the stock's current market value.
DOLLAR ROLL TRANSACTION - the sale by a Portfolio of mortgage-backed or other
asset-backed securities, together with a commitment to buy similar, but not
identical, securities at a future date.
DURATION - a security's or portfolio's sensitivity to changes in interest
rates. For example, if interest rates rise by one percentage point, the share
price of a fund with a duration of five years would decline by about 5%. If
interest rates fall by one percentage point, the fund's share price would rise
by about 5%.
EQUITY SECURITY - an investment that gives you an equity ownership right in a
company. Equity securities (or "equities") include common and preferred stock,
rights and warrants.
FIRST-TIER SECURITY - under Rule 2a-7 under the 1940 Act, a debt security that
is an eligible investment for money market funds and has the highest
short-term rating from a nationally recognized statistical rating organization
(NRSRO), or if unrated, is determined by the fund's portfolio management team
to be of comparable quality, or is a money market fund issued by a registered
investment company, or is a government security.
40
<PAGE>
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 company or
government.
FUNDAMENTAL ANALYSIS - a method of securities analysis that tries to evaluate
the intrinsic, or "true," value of a particular stock. It includes a study of
the overall economy, industry conditions and the financial condition and
management of a company.
FUTURES CONTRACT - a contract to buy or sell an asset or an index of
securities at a specified price on a specified future date. The price is set
through a futures exchange.
GUARANTEED INVESTMENT CONTRACT - an investment instrument issued by a rated
insurance company in return for a payment by an investor.
HIGH QUALITY - in the case of municipal securities, a long-term rating of A or
higher from Duff & Phelps Credit Rating Co. (D&P), Fitch, S&P, Thomson
BankWatch, Inc. (BankWatch), or Moody's in the case of certain bonds that are
lacking a short-term rating from the required number of NRSROs; rated D-1 or
higher by D&P, F-1 or higher by Fitch, SP-1 by S&P, or MIG-1 by Moody's in the
case of notes; rated D-1 or higher by D&P, F-1 or higher by Fitch, or VMIG-1
by Moody's in the case of variable rate demand notes; or rated D-1 or higher
by D&P, F-1 or higher by Fitch, A-1 or higher by S&P or PRIME-1 by Moody's in
the case of tax-exempt commercial paper. The portfolio management team may
consider an unrated municipal security to be investment grade if the team
believes it to be of comparable quality, based on guidelines provided by the
Portfolio's Board of Directors. Please see the SAI for more information about
credit ratings.
HIGH-YIELD DEBT SECURITY - debt securities that, at the time of investment by
the sub-adviser, are rated "BB" or below by S&P or "Ba" or below by Moody's,
or that are unrated and determined to be of comparable quality.
IFC INVESTABLES INDEX - an unmanaged index that tracks more than 1,400 stocks
in 25 emerging markets in Asia, Latin America, Eastern Europe, Africa and the
Middle East. The index is weighted by market capitalization.
INVESTMENT GRADE - a debt security that has been given a medium to high credit
rating (Baa or higher by Moody's, BBB or higher by S&P or a comparable rating
by other nationally recognized statistical rating organization NRSROs) based
on the issuer's ability to pay interest and repay principal on time. The
portfolio management team may consider an unrated debt security to be
investment grade if the team believes it is of comparable quality. Please see
the SAI for more information about credit ratings.
LEHMAN 3-YEAR MUNICIPAL BOND INDEX - a broad-based, unmanaged index of
investment grade bonds with maturities of two to four years. All dividends are
reinvested.
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<PAGE>
LEHMAN 7-YEAR MUNICIPAL BOND INDEX - a broad-based, unmanaged index of
investment grade bonds with maturities of seven to eight years. All dividends
are reinvested.
LEHMAN AGGREGATE BOND INDEX - an index made up of the Lehman
Government/Corporate Index, the Asset-Backed Securities Index and the
Mortgage-Backed Securities Index. These indexes include U.S. government agency
and U.S. Treasury securities, corporate bonds and mortgage-backed securities.
All dividends are reinvested.
LEHMAN GOVERNMENT BOND INDEX - an index of government bonds with an average
maturity of approximately nine years. All dividends are reinvested.
LEHMAN GOVERNMENT/CORPORATE BOND INDEX - an index of U.S. government, U.S.
Treasury and agency securities, and corporate and Yankee bonds. All dividends
are reinvested.
LEHMAN INTERMEDIATE GOVERNMENT BOND INDEX - an index of U.S. government agency
and U.S. Treasury securities. All dividends are reinvested.
LEHMAN INTERMEDIATE TREASURY INDEX - an index of U.S. Treasury securities with
maturities of three to 10 years. All dividends are reinvested.
LEHMAN MUNICIPAL BOND INDEX - a broad-based, unmanaged index of 8,000
investment grade bonds with long-term maturities. All dividends are
reinvested.
LIQUIDITY - a measurement of how easily a security can be bought or sold at a
price that is close to its market value.
MERRILL LYNCH 1-3 YEAR TREASURY INDEX - an index of U.S. Treasury bonds with
maturities of 1 to 3 years. All dividends are reinvested.
MONEY MARKET INSTRUMENT - a short-term debt security that matures in 13 months
or less. Money market instruments include U.S. Treasury obligations, U.S.
government obligations, certificates of deposit, bankers' acceptances,
commercial paper, repurchase agreements and certain municipal securities.
MORTGAGE-BACKED SECURITY OR MORTGAGE-RELATED SECURITY - a debt security that
gives you an interest in, and 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 typically make
monthly payments, which are a combination of interest and a portion of the
principal of the underlying 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.
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<PAGE>
NON-DIVERSIFIED - a portfolio that holds securities of fewer issuers or kinds
of issuers than other kinds of portfolios. Non-diversified portfolios tend to
have greater price swings than more diversified portfolios because events
affecting one or more of its securities may have a disproportionately large
effect on the portfolio.
OVER-THE-COUNTER MARKET - a market where dealers trade securities through a
telephone or computer network rather than through a public stock exchange.
PARTICIPATION - a pass-through certificate representing a share in a pool of
debt obligations or other instruments.
PASS-THROUGH CERTIFICATE - securitized mortgages or other debt securities with
interest and principal paid by a servicing intermediary shortly after interest
payments are received from borrowers.
PREFERRED STOCK - a type of equity security that gives you a limited ownership
right in a company, with certain preferences or priority over common stock.
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.
PRE-REFUNDED BOND - a bond that is repaid before its maturity date. The
repayment is generally financed by a new issue. Issuers generally pre-refund
bonds during periods of lower interest rates to reduce their interest costs.
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.
PRIVATE ACTIVITY BOND - a municipal security that is used to finance private
projects or other projects that aren't qualified for tax purposes. Private
activity bonds are generally taxable, unless their use is specifically
exempted, or may be treated as tax preference items.
PRIVATE PLACEMENT - a private placement is the sale of stocks, bonds or other
investments directly to a qualified investor without having to register the
offering with the U.S. Securities and Exchange Commission or other comparable
foreign regulatory authorities. Qualified investors are typically large
institutional investors rather than individuals. Securities acquired through
private placements generally may not be resold.
QUANTITATIVE ANALYSIS - an analysis of financial information about a company
or security to identify securities that have the potential for growth or are
otherwise suitable for a portfolio to buy.
REPURCHASE AGREEMENT - a short-term (often overnight) investment arrangement.
The investor agrees to buy certain securities from the borrower and the
borrower promises to buy them back at a specified date and price. The
difference between the purchase price paid by the investor and the repurchase
price paid by the borrower represents the investor's return. Repurchase
agreements are popular because they provide very low-risk return and can
virtually eliminate credit difficulties.
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REVERSE REPURCHASE AGREEMENT - a repurchase agreement in which an investor
sells a security to another party, like a bank or dealer, in return for cash,
and agrees to buy the security back at a specified date and price.
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.
RUSSELL 1000 GROWTH - an unmanaged index which measures the performance of the
largest U.S. companies based on total market capitalization, with high
price-to-book ratios and forecasted growth relative to the Russell 1000 index
as a whole.
S&P 500(1) - Standard & Poor's 500 Composite Stock Price Index, an unmanaged
index of 500 widely held common stocks. It is not available for investment.
S&P SMALLCAP 600(1) - Standard & Poor's SmallCap 600 Index, an unmanaged index
of 600 common stocks, weighted by market capitalization. It is not available
for investment.
S&P/BARRA SMALLCAP VALUE INDEX(1) - an unmanaged index of a group of stocks from
the S&P SmallCap 600 that have low price-to-book ratios relative to the S&P
SmallCap 600 as a whole. It is weighted by market capitalization, and is not
available for investment.
S&P 500/BARRA VALUE INDEX(1) - an unmanaged index of a group of stocks from the
S&P 500 that have low price-to-book ratios relative to the S&P 500 as a whole.
It is weighted by market capitalization, and is not available for investment.
SALOMON BROTHERS MORTGAGE INDEX - an index of 30-year and 15-year GNMA, FNMA
and FHLMC securities, and FNMA and FHLMC balloon mortgages.
SECOND-TIER SECURITY - under Rule 2a-7 under the 1940 Act, a debt security
that is an eligible investment for money market funds, but is not a first-tier
security.
SENIOR SECURITY - a debt security that allows holders to receive their share
of a company's remaining assets in a bankruptcy before other bondholders,
creditors, and common and preferred shareholders.
SPECIAL PURPOSE ISSUER - an entity organized solely to issue asset-backed
securities on a pool of assets it owns.
SETTLEMENT DATE - the date on which an order is settled either by payment or
delivery of securities.
TRADE DATE - the effective date of a purchase, sale or exchange transaction,
or other instructions sent to us. The trade date is determined by the day and
time we receive the order or instructions in a form that's acceptable to us.
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U.S. GOVERNMENT OBLIGATIONS - a wide range of debt securities issued or
guaranteed by the U.S. government or its agencies, authorities or
instrumentalities.
U.S. TREASURY OBLIGATION - a debt security 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.
ZERO-COUPON BOND - a bond that makes no periodic interest payments. Zero
coupon bonds are sold at a deep discount to their face value and mature at
face value. The difference between the face value at maturity and the purchase
price represents the return.
(1) S&P and BARRA have not reviewed any stock included in the S&P 500, S&P 600,
BARRA Index or BARRA SmallCap Index for its investment merit. S&P and BARRA
determine and calculate their indexes independently of the Portfolios and
are not a sponsor or affiliate of the Portfolios. S&P and BARRA give no
information and make no statements about the suitability of investing in the
Portfolios or the ability of their indexes to track stock market
performance. S&P and BARRA make 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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[GRAPHIC APPEARS HERE]
NATIONS ANNUITY TRUST
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.
[GRAPHIC APPEARS HERE]
Where to find more information
You'll find more information about Nations Annuity Trust Portfolios in the
following documents:
[GRAPHIC APPEARS HERE]
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 covered.
[GRAPHIC APPEARS HERE]
STATEMENT OF ADDITIONAL INFORMATION
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 SEC.
You can obtain a free copy of these documents, request other information about
the portfolios and make shareholder inquiries by contacting Nations Annuity
Trust:
By telephone: 1.800.321.7854
By mail:
NATIONS ANNUITY TRUST
C/O STEPHENS INC.
ONE BANK OF AMERICA PLAZA
33RD FLOOR
CHARLOTTE, NC 28255
On the Internet: WWW.NATIONS-FUNDS.COM
Information about the Portfolios can be reviewed and copied at the Commission's
Public Reference Room in Washington, D.C. Information on the operation of the
Public Reference Room may be obtained by calling the Commission at
1-202-942-8090. The reports and other information about the Portfolios are
available on the EDGAR Database on the Commission's Internet site at
http://www.sec.gov, and copies of this information may be obtained, after paying
a duplicating fee, by electronic request at the following E-mail address:
[email protected], or by writing the Commission's Public Reference Section,
Washington, D.C. 20549-0102.
SEC file number: [LOGO]
Nations Annuity Trust, 811-04305
<PAGE>
NATIONS ANNUITY TRUST
Statement of Additional Information
NATIONS BALANCED ASSETS PORTFOLIO
NATIONS AGGRESSIVE GROWTH PORTFOLIO
NATIONS INTERNATIONAL GROWTH PORTFOLIO
NATIONS MANAGED INDEX PORTFOLIO
NATIONS SMALLCAP INDEX PORTFOLIO
NATIONS MARSICO FOCUSED EQUITIES PORTFOLIO
NATIONS MARSICO GROWTH & INCOME PORTFOLIO
NATIONS VALUE PORTFOLIO
May 1, 2000
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, 2000
("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 Bank of America
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............................. 6
Asset-Backed Securities....................................... 9
Borrowings.................................................... 11
Commercial Instruments........................................ 12
Combined Transactions........................................ 12
Convertible Securities....................................... 13
Corporate Debt Securities.................................... 13
Custodial Receipts........................................... 14
Currency Swaps............................................... 14
Delayed Delivery Transactions ............................... 14
Dollar Roll Transactions .................................... 14
Equity Swap Contracts ....................................... 15
Foreign Currency Transactions ............................... 16
Futures, Options and Other Derivative
Instruments ........................................... 17
Risk Factors Associated with Futures and Options Transactions. 23
Guaranteed Investment Contracts............................... 31
Interest Rate Transactions .................................. 32
Lower Rated Debt Securities.................................. 32
Options on Currencies........................................ 33
Other Investment Companies................................... 34
Participation Interests and Company Receipts................. 34
Real Estate Investment Trusts................................ 34
Repurchase Agreements........................................ 34
Reverse Repurchase Agreements................................ 35
Securities Lending........................................... 35
Short Sales.................................................. 35
Special Situations........................................... 35
Stripped Securities.......................................... 36
U.S. and Foreign Bank Obligations............................ 36
U.S. Government Obligations.................................. 37
Use of Segregated and Other Special Accounts................. 37
Variable- and Floating-Rate Instruments ..................... 38
Warrants..................................................... 38
When-Issued Purchases and Forward Commitments .............. 38
Portfolio Turnover........................................... 39
Investment Risks............................................. 39
MANAGEMENT OF THE TRUST.............................................. 41
Nations Funds Retirement Plan................................. 45
Nations Fund Deferred Compensation Plan....................... 45
Shareholder and Trustee Liability............................. 47
INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY, TRANSFER
AGENCY AND SHAREHOLDER SERVICING AGREEMENTS ......................... 48
Investment Adviser and Sub-Advisors.......................... 48
Administrator and Co-Administrator........................... 50
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Custodian and Transfer Agent................................. 52
Shareholder Servicing and Distribution Plan.................. 52
Expenses..................................................... 53
Distributor.................................................. 54
Independent Accountants and Reports.......................... 54
Counsel...................................................... 54
PORTFOLIO TRANSACTIONS AND BROKERAGE................................. 54
General Brokerage Policy...................................... 54
Brokerage Commissions......................................... 57
Section 28(e) Standards....................................... 58
PURCHASE, REDEMPTION AND PRICING OF SHARES........................... 59
Purchases..................................................... 59
Redemptions................................................... 59
Net Asset Value Determination................................. 59
DESCRIPTION OF SHARES................................................ 60
Description of Shares of the Trust............................ 60
ADDITIONAL INFORMATION CONCERNING TAXES.............................. 61
General....................................................... 62
Excise Tax.................................................... 62
Taxation of Holders of Variable Contracts and Policies........ 62
Information Regarding a Portfolio's Foreign Investments....... 63
Other Matters................................................. 64
ADDITIONAL INFORMATION ON PERFORMANCE................................ 64
Yield Calculations............................................ 64
Total Return Calculations..................................... 65
MISCELLANEOUS ....................................................... 66
Certain Record Holders........................................ 66
SCHEDULE A - Description of Ratings.................................. A-1
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NATIONS ANNUITY TRUST HISTORY
-----------------------------
Nations Annuity Trust (the "Trust") is an open-end registered
investment company in the Nations Fund family of mutual funds (the "Nations
Funds Family"), which in addition to the Trust, consists of Nations Fund Trust,
Nations Fund, Inc., Nations Reserves, Nations LifeGoal Funds, Inc., Nations
Master Investment Trust and Nations Funds Trust. The Nations Funds Family
currently has more than 70 distinct investment portfolios and total assets in
excess of $70 billion.
The Trust was organized as a Delaware business trust on November 24,
1997. It has a fiscal year end of December 31.
DESCRIPTION OF THE TRUST AND THE INVESTMENTS AND RISKS OF ITS PORTFOLIOS
------------------------------------------------------------------------
The Trust currently consists of eight different investment portfolios,
Nations Balanced Assets Portfolio, Nations Aggressive Growth Portfolio, Nations
International Growth Portfolio, Nations Managed Index Portfolio, Nations
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 discussion on
Investment Limitations and Description of Shares for examples of when the
Investment Company Act of 1940 (the "1940 Act") requires voting by Portfolio.
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 Bank of America
Plaza, 33rd Floor, Charlotte, NC 28255. Participating Insurance Companies also
may call toll-free at (800) 321-7854.
Banc of America Advisors, Inc. ("BAAI") is the investment adviser to
the Portfolios. Banc of America Capital Management, Inc. ("BACAP") is the
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
the investment sub-adviser to Nations International Growth Portfolio. As used
herein, "Adviser" shall mean BAAI, BACAP, 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'
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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 on its website
(www.sec.gov) or by visiting the public reading room of the SEC as is discussed
in the Prospectus. 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 a Portfolio will achieve
its investment objectives. The features of the Portfolios' principal investment
strategies and the primary risks associated with those investment strategies
also 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.
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
Except with respect to Nations International Growth Portfolio, the
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.
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
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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.
Each of the Nations Marsico Focused Equities Portfolio and Nations Marsico
Growth & Income Portfolio may:
1. Not invest in shares of other open-end management investment companies,
subject to the limitations of the Investment Company Act of 1940 (the
"1940 Act"), the rules thereunder, and any orders obtained thereunder
now or in the future. Other investment companies in which the
Portfolios invest can be expected to charge fees for operating
expenses, such as investment advisory and administration fees, that
would be in addition to those charged by a Portfolio.
2. Invest or hold more than 15% (10% in the case of a money market fund)
of the Portfolio's net assets in illiquid securities. For this purpose,
illiquid securities include, among others, (a) securities that are
illiquid by virtue of the absence of a readily available market or
legal or contractual restrictions on resale, (b) fixed time deposits
that are subject to withdrawal penalties and that have maturities of
more than seven days, and (c) repurchase agreements not terminable
within seven days.
3. Not hedge more than 50% of its total assets by selling futures
contracts, buying put options, and writing call options (so called
"short positions"), not buy futures contracts or write put options
whose underlying value exceeds 25% of the Portfolio's total assets, and
not buy call options with a value exceeding 5% of the Fund's total
assets.
4. Lend securities from its portfolio to brokers, dealers and financial
institutions, in amounts not to exceed (in the aggregate) one-third of
the Portfolio's total assets. Any such loans of portfolio securities
will be fully collateralized based on values that are marked to market
daily. The Portfolio will not enter into any portfolio security lending
arrangement having a duration of longer than one year.
5. Not make investments for the purpose of exercising control or
management. (Investments by the Portfolio in entities created under the
laws of foreign countries solely to facilitate investment in securities
in that country will not be deemed the making of investments for the
purpose of exercising control.)
6. Not purchase securities on margin (except for short-term credits
necessary for the clearance of transactions).
7. Not sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short
(short sales "against the box"), and provided that transactions in
futures contracts and options are not deemed to constitute selling
securities short.
8. Not purchase interests, leases, or limited partnership interests in
oil, gas, or other mineral exploration or development programs.
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.
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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:
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.
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.
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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.
WITH RESPECT TO NATIONS INTERNATIONAL GROWTH PORTFOLIO:
The Portfolio may not, as a matter of fundamental policy:
1. Underwrite any issue of securities within the meaning of the 1933 Act
except when it might technically be deemed to be an underwriter either
(a) in connection with the disposition of a portfolio security, or (b)
in connection with the purchase of securities directly from the issuer
thereof in accordance with its investment objective. This restriction
shall not limit the Portfolio's ability to invest in securities issued
by other registered investment companies.
2. Purchase or sell real estate, except the Portfolio may purchase
securities of issuers which deal or invest in real estate and may
purchase securities which are secured by real estate or interests in
real estate.
3. Purchase or sell commodities, except that the Portfolio may to the
extent consistent with its investment objective, invest in securities
of companies that purchase or sell commodities or which invest in such
programs, and purchase and sell options, forward contracts, futures
contracts, and options on futures contracts. This limitation does not
apply to foreign currency transactions including without limitation
forward currency contracts.
4. Purchase any securities which would cause 25% or more of the value of
its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that: (a) there is no
limitation with respect to obligations issued or guaranteed by the U.S.
Government, any state or territory of the United States, or any of
their agencies, instrumentalities or political subdivisions, and (b)
notwithstanding this limitation or any other fundamental investment
limitation, assets may be invested in the securities of one or more
management investment companies to the extent permitted by the 1940
Act, the rules and regulations thereunder and any exemptive relief
obtained by the Portfolio.
5. Make loans, except to the extent permitted by the 1940 Act, the rules
and regulations thereunder and any exemptive relief obtained by the
Portfolio.
6. Borrow money or issue senior securities except to the extent permitted
by the 1940 Act, the rules and regulations thereunder and any exemptive
relief obtained by the Portfolio.
7. Purchase securities (except securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) of any one issuer if, as
a result, more than 5% of its total assets will be invested in the
securities of such issuer or it would own more than 10% of the voting
securities of such issuer, except that (a) up to 25% of its total
assets may be invested without regard to these limitations and (b) the
Portfolio's assets may be invested in the securities of one or more
management investment companies to the extent permitted by the 1940
Act, the rules and regulations thereunder and any exemptive relief
obtained by the Portfolios.
Nations International Growth Portfolio may, as a matter of
non-fundamental policy:
1. Invest in shares of other open-end management investment companies,
subject to the limitations of the 1940 Act, the rules thereunder, and
any orders obtained thereunder now or in the future. Funds in a
master/feeder structure generally invest in the securities of one or
more open-end management investment companies pursuant to various
provisions of the 1940 Act.
2. Not invest or hold more than 15% (10% in the case of a money market
fund) of the Portfolio's net assets in illiquid securities. For this
purpose, illiquid securities include, among others, (a) securities that
are illiquid by virtue of the absence of a readily available market or
legal or contractual restrictions on
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resale, (b) fixed time deposits that are subject to withdrawal
penalties and that have maturities of more than seven days, and (c)
repurchase agreements not terminable within seven days.
3. Invest in futures or options contracts regulated by the CFTC for (i)
bona fide hedging purposes within the meaning of the rules of the CFTC
and (ii) for other purposes if, as a result, no more than 5% of a
Portfolio's net assets would be invested in initial margin and premiums
(excluding amounts "in-the-money") required to establish the contracts.
The Portfolio (i) will not hedge more than 50% of its total assets by
selling futures contracts, buying put options, and writing call options
(so called "short positions"), (ii) will not buy futures contracts or
write put options whose underlying value exceeds 25% of the Portfolio's
total assets, and (iii) will not buy call options with a value
exceeding 5% of the Portfolio's total assets.
4. Lend securities from its portfolio to brokers, dealers and financial
institutions, in amounts not to exceed (in the aggregate) one-third of
the Portfolio's total assets. Any such loans of portfolio securities
will be fully collateralized based on values that are marked to market
daily.
5. Not make investments for the purpose of exercising control of
management. (Investments by the Portfolio in entities created under the
laws of foreign countries solely to facilitate investment in securities
in that country will not be deemed the making of investments for the
purpose of exercising control.)
6. Not sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short
(short sales "against the box"), and provided that transactions in
futures contracts and options are not deemed to constitute selling
securities short.
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 strategies for each Portfolio,
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.
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.
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Nations Aggressive Growth 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.
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. Notwithstanding that each Equity Portfolio may invest in each
type of security listed above in percentages of less than 10% of that
Portfolio's total assets, each Equity Portfolio may invest up to 20% of its
assets in foreign securities. While each Equity Portfolio reserves the right to
so invest, investing in foreign securities is not considered a principal
investment strategy of the Equity Portfolios.
Each Equity Portfolio 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 Marsico Focused Equities Portfolio
and Nations Marsico Growth & Income Portfolio may invest in forward foreign
exchange contracts.
The Equity Portfolios incur transaction (brokerage) costs in connection
with the purchase and sale of portfolio securities. For some portfolios, 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.
THE INTERNATIONAL PORTFOLIO
Nations International Growth Portfolio: In addition to the types of
securities described in the Prospectus, the Portfolio may invest in: options and
futures contracts on securities, securities lending, forward foreign exchange
contracts and repurchase agreements. The Portfolio also may invest in American
Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), European
Depositary Receipts ("EDRs") and American Depositary Shares ("ADSs"). For
temporary defensive purposes, the Portfolio may invest substantially all of its
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assets in U.S. financial markets or U.S. dollar-denominated instruments.
General: The International Portfolio 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 CFTC and options thereon for market exposure
risk management. The International Portfolio may lend its portfolio securities
to qualified institutional investors and may invest in repurchase agreements,
restricted, private placement and other illiquid securities. The International
Portfolio also may invest in real estate investment trust securities. In
addition, the International Portfolio may invest in securities issued by other
investment companies, consistent with the Portfolio's investment objective and
policies and repurchase agreements. The Portfolio also may invest in forward
foreign exchange contracts.
THE INDEX PORTFOLIOS
Nations Managed Index Portfolio: In addition to the types of securities
described in the Prospectus, the Portfolio 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 Portfolio 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 Portfolio
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 Portfolio 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
Portfolio may invest in securities issued by other investment companies,
consistent with such Portfolio's investment objective and policies.
In addition, when consistent with such Portfolio's respective
investment objective, the Portfolio 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
Portfolio 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 Portfolio 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.
Nations SmallCap Index Portfolio: In addition to the types of
securities described in the Prospectus, the Portfolio 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 Portfolio 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
Portfolio 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 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 also
may invest in Standard & Poor's Depositary Receipts ("SPDRs"). In addition, the
Portfolio may invest in other securities issued by other investment companies,
consistent with such Portfolio's investment objective and policies.
The Index Portfolios incur transaction (brokerage) costs in connection
with the purchase and sale of portfolio securities. For the Portfolios, 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
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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.
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.
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 Government National
Mortgage Association ("Ginnie Mae" or "GNMA"), Federal National Mortgage
Association ("Fannie Mae" or "FNMA") or Federal Home Loan Mortgage Corporation
("Freddie Mac" or "FHLMC"). Such Certificates are mortgage-backed securities
which represent a partial
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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.
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
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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.
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.
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.
BORROWINGS
The registered investment companies in the Nations Funds Family
participate in an uncommitted line of credit provided by The Bank of New York
under a line of credit agreement (the "Agreement"). Advances under the Agreement
are taken primarily for temporary or emergency purposes, including the meeting
of redemption requests that otherwise might require the untimely disposition of
securities. Interest on borrowings is payable at the federal funds rate plus
.50% on an annualized basis. The Agreement requires, among other things, that
each participating Portfolio maintain a ratio of no less than 4 to 1 net assets
(not including funds borrowed pursuant to
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the Agreement) to the aggregate amount of indebtedness pursuant to the
Agreement. Specific borrowings by a Portfolio under the Agreement over the last
fiscal year, if any, can by found in the Portfolios' Annual Reports which will
be available once the Portfolios complete a fiscal year.
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.
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.)
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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.
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.
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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.
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.
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
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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.
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
any limitation imposed by the SEC staff.
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
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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.
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.
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
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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).
For more information about the risks associated with foreign
investments see "Investment Risks."
FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS
FUTURES CONTRACTS IN GENERAL. A futures contract is an agreement
between two parties for the future delivery of fixed income securities or equity
securities or for the payment or acceptance of a cash settlement in the case of
futures contracts on an index of fixed income or equity securities. A "sale" of
a futures contract means the contractual obligation to deliver the securities at
a specified price on a specified date, or to make the cash settlement called for
by the contract. Futures contracts have been designed by exchanges which have
been designated "contract markets" by the Commodity Futures Trading Commission
("CFTC") and must be executed through a brokerage firm, known as a futures
commission merchant, which is a member of the relevant contract market. Futures
contracts trade on these markets, and the exchanges, through their clearing
organizations, guarantee that the contracts will be performed as between the
clearing members of the exchange. Presently, futures contracts are based on such
debt securities as long-term U.S. Treasury Bonds, Treasury Notes, GNMA modified
pass-through mortgage-backed securities, three-month U.S. Treasury Bills, bank
certificates of deposit, and on indices of municipal, corporate and government
bonds.
While futures contracts based on securities do provide for the delivery
and acceptance of securities, such deliveries and acceptances are seldom made.
Generally, a futures contract is terminated by entering into an offsetting
transaction. A 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
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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.
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.
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
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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.
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.
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
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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.
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
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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.
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.
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.
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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.
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
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small number of securities. A Portfolio would, however, effect transactions in
such futures or options only for hedging purposes.
The trading of futures and options on indices involves the additional
risk of imperfect correlation between movements in the futures or option price
and the value of the underlying index. The anticipated spread between the prices
may be distorted due to differences in the nature of the markets, such as
differences in margin requirements, the liquidity of such markets and the
participation of speculators in the futures and options market. The purchase of
an option on a futures contract also involves the risk that changes in the value
of underlying futures contract will not be fully reflected in the value of the
option purchased. The risk of imperfect correlation, however, generally tends to
diminish as the maturity date of the futures contract or termination date of the
option approaches. The risk incurred in purchasing an option on a futures
contract is limited to the amount of the premium plus related transaction costs,
although it may be necessary under certain circumstances to exercise the option
and enter into the underlying futures contract in order to realize a profit.
Under certain extreme market conditions, it is possible that a 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.
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.
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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.
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.
Additional Information on Futures and Options
As stated in the Prospectus, each Portfolio may enter into futures
contracts and options for hedging purposes. Such transactions are described in
this Schedule. During the current fiscal year, each of these Portfolios intends
to limit its transactions in futures contracts and options so that not more than
5% of the Portfolio's net assets are at risk. Furthermore, in no event would any
Portfolio purchase or sell futures contracts, or related options thereon, for
hedging purposes if, immediately thereafter, the aggregate initial margin that
is required to be posted by the Portfolio under the rules of the exchange on
which the futures contract (or futures option) is traded, plus any premiums paid
by the Portfolio on its open futures options positions, exceeds 5% of the
Portfolio's total assets, after taking into account any unrealized profits and
unrealized losses on the Portfolio's open contracts and excluding the amount
that a futures option is "in-the-money" at the time of purchase. (An option to
buy a futures contract is "in-the-money" if the value of the contract that is
subject to the option exceeds the exercise price; an option to sell a futures
contract is "in-the-money" if the exercise Price exceeds the value of the
contract that is subject of the option.)
I. Interest Rate Futures Contracts.
--------------------------------
Use of Interest Rate Futures Contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures market have tended to move generally in the aggregate
in concert with the cash market prices and have maintained fairly predictable
relationships. Accordingly, a Portfolio may use interest rate futures as a
defense, or hedge, against anticipated interest rate changes and not for
speculation. As described below, this would include the use of futures contract
sales to protect against expected increases in interest rates and futures
contract purchases to offset the impact of interest rate declines.
A Portfolio presently could accomplish a similar result to that which
it hopes to achieve through the use of futures contracts by selling bonds with
long maturities and investing in bonds with short maturities when interest rates
are expected to increase, or conversely, selling short-term bonds and investing
in long-term bonds
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when interest rates are expected to decline. However, because of the liquidity
that is often available in the futures market the protection is more likely to
be achieved, perhaps at a lower cost and without changing the rate of interest
being earned by the Portfolio, through using futures contracts.
Description of Interest Rates Futures Contracts. An interest rate
futures contract sale would create an obligation by a Portfolio, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by the Portfolio, as purchaser, to take delivery of the
specific type of financial instrument at a specific future time at a specific
price. The specific securities delivered or taken, respectively, at settlement
date, would not be determined until at or near that date. The determination
would be in accordance with the rules of the exchange on which the futures
contract sale or purchase was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by the Portfolio's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Portfolio is paid
the difference and thus realizes a gain. If the offsetting purchase price
exceeds the sale price, the Portfolio pays the difference and realizes a loss.
Similarly, the closing out of a futures contract purchase is effected by the
Portfolio's entering into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the Portfolio realizes a gain, and if the purchase
price exceeds the offsetting sale price, the Portfolio realizes a loss.
Interest rate futures contracts are traded in an auction environment on
the floors of several exchanges - principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. A Portfolio would
deal only in standardized contracts on recognized changes. Each exchange
guarantees performance under contract provisions through a clearing corporation,
a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury Bonds and
Notes; GNMA modified pass-through mortgage-backed securities; three-month United
States Treasury Bills; and ninety-day commercial paper. The Portfolios may trade
in any futures contract for which there exists a public market, including,
without limitation, the foregoing instruments.
Examples of Futures Contract Sale. A Portfolio would engage in an
interest rate futures contract sale to maintain the income advantage from
continued holding of a long-term bond while endeavoring to avoid part or all of
the loss in market value that would otherwise accompany a decline in long-term
securities prices. Assume that the market value of a certain security in a
Portfolio tends to move in concert with the futures market prices of long-term
United States Treasury bonds ("Treasury Bonds"). The Adviser wishes to fix the
current market value of this portfolio security until some point in the future.
Assume the portfolio security has a market value of 100, and the Adviser
believes that, because of an anticipated rise in interest rates, the value will
decline to 95. The Portfolio might enter into futures contract sales of Treasury
bonds for an equivalent of 98. If the market value of the portfolio securities
does indeed decline from 100 to 95, the equivalent futures market price for the
Treasury bonds might also decline from 98 to 93.
In that case, the five-point loss in the market value of the portfolio
security would be offset by the five-point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.
The Adviser could be wrong in its forecast of interest rates and the
equivalent futures market price could rise above 98. In this case, the market
value of the portfolio securities, including the portfolio security being
protected, would increase. The benefit of this increase would be reduced by the
loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Portfolio in the above
example might incur a loss of 2 points (which might be reduced by an offsetting
transaction prior to the settlement date). In each transaction, transaction
expenses would also be incurred.
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Examples of Future Contract Purchase. A Portfolio would engage in an
interest rate futures contract purchase when it is not fully invested in
long-term bonds but wishes to defer for a time the purchase of long-term bonds
in light of the availability of advantageous interim investments, e.g.,
shorter-term securities whose yields are greater than those available on
long-term bonds. The Portfolio's basic motivation would be to maintain for a
time the income advantage from investing in the short-term securities; the
Portfolio would be endeavoring at the same time to eliminate the effect of all
or part of an expected increase in market price of the long-term bonds that the
Portfolio may purchase.
For example, assume that the market price of a long-term bond that the
Portfolio may purchase, currently yielding 10%, tends to move in concert with
futures market prices of Treasury bonds. The Adviser wishes to fix the current
market price (and thus 10% yield) of the long-term bond until the time (four
months away in this example) when it may purchase the bond. Assume the long-term
bond has a market price of 100, and the Adviser believes that, because of an
anticipated fall in interest rates, the price will have risen to 105 (and the
yield will have dropped to about 9-1/2%) in four months. The Portfolio might
enter into futures contracts purchases of Treasury bonds for an equivalent price
of 98. At the same time, the Portfolio would assign a pool of investments in
short-term securities that are either maturing in four months or earmarked for
sale in four months, for purchase of the long-term bond at an assumed market
price of 100. Assume these short-term securities are yielding 15%. If the market
price of the long-term bond does indeed rise from 100 to 105, the equivalent
futures market price for Treasury bonds might also rise from 98 to 103. In that
case, the 5-point increase in the price that the Portfolio pays for the
long-term bond would be offset by the 5-point gain realized by closing out the
futures contract Purchase.
The Adviser could be wrong in its forecast of interest rates; long-term
interest rates might rise to above 10%; and the equivalent futures market price
could fall below 98. If short-term rates at the same time fall to 10% or below,
it is possible that the Portfolio would continue with its purchase program for
long-term bonds. The market price of available long-term bonds would have
decreased. The benefit of this price decrease, and thus yield increase, will be
reduced by the loss realized on closing out the futures contract purchase.
If, however, short-term rates remained above available long-term rates,
it is possible that the Portfolio would discontinue its purchase program for
long-term bonds. The yield on short-term securities in the portfolio, including
those originally in the pool assigned to the particular long-term bond, would
remain higher than yields on long-term bonds. The benefit of this continued
incremental income will be reduced by the loss realized on closing out the
futures contract purchase.
In each transaction, expenses also would be incurred.
II. Index Futures Contracts.
------------------------
A stock or bond index assigns relative values to the stocks or bonds
included in the index, and the index fluctuates with changes in the market
values of the stocks or bonds included. Some stock index futures contracts are
based on broad market indices, such as the Standard & Poor's 500 or the New York
Stock Exchange Composite Index. In contract, certain exchanges offer futures
contracts on narrower market indices, such as the Standard & Poor's 100, the
Bond Buyer Municipal Bond Index, an index composed of 40 term revenue and
general obligation bonds, or indices based on an industry or market segment,
such as oil and gas stocks. Futures contracts are traded on organized exchanges
regulated by the Commodity Futures Trading Commission. Transactions on such
exchanges are cleared through a clearing corporation, which guarantees the
performance of the parties to each contract.
A Portfolio will sell index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise result
from a market decline. The 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 the securities to be sold. Conversely, a
Portfolio will purchase index futures contracts in anticipation of purchases of
securities. In a substantial majority of these transactions, the Portfolio will
purchase such securities upon termination of the long futures position, but a
long futures position may be terminated without a corresponding purchase of
securities.
In addition, a Portfolio may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that a Portfolio expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a long
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futures position based on a more restricted index, such as an index comprised of
securities of a particular industry group. A Portfolio also may 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 the portfolio will decline prior to the time of sale.
The following are examples of transactions in stock index futures (net
of commissions and premiums, if any).
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
-Day Hedge is Placed
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures = $62,500/Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/Contract
Increase in Purchase Gain on Futures = $2,500
Price = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future Hedge
Objective: Protect Against Declining (Value of the Portfolio)
Factors
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index - 1.0
Portfolio Futures
-Day Hedge is Placed
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Gain on Futures = $40,000
Value = $40 000
IF, HOWEVER, THE MARKET MOVED IN THE OPPOSITE DIRECTION, THAT IS, MARKET
VALUE DECREASED AND THE PORTFOLIO HAD ENTERED INTO AN ANTICIPATORY PURCHASE
HEDGE, OR MARKET VALUE INCREASED AND THE PORTFOLIO HAD HEDGED ITS STOCK
PORTFOLIO, THE RESULTS OF THE PORTFOLIO'S TRANSACTIONS IN STOCK INDEX FUTURES
WOULD BE AS SET FORTH BELOW.
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ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
-Day Hedge is Placed
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures = $62,500/Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 120
Actual Cost = $60,000 Value of Futures = $60,000/Contract
Decrease in Purchase Loss on Futures = $2,500/Contract
Price = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index - 1.0
Portfolio Futures
-Day Hedge is Placed
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Portfolio = $40,000 Loss of Futures = $40,000
Value = $40 000
III. Margin Payments
---------------
Unlike when a Portfolio purchases or sells a security, no price is paid
or received by the Portfolio upon the purchase or sale of a futures contract.
Initially, the Portfolio will be required to deposit with the broker or in a
segregated account with the Portfolio's Custodian an amount of cash or cash
equivalents, the value, of which may vary but is generally equal to 10% or less
of the value of the contract. This amount is known as initial margin. The nature
of initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Portfolio upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying security or index fluctuates making
the long and short positions in the futures contract more or less valuable, a
process known as marking to the market. For example, when a Portfolio has
purchased a futures contract and the price of the contract has risen in response
to a rise in the underlying instruments, that position will have increased in
value and the Portfolio will be entitled to receive from the broker a variation
margin payment equal to that increase in value. Conversely, where a Portfolio
has purchased a futures contract and the price of the futures contract has
declined in response to a decrease in the underlying instruments, the position
would be less valuable, the Portfolio would be required to make a variation
margin payment to the broker. At any time prior to expiration of the futures
contract, the Adviser may elect to close the position by taking an opposite
position, subject to the availability of a secondary market, which will operate
to terminate the Portfolio's position in the futures contract. A final
determination of variation margin is
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then made, additional cash is required to be paid by or released to the
Portfolio, and the Portfolio realizes a loss or gain.
IV. Risks of Transactions in Futures Contracts
------------------------------------------
There are several risks in connection with the use of futures by a
Portfolio as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the future and movements in the
price of the securities which are the subject of the hedge. The price of the
future may move more than or less than the price of the securities being hedged.
If the price of the future moves less than the price of the securities which are
the subject of the hedge, the hedge will not be fully effective but, if the
price of securities being hedged has moved in an unfavorable direction, the
Portfolio would be in a better position than if it had not hedged at Al. If the
price of the securities being hedged has moved in a favorable direction, this
advance will be partially offset by the loss on the future. If the price of the
future moves more than the price of the hedged securities, the Portfolio
involved will experience either a loss or gain on the future which will not be
completely offset by movements in the price of the securities which are the
subject of the hedge.
To compensate for the imperfect correlation of movements in the price
of securities being hedged and movements in the price of futures contracts, a
Portfolio may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the volatility over a particular
time period of the prices of such securities has been greater than the
volatility over such time period of the future, or if otherwise deemed to be
appropriate by the Adviser. Conversely, a Portfolio may buy or sell fewer
futures contracts if the volatility over a particular time period of the prices
of the securities being hedged is less than the volatility over such time period
of the futures contract being used, or if otherwise deemed to be appropriate by
the Adviser. It also is possible that, where a Portfolio has sold futures to
hedge its portfolio against a decline in the market, the market may advance, and
the value of securities held by the Portfolio may decline. If this occurred, the
Portfolio would lose money on the future and also experience a decline in value
in its portfolio securities.
Where futures are purchased to hedge against a possible increase in the
price of securities before a Portfolio is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the Portfolio then concludes not to
invest in securities or options at that time because of concern as to possible
further market decline or for other reasons, the Portfolio will realize a loss
on the futures contract that is not offset by a reduction in the price of
securities purchased.
In instances involving the purchase of futures contracts by a
Portfolio, an amount of cash and cash equivalents, equal to the market value of
the futures contracts, will be deposited in a segregated account with the
Portfolio's Custodian and/or in a margin account with a broker to collateralize
the position and thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the Adviser still may not
result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the
Portfolios intend to purchase or sell futures only on exchanges or boards of
trade where there appear to be active secondary markets, there is no assurance
that a liquid secondary market on any exchange or board of trade will exist for
any particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
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price movements, a Portfolio would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in
a futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions.
Successful use of futures by a Portfolio also is subject to the
Adviser's ability to predict correctly movements in the direction of the market.
For example, if a Portfolio has hedged against the possibility of a decline in
the market adversely affecting securities held in its portfolio and securities
prices increase instead, the Portfolio will lose part or all of the benefit to
the increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Portfolio has insufficient cash, it may have to sell securities to meet
daily variation margin requirements. Such sales of securities may be, but will
not necessarily be, at increased prices which reflect the rising market. A
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
V. Options on Futures Contracts.
-----------------------------
The Portfolios may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer or
seller of a futures contract, the holder, or writer, of an option has the right
to terminate its position prior to the scheduled expiration of the option by
selling, or purchasing, an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
of an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased. Depending on the pricing of the option compared to either the futures
contract upon which it is based, or upon the price of the securities being
hedged, an option may or may not be less risky than ownership of the futures
contract or such securities. In general, the market prices of options can be
expected to be more volatile than the market prices on the underlying futures
contract. Compared to the purchase or sale of futures contracts, however, the
purchase of call or put options on futures contracts may frequently involve less
potential risk to a Portfolio because the maximum amount at risk is the premium
paid for the options (plus transaction costs). Although permitted by their
fundamental investment policies, the Portfolios do not currently intend to write
future options, and will not do so in the future absent any necessary regulatory
approvals.
Accounting Treatment.
--------------------
Accounting for futures contracts and options will be in accordance with
generally accepted accounting principles.
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.
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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.
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 (OR HIGH YIELD) 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
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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.
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.
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.
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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 Trust 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.
PARTICIPATION INTERESTS AND COMPANY RECEIPTS
Certain Portfolios may purchase from domestic financial institutions
and trusts created by such institutions participation interests and trust
receipts in high quality debt securities. A participation interest or receipt
gives the Portfolio an undivided interest in the security in the proportion that
the Portfolio's participation interest or receipt bears to the total principal
amount of the security. As to certain instruments for which the Portfolio will
be able to demand payment, the Portfolio intends to exercise its right to do so
only upon a default under the terms of the security, as needed to provide
liquidity or to maintain or improve the quality of its investment portfolio. It
is possible that a participation interest or trust receipt may be deemed to be
an extension of credit by the Portfolio to the issuing financial institution
rather than to the obligor of the underlying security and may not be directly
entitled to the protection of any collateral security provided by the obligor.
In such event, the ability of the Portfolio to obtain repayment could depend on
the issuing financial institution.
Participation interests and trust receipts may have fixed, floating or
variable rates of interest, and will have remaining maturities of thirteen
months or less (as defined by the SEC). If a participation interest or trust
receipt is unrated, the Adviser will have determined that the interest or
receipt is of comparable quality to those instruments in which the Portfolio may
invest pursuant to guidelines approved by the Board of Trustees. For certain
participation interests or trust receipts the Portfolio will have the right to
demand payment, on not more than 30 days' notice, for all or any part of the
Portfolio's participation interest or trust receipt in the securities involved,
plus accrued interest.
REAL ESTATE INVESTMENT TRUSTS
A real estate investment trust ("REIT") is a managed portfolio of real
estate investments which may include office buildings, apartment complexes,
hotels and shopping malls. An equity REIT holds equity positions in real estate,
and it seeks to provide its shareholders with income from the leasing of its
properties, and with capital gains from any sales of properties. A mortgage REIT
specializes in lending money to developers of properties, and passes any
interest income it may earn to its shareholders.
REITs may be affected by changes in the value of the underlying
property owned or financed by the REIT, while Mortgage REITs also may be
affected by the quality of credit extended. Both equity and mortgage REITs are
dependent upon management skill and may not be diversified. REITs also may be
subject to heavy cash flow dependency, defaults by borrowers, self-liquidation,
and the possibility of failing to qualify for tax-free pass-through of income
under the Internal Revenue Code 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.
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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.
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
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litigation, technical breakthroughs and new management or management policies.
Although large and well known companies may be involved, special situations more
often involve comparatively small or unseasoned companies. Investments in
unseasoned companies and special situations often involve much greater risk than
is inherent in ordinary investment securities.
STRIPPED SECURITIES
Certain 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.
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
36
<PAGE>
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.
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 Funding Corporation and
Maritime Administration. Obligations guaranteed as to principal or interest by
the U.S. Government, its agencies, authorities or instrumentalities are deemed
to include: (a) securities for which the payment of principal and interest is
backed by an irrevocable letter of credit issued by the U.S. Government, its
agencies, authorities or instrumentalities and (b) participations in loans made
to foreign governments or their agencies that are so guaranteed. The secondary
market for certain of these participations is limited. If such participations
are illiquid they will not be purchased.
U.S. Government obligations include principal and interest components
of securities issued or guaranteed by the U.S. Treasury if the components are
traded independently under the Separate Trading of Registered Interest and
Principal of Securities program. Obligations issued or guaranteed as to
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.
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.
37
<PAGE>
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.
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
38
<PAGE>
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.
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. For the portfolio turnover rates for each Portfolio see the
"Financial Highlights" in the Prospectus.
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.
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
39
<PAGE>
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."
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 RISKS RELATING TO 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 a Portfolio's share price. General economic and political
factors in the various world markets also can impact a 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, its 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.
SPECIAL RISK RELATING TO INDEX PORTFOLIOS -- The techniques employed by
the Adviser to seek to manage
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<PAGE>
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(*).
<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, 63 Trustee Director, President and Treasurer,
Saunders & Benson, Inc. Saunders & Benson, Inc. (Insurance),
1510 Willow Lawn Drive Insurance Managers, Inc.
Suite 216 (insurance); Trustee, Nations
Richmond, VA 23230 Reserves, Master Investment Trust,
Nations Annuity Trust and Nations
Fund Trust; Director, Nations Fund,
Inc., and Nations LifeGoal Funds,
Inc.; Director, Nations Fund
Portfolios, Inc. through August,
1999.
William P. Carmichael, 56 Trustee Trustee - 231 Funds (investment
Succession Fund company) from 1993 to 1995, Time
The Wrigley Building Horizon Fund (investment company)
400 North Michigan Avenue from 1995 to 1999, Pacific
Suite 1016 Innovations Trust (investment
Chicago, IL 60611 company) from 1997 to 1999, Nations
Annuity Trust (investment company)
since December 1999, Nations Master
Investment Trust (investment company)
since December 1999 and Nations Funds
Trust (investment company) since
December 1999; Director- The Hain
Food Group, Inc. (specialty food
products distributor) until December
1998, Cobra Electronics Corporation
(electronic equipment manufacturer),
Opta Food
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS
POSITION WITH AND CURRENT
NAME, ADDRESS, AND AGE THE TRUST DIRECTORSHIPS
- ---------------------- --------- -------------
<S> <C> <C>
Ingredients, Inc. (food ingredients
manufacturer), Golden Rule Insurance
Company, Nations LifeGoal Funds, Inc.
(investment company) since December
1999.
James Ermer, 57 Trustee Retired Executive Vice President,
11511 Compass Point Drive Corporate Development and Planning -
Ft. Meyers, FL 33908 Land America (title insurance);
Senior Vice President, Finance - CSX
Corporation (transportation and
natural resources); Director -
National Mine Service (mining
supplies), Lawyers Title Corporation
(title insurance); Trustee, Nations
Reserves, Nations Fund Trust,
Nations Annuity Trust and Nations
Master Investment Trust; Director,
Nations Fund, Inc. and Nations
LifeGoal Funds, Inc.; Director,
Nations Fund Portfolios, Inc.
through August, 1999.
William H. Grigg, 67 Trustee Chairman Emeritus since July 1997,
Duke Power Co. Chairman and Chief Executive Officer
16092A Reap Road from April 1994 to July 1997 - Duke
Albermarle, NC 28001 Power Co.; Director - The Shaw
Group, Inc.; Director and Vice
Chairman, Aegis Insurance Services,
Ltd. (a mutual insurance company in
Bermuda); Trustee, Nations
Reserves, Nations Fund Trust,
Nations Annuity Trust and Nations
Master Investment Trust; Director,
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. and
Nations LifeGoal Funds, Inc.;
Director, Nations Fund Portfolios,
Inc. through August, 1999.
Thomas F. Keller, 68 Trustee R.J. Reynolds Industries Professor
Fuqua School of Business of Business Administration and
P.O. Box 90120 Former Dean - Fuqua School of
Duke University Business, Duke University; Director
Durham, NC 27708 - LADD Furniture, Inc. (furniture),
Wendy's International, Inc.
(restaurant operating and
franchising), American Business
Products, Inc. (printing services),
Dimon, Inc. (tobacco), Biogen, Inc.
(pharmaceutical biotechnology);
Trustee, The Mentor Funds, Mentor
Institutional Trust, Cash Reserve
Trust, Nations Reserves, Nations
Fund Trust, Nations Annuity Trust
and Nations Master Investment Trust;
Director, Hatteras Income
Securities, Inc., Nations Government
Income Term Trust 2003, Inc.,
Nations Government Income Term Trust
2004, Inc., Nations Balanced Target
Maturity Fund, Inc. and Nations
LifeGoal Funds, Inc.; Director,
Nations Fund Portfolios, Inc.
through August, 1999.
Carl E. Mundy, Jr., 64 Trustee President and CEO - USO from May
USO World Headquarters 1996 to present; Commandant - United
Washington Navy Yard States Marine Corps from July 1991
Building 198 to July 1995; Director -
901 M Street, S.E. Shering-Plough (pharmaceuticals and
Washington, D.C. 20374-5096 health care products); General
Dynamics Corporation (defense
systems); Trustee, Nations Reserves,
Nations Fund Trust, Nations Annuity
Trust
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS
POSITION WITH AND CURRENT
NAME, ADDRESS, AND AGE THE TRUST DIRECTORSHIPS
- ---------------------- --------- -------------
<S> <C> <C>
and Nations Master Investment Trust;
Director, Nations Fund, Inc. and
Nations LifeGoal Funds, Inc.;
Director, Nations Fund Portfolios,
Inc. through August, 1999.
Dr. Cornelius J. Pings, 71* Trustee President - Association of American
480 S. Orange Grove Blvd. Universities from February 1993 to
Pasadena, CA 91105 June 1998; Director - Farmers Group,
Inc. (insurance company), Nations
Fund, Inc. and Nations LifeGoal
Funds, Inc.; Trustee, Master
Investment Trust, Series I from 1995
to 1999, Master Investment Trust,
Series II from 1995 to 1997, Nations
Reserves, Nations Fund Trust,
Nations Annuity Trust and Nations
Master Investment Trust.;
Director/Trustee and Chairman -
Pacific Horizon Funds, Inc. and
Master Investment Trust, Series I,
from inception to May 1999;
Director - Time Horizon Funds and
Pacific Innovations Trust; Director,
Nations Fund Portfolios, Inc.
through August, 1999.
James B. Sommers, 61* Trustee President - NationsBank Trust from
237 Cherokee Road January 1992 to September 1996;
Charlotte, NC 28207 Executive Vice President -
NationsBank Corporation from January
1992 to May 1997; Chairman - Central
Piedmont Community College
Foundation; Board of Commissioners,
Charlotte/ Mecklenberg Hospital
Authority; Director - Nations Fund,
Inc. and Nations LifeGoal Funds,
Inc.; Trustee, Central Piedmont
Community College; Mint Museum of
Art, Nations Reserves, Nations Fund
Trust, Nations Annuity Trust and
Nations Master Investment Trust;
Director, Nations Fund Portfolios,
Inc. through August, 1999.
A. Max Walker, 78* President, Trustee and Independent Financial Consultant;
4580 Windsor Gate Court Chairman of the Board Director and Chairman of the Board -
Atlanta, GA 30342 Hatteras Income Securities, Inc.,
Nations Government Income Term Trust
2003, Inc., Nations Government
Income Term Trust 2004, Inc.,
Nations Balanced Target Maturity
Fund, Inc.; President, Director and
Chairman of the Board - Nations
Fund, Inc. and Nations LifeGoal
Funds, Inc.; President, Trustee and
Chairman of the Board - Nations
Reserves, Nations Fund Trust,
Nations Annuity Trust and Nations
Master Investment Trust; Director,
Nations Fund Portfolios, Inc.
through August, 1999.
Charles B. Walker, 61 Trustee Director-Ethyl Corporation (chemical
Albermarle Corporation manufacturing); Vice Chairman and
Vice Chairman and CFO Chief Financial Officer - Albemarle
330 South Fourth Street Corporation (chemical
Richmond, VA 23219 manufacturing); Director, Nations
Fund, Inc. and Nations LifeGoal
Funds, Inc.; Trustee, Nations
Reserves, Nations Fund Trust,
Nations Annuity Trust and Nations
Master Investment Trust; Director,
Nations Fund Portfolios, Inc.
through August, 1999.
Thomas S. Word, Jr., 61* Trustee Partner - McGuire, Woods, Battle &
McGuire, Woods, Battle & Boothe LLP Boothe LLP (law firm); Director -
One James Center Vaughan-Bassett Furniture Companies,
8th Floor Inc. (furniture), Nations Fund, Inc.
Richmond, VA 23219 and Nations LifeGoal Funds, Inc.;
Trustee, Nations Reserves, Nations
Fund
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS
POSITION WITH AND CURRENT
NAME, ADDRESS, AND AGE THE TRUST DIRECTORSHIPS
- ---------------------- --------- -------------
<S> <C> <C>
Trust, Nations Annuity Trust and
Nations Master Investment Trust;
Director, Nations Fund Portfolios,
Inc. through August, 1999.
Richard H. Blank, Jr., 42 Secretary and Treasurer Senior Vice President since 1998,
Stephens Inc. Vice President from 1994 to 1998 and
111 Center Street Manager from 1990 to 1994 - Mutual
Little Rock, AR 72201 Fund Services, Stephens Inc.;
Secretary since September 1993 and
Treasurer since November 1998 -
Nations Fund, Inc., Nations LifeGoal
Funds, Inc., Nations Reserves,
Nations Fund Trust, Nations Annuity
Trust and Nations Master Investment
Trust.; Secretary and Treasurer,
Nations Fund Portfolios, Inc.
through August, 1999.
Michael W. Nolte, 39 Assistant Secretary Assistant Secretary - Nations Fund
Stephens Inc. Trust, Nations Fund, Inc., Nations
Reserves, Nations LifeGoal Funds,
Inc., Nations Annuity Trust and
Nations Master Investment Trust;
Assistant Secretary, Nations Fund
Portfolios, Inc. through August,
1999.
Carolyn Wyse, 37 Assistant Secretary and Administrator since 1993 and
Stephens Inc. Assistant Treasurer Assistant Secretary and Assistant
Treasurer since August 1999- Nations
Fund Trust, Nations Fund, Inc.,
Nations Reserves, Nations LifeGoal
Funds, Inc., Nations Annuity Trust,
Nations Master Investment Trust and
Nations Funds Trust.
</TABLE>
Mr. Blank serves as Treasurer to certain other investment companies for
which Stephens also serves as Co-Administrator, Sponsor, Distributor,
Administrator and/or Adviser.
Each Trustee is a board member of the Trust, Nations Fund Trust,
Nations Fund, Inc., Nations Reserves, Nations Master Investment Trust, Nations
LifeGoal Funds, Inc. and Nations Funds Trust each a registered investment
company that is part of the Nations Funds Family, except William P. Carmichael,
who is only a board member of the Trust, Nations Funds Trust, Nations Master
Investment Trust and Nations LifeGoal Funds, Inc. Richard H. Blank, Jr., Michael
W. Nolte, and Carolyn Wyse also are Officers of the Trust, Nations Fund Trust,
Nations Fund Inc., Nations Reserves, Nations Master Investment Trust, Nations
LifeGoal Funds, Inc., and Nations Funds Trust.
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.
44
<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.
45
<PAGE>
Trustee Compensation
--------------------
Board members of the Trust are compensated for their services to the
Nations Funds Family on a flat rate basis, and not on a per registered
investment company or per fund basis as outlined in the following chart.
BOARD MEMBER COMPENSATION ARRANGEMENT
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------- -------------------------------------------------------------
BOARD MEMBER ANNUAL RETAINER: $65,000
BOARD CHAIRMAN: Additional 20% of the base annual
retainer.
Payable in quarterly installments. Payable pro rata
for partial calendar year of service. Allocated across
multiple registrants.
MEETING FEES: $5,000 per meeting for in-person meetings
(up to six meetings per calendar year) and $1,000 for
telephone meetings. Allocated across multiple registrants
convened at meetings.
- ------------------------------------------------- -------------------------------------------------------------
AUDIT COMMITTEE MEMBERS CHAIRMAN: Additional 10% of the base annual retainer as
Board Member.
MEETING FEES: $1,000 per meeting if not held within one
calendar day before or after regularly scheduled Board
meetings. Allocated across multiple registrants convened
at meetings.
- ------------------------------------------------- -------------------------------------------------------------
NOMINATING COMMITTEE MEMBERS MEETING FEES: $1,000 per meeting if not held within one
calendar day before or after regularly scheduled Board
meetings. Allocated across multiple registrants convened
at meetings.
- ------------------------------------------------- -------------------------------------------------------------
</TABLE>
The following Compensation Table provides the compensation paid by the
Trust to the Trustees for the year ended December 31, 1999. From January 1, 1999
to June 30, 1999 each Trustee received (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). Beginning July 1, 1999 the
Trustees were compensated according to the Compensation Arrangement as outlined
above.
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT
COMPENSATION FROM BENEFITS ACCRUED AS PART ESTIMATED ANNUAL TOTAL COMPENSATION FROM
NAME OF PERSON THE OF PORTFOLIO BENEFITS UPON REGISTRANT AND FUND
POSITION (1) TRUST EXPENSES RETIREMENT COMPLEX (2)(3)
------------ ----- -------- ---------- --------------
<S> <C> <C> <C> <C>
Edmund L. Benson, III, $10,061 $1,320 $48,000 $88,071
Trustee (50% Def'd)
William P. Carmichel (4) N/A N/A N/A N/A
Trustee
James Ermer 10,291 1,320 48,000 91,375
Trustee
William H. Grigg 9,830 1,320 48,000 100,766
Trustee (100% Def'd)
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT
COMPENSATION FROM BENEFITS ACCRUED AS PART ESTIMATED ANNUAL TOTAL COMPENSATION FROM
NAME OF PERSON THE OF PORTFOLIO BENEFITS UPON REGISTRANT AND FUND
POSITION (1) TRUST EXPENSES RETIREMENT COMPLEX (2)(3)
------------ ----- -------- ---------- --------------
<S> <C> <C> <C> <C>
Thomas F. Keller 10,192 1,320 51,000 104,081
Trustee (100% Def'd)
Carl E. Mundy, Jr. 10,291 1,320 48,000 91,375
Trustee
Cornelius J. Pings 8,041 1,320 48,000 70,750
Trustee
James Sommers 10,291 1,320 48,000 91,375
Trustee
A. Max Walker 11,855 1,320 54,000 123,125
Chairman of the Board
Charles B. Walker 9,291 1,320 48,000 85,375
Trustee
Thomas S. Word 9,719 1,320 48,000 82,766
Trustee (100% Def'd)
$99,862 $13,200 $489,000 $929,059
======= ======= ======== ========
</TABLE>
(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) Messrs. Grigg, Keller and A.M. Walker receive compensation from 11
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, Mundy,
Pings, Sommers, C. Walker and Word, receive compensation from seven investment
companies, including the Trust, deemed to be part of the fund complex. Mr.
Carmichael receives compensation from four investment companies, including the
Trust, deemed to be part of the fund complex.
(3) Total compensation amounts include deferred compensation (including
interest) payable to or accrued for the following Trustees: Edmund L. Benson,
III ($39,751); William H. Grigg ($79,501); Thomas F. Keller ($82,616); and
Thomas S. Word ($77,543).
(4) Mr. Carmichael was appointed to the Board of Trustees of the Trust,
Nations Funds Trust, Nations Master Investment Trust and Nations LifeGoal Funds,
Inc. in December 1999. Mr. Carmichael did not receive any compensation from the
Trust for the period ended December 31, 1999.
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.
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
47
<PAGE>
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
Bank of America and its Investment Adviser and Sub-Adviser Affiliates
---------------------------------------------------------------------
BAAI is the investment adviser to the Portfolios. BACAP is the
investment sub-adviser to all of the Portfolios except for Nations International
Growth Portfolio, Nations Marsico Focused Equities Portfolio, and Nations
Marsico Growth & Income Portfolio. Gartmore is the investment sub-adviser to
Nations International Growth Portfolio. Marsico Capital is the investment
sub-adviser to Nations Marsico Focused Equities Portfolio and Nations Marsico
Growth & Income Portfolio.
BAAI also serves as the investment adviser to the funds of Nations
Fund, Inc., Nations Fund Trust, Nations Reserves, Nations Funds Trust and the
portfolios of Nations LifeGoal Funds, Inc. and Nations Master Investment Trust,
each a registered investment company that is part of the Nations Funds Family.
In addition, BAAI 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. BACAP also serves as the sub-investment adviser
to Hatteras Income Securities, Inc., Nations Government Income Term Trust 2003,
Inc., Nations Government Income Term Trust 2004, Inc. and Nations Balanced
Target Maturity Fund, Inc.
BAAI and BACAP are each wholly owned subsidiaries of Bank of America,
which in turn is a wholly owned banking subsidiary of Bank of America
Corporation, a bank holding company organized as a Delaware corporation.
The respective principal offices of BAAI and BACAP are located at One
Bank of America Plaza, Charlotte, N.C. 28255.
Marsico Capital is located at 1200 17th Street, Suite 1300, Denver, CO
80202. Thomas F. Marsico is Chairman and Chief Executive Officer of Marsico
Capital. Prior to forming Marsico Capital in September 1997, Mr. Marsico had 18
years of experience as a securities analyst/portfolio manager. Bank of America
owns 50% of Marsico Capital.
Since 1874, Bank of America and its predecessors have been managing
money for foundations, universities, corporations, institutions and individuals.
Today, Bank of America affiliates collectively manage in excess of $100 billion,
including the more than $40 billion in mutual fund assets. It is a company
dedicated to a goal of providing responsible investment management and superior
service. Bank of America is recognized for its sound investment approaches,
which place it among the nation's foremost financial institutions. Bank of
America and its affiliates organization makes available a wide range of
financial services to its over 6 million customers through over 1700 banking and
investment centers.
48
<PAGE>
Sub-Advisers Unaffiliated with BAAI
-----------------------------------
The principal offices of Gartmore are located at Gartmore House, 16-18
Monument Street, London EC3R 8AJ, England.
Investment Advisory and Sub-Advisory Agreements
-----------------------------------------------
Pursuant to the terms of the Trust's Investment Advisory Agreement and
Sub-Advisory Agreements (at times, the "Advisory Agreements") with BAAI, BACAP,
Gartmore, and/or Marsico Capital, and subject at all times to the control of the
Trust's Boards of Trustees and conformity with the stated policies of the Trust,
BAAI, BACAP, Gartmore, and/or 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 Portfolios that they advise.
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 an Adviser, respectively, or any of its
respective officers, directors, employees or agents, such Adviser 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 under
thereunder or for any losses that may be sustained in the purchase, holding or
sale of any security.
Each Advisory Agreement became effective with respect to a Portfolio
after approved by the Board of the Trust, and continues 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 Trust's 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 Advisory Agreement terminates
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 BAAI on 60 days' written notice.
The Portfolios, in any advertisement or sales literature, may advertise
the names, experience and/or qualifications of the portfolio manager(s) of any
Portfolio, or if a Portfolio is managed by team or committee, such Portfolio may
advertise the names, experience and/or qualifications of any such team or
committee member.
The Adviser may waive a portion of its fees; however, any such waiver
may be discontinued at any time. As discussed below," an Adviser will be
required to reduce its fees charged to the Portfolios, in direct proportion to
the fees payable by such Portfolios to an Adviser 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.
Subject to reduction in accordance with the expense limitation
provisions which may be imposed by states in which the Portfolios' shares are
qualified for sale, BAAI received fees from the Portfolios for its services as
outlined in the following chart, which states the net advisory fees paid to
BAAI, the advisory fees waived and expense reimbursements, where applicable, for
the fiscal year ended December 31, 1999.
ADVISORY FEES
-------------
<TABLE>
<CAPTION>
Net Amount Paid Amount Waived Reimbursed by Adviser
--------------- ------------- ---------------------
<S> <C> <C> <C>
Nations Value Portfolio $21,305 $0 ($34,997)
Nations International Growth Portfolio 0 0 ( 39,293)
Nations Aggressive Growth Portfolio 8,325 0 ( 34,244)
Nations Marsico Focused Equities Portfolio 422,380 $ 0 ( 17,335)
Nations Growth & Income Portfolio 233,118 0 ( 18,332)
Nations Managed Index Portfolio (16,607) (28,749) ( 16,890)
Nations SmallCap Index Portfolio 0 (12,583) ( 16,574)
Nations Balanced Assets Portfolio 6,835 0 ( 28,777)
</TABLE>
49
<PAGE>
BAAI received fees from the Portfolios for its services as outlined in
the following chart, which states the net advisory fees paid to BAAI, the
advisory fees waived and expense reimbursements where applicable for the fiscal
year ended December 31, 1998.
<TABLE>
<CAPTION>
Net Amount Paid Amount Waived Reimbursed by Adviser
--------------- ------------- ---------------------
<S> <C> <C> <C>
Nations Value Portfolio $ 0 $ 17,997 $ 13,229
Nations International Growth Portfolio 0 10,834 29,871
Nations Aggressive Growth Portfolio 0 15,986 15,395
Nations Marsico Focused Equities Portfolio 20,310 53,625 0
Nations Growth & Income Portfolio 9,150 43,246 0
Nations Managed Index Portfolio 0 27,337 62,101
Nations SmallCap Index Portfolio 0 20,469 83,193
Nations Balanced Assets Portfolio 0 11,808 22,772
</TABLE>
The table below states the net sub-advisory fees paid to Marsico
Capital for the fiscal periods indicated.
SUB-ADVISORY FEES
Period Ending Period Ending
12/31/98 12/31/99
Net Amount Paid Net Amount Paid
--------------- ---------------
Nations Marsico Focused Equities Portfolio $ 39,264 $ 249,624
Nations Growth & Income Portfolio 27,748 148,736
CO-ADMINISTRATORS AND SUB-ADMINISTRATOR
Stephens Inc. ("Stephens"), 111 Center Street, Suite 300, Little Rock,
AR 72201, and BAAI (the "Co-Administrators") serve as co-administrators of the
Trust.
The Co-Administrators serve under co-administration agreements
("Co-Administration Agreements"), which were approved by the Board of Trustees
on November 5, 1998. Prior to the Co-Administration Agreement that was approved
on November 5, 1998, Stephens and PFPC Inc. ("PFPC"), formerly First Data
Investment Associates, Inc., were paid $22,819 and $9,438, respectively, for
their services in 1998. The Co-Administrators receive, as compensation for their
services rendered under the Co-Administration Agreements, a combined fee,
computed daily and paid monthly, at the annual rate of: 0.22% of the average
daily net assets of the International Portfolio; and 0.23% of the average daily
net assets of the other Portfolios.
Pursuant to the Co-Administration Agreement, Stephens has 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 the Trust, (iii) furnish corporate
secretarial services to the Trust, 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 the Trust's shareholders and the SEC,
including annual and semi-annual reports, (vi) coordinating the provision of
services to the Trust by the Transfer Agent, Sub-Transfer Agent and the
Custodian, and (vii) generally assist in all aspects of the Trust's operations.
Stephens bears all expenses incurred in connection with the performance of its
services.
Also, pursuant to the Co-Administration Agreement, BAAI has agreed to,
among other things, (i) provide accounting and bookkeeping services for the
Portfolios, (ii) compute each Portfolio's net asset value and net income, (iii)
accumulate information required for the Trust's reports to shareholders and the
SEC, (iv) prepare and file the Trust's federal and state tax returns, (v)
perform monthly compliance testing for the Trust, and (vi) prepare and furnish
the Trust monthly broker security transaction summaries and transaction listings
and performance information. BAAI bears all expenses incurred in connection with
the performance of its services.
The Co-Administration Agreements may be terminated by a vote of a
majority of the Board of Trustees, by Stephens or by BAAI, respectively, on 60
days' written notice without penalty. The Co-Administration Agreements are not
assignable without the written consent of the other party. Furthermore, the
Co-Administration Agreements provide that Stephens and BAAI shall not be liable
to the Portfolios or to their
50
<PAGE>
shareholders except in the case of Stephens' or BAAI's, willful misfeasance, bad
faith, gross negligence or reckless disregard of duty.
The Bank of New York ("BNY"), 100 Church Street, New York, New York
10286, serves as sub-administrator for the Portfolios pursuant to a
sub-administration agreement. Pursuant to its terms, BNY assists Stephens and
BAAI in supervising, coordinating and monitoring various aspects of the
Portfolios' administrative operations. For providing such services, BNY is
entitled to receive a monthly fee from Stephens and BAAI based on an annual rate
of 0.01% of the Portfolios' average daily net assets.
The table set forth below states the net Co-Administration fees paid to
BAAI for the fiscal period ended December 31, 1999.
CO-ADMINISTRATION FEES
----------------------
Fees Paid
Nations Value Portfolio $ 6,605
Nations International Growth Portfolio 2,808
Nations Aggressive Growth Portfolio 4,889
Nations Marsico Focused Equities Portfolio 49,277
Nations Growth & Income Portfolio 27,850
Nations Managed Index Portfolio 11,620
Nations SmallCap Index Portfolio 4,774
Nations Balanced Assets Portfolio 4,211
Total: $112,034
--------
The table set forth below states the net Co-Administration fees paid to
Stephens for the fiscal period ended December 31, 1999.
CO-ADMINISTRATION FEES
----------------------
Fees Paid
Nations Value Portfolio $ 4,945
Nations International Growth Portfolio 1,372
Nations Aggressive Growth Portfolio 3,718
Nations Marsico Focused Equities Portfolio 33,797
Nations Growth & Income Portfolio 19,323
Nations Managed Index Portfolio 8,636
Nations SmallCap Index Portfolio 3,778
Nations Balanced Assets Portfolio 3,232
Total: $78,801
-------
The table set forth below states the net Sub-Administration fees paid
to BNY for the fiscal year ended December 31, 1999.
SUB-ADMINISTRATION FEES
-----------------------
Fees Paid
Nations Value Portfolio $ 4,933
Nations International Growth Portfolio 2,401
Nations Aggressive Growth Portfolio 3,706
Nations Marsico Focused Equities Portfolio 33,752
Nations Growth & Income Portfolio 19,291
Nations Managed Index Portfolio 8,611
Nations SmallCap Index Portfolio 3,762
Nations Balanced Assets Portfolio 3,215
Total: $79,671
-------
51
<PAGE>
CUSTODIAN AND TRANSFER AGENT
PFPC, Inc. is located at 400 Bellevue Parkway, Wilmington, Delaware
19809, and acts as transfer agent for each Portfolio's Shares. Under the
transfer agency agreement, the transfer agent maintains 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.
The SEC has amended Rule 17f-5 under the 1940 Act to permit boards to
delegate certain foreign custody matters to foreign custody managers and to
modify the criteria applied in the selection process. Accordingly, BNY serves as
Foreign Custody Manager, pursuant to a Foreign Custody Manager Agreement, under
which the Board of Trustees retains the responsibility for selecting foreign
compulsory depositories, although BNY agrees to make certain findings with
respect to such depositories and to monitor such depositories.
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. There were no fees paid under the Servicing and Distribution Plan for the
fiscal period ended December 31, 1998.
FEES PAID PURSUANT TO SHAREHOLDER SERVICING AND DISTRIBUTION PLAN
-----------------------------------------------------------------
PORTFOLIO NET FEES PAID
- --------- -------------
Nations Value Portfolio $ 0
Nations International Growth Portfolio 0
Nations Aggressive Growth Portfolio 0
Nations Marsico Focused Equities Portfolio 0
Nations Growth & Income Portfolio 0
Nations Managed Index Portfolio 35,936
52
<PAGE>
PORTFOLIO NET FEES PAID
- --------- -------------
Nations SmallCap Index Portfolio 15,731
Nations Balanced Assets Portfolio 0
Total: $51,667
-------
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.
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 Agreements require BAAI, BACAP, 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 BAAI, BACAP, Gartmore, or the Administrator
shall be deducted from the monthly investment advisory and administration fees
otherwise payable to BAAI, BACAP, Gartmore, and the Co-Administrators during
such fiscal year. If required pursuant to such state securities regulations,
BAAI, BACAP, 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.
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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.
INDEPENDENT ACCOUNTANTS 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 accountants. The Board of Trustees has selected
PricewaterhouseCoopers, LLP, 1177 Avenue of the Americas, New York, New York
10036 as the Trust's independent accountant to audit the Trust's books and
review the Trust's tax returns.
The Annual Report for the fiscal year ended December 31, 1999 is hereby
incorporated herein by reference in this SAI. This Annual Report will be sent
free of charge with this SAI to any shareholder who requests this SAI.
COUNSEL
Morrison & Foerster LLP serves as legal counsel to the Trust. Their
address is 2000 Pennsylvania Avenue, N.W., Washington, D.C. 20006.
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.
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.
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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.
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
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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 Bank of America 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 Bank of America 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.
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 Bank of America 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.
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
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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.
BROKERAGE COMMISSIONS
PORTFOLIO FISCAL YEAR ENDED
DECEMBER 31, 1999
Nations Value Portfolio $ 19,511
Nations International Growth Portfolio 5,238
Nations Aggressive Growth Portfolio 3,753
Nations Marsico Focused Equities
Portfolio 105,316
Nations Growth & Income Portfolio 57,287
Nations Managed Index Portfolio 11,037
Nations SmallCap Index Portfolio 7,715
Nations Balanced Assets Portfolio 8,230
Brokerage Commissions Paid to Affiliates
----------------------------------------
During the fiscal periods ended December 31, 1999 and 1998, the Trust
and its Portfolios, did not pay brokerage commissions to Banc of America
Investments, Inc. (the Funds' investment adviser) (or its predecessors), Banc of
America Capital Markets, Inc. (a broker/dealer subsidiary of Bank of America)
(or its predecessors), or Stephens.
The Trust did pay brokerage commissions to Banc of America Securities
LLC (a securities underwriting affiliate of Bank of America Corporation) ("BAS")
(or its predecessor) during the fiscal year ended December 31, 1999, for Nations
Marsico Focused Equities Portfolio, in the amount of $10,449, which is 9.92% of
the total commissions paid and 0.005% of the aggregate dollar amount of
transactions for the Portfolio and for Nations Marsico Growth & Income Portfolio
in the amount of $7,762, which is 13.5% of the total commissions paid and 0.008%
of the aggregate dollar amount of transactions for the Portfolio.
Securities of Regular Broker/Dealers
------------------------------------
As of December 31, 1999, each Fund owned securities of its "regular
brokers or dealers" or their parents, as defined in the 1940 Act, as follows:
Nations Balanced Assets Portfolio
---------------------------------
Bank of New York $ 35,400
Nations Aggressive Growth Portfolio
-----------------------------------
Morgan Stanley $ 239,106
Nations International Growth Portfolio
--------------------------------------
ING Barring $ 60,381
Nations Marsico Growth & Income Portfolio
-----------------------------------------
Morgan Stanley $1,572,534
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
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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.
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
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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.
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.
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
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<PAGE>
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.
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 Aggressive Growth Portfolio, Nations
International Growth Portfolio, Nations Managed Index Portfolio, Nations
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
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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.
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 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,
income, gains and expenses will be determined separately for each Portfolio. As
a regulated investment company, each Portfolio generally will not be taxed on
its income and gains distributed to its shareholders. Each Portfolio intends to
meet these requirements.
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
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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 gain as determined for Federal income
tax purposes) earned in each taxable year. In general, these distributions must
actually or be deemed to be made in the taxable year. However, in certain
circumstances, such distributions may be made in the 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 net realized capital gains (if any) 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 HOLDERS OF VARIABLE CONTRACTS AND POLICIES
Shares of each Portfolio are only offered to holders of variable
annuity contracts and variable insurance policies through Participating
Insurance Companies. As discussed in the prospectus for the variably annuity
contract or variable insurance policy, the contract or policy may qualify for
favorable tax treatment. As long as the variable annuity contract or variable
annuity policy maintains favorable tax treatment, the holder will only be taxed
on his or her investment in a Portfolio through such contract or policy,
regardless of the transfer of Portfolio shares, the amount and nature of a
Portfolio's income and gains, or a Portfolio's distributions of net investment
income and realized capital gains.
In order for a variable annuity contract or variable insurance policy
to qualify for favorable tax treatment, among other things, the "separate
accounts" (referred to as "segregated asset accounts" under the Code) of
participating insurance companies, which maintain and invest net proceeds from
the contracts and policies, must be "adequately diversified." In general, the
investments of a separate account are considered to be "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 for such purposes.
However, Treasury Regulations provide a "look-through rule" with respect to a
separate 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 separate
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 annuity contract or variable life insurance policy, then a separate
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 separate account.
Each Portfolio intends to satisfy the relevant conditions at all times,
thereby enabling the investment of the corresponding separate accounts to be
"adequately diversified." 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 individual holders of the variable annuity contracts or variable life
insurance policies underlying the separate account will qualify for 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 life 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.
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INFORMATION REGARDING A PORTFOLIO'S FOREIGN INVESTMENTS
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 Internal Revenue Service (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 otherwise be subject to
federal income tax or the interest charge with respect to its interest in the
PFIC under the election. However, no assurance can be given that the Portfolio
will be able to determine that it has invested in a PFIC, and, accordingly, the
Portfolio may not be able to make the "mark-to-market" election. Accordingly, a
Portfolio may be subject to the tax and interest charge with respect to its
investments in PFICs described in this paragraph.
Income and dividends received by a Portfolio from sources within
foreign countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. If more than 50% of the value of a Portfolio's
total assets at the close of its taxable year consists of securities of non-U.S.
corporations, the Portfolio generally will be eligible to file an election with
the IRS pursuant to which the regulated investment company may pass-through to
its shareholders foreign taxes paid by the regulated investment company, which
may be claimed either as a credit or deduction by the shareholders. Although the
Nations International Growth Portfolio and Nations International Value Portfolio
may qualify for the election, holders of variable annuity contracts and variable
life insurance policies may not claim credits or deductions for foreign taxes
passed through by a Portfolio. Accordingly, holders of such contracts and
policies can expect to receive no benefit for foreign taxes incurred by a
Portfolio.
OTHER MATTERS
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.
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
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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.
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.
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
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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.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS INCEPTION THROUGH ONE YEAR PERIOD ENDED
---------------------------- 12/31/99 DECEMBER 31, 1999
-------- -----------------
<S> <C> <C>
Nations Balanced Assets Portfolio (0.47%) 1.44%
Nations Aggressive Growth Portfolio 9.20% 9.75%
Nations International Growth Portfolio 24.60% 43.05%
Nations Managed Index Portfolio 16.88% 18.27%
Nations Small Cap Index Portfolio (2.27%) 5.92%
Nations Value Portfolio 3.96% 2.50%
Nations Marsico Growth & Income Portfolio 43.33% 55.10%
Nations Marsico Focused Equities Portfolio 47.83% 53.28%
</TABLE>
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.
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 April 16, 1999, the following people owned 5% or more of the
following Portfolios outstanding securities:
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OWNER SHARES % OWNED
- --------------------------------------------- -------------------- -------------
BALANCED ASSET PORTFOLIO
ROBINSON, LEE 45,648.325 9.22%
3 Athenaeum Hall
Vale of Hlth London NW 3,1 AP 99999
BARKER, LARRY 64,084.082 12.95%
200 Highland Ln
Waverly, TN 37185
HL INVESTMENT ADVISORS, LLC 101,004.141 20.41%
200 Hopmeadow Street
Simsbury, CT 06089
AGGRESSIVE GROWTH PORTFOLIO
ROBINSON, LEE 33,288.532 6.86%
3 Athenaeum Hall
Vale of Hlth London NW 3,1 AP 99999
HL INVESTMENT ADVISORS, LLC 100,228.354 20.66%
200 Hopmeadow Street
Simsbury, CT 06089
INTERNATIONAL GROWTH PORTFOLIO
ROBINSON, LEE 22,267.045 8.68%
3 Athenaeum Hall
Vale of Hlth London NW 3,1 AP 99999
HL INVESTMENT ADVISORS, LLC 100,302.734 39.12%
200 Hopmeadow Street
Simsbury, CT 06089
MANAGED INDEX
HL INVESTMENT ADVISORS, LLC 503,116.531 49.27%
200 Hopemeadow Street
Simsbury, CT 06089
SMALLCAP INDEX PORTFOLIO
HL INVESTMENT ADVISORS, LLC 501,934.016 72.49%
200 Hopmeadow Street
Simsbury, CT 06089
VALUE PORTFOLIO
ROBINSON, LEE 33,833.562 5.01%
3 Athenaeum Hall
Vale of Hlth London NW 3,1 AP 99999
HL INVESTMENT ADVISORS, LLC 100,366.795 14.87%
200 Hopmeadow Street
Simsbury, CT 06089
MARSICO FOCUSED EQUITIES PORTFOLIO
HL INVESTMENT ADVISORS, LLC 300,367.816 11.21%
200 Hopmeadow Street
Simsbury CT 06089
MARSICO GROWTH & INCOME PORTFOLIO
HL INVESTMENT ADVISORS, LLC 300,491.803 17.63%
200 Hopmeadow Street
Simsbury, CT 06089
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OWNER SHARES % OWNED
- --------------------------------------------- -------------------- -------------
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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.
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
A-1
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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.
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.
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
A-2
<PAGE>
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.
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 portfolio 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.
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
A-3
<PAGE>
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.
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"):
A-4
<PAGE>
AAA - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial such that adverse changes in business, economic
or financial conditions are unlikely to increase investment risk
significantly.
AA - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions may increase investment risk albeit not very
significantly.
A - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
BBB - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment
risk than for obligations in other categories.
A plus or minus sign may be appended to a rating below AAA to denote
relative status within major rating categories.
The following summarizes the 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-5
<PAGE>
NATIONS ANNUITY TRUST
ONE BANK OF AMERICA PLAZA
33RD FLOOR
CHARLOTTE, NC 28255
1-800-626-2275
FORM N-1A
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
All references to the "Registration Statement" in the following list of
Exhibits refer to the Registrant's Registration Statement on Form N-1A (File
Nos. 33-40265; 811-08481)
<TABLE>
<CAPTION>
<S> <C>
- ---------------------- -------------------------------------------------------------------------------------
EXHIBIT LETTER DESCRIPTION
- ---------------------- -------------------------------------------------------------------------------------
(a) ARTICLES OF INCORPORATION:
(a)(1) Amended and Restated Declaration of Trust dated February
5, 1998, incorporated by reference to Post-Effective
Amendment No. 4, filed March 7, 2000.
- ---------------------- -------------------------------------------------------------------------------------
(b) BYLAWS:
(b)(1) Amended and Restated Bylaws dated February 5, 1998, last
amended November 17, 1999, incorporated by reference to
Post-Effective Amendment No. 4, filed March 7, 2000.
- ---------------------- -------------------------------------------------------------------------------------
(c) INSTRUMENTS DEFINING RIGHTS OF SECURITIES HOLDERS:
Not Applicable
- ---------------------- -------------------------------------------------------------------------------------
(d) INVESTMENT ADVISORY CONTRACTS:
(d)(1) Investment Advisory Agreement between Banc of America Advisors, Inc. (formerly
NationsBanc Advisors, Inc.) ("BAAI") and Nations Annuity Trust ("Registrant") dated
February 25, 1998, Schedule I dated May 1, 2000, filed herewith.
- ---------------------- -------------------------------------------------------------------------------------
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ---------------------- -------------------------------------------------------------------------------------
EXHIBIT LETTER DESCRIPTION
- ---------------------- -------------------------------------------------------------------------------------
(d)(2) Sub-Advisory Agreement among BAAI, Banc of America Capital Management, Inc.
(formerly TradeStreet Investment Associates, Inc.) ("BACAP") and the Registrant
dated February 25, 1998, filed herewith.
(d)(3) Sub-Advisory Agreement among BAAI, Marsico Capital Management, Inc. ("Marsico") and
the Registrant dated February 8, 1999, incorporated by reference to Post-Effective
Amendment No. 4, filed March 7, 2000.
(d)(4) Interim Sub-Advisory Agreement among BAAI, Gartmore
Global Partners ("Gartmore") and the Registrant dated
March 6, 2000, filed herewith.
- ---------------------- -------------------------------------------------------------------------------------
(e) UNDERWRITING CONTRACT:
(e)(1) Distribution Agreement between the Registrant and Stephens Inc. ("Stephens") dated
February 25, 1998, filed herewith.
- ---------------------- -------------------------------------------------------------------------------------
(f) BONUS OR PROFIT SHARING CONTRACTS:
(f)(1) Deferred Compensation Plan dated August 6, 1997,
incorporated by reference to Post-Effective Amendment No.
4, filed March 7, 2000.
- ---------------------- -------------------------------------------------------------------------------------
(g) CUSTODIAN AGREEMENTS:
(g)(1) Custody Agreement between the Registrant and The Bank of
New York ("BNY") dated October 19, 1998, filed herewith.
(g)(2) Amendment to the Custody Agreement dated September 1,
1999, incorporated by reference to Post-Effective
Amendment No. 4, filed March 7, 2000.
(g)(3) Amendment to the Custody Agreement dated February 14,
2000, incorporated by reference to Post-Effective
Amendment No. 4, filed March 7, 2000.
- ---------------------- -------------------------------------------------------------------------------------
(h) OTHER MATERIAL CONTRACTS:
(h)(1) Co-Administration Agreement among the Registrant, Stephens and BAAI dated
December 1, 1998, filed herewith.
(h)(2) Sub-Administration Agreement among the Registrant, BNY
and BAAI dated December 1, 1998, filed herewith.
- ---------------------- -------------------------------------------------------------------------------------
</TABLE>
C-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ---------------------- -------------------------------------------------------------------------------------
EXHIBIT LETTER DESCRIPTION
- ---------------------- -------------------------------------------------------------------------------------
(h)(3) Transfer Agency and Services Agreement between PFPC Inc. (formerly First Data
Investor Services Group, Inc.) ("PFPC") and the Nations Funds family dated June 1,
1995, Schedule G dated May 1, 2000, filed herewith.
(h)(4) Adoption Agreement and Amendment to Transfer Agency and
Service Agreement dated February 25, 1998, incorporated
by reference to Post-Effective Amendment No. 4, filed
March 7, 2000.
(h)(5) Amendment to Transfer Agency and Services Agreement dated
December 1, 1999, incorporated by reference to
Post-Effective Amendment No. 4, filed March 7, 2000.
(h)(6) Participation Agreement with Hartford Life Insurance
Company dated March 13, 1998, incorporated by reference
to Post-Effective Amendment No. 4, filed March 7, 2000.
- ---------------------- -------------------------------------------------------------------------------------
(i) LEGAL OPINION
Opinion and Consent of Counsel, filed herewith.
- ---------------------- -------------------------------------------------------------------------------------
(j) OTHER OPINIONS
Consent of Independent Accountants--PricewaterhouseCoopers LLP, filed herewith.
- ---------------------- -------------------------------------------------------------------------------------
(k) OMITTED FINANCIAL STATEMENTS
Not Applicable
- ---------------------- -------------------------------------------------------------------------------------
(l) INITIAL CAPITAL AGREEMENT:
(l)(1) Investment Letter, incorporated by reference to Pre-Effective Amendment No. 1,
filed February 20, 1998.
- ---------------------- -------------------------------------------------------------------------------------
(m) RULE 12B-1 PLAN:
(m)(1) Shareholder Servicing and Distribution Plan, filed herewith.
- ---------------------- -------------------------------------------------------------------------------------
(n) FINANCIAL DATA SCHEDULE:
Not Applicable
- ---------------------- -------------------------------------------------------------------------------------
(o) RULE 18F-3 PLAN:
- ---------------------- -------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ---------------------- -------------------------------------------------------------------------------------
EXHIBIT LETTER DESCRIPTION
- ---------------------- -------------------------------------------------------------------------------------
Not Applicable
- ---------------------- -------------------------------------------------------------------------------------
(p) CODES OF ETHICS:
(p)(1) Nations Funds Code of Ethics, filed herewith.
- ---------------------- -------------------------------------------------------------------------------------
(q) Powers of Attorney for Edmund L. Benson, Charles B. Walker, A. Max Walker,
Thomas S. Word, Jr., William H. Grigg, James Ermer, Thomas F. Keller, Carl E.
Mundy, Jr., James B. Sommers, Cornelius J. Pings and William P. Carmichael,
incorporated by reference to Post-Effective Amendment No. 4, filed March 7, 2000.
- ---------------------- -------------------------------------------------------------------------------------
</TABLE>
ITEM 24. PERSONS CONTROLLED BY OF UNDER COMMON CONTROL WITH THE FUND
No person is controlled by or under common control with the Registrant.
ITEM 25. INDEMNIFICATION
Article V, Section 5.3 of the Registrant's Declaration of Trust
provides for the indemnification of the Registrant's trustees, officers,
employees and other agents. Indemnification of the Registrant's administrators,
distributor, custodian and transfer agent is provided for, respectively, in the
Registrant's:
1. Co-Administration Agreement with Stephens and BAAI;
2. Sub-Administration Agreement with BNY and BAAI;
3. Distribution Agreement with Stephens;
4. Custody Agreement with BNY; and
5. Transfer Agency and Services Agreement with PFPC.
Promptly after receipt by an indemnified party above of notice of the
commencement of any action, such indemnified party shall, if a claim in respect
thereof is to be made against the indemnifying party under such subsection,
notify the indemnifying party in writing of the commencement thereof; but the
omission to so notify the indemnifying party shall not relieve it from any
liability which it may have to any indemnified party otherwise than under such
subsection. In case any such action shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, to assume the defense
C-4
<PAGE>
thereof, with counsel satisfactory to such indemnified party, and, after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party shall not be liable to such
indemnified party under such subsection for any legal expenses of other counsel
or any other expenses, in such case subsequently incurred by such indemnified
party, in connection with the defense thereof other than reasonable costs of
investigation.
The Registrant has obtained from a major insurance carrier a directors'
and officers' liability policy covering certain types of errors and omissions.
In no event will the Registrant indemnify any of its trustees, officers,
employees, or agents against any liability to which such person would otherwise
be subject by reason of his/her willful misfeasance, bad faith, gross negligence
in the performance of his/her duties, or by reason of his/her reckless disregard
of the duties involved in the conduct of his/her office or arising under his
agreement with the Registrant. The Registrant will comply with Rule 484 under
the Securities Act of 1933, as amended (the "1933 Act") and Release No. 11330
under the Investment Company Act of 1940, as amended (the "1940 Act"), in
connection with any indemnification.
Insofar as indemnification for liability arising under the 1933 Act 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 1933 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 1933 Act and will be governed by the
final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
To the knowledge of the Registrant, none of the directors or officers
of BAAI, the adviser to the Registrant's portfolios, or BACAP, Marsico or
Gartmore, 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 BAAI, BACAP, Marsico or Gartmore, respectively,
or other subsidiaries of Bank of America Corporation.
(a) BAAI performs investment advisory services for the Registrant and
certain other customers. BAAI is a wholly-owned subsidiary of Bank of America,
N.A. ("Bank of America"), which in turn is a wholly-owned banking subsidiary of
Bank of America Corporation. Information with respect to each director and
officer of the investment adviser is incorporated by reference to Form ADV filed
by BAAI with the
C-5
<PAGE>
SEC pursuant to the Investment Advisers Act of 1940, as amended (the "Advisers
Act") (file no. 801-49874).
(b) BACAP performs investment sub-advisory services for the Registrant
and certain other customers. BACAP is a wholly-owned subsidiary of Bank of
America Corporation. Information with respect to each director and officer of
the investment sub-adviser is incorporated by reference to Form ADV filed by
BACAP (formerly TradeStreet Investment Associates, Inc.) with the SEC pursuant
to the Advisers Act (file no. 801-50372).
(c) Marsico performs investment sub-advisory services for the
Registrant and certain other customers. Marsico Management Holdings, LLC, a
wholly-owned subsidiary of Bank of America, owns 50% of the equity of Marsico
Capital. 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).
(d) 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
Bank of America, 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 27. PRINCIPAL UNDERWRITERS
(a) Stephens, distributor for the Registrant, does not presently act as
investment adviser for any other registered investment companies, but does act
as distributor for Nations Fund Trust, Nations Fund, Inc., Nations Reserves,
Nations LifeGoal Funds, Inc., Nations Funds Trust, Wells Fargo Funds Trust,
Wells Fargo Variable Trust, Barclays Global Investors Funds, Inc. and is the
exclusive placement agent for Wells Fargo Core Trust, Nations Master Investment
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., Nations Balanced Target
Maturity Fund, Inc., and Hatteras Income Securities, 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
with the SEC pursuant to the 1940 Act (file No. 501-15510).
(c) Not applicable.
C-6
<PAGE>
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
(1) BAAI, One Bank of America Plaza, Charlotte, NC 28255 (records
relating to its function as investment adviser and
co-administrator).
(2) BACAP, One Bank of America Plaza, Charlotte, NC 28255
(records relating to its function as investment sub-adviser).
(3) Gartmore, One Bank of America Plaza, Charlotte, NC 28255
(records relating to its function as investment sub-adviser).
(4) Marsico, 1200 17th Street, Suite 1300, Denver, CO 80202
(records relating to its function as investment sub-adviser).
(5) Stephens, 111 Center Street, Little Rock, AR 72201 (records
relating to its function as distributor and
co-administrator).
(6) PFPC 400 Bellevue Parkway, Wilmington, DE 19809 (records
relating to its function as transfer agent).
(7) BNY, 100 Church Street, New York, NY 10286 (records relating
to its function as custodian and sub-administrator)
ITEM 29. MANAGEMENT SERVICES
Not Applicable
ITEM 30. UNDERTAKINGS
Not Applicable
C-7
<PAGE>
dc-96223
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Amendment to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Little
Rock, State of Arkansas on the 28th day of April, 2000.
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 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
* President and Chairman April 28, 2000
--------------------------------------- of the Board of Trustees
(A. Max Walker) (Principal Executive Officer)
/s/ Richard H. Blank, Jr. Treasurer and Secretary April 28, 2000
---------------------------------------- (Principal Financial and
(Richard H. Blank, Jr.) Accounting Officer)
* Trustee April 28, 2000
----------------------------------------
(Edmund L. Benson, III)
* Trustee April 28, 2000
----------------------------------------
(William P. Carmichael)
* Trustee April 28, 2000
----------------------------------------
(James Ermer)
* Trustee April 28, 2000
----------------------------------------
(William H. Grigg)
* Trustee April 28, 2000
----------------------------------------
(Thomas F. Keller)
* Trustee April 28, 2000
----------------------------------------
(Carl E. Mundy, Jr.)
* Trustee April 28, 2000
----------------------------------------
(Cornelius J. Pings)
* Trustee April 28, 2000
----------------------------------------
(Charles B. Walker)
* Trustee April 28, 2000
----------------------------------------
(Thomas S. Word)
* Trustee April 28, 2000
----------------------------------------
(James B. Sommers)
</TABLE>
<PAGE>
/s/ Richard H. Blank, Jr.
-----------------------------
Richard H. Blank, Jr.
*Attorney-in-Fact
<PAGE>
Nations Annuity Trust
Exhibit Index
<TABLE>
<CAPTION>
<S> <C>
Exhibit No. Description
EX 99-23.D1 Investment Advisory Agreement
EX 99-23.D2 Sub-Advisory Agreement-Banc of America Capital Management, Inc.
EX 99-23.D4 Interim Sub-Advisory Agreement-Gartmore Global Partners
EX 99-23.E1 Distribution Agreement
EX 99-23.G1 Custody Agreement
EX 99-23.H1 Co-Administration Agreement
EX 99-23.H2 Sub-Administration Agreement
EX 99-23.H3 Transfer Agency Agreement
EX 99-23.I Opinion and Consent of Counsel-Morrison & Foerster LLP
EX 99-23.J Consent of Independent Accountants-PricewaterhouseCoopers LLP
EX 99-23.M1 Shareholder Servicing and Distribution Plan
EX 99-23.P1 Nations Funds Code of Ethics
</TABLE>
INVESTMENT ADVISORY AGREEMENT
NATIONS ANNUITY TRUST
THIS AGREEMENT is made as of this 25th day of February, 1998, by and
between NATIONS ANNUITY TRUST, a Delaware business trust (the "Trust"), and
NATIONSBANC ADVISORS, INC., a North Carolina corporation (the "Adviser"), on
behalf of those portfolios of the Trust now or hereafter identified on Schedule
I hereto (each a "Portfolio" and collectively, the "Portfolios").
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "Commission") as an open-end management investment company under
the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Adviser is registered with the Commission under the
Investment Advisers Act of 1940, as amended (the "Advisers Act") as an
investment adviser;
WHEREAS, the Trust and the Adviser desire to enter into an agreement to
provide for investment advisory services to the Trust upon the terms and
conditions hereinafter set forth; and
WHEREAS, the Trust and the Adviser contemplate that certain duties of the
Adviser under this Agreement will be delegated to one or more investment
sub-adviser(s) (the "Sub-Adviser(s)") pursuant to separate sub-advisory
agreement(s) (the "Sub-Advisory Agreement(s)");
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Trust hereby appoints the Adviser to act as investment
adviser to each Portfolio for the period and on the terms set forth in this
Agreement. The Adviser accepts such appointment and agrees to furnish the
services herein set forth for the compensation herein provided. In the event
that the Trust establishes one or more portfolios other than the Portfolios with
respect to which it desires to retain the Adviser to act as investment adviser
hereunder, it shall notify the Adviser in writing. If the Adviser is willing to
render such services under this Agreement it shall notify the Trust in writing
whereupon such portfolio shall become a Portfolio hereunder and shall be subject
to the provisions of this Agreement except to the extent that said provisions
(including those relating to the compensation payable by the Portfolio to the
Adviser) are modified with respect to such Portfolio in writing by the Trust and
the Adviser at the time.
2. DELEGATION OF RESPONSIBILITIES. Subject to the approval of the Trust's
Board of Trustees and, if required, the shareholders of the Portfolios, the
Adviser may, pursuant to the Sub-Advisory Agreement(s), delegate to the
Sub-Adviser(s) those of its duties hereunder identified in the Sub-Advisory
Agreement(s), provided that the Adviser shall continue to supervise and monitor
the performance of the duties delegated to the Sub-Adviser(s) and any such
delegation shall not relieve the Adviser of its duties and obligations under
this Agreement. The Adviser shall be solely responsible for compensating the
Sub-Adviser(s) for services rendered under the Sub-Advisory Agreement(s).
-1-
<PAGE>
3. DELIVERY OF DOCUMENTS. The Trust has furnished the Adviser with copies,
properly certified or authenticated, of each of the following:
(a) the Trust's Certificate of Trust as filed with the Secretary
of State of Delaware on November 24, 1997, and Declaration of Trust and all
amendments thereto (such Declaration of Trust, as presently in effect and as it
shall from time to time be amended, is herein called the "Declaration of
Trust");
(b) the Trust's By-Laws and amendments thereto (such By-Laws, as
presently in effect and as it shall from time to time be amended, is herein
called the "By-Laws");
(c) votes of the Trust's Board of Trustees authorizing the
appointment of the Adviser and approving this Agreement;
(d) the Trust's Registration Statement, as amended, on Form N-1A
under the Securities Act of 1933, as amended (the "1933 Act") (File No.
333-40265) and under the 1940 Act (File No. 811-08481); and
(e) the most recent prospectus of the Trust relating to each
Portfolio (such prospectus) together with the related statement of additional
information, as presently in effect and all amendments and supplements thereto,
are herein called the "Prospectus").
The Trust will furnish the Adviser from time to time with copies of all
amendments of or supplements to the foregoing, if any.
4. MANAGEMENT. Subject to the supervision of the Trust's Board of
Trustees, the Adviser will provide a continuous investment program for each
Portfolio, including investment research and management with respect to all
securities, investments, cash and cash equivalents in each Portfolio. The
Adviser will determine from time to time what securities and other investments
will be purchased, retained or sold by the Portfolios and will place the daily
orders for the purchase or sale of securities. The Adviser will provide the
services rendered by it under this Agreement in accordance with each Portfolio's
investment objective, policies and restrictions as stated in the Prospectus and
votes of the Trust's Board of Trustees. The Adviser further agrees that it will:
(a) update each Portfolio's cash availability throughout the
day as required;
(b) maintain historical tax lots for each portfolio security
held by each Portfolio;
(c) transmit trades to the Trust's custodian for proper
settlement;
(d) maintain all books and records with respect to each
Portfolio's securities and transactions;
-2-
<PAGE>
(e) supply the Trust and its Board of Trustees with reports and
statistical data as requested; and
(f) prepare a quarterly broker security transaction summary and
monthly security transaction listing for each Portfolio.
5. OTHER COVENANTS. The Adviser agrees that it:
---------------
(a) will comply with all applicable Rules and Regulations of the
Commission and will in addition conduct its activities under this Agreement in
accordance with other applicable law, including but not limited to the 1940 Act
and the Advisers Act;
(b) will use the same skill and care in providing such services as
it uses in providing services to fiduciary accounts for which it has investment
responsibilities;
(c) will not make loans to any person to purchase or carry
Portfolio shares;
(d) will place orders pursuant to its investment determinations
for the Portfolios either directly with the issuer or with any broker or dealer.
Subject to the other provisions of this paragraph, in executing portfolio
transactions and selecting brokers or dealers, the Adviser will use its best
efforts to seek on behalf of each Portfolio the best overall terms available. In
assessing the best overall terms available for any transaction, the Adviser
shall consider all factors that it deems relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing basis.
In evaluating the best overall terms available, and in selecting the
broker/dealer to execute a particular transaction, the Adviser may also consider
the brokerage and research services (as those terms are defined in Section 28(e)
of the Securities Exchange Act of 1934, as amended) provided to the Portfolio(s)
and/or other accounts over which the Adviser or an affiliate of the Adviser
exercises investment discretion. The Adviser is authorized, subject to the prior
approval of the Trust's Board of Trustees, to pay to a broker or dealer who
provides such brokerage and research services a commission for executing a
portfolio transaction for any Portfolio which is in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction if, but only if, the Adviser determines in good faith that such
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of that particular
transaction or in terms of the overall responsibilities of the Adviser to the
particular Portfolio and to the Trust. In addition, the Adviser is authorized to
take into account the sale of shares of the Trust in allocating purchase and
sale orders for portfolio securities to brokers or dealers (including brokers
and dealers that are affiliated with the Adviser or the Trust's principal
underwriter), provided that the Adviser believes that the quality of the
transaction and the commission are comparable to what they would be with other
qualified firms. In no instance, however, will portfolio securities be purchased
from or sold to the Adviser or the Trust's principal underwriter for the
Portfolios or an affiliated person of either acting as principal or broker,
except as permitted by the Commission or applicable law;
-3-
<PAGE>
(e) will maintain a policy and practice of conducting its
investment advisory services hereunder independently of the commercial banking
operations of its affiliates. In making investment recommendations for a
Portfolio, its investment advisory personnel will not inquire or take into
consideration whether the issuer (or related supporting institution) of
securities proposed for purchase or sale for the Portfolio's account are
customers of the commercial departments of its affiliates. In dealing with
commercial customers, such commercial departments will not inquire or take into
consideration whether securities of those customers are held by the Portfolio;
and
(f) will treat confidentially, and as proprietary information of
the Trust, all records and other information relative to the Trust and prior,
present or potential shareholders, and will not 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, which approval shall not be unreasonably withheld and may not be withheld
and will be deemed granted where the Adviser may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested to divulge such
information by duly constituted authorities, or when so requested by the Trust).
6. SERVICES NOT EXCLUSIVE. The services furnished by the Adviser hereunder
are deemed not to be exclusive, and the Adviser shall be free to furnish similar
services to others so long as its services under this Agreement are not impaired
thereby. To the extent that the purchase or sale of securities or other
investments of the same issuer may be deemed by the Adviser to be suitable for
two or more accounts managed by the Adviser, the available securities or
investments may be allocated in a manner believed by the Adviser to be equitable
to each account. It is recognized that in some cases this procedure may
adversely affect the price paid or received by a Portfolio or the size of the
position obtainable for or disposed of by a Portfolio.
7. BOOKS AND RECORDS. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Adviser hereby agrees that all records which it
maintains for each Portfolio are the property of the Trust and further agrees to
surrender promptly to the Trust any of such records upon the Trust's request.
The Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
8. EXPENSES. During the term of this Agreement, the Adviser will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities and other investments (including
brokerage commissions and other transaction charges, if any) purchased or sold
for the Portfolios. In addition, if the aggregate expenses borne by any
Portfolio in any fiscal year exceed the applicable expense limitations imposed
by the securities regulations of any state in which its shares are registered or
qualified for sale to the public, the Adviser together with the Portfolio's
administrator(s) shall reimburse such Portfolio for such excess in proportion to
the fees otherwise payable to them for such year. The obligation of the Adviser
to reimburse the Trust hereunder is limited in any fiscal year to the amount of
its fee hereunder for such fiscal year, provided, however, that notwithstanding
the foregoing, the Adviser shall reimburse the Trust for the full amount of its
share of any such excess expenses regardless of the fees paid to it during such
fiscal year to the extent that the
-4-
<PAGE>
securities regulations of any state having jurisdiction over the Trust so
require. Such expense reimbursement, if any, will be estimated, reconciled and
paid on a monthly basis.
9. COMPENSATION. For the services provided to each Portfolio and the
expenses assumed pursuant to this Agreement, the Trust will pay the Adviser and
the Adviser will accept as full compensation therefor a fee for that Portfolio
determined in accordance with Schedule I attached hereto. The fee attributable
to each Portfolio shall be a separate charge to such Portfolio and shall be the
several (and not joint or joint and several) obligation of each such Portfolio.
The Trust and the Adviser may, from time to time, agree to reduce, limit or
waive the amounts payable hereunder with respect to one or more Portfolios for
such period or periods they deem advisable.
10. LIMITATION OF LIABILITY. The Adviser shall not be liable for any error
of judgment or mistake of law or for any loss suffered by the Trust in
connection with the performance of this Agreement, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Adviser or any of its officers, directors,
employees or agents, in the performance of its duties or from reckless disregard
by it of its obligations and duties under this Agreement.
11. DURATION AND TERMINATION. This Agreement shall become effective with
respect to a Portfolio when approved in accordance with the requirements of the
1940 Act, and shall continue in effect for a period of two years from the date
first written above. This Agreement shall thereafter continue from year to year,
provided that the continuation of the Agreement is specifically approved at
least annually:
(a) (i) by the Trust's Board of Trustees, or (ii) by the
vote of "a majority of the outstanding voting securities" of the
Portfolio (as defined in Section 2(a)(42) of the 1940 Act); and
(b) by the affirmative vote of a majority of the Trust's
Trustees who are not parties to this Agreement or "interested
persons" (as defined in the 1940 Act) of a party to this Agreement
(other than as Trustees of the Trust), by votes cast in person at
a meeting specifically called for such purpose.
Notwithstanding the foregoing, this Agreement may be terminated as to any
Portfolio at any time, without the payment of any penalty, by the Trust (by vote
of the Trust's Board of Trustees or by vote of a majority of the outstanding
voting securities of the particular Portfolio), or by the Adviser on sixty (60)
days' written notice. The notice provided for herein may be waived by the party
entitled to receipt thereof. This Agreement will immediately terminate in the
event of its assignment. As used in this Agreement, the terms "majority of the
outstanding voting securities," "interested persons" and "assignment" shall have
the same meanings as such terms have in the 1940 Act.
12. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party
-5-
<PAGE>
against which enforcement of the change, waiver, discharge or termination is
sought. No amendment of this Agreement affecting a Portfolio shall be effective
until approved by vote of a majority of the outstanding voting securities of
such Portfolio. However, this shall not prevent the Adviser from reducing,
limiting or waiving its fee.
13. 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 the 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 State of Delaware and 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 must look solely to the Trust
Property belonging to such class for the enforcement of any claims against the
Trust.
14. MISCELLANEOUS. 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. 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 and shall be
governed by Delaware law.
15. COUNTERPARTS. This Agreement may be executed in any manner of
counterparts, each of which shall be deemed an original.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
NATIONS ANNUITY TRUST
on behalf of the Portfolios
By:/s/ A. Max Walker
----------------------------------
A. Max Walker
President and Chairman of the
Board of Trustees
NATIONSBANC ADVISORS, INC.
By:/s/ Edward D. Bedard
------------------------------------
Edward D. Bedard
Senior Vice President and Chief
Operating Officer
-7-
<PAGE>
SCHEDULE I
The Trust shall pay the Adviser as full compensation for services
provided and expenses assumed hereunder an advisory fee for each Portfolio,
computed daily and payable monthly at the annual rates listed below as a
percentage of the average daily net assets of the Portfolio:
<TABLE>
<CAPTION>
------------------------------------------------------------------------- -------------------
RATE OF
PORTFOLIO COMPENSATION
--------- ------------
------------------------------------------------------------------------- -------------------
<S> <C>
Nations Balanced Assets Portfolio 0.65%
------------------------------------------------------------------------- -------------------
Nations Aggressive Growth Portfolio 0.65%
------------------------------------------------------------------------- -------------------
Nations International Growth Portfolio 0.80%
------------------------------------------------------------------------- -------------------
Nations Managed Index Portfolio 0.40%
------------------------------------------------------------------------- -------------------
Nations SmallCap Index Portfolio 0.40%
------------------------------------------------------------------------- -------------------
Nations Marsico Focused Equities Portfolio 0.75%
------------------------------------------------------------------------- -------------------
Nations Marsico Growth & Income Portfolio 0.75%
------------------------------------------------------------------------- -------------------
Nations Value Portfolio 0.65%
------------------------------------------------------------------------- -------------------
</TABLE>
Last Amended: May 1, 2000
IN WITNESS WHEREOF, the parties hereto have caused this amended Schedule I
to be executed by their officers designated below as of the 1st day of May,
2000.
NATIONS ANNUITY TRUST
on behalf of the Portfolios
By: /s/ Richard H. Blank, Jr.
---------------------------------
Richard H. Blank, Jr.
Secretary and Treasurer
BANC OF AMERICA ADVISORS, INC.
(Formerly Nationsbanc Advisors, Inc.)
By: /s/ Robert H. Gordon
---------------------------------
Robert H. Gordon
President
-8-
SUB-ADVISORY AGREEMENT
NATIONS ANNUITY TRUST
THIS AGREEMENT is made as of this 25th day of February, 1998, by and among
NATIONSBANC ADVISORS, INC., a North Carolina corporation (the "Adviser"),
TRADESTREET INVESTMENT ASSOCIATES, INC., a Maryland corporation (the
"Sub-Adviser"), and NATIONS ANNUITY TRUST, a Delaware business trust (the
"Trust"), on behalf of those portfolios of the Trust now or hereafter identified
on Schedule I hereto (each a "Portfolio" and collectively, the "Portfolios").
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "Commission") as an open-end, management investment company
under the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Adviser is registered with the Commission under the
Investment Advisers Act of 1940, as amended (the "Advisers Act") as an
investment adviser;
WHEREAS, the Sub-Adviser also is registered with the Commission under the
Advisers Act as an investment adviser;
WHEREAS, the Adviser and the Trust have entered into an Investment
Advisory Agreement of even date herewith (the "Investment Advisory Agreement"),
pursuant to which the Adviser shall act as investment adviser with respect to
the Portfolios; and
WHEREAS, pursuant to such Investment Advisory Agreement, the Adviser, with
the approval of the Trust, wishes to retain the Sub-Adviser for purposes of
rendering advisory services to the Adviser and the Trust in connection with the
Portfolios upon the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
it is agreed between the parties hereto as follows:
1. APPOINTMENT OF SUB-ADVISER. The Adviser hereby appoints, and the Trust
hereby approves, the Sub-Adviser to render investment research and advisory
services to the Adviser and the Trust with respect to the Portfolios, under the
supervision of the Adviser and subject to the policies and control of the
Trust's Board of Trustees, and the Sub-Adviser hereby accepts such appointment,
all subject to the terms and conditions contained herein.
2. INVESTMENT SERVICES. Subject to the supervision of the Adviser and the
Trust's Board of Trustees, the Sub-Adviser will provide a continuous investment
program for each Portfolio, including investment research and management with
respect to all securities, investments, cash and cash equivalents in each
Portfolio. The Sub-Adviser will determine from time to time what securities and
other investments will be purchased, retained or sold by the Portfolios and will
place the daily orders for the purchase or sale of securities. The Sub-Adviser
-1-
<PAGE>
will provide the services rendered by it under this Agreement in accordance with
each Portfolio's investment objective, policies and restrictions as stated in
the Prospectus and votes of the Trust's Board of Trustees. The Sub-Adviser shall
provide such additional services related to the continuous investment program,
including recordkeeping services, as may reasonably be requested from time to
time by the Trust or the Adviser.
3. CONTROL BY BOARD OF TRUSTEES. As is the case with respect to the
Adviser under the Investment Advisory Agreement, any investment activities
undertaken by the Sub-Adviser pursuant to this Agreement, as well as any other
activities undertaken by the Sub-Adviser with respect to the Trust, shall at all
times be subject to any directives of the Board of Trustees of the Trust.
4. OTHER COVENANTS. In carrying out its obligations under this Agreement,
the Sub-Adviser agrees that it:
(a) will comply with all applicable Rules and Regulations of the
Commission and will in addition conduct its activities under this Agreement in
accordance with other applicable law, including but not limited to the 1940 Act
and the Advisers Act;
(b) will use the same skill and care in providing such services as
it uses in providing services to fiduciary accounts for which it has investment
responsibilities;
(c) will not make loans to any person to purchase or carry
Portfolio shares;
(d) will place orders pursuant to its investment determinations
for the Portfolios either directly with the issuer or with any broker or dealer.
Subject to the other provisions of this paragraph, in executing portfolio
transactions and selecting brokers or dealers, the Sub-Adviser will use its best
efforts to seek on behalf of each Portfolio the best overall terms available. In
assessing the best overall terms available for any transaction, the Sub-Adviser
shall consider all factors that it deems relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing basis.
In evaluating the best overall terms available, and in selecting the
broker/dealer to execute a particular transaction, the Sub-Adviser may also
consider the brokerage and research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934, as amended) provided to
the Portfolio(s) and/or other accounts over which the Sub-Adviser or an
affiliate of the Sub-Adviser exercises investment discretion. The Sub-Adviser is
authorized, subject to the prior approval of the Trust's Board of Trustees, to
pay to a broker or dealer who provides such brokerage and research services a
commission for executing a portfolio transaction for any Portfolio which is in
excess of the amount of commission another broker or dealer would have charged
for effecting that transaction if, but only if, the Sub-Adviser determines in
good faith that such commission was reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer, viewed in
terms of that particular transaction or in terms of the overall responsibilities
of the Sub-Adviser to the particular Portfolio and to the Trust. In addition,
the Sub-Adviser is authorized to take into account the sale of shares of the
Trust in allocating purchase and sale orders for portfolio securities to brokers
or dealers
-2-
<PAGE>
(including brokers and dealers that are affiliated with the Sub-Adviser or the
Trust's principal underwriter), provided that the Sub-Adviser believes that the
quality of the transaction and the commission are comparable to what they would
be with other qualified firms. In no instance, however, will portfolio
securities be purchased from or sold to the Sub-Adviser or the Trust's principal
underwriter for the Portfolios or an affiliated person of either acting as
principal or broker, except as permitted by the Commission or applicable law;
(e) will maintain a policy and practice of conducting its
investment advisory services hereunder independently of the commercial banking
operations of its affiliates. In making investment recommendations for a
Portfolio, its investment advisory personnel will not inquire or take into
consideration whether the issuer (or related supporting institution) of
securities proposed for purchase or sale for the Portfolio's account are
customers of the commercial departments of its affiliates. In dealing with
commercial customers, such commercial departments will not inquire or take into
consideration whether securities of those customers are held by the Portfolio;
and
(f) will treat confidentially, and as proprietary information of
the Trust, all records and other information relative to the Trust and prior,
present or potential shareholders, and will not 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, which approval shall not be unreasonably withheld and may not be withheld
and will be deemed granted where the Sub-Adviser may be exposed to civil or
criminal contempt proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities, or when so requested by the
Trust).
5. SERVICES NOT EXCLUSIVE. The services furnished by the Sub-Adviser
hereunder are deemed not to be exclusive, and the Sub-Adviser shall be free to
furnish similar services to others so long as its services under this Agreement
are not impaired thereby. To the extent that the purchase or sale of securities
or other investments of the same issuer may be deemed by the Sub-Adviser to be
suitable for two or more accounts managed by the Sub-Adviser, the available
securities or investments may be allocated in a manner believed by the
Sub-Adviser to be equitable to each account. It is recognized that in some cases
this procedure may adversely affect the price paid or received by a Portfolio or
the size of the position obtainable for or disposed of by a Portfolio.
6. BOOKS AND RECORDS. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Sub-Adviser hereby agrees that all records which it
maintains for each Portfolio are the property of the Trust and further agrees to
surrender promptly to the Adviser or the Trust any of such records upon request.
The Sub-Adviser further agrees to preserve for the periods prescribed by Rule
31a-2 under the 1940 Act the records required to be maintained by Rule 31a-1
under the 1940 Act.
7. EXPENSES. During the term of this Agreement, the Sub-Adviser will pay
all expenses incurred by it in connection with its activities under this
Agreement other than the cost of securities, commodities and other investments
(including brokerage commissions and other transaction charges, if any)
purchased or sold for the Portfolios. In addition, the Sub-Adviser
-3-
<PAGE>
acknowledges that the Adviser has agreed, pursuant to the Investment Advisory
Agreement, that, if the aggregate expenses borne by any Portfolio in any fiscal
year exceed the applicable expense limitations imposed by the securities
regulations of any state in which its shares are registered or qualified for
sale to the public, the Adviser together with the Portfolio's administrator(s)
shall reimburse such Portfolio for such excess in proportion to the fees
otherwise payable to them for such year. If, for any fiscal year of a Portfolio,
the amount of the aggregate advisory fee which the Trust would otherwise be
obligated to pay is reduced pursuant to expense limitation provisions of the
Investment Advisory Agreement, the fee which the Sub-Adviser would otherwise
receive pursuant to this Agreement shall be reduced proportionately.
8. COMPENSATION. For the services provided to each Portfolio and the
expenses assumed pursuant to this Agreement, the Adviser will pay the
Sub-Adviser and the Sub-Adviser will accept as full compensation therefor a fee
for that Portfolio determined in accordance with Schedule I attached hereto. The
Adviser and the Sub-Adviser may, from time to time, agree to reduce, limit or
waive the amounts payable hereunder with respect to one or more Portfolios for
such period or periods they deem advisable. It is understood that the Adviser
shall be responsible for the Sub-Adviser's fee for its services hereunder, and
the Sub-Adviser agrees that it shall have no claim against the Trust or the
Portfolio with respect to compensation under this Agreement.
9. LIABILITY OF SUB-ADVISER. The Sub-Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Adviser or
the Trust in connection with the performance of this Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the Sub-Adviser in the performance of
its duties, or from reckless disregard by it of its obligations and duties under
this Agreement.
10. DURATION AND TERMINATION. This Agreement shall become effective with
respect to a Portfolio when approved by the Trustees of the Trust, and shall
continue in effect for a period of two years from the date first written above.
This Agreement shall thereafter continue from year to year, provided that the
continuation of the Agreement is specifically approved at least annually:
(a) (i) by the Trust's Board of Trustees, or (ii) by 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) by the affirmative vote of a majority of the Trust's
Trustees who are not parties to this Agreement or "interested
persons" (as defined in the 1940 Act) of a party to this Agreement
(other than as Trustees of the Trust), by votes cast in person at
a meeting specifically called for such purpose.
Notwithstanding the foregoing, this Agreement may be terminated as to any
Portfolio at any time, without the payment of any penalty, by the Trust (by vote
of the Trust's Board of Trustees or by vote of a majority of the outstanding
voting securities of the particular Portfolio), or by the Sub-Adviser or Adviser
on sixty (60) days' written notice to the other parties to this Agreement.
-4-
<PAGE>
The notice provided for herein may be waived by the party entitled to receipt
thereof. This Agreement will immediately terminate in the event of its
assignment. As used in this Agreement, the terms "majority of the outstanding
voting securities," "interested persons" and "assignment" shall have the same
meanings as such terms have in the 1940 Act.
11. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. No amendment of this Agreement affecting a
Portfolio shall be effective until approved by vote of a majority of the
outstanding voting securities of such Portfolio. However, this shall not prevent
the Sub-Adviser from reducing, limiting or waiving its fee.
12. 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 the 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 State of Delaware and 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 must look solely to the property
belonging to such class for the enforcement of any claims against the Trust.
13. MISCELLANEOUS. 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. 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 and shall be
governed by Delaware law.
14. COUNTERPARTS. This Agreement may be executed in any manner of
counterparts, each of which shall be deemed an original.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
NATIONS ANNUITY TRUST
on behalf of the Portfolios
By: /s/ A. Max Walker
----------------------------------
A. Max Walker
President and Chairman of the
Board of Trustees
NATIONSBANC ADVISORS, INC.
By: /s/ Edward D. Bedard
-----------------------------------
Edward D. Bedard
Senior Vice President and Chief
Operating Officer
TRADESTREET INVESTMENT ASSOCIATES, INC.
By: /s/ Holly Deem
----------------------------------
Holly Deem
President
-6-
<PAGE>
SCHEDULE I
The Adviser shall pay the Sub-Adviser as full compensation for services
provided and expenses assumed hereunder a sub-advisory fee for each Portfolio,
computed daily and payable monthly at the annual rates listed below as a
percentage of the average daily net assets of the Portfolio:
<TABLE>
<CAPTION>
------------------------------------------------------------------------- -------------------
RATE OF
PORTFOLIO COMPENSATION
--------- ------------
------------------------------------------------------------------------- -------------------
<S> <C>
Nations Balanced Assets Portfolio 0.25%
------------------------------------------------------------------------- -------------------
Nations Aggressive Growth Portfolio 0.25%
------------------------------------------------------------------------- -------------------
Nations Managed Index Portfolio 0.10%
------------------------------------------------------------------------- -------------------
Nations SmallCap Index Portfolio 0.10%
------------------------------------------------------------------------- -------------------
Nations Value Portfolio 0.25%
------------------------------------------------------------------------- -------------------
</TABLE>
Last Amended: May 1, 2000
IN WITNESS WHEREOF, the parties hereto have caused this amended Schedule I
to be executed by their officers designated below as of the 1st day of May,
2000.
NATIONS ANNUITY TRUST
on behalf of the Portfolios
By: /s/ Richard H. Blank, Jr.
---------------------------------
Richard H. Blank, Jr.
Secretary and Treasurer
BANC OF AMERICA CAPITAL
MANAGEMENT (Formerly, TradeStreet
Investment Associates, Inc.)
By: /s/ Michael Keneally
---------------------------------
Michael Keneally
President
BANC OF AMERICA ADVISORS, INC.
(Formerly, NationsBanc Advisors, Inc.)
By: /s/ Robert H. Gordon
---------------------------------
Robert H. Gordon
President
-7-
INTERIM SUB-ADVISORY AGREEMENT
NATIONS ANNUITY TRUST
THIS AGREEMENT is made as of March 6, 2000, by and among BANC OF AMERICA
ADVISORS, INC. (formerly NationsBanc Advisors, Inc.), a North Carolina
corporation (the "Adviser"), GARTMORE GLOBAL PARTNERS, a general partnership
organized under the laws of the State of Delaware (the "Sub-Adviser"), and
NATIONS ANNUITY TRUST, a Delaware business trust, (the "Trust") on behalf of the
portfolio or portfolios of the Trust as now or hereafter may be identified on
Schedule I hereto (each a "Portfolio" and collectively, the "Portfolios").
RECITALS
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "Commission") as an open-end management investment company under
the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Adviser is registered with the Commission under the
Investment Advisers Act of 1940, as amended (the "Advisers Act") as an
investment adviser;
WHEREAS, the Sub-Adviser is also registered with the Commission under the
Advisers Act as an investment adviser and is regulated by the Investment
Management Regulatory Organization Limited ("IMRO") of the United Kingdom in the
conduct of its investment business and is a member of IMRO;
WHEREAS, the Adviser and the Trust have entered into an Investment
Advisory Agreement of even date herewith (the "Investment Advisory Agreement"),
pursuant to which the Adviser shall act as investment adviser with respect to
the Portfolios; and
WHEREAS, pursuant to such Investment Advisory Agreement, the Adviser, with
the approval of the Trust, wishes to retain the Sub-Adviser for purposes of
rendering advisory services to the Adviser and the Trust in connection with the
Portfolios upon the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt whereof is
hereby acknowledged, the parties hereto agree as follows:
1. APPOINTMENT OF SUB-ADVISER. The Adviser hereby appoints, and the Trust
hereby approves, the Sub-Adviser to render investment research and advisory
services to the Adviser and the Trust with respect to the Portfolios, under the
supervision of the Adviser and subject to the policies and control of the
Trust's Board of Trustees, and the Sub-Adviser hereby accepts such appointment,
all subject to the terms and conditions contained herein.
2. INVESTMENT SERVICES. The specific duties of the Adviser delegated to
the Sub-Adviser shall be the following:
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<PAGE>
(a) obtaining and evaluating pertinent information about significant
developments and economic, statistical and financial data, domestic, foreign or
otherwise, whether affecting the economy generally or the Portfolios
specifically, and whether concerning the individual issuers whose securities are
included in the Portfolios or the activities in which such issuers engage, or
with respect to securities which the Adviser or Sub-Adviser considers desirable
for inclusion in the Portfolios;
(b) investing and reinvesting, on an ongoing basis, assets held in the
Portfolios in strict accordance with the investment policies of the Portfolios
as set forth in the registration statement of the Trust with respect to the
Portfolios, as the same may be amended from time to time;
(c) in accordance with policies and procedures established by the Board of
Trustees of the Trust and the Adviser, selecting brokers and dealers to execute
portfolio transactions for the Portfolios and selecting the markets on or in
which the transactions will be executed;
(d) voting, either in person or by general or limited proxy, or refraining
from voting, any securities held in the Portfolios for any purposes; exercising
or selling any subscription or conversion rights; consenting to and joining in
or opposing any voting trusts, reorganizations, consolidations, mergers,
foreclosures and liquidations and in connection therewith, depositing
securities, and accepting and holding other property received therefor, all as
may be considered appropriate by the Sub-Adviser; and
(e) performing other acts necessary or appropriate in connection with the
proper management of the Portfolios, consistent with its obligations hereunder,
and as may be directed by the Adviser and/or the Trust's Board of Trustees.
In carrying out its obligations under clauses (b) to (e), inclusive, of
this Paragraph 2, the Sub-Adviser shall act only as agent of the Trust and/or
the Portfolio and shall not act as principal. The Sub-Adviser shall not be
responsible for the administration of the Portfolio, for the execution and
settlement of transactions in securities or derivative instruments nor for the
custody of any such securities or instruments or documents of title and the
Sub-Adviser shall not hold any money or other assets of the Portfolio or the
Trust.
3. CONTROL BY BOARD OF TRUSTEES. As is the case with respect to the
Adviser under the Investment Advisory Agreement, any investment activities
undertaken by the Sub-Adviser pursuant to this Agreement, as well as any other
activities undertaken by the Sub-Adviser with respect to the Portfolios, shall
at all times be subject to any directives of the Board of Trustees of the Trust.
Without limiting the right of the Board of Trustees of the Trust to issue
directives, the Board of Trustees shall take into consideration any views or
opinions that may be expressed by the Adviser or Sub-Adviser in formulating
policies, procedures and directives. The Sub-Adviser shall not be obligated to
conform its activities to any directive of the Board of Trustees of the Trust to
the extent that compliance with such directive would be in contravention of any
law, rule or regulation applicable to the Sub-Adviser.
2
<PAGE>
4. COMPLIANCE WITH APPLICABLE REQUIREMENTS. In carrying out its
obligations under this Agreement, the Sub-Adviser shall at all times conform to:
(a) all applicable provisions of the 1940 Act and any rules and
regulations adopted thereunder;
(b) the provisions of the registration statement of the Trust
applicable to the Portfolios, as the same may be amended from time to
time, under the Securities Act of 1933, as amended (the "1933 Act") and
the 1940 Act;
(c) the Conduct of Business Rules of IMRO ("IMRO Rules") to the
extent that the IMRO Rules are not inconsistent with any applicable
requirements under the 1940 Act, the Advisers Act or other United States
federal or state law; and
(d) such policies and procedures that may be established by the
Board of Trustees of the Trust and communicated to the Sub-Adviser from
time to time.
In addition, any code of ethics adopted by the Sub-Adviser pursuant to
Rule 17j-1 under the 1940 Act shall include policies, prohibitions and
procedures which substantially conform to the recommendations regarding personal
investing approved by the Board of Governors of the Investment Company Institute
on June 30, 1994, as such recommendations may amended from time to time.
5. COMPENSATION. The Adviser shall pay the Sub-Adviser, as compensation
for services rendered hereunder, fees, payable monthly, at the annual rates
indicated on Schedule I hereto, as such Schedule may be supplemented and amended
from time to time. It is understood that the Adviser shall be responsible for
the Sub-Adviser's fee for its services hereunder, and the Sub-Adviser agrees
that it shall have no claim against the Trust or the Portfolio with respect to
compensation under this Agreement. The Sub-Adviser's fees shall be pro-rated for
portions of months in which sub-advisory services are provided.
The average daily net asset value of the Portfolios shall be determined in
the manner set forth in the Declaration of Trust and registration statement of
the Trust, as amended from time to time.
6. ESCROW OF FEES. During the period of time commencing on the effective
date of the Agreement, and continuing until the earlier of: (a) such time as an
investment sub-advisory agreement among the Adviser, Gartmore Global Partners
and Nations Annuity Trust is approved by a majority of the outstanding voting
securities of the Portfolio (the "New Investment Sub-Advisory Agreement"); or
(b) the 150th day following the termination of the investment sub-advisory
agreement dated February 25, 1998 among NationsBanc Advisors, Inc., Gartmore
Global Partners and Nations Annuity Trust (the "Prior Investment Sub-Advisory
Agreement"), the fees payable to the Sub-Adviser under the Agreement shall be
paid into an interest-bearing escrow account (the "Account") which shall be
maintained by an escrow agent. Such escrow agent shall be the custodian to the
Portfolios or another bank that shall not be an affiliated party (as defined in
3
<PAGE>
the 1940 Act) of any of the parties hereto. All amounts paid into the Account
(including interest earned on such moneys) may be paid to the Sub-Adviser only
upon the approval, by a majority of the outstanding voting securities of the
Portfolio (as defined in the 1940 Act), of the New Investment Sub-Advisory
Agreement. In the event that the shareholders of the Portfolio fail to approve
the New Investment Sub-Advisory Agreement prior to the earlier of the date
specified in subpart (b) above, all moneys in the Account shall be paid to the
Portfolio less any amounts to be paid to the Sub-Advisor which shall be the
lesser of: (1) any costs incurred in performing the Agreement (plus interest
earned on such amount); or (2) the total amount of moneys in the Account (plus
interest earned). All parties hereto expressly acknowledge that the escrow agent
may release the moneys in the Account only upon receipt of a certificate from an
officer of the Trust (who shall not be an interested person of the Sub-Adviser
(as defined in the 1940 Act) stating that the moneys are to be delivered to the
Sub-Adviser and that the New Investment Sub-Advisory Agreement has been approved
by a majority of the outstanding voting securities of the Portfolio (as defined
in the 1940 Act) or, in the event that the shareholders of the Portfolio failed
to approve the New Investment Sub-Advisory Agreement prior to the earlier of the
date specified in subpart (b) above, that the moneys in the Account are to be
delivered to the Portfolio.
7. EXPENSES OF THE PORTFOLIOS. All of the ordinary business expenses
incurred by the Sub-Adviser in the operations of the Portfolios and the offering
of their shares shall be borne by the Portfolios unless specifically provided
otherwise in this Agreement. These expenses borne by the Portfolios include but
are not limited to brokerage commissions, taxes, legal, auditing, or
governmental fees, the cost of preparing share certificates, custodian, transfer
agent and shareholder service agent costs, expenses of issue, sale, redemption
and repurchase of shares, Trustee and shareholder meetings, the cost of
preparing and distributing reports and notices to shareholders, the fees and
other expenses incurred by the Portfolios in connection with membership in
investment company organizations and the cost of printing copies of prospectuses
and statements of additional information distributed to the Portfolios'
shareholders.
8. EXPENSE LIMITATION. If, for any fiscal year of a Portfolio, the amount
of the aggregate advisory fee which the Trust would otherwise be obligated to
pay with respect to the Portfolio is reduced pursuant to expense limitation
provisions of the Investment Advisory Agreement, the fee which the Sub-Adviser
would otherwise receive pursuant to this Agreement shall be reduced
proportionately.
9. NON-EXCLUSIVITY. The services of the Sub-Adviser to the Adviser and the
Trust with respect to the Portfolio are not to be deemed to be exclusive, and
the Sub-Adviser shall be free to render investment advisory and administrative
or other services to others (including other investment companies) and to engage
in other activities. It is understood and agreed that the officers and directors
of the Sub-Adviser are not prohibited from engaging in any other business
activity or from rendering services to any other person, or from serving as
partners, officers, directors or trustees of any other firm or trust, including
other investment advisory companies.
10. RECORDS. The Sub-Adviser shall provide to the Adviser, with respect to
the orders the Sub-Adviser places for the purchases and sales of portfolio
securities of the Portfolios, the documents and records required pursuant to
Rule 31a-1 under the 1940 Act as well as such records as the Portfolios'
administrator(s) reasonably request to be maintained, including, but not limited
to, trade tickets and confirmations for portfolio trades. All such records shall
be maintained in a form acceptable to the Portfolios and in compliance with the
provisions of Rule 31a-1. All such records will be the property of the
Portfolios and will be available for
4
<PAGE>
inspection and use by the Portfolios. The Sub-Adviser will promptly notify the
Adviser and the Portfolios' administrator(s) if it experiences any difficulty in
providing the records in an accurate and complete manner.
11. TERM AND APPROVAL. This Agreement shall become effective upon the
termination date of the Prior Investment Sub-Advisory Agreement, and shall
continue in effect until the earlier of: (a) such time as the New Investment
Sub-Advisory Agreement is approved by a majority of the outstanding voting
securities of the Portfolio; or (b) the 150th day following the termination of
the Prior Investment Sub-Advisory Agreement.
12. TERMINATION. This Agreement may be terminated at any time with respect
to a Portfolio, without the payment of any penalty, by vote of the Trust's Board
of Trustees or by vote of a majority of the Portfolio's outstanding voting
securities on not more than ten (10) calendar days' written notice to the other
parties to this Agreement, or by the Adviser, or by the Sub-Adviser on sixty
(60) days' written notice to the other parties to this Agreement. Any party
entitled to notice may waive the notice provided for herein. This Agreement
shall automatically terminate in the event of its assignment, the term
"assignment" for purposes of this paragraph having the meaning defined in
Section 2(a)(4) of the 1940 Act.
13. LIABILITY OF SUB-ADVISER. In the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of obligations or duties hereunder
on the part of the Sub-Adviser or any of its officers, directors, employees or
agents, the Sub-Adviser shall not be subject to liability to the Adviser or to
the Trust for any act or omission in the course of, or connected with, rendering
services hereunder or for any losses that may be sustained in the purchase,
holding or sale of any security (including derivatives). For purposes of this
paragraph and paragraph 13, brokers or dealers selected to execute portfolio
transactions for the Portfolios in accordance with Paragraph 2(c) hereof shall
not be considered agents of the Sub-Adviser.
14. INDEMNIFICATION. In the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of duties hereunder on the part of the
Sub-Adviser, or any officers, directors, employees or agents thereof, the Trust
hereby agrees to indemnify and hold harmless the Sub-Adviser against all claims,
actions, suits or proceedings at law or in equity whether brought by a private
party or a governmental department, commission, board, bureau, agency or
instrumentality of any kind: (a) arising from the advertising, solicitation,
sale, purchase or pledge of securities, whether of the Portfolios or other
securities, undertaken by the Portfolios or the Trust's officers, Trustees,
employees, agents or affiliates, or (b) resulting from any violations of the
securities laws, rules, regulations, statutes and codes, whether federal or of
any state, by the Portfolios, or the Trust's officers, Trustees, employees or
affiliates.
15. NOTICES. Any notices under this Agreement shall be in writing and
shall be duly given if delivered, mailed (postage prepaid, effective upon
receipt) or telegraphed, telexed or transmitted by similar telecommunications
device (effective upon completion of transmission, with a confirming copy
delivered or mailed postage prepaid) to such address or number as may be
designated for the receipt of such notice, with a copy to the Trust. Until
further notice, it is agreed that the address and telefax number of the Trust
shall be 111 Center Street, Little Rock, Arkansas 72201, Fax No. (501) 377-2331;
that of Sub-Adviser and the Adviser respectively shall be One NationsBank Plaza,
Charlotte, North Carolina 28255, Fax No. (704) 388-2187.
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<PAGE>
16. QUESTIONS OF INTERPRETATION. Any question of interpretation of any
term or provision of this Agreement having a counterpart in or otherwise derived
from a term or provision of the 1940 Act shall be resolved by reference to such
term or provision of the 1940 Act and to interpretations thereof, if any, by the
United States courts or in the absence of any controlling decision of any such
court, by rules, regulations or orders of the Commission issued pursuant to the
1940 Act. In addition, where the effect of a requirement of the 1940 Act
reflected in any provision of this Agreement is revised by rule, regulation or
order of the Commission, such provision shall be deemed to incorporate the
effect of such rule, regulation or order.
17. IMRO RULES. Addendum A attached hereto sets forth certain requirements
under the IMRO Rules which are applicable to the Sub-Adviser, that are expressly
incorporated herein and made a part hereof, but only to the extent that such
requirements are not inconsistent with any applicable requirements under the
1940 Act, the Advisers Act or other United States Federal or state law.
18. COUNTERPARTS. This Agreement may be executed in any manner of
counterparts, each of which shall be deemed an original.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in triplicate by their respective officers on the day and year first
written above.
NATIONS ANNUITY TRUST,
on behalf of the Portfolios
By: A. Max Walker
--------------------------------
President and Chairman of the
Board of Trustees
BANC OF AMERICA ADVISORS, INC.
By:
--------------------------------
Robert H. Gordon
President
GARTMORE GLOBAL PARTNERS
By:
-------------------------------
Name:
Title:
7
<PAGE>
SCHEDULE I
The Trust shall pay the Sub-Adviser as full compensation for services
provided and expenses assumed hereunder a sub-advisory fee for each Portfolio,
computed daily and payable monthly at the annual rates listed below as a
percentage of the average daily net assets of the Portfolio:
<TABLE>
<CAPTION>
<S> <C>
RATE OF
PORTFOLIO COMPENSATION
--------- ------------
Nations International Growth Portfolio 0.70%
Approved: March 2, 2000
</TABLE>
<PAGE>
ADDENDUM A
1. For the purposes of this Agreement, the Trust, the Portfolios and the
Adviser shall each be regarded as a Non-Private Customer under IMRO
Rules.
2. To the extent that the Sub-Adviser receives any commissions or other
forms of remuneration, directly or indirectly, in connection with
portfolio transactions, no portion of the Sub-Adviser's accrued
investment advisory fee shall be abated thereby.
3. Subject to the supervision of the Adviser and the policies and ultimate
control of the Trust's Board of Trustees, the Sub-Adviser shall advise
the Trust and the Adviser on the management of the Portfolios'
investments in accordance with the terms of this Agreement and in
accordance with the investment parameters (including, inter alia,
percentage limitations, quality standards, investment selection criteria
and types of permissible investments and investment techniques, such as
borrowing, options and futures transactions, portfolio securities
lending, etc.) established pursuant to the investment objectives,
policies and restrictions specifically embodied in the Trust's
Registration Statement on Form N-1A, and any amendments thereto, under
the 1933 Act and the 1940 Act (the "Trust's Registration Statement").
4. The Sub-Adviser shall not have or maintain custody of any securities,
cash or other assets of the Portfolios. Custody of the Portfolios' assets
will be maintained by the custodian bank pursuant to an agreement
approved by the Trust's Board of Trustees. It is expected that such
custodian, or any successor thereto, will not be an "Associate" of the
Sub-Adviser as that term is defined under IMRO Rules.
5. In the event the Portfolios or the Adviser have a significant complaint
regarding the services provided by the Sub-Adviser under the Sub-Advisory
Agreement by and among the Trust, the Adviser and the Sub-Adviser, a
Portfolio officer should communicate such complaint to the Sub-Adviser,
whereupon such complaint will be recorded on a standard form prepared by
the Sub-Adviser for such purposes. The Sub-Adviser's complaints procedure
requires that if a complaint has not been cleared within twenty-eight
(28) days, the Sub-Adviser must so advise IMRO and the Portfolios also
must be advised that they have the right to issue the complaint directly
with a referee appointed by IMRO. A statement describing rights to
compensation in the event of the Sub-Advisers' inability to meet any
liabilities to the Trust or the Adviser will be made available on
request.
6. The Sub-Adviser will provide to the Trust's Board of Trustees written
financial reports and analyses on the Portfolios' securities transactions
and the operations of comparable investment companies on a quarterly
basis or more frequently as reasonably requested by the Board of
Trustees. Such reports and analyses shall include information as at the
last day of an applicable reporting period.
7. The Portfolios may from time to time request or instruct the Sub-Adviser,
directly or through the Adviser, to act or not to act regarding certain
portfolio-related investments and/or operational matters. Such request or
instructions will be communicated orally or in writing to the
Sub-Adviser, directly or through the Adviser and will be acknowledged in
<PAGE>
the same manner in which they are communicated. To the extent that a
particular request or instruction is, or may be, refused (i.e., because
it: (a) is in contravention of (i) a law or regulation, (ii) an
investment policy of the Portfolio, or (iii) a provision of this
Agreement; or (b) is not operationally feasible), such refusal shall be
communicated by the Sub-Adviser, including through the Adviser, and the
Portfolio and the Sub-Adviser, upon advice of counsel, shall discuss
alternatives and determine an appropriate course of action which will be
reported to the full Board at the next meeting of the Trust's Board of
Trustees for its approval.
8. Notwithstanding that all required disclosure concerning the risks
associated with the Portfolios' permissible investments and investment
techniques is included in the Trust's Registration Statement, which
Statement is intended for review by the investors in the Portfolios and
to be retained by them for future reference, with respect to the
Portfolios' specified use of options and futures transactions, particular
attention is drawn to the risk warnings set out in the Annex-Risk Warning
which receipt of is acknowledged by the Trust and the Adviser. However,
nothing stated therein shall be interpreted to modify any provision of
this Agreement.
9. Except as permitted by or pursuant to Section 17 of the 1940 Act and the
Rules promulgated thereunder, the Sub-Adviser, or an "affiliate" thereof
(as that term is defined in the 1940 Act), may not effect transactions:
(i) with or for the Portfolios in which the Sub-Adviser or such affiliate
has directly or indirectly a material interest or a relationship of any
kind with another party which may involve a conflict with the
Sub-Adviser's responsibilities to the Portfolios as a sub-investment
sub-adviser; or (ii) with or through the agency or another person with
whom the Sub-Adviser or such affiliate maintains an arrangement as
described in Rule 1.7(l) of Chapter II of the IMRO Rules.
10. Upon termination of the Sub-Advisory Agreement by and among the Trust,
the Adviser and the Sub-Adviser, unless otherwise directed by the Trust's
Board of Trustees, all securities positions and other portfolio
transactions then in progress shall be transferred to the successor
investment adviser selected by the Board of Trustees. Such termination
shall be without prejudice to the completion of any transactions in
securities already initiated for the Portfolio.
11. The Sub-Adviser shall be entitled at its discretion to disclose any
information known to it relating to the Portfolio's business or affairs
to the Financial Services Authority or to IMRO on the terms that the
information so disclosed shall not without its consent be further
disclosed otherwise than is permitted in respect of Restricted
Information under the provisions of Part VIII of the Financial Services
Act of 1986.
12. The Sub-Adviser shall be entitled at its discretion to disclose the
identity of the Trust and the Portfolio(s) as may be appropriately
required by Counterparties to transactions properly involving the
Portfolios.
2
DISTRIBUTION AGREEMENT
NATIONS ANNUITY TRUST
Stephens Inc.
111 Center Street
Little Rock, Arkansas 72201
Gentlemen:
This is to confirm that, in consideration of the agreements
hereinafter contained, the undersigned, Nations Annuity Trust (the "Trust"), a
Delaware business trust, has agreed that Stephens Inc. (the "Distributor") shall
be, for the period of this Agreement, the exclusive distributor of the shares of
common stock in all classes of shares ("Shares") of the investment portfolios of
the Trust listed on Schedule I (individually, a "Portfolio" and collectively the
"Portfolios"). Absent written notification to the contrary by either the Trust
or the Distributor, each new investment portfolio established in the future
shall automatically become a "Portfolio" for all purposes hereunder and shares
of each new class established in the future shall automatically become "Shares"
for all purposes hereunder as if set forth on Schedule I.
1. SERVICES AS DISTRIBUTOR.
------------------------
1.1 The Distributor will act as agent for the distribution of
Shares in accordance with the instructions of the Trust's Board of Trustees and
the Trust's registration statement and prospectus then in effect under the
Securities Act of 1933, as amended (the "1933 Act"), and will transmit promptly
any orders received by it for the purchase or redemption of Shares to the Trust
or its transfer agent.
1.2 The Distributor agrees to use appropriate efforts to solicit
orders for the sale of Shares and will undertake such advertising and promotion
as it believes appropriate in connection with such solicitation. The Trust
understands that the Distributor is and may in the future be the distributor of
shares of other investment company portfolios including portfolios having
investment objectives similar to those of the Portfolios. The Trust further
understands that existing and future investors in the Portfolios may invest in
shares of such other portfolios. The Trust agrees that the Distributor's duties
to such portfolios shall not be deemed in conflict with its duties to the Trust
under this paragraph 1.2.
1.3 The Distributor shall, at its own expense, finance such
activities as it deems reasonable and which are primarily intended to result in
the sale of Shares, including, but not limited to, advertising, compensation of
underwriters, dealers and sales personnel, the printing and mailing of
prospectuses to other than current shareholders, and the printing and mailing of
sales literature. The Distributor shall be responsible for reviewing and
providing advice and counsel on all sales literature (E.G., advertisements,
brochures and shareholder communications) with respect to each of the
Portfolios. In addition, the Distributor will provide one or more
1
<PAGE>
persons, during normal business hours, to respond to telephone questions with
respect to the Portfolios.
1.4 All activities by the Distributor and its agents and employees
as distributor of Shares shall comply with all applicable laws, rules and
regulations, including, without limitation, all rules and regulations made or
adopted pursuant to the Investment Company Act of 1940, as amended (the "1940
Act") by the Securities and Exchange Commission (the "SEC") or any securities
association registered under the Securities Exchange Act of 1934, as amended.
1.5 Whenever in their judgment such action is warranted by unusual
market, economic or political conditions, or by other circumstances of any kind,
the Trust's officers may decline to accept any orders for, or make any sales of
Shares until such time as those officers deem it advisable to accept such orders
and to make such sales.
1.6 The Trust agrees at its own expense to execute any and all
documents and to furnish any and all information and otherwise to take all
actions that may be reasonably necessary in connection with the registration or
qualification of Shares for sale in such states as the Distributor may designate
to the Trust and the Trust may approve, and the Trust shall pay all fees and
other expenses incurred in connection with such registration or qualification.
1.7 The Trust shall furnish from time to time, for use in
connection with the sale of Shares, such information with respect to the
Portfolios and Shares as the Distributor may reasonably request; and the Trust
warrants that the statements contained in any such information shall fairly show
or represent what they purport to show or represent. The Trust shall also
furnish the Distributor upon request with: (a) audited annual and unaudited
semi-annual statements of the Trust's books and accounts with respect to each
Portfolio, and (b) from time to time such additional information regarding the
Portfolios' financial condition as the Distributor may reasonably request.
1.8 The Distributor may be reimbursed for all or a portion of the
expenses described above to the extent permitted by a distribution plan adopted
by the Trust on behalf of a Portfolio pursuant to Rule 12b-1 under the 1940 Act.
No provision of this Agreement shall be deemed to prohibit any payments by a
Portfolio to the Distributor or by a Portfolio or the Distributor to investment
dealers, banks or other financial institutions through whom shares of the
Portfolio are sold where such payments are made under a distribution plan
adopted by the Trust on behalf of such Portfolio pursuant to Rule 12b-1 under
the 1940 Act. In addition, the Distributor shall be entitled to retain any
front-end sales charge imposed upon the sale of the Shares (and reallow a
portion thereof) as specified in the Trust's registration statement and the
Trust shall pay to the Distributor the proceeds from any contingent deferred
sales charge imposed on the redemption of the shares as specified in the Trust's
registration statement.
1.9 The Distributor will execute and deliver agreements with
broker/dealers, financial institutions and other industry professionals based on
the forms attached hereto or based on the additional forms of agreement approved
from time to time by the Trust's Board of Trustees with respect to the various
classes of shares of the Portfolios, including but not limited
2
<PAGE>
to forms of sales support agreements approved in connection with a distribution
approved in accordance with Rule 12b-1 under the 1940 Act.
2. REPRESENTATIONS; INDEMNIFICATION.
---------------------------------
2.1 The Trust represents to the Distributor that all registration
statements and prospectuses filed by the Trust with the SEC under the 1933 Act,
with respect to Shares have been prepared in conformity with the requirements of
the 1933 Act and rules and regulations of the SEC thereunder. As used in this
Agreement, the terms "registration statement" and "prospectus" shall mean any
registration statement and then current prospectus (together with any related
then current statement of additional information) filed with the SEC with
respect to Shares, and any amendments and supplements thereto which at any time
shall have been filed therewith. The Trust represents and warrants to the
Distributor that any registration statement and prospectus, when such
registration statement becomes effective, will contain all statements required
to be stated therein in conformity with the 1933 Act and the rules and
regulations of the SEC; that all statements of fact contained in any such
registration statement and prospectus will be true and correct when such
registration statement and prospectus become effective; and that neither any
registration statement nor any prospectus when any registration statement
becomes effective will include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading to a purchaser of Shares. The Trust may, but
shall not be obligated to, propose from time to time such amendment or
amendments to any registration statement and such supplement or supplements to
any prospectus which in light of future developments, may, in the opinion of the
Trust's counsel, be necessary or advisable. The Trust shall promptly notify the
Distributor of any advice given to it by the Trust's counsel regarding the
necessity or advisability so to amend or supplement such registration statement
or prospectus. If the Trust shall not propose such amendment or amendments
and/or supplement or supplements within fifteen days after receipt by the Trust
of a written request from the Distributor to do so, the Distributor may, at its
option, terminate this Agreement. The Trust shall not file any amendment to any
registration statement or supplement to any prospectus without giving the
Distributor reasonable notice thereof in advance; provided, however, that
nothing contained in this Agreement shall in any way limit the Trust's right to
file at any time such amendments to any registration statement and/or
supplements to any prospectus, of whatever character, as the Trust may deem
advisable, such right being in all respects absolute and unconditional.
2.2 The Trust authorizes the Distributor and dealers to use any
prospectus in the form furnished from time to time in connection with the sale
of Shares and represented by the Trust as being the then current form of
prospectus. The Trust agrees to indemnify, defend and hold the Distributor, its
several officers and directors, and any person who controls the Distributor
within the meaning of Section 15 of the 1933 Act free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers and directors, or any such controlling person, may incur under the 1933
Act or under common law or otherwise, arising out of or based upon any untrue
statement, or alleged untrue statement, of a material fact contained in any
registration statement or any prospectus or arising out of or based upon any
omission, or alleged omission, to
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state a material fact required to be stated in any registration statement or
prospectus or necessary to make any statement in such documents not misleading;
PROVIDED, HOWEVER, that the Trust's agreement to indemnify the Distributor, its
officers or directors, and any such controlling person shall not be deemed to
cover any claims, demands, liabilities or expenses arising out of any untrue
statement or alleged untrue statement or omission or alleged omission made in
any registration statement or prospectus or in any financial or other statements
in reliance upon and in conformity with any information furnished to the Trust
by the Distributor or any affiliate thereof and used in the preparation thereof;
and FURTHER PROVIDED that the Trust's agreement to indemnify the Distributor and
the Trust's representations and warranties herein set forth shall not be deemed
to cover any liability to the Trust or its shareholders to which the Distributor
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of the Distributor's
reckless disregard of its obligations and duties under this Agreement. The
Trust's agreement to indemnify the Distributor, its officers and directors, and
any such controlling person, as aforesaid, is expressly conditioned upon the
Trust's being notified of any action brought against the Distributor, its
officers or directors, or any such controlling person, such notification to be
given by letter or by telegram or transmitted by similar telecommunications
device, addressed to the Trust at its principal office and sent to the Trust by
the person against whom such action is brought, within a reasonable period of
time after the summons or other first legal process shall have been served. The
failure to so notify the Trust of any such action shall not relieve the Trust
from any liability which the Trust may have to the person against whom such
action is brought by reason of any such untrue, or allegedly untrue, statement
or omission, or alleged omission, otherwise than on account of the Trust's
indemnity agreement contained in this paragraph 2.2. The Trust will be entitled
to assume the defense of any suit brought to enforce any such claim, demand or
liability, but, in such case, such defense shall be conducted by counsel of good
standing chosen by the Trust and approved by the Distributor, which approval
shall not unreasonably be withheld. In the event the Trust elects to assume the
defense of any such suit and retain counsel of good standing approved by the
Distributor, the defendant or defendants in such suit shall bear the fees and
expenses of any additional counsel retained by any of them; but in case the
Trust does not elect to assume the defense of any such suit, or in case the
Distributor reasonably does not approve of counsel chosen by the Trust, the
Trust will reimburse the Distributor, its officers and directors, or the
controlling person or persons named as defendant or defendants in such suit, for
the fees and expenses of any counsel retained by the Distributor or them. The
Trust's indemnification agreement contained in this paragraph 2.2 and the
Trust's representations and warranties in this Agreement shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of the Distributor, its officers and directors, or any controlling
person, and shall survive the delivery of any Shares. This agreement of
indemnity will inure exclusively to the Distributor's benefit, to the benefit of
its several officers and directors, and their respective estates, and to the
benefit of the controlling persons and their successors. The Trust agrees
promptly to notify the Distributor of the commencement of any litigation or
proceedings against the Trust or any of its officers or Trustees in connection
with the issue and sale of any Shares.
2.3 The Distributor agrees to indemnify, defend and hold the
Trust, its several officers and Trustees, and any person who controls the Trust
within the meaning of Section 15 of the 1933 Act free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
costs of investigation or defending such claims, demands or liabilities
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and any counsel fees incurred in connection therewith) which the Trust, its
officers or Trustees or any such controlling person, may incur under the 1933
Act or under common law or otherwise, but only to the extent that such liability
or expense incurred by the Trust, its officers or Trustees, or such controlling
person resulting from such claims or demands, shall arise out of or be based
upon any untrue, or alleged untrue, statement of a material fact contained in
information furnished by the Distributor or any affiliate thereof to the Trust
or its counsel and used in the Trust's registration statement or corresponding
statements made in the prospectus, or shall arise out of or be based upon any
omission, or alleged omission, to state a material fact in connection with such
information furnished by the Distributor or any affiliate thereof to the Trust
or its counsel required to be stated in such answers or necessary to make such
information not misleading. The Distributor's agreement to indemnify the Trust,
its officers and Trustees, and any such controlling person, as aforesaid, is
expressly conditioned upon the Distributor's being notified of any action
brought against the Trust, its officers or Trustees, or any such controlling
person, such notification to be given by letter or telegram addressed to the
Distributor at its principal office in Little Rock, Arkansas and sent to the
Distributor by the person against whom such action is brought, within a
reasonable period of time after the summons or other first legal process shall
have been served. The Distributor shall have the right to control the defense of
such action, with counsel of its own choosing, satisfactory to the Trust, if
such action is based solely upon such alleged misstatement or omission on the
Distributor's part or any affiliate thereof, and in any other event the Trust,
its officers or Trustees or such controlling person shall each have the right to
participate in the defense or preparation of the defense of any such action. The
failure so to notify the Distributor of any such action shall not relieve the
Distributor or any affiliate thereof from any liability which the Distributor or
any affiliate thereof may have to the Trust, its officers or Trustees, or to
such controlling person by reason of any such untrue or alleged untrue
statement, or omission or alleged omission, otherwise than on account of the
Distributor's indemnity agreement contained in this paragraph 2.3.
2.4 No Shares shall be offered by either the Distributor or the
Trust under any of the provisions of this Agreement and no orders for the
purchase or sale of Shares hereunder shall be accepted by the Trust if and so
long as the effectiveness of the registration statement then in effect or any
necessary amendments thereto shall be suspended under any of the provisions of
the 1933 Act, or if and so long as a current prospectus, as required by Section
10(b) of the 1933 Act is not on file with the SEC; provided, however, that
nothing contained in this paragraph 2.4 shall in any way restrict or have any
application to or bearing upon the Trust's obligation to repurchase Shares from
any shareholder in accordance with the provisions of the Trust's prospectus or
Declaration of Trust.
2.5 The Trust agrees to advise the Distributor as soon as
reasonably practical:
(a) of any request by the SEC for amendments to the
registration statement or prospectus then in effect;
(b) of the issuance by the SEC of any stop order suspending
the effectiveness of the registration statement or prospectus then in effect or
of the initiation of any proceeding for that purpose;
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(c) of the happening of any event that makes untrue any
statement of a material fact made in the registration statement or prospectus
then in effect or which requires the making of a change in such registration
statement or prospectus in order to make the statements therein not misleading;
(d) of all actions of the SEC with respect to any amendment to
any registration statement or prospectus which may from time to time be filed
with the SEC; and
(e) if a current prospectus is not on file with the SEC.
For purposes of this section, informal requests by or acts of the
staff of the SEC shall not be deemed actions of or requests by the SEC.
3. CONFIDENTIALITY.
----------------
The Distributor agrees on behalf of itself and its employees to
treat confidentially and as proprietary information of the Trust all records and
other information relative to the Portfolios and/or the Trust and its prior,
present or potential shareholders, and not to 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, which approval shall not be unreasonably withheld and may not be withheld
where the Distributor may be exposed to civil or criminal contempt proceedings
for failure to comply, when requested to divulge such information by duly
constituted authorities, or when so requested by the Trust.
4. LIMITATIONS OF LIABILITY.
-------------------------
Except as provided in paragraph 2.3, the Distributor shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust or any Portfolio in connection with matters to which this agreement
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard of its obligations and duties under this agreement.
5. TERM.
----
This agreement shall become effective on the date of its execution
and, unless sooner terminated as provided herein, shall continue in effect for a
period of two years from the date written below. This Agreement shall thereafter
continue from year to year, provided such continuance is specifically approved
at least annually by (i) the Trust's Board of Trustees, or (ii) by a vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the Portfolio, PROVIDED that in either event the continuance is also approved by
the majority of the Trust's Trustees who are not parties to this agreement or
interested persons (as defined in the 1940 Act) of any such party, by vote cast
in person at a meeting called for the purpose of voting on such approval. This
agreement is not assignable and is terminable with respect to a Portfolio,
without penalty, on not less than sixty (60) days' notice, by the Trust's Board
of Trustees, by vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of such
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Portfolio, or by the Distributor. This agreement will also terminate
automatically in the event of its assignment (as defined in the 1940 Act).
6. MISCELLANEOUS.
--------------
6.1 No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which an enforcement of the change, waiver, discharge or
termination is sought.
6.2 This agreement shall be governed by the laws of the State of
Arkansas.
7. COUNTERPARTS.
------------
7.1 This Agreement may be executed in any manner of counterparts,
each of which shall be deemed an original.
Please confirm that the foregoing is in accordance with your
understanding by indicating your acceptance hereof at the place indicated below,
whereupon it shall become a binding agreement between us.
Yours very truly,
NATIONS ANNUITY TRUST
By: /s/ A. Max Walker
----------------------------------
Name: A. Max Walker
Title: President and Chairman of the
Board of Trustees
Accepted:
STEPHENS INC.
By:/s/ Richard H. Blank, Jr.
-------------------------
Name: Richard H. Blank, Jr.
Title: Vice President
Dated as of February 25, 1998
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SCHEDULE I
1. Nations Balanced Assets Portfolio
2. Nations Aggressive Growth Portfolio
3. Nations International Growth Portfolio
4. Nations Managed Index Portfolio
5. Nations SmallCap Index Portfolio
6. Nations Marsico Focused Equities Portfolio
7. Nations Marsico Growth & Income Portfolio
8. Nations Value Portfolio
Last Amended: May 1, 2000
IN WITNESS WHEREOF, the parties hereto have caused this amended Schedule I
to be executed by their officers designated below as of the 1st day of May,
2000.
NATIONS ANNUITY TRUST
on behalf of the Portfolios
By: /s/ Carolyn Wyse
---------------------------
Carolyn Wyse
Assistant Secretary
STEPHENS INC.
By: /s/ Richard H. Blank, Jr.
---------------------------
Richard H. Blank, Jr.
Senior Vice President
8
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:
(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
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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").
(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.
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(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.
(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.
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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.
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
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<PAGE>
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.
(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
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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.
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
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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.
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;
(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
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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.
(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.
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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;
(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
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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.
(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.
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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.
17. Reports.
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(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
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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.
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.
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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.
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
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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.
(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.
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(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.
(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,
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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.
(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.
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
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<PAGE>
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.
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
17
<PAGE>
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.
(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.
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(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.
(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
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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.
(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
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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.
(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.
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(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.
(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.
(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
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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.
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.
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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.
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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:/s/ Richard H. Blank, Jr.
-------------------------
Richard H. Blank, Jr.
Secretary
THE BANK OF NEW YORK
By:/s/ Stephen E. Grunston
-------------------------
Stephen E. Grunston
Vice President
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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 Aggressive Growth Portfolio
Nations Managed Index Portfolio
Nations SmallCap Index Portfolio
Nations Marsico Focused Equities Portfolio
Nations Marsico Growth & Income Portfolio
Nations International Growth Portfolio
Nations Value Portfolio
Last Amended: May 1, 2000
IN WITNESS WHEREOF, the parties hereto have caused this
amended Schedule I to be executed by their duly authorized officers designated
below as of the 1st day of May, 2000.
NATIONS ANNUITY TRUST
By: /s/ Richard H. Blank, Jr.
----------------------------------------
Richard H. Blank, Jr.
Secretary
THE BANK OF NEW YORK
By: /s/ Stephen E. Grunston
----------------------------------------
Stephen E. Grunston
Vice President
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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
27
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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
- ----------------------
28
<PAGE>
None.
BILLING CYCLE
- -------------
The above fees are billed monthly.
29
<PAGE>
SCHEDULE IV
-----------
OVERDRAFT RATE
30
CO-ADMINISTRATION AGREEMENT
This CO-ADMINISTRATION AGREEMENT (the "Agreement") is made as of
December 1, 1998 by and among STEPHENS INC. ("Stephens"), NATIONSBANC ADVISORS,
INC. ("NBAI") and NATIONS ANNUITY TRUST (the "Annuity Trust").
WHEREAS, the Annuity Trust is registered as an open-end management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Annuity Trust desires to retain Stephens and NBAI to
render certain administrative services for the investment portfolios of the
Annuity Trust listed on Schedule I (individually, a "Fund" and collectively, the
"Funds"), and Stephens and NBAI are willing to render such services.
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed among the parties hereto as follows:
1. Appointment.
------------
(a) The Annuity Trust hereby appoints Stephens to act as
Co-Administrator of the Funds and Stephens hereby accepts such appointment and
agrees to render such services and duties set forth in Paragraph 3, for the
compensation and on the terms herein provided. Absent written notification to
the contrary by the Annuity Trust, NBAI or Stephens, each new investment
portfolio established in the future by the Annuity Trust shall automatically
become a "Fund" for all purposes hereunder as if listed on Schedule I.
(b) The Annuity Trust also hereby appoints NBAI to act as
Co-Administrator of the Funds, and NBAI hereby accepts such appointment and
agrees to render such services and duties set forth in Paragraph 4, for the
compensation and on the terms herein provided. Absent written notification to
the contrary by either the Annuity Trust or NBAI, each new investment portfolio
established in the future by the Annuity Trust shall automatically become a
"Fund" for all purposes hereunder as if listed on Schedule I.
2. Delivery of Documents. The Annuity Trust has furnished Stephens and
NBAI with copies properly certified or authenticated of each of the following:
(a) The Annuity Trust's most recent Post-Effective Amendment to its
Registration Statement on Form N-1A (the "Registration Statement") under the
Securities Act of 1933, as amended, and under the 1940 Act (File Nos. 333-40265
and 811-08481), as filed with the Securities and Exchange Commission (the "SEC")
relating to the Funds' shares (the "Shares");
(b) The Funds' most recent Prospectus(es); and
(c) The Funds' most recent Statement(s) of Additional Information.
1
<PAGE>
The Annuity Trust will furnish Stephens and NBAI from time to time with
copies, properly certified or authenticated, of all amendments of or supplements
to the foregoing. Furthermore, the Annuity Trust will provide Stephens and NBAI
with any other documents that Stephens and NBAI may reasonably request and will
notify Stephens and NBAI as soon as possible of any matter materially affecting
either Stephens' or NBAI's performance of its services under this Agreement.
3. Duties as Co-Administrator. Subject to the supervision and direction of the
Board of Trustees of the Annuity Trust, Stephens, as Co-Administrator, will
assist in supervising various aspects of the Annuity Trust's administrative
operations and undertakes to perform the following specific services from and
after the effective date of this Agreement:
(a) Maintaining office facilities for the Annuity Trust (which may be
in the offices of Stephens or a corporate affiliate);
(b) Furnishing clerical services, internal executive and administrative
services and stationery and office supplies in connection with the foregoing;
(c) Assist in furnishing statistical and research data and data
processing services in connection with the foregoing;
(d) Furnishing corporate secretarial services, including assisting in
the coordination of the preparation and distribution of materials for Board of
Trustees meetings;
(e) Providing the services of certain persons who may be appointed as
officers of the Annuity Trust by the Annuity Trust's Board of Trustees;
(f) Assist in coordinating the provision of legal advice and counsel to
the Annuity Trust with respect to regulatory matters, including monitoring
regulatory and legislative developments which may affect the Annuity Trust and
assisting in the strategic response to such developments, counseling and
assisting the Annuity Trust in routine regulatory examinations or investigations
of the Annuity Trust, and working closely with outside counsel to the Annuity
Trust in connection with any litigation in which the Annuity Trust is involved;
(g) Assist in coordinating the preparation of reports to the Annuity
Trust's shareholders of record and the SEC including, but not necessarily
limited to, Annual Reports and Semi-Annual Reports to Shareholders and on Form
N-SAR and Notices pursuant to Rule 24f-2 under the 1940 Act;
(h) Coordinating with the Annuity Trust regarding the jurisdictions in
which the Shares shall be registered or qualified for sale and, in connection
therewith, being responsible for the registration or qualification and the
maintenance of such registration or qualification of Shares for sale under the
securities laws of any state. Payment of share registration fees and any fees
for qualifying or continuing the qualification of the
2
<PAGE>
Annuity Trust or any Fund as a dealer or broker shall be made or reimbursed by
the Annuity Trust or that Fund, respectively;
(i) Assisting in the preparation and filing on a timely basis of
various reports, registration statements and post-effective amendments thereto,
and other documents required by federal, state and other applicable laws and
regulations, other than those filed or required to be filed by NBAI or the
Funds' Sub-Advisers, Transfer Agent, Sub-Transfer Agent or Custodian;
(j) Performing certain compliance procedures for the Annuity Trust
which will include, among other matters, monitoring compliance with personal
trading guidelines by the Annuity Trust's Board of Trustees; and
(k) Generally assisting in all aspects of the Annuity Trust's
operations.
In performing all services under this Agreement, Stephens shall (i) act
in conformity with: the Annuity Trust's Declaration of Trust and Bylaws, the
1940 Act and the rules thereunder, and other applicable laws and regulations, as
the same may be amended from time to time, and the Annuity Trust's Registration
Statement, as such Registration Statement may be amended from time to time; (ii)
consult and coordinate with the Annuity Trust, as necessary and appropriate; and
(iii) advise and report to the Annuity Trust, as necessary or appropriate, with
respect to any compliance matters that come to its attention.
Stephens represents and warrants to the Annuity Trust that it will use
reasonable efforts to perform its duties and obligations under this Agreement
without: (a) any failure of its computer systems, or those used by it in the
performance of its duties hereunder, to properly record, store, process,
calculate or present calendar dates falling on and after, and time spans
including, January 1, 2000 as a result of the occurrence of, or use of data
containing, such date; (b) any failure of its computer systems, or those used by
it in the performance of its duties hereunder, to calculate any information
dependent on or relating to dates on or after January 1, 2000; or (c) any loss
of functionality or performance with respect to the maintenance of records or
processing of data containing dates falling on or after January 1, 2000 ((a),
(b), and (c) above shall be referred to as "Y2K Failures"). Notwithstanding the
above, Stephens shall not be liable for any Y2K Failures caused by Y2K Failures
in a third party system with which Stephens interfaces or from which Stephens
receives data in connection with the performance of its duties hereunder.
In performing its services under this Agreement, Stephens shall
cooperate and coordinate with NBAI as necessary and appropriate and shall
provide such information as is reasonably necessary or appropriate for NBAI to
perform its responsibilities to the Annuity Trust.
4. Duties as Co-Administrator. Subject to the supervision and direction
of the Board of Trustees of the Annuity Trust, NBAI, as Co-Administrator, will
assist in supervising various aspects of the Annuity Trust's administrative
operations and
3
<PAGE>
undertakes to perform the following specific services, from and after the
effective date of this Agreement:
(a) providing accounting and bookkeeping services (including the
maintenance for the periods prescribed by Rule 31a-2 under the 1940 Act of such
accounts, books and records of the Annuity Trust as may be required by Section
31(a) of the 1940 Act and the rules thereunder). NBAI further agrees that all
such records which it maintains for the Annuity Trust are the property of the
Annuity Trust and further agrees to surrender promptly to the Annuity Trust any
of such records upon the Annuity Trust's request;
(b) valuing each Fund's assets and calculating the net asset value and
the net income of the shares of each Fund in accordance with the Annuity Trust's
current Prospectus(es), applicable pricing procedures and resolutions of the
Annuity Trust's Board of Trustees, provided, that in performing such services,
NBAI shall obtain security market quotes from independent pricing services, or
if such quotes are unavailable, obtain such prices from the Funds' Sub-Advisers;
(c) accumulating information for reports to the Annuity Trust's
shareholders of record and the SEC including, but not necessarily limited to,
Annual Reports and Semi-Annual Reports to Shareholders and on Form N-SAR and
Notices pursuant to Rule 24f-2 under the 1940 Act;
(d) preparing and filing on a timely basis the Annuity Trust's tax
returns and other tax filings;
(e) monitoring the development and implementation of certain compliance
procedures for the Annuity Trust including, but not limited to, monitoring (i)
each Fund's status as a regulated investment company under Sub-Chapter M of the
Internal Revenue Code of 1986, as amended, including performing, on a monthly
basis and based upon information provided by the Fund's Sub-Advisers, the 90%
gross income and asset diversification tests derived from such Sub-Chapter; and
(ii) compliance by each Fund with its investment objective, policies and
restrictions, and applicable laws and regulations;
(f) preparing and furnishing to the Annuity Trust monthly broker
security transaction summaries and monthly security transaction listings and (at
the Annuity Trust's request) performance information (including yield and total
return information) calculated in accordance with applicable U.S. securities
laws and reporting to external databases such information as may reasonably be
requested;
(g) assisting the Annuity Trust and its agents in their accumulation
and preparation of materials for the Board of Trustees' meetings and for
regulatory examinations and inspections of the Annuity Trust, to the extent such
materials relate to the services being performed for the Annuity Trust by NBAI;
and
4
<PAGE>
(h) coordinate the provisions of services to the Annuity Trust by other
service providers to the Annuity Trust, including the transfer agent,
sub-transfer agent and custodian.
In performing all services under this Agreement, NBAI shall (i) act in
conformity with the Annuity Trust's Declaration of Trust and Bylaws; the 1940
Act and the rules thereunder, and other applicable laws and regulations, as the
same may be amended from time to time; and the Annuity Trust's Registration
Statement, as such Registration Statement may be amended from time to time, (ii)
consult and coordinate with the Annuity Trust, as necessary and appropriate, and
(iii) advise and report to the Annuity Trust, as necessary or appropriate, with
respect to any compliance matters that come to its attention.
NBAI represents and warrants to the Annuity Trust that it will use
reasonable efforts to perform its duties and obligations under this Agreement
without: (a) any failure of its computer systems to properly record, store,
process, calculate or present calendar dates falling on and after, and time
spans including, January 1, 2000 as a result of the occurrence of, or use of
data containing, such date; (b) any failure of its computer systems to calculate
any information dependent on or relating to dates on or after January 1, 2000;
or (c) any loss of functionality or performance with respect to the maintenance
of records or processing of data containing dates falling on or after January 1,
2000 ((a), (b), and (c) above shall be referred to as "Y2K Failures").
Notwithstanding the above, NBAI shall not be liable for any Y2K Failures caused
by Y2K Failures in a third party system with which NBAI interfaces or from which
NBAI receives data in connection with the performance of its duties hereunder
including, without limitation, the system of any sub-administrator engaged
pursuant to Paragraph 4.
In connection with its duties under this Paragraph 4, it is understood
and agreed that NBAI may, at its own expense, enter into sub-administration
agreements with other service providers and the Fund(s), provided that each such
service provider agrees with NBAI and the Fund(s) to comply with all relevant
provisions of the 1940 Act and applicable rules and regulations thereunder. In
addition, upon notice to the Board of Trustees of the Annuity Trust, the parties
agree that NBAI may from time to time assume some or all of Stephens' duties set
forth in Paragraph 3 above.
In performing its responsibilities under this Agreement, NBAI shall
cooperate and coordinate with Stephens as necessary and appropriate and shall
provide such information within its possession or control as is reasonably
necessary or appropriate to Stephens to enable it to perform its
responsibilities to the Annuity Trust.
5. Compensation.
-------------
(a) Stephens shall bear all expenses in connection with the performance
of its services under this Agreement, except those enumerated in Paragraph
5(a)(2) below.
(1) Stephens will from time to time employ or associate with such
person or persons as Stephens may believe to be particularly suited to assist it
in performing
5
<PAGE>
services under this Agreement. Such person or persons may be officers and
employees of both Stephens and the Annuity Trust. The compensation of such
person or persons shall be paid by Stephens and no obligation shall be incurred
on behalf of the Annuity Trust or NBAI in such respect.
(2) Stephens shall not be required to pay any of the following
expenses incurred by the Annuity Trust: investment advisory expenses; costs of
printing and mailing stock certificates, prospectuses, reports and notices;
interest on borrowed money; brokerage fees and commissions; taxes and fees
payable to federal, state and other governmental agencies; fees of Trustees of
the Annuity Trust who are not affiliated with Stephens; outside auditing
expenses; outside legal expenses; fees of any other service provider to the
Annuity Trust; or other expenses not specified in this Section 5(a) which may be
properly payable by the Annuity Trust and which are approved by the Annuity
Trust's President or Treasurer.
(3) The Annuity Trust will compensate Stephens for its services
rendered pursuant to this Agreement in accordance with Schedule A. In addition,
the Annuity Trust shall reimburse Stephens for certain reasonable out-of-pocket
distributions made in connection with fulfilling its obligations under the
Agreement. The items eligible for reimbursement are set forth on Schedule A.
(b) NBAI shall bear all expenses in connection with the
performance of its services under this Agreement, except those enumerated in
5(b)(2) below.
(1) NBAI will from time to time employ or associate with such
person or persons as NBAI may believe to be particularly suited to assist it in
performing services under this Agreement. Such person or persons may be officers
and employees of both NBAI and the Annuity Trust. The compensation of such
person or persons shall be paid by NBAI and no obligation shall be incurred on
behalf of the Annuity Trust or Stephens in such respect.
(2) NBAI shall not be required to pay any of the following
expenses incurred by the Annuity Trust: investment advisory expenses; costs of
printing and mailing stock certificates, prospectuses, reports and notices;
interest on borrowed money; brokerage fees and commissions; taxes and fees
payable to federal, state and other governmental agencies; fees of Trustees of
the Annuity Trust who are not affiliated with NBAI; outside auditing expenses;
outside legal expenses; fees of independent pricing services utilized by NBAI to
value each Fund's assets; fees of any other service provider to the Annuity
Trust (other than a sub-administrator engaged pursuant to Paragraph 4); or other
expenses not specified in this Section 5(b) which may be properly payable by the
Annuity Trust and which are approved by the Annuity Trust's President or
Treasurer.
(3) The Annuity Trust will compensate NBAI for its services
rendered pursuant to this Agreement in accordance with Schedule A. In addition,
the Annuity Trust shall reimburse NBAI for certain reasonable out-of pocket
distributions made in connection with fulfilling its obligations under the
Agreement. The items eligible for reimbursement are set forth on Schedule A.
6
<PAGE>
6. Limitation of Liability; Indemnification.
-----------------------------------------
(a) Stephens shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Annuity Trust in connection with
the performance of its obligations and duties under this Agreement, except a
loss resulting from Stephens' willful misfeasance, bad faith or gross negligence
in the performance of such obligations and duties, or by reason of its reckless
disregard thereof.
(b) NBAI shall not be liable for any error of judgment or mistake of
law or for any loss suffered by the Annuity Trust in connection with the
performance of its obligations and duties under this Agreement, except a loss
resulting from NBAI's willful misfeasance, bad faith or gross negligence in the
performance of such obligations and duties, or by reason of its reckless
disregard thereof.
(c) The Annuity Trust, on behalf of each Fund, will indemnify
Stephens and/or NBAI against and hold each harmless from any and all losses,
claims, damages, liabilities or expenses (including reasonable counsel fees and
expenses) resulting from any claim, demand, action or suit relating to the
particular Fund and not resulting from the willful misfeasance, bad faith or
gross negligence of Stephens and/or NBAI in the performance of such obligations
and duties or by reason of their reckless disregard thereof. Stephens and/or
NBAI will not confess any claim or settle or make any compromise in any instance
in which the Annuity Trust will be asked to provide indemnification, except with
the Annuity Trust's prior written consent. Any amounts payable by the Annuity
Trust under this Section 6(c) shall be satisfied only against the assets of the
Fund involved in the claim, demand, action or suit and not against the assets of
any other investment portfolio of the Annuity Trust.
7. Effective Date; Termination of Agreement.
-----------------------------------------
(a) This Agreement shall become effective, on a Fund by Fund basis,
upon the completion of the transfer of a Fund's accounting function to The Bank
of New York, notice of which shall be provided by the Annuity Trust to Stephens
and NBAI for each Fund. This Agreement shall remain in full force and effect
with respect to such Fund(s) unless terminated pursuant to the provisions of
Section 7(c).
(b) The parties agree that the administration arrangements between
Stephens and the Annuity Trust, dated September 1, 1993, and the
sub-administration arrangements between Stephens and NBAI, dated November 18,
1997, with respect to the Funds shall be terminated on a Fund by Fund basis upon
the effectiveness of this Agreement.
(c) This Agreement may be terminated at any time without payment of
any penalty, upon 60 days' written notice, by vote of the Board of Trustees of
the Annuity Trust, by Stephens or by NBAI. Stephens and NBAI will each cooperate
with and assist the Annuity Trust, its agents and any successor administrator or
administrators in the substitution/conversion process.
(d) Sections 6 and 9 shall survive this Agreement's termination.
7
<PAGE>
8. Amendments. No provision of this Agreement may be changed,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, discharge or termination is
sought.
9. Confidentiality. All books, records, information and data pertaining
to the business of the Annuity Trust, its prior, present or potential
shareholders and NBAI's customers that are exchanged or received pursuant to the
performance of Stephens' and/or NBAI's duties under this Agreement shall remain
confidential and shall not be disclosed to any other person, except as
specifically authorized by the Annuity Trust or as may be required by law, and
shall not be used for any purpose other than performance of NBAI's and Stephens'
responsibilities and duties hereunder.
10. Service to Other Companies or Accounts. The Annuity Trust
acknowledges that both Stephens and NBAI now act, will continue to act and may
act in the future as investment adviser to fiduciary and other managed accounts,
and as investment adviser, investment sub-adviser and/or administrator to other
investment companies or series of investment companies, and the Annuity Trust
has no objection to either Stephens or NBAI so acting. The Annuity Trust further
acknowledges that the persons employed by both Stephens and NBAI to assist in
the performance of their duties under this Agreement may not devote their full
time to such service and nothing contained in this Agreement shall be deemed to
limit or restrict the right of Stephens or NBAI or any affiliate of either to
engage in and devote time and attention to other businesses or to render
services of whatever kind or nature.
11. Miscellaneous.
--------------
(a) Any notice or other instrument authorized or required by this
Agreement to be given in writing to the Annuity Trust, Stephens or NBAI shall be
sufficiently given if addressed to that party and received by it at its office
set forth below or at such other place as it may from time to time designate in
writing.
To the Annuity Trust:
Nations Annuity Trust
111 Center Street, Suite 3000
Little Rock, Arkansas 72201
Attention: Secretary
To Stephens:
Stephens Inc.
111 Center Street, Suite 3000
Little Rock, Arkansas 72201
Attention: Richard H. Blank, Jr.
8
<PAGE>
To NBAI:
NationsBanc Advisors, Inc.
One Bank of America Plaza
33rd Floor
Charlotte, NC 28255
Attention: Edward D. Bedard
(b) This Agreement shall extend to and shall be binding upon the
parties hereto and their respective successors and assigns; provided, however,
that this Agreement shall not be assignable without the written consent of the
other parties.
(c) This Agreement shall be construed in accordance with the laws
of the State of Delaware.
(d) This Agreement may be executed in any number of counterparts
each of which shall be deemed to be an original and which collectively shall be
deemed to constitute only one instrument.
(e) The captions of 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.
(f) This Agreement constitutes the entire agreement between the
parties hereto with respect to the matters described herein.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be duly executed and delivered by their duly authorized officers as of the date
first written above.
STEPHENS INC.
By: /s/ Richard H. Blank, Jr.
-------------------------
Richard H. Blank, Jr.
Senior Vice President
NATIONSBANC ADVISORS, INC.
By: /s/ Edward D. Bedard
------------------------
Edward D. Bedard
Senior Vice President and
Chief Operating Officer
NATIONS ANNUITY TRUST
By: /s/ James E. Banks, Jr.
-----------------------
James E. Banks, Jr.
Assistant Secretary
10
<PAGE>
SCHEDULE I
1. Nations Value Portfolio
2. Nations International Growth Portfolio
3. Nations Aggressive Growth Portfolio
4. Nations Marsico Focused Equities Portfolio
5. Nations Marsico Growth & Income Portfolio
6. Nations Managed Index Portfolio
7. Nations SmallCap Index Portfolio
8. Nations Balanced Assets Portfolio
Last Amended: May 1, 2000
IN WITNESS WHEREOF, the parties hereto have caused this amended
Schedule I to be executed by their duly authorized officers designated below as
of the 1st day of May, 2000.
STEPHENS INC.
By: /s/ Richard H. Blank, Jr.
---------------------------------
Richard H. Blank, Jr.
Senior Vice President
BANC OF AMERICA ADVISORS, INC.
(Formerly Nationsbanc Advisors, Inc.)
By: /s/ Edward D. Bedard
---------------------------------
Edward D. Bedard
Senior Vice President and
Chief Operating Officer
NATIONS ANNUITY TRUST
By: /s/ Carolyn Wyse
---------------------------------
Carolyn Wyse
Assistant Secretary
1-1
<PAGE>
SCHEDULE A
For services rendered pursuant to this Agreement, the Annuity Trust
will pay Stephens and NBAI, in the aggregate, an administration fee, computed
daily and payable monthly, based on annual rate of each Fund's daily net assets
as follows:
1. Money Market Funds: 0.10%
2. Fixed Income Funds: 0.22%
3. International Funds: 0.22%
4. Domestic Equity Funds: 0.23%
It is understood and agreed among the parties that the aggregate
administration fee payable hereunder shall be divided by and between Stephens
and NBAI, as they may agreed from time to time.
In addition to the asset-based fee set forth above, the Annuity Trust
shall reimburse Stephens, NBAI and any sub-administrator engaged pursuant to
Paragraph 4 for certain reasonable out-of-pocket expenses incurred by them in
connection with the performance of their respective duties hereunder.
Reimbursable out-of-pocket expenses shall include the following:
reasonable costs associated with postage (including overnight services),
telephone, telecommunications (including facsimiles), duplicating, pricing
services, and forms and supplies.
A-1
SUB-ADMINISTRATION AGREEMENT
This SUB-ADMINISTRATION AGREEMENT (the "Agreement") is made as of
December 1, 1998 by and among THE BANK OF NEW YORK ("BNY"), NATIONSBANC
ADVISORS, INC. ("NBAI") and NATIONS ANNUITY TRUST (the "Annuity Trust").
WHEREAS, the Annuity Trust is registered as an open-end management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act");
WHEREAS, NBAI serves as the Co-Administrator for the investment
portfolios of the Annuity Trust pursuant to a separate Co-Administration
Agreement; and
WHEREAS, NBAI desires to retain BNY to render certain
sub-administrative services to the Annuity Trust and to NBAI, as
Co-Administrator of the Annuity Trust, and BNY is willing to render such
services.
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed among the parties hereto as follows:
1. Appointment and Duties as Sub-Administrator.
-------------------------------------------
(a) NBAI hereby appoints BNY to act as Sub-Administrator of the Annuity
Trust and to render sub-administrative services for each portfolio of the
Annuity Trust listed on Schedule I (individually, a "Fund" and collectively, the
"Funds") and BNY hereby accepts such appointment and agrees to render the
services and duties set forth in Schedule II as it may be amended from time to
time, for the compensation and on the terms herein provided. Each new investment
portfolio established in the future by the Annuity Trust or NBAI will become a
"Fund" for all purposes hereunder when BNY receives a revised Schedule I from
NBAI or the Annuity Trust that includes such new portfolio.
(b) Subject to the other provisions of this Section 1, in performing
all services under this Agreement, BNY shall (i) act in conformity with the
Annuity Trust's Declaration of Trust and Bylaws (the "Bylaws"), the 1940 Act and
the rules thereunder, including but not limited to Rules 31a-1 to 31a-3, and
other applicable laws and regulations, as the same may be amended from time to
time, and the Annuity Trust's Registration Statement, as such Registration
Statement may be amended from time to time; (ii) consult and coordinate with
NBAI and the Annuity Trust, as necessary and appropriate; and (iii) advise and
report to NBAI and the Annuity Trust, as necessary or appropriate, with respect
to any compliance matters that come to its attention. In performing all services
under this Agreement BNY shall meet the minimum quality of service standards set
forth on Schedule III.
(c) The Annuity Trust has furnished BNY and NBAI with copies properly
certified or authenticated of each of the following: (i) the Annuity Trust's
Declaration of Trust or other organizational document and all amendments thereto
(the "Declaration"); (ii) the Annuity Trust's Bylaws; (iii) resolutions of the
Annuity Trust's Board of Trustees or other governing body (the
1
<PAGE>
"Board") authorizing the execution, delivery and performance of this Agreement
by the Annuity Trust; (iv) the Annuity Trust's most recent Post-Effective
Amendment to its Registration Statement on Form N-1A (the "Registration
Statement") under the Securities Act of 1933, as amended, and under the 1940 Act
(File Nos. 333-40265 and 881-08481), as filed with the Securities and Exchange
Commission (the "SEC") relating to the Funds' shares (the "Shares"); (iv) the
Funds' current Prospectus(es); (v) the Funds' current Statement(s) of Additional
Information; and (vi) the pricing procedures applicable to the calculation of
the Funds' net asset values as approved by the Annuity Trust's Board (the
"Pricing Procedures"). It is solely the Annuity Trust's responsibility to
furnish BNY from time to time with copies, properly certified or authenticated,
of all amendments of or supplements to the foregoing, and BNY will not be held
to have knowledge of any such amendments or supplements until the same are
actually received by BNY. Furthermore, the Annuity Trust will provide BNY with
any other documents that BNY and NBAI may reasonably request and will notify BNY
and NBAI as soon as possible of any matter materially affecting either BNY's or
NBAI's performance of its services under this Agreement.
(d)(i) BNY undertakes to report on a regular basis to NBAI and the
Annuity Trust regarding: (A) the readiness of its computer systems, or those
used by it in the performance of its duties hereunder, properly to record,
store, process, calculate or present calendar dates falling on and after, and
time spans including, September 9, 1999, January 1, 2000 or February 29, 2000
(the "Subject Dates") as a result of the occurrence, or use of data containing
any such Subject Dates; (B) the readiness of its computer systems or those used
by it in the performance of its duties hereunder, to calculate any information
dependent on or relating to dates on or after the Subject Dates; and (C) its
ability to perform the administration and fund accounting services set forth in
Schedule II (the "Services") in accordance with any applicable performance
standards set forth in Schedule III (the "Standards") with respect to the
maintenance of records or processing of data containing dates falling on or
after the Subject Dates, provided that, with respect to computers used but not
owned by BNY and third-party computer systems other than InvestOne, BNY's
responsibility shall be limited to seeking similar reports from such owners or
third parties and promptly forwarding such reports to NBAI. Without limiting the
foregoing, BNY undertakes to notify NBAI and the Annuity Trust, in writing, of
any concerns believed by BNY to be material regarding the events described in
this paragraph, provided that, with respect to computers owned by others and
third-party computer systems other than InvestOne, BNY's responsibility shall be
limited to seeking similar notice from such owners or third parties and promptly
forwarding such notifications to NBAI.
(ii) NBAI or the Annuity Trust shall have the right to terminate this
Agreement if there is a "material failure" by BNY to perform any of the Services
in accordance with the Standards due to a failure by computers owned or used by
BNY in performing its duties hereunder to properly process the occurrence of the
Subject Dates or data containing the Subject Dates. As used in this Section
1(d), the term "material failure" shall be limited to a failure to provide any
of the Services in accordance with the Standards, provided that no such failure
shall be deemed a "material failure" if such failure occurs at or about the time
other major financial institutions similar to BNY providing similar services in
a similar volume to investment companies similar to the Annuity Trust are
experiencing similar failures, and, provided further, that no failure by BNY
shall be or be deemed a "material failure" if BNY substantially provides the
Services under a contingency plan, it being agreed that, to the extent that the
parties mutually
2
<PAGE>
agree, the time frames and deadlines set forth in Schedule III of this Agreement
and elsewhere shall not be considered in determining whether BNY is
substantially providing the Services in accordance with the Standards. NBAI and
the Annuity Trust agree to act reasonably and in good faith in considering any
request by BNY to extend time frames and deadlines.
(iii) In the event there is a "material failure" by BNY to provide the
Services and such "material failure" is not cured by BNY within 10 days after
such material failure arises, NBAI or the Annuity Trust shall have the right to
terminate this Agreement upon the giving of 60 days written notice to BNY. BNY
shall, notwithstanding any other provision contained in this Agreement, have no
liability to the Annuity Trust or NBAI under this Agreement if such "material
failure" initially arose out of or was caused by a failure of a computer used
but not owned by BNY or owned by a third party (other than InvestOne) to
properly process the Subject Dates or data containing the Subject Dates, and BNY
shall be entitled to any compensation and reimbursement for out-of-pocket
expense as may then be due and payable, as well as agreed-upon out-of-pocket
expenses incurred in connection with such a termination. If such a termination
is the result of a "material failure" initially arising out of, or caused by a
failure of computers owned by BNY or a failure by InvestOne, then, first, BNY's
liability hereunder for such failure shall, notwithstanding any other provision
contained in this Agreement to the contrary, be limited to the lesser of (x) the
fees paid to a successor service provider during the six months next succeeding
the date of termination to the extent such fees exceed the fees that would have
been paid to BNY hereunder, and (y) $1,000,000; and second, BNY shall not be
entitled to out-of-pocket expenses incurred in connection with such a
termination.
(iv) In the event of conflict between this Section 1(d) and any other
provision contained in this Agreement, this Section 1(d) shall control.
(v) NBAI and the Annuity Trust each agree to hold all of the provisions
of this Section 1(d) in strict confidence and not to disclose, nor permit
disclosure of, such provisions.
(e) Subject to the direction and approval of the Annuity Trust's Board
and appropriate officers and the provisions of this Agreement, BNY shall provide
to each Fund the administrative services set forth on Schedule II attached
hereto. In performing such services hereunder, BNY shall provide, at its
expense, office space, facilities, equipment and personnel. BNY shall not
provide any services relating to the management, investment advisory or
sub-advisory functions of any Fund, distribution of shares of any Fund,
maintenance of any Fund's financial records (except as otherwise agreed by the
parties) or any services normally performed by the Funds' counsel or independent
accountants. Upon receipt of the Annuity Trust's prior written consent, BNY may
delegate any of its duties and obligations hereunder to any delegee or agent
whenever and on such terms and conditions as it deems necessary or appropriate.
Unless expressly agreed in writing, BNY shall not be relieved of liability or
responsibility for the performance of any duties or obligations delegated to a
delegee or agent, provided that BNY shall have no liability for duties or
obligations that are delegated to a delegee or agent at the instruction of the
Annuity Trust or NBAI. The Annuity Trust and NBAI shall cause their respective
officers, and shall use reasonable efforts to cause the Annuity Trust's or
NBAI's legal counsel, independent accountants, and transfer agent to cooperate
with BNY and to provide BNY, upon BNY's reasonable written request, such
information, documents and advice relating to such Fund as is within the
possession or knowledge of such persons, in order to enable BNY
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to perform its duties hereunder. Such cooperation or provision of information,
documents or advice shall be at no cost to BNY, provided BNY's request is
reasonable and NBAI shall have been notified of the request. In connection with
its duties hereunder, BNY shall be entitled to reasonably rely upon any
documents relating to a Fund provided to BNY by any of the aforementioned
persons. BNY may apply to the Annuity Trust or NBAI for written instructions
with respect to any matter arising in connection with BNY's performance
hereunder. If, after a reasonable period of time, BNY receives no response to
any such application, BNY may then notify the Annuity Trust or NBAI of
reasonable action that BNY shall take if written instructions are not received
within a stated period of time after such notice, and then BNY shall not be
liable for taking such reasonable action as if written instructions had been
provided. BNY is entitled to reasonably rely and act in accordance with written
instructions believed to have been given by authorized persons and shall incur
no costs for such reasonable reliance. BNY shall have no duties or
responsibilities whatsoever except such duties and responsibilities as are
specifically set forth in this Agreement and Schedule II hereto, and no covenant
or obligation shall be implied against BNY in connection with this Agreement.
(f) The Annuity Trust and NBAI, for itself and not for the others,
hereby represents and warrants to BNY, which representations and warranties
shall be deemed to be continuing, that: (i) it is duly organized and existing
under the laws of the jurisdiction of its organization, with full power to carry
on its business as now conducted, to enter into this Agreement and to perform
its obligations hereunder; (ii) this Agreement has been duly authorized,
executed and delivered by it in accordance with all requisite action and
constitutes a valid and legally binding obligation, enforceable in accordance
with its terms; (iii) it is conducting its business substantially in compliance
with all applicable laws and regulations, both state and federal, and has
obtained all regulatory licenses, approvals and consents necessary to carry on
its business as now conducted; (iv) there is no statute, regulation, rule, order
or judgment binding on it and no provision of its Declaration or Bylaws, nor of
any mortgage, indenture, credit agreement or other contract binding on it or
affecting its property which would prohibit its execution or performance of this
Agreement; and (v) the Annuity Trust and NBAI will use reasonable efforts to
promptly notify BNY of any errors or omissions contained in any reports,
calculations, valuations and other items of information, provided that any
failure by the Annuity Trust or NBAI to detect any such errors or omissions
shall not relieve BNY of any resulting liability therefrom. To the extent that
NBAI has actual knowledge of any such error or omission and fails to use
reasonable efforts to promptly notify BNY, BNY shall be relieved of any
liability that BNY may have mitigated had NBAI provided notice of such error or
omission to BNY.
(g) BNY hereby represents and warrants to the Annuity Trust and NBAI,
which representations and warranties shall be deemed to be continuing, that: (i)
it is duly organized and existing under the laws of the jurisdiction of its
organization, with full power to carry on its business as now conducted, to
enter into this Agreement and to perform its obligations hereunder; (ii) this
Agreement has been duly authorized, executed and delivered by it in accordance
with all requisite action and constitutes a valid and legally binding
obligation, enforceable in accordance with its terms; and (iii) it is conducting
its business substantially in compliance with all applicable laws and
regulations, both state and federal, and has obtained all regulatory licenses,
approvals and consents necessary to carry on its business as now conducted;
there is no statute, regulation, rule, order or judgment binding on it and no
provision of its Declaration or Bylaws, nor of any mortgage, indenture, credit
agreement or other contract
4
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binding on it or affecting its property which would prohibit its execution or
performance of this Agreement.
2. Compensation. For the services to be rendered, the facilities to be
furnished and the compensation and other expenses to be borne by BNY, as
provided for in this Agreement, BNY shall be entitled to receive a monthly fee
from NBAI and reimbursement for out-of-pocket expenses as set forth in Schedule
IV to this Agreement. It is understood that NBAI shall be responsible for BNY's
monthly fee for its services hereunder, and BNY agrees that it shall have no
claim against the Annuity Trust or the Funds with respect to compensation under
this Agreement.
3. Recordkeeping. BNY shall, as agent for the Annuity Trust, and
subject to the direction and approval of the Annuity Trust's Board and the
provisions of this Agreement, maintain and keep current the books, accounts and
other documents, if any, pursuant to the services and duties provided by BNY as
set forth in Schedule II of this Agreement, and preserve any such books,
accounts and other documents in accordance with the applicable provisions of
Rule 31a-2 of the 1940 Act. Such books, accounts and other documents shall be
made available upon reasonable request for inspection by officers, employees and
auditors of the Annuity Trust and NBAI during BNY's normal business hours. All
records maintained and preserved by BNY pursuant to this Agreement which the
Annuity Trust is required to maintain and preserve in accordance with Rule 31a-2
of the 1940 Act shall be and remain the property of the Annuity Trust and shall
be surrendered to the Annuity Trust promptly upon request in the form in which
such records have been maintained and preserved. Upon reasonable request of the
Annuity Trust, BNY shall provide in data files or hard copy, whichever the
Annuity Trust shall reasonably elect, any records included in any such delivery
which are maintained by BNY on a computer disc, or are similarly maintained, and
the Annuity Trust shall reimburse BNY for its expenses of providing such hard
copy.
4. Standard of Care; Indemnification.
---------------------------------
(a) BNY shall at all times act in good faith and agrees to use its best
efforts to fulfill its obligations under this Agreement, but assumes no
responsibility for loss or damage to the Annuity Trust unless such loss or
damages is caused by BNY's own negligence, bad faith or willful misconduct or
that of its directors, officers or employees. BNY shall be responsible hereunder
for all direct damages resulting from its own negligence, bad faith or willful
misconduct, provided however that it shall not be responsible for lost profits
or lost business arising under or in connection with this Agreement. It is
understood and agreed that for purposes of this Section 4(a), "direct damages"
shall include, but shall not be limited to, all legal costs, penalties,
reimbursement for excess distribution and redemption payments, repurchasing
costs for servicing agents and reimbursement to the Funds for net asset value
breaks (as calculated under the Pricing Procedures).
(b) The Annuity Trust, on behalf of each Fund, will indemnify BNY
against and hold it harmless from any and all losses, claims, damages,
liabilities or expenses (including reasonable counsel fees and expenses of a
defense against any claim, demand, action or suit), relating to the particular
Fund and arising from any one or more of the following: (i) errors in records or
instructions, explanations, information, specifications or documentation of any
kind, as the case
5
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may be, supplied to BNY by any person described in Section 1 hereof or by any
third party described in Section 5; (ii) action or inaction taken or omitted to
be taken by BNY pursuant to written or oral instructions described in this
Agreement (or otherwise without bad faith, negligence or willful misconduct);
(iii) any action taken or omitted to be taken by BNY in good faith in accordance
with the advice or opinion of counsel for a Fund, the Annuity Trust, NBAI
(obtained in accordance with the procedures set forth in this Agreement) or its
own counsel; (iv) any improper use by the Fund, the Annuity Trust, NBAI or their
respective agents, of any valuations or computations supplied by BNY pursuant to
this Agreement; (v) the method of valuation of the securities and the method of
computing a Fund's net asset value or any other amount computed by BNY
hereunder, provided BNY has followed the Pricing Procedures; and (vi) any
valuation of securities, net asset value or other amount provided by a Fund or
NBAI. BNY will not confess any claim or settle or make any compromise in any
instance in which the Annuity Trust will be asked to provide indemnification,
except with the Annuity Trust's prior written consent. Any amounts payable by
the Annuity Trust under this Section 4(b) shall be satisfied only against the
assets of the Fund involved in the claim, demand, action or suit and not against
the assets of any other investment portfolio of the Annuity Trust.
5. Fund Accounting Services.
------------------------
(a) BNY, in performing the services required of it under the terms of
this Agreement, shall be entitled to rely fully on the accuracy and validity of
any and all instructions, explanations, information, specifications and
documentation furnished to it by a Fund and shall have no duty or obligation to
review the accuracy, validity or propriety of such instructions, explanations,
information, specifications or documentation, including, without limitation,
evaluations of securities; the amounts or formula for calculating the amounts
and times of accrual of Fund's liabilities and expenses; the amounts receivable
and the amounts payable on the sale or purchase of securities; and amounts
receivable or amounts payable for the sale or redemption of Fund shares effected
by or on behalf of the Fund. In the event BNY's computations hereunder rely, in
whole or in part, upon information, including, without limitation, bid, offer or
market values of securities or other assets, or accruals of interest or earnings
thereon, from a pricing or similar service utilized, or subscribed to, by BNY
which BNY in its judgment deems reliable, or any other third party pricing
source designated by the Annuity Trust, BNY shall not be responsible for, under
any duty to inquire into, or deemed to make any assurances with respect to, the
accuracy or completeness of such information. BNY shall not be required to
inquire into any valuation of securities or other assets by the Fund or any
third party described in this Section, even though BNY in performing services
similar to the services provided pursuant to this Agreement for others may
receive different valuations of the same or different securities of the same
issuers.
(b) Subject to the provisions of this Agreement and the direction and
approval of the Annuity Trust's Board, BNY shall perform the computations
described in Schedule II at such times and dates and in the manner specified or
described in the then-current Prospectus(es) of a Fund. To the extent valuation
of securities or a computation specified or described in a Fund's Pricing
Procedures or then-current effective Prospectus is at any time inconsistent with
any applicable laws or regulations, the Annuity Trust or NBAI shall immediately
so notify BNY in writing and thereafter shall furnish BNY at all appropriate
times with the values of such securities and such Fund's net asset value or
other amounts otherwise to be calculated by BNY,
6
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or, subject to the prior approval of BNY, instruct BNY in writing to value
securities and make such computations in a manner which the Annuity Trust or
NBAI then represents in writing to be consistent with all applicable laws and
regulations. The Annuity Trust or NBAI may also from time to time, subject to
the prior approval of BNY, instruct BNY in writing to make computations other
than as specified in this Section of this Agreement. By giving such instruction,
the Annuity Trust or NBAI shall be deemed to have represented that such
instruction is consistent with all applicable laws and regulations and the
then-current effective Prospectus of the particular Fund. The Annuity Trust or
NBAI shall have sole responsibility for determining the method of valuation of
securities and the method of computations, and all computations, valuation of
securities and the method of computing each Fund's net asset value shall be
subject to approval by the Annuity Trust and NBAI. BNY shall not be liable for
relying on any price provided by any pricing service believed by BNY to be
reliable, and the Annuity Trust or NBAI shall furnish values when the same are
not available from a pricing service utilized by BNY, with such furnishing to
constitute an instruction to BNY to rely on the provided values.
(c) BNY shall be responsible for determining and properly reflecting in
the computations made by it made by it under this Agreement: (i) the taxable
nature of any distribution or amount received or deemed received by, or payable
to, a Fund; (ii) the taxable nature or effect on a Fund or its shareholders of
any corporate actions, class actions, tax reclaims, tax refunds, or similar
events; (iii) the taxable nature or taxable amount of any distribution or
dividend paid, payable or deemed paid, by a Fund to its shareholders; (iv) the
effect under any federal, state, or foreign income tax laws of a Fund making or
not making any distribution or dividend payment, or any election with respect
thereto; or (v) any tax accounting; provided, however, that if BNY is not
certain of the taxable nature, amount or effect of any such item, it may seek
instructions regarding the proper treatment of such item from the Annuity Trust
or NBAI in accordance with the procedures set forth in Section 1(e), above, and
shall have no liability for acting in reliance on such instructions.
6. Termination of Agreement.
------------------------
(a) This Agreement shall become effective as of the date first set
forth above and shall remain in full force and effect unless terminated pursuant
to the provisions of Section 6(b).
(b) This Agreement may be terminated at any time without payment of any
penalty, upon 60 days' written notice to BNY, by NBAI or by vote of the Board of
the Annuity Trust, or upon 180 days' written notice to NBAI and the Annuity
Trust, by BNY. Upon any such termination, BNY will cooperate with and assist the
Annuity Trust, NBAI, their agents and any successor administrator(s) or
sub-administrator(s) in the substitution/conversion process. In connection with
any termination of this Agreement, unless BNY is in breach of this Agreement,
the Funds and NBAI agree to pay BNY any compensation and reimbursement for
out-of-pocket expenses as may then be due and payable, as well as agreed-upon
out-of-pocket expenses incurred in connection with a termination. If BNY is in
breach of this Agreement, the Funds and NBAI may offset any compensation or
reimbursement amounts owed to BNY by the amount of damages, costs and expenses
incurred as a result of BNY's breach, including costs, expenses and reasonable
incremental fees for a period not to exceed one year incurred in connection with
a conversion by the Annuity Trust and NBAI to a successor service provider. In
the event of a
7
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dispute as to the amount of such damages, the Funds and NBAI agree to escrow the
set-off amount.
(c) Sections 4 and 8 shall survive this Agreement's termination.
7. Amendments. Except as expressly provided in the first paragraph of
Section 1, no provision of this Agreement may be amended or modified orally, but
only by an instrument in writing signed by the party against which enforcement
of the amendment or modification is sought.
8. Confidentiality. All books, records, information and data pertaining
to the business of the Annuity Trust, or its prior, present or potential
shareholders that are exchanged or received in connection with the performance
of BNY's duties under this Agreement shall remain confidential and shall not be
disclosed to any other person, except as specifically authorized by the Annuity
Trust or as may be required by law, and shall not be used for any purpose other
than performance of its responsibilities and duties hereunder, and except that
BNY retains the right to disclose matters subject to confidentiality to its
examiners, regulators, internal or external auditors, its accountants, its
internal and external counsel, and to any other entity whenever it is advised by
its internal or external counsel that it is reasonably likely that BNY would be
liable for a failure to do so. BNY will endeavor to provide written notice to
the Annuity Trust and NBAI at least five business days prior to any disclosures
pursuant to this Section 8, but, provided it shall have provided as much notice
as is reasonably practicable under the circumstances, BNY shall have no
liability for any failure to do so.
9. Service to Other Companies. The Annuity Trust and NBAI acknowledge
that BNY now provides, will continue to provide and may in the future provide
administrative or other services to other investment companies or series of
investment companies, and the Annuity Trust and NBAI have no objection to BNY so
doing. The Annuity Trust and NBAI further acknowledge that the persons employed
by BNY to assist in the performance of BNY's duties under this Agreement may not
devote their full time to such service and nothing contained in this Agreement
shall be deemed to limit or restrict the right of BNY or any affiliate of BNY to
engage in and devote time and attention to other businesses or to render
services of whatever kind or nature.
10. Conversion Schedule. If the Annuity Trust and NBAI, in the exercise
of their reasonable judgment, cannot meet the conversion schedule set forth in
Schedule VI as a result of BNY's inability to provide, or to confirm that it is
capable of providing, the services described in Schedule II or to meet the
quality of service standards set forth in Schedule III with respect to one or
more Funds in accordance with the conversion schedule attached as Schedule VI,
then BNY shall be obligated to pay any resulting incremental costs incurred by
the Annuity Trust or NBAI, including any incremental fees payable to First Data
Investors Services Group by the Annuity Trust or NBAI.
11. Miscellaneous.
-------------
(a) This Agreement shall be construed in accordance with the laws of
the State of New York, without regard to conflict of laws principles thereof.
Each Fund, the Annuity Trust
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and NBAI hereby consent to the jurisdiction of a state or federal court situated
in New York City, New York in connection with any dispute arising hereunder. To
the extent that in any such jurisdiction any of the aforementioned persons may
now or hereafter be entitled to claim, for itself or its assets, immunity from
suit, execution, attachment (before or after judgment) or other legal process,
each irrevocably agrees not to claim, and it hereby waives, such immunity.
(b) In case any provision in or obligation under this Agreement shall
be invalid, illegal or unenforceable in any jurisdiction, the validity, legality
and enforceability of the remaining provisions or obligations shall not in any
way be affected or impaired thereby, and if any provision is inapplicable to any
person or circumstances, it shall nevertheless remain applicable to all other
persons and circumstances.
(c) Each and every right granted to BNY, the Annuity Trust or NBAI
hereunder or under any other document delivered hereunder or in connection
herewith, or allowed it by law or equity, shall be cumulative and may be
exercised from time to time. No failure on the part of BNY, the Annuity Trust or
NBAI to exercise, and no delay in exercising, any right will operate as a waiver
thereof, nor will any single or partial exercise by BNY, the Annuity Trust or
NBAI of any right preclude any other or future exercise thereof or the exercise
of any other right.
(d) BNY shall not be responsible for delays or errors that occur by
reason of circumstances beyond its reasonable control in the performance of its
duties under this Agreement, provided that reasonable back-up and disaster
recovery systems are in place, including, without limitation, labor
difficulties, mechanical breakdowns, computer breakdowns or malfunctions
(hardware or software), flood or catastrophe, acts of God, failures of
transportation, communication or power supply, or other similar circumstances.
Nor shall BNY be responsible for delays or failures to supply the information or
services specified in this Agreement where such delays or failures are caused by
the failure of any person(s) other than BNY to supply any instructions,
explanations, information, specifications or documentation deemed necessary by
BNY in the performance of its duties under this Agreement.
(e) Any notice or other instrument authorized or required by this
Agreement to be given in writing to the Annuity Trust, BNY and/or NBAI shall be
sufficiently given if addressed to that party and received by it at its office
set forth below or at such other place as it may from time to time designate in
writing.
To the Annuity Trust:
Nations Annuity Trust
111 Center Street
Little Rock, Arkansas 72201
Attention: Richard H. Blank, Jr.
To NBAI:
NationsBanc Advisors, Inc.
One Bank of America Plaza
101 South Tryon Street, NC1-002-33-31
9
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Charlotte, NC 28255-0001
Attention: Edward D. Bedard
To BNY:
The Bank of New York
90 Washington Street
22nd Floor
New York, NY 10286
Attention: Stephen E. Grunston
(f) This Agreement shall extend to and shall be binding upon the
parties hereto and their respective successors and assigns; provided, however,
that this Agreement may not be assigned by BNY, nor may BNY delegate
responsibility for the performance of any of its duties hereunder, without the
written consent of the other parties hereto.
(g) This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original and which collectively shall be
deemed to constitute only one instrument.
(h) The captions of 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.
(i) This Agreement constitutes the entire agreement between the parties
hereto with respect to the provision by BNY of sub-administrative services and
the receipt of fees therefor, and supersedes all prior arrangements or
understandings, written or oral, with respect to the provision by BNY of such
services and the receipt of fees therefor.
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IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be duly executed and delivered by their duly authorized officers as of the date
first written above.
THE BANK OF NEW YORK
By: /s/ Stephen E. Grunston
-----------------------
Stephen E. Grunston
Vice President
NATIONSBANC ADVISORS, INC.
By: /s/ Edward D. Bedard
-----------------------
Edward D. Bedard
Senior Vice President and
Chief Operating Officer
NATIONS ANNUITY TRUST
By: /s/ James E. Banks, Jr.
-----------------------
James E. Banks, Jr.
Assistant Secretary
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SCHEDULE I
1. Nations Value Portfolio
2. Nations International Growth Portfolio
3. Nations Aggressive Growth Portfolio
4. Nations Marsico Focused Equities Portfolio
5. Nations Marsico Growth & Income Portfolio
6. Nations Managed Index Portfolio
7. Nations SmallCap Index Portfolio
8. Nations Balanced Assets Portfolio
Last Amended: May 1, 2000
IN WITNESS WHEREOF, the parties hereto have caused this amended
Schedule I to be executed by their duly authorized officers designated below as
of the 1st day of May, 2000.
THE BANK OF NEW YORK
By: /s/ Stephen E. Grunston
-----------------------------------
Stephen E. Grunston
Vice President
BANC OF AMERICA ADVISORS, INC.
(Formerly, NationsBanc Advisors, Inc.)
By: /s/ Edward D. Bedard
-----------------------------------
Edward D. Bedard
Senior Vice President and
Chief Operating Officer
NATIONS ANNUITY TRUST
By: /s/ Richard H. Blank, Jr.
-----------------------------------
Richard H. Blank, Jr.
Secretary
I-1
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SCHEDULE II
FUND ADMINISTRATION SERVICES
BNY shall perform the following sub-administrative services, in
addition to any other services agreed to from time to time:
o Monitor and document compliance by the Funds with their policies and
restrictions as delineated in their Prospectuses and Statements of
Additional Information, including any supplements or amendments thereto,
and with the rules and regulations under the 1940 Act utilizing Charles
River Development's compliance monitoring system or by such other means as
the parties may agree. NBAI shall be responsible for communicating such
policies and restrictions, including any changes thereto, to BNY by such
means as the parties agree.
o Provide income attribution summary schedules necessary for year-end tax
reporting, including the attached examples. Provide a gross up for foreign
taxes on a per share basis and the redesignation of income and capital
gains on a per share basis.
o Prepare federal, state, excise and local income tax returns for the Funds
and file such returns upon the approval of the Funds' independent
accountants; monitor, report on and prepare periodic worksheet and tax
provision packages with respect to Sub-Chapter M qualifications; prepare
and file all Form 1099s with respect to the Funds' Trustees; monitor
compliance with Section 4982 of the Internal Revenue Code; calculate and
maintain records pertaining to original issue discount and premium
amortization as required; identify wash sales and all other book/tax
differences, and report results to the Funds' independent accountants and
Funds management; and such other duties relating to federal and/or state
tax compliance as the parties may agree. BNY shall be responsible for
providing all pertinent tax information to the Funds' independent
accountants.
o Prepare Return of Capital Statement of Position 93-2 adjustments.
o Support NBAI in its preparation of the schedules and provide NBAI unaudited
quarterly and semi-annual and audited annual financial statements and
schedules of Fund investments by providing, without limitation, each Funds'
schedule of investments and general ledger in electronic format and/or hard
copy, as required, and such other information as may be necessary to
complete such financial reports.
o Prepare statistical reports for outside information services (referenced in
Schedule V), and such other information services as the parties may agree,
including the ICI expense survey.
o Attend Fund shareholder and Board of Trustees meetings as requested by
NBAI, including making such presentations as are appropriate, and, with
respect to the Fund administration services described herein, provide such
periodic and special reports to the Annuity Trust and NBAI as the Annuity
Trust and NBAI shall reasonably request.
II-1
<PAGE>
FUND ACCOUNTING SERVICES
BNY shall provide all accounting and recordkeeping services necessary
and appropriate for the business of the Funds, including but not limited to
those set forth below.
Required Records; Ledgers and Journals
--------------------------------------
BNY shall keep current the following accounts and records relating to
the business of the Funds, in such form as is required by the 1940 Act and the
rules thereunder, and generally accepted accounting principles, to support all
filings under applicable federal and state tax laws and regulations and as may
be mutually agreed to among the Annuity Trust, NBAI and BNY, and shall make
available to NBAI and/or the Annuity Trust upon request:
1. Cash Receipts Journal
2. Cash Disbursements Journal
3. Dividends Paid and Payable Schedule (book vs. tax basis)
4. Purchase and Sales Journals - Portfolio Securities
5. Realized/Unrealized Gain (Loss) Reports
6. Subscription and Redemption Journals
7. Security Ledgers - Transaction Report and Tax Lot Holdings Report
8. Broker Ledger - Commission Report
9. Daily Expense Accruals
10. Daily Interest Accruals
11. Daily Trial Balance
12. Portfolio Interest Receivable and Income Journal
13. Portfolio Dividend Receivable and Income Register
14. Listing of Portfolio Holdings - showing cost, market value and
percentage of portfolio comprised of each security
15. Aged Receivables (dividends, interest, tax reclaiming)
16. Portfolio Turnover Rate
17. Cash reconciliations
18. Position reconciliations
BNY will be responsible for maintaining, in accordance with Section 31
and the rules thereunder of the 1940 Act, all books and records so required and
generated in the course of performing their duties under this agreement.
Further, at a minimum, BNY shall maintain on-site the above referenced reports
as of each month end for the most recent fiscal year-ended and the current
fiscal year.
II-2
<PAGE>
Daily Accounting Services
-------------------------
BNY shall perform the following services on each Business Day:
1. Calculate Net Asset Value (NAV), and Public Offering Price (POP) Per Share
Pursuant to SEC formulas:
o Update the valuation of security positions held by each Fund's portfolio in
accordance with the Fund's Pricing Procedures and any other appropriate
procedures established by the Board and NBAI as NBAI shall provide BNY in
writing
o When instructed by NBAI, enter manual prices supplied by broker and link to
pricing procedures
o Calculate each Fund's NAV/POP in accordance with the applicable Pricing
Procedures approved by the Annuity Trust's Board of Trustees and prepare
NAV proof sheet. Review components of change in NAV for reasonableness
based on the tolerance levels as NBAI shall direct BNY in writing
o Review variance reporting for price changes in individual securities using
variance levels established by Fund and report to Fund portfolio managers
and to NBAI
o Review for ex-dividend items indicated by pricing sources; trace to general
ledger for agreement
o Communicate required pricing and yield information (NAV/POP), as
appropriate, to NBAI, the Funds' Transfer Agent and Sub-Transfer Agent and,
electronically, to NASDAQ and to such other third parties as designated by
the Funds with respect to its various distribution channels. In addition,
provide Fund share activity to NBAI.
2. Dividend Rates/Yields/Dollar Weighted Average Maturity:
-------------------------------------------------------
o Calculate, subject to the approval of NBAI, net investment income available
for distribution daily as appropriate
o Calculate daily dividend rate, and 1, 7, 30-day yields/SEC yields
o Calculate dollar weighted average maturity
3. Determine and Report Cash Availability:
-----------------------------------------------
o Receive daily cash and transaction statements from the Funds' Custodian
o Complete daily bank cash reconciliations (including documentation of any
reconciling items) and notify the Funds' Custodian
o Report investable cash to NBAI and Fund sub-advisers
4. Daily Expense Accruals:
--------------------------
o Accrue individual expenses on a daily basis based on Instructions provided
by NBAI, except for those instances where such an adjustment would cause a
full penny break in NAV, in which case such adjustment will be included in
the calculation of NAV on the day received
o If applicable, accrue daily amortization of organization expense as
instructed by NBAI
II-3
<PAGE>
o If applicable, accrue daily Rule 12b-1 Plan expenses
o Adjust expense accruals as instructed by NBAI and provide reports as
requested by NBAI
5. Verify and Record All Daily Income Accruals for Debt Issues:
---------------------------------------------------------------
o Track income and provide year end tax schedules
o Review and verify all interest and amortization reports
o Periodic tie-out of receivables
o Ensure security masters denote proper interest and amortization methods as
per the fund set up sheets as instructed by NBAI
6. Monitor Securities:
---------------------------
o Review each funds portfolio holding and current days security trades for
dividend activity
o Interface with Funds' Custodian for timely collection and postings of
corporate actions, dividends and interest pre-payments
7. Enter All Security Trades:
--------------------------
o Review verification of trade and interest calculations
o Verify settlement through custodian statements
o Maintain security ledger transaction reporting
o Maintain tax lot holdings
o Determine realized gains or losses on security trades
o Provide broker commission information
8. Enter All Fund Share Transactions:
------------------------------------------
o Periodically reconcile dividend payable amounts with the Funds' Transfer
Agent
o Process activity identified on transfer agent reports
o Verify settlement through custodian statements
o Reconcile to transfer agency report balances
o Process and track capital stock gain/loss activity
9. Prepare Daily Trial Balance:
------------------------------------
o Post manual entries to general ledger
o Post custodian bank activity
o Require automated settled transactions between custody and activity records
(prepare, clear and post)
o Post shareholder and security transactions
o Post and verify income and expense accruals and resolve differences
o Prepare general ledger
o Post corporate action activity
II-4
<PAGE>
10. Review and Reconcile Custodian Statements:
------------------------------------------
o Verify all posted interest, dividends, expenses, and shareholder and
security payments/receipts, etc. when requested
o Post all cash settlement activity to trial balance
o Reconcile to ending cash balance accounts
o Report to NBAI the status of past due items and failed trades with the
custodian
o Reconcile cash exception Income items, tax reclaims and past due income
items with custody area
11. Preparation of Accounting Reports:
------------------------------------------
o Price Variance Report
o Trial Balance
o Portfolio Valuation
o NAV Calculation Report
o Cash Availability
o Change in NAV
o Non-standard entries
o Stale Price Report
o Other such reports as may be reasonably be requested by NBAI
Monthly/Quarterly Services
--------------------------
BNY shall provide the following services on a monthly or quarterly
basis, within such timeframe as may be mutually agreed upon by BNY, the Annuity
Trust and NBAI:
1 Submission of Monthly Accounting Reports as mutually agreed upon
-----------------------------------------------------------------
2. Reconcile Asset Listing to Custodian Asset Listing
--------------------------------------------------
3. Provide Monthly Analysis and Reconciliation of Trial Balance Accounts
---------------------------------------------------------------------
4. Prepare Documentation Supporting the Preparation of:
-----------------------------------------------------
o SEC yield reporting
o Income by state reporting
o Standard Industry Code Valuation Report (please provide NBAI's industry
code classifications/is there a standard for all funds)
o Alternative Minimum Tax Income segregation schedule
II-5
<PAGE>
5. Provide Upon Request Broker Commission and Net Trade Reports
-------------------------------------------------------------
Annual (and Semi-Annual) Accounting Services
--------------------------------------------
BNY shall provide the following services on an annual and semi-annual
basis:
1. Supply auditors InvestOne reports supporting securities and shareholder
transactions, income and expense accruals, etc. during the year in
accordance with standard audit assistance requirements
2. Provide NBAI with information to assist NBAI in the preparation of NSAR
filings
- --------------------------------------------------------------------------------
Other Core Services
-------------------
BNY shall provide the following services:
o Accrete discounts and amortize premiums to put and call events as
directed by NBAI and in a manner acceptable under generally accepted
accounting principles
o Process principal repayments on mortgage backed securities
o Update variable securities with current rates
o Process corporate action events through a primary vender feed, and
monitor results via Reuters, Bloomberg, or other available sources as
the parties may agree
o Perform automated portfolio pricing with a second vendor as requested
by NBAI
o Produce documents and respond to inquiries during account and SEC
examinations
Money Market Funds: Prepare daily mark to market reports and analysis
in compliance with Rule 2a-7 including:
o Calculating the daily portfolio weighted average maturity
o Report portfolio diversification based on trade/security information
provided by NBAI by: Country, State, Tier, Liquidity, Asset Backed
Securities, Industry, Letter of Credit
o Listing percentage of portfolio maturing in specified intervals (i.e.,
number of days)
o Providing issuer and guarantor diversification exception reporting
International Funds: BNY shall provide the following services:
-------------------
o Report in base and local currency
II-6
<PAGE>
o Processing of tax liability on foreign income subject to approval of
NBAI
o Daily variance analysis performed on FX rates for security position
held
o Produce automated bifurcation reporting in compliance with IRC Section
988
o Mark to market security receivables and payables on a daily basis
o Determine portfolio exposure by country and currency
In addition to the above, BNY will provide additional support as
agreed upon from time to time (i.e., financial statement production).
II-7
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE III
SERVICE LEVEL PERFORMANCE STANDARDS
- ------------------------------------------------------------ ---------------------------------------------------------------
SERVICE STANDARD
- ------------------------------------------------------------ ---------------------------------------------------------------
<S> <C> <C>
1. Daily Cash Availability [ ] 100% accuracy and delivery by 9:00 a.m. EST for
Money Market Funds and 9:30 a.m. EST for all
others
[ ] Compensation for uninvested cash at Nations Cash
Reserves' mill rate
- ------------------------------------------------------------ -----------------------------------------------------------
2. Calculation of daily NAVs [ ] 100% accuracy by 5:00 p.m. EST including pricing,
expense accruals, cash activity, manual entries,
S/H activity. Delivery by 5:45 p.m. EST
- ------------------------------------------------------------ -----------------------------------------------------------
3. Review of daily NAVs [ ] 100% review by 5:30 p.m. EST
[ ] Review of NAV components for reasonableness
including analysis of the change in the NAV
and the change in mill rates.
[ ] Review of price variance report
[ ] Review of manual proof
- ------------------------------------------------------------ ---------------------------------------------------------------
4. NASDAQ Reporting [ ] 100% accuracy and communication by 5:45 p.m. EST
- ------------------------------------------------------------ ---------------------------------------------------------------
5. Daily Pricing and Rate Report (DPRR) [ ] 100% accuracy in nightly transmission of DPRRs
[ ] Money Market Funds-5:30 p.m. EST
[ ] All other funds- 6:00 p.m. EST
- ------------------------------------------------------------ ---------------------------------------------------------------
6. FundStation Report (SubM) [ ] 100% accuracy and nightly transmission by 7:00 p.m.
EST
- ------------------------------------------------------------ ---------------------------------------------------------------
7. Processing of trade tickets [ ] 100% accuracy and processed by T+1 if received by
the following cut-off times:
[ ] All Funds (except International) - 10:00 am (T+1)
[ ] International - 12:00 p.m. (T+1)
[ ] Same day settlements - 1:30 p.m.
- ------------------------------------------------------------ ---------------------------------------------------------------
</TABLE>
III-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------ ---------------------------------------------------------------
SERVICE STANDARD
- ------------------------------------------------------------ ---------------------------------------------------------------
8. Problem Resolution (general) [ ] NAV impact analysis within 1 day
[ ] Clear and timely communication of 100% of issues
[ ] Ongoing Tracking
- ------------------------------------------------------------ ---------------------------------------------------------------
9. Cash reconciliations [ ] Performed daily and sent daily to NBAI (Money Market
Funds) and sent weekly to NBAI (all other funds)
[ ] Issues communicated to NBAI same day
[ ] Outstanding items addressed within 1 business day
- ------------------------------------------------------------ ---------------------------------------------------------------
10. Position Reconciliations [ ] Performed daily and sent weekly to NBAI
[ ] Issues communicated to NBAI same day
[ ] Open issues addressed within 2 business days
- ------------------------------------------------------------ ---------------------------------------------------------------
11. Tax reporting
[ ] Federal, state, tax returns [ ] Tax provision package prepared within time
parameters as set by NBAI/Independent tax
[ ] Tax provision packages including Sub-M and excise personnel (PWC)
tax amounts/ distributions
[ ] Estimates of tax requirements prepared as required
[ ] Identification of all book/tax differences by NBAI for proper tax planning
[ ] Capital gain estimate preparations
- ------------------------------------------------------------ ---------------------------------------------------------------
12. Statistical Reports [ ] Filed within the time parameters as set forth by
each statistical service
- ------------------------------------------------------------ ---------------------------------------------------------------
13. Expense accruals/payments [ ] Payments made on the business day written
instructions from an authorized signator received
[ ] Expense accruals made with 100% accuracy based upon
written instructions from NBAI
- ------------------------------------------------------------ ---------------------------------------------------------------
14. Management Reports [ ] Provided to NBAI within 10 business days of month end
</TABLE>
III-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------ ---------------------------------------------------------------
SERVICE STANDARD
- ------------------------------------------------------------ ---------------------------------------------------------------
15. Year end tax reports [ ] Provided to NBAI within the time frame agreed to
- ------------------------------------------------------------ ---------------------------------------------------------------
16. Annual/Semi-Annual Reports [ ] Provide Trial Balance within 5 business days after
annual/semi-annual period
[ ] Provide additional financial statement support as
agreed to
- ------------------------------------------------------------ ---------------------------------------------------------------
17. Daily Reports [ ] To be provided on the following day
[ ] Provide detailed portfolio valuation
[ ] Trial Balance
- ------------------------------------------------------------ ---------------------------------------------------------------
18. Daily Cash Sweep [ ] 100% accuracy and communication by 2:00 p.m. EST
[ ] Nations Cash Reserves
[ ] AIM
[ ] Nuveen
- ------------------------------------------------------------ ---------------------------------------------------------------
19. Post Dividends / Corporate Actions [ ] 100% accuracy and posted on effective date
- ------------------------------------------------------------ ---------------------------------------------------------------
20. Monthly Reconciliations [ ] Complete reconciliations within 10 business days
- ------------------------------------------------------------ ---------------------------------------------------------------
21. Reporting to Sub-Advisors [ ] Provide nightly and other periodic reporting to
Nations Funds Sub-Advisors
- ------------------------------------------------------------ ---------------------------------------------------------------
22. Compliance [ ] Provide compliance reports as requested by NBAI
- ------------------------------------------------------------ ---------------------------------------------------------------
</TABLE>
III-3
<PAGE>
SCHEDULE IV
(ATTACHED)
IV-1
<PAGE>
SCHEDULE V
<TABLE>
<CAPTION>
<S> <C>
All Database Companies Quarterly List
---------------------- --------------
AMG Data Services Lipper
Barron's Morningstar
Bloomberg CDA Wiesenberger
CDA Wiesenberger Investment Company Institute
Commerce Clearing House (CCH) S&P Micropal
Forbes Institute for Economic Research
Institute for Economic Research Value Line
Interactive Data Services Media General Financial Services
Investment Company Institute LCG Associates
LCG Associates Closed End Fund Digest (Closed End Only)
Lipper Lipper - International (Closed End Only)
Media General
Moody's Investors Service
Morningstar
S&P Micropal
Strategic Insights
Value Line
</TABLE>
V-1
<PAGE>
SCHEDULE VI
Conversion Schedule
<TABLE>
<CAPTION>
- ---------------------------------------- -------------------------------------- --------------------------------------
Fund Type Number of Funds No Later Than
- ---------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
Money Market Funds 9 Funds 12/1/98
- ---------------------------------------- -------------------------------------- --------------------------------------
Variable Annuity Funds 8 Funds 12/31/98
- ---------------------------------------- -------------------------------------- --------------------------------------
International Funds: 8 Funds 12/31/98
- Global Government
- Emerging Markets
- Pacific Growth
- International Equity
- International Growth
- International Value
- 2 Marsico Funds
- ---------------------------------------- -------------------------------------- --------------------------------------
All Remaining Funds 44 Funds 2/15/99
- ---------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
VI-1
TRANSFER AGENCY AND SERVICES AGREEMENT
(With Facilities Management Arrangement)
THIS AGREEMENT, dated as of this first day of June, 1995 between
NATIONS FUND, INC., a Maryland corporation, NATIONS FUND TRUST, a Massachusetts
business trust, THE CAPITOL MUTUAL FUNDS, a Massachusetts business trust,
NATIONS FUND PORTFOLIOS, INC., a Maryland corporation, and each other investment
company which may become a party hereto pursuant to the terms of this Agreement
(individually a "Fund", and collectively, the "Funds"), each with its principal
place of business at 111 Center Street, Little Rock, Arkansas 72201 and
additional offices at 101 South Tryon Street, Charlotte, North Carolina 28255,
and THE SHAREHOLDER SERVICES GROUP, INC. (the "Transfer Agent"), a Massachusetts
corporation with principal offices at One Exchange Place, 53 State Street,
Boston, Massachusetts 02109.
WITNESSETH
----------
WHEREAS, each Fund desires to appoint the Transfer Agent as its
transfer agent, dividend disbursing agent and agent in connection with certain
other activities and the Transfer Agent desires to accept such appointment;
WHEREAS, each Fund may authorize the issuance of Shares in separate
series, with each such series representing interests in a separate portfolio of
securities and other assets ("Portfolio");
WHEREAS, each Fund and each Portfolio of a Fund subject to this
Agreement, including any investment company or Portfolio as may be added to this
Agreement pursuant to Section 17, shall be identified in the attached Schedule
G; and
WHEREAS, the Transfer Agent and NationsBank, N.A. (Carolinas)
("NationsBank") have entered into a Facilities Management Agreement ("Facilities
Agreement") dated June 1, 1995 pursuant to which the Transfer Agent has
established a servicing and processing center to provide transfer agent services
on behalf of the Funds in Charlotte, North Carolina (the "Charlotte Facility").
NOW THEREFORE, in consideration of the mutual covenants and promises
hereinafter set forth, the Funds and the Transfer Agent agree as follows:
Article 1 Definitions
------------
1.1 Whenever used in this Agreement, the following words and phrases,
unless the context otherwise requires, shall have the following meanings:
(a) "Articles of Incorporation" shall mean the Articles of
Incorporation, Declaration of Trust, or other similar organizational
document as the case may be, of a Fund as the same may be amended from time
to time.
<PAGE>
(b) "Authorized Person" of a Fund shall be deemed to include (i) any
authorized officer of the Fund; (ii) the members of the Joint Operations
Board (as hereinafter defined); or (iii) any person, whether or not such
person is an officer or employee of the Fund, duly authorized to give Oral
Instructions or Written Instructions on behalf of the Fund as indicated in
writing to the Transfer Agent from time to time.
(c) "Board of Directors" of a Fund shall mean the Board of Directors
or Board of Trustees of the Fund, as the case may be.
(d) "Commission" shall mean the Securities and Exchange Commission.
(e) "Custodian" of a Fund refers to any custodian or subcustodian of
securities and other property which the Fund may from time to time deposit,
or cause to be deposited or held under the name or account of such a
custodian pursuant to a Custodian Agreement.
(f) "Joint Operations Board" shall mean the joint board comprised of
one senior representative from the Transfer Agent, one individual
designated by the Funds jointly to represent their respective interests and
the most senior Transfer Agent manager of the Charlotte Facility.
(g) "1940 Act" shall mean the Investment Company Act of 1940 and the
rules and regulations promulgated thereunder, all as amended from time to
time.
(h) "Oral Instructions" shall mean instructions, other than Written
Instructions, actually received by the Transfer Agent from a person
reasonably believed by the Transfer Agent to be an Authorized Person;
(i) "Prospectus" of a Fund shall mean collectively the most recently
dated Fund Prospectuses and Statements of Additional Information, including
any supplements thereto, if any, with respect to each Portfolio of the Fund
which have become effective under the Securities Act of 1933 and the 1940
Act.
(j) "Shares" of a Fund refers collectively to such shares of capital
stock or beneficial interest, as the case may be, or class thereof, of the
Fund as may be issued from time to time.
(k) "Shareholder" shall mean a record owner of Shares.
(l) "Written Instructions" shall mean a written communication signed
by a person reasonably believed by the Transfer Agent to be an Authorized
Person and actually received by the Transfer Agent. Written Instructions
shall include manually executed originals and authorized electronic
transmissions, including telefacsimile of a manually executed original or
other process.
2
<PAGE>
Article 2 Appointment of the Transfer Agent
---------------------------------
2.1 Each Fund hereby appoints and constitutes the Transfer Agent as
transfer agent and dividend disbursing agent for Shares of the Fund and the
Transfer Agent hereby accepts such appointments and agrees to perform the duties
hereinafter set forth.
Article 3 Duties of the Transfer Agent
----------------------------
3.1 The Transfer Agent shall be responsible for:
(a) Administering and performing the customary services of a transfer
agent; agent in connection with dividend and distribution functions; and
agent in connection with shareholder account and administrative functions
in connection with the issuance, transfer and redemption or repurchase
(including coordination with the Custodian) of Shares, as more fully
described in the written schedule of Duties of the Transfer Agent annexed
hereto as Schedule A and incorporated herein, and in accordance with the
terms of each Fund's Prospectus, applicable law and the procedures
established from time to time between the Transfer Agent and the Funds.
(b) Recording the issuance of Shares and maintaining pursuant to
Commission Rule 17Ad-10(e) a record of the total number of Shares which are
authorized, based upon data provided to it by each Fund, and issued and
outstanding. The Transfer Agent shall provide each Fund on a regular basis
with the total number of Shares which are authorized and issued and
outstanding and shall have no obligation, when recording the issuance of
Shares, to monitor the issuance of such Shares or to take cognizance of any
laws relating to the legality or validity of the issue or sale of such
Shares, which functions shall be the sole responsibility of the Fund.
(c) Notwithstanding any of the foregoing provisions of this Agreement,
the Transfer Agent shall be under no duty or obligation to inquire into,
and shall not be liable for: (i) the legality of the issuance or sale of
any Shares or the sufficiency of the amount to be received therefor; (ii)
the legality of the redemption of any Shares, or the propriety of the
amount to be paid therefor; (iii) the legality of the declaration of any
dividend by the Board of Directors, or the legality of the issuance of any
Shares in payment of any dividend; or (iv) the legality of any
recapitalization or readjustment of the Shares.
3.2 In addition, each Fund shall verify the establishment of shares or
share transactions for each State prior to activation on the Transfer Agent's
system and thereafter monitor the daily activity of shares for each State based
upon daily transactions recorded by the Transfer Agent and transmitted to the
Fund or its designated agent. The responsibility of the Transfer Agent for a
Fund's blue sky State registration status is solely limited to the initial
establishment of shares or share transactions subject to blue sky compliance by
the Fund and the reporting of such transactions to the Fund as provided above.
3
<PAGE>
3.3 In addition to the duties set forth herein, the Transfer Agent shall
perform such other duties and functions, and shall be paid such amounts
therefor, as may from time to time be agreed upon in writing between the Funds
and the Transfer Agent.
Article 4 Duties of the Joint Operations Board
-------------------------------------
4.1 The Joint Operations Board will be responsible for the following with
respect to the services to be performed by the Transfer Agent under this
Agreement (the "Services"):
(a) General oversight of the provision of Services by the Transfer
Agent, including, but not limited to, the creation and quarterly review of
quality standards governing the Services pursuant to Article 5 hereof, the
establishment of strategic and/or operational goals with respect to the
Services to be provided at the Charlotte Facility, and addressing such
issues and concerns that may arise from time to time amongst the Funds and
the Transfer Agent under this Agreement.
(b) Review and approval of, from a technical feasibility standpoint,
imaging and other new technologies proposed to be used by the Transfer
Agent in performing the Services at the Charlotte facility.
(c) Review and approval of the Charlotte Facility budget and expense
statements, including those costs for which compensation is sought by the
Transfer Agent pursuant to Article 8 hereof.
(d) Review of those costs incurred by the Transfer Agent, other than
in connection with the Charlotte Facility, for which compensation is sought
by the Transfer Agent pursuant to Article 8 hereof.
4.2 With respect to matters described in Section 4.1 above, the decision of
the Funds' representative on the Joint Operations Board shall control.
4.3 On a monthly basis, the Transfer Agent shall provide to the Joint
Operations Board a statement of the internal and external costs incurred by the
Transfer Agent in connection with the provision of Services for which the
Transfer Agent will seek reimbursement under Article 8 hereof.
Article 5 Quality Standards
-----------------
5.1 The quality of service provided by the Transfer Agent hereunder shall
be maintained at or above the levels set forth in Schedule B hereto. Such
quality standards shall govern the Services provided by the Transfer Agent until
a new set of quality standards is established pursuant to Section 5.2 hereof.
5.2 As soon as practicable after the first ninety (90) days of operation of
the Charlotte Facility, the Joint Operations Board shall establish a new set of
quality standards reasonably acceptable to the Funds and the Transfer Agent.
4
<PAGE>
5.3 The Joint Operations Board shall review and update, if necessary, the
quality standards on a semi-annual basis.
5.4 If, at any time during the term of this Agreement, 20% or more of the
then-current quality standards (e.g., 2 or more out of 10 standards) are not met
by the Transfer Agent during any month (as evidenced by monthly reports), the
Funds shall promptly notify the Transfer Agent in writing of such failure and
the details relating to such failure. If, any of the failed quality standards
are not met by the Transfer Agent during the three month period commencing
thirty (30) days after the Transfer Agent receives such notice, the Funds shall
have the right to terminate this Agreement on thirty (30) days notice.
5.5 Notwithstanding the foregoing, the Funds shall not have the right to
terminate this Agreement based on the failure by the Transfer Agent to have
satisfied a quality standard if such failure was caused directly by the negative
vote of the Funds' representative on the Joint Operations Board with respect to
a commercially reasonable funding request of the Transfer Agent for the
Charlotte Facility.
Article 6 Recordkeeping and Other Information
-----------------------------------
6.1 The Transfer Agent shall create and maintain all records required of it
pursuant to its duties hereunder and as set forth in Schedule A in accordance
with all applicable laws, rules and regulations, including records required by
Section 31(a) of the 1940 Act. All records shall be available during regular
business hours for inspection and use by the Funds. Where applicable, such
records shall be maintained by the Transfer Agent for the periods and in the
places required by Rule 31a-2 under the 1940 Act.
6.2 To the extent required by Section 31 of the 1940 Act, the Transfer
Agent agrees that all such records prepared or maintained by the Transfer Agent
relating to the Services are the property of the relevant Fund and will be
preserved, maintained and made available in accordance with such section, and
will be surrendered promptly to such Fund on and in accordance with the Fund's
request.
6.3 In case of any requests or demands for the inspection of Shareholder
records of a Fund, the Transfer Agent will endeavor to notify the Fund of such
request and secure Written Instructions as to the handling of such request. The
Transfer Agent reserves the right, upon prior notice to the Fund, to exhibit the
Shareholder records to any person whenever it is advised by its counsel that it
may be held liable for the failure to comply with such request.
6.4 Upon reasonable notice by a Fund, the Transfer Agent shall make
available during regular business hours such of its facilities and premises
employed in connection with the performance of its duties under this Agreement
for reasonable visitation by the Fund, or any person retained by the Fund as may
be necessary for the Fund to evaluate the quality of the Services performed by
the Transfer Agent pursuant hereto.
5
<PAGE>
Article 7 Fund Instructions
-----------------
7.1 The Transfer Agent will have no liability when acting for a Fund in
accordance with Written or Oral Instructions believed to have been executed or
orally communicated by an Authorized Person of the Fund and will not be held to
have any notice of any change of authority of any person until receipt of a
Written Instruction thereof from the Fund. The Transfer Agent will also have no
liability when processing Share certificates for a Fund which it reasonably
believes to bear the proper manual or facsimile signatures of the officers of
the Fund and the proper countersignature of the Transfer Agent.
7.2 The Transfer Agent may request Written Instructions from a Fund and may
seek advice from legal counsel for the Fund with prior notice to the Fund, or
its own legal counsel, with respect to any matter arising in connection with
this Agreement, and it shall not be liable for any action taken or not taken or
suffered by it in good faith in accordance with such Written Instructions or in
accordance with the opinion of counsel for the Fund or for the Transfer Agent.
Written Instructions requested by the Transfer Agent will be provided by the
Fund within a reasonable period of time.
7.3 The Transfer Agent, its officers, agents or employees, shall accept
Oral Instructions or Written Instructions given to them with respect to a Fund
by any person representing or acting on behalf of the Fund only if said
representative is an Authorized Person of the Fund. The Funds agree that all
Oral Instructions shall be followed within one business day by confirming
Written Instructions, and that the Funds' failure to so confirm shall not impair
in any respect the Transfer Agent's right to reply on Oral Instructions.
Article 8 Compensation
--------------
8.1 The Funds shall reimburse the Transfer Agent for all the Transfer
Agent's "Costs" incurred in connection with the provision of Services as set
forth in the written Schedule of Costs annexed hereto as Schedule C and
incorporated herein and in addition the Funds shall compensate the Transfer
Agent for the following amounts (the "Margin");
(a) During the first 36 months of the Initial Term (as defined below),
an amount equal to 15% of such Costs during each month.
(b) During the last 24 months of the Initial Term and during each
Renewal Term (as defined below), an amount equal to 12.5% of such Costs
during each month.
8.2 Notwithstanding the foregoing, the charges incurred by the Transfer
Agent under the Facilities Agreement with NationsBank and such other expenses
set forth in the written schedule of Non-Margin Expenses annexed hereto as
Schedule D shall not be included as Costs in connection with the calculation of
the Margin amounts set forth in Subsections 8.1(a) and (b).
6
<PAGE>
8.3 In addition to the Costs and Margin described above, the Fund shall
reimburse the Transfer Agent, and will be billed separately for, those
out-of-pocket expenses incurred by the Transfer Agent in the performance of its
duties hereunder as specified in the written schedule of out-of-pocket expenses
annexed hereto as Schedule E and incorporated herein.
8.4 The Funds agree to pay all fees and out-of-pocket expenses within
thirty (30) days following the receipt of the respective invoice. The Funds
shall not be obligated to pay amounts that are reasonably in dispute until such
dispute is resolved.
Article 9 Documents
---------
9.1 In connection with the appointment of the Transfer Agent, each Fund
shall, on or before the date this Agreement goes into effect, but in any case
within a reasonable period of time for the Transfer Agent to prepare to perform
its duties hereunder, deliver or cause to be delivered to the Transfer Agent the
documents set forth in the written schedule of Fund Documents annexed hereto as
Schedule F.
Article 10 Transfer Agent System
---------------------
10.1 The Transfer Agent shall retain title to and ownership of any and all
data bases, computer programs, screen formats, report formats, interactive
design techniques, derivative works, inventions, discoveries, patentable or
copyrightable matters, concepts, expertise, patents, copyrights, trade secrets,
and other related legal rights utilized by the Transfer Agent in connection with
the services provided by the Transfer Agent to the Fund herein (the "Transfer
Agent System").
10.2 The Transfer Agent hereby grants to each Fund a limited license to the
Transfer Agent System for the sole and limited purpose of having the Transfer
Agent provide the services contemplated hereunder and nothing contained in this
Agreement shall be construed or interpreted otherwise and such license shall
immediately terminate upon the termination of this Agreement.
10.3 The Transfer Agent agrees to provide the Funds with full access to the
Transfer Agent System and all enhancements thereto to the same extent that such
is made available to other Transfer Agent clients.
10.4 In the event the Funds desire the Transfer Agent to develop any
enhancements for the Transfer Agent System, the parties shall agree on the
staffing requirements which will be subject to the approval of the Joint
Operations Board.
10.5 In the event the Funds request an enhancement to the Transfer Agent
System which is estimated to require 5,000 programming hours or more
("Enhancement Project") and the Funds agree to assume the cost of such
Enhancement Project, the Funds and the Transfer Agent shall agree in writing on
any restrictions imposed on the Transfer Agent with respect to the use of such
enhancement prior to commencement of the Enhancement Project.
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<PAGE>
10.6 Each Fund reserves the right to review and examine "imaging" and
significant other technological developments to be implemented with the Transfer
Agent System from a technical feasibility standpoint.
Article 11 Representations and Warranties of the Transfer Agent
----------------------------------------------------
11.1 The Transfer Agent represents and warrants to each Fund that:
(a) It is a corporation duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts;
(b) It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement;
(c) All requisite corporate proceedings have been taken to authorize
it to enter into this Agreement;
(d) It is duly registered with the appropriate regulatory agencies as
a transfer agent and such registration will remain in effect for the
duration of this Agreement;
(e) It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations
under this Agreement.
Article 12 Representations and Warranties of the Funds
-------------------------------------------
12.1 Each Fund represents and warrants to the Transfer Agent that:
(a) It is duly organized and existing and in good standing under the
laws of the jurisdiction in which it is organized;
(b) It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into this Agreement;
(c) All corporate proceedings required by said Articles of
Incorporation, By-Laws and applicable laws have been taken to authorize it
to enter into this Agreement;
(d) A registration statement under the Securities Act of 1933, as
amended, is currently effective and will remain effective, and all
appropriate state securities law filings have been made and will continue
to be made, with respect to all Shares of the Fund being offered for sale;
(e) All outstanding Shares are validly issued, fully paid and
non-assessable and that, when Shares are hereafter issued in accordance
with the terms of the Fund's Articles of Incorporation and its Prospectus,
such Shares shall be validly issued, fully paid and non-assessable.
8
<PAGE>
Article 13 Indemnification
---------------
13.1 The Transfer Agent shall not be responsible for and each Fund shall
indemnify and hold the Transfer Agent harmless from and against any and all
claims, costs, expenses (including reasonable attorneys' fees), losses, damages,
charges, payments and liabilities of any sort or kind which may be asserted
against the Transfer Agent or for which the Transfer Agent may be held to be
liable (a "Claim") arising out of or attributable to any of the following:
(a) Any actions of the Transfer Agent required to be taken pursuant to
this Agreement for the Fund unless such Claim resulted from a negligent act
or failure to act or bad faith by the Transfer Agent in the performance of
its duties hereunder.
(b) The Transfer Agent's reasonable reliance on, or reasonable use of
information, data, records and documents (including but not limited to
magnetic tapes, computer printouts, hard copies and microfilm copies)
received by the Transfer Agent from the Fund, or any authorized third party
acting on behalf of the Fund, including but not limited to the prior
transfer agent for the Fund, in the performance of the Transfer Agent's
duties and obligations hereunder.
(c) The reliance on, or the implementation of, any Written or Oral
Instructions or any other instructions or requests of the Fund which are
deemed to be provided by an Authorized Person of the Fund.
(d) The offer or sales of Shares by the Fund in violation of any
requirement under the securities laws or regulations of any state that such
Shares be registered in such state or in violation of any stop order or
other determination or ruling by any state with respect to the offer or
sale of such Shares in such state.
(e) The Fund's refusal or failure to comply with the terms of this
Agreement, or any Claim which arises out of the Fund's negligence or
misconduct or the breach of any representation or warranty of the Fund made
herein.
13.2 In any case in which a Fund may be asked to indemnify or hold the
Transfer Agent harmless, the Transfer Agent will notify the Fund promptly after
identifying any situation which it believes presents or appears likely to
present a claim for indemnification against the Fund although the failure to do
so shall not prevent recovery by the Transfer Agent, unless the Fund is actually
prejudiced thereby, and the Transfer Agent shall keep the Fund advised with
respect to all developments concerning such situation. The Fund shall have the
option to defend the Transfer Agent against any Claim which may be the subject
of this indemnification, and, in the event that the Fund so elects, such defense
shall be conducted by counsel chosen by the Fund and satisfactory to the
Transfer Agent, and thereupon the Fund shall take over complete defense of the
Claim and the Transfer Agent shall sustain no further legal or other expenses in
respect of such Claim. The Transfer Agent will not confess any Claim or make any
compromise in
9
<PAGE>
any case in which the Fund will be asked to provide indemnification, except
with the Fund's prior written consent. The obligations of the parties hereto
under this Article shall survive the termination of this Agreement, so long as
the Transfer Agent and the Fund act in good faith and are not negligent in their
actions.
Article 14 Standard of Care
----------------
14.1 The Transfer Agent shall at all times act in good faith and agrees to
use its best efforts within commercially reasonable limits to ensure the
accuracy of all services performed under this Agreement, but assumes no
responsibility for loss or damage to the Funds unless said errors are caused by
the Transfer Agent's own negligence, bad faith or willful misconduct or that of
its employees.
Article 15 Consequential Damages
---------------------
15.1 In no event and under no circumstances shall either a Fund or the
Transfer Agent be liable to another party for consequential or indirect loss of
profits, reputation or business or any other special damages under any provision
of this Agreement or for any act or failure to act hereunder.
Article 16 Term and Termination
---------------------
16.1 This Agreement shall be effective on the date first written above and
shall continue for a period of sixty (60) months (the "Initial Term"), unless
earlier terminated pursuant to the terms of this Agreement. Thereafter, this
Agreement shall automatically be renewed for successive terms of twenty-four
(24) months ("Renewal Terms") each, unless terminated pursuant to this
Agreement.
16.2 The Funds or the Transfer Agent may terminate this Agreement at the
end of the Initial Term or at the end of any subsequent Renewal Term upon not
less than nine (9) months prior written notice to the other parties.
16.3 Upon a minimum of nine (9) months prior written notice from the Boards
of Directors of the Funds, the Funds may terminate this Agreement at the end of
the thirty-sixth (36th) or forty-eighth (48th) month of the Initial Term.
16.4 The Funds shall have the right to terminate this Agreement immediately
upon the insolvency or bankruptcy of the Transfer Agent or the appointment of a
receiver for the Transfer Agent, or with respect to any of its assets, or any
change in the financial condition of the Transfer Agent which impedes the
ability of the Transfer Agent to perform any of its obligations hereunder which
is not cured by the Transfer Agent within thirty (30) days of such occurrence.
The Funds shall have the right to seek to renegotiate this Agreement and, if
such negotiations are not successful within a reasonable period of time, not to
exceed ninety (90) days, to terminate this Agreement upon the transfer of
ownership of a controlling interest in the Transfer Agent by or to any person
other than a person who was an affiliate of the Transfer Agent or its parent
company immediately before the transfer.
10
<PAGE>
16.5 In the event that the total number of combined Shareholder accounts
for the Funds and any other open-end investment companies affiliated with the
Funds by reason of having a common investment adviser exceeds three times the
1994 Shareholder account base of 130,000 due to merger or acquisition activity
involving the investment adviser or any affiliates of the adviser, the Funds
shall have the right to terminate this Agreement upon nine (9) months prior
written notice to the Transfer Agent. As used in this Article 16, "affiliates of
the adviser" shall mean (i) a direct or indirect owner of 50% or more of the
outstanding common stock of the adviser (a "parent") or (ii) any company or
association whose outstanding common stock is at least 50% owned, directly or
indirectly, by the adviser or by a parent.
16.6 In the event this Agreement is terminated by the Funds pursuant to
Section 5.4, all expenses associated with the movement of records and materials
to a successor transfer agent will be borne by the Transfer Agent. In the event
of a termination pursuant to any other sections, all expenses associated with
conversion will be borne by the Funds. The Transfer Agent shall cooperate with
any such conversion to a successor transfer agent and shall use its best efforts
to mitigate the costs associated with such transfer.
16.7 If a party hereto is guilty of a material failure to perform its
duties and obligations hereunder (a "Defaulting Party") the other party (the
"Non-Defaulting Party") may give written notice thereof to the Defaulting Party,
and if such material breach shall not have been remedied within thirty (30) days
after such written notice is given, then the Non-Defaulting Party may terminate
this Agreement by giving thirty (30) days written notice of such termination to
the Defaulting Party. If the Transfer Agent is the Non-Defaulting Party, its
termination of this Agreement shall not constitute a waiver of any other rights
or remedies of the Transfer Agent with respect to services performed prior to
such termination or rights of the Transfer Agent to be reimbursed for
out-of-pocket expenses incurred prior to such termination. In all cases,
termination by the Non-Defaulting Party shall not constitute a waiver by the
Non-Defaulting Party of any other rights it might have under this Agreement or
otherwise against the Defaulting Party. The Defaulting Party shall not be
released from any liability with respect to such services performed prior to
such termination.
16.8 In the event of termination of this Agreement by the Funds pursuant to
Sections 16.3 or 16.5:
(a) Prior to the effective date of the termination, the Funds shall
reimburse the Transfer Agent for all unamortized costs incurred by the
Transfer Agent in establishing the Charlotte Facility.
(b) Prior to the effective date of the termination, the Funds shall
assume any and all obligations that the Transfer Agent may have to third
parties arising out of or in connection with the Transfer Agent's
operations at the Charlotte Facility and that the Transfer Agent is not
able to terminate prior to the effective date of the termination of this
Agreement.
11
<PAGE>
(c) Prior to the effective date of the termination, the Funds shall
pay the Transfer Agent an amount equal to 80% of the cumulative Margin (as
defined in Section 8.1) paid by the Funds to the Transfer Agent for the
twelve months preceding the notice of termination, unless the Funds'
investment adviser or any affiliate of the adviser has acquired an entity
providing comparable transfer agency services to those provided under this
Agreement.
(d) The Funds shall reimburse the Transfer Agent for all reasonable
expenses (other than accrued vacation, sick or other leave) incurred by the
Transfer Agent in connection with the termination of the Transfer Agent's
employees located at the Charlotte Facility, or, at the option of the
Funds, the transfer of such employees to another entity providing services
to the Funds. The Transfer Agent shall be obligated to seek to minimize any
such expenses to the extent commercially practicable.
(e) The Transfer Agent shall transfer to the Funds all physical assets
located at the Charlotte Facility.
Article 17 Additional Portfolios and Funds
-------------------------------
17.1 In the event that a Fund establishes one or more Portfolios in
addition to those identified initially on Schedule G, with respect to which the
Fund desires to have the Transfer Agent render services as transfer agent under
the terms hereof, the Fund shall so notify the Transfer Agent in writing, and if
the Transfer Agent agrees in writing to provide such services (such agreement
not to be withheld unreasonably), Schedule G shall be amended to include such
additional Portfolios.
17.2 Subsequent to the effective date of this Agreement, one or more
registered investment companies (a "New Fund") for which NationsBank or any of
its affiliates acts as investment adviser may become a party to this Agreement
upon execution of a written adoption agreement by such New Fund pursuant to
which such New Fund agrees to be bound by the terms of this Agreement (an
"Adoption Agreement"). Following the execution of an Adoption Agreement by a New
Fund, such New Fund shall be deemed a Fund for all purposes of this Agreement
and shall have all the rights, obligations and duties of a Fund under this
Agreement.
Article 18 Confidentiality
-----------------
18.1 In connection with the services provided by the Transfer Agent
hereunder, certain confidential and proprietary information regarding the
Transfer Agent and the Fund may be disclosed to the other. In connection
therewith, the parties agree as follows:
(a) "Confidential Information" shall mean:
(i) any data or information that is competitively sensitive
material, and not generally known to the public, including, but
not limited to, information about product plans, marketing
strategies, finance, operations, customer relationships, customer
profiles,
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<PAGE>
sales estimates, business plans, and internal performance results
relating to the past, present or future business activities of
the Transfer Agent or the Fund, their respective parent
corporation, their respective subsidiaries and affiliated
companies and the customers, clients and suppliers of any of the
foregoing;
(ii) any scientific or technical information, design,
process, procedure, formula, or improvement that is commercially
valuable and secret in the sense that its confidentiality affords
the Transfer Agent or the Fund a competitive advantage over its
competitors; and
(iii) all confidential or proprietary concepts,
documentation, reports, data, specifications, computer software,
source code, object code, flow charts, databases, inventions,
know-how, show-how and trade secrets, whether or not patentable
or copyrightable.
(b) Confidential Information includes, without limitation, all
documents, inventions, substances, engineering and laboratory notebooks,
drawings, diagrams, specifications, bills of material, equipment,
prototypes and models, and any other tangible manifestation of the
foregoing which now exist or come into the control or possession of the
party.
18.2 Except as expressly authorized by prior written consent of the
disclosing party ("Discloser"), the party receiving Confidential Information
("Recipient") shall:
(a) limit access to Discloser's Confidential Information to
Recipient's employees and agent who have a need-to-know in connection with
the subject matter thereof;
(b) advise those employees and agents who have access to the
Confidential Information of the proprietary nature thereof and of the
obligations set forth in this Confidential Agreement;
(c) take appropriate action by instruction or agreement with the
employees and agents having access to Discloser's Confidential Information
to fulfill Recipient's obligations under this Confidentiality Agreement;
(d) safeguard all of Discloser's Confidential Information by using a
reasonable degree of care, but not less than that degree of care used by
Recipient in safeguarding its own similar confidential information or
material;
(e) use all of Discloser's Confidential Information solely for
purposes for which the Confidential Information was conveyed; and
(f) not disclose any of Discloser's Confidential Information, or
information derived therefrom, to third parties.
13
<PAGE>
18.3 Upon Discloser's request, Recipient shall surrender to Discloser all
memoranda, notes, records, drawings, manuals, and other documents or materials
(and all copies of same) relating to or containing Discloser's Confidential
Information. When Recipient returns the materials, Recipient shall certify in
writing that it has returned all materials containing or relating to the
Confidential Information.
18.4 The obligations of confidentiality and restriction on use in this
Article 18 shall not apply to any Confidential Information that Recipient
proves:
(a) Was in the public domain prior to the date of this Agreement or
subsequently came into the public domain through no fault of Recipient; or
(b) Was received by Recipient from a third party without Recipient's
knowledge that the third party was not legally entitled to disclose such
information; or
(c) Was already in Recipient's possession prior to receipt from
Discloser; or
(d) Is required to be disclosed in a judicial or administrative
proceeding after reasonable legal remedies for maintaining such information
in confidence have been exhausted including, but not limited to, giving
Discloser as much advance notice as practical of the possibility of
disclosure to allow Discloser to take appropriate legal action to seek to
prevent such disclosure; or
(e) Is subsequently and independently developed by Recipient's
employees, consultants or agents without reference to Confidential
Information.
18.5 The Funds and the Transfer Agent agree that money damages would not be
a sufficient remedy to an injured party for breach of this Article 18.
Accordingly, in addition to all other remedies that a party may have, a party
shall be entitled to specific performance and injunctive or other equitable
relief against another party as a remedy for any breach of the obligations set
forth in this Article 18. The parties agree to waive any requirement for a bond
in connection with any such injunctive or other equitable relief.
18.6 The rights and obligations established by this Article 18 shall
survive the termination of this Agreement.
Article 19 Force Majeure
--------------
19.1 In the event a party is unable to perform its obligations under the
terms of this Agreement because of acts of God or by reason of circumstances
beyond its control, including war, national emergencies, strikes, labor
difficulties, insurrection, riots or the failure or unavailability of
transportation or communication services or power supplies, such party shall not
be liable for damages incurred by any other party resulting from such failure to
perform. The above in no way relieves the Transfer Agent or the Funds of
responsibility for exercising all backup and contingency plans available and in
effect at
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<PAGE>
such time and does not affect any other remedies that a party may have under
this Agreement.
Article 20 Amendments
----------
20.1 This Agreement may only be amended or modified by a written instrument
executed by all parties except that Schedule A may be amended in the manner set
forth in Section 17.1.
Article 21 Subcontracting
--------------
21.1 Each Fund agrees that the Transfer Agent, in its discretion, may after
notification to the Funds, subcontract for certain of the services to be
provided by the Transfer Agent under this Agreement or the Schedules hereto;
provided that the appointment of any such subcontractor shall not relieve the
Transfer Agent of its responsibilities hereunder.
Article 22 Arbitration
------------
22.1 Any claim or controversy arising out of or relating to this Agreement,
or breach hereof, shall be settled by arbitration administered by the American
Arbitration Association in Charlotte, North Carolina in accordance with its
applicable rules, except that the Federal Rules of Evidence and the Federal
Rules of Civil Procedure with respect to the discovery process shall apply.
22.2 The parties hereby agree that judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction.
22.3 The parties acknowledge and agree that the performance of the
obligations under this Agreement necessitates the use of instrumentalities of
interstate commerce and, notwithstanding other general choice of law provisions
in this Agreement, the parties agree that the Federal Arbitration Act shall
govern and control with respect to the provisions of this Article 22.
Article 23 Notice
--------
23.1 Any notice or other instrument authorized or required by this
Agreement to be given in writing to a party, shall be sufficiently given if
addressed to that party and received by it at its office set forth below or at
such other place as such party may from time to time designate in writing.
To either of the Funds:
[Name of Applicable Fund]
111 Center Street
Little Rock, Arkansas 72201
Attention: Corporate Secretary
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<PAGE>
To the Transfer Agent:
The Shareholder Services Group
One Exchange Place
53 State Street
Boston, Massachusetts 02109
Attention: President
with a copy to:
General Counsel (same address)
Article 24 Successors
------------
24.1 This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns, provided, however, that
this Agreement shall not be assigned to any person other than a person
controlling, controlled by or under common control with the assignor without the
written consent of the other party, which consent shall not be unreasonably
withheld.
Article 25 Governing Law
25.1 This Agreement shall be governed exclusively by the laws of the
Commonwealth of Massachusetts without reference to the choice of law provisions
thereof. Subject to Article 22 hereof, each party hereto hereby (i) consents to
the personal jurisdiction of the Commonwealth of Massachusetts courts over the
parties hereto, hereby waiving any defense of lack of personal jurisdiction; and
(ii) appoints the person to whom notices hereunder are to be sent as agent for
service of process.
Article 26 Counterparts
26.1 This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original; but such counterparts shall, together,
constitute only one instrument.
Article 27 Captions
27.1 The captions of this Agreement are included for convenience of
reference only and in no way define or limit any of the provisions hereof or
otherwise affect their construction or effect.
Article 28 Use of Transfer Agent/Fund Name
28.1 The Funds shall not use the name of the Transfer Agent in any
Prospectus, Statement of Additional Information, Shareholders' report, sales
literature or other material relating to the Fund in a manner not approved prior
thereto in writing by the Transfer Agent; provided, that the Transfer Agent need
only receive notice of all reasonable uses of its name which merely refer in
accurate terms to its appointment hereunder or which are required by any
government agency or applicable law or rule.
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<PAGE>
28.2 The Transfer Agent shall not use the name of a Fund or material
relating to a Fund on any documents or forms for other than internal use in a
manner not approved prior thereto in writing by such Fund; provided, that the
Fund need only receive notice of all reasonable uses of its name which merely
refer in accurate terms to the appointment of the Transfer Agent as transfer
agent for the Fund or which are required by any government agency or applicable
law or rule.
Article 29 Relationship of Parties
-----------------------
29.1 The parties agree that they are independent contractors and not
partners or co-venturers and nothing contained herein shall be interpreted or
construed otherwise.
29.2 The parties hereby acknowledge and agree that each Fund has entered
into this Agreement independently on behalf of itself and its Portfolios which
are now or may hereafter be identified on Schedule G. Notwithstanding anything
to the contrary contained in this Agreement, (i) each Fund individually shall
have the rights and obligations of a Fund as set forth in this Agreement, (ii)
any action by a Fund in violation of this Agreement shall not affect the rights
and obligations of any other Fund under this Agreement, and (iii) the Transfer
agent, in seeking to enforce any provisions of this Agreement with respect to a
Portfolio, shall look solely to the assets and revenues of such Portfolio and
that in no event shall the Transfer Agent in seeking to enforce such obligation
have recourse to the independent assets or revenues of any other Portfolio.
Article 30 Entire Agreement; Severability
------------------------------
30.1 This Agreement and the Schedules attached hereto constitute the entire
agreement of the parties hereto relating to the matters covered hereby and
supersede any previous agreements. If any provision is held to be illegal,
unenforceable or invalid for any reason, the remaining provisions shall not be
affected or impaired thereby.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers, as of the day and year first above
written.
NATIONS FUND, INC.
By: /s/ Richard H. Blank, Jr.
------------------------------
Title: Secretary
---------------------------
NATIONS FUND TRUST
By: /s/ Richard H. Blank, Jr.
------------------------------
Title: Secretary
---------------------------
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THE CAPITOL MUTUAL FUNDS
By: /s/ Richard H. Blank, Jr.
------------------------------
Title: Secretary
---------------------------
NATIONS FUND PORTFOLIOS, INC.
By: /s/ Richard H. Blank, Jr.
------------------------------
Title: Secretary
---------------------------
THE SHAREHOLDER SERVICES
GROUP, INC.
By: /s/ (Illegible)
Title: (Illegible)
---------------------
18
<PAGE>
Schedule A
DUTIES OF THE TRANSFER AGENT
1. Shareholder Information. The Transfer Agent shall maintain a record
of the number of Shares held by each Shareholder of record which shall include
full registration information, including, but not limited to, name, address and
taxpayer identification number and which shall indicate whether such Shares are
held in certificated or uncertificated form.
2. Shareholder Services. The Transfer Agent shall respond as
appropriate to all inquiries and communications from Shareholders relating to
Shareholder accounts with respect to its duties hereunder and as may be from
time to time mutually agreed upon between the Transfer Agent and the Funds.
3. Share Certificates.
------------------
(a) At the expense of the appropriate Fund, each Fund shall supply
the Transfer Agent with adequate supply of blank share certificates to meet the
Transfer Agent's requirements therefor. Such Share certificates shall be
properly signed by facsimile. Each Fund agrees that, notwithstanding the death,
resignation, or removal of any officer of the Fund whose signature appears on
such certificates, the Transfer Agent or its agent may continue to countersign
certificates which bear such signatures until otherwise directed by Written
Instructions.
(b) The Transfer Agent shall issue replacement Share certificates
in lieu of certificates which have been lost, stolen or destroyed, upon receipt
by the Transfer Agent of properly executed affidavits and lost certificate
bonds, in form satisfactory to the Transfer Agent, with the appropriate Fund and
the Transfer Agent as obligees under the bond.
(c) The Transfer Agent shall also maintain a record of each
certificate issued, the number of Shares represented thereby and the Shareholder
of record. With respect to Shares held in open accounts or in uncertificated
form (i.e., no certificate being issued with respect thereto) the Transfer Agent
shall maintain comparable records of the Shareholders thereof, including their
names, addresses and taxpayer identification number. The Transfer Agent shall
further maintain a stop transfer record on lost and/or replaced certificates.
4. Mailing Communications to Shareholders; Proxy Materials. The
Transfer Agent will address and mail to Shareholders of the Funds, all reports
to Shareholders, dividend and distribution notices and proxy material for the
Funds' meetings of Shareholders. In connection with meetings of Shareholders,
the Transfer Agent will prepare Shareholder lists, mail and certify as to the
mailing of proxy materials, process and tabulate returned proxy cards, report on
proxies voted prior to meetings, act as inspector of election at meetings and
certify Shares voted at meetings.
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<PAGE>
5. Sales of Shares
---------------
(a) The Transfer Agent shall not be required to issue any Shares
of a Fund where it has received a Written Instruction from the Fund or official
notice from any appropriate authority that the sale of the Shares of the Fund
has been suspended or discontinued. The existence of such Written Instructions
or such official notice shall be conclusive evidence of the right of the
Transfer Agent to rely on such Written Instructions or official notice.
(b) In the event that any check or other order for the payment of
money is returned unpaid for any reason, the Transfer Agent will endeavor to:
(i) give prompt notice of such return to the Fund or its designee; (ii) place a
stop transfer order against all Shares issued as a result of such check or
order; and (iii) take such actions as the Transfer Agent may from time to time
deem appropriate.
6. Transfer and Repurchase
-----------------------
(a) The Transfer Agent shall process all requests to transfer or
redeem Shares in accordance with the transfer or repurchase procedures set forth
in the Funds' Prospectus.
(b) The Transfer Agent will transfer or repurchase Shares upon
receipt of Oral or Written Instructions or otherwise pursuant to the Prospectus
and Share certificates, if any, properly endorsed for transfer or redemption,
accompanied by such documents as the Transfer Agent reasonably may deem
necessary.
(c) The Transfer Agent reserves the right to refuse to transfer or
repurchase Shares until it is satisfied that the endorsement on the instructions
is valid and genuine. The Transfer Agent also reserves the right to refuse to
transfer or repurchase Shares until it is satisfied that the requested transfer
or repurchase is legally authorized, and it shall incur no liability for the
refusal, in good faith, to make transfers or repurchases which the Transfer
Agent, in its good judgment, deems improper or unauthorized, or until it is
reasonably satisfied that there is no basis to any claims adverse to such
transfer or repurchase.
(d) When Shares are redeemed, the Transfer Agent shall, upon
receipt of the instructions and documents in proper form, deliver to the
Custodian and the appropriate Fund or its designee a notification setting forth
the number of Shares to be redeemed. Such redeemed Shares shall be reflected on
appropriate accounts maintained by the Transfer Agent reflecting outstanding
Shares of the Fund and Shares attributed to individual accounts.
(e) The Transfer Agent, upon receipt of the monies paid to it by
the Custodian for the redemption of Shares, pay such monies as are received from
the Custodian, all in accordance with the procedures described in the Written
Instructions received by the Transfer Agent from the Funds.
2
<PAGE>
(f) The Transfer Agent shall not process or effect any repurchase
with respect to Shares of the Fund after receipt by the Transfer Agent or its
agent of notification of the suspension of the determination of the net asset
value of the Fund.
7. Dividends
----------
(a) Upon the declaration of each dividend and each capital gains
distribution by the Board of Directors of a Fund with respect to Shares of the
Fund, the Fund shall furnish or cause to be furnished to the Transfer Agent
Written Instructions setting forth the date of the declaration of such dividend
or distribution, the ex-dividend date, the date of payment thereof, the record
date as of which Shareholders entitled to payment shall be determined, the
amount payable per Share to the Shareholders of record as of that date, the
total amount payable to the Transfer Agent on the payment date and whether such
dividend or distribution is to be paid in Shares at net asset value.
(b) On or before the payment date specified in such resolution of
the Board of Directors, the Fund will pay to the Transfer Agent sufficient cash
to make payment on such payment date to the Shareholders of record on the record
date.
(c) If, prior to the payment date, the Transfer Agent does not
receive sufficient cash from the Fund to make total dividend and/or distribution
payments to all Shareholders of the Fund of the record date, the Transfer Agent
will, upon notifying the Fund, withhold payment to all Shareholders of record as
of the record date until sufficient cash is provided to the Transfer Agent.
8. In addition to and neither in lieu nor in contravention of the
services set forth above, the Transfer Agent shall: (i) perform all the
customary services of a transfer agent, registrar, dividend disbursing agent and
agent of the dividend reinvestment and cash purchase plan as described herein
consistent with those requirements in effect as at the date of this Agreement.
The detailed definition, frequency, limitations and associated costs (if any)
set out in the attached fee schedule, include but are not limited to:
maintaining all Shareholder accounts, preparing Shareholder meeting lists,
mailing proxies, tabulating proxies, mailing Shareholder reports to current
Shareholders, withholding taxes on U.S. resident and non-resident alien accounts
where applicable, preparing and filing U.S. Treasury Department Forms 1099 and
other appropriate forms required with respect to dividends and distributions by
federal authorities for all Shareholders.
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<PAGE>
Schedule B
Quality Standards
(Effective October 2, 1995 as updated on September 25, 1995)
For all funds, open-end and closed-end, serviced by TSSG, under the Transfer
Agency and Services Agreement (with Facilities Management Arrangement) dated
June 1, 1995, the following quality standards shall apply. This schedule shall
replace the temporary quality standard Schedule B in the original agreement as
referenced in Section 5.2.
Financials:
- ----------
Subscriptions 98%
Redemptions 98%
Exchanges 98%
Non-Financials:
- --------------
Maintenances 98%
Transfers 98%
Correspondence 98%
Adjustments 98%
Telephone Calls 98%
New Accounts:
- ------------
New Account Set-ups 98%
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Performance Standards
- -------------------------------------------------------------------------------------------------------------
Telephone Performance Standards
=============================================================================================================
<S> <C>
Average speed of answer 20 seconds or less
- ------------------------------------------------------- -----------------------------------------------------
Calls abandoned 2% of calls that wait 20 second or more
- ------------------------------------------------------- -----------------------------------------------------
Service level* 80%
- ------------------------------------------------------- -----------------------------------------------------
Article 1 -------------------
*Represents the percentage of calls answered within 20 seconds.
</TABLE>
<PAGE>
Schedule B
[List of Initial Quality Standards based on
1994 quarterly senior management reports]
Nations Fund
Financial Transactions
Subscriptions 98%
Redemptions 98%
Exchanges 98%
Non-Financials
Maintenance 98%
Transfers 98%
New Accounts 98%
% = minimum acceptable levels
Closed End Funds
----------------
Financials 98%
Subscriptions 98%
Redemptions 98%
Exchanges 98%
Non-Financials
Certificate Processing 98%
Maintenance 98%
Transfers 98%
New Accounts 98%
% = minimum acceptable levels
Capitol Funds
-------------
Financials
Subscriptions 98%
Redemptions 98%
Exchanges 98%
Non-Financials
Maintenance 98%
Transfers 98%
1
<PAGE>
New Accounts 98%
% = minimum acceptable levels
2
<PAGE>
Schedule C
Schedule of Costs
-----------------
1. For purposes of this Agreement, "Costs" shall mean all internal and
external costs incurred by the Transfer Agent in connection with and properly
allocated to the Services provided under the Agreement, including, but not
limited to, the costs involved with the operation of the Charlotte Facility,
those costs reasonably incurred by the Transfer Agent to achieve the quality
standards imposed on it under the terms of this Agreement and the Transfer
Agent's overhead, depreciation and amortization costs, excepting out-of-pocket
expenses and such other costs agreed to in writing by the Transfer Agent and the
Funds.
2. The Funds shall have the right to audit, at their own expense, the
books and records of the Transfer Agent with respect to the Costs for which the
Transfer Agent seeks reimbursement under Article 8 on an annual basis, or more
frequently if the Funds have a reasonable basis to dispute any cost for which
the Transfer Agent seeks reimbursement.
3. The Transfer Agent shall use its best efforts to minimize the costs
incurred by it in connection with the provisions of services under this
Agreement to the extent such action is commercially reasonable and consistent
with the quality standards imposed under this Agreement.
<PAGE>
Schedule D
Non-Margin Expenses
-------------------
- - Facilities related expenses as incurred by the Transfer Agent under the
Facilities Management Agreement between the Transfer Agent and NationsBank
- - Out-of-Pocket expenses
- - Sub-Transfer Agent Fees and Expenses
- - Any other expenses agreed to in writing by the Transfer Agent and the Funds
<PAGE>
Schedule E
OUT-OF-POCKET EXPENSES
----------------------
The Funds shall reimburse the Transfer Agent monthly for reasonable
out-of-pocket expenses incurred in connection with the provision of Services
under this Agreement, including, but not limited to the following items:
- - Microfiche/microfilm production
- - Magnetic media tapes and freight
- - Printing costs, including certificates, envelopes, checks and stationery
- - Postage (bulk, pre-sort, ZIP+4, barcoding, first class) direct pass through
to the Funds
- - Due diligence mailings
- - Telephone and telecommunication costs, including all lease, maintenance
and line costs (excluding such telephone and telecommunications costs
provided by NationsBank pursuant to the Facilities Agreement)
- - Ad hoc reports
- - Proxy solicitations, mailings and tabulations
- - Daily & Distribution advice mailings (including all periodic statements)
- - Shipping, Certified and Overnight mail and insurance
- - Year-end form production and mailings
- - Terminals, communication lines, printers and other equipment
and any expenses incurred in connection with such terminals
and lines
- - Duplicating services
- - Courier services
- - Incoming and outgoing wire charges
- - Federal Reserve charges for check clearance
- - Overtime, as approved by the Funds
- - Temporary staff, as approved by the Funds
- - Travel and entertainment, as approved by the Funds
- - Record retention, retrieval and destruction costs, including,
but not limited to exit fees charged by third party record
keeping vendors
- - Third party audit reviews
- - All conversion costs: including System start up costs
- - Insurance
- - Such other miscellaneous expenses reasonably incurred by the
Transfer Agent in performing its duties and responsibilities
under this Agreement.
- - Systems Programming utilizing non-dedicated systems resources at $100 per
hour
The Funds agree that postage and mailing expenses will be paid on the
day of or prior to mailing as agreed with the Transfer Agent. In addition, the
Funds will promptly reimburse the Transfer Agent for any other unscheduled
expenses incurred by the Transfer Agent whenever the Funds and the Transfer
Agent mutually agree that such
1
<PAGE>
expenses are not otherwise properly borne by the Transfer Agent as part of its
duties and obligations under the Agreement.
2
<PAGE>
Schedule F
Fund Documents
--------------
- - Certified copy of the Articles of Incorporation of the Fund, as amended
- - Certified copy of the By-laws of the Fund, as amended
- - Copy of the resolution of the Board of Directors authorizing the execution
and delivery of this Agreement
- - Specimens of the certificates for Shares of the Fund, if applicable, in
the form approved by the Board of Directors of the Fund, with a
certificate of the Secretary of the Fund as to such approval
- - All account application forms and other documents relating to
Shareholder accounts or to any plan, program or service offered by the
Fund
- - Certified list of Shareholders of the Fund with the name, address and
taxpayer identification number of each Shareholder, and the number of
Shares of the Fund held by each, certificate numbers and denominations
(if any certificates have been issued), lists of any accounts against
which stop transfer orders have been placed, together with the reasons
therefore, and the number of Shares redeemed by the Fund.
- - All notices issued by the Fund with respect to the Shares in accordance
with and pursuant to the Articles of Incorporation or By-laws of the
Fund or as required by law and shall perform such other specific duties
as are set forth in the Articles of Incorporation including the giving
of notice of any special or annual meetings of shareholders and any
other notices required thereby.
<PAGE>
SCHEDULE G
FUND PORTFOLIOS
NATIONS FUND TRUST:
1. Nations Government Money Market Fund
2. Nations Tax Exempt Fund
3. Nations Value Fund
4. Nations Strategic Growth Fund
5. Nations Capital Growth Fund
6. Nations MidCap Growth Fund
7. Nations LargeCap Index Fund
8. Nations Managed Index Fund
9. Nations Managed SmallCap Index Fund
10. Nations Managed Value Index Fund
11. Nations Managed SmallCap Value Index Fund
12. Nations Aggressive Growth Fund
13. Nations Balanced Assets Fund
14. Nations Short-Intermediate Government Fund
15. Nations Short-Term Income Fund
16. Nations Strategic Income Fund
17. Nations Investment Grade Bond Fund
18. Nations Municipal Income Fund
19. Nations Short-Term Municipal Income Fund
20. Nations Intermediate Municipal Bond Fund
21. Nations Florida Intermediate Municipal Bond Fund
22. Nations Florida Municipal Bond Fund
23. Nations Georgia Intermediate Municipal Bond Fund
24. Nations Georgia Municipal Bond Fund
25. Nations Maryland Intermediate Municipal Bond Fund
26. Nations Maryland Municipal Bond Fund
27. Nations North Carolina Intermediate Municipal Bond Fund
28. Nations North Carolina Municipal Bond Fund
29. Nations South Carolina Intermediate Municipal Bond Fund
30. Nations South Carolina Municipal Bond Fund
31. Nations Tennessee Intermediate Municipal Bond Fund
32. Nations Tennessee Municipal Bond Fund
33. Nations Texas Intermediate Municipal Bond Fund
34. Nations Texas Municipal Bond Fund
35. Nations Virginia Intermediate Municipal Bond Fund
36. Nations Virginia Municipal Bond Fund
NATIONS FUND, INC.:
1. Nations Prime Fund
2. Nations Treasury Fund
1
<PAGE>
3. Nations Equity Income Fund
4. Nations U.S. Government Bond Fund
5. Nations Small Company Fund
6. Nations Government Securities Fund
7. Nations International Growth Fund
NATIONS RESERVES:
1. Nations Government Reserves
2. Nations Municipal Reserves
3. Nations Cash Reserves
4. Nations Treasury Reserves
5. Nations Money Market Reserves
6. Nations California Tax Exempt Reserves
7. Nations Asset Allocation Fund
8. Nations Convertible Securities Fund
9. Nations California Municipal Bond Fund
10. Nations Intermediate Bond Fund
11. Nations Blue Chip Fund
12. Nations Marsico Focused Equities Fund
13. Nations Marsico Growth & Income Fund
14. Nations International Equity Fund
15. Nations International Value Fund
16. Nations Emerging Markets Fund
NATIONS LIFEGOAL FUNDS, INC.
1. Nations LifeGoal Growth Portfolio
2. Nations LifeGoal Balanced Growth Portfolio
3. Nations LifeGoal Income and Growth Portfolio
NATIONS ANNUITY TRUST:
1. Nations Value Portfolio
2. Nations International Growth Portfolio
3. Nations Aggressive Growth Portfolio
4. Nations Marsico Focused Equities Portfolio
5. Nations Marsico Growth & Income Portfolio
6. Nations Managed Index Portfolio
7. Nations SmallCap Index Portfolio
8. Nations Balanced Assets Portfolio
2
<PAGE>
NATIONS FUNDS TRUST:
1. Nations High Yield Bond Fund
2. Nations Kansas Municipal Income Fund
3. Nations MidCap Index Fund
4. Nations Marsico 21st Century Fund
CLOSED END FUNDS:
1. Nations Balanced Target Maturity Fund
2. Nations Government Income Term Trust 2003, Inc.
3. Nations Government Income Term Trust 2004, Inc.
Last Amended: May 1, 2000
IN WITNESS WHEREOF, the parties hereto have caused the amended Schedule
G to be executed by their Officers designated below as of the 1st day of May,
2000.
PFPC Inc. (indirect successor to The
Shareholder Services Group, Inc.)
By: _____________________________
Name:
Title:
NATIONS FUND TRUST
By: /s/ Richard H. Blank, Jr.
-----------------------------
Richard H. Blank, Jr.
Secretary
NATIONS FUND, INC.
By: /s/ Richard H. Blank, Jr.
-----------------------------
Richard H. Blank, Jr.
Secretary
3
<PAGE>
NATIONS RESERVES
By: /s/ Richard H. Blank, Jr.
------------------------------
Richard H. Blank, Jr.
Secretary
NATIONS LIFEGOAL FUNDS, INC.
By: /s/ Richard H. Blank, Jr.
------------------------------
Richard H. Blank, Jr.
Secretary
NATIONS ANNUITY TRUST
By: /s/ Richard H. Blank, Jr.
------------------------------
Richard H. Blank, Jr.
Secretary
NATIONS FUNDS TRUST
By: /s/ Richard H. Blank, Jr.
------------------------------
Richard H. Blank, Jr.
Secretary
NATIONS BALANCED TARGET MATURITY FUND, INC.
By: /s/ Robert B. Carroll
------------------------------
Robert B. Carroll
Secretary
NATIONS GOVERNMENT INCOME TERM TRUST 2003, INC.
By: /s/ Robert B. Carroll
------------------------------
Robert B. Carroll
Secretary
4
<PAGE>
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
By: /s/ Robert B. Carroll
------------------------------
Robert B. Carroll
Secretary
5
[MORRISON & FOERSTER LLP]
April 28, 2000
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. 5 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 Aggressive Growth
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
23(i) 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:
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 consent to the use of our name and to the reference to
our firm under the heading "Counsel" in the Statement of Additional Information.
<PAGE>
Nations Annuity Trust
April 28, 2000
Page Two
Very truly yours,
/s/ MORRISON & FOERSTER LLP
MORRISON & FOERSTER LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form N-1A of our report dated February 16, 2000, relating to the
financial statements and financial highlights which appears in the December 31,
1999 Annual Report to Shareholders of Nations Balanced Assets Portfolio, Nations
Aggressive Growth Portfolio (formerly Nations Disciplined Equity Portfolio),
Nations International Growth Portfolio, Nations Managed Index Portfolio, Nations
SmallCap Index Portfolio (formerly Nations Managed SmallCap Index Portfolio),
Nations Marsico Focused Equities Portfolio, Nations Marsico Growth & Income
Portfolio and Nations Value Portfolio (each a portfolio of Nations Annuity
Trust), which are also incorporated by reference into the Registration
Statement. We also consent to the references to us under the headings "Financial
highlights" and "Independent Accountants and Reports" in such Registration
Statement.
PricewaterhouseCoopers LLP
New York, New York
April 26, 2000
SHAREHOLDER SERVICING AND DISTRIBUTION PLAN
NATIONS ANNUITY TRUST
This SHAREHOLDER SERVICING AND DISTRIBUTION PLAN (the "Plan") has
been adopted by the Board of Trustees of NATIONS ANNUITY TRUST (the "Trust") in
conformance with Rule 12b-1 under the Investment Company Act of 1940 as amended
(the "1940 Act").
Section 1. PAYMENTS FOR SERVICES. Under the terms of this Plan,
the Trust may act as a distributor of the Shares of which a Portfolio is the
issuer, pursuant to Rule 12b-1 under the 1940 Act. The Trust may incur as a
distributor of the shares of each Portfolio ("Shares") expenses of up to
twenty-five one-hundredths of one percent (0.25%) per annum of the average daily
net assets of the Trust attributable to the Shares of the Portfolios (as defined
on Exhibit A).
Section 2. EXPENSES COVERED BY THE PLAN. Amounts set forth in
Section 1 may be expended when and if authorized in advance by the Trust's Board
of Trustees. Such amounts may be used to finance 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 (the "Distributor") and the cost of administering this Plan, as well
as the shareholder servicing activities described below. All amounts expended
pursuant to this Plan shall be paid:
(a) to the Distributor for reimbursements of distribution-related
expenses actually incurred by the Distributor, including, but not limited
to, expenses of organizing and conducting sales seminars, printing of
prospectuses and statements of additional information (and supplements
thereto) and reports for other than existing shareholders, preparation and
distribution of advertising material and sales literature and costs of
administering this Plan; or
(b) to certain broker/dealers and other financial institutions
("Agents") who offer shares to their customers and who have entered into (i)
Shareholder Servicing Agreements substantially in the form of Exhibit C, and
(ii) Sales Support Agreements substantially in the form of Exhibit B, for
providing the services contemplated thereunder.
The shareholder servicing activities for which compensation may be
received under this Plan may include, among other things: (i) providing general
shareholder liaison services; (ii) processing purchases and redemption requests;
(iii) processing dividend and distribution payments; (iv) providing sales
information periodically to customers, including information showing their
contracts' positions in the Portfolios; (v) providing sub-accounting; (vi)
responding to inquiries from customers; (vii) arranging for bank wires; and
(viii) providing such other similar services as may be reasonably requested.
Servicing agents may include participating insurance companies.
Section 3. Except for the payments specified in Section 1, no
additional payments are to be made by the Trust under this Plan, provided that
nothing herein shall be deemed to preclude
1
<PAGE>
the payments such Portfolios are otherwise obligated to make to: (a) NationsBanc
Advisors, Inc. ("NBAI"), pursuant to the Investment Advisory Agreement; and (b)
TradeStreet Investment Associates, Inc. ("TradeStreet"), Gartmore Global
Partners ("Gartmore") and Marsico Capital Management LLC ("Marsico Capital")
pursuant to Investment Sub-Advisory Agreements; (c) NationsBank of Texas, N.A.
("NationsBank Texas") and The Bank of New York ("BONY"), pursuant to the Custody
and Sub-Custody Agreement; (d) First Data Investor Services Group, Inc. ("First
Data"), pursuant to the Transfer Agency and Registrar Agreement; (e) Stephens
Inc. ("Stephens"), pursuant to the Administration Agreement; (f) NBAI pursuant
to the Sub-Administration Agreement; (g) First Data, pursuant to the
Co-Administration Agreement, Servicing Agents, pursuant to Shareholder Servicing
Agreements; and (h) for the expenses otherwise incurred by a Portfolio and the
Trust on behalf of the Shares in the normal conduct of such Portfolio's business
pursuant to the Investment Advisory Agreement and Investment Sub-Advisory
Agreements, the Custody and Sub-Custody Agreements, the Transfer Agency and
Registrar Agreement, the Administration Agreement, the Sub-Administration
Agreement, the Co-Administration Agreement and the Shareholder Servicing
Agreements. To the extent any such payments by the Trust on behalf of a
Portfolio to NBAI, TradeStreet, Gartmore, Marsico Capital, NationsBank Texas,
First Data, Stephens, or BONY; by NBAI, NationsBank Texas, First Data, BONY, or
Stephens or Servicing Agents, or any affiliate thereof, to any party pursuant to
any agreement; or, generally, by the Trust on behalf of a Portfolio to any
party, are deemed to be payments for the financing of any activity primarily
intended to result in the sale of the Shares within the context of Rule 12b-1
under the 1940 Act, then such payments shall be deemed to have been approved
pursuant to this Plan without regard to Section 1.
Section 4. REPORTS OF DISTRIBUTOR. The officers of the Trust shall
report quarterly in writing to the Board of Trustees on the amounts and purpose
of payments for any of the activities in Section 2 and shall furnish the Board
of Trustees with such other information as the Board may reasonably request in
connection with such payments in order to enable the Board to make an informed
determination on the nature and value of such expenditures.
Section 5. APPROVAL OF PLAN. This Plan shall continue in effect
for a period of more than one year from the date written below only so long as
such continuance is specifically approved at least annually by the Trust's Board
of Trustees, including the Trustees who are not interested persons of the Trust
and have no direct or indirect financial interest in the operation of this Plan
or in any Agreements related to this Plan ("Disinterested Trustees"), by vote
cast in person at a meeting called for the purpose of voting on this Plan.
Section 6. TERMINATION. This Plan may be terminated at any time by
vote of a majority of the Disinterested Trustees or with respect to a particular
Portfolio by vote of a majority of the outstanding voting securities of the
Shares of such Portfolio, on not more than sixty (60) days' written notice to
any other party to the Plan, and shall terminate automatically in the event of
any act that constitutes an assignment of the Distribution Agreement or the
Investment Advisory Agreement.
Section 7. AMENDMENTS. This Plan may be amended at any time by the
Board of Trustees provided that: (a) any amendment to increase materially the
costs which a Portfolio may bear for distribution pursuant to this Plan shall be
effective only upon approval by a vote of a majority of the outstanding Shares
of such Portfolio, and (b) any material amendments of the terms of this Plan
shall become effective only upon approval as provided in Section 6 thereof.
2
<PAGE>
Section 8. SELECTION/NOMINATION OF TRUSTEES. So long as this Plan
is in effect, the selection and nomination of the Trust's Disinterested Trustees
shall be committed to the discretion of such Disinterested Trustees.
Section 9. GOVERNING LAW. This Plan shall be subject to the laws
of the State of Delaware and shall be interpreted and construed to further
promote the operation of the Trust as an open-end management investment company.
As used herein the terms "open-end management investment company," "assignment,"
"principal underwriter," "interested person," and "majority of the outstanding
voting securities" shall have the meanings set forth in the Securities Act of
1933, as amended or the 1940 Act, and the rules and regulations thereunder.
Section 10. SCOPE OF LIABILITY. Nothing herein shall be deemed to
protect the parties to any Agreement entered into pursuant to this Plan against
any liability to the Trust or its shareholders to which they would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence in the
performance of their duties hereunder, or by reason of their reckless disregard
of their obligations and duties hereunder.
Section 11. RECORDS. The Trust will preserve copies of this Plan,
Agreements and any written reports regarding this Plan presented to the Board of
Trustees for a period of not less than six years.
Section 12. LIMITATION OF LIABILITY. 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 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, officers, representatives or agents
are made not individually, but in such capacities, and are not binding upon any
of the Trustees, Shareholders, officers, representatives or agents of the Trust
personally, but bind only the Trust Property (as defined in the Declaration of
Trust), and all persons dealing with a Portfolio's Shares of the Trust must look
solely to the Trust Property belonging to such Portfolio's Shares for the
enforcement of any claims against the Trust.
3
<PAGE>
EXHIBIT A
NATIONS ANNUITY TRUST
Nations Balanced Assets Portfolio
Nations Aggressive Growth Portfolio
Nations International Growth Portfolio
Nations Managed Index Portfolio
Nations SmallCap Index Portfolio
Nations Marsico Focused Equities Portfolio
Nations Marsico Growth & Income Portfolio
Nations Value Portfolio
Last Amended: May 1, 2000
4
NATIONS FUNDS FAMILY
CODE OF ETHICS
This Code of Ethics shall apply to each investment company advised by
an affiliate of Bank of America Corporation that adopts the Code by action of
its Board of Directors(1) (each, a "Company").
A. Legal Requirements.
------------------
Rule 17j-1(a) under the Investment Company Act of 1940, as amended,
(the "Act") makes it unlawful for any Officer or Director of the Company (as
well as other persons), in connection with the purchase or sale by such person
of a security "held or to be acquired"(2) by the Company:
1. To employ any device, scheme or artifice to defraud or the Company;
2. To make to the Company any untrue statement of a material fact or
omit to state to the Company a material fact necessary in order to make the
statements made, in light of the circumstances under which they are made, not
misleading;
3. To engage in any act, practice, or course of business which operates
or would operate as a fraud or deceit upon the Company; or
4. To engage in any manipulative practice with respect to the Company.
The policies, restrictions and procedures included in this Code of
Ethics are designed to prevent violations of these prohibitions.
In addition, the Investment Company Institute (the "ICI") has suggested
that investment companies adopt additional measures to obviate conflicts,
prevent and detect abusive practices and preserve the confidence of investors.
The policies, restrictions and procedures included in this Code of Ethics
substantially conform to the additional measures suggested by the ICI.
- ----------------
(1)As used herein, "Director" shall mean a director or trustee and "Company"
shall mean a corporation or trust.
(2)A security is "held or to be acquired" if within the most recent 15 days it
(i) is or has been held by the Company, or (ii) is being held or has been
considered by the Company or its investment adviser(s) for purchase by the
Company. A purchase or sale includes the writing of an option to purchase or
sell.
<PAGE>
B. Company Policies.
----------------
It is the policy of the Company that no "access person"(3) of the
Company shall engage in any act, practice or course of conduct that would
violate the provisions of Rule 17j-1(a) set forth above. In this regard, each
access person has a duty at all times to place the interests of Company
shareholders first and is required to conduct all personal securities
transactions consistent with the letter and spirit of this Code of Ethics and in
such a manner as to avoid any actual or potential conflicts of interest or any
abuse of the access person's position of trust and responsibility. It is a
fundamental standard that access persons should not take inappropriate advantage
of their positions.
C. Restrictions.
------------
1. No access person shall purchase or sell, directly or indirectly, any
"non-exempt security"(4) where he or she has, or by reason of such transaction
acquires or disposes of, any direct or direct beneficial ownership and where he
or she knows or should have known, at the time of such purchase or sale, that
the non-exempt security:
(a) is being considered for purchase or sale by a fund of the
Company; or
(b) is being purchased or sold by a fund of the Company.
2. "Investment personnel"(5) are prohibited from purchasing any
non-exempt security in an ate placement unless they obtain the prior written
approval of the Company's designated
- -------------------
(3)An "access person" includes: (a) each Director or Officer of the Company; (b)
each employee (if any) of the Company (or of any company in a control
relationship to the Company) who in connection with his/her regular duties
obtains information about the purchase or sale of a security by the Company or
whose functions relate to the making of such recommendations; and (c) any
natural person in a control relationship to the Company who obtains information
concerning recommendations made to the Company with regard to the purchase or
sale of a security. An employee of the Company's investment adviser, or an
entity that controls or is under common control with the Company's investment
adviser, shall not be deemed to be an "access person," hereunder unless he or
she also serves as a Director or Officer of the Company, provided the individual
is subject to a Code of Ethics adopted by his or her employer that complies with
the requirements of Rule 17j-1 and substantially conforms to the policies and
procedures suggested by the ICI.
(4)For purposes of this Code of Ethics, "non-exempt securities" are any
securities other than shares of open-end investment companies, money market
instruments, securities issued by the U.S. Government, or short-term securities
guaranteed by the U.S. Government or issued or guaranteed by its agencies or
instrumentalities.
(5)"Investment personnel" includes any access person of the Company that is
either a portfolio manager (who makes decisions about fund investments) or a
person who assists in the investment process (including analysts and traders).
Other access persons who may from time to time obtain information about the
purchase or sale of a security by the Company are not investment personnel for
purposes of this Code of Ethics.
2
<PAGE>
cominitial public offering. Investment personnel are prohibited from purchasing
any non-exempt security in a privpliance person, who shall consult with
investment personnel that have no personal interest in the issuer prior to
granting such approval.
3. Any profits realized by investment personnel from "short-term
trading"(6) of a non-exempt security shall be disgorged to the Company.
4. Investment personnel are prohibited from receiving any gift or item
valued at more than $100 per donor per year from any person or entity that does
business with or on behalf of the Company.
5. Investment personnel are prohibited from serving on the board of
directors of a company whose stock is publicly traded, absent prior
authorization from the Company's designated compliance person based upon a
determination that the board service would be consistent with the interests of
the Company and its shareholders.
6. Investment personnel must review the adviser's Equity Products
Restricted Trading ("EPRT") List prior to making any personal trade. The EPRT
List is updated daily and should be reviewed on the day the order for the
personal trade is placed.
7. The restrictions set forth in Sections C.1. and C.2. shall not apply
to:
(a) purchases or sales of any non-exempt securities that are
not eligible for purchase or sale by any fund of the
Company;
(b) purchases or sales which are non-volitional on the part of
the access person;
(c) purchases which are part of an automatic dividend
investment plan;
(d) purchases which are effected upon the exercise of rights
issued by an issuer pro rata to all holders of a class of
its securities, to the extent such rights were acquired
from the issuer, and sales of such rights; or
(e) sales which are effected pursuant to a tender offer or
similar transaction involving an offer to acquire all or a
significant portion of a class of securities.
In addition, the restrictions set forth in Section C.1. shall not apply to
purchases or sales which are only remotely potentially harmful to the Company,
because they would be very unlikely to affect a highly institutional market.
D. Procedures.
----------
(6)For purposes of this Code of Ethics, "short-term trading" is defined as a
purchase and sale, or sale and purchase, of the same (or equivalent) securities,
which both occur within any 60-day period.
3
<PAGE>
1. In order to provide the Company with information to enable it to
determine with reasonable assurance whether the provisions of Rule 17j-1(a) are
being observed by its access persons:
(a) Each access person of the Company, other than a Director who
is not an "interested person" of the Company (as defined in the
Act), shall submit reports in the form attached hereto as Exhibit
A to the Company's designated compliance person showing all
transactions in "reportable securities" in which the person has,
or by reason of such transaction acquires or disposes of, any
direct or indirect beneficial ownership.(7) Such reports shall be
filed not later than 10 days after the end of each calendar
quarter, but need not show transactions over which such person had
no direct or indirect influence or control. In lieu of providing
such reports, an applicant may arrange for duplicate confirmations
and account statements to be provided directly to the Company's
designated compliance person.
(b) Each Director who is not an "interested person" of the Company
shall submit the same quarterly report as required under paragraph
(a), but only for a transaction in a "reportable security" where
he/she knew at the time of the transaction or, in the ordinary
course of fulfilling his/her official duties as a Director, should
have known that during the 15-day period immediately preceding or
after the date of the
- ----------------
(7)You will be treated as the "beneficial owner" of a security under this policy
only if two tests are met with respect to a transaction in the security:
(1) You have or you share voting power and/or investment power with
respect to the security. (This is the same test for reporting beneficial
ownership of securities for the proxy statements of public companies, and
includes, among other things, securities which you have the right to acquire
within 60 days.)
(2) You have a direct or indirect pecuniary interest in the security.
(a) A direct pecuniary interest is the opportunity, directly or
indirectly, to profit, or to share the profit, from the transaction.
(b) An indirect pecuniary interest is any nondirect financial
interest, but is specifically defined in the rules to include securities held by
members of your immediate family sharing the same household; securities held by
a partnership of which you are a general partner; securities held by a trust of
which you are the settler if you can revoke the trust, or a beneficiary if you
have or share investment control with the trustee/director; and equity
securities which may be acquired upon exercise of an option or other right, or
through conversion.
Unless both tests are satisfied, you are not the beneficial owner.
For interpretive guidance on either of the two tests, you should consult
the Company's designated compliance person. A report shall not be construed as
an admission by the person making the report that he or she has any direct or
indirect beneficial ownership in the security.
4
<PAGE>
transaction, such security is or was purchased or sold, or
considered for purchase or sale, by the Company. No report is
required if the Director had no direct or indirect influence or
control over the transaction.
The Company does not believe that personal transactions by its access persons in
any securities other than securities which the Company is permitted to purchase
would be prohibited by Rule 17j-1(a). For purposes of subparagraphs (a) and (b)
above, "reportable securities" includes only non-exempt securities which the
funds of the Company are permitted to acquire under their investment objectives
and policies set forth in the Company's then current prospectus(es) under the
Securities Act of 1933, as amended. In the event that any of the investment
objectives and policies for the funds of the Company changes in the future, the
Board of Directors may reconsider the scope of this reporting requirement in
light of such change and Rule 17j-1.
2. Investment personnel are required to provide copies of all brokerage
statements and confirmations to the Company's designated compliance person. All
investment personnel shall disclose all personal securities holdings upon
commencement of employment with the Company and annually thereafter.
3. Every access person of the Company shall provide an annual
certification in the form of Exhibit B to the Company's designated compliance
person. This requirement applies to all Directors, including those who are not
"interested persons" of the Company.
4. The Company's designated compliance person shall notify each "access
person" of the Company who may be required to make reports pursuant to this Code
that such person is subject to reporting requirements and shall deliver a copy
of this Code to each such person. Any amendments to this Code shall be similarly
furnished to each person to whom this Code is applicable.
5. The Company's designated compliance person shall report to the Board
of Directors:
(a) at the next meeting following the receipt of any report on
Exhibit A with respect to each reported transaction in a security
which was, within 15 days before or after the date of the reported
transaction: (i) purchased or sold by the Company, or (ii)
considered by the Company for purchase or sale, unless (in either
case) the amount involved in the transaction was less than
$50,000;
(b) with respect to any transaction not required to be reported to
the Board by the operation of subparagraph (a), that the Company's
designated compliance person believes nonetheless may evidence a
violation of this Code; and
(c) apparent violations of the reporting requirements stated
herein.
6. The Board of Directors shall consider reports made to it hereunder
and shall determine whether the policies established in Paragraph B have been
violated, and what sanctions, if any, should be imposed. The Board of Directors
shall review the operation of this
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<PAGE>
Code at least once a year, and shall make and approve such changes to the Code
as it deems necessary.
7. This Code, a copy of each report by an access person, any written
report hereunder by the Company's designated compliance person and lists of all
persons required to make reports shall be preserved with the Company's records
for the period required by Rule 17j-1. In addition, a record of any violation of
this Code shall be preserved with the Company's records for the period required
by Rule 17j-1.
E. Insider Trading and Conflicts of Interest.
-----------------------------------------
The Board of Directors of the Company has adopted a policy statement on
insider trading and conflicts of interests (the "Policy Statement"), a copy of
which is attached hereto as Exhibit C. All access persons are required by this
Code of Ethics to read and familiarize themselves with their responsibilities
under the Policy Statement.
F. Sanctions.
---------
Upon discovering a violation of this Code, the Board of Directors of
the Company may impose such sanctions as it deems appropriate.
6
<PAGE>
EXHIBIT A
NATIONS FUNDS FAMILY
Securities Transaction Report
for the Calendar Year Ended December 31, 2000.
To the Designated Compliance Person of ___________:
During the quarter referred to above, the following transactions were
effected in reportable securities of which I had, or by reason of such
transaction acquired or disposed of, direct or indirect beneficial ownership,
and which are required to be reported pursuant to the Trust's Code of Ethics:
<TABLE>
<CAPTION>
-------------- ----------------- ------------ ---------------- ------------------ --------------- ----------------
Broker Dealer
or
No. of Nature of Bank Through
Shares or Dollar Transaction Whom
Date of Principal Amount of (Purchase, Effected
Security Transaction Amount Transaction Sale, Other) Price
-------------- ----------------- ------------ ---------------- ------------------ --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
This report (i) excludes transactions with respect to which I had no
direct or indirect influence or control, (ii) excludes other transactions not
required to be reported, and (iii) is not an admission that I have or had any
direct of indirect beneficial ownership in the securities listed above.
Dated: _____________________ Signature: _______________________
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<PAGE>
EXHIBIT B
---------
NATIONS FUNDS FAMILY
Annual Certification of Compliance
for the Calendar Year Ended December 31, 2000
To the Designated Compliance Person of :
-------
I hereby certify that, during the calendar year specified above, I have
complied with the requirements of the Code of Ethics and have disclosed or
reported all personal securities transactions required to be disclosed or
reported pursuant to the requirements of the Code. I have read and understand
the Code of Ethics and recognize that I am subject thereto.
Dated: ____________________________ Signature: ________________________
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<PAGE>
EXHIBIT C
---------
POLICY STATEMENT ON INSIDER TRADING
A. Introduction
--------------
The Company seeks to foster a reputation for integrity and
professionalism. That reputation is a vital business asset. The confidence and
trust placed in us by investors in the Company is something we should value and
endeavor to protect. To further that goal, this Policy Statement implements
procedures to deter the misuse of material, nonpublic information in securities
transactions.
Trading securities while in possession of material, nonpublic
information or improperly communicating that information to others may expose
you to stringent penalties. Criminal sanctions may include a fine of up to
$1,000,000 and/or ten years imprisonment. The Securities and Exchange Commission
can recover the profits gained or losses avoided through the violative trading,
a penalty of up to three times the illicit windfall and an order permanently
barring you from the securities industry. Finally, you may be sued by investors
seeking to recover damages for insider trading violations.
Regardless of whether a government inquiry occurs, the Company views
seriously any violation of this Policy Statement. Such violations constitute
grounds for disciplinary sanctions, including dismissal.
B. Scope of the Policy Statement
------------------------------
This Policy Statement is drafted broadly; it will be applied and
interpreted in a similar manner. This Policy Statement applies to securities
trading and information handling by Access Persons, as defined in the Company's
Code of Ethics, (including spouses, minor children and adult members of their
households).
The law of insider trading is unsettled; an individual legitimately may
be uncertain about the application of the Policy Statement in a particular
circumstance. Often, a single question can forestall disciplinary action or
complex legal problems. You should direct any questions relating to the Policy
Statement to the Company's Compliance Person. You also must notify the
Compliance Person immediately if you have any reason to believe that a violation
of the Policy Statement has occurred or is about to occur.
C. Policy Statement
----------------
No person to whom this Policy Statement applies, including you, may
trade, either personally or on behalf of others, while in possession of
material, nonpublic information; nor may the Company's Access Persons
communicate material, nonpublic information to others in violation of the law.
This section reviews principles important to the Policy Statement.
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<PAGE>
1. What is Material Information?
Information is "material" when there is a substantial likelihood that a
reasonable investor would consider it important in making his or her investment
decisions. Generally, this is information whose disclosure will have a
substantial effect on the price of a company's securities. No simple "bright
line" test exists to determine when information is material; assessments of
materiality involve a highly fact-specific inquiry. For this reason, you should
direct any questions about whether information is material to the Compliance
Person.
Material information often relates to a company's results and
operations including, for example, dividend changes, earning results, changes in
previously released earnings estimates, significant merger or acquisition
proposals or agreements, major litigation, liquidation problems, and
extraordinary management developments.
Material information also may relate to the market for a company's
securities. Information about a significant order to purchase or sell securities
may, in some contexts, be deemed material. Similarly, prepublication information
regarding reports in the financial press also may be deemed material. For
example, the Supreme Court upheld the criminal convictions of insider trading
defendants who capitalized on prepublication information about the Wall Street
Journal's "Heard on the Street" column.
2. What is Nonpublic Information?
Information is "public" when it has been disseminated broadly to
investors in the marketplace. Tangible evidence of such dissemination is the
best indication that the information is public. For example, information is
public after it has become available to the general public through a public
filing with the Securities and Exchange Commission ("SEC") or some other
government agency, the Dow Jones "tape" or the Wall Street Journal or some other
publication of general circulation, and after sufficient time has passed so that
the information has been disseminated widely.
3. Identifying Inside Information
Before executing any trade for yourself or others, including the
Company, you must determine whether you have access to material, nonpublic
information. If you think that you might have access to material, nonpublic
information, you should take the following steps:
(i) Report the information and proposed trade immediately to the
Compliance Person.
(ii) Do not purchase or sell the securities on behalf of yourself or
others, including the Company.
(iii) Do not communicate the information inside or outside the Company,
other than to the Compliance Person.
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<PAGE>
(iv) After the Compliance Person has reviewed the issue, the firm will
determine whether the information is material and nonpublic and, if so, what
action the Company should take.
You should consult with the Compliance Person before taking any action.
This degree of caution will protect you and the Company.
4. Contact with Public Companies
The Company's contacts with public companies represent an important
part of our research efforts. The Company may make investment decisions on the
basis of the Company's conclusions formed through such contacts and analysis of
publicly-available information. Difficult legal issues arise, however, when, in
the course of these contacts, a Company employee or other person subject to this
Policy Statement becomes aware of material, nonpublic information. This could
happen, for example, if a company's Chief Financial Officer prematurely
disclosed quarterly results to an analyst or an investor relations
representative makes a selective disclosure of adverse news to a handful of
investors. In such situations, the Company must make a judgment as to its
further conduct. To protect yourself and the Company, you should contact the
Compliance Person immediately if you believe that you may have received
material, nonpublic information.
5. Tender Offers
Tender offers represent a particular concern in the law of insider
trading for two reasons. First, tender offer activity often produces
extraordinary gyrations in the price of the target company's securities. Trading
during this time period is more likely to attract regulatory attention (and
produces a disproportionate percentage of insider trading cases). Second, the
SEC has adopted a rule which expressly forbids trading and "tipping" while in
possession of material, nonpublic information regarding a tender offer received
from the tender offeror, the target company or anyone acting on behalf of
either. Company employees and others subject to this Policy Statement should
exercise particular caution any time they become aware of nonpublic information
relating to a tender offer.
12
