NATIONS ANNUITY TRUST
NATIONS VALUE PORTFOLIO
NATIONS AGGRESSIVE GROWTH PORTFOLIO
NATIONS MARSICO FOCUSED EQUITIES PORTFOLIO
NATIONS MARSICO GROWTH & INCOME PORTFOLIO
NATIONS INTERNATIONAL VALUE PORTFOLIO
NATIONS INTERNATIONAL GROWTH PORTFOLIO
NATIONS MANAGED INDEX PORTFOLIO
NATIONS SMALLCAP INDEX PORTFOLIO
NATIONS BALANCED ASSETS PORTFOLIO
NATION HIGH YIELD BOND PORTFOLIO
Supplement dated December 29, 2000
to Prospectus dated May 1, 2000, as supplemented
The combined prospectus for the portfolios listed above (each a "Portfolio" and
collectively, the "Portfolios") is hereby supplemented as follows:
A. As of May 1, 2001, all references throughout the prospectus to Nations
Annuity Trust will be changed to Nations Separate Account Trust.
B. Special meetings of shareholders of the Portfolios will be held in the spring
of 2001 to seek approvals relating to certain changes to the Portfolios. If
approved, these changes are anticipated to become effective as of May 1, 2001,
and will result in the May 1, 2001 prospectus being modified from the current
prospectus in the following manner:
1. Under the heading "About the Portfolios," the discussion of each of the
following Portfolios will be replaced with the discussion attached at the end of
this document, which reflects changes to the name, investment objective,
principal investment strategies and stated risks of the applicable Portfolio:
o Nations Aggressive Growth Portfolio will be replaced with the discussion of
Nations Marsico 21st Century Portfolio;
o Nations International Growth Portfolio will be replaced with the discussion
of Nations Marsico International Opportunities Portfolio;
o Nations Managed Index Portfolio will be replaced with the discussion of
Nations Capital Growth Portfolio;
o Nations SmallCap Index Portfolio will be replaced with the discussion of
Nations Small Company Portfolio; and
o Nations Balanced Assets Portfolio will be replaced with the discussion of
Nations Asset Allocation Portfolio.
2. The following paragraph will be added as the second bullet point under the
heading "Other important information:"
o Changing to a feeder fund - Unlike traditional mutual funds, which invest in
individual securities, a "feeder fund" invests all of its assets in another
fund, called a "master portfolio." Other feeder funds generally also invest in
a master portfolio. The master portfolio invests in individual securities and
has the same investment objective, principal investment strategies and
principal risks as the feeder funds. This structure can help reduce a feeder
fund's expenses because its assets are combined with those of other feeder
funds. If a master portfolio doesn't attract other feeder funds, however, a
feeder fund's expenses could be higher than those of a traditional mutual
fund.
Each of the Portfolios may become a feeder fund if the Board of Trustees
decides this would be in the best interests of shareholders. We don't require
shareholder approval to make the change, but we'll notify you if it happens.
1
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3. The "Annual investment advisory fee, as a % of average daily net assets"
chart that follows the third paragraph under the heading "How the Portfolios are
managed -- Investment adviser" will be replaced with the following:
<TABLE>
<CAPTION>
Maximum
advisory
fee
<S> <C>
Nations Value Portfolio 0.65%
Nations Marsico 21st Century Portfolio 0.75%
Nations Marsico Focused Equities Portfolio 0.75%
Nations Marsico Growth & Income Portfolio 0.75%
Nations International Value Portfolio 0.90%
Nations Marsico International Opportunities Portfolio 0.80%
Nations Capital Growth Portfolio 0.65%
Nations Small Company Portfolio 0.90%
Nations Asset Allocation Portfolio 0.65%
Nations High Yield Bond Portfolio 0.55%
</TABLE>
4. Information about the various sub-advisers to the Portfolios under the
heading "How the Portfolios are managed -- Investment sub-advisers" will be
modified as follows:
a) Adding information under the heading "How the Portfolios are managed --
Investment sub-advisers" substantially as follows:
Nations Separate Account Trust and BAAI engage one or more investment
sub-advisers for each Portfolio to make day-to-day investment decisions for the
Portfolio. BAAI retains ultimate responsibility (subject to Board oversight) for
overseeing the sub-advisers and evaluates the Portfolios' needs and available
sub-advisers' skills and abilities on an ongoing basis. Based on its
evaluations, BAAI may at times recommend to Nations Separate Account Trust's
Board that the Portfolio:
o change, add or terminate one or more sub-advisers;
o continue to retain a sub-adviser even though the sub-adviser's
ownership or corporate structure has changed; or
o materially change a sub-advisory agreement with a sub-adviser.
Applicable law requires a Portfolio to obtain shareholder approval in order to
act on most of these types of recommendations, even if Nations Separate Account
Trust's Board has approved the proposed action and believes that the action is
in shareholders' best interests. BAAI and Nations Separate Account Trust have
applied for relief from the SEC to permit the Portfolios to act on many of
BAAI's recommendations with approval only by Nations Separate Account Trust's
Board and not by Portfolio shareholders. BAAI or Nations Separate Account Trust
would inform the Portfolio's shareholders of any actions taken in reliance on
this relief. Until BAAI and Nations Separate Account Trust obtain the relief,
each Portfolio will continue to submit these matters to shareholders for their
approval to the extent required by applicable law.
b) Deleting information regarding Nations Aggressive Growth Portfolio and
replacing the information regarding Nations Managed Index Portfolio, Nations
SmallCap Index Portfolio and Nations Balanced Assets Portfolio in the chart
outlining the BACAP asset management teams responsible for making the day-to-day
investment decisions for certain Portfolios under the heading "How the
Portfolios are managed -- Investment sub-advisers -- Banc of America Capital
Management, Inc.," with the following:
2
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<TABLE>
<CAPTION>
<S> <C>
Nations Capital Growth Portfolio Growth Strategies Team
Nations Small Company Portfolio SmallCap Strategies Team
Nations Asset Allocation Portfolio Fixed Income Management Team
for the fixed income and money
market portions of the Portfolio
</TABLE>
c) Replacing the third and fourth paragraphs under the heading "How the
Portfolios are managed -- Investment sub-advisers -- Marsico Capital Management,
LLC" with the following:
Marsico Capital is the investment sub-adviser to:
o Nations Marsico Focused Equities Portfolio
o Nations Marsico Growth & Income Portfolio
o Nations Marsico 21st Century Portfolio
o Nations Marsico International Opportunities 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 Nations Marsico Focused Equities Portfolio and Nations Marsico Growth &
Income Portfolio. 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 twenty years of experience as a securities
analyst and portfolio manager.
James A. Hillary is the portfolio manager of Nations Marsico 21st Century
Portfolio. Mr. Hillary has eleven years of experience as a securities analyst
and portfolio manager and is a founding member of Marsico Capital. Prior to
joining Marsico Capital in 1997, Mr. Hillary was a portfolio manager at W.H.
Reaves, a New Jersey-based money management firm where he managed equity mutual
funds and separate accounts. He holds a bachelor's degree from Rutgers
University and a law degree from Fordham University. Mr. Hillary is also a
certified public accountant.
James G. Gendelman is the portfolio manager of Nations Marsico International
Opportunities Portfolio. Prior to joining Marsico Capital in May 2000, Mr.
Gendelman spent thirteen years as a Vice President of International Sales for
Goldman, Sachs & Co. He holds a bachelor's degree in accounting from Michigan
State University and an MBA in finance from the University of Chicago. Mr.
Gendelman was an accountant for Ernst & Young from 1983 to 1985.
* * * * *
Please be advised that the prospectus for Nations Marsico Focused Equities
Portfolio and Nations Marsico Growth & Income Portfolio was supplemented on
November 3, 2000 by inserting information at the end of the second paragraph
under the heading "How the Portfolios are managed -- Investment sub-advisers --
Marsico Capital Management, LLC," as follows:
Bank of America recently announced its intention to purchase the remaining 50%
equity interest in Marsico Capital. Under applicable law, the change in
ownership that would result from this purchase would terminate Marsico Capital's
investment sub-advisory agreement with Nations Annuity Trust. Shareholders of
the Portfolios sub-advised by Marsico Capital must approve a new investment
sub-advisory agreement in order for Marsico Capital to continue to serve as
investment sub-adviser to the Portfolios. It is anticipated that special
meetings of shareholders of Nations Marsico Focused Equities Portfolio and
Nations Marsico Growth & Income Portfolio will be called in the spring of 2001
to seek these approvals.
* * * * *
3
<PAGE>
d) Deleting all information under the heading "How the Portfolios are managed --
Investment sub-advisers -- Gartmore Global Partners."
e) Adding the following information under the heading "How the Portfolios are
managed -- Investment sub-advisers" after the disclosure relating to Marsico
Capital Management, LLC:
[GRAPHIC OMITTED]
Chicago Equity Partners LLC
180 North LaSalle
Suite 3800
Chicago, Illinois 60601
Chicago Equity Partners LLC
Chicago Equity is a registered investment adviser and is owned by the firm's
senior management. Chicago Equity is one of two sub-advisers to Nations Asset
Allocation Portfolio.
Chicago Equity's Equity Management Team is responsible for making the day-to-day
investment decisions for the equity portion of Nations Asset Allocation
Portfolio.
* * * * *
5. In addition to the prospectus modifications, on May 1, 2001, the Fee Table
Summary section of the preceding Variable Annuity prospectus will be modified to
reflect the following information in connection with the transition of Nations
Aggressive Growth Portfolio to Nations Marsico 21st Century Portfolio, Nations
International Growth Portfolio to Nations Marsico International Opportunities
Portfolio, Nations Managed Index Portfolio to Nations Capital Growth Portfolio,
Nations SmallCap Index Portfolio to Nations Small Company Portfolio and Nations
Balanced Assets Portfolio to Nations Asset Allocation Portfolio:
<TABLE>
<CAPTION>
12b-1 Total Fund
Distribution Operating
Management and/or Expenses
Fees Servicing Fees Other Expenses (including any
(including (including (including any waivers and any
any waivers) any waivers) reimbursements) reimbursements)
-------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Nations Marsico 21st Century Portfolio (formerly known as
Nations Aggressive Growth Portfolio) 0.00% 0.00% 1.10% 1.10%
-------------------------------------------------------------------------------------------------------------------------
Nations Marsico International Opportunities Portfolio
(formerly know as Nations International Growth
Portfolio) 0.32% 0.00% 0.93% 1.25%
-------------------------------------------------------------------------------------------------------------------------
Nations Capital Growth Portfolio (formerly known as
Nations Managed Index Portfolio) 0.38% 0.00% 0.62% 1.00%
-------------------------------------------------------------------------------------------------------------------------
Nations Small Company Portfolio (formerly known as
Nations SmallCap Index Portfolio) 0.04% 0.00% 1.21% 1.25%
-------------------------------------------------------------------------------------------------------------------------
Nations Asset Allocation Portfolio (formerly known as
Nations Balanced Assets Portfolio) 0.00% 0.00% 1.00% 1.00%
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
The investment adviser and other service providers to these Portfolios have
agreed to waive a portion of their fees and/or reimburse expenses, including
distribution fees, until April 30, 2002 in order to maintain total fund
operating expenses at the levels shown. Absent these waivers and/or
reimbursements, total fund operating expenses would be:
<TABLE>
<CAPTION>
12b-1
Distribution
and/or Total Fund
Management Servicing Operating
Fees Fees Other Expenses Expenses
------------ ------------- ---------------- ------------
<S> <C> <C> <C> <C>
Nations Marsico 21st Century Portfolio 0.75% 0.25% 1.34% 2.34%
------------------------------------------------------------------------------------------------------------------
Nations Marsico International Opportunities Portfolio 0.80% 0.25% 0.93% 1.98%
------------------------------------------------------------------------------------------------------------------
Nations Capital Growth Portfolio 0.65% 0.25% 0.62% 1.52%
------------------------------------------------------------------------------------------------------------------
Nations Small Company Portfolio 0.90% 0.25% 1.21% 2.36%
------------------------------------------------------------------------------------------------------------------
Nations Asset Allocation Portfolio 0.65% 0.25% 1.26% 2.16%
------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
6. In addition to the prospectus modifications, the statement of additional
information will be modified on May 1, 2001 in order to reflect changes to the
fundamental policies of each Portfolio. Please see the statement of additional
information for more information regarding this matter.
* * * * *
C. Nations Annuity Trust has requested exemptive relief from the U.S. Securities
and Exchange Commission relating to the sale of shares to different
insurance products and qualified plans. After obtaining such exemptive relief,
the Portfolios may be made available for purchase through certain variable
annuity contracts and variable life insurance policies offered by the separate
accounts of participating insurance companies and directly to qualified plans.
Due to differences in tax treatment and other considerations, the interests of
various contract owners participating in Nations Annuity Trust and the interests
of qualified plans investing in Nations Annuity Trust may conflict. Nations
Annuity Trust currently does not foresee any disadvantages to shareholders
arising from such potential conflicts of interest. Nevertheless, Nations Annuity
Trust's Board of Trustees intends to monitor events to identify any material
irreconcilable conflicts which may arise, and to determine what action, if any,
should be taken in response to any such conflicts.
5
<PAGE>
[GRAPHIC OMITTED]
About the sub-adviser
Marsico Capital Management, LLC (Marsico Capital) is this Portfolio's
sub-adviser. James A. Hillary is its portfolio manager and makes the day-to-day
investment decisions for the Portfolio.
[GRAPHIC OMITTED] What is a multi-cap portfolio?
A multi-cap portfolio invests in companies across the capitalization spectrum --
small, medium-sized and large companies. As a multi-cap portfolio, this
Portfolio may invest in large, established and well-known U.S. and foreign
companies, as well as small, new and relatively unknown companies that are
believed to have the potential to grow significantly.
Nations Marsico 21st Century Portfolio
[GRAPHIC OMITTED]
Investment objective
The Portfolio seeks long-term growth of capital.
[GRAPHIC OMITTED]
Principal investment strategies
The Portfolio is an aggressive growth portfolio that primarily invests in equity
securities of companies of any capitalization size. The Portfolio will focus on
paradigm shifting technologies and companies seeking to take advantage of
technological innovations in the way business is conducted. The Portfolio may
invest without limit in foreign securities.
The Portfolio also may 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.
6
<PAGE>
[GRAPHIC OMITTED]
Risks and other things to consider
Nations Marsico 21st Century 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 Stock market risk - The value of any 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 historically high levels. There can be no guarantee that these levels
will continue.
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 Technology and technology-related risk - The Portfolio may invest in
technology and technology-related companies, which can be significantly
affected by obsolescence of existing technology, short product cycles,
falling prices and profits, and competition from new market entrants.
o Foreign investment risk - Because the Portfolio may invest without
limitation in foreign securities, it can be affected by the risks of
foreign investing. Foreign investments may be riskier than U.S.
investments because of political and economic conditions, changes in
currency exchange rates, foreign controls on investment, difficulties
selling some securities and lack of or limited financial information.
Withholding taxes also may apply to some foreign investments.
7
<PAGE>
[GRAPHIC OMITTED]
About the sub-adviser
Marsico Capital Management, LLC (Marsico Capital) is this Portfolio's
sub-adviser. James Gendelman is the portfolio manager and makes the day-to-day
investment decisions for the Portfolio.
[GRAPHIC OMITTED] What is an international portfolio?
International stock portfolios invest in a diversified portfolio of companies
located in markets throughout the world. These companies can offer investment
opportunities that are not available in the United States.
Nations Marsico International Opportunities Portfolio
[GRAPHIC OMITTED]
Investment objective
The Portfolio seeks long-term growth of capital.
[GRAPHIC OMITTED]
Principal investment strategies
The Portfolio normally invests at least 65% of its assets in common stocks of
foreign companies. While the Portfolio may invest in companies of any size, it
focuses on large companies. These companies are selected for their long-term
growth potential. The Portfolio normally invests in issuers from at least three
different countries not including the United States and generally holds a core
position of 35 to 50 common stocks. The Portfolio may invest in common stocks of
companies operating in emerging markets.
The Portfolio also may 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 well positioned to take advantage of 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.
8
<PAGE>
[GRAPHIC OMITTED]
Risks and other things to consider
Nations Marsico International Opportunities 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 Stock market risk - The value of any 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.
o Foreign investment risk - Because the Portfolio invests primarily in
foreign securities, it can be affected by the risks of foreign investing.
Foreign investments may be riskier than U.S. investments because of
political and economic conditions, changes in currency exchange rates,
foreign controls on investment, difficulties selling some securities and
lack of or limited financial information. Withholding taxes also may apply
to some foreign investments. If the Portfolio invests in emerging markets
there may be other risks involved, such as those of immature economies and
less developed and more thinly traded securities markets.
9
<PAGE>
[GRAPHIC OMITTED]
About the sub-adviser
Banc of America Capital Management, Inc. (BACAP) is this Portfolio's
sub-adviser. BACAP's Growth Strategies Team makes the day-to-day investment
decisions for the Portfolio.
[GRAPHIC OMITTED] What is a growth portfolio?
Growth portfolios invest in companies 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 growing
industry sectors.
Nations Capital Growth Portfolio
[GRAPHIC OMITTED]
Investment objective
The Portfolio seeks growth of capital by investing in companies that are
believed to have superior earnings growth potential.
[GRAPHIC OMITTED]
Principal investment strategies
The Portfolio normally invests at least 65% of its assets in common stocks of
companies that have one or more of the following characteristics:
o above-average earnings growth compared with the S&P 500
o established operating histories, strong balance sheets and favorable
financial performance
o above-average return on equity compared with the S&P 500
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 team identifies stocks using a disciplined analytical process. Starting with
a universe of companies with market capitalization of at least $1 billion, the
team assesses the investment potential of these companies and their industries
by evaluating:
o the growth prospects of the company's industry
o the company's relative competitive position in the industry
The team believes that this analysis identifies companies with favorable
long-term growth potential, competitive advantages and sensible business
strategies.
The team then uses quantitative analysis to decide when to invest, evaluating
each company's earnings trends and stock valuations, among other things, to try
to determine when it is reasonably valued.
In actively managing the portfolio, the team considers the characteristics of
the S&P 500 Index as a general baseline. The index characteristics evaluated by
the team include risk and sector diversification, as well as individual
securities holdings.
The 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,
the company's growth prospects are deteriorating, when the team believes other
investments are more attractive, or for other reasons.
10
<PAGE>
[GRAPHIC OMITTED]
Risks and other things to consider
Nations Capital Growth Portfolio has the following risks:
o Investment strategy risk - The team chooses stocks that it believes have
superior growth potential and are selling at reasonable prices, 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
historically high levels. There can be no guarantee that these levels will
continue.
o Technology and technology-related risk - The Portfolio may invest in
technology and technology-related companies, which can be significantly
affected by obsolescence of existing technology, short product cycles,
falling prices and profits, and competition from new market entrants.
11
<PAGE>
[GRAPHIC OMITTED]
About the sub-adviser
Banc of America Capital Management, Inc. (BACAP) is this Portfolio's
sub-adviser. BACAP's SmallCap Strategies Team makes the day-to-day investment
decisions for the Portfolio.
[GRAPHIC OMITTED]
Why invest in a small company portfolio?
A small company portfolio invests in smaller companies with promising products
or that are operating in a dynamic field. These companies can have stronger
potential for rapid earnings growth than larger companies. They may, however,
have a harder time securing financing and may be more sensitive to a setback
than larger, more established companies.
The team looks for companies whose earnings are growing quickly, and whose share
prices are reasonably valued.
Nations Small Company Portfolio
[GRAPHIC OMITTED]
Investment objective
The Portfolio seeks long-term capital growth by investing primarily in equity
securities.
[GRAPHIC OMITTED]
Principal investment strategies
The Portfolio normally invests at least 65% of its assets in companies with a
market capitalization of $2 billion or less. The Portfolio usually holds 75 to
130 securities, which include common stocks, preferred stocks and convertible
securities like warrants, rights and convertible debt.
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 team identifies stocks using a disciplined process based on the fundamental
analysis of the overall economy, industry conditions, and the financial position
and management of each company. It generates ideas from:
o company meetings/conferences
o independent industry analysis
o quantitative analysis
o Wall Street (brokerage) research
The team then conducts a rigorous qualitative analysis of each company being
considered for investment. This involves, among other things:
o gaining an in-depth understanding of the company's business
o evaluating the company's growth potential, risks and competitive strengths
o discussing its growth strategy with company management
o validating the growth strategy with external research
The team will only invest in a company when its stock price is attractive
relative to its forecasted growth.
The 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.
12
<PAGE>
The team may sell a security when its price reaches the target set by the team,
the company's growth prospects are deteriorating, when the team believes other
investments are more attractive, or for other reasons.
[GRAPHIC OMITTED]
Risks and other things to consider
Nations Small Company Portfolio has the following risks:
o Investment strategy risk - The team chooses stocks that it believes have
the potential for long-term growth. There is a risk that the value of these
investments will not rise as high as the team expects, or will fall.
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
historically high levels. There can be no guarantee that these levels will
continue.
o Convertible securities risk - The issuer of a convertible security may have
the option to redeem it at a specified price. If a convertible security is
redeemed, the Portfolio may accept the redemption, convert the convertible
security to common stock, or sell the convertible security to a third
party. Any of these transactions could affect the Portfolio's ability to
meet its objective.
o Technology and technology-related risk - The Portfolio may invest in
technology and technology-related companies, which can be significantly
affected by obsolescence of existing technology, short product cycles,
falling prices and profits, and competition from new market entrants.
13
<PAGE>
[GRAPHIC OMITTED]
About the sub-advisers
This Portfolio is managed by two sub-advisers: Banc of America Capital
Management, Inc. (BACAP) and Chicago Equity Partners LLC (Chicago Equity).
Chicago Equity's Equity Management Team makes the day-to-day investment
decisions for the equity portion of the Portfolio. BACAP's Fixed Income
Management Team makes the day-to-day investment decisions for the fixed income
and money market portions of the Portfolio.
[GRAPHIC OMITTED]
What is an asset allocation portfolio?
This asset allocation portfolio invests in a mix of equity and fixed income
securities, and cash equivalents.
Each of these "asset classes" has different risk/return characteristics. The
portfolio management team changes the mix based on its assessment of the
expected risks and returns of each class.
Asset allocation portfolios like this one can provide a diversified asset mix
for you in a single investment.
Nations Asset Allocation Portfolio
[GRAPHIC OMITTED]
Investment objective
The Portfolio seeks to obtain long-term growth from capital appreciation, and
dividend and interest income.
[GRAPHIC OMITTED]
Principal investment strategies
The Portfolio invests in a mix of equity and fixed income securities, as well as
cash equivalents, including U.S. government obligations, commercial paper and
other short-term, interest-bearing instruments.
The equity securities the Portfolio invests in are primarily common stock of
blue chip companies. These companies are well established, nationally known
companies that have a long record of profitability and a reputation for quality
management, products and services.
The fixed income securities the Portfolio invests in are primarily investment
grade bonds and notes. The Portfolio normally invests at least 25% of its assets
in senior securities. The Portfolio may also invest up to 35% of its assets in
mortgage-backed and asset-backed 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.
The team uses asset allocation as its principal investment approach. The team
actively allocates assets among the three asset classes based on its assessment
of the expected risks and returns of each class.
For the equity portion of the Portfolio, the team uses quantitative analysis to
analyze fundamental information about securities and identify value. Starting
with a universe of approximately 2,000 common stocks, the team uses a
multi-factor computer model to rank securities, based on the following criteria,
among others:
o changes in actual and expected earnings
o unexpected changes in earnings
o price-to-earnings ratio
o dividend discount model
o price-to-cash flow
The team tries to manage risk by matching the market capitalization, style and
industry weighting characteristics of the S&P SuperComposite 1500. The team
focuses on selecting individual stocks to try to provide higher returns than the
S&P SuperComposite 1500 while maintaining a level of risk similar to the index.
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.
14
<PAGE>
[GRAPHIC OMITTED]
Risks and other things to consider
Nations Asset Allocation 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
historically high 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 Mortgage-related 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 or other
securities that have lower yields.
o Asset-backed securities risk - Payment of interest and repayment of
principal may be impacted by the cash flows generated by the assets backing
these securities. The value of the Portfolio's asset-backed securities may
also be affected by changes in interest rates, the availability of
information concerning the interests in and structure of the pools of
purchase contracts, financing leases or sales agreements that are
represented by these securities, the creditworthiness of the servicing
agent for the pool, the originator of the loans or receivables, or the
entities that provide any supporting letters of credit, surety bonds, or
other credit enhancements.
15
<PAGE>
NATIONS ANNUITY TRUST
NATIONS VALUE PORTFOLIO
NATIONS AGGRESSIVE GROWTH PORTFOLIO
NATIONS MARSICO FOCUSED EQUITIES PORTFOLIO
NATIONS MARSICO GROWTH & INCOME PORTFOLIO
NATIONS INTERNATIONAL VALUE PORTFOLIO
NATIONS MANAGED INDEX PORTFOLIO
NATION HIGH YIELD BOND PORTFOLIO
Supplement dated December 29, 2000
to Prospectus dated October 11, 2000
The combined prospectus for the portfolios listed above (each a "Portfolio"
and collectively, the "Portfolios") is hereby supplemented as follows:
A. As of May 1, 2001, all references throughout the prospectus to Nations
Annuity Trust will be changed to Nations Separate Account Trust.
B. Special meetings of shareholders of the Portfolios will be held in the spring
of 2001 to seek approvals relating to certain changes to the Portfolios. If
approved, these changes are anticipated to become effective as of May 1, 2001,
and will result in the May 1, 2001 prospectus being modified from the current
prospectus in the following manner:
1. Under the heading "About the Portfolios," the discussion of each of the
following Portfolios will be replaced with the discussion attached at the end of
this document, which reflects changes to the name, investment objective,
principal investment strategies and stated risks of the applicable Portfolio:
o Nations Aggressive Growth Portfolio will be replaced with the discussion of
Nations Marsico 21st Century Portfolio; and
o Nations Managed Index Portfolio will be replaced with the discussion of
Nations Capital Growth Portfolio.
2. The following paragraph will be added as the second bullet point under the
heading "Other important information:"
o Changing to a feeder fund - Unlike traditional mutual funds, which invest in
individual securities, a "feeder fund" invests all of its assets in another
fund, called a "master portfolio." Other feeder funds generally also invest in
a master portfolio. The master portfolio invests in individual securities and
has the same investment objective, principal investment strategies and
principal risks as the feeder funds. This structure can help reduce a feeder
fund's expenses because its assets are combined with those of other feeder
funds. If a master portfolio doesn't attract other feeder funds, however, a
feeder fund's expenses could be higher than those of a traditional mutual
fund.
Each of the Portfolios may become a feeder fund if the Board of Trustees
decides this would be in the best interests of shareholders. We don't require
shareholder approval to make the change, but we'll notify you if it happens.
1
<PAGE>
3. The "Annual investment advisory fee, as a % of average daily net assets"
chart that follows the third paragraph under the heading "How the Portfolios are
managed -- Investment adviser" will be replaced with the following:
<TABLE>
<CAPTION>
Maximum
advisory
fee
<S> <C>
Nations Value Portfolio 0.65%
Nations Marsico 21st Century Portfolio 0.75%
Nations Marsico Focused Equities Portfolio 0.75%
Nations Marsico Growth & Income Portfolio 0.75%
Nations International Value Portfolio 0.90%
Nations Capital Growth Portfolio 0.65%
Nations High Yield Bond Portfolio 0.55%
</TABLE>
4. Information about the various sub-advisers to the Portfolios under the
heading "How the Portfolios are managed -- Investment sub-advisers" will be
modified as follows:
a) Deleting information regarding Nations Aggressive Growth Portfolio and
replacing the information regarding Nations Managed Index Portfolio in the chart
outlining the BACAP asset management teams responsible for making the day-to-day
investment decisions for certain Portfolios under the heading "How the
Portfolios are managed -- Investment sub-advisers -- Banc of America Capital
Management, Inc.," with the following:
<TABLE>
<S> <C>
Nations Capital Growth Portfolio Growth Strategies Team
</TABLE>
b) Replacing the third and fourth paragraphs under the heading "How the
Portfolios are managed -- Investment sub-advisers -- Marsico Capital Management,
LLC" with the following:
Marsico Capital is the investment sub-adviser to:
o Nations Marsico Focused Equities Portfolio
o Nations Marsico Growth & Income Portfolio
o Nations Marsico 21st Century 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 Nations Marsico Focused Equities Portfolio and Nations Marsico Growth &
Income Portfolio. 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 twenty years of experience as a securities
analyst and portfolio manager.
James A. Hillary is the portfolio manager of Nations Marsico 21st Century
Portfolio. Mr. Hillary has eleven years of experience as a securities analyst
and portfolio manager and is a founding member of Marsico Capital. Prior to
joining Marsico Capital in 1997, Mr. Hillary was a portfolio manager at W.H.
Reaves, a New Jersey-based money management firm where he managed equity mutual
funds and separate accounts. He holds a bachelor's degree from Rutgers
University and a law degree from Fordham University. Mr. Hillary is also a
certified public accountant.
2
<PAGE>
* * * * *
5. In addition to the prospectus modifications, on May 1, 2001, the Fee Table
Summary section of the preceding Variable Annuity prospectus will be modified to
reflect the following information in connection with the transition of Nations
Aggressive Growth Portfolio to Nations Marsico 21st Century Portfolio and
Nations Managed Index Portfolio to Nations Capital Growth Portfolio:
<TABLE>
12b-1
Distribution Total Fund
and/or Operating
Management Servicing Expenses
Fees Fees Other Expenses (including any
(including (including (including any waivers and any
any waivers) any waivers) reimbursements) reimbursements)
-------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
Nations Marsico 21st Century Portfolio (formerly known as
Nations Aggressive Growth Portfolio) 0.00% 0.00% 1.10% 1.10%
-----------------------------------------------------------------------------------------------------------------------------
Nations Capital Growth Portfolio (formerly known as
Nations Managed Index Portfolio) 0.38% 0.00% 0.62% 1.00%
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The investment adviser and other service providers to these Portfolios have
agreed to waive a portion of their fees and/ or reimburse expenses, including
distribution fees, until April 30, 2002 in order to maintain total fund
operating expenses at the levels shown. Absent these waivers and/or
reimbursements, total fund operating expenses would be:
<TABLE>
<CAPTION>
12b-1
Distribution
and/or Total Fund
Management Servicing Operating
Fees Fees Other Expenses Expenses
------------ ------------- ---------------- -------------
<S> <C> <C> <C> <C>
Nations Marsico 21st Century Portfolio 0.75% 0.25% 1.34% 2.34%
-----------------------------------------------------------------------------------------------------
Nations Capital Growth Portfolio 0.65% 0.25% 0.62% 1.52%
-----------------------------------------------------------------------------------------------------
</TABLE>
6. In addition to the prospectus modifications, the statement of additional
information will be modified on May 1, 2001 in order to reflect changes to the
fundamental policies of each Portfolio. Please see the statement of additional
information for more information regarding this matter.
* * * * *
C. Nations Annuity Trust has requested exemptive relief from the U.S. Securities
and Exchange Commission relating to the sale of shares to different insurance
products and qualified plans. After obtaining such exemptive relief, the
Portfolios may be made available for purchase through certain variable annuity
contracts and variable life insurance policies offered by the separate accounts
of participating insurance companies and directly to qualified plans. Due to
differences in tax treatment and other considerations, the interests of various
contract owners participating in Nations Annuity Trust and the interests of
qualified plans investing in Nations Annuity Trust may conflict. Nations Annuity
Trust currently does not foresee any disadvantages to shareholders arising from
such potential conflicts of interest. Nevertheless, Nations Annuity Trust's
Board of Trustees intends to monitor events to identify any material
irreconcilable conflicts which may arise, and to determine what action, if any,
should be taken in response to any such conflicts.
3
<PAGE>
[GRAPHIC OMITTED]
About the sub-adviser
Marsico Capital Management, LLC (Marsico Capital) is this Portfolio's
sub-adviser. James A. Hillary is its portfolio manager and makes the day-to-day
investment decisions for the Portfolio.
[GRAPHIC OMITTED] What is a multi-cap portfolio?
A multi-cap portfolio invests in companies across the capitalization spectrum--
small, medium-sized and large companies. As a multi-cap portfolio, this
Portfolio may invest in large, established and well-known U.S. and foreign
companies, as well as small, new and relatively unknown companies that are
believed to have the potential to grow significantly.
Nations Marsico 21st Century Portfolio
[GRAPHIC OMITTED]
Investment objective
The Portfolio seeks long-term growth of capital.
[GRAPHIC OMITTED]
Principal investment strategies
The Portfolio is an aggressive growth portfolio that primarily invests in equity
securities of companies of any capitalization size. The Portfolio will focus on
paradigm shifting technologies and companies seeking to take advantage of
technological innovations in the way business is conducted. The Portfolio may
invest without limit in foreign securities.
The Portfolio also may 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.
4
<PAGE>
[GRAPHIC OMITTED]
Risks and other things to consider
Nations Marsico 21st Century 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 Stock market risk - The value of any 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
historically high levels. There can be no guarantee that these levels will
continue.
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 Technology and technology-related risk - The Portfolio may invest in
technology and technology-related companies, which can be significantly
affected by obsolescence of existing technology, short product cycles,
falling prices and profits, and competition from new market entrants.
o Foreign investment risk - Because the Portfolio may invest without
limitation in foreign securities, it can be affected by the risks of
foreign investing. Foreign investments may be riskier than U.S. investments
because of political and economic conditions, changes in currency exchange
rates, foreign controls on investment, difficulties selling some securities
and lack of or limited financial information. Withholding taxes also may
apply to some foreign investments.
5
<PAGE>
[GRAPHIC OMITTED]
About the sub-adviser
Banc of America Capital Management, Inc. (BACAP) is this Portfolio's
sub-adviser. BACAP's Growth Strategies Team makes the day-to-day investment
decisions for the Portfolio.
[GRAPHIC OMITTED] What is a growth portfolio?
Growth portfolios invest in companies 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 growing
industry sectors.
Nations Capital Growth Portfolio
[GRAPHIC OMITTED]
Investment objective
The Portfolio seeks growth of capital by investing in companies that are
believed to have superior earnings growth potential.
[GRAPHIC OMITTED]
Principal investment strategies
The Portfolio normally invests at least 65% of its assets in common stocks of
companies that have one or more of the following characteristics:
o above-average earnings growth compared with the S&P 500
o established operating histories, strong balance sheets and favorable
financial performance
o above-average return on equity compared with the S&P 500
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 team identifies stocks using a disciplined analytical process. Starting with
a universe of companies with market capitalization of at least $1 billion, the
team assesses the investment potential of these companies and their industries
by evaluating:
o the growth prospects of the company's industry
o the company's relative competitive position in the industry
The team believes that this analysis identifies companies with favorable
long-term growth potential, competitive advantages and sensible business
strategies.
The team then uses quantitative analysis to decide when to invest, evaluating
each company's earnings trends and stock valuations, among other things, to try
to determine when it is reasonably valued.
In actively managing the portfolio, the team considers the characteristics of
the S&P 500 Index as a general baseline. The index characteristics evaluated by
the team include risk and sector diversification, as well as individual
securities holdings.
The 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,
the company's growth prospects are deteriorating, when the team believes other
investments are more attractive, or for other reasons.
6
<PAGE>
[GRAPHIC OMITTED]
Risks and other things to consider
Nations Capital Growth Portfolio has the following risks:
o Investment strategy risk - The team chooses stocks that it believes have
superior growth potential and are selling at reasonable prices, 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
historically high levels. There can be no guarantee that these levels will
continue.
o Technology and technology-related risk - The Portfolio may invest in
technology and technology-related companies, which can be significantly
affected by obsolescence of existing technology, short product cycles,
falling prices and profits, and competition from new market entrants.
7
<PAGE>
NATIONS ANNUITY TRUST
Statement of Additional Information
Nations Balanced Assets Portfolio
Nations Aggressive Growth Portfolio
Nations International Growth Portfolio
Nations International Value Portfolio
Nations Managed Index Portfolio
Nations SmallCap Index Portfolio
Nations Marsico Focused Equities Portfolio
Nations Marsico Growth & Income Portfolio
Nations High Yield Bond Portfolio
Nations Value Portfolio
May 1, 2000
as supplemented July 3, 2000 and December 29, 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
<TABLE>
<CAPTION>
Page
----
<S> <C>
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..................................................... 7
Asset-Backed Securities............................................................... 10
Borrowings............................................................................ 15
Commercial Instruments................................................................ 15
Combined Transactions................................................................. 16
Convertible Securities................................................................ 16
Corporate Debt Securities............................................................. 17
Custodial Receipts.................................................................... 17
Currency Swaps........................................................................ 17
Delayed Delivery Transactions ........................................................ 17
Dollar Roll Transactions ............................................................. 18
Equity Swap Contracts ................................................................ 18
Foreign Currency Transactions ........................................................ 19
Futures, Options and Other Derivative
Instruments ................................................................... 20
Risk Factors Associated with Futures and Options Transactions......................... 26
Guaranteed Investment Contracts....................................................... 35
Interest Rate Transactions ........................................................... 35
Lower Rated Debt Securities........................................................... 36
Options on Currencies................................................................. 37
Other Investment Companies............................................................ 37
Participation Interests and Company Receipts.......................................... 37
Real Estate Investment Trusts......................................................... 37
Repurchase Agreements................................................................. 38
Reverse Repurchase Agreements......................................................... 38
Securities Lending.................................................................... 38
Short Sales........................................................................... 38
Special Situations.................................................................... 39
Stripped Securities................................................................... 39
U.S. and Foreign Bank Obligations..................................................... 39
U.S. Government Obligations........................................................... 40
Use of Segregated and Other Special Accounts.......................................... 40
Variable- and Floating-Rate Instruments .............................................. 41
Warrants.............................................................................. 41
When-Issued Purchases and Forward Commitments ....................................... 42
Portfolio Turnover.................................................................... 42
Investment Risks...................................................................... 42
MANAGEMENT OF THE TRUST...................................................................... 45
Nations Funds Retirement Plan......................................................... 49
Nations Fund Deferred Compensation Plan............................................... 49
Shareholder and Trustee Liability..................................................... 51
INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY, TRANSFER
AGENCY AND SHAREHOLDER SERVICING AGREEMENTS ................................................. 52
Investment Adviser and Sub-Advisors.................................................. 52
Administrator and Co-Administrator................................................... 54
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Custodian and Transfer Agent.......................................................... 56
Shareholder Servicing and Distribution Plan........................................... 56
Expenses.............................................................................. 57
Distributor........................................................................... 58
Independent Accountants and Reports................................................... 58
Counsel............................................................................... 58
PORTFOLIO TRANSACTIONS AND BROKERAGE......................................................... 59
General Brokerage Policy.............................................................. 59
Brokerage Commissions................................................................. 62
Section 28(e) Standards............................................................... 63
PURCHASE, REDEMPTION AND PRICING OF SHARES................................................... 63
Purchases............................................................................. 63
Redemptions........................................................................... 64
Net Asset Value Determination......................................................... 64
DESCRIPTION OF SHARES........................................................................ 65
Description of Shares of the Trust.................................................... 65
ADDITIONAL INFORMATION CONCERNING TAXES...................................................... 66
General............................................................................... 66
Excise Tax............................................................................ 67
Taxation of Holders of Variable Contracts and Policies................................ 67
Information Regarding a Portfolio's Foreign Investments............................... 68
Other Matters......................................................................... 68
ADDITIONAL INFORMATION ON PERFORMANCE........................................................ 68
Yield Calculations.................................................................... 69
Total Return Calculations............................................................. 69
MISCELLANEOUS ............................................................................... 71
Certain Record Holders................................................................ 71
SCHEDULE A - Description of Ratings.......................................................... A-1
</TABLE>
ii
<PAGE>
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 ten different investment portfolios,
Nations Balanced Assets Portfolio, Nations Aggressive Growth Portfolio, Nations
International Growth Portfolio, Nations International Value Portfolio, Nations
Managed Index Portfolio, Nations SmallCap Index Portfolio, Nations Marsico
Focused Equities Portfolio, Nations Marsico Growth & Income Portfolio, Nations
High Yield Bond 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, Nations International Value Portfolio, and
Nations High Yield Bond Portfolio. Gartmore Global Partners ("Gartmore") serves
as the investment sub-adviser to Nations International Growth Portfolio. Brandes
Investment Partners, L.P. ("Brandes") serves as the investment sub-adviser to
Nations International Value Portfolio. MacKay Shields LLC ("MacKay Shields")
serves as the investment sub-advisor to Nations High Yield Bond Portfolio. As
used herein, "Adviser" shall mean BAAI, BACAP, Gartmore, Brandes, MacKay
Shields, and/or Marsico Capital as the context may require.
1
<PAGE>
This SAI is intended to furnish Participating Insurance Companies with
additional information concerning the Trust and the Portfolios. Some of the
information required to be in this SAI is also included in the Portfolios'
current Prospectus, and, in order to avoid repetition, reference will be made to
sections of the Prospectus. Additionally, the Prospectus and this SAI omit
certain information contained in the registration statement filed with the SEC.
Copies of the registration statement, including items omitted from the
Prospectus and this SAI, may be obtained from the SEC 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 Value Portfolio and
Nations High Yield Bond Portfolio, the investment restrictions applicable to the
Portfolios' investment programs are set forth below. 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. 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.
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3. Each Portfolio (except Nations Marsico Focused Equities Portfolio) may
not purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, immediately after such purchase, more than 5% of
the value of such Portfolio's total assets would be invested in the
securities of such issuer, except that up to 25% of the value of the
Portfolio's total assets may be invested without regard to these
limitations and with respect to 75% of such Portfolio's assets, such
Portfolio will not hold more than 10% of the voting securities of any
issuer.
Nations Marsico Focused Equities Portfolio may not purchase securities
of any one issuer (other than securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities) if, immediately
after such purchase, more than 25% of the value of the Portfolio's
total assets would be invested in the securities of one issuer, and
with respect to 50% of the Portfolio's total assets, more than 5% of
its assets would be invested in the securities of one issuer.
Nations International Growth Portfolio may not borrow money except as a
temporary measure and then only in amounts not exceeding 5% of the
value of the Portfolio's total assets or from banks or in connection
with reverse repurchase agreements provided that immediately after such
borrowing, all borrowings of the Portfolio do not exceed one-third of
the Portfolio's total assets and no purchases of portfolio instruments
will be made while the Portfolio has borrowings outstanding in an
amount exceeding 5% of its total assets.
4. 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.
5. 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.
6. 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.
7. 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).
8. Purchase or sell commodity contracts except that each Portfolio may, to
the extent appropriate under its investment policies, purchase publicly
traded securities of a company engaging in whole or in part in such
activities, enter into futures contracts and related options, engage in
transactions on a when-issued or forward commitment basis, and enter
into forward currency contracts in accordance with its investment
policies.
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In addition, certain non-fundamental investment restrictions which may
be changed by a majority vote of the Board of Trustees at any time and without
approval of the shareholders, are also applicable to the Portfolios, including
the following:
1. No Portfolio will purchase securities of a company for the purpose of
exercising control.
2. No Portfolio will invest more than 15% of the value of its net assets
in illiquid securities, including repurchase agreements, time deposits
and Guaranteed Investment Contracts ("GICs") with maturities in excess
of seven days, illiquid restricted securities, and other securities
which are not readily marketable. For purposes of this restriction,
illiquid securities shall not include securities which may be resold
under Rule 144A and Section 4(2) of the Securities Act of 1933 that the
Board of Trustees, or its delegate, determines to be liquid, based upon
the trading markets for the specific security.
3. No Portfolio will mortgage, pledge or hypothecate any assets except to
secure permitted borrowings and then only in an amount up to one-third
of the value of a Portfolio's total assets at the time of borrowing.
For purposes of this limitation, collateral arrangements with respect
to the writing of options, futures contracts, options on futures
contracts, and collateral arrangements with respect to initial and
variation margin are not considered to be a mortgage, pledge or
hypothecation of assets.
4. No Portfolio will invest in securities of other investment companies,
except as they may be acquired as part of a merger, consolidation or
acquisition of assets and except to the extent otherwise permitted by
the 1940 Act.
With respect to Nations International Value Portfolio and Nations High
Yield Bond Portfolio:
Each 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 a 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 a 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 Portfolios.
5. Make loans, except to the extent permitted by the 1940 Act, the rules
and regulations thereunder and any exemptive relief obtained by the
Portfolios.
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 Portfolios.
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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) a
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.
Each 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 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.
A 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.
Please be advised that the Board of Trustees has approved a new set of
fundamental and non-fundamental investment restrictions for the Portfolios.
Pending shareholder approval, these new investment restrictions will be
implemented on May 1, 2001. The new fundamental and non-fundamental investment
restrictions applicable to the Portfolios' investment programs if implemented
are set forth below. The investment limitations that are matters of fundamental
policy may not be changed without the affirmative vote of a Portfolio's
shareholders. The investment limitations that are matters of non-fundamental
policy may be changed without the affirmative vote of a Portfolio's
shareholders.
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In addition to the policies outlined below, each Portfolio is seeking
or has obtained permission from the SEC to invest in other Portfolios in the
Nations Funds family.
Fundamental Policy Restrictions
-------------------------------
Each Portfolio may not:
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 a 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 a 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 Portfolios.
5. Make loans, except to the extent permitted by the 1940 Act, the rules and
regulations thereunder and any exemptive relief obtained by the Portfolios.
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 Portfolios.
7. Except for the Marsico Focused Equities Portfolio, 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) a 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.
Non-Fundamental Policy Restrictions
-----------------------------------
Each Portfolio may:
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. Portfolios 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% 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.
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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.
A 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.
7. The Marsico Focused Equities Portfolio may not purchase securities of any
one issuer (other than U.S. Government Obligations) if, immediately after
such purchase, more than 25% of the value of a Portfolio's total assets
would be invested in the securities of one issuer, and with respect to 50%
of such Portfolio's total assets, more than 5% of its assets would be
invested in the securities of one issuer.
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.
The investment objective and policies of each Portfolio, unless
otherwise specified, are not-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.
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 Portfolios
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
assets in U.S. financial markets or U.S. dollar-denominated instruments.
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<PAGE>
Nations International Value Portfolio: In addition to the types of
securities described in the Prospectus, the Portfolio may invest in: short-term
debt instruments; purchase and write covered call options on specific portfolio
securities and may purchase and write put and call options on foreign stock
indices listed on foreign and domestic exchanges options and futures contracts
on securities, securities lending, forward foreign exchange contracts and
repurchase agreements. The Portfolio also may invest in ADRs, GDRs, EDRs and
ADSs and invest in foreign currency exchange contracts to convert foreign
currencies to and from the U.S. dollar, and to hedge against changes in foreign
currency exchange rates.
General: Both International Portfolios also may invest in certain
specified derivative securities including: exchange-traded options;
over-the-counter options executed with primary dealers, including long calls and
puts and covered calls to enhance return; and U.S. and foreign exchange-traded
financial futures approved by the CFTC and options thereon for market exposure
risk management. Each International Portfolio may lend its portfolio securities
to qualified institutional investors and may invest in repurchase agreements,
restricted, private placement and other illiquid securities. Each International
Portfolio also may invest in real estate investment trust securities. In
addition, each International Portfolio may invest in securities issued by other
investment companies, consistent with the Portfolio's investment objective and
policies and repurchase agreements. Each 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.
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<PAGE>
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 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.
Fixed Income
Nations High Yield Bond Portfolio: In addition to the types of
securities described in the Prospectus, the Portfolio may invest in: debt
securities, which include all types of debt obligations of both domestic and
foreign issuers, such as bonds, debentures, notes, equipment lease certificates,
equipment trust certificates, conditional sales contracts, commercial paper and
U.S. government securities (including obligations, such as repurchase
agreements, secured by such instruments). The debt securities in which the
Portfolio invests may be in non-dollar denominated foreign currency and may
include debt issued by countries or corporations located in emerging market
countries. The Portfolio may invest in participation interests in loans. Such
participation interests, which may take the form of interests in, or assignments
of, loans, are acquired from banks which have made loans or are members of
lending syndicates. The Portfolio's investments in loan participation interests
will be subject to its limitation on investments in illiquid securities and, to
the extent applicable, its limitation on investments in securities rated below
investment grade.
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.
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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 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.
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Moreover, principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates, resulting in a loss of all or part of the premium if any has
been paid. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semiannual basis.
The principal and interest payments on the Mortgage Assets may be
allocated among the various classes of CMOs in several ways. Typically, payments
of principal, including any prepayments, on the underlying mortgages are applied
to the classes in the order of their respective stated maturities or final
distribution dates, so that no payment of principal is made on CMOs of a class
until all CMOs of other classes having earlier stated maturities or final
distribution dates have been paid in full.
Stripped mortgage-backed securities ("SMBS") are derivative multi-class
mortgage securities. A Portfolio will only invest in SMBS that are obligations
backed by the full faith and credit of the U.S. Government. SMBS are usually
structured with two classes that receive different proportions of the interest
and principal distributions from a pool of mortgage assets. A Portfolio will
only invest in SMBS whose mortgage assets are U.S. Government obligations.
A common type of SMBS will be structured so that one class receives
some of the interest and most of the principal from the mortgage assets, while
the other class receives most of the interest and the remainder of the
principal. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, a Portfolio may fail to fully recoup its initial
investment in these securities. The market value of any class which consists
primarily or entirely of principal payments generally is unusually volatile in
response to changes in interest rates.
The average life of mortgage-backed securities varies with the
maturities of the underlying mortgage instruments. The average life is likely to
be substantially less than the original maturity of the mortgage pools
underlying the securities as the result of mortgage prepayments, mortgage
refinancings, or foreclosures. The rate of mortgage prepayments, and hence the
average life of the certificates, will be a function of the level of interest
rates, general economic conditions, the location and age of the mortgage and
other social and demographic conditions. Such prepayments are passed through to
the registered holder with the regular monthly payments of principal and
interest and have the effect of reducing future payments. Estimated average life
will be determined by the Adviser and used for the purpose of determining the
average weighted maturity and duration of the Portfolios.
Additional Information on Mortgage-Backed Securities.
Mortgage-backed securities represent an ownership interest in a pool of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. The mortgagor's monthly
payments to his/her lending institution are "passed-through" to an investor.
Most issuers or poolers provide guarantees of payments, regardless of whether or
not the mortgagor actually makes the payment. The guarantees made by issuers or
poolers are supported by various forms of credit collateral, guarantees or
insurance, including individual loan, title, pool and hazard insurance purchased
by the issuer. There can be no assurance that the private issuers or poolers can
meet their obligations under the policies. Mortgage-backed securities issued by
private issuers or poolers, whether or not such securities are subject to
guarantees, may entail greater risk than securities directly or indirectly
guaranteed by the U.S. Government.
Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential mortgage loans, net of any fees paid. Additional payments are caused
by repayments resulting from the sale of the underlying residential property,
refinancing or foreclosure net of fees or costs which may be incurred. Some
mortgage-backed securities are described as "modified pass-through." These
securities entitle the holders to receive all interest and principal payments
owed on the mortgages in the pool, net of certain fees, regardless of whether or
not the mortgagors actually make the payments.
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Residential mortgage loans are pooled by the FHLMC. FHLMC is a
corporate instrumentality of the U.S. Government and was created by Congress in
1970 for the purpose of increasing the availability of mortgage credit for
residential housing. Its stock is owned by the twelve Federal Home Loan Banks.
FHLMC issues Participation Certificates ("PC's"), which represent interests in
mortgages from FHLMC's national portfolio. FHLMC guarantees the timely payment
of interest and ultimate collection of principal.
FNMA is a Government sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases residential mortgages from a list of
approved sellers/servicers which include state and federally-chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA.
The principal Government guarantor of mortgage-backed securities is the
GNMA. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by approved institutions and backed by pools of
FHA-insured or VA-guaranteed mortgages.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Pools
created by such non-governmental issuers generally offer a higher rate of
interest than Government and Government-related pools because there are no
direct or indirect Government guarantees of payments in the former pools.
However, timely payment of interest and principal of these pools is supported by
various forms of insurance or guarantees, including individual loan, title, pool
and hazard insurance purchased by the issuer. The insurance and guarantees are
issued by Governmental entities, private insurers, and the mortgage poolers.
There can be no assurance that the private insurers or mortgage poolers can meet
their obligations under the policies.
The Portfolio expects that Governmental or private entities may create
mortgage loan pools offering pass-through investments in addition to those
described above. The mortgages underlying these securities may be alternative
mortgage instruments, that is, mortgage instruments whose principal or interest
payment may vary or whose terms to maturity may be shorter than previously
customary. As new types of mortgage-backed securities are developed and offered
to investors, certain Portfolios will, consistent with their investment
objective and policies, consider making investments in such new types of
securities.
Underlying Mortgages
--------------------
Pools consist of whole mortgage loans or participations in loans. The
majority of these loans are made to purchasers of 1-4 family homes. The terms
and characteristics of the mortgage instruments are generally uniform within a
pool but may vary among pools. For example, in addition to fixed-rate,
fixed-term mortgages, a Portfolio may purchase pools of variable-rate mortgages
(VRM), growing equity mortgages (GEM), graduated payment mortgages (GPM) and
other types where the principal and interest payment procedures vary. VRM's are
mortgages which reset the mortgage's interest rate periodically with changes in
open market interest rates. To the extent that the Portfolio is actually
invested in VRM's, the Portfolio's interest income will vary with changes in the
applicable interest rate on pools of VRM's. GPM and GEM pools maintain constant
interest rates, with varying levels of principal repayment over the life of the
mortgage. These different interest and principal payment procedures should not
impact the Portfolio's net asset value since the prices at which these
securities are valued will reflect the payment procedures.
All poolers apply standards for qualification to local lending
institutions which originate mortgages for the pools. Poolers also establish
credit standards and underwriting criteria for individual mortgages included in
the pools. In addition, some mortgages included in pools are insured through
private mortgage insurance companies.
Average Life
------------
The average life of pass-through pools varies with the maturities of
the underlying mortgage instruments. In addition, a pool's term may be shortened
by unscheduled or early payments of principal and interest on the underlying
mortgages. The occurrence of mortgage prepayments is affected by factors
including the level of interest rates, general economic conditions, the location
and age of the mortgage, and other social and demographic conditions.
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As prepayment rates of individual pools vary widely, it is not possible
to accurately predict the average life of a particular pool. For pools of
fixed-rated 30-year mortgages, common industry practice is to assume that
prepayments will result in a 12-year average life. Pools of mortgages with other
maturities or different characteristics will have varying assumptions for
average life.
Returns on Mortgage-Backed Securities
-------------------------------------
Yields on mortgage-backed pass-through securities are typically quoted
based on the maturity of the underlying instruments and the associated average
life assumption. Actual prepayment experience may cause the yield to differ from
the assumed average life yield.
Reinvestment of prepayments may occur at higher or lower interest rates
than the original investment, thus affecting the yields of the Portfolio. The
compounding effect from reinvestments of monthly payments received by the
Portfolio will increase its yield to shareholders, compared to bonds that pay
interest semi-annually.
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.
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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 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.
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Combined Transactions
Certain Portfolios may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple forward
foreign currency exchange contracts and any combination of futures, options and
forward foreign currency exchange contracts ("component" transactions), instead
of a single transaction, as part of a single hedging strategy when, in the
opinion of the Adviser, it is in the best interest of a Portfolio to do so and
where underlying hedging strategies are permitted by a Portfolio's investment
policies. A combined transaction, while part of a single hedging strategy, may
contain elements of risk that are present in each of its component transactions.
(See above for the risk characteristics of certain transactions.)
Convertible Securities
Certain Portfolios may invest in convertible securities, such as bonds,
notes, debentures, preferred stocks and other securities that may be converted
into common stock. All convertible securities purchased by the Portfolio will be
rated in the top two categories by an NRSRO or, if unrated, determined by the
Adviser to be of comparable quality. Investments in convertible securities can
provide income through interest and dividend payments, as well as, an
opportunity for capital appreciation by virtue of their conversion or exchange
features.
The convertible securities in which a Portfolio may invest include
fixed-income and zero coupon debt securities, and preferred stock that may be
converted or exchanged at a stated or determinable exchange ratio into
underlying shares of common stock. The exchange ratio for any particular
convertible security may be adjusted from time to time due to stock splits,
dividends, spin-offs, other corporate distributions or scheduled changes in the
exchange ratio. Convertible debt securities and convertible preferred stocks,
until converted, have general characteristics similar to both debt and equity
securities. Although to a lesser extent than with debt securities, generally,
the market value of convertible securities tends to decline as interest rates
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion exchange feature, the market value of
convertible securities typically changes as the market value of the underlying
common stock changes, and, therefore, also tends to follow movements in the
general market for equity securities. A unique feature of convertible securities
is that as the market price of the underlying common stock declines, convertible
securities tend to trade increasingly on a yield basis, and so may not
experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the price
of a convertible security tends to rise as a reflection of the value of the
underlying common stock, although typically not as much as the price of the
underlying common stock. While no securities investments are without risk,
investments in convertible securities generally entail less risk than
investments in common stock of the same issuer.
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.
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Corporate Debt Securities
Certain Portfolios may invest in corporate debt securities of domestic
issuers of all types and maturities, such as bonds, debentures, notes and
commercial paper. Corporate debt securities may involve equity features, such as
conversion or exchange rights or warrants for the acquisition of stock of the
same or a different issuer, participation based on revenue, sales or profit, or
the purchase of common stock or warrants in a unit transaction (where corporate
debt obligations and common stock are offered as a unit). Each Portfolio may
also invest in corporate debt securities of foreign issuers.
The corporate debt securities in which Nations High Yield Bond
Portfolio will invest will be rated BB or lower by Standard & Poor's Corporation
("S&P") or Ba or below by Moody's Investors Services, Inc. ("Moody's").
The corporate debt securities in which the Portfolios, except Nations
High Yield Bond Portfolio, 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 such 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.
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Dollar Roll Transactions
Certain Portfolios may enter into "dollar roll" transactions, which
consist of the sale by a Portfolio to a bank or broker/dealer (the
"counterparty") of GNMA certificates or other mortgage-backed securities
together with a commitment to purchase from the counterparty similar, but not
identical, securities at a future date, at the same price. The counterparty
receives all principal and interest payments, including prepayments, made on the
security while it is the holder. A Portfolio receives a fee from the
counterparty as consideration for entering into the commitment to purchase.
Dollar rolls may be renewed over a period of several months with a different
repurchase price and a cash settlement made at each renewal without physical
delivery of securities. Moreover, the transaction may be preceded by a firm
commitment agreement pursuant to which the Portfolio agrees to buy a security on
a future date. If the broker/dealer to whom a Portfolio sells the security
becomes insolvent, the Portfolio's right to purchase or repurchase the security
may be restricted; the value of the security may change adversely over the term
of the dollar roll; the security that the Portfolio is required to repurchase
may be worth less than the security that the Portfolio originally held, and the
return earned by the Portfolio with the proceeds of a dollar roll may not exceed
transaction costs.
The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Portfolio's right to
purchase from the counterparty might be restricted. Additionally, the value of
such securities may change adversely before the Portfolio is able to purchase
them. Similarly, the Portfolio may be required to purchase securities in
connection with a dollar roll at a higher price than may otherwise be available
on the open market. Since, as noted above, the counterparty is required to
deliver a similar, but not identical security to the Portfolio, the security
that the Portfolio is required to buy under the dollar roll may be worth less
than an identical security. Finally, there can be no assurance that the
Portfolio's use of the cash that it receives from a dollar roll will provide a
return that exceeds borrowing costs.
Equity Swap Contracts
Certain Portfolios may from time to time enter into equity swap
contracts. The counterparty to an equity swap contract will typically be a bank,
investment banking firm or broker/dealer. For example, the counterparty will
generally agree to pay a Portfolio the amount, if any, by which the notional
amount of the Equity Swap Contract would have increased in value had it been
invested in the stocks comprising the S&P 500 Index in proportion to the
composition of the Index, plus the dividends that would have been received on
those stocks. A Portfolio will agree to pay to the counterparty a floating rate
of interest (typically the London Inter Bank Offered Rate) on the notional
amount of the Equity Swap Contract plus the amount, if any, by which that
notional amount would have decreased in value had it been invested in such
stocks. Therefore, the return to a Portfolio on any Equity Swap Contract should
be the gain or loss on the notional amount plus dividends on the stocks
comprising the S&P 500 Index less the interest paid by the Portfolio on the
notional amount. A Portfolio will only enter into Equity Swap Contracts on a net
basis, i.e., the two parties' obligations are netted out, with the Portfolio
paying or receiving, as the case may be, only the net amount of any payments.
Payments under the Equity Swap Contracts may be made at the conclusion of the
contract or periodically during its term.
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.
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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 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").
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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 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.
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Futures contracts on indices of securities are settled through the
making and acceptance of cash settlements based on changes in value of the
underlying rate or index between the time the contract is entered into and the
time it is liquidated.
Futures Contracts on Fixed Income Securities and Related Indices. As
noted in their respective Prospectuses, certain Portfolios may enter into
transactions in futures contracts for the purpose of hedging a relevant portion
of their portfolios. A Portfolio may enter into transactions in futures
contracts that are based on U.S. Government obligations, including any index of
government obligations that may be available for trading. Such transactions will
be entered into where movements in the value of the securities or index
underlying a futures contract can be expected to correlate closely with
movements in the value of securities held in a Portfolio. For example, a
Portfolio may sell futures contracts in anticipation of a general rise in the
level of interest rates, which would result in a decline in the value of its
fixed income securities. If the expected rise in interest rates occurs, the
Portfolio may realize gains on its futures position, which should offset all or
part of the decline in value of fixed income fund securities. A Portfolio could
protect against such decline by selling fixed income securities, but such a
strategy would involve higher transaction costs than the sale of futures
contracts and, if interest rates again declined, the Portfolio would be unable
to take advantage of the resulting market advance without purchases of
additional securities.
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.
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In addition, a Portfolio may utilize stock index futures contracts in
anticipation of changes in the composition of its portfolio. For example, in the
event that a Portfolio expects to narrow the range of industry groups
represented in its portfolio, it may, prior to making purchases of the actual
securities, establish a long futures position based on a more restricted index,
such as an index comprised of securities of a particular industry group. As such
securities are acquired, a Portfolio's futures positions would be closed out. A
Portfolio may also sell futures contracts in connection with this strategy, in
order to protect against the possibility that the value of the securities to be
sold as part of the restructuring of its portfolio will decline prior to the
time of sale.
Options on Futures Contracts. An option on a futures contract gives the
purchaser (the "holder") the right, but not the obligation, to purchase a
position in the underlying futures contract (i.e., a purchase of such futures
contract) in the case of an option to purchase (a "call" option), or a "short"
position in the underlying futures contract (i.e., a sale of such futures
contract) in the case of an option to sell (a "put" option), at a fixed price
(the "strike price") up to a stated expiration date. The holder pays a
non-refundable purchase price for the option, known as the "premium." The
maximum amount of risk the purchase of the option assumes is equal to the
premium plus related transaction costs, although this entire amount may be lost.
Upon exercise of the option by the holder, the exchange clearing corporation
establishes a corresponding long position in the case of a put option. In the
event that an option is exercised, the parties will be subject to all the risks
associated with the trading of futures contracts, such as payment of variation
margin deposits. In addition, the writer of an option on a futures contract,
unlike the holder, is subject to initial and variation margin requirements on
the option position.
Options on Futures Contracts on Fixed Income Securities and Related
Indices. Certain Portfolios may purchase put options on futures contracts in
which such Portfolios are permitted to invest for the purpose of hedging a
relevant portion of their portfolios against an anticipated decline in the
values of portfolio securities resulting from increases in interest rates, and
may purchase call options on such futures contracts as a hedge against an
interest rate decline when they are not fully invested. A Portfolio would write
options on these futures contracts primarily for the purpose of terminating
existing positions.
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.
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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.
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.
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Purchasing Put and Call Options on Securities. A Portfolio may purchase
put options to protect its portfolio holdings in an underlying security against
a decline in market value. Such hedge protection is provided during the life of
the put option since a Portfolio, as holder of the put option, is able to sell
the underlying security at the put exercise price regardless of any decline in
the underlying security's market price. In order for a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction
costs. By using put options in this manner, a Portfolio will reduce any profit
it might otherwise have realized in its underlying security by the premium paid
for the put option and by transaction costs.
A Portfolio may also purchase call options to hedge against an increase
in prices of securities that it wants ultimately to buy. Such hedge protection
is provided during the life of the call option since the Portfolio, as holder of
the call option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, a Portfolio will reduce
any profit it might have realized had it bought the underlying security at the
time it purchased the call option by the premium paid for the call option and by
transaction costs.
Purchase and Sale of Options and Futures on Stock Indices. A Portfolio
may purchase and sell options on non-U.S. stock indices and stock index futures
as a hedge against movements in the equity markets.
Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specific price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of that stock index is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option expressed in dollars multiplied by a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike options on specific securities, all settlements
of options on stock indices are in cash and gain or loss depends on general
movements in the stocks included in the index rather than price movements in
particular stocks. A stock index futures contract is an agreement in which one
party agrees to deliver to the other an amount of cash equal to a specific
amount multiplied by the difference between the value of a specific stock index
at the close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of securities is made.
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.
24
<PAGE>
The sale of interest rate futures contracts provides an alternative
means of hedging against rising interest rates. As rates increase, the value of
a Portfolio's short position in the futures contracts will also tend to
increase, thus offsetting all or a portion of the depreciation in the market
value of a Portfolio's investments that are being hedged. While a Portfolio will
incur commission expenses in selling and closing out futures positions (which is
done by taking an opposite position which operates to terminate the position in
the futures contract), commissions on futures transactions are lower than
transaction costs incurred in the purchase and sale of portfolio securities.
Options on Stock Index Futures Contracts and Interest Rate Futures
Contracts. A Portfolio may purchase and write call and put options on non-U.S.
stock index and interest rate futures contracts. A Portfolio may use such
options on futures contracts in connection with its hedging strategies in lieu
of purchasing and writing options directly on the underlying securities or stock
indices or purchasing and selling the underlying futures. For example, a
Portfolio may purchase put options or write call options on stock index futures,
or interest rate futures, rather than selling futures contracts, in anticipation
of a decline in general stock market prices or rise in interest rates,
respectively, or purchase call options or write put options on stock index or
interest rate futures, rather than purchasing such futures, to hedge against
possible increases in the price of equity securities or debt securities,
respectively, which the Portfolio intends to purchase.
Purchase and Sale of Currency Futures Contracts and Related Options. In
order to hedge its portfolio and to protect it against possible variations in
foreign exchange rates pending the settlement of securities transactions, a
Portfolio may buy or sell currency futures contracts and related options. If a
fall in exchange rates for a particular currency is anticipated, a Portfolio may
sell a currency futures contract or a call option thereon or purchase a put
option on such futures contract as a hedge. If it is anticipated that exchange
rates will rise, a Portfolio may purchase a currency futures contract or a call
option thereon or sell (write) a put option to protect against an increase in
the price of securities denominated in a particular currency a Portfolio intends
to purchase. These futures contracts and related options thereon will be used
only as a hedge against anticipated currency rate changes, and all options on
currency futures written by a Portfolio will be covered.
A currency futures contract sale creates an obligation by a Portfolio,
as seller, to deliver the amount of currency called for in the contract at a
specified future time for a special price. A currency futures contract purchase
creates an obligation by a Portfolio, as purchaser, to take delivery of an
amount of currency at a specified future time at a specified price. Although the
terms of currency futures contracts specify actual delivery or receipt, in most
instances the contracts are closed out before the settlement date without the
making or taking of delivery of the currency. Closing out of a currency futures
contract is effected by entering into an offsetting purchase or sale
transaction. Unlike a currency futures contract, which requires the parties to
buy and sell currency on a set date, an option on a currency futures contract
entitles its holder to decide on or before a future date whether to enter into
such a contract. If the holder decides not to enter into the contract, the
premium paid for the option is fixed at the point of sale.
The Portfolio will write (sell) only covered put and call options on
currency futures. This means that a Portfolio will provide for its obligations
upon exercise of the option by segregating sufficient cash or short-term
obligations or by holding an offsetting position in the option or underlying
currency future, or a combination of the foregoing. A Portfolio will, so long as
it is obligated as the writer of a call option on currency futures, own on a
contract-for-contract basis an equal long position in currency futures with the
same delivery date or a call option on stock index futures with the difference,
if any, between the market value of the call written and the market value of the
call or long currency futures purchased maintained by a Portfolio in cash,
Treasury bills, or other high grade short-term obligations in a segregated
account with its custodian. If at the close of business on any day the market
value of the call purchased by a Portfolio falls below 100% of the market value
of the call written by the Portfolio, a Portfolio will so segregate an amount of
cash, Treasury bills or other high grade short-term obligations equal in value
to the difference. Alternatively, a Portfolio may cover the call option through
segregating with the custodian an amount of the particular foreign currency
equal to the amount of foreign currency per futures contract option times the
number of options written by a Portfolio. In the case of put options on currency
futures written by the Portfolio, the Portfolio will hold the aggregate exercise
price in cash, Treasury bills, or other high grade short-term obligations in a
segregated account with its custodian, or own put options on currency futures or
short currency futures, with the difference, if any, between the market value of
the put written and the market value of the puts purchased or the currency
futures sold maintained by a Portfolio in cash, Treasury bills or other high
grade short-term obligations in a segregated account with its custodian. If at
the close of business on any day the market value of the put options purchased
or the currency futures by a Portfolio falls below 100% of the market value of
the put options written by the Portfolio, a Portfolio will so segregate an
amount of cash, Treasury bills or other high grade short-term obligations equal
in value to the difference.
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<PAGE>
If other methods of providing appropriate cover are developed, a
Portfolio reserves the right to employ them to the extent consistent with
applicable regulatory and exchange requirements. In connection with transactions
in stock index options, stock index futures, interest rate futures, foreign
currency futures and related options on such futures, a Portfolio will be
required to deposit as "initial margin" an amount of cash or short-term
government securities equal to from 5% to 8% of the contract amount. Thereafter,
subsequent payments (referred to as "variation margin") are made to and from the
broker to reflect changes in the value of the futures contract.
Limitations on Purchase of Options. The staff of the SEC has taken the
position that purchased over-the-counter options and assets used to cover
written over-the-counter options are illiquid and, therefore, together with
other illiquid securities, cannot exceed 15% of a Portfolio's assets. The
Adviser intends to limit a Portfolio's writing of over-the-counter options in
accordance with the following procedure. Each Portfolio intends to write
over-the-counter options only with primary U.S. Government securities dealers
recognized by the Federal Reserve Bank of New York. Also, the contracts which a
Portfolio has in place with such primary dealers will provide that the Portfolio
has the absolute right to repurchase an option it writes at any time at a price
which represents the fair market value, as determined in good faith through
negotiation between the parties, but which in no event will exceed a price
determined pursuant to a formula in the contract. Although the specific formula
may vary between contracts with different primary dealers, the formula will
generally be based on a multiple of the premium received by a Portfolio for
writing the option, plus the amount, if any, of the option's intrinsic value
(i.e., the amount that the option is in-the-money). The formula also may include
a factor to account for the difference between the price of the security and the
strike price of the option if the option is written out-of-the-money. A
Portfolio will treat all or a part of the formula price as illiquid for purposes
of the 15% test imposed by the SEC staff.
Risk Factors Associated with Futures and Options Transactions
-------------------------------------------------------------
The effective use of options and futures strategies depends on, among
other things, a Portfolio's ability to terminate options and futures positions
at times when its the Adviser deems it desirable to do so. Although a Portfolio
will not enter into an option or futures position unless the Adviser believes
that a liquid secondary market exists for such option or future, there is no
assurance that a Portfolio will be able to effect closing transactions at any
particular time or at an acceptable price. A Portfolio generally expects that
its options and futures transactions will be conducted on recognized U.S. and
foreign securities and commodity exchanges. In certain instances, however, a
Portfolio may purchase and sell options in the over-the-counter market. A
Portfolio's ability to terminate option positions established in the
over-the-counter market may be more limited than in the case of exchange-traded
options and may also involve the risk that securities dealers participating in
such transactions would fail to meet their obligations to the Portfolio.
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.
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<PAGE>
In addition to certain risk factors described above, the following sets
forth certain information regarding the potential risks associated with the
Portfolios' futures and options transactions.
Risk of Imperfect Correlation. A Portfolio's ability effectively to
hedge all or a portion of its portfolio through transactions in futures, options
on futures or options on stock indices depends on the degree to which movements
in the value of the securities or index underlying such hedging instrument
correlate with movements in the value of the relevant portion of the Portfolio's
securities. If the values of the securities being hedged do not move in the same
amount or direction as the underlying security or index, the hedging strategy
for a Portfolio might not be successful and the Portfolio could sustain losses
on its hedging transactions which would not be offset by gains on its portfolio.
It is also possible that there may be a negative correlation between the
security or index underlying a futures or option contract and the portfolio
securities being hedged, which could result in losses both on the hedging
transaction and the fund securities. In such instances, a Portfolio's overall
return could be less than if the hedging transactions had not been undertaken.
Stock index futures or options based on a narrower index of securities may
present greater risk than options or futures based on a broad market index, as a
narrower index is more susceptible to rapid and extreme fluctuations resulting
from changes in the value of a small number of securities. A Portfolio would,
however, effect transactions in such futures or options only for hedging
purposes.
The trading of futures and options on indices involves the additional
risk of imperfect correlation between movements in the futures or option price
and the value of the underlying index. The anticipated spread between the prices
may be distorted due to differences in the nature of the markets, such as
differences in margin requirements, the liquidity of such markets and the
participation of speculators in the futures and options market. The purchase of
an option on a futures contract also involves the risk that changes in the value
of underlying futures contract will not be fully reflected in the value of the
option purchased. The risk of imperfect correlation, however, generally tends to
diminish as the maturity date of the futures contract or termination date of the
option approaches. The risk incurred in purchasing an option on a futures
contract is limited to the amount of the premium plus related transaction costs,
although it may be necessary under certain circumstances to exercise the option
and enter into the underlying futures contract in order to realize a profit.
Under certain extreme market conditions, it is possible that a Portfolio will
not be able to establish hedging positions, or that any hedging strategy adopted
will be insufficient to completely protect the Portfolio.
A Portfolio will purchase or sell futures contracts or options only if,
in the Adviser's judgment, there is expected to be a sufficient degree of
correlation between movements in the value of such instruments and changes in
the value of the relevant portion of the Portfolio's portfolio for the hedge to
be effective. There can be no assurance that the Adviser's judgment will be
accurate.
Potential Lack of a Liquid Secondary Market. The ordinary spreads
between prices in the cash and futures markets, due to differences in the
natures of those markets, are subject to distortions. First, all participants in
the futures market are subject to initial deposit and variation margin
requirements. This could require a Portfolio to post additional cash or cash
equivalents as the value of the position fluctuates. Further, rather than
meeting additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the liquidity of the
futures or options market may be lacking. Prior to exercise or expiration, a
futures or option position may be terminated only by entering into a closing
purchase or sale transaction, which requires a secondary market on the exchange
on which the position was originally established. While a Portfolio will
establish a futures or option position only if there appears to be a liquid
secondary market therefor, there can be no assurance that such a market will
exist for any particular futures or option contract at any specific time. In
such event, it may not be possible to close out a position held by a Portfolio,
which could require the Portfolio to purchase or sell the instrument underlying
the position, make or receive a cash settlement, or meet ongoing variation
margin requirements. The inability to close out futures or option positions also
could have an adverse impact on a Portfolio's ability effectively to hedge its
securities, or the relevant portion thereof.
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<PAGE>
The liquidity of a secondary market in a futures contract or an option
on a futures contract may be adversely affected by "daily price fluctuation
limits" established by the exchanges, which limit the amount of fluctuation in
the price of a contract during a single trading day and prohibit trading beyond
such limits once they have been reached. The trading of futures and options
contracts also is subject to the risk of trading halts, suspensions, exchange or
clearing house equipment failures, government intervention, insolvency of the
brokerage firm or clearing house or other disruptions of normal trading
activity, which could at times make it difficult or impossible to liquidate
existing positions or to recover excess variation margin payments.
Risk of Predicting Interest Rate Movements. Investments in futures
contracts on fixed income securities and related indices involve the risk that
if the Adviser's investment judgment concerning the general direction of
interest rates is incorrect, a Portfolio's overall performance may be poorer
than if it had not entered into any such contract. For example, if a Portfolio
has been hedged against the possibility of an increase in interest rates which
would adversely affect the price of bonds held in its portfolio and interest
rates decrease instead, the Portfolio will lose part or all of the benefit of
the increased value of its bonds which have been hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
a Portfolio has insufficient cash, it may have to sell bonds from its portfolio
to meet daily variation margin requirements, possibly at a time when it may be
disadvantageous to do so. Such sale of bonds may be, but will not necessarily
be, at increased prices which reflect the rising market.
Trading and Position Limits. Each contract market on which futures and
option contracts are traded has established a number of limitations governing
the maximum number of positions which may be held by a trader, whether acting
alone or in concert with others. The Adviser does not believe that these trading
and position limits will have an adverse impact on the hedging strategies
regarding the Portfolios' investments.
Regulations on the Use of Futures and Options Contracts. Regulations of
the CFTC require that the Portfolios enter into transactions in futures
contracts and options thereon for hedging purposes only, in order to assure that
they are not deemed to be a "commodity pool" under such regulations. In
particular, CFTC regulations require that all short futures positions be entered
into for the purpose of hedging the value of investment securities held by a
Portfolio, and that all long futures positions either constitute bona fide
hedging transactions, as defined in such regulations, or have a total value not
in excess of an amount determined by reference to certain cash and securities
positions maintained for the Portfolio, and accrued profits on such positions.
In addition, a Portfolio may not purchase or sell such instruments if,
immediately thereafter, the sum of the amount of initial margin deposits on its
existing futures positions and premiums paid for options on futures contracts
would exceed 5% of the market value of the Portfolio's total assets.
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.)
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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 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.
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<PAGE>
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.
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.
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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 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
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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.
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 then made, additional cash is required to
be paid by or released to the Portfolio, and the Portfolio realizes a loss or
gain.
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IV. Risks of Transactions in Futures Contracts
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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.
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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
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.
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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.
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.
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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 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.
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Options on Currencies
Certain Portfolios may purchase and sell options on currencies to hedge
the value of securities the Portfolio holds or intends to buy. Options on
foreign currencies may be traded on U.S. and foreign exchanges or
over-the-counter.
Other Investment Companies
In seeking to attain their investment objectives, certain Portfolios
may invest in securities issued by other investment companies within the limits
prescribed by the 1940 Act. Each Portfolio currently intends to limit its
investments so that, as determined immediately after a securities purchase is
made: (a) not more than 5% of the value of its total assets will be invested in
the securities of any one investment company; (b) not more than 10% of the value
of its total assets will be invested in the aggregate in securities of
investment companies as a group; and (c) not more than 3% of the outstanding
voting stock of any one investment company will be owned by the Portfolio or by
the 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").
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Repurchase Agreements
The repurchase price under any repurchase agreements described in the
Prospectuses generally equals the price paid by a Portfolio plus interest
negotiated on the basis of current short-term rates (which may be more or less
than the rate on the securities underlying the repurchase agreement). Securities
subject to repurchase agreements will be held by a Company's custodian in a
segregated account or in the Federal Reserve/Treasury book-entry system.
Repurchase agreements are considered to be loans by such Company under the 1940
Act.
Reverse Repurchase Agreements
At the time a Portfolio enters into a reverse repurchase agreement, it
may establish a segregated account with its custodian bank in which it will
maintain cash, U.S. Government securities or other liquid high grade debt
obligations equal in value to its obligations in respect of reverse repurchase
agreements. Reverse repurchase agreements involve the risk that the market value
of the securities the Portfolios are obligated to repurchase under the agreement
may decline below the repurchase price. In the event the buyer of securities
under a reverse repurchase agreement files for bankruptcy or becomes insolvent,
the Portfolios' use of proceeds of the agreement may be restricted pending a
determination by the other party, or its trustee or receiver, whether to enforce
the Portfolios' obligation to repurchase the securities. Reverse repurchase
agreements are speculative techniques involving leverage, and are subject to
asset coverage requirements if the Portfolios do not establish and maintain a
segregated account (as described above). In addition, some or all of the
proceeds received by a Portfolio from the sale of a portfolio instrument may be
applied to the purchase of a repurchase agreement. To the extent the proceeds
are used in this fashion and a common broker/dealer is the counterparty on both
the reverse repurchase agreement and the repurchase agreement, the arrangement
might be recharacterized as a swap transaction. Under the requirements of the
1940 Act, the Portfolios are required to maintain an asset coverage (including
the proceeds of the borrowings) of at least 300% of all borrowings. Depending on
market conditions, the Portfolios' asset coverage and other factors at the time
of a reverse repurchase, the Portfolios may not establish a segregated account
when the Adviser believes it is not in the best interests of the Portfolios to
do so. In this case, such reverse repurchase agreements will be considered
borrowings subject to the asset coverage described above.
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.
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Special Situations
Certain Portfolios may invest in "special situations." A special
situation arises when, in the opinion of the Adviser, the securities of a
particular company will, within a reasonably estimable period of time, be
accorded market recognition at an appreciated value solely by reason of a
development applicable to that company, and regardless of general business
conditions or movements of the market as a whole. Developments creating special
situations might include, among others: liquidations, reorganizations,
recapitalizations, mergers, material litigation, technical breakthroughs and new
management or management policies. Although large and well known companies may
be involved, special situations more often involve comparatively small or
unseasoned companies. Investments in unseasoned companies and special situations
often involve much greater risk than is inherent in ordinary investment
securities.
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.
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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
procedures approved established by the Trust's Board of Trustees, are of an
investment quality comparable to obligations of domestic banks which may be
purchased by a Portfolio. These obligations may be general obligations of the
parent bank in addition to the issuing branch or subsidiary, but the parent
bank's obligations may be limited by the terms of the specific obligation or by
governmental regulation. Each Portfolio also limits its investments in foreign
bank obligations to banks, branches and subsidiaries located in Western Europe
(United Kingdom, France, Germany, Belgium, The Netherlands, Italy and
Switzerland), Scandinavia (Denmark and Sweden), Australia, Japan, the Cayman
Islands, the Bahamas and Canada. Each Portfolio will limit its investment in
securities of foreign banks to not more than 20% of total assets at the time of
investment.
Each Portfolio may also make interest-bearing savings deposits in
commercial and savings banks in amounts not in excess of 5% of the total assets
of the Portfolio.
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.
40
<PAGE>
A forward foreign currency contract that obligates a Portfolio to
provide currencies will require the Portfolio to hold currencies or liquid
securities denominated in a foreign currency which will equal the Portfolio's
obligations. Such a contract requiring the purchase of currencies also requires
segregation.
Unless a segregated account consists of the securities, cash or
currencies that are the subject of the obligation, a Portfolio will hold cash,
U.S. Government securities and other high grade liquid debt obligations in a
segregated account. These assets cannot be transferred while the obligation is
outstanding unless replaced with other suitable assets. In the case of an
index-based transaction, a Portfolio could own securities substantially
replicating the movement of the particular index.
In the case of a futures contract, a Portfolio must deposit initial
margin and variation margin, as often as daily, if the position moves adversely,
sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Similarly, options on futures contracts require a Portfolio to
deposit margin to the extent necessary to meet the Portfolio's commitments.
In lieu of such assets, such transactions may be covered by other means
consistent with applicable regulatory policies. A Portfolio may enter into
off-setting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
hedging transactions. For example, a Portfolio could purchase a put option if
the strike price of that option is the same or higher than the strike price of a
put option sold by that Portfolio. Moreover, instead of segregating assets if a
Portfolio held a futures or forward contract, it could purchase a put option on
the same futures or forward contract with a strike price as high or higher than
the price of the contract held. Of course, the off-setting transaction must
terminate at the time of or after the primary transaction.
Variable- and Floating-Rate Instruments
Certain Portfolios may purchase variable-rate and floating rate
obligations. If such instrument is not rated, the Adviser will consider the
earning power, cash flows, and other liquidity ratios of the issuers and
guarantors of such obligations and, if the obligation is subject to a demand
feature, will monitor their financial status to meet payment on demand. In
determining average weighted portfolio maturity, a variable-rate demand
instrument issued or guaranteed by the U.S. Government or an agency or
instrumentality thereof will be deemed to have a maturity equal to the period
remaining until the obligations next interest rate adjustment. Other
variable-rate obligations will be deemed to have a maturity equal to the longer
of the period remaining to the next interest rate adjustment or the time a
Portfolio can recover payment of principal as specified in the instrument.
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.
41
<PAGE>
When-Issued Purchases and Forward Commitments
A Portfolio may agree to purchase securities on a when-issued basis or
enter into a forward commitment to purchase securities. When a Portfolio engages
in these transactions, its custodian will segregate cash, U.S. government
securities or other high quality debt obligations equal to the amount of the
commitment. Normally, the custodian will segregate portfolio securities to
satisfy a purchase commitment, and in such a case a Portfolio may be required
subsequently to segregate additional assets in order to ensure that the value of
the segregated assets remains equal to the amount of the Portfolio's commitment.
Because a Portfolio will segregate cash or liquid assets to satisfy its purchase
commitments in the manner described, the Portfolio's liquidity and ability to
manage its portfolio might be adversely affected in the event its commitments to
purchase when-issued securities ever exceeded 25% of the value of its assets. In
the case of a forward commitment to sell portfolio securities, the Portfolio's
custodian will hold the portfolio securities themselves in a segregated account
while the commitment is outstanding.
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.
42
<PAGE>
Nations Marsico Focused Equities Portfolio, as a non-diversified fund,
may invest in fewer issuers than diversified funds such as Nations Marsico
Growth & Income Portfolio. Therefore, appreciation or depreciation of an
investment in a single issuer could have a greater impact on the Portfolio's net
asset value. The Portfolio reserves the right to become a diversified fund by
limiting the investments in which more than 5% of its total assets are invested.
The value of a Portfolio's investments in debt securities, including
U.S. Government Obligations, will tend to decrease when interest rates rise and
increase when interest rates fall. In general, longer-term debt instruments tend
to fluctuate in value more than shorter-term debt instruments in response to
interest rate movements. In addition, debt securities that are not backed by the
United States Government are subject to credit risk, which is the risk that the
issuer may not be able to pay principal and/or interest when due. In addition,
obligations with the lowest investment grade rating (e.g., "BBB" by Standard &
Poor's Corporation ("S&P") or "Baa" by Moody's Investors Service, Inc.
("Moody's")) have speculative characteristics and changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade debt
obligations. Subsequent to its purchase by the Portfolio, an issue of securities
may cease to be rated or its rating may be reduced below the minimum rating
required for purchase by the Portfolio. The Adviser will consider such an event
in determining whether the Portfolio should continue to hold the obligation.
Unrated obligations may be acquired by the Portfolio if they are determined by
the Adviser to be of comparable quality at the time of purchase to rated
obligations that may be acquired.
Certain of the Portfolios' investments constitute derivative
securities, which are securities whose value is derived, at least in part, from
an underlying index or reference rate. There are certain types of derivative
securities that can, under certain circumstances, significantly increase a
purchaser's exposure to market or other risks. The Adviser, however, only
purchases derivative securities in circumstances where it believes such
purchases are consistent with such Portfolio's investment objective and do not
unduly increase the Portfolio's exposure to market or other risks. For
additional risk information regarding the Portfolios' investments in particular
instruments, see "Appendix A -- Portfolio Securities."
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 International Portfolios -- Investors should
understand and consider carefully the special risks involved in foreign
investing.
Investors in International Portfolios should be aware that such
Portfolios 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 Portfolios offer a more efficient way for individual
investors to participate in foreign markets, expenses, including custodial fees,
are also higher than the typical domestic equity mutual fund.
43
<PAGE>
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 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.
Special Risk Relating to Nations High Yield Bond Portfolio -- High
yield bonds may be more susceptible to real or perceived adverse economic and
competitive industry conditions than higher grade bonds. The prices of high
yield bonds have been found to be less sensitive to interest-rate changes than
more highly rated investments, but more sensitive to adverse economic downturns
or individual corporate developments. A projection of an economic downturn or of
a period of rising interest rates, for example, could cause a decline in high
yield bond prices because the advent of a recession could lessen the ability of
a highly leveraged company to make principal and interest payments on its debt
securities. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of high yield bonds,
especially in a thinly traded market. Legislation designed to limit the use of
high yield bonds in corporate transactions may have a material adverse effect on
a Portfolio's net asset value and investment practices. In addition, there may
be special tax considerations associated with investing in high yield bonds
structured as zero coupon or payment-in-kind securities. A Portfolio records the
interest on these securities annually as income even though it receives no cash
interest until the security's maturity or payment date. Also, distributions on
account of such interest generally will be taxable to shareholders even if the
Portfolio does not distribute cash to them. Therefore, in order to pay taxes on
this interest, shareholders may have to redeem some of their shares to pay the
tax or the Portfolio may have to sell some of its assets to reduce the
Portfolio's assets and may thereby increase its expense ratio and decrease its
rate of return. The Sub-Adviser seeks to reduce risk through diversification,
credit analysis and attention to current developments and trends in both the
economy and financial markets. In addition, investments in foreign securities
may serve to provide further diversification.
Because certain high yield debt instruments that the Nations High Yield
Bond Portfolio purchases may be instruments issued by foreign governments,
agencies, corporations or other entities of countries, some of which may be
considered emerging markets countries, there are certain additional risks
associated with such investments.
Investors should also understand and consider carefully the special
risks involved in foreign investing. Such risks include, but are not limited to:
(1) restrictions on foreign investment and repatriation of capital; (2)
fluctuations in currency exchange rates, which can significantly affect a
Portfolio's share price; (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 U.S. markets; (6) exposure to political and economic
risks, including the risk of nationalization, expropriation of assets and war;
(7) possible impositions 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.
44
<PAGE>
Certain of the risks associated with investments by Nations High Yield
Bond Portfolio in foreign securities are heightened with respect to investment
in emerging markets countries. Political and economic structures in many
emerging market countries, especially those in Eastern Europe, the Pacific
Basin, and the Far East, may be undergoing significant evolution and rapid
development, and may lack the social, political and economic stability
characteristic of more developed countries. Investing in emerging markets
securities also involves risks which are in addition to the usual risks inherent
in foreign investments. For example, some emerging market countries may have
fixed or managed currencies that are not free-floating against the U.S. dollar.
Further, certain currencies may not be traded internationally and some countries
with emerging securities markets have sustained long periods of substantially
high inflation or rapid fluctuation in inflation rates which can have negative
effects on a country's economy or securities markets.
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, Nations Master Investment
Trust, Nations Annuity Trust,
Nations Fund Trust, and Nations
Funds 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 company)
Succession Fund from 1993 to 1995, Time Horizon Fund
The Wrigley Building (investment company) from 1995 to 1999,
400 North Michigan Avenue Pacific Innovations Trust (investment
Suite 1016 company) from 1997 to 1999, Nations Annuity
Chicago, IL 60611 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
Ingredients,
Inc.
(food
ingredients
manufacturer),
Golden
Rule
Insurance
Company,
Nations
LifeGoal
Funds,
Inc.
(investment
company)
since
December
1999.
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
During Past 5 Years
Position with and Current
Name, Address, and Age the Trust Directorships
---------------------- --------- -------------
<S> <C> <C>
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, Nations
Master Investment Trust, and Nations
Funds 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, Nations
Master Investment Trust, and Nations
Funds 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,
Nations Master Investment Trust, and
Nations Funds 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, Nations Master Investment
Trust, and Nations Funds Trust;
Director, Nations Fund, Inc. and
Nations LifeGoal Funds, Inc.;
Director, Nations Fund Portfolios,
Inc. through August, 1999.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
During Past 5 Years
Position with and Current
Name, Address, and Age the Trust Directorships
---------------------- --------- -------------
<S> <C> <C>
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, Nations
Master Investment Trust, and Nations
Funds 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 January
237 Cherokee Road 1992 to September 1996; Executive Vice
Charlotte, NC 28207 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,
Nations
Master
Investment
Trust,
and
Nations
Funds
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, Nations
Master Investment Trust, and Nations
Funds 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, Nations
Master Investment Trust, and Nations
Funds Trust; Director, Nations Fund
Portfolios, Inc. through August,
1999.
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
During Past 5 Years
Position with and Current
Name, Address, and Age the Trust Directorships
---------------------- --------- -------------
<S> <C> <C>
Thomas S. Word, Jr., 61* Trustee Partner - McGuire, Woods, Battle & Boothe
McGuire, Woods, Battle & Boothe LLP LLP (law firm); Director - Vaughan-Bassett
One James Center Furniture Companies, Inc. (furniture),
8th Floor Nations Fund, Inc. and Nations LifeGoal
Richmond, VA 23219 Funds, Inc.; Trustee, Nations Reserves,
Nations Fund Trust, Nations Annuity Trust,
Nations Master Investment Trust, and Nations
Funds 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, Nations Master Investment
Trust, and Nations Funds 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, Nations
Master Investment Trust, and Nations
Funds 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.
48
<PAGE>
The Trust, each Adviser, and Stephens have adopted a code 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 amendments to Rule 17j-1
under the 1940 Act as set forth in the August 20, 1999 Release. Each code of
ethics, 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
director or officer of the Trust, (ii) any employee of the Trust (or any company
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. The codes
of ethics for the Companies, Advisers, and Stephens are on public file with, and
are available from, the SEC.
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.
49
<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)
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
</TABLE>
50
<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>
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 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.
51
<PAGE>
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 International Value Portfolio, Nations Marsico Focused
Equities Portfolio, Nations Marsico Growth & Income Portfolio, and Nations High
Yield Bond Portfolio. Gartmore is the investment sub-adviser to Nations
International Growth Portfolio. Brandes is the investment sub-adviser to Nations
International Value Portfolio. Marsico Capital is the investment sub-adviser to
Nations Marsico Focused Equities Portfolio and Nations Marsico Growth & Income
Portfolio. MacKay Shields is the investment sub-adviser to Nations High Yield
Bond 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 $90 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.
Sub-Advisers Unaffiliated with BAAI
-----------------------------------
Brandes Investment Partners, Inc. owns a controlling interest in
Brandes Investment Partners, L.P. and serves as its General Partner. Charles
Brandes is the controlling shareholder of Brandes Investment Partners, Inc. The
principal offices of Brandes are located at 12750 High Bluff Drive, San Diego,
CA 92130.
MacKay Shields is located at 9 West 57th Street, New York, New York
10019.
52
<PAGE>
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, Bandes, Marsico Capital, and/or MacKay Shields, 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, Brandes, Marsico Capital,
and/or MacKay Shields 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. Because Nations International Value
Portfolio and Nations High Yield Bond Portfolio are new series, they have not
yet completed a single fiscal year. Accordingly, advisory fees and sub-advisory
fees paid to their advisers and sub-advisers, respectively, are not included
below.
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>
53
<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
-----------------
<TABLE>
<CAPTION>
Period Ending 12/31/98 Period Ending 12/31/99
Net Amount Paid Net Amount Paid
--------------- ---------------
<S> <C> <C>
Nations Marsico Focused Equities Portfolio $ 39,264 $ 249,624
Nations Growth & Income Portfolio 27,748 148,736
</TABLE>
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.
54
<PAGE>
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 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.
Because Nations International Value Portfolio and Nations High Yield
Bond Portfolio are new series, they have not yet completed a single fiscal year.
Accordingly, co-administration fees and sub-administration fees paid to their
co-administrators and sub-administrator, respectively, are not included below.
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
-------
55
<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. The table set forth below states the net
fees paid under the Servicing and Distribution Plan for the year ended December
31, 1999. Because Nations International Value Portfolio and Nations High Yield
Bond Portfolio are new series, they have not yet completed a single fiscal year.
Accordingly, fees paid under their Servicing and Distribution Plan are not
included below.
56
<PAGE>
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
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, Brandes, MacKay
Shields, and Marsico Capital 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, Brandes, MacKay Shields, and Marsico Capital or the Administrator
shall be deducted from the monthly investment advisory and administration fees
otherwise payable to BAAI, BACAP, Gartmore, Brandes, MacKay Shields, and Marsico
Capital and the Co-Administrators during such fiscal year. If required pursuant
to such state securities regulations, BAAI, BACAP, Gartmore, Brandes, MacKay
Shields, and Marsico Capital 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).
57
<PAGE>
Distributor
Stephens Inc. (the "Distributor") serves as the principal underwriter
and distributor of the shares of the Portfolios.
Pursuant to a distribution agreement (the "Distribution Agreement"),
the Distributor, as agent, sells shares of the Portfolios on a continuous basis
and transmits purchase and redemption orders that its receives to the Trust or
the Transfer Agent. Additionally, the Distributor has agreed to use appropriate
efforts to solicit orders for the sale of shares and to undertake such
advertising and promotion as it believes appropriate in connection with such
solicitation. Pursuant to the Distribution Agreement, the Distributor, at its
own expense, finances those activities which are primarily intended to result in
the sale of shares of the Portfolios, including, but not limited to,
advertising, compensation of underwriters, dealers and sales personnel, the
printing of prospectuses to other than existing shareholders, and the printing
and mailing of sales literature. The Distributor, however, may be reimbursed for
all or a portion of such expenses to the extent permitted by the Distribution
Agreement adopted by the Trust pursuant to Rule 12b-1 under the 1940 Act.
The Distribution Agreement will continue year to year as long as such
continuance is approved at least annually by (i) the Board of Trustees or a vote
of the majority (as defined in the 1940 Act) of the outstanding voting
securities of the Portfolio and (ii) a majority of the Trustees who are not
parties to the Distribution Agreement or "interested persons" of any such party
by a vote cast in person at a meeting called for such purpose. The Distribution
Agreement is not assignable and is terminable with respect to a Portfolio,
without penalty, on 60 days' notice by the Board of Trustees, the vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the Portfolio, or by the Distributor.
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.
58
<PAGE>
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.
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.
59
<PAGE>
In certain instances there may be securities which are suitable for
more than one Portfolio as well as for one or more of the other clients of the
Adviser. Investment decisions for each Portfolio and for the Adviser's other
clients are made with the goal of achieving their respective investment
objectives. It may happen that a particular security is bought or sold for only
one client even though it may be held by, or bought or sold for, other clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security in a particular transaction as far
as a Portfolio is concerned. The Trust believes that over time its ability to
participate in volume transactions will produce superior executions for the
Portfolios.
The portfolio turnover rate for each Portfolio is calculated by
dividing the lesser of purchases or sales of portfolio securities for the
reporting period by the monthly average value of the portfolio securities owned
during the reporting period. The calculation excludes all securities, including
options, whose maturities or expiration dates at the time of acquisition are one
year or less. Portfolio turnover may vary greatly from year to year as well as
within a particular year, and may be affected by cash requirements for
redemption of shares and by requirements which enable the Portfolios to receive
favorable tax treatment. Portfolio turnover will not be a limiting factor in
making portfolio decisions.
The Portfolios may participate, if and when practicable, in bidding for
the purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group. A
Portfolio will engage in this practice, however, only when the Adviser, in its
sole discretion, believes such practice to be otherwise in the Portfolio's
interests.
The Trust will not execute portfolio transactions through, purchase or
sell portfolio securities from or to the Distributor, the Adviser, the
Administrator, the Co-Administrator, or their respective affiliates acting as
principal (including repurchase and reverse repurchase agreements), except to
the extent permitted by the SEC. In addition, the Trust will not give preference
to correspondents of 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.
60
<PAGE>
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 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.
Because Nations International Value Portfolio and Nations High Yield
Bond Portfolio are new series, they have not yet completed a single fiscal year.
Accordingly, brokerage commissions paid by such Portfolios are not included
below.
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 105,316
Portfolio
Nations Growth & Income Portfolio 57,287
Nations Managed Index Portfolio 11,037
Nations SmallCap Index Portfolio 7,715
Nations Balanced Assets Portfolio 8,230
61
<PAGE>
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 the
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 the 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
Directed Brokerage
------------------
During the fiscal year ended December 31, 1999, the Portfolios directed
brokerage transactions to brokers because of research services provided. The
amount of such transactions and related commissions were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------- ------------------------------ ---------------------------
Portfolio Amount of Transaction Related Commissions
-------------------------------------------------- ------------------------------ ---------------------------
<S> <C> <C>
Nations Value Portfolio $ 5,142,686.93 $ 7,088.50
-------------------------------------------------- ------------------------------ ---------------------------
Nations Aggressive Portfolio $ 500,127.04 $ 240.00
-------------------------------------------------- ------------------------------ ---------------------------
Nations Managed Index Portfolio $ 9,256.25 $ 2.50
-------------------------------------------------- ------------------------------ ---------------------------
Nations SmallCap Index Portfolio $ 371,324.82 $ 460.51
-------------------------------------------------- ------------------------------ ---------------------------
Nations Balanced Assets Portfolio $ 2,180,264.94 $ 2,829.50
-------------------------------------------------- ------------------------------ ---------------------------
Nations Marsico Focused Equities Portfolio $ 10,701,913.00 $ 7,221.00
-------------------------------------------------- ------------------------------ ---------------------------
Nations Marsico Growth & Income Portfolio $ 5,179,287.00 $ 3,640.00
-------------------------------------------------- ------------------------------ ---------------------------
</TABLE>
62
<PAGE>
Section 28(e) Standards
Under Section 28(e) of the Securities Exchange Act of 1934, the Adviser
shall not be "deemed to have acted unlawfully or to have breached its fiduciary
duty" solely because under certain circumstances it has caused the account to
pay a higher commission than the lowest available. To obtain the benefit of
Section 28(e), an adviser must make a good faith determination that the
commissions paid are "reasonable in relation to the value of the brokerage and
research services provided ...viewed in terms of either that particular
transaction or its overall responsibilities with respect to the accounts as to
which it exercises investment discretion and that the services provided by a
broker provide an adviser with lawful and appropriate assistance in the
performance of its investment decision making responsibilities." Accordingly,
the price paid by a Portfolio in any transaction may be less favorable than that
available from another broker/dealer if the difference is reasonably justified
by other aspects of the portfolio execution services offered.
Broker/dealers utilized by the Adviser may furnish statistical,
research and other information or services which are deemed by the Adviser to be
beneficial to the Portfolios' investment programs. Research services received
from brokers supplement the Adviser's own research and may include the following
types of information: statistical and background information on industry groups
and individual companies; forecasts and interpretations with respect to U.S. and
foreign economies, securities, markets, specific industry groups and individual
companies; information on political developments; portfolio management
strategies; performance information on securities and information concerning
prices of securities; and information supplied by specialized services to the
Adviser and to the Trust's Trustees with respect to the performance, investment
activities, fees and expenses of other mutual funds. Such information may be
communicated electronically, orally or in written form. Research services may
also include providing equipment used to communicate research information,
arranging meetings with management of the Trust and providing access to
consultants who supply research information.
The outside research assistance is useful to the Adviser since the
brokers utilized by the Adviser, as a group, tend to follow a broader universe
of securities and other matters than the Adviser's staff can follow. In
addition, this research provides the Adviser with a diverse perspective on
financial markets. Research services which are provided to the Adviser by
brokers are available for the benefit of all accounts managed or advised by the
Adviser. In some cases, the research services are available only from the broker
providing such services. In other cases, the research services may be obtainable
from alternative sources in return for cash payments. The Adviser is of the
opinion that because the broker research supplements rather than replaces its
research, the receipt of such research does not tend to decrease its expenses,
but tends to improve the quality of its investment advice. However, to the
extent that the Adviser would have purchased any such research services had such
services not been provided by brokers, the expenses of such services to the
Adviser could be considered to have been reduced accordingly. Certain research
services furnished by broker/dealers may be useful to the Adviser with clients
other than the Portfolios. Similarly, any research services received by the
Adviser through the placement of portfolio transactions of other clients may be
of value to the Adviser in fulfilling its obligations to the Portfolios. The
Adviser is of the opinion that this material is beneficial in supplementing its
research and analysis; and, therefore, it may benefit the Trust by improving the
quality of the Adviser's investment advice. The advisory fees paid by the Trust
are not reduced because the Adviser receives such services.
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.
63
<PAGE>
Although this Prospectus discusses the Portfolios being made available
to serve as the underlying investment vehicles for variable life insurance
separate accounts, it is not presently contemplated that the Portfolios will
accept such investments. In addition, in no instance will the Portfolios be made
available to life insurance separate accounts without the Trust having received
any necessary SEC consents or approvals. It is conceivable that in the future it
may be disadvantageous for variable annuity separate accounts and variable life
insurance separate accounts to invest in the Portfolios simultaneously. Although
the Trust and the Portfolios do not currently foresee any such disadvantages
either to variable annuity contract owners or variable life insurance policy
owners, the Trust's Board of Trustees intends to monitor events in order to
identify any material conflicts between such contract owners and policy owners
and to determine what action, if any, should be taken in response thereto. If
the Board of Trustees were to conclude that separate funds should be established
for variable life and variable annuity separate accounts, the variable life and
variable annuity contract holders would not bear any expenses attendant to the
establishment of such separate funds.
Purchases of the Portfolios may be effected on days on which the New
York Stock Exchange (the "Exchange") is open for business (a "Business Day").
The Trust and Stephens reserve the right to reject any purchase order.
The issuance of Shares is recorded on the books of the Trust, and share
certificates are not issued.
EFFECTIVE TIME OF PURCHASES: Purchase orders for Shares in the
Portfolios that are received by Stephens or by the Transfer Agent before the
close of regular trading hours on the Exchange (currently 4:00 p.m., Eastern
time) on any Business Day are priced according to the net asset value determined
on that day but are not executed until 4:00 p.m., Eastern time, on the Business
Day on which immediately available funds in payment of the purchase price are
received by the Portfolio's Custodian.
Redemptions
Redemption proceeds are normally remitted in Federal funds wired to the
redeeming Participating Insurance Company within three Business Days following
receipt of the order. It is the responsibility of Stephens to transmit orders it
receives to the Trust. No charge for wiring redemption payments is imposed by
the Trust. Redemption orders are effected at the net asset value per share next
determined after acceptance of the order by Stephens or by the Transfer Agent.
The Trust may redeem shares involuntarily or make payment for
redemption in readily marketable securities or other property under certain
circumstances in accordance with the 1940 Act.
Net Asset Value Determination
Shares of each Portfolio are sold at their respective net asset value
next determined after the receipt of the purchase order. Participating Insurance
Companies may at any time redeem all or a portion of their shares at the next
determined net asset value following receipt of a redemption order.
The net asset value per share of each of the Portfolios is determined
at the times and in the manner described in the Prospectus.
A security listed or traded on an exchange is valued at its last sales
price on the exchange where the security is principally traded or, lacking any
sales on a particular day, the security is valued at the mean between the
closing bid and asked prices on that day. Each security traded in the
over-the-counter market (but not including securities reported on the Nasdaq
National Market System) is valued at the mean between the last bid and asked
prices based upon quotes furnished by market makers for such securities. Each
security reported on the Nasdaq National Market System is valued at the last
sales price on the valuation date.
Securities for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the supervision of
the Trust's Officers in a manner specifically authorized by the Board of
Trustees of the Trust. Short-term obligations having 60 days or less to maturity
are valued at amortized cost, which approximates market value.
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<PAGE>
Generally, trading in foreign securities, as well as U.S. Government
securities, money market instruments and repurchase agreements, is substantially
completed each day at various times prior to the close of the New York Stock
Exchange. The values of such securities used in computing the net asset value of
the shares of a Portfolio are determined as of such times. Foreign currency
exchange rates are also generally determined prior to the close of the New York
Stock Exchange. Occasionally, events affecting the value of such securities and
such exchange rates may occur between the times at which they are determined and
the close of the New York Stock Exchange, which will not be reflected in the
computation of net asset value. If during such periods, events occur which
materially affect the value of such securities, the securities will be valued at
their fair market value as determined in good faith by the Trustees.
For purposes of determining the net asset value per share of the
International Growth Portfolio, all assets and liabilities of the International
Growth Portfolio initially expressed in foreign currencies will be converted
into U.S. dollars at the mean between the bid and ask prices of such currencies
against U.S. dollars quoted by a major bank that is a regular participant in the
foreign exchange market, or on the basis of a pricing service that takes into
account the quotes provided by a number of such major banks.
The Trust may redeem shares involuntarily to reimburse the Portfolios
for any loss sustained by reason of the failure of a shareholder to make full
payment for shares purchased by the shareholder, or to collect any charge
relating to a transaction effected for the benefit of a shareholder which is
applicable to shares as provided in the Prospectus from time to time. The Trust
also may make payment for redemptions in readily marketable securities or other
property if it is appropriate to do so in light of the Trust's responsibilities
under the 1940 Act.
The right of redemption may be suspended, or the date of payment
postponed, when (a) trading on the New York Stock Exchange is restricted, as
determined by applicable rules and regulations of the SEC, (b) the New York
Stock Exchange is closed for other than customary weekend and holiday closings,
(c) the SEC has by order permitted such suspension, or (d) an emergency as
determined by the SEC exists making disposal of portfolio securities or the
valuation of the net assets of a Portfolio of the Trust not reasonably
practicable. The Exchange is closed for business on New Years Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Veterans Day, Thanksgiving Day and Christmas Day.
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 ten
Portfolios, each representing an unlimited number of beneficial interests --
Nations Balanced Assets Portfolio, Nations Aggressive Growth Portfolio, Nations
International Growth Portfolio, Nations International Value Portfolio, Nations
Managed Index Portfolio, Nations SmallCap Index Portfolio, Nations High Yield
Bond 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.
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<PAGE>
All shares of a Portfolio have equal voting rights and will be voted in
the aggregate, and not by series, except where voting by a series is required by
law or where the matter involved only affects one series. For example, a change
in a Portfolio's fundamental investment policy would be voted upon only by
shareholders of the Portfolio involved. Additionally, approval of an advisory
contract is a matter to be determined separately by Portfolio. Approval by the
shareholders of one Portfolio is effective as to that Portfolio whether or not
sufficient votes are received from the shareholders of the other Portfolios to
approve the proposal as to those Portfolios. As used in the Prospectus and in
this SAI, the term "majority," when referring to approvals to be obtained from
shareholders of the Portfolio, means the vote of the lesser of (i) 67% of the
shares of the Portfolio represented at a meeting if the shareholders of more
than 50% of the outstanding interests of the Portfolio are present in person or
by proxy, or (ii) more than 50% of the outstanding shares of the Portfolio. The
term "majority," when referring to the approvals to be obtained from
shareholders of Nations Annuity Trust as a whole, means the vote of the lesser
of (i) 67% of the Trust's shares represented at a meeting if the shareholders of
more than 50% of the Trust's outstanding shares are present in person or by
proxy, or (ii) more than 50% of the Trust's outstanding shares. Shareholders are
entitled to one vote for each full share held and fractional votes for
fractional shares held.
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.
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<PAGE>
Qualification as a regulated investment company under the Code
requires, among other things, that (a) each Portfolio derive at least 90% of its
annual gross income from dividends, interest, certain payments with respect to
securities loans, gains from the sale or other disposition of stock or
securities or foreign currencies (to the extent such currency gains are directly
related to the regulated investment company's principal business of investing in
stock or securities) and other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; and (b) the Portfolio
diversify its holdings so that, at the end of each quarter of the taxable year,
(i) at least 50% of the market value of the Portfolio's assets is represented by
cash, government securities and other securities limited in respect of any one
issuer to an amount not greater than 5% of the Portfolio's assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities of any one issuer (other than
U.S. Government obligations and the securities of other regulated investment
companies) or in two or more issuers which the Portfolio controls and which are
determined to be engaged in the same or similar trades or businesses.
The Portfolios must also distribute or be deemed to distribute to their
shareholders at least 90% of their net investment income (which, for this
purpose, includes net short-term capital 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.
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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.
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.
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Total return and yield figures quoted for the Portfolios include the
effect of deducting each Portfolio's expenses, but may not include charges and
expenses attributable to any particular insurance product. Since you can only
purchase shares of the Portfolios through an insurance product, you should
carefully review the prospectus of the insurance product you have chosen for
information on relevant charges and expenses. Excluding these charges from
quotations of the Portfolio's performance has the effect of increasing the
performance quoted. Investment performance, which will vary, is based on many
factors, including market conditions, the composition of a Portfolio's
securities and a Portfolio's operating expenses as well as the charges and fees
imposed by the separate accounts. Investment performance also often reflects the
risks associated with such Portfolio's investment objective and policies. These
factors should be considered when comparing a Portfolio's investment results to
those of other mutual funds and other investment vehicles. Since yields
fluctuate, yield data cannot necessarily be used to compare an investment in a
Portfolio with bank deposits, savings accounts, and similar investment
alternatives which often provide an agreed-upon or guaranteed fixed yield for a
stated period of time. Any Portfolio advertising will be accompanied by
performance information of the related Participating Insurance Company's
separate account which fund the Contract and by an explanation that Portfolio
performance information does not reflect separate account fees and charges.
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:
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P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the period of
a hypothetical $1,000 payment made at the beginning
of such period.
This calculation, (i) assumes all dividends and distributions are
reinvested at net asset value on the appropriate reinvestment dates, and (ii)
deducts (a) the maximum sales charge from the hypothetical initial $1,000
investment, and (b) all recurring fees, such as advisory and administrative
fees, charged as expenses to all shareholder accounts.
Because Nations International Value Portfolio and Nations High Yield
Bond Portfolio are new series, they have not yet completed a single fiscal year.
Accordingly, performance information for such Portfolios is not included below.
<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.
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Any given performance comparison should not be considered
representative of a Portfolio's performance for any future period.
Additional Information about MacKay Shields's Performance Appearing in the
Prospectus for the High Yield Bond Portfolio
The High Yield Composite contained in the Prospectus includes all
discretionary high yield accounts managed by MacKay Shields with substantially
similar objectives for a full quarter. Composite performance reflects
reinvestment of income and dividends and is a market-weighted average of the
time-weighted return, before advisory fees, of each account for the period since
inception. Performance is expressed in U.S. Dollars. The composite creation and
inception date is 7/1/91. Fees, which are described in MacKay Shields' ADV Part
II, and related expenses will reduce returns. For example, a .50% annual
investment advisory fee would have the effect of reducing the annual compound
return by .50% in the first year and by a cumulative 2.53% in the fifth year.
Non-fee paying portfolios are not included in the composite. Past performance is
not necessarily indicative of future results.
MacKay Shields, an SEC-registered investment adviser, has prepared and
presented the performance information in compliance with the Performance
Presentation Standards of the Association for Investment Management and Research
(AIMR-PPSTM). AIMR has not been involved with the preparation or review of this
report. MacKay Shields (and its High Yield composite) has received a Level 1
verification from an independent accounting firm for the period January 1, 1988
through the most recent quarter. An opinion is available on request, as is a
complete list and description of the firm's composites. Balanced segments may be
utilized within this composite. Each balanced segment includes its own cash
balance. No leverage has been used in this composite. The asset mix of high
yield accounts may not be precisely comparable to the CS First Boston High Yield
Index. One account was removed from the composite after 12/31/95 because it was
no longer representative of the style. The number of accounts, composite assets
(in millions), percentage of total firm assets, and standard deviation of annual
returns were as follows at year-ends 1991-1999, respectively: 1, $299, 3.7% N/A;
1, $510, 6.1%, 0.0; 1, $935, 8.8%, 0.0; 1, $1,126, 8.9%, 0.0; 4, $1,756, 9.6%,
0.0; 5, $261, 1.1%, 3.2; 6, $254, 0.9%, 2.2; 10, $670, 2.2%, 1.8; 17,$1,901,
5.6%, 2.4.
At December 31, 1999 MacKay Shields was managing a total of $6,750
million of High Yield assets. Of the total assets managed in the High Yield
style, $1,901 million, or 28.2% is represented in the High Yield Composite.
MISCELLANEOUS
-------------
Certain Record Holders
As of April 16, 1999, the following people owned 5% or more of the
following Portfolios outstanding securities:
Owner Shares % Owned
----------------------------------------- -------------------- ----------------
Balanced Asset Portfolio
ROBINSON, LEE 437,551.75 7.00%
3 Athenaeum Hall
Vale of Hlth London NW 3,1 AP 99999
BARKER, LARRY 589,146.23 9.00%
200 Highland Lane
Waverly, TN 37185
Aggressive Growth Portfolio
ROBINSON, LEE 317,653.82 5.50%
3 Athenaeum Hall
Vale of Hlth London NW 3,1 AP 99999
SmallCap Index Portfolio
ROBERTS, JOHN 150,700.43 5.00%
545 Sparks Roberts Road
Piedmont, AL 36272
71
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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 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.
A-1
<PAGE>
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 payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
A-2
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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.
A-3
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The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of senior short-term
promissory obligations. Issuers rated Prime-2 (or related supporting
institutions) are considered to have a strong capacity for repayment of senior
short-term promissory obligations. This will normally be evidenced by many of
the characteristics of issuers rated Prime-1, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
For commercial paper, D&P uses the short-term debt ratings described
above.
For commercial paper, Fitch uses the short-term debt ratings described
above.
Thomson BankWatch, Inc. ("BankWatch") ratings are based upon a
qualitative and quantitative analysis of all segments of the organization
including, where applicable, holding trust and operating subsidiaries. BankWatch
ratings do not constitute a recommendation to buy or sell securities of any of
these trust. Further, BankWatch does not suggest specific investment criteria
for individual clients.
BankWatch long-term ratings apply to specific issues of long-term debt
and preferred stock. The long-term ratings specifically assess the likelihood of
untimely payment of principal or interest over the term to maturity of the rated
instrument. The following are the four investment grade ratings used by
BankWatch for long-term debt:
AAA - The highest category; indicates ability to repay principal
and interest on a timely basis is extremely high.
AA - The second highest category; indicates a very strong ability
to repay principal and interest on a timely basis with limited incremental
risk versus issues rated in the highest category.
A - The third highest category; indicates the ability to repay
principal and interest is strong. Issues rated "A" could be more
vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
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.
A-4
<PAGE>
The following summarizes the four highest long-term debt ratings used
by IBCA Limited and its affiliate, IBCA Inc. (collectively "IBCA"):
AAA - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial such that adverse changes in business, economic
or financial conditions are unlikely to increase investment risk
significantly.
AA - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions may increase investment risk albeit not very
significantly.
A - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
BBB - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment
risk than for obligations in other categories.
A plus or minus sign may be appended to a rating below AAA to denote
relative status within major rating categories.
The following summarizes the 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
