As filed with the Securities and Exchange Commission
on October 25, 1999
Registration No. 333- ; 811-09645
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No.
[ ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. [ ]
(Check appropriate box or boxes)
-----------------------
NATIONS FUNDS TRUST
(Exact Name of Registrant as specified in Charter)
111 Center Street
Little Rock, Arkansas 72201
(Address of Principal Executive Offices, including Zip Code)
--------------------------
Registrant's Telephone Number, including Area Code: (800) 321-7854
Richard H. Blank, Jr.
c/o Stephens Inc.
111 Center Street
Little Rock, Arkansas 72201
(Name and Address of Agent for Service)
With copies to:
Robert M. Kurucza, Esq. Carl Frischling, Esq.
Marco E. Adelfio, Esq. Kramer, Levin, Naftalis
Morrison & Foerster LLP & Frankel
2000 Pennsylvania Ave., N.W. 919 3rd Avenue
Suite 5500 New York, New York 10022
Washington, D.C. 20006
It is expected that the securities will be sold to the public as soon as
possible after the registration statement is effective.
The Registrant hereby elects to register an indefinite number of shares of its
Common Stock, $0.001 par value, under the Securities Act of 1933, pursuant to
Rule 24F-2(a)(1) under the Investment Company Act of 1940, as amended.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
[GRAPHIC HERE]
Index, Fixed Income and State Municipal Bond Funds
Prospectus -- Primary A Shares
January , 2000
Index Fund
Nations MidCap Index Fund
Fixed Income Fund
Nations High Yield Fund
State Municipal Bond Fund
Nations Kansas Intermediate Municipal Bond Fund
The Securities and Exchange Commission (SEC) has not approved or disapproved
these securities or determined if this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
NOT FDIC INSURED
MAY LOSE VALUE
NO BANK GUARANTEE
[NATIONS FUNDS LOGO APPEARS HERE]
<PAGE>
An overview of the Funds
- --------------------------------------------------------------------------------
[GRAPHIC]
Terms used in this prospectus
In this prospectus, we, us and our refer to the Nations Funds
Family (Nations Funds). Some other important terms we've used may
be new to you. These are printed in italics where they first
appear in a section and are described in Terms used in this
prospectus.
[GRAPHIC]
You'll find Terms used
in this prospectus on
page 167.
Your investment in these Funds is not a bank deposit and is not
insured or guaranteed by Bank of America, N. A. (Bank of America),
the Federal Deposit Insurance Corporation (FDIC) or any other
government agency. Your investment may lose money.
Affiliates of Bank of America are paid for the services they
provide to the Funds.
This booklet, which is called a prospectus, tells you about three groups of
Nations Funds -- our Index, Fixed Income and State Municipal Bond Funds.
Please read it carefully, because it contains information that's designed to
help you make informed investment decisions.
About the Funds
Each group of Funds has a different investment focus:
o Index Funds are intended to match the industry and risk characteristics
of a specific stock market index, like the S&P 500, by investing
primarily in equity securities that are included in the index
o Fixed Income Funds focus on the potential to earn income by investing
primarily in fixed income securities
o State Municipal Bond Funds focus on the potential to earn income that is
free from federal and state income tax by investing primarily in
municipal securities.
The Funds also have different risk/return characteristics because they invest
in different kinds of securities.
Fixed income securities and municipal securities have the potential to
increase in value because when interest rates fall, the value of these
securities tends to rise. When interest rates rise, however, the value of
these securities tends to fall. Other things can also affect the value of
fixed income securities.
Because State Municipal Bond Funds invest primarily in securities issued by
one state, the Fund is considered to be non-diversified. This means the value
of a Fund and the amount of interest it pays could also be affected by the
financial conditions of the state, its public authorities and local
governments.
In every case, there's a risk that you'll lose money or you may not earn as
much as you expect.
Choosing the right Funds for you
Not every Fund is right for every investor. When you're choosing a Fund to
invest in, you should consider things like your investment goals, how much
risk you can accept and how long you're planning to hold your investment.
The Index Fund focuses on long-term growth. It may be suitable for you if:
o you have longer-term investment goals
o they're part of a balanced portfolio
o you want to try to protect your portfolio against a loss of buying power
that inflation can cause over time
2
<PAGE>
It may not be suitable for you if:
o you're not prepared to accept or are unable to bear the risks associated
with equity securities, including foreign securities
o you have short-term investment goals
o you're looking for a regular stream of income
The Fixed Income Fund focuses on the potential to earn income. It may be
suitable for you if:
o you're looking for income
o you have longer-term investment goals
It may not be suitable for you if:
o you're not prepared to accept or are unable to bear the risks associated
with fixed income securities
The State Municipal Bond Fund may be suitable for you if:
o you're looking for income
o you want to reduce taxes on your investment
o you have longer-term investment goals
It may not be suitable for you if:
o you're not prepared to accept or are unable to bear the risks associated
with fixed income securities
You'll find a discussion of each Fund's principal investments, strategies and
risks in the Fund descriptions that start on page 7.
For more information
If you have any questions about the Funds, please call us at 1.800.765.2668 or
contact your investment professional.
You'll find more information about the Funds in the Statement of Additional
Information (SAI). The SAI includes more detailed information about each
Fund's investments, policies, performance and management, among other things.
Please turn to the back cover to find out how you can get a copy.
3
<PAGE>
What's inside
- --------------------------------------------------------------------------------
[GRAPHIC]
Banc of America Advisors, Inc.
Banc of America Advisors, Inc. (BAAI) is the investment adviser to
each of the Funds. BAAI is responsible for the overall management
and supervision of the investment management of each Fund. BAAI
and Nations Funds have engaged sub-advisers, which are responsible
for the day-to-day investment decisions for each of the Funds.
[GRAPHIC]
You'll find more about
BAAI and the sub-advisers
starting on page .
<TABLE>
[GRAPHIC]
<S> <C>
About the Funds
Index Fund
Nations MidCap Index Fund 5
Sub-adviser: TradeStreet Investment Associates, Inc.
- ----------------------------------------------------------------------
Fixed Income Fund
Nations High Yield Fund 8
Sub-adviser:
- ----------------------------------------------------------------------
State Municipal Bond Fund
Nations Kansas Intermediate Municipal Bond Fund 11
Sub-adviser: TradeStreet Investment Associates, Inc.
- ----------------------------------------------------------------------
Other important information 14
- ----------------------------------------------------------------------
How the Funds are managed 16
[GRAPHIC]
About your investment
Information for investors
Buying, selling and exchanging shares 18
Distributions and taxes 21
- ----------------------------------------------------------------------
Terms used in this prospectus 23
- ----------------------------------------------------------------------
Where to find more information back cover
</TABLE>
4
<PAGE>
About the Index Fund
- --------------------------------------------------------------------------------
[GRAPHIC]
About the sub-adviser
TradeStreet is this Fund's sub-adviser. TradeStreet's Structured
Products Management Team makes the day-to-day investment decisions
for the Fund.
[GRAPHIC]
You'll find more about TradeStreet on page 24.
[GRAPHIC]
What is an index fund?
Index funds use a "passive" or "indexing" investment approach,
which attempts to duplicate the performance of a specific market
index.
Correlation measures how closely a fund's returns match those of
an index. A perfect correlation of 1.0 means that the net asset
value of the fund increases or decreases in exact proportion to
changes in the index.
Nations MidCap Index Fund
[GRAPHIC]
Investment objective
This Fund seeks investment results that (before fees and expenses)
correspond to the total return of the Standard & Poor's MidCap 400
Stock Price Index (S&P 400).
[GRAPHIC]
Principal investment strategies
The Fund normally invests at least 80% of its assets in common stocks
that are included in the S&P 400. The S&P 400 is an unmanaged index of
400 domestic common stocks chosen for their market size, liquidity and
industry representation. The index is weighted by market value, and is
not available for investment.
The Fund may buy stock index futures and other financial futures as
substitutes for the underlying securities in the S&P 400.
The Fund 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.
Different common stocks have different weightings in the S&P 400, depending on
the amount of stock outstanding and the stock's current price. In trying to
match the performance of the S&P 400, the management team will try to allocate
the Fund's portfolio among common stocks in approximately the same weightings
as the S&P 400, beginning with the most heavily weighted stocks that make up a
larger portion of the value of the S&P 400.
The team generally will try to match the composition of the S&P 400 as closely
as possible. The team starts with the stocks that make up a larger portion of
the value of the S&P 400. It may not always invest in stocks that make up the
smaller percentages because it may be more difficult and costly to make
relatively small transactions. The team may remove a stock from the Fund's
holdings or not invest in a stock if it believes that the stock is not liquid
enough, or for other reasons. The team can substitute stocks that are not
included in the S&P 400, if it believes these stocks have similar
characteristics.
The Fund tries to achieve a correlation of at least 0.95 with the return of
the S&P 400 on an annual basis (before fees and expenses). The Fund's ability
to track the S&P 400 is affected by transaction costs and other expenses,
changes in the composition of the S&P 400, changes in the number of shares
issued by the companies represented in the S&P 400, and by the timing and
amount of shareholder purchases and redemptions, among other things.
5
<PAGE>
[GRAPHIC]
You'll find more about
other risks of investing in
this Fund starting on
page 22 and in the SAI.
Equity mutual funds, like other investors in equity securities, incur
transaction costs, such as brokerage costs, when they buy and sell securities.
The management team tries to minimize these costs for the Fund by using
program trades and crossing networks.
The team may sell a stock when its percentage weighting in the index is
reduced, when the stock is removed from the index, or for other reasons.
[GRAPHIC]
Risks and other things to consider
Nations MidCap Index Fund has the following risks:
o Investment strategy risk - This Fund tries to match (before fees and
expenses) the returns of the S&P 400, and is not actively managed.
There is no assurance that the returns of the Fund will match the
returns of the S&P 400. The value of the Fund will rise and fall
with the performance of the S&P 400.
o Stock market risk - The value of the stocks the Fund holds can be
affected by changes in U.S. or foreign economies and financial
markets, and the companies that issue the stocks, among other
things. Stock prices can rise or fall over short as well as long
periods. In general, stock markets tend to move in cycles, with
periods of rising prices and periods of falling prices. As of the
date of this prospectus, the stock markets, as measured by the S&P
500 and other commonly used indices, were trading at or close to
record levels. There can be no guarantee that these levels will
continue.
o Futures risk - This Fund may use futures contracts as a substitute
for the securities included in the index. There is a risk that this
could result in losses, reduce returns, increase transaction costs
or increase the Fund's volatility.
[GRAPHIC]
There are two kinds of fees -- sales charges you pay directly, and
annual fund operating expenses that are deducted from a fund's
assets.
Total net expenses are actual expenses paid by the Fund after
waivers and/or reimbursements.
[GRAPHIC]
WHAT IT COSTS TO INVEST IN THE FUND
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<TABLE>
<CAPTION>
Shareholder fees
(Fees paid directly from your investment) Primary A Shares
<S> <C>
Maximum sales charge (load) imposed on purchases none
Maximum deferred sales charge (load) none
Annual Fund operating expenses
(Expenses that are deducted from the Fund's assets)
Management fees 0.40%
Other expenses 0.33%
------
Total annual Fund operating expenses 0.73%
Fee waivers and/or reimbursements (0.38)%
------
Total net expenses(1) 0.35%
======
</TABLE>
(1)The Fund's investment adviser and/or some of its other service
providers have agreed to waive fees and/or reimburse expenses until
July 31, 2000. The figure shown here is after waivers and/or
reimbursements. There is no guarantee that these waivers and/or
reimbursements will continue after this date.
6
<PAGE>
[GRAPHIC]
This is an example only. Your actual costs could be higher or
lower, depending on the amount you invest, and on the Fund's
actual expenses and performance.
Example
This example is intended to help you compare the cost of investing in
this Fund with the cost of investing in other mutual funds.
This example assumes:
o you invest $10,000 in Primary A Shares of the Fund for the time
periods indicated and then sell all of your shares at the end of
those periods
o you reinvest all dividends and distributions in the Fund
o your investment has a 5% return each year
o the Fund's operating expenses remain the same as shown in the
table above
o the waivers and/or reimbursements shown above expire [July 31,
2000] and are not reflected in the 3, 5 and 10 year examples
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Primary A Shares $36 $195 $368 $871
</TABLE>
7
<PAGE>
About the Fixed Income Fund
- --------------------------------------------------------------------------------
[GRAPHIC]
About the sub-adviser
[Insert sub-adviser's name] is this Fund's sub-adviser. [Insert
portfolio management team name] makes the day-to-day investment
decisions for the Fund.
[GRAPHIC]
You'll find more about
[name of sub-adviser] and
[name of portfolio management team] on page [insert number].
[GRAPHIC]
High yield debt securities
This Fund invests primarily in high yield debt securities. High
yield debt securities offer the potential for higher income than
other kinds of debt securities with similar maturities, but they
also have higher credit risk.
Nations High Yield Fund
[GRAPHIC]
Investment Objective
This Fund seeks maximum income by investing in a diversified portfolio
of high-yield debt securities.
[GRAPHIC]
Principal Investment Strategies
The Fund normally invests at least 65% of its assets in domestic and
foreign corporate high-yield debt securities.
The Fund invests primarily in:
o Domestic corporate debt securities
o U.S. dollar-denominated foreign corporate debt securities
o Zero-coupon bonds
o U.S. government obligations
o Equity securities (up to 25% of its assets)
The Fund 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.
When selecting individual investments, the portfolio management team:
o Uses a "bottom-up," total return approach with respect to an
issuer
o Emphasizes current income while attempting to minimize risk to
principal
o Seeks to identify a catalyst for capital appreciation
o Selects securities using fundamental credit analysis
o tries to manage risk by diversifying the Fund's investments
across securities of many different issuers
o is attentive to current developments and trends in both the
economy and financial markets
The portfolio management team may sell a security when its market price rises
above the target price the team has set, when it believes there has been a
deterioration in an issuer's fundamentals or an issue's credit quality, or for
diversification or other reasons.
8
<PAGE>
[GRAPHIC]
Risks and other things to consider
Nations High Yield Fund has the following risks:
o Investment strategy risk - There is a risk that the value of the
investments that the portfolio management team chooses will not
rise as high as the team expects, or will fall.
o Credit risk - The types of securities in which the Fund typically
invests are generally considered speculative because they present
a greater risk of loss, including default, than higher quality
debt securities. These securities typically pay a premium -- a
high interest rate or yield -- because of the increased risk of
loss. These securities also can be subject to greater price
volatility.
o Interest rate risk - The prices of 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 Derivatives risk - This Fund may invest in derivatives. There is
a risk that these investments could result in losses, reduce
returns, increase transaction costs or increase the Fund's
volatility.
[GRAPHIC]
There are two kinds of fees -- sales charges you pay directly, and
annual fund operating expenses that are deducted from a fund's
assets.
Total net expenses are actual expenses paid by the Fund after
waivers and/or reimbursements.
[GRAPHIC]
What it costs to invest in the fund
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<TABLE>
<CAPTION>
Shareholder fees Primary A
(Fees paid directly from your investment) Shares
<S> <C>
Maximum sales charge (load) imposed on purchases none
Maximum deferred sales charge (load) none
Annual Fund operating expenses
(Expenses that are deducted from the Fund's assets)
Management fees 0.65%
Other expenses 0.38%
------
Total annual Fund operating expenses 1.03%
Fee waivers and/or reimbursements 0.00%
------
Total net expenses(2) 1.03%
======
</TABLE>
(2)The Fund's investment adviser and/or some of its other service
providers have agreed to limit total annual operating expenses to
0.72% for Primary A Shares until May 2000. The figure shown here is
after waivers and/or reimbursements. There is no guarantee that these
waivers and/or reimbursements will continue after this date.
9
<PAGE>
[GRAPHIC]
This is an example only. Your actual costs could be higher or
lower, depending on the amount you invest, and on the Fund's
actual expenses and performance.
Example
This example is intended to help you compare the cost of investing in
this Fund with the cost of investing in other mutual funds.
This example assumes:
o you invest $10,000 in Primary A Shares of the Fund for the time
periods indicated and then sell all of your shares at the end of
those periods
o you reinvest all dividends and distributions in the Fund
o your investment has a 5% return each year
o the Fund's operating expenses remain the same as shown in the
table above
o the waivers and/or reimbursements included in above expire May
2000 and are not reflected in the 3, 5 and 10 year examples
Although your actual costs may be higher or lower, based on these
assumptions, your costs would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Primary A Shares $107 $328 $569 $1,259
</TABLE>
10
<PAGE>
About the State Municipal Bond Fund
- --------------------------------------------------------------------------------
[GRAPHIC]
About the sub-adviser
TradeStreet is this Fund's sub-adviser. TradeStreet's Municipal
Fixed Income Management Team makes the day-to-day investment
decisions for the Fund.
[GRAPHIC]
You'll find more about TradeStreet on page 60.
[GRAPHIC]
This Fund at a glance
o Who should consider investing: Residents of Kansas
o Duration: 3 to 8 years
o Income potential: Moderate
o Risk potential: Moderate
[GRAPHIC]
Duration
Duration is a measure used to estimate how much a Fund's portfolio
will fluctuate in response to a change in interest rates.
Nations Kansas Intermediate Municipal
Bond Fund
[GRAPHIC]
Investment objective
This Fund seeks high current income exempt from federal and Kansas
state income taxes consistent with moderate fluctuation of principal.
[GRAPHIC]
Principal investment strategies
This Fund normally invests at least 80% of its assets in investment
grade intermediate-term municipal securities that pay interest that is
free from federal income tax and Kansas state income tax.
The Fund may invest up to 20% of its assets in debt securities that are
taxable, including securities that are subject to the federal alternative
minimum tax.
The Fund 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.
Normally, the Fund's average dollar-weighted maturity will be between three
and 10 years, and its duration will be between three and 8 years.
When selecting individual investments, the portfolio management team:
o looks at a security's potential to generate both income and price
appreciation
o allocates assets among revenue bonds, general obligation bonds,
insured bonds and pre-refunded bonds (bonds that are repaid
before their maturity date), based on how they have performed in
the past, and on how they are expected to perform under current
market conditions. The team may change the allocations when
market conditions change
o selects securities using credit and structure analysis. Credit
analysis evaluates the creditworthiness of individual issuers.
The team may invest in securities with lower credit ratings if it
believes that the potential for a higher yield is substantial
compared with the risk involved, and that the credit quality is
stable or improving. Structure analysis evaluates the
characteristics of a security, including its call features,
coupons, and expected timing of cash flows
The team also considers other factors. It reviews public policy
issues that may affect the municipal bond market. Securities with
different coupon rates may also represent good investment
opportunities based on supply and demand conditions for bonds
o tries to maintain a duration that is similar to the duration of
the Fund's benchmark. This can help manage interest rate risk
The team may sell a security when it believes the security is overvalued,
there is a deterioration in the security's credit rating or in the issuer's
financial situation, when other investments are more attractive, or for other
reasons.
11
<PAGE>
[GRAPHIC]
You'll find more about
other risks of investing
in this Fund starting on
page 57 and in the SAI.
[GRAPHIC]
Risks and other things to consider
Nations Kansas Intermediate Municipal Bond Fund has the following risks:
o Investment strategy risk - This Fund is considered to be
non-diversified because it invests most of its assets in
securities that pay interest that is free from income tax in one
state. The value of the Fund and the amount of interest it pays
could also be affected by the financial conditions of the state,
its public authorities and local governments. Although the Fund
tries to maintain a share price of $1.00, an investment in the
Fund could lose money. An investment in this Fund is not a bank
deposit and is not insured or guaranteed by Bank of America, the
FDIC or any other government agency.
o Interest rate risk - The prices of 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 Fund 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 Changing distribution levels - The level of monthly income
distributions paid by the Fund depends on the amount of income
paid by the securities the Fund holds. It is not guaranteed and
will change. Changes in the value of the securities, however,
generally should not affect the amount of income they pay.
o Holding cash - The Fund may hold cash while it's waiting to make
an investment, as a temporary defensive strategy, or if the
portfolio management team believes that attractive tax-exempt
investments are not available. Any uninvested cash the Fund holds
does not earn income.
o Tax considerations - Most of the distributions paid by the Fund
come from interest on municipal securities, and are generally
free from federal income tax and Kansas state income tax, but may
be subject to the federal alternative minimum tax, and other
state and local taxes. Any portion of a distribution that comes
from income paid by other kinds of securities or from realized
capital gains is generally subject to federal, state and local
taxes.
12
<PAGE>
[GRAPHIC]
There are two kinds of fees --
sales charges you pay directly, and annual fund operating expenses
that are deducted from a fund's assets.
Total net expenses are actual expenses paid by the Fund after
waivers and/or reimbursements.
[GRAPHIC]
What it costs to invest in the fund
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<TABLE>
<CAPTION>
Shareholder fees Primary A
(Fees paid directly from your investment) Shares
<S> <C>
Maximum sales charge (load) imposed on purchases none
Maximum deferred sales charge (load) none
Annual Fund operating expenses
(Expenses that are deducted from the Fund's assets)
Management fees 0.40%
Other expenses 0.22%
------
Total annual Fund operating expenses 0.78%
Fee waivers and/or reimbursements (0.28)%
------
Total net expenses(1) 0.50%
======
</TABLE>
(1)The Fund's investment adviser and/or some of its other service
providers have agreed to waive fees and/or reimburse expenses until
July 31, 2000. The figure shown here is after waivers and/or
reimbursements. There is no guarantee that these waivers and/or
reimbursements will continue after this date.
[GRAPHIC]
This is an example only. Your actual costs could be higher or
lower, depending on the amount you invest, and on the Fund's
actual expenses and performance.
Example
This example is intended to help you compare the cost of investing in
this Fund with the cost of investing in other mutual funds.
This example assumes:
o you invest $10,000 in Primary A Shares of the Fund for the time
periods indicated and then sell all of your shares at the end of
those periods
o you reinvest all dividends and distributions in the Fund
o your investment has a 5% return each year
o the Fund's operating expenses remain the same as shown in the
table above
o the waivers and/or reimbursements shown above expire July 31,
2000 and are not reflected in the 3, 5 and 10 year examples
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Primary A Shares $51 $217 $397 $918
</TABLE>
13
<PAGE>
[GRAPHIC]
Other important information
You'll find specific information about each Fund's principal investments,
strategies and risks in the descriptions starting on page 7. The following are
some other risks and information you should consider before you invest:
o Changing investment objectives and policies - The investment
objective and certain investment policies of any Fund can be
changed without shareholder approval. Other investment policies
may be changed only with shareholder approval.
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, 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.
A Fund 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.
o Holding other kinds of investments - The Funds may hold
investments that aren't part of their principal investment
strategies. Please refer to the SAI for more information. The
portfolio managers or management team can also choose not to
invest in specific securities described in this prospectus and in
the SAI.
o Foreign investment risk - Funds that invest in foreign securities
may be affected by changes in currency exchange rates and the
costs of converting currencies; the implementation of the Euro;
foreign government controls on foreign investment, repatriation
of capital, and currency and exchange; foreign taxes; inadequate
supervision and regulation of some foreign markets; difficulty
selling some investments which may increase volatility; different
settlement practices or delayed settlements in some markets;
difficulty getting complete or accurate information about foreign
companies; less strict accounting, auditing and financial
reporting standards than those in the U.S.; political, economic
or social instability; and difficulty enforcing legal rights
outside the U.S.
o Emerging markets risk - Securities issued by companies in
developing or emerging market countries, like those in Eastern
Europe, the Middle East, Asia or Africa, may be more sensitive to
the risks of foreign investing. In particular, these countries
may experience instability resulting from rapid social, political
and economic development. Many of these countries are dependent
on international trade, which makes them sensitive to world
commodity prices and economic downturns in other countries. Some
emerging countries have a higher risk of currency devaluation,
and some countries may experience long periods of high inflation
or rapid changes in inflation rates.
14
<PAGE>
o Investing defensively - A Fund may temporarily hold investments
that are not part of its investment objective or its principal
investment strategies to try to protect it during a market or
economic downturn or because of political or other conditions. A
Fund may not achieve its investment objective while it is
investing defensively.
o Portfolio turnover - A Fund that replaces -- or turns over --
more than 100% of its investments in a year is considered to
trade frequently. Frequent trading can result in larger
distributions of short-term capital gains to shareholders. These
gains are taxable at higher rates than long-term capital gains.
Frequent trading can also mean higher brokerage and other
transaction costs, which could reduce the Fund's returns. The
Funds generally buy securities for capital appreciation,
investment income, or both, and don't engage in short-term
trading. The annual portfolio turnover rate for Nations Strategic
Equity Fund and the Managed Index Funds is expected to be no more
than 25%. You'll find the portfolio turnover rate for each Fund
in Financial highlights.
15
<PAGE>
[GRAPHIC]
How the Funds are managed
[GRAPHIC]
Banc of America Advisors, Inc.
One Bank of America Plaza
Charlotte, North Carolina 28255
Investment adviser
BAAI is the investment adviser to over 60 mutual fund portfolios in the
Nations Funds family, including the Funds described in this prospectus.
BAAI is a registered investment adviser. It's a wholly-owned subsidiary of
Bank of America, which is owned by Bank of America Corporation. Nations Funds
pay BAAI an annual fee for its investment advisory services. The fee is
calculated daily based on the average net assets of each Fund and is paid
monthly. BAAI uses part of this money to pay investment sub-advisers for the
services they provide to each Fund.
BAAI has agreed to waive fees and/or reimburse expenses for certain Funds
until May 2000 or July 31, 2000. You'll find a discussion of any waiver and/or
reimbursement in the Fund descriptions. There is no assurance that BAAI will
continue to waive and/or reimburse any fees and/or expenses after these dates.
The following chart shows the maximum advisory fees BAAI can receive, along
with the actual advisory fees it received during the Funds' last fiscal year,
after waivers and/or reimbursements:
Annual investment advisory fee, as a % of average daily net assets
<TABLE>
<CAPTION>
Maximum
advisory
fee(1)
<S> <C>
Nations MidCap Index Fund 0.40%
Nations High Yield Fund 0.65%
Nations Kansas Intermediate Bond Fund 0.40%
</TABLE>
(1)These fees are the current contract levels, which in most cases have been
reduced from the contract levels that were in effect during the last fiscal
year.
16
<PAGE>
Investment sub-advisers
Nations Funds and BAAI have engaged investment sub-advisers to provide
day-to-day portfolio management for the Funds. These sub-advisers function
under the supervision of BAAI and the Boards of Directors/Trustees of Nations
Funds.
[GRAPHIC]
TradeStreet Investment
Associates, Inc.
One Bank of America Plaza
Charlotte, North Carolina 28255
TradeStreet Investment Associates, Inc.
TradeStreet is a registered investment adviser and a wholly-owned subsidiary
of Bank of America. Its management expertise covers all major domestic asset
classes, including equity and fixed income securities, and money market
instruments.
Currently managing more than $90 billion, TradeStreet has over 200
institutional clients and is sub-adviser to more than 50 mutual funds in the
Nations Funds family. TradeStreet takes a team approach to investment
management. Each team has access to the latest technology and analytical
resources.
TradeStreet is the investment sub-adviser to the Funds shown in the table
below. The table also tells you which internal TradeStreet asset management
team is responsible for making the day-to-day investment decisions for each
Fund.
<TABLE>
<CAPTION>
Fund TradeStreet Team
<S> <C>
Nations MidCap Index Fund Structured Products Management Team
Nations Kansas Intermediate Municipal Fixed Income Management
Municipal Bond Fund Team
</TABLE>
[GRAPHIC]
Stephens Inc.
111 Center Street
Little Rock, Arkansas 72201
Other service providers
The Funds are distributed and co-administered by Stephens Inc., a registered
broker/dealer.
BAAI is also co-administrator of the Funds, and assists in overseeing the
administrative operations of the Funds. The Funds pay BAAI and Stephens a
combined fee for their services, plus certain out-of-pocket expenses. The fee
is calculated as an annual percentage of the average daily net assets of the
Funds and is paid monthly, as follows:
<TABLE>
<S> <C>
Domestic Equity Funds 0.23%
Fixed Income Funds 0.22%
State Municipal Bond Funds 0.22%
</TABLE>
[GRAPHIC]
First Data Investor
Services Group, Inc.
101 Federal Street
Boston, Massachusetts 02110
First Data Investor Services Group, Inc. (First Data) is the transfer agent
for the Funds' shares. Its responsibilities include processing purchases,
sales and exchanges, calculating and paying distributions, keeping shareholder
records, preparing account statements and providing customer service.
17
<PAGE>
About your investment
- --------------------------------------------------------------------------------
[GRAPHIC]
When you sell shares of a mutual fund, the fund is effectively
"buying" them back from you. This is called a redemption.
[GRAPHIC]
A business day is any day that the New York Stock Exchange (NYSE)
is open. A business day ends at the close of regular trading on
the NYSE, usually at 4:00 p.m. Eastern time. If the NYSE closes
early, the business day ends as of the time the NYSE closes.
The NYSE is closed on weekends and on the following national
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
[GRAPHIC]
Buying, selling and exchanging shares
This prospectus offers Primary A Shares of the Funds. Here are some general
rules about this class of shares:
o Primary A Shares are available to certain financial institutions
and intermediaries for their own accounts, and for certain client
accounts for which they act as a fiduciary, agent or custodian.
These include:
o Bank of America and certain of its affiliates
o certain other financial institutions and intermediaries,
including financial planners and investment advisers
o institutional investors
o charitable foundations
o endowments
o other Funds in Nations Funds Family
o The minimum initial investment is $250,000. Financial
institutions or intermediaries can total the investments they
make on behalf of their clients to meet the minimum initial
investment amount.
o There is no minimum amount for additional investments.
o There are no sales charges for buying, selling or exchanging
these shares.
You'll find more information about buying, selling and exchanging Primary A
Shares on the pages that follow. You should also ask your financial
institution or intermediary about its limits, fees and policies for buying,
selling and exchanging shares, which may be different from those described
here, and about its related programs or services.
The Funds also offer other classes of shares, with different features and
expense levels, which you may be eligible to buy. Please contact your
investment professional, or call us at 1.800.765.2668 if you have any
questions or you need help placing an order.
How shares are priced
All transactions are based on the price of a Fund's shares -- or its net asset
value per share. We calculate net asset value per share for each class of each
Fund at the end of each business day. First, we calculate the net asset value
for each class of a Fund by determining the value of the Fund's assets in the
class and then subtracting its liabilities. Next, we divide this amount by the
number of shares that investors are holding in the class.
18
<PAGE>
Valuing securities in a Fund
The value of a Fund's assets is based on the total market value of all of the
securities it holds. The prices reported on stock exchanges and securities
markets around the world are usually used to value securities in a Fund. If
prices aren't readily available, we'll base the price of a security on its
fair market value. We use the amortized cost method, which approximates market
value, to value short-term investments maturing in 60 days or less.
International markets may be open on days when U.S. markets are closed. The
value of foreign securities owned by a Fund could change on days when Fund
shares may not be bought or sold.
How orders are processed
Orders to buy, sell or exchange shares are processed on business days. Orders
received by Stephens, First Data or their agents before the end of a business
day (usually 4:00 p.m. Eastern time, unless the NYSE closes early) will
receive that day's net asset value per share. Orders received after the end of
a business day will receive the next business day's net asset value per share.
The business day that applies to your order is also called the trade date. We
may refuse any order to buy or exchange shares. If this happens, we'll return
any money we've received.
[GRAPHIC]
Buying shares
Here are some general rules for buying shares:
o Investors buy Primary A Shares at net asset value per share.
o If we don't receive payment within three business days of
receiving an order, we'll refuse the order. We'll return any
payment received for orders that we refuse.
o Financial institutions and intermediaries are responsible for
sending us orders for their clients and for ensuring that we
receive payment on time.
o Shares purchased are recorded on the books of the Fund. We don't
issue certificates.
o Financial institutions and intermediaries are responsible for
recording the beneficial ownership of the shares of their
clients, and for reporting this ownership on account statements
they send to their clients.
[GRAPHIC]
Selling shares
Here are some general rules for selling shares:
o We normally send the sale proceeds by federal funds wire within
three business days after Stephens, First Data or their agents
receive the order.
o If shares were paid for with a check that wasn't certified, we'll
hold the sale proceeds when those shares are sold for at least 15
days after the trade date of the purchase, or until the check has
cleared.
o Financial institutions and intermediaries are responsible for
sending us orders for their clients and for depositing the sale
proceeds to their accounts on time.
19
<PAGE>
o Under certain circumstances allowed under the Investment Company
Act of 1940 (1940 Act), we can pay investors in securities or
other property when they sell shares, or delay payment of the
sale proceeds for up to seven days.
o Other restrictions may apply to retirement plan accounts. For
more information about these restrictions, please contact your
retirement plan administrator.
We may sell shares:
o if the value of an investor's account falls below $500. We'll
provide 60 days notice in writing if we're going to do this
o if a financial institution or intermediary tells us to sell the
shares for a client under arrangements it has made with its
clients
o under certain other circumstances allowed under the 1940 Act
[GRAPHIC]
You should make sure you understand the investment objectives and
policies of the Fund you're exchanging into. Please read its
prospectus carefully.
[GRAPHIC]
Exchanging shares
Investors can sell shares of a Fund to buy shares of another Nations
Fund. This is called an exchange, and may be appropriate if investment
goals or tolerance for risk change.
Here's how exchanges work:
o Investors can exchange Primary A Shares of a Fund for Primary A
Shares of any other Nations Fund. In some cases, the only Money
Market Fund option is Trust Class Shares of Nations Reserves
Money Market Funds.
o The rules for buying shares of a Fund, including any minimum
investment requirements, apply to exchanges into that Fund.
o Exchanges can only be made into a Fund that is legally sold in
the investor's state of residence.
o Exchanges can generally only be made into a Fund that is
accepting investments.
o We may limit the number of exchanges that can be made within a
specified period of time.
o We may change or cancel the right to make an exchange by giving
the amount of notice required by regulatory authorities
(generally 60 days for a material change or cancellation).
20
<PAGE>
[GRAPHIC]
Distributions and taxes
[GRAPHIC]
The power of compounding
Reinvesting your distributions buys you more shares of a
Fund -- which lets you take advantage of the potential for
compound growth.
Putting the money you earn back into your investment means it, in
turn, may earn even more money. Over time, the power of
compounding has the potential to significantly increase the value
of your investment. There is no assurance, however, that you'll
earn more money if you reinvest your distributions.
About distributions
A mutual fund can make money two ways:
o It can earn income. Examples are interest paid on bonds and
dividends paid on common stocks.
o A fund can also have capital gain if the value of its investments
increases. If a fund sells an investment at a gain, the gain is
realized. If a fund continues to hold the investment, any gain is
unrealized.
A mutual fund is not subject to income tax as long as it distributes its net
investment income and realized capital gain to its shareholders. The Funds
intend to pay out a sufficient amount of their income and capital gain to
their shareholders so the Funds won't have to pay any income tax. When a Fund
makes this kind of a payment, it's split equally among all shares, and is
called a distribution.
All of the Funds distribute any net realized capital gain at least once a
year. The frequency of distributions of net investment income varies by Fund:
<TABLE>
<CAPTION>
Frequency of
Fund income distributions
<S> <C>
Nations MidCap Index Fund quarterly
Nations High Yield Fund monthly
Nations Kansas Intermediate Municipal Bond Fund monthly
</TABLE>
A distribution is paid based on the number of shares you hold on the record
date, which is usually the day before the distribution is declared. Shares of
the Index Fund are eligible to receive distributions from the trade date of
the purchase, as long as it's at least one day before a distribution is
declared, up to the day before the shares are sold. Shares of the Fixed Income
Fund are eligible to receive distributions from the trade date of the purchase
up to and including the day before the shares are sold.
Different share classes of a Fund usually pay different distribution amounts,
because each class has different expenses. Each time a distribution is made,
the net asset value per share of the share class is reduced by the amount of
the distribution.
We'll automatically reinvest distributions in additional shares of the same
Fund unless you tell us you want to receive your distributions in cash. You
can do this by writing to us at the address on the back cover, or by calling
us at 1.800.765.2668.
We generally pay cash distributions within five business days after the end of
the month, quarter or year in which the distribution was made. If you sell all
of your shares, we'll pay any distribution that applies to those shares in
cash within five business days after the sale was made.
21
<PAGE>
If you buy shares of a Fund shortly before it makes a distribution, you will,
in effect, receive part of your purchase back in the distribution, which is
subject to tax. Similarly, if you buy shares of a Fund that holds securities
with unrealized capital gain, you will, in effect, receive part of your
purchase back if and when the Fund sells those securities and realizes and
distributes the gain. This distribution is also subject to tax. Some Funds
have built up, or have the potential to build up, high levels of unrealized
capital gain.
[GRAPHIC]
This information is a summary of how federal income taxes may
affect your investment in the Funds. It is not intended as a
substitute for careful tax planning. You should consult with your
own tax advisor about your situation, including any foreign, state
and local taxes that may apply.
[GRAPHIC]
For more information about
taxes, please see the SAI.
How taxes affect your investment
Distributions that come from net investment income, net foreign currency gain
and any excess of net short-term capital gain over net long-term capital loss,
generally are taxable to you as ordinary income.
Distributions that come from net capital gain (generally the excess of net
long-term capital gain over net short-term capital loss) generally are taxable
to you as net capital gain.
In general, all distributions are taxable to you when paid, whether they are
paid in cash or automatically reinvested in additional shares of the Fund.
However, any distributions declared in October, November or December of one
year and distributed in January of the following year will be taxable as if
they had been paid to you on December 31 of the first year.
We'll send you a notice every year that tells you how much you've received in
distributions during the year and their federal tax status. Foreign, state and
local taxes may also apply to these distributions.
Withholding tax
We're required by federal law to withhold tax of 31% on any distributions and
redemption proceeds paid to you (including amounts deemed to be paid for "in
kind" redemptions and exchanges) if:
o you haven't given us a correct Taxpayer Identification Number
(TIN) and haven't certified that the TIN is correct and
withholding doesn't apply
o the Internal Revenue Service (IRS) has notified us that the TIN
listed on your account is incorrect according to its records
o the IRS informs us that you are otherwise subject to backup
withholding
The IRS may also impose penalties against you if you don't give us a correct
TIN.
Amounts we withhold are applied to your federal income tax liability. You may
receive a refund from the IRS if the withholding tax results in an overpayment
of taxes.
We're also normally required by federal law to withhold tax on distributions
paid to foreign shareholders.
Taxation of redemptions and exchanges
Your redemptions (including redemptions "in kind") and exchanges of Fund
shares will usually result in a taxable capital gain or loss to you, depending
on the amount you receive for your shares (or are deemed to receive in the
case of exchanges) and the amount you paid (or are deemed to have paid) for
them.
22
<PAGE>
[GRAPHIC]
Terms used in this prospectus
Asset-backed security - a debt security that gives you an interest in a pool
of assets that is collateralized or "backed" by one or more kinds of assets,
including real property, receivables or mortgages, generally issued by banks,
credit card companies or other lenders. Some securities may be issued or
guaranteed by the U.S. government or its agencies, authorities or
instrumentalities. Asset-backed securities typically make periodic payments,
which may be interest or a combination of interest and a portion of the
principal of the underlying assets.
Average dollar-weighted maturity - the average length of time until the debt
securities held by a Fund reach maturity. In general, the longer the average
dollar-weighted maturity, the more a Fund's share price will fluctuate in
response to changes in interest rates.
Bank obligation - a money market instrument issued by a bank, including
certificates of deposit, time deposits and bankers' acceptances.
Capital gain or loss - the difference between the purchase price of a security
and its selling price. You realize a capital gain when you sell a security for
more than you paid for it. You realize a capital loss when you sell a security
for less than you paid for it.
Cash equivalents - short-term, interest-bearing instruments, including
obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities, bank obligations, asset-backed securities, foreign
government securities and commercial paper issued by U.S. and foreign issuers
which, at the time of investment, is rated at least Prime-2 by Moody's
Investor Services, Inc. (Moody's), A-2 by S&P, or F-1 by Fitch IBCA (Fitch).
Collateralized mortgage obligation (CMO) - a debt security that is backed by
real estate mortgages. CMO payment obligations are covered by interest and/or
principal payments from a pool of mortgages. In addition, the underlying
assets of a CMO are typically separated into classes, called tranches, based
on maturity. Each tranche pays a different rate of interest. CMOs are not
generally issued by the U.S. government, its agencies or instrumentalities.
Commercial paper - a money market instrument issued by a large company.
Common stock - a security that represents part equity ownership in a company.
Common stock typically allows you to vote at shareholder meetings and to share
in the company's profits by receiving dividends.
Convertible debt - a debt security that can be exchanged for common stock (or
another type of security) on a specified basis and date.
Convertible security - a security that can be exchanged for common stock (or
another type of security) at a specified rate. Convertible securities include
convertible debt, rights and warrants.
23
<PAGE>
Corporate obligation - a money market instrument issued by a corporation or
commercial bank.
Crossing networks - an electronic system where anonymous parties can match buy
and sell transactions. These transactions don't affect the market, and
transaction costs are extremely low.
Debt security - when you invest in a debt security, you are typically lending
your money to a governmental body or company (the issuer) to help fund their
operations or major projects. The issuer pays interest at a specified rate on
a specified date or dates, and repays the principal when the security matures.
Short-term debt securities include money market instruments such as treasury
bills. Long-term debt securities include fixed income securities such as
government and corporate bonds, and mortgage-backed and asset-backed
securities.
Depositary receipts - evidence of the deposit of a security with a custodian
bank. American Depositary Receipts (ADRs), for example, are certificates
traded in U.S. markets representing an interest of a foreign company. They
were created to make it possible for foreign issuers to meet U.S. security
registration requirements. Other examples include ADSs, GDRs and EDRs.
Dividend yield - rate of return of dividends paid on a common or preferred
stock. It equals the amount of the annual dividend on a stock expressed as a
percentage of the stock's current market value.
Dollar roll transaction - the sale by a Fund of mortgage-backed or other
asset-backed securities, together with a commitment to buy similar, but not
identical, securities at a future date.
Duration - a security's or portfolio's sensitivity to changes in interest
rates. For example, if interest rates rise by one percentage point, the share
price of a fund with a duration of five years would decline by about 5%. If
interest rates fall by one percentage point, the fund's share price would rise
by about 5%.
Equity security - an investment that gives you an equity ownership right in a
company. Equity securities (or "equities") include common and preferred stock,
rights and warrants.
First Boston Convertible Index - a widely-used unmanaged index that measures
the performance of convertible securities. The index is not available for
investment.
First-tier security - under Rule 2a-7 under the 1940 Act, a debt security that
is an eligible investment for money market funds and has the highest
short-term rating from a nationally recognized statistical rating organization
(NRSRO), or if unrated, is determined by the fund's portfolio management team
to be of comparable quality, or is a money market fund issued by a registered
investment company, or is a government security.
24
<PAGE>
Fixed income security - an intermediate to long-term debt security that
matures in more than one year.
Foreign security - a debt or equity security issued by a foreign company or
government.
Fundamental analysis - a method of securities analysis that tries to evaluate
the intrinsic, or "true," value of a particular stock. It includes a study of
the overall economy, industry conditions and the financial condition and
management of a company.
Futures contract - a contract to buy or sell an asset or an index of
securities at a specified price on a specified future date. The price is set
through a futures exchange.
Guaranteed investment contract - an investment instrument issued by a rated
insurance company in return for a payment by an investor.
High quality - in the case of municipal securities, a long-term rating of A or
higher from Duff & Phelps Credit Rating Co. (D&P), Fitch, S&P, Thomson
BankWatch, Inc. (BankWatch), or Moody's in the case of certain bonds that are
lacking a short-term rating from the required number of NRSROs; rated D-1 or
higher by D&P, F-1 or higher by Fitch, SP-1 by S&P, or MIG-1 by Moody's in the
case of notes; rated D-1 or higher by D&P, F-1 or higher by Fitch, or VMIG-1
by Moody's in the case of variable rate demand notes; or rated D-1 or higher
by D&P, F-1 or higher by Fitch, A-1 or higher by S&P or Prime-1 by Moody's in
the case of tax-exempt commercial paper. The portfolio management team may
consider an unrated municipal security to be investment grade if the team
believes it to be of comparable quality, based on guidelines provided by the
Fund's Board of Directors. Please see the SAI for more information about
credit ratings.
High-yield debt security - debt securities that, at the time of investment
by the sub-adviser, are rated "BB" or below by S&P or "Ba" or below by
Moody's, or that are unrated and determined to be of comparable quality.
IFC Investables Index - an unmanaged index that tracks more than 1,400 stocks
in 25 emerging markets in Asia, Latin America, Eastern Europe, Africa and the
Middle East. The index is weighted by market capitalization.
Investment grade - a debt security that has been given a medium to high credit
rating (Baa or higher by Moody's, BBB or higher by S&P or a comparable rating
by other NRSROs) based on the issuer's ability to pay interest and repay
principal on time. The portfolio management team may consider an unrated debt
security to be investment grade if the team believes it is of comparable
quality. Please see the SAI for more information about credit ratings.
Lehman 3-Year Municipal Bond Index - a broad-based, unmanaged index of
investment grade bonds with maturities of two to four years. All dividends are
reinvested.
Lehman 7-Year Municipal Bond Index - a broad-based, unmanaged index of
investment grade bonds with maturities of seven to eight years. All dividends
are reinvested.
25
<PAGE>
Lehman Aggregate Bond Index - an index made up of the Lehman
Government/Corporate Index, the Asset-Backed Securities Index and the
Mortgage-Backed Securities Index. These indexes include U.S. government agency
and U.S. Treasury securities, corporate bonds and mortgage-backed securities.
All dividends are reinvested.
Lehman Government Bond Index - an index of government bonds with an average
maturity of approximately nine years. All dividends are reinvested.
Lehman Government/Corporate Bond Index - an index of U.S. government, U.S.
Treasury and agency securities, and corporate and Yankee bonds. All dividends
are reinvested.
Lehman Intermediate Government Bond Index - an index of U.S. government agency
and U.S. Treasury securities. All dividends are reinvested.
Lehman Intermediate Treasury Index - an index of U.S. Treasury securities with
maturities of three to 10 years. All dividends are reinvested.
Lehman Municipal Bond Index - a broad-based, unmanaged index of 8,000
investment grade bonds with long-term maturities. All dividends are
reinvested.
Liquidity - a measurement of how easily a security can be bought or sold at a
price that is close to its market value.
Merrill Lynch 1-3 Year Treasury Index - an index of U.S. Treasury bonds with
maturities of 1 to 3 years. All dividends are reinvested.
Money market instrument - a short-term debt security that is considered to
mature in 13 months or less. Money market instruments include U.S. Treasury
obligations, U.S. government obligations, certificates of deposit, bankers'
acceptances, commercial paper, repurchase agreements and certain municipal
securities.
Mortgage-backed security or Mortgage-related security - a debt security that
gives you an interest in, and is backed by, a pool of residential mortgages
issued by the U.S. government or by financial institutions. The underlying
mortgages may be guaranteed by the U.S. government or one of its agencies,
authorities or instrumentalities. Mortgage-backed securities typically make
monthly payments, which are a combination of interest and a portion of the
principal of the underlying mortgages.
MSCI EAFE Index - Morgan Stanley Capital International Europe, Australasia and
Far East Index, an index of over 1,100 stocks from 21 developed markets in
Europe, Australia, New Zealand and Asia. The index reflects the relative size
of each market.
26
<PAGE>
Municipal security (obligation) - a debt security issued by state or local
governments or governmental authorities to pay for public projects and
services. "General obligations" are typically backed by the issuer's full
taxing and revenue-raising powers. "Revenue securities" depend on the income
earned by a specific project or authority, like road or bridge tolls, user
fees for water or revenues from a utility. Interest income from these
securities is exempt from federal income taxes and is generally exempt from
state taxes if you live in the state that issued the security. If you live in
the municipality that issued the security, interest income may also be exempt
from local taxes.
Non-diversified - a fund that holds securities of fewer issuers or kinds of
issuers than other kinds of funds. Non-diversified funds tend to have greater
price swings than more diversified funds because events affecting one or more
of its securities may have a disproportionately large effect on the fund.
Over-the-counter market - a market where dealers trade securities through a
telephone or computer network rather than through a public stock exchange.
Participation - a pass-through certificate representing a share in a pool of
debt obligations or other instruments.
Pass-through certificate - securitized mortgages or other debt securities with
interest and principal paid by a servicing intermediary shortly after interest
payments are received from borrowers.
Preferred stock - a type of equity security that gives you a limited ownership
right in a company, with certain preferences or priority over common stock.
Preferred stock generally pays a fixed annual dividend. If the company goes
bankrupt, preferred shareholders generally receive their share of the
company's remaining assets before common shareholders and after bondholders
and other creditors.
Pre-refunded bond - a bond that is repaid before its maturity date. The
repayment is generally financed by a new issue. Issuers generally pre-refund
bonds during periods of lower interest rates to reduce their interest costs.
Price-to-earnings ratio (P/E ratio) - the current price of a share divided by
its actual or estimated earnings per share. The P/E ratio is one measure of
the value of a company.
Private activity bond - a municipal security that is used to finance private
projects or other projects that aren't qualified for tax purposes. Private
activity bonds are generally taxable, unless their use is specifically
exempted, or may be treated as tax preference items.
Quantitative analysis - an analysis of financial information about a company
or security to identify securities that have the potential for growth or are
otherwise suitable for a fund to buy.
27
<PAGE>
Real Estate Investment Trust (REIT) - a portfolio of real estate investments
which may include office buildings, apartment complexes, hotels and shopping
malls, and real-estate-related loans or interests.
Repurchase agreement - a short-term (often overnight) investment arrangement.
The investor agrees to buy certain securities from the borrower and the
borrower promises to buy them back at a specified date and price. The
difference between the purchase price paid by the investor and the repurchase
price paid by the borrower represents the investor's return. Repurchase
agreements are popular because they provide very low-risk return and can
virtually eliminate credit difficulties.
Reverse repurchase agreement - a repurchase agreement in which an investor
sells a security to another party, like a bank or dealer, in return for cash,
and agrees to buy the security back at a specified date and price.
Right - a temporary privilege allowing investors who already own a common
stock to buy additional shares directly from the company at a specified price
or formula.
Russell 2000 - an unmanaged index of 2,000 of the smallest stocks representing
approximately 11% of the U.S. equity market. The index is weighted by market
capitalization, and is not available for investment.
S&P 400(1)- Standard & Poor's 400 Composite Stock Price Index, an unmanaged
index of 400 widely held common stocks. It is not available for investment.
S&P MidCap 400(1)- an unmanaged index of 400 domestic stocks chosen for market
size, liquidity and industry representation. The index is weighted by market
value, and is not available for investment.
S&P SmallCap 600(1)- Standard & Poor's SmallCap 600 Index, an unmanaged index
of 600 common stocks, weighted by market capitalization. It is not available
for investment.
S&P/BARRA SmallCap Value Index(1)- an unmanaged index of a group of stocks from
the S&P SmallCap 600 that have low price-to-book ratios relative to the S&P
SmallCap 600 as a whole. It is weighted by market capitalization, and is not
available for investment.
S&P/BARRA Value Index(1) - an unmanaged index of a group of stocks from the S&P
500 that have low price-to-book ratios relative to the S&P 500 as a whole. It
is weighted by market capitalization, and is not available for investment.
Salomon Brothers Mortgage Index - an index of 30-year and 15-year GNMA, FNMA
and FHLMC securities, and FNMA and FHLMC balloon mortgages.
Second-tier security - under Rule 2a-7 under the 1940 Act, a debt security
that is an eligible investment for money market funds, but is not a first-tier
security.
28
<PAGE>
Senior security - a debt security that allows holders to receive their share
of a company's remaining assets in a bankruptcy before other bondholders,
creditors, and common and preferred shareholders.
Special purpose issuer - an entity organized solely to issue asset-backed
securities on a pool of assets it owns.
Trade date - the effective date of a purchase, sale or exchange transaction,
or other instructions sent to us. The trade date is determined by the day and
time we receive the order or instructions in a form that's acceptable to us.
U.S. government obligations - a wide range of debt securities issued or
guaranteed by the U.S. government or its agencies, authorities or
instrumentalities.
U.S. Treasury obligation - a debt security issued by the U.S. Treasury.
Warrant - a certificate that gives you the right to buy common shares at a
specified price within a specified period of time.
Wilshire 5000 Equity Index - an index that measures the performance of the
equity securities of all companies headquartered in the U.S. that have readily
available price data -- over 7, 000 companies. The index is weighted by market
capitalization and is not available for investment.
Zero-coupon bond - a bond that makes no periodic interest payments. Zero
coupon bonds are sold at a deep discount to their face value and mature at
face value. The difference between the face value at maturity and the purchase
price represents the return.
(1)S&P and BARRA have not reviewed any stock included in the S&P 400, S&P 600,
BARRA Index or BARRA SmallCap Index for its investment merit. S&P and BARRA
determine and calculate their indexes independently of the Funds and are not
a sponsor or affiliate of the Funds. S&P and BARRA give no information and
make no statements about the suitability of investing in the Funds or the
ability of their indexes to track stock market performance. S&P and BARRA
make no guarantees about the indexes, any data included in them and the
suitability of the indexes or their data for any purpose. "Standard and
Poor's," "S&P 400" and "S&P 600" are trademarks of the McGraw-Hill
Companies, Inc.
29
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
[GRAPHIC]
Where to find more information
You'll find more information about the Equity, International, Index, Balanced,
Fixed Income and Municipal Bond Funds in the following documents:
[GRAPHIC]
Annual and semi-annual reports
The annual and semi-annual reports contain information about Fund
investments and performance, the financial statements and the auditor's
reports. The annual report also includes a discussion about the market
conditions and investment strategies that had a significant effect on
each Fund's performance during the period covered.
[GRAPHIC]
Statement of Additional Information
The SAI contains additional information about the Funds and their
policies. The SAI is legally part of this prospectus (it's incorporated
by reference). A copy has been filed with the SEC.
You can obtain a free copy of these documents, request other
information about the Funds and make shareholder inquiries by
contacting Nations Funds:
By telephone: 1.800.765.2668
By mail:
Nations Funds
c/o Stephens Inc.
One Bank of America Plaza
33rd Floor
Charlotte, NC 28255
On the Internet: www.nationsbank.com/nationsfunds
If you prefer, you can write the SEC's Public Reference Room and ask
them to mail you copies of these documents. They'll charge you a fee
for this service. You can also download them from the SEC's website or
visit the Public Reference Section and copy the documents while you're
there. Please call the SEC for more information.
Public Reference Section of the SEC
Washington, DC 20549-6009
1.800.SEC.0330
www.sec.gov
SEC file number:
Nations Funds Trust,
[NATIONS FUNDS LOGO APPEARS HERE]
NF-COMPROPA-8/99
<PAGE>
[GRAPHIC]
INDEX FUND
PROSPECTUS -- INVESTOR A SHARES
JANUARY , 2000
Index Fund
Nations MidCap Index Fund
The Securities and Exchange Commission (SEC) has not approved or disapproved
these securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
NOT FDIC
INSURED
- -------------------
May Lose Value
- -------------------
No Bank Guarantee
- -------------------
NATIONS FUNDS LOGO
<PAGE>
AN OVERVIEW OF THE FUND
- --------------------------------------------------------------------------------
[GRAPHIC]
TERMS USED IN THIS PROSPECTUS
IN THIS PROSPECTUS, WE, US AND OUR REFER TO THE NATIONS FUNDS
FAMILY (NATIONS FUNDS). SOME OTHER IMPORTANT TERMS WE'VE USED MAY
BE NEW TO YOU. THESE ARE PRINTED IN ITALICS WHERE THEY FIRST APPEAR
IN A SECTION AND ARE DESCRIBED IN TERMS USED IN THIS PROSPECTUS.
[GRAPHIC]
YOU'LL FIND TERMS USED IN THIS PROSPECTUS ON PAGE 38.
YOUR INVESTMENT IN THIS FUND IS NOT A BANK DEPOSIT AND IS NOT
INSURED OR GUARANTEED BY BANK OF AMERICA, N.A. (BANK OF AMERICA),
THE FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) OR ANY OTHER
GOVERNMENT AGENCY. YOUR INVESTMENT MAY LOSE MONEY.
AFFILIATES OF BANK OF AMERICA ARE PAID FOR THE SERVICES THEY
PROVIDE TO THE FUNDS.
This booklet, which is called a prospectus, tells you about one of Nations
Funds Index Funds. Please read it carefully because it contains information
that's designed to help you make informed investment decisions.
ABOUT THE FUND
The Index Fund focuses on long-term growth. It is intended to match the
industry and risk characteristics of a specific stock market index, like the
S&P 500, by investing primarily in the equity securities that are included in
the index.
Equity securities have the potential to provide you with higher returns than
many other kinds of investments, but they also tend to have the highest risk.
There's always the risk that you'll lose money, or you may not earn as much as
you expect.
IS THIS FUND RIGHT FOR YOU?
Not every Fund is right for every investor. When you're choosing a Fund to
invest in, you should consider things like your investment goals, how much risk
you can accept and how long you're planning to hold your investment.
The Index Fund may be suitable for you if:
o you have longer-term investment goals
o they're part of a balanced portfolio
o you want to try to protect your portfolio against a loss of buying power
that inflation can cause over time
It may not be suitable for you if:
o you're not prepared to accept or are unable to bear the risks associated
with equity securities
o you have short-term investment goals
o you're looking for a regular stream of income
You'll find a discussion of the Fund's principal investments, strategies and
risks in the Fund descriptions that start on page 4.
FOR MORE INFORMATION
If you have any questions about the Fund, please call us at 1.800.321.7854 or
contact your investment professional.
You'll find more information about the Fund in the Statement of Additional
Information (SAI). The SAI includes more detailed information about the Fund's
investments, policies, performance and management, among other things. Please
turn to the back cover to find out how you can get a copy.
2
<PAGE>
WHAT'S INSIDE
- --------------------------------------------------------------------------------
[GRAPHIC]
BANC OF AMERICA ADVISORS, INC.
BANC OF AMERICA ADVISORS, INC. (BAAI) IS THE INVESTMENT ADVISER TO
THE FUND. BAAI IS RESPONSIBLE FOR THE OVERALL MANAGEMENT AND
SUPERVISION OF THE INVESTMENT MANAGEMENT OF THE FUND. BAAI AND
NATIONS FUNDS HAVE ENGAGED A SUB-ADVISER -- TRADESTREET INVESTMENT
ASSOCIATES, INC. (TRADESTREET), WHICH IS RESPONSIBLE FOR THE
DAY-TO-DAY INVESTMENT DECISIONS FOR THE FUND.
[GRAPHIC]
YOU'LL FIND MORE ABOUT BAAI AND TRADESTREET STARTING ON PAGE 23.
<TABLE>
[GRAPHIC]
<S> <C>
ABOUT THE INDEX FUND
NATIONS MIDCAP INDEX FUND 4
Sub-adviser: TradeStreet
- ------------------------------------------------------------
OTHER IMPORTANT INFORMATION 7
- ------------------------------------------------------------
HOW THE FUND IS MANAGED 8
[GRAPHIC]
About your investment
INFORMATION FOR INVESTORS
Buying, selling and exchanging shares 10
How selling and servicing agents are paid 16
Distributions and taxes 17
- ------------------------------------------------------------
TERMS USED IN THIS PROSPECTUS 20
- ------------------------------------------------------------
WHERE TO FIND MORE INFORMATION BACK COVER
</TABLE>
3
<PAGE>
About the Index Fund
- --------------------------------------------------------------------------------
[GRAPHIC]
ABOUT THE SUB-ADVISER
TRADESTREET IS THIS FUND'S SUB-ADVISER. TRADESTREET'S STRUCTURED
PRODUCTS MANAGEMENT TEAM MAKES THE DAY-TO-DAY INVESTMENT DECISIONS
FOR THE FUND.
[GRAPHIC]
YOU'LL FIND MORE ABOUT TRADESTREET ON PAGE 24.
[GRAPHIC]
WHAT IS AN INDEX FUND?
INDEX FUNDS USE A "PASSIVE" OR "INDEXING" INVESTMENT APPROACH,
WHICH ATTEMPTS TO DUPLICATE THE PERFORMANCE OF A SPECIFIC MARKET
INDEX.
CORRELATION MEASURES HOW CLOSELY A FUND'S RETURNS MATCH THOSE OF AN
INDEX. A PERFECT CORRELATION OF 1.0 MEANS THAT THE NET ASSET VALUE
OF THE FUND INCREASES OR DECREASES IN EXACT PROPORTION TO CHANGES
IN THE INDEX.
NATIONS MIDCAP INDEX FUND
[GRAPHIC]
INVESTMENT OBJECTIVE
This Fund seeks investment results that (before fees and expenses)
correspond to the total return of the Standard & Poor's MidCap 400 Stock
Price Index (S&P 400).
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests at least 80% of its assets in common stocks
that are included in the S&P 400. The S&P 400 is an unmanaged index of
400 domestic common stocks chosen for their market size, liquidity and
industry representation. The index is weighted by market value, and is
not available for investment.
The Fund may buy stock index futures and other financial futures as substitutes
for the underlying securities in the S&P 400.
The Fund 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.
Different common stocks have different weightings in the S&P 400, depending on
the amount of stock outstanding and the stock's current price. In trying to
match the performance of the S&P 400, the management team will try to allocate
the Fund's portfolio among common stocks in approximately the same weightings
as the S&P 400, beginning with the most heavily weighted stocks that make up a
larger portion of the value of the S&P 400.
The team generally will try to match the composition of the S&P 400 as closely
as possible. The team starts with the stocks that make up a larger portion of
the value of the S&P 400. It may not always invest in stocks that make up the
smaller percentages because it may be more difficult and costly to make
relatively small transactions. The team may remove a stock from the Fund's
holdings or not invest in a stock if it believes that the stock is not liquid
enough, or for other reasons. The team can substitute stocks that are not
included in the S&P 400, if it believes these stocks have similar
characteristics.
The Fund tries to achieve a correlation of at least 0.95 with the return of the
S&P 400 on an annual basis (before fees and expenses). The Fund's ability to
track the S&P 400 is affected by transaction costs and other expenses, changes
in the composition of the S&P 400, changes in the number of shares issued by
the companies represented in the S&P 400, and by the timing and amount of
shareholder purchases and redemptions, among other things.
4
<PAGE>
[GRAPHIC]
YOU'LL FIND MORE ABOUT OTHER RISKS OF INVESTING IN THIS FUND
STARTING ON PAGE 22 AND IN THE SAI.
Equity mutual funds, like other investors in equity securities, incur
transaction costs, such as brokerage costs, when they buy and sell securities.
The management team tries to minimize these costs for the Fund by using program
trades and crossing networks.
The team may sell a stock when its percentage weighting in the index is
reduced, when the stock is removed from the index, or for other reasons.
[GRAPHIC]
RISKS AND OTHER THINGS TO CONSIDER
Nations MidCap Index Fund has the following risks:
o INVESTMENT STRATEGY RISK - This Fund tries to match (before fees and
expenses) the returns of the S&P 400, and is not actively managed.
There is no assurance that the returns of the Fund will match the
returns of the S&P 400. The value of the Fund will rise and fall with
the performance of the S&P 400.
o STOCK MARKET RISK - The value of the stocks the Fund holds can be
affected by changes in U.S. or foreign economies and financial
markets, and the companies that issue the stocks, among other things.
Stock prices can rise or fall over short as well as long periods. In
general, stock markets tend to move in cycles, with periods of rising
prices and periods of falling prices. As of the date of this
prospectus, the stock markets, as measured by the S&P 500 and other
commonly used indices, were trading at or close to record levels.
There can be no guarantee that these levels will continue.
o FUTURES RISK - This Fund may use futures contracts as a substitute
for the securities included in the index. There is a risk that this
could result in losses, reduce returns, increase transaction costs or
increase the Fund's volatility.
5
<PAGE>
[GRAPHIC]
THERE ARE TWO KINDS OF FEES -- SALES CHARGES YOU PAY DIRECTLY, AND
ANNUAL FUND OPERATING EXPENSES THAT ARE DEDUCTED FROM A FUND'S
ASSETS.
TOTAL NET EXPENSES ARE ACTUAL EXPENSES PAID BY THE FUND AFTER
WAIVERS AND/OR REIMBURSEMENTS.
[GRAPHIC]
THIS IS AN EXAMPLE ONLY. YOUR ACTUAL COSTS COULD BE HIGHER OR
LOWER, DEPENDING ON THE AMOUNT YOU INVEST, AND ON THE FUND'S ACTUAL
EXPENSES AND PERFORMANCE.
[GRAPHIC]
WHAT IT COSTS TO INVEST IN THE FUND
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(Fees paid directly from your investment) Investor A Shares
<S> <C>
Maximum sales charge (load) imposed on purchases none
Maximum deferred sales charge (load) none
Annual Fund operating expenses
(Expenses that are deducted from the Fund's assets)
Management fees 0.40%
Distribution (12b-1) and shareholder servicing fees 0.25%
Other expenses 0.33%
------
Total annual Fund operating expenses 0.98%
Fee waivers and/or reimbursements (0.38)%
------
Total net expenses(1) 0.60%
======
</TABLE>
(1)The Fund's investment adviser and/or some of its other service
providers have agreed to waive fees and/or reimburse expenses until
July 31, 2000. The figure shown here is after waivers and/or
reimbursements. There is no guarantee that these waivers and/or
reimbursements will continue after this date.
EXAMPLE
This example is intended to help you compare the cost of investing in
this Fund with the cost of investing in other mutual funds.
This example assumes:
o you invest $10,000 in Investor A Shares of the Fund for the time periods
indicated and then sell all of your shares at the end of those periods
o you reinvest all dividends and distributions in the Fund
o your investment has a 5% return each year
o the Fund's operating expenses remain the same as shown in the table
above
o the waivers and/or reimbursements shown above expire July 31, 2000 and
are not reflected in the 3, 5 and 10 year examples
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Investor A Shares $61 $274 $505 $1,167
</TABLE>
6
<PAGE>
[GRAPHIC]
OTHER IMPORTANT INFORMATION
You'll find specific information about the Fund's principal investments,
strategies and risks in the descriptions starting on page 4. The following are
some other risks and information you should consider before you invest:
O CHANGING INVESTMENT OBJECTIVES AND POLICIES - The investment
objective and certain investment policies of the Fund can be changed
without shareholder approval. Other investment policies may be
changed only with shareholder approval.
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, 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.
The Fund 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.
O HOLDING OTHER KINDS OF INVESTMENTS - The Fund may hold investments
that aren't part of its principal investment strategies. Please refer
to the SAI for more information. The portfolio managers or management
team can also choose not to invest in specific securities described
in this prospectus and in the SAI.
O INVESTING DEFENSIVELY - The Fund may temporarily hold investments
that are not part of its investment objective or its principal
investment strategies to try to protect it during a market or
economic downturn or because of political or other conditions. The
Fund may not achieve its investment objective while it is investing
defensively.
O PORTFOLIO TURNOVER - The Fund that replaces -- or turns over -- more
than 100% of its investments in a year is considered to trade
frequently. Frequent trading can result in larger distributions of
short-term capital gains to shareholders. These gains are taxable at
higher rates than long-term capital gains. Frequent trading can also
mean higher brokerage and other transaction costs, which could reduce
the Fund's returns. The Fund generally buys securities for capital
appreciation, investment income, or both, and don't engage in
short-term trading. You'll find the portfolio turnover rate for the
Fund in FINANCIAL HIGHLIGHTS.
7
<PAGE>
[GRAPHIC]
BANC OF AMERICA ADVISORS, INC.
ONE BANK OF AMERICA PLAZA
CHARLOTTE, NORTH CAROLINA 28255
[GRAPHIC]
HOW THE FUND IS MANAGED
INVESTMENT ADVISER
BAAI is the investment adviser to over 60 mutual fund portfolios in the Nations
Funds family, including the Index Fund described in this prospectus.
BAAI is a registered investment adviser. It's a wholly-owned subsidiary of Bank
of America, which is owned by Bank of America Corporation. Nations Funds pays
BAAI an annual fee for its investment advisory services. The fee is calculated
daily based on the average net assets of each Fund and is paid monthly. BAAI
uses part of this money to pay investment sub-advisers for the services they
provide to the Fund.
BAAI has agreed to waive fees and/or reimburse expenses for certain Funds until
July 31, 2000. You'll find a discussion of any waiver and/or reimbursement in
the Fund descriptions. There is no assurance that BAAI will continue to waive
and/or reimburse any fees and/or expenses after this date.
The following chart shows the maximum advisory fees BAAI can receive, along
with the actual advisory fees it received during the Fund's last fiscal year,
after waivers and/or reimbursements:
ANNUAL INVESTMENT ADVISORY FEE, AS A % OF AVERAGE DAILY NET ASSETS
<TABLE>
<CAPTION>
Maximum
advisory
fee(1)
<S> <C>
Nations MidCap Index Fund 0.40%
</TABLE>
(1)These fees are the current contract levels, which have been reduced from the
contract levels in effect during the last fiscal year.
8
<PAGE>
[GRAPHIC]
TRADESTREET INVESTMENT ASSOCIATES, INC.
ONE BANK OF AMERICA PLAZA
CHARLOTTE, NORTH CAROLINA 28255
[GRAPHIC]
STEPHENS INC.
111 CENTER STREET
LITTLE ROCK, ARKANSAS 72201
[GRAPHIC]
FIRST DATA INVESTOR
SERVICES GROUP, INC.
101 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
INVESTMENT SUB-ADVISER
Nations Funds and BAAI have engaged an investment sub-adviser, TradeStreet
Investment Associates, Inc., to provide day-to-day portfolio management for the
Fund. TradeStreet functions under the supervision of BAAI and the Board of
Trustees of Nations Funds.
TRADESTREET INVESTMENT ASSOCIATES, INC.
TradeStreet is a registered investment adviser and a wholly-owned subsidiary of
Bank of America. Its management expertise covers all major domestic asset
classes, including equity and fixed income securities and money market
instruments.
Currently managing more than $90 billion, TradeStreet has over 200
institutional clients and is sub-adviser to more than 50 mutual funds in the
Nations Funds family. TradeStreet takes a team approach to investment
management. Each team has access to the latest technology and analytical
resources.
TradeStreet's Structured Products Management Team is responsible for making the
day-to-day investment decisions for the Fund.
OTHER SERVICE PROVIDERS
The Fund is distributed and co-administered by Stephens Inc., a registered
broker/dealer. Stephens may pay distribution (12b-1) and shareholder servicing
fees, and/or other compensation to companies for selling shares and providing
services to investors.
BAAI is also co-administrator of the Fund, and assists in overseeing the
administrative operations of the Fund. The Fund pays BAAI and Stephens a
combined fee of 0.23% for their services, plus certain out-of-pocket-expenses.
The fee is calculated as an annual percentage of the average daily net assets
of the Fund, and is paid monthly.
First Data Investor Services Group, Inc. (First Data) is the transfer agent for
the Fund's shares. Its responsibilities include processing purchases, sales and
exchanges, calculating and paying distributions, keeping shareholder records,
preparing account statements and providing customer service.
9
<PAGE>
ABOUT YOUR INVESTMENT
- --------------------------------------------------------------------------------
[GRAPHIC]
WE'VE USED THE TERM, INVESTMENT PROFESSIONAL, TO REFER TO THE
PERSON WHO HAS ASSISTED YOU WITH BUYING NATIONS FUNDS. SELLING
AGENT OR SERVICING AGENT (SOMETIMES REFERRED TO AS A SELLING AGENT)
MEANS THE COMPANY THAT EMPLOYS YOUR INVESTMENT PROFESSIONAL.
SELLING AGENTS INCLUDE BANKS, BROKERAGE FIRMS, MUTUAL FUND DEALERS
AND OTHER FINANCIAL INSTITUTIONS, INCLUDING AFFILIATES OF BANK OF
AMERICA.
WHEN YOU SELL SHARES OF A MUTUAL FUND, THE FUND IS EFFECTIVELY
"BUYING" THEM BACK FROM YOU. THIS IS CALLED A REDEMPTION.
[GRAPHIC]
BUYING, SELLING AND EXCHANGING SHARES
You can invest in the Fund through your selling agent or directly from Nations
Funds. You don't pay any sales charges when you buy, sell or exchange Investor
A Shares of the Index Fund.
We encourage you to consult with an investment professional who can open an
account for you with a selling agent and help you with your investment
decisions. Once you have an account, you can buy, sell and exchange shares by
contacting your investment professional or selling agent. They will look after
any paperwork that's needed to complete a transaction and send your order to
us.
You should also ask your selling agent about its limits, fees and policies for
buying, selling and exchanging shares, which may be different from those
described here, and about its related programs or services.
The table on the next page summarizes some key information about buying,
selling and exchanging shares. Please contact your investment professional, or
call us at 1.800.321.7854 if you have any questions, or you need help placing
an order.
10
<PAGE>
<TABLE>
<CAPTION>
Ways to
buy, sell or
exchange
-----------------
<S> <C>
Buying shares In a lump sum
- ------------------- Using our
Systematic
Investment Plan
-----------------
Selling shares In a lump sum
- ------------------- Using our
Automatic
Withdrawal Plan
-----------------
Exchanging shares In a lump sum
Using our
Automatic
Exchange
Feature
<CAPTION>
How much you can buy,
sell or exchange Other things to know
---------------------------------------- ---------------------------------------------------
<S> <C> <C>
Buying shares minimum initial investment: There is no limit to the amount you can invest
o $1,000 for regular accounts in Investor A Shares.
o $500 for traditional and Roth IRA
accounts
o $250 for certain fee-based accounts
o no minimum for certain retirement
plan accounts like 401(k) plans and
SEP accounts, but other restrictions
apply
minimum additional investment:
o $100 for all accounts
minimum initial investment: You can buy shares monthly, twice a month or
o $100 quarterly, using automatic transfers from your
minimum additional investment: bank account.
o $50
- ------------------ ---------------------------------------------------------------------------------------------
Selling shares o you can sell up to $50,000 of your We'll send you or your selling agent the sale
shares by telephone, otherwise there proceeds, usually within three business days of
are no limits to the amount you can receiving your order.
sell
o other restrictions may apply to If you paid for your shares with a check that
withdrawals from retirement plan wasn't certified, we'll hold the sale proceeds
accounts when you sell those shares for at least 15 days
after the trade date of the purchase, or until the
check has cleared.
o minimum $25 per withdrawal Your account balance must be at least $10,000
to set up the plan. You can make withdrawals
monthly, twice a month or quarterly. We'll send
your money by check or deposit it directly to
your bank account.
- ------------------ ---------------------------------------------------------------------------------------------
Exchanging shares o minimum $1,000 per exchange You can exchange Investor A Shares of an Index
Fund for Investor A Shares of any other Index
Fund.
o minimum $25 per exchange You must already have an investment in the
Funds you want to exchange. You can make
exchanges monthly or quarterly.
</TABLE>
11
<PAGE>
[GRAPHIC]
A BUSINESS DAY IS ANY DAY THAT THE NEW YORK STOCK EXCHANGE (NYSE)
IS OPEN. A BUSINESS DAY ENDS AT THE CLOSE OF REGULAR TRADING ON THE
NYSE, USUALLY AT 4:00 P.M. EASTERN TIME. IF THE NYSE CLOSES EARLY,
THE BUSINESS DAY ENDS AS OF THE TIME THE NYSE CLOSES.
THE NYSE IS CLOSED ON WEEKENDS AND ON THE FOLLOWING NATIONAL
HOLIDAYS: NEW YEAR'S DAY, MARTIN LUTHER KING, JR. DAY, PRESIDENTS'
DAY, GOOD FRIDAY, MEMORIAL DAY, INDEPENDENCE DAY, LABOR DAY,
THANKSGIVING DAY AND CHRISTMAS DAY.
HOW SHARES ARE PRICED
All transactions are based on the price of a Fund's shares -- or its net asset
value per share. We calculate net asset value per share for each class of each
Fund at the end of each business day. First, we calculate the net asset value
for each class of a Fund by determining the value of the Fund's assets in the
class and then subtracting its liabilities. Next, we divide this amount by the
number of shares that investors are holding in the class.
VALUING SECURITIES IN THE FUND
The value of the Fund's assets is based on the total market value of all of the
securities it holds. The prices reported on stock exchanges and securities
markets around the world are usually used to value securities in the Fund. If
prices aren't readily available, we'll base the price of a security on its fair
market value. We use the amortized cost method, which approximates market
value, to value short-term investments maturing in 60 days or less.
HOW ORDERS ARE PROCESSED
Orders to buy, sell or exchange shares are processed on business days. Orders
received by Stephens, First Data or their agents before the end of a business
day (usually 4:00 p.m. Eastern time, unless the NYSE closes early) will receive
that day's net asset value per share. Orders received after the end of a
business day will receive the next business day's net asset value per share.
The business day that applies to your order is also called the trade date. We
may refuse any order to buy or exchange shares. If this happens, we'll return
any money we've received to your selling agent.
TELEPHONE ORDERS
You can place orders to buy, sell or exchange by telephone if you complete the
telephone authorization section of our account application and send it to us.
Here's how telephone orders work:
o If you sign up for telephone orders after you open your account, you
must have your signature guaranteed.
o Telephone orders may not be as secure as written orders. You may be
responsible for any loss resulting from a telephone order.
o We'll take reasonable steps to confirm that telephone instructions
are genuine. For example, we require proof of your identification
before we will act on instructions received by telephone and may
record telephone conversations. If we and our service providers don't
take these steps, we may be liable for any losses from unauthorized
or fraudulent instructions.
o Telephone orders may be difficult to complete during periods of
significant economic or market change.
12
<PAGE>
[GRAPHIC]
BUYING SHARES
Here are some general rules for buying shares:
o You buy Investor A Shares at net asset value per share.
o If we don't receive your money within three business days of
receiving your order, we'll refuse the order.
o Selling agents are responsible for sending orders to us and
ensuring we receive your money on time.
o Shares you buy are recorded on the books of the Fund. We don't
issue certificates unless you ask for them in writing, and we
don't issue certificates for fractions of shares.
MINIMUM INITIAL INVESTMENT
The minimum initial amount you can buy is usually $1,000.
If you're buying shares through one of the following accounts or plans,
the minimum initial amount you can buy is:
o $500 for traditional and Roth individual retirement accounts (IRAs)
o $250 for accounts set up with some fee-based investment advisers or
financial planners, including wrap fee accounts and other managed
accounts
o $100 using our Systematic Investment Plan
o There is no minimum for 401(k) plans, simplified employee pension
plans (SEPs), salary reduction-simplified employee pension plans
(SAR-SEPs), Savings Incentives Match Plans for Employees (SIMPLE
IRAs), salary reduction-IRAs (SAR-IRAs) or other similar kinds of
accounts. However, if the value of your account falls below $1,000
for 401(k) plans or $500 for the other plans within one year after
you open your account, we may sell your shares. We'll give you 60
days notice in writing if we're going to do this
MINIMUM ADDITIONAL INVESTMENT
You can make additional purchases of $100, or $50 if you use our
Systematic Investment Plan.
SYSTEMATIC INVESTMENT PLAN
You can make regular purchases of $50 or more using automatic transfers from
your bank account to the Funds you choose. You can contact your investment
professional or us to set up the plan.
Here's how the plan works:
o You can buy shares twice a month, monthly or quarterly.
o You can choose to have us transfer your money on or about the 15th
or the last day of the month.
o Some exceptions may apply to employees of Bank of America and its
affiliates, and to plans set up before August 1, 1997. For
details, please contact your investment professional.
13
<PAGE>
[GRAPHIC]
FOR MORE INFORMATION ABOUT TELEPHONE ORDERS, SEE PAGE 27.
[GRAPHIC]
SELLING SHARES
Here are some general rules for selling shares:
o If you're selling your shares through a selling agent, we'll
normally send the sale proceeds by federal funds wire within three
business days after Stephens, First Data or their agents receive
your order. Your selling agent is responsible for depositing the
sale proceeds to your account on time.
o If you're selling your shares directly through us, we'll normally
send the sale proceeds by mail or wire them to your bank account
within three business days after the Fund receives your order.
o You can sell up to $50,000 of shares by telephone if you qualify
for telephone orders.
o If you paid for your shares with a check that wasn't certified,
we'll hold the sale proceeds when you sell those shares for at
least 15 days after the trade date of the purchase, or until the
check has cleared.
o If you hold any shares in certificate form, you must sign the
certificates (or send a signed stock power with them) and send
them to First Data. Your signature must be guaranteed unless
you've made other arrangements with us. We may ask for any other
information we need to prove that the order is properly
authorized.
o Under certain circumstances allowed under the Investment Company
Act of 1940 (1940 Act), we can pay you in securities or other
property when you sell your shares, or delay payment of the sale
proceeds for up to seven days.
o Other restrictions may apply to retirement plan accounts. For more
information about these restrictions, please contact your
retirement plan administrator.
We may sell your shares:
o if the value of your account falls below $500. We'll give you 60
days notice in writing if we're going to do this
o if your selling agent tells us to sell your shares under
arrangements made between the selling agent and its customers
o under certain other circumstances allowed under the 1940 Act
AUTOMATIC WITHDRAWAL PLAN
The Automatic Withdrawal Plan lets you withdraw $25 or more every month, every
quarter or every year. You can contact your investment professional or us to set
up the plan.
Here's how the plan works:
o Your account balance must be at least $10,000 to set up the plan.
o If you set up the plan after you've opened your account, your
signature must be guaranteed.
o You can choose to have us transfer your money on or about the 15th
or the 25th of the month.
o We'll send you a check or deposit the money directly to your bank
account.
o You can cancel the plan by giving your selling agent or us 30 days
notice in writing.
It's important to remember that if you withdraw more than your investment in
the Fund is earning, you'll eventually use up your original investment.
14
<PAGE>
[GRAPHIC]
YOU SHOULD MAKE SURE YOU UNDERSTAND THE INVESTMENT OBJECTIVES AND
POLICIES OF THE FUND YOU'RE EXCHANGING INTO. PLEASE READ ITS
PROSPECTUS CAREFULLY.
[GRAPHIC]
EXCHANGING SHARES
You can sell shares of the Fund to buy shares of another Nations Fund.
This is called an exchange. You might want to do this if your investment
goals or tolerance for risk changes.
Here's how exchanges work:
o You can exchange Investor A Shares of an Index Fund for Investor A
Shares of any other Index Fund.
o If you received Investor A Shares of a Managed Index Fund through a
conversion of Investor C Shares originally bought through a 401(k)
plan, you can also exchange your shares for:
o Investor C Shares of any other Nations Fund, except Nations Funds
Money Market Funds
o Daily Shares of Nations Funds Money Market Funds (before October 1,
1999)
o Investor C Shares of Nations Reserves Money Market Funds (on or
after October 1, 1999)
o You must exchange at least $1,000, or $25 if you use our Automatic
Exchange Feature.
o The rules for buying shares of a Fund, including any minimum
investment requirements, apply to exchanges into that Fund.
o You may only make an exchange into a Fund that is legally sold in your
state of residence.
o You generally may only make an exchange into a Fund that is accepting
investments.
o We may limit the number of exchanges you can make within a specified
period of time.
o We may change or cancel your right to make an exchange by giving the
amount of notice required by regulatory authorities (generally 60 days
for a material change or cancellation).
o You cannot exchange any shares you own in certificate form until First
Data has received the certificate and deposited the shares to your
account.
AUTOMATIC EXCHANGE FEATURE
The Automatic Exchange Feature lets you exchange $25 or more of Investor A
Shares every month or every quarter. You can contact your investment
professional or us to set up the plan.
Here's how automatic exchanges work:
o Send your request to First Data in writing or call 1.800.321.7854.
o You must already have an investment in the Funds you want to exchange.
o You can choose to have us transfer your money on or about the 15th or
the last day of the month.
o The rules for making exchanges apply to automatic exchanges.
15
<PAGE>
[GRAPHIC]
THE FINANCIAL INSTITUTION OR INTERMEDIARY THAT BUYS SHARES FOR YOU
IS ALSO SOMETIMES REFERRED TO AS A SELLING AGENT.
THE DISTRIBUTION FEE IS OFTEN REFERRED TO AS A "12B-1" FEE BECAUSE
IT'S PAID THROUGH A PLAN APPROVED UNDER RULE 12B-1 UNDER THE 1940
ACT.
YOUR SELLING AGENT MAY CHARGE OTHER FEES RELATED TO SERVICES
PROVIDED TO YOUR ACCOUNT.
[GRAPHIC]
HOW SELLING AND SERVICING AGENTS ARE PAID
Selling and servicing agents usually receive compensation based on your
investment in the Fund. The kind and amount of the compensation depends on the
share class you invest in. Selling agents typically pay a portion of the
compensation they receive to their investment professionals.
DISTRIBUTION (12B-1) AND SHAREHOLDER SERVICING FEES
Stephens and selling and servicing agents are compensated for selling shares
and providing services to investors under a combined distribution and
shareholder servicing plan.
Stephens and selling and servicing agents may receive a maximum combined annual
distribution (12b-1) and shareholder servicing fee of 0.25% for selling shares
and providing services to investors.
Fees are calculated daily and deducted monthly. Because these fees are paid out
of the Fund's assets on an ongoing basis, over time they will increase the cost
of your investment, and may cost you more than any sale's charges you may pay.
The Fund pays these fees to Stephens and to eligible selling and servicing
agents for as long as the plans continue. We may reduce or discontinue payments
at any time.
OTHER COMPENSATION
Selling and servicing agents may also receive:
o a bonus, incentive or other compensation relating to the sale, promotion and
marketing of the Fund
o an amount of up to 1.00% of the net asset value per share on all sales of
Investor A Shares
o non-cash compensation like trips to sales seminars or vacation destinations,
tickets to sporting events, theater or other entertainment, opportunities to
participate in golf or other outings and gift certificates for meals or
merchandise
This compensation, which is not paid by the Fund, is discretionary and may be
available only to selected selling and servicing agents. For example, Stephens
sometimes sponsors promotions involving Banc of America Investment, Inc., an
affiliate of BAAI, and certain other selling or servicing agents. Selected
selling and servicing agents also may receive compensation for opening a
minimum number of accounts.
BAAI also may pay amounts from its own assets to Stephens or to selling or
servicing agents for services they provide.
16
<PAGE>
[GRAPHIC]
THE POWER OF COMPOUNDING
REINVESTING YOUR DISTRIBUTIONS
BUYS YOU MORE SHARES OF A
FUND -- WHICH LETS YOU TAKE ADVANTAGE OF THE POTENTIAL FOR COMPOUND
GROWTH.
PUTTING THE MONEY YOU EARN BACK INTO YOUR INVESTMENT MEANS IT, IN
TURN, MAY EARN EVEN MORE MONEY. OVER TIME, THE POWER OF COMPOUNDING
HAS THE POTENTIAL TO SIGNIFICANTLY INCREASE THE VALUE OF YOUR
INVESTMENT. THERE IS NO ASSURANCE, HOWEVER, THAT YOU'LL EARN MORE
MONEY IF YOU REINVEST YOUR DISTRIBUTIONS.
[GRAPHIC]
DISTRIBUTIONS AND TAXES
ABOUT DISTRIBUTIONS
A mutual fund can make money two ways:
o It can earn income. Examples are interest paid on bonds and dividends paid
on common stocks.
o A fund can also have capital gain if the value of its investments
increases. If a fund sells an investment at a gain, the gain is realized.
If a fund continues to hold the investment, any gain is unrealized.
A mutual fund is not subject to income tax as long as it distributes its net
investment income and realized capital gain to its shareholders. The Fund
intends to pay out a sufficient amount of their income and capital gain to
their shareholders so the Fund won't have to pay any income tax. When a Fund
makes this kind of a payment, it's split equally among all shares, and is
called a distribution.
The Fund distributes any net realized capital gain at least once a year. The
frequency of distributions of net investment income varies by Fund:
<TABLE>
<CAPTION>
Frequency of
Fund income distributions
<S> <C>
Nations MidCap Index Fund quarterly
</TABLE>
A distribution is paid based on the number of shares you hold on the record
date, which is usually the day the distribution is declared (daily dividend
Funds) or the day before the distribution is declared (all other Funds). Shares
are eligible to receive distributions from the settlement date (daily dividend
Funds) or the trade date (all other Funds) of the purchase up to and including
the day before the shares are sold.
Different share classes of a Fund usually pay different distribution amounts,
because each class has different expenses. Each time a distribution is made,
the net asset value per share of the share class is reduced by the amount of
the distribution.
We'll automatically reinvest distributions in additional shares of the same
Fund unless you tell us you want to receive your distributions in cash. You can
do this by writing to us at the address on the back cover or by calling us at
1.800.321.7854.
We generally pay cash distributions within five business days after the end of
the month, quarter or year in which the distribution was made. If you sell all
of your shares, we'll pay any distribution that applies to those shares in cash
within five business days after the sale was made.
17
<PAGE>
[GRAPHIC]
THIS INFORMATION IS A SUMMARY OF HOW FEDERAL INCOME TAXES MAY
AFFECT YOUR INVESTMENT IN THE FUND. IT IS NOT INTENDED AS A
SUBSTITUTE FOR CAREFUL TAX PLANNING. YOU SHOULD CONSULT WITH YOUR
OWN TAX ADVISOR ABOUT YOUR SITUATION, INCLUDING ANY FOREIGN, STATE
AND LOCAL TAXES THAT MAY APPLY.
[GRAPHIC]
FOR MORE INFORMATION ABOUT TAXES, PLEASE SEE THE SAI.
If you buy shares of a Fund shortly before it makes a distribution, you will,
in effect, receive part of your purchase back in the distribution, which is
subject to tax. Similarly, if you buy shares of a Fund that holds securities
with unrealized capital gain, you will, in effect, receive part of your
purchase back if and when the Fund sells those securities and distributes the
gain. This distribution is also subject to tax. Some Funds have built up, or
have the potential to build up, high levels of unrealized capital gain.
HOW TAXES AFFECT YOUR INVESTMENT
Distributions that come from net investment income and any excess of net
short-term capital gain over net long-term capital loss generally are taxable
to you as ordinary income.
Distributions that come from net capital gain (generally the excess of net
long-term capital gain over net short-term capital loss) generally are taxable
to you as net capital gain.
In general, all distributions are taxable to you when paid, whether they are
paid in cash or automatically reinvested in additional shares of the Fund.
However, any distributions declared in October, November or December of one
year and distributed in January of the following year will be taxable as if
they had been paid to you on December 31 of the first year.
We'll send you a notice every year that tells you how much you've received in
distributions during the year and their federal tax status. Foreign, state and
local taxes may also apply to these distributions.
WITHHOLDING TAX
We're required by federal law to withhold tax of 31% on any distributions and
redemption proceeds paid to you (including amounts deemed to be paid for "in
kind" redemptions and exchanges) if:
o you haven't given us a correct Taxpayer Identification Number (TIN) and
haven't certified that the TIN is correct and withholding doesn't apply
o the Internal Revenue Service (IRS) has notified us that the TIN listed on
your account is incorrect according to its records
o the IRS informs us that you're otherwise subject to backup withholding
The IRS may also impose penalties against you if you don't give us a correct
TIN.
Amounts we withhold are applied to your federal income tax liability. You may
receive a refund from the IRS if the withholding tax results in an overpayment
of taxes.
We're also normally required by federal law to withhold tax on distributions
paid to foreign shareholders.
18
<PAGE>
TAXATION OF REDEMPTIONS AND EXCHANGES
Your redemptions (including redemptions "in kind") and exchanges of Fund shares
will usually result in a taxable capital gain or loss, depending on the amount
you receive for your shares (or are deemed to receive in the case of exchanges)
and the amount you paid (or are deemed to have paid) for them.
19
<PAGE>
[GRAPHIC]
TERMS USED IN THIS PROSPECTUS
ASSET-BACKED SECURITY - a debt security that gives you an interest in a pool of
assets that is collateralized or "backed" by one or more kinds of assets,
including real property, receivables or mortgages, generally issued by banks,
credit card companies or other lenders. Some securities may be issued or
guaranteed by the U.S. government or its agencies, authorities or
instrumentalities. Asset-backed securities typically make periodic payments,
which may be interest or a combination of interest and a portion of the
principal of the underlying assets.
CAPITAL GAIN OR LOSS - the difference between the purchase price of a security
and its selling price. You realize a capital gain when you sell a security for
more than you paid for it. You realize a capital loss when you sell a security
for less than you paid for it.
CASH EQUIVALENTS - short-term, interest-bearing instruments, including
obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities, bank obligations, asset-backed securities, foreign
government securities and commercial paper issued by U.S. and foreign issuers
which, at the time of investment, is rated at least Prime-2 by Moody's Investor
Services, Inc. (Moody's), A-2 by S&P, or F-1 by Fitch IBCA (Fitch).
COMMON STOCK - a security that represents part equity ownership in a company.
Common stock typically allows you to vote at shareholder meetings and to share
in the company's profits by receiving dividends.
CONVERTIBLE DEBT - a debt security that can be exchanged for common stock (or
another type of security) on a specified basis and date.
CONVERTIBLE SECURITY - a security that can be exchanged for common stock (or
another type of security) at a specified rate. Convertible securities include
convertible debt, rights and warrants.
CROSSING NETWORKS - an electronic system where anonymous parties can match buy
and sell transactions. These transactions don't affect the market, and
transaction costs are extremely low.
DEBT SECURITY - when you invest in a debt security, you are typically lending
your money to a governmental body or company (the issuer) to help fund their
operations or major projects. The issuer pays interest at a specified rate on a
specified date or dates, and repays the principal when the security matures.
Short-term debt securities include money market instruments such as treasury
bills. Long-term debt securities include fixed income securities such as
government and corporate bonds, and mortgage-backed and asset-backed
securities.
DEPOSITARY RECEIPTS - evidence of the deposit of a security with a custodian
bank. American Depositary Receipts (ADRs), for example, are certificates traded
in U.S. markets representing an interest of a foreign company. They were
created to make it possible for foreign issuers to meet U.S. security
registration requirements. Other examples include ADSs, GDRs and EDRs.
20
<PAGE>
DIVIDEND YIELD - rate of return of dividends paid on a common or preferred
stock. It equals the amount of the annual dividend on a stock expressed as a
percentage of the stock's current market value.
EQUITY SECURITY - an investment that gives you an equity ownership right in a
company. Equity securities (or "equities") include common and preferred stock,
rights and warrants.
FIRST BOSTON CONVERTIBLE INDEX - a widely-used unmanaged index that measures
the performance of convertible securities. The index is not available for
investment.
FIXED INCOME SECURITY - an intermediate to long-term debt security that matures
in more than one year.
FOREIGN SECURITY - a debt or equity security issued by a foreign company or
government.
FUNDAMENTAL ANALYSIS - a method of securities analysis that tries to evaluate
the intrinsic, or "true," value of a particular stock. It includes a study of
the overall economy, industry conditions and the financial condition and
management of a company.
FUTURES CONTRACT - a contract to buy or sell an asset or an index of securities
at a specified price on a specified future date. The price is set through a
futures exchange.
IFC INVESTABLES INDEX - an unmanaged index that tracks more than 1,400 stocks
in 25 emerging markets in Asia, Latin America, Eastern Europe, Africa and
Middle East. The index is weighted by market capitalization.
INVESTMENT GRADE - a debt security that has been given a medium to high credit
rating (Baa or higher by Moody's, BBB or higher by S&P or a comparable rating
by other nationally recognized statistical rating organization NRSROs) based on
the issuer's ability to pay interest and repay principal on time. The portfolio
management team may consider an unrated debt security to be investment grade if
the team believes it is of comparable quality. Please see the SAI for more
information about credit ratings.
LIQUIDITY - a measurement of how easily a security can be bought or sold at a
price that is close to its market value.
MONEY MARKET INSTRUMENT - a short-term debt security that matures in 13 months
or less. Money market instruments include U.S. Treasury obligations, U.S.
government obligations, certificates of deposit, bankers' acceptances,
commercial paper, repurchase agreements and certain municipal securities.
MORTGAGE-BACKED SECURITY OR MORTGAGE-RELATED SECURITY - a debt security that
gives you an interest in, and is backed by, a pool of residential mortgages
issued by the U.S. government or by financial institutions. The underlying
mortgages may be guaranteed by the U.S. government or one of its agencies,
authorities or instrumentalities.
21
<PAGE>
Mortgage-backed securities typically make monthly payments, which are a
combination of interest and a portion of the principal of the underlying
mortgages.
MSCI EAFE INDEX - Morgan Stanley Capital International Europe, Australasia and
Far East Index, an index of over 1,100 stocks from 21 developed markets in
Europe, Australia, New Zealand and Asia. The index reflects the relative size
of each market.
MUNICIPAL SECURITY (OBLIGATION) - a debt security issued by state or local
governments or governmental authorities to pay for public projects and
services. "General obligations" are typically backed by the issuer's full
taxing and revenue-raising powers. "Revenue securities" depend on the income
earned by a specific project or authority, like road or bridge tolls, user fees
for water or revenues from a utility. Interest income from these securities is
exempt from federal income taxes and is generally exempt from state taxes if
you live in the state that issued the security. If you live in the municipality
that issued the security, interest income may also be exempt from local taxes.
NON-DIVERSIFIED - a fund that holds securities of fewer issuers or kinds of
issuers than other kinds of funds. Non-diversified funds tend to have greater
price swings than more diversified funds because events affecting one or more
of its securities may have a disproportionately large effect on the fund.
OVER-THE-COUNTER MARKET - a market where dealers trade securities through a
telephone or computer network rather than through a public stock exchange.
PREFERRED STOCK - a type of equity security that gives you a limited ownership
right in a company, with certain preferences or priority over common stock.
Preferred stock generally pays a fixed annual dividend. If the company goes
bankrupt, preferred shareholders generally receive their share of the company's
remaining assets before common shareholders and after bondholders and other
creditors.
PRICE-TO-EARNINGS RATIO (P/E RATIO) - the current price of a share divided by
its actual or estimated earnings per share. The P/E ratio is one measure of the
value of a company.
QUANTITATIVE ANALYSIS - an analysis of financial information about a company or
security to identify securities that have the potential for growth or are
otherwise suitable for a fund to buy.
REAL ESTATE INVESTMENT TRUST (REIT) - a portfolio of real estate investments
which may include office buildings, apartment complexes, hotels and shopping
malls, and real-estate-related loans or interests.
RIGHT - a temporary privilege allowing investors who already own a common stock
to buy additional shares directly from the company at a specified price or
formula.
22
<PAGE>
RUSSELL 2000 - an unmanaged index of 2,000 of the smallest stocks representing
approximately 11% of the U.S. equity market. The index is weighted by market
capitalization, and is not available for investment.
S&P 400(1) - Standard & Poor's 400 Composite Stock Price Index, an unmanaged
index of 400 widely held common stocks. It is not available for investment.
S&P MIDCAP 400(1) - an unmanaged index of 400 domestic stocks chosen for market
size, liquidity and industry representation. The index is weighted by market
value, and is not available for investment.
S&P SMALLCAP 600(1) - Standard & Poor's SmallCap 600 Index, an unmanaged index
of 600 common stocks, weighted by market capitalization. It is not available
for investment.
S&P/BARRA SMALLCAP VALUE INDEX(1) - an unmanaged index of a group of stocks
from the S&P SmallCap 600 that have low price-to-book ratios relative to the
S&P SmallCap 600 as a whole. It is weighted by market capitalization, and is
not available for investment.
S&P/BARRA VALUE INDEX(1) - an unmanaged index of a group of stocks from the S&P
500 that have low price-to-book ratios relative to the S&P 500 as a whole. It
is weighted by market capitalization, and is not available for investment.
SENIOR SECURITY - a debt security that allows holders to receive their share of
a company's remaining assets in a bankruptcy before other bondholders,
creditors, and common and preferred shareholders.
SETTLEMENT DATE - the date on which an order is settled either by payment or
delivery of securities.
TRADE DATE - the effective date of a purchase, sale or exchange transaction, or
other instructions sent to us. The trade date is determined by the day and time
we receive the order or instructions in a form that's acceptable to us.
U.S. GOVERNMENT OBLIGATIONS - a wide range of debt securities issued or
guaranteed by the U.S. government or its agencies, authorities or
instrumentalities.
WARRANT - a certificate that gives you the right to buy common shares at a
specified price within a specified period of time.
WILSHIRE 5000 EQUITY INDEX - an index that measures the performance of the
equity securities of all companies headquartered in the U.S. that have readily
available price data -- over 7,000 companies. The index is weighted by market
capitalization and is not available for investment.
(1)S&P and BARRA have not reviewed any stock included in the S&P 400, S&P 600,
BARRA Index or BARRA SmallCap Index for its investment merit. S&P and BARRA
determine and calculate their indexes independently of the Funds and are not
a sponsor or affiliate of the Funds. S&P and BARRA give no information and
make no statements about the suitability of investing in the Funds or the
ability of their indexes to track stock market performance. S&P and BARRA
make no guarantees about the indexes, any data included in them and the
suitability of the indexes or their data for any purpose. "Standard and
Poor's," "S&P 400" and "S&P 600" are trademarks of the McGraw-Hill
Companies, Inc.
23
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
[GRAPHIC]
WHERE TO FIND MORE INFORMATION
You'll find more information about the Index Funds in the following documents:
[GRAPHIC]
ANNUAL AND SEMI-ANNUAL REPORTS
The annual and semi-annual reports contain information about Fund
investments and performance, the financial statements and the auditor's
reports. The annual report also includes a discussion about the market
conditions and investment strategies that had a significant effect on
each Fund's performance during the period covered.
[GRAPHIC]
STATEMENT OF ADDITIONAL INFORMATION
The SAI contains additional information about the Funds and their
policies. The SAI is legally part of this prospectus (it's incorporated
by reference). A copy has been filed with the SEC.
You can obtain a free copy of these documents, request other information
about the Funds and make shareholder inquiries by contacting Nations
Funds:
By telephone: 1.800.321.7854
By mail:
NATIONS FUNDS
C/O STEPHENS INC.
ONE BANK OF AMERICA PLAZA
33RD FLOOR
CHARLOTTE, NC 28255
On the Internet: WWW.NATIONSBANK.COM/NATIONSFUNDS
If you prefer, you can write the SEC's Public Reference Room and ask
them to mail you copies of these documents. They'll charge you a fee for
this service. You can also download them from the SEC's website or visit
the Public Reference Section and copy the documents while you're there.
Please call the SEC for more information.
PUBLIC REFERENCE SECTION OF THE SEC
WASHINGTON, DC 20549-6009
1.800.SEC.0330
WWW.SEC.GOV
SEC file number:
Nations Funds Trust,
[GRAPHIC]
NATIONS FUNDS
<PAGE>
FIXED INCOME FUND AND STATE MUNICIPAL BOND FUNDS
PROSPECTUS -- INVESTOR A, B AND C SHARES
JANUARY , 2000
Fixed Income Fund
NATIONS HIGH YIELD FUND
State Municipal Bond Fund
NATIONS KANSAS INTERMEDIATE MUNICIPAL BOND FUND
THE SECURITIES AND EXCHANGE COMMISSION (SEC) HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NOT FDIC
INSURED
- -------------------
May Lose Value
- -------------------
No Bank Guarantee
- -------------------
NATIONS FUNDS
<PAGE>
AN OVERVIEW OF THE FUNDS
- --------------------------------------------------------------------------------
[GRAPHIC]
TERMS USED IN THIS PROSPECTUS
IN THIS PROSPECTUS, WE, US AND OUR REFER TO THE NATIONS FUNDS
FAMILY (NATIONS FUNDS). SOME OTHER IMPORTANT TERMS WE'VE USED MAY
BE NEW TO YOU. THESE ARE PRINTED IN ITALICS WHERE THEY FIRST APPEAR
IN A SECTION AND ARE DESCRIBED IN TERMS USED IN THIS PROSPECTUS.
[GRAPHIC]
YOU'LL FIND TERMS USED IN
THIS PROSPECTUS ON PAGE 72.
YOUR INVESTMENT IN THESE FUNDS IS NOT A BANK DEPOSIT AND IS NOT
INSURED OR GUARANTEED BY BANK OF AMERICA, N. A. (BANK OF AMERICA),
THE FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) OR ANY OTHER
GOVERNMENT AGENCY. YOUR INVESTMENT MAY LOSE MONEY.
AFFILIATES OF BANK OF AMERICA ARE PAID FOR THE SERVICES THEY
PROVIDE TO THE FUNDS.
This booklet, which is called a prospectus, tells you about one of the Nations
Funds Fixed Income Funds and one of the Nations Funds State Municipal Bond
Funds. Please read it carefully, because it contains information that's
designed to help you make informed investment decisions.
ABOUT THE FUNDS
The Fixed Income Fund focuses on the potential to earn income by investing
primarily in FIXED INCOME SECURITIES.
Fixed income securities have the potential to increase in value because when
interest rates fall, the value of these securities tends to rise. When interest
rates rise, however, the value of these securities tends to fall. Other things
can also affect the value of fixed income securities. There's always a risk
that you'll lose money or you may not earn as much as you expect.
State Municipal Bond Funds invest most of their assets in securities issued by
one state and are generally intended for residents of that state.
The Fund focuses on the potential to earn income that is free from federal and
state income tax by investing primarily in MUNICIPAL SECURITIES.
Municipal securities also have the potential to increase in value because when
interest rates fall, the value of these securities tends to rise. When interest
rates rise, however, the value of these securities tends to fall. Other things
can also affect the value of municipal securities. There's always a risk that
you'll lose money, or you may not earn as much as you expect.
Because they invest primarily in securities issued by one state, the Fund is
considered to be NON-DIVERSIFIED. This means the value of a Fund and the amount
of interest it pays could also be affected by the financial conditions of the
state, its public authorities and local governments.
ARE THESE FUNDS RIGHT FOR YOU?
Not every Fund is right for every investor. When you're choosing a Fund to
invest in, you should consider things like your investment goals, how much risk
you can accept and how long you're planning to hold your investment.
The Fixed Income Fund may be suitable for you if:
o you're looking for income
o you have longer-term investment goals
2
<PAGE>
It may not be suitable for you if:
o you're not prepared to accept or are unable to bear the risks associated
with fixed income securities
The State Municipal Fund may be suitable for you if:
o you're looking for income
o you want to reduce taxes on your investment
o you have longer-term investment goals
It may not be suitable for you if:
o you're not prepared to accept or are unable to bear the risks associated
with FIXED INCOME SECURITIES
You'll find a discussion of each Fund's principal investments, strategies and
risks in the Fund descriptions that start on page 4.
FOR MORE INFORMATION
If you have any questions about the Funds, please call us at 1.800.321.7854 or
contact your investment professional.
You'll find more information about the Funds in the Statement of Additional
Information (SAI). The SAI includes more detailed information about each Fund's
investments, policies, performance and management, among other things. Please
turn to the back cover to find out how you can get a copy.
3
<PAGE>
WHAT'S INSIDE
- --------------------------------------------------------------------------------
[GRAPHIC]
BANC OF AMERICA ADVISORS, INC.
BANC OF AMERICA ADVISORS, INC. (BAAI) IS THE INVESTMENT ADVISER TO
EACH OF THE FUNDS. BAAI IS RESPONSIBLE FOR THE OVERALL MANAGEMENT
AND SUPERVISION OF THE INVESTMENT MANAGEMENT OF EACH FUND. BAAI
AND NATIONS FUNDS HAVE ENGAGED SUB-ADVISERS, WHICH ARE RESPONSIBLE
FOR THE DAY-TO-DAY INVESTMENT DECISIONS FOR EACH OF THE FUNDS.
[GRAPHIC]
YOU'LL FIND MORE ABOUT
BAAI AND THE SUB-ADVISERS
STARTING ON PAGE 34.
<TABLE>
[GRAPHIC]
ABOUT THE FUNDS
<S> <C>
FIXED INCOME FUND
NATIONS HIGH YIELD FUND 5
Sub-adviser:
- ---------------------------------------------------------------------
STATE MUNICIPAL BOND FUND
NATIONS KANSAS INTERMEDIATE MUNICIPAL BOND FUND 8
Sub-adviser: TradeStreet Investment Associates, Inc.
- ---------------------------------------------------------------------
OTHER IMPORTANT INFORMATION 12
- ---------------------------------------------------------------------
HOW THE FUNDS ARE MANAGED 13
[GRAPHIC]
ABOUT YOUR INVESTMENT
INFORMATION FOR INVESTORS
Choosing a share class 15
Buying, selling and exchanging shares 26
How selling and servicing agents are paid 35
Distributions and taxes 37
- --------------------------------------------------------------------
TERMS USED IN THIS PROSPECTUS 40
- --------------------------------------------------------------------
WHERE TO FIND MORE INFORMATION BACK COVER
</TABLE>
4
<PAGE>
ABOUT THE FIXED INCOME FUND
- --------------------------------------------------------------------------------
[GRAPHIC]
ABOUT THE SUB-ADVISER
[INSERT SUB-ADVISER'S NAME] IS THIS FUND'S SUB-ADVISER. [Insert
portfolio management team name] MAKES THE DAY-TO-DAY INVESTMENT
DECISIONS FOR THE FUND.
[GRAPHIC]
YOU'LL FIND MORE ABOUT [NAME OF SUB-ADVISER] AND [name of
portfolio management team] ON PAGE[insert number].
[GRAPHIC]
HIGH YIELD DEBT SECURITIES
THIS FUND INVESTS PRIMARILY IN HIGH YIELD DEBT SECURITIES. HIGH
YIELD DEBT SECURITIES OFFER THE POTENTIAL FOR HIGHER INCOME THAN
OTHER KINDS OF DEBT SECURITIES WITH SIMILAR MATURITIES, BUT THEY
ALSO HAVE HIGHER CREDIT RISK.
NATIONS HIGH YIELD FUND
[GRAPHIC]
INVESTMENT OBJECTIVE
This Fund seeks maximum income by investing in a diversified portfolio
of high-yield debt securities.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests at least 65% of its assets in domestic and
foreign corporate HIGH-YIELD DEBT SECURITIES.
The Fund invests primarily in:
o Domestic corporate debt securities
o U.S. dollar-denominated foreign corporate DEBT SECURITIES
o ZERO-COUPON BONDS
o U.S. GOVERNMENT OBLIGATIONS
o EQUITY SECURITIES (up to 25% of its assets)
The Fund 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.
When selecting individual investments, the portfolio management team:
o Uses a "bottom-up," total return approach with respect to an issuer
o Emphasizes current income while attempting to minimize risk to principal
o Seeks to identify a catalyst for capital appreciation
o Selects securities using fundamental credit analysis
o tries to manage risk by diversifying the Fund's investments across
securities of many different issuers
o is attentive to current developments and trends in both the economy and
financial markets
The portfolio management team may sell a security when its market price rises
above the target price the team has set, when it believes there has been a
deterioration in an issuer's fundamentals or an issue's credit quality, or for
diversification or other reasons.
5
<PAGE>
[GRAPHIC]
THERE ARE TWO KINDS OF FEES -- SALES CHARGES YOU PAY DIRECTLY, AND
ANNUAL FUND OPERATING EXPENSES THAT ARE DEDUCTED FROM A FUND'S
ASSETS.
TOTAL NET EXPENSES ARE ACTUAL EXPENSES PAID BY THE FUND AFTER
WAIVERS AND/OR REIMBURSEMENTS.
[GRAPHIC]
RISKS AND OTHER THINGS TO CONSIDER
Nations High Yield Fund has the following risks:
o INVESTMENT STRATEGY RISK - There is a risk that the value of the
investments that the portfolio management team chooses will not rise
as high as the team expects, or will fall.
o CREDIT RISK - The types of securities in which the Fund typically
invests are generally considered speculative because they present a
greater risk of loss, including default, than higher quality debt
securities. These securities typically pay a premium -- a high
interest rate or yield -- because of the increased risk of loss.
These securities also can be subject to greater price volatility.
o INTEREST RATE RISK - The prices of 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 DERIVATIVES RISK - This Fund may invest in derivatives. There is a
risk that these investments could result in losses, reduce returns,
increase transaction costs or increase the Fund's volatility.
[GRAPHIC]
WHAT IT COSTS TO INVEST IN THE FUND
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<TABLE>
<CAPTION>
SHAREHOLDER FEES Investor A Investor B Investor C
(Fees paid directly from your investment) Shares Shares Shares
<S> <C> <C> <C>
Maximum sales charge (load) imposed on purchases,
as a % of offering price 4.75% none none
Maximum deferred sales charge
as a % of net asset value none(1) 5.00%(2) 1.00%(3)
Redemption fee, as a %
of the amount sold none none none
ANNUAL FUND OPERATING EXPENSES
(Expenses that are deducted from the Fund's assets)
Management fees 0.65% 0.65% 0.65%
Distribution (12b-1) and shareholder servicing fees 0.23% 1.00% 1.00%
Other expenses 0.38% 0.38% 0.38%
------ -------- --------
Total annual Fund operating expenses 1.28% 2.03% 2.03%
Fee waivers and/or reimbursements 0.00% 0.00% 0.00%
------ -------- --------
Total net expenses(4) 1.28% 2.03% 2.03%
====== ======== ========
</TABLE>
(1)A 1.00% maximum deferred sales charge applies to investors who buy $1
million or more of Investor A Shares and sell them within eighteen
months of buying them.
(2)This charge decreases over time. Please see page 42 for details.
(3)This charge applies to investors who buy Investor C Shares and sell
them within one year of buying them. Please see page 44 for details.
6
<PAGE>
[GRAPHIC]
THIS IS AN EXAMPLE ONLY. YOUR ACTUAL COSTS COULD BE HIGHER OR
LOWER, DEPENDING ON THE AMOUNT YOU INVEST, AND ON THE FUND'S
ACTUAL EXPENSES AND PERFORMANCE.
(4)Nations High Yield Fund's investment adviser and/or some of its other
service providers have agreed to limit total annual operating
expenses to 0.97% for Investor A Shares, 1.72% for Investor B Shares,
and 1.72% for Investor C Shares until May 2000. The figures shown
here are after waivers and/or reimbursements. There is no guarantee
that these waivers and/or reimbursements will continue after this
date.
EXAMPLE
This example is intended to help you compare the cost of investing in
this Fund with the cost of investing in other mutual funds.
This example assumes:
o you invest $10,000 in Investor A, Investor B or Investor C Shares
of the Fund for the time periods indicated and then sell all of
your shares at the end of those periods
o you reinvest all dividends and distributions in the Fund
o your investment has a 5% return each year
o the Fund's operating expenses remain the same as shown in the
table above
o the waivers and/or reimbursements shown above expire May 2000 and
are not reflected in the 3, 5 and 10 year examples
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<S> <C> <C> <C> <C>
1 year 3 years 5 years 10 years
Investor A Shares $700 $960 $1,240 $2,030
Investor B Shares $706 $937 $1,293 $2,166
Investor C Shares $306 $637 $1,093 $2,358
</TABLE>
If you bought Investor B or Investor C Shares, you would pay the
following expenses if you didn't sell your shares:
<TABLE>
<S> <C> <C> <C> <C>
1 year 3 years 5 years 10 years
Investor B Shares $206 $637 $1,093 $2,166
Investor C Shares $206 $637 $1,093 $2,358
</TABLE>
7
<PAGE>
ABOUT THE STATE MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
[GRAPHIC]
ABOUT THE SUB-ADVISER
TRADESTREET IS THIS FUND'S SUB-ADVISER. TRADESTREET'S MUNICIPAL
FIXED INCOME MANAGEMENT TEAM MAKES THE DAY-TO-DAY INVESTMENT
DECISIONS FOR THE FUND.
[GRAPHIC]
YOU'LL FIND MORE ABOUT TRADESTREET ON PAGE 93.
[GRAPHIC]
THIS FUND AT A GLANCE
o WHO SHOULD CONSIDER INVESTING: RESIDENTS OF KANSAS
o DURATION: 3 TO 8 YEARS
o INCOME POTENTIAL: MODERATE
o RISK POTENTIAL: MODERATE
[GRAPHIC]
DURATION
DURATION IS A MEASURE USED TO ESTIMATE HOW MUCH A FUND'S PORTFOLIO
WILL FLUCTUATE IN RESPONSE TO A CHANGE IN INTEREST RATES.
NATIONS KANSAS INTERMEDIATE MUNICIPAL BOND FUND
[GRAPHIC]
INVESTMENT OBJECTIVE
This Fund seeks high current income exempt from federal and Kansas state
income taxes consistent with moderate fluctuation of principal.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
This Fund normally invests at least 80% of its assets in INVESTMENT
GRADE intermediate-term MUNICIPAL SECURITIES that pay interest that is
free from federal income tax and Kansas state income tax.
The Fund may invest up to 20% of its assets in DEBT SECURITIES that are
taxable, including securities that are subject to the federal alternative
minimum tax.
The Fund 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.
Normally, the Fund's AVERAGE DOLLAR-WEIGHTED MATURITY will be between three and
10 years, and its DURATION will be between three and 8 years.
When selecting individual investments, the portfolio management team:
o looks at a security's potential to generate both income and price
appreciation
o allocates assets among revenue bonds, general obligation bonds, insured
bonds and PRE-REFUNDED BONDS (bonds that are repaid before their
maturity date), based on how they have performed in the past, and on
how they are expected to perform under current market conditions. The
team may change the allocations when market conditions change
o selects securities using credit and structure analysis. Credit analysis
evaluates the creditworthiness of individual issuers. The team may
invest in securities with lower credit ratings if it believes that the
potential for a higher yield is substantial compared with the risk
involved, and that the credit quality is stable or improving. Structure
analysis evaluates the characteristics of a security, including its
call features, coupons, and expected timing of cash flows
The team also considers other factors. It reviews public policy issues
that may affect the municipal bond market. Securities with different
coupon rates may also represent good investment opportunities based on
supply and demand conditions for bonds
o tries to maintain a duration that is similar to the duration of the
Fund's benchmark. This can help manage interest rate risk
The team may sell a security when it believes the security is overvalued, there
is a deterioration in the security's credit rating or in the issuer's financial
situation, when other investments are more attractive, or for other reasons.
8
<PAGE>
[GRAPHIC]
YOU'LL FIND MORE ABOUT OTHER RISKS OF INVESTING IN THIS FUND
STARTING ON PAGE 91 AND IN THE SAI.
[GRAPHIC]
RISKS AND OTHER THINGS TO CONSIDER
Nations Kansas Intermediate Municipal Bond Fund has the following
risks:
o INVESTMENT STRATEGY RISK - This Fund is considered to be
NON-DIVERSIFIED because it invests most of its assets in securities
that pay interest that is free from income tax in one state. The
value of the Fund and the amount of interest it pays could also be
affected by the financial conditions of the state, its public
authorities and local governments. Although the Fund tries to
maintain a share price of $1.00, an investment in the Fund could lose
money. AN INVESTMENT IN THIS FUND IS NOT A BANK DEPOSIT AND IS NOT
INSURED OR GUARANTEED BY BANK OF AMERICA, THE FDIC OR ANY OTHER
GOVERNMENT AGENCY.
o INTEREST RATE RISK - The prices of 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 Fund 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 CHANGING DISTRIBUTION LEVELS - The level of monthly income
distributions paid by the Fund depends on the amount of income paid
by the securities the Fund holds. It is not guaranteed and will
change. Changes in the value of the securities, however, generally
should not affect the amount of income they pay.
o HOLDING CASH - The Fund may hold cash while it's waiting to make an
investment, as a temporary defensive strategy, or if the portfolio
management team believes that attractive tax-exempt investments are
not available. Any uninvested cash the Fund holds does not earn
income.
o TAX CONSIDERATIONS - Most of the distributions paid by the Fund come
from interest on municipal securities, and are generally free from
federal income tax and Kansas state income tax, but may be subject to
the federal alternative minimum tax, and other state and local taxes.
Any portion of a distribution that comes from income paid by other
kinds of securities or from realized capital gains is generally
subject to federal, state and local taxes.
9
<PAGE>
[GRAPHIC]
THERE ARE TWO KINDS OF FEES --
SALES CHARGES YOU PAY DIRECTLY, AND ANNUAL FUND OPERATING EXPENSES
THAT ARE DEDUCTED FROM A FUND'S ASSETS.
TOTAL NET EXPENSES ARE ACTUAL EXPENSES PAID BY THE FUND AFTER
WAIVERS AND/OR REIMBURSEMENTS.
[GRAPHIC]
WHAT IT COSTS TO INVEST IN THE FUND
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<TABLE>
<CAPTION>
SHAREHOLDER FEES Investor A Investor B Investor C
(Fees paid directly from your investment) Shares Shares Shares
<S> <C> <C> <C>
Maximum sales charge (load) imposed
on purchases, as a % of offering price 3.25% none none
Maximum deferred sales charge (load)
as a % of net asset value none(1) 3.00%(2) 1.00%(3)
Redemption fee, as a % of the amount sold none none none
ANNUAL FUND OPERATING EXPENSES(5)
(Expenses that are deducted from the Fund's assets)
Management fees 0.40% 0.40% 0.40%
Distribution (12b-1) and shareholder
servicing fees 0.25% 1.00% 1.00%
Other expenses 0.38% 0.38% 0.38%
------ -------- --------
Total annual Fund operating expenses 1.03% 1.78% 1.78%
Fee waivers and/or reimbursements (0.28)% (0.28)% (0.28)%
------ -------- --------
Total net expenses(4) 0.75% 1.50% 1.50%
====== ======== ========
</TABLE>
(1)A 1.00% maximum deferred sales charge applies to investors who buy $1
million or more of Investor A Shares and sell them within eighteen
months of buying them. Please see page for details.
(2)This charge decreases over time. Please see page for details.
(3)This charge applies to investors who buy Investor C Shares and sell
them within one year of buying them. Please see page for details.
(4)The Fund's investment adviser and/or some of its other service
providers have agreed to waive fees and/or reimburse expenses until
July 31, 2000. The figures shown here are after waivers and/or
reimbursements. There is no guarantee that these waivers and/or
reimbursements will continue after this date.
10
<PAGE>
[GRAPHIC]
THIS IS AN EXAMPLE ONLY. YOUR ACTUAL COSTS COULD BE HIGHER OR
LOWER, DEPENDING ON THE AMOUNT YOU INVEST, AND ON THE FUND'S
ACTUAL EXPENSES AND PERFORMANCE.
EXAMPLE
This example is intended to help you compare the cost of investing in
this Fund with the cost of investing in other mutual funds.
This example assumes:
o you invest $10,000 in Investor A, Investor B or Investor C Shares of
the Fund for the time periods indicated and then sell all of your
shares at the end of those periods
o you reinvest all dividends and distributions in the Fund
o your investment has a 5% return each year
o the Fund's operating expenses remain the same as shown in the table
above
o the waivers and/or reimbursements shown above expire July 31, 2000
and are not reflected in the 3, 5 and 10 year examples
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Investor A Shares $399 $611 $840 $1,500
Investor B Shares $453 $729 $930 $1,853
Investor C Shares $253 $529 $930 $2,052
</TABLE>
If you bought Investor B or Investor C Shares, you would pay the
following expenses if you didn't sell your shares:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Investor B Shares $153 $529 $930 $1,853
Investor C Shares $153 $529 $930 $2,052
</TABLE>
11
<PAGE>
[GRAPHIC]
OTHER IMPORTANT INFORMATION
You'll find specific information about each Fund's principal investments,
strategies and risks in the descriptions starting on page 4. The following are
some other risks and information you should consider before you invest:
o CHANGING INVESTMENT OBJECTIVES AND POLICIES - The investment
objective and certain investment policies of any Fund can be changed
without shareholder approval. Other investment policies may be
changed only with shareholder approval.
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, 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.
A Fund may become a feeder fund if the Board of Trustees decides this
would be in the best interests of shareholders.
o HOLDING OTHER KINDS OF INVESTMENTS - The Funds may hold investments
that aren't part of their principal investment strategies. Please
refer to the SAI for more information. The portfolio managers or
management team can also choose not to invest in specific securities
described in this prospectus and in the SAI.
o INVESTING DEFENSIVELY - A Fund may temporarily hold investments that
are not part of its investment objective or its principal investment
strategies to try to protect it during a market or economic downturn
or because of political or other conditions. A Fund may not achieve
its investment objective while it is investing defensively.
o PORTFOLIO TURNOVER - A Fund that replaces -- or turns over -- more
than 100% of its investments in a year is considered to trade
frequently. Frequent trading can result in larger distributions of
short-term CAPITAL GAINS to shareholders. These gains are taxable at
higher rates than long-term capital gains. Frequent trading can also
mean higher brokerage and other transaction costs, which could reduce
the Fund's returns. The Funds generally buy securities for capital
appreciation, investment income, or both, and don't engage in
short-term trading. You'll find the portfolio turnover rate for each
Fund in FINANCIAL HIGHLIGHTS.
12
<PAGE>
[GRAPHIC]
BANC OF AMERICA ADVISORS, INC.
ONE BANK OF AMERICA PLAZA
CHARLOTTE, NORTH CAROLINA 28255
[GRAPHIC]
HOW THE FUNDS ARE MANAGED
INVESTMENT ADVISER
BAAI is the investment adviser to over 60 mutual fund portfolios in the Nations
Funds family, including the Fixed Income and State Municipal Bond Fund
described in this prospectus.
BAAI is a registered investment adviser. It's a wholly-owned subsidiary of Bank
of America, which is owned by Bank of America Corporation. Nations Funds pays
BAAI an annual fee for its investment advisory services. The fee is calculated
daily based on the average net assets of each Fund and is paid monthly. BAAI
uses part of this money to pay investment sub-advisers for the services they
provide to each Fund.
BAAI has agreed to waive fees and/or reimburse expenses for certain Funds until
July 31, 2000. You'll find a discussion of any waiver and/or reimbursement in
the Fund descriptions. There is no assurance that BAAI will continue to waive
and/or reimburse any fees and/or expenses after this date.
The following chart shows the maximum advisory fees BAAI can receive, along
with the actual advisory fees it received during the Funds' last fiscal year,
after waivers and/or reimbursements:
ANNUAL INVESTMENT ADVISORY FEE, AS A % OF AVERAGE DAILY NET ASSETS
------------------------------------------------------------------
<TABLE>
<CAPTION>
Maximum
advisory
fee(1)
<S> <C>
Nations High Yield Fund 0.65%
Nations Kansas Intermediate Municipal Bond Fund 0.40%
</TABLE>
(1)These fees are the current contract levels, which in most cases have been
reduced from the contract levels that were in effect during the last fiscal
year.
13
<PAGE>
[GRAPHIC]
TRADESTREET INVESTMENT
ASSOCIATES, INC.
ONE BANK OF AMERICA PLAZA
CHARLOTTE, NORTH CAROLINA 28255
[GRAPHIC]
STEPHENS INC.
111 CENTER STREET
LITTLE ROCK, ARKANSAS 72201
[GRAPHIC]
FIRST DATA INVESTOR
SERVICES GROUP, INC.
101 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
INVESTMENT SUB-ADVISERS
Nations Funds and BAAI have engaged investment sub-advisers to provide
day-to-day portfolio management for the Funds. These sub-advisers function
under the supervision of BAAI and the Boards of Directors/Trustees of Nations
Funds.
TRADESTREET INVESTMENT ASSOCIATES, INC.
TradeStreet is a registered investment adviser and a wholly-owned subsidiary of
Bank of America. Its management expertise covers all major domestic asset
classes, including EQUITY and FIXED INCOME SECURITIES, and MONEY MARKET
INSTRUMENTS.
Currently managing more than $90 billion, TradeStreet has over 200
institutional clients and is sub-adviser to more than 50 mutual funds in the
Nations Funds family. TradeStreet takes a team approach to investment
management. Each team has access to the latest technology and analytical
resources.
TradeStreet is the investment sub-adviser to the Funds shown in the table
below. The table also tells you which internal TradeStreet asset management
team is responsible for making the day-to-day investment decisions for each
Fund.
<TABLE>
<CAPTION>
Fund TradeStreet Team
<S> <C>
Nations Kansas Intermediate Municipal Bond Fund Municipal Fixed Income
Management Team
</TABLE>
OTHER SERVICE PROVIDERS
The Funds are distributed and co-administered by Stephens Inc., a registered
broker/dealer. Stephens may pay commissions, distribution (12b-1) and
shareholder servicing fees, and/or other compensation to companies for selling
shares and providing services to investors.
BAAI is also co-administrator of the Funds, and assists in overseeing the
administrative operations of the Funds. The Funds pay BAAI and Stephens a
combined fee of 0.22% for their services, plus certain out-of-pocket expenses.
The fee is calculated as an annual percentage of the average daily net assets
of the Funds, and is paid monthly.
First Data Investor Services Group, Inc. (First Data) is the transfer agent for
the Funds shares. Its responsibilities include processing purchases, sales and
exchanges, calculating and paying distributions, keeping shareholder records,
preparing account statements and providing customer service.
14
<PAGE>
ABOUT YOUR INVESTMENT
- --------------------------------------------------------------------------------
[GRAPHIC]
WE'VE USED THE TERM, INVESTMENT PROFESSIONAL, TO REFER TO THE
PERSON WHO HAS ASSISTED YOU WITH BUYING NATIONS FUNDS. SELLING
AGENT OR SERVICING AGENT (SOMETIMES REFERRED TO AS A SELLING AGENT)
MEANS THE COMPANY THAT EMPLOYS YOUR INVESTMENT PROFESSIONAL.
SELLING AND SERVICING AGENTS INCLUDE BANKS, BROKERAGE FIRMS, MUTUAL
FUND DEALERS AND OTHER FINANCIAL INSTITUTIONS, INCLUDING AFFILIATES
OF BANK OF AMERICA.
[GRAPHIC]
FOR MORE INFORMATION ABOUT HOW TO CHOOSE A SHARE CLASS, CONTACT
YOUR INVESTMENT PROFESSIONAL OR CALL US AT 1.800.321.7854.
[GRAPHIC]
BEFORE YOU INVEST, PLEASE NOTE THAT OVER TIME, DISTRIBUTION
(12B-1) AND SHAREHOLDER SERVICING FEES WILL INCREASE THE COST OF
YOUR INVESTMENT, AND MAY COST YOU MORE THAN ANY SALES CHARGES YOU
MAY PAY. FOR MORE INFORMATION, SEE HOW SELLING AND SERVICING
AGENTS ARE PAID.
[GRAPHIC]
Choosing a share class
Before you can invest in the Funds, you'll need to choose a share class. There
are three classes of shares for each Fund offered by this prospectus except
Nations Short-Term Income Fund, which doesn't offer Investor B Shares.
Each class has its own sales charges and fees. The table below compares the
charges and fees of the share classes.
<TABLE>
<CAPTION>
Nations High Yield
Fund, Nations Kansas
Intermediate Municipal
Investor A Shares Bond Fund
<S> <C>
Maximum amount you can buy no limit
Maximum front-end sales charge 3.25%
Maximum deferred sales charge(1) none
Redemption fee(2) none
Maximum annual distribution and shareholder servicing fees 0.25%
distribution (12b-1)/
service fee
Conversion feature none
</TABLE>
(1)A 1.00% maximum deferred sales charge applies to investors who buy $1
million or more of Investor A Shares and sell them within eighteen months
of buying them. Different charges may apply to purchases made prior to
August 1, 1999. Please see page 41 for details.
(2)A 1.00% redemption fee applies to investors who bought $1 million or more
of Investor A Shares between July 31, 1997 and November 15, 1998 and sell
them within 18 months of buying them. The fee is paid to the Fund. Please
see page 41 for details.
15
<PAGE>
<TABLE>
<CAPTION>
Nations High Yield
Fund, Nations Kansas
Intermediate Municipal
Investor B Shares Bond Fund
<S> <C>
Maximum amount you can buy $250,000
Maximum front-end sales charge none
Maximum deferred sales charge 3.00%(1)
Redemption fee none
Maximum annual distribution and shareholder servicing fees 0.75%
distribution
(12b-1) fee
0.25% service fee
Conversion feature yes
</TABLE>
(1)This charge decreases over time. Please see page 42 for details. Different
charges apply to Investor B Shares of certain funds bought before January 1,
1996 and after July 31, 1997. Please see page 41 for details.
<TABLE>
<CAPTION>
Nations High Yield
Fund, Nations Kansas
Intermediate Municipal
Investor C Shares Bond Fund
<S> <C>
Maximum amount you can buy no limit
Maximum front-end sales charge none
Maximum deferred sales charge1 1.00%
Redemption fee none
Maximum annual distribution and shareholder servicing fees 0.75%
distribution
(12b-1) fee
0.25% service fee
Conversion feature none
</TABLE>
(1)This charge applies to investors who buy Investor C Shares and sell them
within one year of buying them. Please see page 44 for details.
The share class you choose will depend on how much you're investing, how long
you're planning to stay invested, and how you prefer to pay the sales charge.
16
<PAGE>
[GRAPHIC]
THE OFFERING PRICE PER SHARE IS THE NET ASSET VALUE PER SHARE PLUS
ANY SALES CHARGE THAT APPLIES.
THE NET ASSET VALUE PER SHARE IS THE PRICE OF A SHARE CALCULATED BY
A FUND EVERY BUSINESS DAY.
The total cost of your investment over the time you expect to hold your shares
will be affected by the distribution (12b-1) and shareholder servicing fees, as
well as by the amount of any front-end sales charge or contingent deferred
sales charge (CDSC) that applies, and when you're required to pay the charge.
You should think about these things carefully before you invest.
Investor A Shares have a front-end sales charge, which is deducted when you buy
your shares. This means that a smaller amount is invested in the Funds, unless
you qualify for a waiver or reduction of the sales charge. However, Investor A
Shares have lower ongoing distribution (12b-1) and/or shareholder servicing
fees than Investor B and Investor C Shares. This means that Investor A Shares
can be expected to pay relatively higher dividends per share.
Investor B Shares have limits on how much you can invest. When you buy Investor
B or Investor C Shares, the full amount is invested in the Funds. However, you
may pay a CDSC when you sell your shares. Over time, Investor B and Investor C
Shares can incur distribution (12b-1) and shareholder servicing fees that are
equal to or more than the front-end sales charge, and the distribution (12b-1)
and shareholder servicing fees you would pay for Investor A Shares. Although
the full amount of your purchase is invested in the Funds, any positive
investment return on this money may be partially or fully offset by the
expected higher annual expenses of Investor B and Investor C Shares. You should
also consider the conversion feature for Investor B Shares, which is described
in ABOUT INVESTOR B SHARES.
[GRAPHIC]
ABOUT INVESTOR A SHARES
There is no limit to the amount you can invest in Investor A Shares. You
generally will pay a front-end sales charge when you buy your shares, or
in some cases, a CDSC when you sell your shares.
FRONT-END SALES CHARGE
You'll pay a front-end sales charge when you buy Investor A Shares,
unless:
o you qualify for a waiver of the sales charge. You can find out if you
qualify for a waiver in the section, WHEN YOU MIGHT NOT HAVE TO PAY A
SALES CHARGE
o you're reinvesting distributions
The sales charge you'll pay depends on the Fund you're buying, and the
amount you're investing -- the larger the investment, the smaller the
sales charge.
17
<PAGE>
<TABLE>
<CAPTION>
Nations High Yield Fund
Nations Kansas Intermediate Municipal Bond Fund
<S> <C> <C> <C>
Amount
retained
by selling
Sales charge Sales charge agents
as a % of the as a % of the as a % of the
offering price net asset value offering price
Amount you bought per share per share per share
$0-$99,999 3.25% 3.36% 3.00%
$100,000- $249,999 2.50% 2.56% 2.25%
$250,000- $499,999 2.00% 2.04% 1.75%
$500,000- $999,999 1.50% 1.53% 1.25%
$1,000,000 or more 0.00% 0.00% 1.00%(1)
</TABLE>
(1)1.00% on the first $3,000,000, 0.50% on the next $47,000,000, 0.25%
on amounts over $50,000,000. Stephens pays the amount retained by
selling agents on investments of $1,000,000 or more, but may be
reimbursed when a CDSC is deducted if the shares are sold within
eighteen months from the time they were bought. Please see HOW
SELLING AND SERVICING AGENTS ARE PAID for more information.
18
<PAGE>
CONTINGENT DEFERRED SALES CHARGE
If you own or buy $1,000,000 or more of Investor A Shares, there are two
situations when you'll pay a CDSC:
o If you bought your shares before August 1, 1999, and you sell them:
o during the first year you own them, you'll pay a CDSC of 1.00%
o during the second year you own them, you'll pay a CDSC of 0.50%
o If you buy your shares on or after August 1, 1999 and sell them within
18 months of buying them, you'll pay a CDSC of 1.00%.
The CDSC is calculated from the day your purchase is accepted (the TRADE
DATE). We deduct the CDSC from the market value or purchase price of the
shares, whichever is lower.
You won't pay a CDSC on any increase in net asset value since you bought
your shares, or on any shares you receive from reinvested distributions.
We'll sell any shares that aren't subject to the CDSC first. We'll then
sell shares that result in the lowest CDSC.
REDEMPTION FEE
There are two situations when we'll charge a 1% redemption fee on the
sale of Investor A Shares:
o if you bought $1,000,000 or more Investor A Shares between July 31,
1997 and November 15, 1998 and sell them within 18 months of buying
them
o if an employee benefit plan made its initial investment in Investor A
Shares between July 31, 1997 and November 15, 1998 and sold those
shares within 18 months of buying them because the plan sold all of
its Nations Funds holdings
The fee is deducted from the amount sold and is paid to the Fund. The
Fund can reduce or cancel the fee at any time.
[GRAPHIC]
ABOUT INVESTOR B SHARES
You can buy up to $250,000 of Investor B Shares at a time. You don't pay
a sales charge when you buy Investor B Shares, but you may have to pay a
CDSC when you sell them.
CONTINGENT DEFERRED SALES CHARGE
You'll pay a CDSC when you sell your Investor B Shares, unless:
o you bought the shares on or after January 1, 1996 and before August 1,
1997
o you received the shares from reinvested distributions
o you qualify for a waiver of the CDSC. You can find out how to qualify
for a waiver on page 46
The CDSC you pay depends on the Fund you bought, when you bought your
shares, how much you bought in some cases, and how long you held them.
19
<PAGE>
<TABLE>
<CAPTION>
Nations High Yield Fund
Nations Kansas Intermediate Municipal Bond Fund
If you sell your shares
during the following year: You'll pay a CDSC of:
- --------------------------------- ---------------------------------------------------------------------
Shares
you
bought Shares
Shares on or after you
you bought Shares you bought between 1/1/1996 bought
after 8/1/1997 and 11/15/1998 and before before
11/15/1998 in the following amounts: 8/1/1997 1/1/1996
------------ -------------------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$500,000-
$0-$499,999 $999,999
the first year you own them 3.0% 3.0% 2.0% none 4.0%
the second year you own them 3.0% 2.0% 1.0% none 3.0%
the third year you own them 2.0% 1.0% none none 3.0%
the fourth year you own them 1.0% none none none 2.0%
the fifth year you own them none none none none 2.0%
the sixth year you own them none none none none 1.0%
after six years of owning them none none none none none
</TABLE>
The CDSC is calculated from the trade date of your purchase. We deduct
the CDSC from the market value or purchase price of the shares,
whichever is lower. We'll sell any shares that aren't subject to the
CDSC first. We'll then sell shares that result in the lowest CDSC.
Your selling agent receives compensation when you buy Investor B Shares.
Please see HOW SELLING AND SERVICING AGENTS ARE PAID for more
information.
20
<PAGE>
ABOUT THE CONVERSION FEATURE
Investor B Shares generally convert automatically to Investor A Shares
according to the following schedule:
<TABLE>
<CAPTION>
Nations High Yield Fund
Nations Kansas Intermediate Municipal Bond Fund
Will convert to Investor A Shares
Investor B Shares you bought after you've owned them for
<S> <C>
after November 15, 1998 eight years
between August 1, 1997
and November 15, 1998
$0-$249,999 six years
$250,000-$499,999 six years
$500,000-$999,999 five years
before August 1, 1997 six years
</TABLE>
The conversion feature allows you to benefit from the lower operating
costs of Investor A Shares, which can help increase total returns.
Here's how the conversion works:
o We won't convert your shares if you tell your investment
professional, selling agent or the transfer agent within 90 days
before the conversion date that you don't want your shares to be
converted. Remember, it's in your best interest to convert your
shares because Investor A Shares have lower expenses.
o Shares are converted at the end of the month in which they become
eligible for conversion. Any shares you received from reinvested
distributions on these shares will convert to Investor A Shares at
the same time.
o You'll receive the same dollar value of Investor A Shares as the
Investor B Shares that were converted. No sales charge or other
charges apply.
o Investor B Shares that you received from an exchange of Investor B
Shares of another Nations Fund will convert based on the day you
bought the original shares. Your conversion date may be later if you
exchanged to or from a Nations Funds Money Market Fund.
o Conversions are free from federal tax.
21
<PAGE>
[GRAPHIC]
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL FOR MORE INFORMATION
ABOUT REDUCTIONS AND WAIVERS OF SALES CHARGES.
YOU SHOULD TELL YOUR INVESTMENT PROFESSIONAL THAT YOU MAY QUALIFY
FOR A REDUCTION OR A WAIVER BEFORE BUYING SHARES.
WE CAN CHANGE OR CANCEL THESE TERMS AT ANY TIME. ANY CHANGE OR
CANCELLATION APPLIES ONLY TO FUTURE PURCHASES.
[GRAPHIC]
ABOUT INVESTOR C SHARES
There is no limit to the amount you can invest in Investor C Shares. You
don't pay a sales charge when you buy Investor C Shares, but you may pay
a CDSC when you sell them.
CONTINGENT DEFERRED SALES CHARGE
You'll pay a CDSC of 1.00% when you sell Investor C Shares within one
year of buying them, unless:
o you received the shares from reinvested distributions
o you qualify for a waiver of the CDSC. You can find out how to qualify
for a waiver on page 46
The CDSC is calculated from the trade date of your purchase. We deduct
the CDSC from the market value or purchase price of the shares,
whichever is lower. We'll sell any shares that aren't subject to the
CDSC first. We'll then sell shares that result in the lowest CDSC.
Your selling agent receives compensation when you buy Investor C Shares.
Please see HOW SELLING AND SERVICING AGENTS ARE PAID for more
information.
WHEN YOU MIGHT NOT HAVE TO PAY A SALES CHARGE
FRONT-END SALES CHARGES
(Investor A Shares)
There are three ways you can lower the front-end sales charge you pay on
Investor A Shares:
o COMBINE PURCHASES YOU'VE ALREADY MADE
Rights of accumulation allow you to combine the value of Investor A,
Investor B and Investor C Shares you already own with Investor A Shares
you're buying to calculate the sales charge. The sales charge is based
on the total value of the shares you already own, or the original
purchase cost, whichever is higher, plus the value of the shares you're
buying. Index Funds and Money Market Funds, except Investor B and
Investor C Shares of Nations Reserves Money Market Funds, don't qualify
for rights of accumulation.
o COMBINE PURCHASES YOU PLAN TO MAKE
By signing a letter of intent, you can combine the value of shares you
already own with the value of shares you plan to buy over a 13-month
period to calculate the sales charge.
o You can choose to start the 13-month period up to 90 days before you
sign the letter of intent.
o Each purchase you make will receive the sales charge that applies to
the total amount you plan to buy.
22
<PAGE>
o If you don't buy as much as you planned within the period, you must
pay the difference between the charges you've paid and the charges
that actually apply to the shares you've bought.
o Your first purchase must be at least 5% of the minimum amount for the
sales charge level that applies to the total amount you plan to buy.
o If the purchase you've made later qualifies for a reduced sales charge
through the 90-day backdating provisions, we'll make an adjustment for
the lower charge when the letter of intent expires. Any adjustment
will be used to buy additional shares at the reduced sales charge.
o COMBINE PURCHASES WITH FAMILY MEMBERS
You can receive a quantity discount by combining purchases of Investor
A Shares that you, your spouse and children under age 21 make on the
same day. Some distributions or payments from the dissolution of
certain qualified plans also qualify for the quantity discount. Index
Funds and Money Market Funds, except Investor B and Investor C Shares
of Nations Reserves Money Market Funds, don't qualify.
The following investors can buy Investor A Shares without paying a
front-end sales charge:
o full-time employees and retired employees of Bank of America
Corporation (and its predecessors), its affiliates and subsidiaries
and the immediate families of these people
o banks, trust companies and thrift institutions, acting as fiduciaries
o individuals receiving a distribution from a Bank of America trust or
other fiduciary account may use the proceeds of that distribution to
buy Investor A Shares without paying a front-end sales charge, as long
as the proceeds are invested through a trust account established with
certain trustees and invested in the Funds within 90 days
o Nations Funds' Trustees, Directors and employees of its investment
sub-advisers
o registered broker/dealers that have entered into a Nations Funds
dealer agreement with Stephens may buy Investor A Shares without
paying a front-end sales charge for their investment account only
o registered personnel and employees of these broker/dealers may buy
Investor A Shares without paying a front-end sales charge according to
the internal policies and procedures of their employer as long as
these purchases are made for their own investment purposes
o employees or partners of any service provider to the Funds
o investors who buy through accounts established with certain fee-based
investment advisers or financial planners, including Nations Funds
Personal Investment Planner accounts, wrap fee accounts and other
managed agency/asset allocation accounts
o shareholders of certain Funds that reorganized into the Nations Funds
who were entitled to buy shares at net asset value
23
<PAGE>
The following plans can buy Investor A Shares without paying a front-end
sales charge:
o pension, profit-sharing or other employee benefit plans established
under Section 401 or Section 457 of the Internal Revenue Code of 1986,
as amended (the tax code)
o employee benefit plans created according to Section 403(b) of the tax
code and sponsored by a non-profit organization qualified under
Section 501(c)(3) of the tax code. To qualify for the waiver, the plan
must:
o have at least $500,000 invested in Investor A Shares of Nations
Funds (except Money Market Funds), or
o sign a letter of intent to buy at least $500,000 of Investor A
Shares of Nations Funds (except Money Market Funds), or
o be an employer-sponsored plan with at least 100 eligible
participants, or
o be a participant in an alliance program that has signed an agreement
with the Fund or a selling agent
You can also buy Investor A Shares without paying a sales charge if you
buy the shares within 120 days of selling the same Fund. This is called
the reinstatement privilege. You can invest up to the amount of the sale
proceeds. We'll credit your account with any CDSC paid when you sold the
shares. The reinstatement privilege does not apply to any shares you
bought through a previous reinstatement. First Data, Stephens or their
agents must receive your written request within 120 days after you sell
your shares.
Stephens may pay selling agents up to 1.00% of the net asset value of
Investor A Shares bought without a sales charge. Stephens may be
reimbursed through any CDSC that applies.
CONTINGENT DEFERRED SALES CHARGES
(Investor A, Investor B and Investor C Shares)
You won't pay a CDSC on the following transactions:
o shares sold following the death or disability (as defined in the tax
code) of a shareholder, including a registered joint owner
24
<PAGE>
o the following retirement plan distributions:
o lump-sum or other distributions from a qualified corporate or
self-employed retirement plan following the retirement (or following
attainment of age 59 1/2 in the case of a "key employee" of a "top
heavy" plan)
o distributions from an IRA or Custodial Account under Section
403(b)(7) of the tax code, following attainment of age 59 1/2
o a tax-free return of an excess contribution to an IRA
o distributions from a qualified retirement plan that aren't subject
to the 10% additional federal withdrawal tax under Section 72(t)(2)
of the tax code
o payments made to pay medical expenses which exceed 7.5% of income, and
distributions made to pay for insurance by an individual who has
separated from employment and who has received unemployment
compensation under a federal or state program for at least 12 weeks
o shares sold under our right to liquidate a shareholder's account,
including instances where the aggregate net asset value of Investor A,
Investor B or Investor C Shares held in the account is less than the
minimum account size
o withdrawals made under the Automatic Withdrawal Plan described in
BUYING, SELLING AND EXCHANGING SHARES, if the total withdrawals of
Investor A, Investor B or Investor C Shares made in a year are less
than 12% of the total value of those shares in your account. A CDSC
may only apply to Investor A Shares if you bought more than $1,000,000
We'll also waive the CDSC on the sale of Investor A or Investor C Shares
bought before September 30, 1994 by current or retired employees of Bank
of America and its affiliates, or by current or former trustees or
directors of the Nations Funds or other management companies managed by
Bank of America.
You won't pay a CDSC on the sale of Investor B or Investor C Shares if
you reinvest any of the proceeds in the same Fund within 120 days of the
sale. This is called the reinstatement privilege. You can invest up to
the amount of the sale proceeds. We'll credit your account with any CDSC
paid when you sold the shares. The reinstatement privilege does not
apply to any shares you bought through a previous reinstatement. First
Data, Stephens or their agents must receive your written request within
120 days after you sell your shares.
25
<PAGE>
[GRAPHIC]
WHEN YOU SELL SHARES OF A MUTUAL, FUND, THE FUND IS EFFECTIVELY
"BUYING" THEM BACK FROM YOU. THIS IS CALLED A REDEMPTION.
[GRAPHIC]
Buying, selling and exchanging shares
You can invest in the Funds through your selling agent or directly from Nations
Funds.
We encourage you to consult with an investment professional who can open an
account for you with a selling agent and help you with your investment
decisions. Once you have an account, you can buy, sell and exchange shares by
contacting your investment professional or selling agent. They will look after
any paperwork that's needed to complete a transaction and send your order to
us.
You should also ask your selling agent about its limits, fees and policies for
buying, selling and exchanging shares, which may be different from those
described here, and about its related programs or services.
The table on the next page summarizes some key information about buying,
selling and exchanging shares. You'll find sales charges and other fees that
apply to these transactions in CHOOSING A SHARE CLASS.
The Funds also offer other classes of shares, with different features and
expense levels, which you may be eligible to buy. Please contact your
investment professional, or call us at 1.800.321.7854 if you have any questions
or you need help placing an order.
26
<PAGE>
<TABLE>
<CAPTION>
Ways to
buy, sell or How much you can buy,
exchange sell or exchange Other things to know
---------------- ---------------------------------------- -----------------------------------------------------
<S> <C> <C>
Buying shares In a lump sum minimum initial investment: There is no limit to the amount you can invest in
o $1,000 for regular accounts Investor A and C Shares. You can invest up to
o $500 for traditional and Roth IRA $250,000 in Investor B Shares at a time.
accounts
o $250 for certain fee-based accounts Investor B Shares are not available for Nations
Short-Term Income Fund.
o no minimum for certain retirement
plan accounts like 401(k) plans and
SEP accounts, but other restrictions
apply
minimum additional investment:
o $100 for all accounts
Using our minimum initial investment: You can buy shares monthly, twice a month or
Systematic o $100 quarterly, using automatic transfers from your
Investment Plan minimum additional investment: bank account.
o $50
- --------------------------------------------------------------------------------------------------------------------
Selling shares In a lump sum o you can sell up to $50,000 of your We'll deduct any CDSC from the amount you're
shares by telephone, otherwise there selling and send you or your selling agent the
are no lim its to the amount you can balance, usually within three business days of
sell receiving your order.
o other restrictions may apply to If you paid for your shares with a check that
withdrawals from retirement plan wasn't certified, we'll hold the sale proceeds
accounts when you sell those shares for at least 15 days
after the trade date of the purchase, or until the
check has cleared.
Using our o minimum $25 per withdrawal Your account balance must be at least $10,000
Automatic to set up the plan. You can make withdrawals
Withdrawal Plan monthly, twice a month or quarterly. We'll send
your money by check or deposit it directly to
your bank account. No CDSC is deducted if you
withdraw 12% or less of the value of your
shares in a class.
- -----------------------------------------------------------------------------------------------------------------
Exchanging shares In a lump sum o minimum $1,000 per exchange You can exchange your Investor A Shares for
Investor A Shares of any other Nations Fund,
except Index Funds. You won't pay a front-end
sales charge, CDSC or redemption fee on the
shares you're exchanging.
You can exchange your Investor B Shares for:
o Investor B Shares of any other Nations Fund,
except Nations Funds Money Market Funds
o Investor C Shares of Nations Funds Money
Market Funds (before October 1, 1999)
o Investor B Shares of Nations Reserves Money
Market Funds (on or after October 1, 1999)
You won't pay a CDSC on the shares you're
exchanging.
You can exchange your Investor C Shares for:
o Investor C Shares of any other Nations Fund,
except Nations Funds Money Market Funds
o Daily Shares of Nations Funds Money Market
Funds (before October 1, 1999)
o Investor C Shares of Nations Reserves Money
Market Funds (on or after October 1, 1999)
If you received Investor C Shares of a Fund from
an exchange of Investor A Shares of a Managed
Index Fund, you can also exchange these shares
for Investor A Shares of an Index Fund.
You won't pay a CDSC on the shares you're
exchanging.
Using our o minimum $25 per exchange This feature is not available for Investor B
Automatic Shares. You must already have an investment in
Exchange Feature the Funds you want to exchange. You can make
exchanges monthly or quarterly.
</TABLE>
27
<PAGE>
[GRAPHIC]
A BUSINESS DAY IS ANY DAY THAT THE NEW YORK STOCK EXCHANGE (NYSE)
IS OPEN. A BUSINESS DAY ENDS AT THE CLOSE OF REGULAR TRADING ON THE
NYSE, USUALLY AT 4:00 P.M. EASTERN TIME. IF THE NYSE CLOSES EARLY,
THE BUSINESS DAY ENDS AS OF THE TIME THE NYSE CLOSES.
THE NYSE IS CLOSED ON WEEKENDS AND ON THE FOLLOWING NATIONAL
HOLIDAYS: NEW YEAR'S DAY, MARTIN LUTHER KING, JR. DAY, PRESIDENTS'
DAY, GOOD FRIDAY, MEMORIAL DAY, INDEPENDENCE DAY, LABOR DAY,
THANKSGIVING DAY AND CHRISTMAS DAY.
HOW SHARES ARE PRICED
All transactions are based on the price of a Fund's shares -- or its net asset
value per share. We calculate net asset value per share for each class of each
Fund at the end of each business day. First, we calculate the net asset value
for each class of a Fund by determining the value of the Fund's assets in the
class and then subtracting its liabilities. Next, we divide this amount by the
number of shares that investors are holding in the class.
VALUING SECURITIES IN A FUND
The value of a Fund's assets is based on the total market value of all of the
securities it holds. The prices reported on stock exchanges and securities
markets around the world are usually used to value securities in a Fund. If
prices aren't readily available, we'll base the price of a security on its fair
market value. We use the amortized cost method, which approximates market
value, to value short-term investments maturing in 60 days or less.
HOW ORDERS ARE PROCESSED
Orders to buy, sell or exchange shares are processed on business days. Orders
received by Stephens, First Data or their agents before the end of a business
day (usually 4:00 p.m. Eastern time, unless the NYSE closes early) will receive
that day's net asset value per share. Orders received after the end of a
business day will receive the next business day's net asset value per share.
The business day that applies to your order is also called the TRADE DATE. We
may refuse any order to buy or exchange shares. If this happens, we'll return
any money we've received to your selling agent.
TELEPHONE ORDERS
You can place orders to buy, sell or exchange by telephone if you complete the
telephone authorization section of our account application and send it to us.
Here's how telephone orders work:
o If you sign up for telephone orders after you open your account, you
must have your signature guaranteed.
o Telephone orders may not be as secure as written orders. You may be
responsible for any loss resulting from a telephone order.
o We'll take reasonable steps to confirm that telephone instructions
are genuine. For example, we require proof of your identification
before we will act on instructions received by telephone and may
record telephone conversations. If we and our service providers don't
take these steps, we may be liable for any losses from unauthorized
or fraudulent instructions.
o Telephone orders may be difficult to complete during periods of
significant economic or market change.
28
<PAGE>
[GRAPHIC]
THE OFFERING PRICE PER SHARE IS THE NET ASSET VALUE PER SHARE PLUS
ANY SALES CHARGE THAT APPLIES.
THE NET ASSET VALUE PER SHARE IS THE PRICE OF A SHARE CALCULATED BY
A FUND EVERY BUSINESS DAY.
[GRAPHIC]
BUYING SHARES
Here are some general rules for buying shares:
o You buy Investor A Shares at the offering price per share. You buy
Investor B and Investor C Shares at net asset value per share.
o If we don't receive your money within three business days of
receiving your order, we'll refuse the order.
o Selling agents are responsible for sending orders to us and
ensuring we receive your money on time.
o Shares you buy are recorded on the books of the Fund. We don't
issue certificates unless you ask for them in writing, and we
don't issue certificates for fractions of shares.
MINIMUM INITIAL INVESTMENT
The minimum initial amount you can buy is usually $1,000.
If you're buying shares through one of the following accounts or plans,
the minimum initial amount you can buy is:
o $500 for traditional and Roth individual retirement accounts (IRAs)
o $250 for accounts set up with some fee-based investment advisers
or financial planners, including wrap fee accounts and other
managed accounts
o $100 using our Systematic Investment Plan
o There is no minimum for 401(k) plans, simplified employee pension
plans (SEPs), salary reduction-simplified employee pension plans
(SAR-SEPs), Savings Incentives Match Plans for Employees (SIMPLE
IRAs), salary reduction IRAs (SAR-IRAs) or other similar kinds of
accounts. However, if the value of your account falls below $1,000
for 401(k) plans or $500 for the other plans within one year after
you open your account, we may sell your shares. We'll give you 60
days notice in writing if we're going to do this
MINIMUM ADDITIONAL INVESTMENT
You can make additional purchases of $100, or $50 if you use our
Systematic Investment Plan.
29
<PAGE>
[GRAPHIC]
FOR MORE INFORMATION
ABOUT TELEPHONE ORDERS,
SEE PAGE 50.
SYSTEMATIC INVESTMENT PLAN
You can make regular purchases of $50 or more using automatic transfers from
your bank account to the Funds you choose. You can contact your investment
professional or us to set up the plan.
Here's how the plan works:
o You can buy shares twice a month, monthly or quarterly.
o You can choose to have us transfer your money on or about the 15th or the
last day of the month.
o Some exceptions may apply to employees of Bank of America and its
affiliates, and to plans set up before August 1, 1997. For details, please
contact your investment professional.
[GRAPHIC]
SELLING SHARES
Here are some general rules for selling shares:
o We'll deduct any CDSC from the amount you're selling and send you
the balance.
o If you're selling your shares through a selling agent, we'll
normally send the sale proceeds by federal funds wire within three
business days after Stephens, First Data or their agents receive
your order. Your selling agent is responsible for depositing the
sale proceeds to your account on time.
o If you're selling your shares directly through us, we'll normally
send the sale proceeds by mail or wire them to your bank account
within three business days after the Fund receives your order.
o You can sell up to $50,000 of shares by telephone if you qualify
for telephone orders.
o If you paid for your shares with a check that wasn't certified,
we'll hold the sale proceeds when you sell those shares for at
least 15 days after the trade date of the purchase, or until the
check has cleared.
o If you hold any shares in certificate form, you must sign the
certificates (or send a signed stock power with them) and send
them to First Data. Your signature must be guaranteed unless
you've made other arrangements with us. We may ask for any other
information we need to prove that the order is properly
authorized.
o Under certain circumstances allowed under the Investment Company
Act of 1940 (1940 Act), we can pay you in securities or other
property when you sell your shares, or delay payment of the sale
proceeds for up to seven days.
o Other restrictions may apply to retirement plan accounts. For more
information about these restrictions, please contact your
retirement plan administrator.
30
<PAGE>
[GRAPHIC]
YOU SHOULD MAKE SURE YOU UNDERSTAND THE INVESTMENT OBJECTIVES AND
POLICIES OF THE FUND YOU'RE EXCHANGING INTO. PLEASE READ ITS
PROSPECTUS CAREFULLY.
We may sell your shares:
o if the value of your account falls below $500. We'll give you 60
days notice in writing if we're going to do this
o if your selling agent tells us to sell your shares under
arrangements made between the selling agent and its customers
o under certain other circumstances allowed under the 1940 Act
AUTOMATIC WITHDRAWAL PLAN
The Automatic Withdrawal Plan lets you withdraw $25 or more every month, every
quarter or every year. You can contact your investment professional or us to
set up the plan.
Here's how the plan works:
o Your account balance must be at least $10,000 to set up the plan.
o If you set up the plan after you've opened your account, your
signature must be guaranteed.
o You can choose to have us transfer your money on or about the 15th
or the 25th of the month.
o You won't pay a CDSC on Investor A, Investor B or Investor C
Shares if you withdraw 12% or less of the value of those shares in
a year. Otherwise, we'll deduct any CDSC from the withdrawals.
o We'll send you a check or deposit the money directly to your bank
account.
o You can cancel the plan by giving your selling agent or us 30 days
notice in writing.
It's important to remember that if you withdraw more than your investment in
the Fund is earning, you'll eventually use up your original investment.
[GRAPHIC]
EXCHANGING SHARES
You can sell shares of one Fund to buy shares of another Nations Fund.
This is called an exchange. You might want to do this if your investment
goals or tolerance for risk changes.
Here's how exchanges work:
o You must exchange at least $1,000, or $25 if you use our Automatic
Exchange Feature.
o The rules for buying shares of a Fund, including any minimum
investment requirements, apply to exchanges into that Fund.
o You may only make an exchange into a Fund that is legally sold in
your state of residence.
31
<PAGE>
o You generally may only make an exchange into a Fund that is
accepting investments.
o We may limit the number of exchanges you can make within a
specified period of time.
o We may change or cancel your right to make an exchange by giving
the amount of notice required by regulatory authorities (generally
60 days for a material change or cancellation).
o You cannot exchange any shares you own in certificate form until
First Data has received the certificate and deposited the shares
to your account.
EXCHANGING INVESTOR A SHARES
You can exchange Investor A Shares of a Fund for Investor A Shares of
any other Nations Fund, except Index Funds.
Here are some rules for exchanging Investor A Shares:
o You won't pay a front-end sales charge on the shares of the Fund
you're exchanging.
o You won't pay a CDSC on the shares you're exchanging. Any CDSC
will be deducted later on when you sell the shares you received
from the exchange. The CDSC at that time will be based on the
period from when you bought the original shares until when you
sold the shares you received from the exchange.
o You won't pay a redemption fee on the shares you're exchanging.
Any redemption fee will be deducted later on when you sell the
shares you received from the exchange. Any redemption fee will be
paid to the original Fund.
o If you received Investor A Shares of Nations Short-Term Income
Fund directly or indirectly from an exchange of Investor B Shares
of another Fund, you can exchange these shares for:
o Investor B Shares of any other Nations Fund, except Nations Funds
Money Market Funds, or
o Investor C Shares of Nations Funds Money Market Funds (before
October 1, 1999)
o Investor B Shares of Nations Reserves Money Market Funds (on or
after October 1, 1999)
A CDSC may apply to the shares you receive from the exchange, and to
any Investor B Shares you receive from an exchange of these shares.
The CDSC will be based on the period from when you bought your
original Investor B Shares until you sell the shares you received
from the exchange.
32
<PAGE>
EXCHANGING INVESTOR B SHARES
You can exchange Investor B Shares of a Fund for:
o Investor B Shares of any other Nations Fund, except Nations Funds
Money Market Funds
o Investor C Shares of Nations Funds Money Market Funds (before
October 1, 1999)
o Investor B Shares of Nations Reserves Money Market Funds (on or
after October 1, 1999)
You won't pay a CDSC on the shares you're exchanging. Any CDSC will be
deducted later on when you sell the shares you received from the
exchange. The CDSC will be based on the period from when you bought the
original shares until you sold the shares you received from the
exchange.
If you received Investor C Shares of a Nations Funds Money Market Fund
from an exchange of Investor B Shares of a Fund before October 1, 1999,
a CDSC may apply when you sell your Investor C Shares. The CDSC will be
based on the period from when you bought the original shares until you
exchanged them.
EXCHANGING INVESTOR C SHARES
You can exchange Investor C Shares of a Fund for:
o Investor C Shares of any other Nations Fund, except Nations Funds
Money Market Funds
o Daily Shares of Nations Funds Money Market Funds (before October 1,
1999)
o Investor C Shares of Nations Reserves Money Market Funds (on or
after October 1, 1999)
If you received Investor C Shares of a Fund from an exchange of Investor
A Shares of a Managed Index Fund, you can also exchange these shares for
Investor A Shares of an Index Fund.
You won't pay a CDSC on the shares you're exchanging. Any CDSC will be
deducted later on when you sell the shares you received from the
exchange. The CDSC will be based on the period from when you bought the
original shares until you sold the shares you received from the
exchange.
If you received Daily Shares of a Nations Funds Money Market Fund
through an exchange of Investor C Shares of a Fund before October 1,
1999, a CDSC may apply when you sell your Daily Shares. The CDSC will be
based on the period from when you bought the original shares until you
exchanged them.
33
<PAGE>
AUTOMATIC EXCHANGE FEATURE
The Automatic Exchange Feature lets you exchange $25 or more of Investor A or
Investor C Shares every month or every quarter. You can contact your investment
professional or us to set up the plan.
Here's how automatic exchanges work:
o Send your request to First Data in writing or call 1.800.321.7854.
o You must already have an investment in the Funds you want to
exchange.
o You can choose to have us transfer your money on or about the 15th
or the last day of the month.
o The rules for making exchanges apply to automatic exchanges.
34
<PAGE>
[GRAPHIC]
THE FINANCIAL INSTITUTION OR INTERMEDIARY THAT BUYS SHARES FOR YOU
IS ALSO SOMETIMES REFERRED TO AS A SELLING AGENT.
THE DISTRIBUTION FEE IS OFTEN REFERRED TO AS A "12B-1" FEE BECAUSE
IT'S PAID THROUGH A PLAN APPROVED UNDER RULE 12B-1 UNDER THE 1940
ACT.
YOUR SELLING AGENT MAY CHARGE OTHER FEES FOR SERVICES PROVIDED TO
YOUR ACCOUNT.
[GRAPHIC]
HOW SELLING AND SERVICING AGENTS ARE PAID
Selling and servicing agents usually receive compensation based on your
investment in the Funds. The kind and amount of the compensation depends on the
share class you invest in. Selling agents typically pay a portion of the
compensation they receive to their investment professionals.
COMMISSIONS
Your selling agent may receive an up-front commission (reallowance) when you
buy shares of a Fund. The amount of this commission depends on which share
class you choose:
o up to 4.25% of the offering price per share of Investor A Shares. The
commission is paid from the sales charge we deduct when you buy your
shares
o up to 4.00% of the net asset value per share of Investor B Shares. The
commission is not deducted from your purchase -- we pay your selling agent
directly
o up to 1.00% of the net asset value per share of Investor C Shares. The
commission is not deducted from your purchase -- we pay your selling agent
directly
If you buy Investor B or Investor C Shares you will be subject to higher
distribution (12b-1) and shareholder servicing fees and may be subject to a
CDSC when you sell your shares.
DISTRIBUTION (12B-1) AND SHAREHOLDER SERVICING FEES
Stephens and selling and servicing agents may be compensated for selling
shares and providing services to investors under distribution and shareholder
servicing plans.
The amount of the fee depends on the class of shares you own:
<TABLE>
<CAPTION>
Maximum annual distribution (12b-1)
and shareholder servicing fees
(as an annual % of average daily net assets)
<S> <C>
Investor A Shares 0.25% combined distribution (12b-1) and shareholder servicing fee
Investor B Shares 0.75% distribution (12b-1) fee, 0.25% shareholder servicing fee
Investor C Shares 0.75% distribution (12b-1) fee, 0.25% shareholder servicing fee
</TABLE>
Fees are calculated daily and deducted monthly. Because these fees are paid out
of the Funds' assets on an ongoing basis, they will increase the cost of your
investment over time, and may cost you more than any sales charges you may pay.
The Funds pay these fees to Stephens and to eligible selling and servicing
agents for as long as the plans continue. We may reduce or discontinue payments
at any time.
35
<PAGE>
OTHER COMPENSATION
Selling and servicing agents may also receive:
o a bonus, incentive or other compensation relating to the sale,
promotion and marketing of the Funds
o additional amounts on all sales of shares:
o up to 1.00% of the offering price per share of Investor A Shares
o up to 1.00% of the net asset value per share of Investor B Shares
o up to 1.00% of the net asset value per share of Investor C Shares
o non-cash compensation like trips to sales seminars or vacation
destinations, tickets to sporting events, theater or other
entertainment, opportunities to participate in golf or other outings
and gift certificates for meals or merchandise
This compensation, which is not paid by the Funds, is discretionary and may be
available only to selected selling and servicing agents. For example, Stephens
sometimes sponsors promotions involving Banc of America Investments, Inc., an
affiliate of BAAI, and certain other selling or servicing agents. Selected
selling and servicing agents also may receive compensation for opening a
minimum number of accounts.
BAAI also may pay amounts from its own assets to Stephens or to selling or
servicing agents for related services they provide.
36
<PAGE>
[GRAPHIC]
THE POWER OF COMPOUNDING
REINVESTING YOUR DISTRIBUTIONS BUYS YOU MORE SHARES OF A
FUND -- WHICH LETS YOU TAKE ADVANTAGE OF THE POTENTIAL FOR
COMPOUND GROWTH.
PUTTING THE MONEY YOU EARN BACK INTO YOUR INVESTMENT MEANS IT, IN
TURN, MAY EARN EVEN MORE MONEY. OVER TIME, THE POWER OF COMPOUNDING
HAS THE POTENTIAL TO SIGNIFICANTLY INCREASE THE VALUE OF YOUR
INVESTMENT. THERE IS NO ASSURANCE, HOWEVER, THAT YOU'LL EARN MORE
MONEY IF YOU REINVEST YOUR DISTRIBUTIONS.
[GRAPHIC]
Distributions and taxes
ABOUT DISTRIBUTIONS
A mutual fund can make money two ways:
o It can earn income. Examples are interest paid on bonds and dividends
paid on COMMON STOCKS.
o A fund can also have CAPITAL GAIN if the value of its investments
increases. If a fund sells an investment at a gain, the gain is
realized. If a fund continues to hold the investment, any gain is
unrealized.
A mutual fund is not subject to income tax as long as it distributes its net
investment income and realized capital gain to its shareholders. The Funds
intend to pay out a sufficient amount of their income and capital gain to their
shareholders so the Funds won't have to pay any income tax. When a Fund makes
this kind of a payment, it's split equally among all shares, and is called a
distribution.
All of the Funds distribute any net realized capital gain at least once a year.
All of the Funds declare distributions of net investment income daily and pay
them monthly.
A distribution is paid based on the number of shares you hold on the record
date, which is usually the day the distribution is declared (daily dividend
Funds) or the day before the distribution is declared (all other Funds). Shares
are eligible to receive distributions from the SETTLEMENT DATE (daily dividend
Funds) or the TRADE DATE (all other Funds) of the purchase up to and including
the day before the shares are sold.
Different share classes of a Fund usually pay different distribution amounts,
because each class has different expenses. Each time a distribution is made,
the net asset value per share of the share class is reduced by the amount of
the distribution.
We'll automatically reinvest distributions in additional shares of the same
Fund unless you tell us you want to receive your distributions in cash. You can
do this by writing to us at the address on the back cover, or by calling us at
1.800.321.7854.
We generally pay cash distributions within five business days after the end of
the month, quarter or year in which the distribution was made. If you sell all
of your shares, we'll pay any distribution that applies to those shares in cash
within five business days after the sale was made.
If you buy shares of a Fund shortly before it makes a distribution, you will,
in effect, receive part of your purchase back in the distribution, which is
subject to tax. Similarly, if you buy shares of a Fund that holds securities
with unrealized capital gain, you will, in effect, receive part of your
purchase back if and when the Fund sells those securities and distributes the
gain. This distribution is also subject to tax. Some Funds have built up, or
have the potential to build up, high levels of unrealized capital gain.
37
<PAGE>
[GRAPHIC]
THIS INFORMATION IS A SUMMARY OF HOW FEDERAL INCOME TAXES MAY
AFFECT YOUR INVESTMENT IN THE FUNDS. IT IS NOT INTENDED AS A
SUBSTITUTE FOR CAREFUL TAX PLANNING. YOU SHOULD CONSULT WITH YOUR
OWN TAX ADVISOR ABOUT YOUR SITUATION, INCLUDING ANY FOREIGN, STATE
AND LOCAL TAXES THAT MAY APPLY.
[GRAPHIC]
FOR MORE INFORMATION ABOUT
TAXES, PLEASE SEE THE SAI.
HOW TAXES AFFECT YOUR INVESTMENT
Distributions that come from a Fund's net investment income, net foreign
currency gain and any excess of net short-term capital gain over net long-term
capital loss generally are taxable to you as ordinary income.
Distributions that come from a Fund's net capital gain (generally the excess of
net long-term capital gain over net short-term capital loss), generally are
taxable to you as net capital gain. Corporate shareholders won't be able to
deduct any distributions from a Fund when determining their taxable income.
In general, all distributions are taxable to you when paid, whether they are
paid in cash or automatically reinvested in additional shares of the Fund.
However, any distributions declared in October, November or December of one
year and distributed in January of the following year will be taxable as if
they had been paid to you on December 31 of the first year.
We'll send you a notice every year that tells you how much you've received in
distributions during the year and their federal tax status. Foreign, state and
local taxes may also apply to these distributions.
WITHHOLDING TAX
We're required by federal law to withhold tax of 31% on any distributions and
redemption proceeds paid to you (including amounts deemed to be paid for "in
kind" redemptions and exchanges) if:
o you haven't given us a correct Taxpayer Identification Number (TIN) and
haven't certified that the TIN is correct and withholding doesn't apply
o the Internal Revenue Service (IRS) has notified us that the TIN listed
on your account is incorrect according to its records
o the IRS informs us that you're otherwise subject to backup withholding
The IRS may also impose penalties against you if you don't give us a correct
TIN.
Amounts we withhold are applied to your federal income tax liability. You may
receive a refund from the IRS if the withholding tax results in an overpayment
of taxes.
We're also normally required by federal law to withhold tax on distributions
paid to foreign shareholders.
38
<PAGE>
TAXATION OF REDEMPTIONS AND EXCHANGES
Your redemptions (including redemptions "in kind") and exchanges of Fund shares
will usually result in a taxable capital gain or loss, depending on the amount
you receive for your shares (or are deemed to receive in the case of exchanges)
and the amount you paid (or are deemed to have paid) for them.
39
<PAGE>
[GRAPHIC]
TERMS USED IN THIS PROSPECTUS
ASSET-BACKED SECURITY - a debt security that gives you an interest in a pool of
assets that is collateralized or "backed" by one or more kinds of assets,
including real property, receivables or mortgages, generally issued by banks,
credit card companies or other lenders. Some securities may be issued or
guaranteed by the U.S. government or its agencies, authorities or
instrumentalities. Asset-backed securities typically make periodic payments,
which may be interest or a combination of interest and a portion of the
principal of the underlying assets.
AVERAGE DOLLAR-WEIGHTED MATURITY - the average length of time until the debt
securities held by a Fund reach maturity. In general, the longer the average
dollar-weighted maturity, the more a Fund's share price will fluctuate in
response to changes in interest rates.
BANK OBLIGATION - a money market instrument issued by a bank, including
certificates of deposit, time deposits and bankers' acceptances.
CAPITAL GAIN OR LOSS - the difference between the purchase price of a security
and its selling price. You realize a capital gain when you sell a security for
more than you paid for it. You realize a capital loss when you sell a security
for less than you paid for it.
CASH EQUIVALENTS - short-term, interest-bearing instruments, including
obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities, bank obligations, asset-backed securities, foreign
government securities and commercial paper issued by U.S. and foreign issuers
which, at the time of investment, is rated at least Prime-2 by Moody's Investor
Services, Inc. (Moody's), A-2 by S&P, or F-1 by Fitch IBCA (Fitch).
COLLATERALIZED MORTGAGE OBLIGATION (CMO) - a debt security that is backed by
real estate mortgages. CMO payment obligations are covered by interest and/or
principal payments from a pool of mortgages. In addition, the underlying assets
of a CMO are typically separated into classes, called tranches, based on
maturity. Each tranche pays a different rate of interest. CMOs are not
generally issued by the U.S. government, its agencies or instrumentalities.
COMMERCIAL PAPER - a money market instrument issued by a large company.
COMMON STOCK - a security that represents part equity ownership in a company.
Common stock typically allows you to vote at shareholder meetings and to share
in the company's profits by receiving dividends.
CONVERTIBLE SECURITY - a security that can be exchanged for common stock (or
another type of security) at a specified rate. Convertible securities include
convertible debt, rights and warrants.
CORPORATE OBLIGATION - a money market instrument issued by a corporation or
commercial bank.
40
<PAGE>
DEBT SECURITY - when you invest in a debt security, you are typically lending
your money to a governmental body or company (the issuer) to help fund their
operations or major projects. The issuer pays interest at a specified rate on a
specified date or dates, and repays the principal when the security matures.
Short-term debt securities include money market instruments such as treasury
bills. Long-term debt securities include fixed income securities such as
government and corporate bonds, and mortgage-backed and asset-backed
securities.
DEPOSITARY RECEIPTS - evidence of the deposit of a security with a custodian
bank. American Depositary Receipts (ADRs), for example, are certificates traded
in U.S. markets representing an interest of a foreign company. They were
created to make it possible for foreign issuers to meet U.S. security
registration requirements. Other examples include ADSs, GDRs and EDRs.
DOLLAR ROLL TRANSACTION - the sale by a Fund of mortgage-backed or other
asset-backed securities, together with a commitment to buy similar, but not
identical, securities at a future date.
DURATION - a measure used to estimate a security's or portfolio's sensitivity
to changes in interest rates. For example, if interest rates rise by one
percentage point, the share price of a fund with a duration of five years would
decline by about 5%. If interest rates fall by one percentage point, the fund's
share price would rise by about 5%.
EQUITY SECURITY - an investment that gives you an equity ownership right in a
company. Equity securities (or "equities") include common and preferred stock,
rights and warrants.
FIRST-TIER SECURITY - under Rule 2a-7 under the 1940 Act, a debt security that
is an eligible investment for money market funds and has the highest short-term
rating from a nationally recognized statistical rating organization (NRSRO), or
if unrated, is determined by the fund's portfolio management team to be of
comparable quality, or is a money market fund issued by a registered investment
company, or is a government security.
FIXED INCOME SECURITY - an intermediate to long-term debt security that matures
in more than one year.
FOREIGN SECURITY - a debt or equity security issued by a foreign company or
government.
FUTURES CONTRACT - a contract to buy or sell an asset or an index of securities
at a specified price on a specified future date. The price is set through a
futures exchange.
GUARANTEED INVESTMENT CONTRACT - an investment instrument issued by a rated
insurance company in return for a payment by an investor.
41
<PAGE>
HIGH QUALITY - in the case of municipal securities, a long-term rating of A or
higher from Duff & Phelps Credit Rating Co. (D&P), Fitch, S&P, Thomson
BankWatch, Inc. (BankWatch), or Moody's in the case of certain bonds that are
lacking a short-term rating from the required number of NRSROS; rated D-1 or
higher by D&P, F-1 or higher by Fitch, SP-1 by S&P, or MIG-1 by Moody's in the
case of notes; rated D-1 or higher by D&P, F-1 or higher by Fitch, or VMIG-1 by
Moody's in the case of variable rate demand notes; or rated D-1 or higher by
D&P, F-1 or higher by Fitch, A-1 or higher by S&P or PRIME-1 by Moody's in the
case of tax-exempt commercial paper. The portfolio management team may consider
an unrated municipal security to be investment grade if the team believes it to
be of comparable quality, based on guidelines provided by the Fund's Board of
Directors. Please see the SAI for more information about credit ratings.
HIGH-YIELD DEBT SECURITY - debt securities that, at the time of investment by
the sub-adviser, are rated "BB" or below by S&P or "Ba" or below by Moody's,
or that are unrated and determined to be of comparable quality.
INVESTMENT GRADE - a debt security that has been given a medium to high credit
rating (Baa or higher by Moody's, BBB or higher by S&P or a comparable rating
by other NRSROs) based on the issuer's ability to pay interest and repay
principal on time. The portfolio management team may consider an unrated debt
security to be investment grade if the team believes it is of comparable
quality. Please see the SAI for more information about credit ratings.
LEHMAN 3-YEAR MUNICIPAL BOND INDEX - a broad-based, unmanaged index of
investment grade bonds with maturities of two to four years. All dividends are
reinvested.
LEHMAN 7-YEAR MUNICIPAL BOND INDEX - a broad-based, unmanaged index of
investment grade bonds with maturities of seven to eight years. All dividends
are reinvested.
LEHMAN AGGREGATE BOND INDEX - an index made up of the Lehman
Government/Corporate Index, the Asset-Backed Securities Index and the
Mortgage-Backed Securities Index. These indexes include U.S. government agency
and U.S. Treasury securities, corporate bonds and mortgage-backed securities.
All dividends are reinvested.
LEHMAN GOVERNMENT BOND INDEX - an index of government bonds with an average
maturity of approximately nine years. All dividends are reinvested.
LEHMAN GOVERNMENT/CORPORATE BOND INDEX - an index of U.S. government, U.S.
Treasury and agency securities, and corporate and Yankee bonds. All dividends
are reinvested.
LEHMAN INTERMEDIATE GOVERNMENT BOND INDEX - an index of U.S. government agency
and U.S. Treasury securities. All dividends are reinvested.
LEHMAN INTERMEDIATE TREASURY INDEX - an index of U.S. Treasury securities with
maturities of three to 10 years. All dividends are reinvested.
LEHMAN MUNICIPAL BOND INDEX - a broad-based, unmanaged index of 8,000
investment grade bonds with long-term maturities. All dividends are reinvested.
42
<PAGE>
LIQUIDITY - a measurement of how easily a security can be bought or sold at a
price that is close to its market value.
MERRILL LYNCH 1-3 YEAR TREASURY INDEX - an index of U.S. Treasury bonds with
maturities of 1 to 3 years. All dividends are reinvested.
MONEY MARKET INSTRUMENT - a short-term debt security that matures in 13 months
or less. Money market instruments include U.S. Treasury obligations, U.S.
government obligations, certificates of deposit, bankers' acceptances,
commercial paper, repurchase agreements and certain municipal securities.
MORTGAGE-BACKED SECURITY OR MORTGAGE-RELATED SECURITY - a debt security that
gives you an interest in, and is backed by, a pool of residential mortgages
issued by the U.S. government or by financial institutions. The underlying
mortgages may be guaranteed by the U.S. government or one of its agencies,
authorities or instrumentalities. Mortgage-backed securities typically make
monthly payments, which are a combination of interest and a portion of the
principal of the underlying mortgages.
MUNICIPAL SECURITY (OBLIGATION) - a debt security issued by state or local
governments or governmental authorities to pay for public projects and
services. "General obligations" are typically backed by the issuer's full
taxing and revenue-raising powers. "Revenue securities" depend on the income
earned by a specific project or authority, like road or bridge tolls, user fees
for water or revenues from a utility. Interest income from these securities is
exempt from federal income taxes and is generally exempt from state taxes if
you live in the state that issued the security. If you live in the municipality
that issued the security, interest income may also be exempt from local taxes.
NON-DIVERSIFIED - a fund that holds securities of fewer issuers or kinds of
issuers than other kinds of funds. Non-diversified funds tend to have greater
price swings than more diversified funds because events affecting one or more
of its securities may have a disproportionately large effect on the fund.
PARTICIPATION - a pass-through certificate representing a share in a pool of
debt obligations or other instruments.
PASS-THROUGH CERTIFICATE - securitized mortgages or other debt securities with
interest and principal paid by a servicing intermediary shortly after interest
payments are received from borrowers.
PRE-REFUNDED BOND - a bond that is repaid before its maturity date. The
repayment is generally financed by a new issue. Issuers generally pre-refund
bonds during periods of lower interest rates to reduce their interest costs.
43
<PAGE>
PRIVATE ACTIVITY BOND - a municipal security that is used to finance private
projects or other projects that aren't qualified for tax purposes. Private
activity bonds are generally taxable, unless their use is specifically
exempted, or may be treated as tax preference items.
REAL ESTATE INVESTMENT TRUST (REIT) - a portfolio of real estate investments
which may include office buildings, apartment complexes, hotels and shopping
malls, and real-estate-related loans or interests.
REPURCHASE AGREEMENT - a short-term (often overnight) investment arrangement.
The investor agrees to buy certain securities from the borrower and the
borrower promises to buy them back at a specified date and price. The
difference between the purchase price paid by the investor and the repurchase
price paid by the borrower represents the investor's return. Repurchase
agreements are popular because they provide very low-risk return and can
virtually eliminate credit difficulties.
REVERSE REPURCHASE AGREEMENT - a repurchase agreement in which an investor
sells a security to another party, like a bank or dealer, in return for cash,
and agrees to buy the security back at a specified date and price.
SALOMON BROTHERS MORTGAGE INDEX - an index of 30-year and 15-year GNMA, FNMA
and FHLMC securities, and FNMA and FHLMC balloon mortgages.
SECOND-TIER SECURITY - under Rule 2a-7 under the 1940 Act, a debt security that
is an eligible investment for money market funds, but is not a first-tier
security.
SETTLEMENT DATE - the date on which an order is settled either by payment or
delivery of securities.
SPECIAL PURPOSE ISSUER - an entity organized solely to issue asset-backed
securities on a pool of assets it owns.
TRADE DATE - the effective date of a purchase, sale or exchange transaction, or
other instructions sent to us. The trade date is determined by the day and time
we receive the order or instructions in a form that's acceptable to us.
U.S. GOVERNMENT OBLIGATIONS - a wide range of debt securities issued or
guaranteed by the U.S. government or its agencies, authorities or
instrumentalities.
U.S. TREASURY OBLIGATION - a debt security issued by the U.S. Treasury.
ZERO-COUPON BOND - a bond that makes no periodic interest payments. Zero coupon
bonds are sold at a deep discount to their face value and mature at face value.
The difference between the face value at maturity and the purchase price
represents the return.
44
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
[GRAPHIC]
WHERE TO FIND MORE INFORMATION
You'll find more information about the Fixed Income Funds in the following
documents:
[GRAPHIC]
ANNUAL AND SEMI-ANNUAL REPORTS
The annual and semi-annual reports contain information about Fund
investments and performance, the financial statements and the auditor's
reports. The annual report also includes a discussion about the market
conditions and investment strategies that had a significant effect on
each Fund's performance during the period covered.
[GRAPHIC]
STATEMENT OF ADDITIONAL INFORMATION
The SAI contains additional information about the Funds and their
policies. The SAI is legally part of this prospectus (it's incorporated
by reference). A copy has been filed with the SEC.
You can obtain a free copy of these documents, request other information
about the Funds and make shareholder inquiries by contacting Nations
Funds:
By telephone: 1.800.321.7854
By mail:
NATIONS FUNDS
C/O STEPHENS INC.
ONE BANK OF AMERICA PLAZA
33RD FLOOR
CHARLOTTE, NC 28255
On the Internet: WWW.NATIONSBANK.COM/NATIONSFUNDS
If you prefer, you can write the SEC's Public Reference Room and ask
them to mail you copies of these documents. They'll charge you a fee for
this service. You can also download them from the SEC's website or visit
the Public Reference Section and copy the documents while you're there.
Please call the SEC for more information.
PUBLIC REFERENCE SECTION OF THE SEC
WASHINGTON, DC 20549-6009
1.800.SEC.0330
WWW.SEC.GOV
SEC file number:
Nations Funds Trust,
NF-BONDPROLX-8/99
[GRAPHIC]
NATIONS FUNDS
<PAGE>
NATIONS FUNDS TRUST
STATEMENT OF ADDITIONAL INFORMATION
Nations High Yield Fund
Nations Kansas Municipal Bond Fund
Nations MidCap Index Fund
PRIMARY A, INVESTOR A, INVESTOR B AND INVESTOR C SHARES
January __, 2000
This Statement of Additional Information ("SAI") provides supplementary
information pertaining to the classes of shares representing interests in the
above listed series of Nations Funds Trust (individually, a "Fund" and
collectively, the "Funds"). This SAI is not a prospectus, and should be read
only in conjunction with the current prospectuses for the aforementioned Funds
related to the class or series of shares in which one is interested, dated
January __, 2000, as supplemented (each a "Prospectus"). All terms used in this
SAI that are defined in the Prospectuses will have the same meanings assigned in
the Prospectuses. Copies of the Prospectuses may be obtained without charge by
writing Nations Funds Trust, c/o Stephens Inc., One Bank of America Plaza, 33rd
Floor, Charlotte, North Carolina 28255, or by calling Nations Funds Trust at
(800) 321-7854.
<PAGE>
TABLE OF CONTENTS
Page
HISTORY OF NATIONS FUNDS TRUST............................................... 1
DESCRIPTION OF THE TRUST AND THE INVESTMENTS AND RISKS
OF ITS FUNDS ................................................................ 1
General............................................................... 1
Investment Limitations ............................................... 2
The Funds' Fundamental Policy Restrictions............................ 2
The Funds' Non-Fundamental Policy Restrictions........................ 3
Permissible Fund Investments.......................................... 3
Asset-Backed Securities............................................... 5
Borrowings............................................................ 9
Commercial Instruments................................................ 9
Combined Transactions.................................................10
Convertible Securities................................................10
Corporate Debt Securities.............................................11
Custodial Receipts....................................................11
Currency Swaps........................................................11
Delayed Delivery Transactions.........................................11
Dollar Roll Transactions .............................................12
Equity Swap Contracts ................................................12
Foreign Currency Transactions ........................................13
Futures, Options and Other Derivative Instruments.....................14
Guaranteed Investment Contracts.......................................28
Insured Municipal Securities .........................................28
Interest Rate Transactions ...........................................28
Lower Rated (or High Yield) Debt Securities...........................29
Municipal Securities .................................................30
Options on Currencies.................................................33
Other Investment Companies............................................33
Participation Interests and Company Receipts..........................33
Real Estate Investment Trusts.........................................34
Repurchase Agreements ................................................34
Reverse Repurchase Agreements ........................................34
Securities Lending....................................................35
Short Sales...........................................................35
Special Situations....................................................35
Standard & Poor's Depositary Receipts.................................35
Stand-by Commitments .................................................36
Stripped Securities...................................................36
U.S. and Foreign Bank Obligations.....................................37
U.S. Government Obligations...........................................37
Use of Segregated and Other Special Accounts..........................38
Variable and Floating Rate Instruments ...............................38
Warrants..............................................................39
When-Issued Purchases and Forward Commitments .......................39
Portfolio Turnover....................................................40
Investment Risks and Considerations...................................40
MANAGEMENT OF THE TRUST......................................................41
Nations Funds Retirement Plan.........................................44
Nations Funds Deferred Compensation Plan..............................44
Shareholder and Trustee Liability.....................................45
i
<PAGE>
INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY,
TRANSFER AGENCY, OTHER SERVICE PROVIDERS, SHAREHOLDER SERVICING AND
DISTRIBUTION AGREEMENTS .....................................................45
Investment Adviser and Sub-Advisers...................................45
Co-Administrators and Sub-Administrator...............................46
Distribution Plans and Shareholder Servicing Arrangements for
Primary A Shares..................................................47
Investor A Shares ................................................47
Investor B Shares.................................................48
Investor C Shares.................................................48
Expenses..........................................................50
Transfer Agents and Custodians........................................50
Distributor...........................................................51
Independent Accountants and Reports...................................51
Counsel...............................................................52
FUND TRANSACTIONS AND BROKERAGE..............................................52
General Brokerage Policy..............................................52
Section 28(e) Standards...............................................54
DESCRIPTION OF SHARES........................................................55
Description of Shares of the Trust....................................55
Net Asset Value Determination.........................................56
ADDITIONAL INFORMATION CONCERNING TAXES......................................56
General...............................................................57
Excise Tax ...........................................................57
Private Letter Ruling.................................................57
Taxation of Fund Investments..........................................57
Foreign Taxes ........................................................58
Capital Gain Distributions............................................59
Disposition of Fund Shares............................................59
Federal Income Tax Rates..............................................59
Corporate Shareholders................................................60
Foreign Shareholders..................................................60
Backup Withholding....................................................60
Special Tax Considerations Pertaining to the Kansas Fund .............60
Other Matters.........................................................61
ADDITIONAL INFORMATION ON PERFORMANCE........................................61
Yield Calculations....................................................64
Total Return Calculations.............................................65
MISCELLANEOUS ...............................................................66
Certain Record Holders................................................66
SCHEDULE A - Description of Ratings..........................................A-1
ii
<PAGE>
HISTORY OF NATIONS FUNDS TRUST
Nations Funds Trust (the "Trust") is an open-end registered investment
company in the Nations Funds family of mutual funds (the "Nations Funds
Family"), which in addition to the Trust, consists of the Nations Fund Trust,
Nations Fund, Inc., Nations Reserves, Nations LifeGoal Funds, Inc., Nations
Annuity Trust and Nations Master Investment 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 October 22,
1999. It has a fiscal year end of March 31st.
DESCRIPTION OF THE TRUST AND
THE INVESTMENTS AND RISKS OF ITS FUNDS
GENERAL.
The Trust currently consists of three different investment portfolios.
This SAI pertains to the:
o Primary A Shares of the Nations High Yield Fund (the "High Yield
Fund"), Nations Kansas Municipal Bond Fund (the "Kansas Fund") and
the Nations MidCap Index Fund (the "MidCap Index Fund");
o Investor A Shares of the High Yield Fund, the Kansas Fund and the
MidCap Index Fund; and
o Investor B Shares and Investor C Shares of the High Yield Fund and
the Kansas Fund.
All of the Funds of the Trust are diversified, with the exception of
the Kansas Fund.
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 Fund of the Trust will vote in the aggregate and not by fund, and
shareholders of each fund 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 fund 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 fund.
As of the date of the SAI set forth on the cover page, Bank of America,
N.A. ("Bank of America") and its affiliates possessed or shared power to dispose
or vote with respect to more than 25% of the outstanding shares of the Trust and
therefore could be considered to be a controlling person of the Trust for
purposes of the 1940 Act. For more detailed information concerning the
percentage of each class or series of shares over which Bank of America and its
affiliates possessed or shared power to dispose or vote as of a certain date,
see the discussion on Certain Record Holders.
The Trust does not presently intend to hold annual meetings except as
required by the 1940 Act.
Banc of America Advisors, Inc. ("BAAI") is the investment adviser to
the Funds. TradeStreet Investment Associates, Inc. ("TradeStreet") is the
investment sub-adviser to the MidCap Index Fund and the Kansas Fund. [INSERT
HIGH YIELD'S SUB-ADVISER NAME] is the investment sub-adviser to the High Yield
Fund. As used herein the term "Adviser" shall mean BAAI, TradeStreet and/or
[INSERT HIGH YIELD'S SUB-ADVISER NAME] as the context may require.
This SAI is intended to furnish prospective investors with additional
information concerning the Trust and the Funds. Some of the information required
to be in this SAI is also included in the Funds' current Prospectuses.
Additionally, the Prospectuses 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 Prospectuses 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 Prospectuses. No investment in
the Funds' Shares should be made without first reading the related Prospectuses.
1
<PAGE>
INVESTMENT LIMITATIONS
Information concerning each Fund's investment objective is set forth in
each of the Prospectuses. There can be no assurance that the Funds will achieve
their objectives. The features of the Funds' principal investment strategies and
the principal risks associated with those investment strategies also are
discussed in the Prospectuses.
The most significant fundamental and non-fundamental investment
restrictions applicable to the Funds' investment programs are set forth below.
The investment limitations that are matters of fundamental policy may not be
changed without the affirmative vote of a Fund's shareholders. The investment
limitations that are matters of non-fundamental policy may be changed without
the affirmative vote of a Fund's shareholders.
In addition to the policies outlined below, each Fund is seeking or has
obtained permission from the SEC to borrow money from or lend money to other
funds of the companies, and to other investment companies that permit such
transactions, and for which BAAI serves as investment adviser.
The Funds' Fundamental Policy Restrictions
Each Fund 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 Fund's ability to invest in securities issued by
other registered investment companies.
2. Purchase or sell real estate, except a Fund 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 Fund 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 Funds.
5. Make loans, except to the extent permitted by the 1940 Act, the rules
and regulations thereunder and any exemptive relief obtained by the
Funds.
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 Funds.
7. Except for the Kansas Fund, 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 Fund's assets may be invested in
the securities of one or more management investment companies to the
extent permitted by the 1940 Act.
2
<PAGE>
The Funds' Non-Fundamental Policy Restrictions
Each Fund 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. 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 Fund'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
Fund's net assets would be invested in initial margin and premiums
(excluding amounts "in-the-money") required to establish the contracts.
A Fund (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 Fund's total
assets, and (iii) will not buy call options with a value exceeding 5%
of the Fund's total assets.
4. Lend securities from its portfolio to brokers, dealers and financial
institutions, in amounts not to exceed (in the aggregate) one-third of
the Fund'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 Fund 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 Kansas Fund 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 Fund's total assets would be invested
in the securities of one issuer, and with respect to 50% of such Fund'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 Fund.
PERMISSIBLE FUND INVESTMENTS
In addition to the principal investment strategies for each Fund, which
are outlined in the Funds' prospectuses, each Fund also may invest in other
types of securities in percentages of less than 10% of its total assets (unless
otherwise indicated, E.G., most Funds 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.
High Yield Fund: In addition to the types of securities described in
its Prospectuses, the Fund 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,
3
<PAGE>
commercial paper and U.S. government securities (including obligations, such as
repurchase agreements, secured by such instruments). The Fund 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 Fund'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.
Kansas Fund: In addition to the types of securities described in its
Prospectuses, the Fund may invest in: 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 term calls and puts and covered calls; and U.S. and foreign
exchange-traded financial futures and options thereon approved by the CFTC for
market exposure risk management. The Fund also may lend its portfolio securities
to qualified institutional investors and may invest in repurchase agreements,
restricted, private placement and other illiquid securities. Additionally, the
Fund may purchase securities issued by other investment companies, consistent
with the its investment objective, investment strategies and policies. The Fund
also may invest in instruments issued by trusts or certain partnerships
including pass-through certificates representing participations in, or debt
instruments backed by, the securities and other assets owned by such issuers.
MidCap Index Fund: In addition to the types of securities described in
its Prospectuses, the Fund 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 Fund 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 Fund 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 Fund may lend its securities to qualified institutional
investors and may invest in repurchase agreements, restricted, private placement
and other illiquid securities. The Fund also may invest in Standard & Poor's
Depositary Receipts ("SPDRs"). In addition, the Funds may invest in other
securities issued by other investment companies, consistent with the Fund's
investment objective and policies.
In addition, when consistent with the Fund's investment objective, the Adviser
will employ various techniques to manage capital gain distributions. These
techniques include utilizing a share identification methodology whereby the Fund
will specifically identify each lot of shares of Fund securities that it holds,
which will allow the Fund 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 Fund securities, if any, with a lower tax basis. The
Fund will sell first those shares with the highest tax basis only when it is in
the best interest of the Fund to do so, and reserves the right to sell other
shares when appropriate. In addition, the Fund may, at times, sell Fund
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 Fund construction process
discussed above, employ a low Fund turnover strategy designed to defer the
realization of capital gains.
The Fund incurs transaction (brokerage) costs in connection with the
purchase and sale of Fund securities. For some funds, these costs can have a
material negative impact on performance. With respect thereto, 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.
Kansas Fund: In addition to the types of securities described in its
Prospectuses, the Fund may invest in: 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 term calls and puts and covered calls; and U.S. and foreign
exchange-traded financial futures and options thereon approved by the CFTC for
market exposure risk management. The Fund also may lend its portfolio securities
to qualified institutional investors and may invest in repurchase agreements,
restricted, private placement and other illiquid securities. Additionally, the
Fund may purchase securities issued by other investment companies, consistent
with the its investment objective, investment strategies and policies. The Fund
also may invest in instruments issued by trusts or certain partnerships
including pass-through certificates representing participations in, or debt
instruments backed by, the securities and other assets owned by such issuers.
4
<PAGE>
Additional information on the particular types of securities in which
certain Funds may invest in is set forth below.
ASSET-BACKED SECURITIES
IN GENERAL. Asset-backed securities arise through the grouping by
governmental, government-related, and private organizations of loans,
receivables, or other assets originated by various lenders. Asset-backed
securities consist of both mortgage- and non-mortgage-backed securities.
Interests in pools of these assets may differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal paid at maturity or specified call dates. Conversely,
asset-backed securities provide periodic payments which may consist of both
interest and principal payments.
The life of an asset-backed security varies depending upon the 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 Fund 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
Fund.
Mortgage-backed securities issued by private issuers, whether or not
such obligations are subject to guarantees by the private issuer, may entail
greater risk than obligations directly or indirectly guaranteed by the U.S.
Government.
Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities (collateral
collectively hereinafter referred to as "Mortgage Assets"). Multi-class
pass-through securities are interests in a trust composed of Mortgage Assets and
all references herein to CMOs will
5
<PAGE>
include multi-class pass-through securities. Payments of principal of and
interest on the Mortgage Assets, and any reinvestment income thereon, provide
the funds to pay debt service on the CMOs or make scheduled distribution on the
multi-class pass-through securities.
Moreover, principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates, resulting in a loss of all or part of the premium if any has
been paid. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semiannual basis.
The principal and interest payments on the Mortgage Assets may be
allocated among the various classes of CMOs in several ways. Typically, payments
of principal, including any prepayments, on the underlying mortgages are applied
to the classes in the order of their respective stated maturities or final
distribution dates, so that no payment of principal is made on CMOs of a class
until all CMOs of other classes having earlier stated maturities or final
distribution dates have been paid in full.
Stripped mortgage-backed securities ("SMBS") are derivative multi-class
mortgage securities. A Fund will only invest in SMBS that are obligations backed
by the full faith and credit of the U.S. Government. SMBS are usually structured
with two classes that receive different proportions of the interest and
principal distributions from a pool of mortgage assets. A Fund will only invest
in SMBS whose mortgage assets are U.S. Government obligations.
A common type of SMBS will be structured so that one class receives
some of the interest and most of the principal from the mortgage assets, while
the other class receives most of the interest and the remainder of the
principal. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, a Fund may fail to fully recoup its initial investment
in these securities. The market value of any class which consists primarily or
entirely of principal payments generally is unusually volatile in response to
changes in interest rates.
The average life of mortgage-backed securities varies with the
maturities of the underlying mortgage instruments. The average life is likely to
be substantially less than the original maturity of the mortgage pools
underlying the securities as the result of mortgage prepayments, mortgage
refinancings, or foreclosures. The rate of mortgage prepayments, and hence the
average life of the certificates, will be a function of the level of interest
rates, general economic conditions, the location and age of the mortgage and
other social and demographic conditions. Such prepayments are passed through to
the registered holder with the regular monthly payments of principal and
interest and have the effect of reducing future payments. Estimated average life
will be determined by the Adviser and used for the purpose of determining the
average weighted maturity and duration of the Funds.
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.
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.
6
<PAGE>
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 Fund 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 Funds 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 Fund 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 Fund is actually invested in
VRM's, the Fund'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
Fund'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.
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
7
<PAGE>
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 Fund. The
compounding effect from reinvestments of monthly payments received by the Fund
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.
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 Fund maintain a ratio of no less than 4 to 1 net assets (not
including funds borrowed pursuant to the Agreement) to the aggregate amount of
indebtedness pursuant to the Agreement. Specific borrowings by a Fund under the
Agreement over the last fiscal year, if any, can by found in the Funds' Annual
Reports for the year ended March 31, 1999.
8
<PAGE>
COMMERCIAL INSTRUMENTS
Commercial Instruments consist of short-term U.S. dollar-denominated
obligations issued by domestic corporations or issued in the U.S. by foreign
corporations and foreign commercial banks. The Prime Fund will limit purchases
of commercial instruments to instruments which: (a) if rated by at least two
NRSROs are rated in the highest rating category for short-term debt obligations
given by such organizations, or if only rated by one such organization, are
rated in the highest rating category for short-term debt obligations given by
such organization; or (b) if not rated, are (i) comparable in priority and
security to a class of short-term instruments of the same issuer that has such
rating(s), or (ii) of comparable quality to such instruments as determined by
the Board on the advice of the Adviser.
Investments by a Fund in commercial paper will consist of issues rated
in a manner consistent with such Fund's investment policies and objectives. In
addition, the Funds may acquire unrated commercial paper and corporate bonds
that are determined by the Adviser at the time of purchase to be of comparable
quality to rated instruments that may be acquired by such Funds as previously
described.
Variable-rate master demand notes are unsecured instruments that permit
the indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate. While some of these notes are not rated by credit rating
agencies, issuers of variable rate master demand notes must satisfy the Adviser
that similar criteria to that set forth above with respect to the issuers of
commercial paper purchasable by the Prime Fund are met. Variable-rate
instruments acquired by a Fund will be rated at a level consistent with such
Fund's investment objective and policies of high quality as determined by a
major rating agency or, if not rated, will be of comparable quality as
determined by the Adviser. See also the discussion of variable- and
floating-rate instruments in this SAI.
Variable- and floating-rate instruments are unsecured instruments that
permit the indebtedness thereunder to vary. While there may be no active
secondary market with respect to a particular variable or floating rate
instrument purchased by a Fund, a Fund may, from time to time as specified in
the instrument, demand payment of the principal or may resell the instrument to
a third party. The absence of an active secondary market, however, could make it
difficult for a Fund to dispose of an instrument if the issuer defaulted on its
payment obligation or during periods when a Fund is not entitled to exercise its
demand rights, and a Fund could, for these or other reasons, suffer a loss. A
Fund may invest in variable and floating rate instruments only when the Adviser
deems the investment to involve minimal credit risk. If such instruments are not
rated, the Adviser will consider the earning power, cash flows, and other
liquidity ratios of the issuers of such instruments and will continuously
monitor their financial status to meet payment on demand. In determining average
weighted portfolio maturity, an instrument will be deemed to have a maturity
equal to the longer of the period remaining to the next interest rate adjustment
or the demand notice period specified in the instrument.
Certain Funds also may purchase short-term participation interests in
loans extended by banks to companies, provided that both such banks and such
companies meet the quality standards set forth above. In purchasing a loan
participation or assignment, the Fund acquires some or all of the interest of a
bank or other lending institution in a loan to a corporate borrower. Many such
loans are secured and most impose restrictive covenants which must be met by the
borrower and which are generally more stringent than the covenants available in
publicly traded debt securities. However, interests in some loans may not be
secured, and the Fund will be exposed to a risk of loss if the borrower
defaults. Loan participations also may be purchased by the Fund when the
borrowing company is already in default. In purchasing a loan participation, the
Fund may have less protection under the federal securities laws than it has in
purchasing traditional types of securities. The Fund's ability to assert its
rights against the borrower will also depend on the particular terms of the loan
agreement among the parties.
COMBINED TRANSACTIONS
Certain Funds may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple forward foreign
currency exchange contracts and any combination of futures, options and forward
foreign currency exchange contracts ("component" transactions), instead of a
single transaction, as part of a single hedging strategy when, in the opinion of
the Adviser, it is in the best interest of a Fund to do so and where underlying
hedging strategies are permitted by a Fund's investment policies. A combined
transaction, while part of a single hedging strategy, may contain elements of
risk that are present in each of its component transactions.
CONVERTIBLE SECURITIES
Certain Funds may invest in convertible securities, such as bonds,
notes, debentures, preferred stocks and other securities that may be converted
into common stock. All convertible securities purchased by the Fund will be
9
<PAGE>
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 Fund may invest include
fixed-income and zero coupon debt securities, and preferred stock that may be
converted or exchanged at a stated or determinable exchange ratio into
underlying shares of common stock. The exchange ratio for any particular
convertible security may be adjusted from time to time due to stock splits,
dividends, spin-offs, other corporate distributions or scheduled changes in the
exchange ratio. Convertible debt securities and convertible preferred stocks,
until converted, have general characteristics similar to both debt and equity
securities. Although to a lesser extent than with debt securities, generally,
the market value of convertible securities tends to decline as interest rates
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion exchange feature, the market value of
convertible securities typically changes as the market value of the underlying
common stock changes, and, therefore, also tends to follow movements in the
general market for equity securities. A unique feature of convertible securities
is that as the market price of the underlying common stock declines, convertible
securities tend to trade increasingly on a yield basis, and so may not
experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the price
of a convertible security tends to rise as a reflection of the value of the
underlying common stock, although typically not as much as the price of the
underlying common stock. While no securities investments are without risk,
investments in convertible securities generally entail less risk than
investments in common stock of the same issuer.
As debt securities, convertible securities are investments which
provide for a stream of income or, in the case of zero coupon securities,
accretion of income with generally higher yields than common stocks. Of course,
like all debt securities, there can be no assurance of income or principal
payments because the issuers of the convertible securities may default on their
obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion
exchange features. Convertible securities generally are subordinated to other
similar debt securities but not to non-convertible securities of the same
issuer. Convertible bonds, as corporate debt obligations, are senior in right of
payment to all equity securities, and convertible preferred stock is senior to
common stock, of the same issuer. However, convertible bonds and convertible
preferred stock typically have lower coupon rates than similar non-convertible
securities. Convertible securities may be issued as fixed income obligations
that pay current income or as zero coupon notes and bonds, including Liquid
Yield Option Notes ("LYONs"). Zero coupon securities pay no cash income and are
sold at substantial discounts from their value at maturity. When held to
maturity, their entire income, which consists of accretion of discount, comes
from the difference between the issue price and their value at maturity. Zero
coupon convertible securities offer the opportunity for capital appreciation
because increases (or decreases) in the market value of such securities closely
follow the movements in the market value of the underlying common stock. Zero
coupon convertible securities generally are expected to be less volatile than
the underlying common stocks because they usually are issued with short
maturities (15 years or less) and are issued with options and/or redemption
features exercisable by the holder of the obligation entitling the holder to
redeem the obligation and receive a defined cash payment.
CORPORATE DEBT SECURITIES
Certain Funds may invest in corporate debt securities of domestic
issuers of all types and maturities, such as bonds, debentures, notes and
commercial paper. Corporate debt securities may involve equity features, such as
conversion or exchange rights or warrants for the acquisition of stock of the
same or a different issuer, participation based on revenue, sales or profit, or
the purchase of common stock or warrants in a unit transaction (where corporate
debt obligations and common stock are offered as a unit). Each Fund may also
invest in corporate debt securities of foreign issuers.
The corporate debt securities in which the Funds will invest will be
rated investment grade by at least one NRSRO (E.G., BBB or above by Standard &
Poor's Corporation ("S&P") or Baa or above by Moody's Investors Services, Inc.
("Moody's")). Commercial paper purchased by the Funds will be rated in the top
two categories by a NRSRO. Corporate debt securities that are not rated may be
purchased by such Funds if they are determined by the Adviser to be of
comparable quality under the direction of the Board of Trustees of the Trust. If
the rating of any corporate debt security held by a Fund falls below such
ratings or if the Adviser determines that an unrated corporate debt security is
no longer of comparable quality, then such security shall be disposed of in an
orderly manner as quickly as possible. A description of these ratings is
attached as Schedule A to this Statement of Additional Information.
10
<PAGE>
CUSTODIAL RECEIPTS
Certain Funds may also acquire custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Government notes or bonds. Such notes and bonds are held in custody by a
bank on behalf of the owners. These custodial receipts are known by various
names, including "Treasury Receipts," "Treasury Investors Growth Receipts" and
"Certificates of Accrual on Treasury Securities." Although custodial receipts
are not considered U.S. Government securities, they are indirectly issued or
guaranteed as to principal and interest by the U.S. Government, its agencies,
authorities or instrumentalities. Custodial receipts will be treated as illiquid
securities.
CURRENCY SWAPS
Certain Funds also may enter into currency swaps for hedging purposes
and to seek to increase total return. In as much as swaps are entered into for
good faith hedging purposes or are offset by a segregated account as described
below, the Fund and the Adviser believe that swaps do not constitute senior
securities as defined in the 1940 Act and, accordingly, will not treat them as
being subject to the Fund's borrowing restrictions. The net amount of the
excess, if any, of the Fund's obligations over its entitlement with respect to
each currency swap will be accrued on a daily basis and an amount of cash or
liquid high grade debt securities (I.E., securities rated in one of the top
three ratings categories by an NRSRO, or, if unrated, deemed by the Adviser to
be of comparable credit quality) having an aggregate net asset value at least
equal to such accrued excess will be maintained in a segregated account by the
Fund's custodian. The Fund will not enter into any currency swap unless the
credit quality of the unsecured senior debt or the claims-paying ability of the
other party thereto is considered to be investment grade by the Adviser.
DELAYED DELIVERY TRANSACTIONS
In a delayed delivery transaction, the Fund relies on the other party
to complete the transaction. If the transaction is not completed, the Fund may
miss a price or yield considered to be advantageous. In delayed delivery
transactions, delivery of the securities occurs beyond normal settlement
periods, but a Fund would not pay for such securities or start earning interest
on them until they are delivered. However, when a Fund purchases securities on
such a delayed delivery basis, it immediately assumes the risk of ownership,
including the risk of price fluctuation. Failure by a counterparty to deliver a
security purchased on a delayed delivery basis may result in a loss or missed
opportunity to make an alternative investment. Depending upon market conditions,
a Fund's delayed delivery purchase commitments could cause its net asset value
to be more volatile, because such securities may increase the amount by which
the Fund's total assets, including the value of when-issued and delayed delivery
securities held by the Fund, exceed its net assets.
DOLLAR ROLL TRANSACTIONS
Certain Funds may enter into "dollar roll" transactions, which consist
of the sale by a Fund to a bank or broker/dealer (the "counterparty") of GNMA
certificates or other mortgage-backed securities together with a commitment to
purchase from the counterparty similar, but not identical, securities at a
future date, at the same price. The counterparty receives all principal and
interest payments, including prepayments, made on the security while it is the
holder. A Fund receives a fee from the counterparty as consideration for
entering into the commitment to purchase. Dollar rolls may be renewed over a
period of several months with a different repurchase price and a cash settlement
made at each renewal without physical delivery of securities. Moreover, the
transaction may be preceded by a firm commitment agreement pursuant to which the
Fund agrees to buy a security on a future date. If the broker/dealer to whom a
Fund sells the security becomes insolvent, the Fund's right to purchase or
repurchase the security may be restricted; the value of the security may change
adversely over the term of the dollar roll; the security that the Fund is
required to repurchase may be worth less than the security that the Fund
originally held, and the return earned by the Fund with the proceeds of a dollar
roll may not exceed transaction costs.
The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Fund's right to purchase
from the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Fund is able to purchase them.
Similarly, the Fund may be required to purchase securities in connection with a
dollar roll at a higher price than may otherwise be available on the open
market. Since, as noted above, the counterparty is required to deliver a
similar, but not identical security to the Fund, the security that the Fund is
11
<PAGE>
required to buy under the dollar roll may be worth less than an identical
security. Finally, there can be no assurance that the Fund's use of the cash
that it receives from a dollar roll will provide a return that exceeds borrowing
costs.
EQUITY SWAP CONTRACTS
Certain Funds may from time to time enter into equity swap contracts.
The counterparty to an equity swap contract will typically be a bank, investment
banking firm or broker/dealer. For example, the counterparty will generally
agree to pay a Fund the amount, if any, by which the notional amount of the
Equity Swap Contract would have increased in value had it been invested in the
stocks comprising the S&P 500 Index in proportion to the composition of the
Index, plus the dividends that would have been received on those stocks. A Fund
will agree to pay to the counterparty a floating rate of interest (typically the
London Inter Bank Offered Rate) on the notional amount of the Equity Swap
Contract plus the amount, if any, by which that notional amount would have
decreased in value had it been invested in such stocks. Therefore, the return to
a Fund on any Equity Swap Contract should be the gain or loss on the notional
amount plus dividends on the stocks comprising the S&P 500 Index less the
interest paid by the Fund on the notional amount. A Fund will only enter into
Equity Swap Contracts on a net basis, I.E., the two parties' obligations are
netted out, with the Fund paying or receiving, as the case may be, only the net
amount of any payments. Payments under the Equity Swap Contracts may be made at
the conclusion of the contract or periodically during its term.
If there is a default by the counterparty to an Equity Swap Contract, a
Fund will be limited to contractual remedies pursuant to the agreements related
to the transaction. There is no assurance that Equity Swap Contract
counterparties will be able to meet their obligations pursuant to Equity Swap
Contracts or that, in the event of default, a Fund will succeed in pursuing
contractual remedies. A Fund thus assumes the risk that it may be delayed in or
prevented from obtaining payments owed to it pursuant to Equity Swap Contracts.
A Fund will closely monitor the credit of Equity Swap Contract counterparties in
order to minimize this risk.
Certain Funds may from time to time enter into the opposite side of
Equity Swap Contracts (I.E., where a Fund is obligated to pay the increase (net
of interest) or receive the decrease (plus interest) on the contract to reduce
the amount of the Fund's equity market exposure consistent with the Fund's
objective. These positions are sometimes referred to as Reverse Equity Swap
Contracts.
Equity Swap Contracts will not be used to leverage a Fund. A Fund will
not enter into any Equity Swap Contract or Reverse Equity Swap Contract unless,
at the time of entering into such transaction, the unsecured senior debt of the
counterparty is rated at least A by Moody's or S&P. Since the SEC considers
Equity Swap Contracts and Reverse Equity Swap Contracts to be illiquid
securities, a Fund will not invest in Equity Swap Contracts or Reverse Equity
Swap Contracts if the total value of such investments together with that of all
other illiquid securities which a Fund owns would exceed any limitation imposed
by the SEC Staff.
The Adviser does not believe that a Fund's obligations under Equity
Swap Contracts or Reverse Equity Swap Contracts are senior securities and,
accordingly, the Fund will not treat them as being subject to its borrowing
restrictions. However, the net amount of the excess, if any, of a Fund's
obligations over its respective entitlements with respect to each Equity Swap
Contract and each Reverse Equity Swap Contract will be accrued on a daily basis
and an amount of cash, U.S. Government securities or other liquid high quality
debt securities having an aggregate market value at least equal to the accrued
excess will be maintained in a segregated account by the Fund's custodian.
FOREIGN CURRENCY TRANSACTIONS
Certain Funds may invest in foreign currency transactions. Foreign
securities involve currency risks. The U.S. dollar value of a foreign security
tends to decrease when the value of the U.S. dollar rises against the foreign
currency in which the security is denominated, and tends to increase when the
value of the U.S. dollar falls against such currency. A Fund may purchase or
sell forward foreign currency exchange contracts ("forward contracts") to
attempt to minimize the risk to the Fund from adverse changes in the
relationship between the U.S. dollar and foreign currencies. A Fund may also
purchase and sell foreign currency futures contracts and related options (see
"Purchase and Sale of Currency Futures Contracts and Related Options"). A
forward contract is an obligation to 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,
12
<PAGE>
and is traded at a net price without commission. A Fund will direct its
custodian to segregate high grade liquid assets in an amount at least equal to
its obligations under each forward foreign currency exchange contract. Neither
spot transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of a Fund's portfolio securities or in foreign
exchange rates, or prevent loss if the prices of these securities should
decline.
A Fund may enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of the security (a
"transaction hedge"). In addition, when the Adviser believes that a foreign
currency may suffer a substantial decline against the U.S. dollar, it may enter
into a forward sale contract to sell an amount of that foreign currency
approximating the value of some or all of the Fund's securities denominated in
such foreign currency, or when the Adviser believes that the U.S. dollar may
suffer a substantial decline against the foreign currency, it may enter into a
forward purchase contract to buy that foreign currency for a fixed dollar amount
(a "position hedge").
A Fund may, however, enter into a forward contract to sell a different
foreign currency for a fixed U.S. dollar amount where the Adviser believes that
the U.S. dollar value of the currency to be sold pursuant to the forward
contract will fall whenever there is a decline in the U.S. dollar value of the
currency in which the fund securities are denominated (a "cross-hedge").
Foreign currency hedging transactions are an attempt to protect a Fund
against changes in foreign currency exchange rates between the trade and
settlement dates of specific securities transactions or changes in foreign
currency exchange rates that would adversely affect a portfolio position or an
anticipated portfolio position. Although these transactions tend to minimize the
risk of loss due to a decline in the value of the hedged currency, at the same
time they tend to limit any potential gain that might be realized should the
value of the hedged currency increase. The precise matching of the forward
contract amount and the value of the securities involved will not generally be
possible because the future value of these securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and date it matures.
The Fund's custodian will segregate cash, U.S. Government securities or
other high-quality debt securities having a value equal to the aggregate amount
of the Fund's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the segregated securities
declines, additional cash or securities will be segregated on a daily basis so
that the value of the segregated securities will equal the amount of the Fund's
commitments with respect to such contracts. As an alternative to segregating all
or part of such securities, the Fund may purchase a call option permitting the
Fund to purchase the amount of foreign currency being hedged by a forward sale
contract at a price no higher than the forward contract price or the Fund may
purchase a put option permitting the Fund to sell the amount of foreign currency
subject to a forward purchase contract at a price as high or higher than the
forward contract price.
The Funds are dollar-denominated mutual funds and therefore
consideration is given to hedging part or all of the portfolio back to U.S.
dollars from international currencies. All decisions to hedge are based upon an
analysis of the relative value of the U.S. dollar on an international purchasing
power parity 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).
13
<PAGE>
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 CFTC and must be executed through a
brokerage firm, known as a futures commission merchant, which is a member of the
relevant contract market. Futures contracts trade on these markets, and the
exchanges, through their clearing organizations, guarantee that the contracts
will be performed as between the clearing members of the exchange. Presently,
futures contracts are based on such debt securities as long-term U.S. Treasury
Bonds, Treasury Notes, GNMA modified pass-through mortgage-backed securities,
three-month U.S. Treasury Bills, bank certificates of deposit, and on indices of
municipal, corporate and government bonds.
While futures contracts based on securities do provide for the delivery
and acceptance of securities, such deliveries and acceptances are seldom made.
Generally, a futures contract is terminated by entering into an offsetting
transaction. A Fund will incur brokerage fees when it purchases and sells
futures contracts. At the time such a purchase or sale is made, a Fund must
provide cash or money market securities as a deposit known as "margin." The
initial deposit required will vary, but may be as low as 2% or less of a
contract's face value. Daily thereafter, the futures contract is valued through
a process known as "marking to market," and a Fund that engages in futures
transactions may receive or be required to pay "variation margin" as the futures
contract becomes more or less valuable. At the time of delivery of securities
pursuant to a futures contract based on securities, adjustments are made to
recognize differences in value arising from the delivery of securities with a
different interest rate than the specific security that provides the standard
for the contract. In some (but not many) cases, securities called for by a
futures contract may not have been issued when the contract was written.
Futures contracts on indices of securities are settled through the
making and acceptance of cash settlements based on changes in value of the
underlying rate or index between the time the contract is entered into and the
time it is liquidated.
FUTURES CONTRACTS ON FIXED INCOME SECURITIES AND RELATED INDICES. As
noted in their respective Prospectuses, certain Funds may enter into
transactions in futures contracts for the purpose of hedging a relevant portion
of their portfolios. A Fund may enter into transactions in futures contracts
that are based on U.S. Government obligations, including any index of government
obligations that may be available for trading. Such transactions will be entered
into where movements in the value of the securities or index underlying a
futures contract can be expected to correlate closely with movements in the
value of securities held in a Fund. For example, a Fund may sell futures
contracts in anticipation of a general rise in the level of interest rates,
which would result in a decline in the value of its fixed income securities. If
the expected rise in interest rates occurs, the Fund may realize gains on its
futures position, which should offset all or part of the decline in value of
fixed income fund securities. A Fund could protect against such decline by
selling fixed income securities, but such a strategy would involve higher
transaction costs than the sale of futures contracts and, if interest rates
again declined, the Fund would be unable to take advantage of the resulting
market advance without purchases of additional securities.
The purpose of the purchase or sale of a futures contract on government
securities and indices of government securities, in the case of the
above-referenced Funds, which hold or intend to acquire long-term debt
securities, is to protect a Fund from fluctuations in interest rates without
actually buying or selling long-term debt securities. For example, if long-term
bonds are held by a Fund, and interest rates were expected to increase, the Fund
might enter into futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling an equivalent value of the long-term
bonds held by the Fund. If interest rates did increase, the value of the debt
securities in the Fund would decline, but the value of the futures contracts to
the Fund would increase at approximately the same rate thereby keeping the net
asset value of the Fund from declining as much as it otherwise would have. When
a Fund is not fully invested and a decline in interest rates is anticipated,
which would increase the cost of fixed income securities that the Fund intends
to acquire, it may purchase futures contracts. In the event that the projected
decline in interest rates occurs, the increased cost of the securities acquired
by the Fund should be offset, in whole or part, by gains on the futures
contracts by entering into offsetting transactions on the contract market on
which the initial purchase was effected. In a substantial majority of
transactions involving futures contracts on fixed income securities, a Fund will
purchase the securities upon termination of the long futures positions, but
under unusual market conditions, a long futures position may be terminated
without a corresponding purchase of securities.
14
<PAGE>
Similarly, when it is expected that interest rates may decline, futures
contracts on fixed income securities and indices of government securities may be
purchased for the purpose of hedging against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of such futures
contracts should be similar to that of long-term bonds, a Fund could take
advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Fund's cash reserves could then be used to
buy long-term bonds in the cash market. Similar results could be accomplished by
selling bonds with long maturities and investing in bonds with short maturities
when interest rates are expected to increase. However, since the futures market
is more liquid than the cash market, the use of these futures contracts as an
investment technique allows a Fund to act in anticipation of such an interest
rate decline without having to sell its portfolio securities. To the extent a
Fund enters into futures contracts for this purpose, the segregated assets
maintained by a Fund will consist of cash, cash equivalents or high quality debt
securities of the Fund in an amount equal to the difference between the
fluctuating market value of such futures contract and the aggregate value of the
initial deposit and variation margin payments made by the Fund with respect to
such futures contracts.
STOCK INDEX FUTURES CONTRACTS. Certain Funds may sell stock index
futures contracts in order to offset a decrease in market value of its
securities that might otherwise result from a market decline. A Fund may do so
either to hedge the value of its portfolio as a whole, or to protect against
declines, occurring prior to sales of securities, in the value of securities to
be sold. Conversely, a Fund may purchase stock index futures contracts in order
to protect against anticipated increases in the cost of securities to be
acquired.
In addition, a Fund may utilize stock index futures contracts in
anticipation of changes in the composition of its portfolio. For example, in the
event that a Fund expects to narrow the range of industry groups represented in
its portfolio, it may, prior to making purchases of the actual securities,
establish a long futures position based on a more restricted index, such as an
index comprised of securities of a particular industry group. As such securities
are acquired, a Fund's futures positions would be closed out. A Fund may also
sell futures contracts in connection with this strategy, in order to 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 Funds may purchase put options on futures contracts in which
such Funds are permitted to invest for the purpose of hedging a relevant portion
of their portfolios against an anticipated decline in the values of portfolio
securities resulting from increases in interest rates, and may purchase call
options on such futures contracts as a hedge against an interest rate decline
when they are not fully invested. A Fund would write options on these futures
contracts primarily for the purpose of terminating existing positions.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS, OPTIONS ON STOCK INDICES AND
OPTIONS ON EQUITY SECURITIES. Certain Funds may purchase put options on stock
index futures contracts, stock indices or equity securities for the purpose of
hedging the relevant portion of their portfolio securities against an
anticipated market-wide decline or against declines in the values of individual
portfolio securities, and they may purchase call options on such futures
contracts as a hedge against a market advance when they are not fully invested.
A Fund would write options on such futures contracts primarily for the purpose
of terminating existing positions. In general, options on stock indices will be
employed in lieu of options on stock index futures contracts only where they
present an opportunity to hedge at lower cost. With respect to options on equity
securities, a Fund may, under certain circumstances, purchase a combination of
call options on such securities and U.S. Treasury bills. The Adviser believes
that such a combination may more closely parallel movements in the value of the
security underlying the call option than would the option itself.
15
<PAGE>
Further, while a Fund generally would not write options on individual
portfolio securities, it may do so under limited circumstances known as
"targeted sales" and "targeted buys," which involve the writing of call or put
options in an attempt to purchase or sell portfolio securities at specific
desired prices. A Fund would receive a fee, or a "premium," for the writing of
the option. For example, where the Fund seeks to sell portfolio securities at a
"targeted" price, it may write a call option at that price. In the event that
the market rises above the exercise price, it would receive its "targeted"
price, upon the exercise of the option, as well as the premium income. Also,
where it seeks to buy portfolio securities at a "targeted" price, it may write a
put option at that price for which it will receive the premium income. In the
event that the market declines below the exercise price, a Fund would pay its
"targeted" price upon the exercise of the option. In the event that the market
does not move in the direction or to the extent anticipated, however, the
targeted sale or buy might not be successful and a Fund could sustain a loss on
the transaction that may not be offset by the premium received. In addition, a
Fund may be required to forego the benefit of an intervening increase or decline
in value of the underlying security.
OPTIONS AND FUTURES STRATEGIES. The Adviser may seek to increase the
current return of certain Funds by writing covered call or put options. In
addition, through the writing and purchase of options and the purchase and sale
of U.S. and certain foreign stock index futures contracts, interest rate futures
contracts, foreign currency futures contracts and related options on such
futures contracts, the Adviser may at times seek to hedge against a decline in
the value of securities included in the Fund or an increase in the price of
securities that it plans to purchase for the Fund. Expenses and losses incurred
as a result of such hedging strategies will reduce the Fund's current return. A
Fund's investment in foreign stock index futures contracts and foreign interest
rate futures contracts, and related options on such futures contracts, are
limited to only those contracts and related options that have been approved by
the CFTC for investment by U.S. investors. Additionally, with respect to a
Fund's investment in foreign options, unless such options are specifically
authorized for investment by order of the CFTC or meet the definition of trade
options as set forth in CFTC Rule 32.4, a Fund will not make these investments.
The ability of a Fund to engage in the options and futures strategies
described below will depend on the availability of liquid markets in such
instruments. Markets in options and futures with respect to stock indices,
foreign government securities and foreign currencies are relatively new and
still developing. It is impossible to predict the amount of trading interest
that may exist in various types of options or futures. Therefore, no assurance
can be given that a Fund will be able to utilize these instruments effectively
for the purposes stated below. Furthermore, a Fund's ability to engage in
options and futures transactions may be limited by tax considerations. Although
a Fund will only engage in options and futures transactions for limited
purposes, these activities will involve certain risks which are described below
under "Risk Factors Associated with Futures and Options Transactions." A Fund
will not engage in options and futures transactions for leveraging purposes.
WRITING COVERED OPTIONS ON SECURITIES. Certain Funds may write covered
call options and covered put options on securities in which it is permitted to
invest from time to time as the Adviser determines is appropriate in seeking to
attain its objective. Call options written by a Fund give the holder the right
to buy the underlying securities from a Fund at a stated exercise price; put
options give the holder the right to sell the underlying security to the Fund at
a stated price.
A Fund may write only covered options, which means that, so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, a Fund will
maintain in a separate account cash or short-term U.S. Government securities
with a value equal to or greater than the exercise price of the underlying
securities. A Fund may also write combinations of covered puts and calls on the
same underlying security.
A Fund will receive a premium from writing a put or call option, which
increases the Fund's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price of the underlying security to the
exercise price of the option, the term of the option and the volatility of the
market price of the underlying security. By writing a call option, a Fund limits
its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, the Fund assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then current market
value, resulting in a potential capital loss if the purchase price exceeds the
market value plus the amount of the premium received, unless the security
subsequently appreciates in value.
16
<PAGE>
A Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written. A Fund will realize a
profit or loss from such transaction if the cost of such transaction is less or
more than the premium received from the writing of the option. In the case of a
put option, any loss so incurred may be partially or entirely offset by the
premium received from a simultaneous or subsequent sale of a different put
option. Because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option is likely to be offset in whole
or in part by unrealized appreciation of the underlying security owned by a
Fund.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES. A Fund may purchase put
options to protect its portfolio holdings in an underlying security against a
decline in market value. Such hedge protection is provided during the life of
the put option since a Fund, as holder of the put option, is able to sell the
underlying security at the put exercise price regardless of any decline in the
underlying security's market price. In order for a put option to be profitable,
the market price of the underlying security must decline sufficiently below the
exercise price to cover the premium and transaction costs. By using put options
in this manner, a Fund will reduce any profit it might otherwise have realized
in its underlying security by the premium paid for the put option and by
transaction costs.
A Fund may also purchase call options to hedge against an increase in
prices of securities that it wants ultimately to buy. Such hedge protection is
provided during the life of the call option since the Fund, as holder of the
call option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, a Fund will reduce any
profit it might have realized had it bought the underlying security at the time
it purchased the call option by the premium paid for the call option and by
transaction costs.
PURCHASE AND SALE OF OPTIONS AND FUTURES ON STOCK INDICES. A Fund may
purchase and sell options on non-U.S. stock indices and stock index futures as a
hedge against movements in the equity markets.
Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specific price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of that stock index is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option expressed in dollars multiplied by a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike options on specific securities, all settlements
of options on stock indices are in cash and gain or loss depends on general
movements in the stocks included in the index rather than price movements in
particular stocks. A stock index futures contract is an agreement in which one
party agrees to deliver to the other an amount of cash equal to a specific
amount multiplied by the difference between the value of a specific stock index
at the close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of securities is made.
If the Adviser expects general stock market prices to rise, a Fund
might purchase a call option on a stock index or a futures contract on that
index as a hedge against an increase in prices of particular equity securities
it wants ultimately to buy. If in fact the stock index does rise, the price of
the particular equity securities intended to be purchased may also increase, but
that increase would be offset in part by the increase in the value of a Fund's
index option or futures contract resulting from the increase in the index. If,
on the other hand, the Adviser expects general stock market prices to decline, a
Fund might purchase a put option or sell a futures contract on the index. If
that index does in fact decline, the value of some or all of the equity
securities in a Fund may also be expected to decline, but that decrease would be
offset in part by the increase in the value of the Fund's position in such put
option or futures contract.
PURCHASE AND SALE OF INTEREST RATE FUTURES. A Fund may purchase and
sell interest rate futures contracts on foreign government securities including,
but not limited to, debt securities of the governments and central banks of
France, Germany, Denmark and Japan for the purpose of hedging fixed income and
interest sensitive securities against the adverse effects of anticipated
movements in interest rates.
A Fund may sell interest rate futures contracts in anticipation of an
increase in the general level of interest rates. Generally, as interest rates
rise, the market value of the fixed income securities held by a Fund will fall,
thus reducing the net asset value of the Fund. This interest rate risk can be
reduced without employing futures as a hedge by selling long-term fixed income
securities and either reinvesting the proceeds in securities with shorter
maturities or by holding assets in cash. This strategy, however, entails
increased transaction costs to a Fund in the form of dealer spreads and
brokerage commissions.
17
<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 Fund's short position in the futures contracts will also tend to increase,
thus offsetting all or a portion of the depreciation in the market value of a
Fund's investments that are being hedged. While a Fund will incur commission
expenses in selling and closing out futures positions (which is done by taking
an opposite position which operates to terminate the position in the futures
contract), commissions on futures transactions are lower than transaction costs
incurred in the purchase and sale of portfolio securities.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS AND INTEREST RATE FUTURES
CONTRACTS. A Fund may purchase and write call and put options on non-U.S. stock
index and interest rate futures contracts. A Fund may use such options on
futures contracts in connection with its hedging strategies in lieu of
purchasing and writing options directly on the underlying securities or stock
indices or purchasing and selling the underlying futures. For example, a Fund
may purchase put options or write call options on stock index futures, or
interest rate futures, rather than selling futures contracts, in anticipation of
a decline in general stock market prices or rise in interest rates,
respectively, or purchase call options or write put options on stock index or
interest rate futures, rather than purchasing such futures, to hedge against
possible increases in the price of equity securities or debt securities,
respectively, which the Fund intends to purchase.
PURCHASE AND SALE OF CURRENCY FUTURES CONTRACTS AND RELATED OPTIONS. In
order to hedge its portfolio and to protect it against possible variations in
foreign exchange rates pending the settlement of securities transactions, a Fund
may buy or sell currency futures contracts and related options. If a fall in
exchange rates for a particular currency is anticipated, a Fund may sell a
currency futures contract or a call option thereon or purchase a put option on
such futures contract as a hedge. If it is anticipated that exchange rates will
rise, a Fund may purchase a currency futures contract or a call option thereon
or sell (write) a put option to protect against an increase in the price of
securities denominated in a particular currency a Fund intends to purchase.
These futures contracts and related options thereon will be used only as a hedge
against anticipated currency rate changes, and all options on currency futures
written by a Fund will be covered.
A currency futures contract sale creates an obligation by a Fund, as
seller, to deliver the amount of currency called for in the contract at a
specified future time for a special price. A currency futures contract purchase
creates an obligation by a Fund, as purchaser, to take delivery of an amount of
currency at a specified future time at a specified price. Although the terms of
currency futures contracts specify actual delivery or receipt, in most instances
the contracts are closed out before the settlement date without the making or
taking of delivery of the currency. Closing out of a currency futures contract
is effected by entering into an offsetting purchase or sale transaction. Unlike
a currency futures contract, which requires the parties to buy and sell currency
on a set date, an option on a currency futures contract entitles its holder to
decide on or before a future date whether to enter into such a contract. If the
holder decides not to enter into the contract, the premium paid for the option
is fixed at the point of sale.
The Fund will write (sell) only covered put and call options on
currency futures. This means that a Fund will provide for its obligations upon
exercise of the option by segregating sufficient cash or short-term obligations
or by holding an offsetting position in the option or underlying currency
future, or a combination of the foregoing. A Fund will, so long as it is
obligated as the writer of a call option on currency futures, own on a
contract-for-contract basis an equal long position in currency futures with the
same delivery date or a call option on stock index futures with the difference,
if any, between the market value of the call written and the market value of the
call or long currency futures purchased maintained by a Fund in cash, Treasury
bills, or other high grade short-term obligations in a segregated account with
its custodian. If at the close of business on any day the market value of the
call purchased by a Fund falls below 100% of the market value of the call
written by the Fund, a Fund will so segregate an amount of cash, Treasury bills
or other high grade short-term obligations equal in value to the difference.
Alternatively, a Fund may cover the call option through segregating with the
custodian an amount of the particular foreign currency equal to the amount of
foreign currency per futures contract option times the number of options written
by a Fund. In the case of put options on currency futures written by the Fund,
the Fund will hold the aggregate exercise price in cash, Treasury bills, or
other high grade short-term obligations in a segregated account with its
custodian, or own put options on currency futures or short currency futures,
with the difference, if any, between the market value of the put written and the
market value of the puts purchased or the currency futures sold maintained by a
Fund in cash, Treasury bills or other high grade short-term obligations in a
segregated account with its custodian. If at the close of business on any day
the market value of the put options purchased or the currency futures by a Fund
falls below 100% of the market value of the put options written by the Fund, a
Fund will so segregate an amount of cash, Treasury bills or other high grade
short-term obligations equal in value to the difference.
18
<PAGE>
If other methods of providing appropriate cover are developed, a Fund
reserves the right to employ them to the extent consistent with applicable
regulatory and exchange requirements. In connection with transactions in stock
index options, stock index futures, interest rate futures, foreign currency
futures and related options on such futures, a Fund will be required to deposit
as "initial margin" an amount of cash or short-term government securities equal
to from 5% to 8% of the contract amount. Thereafter, subsequent payments
(referred to as "variation margin") are made to and from the broker to reflect
changes in the value of the futures contract.
LIMITATIONS ON PURCHASE OF OPTIONS. The staff of the SEC has taken the
position that purchased over-the-counter options and assets used to cover
written over-the-counter options are illiquid and, therefore, together with
other illiquid securities, cannot exceed 15% of a Fund's assets. The Adviser
intends to limit a Fund's writing of over-the-counter options in accordance with
the following procedure. Each Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts which a Fund has in place with
such primary dealers will provide that the Fund has the absolute right to
repurchase an option it writes at any time at a price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by a Fund for writing the option, plus the
amount, if any, of the option's intrinsic value (I.E., the amount that the
option is in-the-money). The formula also may include a factor to account for
the difference between the price of the security and the strike price of the
option if the option is written out-of-the-money. A Fund will treat all or a
part of the formula price as illiquid for purposes of any limitation on illiquid
securities imposed by the SEC staff.
Risk Factors Associated with Futures and Options Transactions
The effective use of options and futures strategies depends on, among
other things, a Fund's ability to terminate options and futures positions at
times when its the Adviser deems it desirable to do so. Although a Fund will not
enter into an option or futures position unless the Adviser believes that a
liquid secondary market exists for such option or future, there is no assurance
that a Fund will be able to effect closing transactions at any particular time
or at an acceptable price. A Fund generally expects that its options and futures
transactions will be conducted on recognized U.S. and foreign securities and
commodity exchanges. In certain instances, however, a Fund may purchase and sell
options in the over-the-counter market. A Fund's ability to terminate option
positions established in the over-the-counter market may be more limited than in
the case of exchange-traded options and may also involve the risk that
securities dealers participating in such transactions would fail to meet their
obligations to the Fund.
Options and futures markets can be highly volatile and transactions of
this type carry a high risk of loss. Moreover, a relatively small adverse market
movement with respect to these types of transactions may result not only in loss
of the original investment but also in unquantifiable further loss exceeding any
margin deposited.
The use of options and futures involves the risk of imperfect
correlation between movements in options and futures prices and movements in the
price of securities which are the subject of the hedge. Such correlation,
particularly with respect to options on stock indices and stock index futures,
is imperfect, and such risk increases as the composition of a Fund diverges from
the composition of the relevant index. The successful use of these strategies
also depends on the ability of the Adviser to correctly forecast interest rate
movements, currency rate movements and general stock market price movements.
In addition to certain risk factors described above, the following sets
forth certain information regarding the potential risks associated with the
Funds' futures and options transactions.
RISK OF IMPERFECT CORRELATION. A Fund's ability effectively to hedge
all or a portion of its portfolio through transactions in futures, options on
futures or options on stock indices depends on the degree to which movements in
the value of the securities or index underlying such hedging instrument
correlate with movements in the value of the relevant portion of the Fund's
securities. If the values of the securities being hedged do not move in the same
amount or direction as the underlying security or index, the hedging strategy
for a Fund might not be successful and the Fund could sustain losses on its
hedging transactions which would not be offset by gains on its portfolio. It is
also possible that there may be a negative correlation between the security or
index underlying a futures or option contract and the portfolio securities being
hedged, which could result in losses both on the hedging transaction and the
fund securities. In such instances, a Fund's overall return could be less than
if the hedging transactions had not been undertaken. Stock index futures or
options based on a narrower index of securities may present greater risk than
options or futures based on a broad market index, as a narrower index is more
susceptible to rapid and extreme fluctuations resulting from changes in the
value of a small number of securities. A Fund would, however, effect
transactions in such futures or options only for hedging purposes.
19
<PAGE>
The trading of futures and options on indices involves the additional
risk of imperfect correlation between movements in the futures or option price
and the value of the underlying index. The anticipated spread between the prices
may be distorted due to differences in the nature of the markets, such as
differences in margin requirements, the liquidity of such markets and the
participation of speculators in the futures and options market. The purchase of
an option on a futures contract also involves the risk that changes in the value
of underlying futures contract will not be fully reflected in the value of the
option purchased. The risk of imperfect correlation, however, generally tends to
diminish as the maturity date of the futures contract or termination date of the
option approaches. The risk incurred in purchasing an option on a futures
contract is limited to the amount of the premium plus related transaction costs,
although it may be necessary under certain circumstances to exercise the option
and enter into the underlying futures contract in order to realize a profit.
Under certain extreme market conditions, it is possible that a Fund will not be
able to establish hedging positions, or that any hedging strategy adopted will
be insufficient to completely protect the Fund.
A Fund will purchase or sell futures contracts or options only if, in
the Adviser's judgment, there is expected to be a sufficient degree of
correlation between movements in the value of such instruments and changes in
the value of the relevant portion of the Fund's portfolio for the hedge to be
effective. There can be no assurance that the Adviser's judgment will be
accurate.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET. The ordinary spreads
between prices in the cash and futures markets, due to differences in the
natures of those markets, are subject to distortions. First, all participants in
the futures market are subject to initial deposit and variation margin
requirements. This could require a Fund to post additional cash or cash
equivalents as the value of the position fluctuates. Further, rather than
meeting additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the liquidity of the
futures or options market may be lacking. Prior to exercise or expiration, a
futures or option position may be terminated only by entering into a closing
purchase or sale transaction, which requires a secondary market on the exchange
on which the position was originally established. While a Fund will establish a
futures or option position only if there appears to be a liquid secondary market
therefor, there can be no assurance that such a market will exist for any
particular futures or option contract at any specific time. In such event, it
may not be possible to close out a position held by a Fund, which could require
the Fund to purchase or sell the instrument underlying the position, make or
receive a cash settlement, or meet ongoing variation margin requirements. The
inability to close out futures or option positions also could have an adverse
impact on a Fund's ability effectively to hedge its securities, or the relevant
portion thereof.
The liquidity of a secondary market in a futures contract or an option
on a futures contract may be adversely affected by "daily price fluctuation
limits" established by the exchanges, which limit the amount of fluctuation in
the price of a contract during a single trading day and prohibit trading beyond
such limits once they have been reached. The trading of futures and options
contracts also is subject to the risk of trading halts, suspensions, exchange or
clearing house equipment failures, government intervention, insolvency of the
brokerage firm or clearing house or other disruptions of normal trading
activity, which could at times make it difficult or impossible to liquidate
existing positions or to recover excess variation margin payments.
RISK OF PREDICTING INTEREST RATE MOVEMENTS. Investments in futures
contracts on fixed income securities and related indices involve the risk that
if the Adviser's investment judgment concerning the general direction of
interest rates is incorrect, a Fund's overall performance may be poorer than if
it had not entered into any such contract. For example, if a Fund has been
hedged against the possibility of an increase in interest rates which would
adversely affect the price of bonds held in its portfolio and interest rates
decrease instead, the Fund will lose part or all of the benefit of the increased
value of its bonds which have been hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if a Fund has
insufficient cash, it may have to sell bonds from its portfolio to meet daily
variation margin requirements, possibly at a time when it may be disadvantageous
to do so. Such sale of bonds may be, but will not necessarily be, at increased
prices which reflect the rising market.
20
<PAGE>
TRADING AND POSITION LIMITS. Each contract market on which futures and
option contracts are traded has established a number of limitations governing
the maximum number of positions which may be held by a trader, whether acting
alone or in concert with others. The Adviser does not believe that these trading
and position limits will have an adverse impact on the hedging strategies
regarding the Funds' investments.
REGULATIONS ON THE USE OF FUTURES AND OPTIONS CONTRACTS. Regulations of
the CFTC require that the Funds enter into transactions in futures contracts and
options thereon for hedging purposes only, in order to assure that they are not
deemed to be a "commodity pool" under such regulations. In particular, CFTC
regulations require that all short futures positions be entered into for the
purpose of hedging the value of investment securities held by a Fund, and that
all long futures positions either constitute bona fide hedging transactions, as
defined in such regulations, or have a total value not in excess of an amount
determined by reference to certain cash and securities positions maintained for
the Fund, and accrued profits on such positions. In addition, a Fund may not
purchase or sell such instruments if, immediately thereafter, the sum of the
amount of initial margin deposits on its existing futures positions and premiums
paid for options on futures contracts would exceed 5% of the market value of the
Fund's total assets.
When a Fund purchases a futures contract, an amount of cash or cash
equivalents or high quality debt securities will be segregated with the Fund's
custodian so that the amount so segregated, plus the initial deposit and
variation margin held in the account of its broker, will at all times equal the
value of the futures contract, thereby insuring that the use of such futures is
unleveraged.
The Funds' ability to engage in the hedging transactions described
herein may be limited by the current federal income tax requirement that a Fund
derive less than 30% of its gross income from the sale or other disposition of
stock or securities held for less than three months. The Funds may also further
limit their ability to engage in such transactions in response to the policies
and concerns of various Federal and state regulatory agencies. Such policies may
be changed by vote of the Board of Trustees.
Additional Information on Futures and Options
As stated in the Prospectus, each Non-Money Market Fund, 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 Funds
intends to limit its transactions in futures contracts and options so that not
more than 5% of the Fund's net assets are at risk. Furthermore, in no event
would any Fund 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 Fund under the rules of the exchange on
which the futures contract (or futures option) is traded, plus any premiums paid
by the Fund on its open futures options positions, exceeds 5% of the Fund's
total assets, after taking into account any unrealized profits and unrealized
losses on the Fund's open contracts and excluding the amount that a futures
option is "in-the-money" at the time of purchase. (An option to buy a futures
contract is "in-the-money" if the value of the contract that is subject to the
option exceeds the exercise price; an option to sell a futures contract is
"in-the-money" if the exercise Price exceeds the value of the contract that is
subject of the option.)
I. Interest Rate Futures Contracts.
Use of Interest Rate Futures Contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures market have tended to move generally in the aggregate
in concert with the cash market prices and have maintained fairly predictable
relationships. Accordingly, a Fund 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 Fund 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 Fund, through using futures contracts.
21
<PAGE>
Description of Interest Rates Futures Contracts. An interest rate
futures contract sale would create an obligation by a Fund, 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 Fund, 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 Fund'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 Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the Fund's entering
into a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund 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 Fund 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 Funds 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 Fund 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 Fund 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 Fund might enter into futures contract sales of Treasury bonds for an
equivalent of 98. If the market value of the portfolio securities does indeed
decline from 100 to 95, the equivalent futures market price for the Treasury
bonds might also decline from 98 to 93.
In that case, the five-point loss in the market value of the portfolio
security would be offset by the five-point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.
The Adviser could be wrong in its forecast of interest rates and the
equivalent futures market price could rise above 98. In this case, the market
value of the portfolio securities, including the portfolio security being
protected, would increase. The benefit of this increase would be reduced by the
loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund 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 Fund 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 Fund's basic motivation would be to maintain for a time the
income advantage from investing in the short-term securities; the Fund 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 Fund may
purchase.
22
<PAGE>
For example, assume that the market price of a long-term bond that the
Fund 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 Fund might enter
into futures contracts purchases of Treasury bonds for an equivalent price of
98. At the same time, the Fund 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 Fund 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 Fund 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 Fund would discontinue its purchase program for
long-term bonds. The yield on short-term securities in the portfolio, including
those originally in the pool assigned to the particular long-term bond, would
remain higher than yields on long-term bonds. The benefit of this continued
incremental income will be reduced by the loss realized on closing out the
futures contract purchase.
In each transaction, expenses also would be incurred.
II. Index Futures Contracts.
A stock or bond index assigns relative values to the stocks or bonds
included in the index, and the index fluctuates with changes in the market
values of the stocks or bonds included. Some stock index futures contracts are
based on broad market indices, such as the Standard & Poor's 500 or the New York
Stock Exchange Composite Index. In contract, certain exchanges offer futures
contracts on narrower market indices, such as the Standard & Poor's 100, the
Bond Buyer Municipal Bond Index, an index composed of 40 term revenue and
general obligation bonds, or indices based on an industry or market segment,
such as oil and gas stocks. Futures contracts are traded on organized exchanges
regulated by the Commodity Futures Trading Commission. Transactions on such
exchanges are cleared through a clearing corporation, which guarantees the
performance of the parties to each contract.
A Fund 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 Fund may do so either to hedge the value of its portfolio as
a whole, or to protect against declines, occurring prior to sales of securities,
in the value of the securities to be sold. Conversely, a Fund will purchase
index futures contracts in anticipation of purchases of securities. In a
substantial majority of these transactions, the Fund 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 Fund may utilize index futures contracts in anticipation
of changes in the composition of its portfolio holdings. For example, in the
event that a Fund 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 Fund 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).
23
<PAGE>
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
-Day Hedge is Placed
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures = $62,500/Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/Contract
Increase in Purchase Gain on Futures = $2,500
Price = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future Hedge
Objective: Protect Against Declining (Value of the Portfolio)
Factors
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index - 1.0
Portfolio Futures
-Day Hedge is Placed
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Gain on Futures = $40,000
Value = $40 000
IF, HOWEVER, THE MARKET MOVED IN THE OPPOSITE DIRECTION, THAT IS, MARKET
VALUE DECREASED AND THE FUND HAD ENTERED INTO AN ANTICIPATORY PURCHASE HEDGE, OR
MARKET VALUE INCREASED AND THE FUND HAD HEDGED ITS STOCK PORTFOLIO, THE RESULTS
OF THE FUND'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
24
<PAGE>
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 Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to deposit with the broker or in a segregated account
with the Fund'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 Fund 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 Fund 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 Fund will be
entitled to receive from the broker a variation margin payment equal to that
increase in value. Conversely, where a Fund 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 Fund 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 Fund'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 Fund, and the Fund realizes a
loss or gain.
IV. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by a Fund
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 Fund 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 Fund 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
Fund 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 Fund 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 Fund 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 Fund may decline. If this occurred, the Fund 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 Fund 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 Fund 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 Fund will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
25
<PAGE>
In instances involving the purchase of futures contracts by a Fund, 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 Fund's Custodian
and/or in a margin account with a broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of Price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the Adviser still may not
result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
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 Fund 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 Fund also is subject to the Adviser's
ability to predict correctly movements in the direction of the market. For
example, if a Fund has hedged against the possibility of a decline in the market
adversely affecting securities held in its portfolio and securities prices
increase instead, the Fund 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 Fund
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 Fund may have to sell
securities at a time when it may be disadvantageous to do so.
V. Options on Futures Contracts.
The Funds 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.
26
<PAGE>
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 Fund because the maximum amount at risk is the premium paid
for the options (plus transaction costs). Although permitted by their
fundamental investment policies, the Funds do not currently intend to write
future options, and will not do so in the future absent any necessary regulatory
approvals.
Accounting Treatment.
Accounting for futures contracts and options will be in accordance with
generally accepted accounting principles.
GUARANTEED INVESTMENT CONTRACTS
Guaranteed investment contracts, investment contracts or funding
agreements (each referred to as a "GIC") are investment instruments issued by
highly rated insurance companies. Pursuant to such contracts, a Fund may make
cash contributions to a deposit fund of the insurance company's general or
separate accounts. The insurance company then credits to a Fund guaranteed
interest. The insurance company may assess periodic charges against a GIC for
expense and service costs allocable to it, and the charges will be deducted from
the value of the deposit fund. The purchase price paid for a GIC generally
becomes part of the general assets of the issuer, and the contract is paid from
the general assets of the issuer.
A Fund will only purchase GICs from issuers which, at the time of
purchase, meet quality and credit standards established by the Adviser.
Generally, GICs are not assignable or transferable without the permission of the
issuing insurance companies, and an active secondary market in GICs does not
currently exist. Also, a Fund may not receive the principal amount of a GIC from
the insurance company on seven days' notice or less, at which point the GIC may
be considered to be an illiquid investment.
INSURED MUNICIPAL SECURITIES
Certain of the Municipal Securities held by the Funds may be insured at
the time of issuance as to the timely payment of principal and interest. The
insurance policies will usually be obtained by the issuer of the Municipal
Securities at the time of its original issuance. In the event that the issuer
defaults with respect to interest or principal payments, the insurer will be
notified and will be required to make payment to the bondholders. There is,
however, no guarantee that the insurer will meet its obligations. In addition,
such insurance will not protect against market fluctuations caused by changes in
interest rates and other factors.
INTEREST RATE TRANSACTIONS
Among the strategic transactions into which certain Funds may enter are
interest rate swaps and the purchase or sale of related caps and floors. The
Funds expect to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio, to protect
against currency fluctuations, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. A Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by a Fund
with another party of their respective commitments to pay or receive interest,
E.G. an exchange of floating rate payments for fixed rate payments with respect
to a notional amount of principal. A currency swap is an agreement to exchange
cash flows on a notional amount of two or more currencies based on the relative
value differential among them and an index swap is an agreement to swap cash
flows on a notional amount based on changes in the values of the reference
indices. The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount.
27
<PAGE>
A Fund will usually enter into swaps on a net basis, I.E., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. In as much as these swaps, caps and
floors are entered into for good faith hedging purposes, the Adviser and the
Fund believe such obligations do not constitute senior securities under the 1940
Act and, accordingly, will not treat them as being subject to its borrowing
restrictions. A Fund will not enter into any swap, cap and floor transaction
unless, at the time of entering into such transaction, the unsecured long-term
debt of the counterparty, combined with any credit enhancements, is rated at
least "A" by Standard & Poor's Corporation or Moody's Investors Service, Inc. or
has an equivalent rating from an NRSRO or is determined to be of equivalent
credit quality by the Adviser. If there is a default by the counterparty, the
Fund may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps and floors are more recent innovations
for which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
With respect to swaps, a Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high grade securities
having a value equal to the accrued excess. Caps and floors require segregation
of assets with a value equal to the Fund's net obligation, if any.
LOWER RATED (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 Fund's portfolio, with a commensurate effect
on the value of the Fund's shares. Therefore, an investment in the Fund should
not be considered as a complete investment program and may not be appropriate
for all investors.
The market prices of lower rated securities may fluctuate more than
higher rated securities and may decline significantly in periods of general
economic difficulty which may follow periods of rising interest rates. During an
economic downturn or a prolonged period of rising interest rates, the ability of
issuers of lower quality debt to service their payment obligations, meet
projected goals, or obtain additional financing may be impaired.
Since the risk of default is higher for lower rated securities, the
Adviser will try to minimize the risks inherent in investing in lower rated debt
securities by engaging in credit analysis, diversification, and attention to
current developments and trends affecting interest rates and economic
conditions. The Adviser will attempt to identify those issuers of high-yielding
securities whose financial condition is adequate to meet future obligations,
have improved, or are expected to improve in the future.
Unrated securities are not necessarily of lower quality than rated
securities, but they may not be attractive to as many buyers. Each Fund's
policies regarding lower rated debt securities are not fundamental and may be
changed at any time without shareholder approval.
While the market values of lower rated debt and comparable unrated
securities tend to react less to fluctuations in interest rate levels than the
market values of higher-rated securities, the market values of certain lower
rated debt and comparable unrated securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
higher-rated securities. In addition, lower rated debt securities and comparable
unrated securities generally present a higher degree of credit risk. Issuers of
lower rated debt and comparable unrated securities often are highly leveraged
and may not have more traditional methods of financing available to them so that
their ability to service their debt obligations during an economic downturn or
during sustained periods of rising interest rates may be impaired. The risk of
loss due to default by such issuers is significantly greater because lower rated
debt and comparable unrated securities generally are unsecured and frequently
are subordinated to the prior payment of senior indebtedness. A Fund may incur
additional expenses to the extent that it is required to seek recovery upon a
default in the payment of principal or interest on its portfolio holdings. The
existence of limited markets for lower rated debt and comparable unrated
securities may diminish a Fund's ability to (a) obtain accurate market
quotations for purposes of valuing such securities and calculating its net asset
value and (b) sell the securities at fair value either to meet redemption
requests or to respond to changes in the economy or in financial markets.
28
<PAGE>
Fixed-income securities, including lower rated debt securities and
comparable unrated securities, frequently have call or buy-back features that
permit their issuers to call or repurchase the securities from their holders,
such as a Fund. If an issuer exercises these rights during periods of declining
interest rates, a Fund may have to replace the security with a lower yielding
security, thus resulting in a decreased return to a Fund.
The market for certain lower rated debt and comparable unrated
securities is relatively new and has not weathered a major economic recession.
The effect that such a recession might have on such securities is not known. Any
such recession, however, could disrupt severely the market for such securities
and adversely affect the value of such securities. Any such economic downturn
also could adversely affect the ability of the issuers of such securities to
repay principal and pay interest thereon.
MUNICIPAL SECURITIES
GENERALLY. The two principal classifications of municipal securities
are "general obligation" securities and "revenue" securities. General obligation
securities are secured by the issuer's pledge of its full faith, credit, and
taxing power for the payment of principal and interest. Revenue securities are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as the user of the facility being financed. Private
activity bonds held by a Fund are in most cases revenue securities and are not
payable from the unrestricted revenues of the issuer. Consequently, the credit
quality of private activity bonds is usually directly related to the credit
standing of the corporate user of the facility involved.
Municipal securities may include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which created
the issuer.
Municipal securities may include variable- or floating- rate
instruments issued by industrial development authorities and other governmental
entities. While there may not be an active secondary market with respect to a
particular instrument purchased by a Fund, a Fund may demand payment of the
principal and accrued interest on the instrument or may resell it to a third
party as specified in the instruments. The absence of an active secondary
market, however, could make it difficult for a Fund to dispose of the instrument
if the issuer defaulted on its payment obligation or during periods the Fund is
not entitled to exercise its demand rights, and the Fund could, for these or
other reasons, suffer a loss.
Some of these instruments may be unrated, but unrated instruments
purchased by a Fund will be determined by the Adviser to be of comparable
quality at the time of purchase to instruments rated "high quality" by any major
rating service. Where necessary to ensure that an instrument is of comparable
"high quality," a Fund will require that an issuer's obligation to pay the
principal of the note may be backed by an unconditional bank letter or line of
credit, guarantee, or commitment to lend.
Municipal securities may include participations in privately arranged
loans to municipal borrowers, some of which may be referred to as "municipal
leases." Generally such loans are unrated, in which case they will be determined
by the Adviser to be of comparable quality at the time of purchase to rated
instruments that may be acquired by a Fund. Frequently, privately arranged loans
have variable interest rates and may be backed by a bank letter of credit. In
other cases, they may be unsecured or may be secured by assets not easily
liquidated. Moreover, such loans in most cases are not backed by the taxing
authority of the issuers and may have limited marketability or may be marketable
only by virtue of a provision requiring repayment following demand by the
lender. Such loans made by a Fund may have a demand provision permitting the
Fund to require payment within seven days. Participations in such loans,
however, may not have such a demand provision and may not be otherwise
marketable.
Although lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate, and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds. In the case of a
"non-appropriation" lease, the Funds' ability to recover under the lease in the
event of non-appropriation or default will be limited solely to the repossession
of the leased property in the event foreclosure might prove difficult.
29
<PAGE>
The Funds will not invest more than 5% of their total investment assets
in lease obligations that contain "non-appropriation" clauses where (1) the
nature of the leased equipment or property is such that its ownership or use is
essential to a governmental function of the municipality, (2) the lease payments
will commence amortization of principal at an early date resulting in an average
life of seven years or less for the lease obligation, (3) appropriate covenants
will be obtained from the municipal obligor prohibiting the substitution or
purchase of similar equipment if lease payments are not appropriated, (4) the
lease obligor has maintained good market acceptability in the past, (5) the
investment is of a size that will be attractive to institutional investors, and
(6) the underlying leased equipment has elements of probability and/or use that
enhance its marketability in the event foreclosure on the underlying equipment
were ever required. The Funds have not imposed any percentage limitations with
respect to their investment in lease obligations not subject to the
"non-appropriation" risk. To the extent municipal leases are illiquid, they will
be subject to each Fund's limitation on investments in illiquid securities.
Recovery of an investment in any such loan that is illiquid and payable on
demand may depend on the ability of the municipal borrower to meet an obligation
for full repayment of principal and payment of accrued interest within the
demand period, normally seven days or less (unless a Fund determines that a
particular loan issue, unlike most such loans, has a readily available market).
As it deems appropriate, the Adviser will establish procedures to monitor the
credit standing of each such municipal borrower, including its ability to meet
contractual payment obligations.
In evaluating the credit quality of a municipal lease obligation and
determining whether such lease obligation will be considered "liquid," the
Adviser for each Fund will consider: (1) whether the lease can be canceled; (2)
what assurance there is that the assets represented by the lease can be sold;
(3) the strength of the lessee's general credit (E.G., its debt, administrative,
economic, and financial characteristics); (4) the likelihood that the
municipality will discontinue appropriating funding for the leased property
because the property is no longer deemed essential to the operations of the
municipality (E.G., the potential for an "event of non-appropriation"); and (5)
the legal recourse in the event of failure to appropriate.
Municipal securities may include units of participation in trusts
holding pools of tax-exempt leases. Municipal participation interests may be
purchased from financial institutions, and give the purchaser an undivided
interest in one or more underlying municipal security. To the extent that
municipal participation interests are considered to be "illiquid securities,"
such instruments are subject to each Fund's limitation on the purchase of
illiquid securities. Municipal leases and participating interests therein, which
may take the form of a lease or an installment sales contract, are issued by
state and local governments and authorities to acquire a wide variety of
equipment and facilities. Interest payments on qualifying leases are exempt from
Federal income taxes.
In addition, certain of the Funds may acquire "stand-by commitments"
from banks or broker/dealers with respect to municipal securities held in their
portfolios. Under a stand-by commitment, a dealer would agree to purchase at a
Fund's option specified Municipal Securities at a specified price. The Funds
will acquire stand-by commitments solely to facilitate portfolio liquidity and
do not intend to exercise their rights thereunder for trading purposes.
Although the Funds do not presently intend to do so on a regular basis,
each may invest more than 25% of its total assets in municipal securities the
interest on which is paid solely from revenues of similar projects if such
investment is deemed necessary or appropriate by the Adviser. To the extent that
more than 25% of a Fund's total assets are invested in Municipal Securities that
are payable from the revenues of similar projects, a Fund will be subject to the
peculiar risks presented by such projects to a greater extent than it would be
if its assets were not so concentrated.
There are, of course, variations in the quality of Municipal
Securities, both within a particular classification and between classifications,
and the yields on Municipal Securities depend upon a variety of factors,
including general money market conditions, the financial condition of the
issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of NRSROs represent their opinions as to the quality of
Municipal Securities. It should be emphasized, however, that these ratings are
general and are not absolute standards of quality, and Municipal Securities with
the same maturity, interest rate, and rating may have different yields while
Municipal Securities of the same maturity and interest rate with different
ratings may have the same yield. Subsequent to its purchase by a Fund, an issue
of Municipal Securities may cease to be rated, or its rating may be reduced
below the minimum rating required for purchase by that Fund. The Adviser will
consider such an event in determining whether a Fund should continue to hold the
obligation.
30
<PAGE>
Opinions relating to the validity of Municipal Securities and to the
exemption of interest thereon from regular Federal income tax or state income
tax are rendered by counsel to the issuer or bond counsel at the time of
issuance. Neither the Funds nor the Adviser will review the proceedings relating
to the issuance of Municipal Securities or the bases for opinions relating to
the validity of such issuance.
The payment of principal and interest on most securities purchased by a
Fund will depend upon the ability of the issuers to meet their obligations. Each
state, each of their political subdivisions, municipalities, and public
authorities, as well as the District of Columbia, Puerto Rico, Guam, and the
Virgin Islands are a separate "issuer" as that term is used in the Prospectuses
and this SAI. The non-governmental user of facilities financed by private
activity bonds is also considered to be an "issuer." An issuer's obligations
under its Municipal Securities are subject to the provisions of bankruptcy,
insolvency, and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Code, and laws, if any, which may be enacted by
Federal or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes. The power or
ability of an issuer to meet its obligations for the payment of interest on and
principal of its Municipal Securities may be materially adversely affected by
litigation or other conditions.
Certain types of Municipal Securities (private activity bonds) have
been or are issued to obtain funds to provide, among other things, privately
operated housing facilities, pollution control facilities, convention or trade
show facilities, mass transit, airport, port or parking facilities, and certain
local facilities for water supply, gas, electricity, or sewage or solid waste
disposal. Private activity bonds are also issued for privately held or publicly
owned corporations in the financing of commercial or industrial facilities. Most
governments are authorized to issue private activity bonds for such purposes in
order to encourage corporations to locate within their communities. The
principal and interest on these obligations may be payable from the general
revenues of the users of such facilities.
The following information relating to the Fund supplements information
relevant to the Fund in the related Prospectuses.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the Federal income tax exemption for
interest on Municipal Securities. Moreover, with respect to Municipal Securities
issued by Kansas, the Trust cannot predict which legislation, if any, may be
proposed in the state legislature or which proposals, if any, might be enacted.
Such proposals, while pending or if enacted, might materially and adversely
affect the availability of Municipal Securities generally, or Kansas Municipal
Securities specifically, for investment by the Fund and the liquidity and value
of such portfolios. In such an event, a Fund impacted would re-evaluate its
investment objective and policies and consider possible changes in its structure
or possible dissolution.
Although the Kansas Fund invests primarily in Municipal Securities with
intermediate and long-term maturities, it may also purchase short-term General
Obligation Notes, Tax Anticipation Notes, Bond Anticipation Notes, Revenue
Anticipation Notes, Tax-Exempt Commercial Paper, Construction Loan Notes, and
other forms of short-term loans. Such instruments are issued with a short-term
maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements, or other revenues. The Fund may also invest in long-term tax-exempt
instruments.
The following information as to certain Kansas State considerations is
given to investors in view of the Fund's policy of concentrating its investments
in Kansas issuers. Such information supplements the information in the
Prospectuses. It is derived from sources that are generally available to
investors and is believed to be accurate. Such information constitutes only a
brief summary, does not purport to be a complete description and is based on
information from official statements relating to securities offerings of Kansas
State issuers. Neither the Trust nor the Kansas Fund has independently verified
this information.
31
<PAGE>
Traditionally a farm-based economy, recent growth in the trade,
services and manufacturing sectors has decreased Kansas' strong dependence on
agriculture. At present, the Kansas economy has four major economic sectors
(wholesale and retail trade, manufacturing, services, and government) which
employ from 16 to 24 percent of the labor force. Agriculture employed an
estimated 4.6 percent of the work force in 1996.
Primary sources of state revenue are a 4.9% sales tax, a corporate
income tax between 4% and 7.35% and an individual income tax between 3.5% and
7.75%. In 1994, the sales tax constituted 31% of taxes collected. The largest
percentage of expenditures from all state funds are in the areas of education
and research (public schools, state universities, state board of education) and
human resources (assistance programs). General property taxes generate a large
portion of local tax revenue. Local sales and use taxes have provided an
increased amount of revenue, from $30 million in 1980 to $343.9 million in 1995.
The State's 1995 General Fund showed total revenues of $3.2 billion
against total expenditures of $2.5 billion. In 1990, the Kansas legislature
approved House Bill 2867 which established ending balances as a mechanism to
hold state expenditure growth to the level of revenue growth. House Bill 2867
requires that in each fiscal year certain funds be transferred from the state
General Fund to the newly created cash operating reserve fund. The reserve fund
is designed to be available in the event that revenues in the General Fund are
insufficient to meet budgeted expenditures. House Bill 2867 also provides that
state General Fund balances in addition to the cash operating reserve fund must
be one percent of expenditures in fiscal year 1993, two percent of expenditures
in fiscal year 1994 and 2.5 percent in 1995 and each fiscal year thereafter.
BAAI believes that the information summarized above describes some of
the more significant matters relating to the Kansas Fund. The sources of the
information are the official statements of issuers located in the state, other
publicly available documents, and oral statements from various state agencies.
BAAI has not independently verified any of the information contained in the
official statements, other publicly available documents, or oral statements from
various state agencies.
OPTIONS ON CURRENCIES
Certain Funds may purchase and sell options on currencies to hedge the
value of securities the Fund 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 Funds may
invest in securities issued by other investment companies within the limits
prescribed by the 1940 Act, its rules and regulations and any exemptive relief
obtained by the Funds. Each Fund currently intends to limit its investments so
that, as determined immediately after a securities purchase is made: (a) not
more than 5% of the value of its total assets will be invested in the securities
of any one investment company; (b) not more than 10% of the value of its total
assets will be invested in the aggregate in securities of investment companies
as a group; and (c) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Fund or by the Trust as a whole. As a
shareholder of another investment company, a Fund would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including Advisory fees. These expenses would be in addition to the Advisory and
other expenses that a Fund bears in connection with its own operations. The
Adviser has agreed to remit to the respective investing Fund fees payable to it
under its respective Investment Advisory Agreement with an affiliated money
market Fund to the extent such fees are based upon the investing Fund's assets
invested in shares of the affiliated money market fund.
PARTICIPATION INTERESTS AND COMPANY RECEIPTS
Certain Funds 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
Fund an undivided interest in the security in the proportion that the Fund's
participation interest or receipt bears to the total principal amount of the
security. As to certain instruments for which the Fund will be able to demand
payment, the Fund 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 Fund 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 Fund to obtain repayment could depend on the issuing
financial institution.
32
<PAGE>
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 Fund may
invest pursuant to guidelines approved by the Board of Trustees. For certain
participation interests or trust receipts the Fund will have the right to demand
payment, on not more than 30 days' notice, for all or any part of the Fund'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.
REPURCHASE AGREEMENTS
The repurchase price under any repurchase agreements described in the
Prospectuses generally equals the price paid by a Fund plus interest negotiated
on the basis of current short-term rates (which may be more or less than the
rate on the securities underlying the repurchase agreement). Securities subject
to repurchase agreements will be held by the Trust's custodian in a segregated
account or in the Federal Reserve/Treasury book-entry system. Repurchase
agreements are considered to be loans by the Trust under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS
At the time a Fund enters into a reverse repurchase agreement, it may
establish a segregated account with its custodian bank in which it will maintain
cash, U.S. Government securities or other liquid high grade debt obligations
equal in value to its obligations in respect of reverse repurchase agreements.
Reverse repurchase agreements involve the risk that the market value of the
securities the Funds are obligated to repurchase under the agreement may decline
below the repurchase price. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, the Funds' use
of proceeds of the agreement may be restricted pending a determination by the
other party, or its trustee or receiver, whether to enforce the Funds'
obligation to repurchase the securities. Reverse repurchase agreements are
speculative techniques involving leverage, and are subject to asset coverage
requirements if the Funds do not establish and maintain a segregated account (as
described above). In addition, some or all of the proceeds received by a Fund
from the sale of a portfolio instrument may be applied to the purchase of a
repurchase agreement. To the extent the proceeds are used in this fashion and a
common broker/dealer is the counterparty on both the reverse repurchase
agreement and the repurchase agreement, the arrangement might be recharacterized
as a swap transaction. Under the requirements of the 1940 Act, the Funds are
required to maintain an asset coverage (including the proceeds of the
borrowings) of at least 300% of all borrowings. Depending on market conditions,
the Funds' asset coverage and other factors at the time of a reverse repurchase,
the Funds may not establish a segregated account when the Adviser believes it is
not in the best interests of the Funds to do so. In this case, such reverse
repurchase agreements will be considered borrowings subject to the asset
coverage described above.
SECURITIES LENDING
To increase return on portfolio securities, certain Funds may lend
their portfolio securities to broker/dealers and other institutional investors
pursuant to agreements requiring that the loans be continuously secured by
collateral equal at all times in value to at least the market value of the
securities loaned. Collateral for such loans may include cash, securities of the
U.S. Government, its agencies or instrumentalities, an irrevocable letter of
credit issued by (i) a U.S. bank that has total assets exceeding $1 billion and
that is a member of the Federal Deposit Insurance Corporation, or (ii) a foreign
bank that is one of the 75 largest foreign commercial banks in terms of total
assets, or any combination thereof. Such loans will not be made if, as a result,
the aggregate of all outstanding loans of the Fund involved exceeds 33% of the
value of its total assets 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 Fund is able to
terminate the securities loan upon notice of not more than five business days
and thereby secure the return to the Fund of securities identical to the
transferred securities upon termination of the loan.
33
<PAGE>
SHORT SALES
Certain Funds may from time to time enter into short sales
transactions. A Fund will not make short sales of securities nor maintain a
short position unless at all times when a short position is open, such Fund owns
an equal amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for securities of
the same issue as, and equal in amount to, the securities sold short. This is a
technique known as selling short "against the box." Such short sales will be
used by a Fund for the purpose of deferring recognition of gain or loss for
federal income tax purposes.
SPECIAL SITUATIONS
Certain Funds may invest in "special situations." A special situation
arises when, in the opinion of the Adviser, the securities of a particular
company will, within a reasonably estimable period of time, be accorded market
recognition at an appreciated value solely by reason of a development applicable
to that company, and regardless of general business conditions or movements of
the market as a whole. Developments creating special situations might include,
among others: liquidations, reorganizations, recapitalizations, mergers,
material litigation, technical breakthroughs and new management or management
policies. Although large and well known companies may be involved, special
situations more often involve comparatively small or unseasoned companies.
Investments in unseasoned companies and special situations often involve much
greater risk than is inherent in ordinary investment securities.
STANDARD & POOR'S DEPOSITARY RECEIPTS ("SPDRS")
Certain Funds may purchase Standard & Poor's Depositary Receipts, or
SPDRs, which are interests in a unit investment trust holding a portfolio of
securities linked to the S&P 500 Index. Because a unit investment trust is an
investment company under the 1940 Act, a Fund's investments in SPDRs are subject
to the limitations set forth in Section 12(d)(1)(A) of the 1940 Act.
SPDRs closely track the underlying portfolio of securities, trade like
a share of common stock and pay periodic dividends proportionate to those paid
by the portfolio of stocks that comprise the S&P 500 Index. As a holder of
interests in a unit investment trust, a Fund would indirectly bear its ratable
share of that unit investment trust's expenses. At the same time the Fund would
continue to pay its own management and advisory fees and other expenses, as a
result of which the Fund and its shareholders in effect will be absorbing
duplicate levels of fees with respect to investments in such unit investment
trusts.
SPDRs are subject to the risks of an investment in a broadly based
portfolio of large-capitalization common stocks, including the risk that the
general level of stock prices may decline, thereby adversely affecting the value
of such investment. In addition, because individual investments in SPDRs are not
redeemable, except upon termination of the unit investment trust, the liquidity
of small holdings of SPDRs will depend upon the existence of a secondary market.
Large holdings of SPDRs are called "creation unit size" and are redeemable in
kind only and are not redeemable for cash from the unit investment trust. The
price of SPDRs is derived and based upon the securities held by the unit
investment trust. Accordingly, the level of risk involved in the purchase or
sale of a SPDR is similar to the risk involved in the purchase or sale of
traditional common stock, with the exception that the pricing mechanism for
SPDRs is based on a basket of stocks. Disruptions in the markets for the
securities underlying SPDRs purchased or sold by a Fund could result in losses
on SPDRs.
STAND-BY COMMITMENTS
Certain Funds may acquire "stand-by commitments" with respect to
Municipal Securities held in their portfolios. Under a "stand-by commitment," a
dealer agrees to purchase from a Fund, at a Fund's option, specified Municipal
Securities at a specified price. Stand-by commitments are exercisable by a Fund
at any time before the maturity of the underlying Municipal Securities, and may
be sold, transferred, or assigned by a Fund only with the underlying
instruments.
34
<PAGE>
The amount payable to a tax-free bond fund, such as the Kansas Fund,
upon its exercise of a stand-by commitment will normally be (i) the Fund's
acquisition cost of the Municipal Securities (excluding any accrued interest
which a the Fund paid on their acquisition), less any amortized market premium
or plus any amortized market or original issue discount during the period a Fund
owned the securities, plus (ii) all interest accrued on the securities since the
last interest payment date during that period. Under normal market conditions,
in determining net asset value a Fund values the underlying Municipal Securities
on an amortized cost basis. Accordingly, the amount payable by a dealer upon
exercise of a stand-by commitment will normally be substantially the same as the
portfolio value of the underlying Municipal Securities.
A Fund's right to exercise stand-by commitments will be unconditional
and unqualified. A stand-by commitment will not be transferable by a Fund,
although the Fund could sell the underlying Municipal Securities to a third
party at any time. Until a Fund exercises its stand-by commitment, it owns the
securities in its portfolio which are subject to the stand-by commitment.
The Funds expect that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for the security being acquired
which will be subject to the commitment (thus reducing the yield to maturity
otherwise available for the same security). When a Fund pays any consideration
directly or indirectly for a stand-by commitment, its cost will be reflected as
unrealized depreciation for the period during which the commitment is held by
that Fund.
Each Fund intends to enter into stand-by commitments only with banks
and broker/dealers which, in the Adviser's opinion, present minimal credit
risks. In evaluating the credit worthiness of the issuer of a stand-by
commitment, the Adviser will review periodically the issuer's assets,
liabilities, contingent claims, and other relevant financial information.
The Funds would acquire stand-by commitments solely to facilitate
portfolio liquidity and do not intend to exercise their rights thereunder for
trading purposes. Stand-by commitments acquired by a Fund will be valued at zero
in determining net asset value. A Fund's reliance upon the credit of these
dealers, banks, and broker/dealers will be secured by the value of the
underlying Municipal Securities that are subject to the commitment. Thus, the
risk of loss to the Fund in connection with a "stand-by commitment" will not be
qualitatively different from the risk of loss faced by a person that is holding
securities pending settlement after having agreed to sell the securities in the
ordinary course of business.
STRIPPED SECURITIES
Certain Funds may purchase stripped securities issued or guaranteed by
the U.S. Government, where the principal and interest components are traded
independently under the Separate Trading of Registered Interest and Principal of
Securities program ("STRIPS"). Under STRIPS, the principal and interest
components are individually numbered and separately issued by the U.S. Treasury
at the request of depository financial institutions, which then trade the
component parts independently.
In addition, the Fund may purchase stripped mortgage-backed securities
("SMBS") issued by the U.S. Government (or a U.S. Government agency or
instrumentality) or by private issuers such as banks and other institutions. If
the underlying obligations experience greater than anticipated prepayments of
principal, the Fund may fail to fully recover its initial investment. The market
value of the class consisting entirely of principal payments can be extremely
volatile in response to changes in interest rates. The yields on a class of SMBS
that receives all or most of the interest are generally higher than prevailing
market yields on other mortgage-backed obligations because their cash flow
patterns are also volatile and there is a greater risk that the initial
investment will not be full recovered. SMBS issued by the U.S. Government (or a
U.S. Government agency or instrumentality) may be considered liquid under
guidelines established by the 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 Fund's per share net asset value.
Although stripped securities may not pay interest to holders prior to
maturity, Federal income tax regulations require a Fund to recognize as interest
income a portion of the bond's discount each year. This income must then be
distributed to shareholders along with other income earned by the Fund. To the
extent that any shareholders in the Fund elect to receive their dividends in
cash rather than reinvest such dividends in additional Fund shares, cash to make
these distributions will have to be provided from the assets of the Fund or
other sources such as proceeds of sales of Fund shares and/or sales of portfolio
securities. In such cases, the Fund will not be able to purchase additional
income producing securities with cash used to make such distributions and its
current income may ultimately be reduced as a result.
35
<PAGE>
U.S. AND FOREIGN BANK OBLIGATIONS
These obligations include negotiable certificates of deposit, banker's
acceptances and fixed time deposits. Each Fund limits its investments in
domestic bank obligations to banks having total assets in excess of $1 billion
and subject to regulation by the U.S. Government. Each Fund may also invest in
certificates of deposit issued by members of the Federal Deposit Insurance
Corporation ("FDIC") having total assets of less than $1 billion, provided that
the Fund will at no time own more than $100,000 principal amount of certificates
of deposit (or any higher principal amount which in the future may be fully
covered by FDIC insurance) of any one of those issuers. Fixed time deposits are
obligations which are payable at a stated maturity date and bear a fixed rate of
interest. Generally, fixed time deposits may be withdrawn on demand by a Fund,
but they may be subject to early withdrawal penalties which vary depending upon
market conditions and the remaining maturity of the obligation. Although fixed
time deposits do not have a market, there are no contractual restrictions on a
Fund's right to transfer a beneficial interest in the deposit to a third party.
Each Fund limits any investments in foreign bank obligations (I.E.,
obligations of foreign branches and subsidiaries of domestic banks, and domestic
and foreign branches and agencies of foreign banks) to obligations of banks
which at the time of investment are branches or subsidiaries of domestic banks
which meet the criteria in the preceding paragraphs or are branches or agencies
of foreign banks which (i) have more than $10 billion, or the equivalent in
other currencies, in total assets; (ii) in terms of assets are among the 75
largest foreign banks in the world; (iii) have branches or agencies in the
United States; and (iv) in the opinion of the Adviser, pursuant to the
established by the Board of Trustees of the Trust, are of an investment quality
comparable to obligations of domestic banks which may be purchased by a Fund.
These obligations may be general obligations of the parent bank in addition to
the issuing branch or subsidiary, but the parent bank's obligations may be
limited by the terms of the specific obligation or by governmental regulation.
Each Fund also limits its investments in foreign bank obligations to banks,
branches and subsidiaries located in Western Europe (United Kingdom, France,
Germany, Belgium, The Netherlands, Italy and Switzerland), Scandinavia (Denmark
and Sweden), Australia, Japan, the Cayman Islands, the Bahamas and Canada. Each
Fund will limit its investment in securities of foreign banks to not more than
20% of total assets at the time of investment.
Each Fund may also make interest-bearing savings deposits in commercial
and savings banks in amounts not in excess of 5% of the total assets of the
Fund.
U.S. GOVERNMENT OBLIGATIONS
Each Fund may invest in U.S. Government obligations. Examples of the
types of U.S. Government obligations that may be held by the Funds include, in
addition to U.S. Treasury bonds, notes and bills, the obligations of the Federal
Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage Association,
Federal National Mortgage Association, General Services Administration, Student
Loan Marketing Association, Central Bank for Cooperatives, Federal Home Loan
Mortgage Corporation, Federal Intermediate Credit Banks, Tennessee Valley
Authority, Resolution Funding Corporation and Maritime Administration.
Obligations guaranteed as to principal or interest by the U.S. Government, its
agencies, authorities or instrumentalities are deemed to include: (a) securities
for which the payment of principal and interest is backed by an irrevocable
letter of credit issued by the U.S. Government, its agencies, authorities or
instrumentalities and (b) participations in loans made to foreign governments or
their agencies that are so guaranteed. The secondary market for certain of these
participations is limited. If such participations are illiquid they will not be
purchased.
U.S. Government obligations include principal and interest components
of securities issued or guaranteed by the U.S. Treasury if the components are
traded independently under the Separate Trading of Registered Interest and
Principal of Securities program. Obligations issued or guaranteed as to
principal or interest by the U.S. Government, its agencies, authorities or
instrumentalities may also be acquired in the form of custodial receipts. These
receipts evidence ownership of future interest payments, principal payments or
both on certain notes or bonds issued by the U.S. Government, its agencies,
authorities or instrumentalities.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Options, futures and forward foreign currency contracts that obligate a
Fund to provide cash, securities or currencies to complete such transactions
will entail that Fund to either segregate assets in an account with, or on the
books of, the Trust's custodian, or otherwise "covering" the transaction as
described below. For example, a call option written by a Fund will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or liquid assets
sufficient to meet the obligation by purchasing and delivering the securities if
the call is exercised. A call option written on an index will require that Fund
to have portfolio securities that correlate with the index. A put option written
by a Fund also will require that Fund to have available assets sufficient to
purchase the securities the Fund would be obligated to buy if the put is
exercised.
36
<PAGE>
A forward foreign currency contract that obligates a Fund to provide
currencies will require the Fund to hold currencies or liquid securities
denominated in a foreign currency which will equal the Fund's obligations.
Such a contract requiring the purchase of currencies also requires segregation.
Unless a segregated account consists of the securities, cash or
currencies that are the subject of the obligation, a Fund will hold cash, U.S.
Government securities and other high grade liquid debt obligations in a
segregated account. These assets cannot be transferred while the obligation is
outstanding unless replaced with other suitable assets. In the case of an
index-based transaction, a Fund could own securities substantially replicating
the movement of the particular index.
In the case of a futures contract, a Fund must deposit initial margin
and variation margin, as often as daily, if the position moves adversely,
sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Similarly, options on futures contracts require a Fund to
deposit margin to the extent necessary to meet the Fund's commitments.
In lieu of such assets, such transactions may be covered by other means
consistent with applicable regulatory policies. A Fund may enter into
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 Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by that Fund. Moreover, instead of segregating assets if a Fund held
a futures or forward contract, it could purchase a put option on the same
futures or forward contract with a strike price as high or higher than the price
of the contract held. Of course, the off-setting transaction must terminate at
the time of or after the primary transaction.
VARIABLE- AND FLOATING-RATE INSTRUMENTS
Certain Funds 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 Fund can recover payment of principal as specified
in the instrument.
Variable-rate demand notes held by a Money Market Fund may have
maturities of more than 397 days, provided (i) the Fund is entitled to payment
principal on not more than 30 days' notice, or at specified intervals not
exceeding 397 days (upon not more than 30 days' notice), and (ii) the rate of
interest on such note is adjusted automatically at periodic intervals which may
extend up to 397 days.
The variable- and-floating rate demand instruments that the Funds may
purchase include participations in Municipal Securities purchased from and owned
by financial institutions, primarily banks. Participation interests provide a
Fund with a specified undivided interest (up to 100%) in the underlying
obligation and the right to demand payment of the unpaid principal balance plus
accrued interest on the participation interest from the institution upon a
specified number of days' notice, not to exceed 30 days. Each participation
interest is backed by an irrevocable letter of credit or guarantee of a bank
that the Adviser has determined meets the prescribed quality standards for the
Funds. The bank typically retains fees out of the interest paid on the
obligation for servicing the obligation, providing the letter of credit, and
issuing the repurchase commitment.
WARRANTS
Certain Funds are permitted to invest in warrants. Warrants are
privileges issued by corporations enabling the owner to subscribe to and
purchase a specified number of shares of the corporation at a specified price
during a specified period of time. The prices of warrants do not necessarily
correlate with the prices of the underlying securities. The purchase of warrants
involves the risk that the purchaser could lose the purchase value of the
warrant if the right to subscribe to additional shares is not exercised prior to
the warrant's expiration. Also, the purchase of warrants involves the risk that
the effective price paid for the warrant added to the subscription price of the
related security may exceed the value of the subscribed security's market price
such as when there is no movement in the level of the underlying security.
37
<PAGE>
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS
A Fund may agree to purchase securities on a when-issued basis or enter
into a forward commitment to purchase securities. When a Fund engages in these
transactions, its custodian will segregate cash, U.S. Government securities or
other high quality debt obligations equal to the amount of the commitment.
Normally, the custodian will segregate portfolio securities to satisfy a
purchase commitment, and in such a case a Fund may be required subsequently to
segregate additional assets in order to ensure that the value of the segregated
assets remains equal to the amount of the Fund's commitment. Because a Fund will
segregate cash or liquid assets to satisfy its purchase commitments in the
manner described, the Fund's liquidity and ability to manage its portfolio might
be adversely affected in the event its commitments to purchase when-issued
securities ever exceeded 25% of the value of its assets. In the case of a
forward commitment to sell portfolio securities, the Fund's custodian will hold
the portfolio securities themselves in a segregated account while the commitment
is outstanding.
A Fund will make commitments to purchase securities on a when-issued
basis or to purchase or sell securities on a forward commitment basis only with
the intention of completing the transaction and actually purchasing or selling
the securities. If deemed advisable as a matter of investment strategy, however,
a Fund may dispose of or renegotiate a commitment after it is entered into, and
may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a capital gain or loss.
When a Fund engages in when-issued and forward commitment transactions,
it relies on the other party to consummate the trade. Failure of such party to
do so may result in the Fund's incurring a loss or missing an opportunity to
obtain a price considered to be advantageous.
The value of the securities underlying a when-issued purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their value, is taken into account when determining the net asset value of a
Fund starting on the date the Fund agrees to purchase the securities. The Fund
does not earn dividends on the securities it has committed to purchase until
they are paid for and delivered on the settlement date. When the Fund makes a
forward commitment to sell securities it owns, the proceeds to be received upon
settlement are included in the Fund's assets. Fluctuations in the value of the
underlying securities are not reflected in the Fund's net asset value as long as
the commitment remains in effect.
PORTFOLIO TURNOVER
Generally, the Equity Funds will purchase portfolio securities for
capital appreciation or investment income, or both, and not for short-term
trading profits. If a Fund'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 Funds' portfolio turnover rates, see the
"Financial Highlights" in the Prospectus.
INVESTMENT RISKS AND CONSIDERATIONS
In addition to the investment risks and considerations identified in
certain of the securities descriptions above, there are additional investment
risks and considerations associated with an investment in certain of the Funds.
Investments by a Fund in common stocks and other equity securities are
subject to stock market risks. The value of the stocks that the Fund 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 SAI, 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.
The Kansas Fund is a non-diversified fund, which means that it
typically invest in fewer issuers than diversified funds. Therefore,
appreciation or depreciation of an investment in a single issuer could have a
greater impact on the Fund's net asset value.
38
<PAGE>
The value of a Fund'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 Fund, an issue of securities may
cease to be rated or its rating may be reduced below the minimum rating required
for purchase by the Fund. The Adviser will consider such an event in determining
whether the Fund should continue to hold the obligation. Unrated obligations may
be acquired by the Fund 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 Funds' 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 Fund's investment objective and do not unduly
increase the Fund's exposure to market or other risks. For additional risk
information regarding the Funds' investments in particular instruments, see
"Appendix A -- Fund Securities."
SPECIAL RISK RELATING TO THE HIGH YIELD FUND -- 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 Fund'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 Fund 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
Fund 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 Fund may have to sell some of its assets to reduce the Fund'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.
MANAGEMENT OF THE TRUST
The business and affairs of the Trust is managed under the direction of
its Board of Trustees. This SAI contains the names of and general background
information concerning each Trustee. 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(*).
39
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS
POSITION WITH AND CURRENT
NAME, ADDRESS, AND AGE THE COMPANIES DIRECTORSHIPS
- ---------------------- ------------- -------------
<S> C> <C>
Edmund L. Benson, III, 62 Trustee Director, President and Treasurer,
Saunders & Benson, Inc. Saunders & Benson, Inc. (Insurance),
1510 Willow Lawn Drive Insurance Managers, Inc.
Suite 216 (insurance); Trustee, Nations
Richmond, VA 23230 Reserves, Master Investment Trust,
Nations Annuity Trust and Nations
Fund Trust; Director, Nations Fund,
Inc., and Nations LifeGoal Funds,
Inc.; Director, Nations Fund
Portfolios, Inc. through August,
1999.
James Ermer, 56 Trustee Retired Executive Vice President,
11511 Compass Point Drive Corporate Development and Planning -
Ft. Meyers, FL 33908 Land America (title insurance);
Senior Vice President, Finance - CSX
Corporation (transportation and
natural resources); Director National
Mine Service (mining supplies),
Lawyers Title Corporation (title
insurance); Trustee, Nations
Reserves, Nations Fund Trust, Nations
Annuity Trust and Nations Master
Investment Trust; Director, Nations
Fund, Inc. and Nations LifeGoal
Funds, Inc.; Director, Nations Fund
Portfolios, Inc. through August,
1999.
William H. Grigg, 66 Trustee Chairman Emeritus since July 1997,
Duke Power Co. Chairman and Chief Executive Officer
16092A Reap Road from April 1994 to July 1997 - Duke
Albermarle, NC 28001 Power Co.; Director - The Shaw
Group, Inc.; Director and Vice
Chairman, Aegis Insurance Services,
Ltd. (a mutual insurance company in
Bermuda); Trustee, Nations Reserves,
Nations Fund Trust, Nations Annuity
Trust and Nations Master Investment
Trust; Director, Hatteras Income
Securities, Inc., Nations Government
Income Term Trust 2003, Inc., Nations
Government Income Term Trust 2004,
Inc., Nations Balanced Target
Maturity Fund, Inc., Nations Fund,
Inc. and Nations LifeGoal Funds,
Inc.; Director, Nations Fund
Portfolios, Inc. through August,
1999.
Thomas F. Keller, 67 Trustee R.J. Reynolds Industries Professor
Fuqua School of Business of Business Administration and
P.O. Box 90120 Former Dean - Fuqua School of
Duke University Business, Duke University; Director
Durham, NC 27708 - LADD Furniture, Inc. (furniture),
Wendy's International, Inc.
(restaurant operating and
franchising), American Business
Products, Inc. (printing services),
Dimon, Inc. (tobacco), Biogen, Inc.
(pharmaceutical biotechnology);
Trustee, The Mentor Funds, Mentor
Institutional Trust, Cash Reserve
Trust, Nations Reserves, Nations
Fund Trust, Nations Annuity Trust
and Nations Master Investment Trust;
Director, Hatteras Income
Securities, Inc., Nations Government
Income Term Trust 2003, Inc.,
Nations Government Income Term Trust
2004, Inc., Nations Balanced Target
Maturity Fund, Inc. and Nations
LifeGoal Funds, Inc.; Director,
Nations Fund Portfolios, Inc.
through August, 1999.
Carl E. Mundy, Jr., 64 Trustee President and CEO - USO from May
USO World Headquarters 1996 to present; Commandant - United
Washington Navy Yard States Marine Corps from July 1991
Building 198 to July 1995; Director -
901 M Street, S.E. Shering-Plough (pharmaceuticals and
Washington, D.C. 20374-5096 health care products); General
Dynamics Corporation (defense
systems); Trustee, Nations Reserves,
Nations Fund Trust, Nations Annuity
Trust and Nations Master Investment
Trust; Director, Nations Fund, Inc.
and Nations LifeGoal Funds, Inc.;
Director, Nations Fund Portfolios,
Inc. through August, 1999.
40
<PAGE>
PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS
POSITION WITH AND CURRENT
NAME, ADDRESS, AND AGE THE COMPANIES DIRECTORSHIPS
- ---------------------- ------------- -------------
Dr. Cornelius J. Pings, 70* Trustee President - Association of American
480 S. Orange Grove Blvd. Universities from February 1993 to
Pasadena, CA 91105 June 1998; Director - Farmers Group,
Inc. (insurance company), Nations
Fund, Inc. and Nations LifeGoal
Funds, Inc.; Trustee, Master
Investment Trust, Series I from 1995
to 1999, Master Investment Trust,
Series II from 1995 to 1997, Nations
Reserves, Nations Fund Trust,
Nations Annuity Trust and Nations
Master Investment Trust.;
Director/Trustee and Chairman -
Pacific Horizon Funds, Inc. and
Master Investment Trust, Series I,
from inception to May 1999;
Director - Time Horizon Funds and
Pacific Innovations Trust; Director,
Nations Fund Portfolios, Inc.
through August, 1999.
James B. Sommers*, 60 Trustee President - NationsBank Trust from
237 Cherokee Road January 1992 to September 1996;
Charlotte, NC 28207 Executive Vice President -
NationsBank Corporation from January
1992 to May 1997; Chairman - Central
Piedmont Community College
Foundation; Board of Commissioners,
Charlotte/ Mecklenberg Hospital
Authority; Director - Nations Fund,
Inc. and Nations LifeGoal Funds,
Inc.; Trustee, Central Piedmont
Community College; Mint Museum of
Art, Nations Reserves, Nations Fund
Trust, Nations Annuity Trust and
Nations Master Investment Trust;
Director, Nations Fund Portfolios,
Inc. through August, 1999.
A. Max Walker*, 77 President, Trustee and Independent Financial Consultant;
4580 Windsor Gate Court Chairman of the Board Director and Chairman of the Board -
Atlanta, GA 30342 Hatteras Income Securities, Inc.,
Nations Government Income Term Trust
2003, Inc., Nations Government Income
Term Trust 2004, Inc., Nations
Balanced Target Maturity Fund, Inc.;
President, Director and Chairman of
the Board - Nations Fund, Inc. and
Nations LifeGoal Funds, Inc.;
President, Trustee and Chairman of
the Board - Nations Reserves, Nations
Fund Trust, Nations Annuity Trust and
Nations Master Investment Trust;
Director, Nations Fund Portfolios,
Inc. through August, 1999.
Charles B. Walker, 60 Trustee Director-Ethyl Corporation (chemical
Albermarle Corporation manufacturing); Vice Chairman and
Vice Chairman and CFO Chief Financial Officer - Albemarle
330 South Fourth Street Corporation (chemical
Richmond, VA 23219 manufacturing); Director, Nations
Fund, Inc. and Nations LifeGoal
Funds, Inc.; Trustee, Nations
Reserves, Nations Fund Trust,
Nations Annuity Trust and Nations
Master Investment Trust; Director,
Nations Fund Portfolios, Inc.
through August, 1999.
Thomas S. Word, Jr.*, 61 Trustee Partner - McGuire, Woods, Battle &
McGuire, Woods, Battle & Boothe LLP Boothe LLP (law firm); Director -
One James Center Vaughan-Bassett Furniture Companies,
8th Floor Inc. (furniture), Nations Fund, Inc.
Richmond, VA 23219 and Nations LifeGoal Funds, Inc.;
Trustee, Nations Reserves, Nations
Fund Trust, Nations Annuity Trust
and Nations Master Investment Trust;
Director, Nations Fund Portfolios,
Inc. through August, 1999.
41
<PAGE>
PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS
POSITION WITH AND CURRENT
NAME, ADDRESS, AND AGE THE COMPANIES DIRECTORSHIPS
- ---------------------- ------------- -------------
Richard H. Blank, Jr., 42 Secretary and Treasurer Senior Vice President since 1998,
Stephens Inc. Vice President from 1994 to 1998 and
111 Center Street Manager from 1990 to 1994 - Mutual
Little Rock, AR 72201 Fund Services, Stephens Inc.;
Secretary since September 1993 and
Treasurer since November 1998 Nations
Fund, Inc., Nations LifeGoal Funds,
Inc., Nations Reserves, Nations Fund
Trust, Nations Annuity Trust and
Nations Master Investment Trust.;
Secretary and Treasurer, Nations Fund
Portfolios, Inc. through August,
1999.
Michael W. Nolte, 38 Assistant Secretary Assistant Secretary - Nations Fund
Stephens Inc. Trust, Nations Fund, Inc., Nations
Reserves, Nations LifeGoal Funds,
Inc., Nations Annuity Trust and
Nations Master Investment Trust;
Assistant Secretary, Nations Fund
Portfolios, Inc. through August,
1999.
James E. Banks, 43 Assistant Secretary Assistant Secretary - Nations Fund
Stephens Inc. Trust, Nations Fund, Inc., Nations
Reserves, Nations LifeGoal Funds,
Inc., Nations Annuity Trust and
Nations Master Investment Trust; ;
Director, Nations Fund Portfolios,
Inc. through August, 1999.
</TABLE>
Each Trustee is a board member of the Trust, Nations Fund Trust,
Nations Fund, Inc., Nations Reserves, Nations Annuity Trust, Nations Master
Investment Trust and Nations LifeGoal Funds, Inc., each a registered investment
company that is part of the Nations Funds family. Richard H. Blank, Jr., Michael
W. Nolte, and James E. Banks. Jr. also are officers of Trust, Nations Fund
Trust, Nations Fund, Inc., Nations Reserves, Nations Annuity Trust, Nations
Master Investment Trust and Nations LifeGoal Funds, Inc.
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 Trust's 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 Fund, or (ii) was being purchased or
sold by a Fund. For purposes of the Code of Ethics, an access person means (i) a
trustee or officer of the Trust, (ii) any employee of the Trust (or any 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" directors or
trustees, submit reports to the Trust's designated compliance person regarding
transactions involving securities which are eligible for purchase by a Fund.
42
<PAGE>
NATIONS FUNDS RETIREMENT PLAN
Under the terms of the Nations Funds Retirement Plan for Eligible
Directors/Trustees (the "Retirement Plan"), each Director/Trustee may be
entitled to certain benefits upon retirement from the Board of
Directors/Trustees. Pursuant to the Retirement Plan, the normal retirement date
is the date on which the eligible director/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 director/trustee
retires before reaching age 65, no benefits are payable. Each eligible
director/trustee is entitled to receive an annual benefit from the Funds
commencing on the first day of the calendar quarter coincident with or next
following his date of retirement equal to 5% of the aggregate
director's/trustee's fees payable by the Funds during the calendar year in which
the director's/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 Funds. Such benefit is payable to each eligible director/trustee in
quarterly installments for a period of no more than five years. If an eligible
director/trustee's dies after attaining age 65, the director's/trustees
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
director/trustee if he had not died. The Retirement Plan is unfunded. The
benefits owed to each director/trustee are unsecured and subject to the general
creditors of the Funds.
NATIONS FUNDS DEFERRED COMPENSATION PLAN
Under the terms of the Nations Funds Deferred Compensation Plan for
Eligible Directors/Trustees (the "Deferred Compensation Plan"), each
director/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 director/trustee for that calendar year. An application was
submitted to and approved by the SEC to permit deferring directors/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 of certain
Funds. Distributions from the deferring directors'/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 director's/trustees' retirement
benefits commence under the Retirement Plan. The Board of Directors/Trustees, in
its sole discretion, may accelerate or extend such payments after a
director's/trustee's termination of service. If a deferring director/trustee
dies prior to the commencement of the distribution of amounts in his deferral
account, the balance of the deferral account will be distributed to his
designated beneficiary in a lump sum as soon as practicable after the
director's/trustee's death. If a deferring director/trustee dies after the
commencement of such distribution, but prior to the complete distribution of his
deferral account, the balance of the amounts credited to his deferral account
will be distributed to his designated beneficiary over the remaining period
during which such amounts were distributable to the director/trustee. Amounts
payable under the Deferred Compensation Plan are not funded or secured in any
way and deferring directors/trustees have the status of unsecured creditors of
the Funds from which they are deferring compensation.
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. The Nations Funds family currently
consists of the Trust, Nations Fund Trust, Nations Fund, Inc., Nations Reserves,
Nations Annuity Trust, Nations LifeGoal Funds, Inc. and Nations Master
Investment Trust.
Under the structure, each Board member would receive a base retainer
fee in the amount of $65,000 per year, in addition to $5,000 for each in-person
meeting attended; in addition to $1,000 for each telephonic meeting attended.
Each Board member would be compensated only for a maximum of six in-person
meetings per calendar year. In addition, the Chairman of the Board, currently A.
Max Walker, would receive an additional fee of 20% of the base retainer fee; the
Chairman of the Audit Committees would receive an additional fee of 10% of the
base retainer fee. The members of the Nominating Committees will receive
additional compensation at the rate of $1,000 per meeting attended.
SHAREHOLDER AND TRUSTEE LIABILITY
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 also 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.
43
<PAGE>
The Declaration of Trust states further that no Trustee, officer, or
agent of the Trust shall be personally liable for or on account of any contract,
debt, tort, claim, damage, judgment, or decree arising out of or connected with
the administration or preservation of the trust estate or the conduct of any
business of the Trust; nor shall any Trustee be personally liable to any person
for any action or failure to act except by reason of his own bad faith, willful
misfeasance, gross negligence, or reckless disregard of his duties as Trustee.
The Declaration of Trust also provides that all persons having any claim against
the Trustees shall look solely to the trust property for payment.
With the exceptions stated, the Declaration of Trust provides that a
Trustee is entitled to be indemnified against all liabilities and expenses
reasonably incurred by him in connection with the defense or disposition of any
proceeding in which he may be involved or with which he may be threatened by
reason of his 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, OTHER SERVICE PROVIDERS, SHAREHOLDER SERVICING AND
DISTRIBUTION AGREEMENTS
INVESTMENT ADVISER AND SUB-ADVISERS
Bank of America and its Investment Adviser and Sub-Adviser Affiliates
BAAI is the investment adviser to the Funds. TradeStreet is the
investment sub-adviser to the MidCap Index Fund and the Kansas Fund. [insert
name] is the investment sub-adviser to the High Yield Fund.
The respective principal offices of BAAI and TradeStreet are located at
One Bank of America Plaza, Charlotte, N.C. 28255. [insert name] is located at
[insert address].
Since 1874, Bank of America and its predecessors have been managing
money for foundations, universities, corporations, institutions and individuals.
Today, Bank of America affiliates collectively manage in excess of $100 billion,
including the more than $40 billion in mutual fund assets. It is a company
dedicated to a goal of providing responsible investment management and superior
service. Bank of America is recognized for its sound investment approaches,
which place it among the nation's foremost financial institutions. Bank of
America and its affiliates organization makes available a wide range of
financial services to its over 6 million customers through over 1700 banking and
investment centers.
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,
TradeStreet and/or [insert name], and subject at all times to the control of the
Board of Trustees and, in conformity with the stated policies of the Trust,
TradeStreet and [insert name] each select and manages the investments of their
respective Funds. Each such advisory entity obtains and evaluates economic,
statistical and financial information to formulate and implement investment
policies for the Funds 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, trustees, 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 Fund 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 or (ii) the vote of "a majority of the
outstanding voting securities" of a Fund (as defined in Section 2(a)(42) of the
1940 Act), and (b) the affirmative vote of a majority of the Trust's Board of
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 Fund 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 Fund) or by BAAI on 60 days' written
notice.
44
<PAGE>
The Funds, in any advertisement or sales literature, may advertise the
names, experience and/or qualifications of the portfolio manager(s) of any Fund,
or if a Fund is managed by team or committee, such Fund 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 Funds, in direct proportion to the
fees payable by such Funds to an Adviser and the Administrator, if the expenses
of the Funds exceed the applicable expense limitation of any state in which the
Funds' shares are registered or qualified for sale.
Because the Funds are new series they have not yet paid any advisory or
sub-advisory fees.
CO-ADMINISTRATORS AND SUB-ADMINISTRATOR
Stephens Inc. and BAAI (the "Co-Administrators") serve as
co-administrators of the Trust pursuant to co-administration agreements
("Co-Administration Agreements"). Under the Co-Administration Agreements, the
co-administrators receive, as compensation for their services rendered,
co-administration fees, computed daily and paid monthly, at the annual rate of:
0.12% of the High Yield Fund and the Kansas Fund; and 0.13% of the MidCap Index
Fund, of the average daily net assets of each such Fund.
Pursuant to the Co-Administration Agreement, Stephens has agreed to,
among other things, (i) maintain office facilities for the Funds, (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 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
Funds, (ii) compute each Fund's net asset value and net income, (iii) accumulate
information required for the Trust's reports to shareholders and the SEC, (iv)
prepare and file the Trust's federal and state tax returns, (v) perform monthly
compliance testing for the Trust, and (vi) prepare and furnish the Trust monthly
broker security transaction summaries and transaction listings and performance
information. BAAI bears all expenses incurred in connection with the performance
of its services.
The Co-Administration Agreement may be terminated by a vote of a
majority of the 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 Funds or to their shareholders except in the case of Stephens's or
BAAI's, willful misfeasance, bad faith, gross negligence or reckless disregard
of duty.
BNY serves as sub-administrator for the Funds pursuant to
sub-administration agreements. Pursuant to their terms, BNY assists Stephens and
BAAI in supervising, coordinating and monitoring various aspects of the Funds'
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 Funds' average daily net assets.
DISTRIBUTION PLANS AND SHAREHOLDER SERVICING ARRANGEMENTS
PRIMARY A SHARES
The Trust has not adopted an shareholder servicing or distribution plan
for the Primary A Shares.
45
<PAGE>
INVESTOR A SHARES
The Trust has adopted a Shareholder Servicing and Distribution Plan
(the "Investor A Plan") pursuant to Rule 12b-1 under the 1940 Act with respect
to each Fund's Investor A Shares. The Investor A Plan provides that each Fund
may pay, up to [ ]% (on an annualized basis) of the average daily net asset
value of the Funds: (i) the Distributor for reimbursements of
distribution-related expenses actually incurred by the Distributor, including,
but not limited to, expenses of organizing and conducting sales seminars,
printing of prospectuses and statements of additional information (and
supplements thereto) and reports for other than existing shareholders,
preparation and distribution of advertising material and sales literature and
costs of administering the Investor A Plan; or (ii) certain broker/dealers and
other financial institutions ("Agents") who offer shares to their customers and
who have entered into Shareholder Servicing Agreements, and Sales Support
Agreements with respect to the Funds, for providing the services contemplated
thereunder.
The shareholder servicing activities for which compensation may be
received under the Investor A Plan may include, among other things: (i)
aggregating and processing purchase and redemption requests and transmitting
promptly net purchase and redemption orders to the Distributor or transfer
agent; (ii) providing customers with a service that invests the assets of their
accounts in Shares pursuant to specific or pre-authorized instructions; (iii)
processing dividend and distribution payments; (iv) providing information
periodically to customers showing their positions in Shares; (v) arranging for
bank wires; (vi) responding to customers' inquiries concerning their investment
in Shares; (vii) providing subaccounting with respect to Shares beneficially
owned by customers or the information to the Trust necessary for subaccounting;
(viii) if required by law, forwarding shareholder communications (such as
proxies, shareholder reports, annual and semi-annual financial statements and
dividend, distribution and tax notices) to customers; (ix) forwarding to
customers proxy statements and proxies containing any proposals regarding the
Shareholder Servicing Agreement; (x) general shareholder liaison services; and
(xi) providing such other similar services as the Trust may reasonably request
to the extent such firms are permitted to do so under applicable statutes, rules
or regulations.
The Investor A Plan may be terminated at any time by a vote of a
majority of the non-interested Trustees or with respect to a particular Fund, by
vote of a majority of the outstanding securities of the Investor A Shares of
such Fund.
Because the Funds are new series, they have not yet paid any fees
pursuant to the Investor A Plan.
INVESTOR B SHARES
The Trust has adopted a Distribution Plan (the "Investor B Distribution
Plan") pursuant to Rule 12b-1 under the 1940 Act with respect to each Fund's
Investor B Shares. The Trust also has adopted a Shareholder Servicing Plan (the
"Investor B Servicing Plan") for each Fund's Investor B Shares.
Under the Investor B Distribution Plan, the Trust may compensate or
reimburse its Distributor for any activities or expenses primarily intended to
result in the sale of Investor B Shares of the Trust's Funds. Payments by the
Trust may not exceed, on an annual basis, 0.75% of the average daily net asset
value of a Fund's Investor B Shares.
The fees payable under the Investor B Distribution Plan are used
primarily to compensate or reimburse the Distributor for distribution services
provided by it, and related expenses incurred, including payments by the
Distributor to compensate or reimburse banks, broker/dealers or other financial
institutions that have entered into Sales Support Agreements with the
Distributor ("Selling Agents"), for sales support services provided, and related
expenses incurred, by such Selling Agents. These services may include:
preparation, printing and distribution of prospectuses, sales literature and
advertising materials by the Distributor or, as applicable, Selling Agents,
attributable to distribution or sales support activities, respectively;
commissions, incentive compensation or other compensation to, and expenses of,
account executives or other employees of the Distributor or Selling Agents,
attributable to distribution or sales support activities, respectively; overhead
and other office expenses of the Distributor or Selling Agents, attributable to
distribution or sales support activities, respectively; opportunity costs
relating to the foregoing (which may be calculated as a carrying charge on the
Distributor's or Selling Agents' unreimbursed expenses incurred in connection
with distribution or sales support activities, respectively); and any other
costs and expenses relating to distribution or sales support activities.
Notwithstanding anything herein to the contrary, no Fund shall be
obligated to make any payments under this Plan that exceed the maximum amounts
payable under Rule 2830, of the National Association of Securities Dealers, Inc.
Conduct Rules.
46
<PAGE>
Under the Investor B Servicing Plan, the Trust may execute agreements
with broker/dealers, banks and other financial institutions that are dealers of
record or holders of record or which have a servicing relationship ("Servicing
Agents") with the beneficial owners of Investor B Shares of the Trust, pursuant
to which, Servicing Agents shall provide shareholder support services to their
clients who beneficially own Investor B Shares of the Funds in consideration of
a fee, at an annual rate of up to 0.25% of the average daily net asset value of
the Investor B Shares beneficially owned by or attributable to such clients.
Affiliates of the Trust's distributor, administrator, co-administrator and
adviser are eligible to become Servicing Agents and to receive fees under this
Plan. The Investor B Servicing Plan further provides that all expenses incurred
by a Fund in connection with the Agreements and the implementation of such Plan
is be borne either by the holders of the Investor B Shares of the particular
Fund involved. If more than one Fund is involved and these expenses are not
directly attributable to the Investor B Shares of a particular Fund, then the
expenses may be allocated between or among the Shares of the Funds in a fair and
equitable manner.
The Investor B Servicing Plan may be terminated only by a majority of
the Board of Trustees, including a majority of the Trustees who are not
"interested persons," as defined in the Investment Company Act of 1940, of the
Trust.
INVESTOR C SHARES
The Trust has adopted a Distribution Plan (the "Investor C Distribution
Plan") pursuant to Rule 12b-1 under the 1940 Act with respect to each Fund's
Investor C Shares. The Trust also has adopted a Shareholder Servicing Plan (the
"Investor C Servicing Plan") for each Fund's Investor C Shares.
Under the Investor C Distribution Plan, the Trust may compensate or
reimburse its Distributor for any activities or expenses primarily intended to
result in the sale of Investor C Shares of the Trust's Funds. Payments by the
Trust may not exceed, on an annual basis, 0.75% of the average daily net asset
value of a Fund's Investor C Shares.
The fees payable under the Investor C Distribution Plan are used
primarily to compensate or reimburse the Distributor for distribution services
provided by it, and related expenses incurred, including payments by the
Distributor to compensate or reimburse banks, broker/dealers or other financial
institutions that have entered into Sales Support Agreements with the
Distributor ("Selling Agents"), for sales support services provided, and related
expenses incurred, by such Selling Agents. These services may include:
preparation, printing and distribution of prospectuses, sales literature and
advertising materials by the Distributor or, as applicable, Selling Agents,
attributable to distribution or sales support activities, respectively;
commissions, incentive compensation or other compensation to, and expenses of,
account executives or other employees of the Distributor or Selling Agents,
attributable to distribution or sales support activities, respectively; overhead
and other office expenses of the Distributor or Selling Agents, attributable to
distribution or sales support activities, respectively; opportunity costs
relating to the foregoing (which may be calculated as a carrying charge on the
Distributor's or Selling Agents' unreimbursed expenses incurred in connection
with distribution or sales support activities, respectively); and any other
costs and expenses relating to distribution or sales support activities.
Notwithstanding anything herein to the contrary, no Fund shall be
obligated to make any payments under this Plan that exceed the maximum amounts
payable under Rule 2830, of the National Association of Securities Dealers, Inc.
Conduct Rules.
Under the Investor C Servicing Plan, the Trust may execute agreements
with broker/dealers, banks and other financial institutions that are dealers of
record or holders of record or which have a servicing relationship ("Servicing
Agents") with the beneficial owners of Investor C Shares of the Trust, pursuant
to which, Servicing Agents shall provide shareholder support services to their
clients who beneficially own Investor C Shares of the Funds in consideration of
a fee, at an annual rate of up to 0.25% of the average daily net asset value of
the Investor C Shares beneficially owned by or attributable to such clients.
Affiliates of the Trust's distributor, administrator, co-administrator and
adviser are eligible to become Servicing Agents and to receive fees under this
Plan. The Investor C Servicing Plan further provides that all expenses incurred
by a Fund in connection with the Agreements and the implementation of such Plan
is be borne either by the holders of the Investor C Shares of the particular
Fund involved. If more than one Fund is involved and these expenses are not
directly attributable to the Investor C Shares of a particular Fund, then the
expenses may be allocated between or among the Shares of the Funds in a fair and
equitable manner.
The Investor C Servicing Plan may be terminated only by a majority of
the Board of Trustees, including a majority of the Trustees who are not
"interested persons," as defined in the Investment Company Act of 1940, of the
Trust.
47
<PAGE>
INFORMATION APPLICABLE TO INVESTOR A, INVESTOR B, INVESTOR C PLANS
The Investor A Plan, the Investor B Plans and the Investor C Plans
(each a "Plan" and collectively the "Plans") may only be used for the purposes
specified above and as stated in each such Plan. Compensation payable to Selling
Agents or Servicing Agents for shareholder support services under the Plans
subject to, among other things, the National Association of Securities Dealers,
Inc. ("NASD") Conduct Rules, which govern receipt by NASD members of Plan fees
from registered investment companies.
Each Plan requires the officers of the Trust or the Distributor to
provide the Board of Trustees at least quarterly with a written report of the
amounts expended pursuant to the Plan and the purposes for which such
expenditures were made. The Board of Trustees reviews these reports in
connection with its decisions with respect to the Plans.
As required by Rule 12b-1 under the 1940 Act, the Investor A Plan,
Investor B Distribution Plan and Investor C Distribution Plan were approved by
the Board of Trustees, including a majority of the trustees who are not
"interested persons" (as defined in the 1940 Act) of the Trust and who have no
direct or indirect financial interest in the operation of any Plan or in any
agreements related to such Plan.
In approving the Investor A Plan, Investor B Distribution Plan and
Investor C Distribution Plan in accordance with the requirements of Rule 12b-1,
the Trustees considered various factors and determined that there was a
reasonable likelihood that each such Plan will benefit the respective Investor
A, Investor B or Investor C Shares and the holders of such shares. The Investor
A Plan, Investor B Distribution Plan and Investor C Distribution Plan were
approved by the initial shareholders of the Funds' Investor A, B and C Shares,
resepctvely, on [INSERT DATE].
EXPENSES
The 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,
except that to the extent permitted under the Plans relating to the Investor A,
Investor B or Investor C Shares of each Fund, sales-related expenses incurred by
the Distributor may be reimbursed by the Trust.
The Trust pays or causes to be paid all other expenses of the Trust,
including, without limitation: the fees of the Adviser, the Administrator and
Co-Administrator; the charges and expenses of any registrar, any custodian or
depository appointed by the Trust for the safekeeping of its cash, fund
securities and other property, and any stock transfer, dividend or accounting
agent or agents appointed by the Trust; brokerage commissions chargeable to the
Trust in connection with fund 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.
48
<PAGE>
Expenses of the Trust which are not directly attributable to the
operations of any class of shares or Fund are pro-rated among all classes of
shares or Fund of the Trust based upon the relative net assets of each class or
Fund. Expenses of the Trust which are not directly attributable to a specific
class of shares but are directly attributable to a specific Fund are prorated
among all the classes of shares of such Fund based upon the relative net assets
of each such class of shares. Expenses of the Trust which are directly
attributable to a class of shares are charged against the income available for
distribution as dividends to such class of shares.
The Advisory Agreement, the Sub-Advisory Agreements, and the
Administration Agreement require BAAI, TradeStreet, [INSERT NAME], and the
Administrator 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 Fund'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, TradeStreet, [INSERT NAME] or the Administrator shall be
deducted from the monthly investment advisory and administration fees otherwise
payable to BAAI, TradeStreet, [INSERT NAME] and the Administrator during such
fiscal year. If required pursuant to such state securities regulations, BAAI,
TradeStreet, [INSERT NAME] and the Administrator 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).
TRANSFER AGENTS AND CUSTODIANS
First Data is located at One Exchange Place, 53 State Street, Boston,
Massachusetts 02109, and acts as transfer agent for each Fund's Shares. Under
the transfer agency agreements, 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.
Bank of America serves as sub-transfer agent for each Fund's Primary A
Shares.
The Bank of New York ("BONY") 90 Washington Street, New York, N.Y.
10286 serves as custodian for the Funds' assets. As custodian, BONY maintains
the Funds' 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 Funds for payments of dividends, distributions and
redemptions, endorses and collects on behalf of such Funds all checks, and
receives all dividends and other distributions made on securities owned by such
Funds.
The Bank of New York ("BONY"), Avenue des Arts, 35 1040 Brussels,
Belgium serves as custodian for the assets of the international Funds.
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, BONY serves
as Foreign Custody Manager, pursuant to a Foreign Custody Manager Agreement,
under which the Board of Directors/Trustees retain the responsibility for
selecting foreign compulsory depositories, although BONY agrees to make certain
findings with respect to such depositories and to monitor such depositories.
DISTRIBUTOR
Stephens Inc. (the "Distributor") serves as the principal underwriter
and distributor of the shares of the Funds.
Pursuant to a distribution agreement (the "Distribution Agreement"),
the Distributor, as agent, sells shares of the Funds on a continuous basis and
transmits purchase and redemption orders that its receives to the Companies 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 Funds, 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 a distribution plan adopted
by the Companies pursuant to Rule 12b-1 under the 1940 Act.
49
<PAGE>
The Distribution Agreement will continue year to year as long as such
continuance is approved at least annually by (i) the Board of Directors/Trustees
or a vote of the majority (as defined in the 1940 Act) of the outstanding voting
securities of the Fund 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 Fund, without
penalty, on 60 days' notice by the Board of Directors/Trustees, the vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the Fund, or by the Distributor.
INDEPENDENT ACCOUNTANTS AND REPORTS
The Companies issue unaudited financial information semi-annually and
audited financial statements annually. The Companies furnish proxy statements
and other shareholder reports to shareholders of record.
The annual financial statements will be audited by the Trust's
independent accountant. 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 for the Funds' fiscal year ended March 31, 2000.
Because the Trust is a newly registered investment company, it has not
yet issued any annual or semi-annual shareholder reports.
COUNSEL
Morrison & Foerster LLP serves as legal counsel to the Companies. Their
address is 2000 Pennsylvania Avenue, N.W., Washington, D.C. 20006.
Morrison & Foerster LLP, counsel to the Companies and special counsel
to Bank of America has advised the Companies and Bank of America that Bank of
America and its affiliates may perform the services contemplated by the
Investment Advisory Agreement and this Prospectus without violation of the
Glass-Steagall Act. Such counsel has pointed out, however, that there are no
controlling judicial or administrative interpretations or decisions and that
future judicial or administrative interpretations of, or decisions relating to,
present federal or state statutes, including the Glass-Steagall Act, and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as future changes in such federal or state
statutes, regulations and judicial or administrative decisions or
interpretations, could prevent such entities from continuing to perform, in
whole or in part, such services. If any such entity were prohibited from
performing any of such services, it is expected that new agreements would be
proposed or entered into with another entity or entities qualified to perform
such services.
FUND 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
Fund, for the selection of broker/dealers, for the execution of such Fund'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. 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.
50
<PAGE>
In placing orders for portfolio securities of a Fund, 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. In addition, the Adviser
will consider research and investment services provided by brokers or dealers
who effect or are parties to portfolio transactions of a Fund, 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 Fund 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 Fund. Services furnished by such brokers may be used by
the Adviser in providing investment advisory and investment management services
for the Companies.
Commission rates are established pursuant to negotiations with the
broker based on the quality and quantity of execution services provided by the
broker in the light of generally prevailing rates. The allocation of orders
among brokers and the commission rates paid are reviewed periodically by the
Trustees of the Trust. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Transactions on foreign
stock exchanges involve payment of brokerage commissions which are generally
fixed. Transactions in both foreign and domestic over-the-counter markets are
generally principal transactions with dealers, and the costs of such
transactions involve dealer spreads rather than brokerage commissions. With
respect to over-the-counter transactions, the Adviser, where possible, will deal
directly with dealers who make a market in the securities involved except in
those circumstances in which better prices and execution are available
elsewhere.
In certain instances there may be securities which are suitable for
more than one Fund as well as for one or more of the other clients of the
Adviser. Investment decisions for each Fund 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 Fund is concerned. The Companies believe that over time their ability to
participate in volume transactions will produce superior executions for the
Funds.
The portfolio turnover rate for each Fund 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 Funds to receive favorable tax
treatment.
The Funds 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
Fund will engage in this practice, however, only when the Adviser, in its sole
discretion, believes such practice to be otherwise in the Fund's interests.
The Companies will not execute portfolio transactions through, or
purchase or sell portfolio securities from or to the distributor, the Adviser,
the administrator, the co-administrator or their affiliates, acting as principal
(including repurchase and reverse repurchase agreements), except to the extent
permitted by applicable law. In addition, the Companies 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 Fund 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 Fund will not purchase
securities during the existence of any underwriting or selling group relating
thereto of which the distributor, the Adviser, the administrator, or the
co-administrator, or any of their affiliates, is a member, except to the extent
permitted by the SEC. Under certain circumstances, the Funds 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.
51
<PAGE>
Certain affiliates of Bank of America Corporation and its subsidiary
banks may have deposit, loan or commercial banking relationships with the
corporate users of facilities financed by industrial development revenue bonds
or private activity bonds purchased by the High Yield Bond Fund or the Kansas
Fund. Bank of America or certain of its affiliates may serve as trustee, tender
agent, guarantor, placement agent, underwriter, or in some other capacity, with
respect to certain issues of municipal securities.
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 Funds 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 Fund are made independently from those
for the Trust's other investment portfolios, 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
Funds. When a purchase or sale of the same security is made at substantially the
same time on behalf of one or more of the Funds 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 Fund 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 Fund or the size
of the position obtained or sold by the Fund. To the extent permitted by law,
the Adviser may aggregate the securities to be sold or purchased for the Funds
with those to be sold or purchased for other investment portfolios, investment
companies, or accounts in executing transactions.
Because the Trust is a new registered investment company, it has not
yet paid any brokerage commissions.
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), the 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 to a Fund 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 Funds' 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; fund 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 Directors/Trustees with respect to the performance, investment
activities and fees and expenses of other mutual funds. Such information may be
communicated electronically, orally or in written form. Research services may
also include the providing of equipment used to communicate research
information, the arranging of meetings with management of companies and the
providing of access to consultants who supply research information.
52
<PAGE>
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
Funds. Similarly, any research services received by the Adviser through the
placement of fund transactions of other clients may be of value to the Adviser
in fulfilling its obligations to the Funds. The Adviser is of the opinion that
this material is beneficial in supplementing its research and analysis; and,
therefore, it may benefit the Companies by improving the quality of the
Adviser's investment advice. The advisory fees paid by the Companies 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
Funds.
DESCRIPTION OF SHARES
DESCRIPTION OF SHARES OF THE TRUST
The Trust's Board of Trustees has authorized the issuance of the
classes of shares of the Funds indicated above and may, in the future, authorize
the creation of additional investment portfolios or classes of shares.
The Board may classify or reclassify any unissued shares of the Trust
into shares of any class, classes or Fund 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 Fund or class. Any such classification or
reclassification will comply with the provisions of the 1940 Act. Fractional
shares shall have the same rights as full shares to the extent of their
proportionate interest.
All shares of a Fund 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
Fund's fundamental investment policy would be voted upon only by shareholders of
the Fund involved. 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. The Trust
will hold a special meeting of its shareholders for the purpose of voting on the
question of removal of a Board member, only to the extent required by the 1940
Act.
Each share of a Fund represents an equal proportional interest in the
Fund with each other share and is entitled to such dividends and distributions
out of the income earned on the assets belonging to the Fund, as are declared in
the discretion of the Board members. In the event of the liquidation or
dissolution of the Trust, shareholders of the Trust's Funds are entitled to
receive the assets attributable to the Fund that are available for distribution,
and a distribution of any general assets not attributable to a particular Fund
that are available for distribution in such manner and on such basis as the
Board members 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 investment income for the Funds for dividend purposes consists of
(i) interest accrued and original issue discount earned on a Fund'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
Fund and the general expenses of the Trust prorated to a Fund on the basis of
its relative net assets, plus dividend or distribution income on a Fund's
assets.
Prior to purchasing shares in one of the Funds, the impact of dividends
or distributions which are expected to be or have been declared, but not paid,
should be carefully considered. Any dividend or distribution declared shortly
after a purchase of such shares prior to the record date will have the effect of
reducing the per share net asset value by the per share amount of the dividend
or distribution. All or a portion of such dividend or distribution, although in
effect a return of capital, may be subject to tax.
Shareholders receiving a distribution in the form of additional shares
will be treated as receiving an amount equal to the fair market value of the
shares received, determined as of the reinvestment date.
53
<PAGE>
The Funds use the so-called "equalization accounting method" to
allocate a portion of earnings and profits to redemption proceeds. This method
permits a fund to achieve more balanced distributions for both continuing and
departing shareholders. Continuing shareholders should realize tax savings or
deferrals through this method, and departing shareholders will not have their
tax obligations change. Although using this method will not affect a Fund's
total returns, it may reduce the amount that otherwise would be distributable to
continuing shareholders by reducing the effect of redemptions on dividend and
distribution amounts.
NET ASSET VALUE DETERMINATION
With respect to the Funds, 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. With respect to the Bond
Funds, securities may be valued on the basis of prices provided by an
independent pricing service. Prices provided by the pricing service may be
determined without exclusive reliance on quoted prices, and may reflect
appropriate factors such as yield, type of issue, coupon rate maturity and
seasoning differential. Securities for which prices are not provided by the
pricing service are valued at the mean between the last bid and asked prices
based upon quotes furnished by market makers for such securities.
Securities for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the supervision of
the Trust's officers in a manner specifically authorized by the Board of
Trustees of the Trust. Short-Term obligations having 60 days or less to maturity
are valued at amortized cost, which approximates market value.
Generally, trading in foreign securities, as well as U.S. Government
securities, money market instruments and repurchase agreements, is substantially
completed each day at various times prior to the close of the New York Stock
Exchange. The values of such securities used in computing the net asset value of
the shares of the Fund 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 Funds, all assets and liabilities of the International Funds
initially expressed in foreign currencies will be converted into U.S. dollars at
the mean between the bid and offer 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 Funds for
any loss sustained by reason of the failure of a shareholder to make full
payment for Investor 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 Investor Shares as provided in the related Prospectuses 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.
Under the 1940 Act, the Funds may suspend the right of redemption or
postpone the date of payment for Shares during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC. (The Funds may also suspend or postpone the
recordation of the transfer of their shares upon the occurrence of any of the
foregoing conditions.)
ADDITIONAL INFORMATION CONCERNING TAXES
The following information supplements and should be read in conjunction
with the Prospectuses. The Prospectuses of the Funds describe generally the tax
treatment of distributions by the Funds. This section of the SAI includes
additional information concerning Federal income taxes.
54
<PAGE>
GENERAL
The Trust intends to qualify each Fund as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), as long as such qualification is in the best interest of the Fund's
shareholders. Each Fund will be treated as a separate entity for tax purposes
and, thus, the provisions of the Code applicable to regulated investment
companies generally will be applied to each Fund, rather than to the Trust as a
whole. In addition, net capital gain, net investment income, and operating
expenses will be determined separately for each Fund. As a regulated investment
company, each Fund will not be taxed on its net investment income and capital
gains distributed to shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) each Fund 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 Fund 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 Fund'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 Fund'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 Fund controls and which are
determined to be engaged in the same or similar trades or businesses.
Each Fund also must distribute or be deemed to distribute to its
shareholders at least 90% of its net investment income which, for this purpose,
includes net short-term capital gains and certain other items earned in each
taxable year. In general, these distributions must actually or be deemed to be
made in the taxable year. However, in certain circumstances, such distributions
may be made in the 12 months following the taxable year. Furthermore,
distributions declared in October, November or December of one taxable year and
paid by January 31 of the following taxable year will be treated as paid by
December 31 the first taxable year. The Funds intend to pay out substantially
all of their net investment income and net capital gain (if any) for each year.
EXCISE TAX
A 4% nondeductible excise tax will be imposed on each Fund (other than
to the extent of its tax-exempt interest income) to the extent it does not meet
certain minimum distribution requirements by the end of each calendar year. Each
Fund 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.
PRIVATE LETTER RULING
In order for a Fund to maintain regulated investment company status
under the Code, its dividends, including--for this purpose--capital gain
distributions, must not constitute "preferential dividends," within the meaning
of Section 562(c) of the Code. The Trust has received a private letter ruling
from the Internal Revenue Service ("IRS") generally to the effect that the
following will not give rise to preferential dividends: differing fees imposed
on the different classes of shares with respect to servicing, distribution and
administrative support services, and transfer agency arrangements; differing
sales charges on purchases and redemptions of such shares; and conversion
features resulting in the Trust paying different dividends or distributions on
the different classes of shares.
TAXATION OF FUND INVESTMENTS
Except as provided herein, gains and losses on the sale of portfolio
securities by a Fund will generally be capital gains and losses. Such gains and
losses will ordinarily be long-term capital gains and losses if the securities
have been held by the Fund for more than one year at the time of disposition of
the securities.
Gains recognized on the disposition of a debt obligation purchased by a
Fund at a market discount (generally at a price less than its principal amount)
will be treated as ordinary income to the extent of the portion of market
discount which accrued, but was not previously recognized pursuant to an
available election, during the term the Fund held the debt obligation.
55
<PAGE>
If an option granted by a Fund lapses or is terminated through a
closing transaction, such as a repurchase by the Fund of the option from its
holder, the Fund will realize a short-term capital gain or loss, depending on
whether the premium income is greater or less than the amount paid by the Fund
in the closing transaction. Some realized capital losses may be deferred if they
result from a position which is part of a "straddle," discussed below. If
securities are sold by a Fund pursuant to the exercise of a call option written
by it, the Fund will add the premium received to the sale price of the
securities delivered in determining the amount of gain or loss on the sale. If
securities are purchased by a Fund pursuant to the exercise of a put option
written by it, such Fund will subtract the premium received from its cost basis
in the securities purchased.
The amount of any gain or loss realized by a Fund on closing out a
regulated futures contract will generally result in a realized capital gain or
loss for Federal income tax purposes. Regulated futures contracts held at the
end of each fiscal year will be required to be "marked to market" for Federal
income tax purposes pursuant to Section 1256 of the Code. In this regard, they
will be deemed to have been sold at market value. Sixty percent (60%) of any net
gain or loss recognized on these deemed sales and sixty percent (60%) of any net
realized gain or loss from any actual sales, will generally be treated as
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss. Transactions that qualify as designated hedges are
excepted from the "mark-to-market" rule and the "60%/40%" rule.
Under Section 988 of the Code, a Fund will generally recognize ordinary
income or loss to the extent gain or loss realized on the disposition of
portfolio securities is attributable to changes in foreign currency exchange
rates. In addition, gain or loss realized on the disposition of a foreign
currency forward contract, futures contract, option or similar financial
instrument, or of foreign currency itself, will generally be treated as ordinary
income or loss. The Funds will attempt to monitor Section 988 transactions,
where applicable, to avoid adverse tax impact.
Offsetting positions held by a Fund involving certain financial
forward, futures or options contracts may be considered, for tax purposes, to
constitute "straddles." "Straddles" are defined to include "offsetting
positions" in actively traded personal property. The tax treatment of
"straddles" is governed by Section 1092 of the Code which, in certain
circumstances, overrides or modifies the provisions of Section 1256. If a Fund
were treated as entering into "straddles" by engaging in certain financial
forward, futures or option contracts, such straddles could be characterized as
"mixed straddles" if the futures, forwards, or options comprising a part of such
straddles were governed by Section 1256 of the Code. The Fund may make one or
more elections with respect to "mixed straddles." Depending upon which election
is made, if any, the results with respect to the Fund may differ. Generally, to
the extent the straddle rules apply to positions established by the Fund, losses
realized by the Fund may be deferred to the extent of unrealized gain in any
offsetting positions. Moreover, as a result of the straddle and the conversion
transaction rules, short-term capital loss on straddle positions may be
recharacterized as long-term capital loss, and long-term capital gain may be
characterized as short-term capital gain or ordinary income.
If a Fund enters into a "constructive sale" of any appreciated position
in stock, a partnership interest, or certain debt instruments, the Fund must
recognize gain (but not loss) with respect to that position. For this purpose, a
constructive sale occurs when the Fund enters into one of the following
transactions with respect to the same or substantially identical property: (i) a
short sale; (ii) an offsetting notional principal contract; or (iii) a futures
or forward contract.
If a Fund purchases shares in a "passive foreign investment company"
("PFIC"), the Fund may be subject to Federal income tax and an interest charge
imposed by the IRS upon certain distributions from the PFIC or the Fund's
disposition of its PFIC shares. If the Fund invests in a PFIC, the Fund intends
to make an available election to mark-to-market its interest in PFIC shares.
Under the election, the Fund 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 Fund 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 Fund as ordinary income (or loss)
notwithstanding any distributions by the PFIC, the Fund will not be subject to
Federal income tax or the interest charge with respect to its interest in the
PFIC under the election.
56
<PAGE>
FOREIGN TAXES
Income and dividends received by a Fund 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 Fund's total
assets at the close of its taxable year consists of securities of non-U.S.
corporations, the Fund 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. Only the
International Funds expect to qualify for the election. However, even if a Fund
qualifies for the election, foreign taxes will only pass-through to a Fund
shareholder if (i) the shareholder holds the Fund shares for at least 16 days
during the 30 day period beginning 15 days prior to the date upon which the
shareholder becomes entitled to receive Fund distributions corresponding with
the pass-through of the foreign taxes paid by the Fund, and (ii) with respect to
foreign source dividends received by the Fund on shares giving rise to foreign
tax, the Fund holds the shares for at least 16 days during the 30 day period
beginning 15 days prior to the date upon which the Fund becomes entitled to the
dividend.
An individual with $300 or less of creditable foreign taxes generally
is exempt from foreign source income and certain other limitations imposed by
the Code on claiming a credit for such taxes. The $300 amount is increased to
$600 for joint filers.
CAPITAL GAIN DISTRIBUTIONS
Distributions which are designated by a Fund as capital gain
distributions will be taxed to shareholders as long-term term capital gain (to
the extent such distributions equal or exceed the Fund's actual net capital
gains for the taxable year), regardless of how long a shareholder has held Fund
shares. Such distributions will be designated as capital gain distributions in a
written notice mailed by the Fund to its shareholders not later than 60 days
after the close of the Fund's taxable year.
DISPOSITION OF FUND SHARES
A disposition of Fund shares pursuant to a redemption (including a
redemption in-kind) or an exchange will ordinarily result in a taxable capital
gain or loss, depending on the amount received for the shares (or are deemed to
be received in the case of an exchange) and the cost of the shares.
If a shareholder exchanges or otherwise disposes of Fund shares within
90 days of having acquired such shares and if, as a result of having acquired
those shares, the shareholder subsequently pays a reduced sales charge on a new
purchase of shares of the Fund or a different regulated investment company, the
sales charge previously incurred in acquiring the Fund's shares shall not be
taken into account (to the extent such previous sales charges do not exceed the
reduction in sales charges on the new purchase) for the purpose of determining
the amount of gain or loss on the disposition, but will be treated as having
been incurred in the acquisition of such other shares. Also, any loss realized
on a redemption or exchange of shares of the Fund will be disallowed to the
extent that substantially identical shares are acquired within the 61-day period
beginning 30 days before and ending 30 days after the shares are disposed of.
If a shareholder receives a capital gain distribution with respect to
any Fund share and such Fund share is held for six months or less, then (unless
otherwise disallowed) any loss on the sale or exchange of that Fund share will
be treated as a long-term capital loss to the extent of the capital gain
distribution. In addition, if a shareholder holds Fund shares for six months or
less, any loss on the sale or exchange of those shares will be disallowed to the
extent of the amount of exempt-interest dividends received with respect to the
shares. The Treasury Department is authorized to issue regulations reducing the
six months holding requirement to a period of not less than the greater of 31
days or the period between regular distributions where a Fund regularly
distributes at least 90% of its net tax-exempt interest, if any. No such
regulations have been issued as of the date of this SAI. The loss disallowance
rules described in this paragraph do not apply to losses realized under a
periodic redemption plan.
FEDERAL INCOME TAX RATES
As of the printing of this SAI, the maximum individual tax rate
applicable to ordinary income is 39.6% (marginal tax rates may be higher for
some individuals to reduce or eliminate the benefit of exemptions and
deductions); the maximum individual marginal tax rate applicable to net capital
gain is 20%; and the maximum corporate tax rate applicable to ordinary income
and net capital gain is 35% (marginal tax rates may be higher for some
corporations to reduce or eliminate the benefit of lower marginal income tax
rates). Naturally, the amount of tax payable by an individual or corporation
will be affected by a combination of tax laws covering, for example, deductions,
credits, deferrals, exemptions, sources of income and other matters.
57
<PAGE>
CORPORATE SHAREHOLDERS
Corporate shareholders of the Funds may be eligible for the
dividends-received deduction on distributions attributable to dividends received
from domestic corporations, which, if received directly by the corporate
shareholder, would qualify for such deduction. A distribution by a Fund
attributable to dividends of a domestic corporation will only qualify for the
dividends-received deduction if (i) the corporate shareholder generally holds
the Fund shares upon which the distribution is made for at least 46 days during
the 90 day period beginning 45 days prior to the date upon which the shareholder
becomes entitled to the distribution; and (ii) the Fund generally holds the
shares of the domestic corporation producing the dividend income for at least 46
days during the 90 day period beginning 45 days prior to the date upon which the
Fund becomes entitled to such dividend income.
FOREIGN SHAREHOLDERS
Under the Code, distributions of net investment income by a Fund to a
nonresident alien individual, foreign trust (I.E., trust which a U.S. court is
able to exercise primary supervision over administration of that trust and one
or more U.S. persons have authority to control substantial decisions of that
trust), foreign estate (I.E., the income of which is not subject to U.S. tax
regardless of source), foreign corporation, or foreign partnership (each a
"foreign shareholder") will be subject to U.S. withholding tax (at a rate of 30%
or a lower treaty rate if applicable). Withholding will not apply if a
distribution paid by a Fund to a foreign shareholder is "effectively connected"
with a U.S. trade or business (or, if an income tax treaty applies, is
attributable to a U.S. permanent establishment of the foreign shareholder), in
which case the reporting and withholding requirements applicable to U.S. persons
will apply. Distributions of net long-term capital gains are generally not
subject to tax withholding.
BACKUP WITHHOLDING
The Trust may be required to withhold, subject to certain exemptions,
at a rate of 31% ("backup withholding") on dividends, capital gain
distributions, and redemption proceeds (including proceeds from exchanges and
redemptions in-kind) paid or credited to an individual Fund shareholder, if the
shareholder fails to certify that the Taxpayer Identification Number ("TIN")
provided is correct and that the shareholder is not subject to backup
withholding, or the IRS notifies the Trust that the shareholder's TIN is
incorrect or that the shareholder is subject to backup withholding. Such tax
withheld does not constitute any additional tax imposed on the shareholder, and
may be claimed as a tax payment on the shareholder's Federal income tax return.
An investor must provide a valid TIN upon opening or reopening an account.
Failure to furnish a valid TIN to the Trust could subject the investor to
penalties imposed by the IRS.
SPECIAL TAX CONSIDERATIONS PERTAINING TO THE KANSAS FUND
In each year that the Kansas Fund qualifies as a regulated investment
company for Federal income tax purposes, dividends distributed to the Fund's
shareholders who are Kansas resident individuals, or estates or trusts resident
in Kansas, will be excluded from the computation of Kansas adjusted gross income
to the extent that such dividends (a) qualify as exempt-interest dividends for
Federal income tax purposes and (b) are attributable to interest on obligations
(i) issued after December 31, 1987 by the State of Kansas or its political
subdivisions or on certain specific obligations issued before January 1, 1988 by
such entities, or (ii) of any authority, commission or instrumentality of the
United States or its possessions, to the extent exempted from state income taxes
under Federal law. The Fund intends to primarily invest only in obligations
which will permit distributions attributable to interest to be excludable from
Kansas adjusted gross income on resident individuals, estates and trusts.
Resident individuals, estates and trusts will generally be subject to Kansas
income tax on other types of distributions received from the Fund, including
distributions attributable to interest on certain obligations issued before
January 1, 1988, by the State of Kansas or its political subdivisions, to
interest on obligations of other issuers and to all long-term and short-term
capital gains, if any, to the extent such capital gains distributions are
included in Federal taxable income. Corporations within Kansas' tax jurisdiction
are subject to the same rules as Kansas individuals in computing such
corporation's net income before apportionment.
The foregoing discussion of Kansas law does not apply to shareholders
which are banks or to certain other individuals or entities who are in the
banking business. Banks and others in the banking business are subject to the
Kansas privilege tax on net income for which distributions from the Kansas Fund
are not exempt.
Except as noted above with respect to Kansas income taxation,
distributions from the Kansas Fund may be taxable to investors under other state
and local laws imposing taxes on or measured by net income, even though all or a
portion of such distributions are derived from tax-exempt obligations which, if
realized directly by the investor, would be nontaxable. The Fund will notify its
shareholders within 60 days after the close of each year as to the amount of
exempt interest dividends from Kansas obligations which is exempt from Kansas
individual income taxation.
Earnings derived from the Kansas Fund will not be subject to the local
intangibles tax imposed by various counties, cities and townships in Kansas.
58
<PAGE>
OTHER MATTERS
Investors should be aware that the investments to be made by the Funds
may involve sophisticated tax rules that may result in income or gain
recognition by a Fund without corresponding current cash receipts. Although the
Funds will seek to avoid significant noncash income, such noncash income could
be recognized by a Fund, in which case the Fund may distribute cash derived from
other sources in order to meet the minimum distribution requirements described
above.
The foregoing discussion and the discussions in the Prospectus
applicable to each shareholder address only some of the Federal tax
considerations generally affecting investments in the Fund. 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
Funds may be obtained by calling (800) 321-7854. From time to time, the yield
and total return of a Fund's Shares may be quoted in advertisements, shareholder
reports, and other communications to shareholders. Quotations of yield and total
return reflect only the performance of a hypothetical investment in a Fund or
class of shares during the particular time period shown. Yield and total return
vary based on changes in the market conditions and the level of a Fund's
expenses, and no reported performance figure should be considered an indication
of performance which may be expected in the future.
Standardized performance for the Funds, I.E., that required in both
form and content by Form N-1A, is shown below and may be advertised by the
Funds. The main purpose of standardized performance is to allow an investor to
review the performance of a Fund's class of shares and compare such performance
with that of investment alternatives, including other mutual funds.
Non-standardized performance also may be advertised by the Funds. One
purpose of providing non-standardized performance to an investor is to provide
that investor with a different snapshot of a Fund's performance that may not be
captured by standardized performance. The non-standardized performance of a
Fund's class of shares, however, may not be directly comparable to the
performance of investment alternatives because of differences in certain
variables (such as the length of time over which performance is shown and the
exclusion of certain charges or expenses) and methods used to value portfolio
securities, compute expenses and calculate performance. Non-standardized
performance may include, but is not limited to, performance for non-standardized
periods, including year-to-date and other periods less than a year, performance
not reflecting the deduction of certain charges, fees and/or expenses, and
performance reflecting the deduction of applicable state or federal taxes.
After-tax returns are generally calculated using the same methodology as that
used in calculating total return, except that such after-tax returns reflect the
deduction of taxes according to applicable federal income and capital gain tax
rates attributable to dividends, distributions and an investor's redemptions. Of
course, after-tax returns for individual investors will vary as the tax rates
applicable to such investors vary. In addition, the Funds may also advertise
their tax efficiency ratios and compare those ratios with other mutual funds. A
tax efficiency ratio is intended to let an investor know how tax efficient a
fund has been over a period of time, and is typically related to its portfolio
turnover rate. That is, an investor could expect that the higher a Fund's
portfolio turnover rate, the greater the percentage of its gains that would have
been realized and consequently, the less tax efficient it was over a given
period of time.
In general, comparisons to other mutual funds or investment
alternatives may be useful to investors who wish to compare past performance of
the Funds or a class with that of competitors. Of course, past performance
cannot be a guarantee of future results.
59
<PAGE>
Each Fund 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 Funds also may
compare the performance and yield of a class or series of shares to those of
other mutual funds with similar investment objectives and to other relevant
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For example,
the performance and yield of a class of shares in a Fund 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 Fund. The "yield" and "effective yield" of each class of
shares of a Money Market Fund may be compared to the respective averages
compiled by DONOGHUE'S MONEY FUND REPORT, a widely recognized independent
publication that monitors the performance of money market funds, or to the
average yields reported by the BANK RATE MONITOR for money market deposit
accounts offered by leading banks and thrift institutions in the top five
metropolitan statistical areas.
The Funds also may use the following information in advertisements and
other types of literature, only to the extent the information is appropriate for
the Fund: (i) the Consumer Price Index may be used to assess the real rate of
return from an investment in a Fund; (ii) other government statistics,
including, but not limited to, The Survey of Current Business, may be used to
illustrate investment attributes of a Fund or the general economic, business,
investment, or financial environment in which a Fund operates; (iii) the effect
of tax-deferred compounding on the investment returns of a Fund, or on returns
in general, may be illustrated by graphs, charts, etc., where such graphs or
charts would compare, at various points in time, the return from an investment
in a Fund (or returns in general) on a tax-deferred basis (assuming reinvestment
of capital gains and dividends and assuming one or more tax rates) with the
return on a taxable basis; and (iv) the sectors or industries in which a Fund
invests may be compared to relevant indices of stocks or surveys (E.G., S&P
Industry Surveys) to evaluate a Fund's historical performance or current or
potential value with respect to the particular industry or sector. In addition,
the performance of a Fund's class of shares may be compared to the Standard &
Poor's 500 Stock Index, an unmanaged index of a group of common stocks, the
Consumer Price Index, the Dow Jones Industrial Average, a recognized unmanaged
index of common stocks of 30 industrial companies listed on the New York Stock
Exchange, the Europe, Far East and Australia Index, a recognized unmanaged index
of international stocks, or any similar recognized index. The performance of a
Fund's class of shares also may be compared to a composite index prepared by the
Adviser, an affiliate of the Adviser, or an unaffiliated party to the Adviser.
In addition, the Funds also may use, in advertisements and other types
of literature, information and statements: (1) showing that bank savings
accounts offer a guaranteed return of principal and a fixed rate of interest,
but no opportunity for capital growth; and (2) describing Bank of America, and
its affiliates and predecessors, as one of the first investment managers to
advise investment accounts using asset allocation and index strategies. The
Funds also may include in advertising and other types of literature information
and other data from reports and studies prepared by the Tax Foundation,
including information regarding federal and state tax levels and the related
"Tax Freedom Day."
The Funds also may discuss in advertising and other types of literature
that a Fund has been assigned a rating by an NRSRO, such as Standard & Poor's
Corporation. Such rating would assess the creditworthiness of the investments
held by the Fund. The assigned rating would not be a recommendation to purchase,
sell or hold the Fund's shares since the rating would not comment on the market
price of the Fund's shares or the suitability of the Fund for a particular
investor. In addition, the assigned rating would be subject to change,
suspension or withdrawal as a result of changes in, or unavailability of,
information relating to the Fund or its investments. The Funds may compare a
Fund's performance with other investments which are assigned ratings by NRSROs.
Any such comparisons may be useful to investors who wish to compare the Fund's
past performance with other rated investments.
The Funds also may disclose in sales literature the distribution rate
on the shares of a Fund. Distribution rate, which may be annualized, is the
amount determined by dividing the dollar amount per share of the most recent
dividend by the most recent NAV or maximum offering price per share as of a date
specified in the sales literature. Distribution rate will be accompanied by the
standard 30-day yield as required by the SEC.
60
<PAGE>
In addition, certain potential benefits of investing in world
securities markets may be discussed in promotional materials. Such benefits
include, but are not limited to: a) the expanded opportunities for investment in
securities markets outside the U.S.; b) the growth of securities markets outside
the U.S. vis-a-vis U.S. markets; c) the relative return associated with foreign
securities markets vis-a-vis U.S. markets; and d) a reduced risk of portfolio
volatility resulting from a diversified securities portfolio consisting of both
U.S. and foreign securities.
IBBOTSON DATA. Ibbotson Associates of Chicago, Illinois, ("Ibbotson")
provides historical returns of the capital markets in the United States. The
Funds may compare the performance of their share classes or series to the
long-term performance of the U.S. capital markets in order to demonstrate
general long-term risk versus reward investment scenarios. Performance
comparisons could also include the value of a hypothetical investment in common
stocks, long-term bonds or treasuries.
The capital markets tracked by Ibbotson are common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, Treasury Bills, and the U.S. rate of
inflation. These capital markets are based on the returns of several different
indices. For common stocks, the S&P is used. For small capitalization stocks,
return is based on the return achieved by Dimensional Fund Advisors (DFA) Small
Company Fund. This fund is a market-value-weighted index of the ninth and tenth
deciles of the Exchange, plus stocks listed on the American Stock Exchange
(AMEX) and over-the-counter (OTC) with the same or less capitalization as the
upperbound of the Exchange ninth docile. At year-end 199, the DFA Small Company
Fund contained approximately 2,663 stocks, with a weighted average market
capitalization of $16.7 million. The unweighted average market capitalization
was $82.97 million, while the median was $6.0 million.
Unlike an investment in a common stock mutual fund, an investment in
bonds that are held to maturity provides a fixed and stated rate of return.
Bonds have a senior priority in liquidation or bankruptcy to common stocks, and
interest on bonds is generally paid from assets of the corporation before any
distributions to common shareholders. Bonds rated in the two highest rating
categories are considered high quality and to present minimal risks of default.
See Schedule A for a more complete explanation of these ratings of corporate
bonds. An advantage of investing in government bonds is that, in many cases,
they are backed by the credit and taxing power of the United States government,
and therefore, such securities may present little or no risk of default.
Although government securities fluctuate in price, they are highly liquid and
may be purchased and sold with relatively small transaction costs (direct
purchase of Treasury securities can be made with no transaction costs).
Long-term corporate bond returns are based on the performance of the
Salomon Brothers Long-Term-High-Grade Corporate Bond Index and include nearly
all "Aaa-" and "Aa-" rated bonds. Returns on intermediate-term government bonds
are based on a one-bond portfolio constructed each year, containing a bond which
is the shortest noncallable bond available with a maturity not less than 5
years. This bond is held for the calendar year and returns are recorded. Returns
on long-term government bonds are based on a one-bond portfolio constructed each
year, containing a bond that meets several criteria, including having a term of
approximately 20 years. The bond is held for the calendar year and returns are
recorded. Returns on U.S. Treasury Bills are based on a one-bill portfolio
constructed each month, containing the shortest-term bill having not less than
one month to maturity. The total return on the bill is the month end price
divided by the previous month-end price, minus one. Data up to 1976 is from the
U.S. Government Bond file at the University of Chicago's Center for Research in
Security Prices; the Wall Street Journal is the source thereafter. Inflation
rates are based on the CPI. Ibbotson calculates total returns in the same method
as the Funds.
YIELD CALCULATIONS
Income calculated for the purposes of calculating a Fund'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 Fund may differ from the rate of
distributions a Fund paid over the same period or the rate of income reported in
the Funds' financial statements.
61
<PAGE>
Yield is calculated separately for the Primary A, Investor A, Investor
B and Investor C Shares of a Fund by dividing the net investment income per
share for a particular class or series of shares (as described below) earned
during a 30-day period by the maximum offering price per share on the last day
of the period (for Primary A, maximum offering price per share is the same as
the net asset value per share) and annualizing the result on a semi-annual basis
by adding one to the quotient, raising the sum to the power of six, subtracting
one from the result and then doubling the difference. For a class or series of
shares in a Fund, net investment income per share earned during the period is
based on the average daily number of shares outstanding during the period
entitled to receive dividends and includes dividends and interest earned during
the period minus expenses accrued for the period, net of reimbursements. This
calculation can be expressed as follows:
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 = the 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 (again, for Primary A Shares, this
is equivalent to net asset value per share).
For the purpose of determining net investment income earned during the
period (variable- "a" in the formula), dividend income on equity securities held
by a Fund is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is in the portfolio. Each Fund calculates
interest earned on any debt obligations held in its portfolio by computing the
yield to maturity of each obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest) and dividing
the result by 360 and multiplying the quotient by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. For purposes of this calculation, it is assumed
that each month contains 30 days. The maturity of an obligation with a call
provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. With respect to debt
obligations purchased at a discount or premium, the formula generally calls for
amortization of the discount or premium. The amortization schedule will be
adjusted monthly to reflect changes in the market values of such debt
obligations. The California Municipal Bond Fund, Municipal Income Fund,
Short-Term Municipal Income Fund, Intermediate Municipal Bond Fund, the State
Intermediate Municipal Bond Funds and the State Municipal Bond Funds calculate
interest gained on tax-exempt obligations issued without original issue discount
and having a current market discount by using the coupon rate of interest
instead of the yield to maturity. In the case of tax-exempt obligations that are
issued with original issue discount, where the discount based on the current
market value exceeds the then-remaining portion of original issue discount, the
yield to maturity is the imputed rate based on the original issue discount
calculation. Conversely, where the discount based on the current market value is
less than the remaining portion of the original issue discount, the yield to
maturity is based on the market value.
Expenses accrued for the period (variable "b" in the formula) include
recurring fees charged by Nations Funds to shareholder accounts in proportion to
the length of the base period. Undeclared earned income will be subtracted from
the maximum offering price per share (which for Primary A and Primary B Shares
is net asset value per share) (variable "d" in the formula). Undeclared earned
income is the net investment income which, at the end of the base period, has
not been declared as a dividend, but is reasonably expected to be and is
declared as a dividend shortly thereafter. A Fund's maximum offering price per
share for purposes of the formula includes the maximum sales charge, if any,
imposed by the Fund, as reflected in the Fund's prospectus.
The Funds may provide additional yield calculations in communications
(other than advertisements) to the holders of Primary A, Investor A, Investor B
or Investor C Shares. These may be calculated based on the Primary A, Investor
A, Investor B or Investor C Shares' net asset values per share (rather than
their maximum offering prices) on the last day of the period covered by the
yield computations. That is, some communications provided to the holders of
Primary A, Investor A, Investor B or Investor C Shares may also include
additional yield calculations prepared for the holders of Primary A Shares. Such
additional quotations, therefore, will not reflect the effect of the sales
charges mentioned above.
62
<PAGE>
Because the Funds are new series they do not yet have any historical
yield performance.
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 Fund. The Funds' average annual and cumulative total
return figures are computed in accordance with the standardized methods
prescribed by the SEC. Average annual total return figures are computed by
determining the average annual compounded rates of return over the periods
indicated in the advertisement, sales literature or shareholders' report that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1 + T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period.
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. All performance
calculations for the period ended March 31, 1999, reflect the deduction of sales
charges, if any, that would have been deducted from a sale of shares.
Cumulative total return is based on the overall percentage change in
value of a hypothetical investment in the Fund, assuming all Fund dividends and
capital gain distributions are reinvested, without reflecting the effect of any
sales charge that would be paid by an investor, and is not annualized.
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.
Because the Funds are new series they do not yet have any historical
return performance.
MISCELLANEOUS
63
<PAGE>
CERTAIN RECORD HOLDERS
The name, address and percentage of ownership of each person who is
known by the Registrant to have owned of record or beneficially five percent or
more of any of the Funds as of January __, 2000 is:
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
64
<PAGE>
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.
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.
A-1
<PAGE>
B - Bond 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.
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:
A-2
<PAGE>
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 funds, is judged to be "outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations." D-1 indicates very high
certainty of timely payment. Liquidity factors are excellent and supported by
good fundamental protection factors. Risk factors are considered to be minor.
D-1 indicates high certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2 indicates good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small. D-3 indicates satisfactory liquidity and other protection factors which
qualify the issue as investment grade. Risk factors are larger and subject to
more variation. Nevertheless, timely payment is expected.
The following summarizes the two highest rating categories used by
Fitch for short-term obligations each of which denotes that the securities are
investment grade:
F-1+ securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
F-1 securities possess very strong credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in degree than
issues rated F-1+.
F-2 securities possess good credit quality. Issues carrying this rating
have a satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned the F-1+ and F-1 ratings.
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted A-1+. Capacity for timely payment on
commercial paper rated A-2 is satisfactory, but the relative degree of safety is
not as high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of senior short-term
promissory obligations. Issuers rated Prime-2 (or related supporting
institutions) are considered to have a strong capacity for repayment of senior
short-term promissory obligations. This will normally be evidenced by many of
the characteristics of issuers rated Prime-1, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
For commercial paper, D&P uses the short-term debt ratings described
above.
For commercial paper, Fitch uses the short-term debt ratings described
above.
Thomson BankWatch, Inc. ("BankWatch") ratings are based upon a
qualitative and quantitative analysis of all segments of the organization
including, where applicable, holding company and operating subsidiaries.
BankWatch ratings do not constitute a recommendation to buy or sell securities
of any of these companies. Further, BankWatch does not suggest specific
investment criteria for individual clients.
BankWatch long-term ratings apply to specific issues of long-term debt
and preferred stock. The long-term ratings specifically assess the likelihood of
untimely payment of principal or interest over the term to maturity of the rated
instrument. The following are the four investment grade ratings used by
BankWatch for long-term debt:
AAA - The highest category; indicates ability to repay principal
and interest on a timely basis is extremely high.
AA - The second highest category; indicates a very strong ability
to repay principal and interest on a timely basis with limited incremental
risk versus issues rated in the highest category.
A-3
<PAGE>
A - The third highest category; indicates the ability to repay
principal and interest is strong. Issues rated "A" could be more
vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
BBB - The lowest investment grade category; indicates an acceptable
capacity to repay principal and interest. Issues rated "BBB" are, however,
more vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
Long-term debt ratings may include a plus (+) or minus (-) sign to
indicate where within a category the issue is placed.
The BankWatch short-term ratings apply to commercial paper, other
senior short-term obligations and deposit obligations of the entities to which
the rating has been assigned. The BankWatch short-term ratings specifically
assess the likelihood of an untimely payment of principal or interest.
TBW-1 The highest category; indicates a very high
likelihood that principal and interest will be paid
on a timely basis.
TBW-2 The second highest category; while the degree of
safety regarding timely repayment of principal and
interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1".
TBW-3 The lowest investment grade category; indicates that
while more susceptible to adverse developments (both
internal and external) than obligations with higher
ratings, capacity to service principal and interest
in a timely fashion is considered adequate.
TBW-4 The lowest rating category; this rating is regarded
as non-investment grade and therefore speculative.
The following summarizes the four highest long-term debt ratings used
by IBCA Limited and its affiliate, IBCA Inc. (collectively "IBCA"):
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-4
<PAGE>
NATIONS FUNDS TRUST
ONE BANK OF AMERICA PLAZA
33RD FLOOR
CHARLOTTE, NC 28255
1-800-626-2275
FORM N-1A
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
All references to the "Registration Statement" in the following
list of Exhibits refer to the Registrant's Registration Statement on Form N-1A
[(FILE NOS. __-_____; ___-____)]
<TABLE>
<CAPTION>
- ---------------------- -------------------------------------------------------------------------------------
EXHIBIT LETTER DESCRIPTION
- ---------------------- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(a) ARTICLES OF INCORPORATION:
(a)(1) Certificate of Trust, to be filed by amendment.
(a)(2) Declaration of Trust, to be filed by amendment.
- ---------------------- -------------------------------------------------------------------------------------
(b) BY-LAWS:
By-Laws, to be filed by amendment.
- ---------------------- -------------------------------------------------------------------------------------
(c) INSTRUMENTS DEFINING RIGHTS OF SECURITIES HOLDERS:
Not Applicable
- ---------------------- -------------------------------------------------------------------------------------
(d) INVESTMENT ADVISORY CONTRACTS:
(d)(1) Form of Investment Advisory Agreement between Nations Funds Trust and Banc of
America Advisors, Inc. ("BAAI"), filed herewith.
(d)(2) Form of Sub-Advisory Agreement among Nations Funds Trust,
BAAI and Sub-Adviser on behalf of the Funds of Nations
Funds Trust, filed herewith.
- ---------------------- -------------------------------------------------------------------------------------
(e) UNDERWRITING CONTRACT:
Form of Distribution Agreement between Nations Funds
Trust and Stephens Inc., filed herewith.
- ---------------------- -------------------------------------------------------------------------------------
C-1
<PAGE>
- ---------------------- -------------------------------------------------------------------------------------
EXHIBIT LETTER DESCRIPTION
(f) BONUS OR PROFIT SHARING CONTRACTS:
Nations Funds Trust Deferred Compensation Plan, to be filed by amendment.
- ---------------------- -------------------------------------------------------------------------------------
(g) CUSTODIAN AGREEMENT:
Form of Custody Agreement between Nations Funds Trust and
The Bank of New York, filed herewith.
- ---------------------- -------------------------------------------------------------------------------------
(h) OTHER MATERIAL CONTRACTS:
(h)(1) Form of Co-Administration Agreement among Nations Funds Trust, Stephens Inc. and
BAAI, filed herewith.
(h)(2) Form of Sub-Administration Agreement among Nations Funds Trust, The Bank of New
York and BAAI, filed herewith.
(h)(3) Transfer Agency between First Data Investor Services Group, Inc. ("First Data") and
Nations Funds Trust, to be filed by amendment.
(h)(4) Sub-Transfer Agency Agreement among First Data, Bank of America, N.A. ("Bank of
America") and Nations Funds Trust, to be filed by amendment.
(h)(5) Cross Indemnification Agreement among Nations Fund Trust, Nations Fund, Inc.,
Nations Reserves, Nations Master Investment Trust and Nations Funds Trust, to be
filed by amendment.
(h)(6) Form of Shareholder Servicing Plan relating to Investor B Shares, filed herewith.
(h)(7) Form of Shareholder Servicing Plan relating to Investor C Shares, filed herewith.
- ---------------------- -------------------------------------------------------------------------------------
(i) LEGAL OPINION
Not Applicable.
- ---------------------- -------------------------------------------------------------------------------------
(j) OTHER OPINIONS
Not Applicable.
- ---------------------- -------------------------------------------------------------------------------------
C-2
<PAGE>
- ---------------------- -------------------------------------------------------------------------------------
EXHIBIT LETTER DESCRIPTION
(k) OMITTED FINANCIAL STATEMENTS
Not Applicable
- ---------------------- -------------------------------------------------------------------------------------
(l) INITIAL CAPITAL AGREEMENTS:
Investment Letter, to be filed by amendment.
- ---------------------- -------------------------------------------------------------------------------------
(m) RULE 12B-1 PLANS:
(m)(1) Form of Shareholder Servicing and Distribution Plan relating to Investor A Shares,
filed herewith.
(m)(2) Form of Distribution Plan relating to Investor B Shares, filed herewith.
(m)(3) Form of Distribution Plan relating to Investor C Shares, filed herewith.
- ---------------------- -------------------------------------------------------------------------------------
(n) FINANCIAL DATA SCHEDULE:
Not Applicable
- ---------------------- -------------------------------------------------------------------------------------
(o) RULE 18F-3 PLAN:
Form of Rule 18f-3 Multi-Class Plan, filed herewith.
- ---------------------- -------------------------------------------------------------------------------------
</TABLE>
ITEM 24. PERSONS CONTROLLED BY OF UNDER COMMON CONTROL WITH THE FUND
No person is controlled by or under common control with the Registrant.
ITEM 25. INDEMNIFICATION
Article V, Section 2 of the Declaration of Trust provides for the
indemnification of Registrant's trustees and employees Indemnification of
Registrant's administrators, principal underwriter, custodian and transfer agent
is provided for, respectively, in the:
1. Co-Administration Agreement with Stephens Inc. and BAAI;
2. Sub--Administration Agreement with The Bank of New York;
3. Distribution Agreement with Stephens Inc.;
4. Custody Agreement with The Bank of New York; and
5. Transfer Agency Agreement with First Data.
C-3
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
the Registrant by the Registrant pursuant to the Declaration of Trust or
otherwise, the Registrant is aware that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and, therefore, is unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by trustees, directors, officers or
controlling persons of the Registrant in connection with the successful defense
of any act, suit or proceeding) is asserted by such trustees, officers or
controlling persons in connection with the shares being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issues.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
To the knowledge of the Registrant, none of the directors or officers
of BAAI, the adviser to the Registrant's portfolios, or the investment
sub-advisers, except those set forth below, are or have been, at any time during
the past two calendar years, engaged in any other business, profession, vocation
or employment of a substantial nature, except that certain directors and
officers also hold various positions with, and engage in business for, the
company that owns all the outstanding stock (other than directors' qualifying
shares) of BAAI or TradeStreet, respectively, or other subsidiaries of Bank of
America Corporation.
(a) BAAI performs investment advisory services for the Registrant and
certain other customers. BAAI is a wholly owned subsidiary of Bank of America,
which in turn is a wholly owned banking subsidiary of Bank of America
Corporation. Information with respect to each director and officer of the
investment adviser is incorporated by reference to Form ADV filed by BAAI with
the SEC pursuant to the Investment Advisers Act of 1940, as amended (the
"Advisers Act") (file no. 801-49874).
(b) TradeStreet performs investment sub-advisory services for the
Registrant and certain other customers. TradeStreet is a wholly owned subsidiary
of Bank of America, which in turn is a wholly owned banking subsidiary of Bank
of America Corporation. Information with respect to each director and officer of
the investment sub-adviser is incorporated by reference to Form ADV filed by
TradeStreet with the SEC pursuant to the Advisers Act (file no. 801-50372).
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Stephens, distributor for the Registrant, does not presently act as
investment adviser for any other registered investment companies, but does act
as principal underwriter for Nations Fund Trust, Nations Fund, Inc., Nations
LifeGoal Fund, Inc., Nations Annuity Trust, the Overland Express Funds, Inc.,
Stagecoach Inc., Stagecoach Funds, Inc. and Stagecoach Trust, and is the
exclusive placement agent for Master Investment Trust, Managed Series Investment
Trust, Life & Annuity Trust and
C-4
<PAGE>
Master Investment Portfolio, all of which are registered open-end management
investment companies, and has acted as principal underwriter for the Liberty
Term Trust, Inc., Nations Government Income Term Trust 2003, Inc., Nations
Government Income Term Trust 2004, Inc. and the Managed Balanced Target Maturity
Fund, Inc., closed-end management investment companies.
(b) Information with respect to each director and officer of the
principal underwriter is incorporated by reference to Form ADV filed by Stephens
Inc. with the SEC pursuant to the Investment Company Act of 1940, as amended
(the "1940 Act") (file No. 501-15510).
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
(1) BAAI, One Bank of America Plaza, Charlotte, NC 28255 (records relating
to its function as Investment Adviser and Co-Administrator).
(2) TradeStreet, One Bank of America Plaza, Charlotte, NC 28255 (records
relating to its function as Sub-Adviser).
(3) Stephens, 111 Center Street, Little Rock, AR 72201 (records relating
to its function as Distributor and Co-Administrator).
(4) First Data, 101 Federal Street, Boston, MA 02110 (records relating to
its function as Transfer Agent).
(5) Bank of New York, 90 Washington Street, New York, NY 10286 (records
relating to its function as Custodian and Sub-Administrator)
ITEM 29. MANAGEMENT SERVICES
Not Applicable
ITEM 30. UNDERTAKINGS
Not Applicable
C-5
<PAGE>
Signatures
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Little Rock, State of Arkansas on the 25th day of
October, 1999.
NATIONS FUNDS TRUST
By: /s/ Richard H. Blank, Jr.
-------------------------------------
Richard H. Blank, Jr.
Secretary and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SIGNATURES TITLE DATE
* Trustee October 25, 1999
- ------------------------------
(Marco E. Adelfio)
* Trustee October 25, 1999
- ------------------------------
(Steven G. Cravath)
* Trustee October 25, 1999
- ------------------------------
(Barry I. Pershkow)
/s/ Richard H. Blank, Jr. Secretary and Treasurer October 25, 1999
- -------------------------------------
(Richard H. Blank, Jr.)
By/s/ Richard H. Blank, Jr.
(Richard H. Blank, Jr.)
*Attorney-in-Fact
October 25, 1999
</TABLE>
dc-179700
<PAGE>
Nations Funds Trust
Exhibit Index
Exhibit No. Description
- ----------- -----------
EX-99.D1 Form of Investment Advisory Agreement
EX-99.D2 Form of Sub-Advisory Agreement
EX-99.E Form of Distribution Agreement
EX-99.G Form of Custody Agreement
EX-99.H1 Form of Co-Administration Agreement
EX-99.H2 Form of Sub-Administration Agreement
EX-99.H6 Form of Shareholder Servicing Plan
EX-99.H7 Form of Shareholder Servicing Plan
EX-99.M1 Form of Shareholder Servicing and Distribution Plan
EX-99.M2 Form of Distribution Plan--Investor B Shares
EX-99.M3 Form of Distribution Plan--Investor C Shares
EX-99.O Form of Rule 18f-3 Multi-Class Plan
EX-99.P Powers of Attorney
dc-175080
Exhibit 99.D1
FORM OF
INVESTMENT ADVISORY AGREEMENT
NATIONS FUNDS TRUST
THIS AGREEMENT is made as of [DATE], by and between NATIONS FUNDS TRUST,
a Delaware business trust (the "Trust"), and BANC OF AMERICA ADVISORS, INC., a
North Carolina corporation (the "Adviser"), on behalf of those series of the
Trust now or hereafter identified on Schedule I (each, a "Fund" and
collectively, the "Funds").
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "Commission") as an open-end management investment company under
the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Adviser is registered with the Commission as an investment
adviser under the Investment Advisers Act of 1940, as amended (the "Advisers
Act");
WHEREAS, the Trust desires that the Adviser manage the investment
operations of the Funds and the Adviser desires to manage said operations; and
WHEREAS, the Board of Trustees of the Trust (the "Board"), including a
majority of the Trustees who are not "interested persons" (as defined herein) of
any party to this Agreement, have approved this arrangement;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT OF ADVISER. The Trust hereby appoints the Adviser and
the Adviser hereby agrees to manage the investment operations of each Fund
subject to the terms of this Agreement and subject to the supervision of the
Board. The Trust and the Adviser contemplate that certain duties of the Adviser
under this Agreement may be delegated to one or more investment sub-adviser(s)
(the "Sub-Adviser(s)") pursuant to separate investment sub-advisory agreement(s)
(the "Sub-Advisory Agreement(s)"). The Adviser may, in its discretion, provide
services under this Agreement through its own employees or through one or more
affiliated companies that are qualified to act as investment advisers under
applicable law and are under common control of Bank of America Corporation.
2. SERVICES OF ADVISER. The Adviser shall perform, or arrange for the
performance of, the management services necessary for the investment operations
of each Fund, including but not limited to:
(a) Managing the investment and reinvestment of all
assets, now or hereafter acquired by each Fund,
including determining what securities and other
investments are to be purchased or sold for each Fund
and executing transactions accordingly;
(b) Transmitting trades to each Fund's custodian for
settlement in accordance with each Fund's procedures
and as may be directed by the Trust;
-1-
<PAGE>
(c) Assisting in the preparation of all shareholder
communications, including shareholder reports, and
participating in shareholder relations;
(d) Making recommendations as to the manner in which
voting rights, rights to consent to Fund action and
any other rights pertaining to each Fund's portfolio
securities shall be exercised;
(e) Making recommendations to the Board with respect to
Fund investment policies, and carrying out such
investment policies as are adopted by the Board;
(f) Supplying reports, evaluations, analyses, statistical
data and information to the Board or to the Funds'
officers and other service providers as the Board may
reasonably request from time to time or as may be
necessary or appropriate for the operation of the
Trust as an open-end investment company or as
necessary to comply with Section 3(a) of this
Agreement;
(g) Maintaining all required books and records with
respect to the investment decisions and securities
transactions for each Fund;
(h) Furnishing any and all other services, subject to
review by the Board, that the Adviser from time to
time determines to be necessary or useful to perform
its obligations under this Agreement or as the Board
may reasonably request from time to time.
3. RESPONSIBILITIES OF ADVISER. In carrying out its obligations under
this Agreement, the Adviser agrees that it will:
(a) Comply with all applicable law, including but not
limited to the 1940 Act and the Advisers Act, the
rules and regulations of the Commission thereunder,
and the conditions of any order affecting the Trust
or a Fund issued thereunder;
(b) Use the same skill and care in providing such
services as it uses in providing services to other
fiduciary accounts for which it has investment
responsibilities;
(c) Not make loans to any person for the purpose of
purchasing or carrying Fund shares;
(d) Place, or arrange for the placement of, all orders
pursuant to its investment determinations for the
Funds either directly with the issuer or with any
broker or dealer (including any affiliated broker or
dealer). In executing portfolio transactions and
selecting brokers or dealers, the Adviser will use
its best efforts to seek on behalf of each Fund the
best overall terms available. In assessing the best
overall terms available for any transaction, the
Adviser shall consider all factors that it deems
relevant, including the
-2-
<PAGE>
breadth of the market in the security, the price of
the security, the financial condition and execution
capability of the broker or dealer, and the
reasonableness of the commission, if any, both for
the specific transaction and on a continuing basis.
In evaluating the best overall terms available, and
in selecting the broker or dealer to execute a
particular transaction, the Adviser may also consider
whether such broker or dealer furnishes research and
other information or services to the Adviser;
(e) Adhere to the investment objective, strategies and
policies and procedures of the Trust adopted on
behalf of each Fund; and
(f) Maintain a policy and practice of conducting its
investment advisory services hereunder independently
of the commercial banking operations of its
affiliates. In making investment recommendations for
a Fund, the Adviser's investment advisory personnel
will not inquire or take into consideration whether
the issuers (or related supporting institutions) of
securities proposed for purchase or sale for the
Fund's account are customers of the commercial
departments of its affiliates. In dealing with
commercial customers, such commercial departments
will not inquire or take into consideration whether
securities of those customers are held by the Fund.
4. CONFIDENTIALITY OF INFORMATION. Each party agrees that it will treat
confidentially all information provided by the other party regarding such other
party's business and operations, including without limitation the investment
activities or holdings of a Fund. All confidential information provided by a
party hereto shall not be disclosed to any unaffiliated third party without the
prior consent of the providing party. The foregoing shall not apply to any
information that is public when provided or thereafter becomes public or which
is required to be disclosed by any regulatory authority in the lawful and
appropriate exercise of its jurisdiction over a party, by any auditor of the
parties hereto, by judicial or administrative process or otherwise by applicable
law or regulation.
5. DELEGATION OF DUTIES. Subject to the approval of the Board and, if
required, the shareholders of the Funds, the Adviser may delegate to one or more
Sub-Adviser(s) any or all of its duties hereunder, provided that the Adviser
shall continue to supervise and monitor the performance of the duties delegated
to the Sub-Adviser(s) and any such delegation shall not relieve the Adviser of
its duties and obligations under this Agreement. The Adviser shall be solely
responsible for compensating the Sub-Adviser(s) for performing any of the duties
delegated to them. The Adviser may request that the Trust pay directly to the
Sub-Adviser(s) the portion of the Adviser's compensation that the Adviser is
obligated to pay to the Sub-Adviser(s). If the Trust agrees to such request, it
will pay such portion to the Sub-Adviser(s) on behalf of the Adviser, thereby
reducing the compensation paid to the Adviser by the amount paid directly to the
Sub-Adviser(s). However, such an arrangement will not relieve the Adviser of its
responsibility for compensating the Sub-Adviser(s). In the event that any
Sub-Adviser appointed hereunder is terminated, the Adviser may provide
investment advisory services pursuant to this Agreement through its own
employees or through one or more affiliated companies that are
-3-
<PAGE>
qualified to act as investment advisers under applicable law and are under
common control of Bank of America Corporation or through other Sub-Adviser(s) as
approved by the Trust in accordance with applicable law.
6. SERVICES NOT EXCLUSIVE. The services furnished by the Adviser
hereunder are deemed not to be exclusive, and the Adviser shall be free to
furnish similar services to others so long as its provision of services under
this Agreement is not impaired thereby. To the extent that the purchase or sale
of securities or other investments of the same issuer may be deemed by the
Adviser to be suitable for two or more accounts managed by the Adviser, the
available securities or investments may be allocated in a manner believed by the
Adviser to be equitable to each account. It is recognized that in some cases
this procedure may adversely affect the price paid or received by a Fund or the
size of the position obtainable for or disposed of by a Fund. Nothing in this
Agreement shall limit or restrict the right of any of the Adviser's partners,
officers or employees to engage in any other business or to devote his or her
time and attention in part to the management or other aspects of any business,
whether of a similar or dissimilar nature, nor limit or restrict the Adviser's
right to engage in any other business or to render services of any kind to any
other corporation, firm, individual or association.
7. DELIVERY OF DOCUMENTS. The Trust has furnished the Adviser with
copies, properly certified or authenticated, of each of the following:
(a) the Trust's Certificate of Trust, as filed with the
Secretary of State of Delaware, and Declaration of
Trust (such Declaration of Trust, as presently in
effect and as from time to time amended, is herein
called the "Declaration of Trust");
(b) the Trust's Bylaws, if any;
(c) the most recent prospectus(es) and statement(s) of
additional information relating to each Fund (such
prospectus(es) together with the related statement(s)
of additional information, as presently in effect and
all amendments and supplements thereto, are herein
called the "Prospectus"); and
(d) any and all applicable policies and procedures
approved by the Board.
The Trust will promptly furnish the Adviser with copies of any and all
amendments of or additions or supplements to the foregoing.
8. BOOKS AND RECORDS. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Adviser hereby agrees that all records that it maintains
for each Fund under this Agreement are the property of the Trust and further
agrees to surrender promptly to the Trust any of such records upon request. The
Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
-4-
<PAGE>
9. EXPENSES OF THE FUNDS. Except to the extent expressly assumed by the
Adviser and except to any extent required by law to be paid or reimbursed by the
Adviser, the Adviser shall have no duty to pay any ordinary operating expenses
incurred in the organization and operation of the Funds. Ordinary operating
expenses include, but are not limited to, brokerage commissions and other
transaction charges, taxes, legal, auditing, printing, or governmental fees,
other service providers' fees and expenses, expenses of issue, sale, redemption
and repurchase of shares, expenses of registering and qualifying shares for
sale, expenses relating to Board and shareholder meetings, the cost of preparing
and distributing reports and notices to shareholders and interest payments and
other fees or charges associated with any credit facilities established by or on
behalf of the Funds.
10. COMPENSATION. For the services provided to each Fund and the
expenses assumed pursuant to this Agreement, the Trust will pay the Adviser and
the Adviser will accept as full compensation therefor a fee determined in
accordance with Schedule I attached hereto; provided, however, that the
compensation paid to the Adviser shall be reduced by any amount paid by the
Trust directly to the Sub-Advisor(s) pursuant to Section 5 of this Agreement. In
addition, BAAI or its affiliated persons may receive compensation or
reimbursement of recordkeeping, bookkeeping, accounting, administrative and
transactional fees or charges incurred in connection with any credit facilities
established by or on behalf of the Funds. The fees or charges attributable to
each Fund shall be a separate charge to such Fund and shall be the several (and
not joint or joint and several) obligation of each such Fund. The Trust and the
Adviser may, from time to time, agree to reduce, limit or waive the amounts
payable hereunder with respect to one or more Funds for such period or periods
they deem advisable.
11. LIABILITY OF ADVISER. The Adviser shall not be liable for any error
of judgment or mistake of law or for any loss suffered by the Trust in
connection with the performance of this Agreement, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or negligence
on the part of the Adviser or any of its officers, directors, employees or
agents, in the performance of its duties, or from reckless disregard by it of
any of its obligations and duties under this Agreement.
12. TERM AND APPROVAL. This Agreement will become effective as of the
date set forth herein above, and shall continue in effect until the second
anniversary of its effective date. This Agreement will become effective with
respect to each additional Fund as of the date set forth on Schedule I when each
such Fund is added thereto. The Agreement shall continue in effect for a Fund
after the second anniversary of the effective date for successive annual periods
ending on each anniversary of such date, provided that the continuation of the
Agreement is specifically approved for the Fund at least annually:
(a)(i) by the Board or (ii) by the vote of "a majority
of the outstanding voting securities" of the Fund (as
defined in Section 2(a)(42) of the 1940 Act); and
(b) by the affirmative vote of a majority of the Trustees
of the Trust who are not parties to this Agreement or
"interested persons" (as defined in the
-5-
<PAGE>
1940 Act) of a party to this Agreement (other than as
Trustees of the Trust), by votes cast in person at a
meeting specifically called for such purpose.
13. TERMINATION. This Agreement may be terminated without payment of
any penalty at any time by:
(a) the Trust with respect to a Fund, by vote of the
Board or by vote of a majority of a Fund's
outstanding voting securities, upon sixty (60) days'
written notice to the Adviser; or
(b) the Adviser with respect to a Fund, upon sixty (60)
days' written notice to the Trust.
Any party entitled to notice may waive the notice provided for herein.
This Agreement shall automatically terminate in the event of its assignment,
unless an order is issued by the Commission conditionally or unconditionally
exempting such assignment from the provisions of Section 15(a) of the 1940 Act,
in which event this Agreement shall remain in full force and effect subject to
the terms of such order. For the purposes of this paragraph, the definitions
contained in Section 2(a) of the 1940 Act and the applicable rules under the
1940 Act shall apply.
14. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be
changed, waived, discharged or terminated orally, except by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
15. NOTICES. Any notices under this Agreement shall be in writing,
addressed and delivered or mailed postage paid to such address as may be
designated for the receipt of such notice. Until further notice, it is agreed
that the address of the Trust shall be c/o Stephens Inc., 111 Center Street,
Little Rock, Arkansas 72201, Attention: Secretary, and that of the Adviser shall
be One Bank of America Plaza, 33rd Floor, 101 South Tryon Street, Charlotte,
North Carolina 28255, Attention: President.
16. RELEASE. The names "Nations Funds Trust" and "Trustees of Nations
Funds Trust" refer respectively to the Trust created by the Declaration of Trust
and the Trustees as Trustees but not individually or personally. All parties
hereto acknowledge and agree that any and all liabilities of the Trust arising,
directly or indirectly, under this Agreement will be satisfied solely out of the
assets of the Trust and that no Trustee, officer or shareholder shall be
personally liable for any such liabilities. All persons dealing with any Fund of
the Trust must look solely to the property belonging to such Fund for the
enforcement of any claims against the Trust.
17. MISCELLANEOUS. This Agreement contains the entire understanding of
the parties hereto. Each provision of this Agreement is intended to be
severable. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby.
-6-
<PAGE>
18. GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, Delaware law and the federal securities laws, including the
1940 Act and the Advisers Act.
19. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original.
20. USE OF THE NAME "NATIONS FUNDS". The name "Nations Funds" is the
property of Bank of America Corporation and/or its affiliates and its use by the
Trust is governed by a separate License Agreement.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below as of the day and
year first above written.
NATIONS FUNDS TRUST
on behalf of the Funds
By:_________________________________
A. Max Walker
President and Chairman of the
Board of Trustees
BANC OF AMERICA ADVISORS, INC.
By:_________________________________
Robert H. Gordon
President
-8-
<PAGE>
SCHEDULE I
The Trust shall pay the Adviser as, full compensation for services
provided and expenses assumed hereunder, an advisory fee for each Fund, computed
daily and payable monthly at the annual rates listed below as a percentage of
the average daily net assets of the Fund:
RATE OF
FUND COMPENSATION EFFECTIVE DATE
---- ------------ --------------
Fund Name -.--%
Approved:
-9-
Exhibit 99.D2
FORM OF
INVESTMENT SUB-ADVISORY AGREEMENT
NATIONS FUNDS TRUST
THIS AGREEMENT is made as of [DATE], by and between BANC OF AMERICA
ADVISORS, INC., a North Carolina corporation (the "Adviser"), [SUB-ADVISER], a
[STATE] corporation (the "Sub-Adviser"), and NATIONS FUNDS TRUST, a Delaware
business trust (the "Trust"), on behalf of those series of the Trust now or
hereafter identified on Schedule I (each a "Fund" and collectively, the
"Funds").
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "Commission") as an open-end management investment company under
the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Adviser is registered with the Commission as an investment
adviser under the Investment Advisers Act of 1940, as amended (the "Advisers
Act");
WHEREAS, the Sub-Adviser is also registered with the Commission as an
investment adviser under the Advisers Act;
WHEREAS, the Adviser and the Trust have entered into an investment
advisory agreement (the "Investment Advisory Agreement"), pursuant to which the
Adviser manages the investment operations of each Fund and may delegate certain
duties of the Adviser to one or more investment sub-adviser(s); and
WHEREAS, the Adviser, with the approval of the Board of Trustees of the
Trust (the "Board"), including a majority of the Trustees who are not
"interested persons" (defined herein) of any party to this Agreement, desires to
delegate to the Sub-Adviser the duty to manage the portfolio investments of the
Funds;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT OF SUB-ADVISER. The Adviser hereby appoints the
Sub-Adviser and the Sub-Adviser hereby agrees to manage the portfolio
investments of each Fund subject to the terms of this Agreement and subject to
the supervision of the Adviser and the Board.
2. SERVICES OF SUB-ADVISER. The Sub-Adviser shall perform all services
necessary for the management of the portfolio investments of each Fund,
including but not limited to:
(a) Managing the investment and reinvestment of all
assets, now or hereafter acquired by each Fund,
including determining what securities and other
investments are to be purchased or sold for each Fund
and executing transactions accordingly;
-1-
<PAGE>
(b) Transmitting trades to each Fund's custodian for
settlement in accordance with each Fund's procedures
and as may be directed by the Trust;
(c) Assisting in the preparation of all shareholder
communications, including shareholder reports, and
participating in shareholder relations;
(d) Making recommendations as to the manner in which
voting rights, rights to consent to Fund action and
any other rights pertaining to each Fund's portfolio
securities shall be exercised;
(e) Making recommendations to the Adviser and the Board
with respect to Fund investment policies and
procedures, and carrying out such investment policies
and procedures as are approved by the Board or by the
Adviser under authority delegated by the Board to the
Adviser;
(f) Supplying reports, evaluations, analyses, statistical
data and information to the Adviser, the Board or to
the Funds' officers and other service providers as
the Adviser or the Board may reasonably request from
time to time or as may be necessary or appropriate
for the operation of the Trust as an open-end
investment company or as necessary to comply with
Section 3(a) of this Agreement;
(g) Maintaining all required books and records with
respect to the investment decisions and securities
transactions for each Fund;
(h) Furnishing any and all other services, subject to
review by the Board, that the Adviser from time to
time determines to be necessary or useful to perform
its obligations under the Investment Advisory
Agreement or as the Board may reasonably request from
time to time.
3. RESPONSIBILITIES OF SUB-ADVISER. In carrying out its obligations
under this Agreement, the Sub-Adviser agrees that it will:
(a) Comply with all applicable law, including but not
limited to the 1940 Act and the Advisers Act, the
rules and regulations of the Commission thereunder,
and the conditions of any order affecting the Trust
or a Fund issued thereunder;
(b) Use the same skill and care in providing such
services as it uses in providing services to other
fiduciary accounts for which it has investment
responsibilities;
(c) Not make loans to any person for the purpose of
purchasing or carrying Fund shares;
(d) Place, or arrange for the placement of, all orders
pursuant to its investment determinations for the
Funds either directly with the issuer or with any
-2-
<PAGE>
broker or dealer (including any affiliated broker or
dealer). In executing portfolio transactions and
selecting brokers or dealers, the Sub-Adviser will
use its best efforts to seek on behalf of each Fund
the best overall terms available. In assessing the
best overall terms available for any transaction, the
Sub-Adviser shall consider all factors that it deems
relevant, including the breadth of the market in the
security, the price of the security, the financial
condition and execution capability of the broker or
dealer, and the reasonableness of the commission, if
any, both for the specific transaction and on a
continuing basis. In evaluating the best overall
terms available, and in selecting the broker or
dealer to execute a particular transaction, the
Sub-Adviser may also consider whether such broker or
dealer furnishes research and other information or
services to the Sub-Adviser; and
(e) Adhere to the investment objective, strategies and
policies and procedures of the Trust adopted on
behalf of each Fund.
4. CONFIDENTIALITY OF INFORMATION. Each party agrees that it will treat
confidentially all information provided by another party regarding such other
party's business and operations, including without limitation the investment
activities or holdings of a Fund. All confidential information provided by a
party hereto shall not be disclosed to any unaffiliated third party without the
prior consent of the providing party. The foregoing shall not apply to any
information that is public when provided or thereafter becomes public or which
is required to be disclosed by any regulatory authority in the lawful and
appropriate exercise of its jurisdiction over a party, by any auditor of the
parties hereto, by judicial or administrative process or otherwise by applicable
law or regulation.
5. SERVICES NOT EXCLUSIVE. The services furnished by the Sub-Adviser
hereunder are deemed not to be exclusive, and the Sub-Adviser shall be free to
furnish similar services to others so long as its provision of services under
this Agreement is not impaired thereby. To the extent that the purchase or sale
of securities or other investments of the same issuer may be deemed by the
Sub-Adviser to be suitable for two or more accounts managed by the Sub-Adviser,
the available securities or investments may be allocated in a manner believed by
the Sub-Adviser to be equitable to each account. It is recognized that in some
cases this procedure may adversely affect the price paid or received by a Fund
or the size of the position obtainable for or disposed of by a Fund.
6. DELIVERY OF DOCUMENTS. The Trust will provide the Sub-Adviser with
copies, properly certified or authenticated, of each of the following:
(a) the Trust's Certificate of Trust, as filed with the
Secretary of State of Delaware, and Declaration of
Trust (such Declaration of Trust, as presently in
effect and as from time to time amended, is herein
called the "Declaration of Trust");
(b) the Trust's Bylaws, if any;
-3-
<PAGE>
(c) the most recent prospectus(es) and statement(s) of
additional information relating to each Fund (such
prospectus(es) together with the related statement(s)
of additional information, as presently in effect and
all amendments and supplements thereto, are herein
called the "Prospectus"); and
(d) any and all applicable policies and procedures
approved by the Board.
The Trust will promptly furnish the Sub-Adviser with copies of any and
all amendments of or additions or supplements to the foregoing.
7. BOOKS AND RECORDS. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Sub-Adviser hereby agrees that all records that it
maintains for each Fund under this Agreement are the property of the Trust and
further agrees to surrender promptly to the Trust or the Adviser any of such
records upon request. The Sub-Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act the records required to be
maintained by Rule 31a-1 under the 1940 Act.
8. EXPENSES OF THE FUNDS. Except to the extent expressly assumed by the
Sub-Adviser and except to any extent required by law to be paid or reimbursed by
the Sub-Adviser, the Sub-Adviser shall have no duty to pay any ordinary
operating expenses incurred in the organization and operation of the Funds.
Ordinary operating expenses include, but are not limited to, brokerage
commissions and other transaction charges, taxes, legal, auditing, printing, or
governmental fees, other Fund service providers' fees and expenses, expenses of
issue, sale, redemption and repurchase of shares, expenses of registering and
qualifying shares for sale, expenses relating to Board and shareholder meetings,
and the cost of preparing and distributing reports and notices to shareholders.
The Sub-Adviser shall pay all other expenses incurred by it in connection with
its services under this Agreement.
9. COMPENSATION. Except as otherwise provided herein, for the services
provided to each Fund and the expenses assumed pursuant to this Agreement, the
Adviser will pay the Sub-Adviser and the Sub-Adviser will accept as full
compensation therefor a fee determined in accordance with Schedule I attached
hereto. It is understood that the Adviser shall be solely responsible for
compensating the Sub-Adviser for performing any of the duties delegated to the
Sub-Adviser and the Sub-Adviser agrees that it shall have no claim against the
Trust or any Fund with respect to compensation under this Agreement. To the
extent that the advisory fee that the Trust would be obligated to pay to the
Adviser with respect to a Fund pursuant to the Investment Advisory Agreement is
reduced or reimbursed, the fee that the Sub-Adviser would otherwise receive
pursuant to this Agreement shall be reduced or reimbursed proportionately.
10. LIABILITY OF SUB-ADVISER. The Sub-Adviser shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the Adviser
or the Trust in connection with the performance of its duties under this
Agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services, from willful misfeasance, bad faith
or negligence on the part of the Sub-Adviser or any of its officers, directors,
employees or agents, in connection with the performance of their duties under
this Agreement, from reckless
-4-
<PAGE>
disregard by it or its officers, directors, employees or agents of any of their
obligations and duties under this Agreement, or from any violations of
securities laws, rules, regulations, statutes and codes, whether federal or
state, by the Sub-Adviser or any of its officers, directors, employees or
agents.
11. INDEMNIFICATION. The Sub-Adviser shall indemnify and hold harmless
the Funds and the Adviser from and against any and all direct or indirect
claims, losses, liabilities or damages (including reasonable attorney's fees and
other related expenses) resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services, from willful misfeasance, bad faith
or negligence on the part of the Sub-Adviser or any of its officers, directors,
employees or agents, in connection with the performance of their duties under
this Agreement, from reckless disregard by it or its officers, directors,
employees or agents of any of their obligations and duties under this Agreement,
or resulting from any violations of securities laws, rules, regulations,
statutes and codes, whether federal or state, by the Sub-Adviser or any of its
officers, directors, employees or agents; provided, however, that the
Sub-Adviser shall not be required to indemnify or otherwise hold the Funds or
the Adviser harmless under this Section 11 where the claim against, or the loss,
liability or damage experienced by the Funds or the Adviser, is caused by or is
otherwise directly related to the Funds' or the Adviser's own willful
misfeasance, bad faith or negligence, or to the reckless disregard by the Funds
or the Adviser of their duties under this Agreement.
12. TERM AND APPROVAL. This Agreement will become effective as of the
date set forth herein above, and shall continue in effect until the second
anniversary of its effective date. This Agreement will become effective with
respect to each additional Fund as of the date set forth on Schedule I when each
such Fund is added thereto. The Agreement shall continue in effect for a Fund
after the second anniversary of the effective date for successive annual periods
ending on each anniversary of such date, provided that the continuation of the
Agreement is specifically approved for the Fund at least annually:
(a)(i) by the Board or (ii) by the vote of "a majority of
the outstanding voting securities" of the Fund (as
defined in Section 2(a)(42) of the 1940 Act); and
(b) by the affirmative vote of a majority of the Trustees
of the Trust who are not parties to this Agreement or
"interested persons" (as defined in the 1940 Act) of
a party to this Agreement (other than as Trustees of
the Trust), by votes cast in person at a meeting
specifically called for such purpose.
13. TERMINATION. This Agreement may be terminated without payment of
any penalty at any time by:
(a) the Trust with respect to a Fund, by vote of the
Board or by vote of a majority of a Fund's
outstanding voting securities, upon sixty (60) days'
written notice to the other parties to this
Agreement; or
-5-
<PAGE>
(b) the Adviser or the Sub-Adviser with respect to a
Fund, upon sixty (60) days' written notice to the
other parties to this Agreement.
Any party entitled to notice may waive the notice provided for herein.
This Agreement shall automatically terminate in the event of its assignment,
unless an order is issued by the Commission conditionally or unconditionally
exempting such assignment from the provisions of Section 15(a) of the 1940 Act,
in which event this Agreement shall remain in full force and effect subject to
the terms of such order. For the purposes of this paragraph, the definitions
contained in Section 2(a) of the 1940 Act and the applicable rules under the
1940 Act shall apply.
14. CODE OF ETHICS. The Sub-Adviser represents that it has adopted a
written code of ethics complying with the requirements of Rule 17j-1 under the
1940 Act and will provide the Adviser or the Trust with a copy of such code, any
amendments or supplements thereto and its policies and/or procedures implemented
to ensure compliance therewith.
15. INSURANCE. The Sub-Adviser shall maintain for the term of this
Agreement and provide evidence thereof to the Trust or the Adviser a blanket
bond and professional liability (error and omissions) insurance in an amount
reasonably acceptable to Adviser.
16. REPRESENTATIONS AND WARRANTIES. Each party to this Agreement
represents and warrants that the execution, delivery and performance of its
obligations under this Agreement are within its powers, have been duly
authorized by all necessary actions and that this Agreement constitutes a legal,
valid and binding obligation enforceable against it in accordance with its
terms. The Sub-Adviser further represents and warrants that it is duly
registered as an investment adviser under the Advisers Act.
17. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be
changed, waived, discharged or terminated orally, except by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
18. NOTICES. Any notices under this Agreement shall be in writing,
addressed and delivered or mailed postage paid to such address as may be
designated for the receipt of such notice. Until further notice, it is agreed
that the address of the Trust shall be c/o Stephens Inc., 111 Center Street,
Little Rock, Arkansas 72201, Attention: Secretary, that of the Adviser shall be
One Bank of America Plaza, 33rd Floor, 101 South Tryon Street, Charlotte, North
Carolina 28255, Attention: President and that of the Sub-Adviser shall be
_________________________. The Sub-Adviser agrees to promptly notify the Adviser
and the Trust in writing of the occurrence of any event which could have a
material impact on the performance of its duties under this Agreement, including
but not limited to (i) the occurrence of any event which could disqualify the
Sub-Adviser from serving as an investment adviser pursuant to Section 9 of the
1940 Act; (ii) any material change in the Sub-Adviser's business activities;
(iii) any event that would constitute a change in control of the Sub-Adviser;
(iv) any change in the portfolio manager or portfolio management team of a Fund;
(v) the existence of any pending or threatened audit, investigation,
examination, complaint or other inquiry (other than routine audits or regulatory
examinations or inspections) relating to any Fund; and (vi) any material
violation of the Sub-Adviser's code of ethics.
-6-
<PAGE>
19. RELEASE. The names "Nations Funds Trust" and "Trustees of Nations
Funds Trust" refer respectively to the Trust created by the Declaration of Trust
and the Trustees as Trustees but not individually or personally. All parties
hereto acknowledge and agree that any and all liabilities of the Trust arising,
directly or indirectly, under this Agreement will be satisfied solely out of the
assets of the Trust and that no Trustee, officer or shareholder shall be
personally liable for any such liabilities. All persons dealing with any Fund of
the Trust must look solely to the property belonging to such Fund for the
enforcement of any claims against the Trust.
20. MISCELLANEOUS. This Agreement contains the entire understanding of
the parties hereto. Each provision of this Agreement is intended to be
severable. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby.
21. GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, Delaware law and the federal securities laws, including the
1940 Act and the Advisers Act.
22. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original.
23. USE OF THE NAME "NATIONS FUNDS". The Sub-Adviser acknowledges and
agrees that the name "Nations Funds" is the property of Bank of America
Corporation and/or its affiliates and that the Sub-Adviser will not use such
name or the name of the Adviser, the Trust or any Fund except in accordance with
such policies and procedures as may be mutually agreed to in writing.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
NATIONS FUNDS TRUST
on behalf of the Funds
By:_________________________________
A. Max Walker
President and Chairman of
the Board of Trustees
BANC OF AMERICA ADVISORS, INC.
By:_________________________________
Robert H. Gordon
President
[SUB-ADVISER NAME]
By:_________________________________
[NAME]
[TITLE]
-8-
<PAGE>
SCHEDULE I
The Adviser shall pay the Sub-Adviser as, full compensation for
services provided and expenses assumed hereunder, a sub-advisory fee for each
Fund, computed daily and payable monthly at the annual rates listed below as a
percentage of the average daily net assets of the Fund:
RATE OF
FUND COMPENSATION EFFECTIVE DATE
---- ------------ --------------
Fund Name -.--%
Approved:
-9-
Exhibit 99.E
FORM OF
DISTRIBUTION AGREEMENT
NATIONS FUNDS TRUST
Stephens Inc.
111 Center Street
Little Rock, Arkansas 72201
Gentlemen:
This is to confirm that, in consideration of the agreements
hereinafter contained, the undersigned, Nations Funds Trust (the "Trust"), a
Delaware business trust, has agreed that Stephens Inc. (the "Distributor") shall
be, for the period of this Agreement, the exclusive distributor of the units of
beneficial interest in all classes of shares ("Shares") of the investment
portfolios of the Trust listed on Schedule I (individually, a "Fund" and
collectively the "Funds"). Absent written notification to the contrary by either
the Trust or the Distributor, each new investment portfolio established in the
future shall automatically become a "Fund" for all purposes hereunder and shares
of each new class established in the future shall automatically become "Shares"
for all purposes hereunder as if set forth on Schedule I.
1. Services as Distributor.
1.1. The Distributor will act as agent for the distribution of
Shares in accordance with the instructions of the Trust's Board of Trustees and
the Trust's registration statement and prospectus then in effect under the
Securities Act of 1933, as amended, and will transmit promptly any orders
received by it for the purchase or redemption of Shares to the Trust or its
transfer agent.
1.2. The Distributor agrees to use appropriate efforts to solicit
orders for the sale of Shares and will undertake such advertising and promotion
as it believes appropriate in connection with such solicitation. The Trust
understands that the Distributor is and may in the future be the distributor of
shares of other investment
<PAGE>
Company portfolios ("Portfolios") including Portfolios having investment
objectives similar to those of the Funds. The Trust further understands that
existing and future investors in the Funds may invest in shares of such other
Portfolios. The Trust agrees that the Distributor's duties to such Portfolios
shall not be deemed in conflict with its duties to the Trust under this
paragraph 1.2.
1.3. The Distributor shall, at its own expense, finance such
activities as it deems reasonable and which are primarily intended to result in
the sale of Shares, including, but not limited to, advertising, compensation of
underwriters, dealers and sales personnel, the printing and mailing of
prospectuses to other than current shareholders, and the printing and mailing of
sales literature. The Distributor shall be responsible for reviewing and
providing advice and counsel on all sales literature (e.g., advertisements,
brochures and shareholder communications) with respect to each of the Funds. In
addition, the Distributor will provide one or more persons, during normal
business hours, to respond to telephone questions with respect to the Funds.
1.4. All activities by the Distributor and its agents and
employees as distributor of Shares shall comply with all applicable laws, rules
and regulations, including, without limitation, all rules and regulations made
or adopted pursuant to the Investment Company Act of 1940 ("1940 Act") by the
Securities and Exchange Commission (the "SEC") or any securities association
registered under the Securities Exchange Act of 1934.
1.5. Whenever in their judgment such action is warranted by
unusual market, economic or political conditions, or by other circumstances of
any kind, the Trust's officers may decline to accept any orders for, or make any
sales of Shares until such time as those officers deem it advisable to accept
such orders and to make such sales.
1.6. The Trust agrees at its own expense to execute any and all
documents and to furnish any and all information and otherwise to take all
actions that may be reasonably necessary in connection with the registration or
qualification of Shares for sale in such states as the Distributor may designate
to the Trust and the Trust may
2
<PAGE>
approve, and the Trust shall pay all fees and other expenses incurred in
connection with such registration or qualification.
1.7. The Trust shall furnish from time to time, for use in
connection with the sale of Shares, such information with respect to the Funds
and Shares as the Distributor may reasonably request; and the Trust warrants
that the statements contained in any such information shall fairly show or
represent what they purport to show or represent. The Trust shall also furnish
the Distributor upon request with: (a) audited annual and unaudited semi-annual
statements of the Trust's books and accounts with respect to each Fund, and, (b)
from time to time such additional information regarding the Funds' financial
condition as the Distribution may reasonably request.
1.8. The Distributor may be reimbursed for all or a portion of
the expenses described above to the extent permitted by a distribution plan
adopted by the Trust on behalf of a Fund pursuant to Rule 12b-1 under the 1940
Act. No provision of this Agreement shall be deemed to prohibit any payments by
a Fund to the Distributor or by a Fund or the Distributor to investment dealers,
banks or other financial institutions through whom shares of the Fund are sold
where such payments are made under a distribution plan adopted by the Trust on
behalf of such Fund pursuant to Rule 12b-1 under the 1940 Act. In addition, the
Trust shall pay to the Distributor the proceeds from any contingent deferred
sales charge imposed on the redemption of the shares as specified in the Fund's
Registration Statement.
1.9. The Distributor will execute and deliver agreements with
broker/dealers, financial institutions and other industry professionals based on
the forms attached hereto or based on the additional forms of agreement approved
from time to time by the Trust's Board of Trustees with respect to the various
classes of shares of the Funds, including but not limited to forms of sales
support agreements and shareholder servicing agreements approved in connection
with a distribution and/or servicing plan approved in accordance with Rule 12b-1
under the 1940 Act.
3
<PAGE>
2. Representations; Indemnification.
---------------------------------
2.1. The Trust represents to the Distributor that all
registration statements and prospectuses filed by the Trust with the SEC under
the Securities Act of 1933, as amended ("Act"), with respect to Shares have been
prepared in conformity with the requirements of the said Act and rules and
regulations of the SEC thereunder. As used in this Agreement, the terms
"registration statement" and "prospectus" shall mean any registration statement
and then current prospectus (together with any related then current statement of
additional information) filed with the SEC with respect to Shares, and any
amendments and supplements thereto which at any time shall have been filed
therewith. The Trust represents and warrants to the Distributor that any
registration statement and prospectus, when such registration statement becomes
effective, will contain all statements required to be stated therein in
conformity with the said Act and the rules and regulations of the SEC; that all
statements of fact contained in any such registration statement and prospectus
will be true and correct when such registration statement and prospectus become
effective; and that neither any registration statement nor any prospectus when
any registration statement becomes effective will include an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading to a purchaser of
Shares. The Trust may, but shall not be obligated to, propose from time to time
such amendment or amendments to any registration statement and such supplement
or supplements to any prospectus which in light of future developments, may, in
the opinion of the Trust's counsel, be necessary or advisable. The Trust shall
promptly notify the Distributor of any advice given to it by the Trust's counsel
regarding the necessity or advisability so to amend or supplement such
registration statement or prospectus. If the Trust shall not propose such
amendment or amendments and/or supplement or supplements within fifteen days
after receipt by the Trust of a written request from the Distributor to do so,
the Distributor may, at its option, terminate this Agreement. The Trust shall
not file any amendment to any registration statement or supplement to any
prospectus without giving the Distributor reasonable notice thereof in advance;
provided, however, that nothing contained in this Agreement shall in any way
limit the Trust's right to file at any time such amendments to any registration
statement and/or supplements to
4
<PAGE>
any prospectus, of whatever character, as the Trust may deem advisable, such
right being in all respects absolute and unconditional.
2.2. The Trust authorizes the Distributor and dealers to use any prospectus in
the form furnished from time to time in connection with the sale of Shares and
represented by the Trust as being the then current form of prospectus. The Trust
agrees to indemnify, defend and hold the Distributor, its several officers and
directors, and any person who controls the Distributor within the meaning of
Section 15 of the Act free and harmless from and against any and all claims,
demands, liabilities and expenses (including the cost of investigating or
defending such claims, demands or liabilities and any counsel fees incurred in
connection therewith) which the Distributor, its officers and directors, or any
such controlling person, may incur under the Act or under common law or
otherwise, arising out of or based upon any untrue statement, or alleged untrue
statement, of a material fact contained in any registration statement or any
prospectus or arising out of or based upon any omission, or alleged omission, to
state a material fact required to be stated in any registration statement or
prospectus or necessary to make any statement in such documents not misleading;
provided, however, that the Trust's agreement to indemnify the Distributor, its
officers or directors, and any such controlling person shall not be deemed to
cover any claims, demands, liabilities or expenses arising out of any untrue
statement or alleged untrue statement or omission or alleged omission made in
any registration statement or prospectus or in any financial or other statements
in reliance upon and in conformity with any information furnished to the Trust
by the Distributor or any affiliate thereof and used in the preparation thereof;
and further provided that the Trust's agreement to indemnify the Distributor and
the Trust's representations and warranties herein set forth shall not be deemed
to cover any liability to the Trust or its shareholders to which the Distributor
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of the Distributor's
reckless disregard of its obligations and duties under this Agreement. The
Trust's agreement to indemnify the Distributor, its officers and directors, and
any such controlling person, as aforesaid, is expressly conditioned upon the
Trust's being notified of any action brought against the Distributor, its
officers or directors, or any such controlling person, such notification to be
given by letter or by
5
<PAGE>
telegram addressed to the Trust at its principal office and sent to the Trust by
the person against whom such action is brought, within a reasonable period of
time after the summons or other first legal process shall have been served. The
failure to so notify the Trust of any such action shall not relieve the Trust
from any liability which the Trust may have to the person against whom such
action is brought by reason of any such untrue, or allegedly untrue, statement
or omission, or alleged omission, otherwise than on account of the Trust's
indemnity agreement contained in this paragraph 2.2. The Trust will be entitled
to assume the defense of any suit brought to enforce any such claim, demand or
liability, but, in such case, such defense shall be conducted by counsel of good
standing chosen by the Trust and approved by the Distributor, which approval
shall not unreasonably be withheld. In the event the Trust elects to assume the
defense of any such suit and retain counsel of good standing approved by the
Distributor, the defendant or defendants in such suit shall bear the fees and
expenses of any additional counsel retained by any of them; but in case the
Trust does not elect to assume the defense of any such suit, or in case the
Distributor reasonably does not approve of counsel chosen by the Trust, the
Trust will reimburse the Distributor, its officers and directors, or the
controlling person or persons named as defendant or defendants in such suit, for
the fees and expenses of any counsel retained by the Distributor or them. The
Trust's indemnification agreement contained in this paragraph 2.2 and the
Trust's representations and warranties in this Agreement shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of the Distributor, its officers and directors, or any controlling
person, and shall survive the delivery of any Shares. This agreement of
indemnity will inure exclusively to the Distributor's benefit, to the benefit of
its several officers and directors, and their respective estates, and to the
benefit of the controlling persons and their successors. The Trust agrees
promptly to notify the Distributor of the commencement of any litigation or
proceedings against the Trust or any of its officers or directors in connection
with the issue and sale of any Shares.
2.3. The Distributor agrees to indemnify, defend and hold the Trust, its several
officers and trustees, and any person who controls the Trust within the meaning
of Section 15 of the Act free and harmless from and against any and all claims,
6
<PAGE>
demands, liabilities and expenses (including the costs of investigation or
defending such claims, demands or liabilities and any counsel fees incurred in
connection therewith) which the Trust, its officers or trustees or any such
controlling person, may incur under the Act or under common law or otherwise,
but only to the extent that such liability or expense incurred by the Trust, its
officers or trustees, or such controlling person resulting from such claims or
demands, shall arise out of or be based upon any untrue, or alleged untrue,
statement of a material fact contained in information furnished by the
Distributor or any affiliate thereof to the Trust or its counsel and used in the
Trust's registration statement or corresponding statements made in the
prospectus, or shall arise out of or be based upon any omission, or alleged
omission, to state a material fact in connection with such information furnished
by the Distributor or any affiliate thereof to the Trust or its counsel required
to be stated in such answers or necessary to make such information not
misleading. The Distributor's agreement to indemnify the Trust, its officers and
directors, and any such controlling person, as aforesaid, is expressly
conditioned upon the Distributor's being notified of any action brought against
the Trust, its officers or directors, or any such controlling person, such
notification to be given by letter or telegram addressed to the Distributor at
its principal office in Little Rock, Arkansas and sent to the Distributor by the
person against whom such action is brought, within a reasonable period of time
after the summons or other first legal process shall have been served. The
Distributor shall have the right to control the defense of such action, with
counsel of its own choosing, satisfactory to the Trust, if such action is based
solely upon such alleged misstatement or omission on the Distributor's part or
any affiliate thereof, and in any other event the Trust, its officers or
directors or such controlling person shall each have the right to participate in
the defense or preparation of the defense of any such action. The failure so to
notify the Distributor of any such action shall not relieve the Distributor or
any affiliate thereof from any liability which the Distributor or any affiliate
thereof may have to the Trust, its officers or directors, or to such controlling
person by reason of any such untrue or alleged untrue statement, or omission or
alleged omission, otherwise than on account of the Distributor's indemnity
agreement contained in this paragraph 2.3.
2.4. No Shares shall be offered by either the Distributor or the Trust under any
of the provisions of this Agreement and no orders for the purchase or sale of
7
<PAGE>
Shares hereunder shall be accepted by the Trust if and so long as the
effectiveness of the registration statement then in effect or any necessary
amendments thereto shall be suspended under any of the provisions of the Act, or
if and so long as a current prospectus, as required by Section 10(b) of said
Act, as amended, is not on file with the SEC; provided, however, that nothing
contained in this paragraph 2.4 shall in any way restrict or have any
application to or bearing upon the Trust's obligation to repurchase Shares from
any shareholder in accordance with the provisions of the Trust's prospectus or
Articles of Incorporation.
2.5. The Trust agrees to advise the Distributor as soon as reasonably
practical:
(a) of any request by the SEC for amendments to the registration
statement or prospectus then in effect;
(b) of the issuance by the SEC of any stop order suspending the
effectiveness of the registration statement or prospectus then in effect or of
the initiation of any proceeding for that purpose;
(c) of the happening of any event that makes untrue any statement
of a material fact made in the registration statement or prospectus then in
effect or which requires the making of a change in such registration statement
or prospectus in order to make the statements therein not misleading;
(d) of all actions of the SEC with respect to any amendment to
any registration statement or prospectus which may from time to time be filed
with the SEC; and
(e) if a current prospectus is not on file with the SEC.
For purposes of this section, informal requests by or acts of
the Staff of the SEC shall not be deemed actions of or requests by the SEC.
8
<PAGE>
3. Confidentiality.
----------------
The Distributor agrees on behalf of itself and its employees
to treat confidentially and as proprietary information of the Trust all records
and other information relative to the Funds and/or the Trust and its prior,
present or potential shareholders, and not to use such records and information
for any purpose other than performance of its responsibilities and duties
hereunder, except after prior notification to and approval in writing by the
Trust, which approval shall not be unreasonably withheld and may not be withheld
where the Distributor may be exposed to civil or criminal contempt proceedings
for failure to comply, when requested to divulge such information by duly
constituted authorities, or when so requested by the Trust.
4. Limitations of Liability.
-------------------------
4.1. Except as provided in paragraph 2.3, the Distributor shall not be
liable for any error of judgment or mistake or law or for any loss suffered by
the Trust or any Fund in connection with matters to which this agreement
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard of its obligations and duties under this agreement.
4.2. The names "Nations Fund Trust" and "Trustees of Nations Fund
Trust" refer respectively to the Trust created and the Trustees, as trustees but
not individually or personally, acting from time to time under a Declaration of
Trust dated May 6, 1985, which is hereby referred to and a copy of which is on
file at the office of the state Secretary of the Commonwealth of Massachusetts
and at the principal office of the Trust. The obligations of "Nations Fund
Trust" entered into the name or on behalf thereof by any of the Trustees,
representatives or agents are made not individually, but in such capacities, and
are not binding upon any of the Trustees, Shareholders, or representatives of
the Trust personally, but bind only the Trust Property, and all persons dealing
with any class of Shares of the Trust must look solely to the Trust Property
belonging to such class for the enforcement of any claims against the Trust.
9
<PAGE>
5. Term.
-----
This agreement shall become effective on the date of its execution and,
unless sooner terminated as provided herein, shall continue thereafter with
respect to each Fund for successive annual periods, provided such continuance is
specifically approved at least annually by (i) the Trust's Board of Trustees or
(ii) by a vote of a majority (as defined in the 1940 Act) of the outstanding
voting securities of the Fund, provided that in either event the continuance is
also approved by the majority of the Trust's Trustees who are not parties to
this agreement or interested persons (as defined in the 1940 Act) of any such
party, by vote cast in person at a meeting called for the purpose of voting on
such approval. This agreement is not assignable and is terminable with respect
to a Fund, without penalty, on not less than sixty days' notice, by the Trust's
Board of Trustees, by vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of such Fund, or by the Distributor. This
agreement will also terminate automatically in the event of its assignment (as
defined in the 1940 Act).
6. Miscellaneous.
--------------
6.1. No provision of this Agreement may be changed, waived, discharged
or terminated orally, but only by an instrument in writing signed by the party
against which an enforcement of the change, waiver, discharge or termination is
sought.
6.2. This agreement shall be governed by the laws of the State of
Arkansas.
10
<PAGE>
Please confirm that the foregoing is in accordance with your
understanding by indicating your acceptance hereof at the place indicated below,
whereupon it shall become a binding agreement between us.
Yours very truly,
NATIONS FUNDS TRUST
By:_________________________________
Name: Richard H. Blank, Jr.
Title: Secretary
Accepted:
STEPHENS INC.
By:___________________________
Name:
Title:
Dated:
11
<PAGE>
SCHEDULE I
NATIONS FUNDS TRUST:
1. Nations High Yield Fund
2. Nations MidCap Index
3. Nations Kansas Intermediate Municipal Bond Fund
Exhibit 99.G
FORM OF
CUSTODY AGREEMENT
THIS AGREEMENT is made as of the __ day of ___, 2000 by and
between The Bank of New York, a New York corporation authorized to do a banking
business ("Custodian"), and Nations Funds Trust, a Delaware business trust (the
"Trust").
W I T N E S S E T H
--------------------
WHEREAS, the Trust is a registered open-end management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Trust desires to retain Custodian to serve as
custodian for the Trust, on behalf of its portfolios listed on Schedule I
(individually a "Fund" and collectively the "Funds") and to provide the services
described herein, and Custodian is willing to serve and to provide such
services; and
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, the Trust and Custodian hereby agree as follows:
1. APPOINTMENT. The Trust hereby appoints Custodian to act as custodian
of its portfolio securities, cash and other property on the terms set forth in
this Agreement. Custodian accepts such appointment and agrees to furnish the
services herein set forth in return for the compensation as provided in
Paragraph 23 hereof. Custodian agrees to comply with all relevant provisions of
the 1940 Act and applicable rules and regulations thereunder.
The Trust may from time to time issue separate series or classes, and
classify and reclassify shares of any such series or class. The Trust shall
promptly specify to Custodian in writing such series or classes, or any
reclassification and thereafter Custodian shall identify to each such series or
class Property, as hereinafter defined, belonging to such series or class, and
such reports, confirmations and notices to the Trust as are called for under
this Agreement shall identify the series or class to which such report,
confirmation or notice pertains.
2. DELIVERY OF DOCUMENTS. The Trust has furnished Custodian with copies
properly certified or authenticated of each of the following:
(a) votes of the Trust's Board of Trustees authorizing
the appointment of Custodian as custodian of
portfolio securities, cash and other property of the
Trust, respectively, and approving and consenting to
this Agreement;
(b) schedules identifying and containing the signatures
of all of the Trust's officers and any other persons
authorized to issue Oral Instructions and to sign
Written Instructions, as hereinafter defined, on
behalf of the Funds of the Trust;
1
<PAGE>
(c) the Trust's current Registration Statement on Form
N-1A under the 1940 Act, as filed with the Securities
and Exchange Commission (the "SEC"), relating to
shares of beneficial interest of the Trust, without
par value (the "Shares");
(d) the current prospectus(es) and statement of
additional information of each of the Funds,
including all amendments and supplements thereto
(collectively the "Prospectuses"); and
(e) a copy of the opinion of counsel for the Trust, filed
with the SEC as part of the Trust's current
registration statement.
The Trust will furnish Custodian from time to time with
copies, properly certified or authenticated, of all amendments of or supplements
to any of the foregoing, if any.
3. DEFINITIONS.
(a) "Authorized Person". As used in this Agreement, the term
"Authorized Person" means any of the Trust's officers, and any other person,
whether or not any such person is an officer or employee of the Trust, duly
authorized by the Board of Trustees of the Trust to give Oral and Written
Instructions to Custodian on behalf of the Trust and listed on a schedule
provided to Custodian pursuant to Section 2 of this Agreement. Authorized
Persons duly authorized by the Board of Trustees of the Trust to buy and sell
foreign currency on a spot and forward basis and options to buy and sell foreign
currency are denoted by an asterisk thereon.
(b) "Book-Entry System". As used in this Agreement, the term
"Book-Entry System" means the Federal Reserve/Treasury book-entry system for
United States and federal agency securities, its successor or successors and its
nominee or nominees and any book-entry system maintained by a clearing agency
registered with the SEC under Section 17A of the Securities Exchange Act of 1934
(the "1934 Act").
(c) "Composite Currency Unit". Shall mean the European
Currency Unit or any other composite unit consisting of the aggregate of
specified amounts of specified Currencies as such unit may be constituted from
time to time.
(d) "Currency". Shall mean money denominated in a lawful
currency of any country or the European Currency Unit.
(e) "FX Transaction". Shall mean any transaction for the
purchase by one party of an agreed amount in one Currency against the sale by it
to the other party of an agreed amount in another Currency.
(f) "Instructions". Shall mean instruction communications
transmitted by appropriately safeguarded (whether by password protection or
other means) electronic or telecommunications media including but not limited to
S.W.I.F.T., LASER, computer-to-computer interface, dedicated transmission line
and tested telex.
2
<PAGE>
(g) "Oral Instructions". As used in this Agreement, the term
"Oral Instructions" means oral instructions actually received by Custodian from
an Authorized Person or from a person reasonably believed by Custodian to be an
Authorized Person.
(h) "Officer's Certificate". The term "Officer's Certificate"
as used in this Agreement means instructions delivered by hand, mail, tested
telegram, cable, telex, or facsimile sending device, and actually received by
Custodian signed or reasonably believed by Custodian to be signed by two
officers of the Trust listed on a schedule provided to Custodian pursuant to
Section 2 of this Agreement.
(i) "Property". The term "Property", as used in this
Agreement, means:
(i) any and all securities and other property of the
Trust which the Trust may from time to time deliver to Custodian, as applicable,
or which Custodian may from time to time hold for the Trust;
(ii) all income in respect of any securities or other
property described in immediately preceding clause (i);
(iii) all proceeds of sales of any of such securities or
other property described in preceding clause (i) actually received by Custodian;
and
(iv) proceeds of the sale of Shares received by
Custodian from time to time from or on behalf of the Trust.
(j) "Securities Depository". As used in this Agreement, the
term "Securities Depository" shall mean The Depository Trust Company, a clearing
agency registered with the SEC or its successor or successors and its nominee or
nominees; and shall also mean any other registered clearing agency, its
successor or successors specifically identified in a certified copy of a
resolution of the Trust's Board of Trustees approving deposits by Custodian
therein.
(k) "Written Instructions". As used in this Agreement,
"Written Instructions" means instructions delivered by hand, mail, tested
telegram, cable, telex, or facsimile sending device, and actually received by
Custodian, signed or reasonably believed by Custodian to be signed by an
appropriate number of Authorized Person(s), and the term Written Instructions
shall also include Instructions, except that Instructions need not be signed or
reasonably believed to be signed by any Authorized Person(s) where such
Instructions are transmitted by Software pursuant to Paragraph 26A. A fax
receipt or comparable confirmation of transmission of any Written Instructions
shall be deemed evidence of actual receipt by Custodian.
4. DELIVERY AND REGISTRATION OF THE PROPERTY. The Trust shall deliver
or cause to be delivered to Custodian all securities and all monies owned by the
Funds, including cash received for the issuance of Shares, at any time during
the period of this Agreement, except for securities and monies to be delivered
to any sub-custodian appointed, with approval of the Trust, by Custodian
pursuant to Paragraphs 7, 27, or 28(g) hereof. Custodian will not be responsible
for such securities and such monies until actually received by it. All
securities delivered to Custodian or any such sub-custodian (other than in
bearer form) shall be registered in the name of the Fund or in the name of a
nominee of a Fund or in the name of Custodian or any nominee
3
<PAGE>
of Custodian (with or without indication of fiduciary status) or in the name of
any sub-custodian or any nominee of such sub-custodian appointed, with approval
of the Trust, pursuant to Paragraphs 7, 27, or 28(g) hereof or shall be properly
endorsed and in form for transfer satisfactory to Custodian.
5. VOTING AND OTHER RIGHTS. With respect to all securities, however
registered, it is understood that the voting and other rights and powers shall
be exercised by the Trust. Custodian's only duty with respect to such rights
shall be to mail to the Trust within two (2) business days following receipt by
Custodian any documents received by Custodian as custodian, including notices of
corporate action, proxies, proxy soliciting materials and offering circulars,
with any elections or proxies for securities registered in a nominee name
executed by such nominee. In addition, Custodian shall provide notice of
Custodian's receipt of such documents by electronic means (e.g., posting notice
on LASER), as agreed between the parties. Where warrants, options, tenders or
other securities have fixed expiration dates, the Trust understands that in
order for Custodian to act, Custodian must receive the Trust's instructions at
its offices in New York, addressed as Custodian may from time to time request,
by no later than noon (New York City time) at least one (1) business day prior
to the last scheduled date to act with respect thereto (or such earlier date or
time as Custodian may reasonably notify the Trust). Absent Custodian's timely
receipt of such instructions, such instructions will expire without liability to
Custodian. Custodian shall have no duty to forward to the Trust any annual,
quarterly or special reports issued by companies whose securities are held by
Custodian hereunder.
6. RECEIPT AND DISBURSEMENT OF MONEY.
(a) Custodian shall open and maintain a custody account for
each Fund of the Trust, subject only to draft or order by Custodian acting
pursuant to the terms of this Agreement, and, subject to Paragraphs 7, 27, or
28(g) hereof, shall hold in such account, subject to the provisions hereof, all
cash received by it from or for the Funds. Custodian shall make payments of cash
to, or for the account of, each Fund from such cash only: (i) for the purchase
of securities for the Funds as provided in Paragraph 14 hereof; (ii) upon
receipt of an Officer's Certificate for the payment of dividends or other
distributions on or with respect to Shares, or for the payment of interest,
taxes, administration, distribution or advisory fees or expenses which are to be
borne by the Funds under the terms of this Agreement and, with respect to each
Fund, and under the terms of any investment advisory agreements, administration
agreements or distribution agreements; (iii) upon receipt of Written
Instructions for payments in connection with the conversion, exchange or
surrender of securities owned or subscribed to by the Funds and held by or to be
delivered to Custodian; (iv) to a sub-custodian pursuant to Paragraphs 7, 27, or
28(g) hereof; (v) for the redemption of Shares; or (vi) upon receipt of an
Officer's Certificate for other corporate purposes.
(b) Custodian is hereby authorized to endorse and collect all
checks, drafts or other orders for the payment of money received as Custodian
for the Funds.
7. RECEIPT OF SECURITIES.
(a) Except as provided by Paragraphs 7(c), 8, 27, or 28(g)
hereof, and except as otherwise directed by Oral or Written Instructions
described in Paragraph 11 hereof, Custodian
4
<PAGE>
shall hold and physically segregate in a separate account with respect to each
Fund, identifiable from those of any other person, all securities and non-cash
property received by it for the Funds. All such securities and non-cash property
are to be held or disposed of by Custodian for each Fund pursuant to the terms
of this Agreement. In the absence of Written Instructions accompanied by a
certified resolution authorizing the specific transaction by the Trust's Board
of Trustees, and subject to Paragraph 25 hereof, Custodian shall have no power
or authority to withdraw, deliver, assign, hypothecate, pledge or otherwise
dispose of any such securities and investments, except in accordance with the
express terms provided for in this Agreement. In no case may any trustee,
officer, employee or agent of the Trust withdraw any securities. In connection
with its duties under this Paragraph 7(a), Custodian may enter into
sub-custodian agreements with other banks or trust companies for the receipt of
certain securities and cash to be held by Custodian for the account of a Fund
pursuant to this Agreement, provided Custodian obtains the prior written
approval of the Trust to any such sub-custody arrangement. Custodian will
provide the Trust with a copy of each sub-custodian agreement it executes
pursuant to this Paragraph 7(a). Custodian shall be liable for acts or omissions
of any such sub-custodian selected by it pursuant to this Paragraph 7(a), under
the standards of care provided for herein, except for any such sub-custodian
engaged at the specific direction of the Funds. Notwithstanding anything herein
to the contrary, this Paragraph 7(a) shall not apply to Custodian's engagement
of foreign sub-custodians, which shall instead be governed by Paragraph 27
hereof.
(b) Promptly after the close of business on each day,
Custodian shall furnish the Trust with confirmations and a summary of all
transfers to or from the account of each Fund during said day. Where securities
are transferred to the account of any Fund established at a Securities
Depository or the Book Entry System pursuant to Paragraph 8 herein, Custodian
shall also, by book-entry or otherwise, identify as belonging to such Fund the
quantity of securities in a fungible bulk of securities registered in the name
of Custodian (or its nominee) or shown in Custodian's account on the books of a
Securities Depository or the Book-Entry System. At least monthly and from time
to time, Custodian shall furnish the Trust with a detailed statement of the
Property held for each Fund under this Agreement.
(c) Notwithstanding any provision elsewhere contained herein,
Custodian shall not be required to obtain possession of any instrument or
certificate representing any futures contract, any option, or any futures
contract option until after it shall have determined, or shall have received an
Officer's Certificate from the Trust stating that any such instruments or
certificates are available. The Trust shall deliver to Custodian such an
Officer's Certificate no later than the business day preceding the availability
of any such instrument or certificate. Prior to such availability, Custodian
shall comply with the 1940 Act in connection with the purchase, sale,
settlement, closing out or writing of futures contracts, options, or futures
contract options by making payments or deliveries specified in such Officer's
Certificates or Written Instructions received by Custodian in connection with
any such purchase, sale, writing, settlement or closing out upon its receipt
from a broker, dealer, or futures commission merchant of a statement or
confirmation reasonably believed by Custodian to be in the form customarily used
by brokers, dealers, or future commission merchants with respect to such futures
contracts, options, or futures contract options, as the case may be, confirming
that the same is held by such broker, dealer or futures commission merchant, in
book-entry form or otherwise, in the name of Custodian (or any nominee of
Custodian) as Custodian for the Fund, provided, however, that
5
<PAGE>
notwithstanding the foregoing, and subject to Paragraph 13(b) hereof, payments
to or deliveries from any margin account, and payments with respect to future
contracts, options, or future contract options to which a margin account
relates, shall be made in accordance with the terms and conditions of the
Trust's relevant margin account agreement. Whenever any such instruments or
certificates are available, Custodian shall, notwithstanding any provision in
this Agreement to the contrary, make payment for any futures contract, option,
or futures contract option for which such instruments or such certificates are
available against the delivery to Custodian of such instrument or such
certificate, and deliver any futures contract, option or futures contract option
for which such instruments or such certificates are available only against
receipt by Custodian of payment therefor. Any such instrument or certificate
delivered to Custodian shall be held by Custodian hereunder in accordance with,
and subject to, the provisions of this Agreement.
8. USE OF SECURITIES DEPOSITORY OR THE BOOK-ENTRY SYSTEM. The Trust
shall deliver to Custodian a certified vote of the Board of Trustees of the
Trust approving, authorizing and instructing Custodian on a continuous and
ongoing basis until instructed to the contrary by Written Instructions: (i) to
deposit in a Securities Depository or the Book-Entry System all securities of
the Funds held hereunder eligible for deposit therein, and (ii) to utilize a
Securities Depository or the Book-Entry System to the extent possible in
connection with the performance of its duties hereunder, including without
limitation, settlements of purchases and sales of securities by the Funds, and
deliveries and returns of securities loaned, subject to repurchase agreements or
used as collateral in connection with borrowings. Without limiting the
generality of such use, the following provisions shall apply thereto:
(a) Securities and any cash of the Funds deposited by
Custodian in a Securities Depository or the Book-Entry System will at all times
be segregated from any assets and cash controlled by Custodian in other than a
fiduciary or custodian capacity. Subject to Paragraph 28(m) hereof, Custodian
and its sub-custodians, if any, will pay out money only upon receipt of
securities and will deliver securities only upon receipt of money, absent
Written Instructions to the contrary.
(b) All books and records maintained by Custodian that relate
to the Funds' participation in a Securities Depository or the Book-Entry System
will at all times during Custodian's regular business hours be open to
inspection by the Trust's duly authorized employees or agents and the Trust's
independent auditors in accordance with applicable regulations, it being
understood, however, that such records may be kept in an off-site Custodian
storage location and the Trust will be furnished with all information in respect
of the services rendered to it as it may require.
(c) Custodian will provide the Trust with copies of any report
obtained by Custodian on the system of internal accounting control of the
Securities Depository or Book-Entry System promptly after receipt of such a
report by Custodian. Custodian will also provide the Trust with such reports on
its own system of internal control as the Trust may reasonably request from time
to time.
9. INSTRUCTIONS CONSISTENT WITH THE CHARTER, ETC. Unless otherwise
provided in this Agreement, Custodian shall act only upon Officer's
Certificates, Oral Instructions and/or
6
<PAGE>
Written Instructions. Custodian may assume that any Officer's Certificate, Oral
Instructions or Written Instructions received hereunder are not in any way
inconsistent with any provision of the Declaration of Trust or By-Laws or any
vote of the Trust's Board of Trustees, or any committee thereof. Custodian shall
be entitled to rely upon any Oral Instructions or Written Instructions actually
received by Custodian pursuant to this Agreement, and upon any certificate, oral
instructions, or written instructions reasonably believed by Custodian to be an
Officer's Certificate, Oral Instructions or Written Instructions. The Trust
agrees to forward to Custodian, Written Instructions confirming Oral
Instructions in such manner that the Written Instructions are received by
Custodian at the close of business of the same day that such Oral Instructions
are given to Custodian. The Trust agrees that the fact that such confirming
Written Instructions are not received by Custodian shall in no way affect the
validity of any of the transactions authorized by the Trust by giving Oral
Instructions, and that Custodian's records with respect to the content of Oral
Instructions shall be controlling.
10. TRANSACTIONS NOT REQUIRING INSTRUCTIONS. Custodian is authorized to
take the following action without Oral Instructions, Written Instructions, or an
Officer's Certificate:
(a) Collection of Income and Other Payments. Custodian shall
subject to Paragraph 28(f) hereof:
(i) Collect and receive for the account of any Fund, all
income and other payments and distributions, including (without limitation)
stock dividends, rights, warrants and similar items, included or to be included
in the Property of any Fund, and promptly advise the Trust of such receipt and
shall credit such income, as collected, to such Fund of the Trust. From time to
time, Custodian may elect, but shall not be so obligated, to credit the account
with interest, dividends or principal payments on the payable or contractual
settlement date, in anticipation of receiving same from a payor, central
depository, Securities Depository, broker or other agent employed by the Trust
or Custodian. Any such crediting and posting shall be at the Trust's sole risk,
and Custodian shall be authorized to reverse (A) any such advance posting in the
event it does not receive good funds from any such payor, central depository,
Securities Depository, broker or agent, and (B) any other payment or crediting,
including, without limitation, payments made by check or draft, in the event it
does not receive good funds or final payment;
(ii) With respect to securities of foreign issue, and
subject to Paragraph 27 hereof, effect collection of dividends, interest and
other income, and to promptly transmit to the Trust all reports, written
information or notices actually received by Custodian as Custodian, including
notices of any call for redemption, offer of exchange, right of subscription,
reorganization, or other proceedings affecting such securities, or any default
in payments due thereon. It is understood, however, that Custodian shall be
under no responsibility for any failure or delay in effecting such collections
or giving such notice with respect to securities of foreign issue, regardless of
whether or not the relevant information is published in any financial service
available to it unless such failure or delay is due to Custodian's own
negligence. Collections of income in foreign currency are, to the extent
possible, to be converted into United States dollars unless otherwise instructed
in writing, and in effecting such conversion Custodian may use such methods or
agencies as it may see fit, including the facilities of its own foreign division
at customary rates. All risk and expenses incident to such collection and
conversion are for the
7
<PAGE>
account of the Funds and Custodian shall have no responsibility for fluctuations
in exchange rates affecting any such conversions;
(iii) Endorse and deposit for collection in the name of
the Trust and each of its Funds, checks, drafts, or other orders for the payment
of money on the same day as received;
(iv) Receive and hold for the account of each of the
Fund's securities received by the Funds as a result of a stock dividend, share
split-up or reorganization, recapitalization, readjustment or other
rearrangement or distribution of rights or similar securities issued with
respect to any portfolio securities of the Funds held by Custodian hereunder;
(v) Present for payment and collect the amount payable
upon all securities which may mature or be called, redeemed or retired, or
otherwise become payable on the date such securities become payable, but, with
respect to calls, early redemptions, or early retirements, only if Custodian
either: (i) receives a written notice of the same, or (ii) notice of the same
appears in one or more of the publications then listed in Appendix A hereto,
which Appendix may be amended to add other publications at any time by Custodian
without prior notice to or consent from the Trust and which may be amended to
delete a publication with the prior notice and consent from the Trust;
(vi) Subject to Paragraphs 28(e) and (f) hereof, take
any action which may be necessary and proper in connection with the collection
and receipt of such income and other payments and the endorsement for collection
of checks, drafts and other negotiable instructions; and
(vii) With respect to domestic securities, to exchange
securities in temporary form for securities in definitive form, to effect an
exchange of the shares where the par value of stock is changed, and to surrender
securities at maturity or when advised by the Trust or the investment adviser to
the Trust of an earlier call for redemption, against payment therefor in
accordance with accepted industry practice. When fractional shares of stock of a
declaring corporation are received as a stock distribution, Custodian is
authorized to sell the fraction received and credit the Trust's account. Unless
specifically instructed to the contrary in writing, Custodian is authorized to
exchange securities in bearer form for securities in registered form. If any
Property registered in the name of a nominee of Custodian is called for partial
redemption by the issuer of such Property, Custodian is authorized to allot the
called portion to the respective beneficial holders of the Property in such
manner deemed to be fair and equitable by Custodian in its reasonable
discretion.
(b) Miscellaneous Transactions. Custodian is authorized to
deliver or cause to be delivered Property against payment or other consideration
or written receipt therefor in the following cases:
(i) for examination by a broker selling for the account
of the Trust in accordance with street delivery custom;
(ii) for the exchange for interim receipts or temporary
securities for definitive securities;
8
<PAGE>
(iii) for transfer of securities into the name of the
Funds or Custodian or a nominee of either, or for exchange of securities for a
different number of bonds, certificates, or other evidence, representing the
same aggregate face amount or number of units bearing the same interest rate,
maturity date and call provisions, if any; provided that, in any such case, the
new securities are to be delivered to Custodian.
11. TRANSACTIONS REQUIRING INSTRUCTIONS. Upon receipt of Oral or
Written Instructions, and not otherwise, Custodian, directly or through the use
of a Securities Depository or the Book-Entry System, shall:
(a) execute and deliver to such persons as may be designated
in such Oral or Written Instructions, proxies, consents, authorizations, and any
other instruments whereby the authority of the Funds as owners of any securities
may be exercised;
(b) deliver any securities held for any Fund against receipt
of other securities or cash issued or paid in connection with the liquidation,
reorganization, refinancing, merger, consolidation or recapitalization of any
corporation, or the exercise of any conversion privilege;
(c) deliver any securities held for any Fund to any protective
committee, reorganization committee or other person in connection with the
reorganization, refinancing, merger, consolidation, recapitalization or sale of
assets of any corporation, against receipt of such certificates or deposit,
interim receipts or other instruments or documents as may be issued to it to
evidence such delivery;
(d) make such transfers or exchanges of the assets of any Fund
and take such other steps as shall be stated in said instructions to be for the
purposes of effectuating any duly authorized plan of liquidation,
reorganization, merger, consolidation or recapitalization of the Funds;
(e) subject to Paragraph 25(b) hereof, release securities
belonging to any Fund to any bank or trust company for the purpose of pledge or
hypothecation to secure any loan incurred by such Fund; provided, however, that
securities shall be released only upon payment to Custodian of the monies
borrowed, except that in cases where additional collateral is required to secure
a borrowing already made, subject to proper prior authorization, further
securities may be released for that purpose; and pay such loan upon redelivery
to it of the securities pledged or hypothecated therefor and upon surrender of
the note or notes evidencing the loan;
(f) deliver any securities held for any Fund upon the exercise
of a covered call option written by such Fund on such securities;
(g) release and deliver securities owned by a Fund in
connection with any repurchase agreement entered into on behalf of such Fund,
but subject to Paragraph 28(m) hereof, only on receipt of payment therefor; and
pay out monies of such Fund in connection with such repurchase agreements, but
only upon the delivery of the securities;
(h) otherwise transfer, exchange or deliver securities in
accordance with Oral or Written Instructions specifying the purpose of such
transfer, including without limitation,
9
<PAGE>
loans of securities, short sales, or reverse repurchase agreements, and subject
to Paragraph 7(a) hereof.
12. SEGREGATED ACCOUNTS. Custodian shall upon receipt of Written or
Oral Instructions establish and maintain a segregated account or accounts on its
records for and on behalf of any Fund, into which account or accounts shall be
credited, but only pursuant to an Officer's Certificate or Written Instructions
specifying the particular securities and/or amount of cash, cash and/or
securities, including securities in the Book-Entry System: (i) for the purposes
of compliance by the Funds and the Trust with the procedures required by a
securities or option exchange, (ii) for the purpose of compliance by the Funds
and the Trust with the 1940 Act and Release No. 10666 or any subsequent release
or releases of the SEC relating to the maintenance of segregated accounts by
registered investment companies, and (iii) for other proper corporate purposes.
13. DIVIDENDS AND DISTRIBUTIONS.
(a) The Trust shall furnish Custodian with appropriate
evidence of action by the Trust's Board of Trustees declaring and authorizing
the payment of any dividends and distributions. Upon receipt by Custodian of an
Officer's Certificate with respect to dividends and distributions declared by
the Trust's Board of Trustees and payable to interestholders of any Fund who are
entitled to receive cash for fractional shares and those who have elected in the
proper manner to receive their distributions on dividends in cash, and in
conformance with procedures mutually agreed upon by Custodian and the Trust, and
the Trust's administrator or transfer agent, Custodian shall pay to the Fund's
transfer agent, as agent for the interestholders, an amount equal to the amount
indicated in said Officer's Certificate as payable by the Fund to such
interestholders for distribution in cash by the transfer agent to such
interestholders.
(b) Custodian may enter into separate custodial agreements
with various futures commission merchants ("FCMs") that the Trust uses (each an
"FCM Agreement"), pursuant to which the Funds' margin deposits in any
transactions involving futures contracts and options on futures contracts will
be held by Custodian in accounts (each an "FCM Account") subject to the
disposition by the FCM involved in such contracts in accordance with the
customer contract between the FCM and the Trust ("FCM Contract"), SEC rules
governing such segregated accounts, Commodity Futures Trading Commission
("CFTC") rules and the rules of the applicable commodities exchange. Such FCM
Agreements shall only be entered into by Custodian upon receipt by Custodian of
Written Instructions from the Trust which state that: (i) an FCM Contract has
been entered into; (ii) the Trust is in compliance with all the rules and
regulations of the CFTC; and (iii) the FCM Agreement is acceptable to the Trust.
Transfers of initial margin shall be made into an FCM Account only upon Written
Instructions; transfers of premium and variation margin may be made into an FCM
Account pursuant to Oral Instructions. Transfers of funds from an FCM Account to
the FCM for which Custodian holds such an account may only occur in accordance
with the terms of the FCM Agreement.
14. PURCHASE OF SECURITIES. Promptly after each purchase of securities
by the Trust on behalf of any Fund, the Trust shall deliver to Custodian Oral or
Written Instructions specifying with respect to each such purchase: (a) the name
of the issuer and the title of the securities; (b) the number of shares of the
principal amount purchased and accrued interest, if
10
<PAGE>
any; (c) the dates of purchase and settlement; (d) the purchase price per unit;
(e) the total amount payable upon such purchase; (f) the name of the person from
whom or the broker through whom the purchase was made; and (g) the Fund for
which the purchase was made. Custodian shall upon receipt of securities
purchased by or for the Trust pay out of the monies held for the account of the
Trust the total amount payable to the person from whom or the broker through
whom the purchase was made, provided that the same conforms to the total amount
payable as set forth in such Oral or Written Instructions.
15. SALES OF SECURITIES. Promptly after each sale of securities by the
Funds or the Trust shall deliver to Custodian Oral or Written Instructions,
specifying with respect to each such sale: (a) the name of the issuer and the
title of the security; (b) the number of shares or principal amount sold, and
accrued interest, if any; (c) the dates of sale; (d) the sale price per unit;
(e) the total amount payable to the Trust upon such sale; (f) the name of the
broker through whom or the person to whom the sale was made; and (g) the Fund
for which the sale was made. Custodian shall, subject to Paragraph 28(m) hereof,
deliver the securities against payment of the total amount payable to the Trust
upon such sale, provided that the same conforms to the total amount payable as
set forth in such Oral and Written Instructions.
16. RECORDS. The books and records pertaining to the Funds and the
Trust which are in the possession of Custodian shall be the property of the
Trust. Such books and records shall be prepared and maintained as required by
the 1940 Act and other applicable securities laws, rules and regulations. The
SEC, the Trust, or the Trust's authorized representatives, shall have access to
such books and records at all times during Custodian's normal business hours.
Upon the reasonable request of the Trust, copies of any such books and records
shall be provided by Custodian to the Trust or the Trust's authorized
representative, and the Trust shall reimburse Custodian reasonable expenses for
providing such copies. Upon reasonable request of the Trust, Custodian shall
provide in hard copy, tape or on micro-film, or such other medium as agreed to
among the Trust and Custodian, and any books and records maintained by
Custodian.
17. REPORTS.
(a) Custodian shall furnish the Trust the following reports:
(i) such periodic and special reports as the Trust may
reasonably request from time to time;
(ii) a monthly statement summarizing all transactions
and entries for the account of each Fund;
(iii) a monthly report of portfolio securities belonging
to each Fund showing the adjusted average cost of each issue and market
value at the end of such month;
(iv) a monthly report of the cash account of each Fund
showing disbursements;
(v) the reports to be furnished to the Trust pursuant to
Rule 17f-4 under the 1940 Act; and
11
<PAGE>
(vi) such other information as may be agreed upon from
time to time between the Trust and Custodian.
(b) Subject to Paragraphs 5 and 27(g) hereof, Custodian shall
transmit promptly to the Trust any proxy statement, proxy materials, notice of a
call or conversion or similar communications actually received by Custodian as
custodian of the Property.
(c) Custodian shall report as the market value at the end of
each month the last closing bid, offer or sale price to the extent, and as the
same, is furnished to Custodian by a pricing or similar service utilized or
subscribed to by Custodian. Custodian shall not be responsible for, have any
liability with respect to, or be under any duty to inquire into, nor deemed to
make any assurances with respect to, the accuracy or completeness of such
information, even if The Bank of New York in performing services for others,
including services similar to those performed hereunder, receives different
valuations of the same or different securities of the same issuer.
18. COOPERATION WITH ACCOUNTANTS. Custodian shall cooperate with the
Trust's independent certified public accountants and shall take all reasonable
action in the performance of its obligations under this Agreement, to assure
that the necessary information is made available to such accountants.
19. CONFIDENTIALITY. Custodian agrees on behalf of itself and its
employees to treat all record and other information relative to the Trust, its
prior, present or potential interestholders, its service providers and its
prior, present or potential customers, as confidential information, and to
protect and safeguard the same to the extent required by applicable law,
provided, however, that Custodian may make such disclosure as required by
applicable law, regulation, court order, decrees or legal process and upon
receipt of any of the foregoing requiring such disclosure, Custodian's only
obligation shall be to notify the Trust thereof. Custodian further agrees not to
otherwise use such records and information for any purpose other than
performance of its responsibilities and duties hereunder, except after prior
notification to and approval in writing by the Trust.
20. EQUIPMENT FAILURES. In the event of equipment failures beyond
Custodian's control, Custodian shall take reasonable steps to minimize service
interruptions but shall not have any further liability with respect thereto.
Notwithstanding the foregoing, Custodian shall maintain sufficient back up
electronic data processing equipment to enable Custodian to fulfill its
obligations under this Agreement consistent with standard industry practices.
21. RIGHT TO RECEIVE ADVICE.
(a) Advice of Fund. If Custodian shall be in doubt as to any
action to be taken or omitted by it, either may request, and shall receive, from
the Trust clarification or advice, including Oral or Written Instructions.
(b) Advice of Counsel. If Custodian shall be in doubt as to
any question of law involved in any action to be taken or omitted by Custodian,
it may request at its option advice from its own counsel, at its own expense, or
advice from the Trust's counsel.
12
<PAGE>
(c) Conflicting Advice. In case of conflict between
directions, advice or Oral or Written Instructions received by Custodian
pursuant to subparagraph (a) of this paragraph and advice received by Custodian
pursuant to subparagraph (b) of this paragraph, Custodian shall be entitled to
rely on and follow the advice received pursuant to subparagraph (b) alone.
(d) Protection of Custodian. Custodian shall be protected in
any action or inaction which it takes or omits to take in reliance on any
directions, advice or Oral or Written Instructions received pursuant to
subparagraphs (a) or (b) of this section which it, after receipt of any such
directions, advice or Oral or Written Instructions, in good faith reasonably
believes to be consistent with such directions, advice or Oral or Written
Instructions, as the case may be. Nothing in this Paragraph 21 shall be
construed as imposing upon Custodian any obligation: (i) to seek such
directions, advice or Oral or Written Instructions, or (ii) to act in accordance
with such directions, advice or Oral or Written Instructions when received,
unless, under the terms or another provision of this Agreement, the same is a
condition to Custodian's properly taking or omitting to take such action.
Nothing in this Paragraph 21(d) shall excuse Custodian when an action or
omission on the part of Custodian constitutes willful misfeasance or bad faith,
or negligence or reckless disregard by Custodian of its duties under this
Agreement.
22. COMPLIANCE WITH GOVERNMENTAL RULES AND REGULATIONS. Custodian
undertakes to comply with the laws, rules and regulations of governmental
authorities having jurisdiction over Custodian and its express duties hereunder.
23. COMPENSATION. As compensation for the services rendered by
Custodian during the term of this Agreement, the Trust shall pay to Custodian,
in addition to reimbursement of its out-of-pocket expenses, such compensation as
may be agreed upon from time to time in writing by the Trust and Custodian as
set forth in Schedule III.
24. INDEMNIFICATION. The Trust agrees to indemnify Custodian against,
and hold harmless from all taxes, charges, expenses (including reasonable fees
and expenses of counsel), assessments, claims, losses, demands and liabilities
whatsoever (including, without limitation, liabilities arising under the 1933
Act, the 1934 Act and the 1940 Act, and any state and foreign securities laws,
all as currently in effect or as may be amended from time to time) and expenses,
including without limitation, reasonable attorney's fees and disbursements,
howsoever arising or incurred because of or in connection with this Agreement,
except for such liability, claim, loss, demand, charge, expense, tax or
assessment arising out of Custodian's, or such nominees', willful misconduct or
negligence or reckless disregard of its duties under this Agreement. For the
purposes of this Agreement, including, without limitation, for purposes of
Paragraphs 24 and 28, neither Custodian's acceptance of Instructions in
accordance with Paragraph 26A nor Custodian's use of Foreign Sub-Custodians
pursuant to agreements that do not permit actual examination by independent
public accountants, nor the denial of examination by any Foreign Sub-Custodian,
as defined in Paragraph 27, shall, in and of itself, constitute, or be deemed to
constitute, a breach by Custodian of this Agreement or negligence, willful
misconduct, or reckless disregard of its duties by Custodian, provided the
relevant agreement between Custodian and a Foreign Sub-Custodian satisfies the
requirements of Rule 17f-5.
13
<PAGE>
25. OVERDRAFTS OR INDEBTEDNESS.
(a) Custodian shall advance funds under this Agreement with
respect to any Fund which results in an overdraft because the moneys held by
Custodian in the separate account for such Fund shall be insufficient to pay the
total amount payable upon a purchase of securities by such Fund, as set forth in
an Officer's Certificate or Oral or Written Instructions, or which results in an
overdraft in the separate account of such Fund for some other reason, or if the
Trust is for any other reason indebted to Custodian, including any indebtedness
to The Bank of New York under the Trust's Cash Management and Related Services
Agreement, (except a borrowing for investment or for temporary or emergency
purposes using securities as collateral pursuant to a separate agreement and
subject to the provisions of Paragraph 25(b) hereof), such overdraft or
indebtedness shall be deemed to be a loan made by Custodian to the Trust for
such Fund payable on demand and shall bear interest from the date incurred at a
rate per annum (based on a 360-day year for the actual number of days involved)
equal to the overdraft rate specified in Schedule III to this Agreement. In
addition, the Trust hereby agrees that to the extent of such overdraft or
indebtedness, Custodian shall have a continuing lien, security entitlement and
security interest in and to any property at any time held by it for the benefit
of such Fund or in which the Fund may have an interest which is then in
Custodian's possession or control or in possession or control of any third party
acting on Custodian's behalf. The Trust authorizes Custodian, in its sole
discretion, at any time to charge any such overdraft or indebtedness together
with interest due thereon against any balance of account standing to such Fund's
credit on Custodian's books. In addition, the Trust hereby covenants that on
each Business Day on which either it intends to enter a Reverse Repurchase
Agreement and/or otherwise borrow from a third party, or which next succeeds a
Business Day on which at the close of business the Trust had outstanding a
Reverse Repurchase Agreement or such a borrowing, it shall prior to 1:00 p.m.,
New York City time, advise Custodian, in writing, of each such borrowing, shall
specify the Fund to which the same relates, and shall not incur any indebtedness
not so specified other than from Custodian.
(b) The Trust will cause to be delivered to Custodian by any
bank (including, if the borrowing is pursuant to a separate agreement,
Custodian) from which it borrows money for investment or for temporary or
emergency purposes using securities held by Custodian hereunder as collateral
for such borrowings, a notice or undertaking in the form currently employed by
such bank setting forth the amount which such bank will loan to the Trust
against delivery of a stated amount of collateral. The Trust shall promptly
deliver to Custodian Written Instructions specifying with respect to each such
borrowing: (a) the Fund to which such borrowing relates; (b) the name of the
bank; (c) the amount and terms of the borrowing, which may be set forth by
incorporating by reference an attached promissory note, duly endorsed by the
Fund, or other loan agreement; (d) the time and date, if known, on which the
loan is to be entered into; (e) the date on which the loan becomes due and
payable; (f) the total amount payable to the Fund on the borrowing date; (g) the
market value of securities to be delivered as collateral for such loan,
including the name of the issuer, the title and the number of shares or the
principal amount of any particular securities and (h) a statement specifying
whether such loan is for investment purposes or for temporary or emergency
purposes and that such loan is in conformance with the 1940 Act and the Fund's
prospectus. Custodian shall deliver on the borrowing date specified in Written
14
<PAGE>
Instructions the specified collateral and the executed promissory note, if any,
against delivery by the lending bank of the total amount of the loan payable,
provided that the same conforms to the total amount payable as set forth in such
Written Instructions. Custodian may, at the option of the lending bank, keep
such collateral in its possession, but such collateral shall be subject to all
rights therein given the lending bank by virtue of any promissory note or loan
agreement. Custodian shall deliver such securities as additional collateral as
may be specified in Written Instructions to collateralize further any
transaction described in this Paragraph 25(b). The Trust shall cause all
securities released from collateral status to be returned directly to Custodian,
and Custodian shall receive from time to time such return of collateral as may
be tendered to it. In the event that the Trust fails to specify in Written
Instructions the Fund, the name of the issuer, the title and number of shares or
the principal amount of any particular securities to be delivered as collateral
by Custodian, Custodian shall not be under any obligation to deliver any
securities.
26A. INSTRUCTIONS.
(a) It is understood and agreed that Custodian may, from time
to time, provide software to the Trust for purposes of enabling a Fund to
transmit Instructions to Custodian (the "Software"). Such Software has been
designed to include password protection or other features to restrict the use of
the Software to Authorized Persons; provided, however, that the Custodian makes
no warranty or representations of any kind with respect to such protections or
features, express or implied, including, but not limited to, any implied
warranties of merchantability or fitness for a particular purpose. The Trust and
the Custodian shall use commercially reasonable efforts to develop other
mechanisms (i) to enable the Trust to restrict the use of the Software to
Authorized Persons, (ii) to identify transmissions from a terminal other than an
authorized terminal, and (iii) for the prompt and accurate transmission of
Instructions by Authorized Persons to Custodian. It is further understood and
agreed that Custodian may provide specialized hardware or other equipment to
enable the Trust and the Funds to utilize the Software. With respect to any such
Software, Custodian grants to the Trust and its service providers a personal,
nontransferable and nonexclusive license to use the Software solely for the
purpose of transmitting Instructions to, and receiving communications from,
Custodian in connection with its account(s). The Trust and its service providers
agree not to sell, reproduce, lease or otherwise provide, directly or
indirectly, the Software or any portion thereof to any third party without the
prior written consent of Custodian. At no time shall the Trust be obligated to
use the Software to transmit Instructions to Custodian.
(b) The Trust shall obtain and maintain at its own cost and
expense all equipment and services, including but not limited to communications
services, necessary for it to utilize the Software and transmit Instructions to
Custodian; provided, however, that the parties acknowledge and agree that if any
specialized equipment is necessary to enable the Trust to utilize the Software,
Custodian shall, at its own expense, provide and maintain such equipment.
(c) The Trust acknowledges that the Software, all databases
made available to the Trust by utilizing the Software (other than databases
relating solely to the assets of the Funds and transactions with respect
thereto), and any proprietary data, processes, information and documentation
(other than those which are or become part of the public domain or are legally
required to be made available to the public) (collectively, the "Information"),
are the exclusive and confidential property of Custodian. The Trust shall keep
the Information confidential by using the same care and discretion that the
Trust uses with respect to its own confidential property and trade secrets and
shall neither make nor permit any disclosure without the prior
15
<PAGE>
written consent of Custodian. Upon termination of this Agreement or the Software
license granted hereunder for any reason, the Trust shall return to Custodian
all copies of the Information which are in its possession or under its control
or which the Trust distributed to third parties.
(d) Custodian reserves the right to modify the Software from
time to time upon reasonable prior notice and the Trust shall, if it desires in
its sole discretion to continue to use the Software, install new releases of the
Software as Custodian may direct. The Trust agrees not to modify or attempt to
modify the Software without Custodian's prior written consent. The Trust
acknowledges that any modifications to the Software, whether by the Trust or
Custodian and whether with or without Custodian's consent, shall become the
property of Custodian.
(e) Where the method for transmitting Instructions by the
Trust involves an automatic systems acknowledgment to the Trust by Custodian of
its receipt of such Instructions, including any transmission of Instructions
using the Software, then (i) if an acknowledgment is not actually received by
the Trust, Custodian shall not be deemed to have received any such Instructions,
and (ii) if an acknowledgment is actually received by the Trust, the Custodian
shall be deemed to have received such Instructions and shall be responsible for
any error, omission, interruption or delay in connection with the transmission
of such Instructions; provided, however, that the Trust shall promptly review
all acknowledgments actually received and notify the Custodian in the event of
any apparent discrepancy.
(f) (i) The Trust agrees that where it delivers to Custodian
Instructions hereunder using the Software, it shall be the Trust's sole
responsibility to ensure that only persons duly authorized by the Trust and the
correct number of such persons transmit such Instructions to Custodian and the
Trust will cause all such persons to treat applicable use and authorization
codes, passwords and authentication keys with extreme care, and authorizes
Custodian to act in accordance with and rely upon Instructions received by it
pursuant hereto using the Software. (ii) The Trust hereby represents,
acknowledges and agrees that it is fully informed of the protections and risks
associated with the various methods of transmitting Instructions to Custodian
and that there may be more secure methods of transmitting Instructions to
Custodian than the method(s) selected by the Trust. (iii) With respect to all
Oral Instructions and all Written Instructions other than Instructions delivered
to Custodian using the Software provided by Custodian, Custodian shall exercise
all commercially reasonable efforts to form a reasonable belief that each such
instruction has been given by an Authorized Person and, where required, signed
by an appropriate number of Authorized Person(s).
(g) The Trust shall notify Custodian of any errors, omissions
or interruptions in, or delay or unavailability of, its ability to send
Instructions using the Software provided by Custodian as promptly as
practicable, and in any event within 24 hours after the earliest of (i)
discovery thereof, (ii) the business day on which discovery should have occurred
through the exercise of reasonable care and (iii) in the case of any error, the
date of actual receipt of the earliest notice which reflects such error, it
being agreed that discovery and receipt of notice may only occur on a business
day. Custodian shall, as promptly as practicable, and in any event within 24
hours after the earliest of (i) discovery thereof, (ii) the business day on
which discovery should have occurred through the exercise of reasonable care and
(iii) in the case of any error, the date of actual receipt of the earliest
notice which reflects such error, it being agreed that discovery and receipt of
notice may only occur on a business day, advise the Trust whenever
16
<PAGE>
Custodian learns or reasonably should have learned, of any errors, omissions or
interruption in, or delay or unavailability of, the Trust's ability to send
Instructions using the Software provided by Custodian.
26B. FX TRANSACTIONS.
(a) Whenever a Fund shall enter into an FX Transaction, the
Fund shall promptly deliver to Custodian a Certificate or Oral Instructions
specifying with respect to such FX Transaction: (i) the Series to which such FX
Transaction is specifically allocated; (ii) the type and amount of Currency to
be purchased by the Fund; (iii) the type and amount of Currency to be sold by
the Fund; (iv) the date on which the Currency to be purchased is to be
delivered; (v) the date on which the Currency to be sold is to be delivered; and
(vi) the name of the person from whom or through whom such Currencies are to be
purchased and sold. Unless otherwise instructed by a Certificate or Oral
Instructions, Custodian shall deliver, or shall instruct a Foreign Sub-Custodian
to deliver, the Currency to be sold on the date on which such delivery is to be
made, as set forth in the Certificate, and shall receive, or instruct a Foreign
Sub-Custodian to receive, the Currency to be purchased on the date as set forth
in the Certificate.
(b) Where the Currency to be sold is to be delivered on the
same day as the Currency to be purchased, as specified in the Certificate or
Oral Instructions, Custodian or a Foreign Sub-Custodian may arrange for such
deliveries and receipts to be made in accordance with the customs prevailing
from time to time among brokers or dealers in Currencies, and such receipt and
delivery may not be completed simultaneously. The Fund assumes all
responsibility and liability for all credit risks involved in connection with
such receipts and deliveries, which responsibility and liability shall continue
until the Currency to be received by the Fund has been received in full.
(c) Any foreign exchange transaction effected by Custodian in
connection with this Agreement may be entered with Custodian, any office, branch
or subsidiary of The Bank of New York, or any Foreign Sub-Custodian (as defined
below) acting as principal or otherwise through customary banking channels. The
Fund may issue a standing Certificate with respect to foreign exchange
transactions but Custodian may establish rules or limitations concerning any
foreign exchange facility made available to the Fund. The Fund shall bear all
risks of investing in securities or holding Currency. Without limiting the
foregoing, the Fund shall bear the risks that rules or procedures imposed by a
Foreign Sub-Custodian or foreign depositories, exchange controls, asset freezes
or other laws, rules, regulations or orders shall prohibit or impose burdens or
costs on the transfer to, by or for the account of the Fund of securities or any
cash held outside the Fund's jurisdiction or denominated in Currency other than
its home jurisdiction or the conversion of cash from one Currency into another
Currency. Custodian shall not be obligated to substitute another Currency for a
Currency (including a Currency that is a component of a Composite Currency Unit)
whose transferability, convertibility or availability has been affected by such
law, regulation, rule or procedure. Neither Custodian nor any Foreign
Sub-Custodian shall be liable to the Fund for any loss resulting from any of the
foregoing events.
17
<PAGE>
27. DUTIES OF CUSTODIAN WITH RESPECT TO PROPERTY OF ANY FUND HELD
OUTSIDE OF THE UNITED STATES.
(a) Custodian is authorized and instructed to employ, as
sub-custodian for each Fund's foreign securities and other assets, the foreign
banking institutions and foreign securities depositories and clearing agencies
selected from time to time by Custodian as the Foreign Custody Manager appointed
by the Trust's Board of Trustees ("Foreign Sub-Custodians") to carry out their
respective responsibilities in accordance with the terms of the sub-custodian
agreement between each such Foreign Sub-Custodian and Custodian (each such
agreement, a "Foreign Sub-Custodian Agreement"). Upon receipt of an Officer's
Certificate, the Trust may designate any additional foreign sub-custodian with
which Custodian has an agreement for such entity to act as Custodian's agent, as
its sub-custodian and any such additional foreign sub-custodian shall be deemed
a Foreign Sub-Custodian hereunder. Upon receipt of an Officer's Certificate,
Custodian shall cease using any one or more Foreign Sub-Custodians for the
Fund's assets.
(b) Each Foreign Sub-Custodian Agreement shall be
substantially in the form delivered to the Trust herewith and will not be
amended in a way that materially or adversely affects the Trust without the
Trust's prior written consent.
(c) Custodian shall identify on its books as belonging to each
Fund the Foreign Securities of such Fund held by each Foreign Sub-Custodian. At
the election of the Trust, it shall be entitled to be subrogated to any claims
by the Trust or any Fund against a Foreign Sub-Custodian as a consequence of any
loss, damage, cost, expense, liability or claim sustained or incurred by the
Trust or any Fund if and to the extent that the Trust or such Fund has been made
whole by Custodian for any such loss, damage, cost, expense, liability or claim.
(d) Upon request of the Trust, Custodian will, consistent with
the terms of the applicable Foreign Sub-Custodian Agreement, use reasonable
efforts to arrange for the independent accountants of the Trust to be afforded
access to the books and records of any Foreign Sub-Custodian insofar as such
books and records relate to the performance of such Foreign Sub-Custodian under
its agreement with Custodian on behalf of the Trust.
(e) Custodian will supply to the Trust from time to time, as
mutually agreed upon, statements in respect of the securities and other assets
of each Fund held by Foreign Sub-Custodians, including but not limited to, an
identification of entities having possession of each Fund's Foreign Securities
and other assets, and advises or notifications of any transfers of Foreign
Securities to or from each custodial account maintained by a Foreign
Sub-Custodian for Custodian on behalf of the Fund.
(f) Custodian agrees that it will use reasonable care in
monitoring compliance by each Foreign Sub-Custodian with the terms of the
relevant Foreign Sub-Custodian Agreement and that if it learns of any breach of
such Foreign Sub-Custodian Agreement believed by Custodian to have a material
adverse effect on the Trust or any Fund it will promptly notify the Trust in
writing of such breach. Custodian also agrees to use reasonable and diligent
efforts to enforce its rights under the relevant Foreign Sub-Custodian
Agreement.
18
<PAGE>
(g) Custodian shall transmit promptly to the Trust all
notices, reports or other written information received pertaining to the Funds'
Foreign Securities, including without limitation, notices of corporate action,
proxies and proxy solicitation materials.
(h) Notwithstanding any provision of this Agreement to the
contrary, settlement and payment for securities received for the account of the
Trust or any Fund and delivery of securities maintained for the account of the
Trust or any Fund may be effected in accordance with the customary or
established securities trading or securities processing practices and procedures
in the jurisdiction or market in which the transaction occurs, including,
without limitation, delivery of securities to the purchaser thereof or to a
dealer therefor (or an agent for such purchaser or dealer) against a receipt
with the expectation of receiving later payment for such securities from such
purchaser or dealer.
(i) With respect to any losses or damages arising out of or
relating to any actions or omissions of any Foreign Sub-Custodian, the sole
responsibility and liability of Custodian shall be to take all appropriate and
reasonable action at the Trust's expense to recover such loss or damage from the
Foreign Sub-Custodian. It is expressly understood and agreed that Custodian's
sole responsibility and liability shall be limited to amounts so recovered from
the Foreign Sub-Custodian.
28. CONCERNING CUSTODIAN.
(a) (i) Custodian shall exercise care and diligence and act in
good faith and use all commercially reasonable efforts in the performance of its
duties hereunder. Custodian shall be responsible to the Trust for its own
failure or the failure of any sub-custodian that it shall appoint (other than a
foreign sub-custodian referred to in Paragraph 27 or a sub-custodian appointed
by Custodian at the specific direction of the Trust) or that of its employees or
agents, to perform its duties, obligations or responsibilities in accordance
with this Agreement, but only to the extent that such failure results from acts
or omissions that constitute willful misfeasance, bad faith or negligence on the
part of Custodian, or on the part of its employees or agents, or reckless
disregard of such duties, obligations and responsibilities.
(ii) Without limiting the generality of the foregoing or
any other provision of this Agreement, in no event shall Custodian be liable to
the Fund or any third party nor, except as otherwise provided in this
subparagraph for special, indirect or consequential damages or lost profits or
loss of business, arising under or in connection with this Agreement, even if
previously informed of the possibility of such damages and regardless of the
form of action. Custodian may, with respect to questions of law arising under
any FCM Agreement, apply for and obtain the advice and opinion of counsel to the
Trust at the expense of the Trust, or of its own counsel at its own expense, and
shall be fully protected with respect to anything done or omitted by it in good
faith in conformity with such advice or opinion. Custodian shall be liable to
the Trust for any loss or damage resulting from the use of the Book-Entry System
or any Securities Depository arising by reason of any negligence or willful
misconduct on the part of Custodian or any of its employees or agents.
(iii) Custodian's liability pursuant to the last
sentence of subparagraph (a)(i) shall include, but not be limited to,
reimbursing the Trust for court-ordered
19
<PAGE>
damage awards, fines, penalties, and judicially-approved settlements (and
attorney's fees and disbursements relating thereto) arising out of or in
connection with the conduct giving rise to such liability.
(iv) If the Trust receives notice of the commencement of
any action, suit, or proceeding (an "Action"), or notice that any Action may be
commenced, for which Custodian may be liable to the Trust pursuant to this
Paragraph 28, the Trust shall give notice to Custodian of the commencement of
the Action or of the possibility that an Action will be commenced. Any omission
to notify Custodian will not relieve Custodian from any liability which it may
have under this Paragraph, except to the extent the failure to notify Custodian
prejudices the rights of Custodian. Custodian will be entitled at its sole
expense and liability, to exercise full control of the defense, compromise or
settlement of any such Action, provided that Custodian: (1) notifies the Trust
in writing of Custodian's intention to assume such defense; and (2) retains
legal counsel reasonably satisfactory to the Trust to conduct the defense of
such Action. If Custodian advises the Trust that it does not wish to exercise
full control of any defense, compromise or settlement of any Action, Custodian
shall be responsible for the fees and expenses of counsel selected by the Trust,
in addition to any other amounts for which Custodian may be liable pursuant to
this Paragraph 28. The other person will cooperate with the person assuming the
defense, compromise or settlement of any Action in accordance with this
Paragraph in any manner that such person reasonably may request. If Custodian so
assumes the defense of any such Action, the Trust will have the right to employ
a separate counsel and to participate in (but not control) the defense,
compromise or settlement of the Action, but the fees and expenses of such
counsel will be at the expense of the Trust unless: (a) Custodian has agreed to
pay such fees and expenses, (b) any relief other than the payment of money
damages is sought against the Trust, or (c) the Trust has been advised by its
counsel that there may be one or more defenses available to it which are
different from or additional to those available to Custodian and that a conflict
of interest therefore exists, and in any such case that portion of the fees and
expenses of such separate counsel that are reasonably related to matters for
which Custodian is liable pursuant to this Paragraph will be paid by Custodian.
The Trust will not settle or compromise any such Action for which Custodian is
liable pursuant to this Paragraph without the prior written consent of
Custodian, unless Custodian has failed, after reasonable notice, to undertake
control of such Action in the manner provided in this Paragraph. Custodian will
not settle or compromise any such Action in which any relief other than the
payment of money damages is sought against the Trust without the consent of the
Trust, such consent not to be unreasonably withheld. In the event that Custodian
intends to settle or compromise any Action in which solely money damages are
sought, Custodian shall give the Trust fifteen (15) business days prior written
notice.
(b) Without limiting the generality of the foregoing,
Custodian shall be under no obligation to inquire into, and shall not be liable
for:
(i) the validity of the issue of any securities
purchased, sold, or written by or for the Trust or any Fund, the legality of the
purchase, sale or writing thereof, or the propriety of the amount paid or
received therefor;
(ii) the legality of the sale or redemption of any
Shares, or the propriety of the amount to be received or paid therefor;
20
<PAGE>
(iii) the legality of the declaration or payment of any
dividend by the Trust;
(iv) the legality of any borrowing by the Trust using
securities as collateral;
(v) the legality of any loan of portfolio securities, or
under any duty or obligation to see to it that any cash collateral delivered to
it by a broker, dealer, or financial institution or held by it at any time as a
result of such loan of portfolio securities is adequate collateral for or
against any loss Custodian, the Trust or any Fund might sustain as a result of
such loan. Custodian specifically, but not by way of limitation, shall not be
under any duty or obligation periodically to check or notify the Trust or any
Fund that the amount of such cash collateral held by Custodian for the Trust is
sufficient collateral for the Trust, but such duty or obligation shall be the
sole responsibility of the Trust. In addition, Custodian shall be under no duty
or obligation to see that any broker, dealer or financial institution to which
portfolio securities are lent makes payment to it of any dividends or interest
which are payable to or for the account of the Trust during the period of such
loan or at the termination of such loan, provided, however, that Custodian shall
promptly notify the Trust in the event that such dividends or interest are not
paid and received when due; or
(vi) the sufficiency or value of any amounts of money
and/or securities held in any segregated account described in Paragraph 12(a)
hereof in connection with transactions by the Funds, or whether such segregated
account provides the compliance intended to be achieved. In addition, Custodian
shall not be under any duty or obligation to see that any broker, dealer, FCM or
Clearing Member makes payment to the Fund of any variation margin payment or
similar payment which the Fund may be entitled to receive from such broker,
dealer, FCM or Clearing Member, to see that any payment received by Custodian
from any broker, dealer, FCM or Clearing Member is the amount the Trust is
entitled to receive, or to notify the Trust or a Fund of Custodian's receipt or
non-receipt of any such payment.
(c) Custodian shall not be liable for, or considered to be
sub-custodian or custodian of, any money, whether or not represented by any
check, draft, or other instrument for the payment of money, received by
Custodian on behalf of the Trust until Custodian actually receives and collects
such money directly or by the final crediting of the account representing the
Fund's interest at the Book-Entry System or a Securities Depository.
(d) Custodian shall not have any responsibility or be liable
for ascertaining or acting upon any calls, conversions, exchange offers,
tenders, interest rate changes or similar matters relating to securities held in
a Securities Depository, unless Custodian shall have actually received timely
notice from such Securities Depository. In no event shall Custodian have any
responsibility or liability for the failure of any Securities Depository to
collect, or for the late collection or late crediting by a Securities Depository
of any amount payable upon securities deposited in a Securities Depository which
may mature or be redeemed, retired, called or otherwise become payable. Upon
receipt of Written Instructions from the Trust of an overdue amount on
securities held in a Securities Depository, Custodian shall make a claim against
a Securities Depository on behalf of the Trust, except that Custodian shall not
be under any obligation to appear in, prosecute or defend any action suit or
proceeding in respect to any securi-
21
<PAGE>
ties held by a Securities Depository which in its opinion may involve it in
expense or liability, unless indemnity satisfactory to it against all expense
and liability be furnished as often as may be required.
(e) Custodian shall not be under any duty or obligation to
take action to effect collection of any amount due to the Trust from a transfer
agent of the Trust nor to take any action to effect payment or distribution by
the transfer agent of the Trust of any amount paid by Custodian to the transfer
agent of the Trust in accordance with this Agreement.
(f) Custodian shall not be under any duty or obligation to
take action to effect collection of any amount, if the securities upon which
such amount is payable are in default, or if payment is refused after due demand
or presentation, unless and until: (i) it shall be directed to take such action
by Written Instructions, and (ii) it shall be assured to its reasonable
satisfaction of reimbursement of its costs and expenses in connection with any
such action.
(g) Custodian may in addition to the employment of Foreign
Sub-Custodians pursuant to Paragraphs 7 and 27, hereof appoint one or more
banking institutions as Depository or Depositories, as a sub-custodian or as
sub-custodians, or as a co-custodian or as co-custodians, including, but not
limited to, banking institutions located in foreign countries, of securities and
moneys at any time owned by the Funds, upon such terms and conditions as may be
approved in an Officer's Certificate or contained in an agreement executed by
Custodian and the Trust and the appointed institution.
(h) Custodian shall not be under any duty or obligation: (i)
to ascertain whether any securities at any time delivered to, or held by it or
by any Foreign Sub-Custodian, for the account of the Trust and specifically
allocated to a Fund are such as properly may be held by the Trust or such Fund
under the provisions of its Prospectus, or (ii) to ascertain whether any
transactions by the Fund, whether or not involving Custodian, are such
transactions as may properly be engaged in by the Fund.
(i) Custodian shall charge its compensation and any expenses
with respect to the Funds of the Trust incurred by Custodian in the performance
of its duties under this Agreement only against the money of the Fund or Funds
of the Trust from which such compensation or expenses is actually due and
payable, and under no circumstances shall any compensation or expenses due to
Custodian be considered to be a joint, or joint and several, obligation of the
Funds of the Trust. To the extent that Custodian is entitled to recover from the
Trust any loss, damage, liability or expense (including counsel fees) under this
Agreement, Custodian shall charge the amount due in respect of such loss,
damage, liability or expense (including counsel fees) only against the money
held by it for the Fund or Funds of the Trust that is/are identified by the
Trust in an Officer's Certificate, unless and until the Trust instructs
Custodian by an Officer's Certificate to charge against money held by it for the
account of a Fund such Fund's pro rata share (based on such Fund's net asset
value at the time of the charge in proportion to the aggregate net asset value
of all Funds at that time) of the amount of such loss, damage, liability or
expense (including counsel fees).
(j) Custodian shall be entitled to rely upon any Officer's
Certificate, Written Instructions, notice or other instrument in writing
received by Custodian and reasonably believed
22
<PAGE>
by Custodian, to be an Officer's Certificate or Written Instructions. Custodian
shall be entitled to rely upon any Oral Instructions actually received by
Custodian. The Trust agrees to forward to Custodian Written Instructions
confirming such Oral Instructions in such manner so that such Written
Instructions are received by Custodian, whether by hand delivery, telecopier or
other similar device, or otherwise, by the close of business of the same day
that such Oral Instructions are received by Custodian. The Trust agrees that the
fact that such confirming instructions are not received, or that contrary
instructions are received, by Custodian shall in no way affect the validity of
the transactions or enforceability of the transactions hereby authorized by the
Trust. The Trust agrees that Custodian shall not incur any liability to the
Trust in acting upon Oral Instructions given to Custodian hereunder concerning
such transactions provided such instructions reasonably appear to have been
received from an Authorized Person.
(k) Custodian shall be entitled to rely upon any instrument,
instruction or notice received by it and reasonably believed by it to be given
in accordance with the terms and conditions of any FCM Agreement. Without
limiting the generality of the foregoing, Custodian shall not be under any duty
to inquire into, and Custodian shall not be liable for, the accuracy of any
statements or representations contained in any such instrument or other notice
including, without limitation, any specification of any amount to be paid to a
broker, dealer, futures commission merchant or clearing member.
(l) Custodian shall provide the Trust with any report obtained
by Custodian on the system of internal accounting control of the Book-Entry
System, any Securities Depository utilized hereunder the Depository or the
Options Clearing Corporation, and with such reports on its own systems of
internal accounting control as the Trust may reasonably request from time to
time.
(m) Subject to the foregoing provisions of this Agreement,
including, without limitation, those contained in Paragraph 27 hereof, Custodian
may deliver and receive securities, and receipts with respect to such
securities, and arrange for payments to be made and received by Custodian in
accordance with the customs prevailing from time to time among brokers or
dealers in such securities. When Custodian is instructed to deliver securities
against payment, delivery of such securities and receipt of payment therefor may
not be completed simultaneously. The Fund assumes all responsibility and
liability for all credit risks involved in connection with Custodian's delivery
of securities pursuant to proper instructions of the Fund, which responsibility
and liability shall continue until final payment in full has been received by
Custodian.
(n) Custodian shall not have any duties or responsibilities
whatsoever except such duties and responsibilities as are specifically set forth
in this Agreement, and no covenant or obligation shall be implied in this
Agreement against Custodian.
29. TERMINATION. Any of the parties hereto may terminate this Agreement
by giving to the other parties a notice in writing specifying the date of such
termination, which shall be not less than ninety (90) days after the date of
giving of such notice. Upon the date set forth in such notice this Agreement
shall terminate, and Custodian shall on that date deliver directly to the Trust
or a successor custodian designated by the Trust all securities and moneys then
owned by the Trust and held by Custodian, after deducting all fees, expenses and
other amounts for the
23
<PAGE>
payment or reimbursement of which it shall then be entitled; provided, however,
that transaction fees and expenses payable by the Trust in connection with a
deconversion to a successor custodian shall be limited to Custodian's actual
direct cost.
30. NOTICES. All notices and other communications (collectively
referred to as "Notice" or "Notices" in this paragraph) hereunder shall be in
writing or by confirm in telegram, cable, telex, or facsimile sending device.
Notices shall be addressed: (a) if to Custodian, at Custodian's address, 90
Washington Street, 22nd Floor, New York, New York 10286, Attention: Frank Ajosa;
(b) if to the Trust, at the address of the Trust, 111 Center Street, Little
Rock, Arkansas 72201, Attention: Richard H. Blank, Jr., Secretary; or (c) if to
none of the foregoing, at such other address as shall have been notified to the
sender of any such Notice or other communication. Notice shall be deemed to have
been given when actually received by the other party. All postage, cable,
telegram, telex and facsimile sending device charges arising from the sending of
a Notice hereunder shall be paid by the sender.
31. FURTHER ACTIONS. Each party agrees to perform such further acts and
execute such further documents as it deems necessary to effectuate the purposes
hereof.
32. AMENDMENTS. This Agreement or any part hereof may be changed or
waived only by an instrument in writing signed by the party against which
enforcement of such change or waiver is sought.
33. MISCELLANEOUS.
(a) The Trust agrees that Custodian may be a counterparty in
any purchase or sale of foreign currency by or for the Trust on a spot or
forward basis, and on any option to buy or sell foreign currency.
(b) This Agreement embodies the entire Agreement and
understanding between the parties hereto, and supersedes all prior agreements
and understandings relating to the subject matter hereof. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction or
effect. This Agreement shall be deemed to be a contract made in New York and
governed by New York law. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors.
34. RELEASE. The names "Nations Master Investment Trust" and "Trustees
of Nations Master Investment Trust" refer respectively to the Trust created and
the Trustees, as trustees but not individually or personally, acting from time
to time under a Declaration of Trust and Certificate of Trust dated January 14,
1999, which is hereby referred to and a copy of which is on file at the
principal office of the Trust. The obligations of "Nations Master Investment
Trust" entered into in the name or on behalf thereof by any of the Trustees,
representatives or agents are made not individually, but in such capacities, and
are not binding upon any of the Trustees, Interestholders, or representatives of
the Trust personally, but bind only the Trust Property (as defined in the
Declaration of Trust), and all persons dealing with any class of Shares of the
Trust
24
<PAGE>
Property, and all persons dealing with any class of Shares of the Trust must
look solely to the Trust Property belonging to such class for the enforcement of
any claims against the Trust.
35. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original.
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the day and year first above
written.
NATIONS FUNDS TRUST
By: ______________________
James E. Banks, Jr.
Assistant Secretary
THE BANK OF NEW YORK
By: ______________________
Stephen E. Grunston
Vice President
26
<PAGE>
SCHEDULE I
----------
The Custody Agreement between Nations Funds Trust, and Sub-Custodian
applies to the following Funds of the Trust:
Nations High Yield Fund
Nations Kansas Intermediate Municipal Bond Fund
Nations MidCap Index Fund
Approved: [__________________]
27
<PAGE>
SCHEDULE II
-----------
I, Ira Rosner, a Vice President with THE BANK OF NEW YORK do hereby designate
the following publications:
The Bond Buyer
Depository Trust Company Services
Financial Daily Card Service
JJ Kenney Municipal Bond Service
London Financial Times
Standard & Poor's Called Bond Record
Wall Street Journal
28
<PAGE>
SCHEDULE III
------------
DOMESTIC CUSTODIAN FEE SCHEDULE
FOR
NATIONS MASTER INVESTMENT TRUST
SAFEKEEPING/INCOME COLLECTION/REPORTING DTC-ID AFFIRMATION
ALL SYSTEMS DEVELOPMENT AND USAGE CHARGES
- -----------------------------------------
3/4ths of one basis point per annum on the aggregate net assets of
all Nations' Non-Money Market Funds up to $10 billion.
1/2 of a basis point on the excess.
SECURITY TRANSACTION CHARGES/PAYDOWNS
- -------------------------------------
$ 5 Paydowns
$ 7 DTC/FRB/PTC
$15 Physicals, options and futures
$40 Euro C/D's
OTHER CHARGES
- -------------
$ 5 Bank official checks
$ 2 Money transfers in/out of the Fund's custodian account not
related to securities transactions.
EARNINGS CREDITS ON BALANCES/INTEREST ON OVERDRAFTS
- ----------------------------------------------------
Earnings credits are provided to each Fund on 80% of the daily balance in the
domestic custodian account computed at the 90-day T-bill rate on the day of the
balance.
Overdrafts, excluding bank errors, will cause a reduction of earnings credits
daily, computed at 1% above the average Federal Funds rate on the day of the
overdraft.
Credits and debits will be accumulated daily and offset monthly against the
Bank's domestic custodian fees. To the extent a net debit is accumulated, each
Fund will be billed for the expense. To the extent a net earnings credit is
generated, such excess earnings credit can be carried forward to the next
succeeding month. However, no earnings credit will be carried forward after
year-end.
29
<PAGE>
OUT-OF-POCKET EXPENSES
- ----------------------
None.
BILLING CYCLE
- -------------
The above fees are billed monthly.
30
<PAGE>
SCHEDULE IV
-----------
OVERDRAFT RATE
31
Exhibit 99.H1
FORM OF
CO-ADMINISTRATION AGREEMENT
This CO-ADMINISTRATION AGREEMENT (the "Agreement") is made as of
[_______________ ] by and among STEPHENS INC. ("Stephens"), BANC OF AMERICA
("BAAI") and NATIONS FUNDS TRUST (the "Trust").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Trust desires to retain Stephens and BAAI to render
certain administrative services for the investment portfolios of the Trust
listed on Schedule I (individually, a "Fund" and collectively, the "Funds"), and
Stephens and BAAI are willing to render such services.
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed among the parties hereto as follows:
1. Appointment.
(a) The Trust hereby appoints Stephens to act as
Co-Administrator of the Funds and Stephens hereby accepts such appointment and
agrees to render such services and duties set forth in Paragraph 3, for the
compensation and on the terms herein provided. Absent written notification to
the contrary by the Trust, BAAI or Stephens, each new investment portfolio
established in the future by the Trust shall automatically become a "Fund" for
all purposes hereunder as if listed on Schedule I.
(b) The Trust also hereby appoints BAAI to act as
Co-Administrator of the Funds, and BAAI hereby accepts such appointment and
agrees to render such services and duties set forth in Paragraph 4, for the
compensation and on the terms herein provided. Absent written notification to
the contrary by either the Trust or BAAI, each new investment portfolio
established in the future by the Trust shall automatically become a "Fund" for
all purposes hereunder as if listed on Schedule I.
2. Delivery of Documents. The Trust has furnished Stephens and BAAI
with copies properly certified or authenticated of each of the following:
(a) The Trust's Registration Statement on Form N-1A (the
"Registration Statement") under the Securities Act of 1933, as amended, and
under the 1940 Act [(FILE NOS. __________ AND __________)], as filed with the
Securities and Exchange Commission (the "SEC") relating to the Funds' shares
(the "Shares");
(b) The Funds' most recent Prospectus(es); and
(c) The Funds' most recent Statement(s) of Additional
Information.
1
<PAGE>
The Trust will furnish Stephens and BAAI from time to time with copies,
properly certified or authenticated, of all amendments of or supplements to the
foregoing. Furthermore, the Trust will provide Stephens and BAAI with any other
documents that Stephens and BAAI may reasonably request and will notify Stephens
and BAAI as soon as possible of any matter materially affecting either Stephens'
or BAAI's performance of its services under this Agreement.
3. Duties as Co-Administrator. Subject to the supervision and direction
of the Board of Trustees of the Trust, Stephens, as Co-Administrator, will
assist in supervising various aspects of the Trust's administrative operations
and undertakes to perform the following specific services from and after the
effective date of this Agreement:
(a) Maintaining office facilities for the Trust (which may be
in the offices of Stephens or a corporate affiliate);
(b) Furnishing clerical services, internal executive and
administrative services and stationery and office supplies in connection with
the foregoing;
(c) Assist in furnishing statistical and research data and
data processing services in connection with the foregoing;
(d) Furnishing corporate secretarial services, including
assisting in the coordination of the preparation and distribution of materials
for Board of Trustees meetings;
(e) Providing the services of certain persons who may be
appointed as officers of the Trust by the Trust's Board of Trustees;
(f) Assist in coordinating the provision of legal advice and
counsel to the Trust with respect to regulatory matters, including monitoring
regulatory and legislative developments which may affect the Trust and assisting
in the strategic response to such developments, counseling and assisting the
Trust in routine regulatory examinations or investigations of the Trust, and
working closely with outside counsel to the Trust in connection with any
litigation in which the Trust is involved;
(g) Assist in coordinating the preparation of reports to the
Trust's shareholders of record and the SEC including, but not necessarily
limited to, Annual Reports and Semi-Annual Reports to Shareholders and on Form
N-SAR and Notices pursuant to Rule 24f-2 under the 1940 Act;
(h) Coordinating with the Trust regarding the jurisdictions in
which the Shares shall be registered or qualified for sale and, in connection
therewith, being responsible for the registration or qualification and the
maintenance of such registration or qualification of Shares for sale under the
securities laws of any state. Payment of share registration fees and any fees
for qualifying or continuing the qualification of the Trust or any Fund as a
dealer or broker shall be made or reimbursed by the Trust or that Fund,
respectively;
2
<PAGE>
(i) Assisting in the preparation and filing on a timely basis
of various reports, registration statements and post-effective amendments
thereto, and other documents required by federal, state and other applicable
laws and regulations, other than those filed or required to be filed by BAAI or
the Funds' Sub-Advisers, Transfer Agent, Sub-Transfer Agent or Custodian;
(j) Performing certain compliance procedures for the Trust
which will include, among other matters, monitoring compliance with personal
trading guidelines by the Trust's Board of Trustees; and
(k) Generally assisting in all aspects of the Trust's
operations.
In performing all services under this Agreement, Stephens shall (i) act
in conformity with: the Trust's Declaration of Trust and Bylaws, the 1940 Act
and the rules thereunder, and other applicable laws and regulations, as the same
may be amended from time to time, and the Trust's Registration Statement, as
such Registration Statement may be amended from time to time; (ii) consult and
coordinate with the Trust, as necessary and appropriate; and (iii) advise and
report to the Trust, as necessary or appropriate, with respect to any compliance
matters that come to its attention.
Stephens represents and warrants to the Trust that it will use
reasonable efforts to perform its duties and obligations under this Agreement
without: (a) any failure of its computer systems, or those used by it in the
performance of its duties hereunder, to properly record, store, process,
calculate or present calendar dates falling on and after, and time spans
including, January 1, 2000 as a result of the occurrence of, or use of data
containing, such date; (b) any failure of its computer systems, or those used by
it in the performance of its duties hereunder, to calculate any information
dependent on or relating to dates on or after January 1, 2000; or (c) any loss
of functionality or performance with respect to the maintenance of records or
processing of data containing dates falling on or after January 1, 2000 ((a),
(b), and (c) above shall be referred to as "Y2K Failures"). Notwithstanding the
above, Stephens shall not be liable for any Y2K Failures caused by Y2K Failures
in a third party system with which Stephens interfaces or from which Stephens
receives data in connection with the performance of its duties hereunder.
In performing its services under this Agreement, Stephens shall
cooperate and coordinate with BAAI as necessary and appropriate and shall
provide such information as is reasonably necessary or appropriate for BAAI to
perform its responsibilities to the Trust.
4. Duties as Co-Administrator. Subject to the supervision and direction
of the Board of Trustees of the Trust, BAAI, as Co-Administrator, will assist in
supervising various aspects of the Trust's administrative operations and
undertakes to perform the following specific services, from and after the
effective date of this Agreement:
(a) providing accounting and bookkeeping services (including
the maintenance for the periods prescribed by Rule 31a-2 under the 1940
3
<PAGE>
Act of such accounts, books and records of the Trust as may be required by
Section 31(a) of the 1940 Act and the rules thereunder). BAAI further agrees
that all such records which it maintains for the Trust are the property of the
Trust and further agrees to surrender promptly to the Trust any of such records
upon the Trust's request;
(b) valuing each Fund's assets and calculating the net asset
value and the net income of the shares of each Fund in accordance with the
Trust's current Prospectus(es), applicable pricing procedures and resolutions of
the Trust's Board of Trustees, provided, that in performing such services, BAAI
shall obtain security market quotes from independent pricing services, or if
such quotes are unavailable, obtain such prices from the Funds' Sub-Advisers;
(c) accumulating information for reports to the Trust's
shareholders of record and the SEC including, but not necessarily limited to,
Annual Reports and Semi-Annual Reports to Shareholders and on Form N-SAR and
Notices pursuant to Rule 24f-2 under the 1940 Act;
(d) preparing and filing on a timely basis the Trust's tax
returns and other tax filings;
(e) monitoring the development and implementation of certain
compliance procedures for the Trust including, but not limited to, monitoring
(i) each Fund's status as a regulated investment company under Sub-Chapter M of
the Internal Revenue Code of 1986, as amended, including performing, on a
monthly basis and based upon information provided by the Fund's Sub-Advisers,
the 90% gross income and asset diversification tests derived from such
Sub-Chapter; and (ii) compliance by each Fund with its investment objective,
policies and restrictions, and applicable laws and regulations;
(f) preparing and furnishing to the Trust monthly broker
security transaction summaries and monthly security transaction listings and (at
the Trust's request) performance information (including yield and total return
information) calculated in accordance with applicable U.S. securities laws and
reporting to external databases such information as may reasonably be requested;
(g) assisting the Trust and its agents in their accumulation
and preparation of materials for the Board of Trustees' meetings and for
regulatory examinations and inspections of the Trust, to the extent such
materials relate to the services being performed for the Trust by BAAI; and
(h) coordinate the provisions of services to the Trust by
other service providers to the Trust, including the transfer agent, sub-transfer
agent and custodian.
In performing all services under this Agreement, BAAI shall (i) act in
conformity with the Trust's Declaration of Trust and Bylaws; the 1940 Act and
the rules thereunder, and other applicable laws and regulations, as the same may
be amended from time to time; and the Trust's Registration Statement, as such
Registration Statement may be amended from time to time, (ii) consult and
coordinate with the Trust, as necessary and
4
<PAGE>
appropriate, and (iii) advise and report to the Trust, as necessary or
appropriate, with respect to any compliance matters that come to its attention.
BAAI represents and warrants to the Trust that it will use reasonable
efforts to perform its duties and obligations under this Agreement without: (a)
any failure of its computer systems to properly record, store, process,
calculate or present calendar dates falling on and after, and time spans
including, January 1, 2000 as a result of the occurrence of, or use of data
containing, such date; (b) any failure of its computer systems to calculate any
information dependent on or relating to dates on or after January 1, 2000; or
(c) any loss of functionality or performance with respect to the maintenance of
records or processing of data containing dates falling on or after January 1,
2000 ((a), (b), and (c) above shall be referred to as "Y2K Failures").
Notwithstanding the above, BAAI shall not be liable for any Y2K Failures caused
by Y2K Failures in a third party system with which BAAI interfaces or from which
BAAI receives data in connection with the performance of its duties hereunder
including, without limitation, the system of any sub-administrator engaged
pursuant to Paragraph 4.
In connection with its duties under this Paragraph 4, it is understood
and agreed that BAAI may, at its own expense, enter into sub-administration
agreements with other service providers and the Fund(s), provided that each such
service provider agrees with BAAI and the Fund(s) to comply with all relevant
provisions of the 1940 Act and applicable rules and regulations thereunder. In
addition, upon notice to the Board of Trustees of the Trust, the parties agree
that BAAI may from time to time assume some or all of Stephens' duties set forth
in Paragraph 3 above.
In performing its responsibilities under this Agreement, BAAI shall
cooperate and coordinate with Stephens as necessary and appropriate and shall
provide such information within its possession or control as is reasonably
necessary or appropriate to Stephens to enable it to perform its
responsibilities to the Trust.
5. Compensation.
(a) Stephens shall bear all expenses in connection with the
performance of its services under this Agreement, except those enumerated in
Paragraph 5(a)(2) below.
(1) Stephens will from time to time employ or associate
with such person or persons as Stephens may believe to be particularly suited to
assist it in performing services under this Agreement. Such person or persons
may be officers and employees of both Stephens and the Trust. The compensation
of such person or persons shall be paid by Stephens and no obligation shall be
incurred on behalf of the Trust or BAAI in such respect.
(2) Stephens shall not be required to pay any of the
following expenses incurred by the Trust: investment advisory expenses; costs of
printing and mailing stock certificates, prospectuses, reports and notices;
interest on borrowed money; brokerage fees and commissions; taxes and fees
payable to federal, state and other
5
<PAGE>
governmental agencies; fees of Trustees of the Trust who are not affiliated with
Stephens; outside auditing expenses; outside legal expenses; fees of any other
service provider to the Trust; or other expenses not specified in this Section
5(a) which may be properly payable by the Trust and which are approved by the
Trust's President or Treasurer.
(3) The Trust will compensate Stephens for its services
rendered pursuant to this Agreement in accordance with Schedule A. In addition,
the Trust shall reimburse Stephens for certain reasonable out-of-pocket
distributions made in connection with fulfilling its obligations under the
Agreement. The items eligible for reimbursement are set forth on Schedule A.
(b) BAAI shall bear all expenses in connection with the
performance of its services under this Agreement, except those enumerated in
5(b)(2) below.
(1) BAAI will from time to time employ or associate with
such person or persons as BAAI may believe to be particularly suited to assist
it in performing services under this Agreement. Such person or persons may be
officers and employees of both BAAI and the Trust. The compensation of such
person or persons shall be paid by BAAI and no obligation shall be incurred on
behalf of the Trust or Stephens in such respect.
(2) BAAI shall not be required to pay any of the
following expenses incurred by the Trust: investment advisory expenses; costs of
printing and mailing stock certificates, prospectuses, reports and notices;
interest on borrowed money; brokerage fees and commissions; taxes and fees
payable to federal, state and other governmental agencies; fees of Trustees of
the Trust who are not affiliated with BAAI; outside auditing expenses; outside
legal expenses; fees of independent pricing services utilized by BAAI to value
each Fund's assets; fees of any other service provider to the Trust (other than
a sub-administrator engaged pursuant to Paragraph 4); or other expenses not
specified in this Section 5(b) which may be properly payable by the Trust and
which are approved by the Trust's President or Treasurer.
(3) The Trust will compensate BAAI for its services
rendered pursuant to this Agreement in accordance with Schedule A. In addition,
the Trust shall reimburse BAAI for certain reasonable out-of pocket
distributions made in connection with fulfilling its obligations under the
Agreement. The items eligible for reimbursement are set forth on Schedule A.
6. Limitation of Liability; Indemnification.
(a) Stephens shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Trust in connection with the
performance of its obligations and duties under this Agreement, except a loss
resulting from Stephens' willful misfeasance, bad faith or gross negligence in
the performance of such obligations and duties, or by reason of its reckless
disregard thereof.
(b) BAAI shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Trust in connection with the
performance of its
6
<PAGE>
obligations and duties under this Agreement, except a loss resulting from BAAI's
willful misfeasance, bad faith or gross negligence in the performance of such
obligations and duties, or by reason of its reckless disregard thereof.
(c) The Trust, on behalf of each Fund, will indemnify Stephens
and/or BAAI against and hold each harmless from any and all losses, claims,
damages, liabilities or expenses (including reasonable counsel fees and
expenses) resulting from any claim, demand, action or suit relating to the
particular Fund and not resulting from the willful misfeasance, bad faith or
gross negligence of Stephens and/or BAAI in the performance of such obligations
and duties or by reason of their reckless disregard thereof. Stephens and/or
BAAI will not confess any claim or settle or make any compromise in any instance
in which the Trust will be asked to provide indemnification, except with the
Trust's prior written consent. Any amounts payable by the Trust under this
Section 6(c) shall be satisfied only against the assets of the Fund involved in
the claim, demand, action or suit and not against the assets of any other
investment portfolio of the Trust.
7. Effective Date; Termination of Agreement.
(a) This Agreement shall become effective, on a Fund by Fund
basis, upon the completion of the transfer of a Fund's accounting function to
The Bank of New York, notice of which shall be provided by the Trust to Stephens
and BAAI for each Fund. This Agreement shall remain in full force and effect
with respect to such Fund(s) unless terminated pursuant to the provisions of
Section 7(c).
(b) The parties agree that the administration arrangements
between Stephens and the Trust [dated ___________], and the sub-administration
arrangements between Stephens and BAAI, dated November 18, 1997, with respect to
the Funds shall be terminated on a Fund by Fund basis upon the effectiveness of
this Agreement.
(c) This Agreement may be terminated at any time without
payment of any penalty, upon 60 days' written notice, by vote of the Board of
Trustees of the Trust, by Stephens or by BAAI. Stephens and BAAI will each
cooperate with and assist the Trust, its agents and any successor administrator
or administrators in the substitution/conversion process.
(d) Sections 6 and 9 shall survive this Agreement's
termination.
8. Amendments. No provision of this Agreement may be changed,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, discharge or termination is
sought.
9. Confidentiality. All books, records, information and data pertaining
to the business of the Trust, its prior, present or potential shareholders and
BAAI's customers that are exchanged or received pursuant to the performance of
Stephens' and/or BAAI's duties under this Agreement shall remain confidential
and shall not be disclosed to any other person, except as specifically
authorized by the Trust or as may be required by law, and shall not be used for
any purpose other than performance of BAAI's and Stephens' responsibilities and
duties hereunder.
7
<PAGE>
10. Service to Other Companies or Accounts. The Trust acknowledges that
both Stephens and BAAI now act, will continue to act and may act in the future
as investment adviser to fiduciary and other managed accounts, and as investment
adviser, investment sub-adviser and/or administrator to other investment
companies or series of investment companies, and the Trust has no objection to
either Stephens or BAAI so acting. The Trust further acknowledges that the
persons employed by both Stephens and BAAI to assist in the performance of their
duties under this Agreement may not devote their full time to such service and
nothing contained in this Agreement shall be deemed to limit or restrict the
right of Stephens or BAAI or any affiliate of either to engage in and devote
time and attention to other businesses or to render services of whatever kind or
nature.
11. Miscellaneous.
(a) Any notice or other instrument authorized or required by
this Agreement to be given in writing to the Trust, Stephens or BAAI shall be
sufficiently given if addressed to that party and received by it at its office
set forth below or at such other place as it may from time to time designate in
writing.
To the Trust:
Nations Funds Trust
111 Center Street, Suite 3000
Little Rock, Arkansas 72201
Attention: Secretary
To Stephens:
Stephens Inc.
111 Center Street, Suite 3000
Little Rock, Arkansas 72201
Attention: Richard H. Blank, Jr.
To BAAI:
Banc of America Advisors, Inc.
One Bank of America Plaza
33rd Floor
Charlotte, NC 28255
Attention: Edward D. Bedard
(b) This Agreement shall extend to and shall be binding upon
the parties hereto and their respective successors and assigns; provided,
however, that this Agreement shall not be assignable without the written consent
of the other parties.
(c) This Agreement shall be construed in accordance with the
laws of the State of Delaware.
(d) This Agreement may be executed in any number of
counterparts each of which shall be deemed to be an original and which
collectively shall be deemed to constitute only one instrument.
8
<PAGE>
(e) The captions of this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
(f) This Agreement constitutes the entire agreement between
the parties hereto with respect to the matters described herein.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be duly executed and delivered by their duly authorized officers as of the date
first written above.
STEPHENS INC.
By: _________________________________
Name: Richard H. Blank, Jr.
Title: Senior Vice President
BANC OF AMERICA ADVISORS, INC.
By: __________________________________
Name: Edward D. Bedard
Title: Senior Vice President and
Chief Operating Officer
NATIONS FUNDS TRUST
By: __________________________________
Name: James E. Banks, Jr.
Title: Assistant Secretary
10
<PAGE>
SCHEDULE I
1. Nations High Yield Fund
2. Nations Kansas Intermediate Municipal Bond Fund
3. Nations MidCap Index Fund
Amended: [_______________]
I-1
<PAGE>
SCHEDULE A
For services rendered pursuant to this Agreement, the Trust will pay
Stephens and BAAI, in the aggregate, an administration fee, computed daily and
payable monthly, based on annual rate of each Fund's daily net assets as
follows:
1. Money Market Funds: [0.10%]
2. Fixed Income Funds: [0.22%]
3. International Funds: [0.22%]
4. Domestic Equity Funds: [0.23%]
It is understood and agreed among the parties that the aggregate
administration fee payable hereunder shall be divided by and between Stephens
and BAAI, as they may agree from time to time.
In addition to the asset-based fee set forth above, the Trust shall
reimburse Stephens, BAAI and any sub-administrator engaged pursuant to Paragraph
4 for certain reasonable out-of-pocket expenses incurred by them in connection
with the performance of their respective duties hereunder.
Reimbursable out-of-pocket expenses shall include the following:
reasonable costs associated with postage (including overnight services),
telephone, telecommunications (including facsimiles), duplicating, pricing
services, and forms and supplies.
A-1
Exhibit 99.H2
FORM OF
SUB-ADMINISTRATION AGREEMENT
This SUB-ADMINISTRATION AGREEMENT (the "Agreement") is made as of
[_________________] by and among THE BANK OF NEW YORK ("BNY"), BANC OF AMERICA
ADVISORS, INC. ("BAAI") and NATIONS FUNDS TRUST (the "Trust").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, BAAI serves as the Co-Administrator for the investment
portfolios of the Trust pursuant to a separate Co-Administration Agreement; and
WHEREAS, BAAI desires to retain BNY to render certain
sub-administrative services to the Trust and to BAAI, as Co-Administrator of the
Trust, and BNY is willing to render such services.
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed among the parties hereto as follows:
1. Appointment and Duties as Sub-Administrator.
(a) BAAI hereby appoints BNY to act as Sub-Administrator of the Trust
and to render sub-administrative services for each portfolio of the Trust listed
on Schedule I (individually, a "Fund" and collectively, the "Funds") and BNY
hereby accepts such appointment and agrees to render the services and duties set
forth in Schedule II as it may be amended from time to time, for the
compensation and on the terms herein provided. Each new investment portfolio
established in the future by the Trust or BAAI will become a "Fund" for all
purposes hereunder when BNY receives a revised Schedule I from BAAI or the Trust
that includes such new portfolio.
(b) Subject to the other provisions of this Section 1, in performing
all services under this Agreement, BNY shall (i) act in conformity with the
Trust's Agreement and Declaration of Trust and Bylaws (the "Bylaws"), the 1940
Act and the rules thereunder, including but not limited to Rules 31a-1 to 31a-3,
and other applicable laws and regulations, as the same may be amended from time
to time, and the Trust's Registration Statement, as such Registration Statement
may be amended from time to time; (ii) consult and coordinate with BAAI and the
Trust, as necessary and appropriate; and (iii) advise and report to BAAI and the
Trust, as necessary or appropriate, with respect to any compliance matters that
come to its attention. In performing all services under this Agreement BNY shall
meet the minimum quality of service standards set forth on Schedule III.
(c) The Trust has furnished BNY and BAAI with copies properly certified
or authenticated of each of the following: (i) the Trust's Agreement and
Declaration of Trust or
1
<PAGE>
other organizational document and all amendments thereto (the "Declaration");
(ii) the Trust's Bylaws; (iii) resolutions of the Trust's Board of Trustees or
other governing body (the "Board") authorizing the execution, delivery and
performance of this Agreement by the Trust; (iv) the Trust's Registration
Statement on Form N-1A (the "Registration Statement") under the Securities Act
of 1933, as amended, and under the 1940 Act [(FILE NOS. __________ AND
________)], as filed with the Securities and Exchange Commission (the "SEC")
relating to the Funds' shares (the "Shares"); (iv) the Funds' current
Prospectus(es); (v) the Funds' current Statement(s) of Additional Information;
and (vi) the pricing procedures applicable to the calculation of the Funds' net
asset values as approved by the Trust's Board (the "Pricing Procedures"). It is
solely the Trust's responsibility to furnish BNY from time to time with copies,
properly certified or authenticated, of all amendments of or supplements to the
foregoing, and BNY will not be held to have knowledge of any such amendments or
supplements until the same are actually received by BNY. Furthermore, the Trust
will provide BNY with any other documents that BNY and BAAI may reasonably
request and will notify BNY and BAAI as soon as possible of any matter
materially affecting either BNY's or BAAI's performance of its services under
this Agreement.
(d)(i) BNY undertakes to report on a regular basis to BAAI and the
Trust regarding: (A) the readiness of its computer systems, or those used by it
in the performance of its duties hereunder, properly to record, store, process,
calculate or present calendar dates falling on and after, and time spans
including, January 1, 2000 or February 29, 2000 (the "Subject Dates") as a
result of the occurrence, or use of data containing any such Subject Dates; (B)
the readiness of its computer systems or those used by it in the performance of
its duties hereunder, to calculate any information dependent on or relating to
dates on or after the Subject Dates; and (C) its ability to perform the
administration and fund accounting services set forth in Schedule II (the
"Services") in accordance with any applicable performance standards set forth in
Schedule III (the "Standards") with respect to the maintenance of records or
processing of data containing dates falling on or after the Subject Dates,
provided that, with respect to computers used but not owned by BNY and
third-party computer systems other than InvestOne, BNY's responsibility shall be
limited to seeking similar reports from such owners or third parties and
promptly forwarding such reports to BAAI. Without limiting the foregoing, BNY
undertakes to notify BAAI and the Trust, in writing, of any concerns believed by
BNY to be material regarding the events described in this paragraph, provided
that, with respect to computers owned by others and third-party computer systems
other than InvestOne, BNY's responsibility shall be limited to seeking similar
notice from such owners or third parties and promptly forwarding such
notifications to BAAI.
(ii) BAAI or the Trust shall have the right to terminate this Agreement
if there is a "material failure" by BNY to perform any of the Services in
accordance with the Standards due to a failure by computers owned or used by BNY
in performing its duties hereunder to properly process the occurrence of the
Subject Dates or data containing the Subject Dates. As used in this Section
1(d), the term "material failure" shall be limited to a failure to provide any
of the Services in accordance with the Standards, provided that no such failure
shall be deemed a "material failure" if such failure occurs at or about the time
other major financial institutions similar to BNY providing similar services in
a similar volume to investment companies similar to the Trust are experiencing
similar failures, and, provided further, that no failure by BNY shall be or be
deemed a "material failure" if BNY substantially provides the Services under a
2
<PAGE>
contingency plan, it being agreed that, to the extent that the parties mutually
agree, the time frames and deadlines set forth in Schedule III of this Agreement
and elsewhere shall not be considered in determining whether BNY is
substantially providing the Services in accordance with the Standards. BAAI and
the Trust agree to act reasonably and in good faith in considering any request
by BNY to extend time frames and deadlines.
(iii) In the event there is a "material failure" by BNY to provide the
Services and such "material failure" is not cured by BNY within 10 days after
such material failure arises, BAAI or the Trust shall have the right to
terminate this Agreement upon the giving of 60 days written notice to BNY. BNY
shall, notwithstanding any other provision contained in this Agreement, have no
liability to the Trust or BAAI under this Agreement if such "material failure"
initially arose out of or was caused by a failure of a computer used but not
owned by BNY or owned by a third party (other than InvestOne) to properly
process the Subject Dates or data containing the Subject Dates, and BNY shall be
entitled to any compensation and reimbursement for out-of-pocket expense as may
then be due and payable, as well as agreed-upon out-of-pocket expenses incurred
in connection with such a termination. If such a termination is the result of a
"material failure" initially arising out of, or caused by a failure of computers
owned by BNY or a failure by InvestOne, then, first, BNY's liability hereunder
for such failure shall, notwithstanding any other provision contained in this
Agreement to the contrary, be limited to the lesser of (x) the fees paid to a
successor service provider during the six months next succeeding the date of
termination to the extent such fees exceed the fees that would have been paid to
BNY hereunder, and (y) $1,000,000; and second, BNY shall not be entitled to
out-of-pocket expenses incurred in connection with such a termination.
(iv) In the event of conflict between this Section 1(d) and any other
provision contained in this Agreement, this Section 1(d) shall control.
(v) BAAI and the Trust each agree to hold all of the provisions of this
Section 1(d) in strict confidence and not to disclose, nor permit disclosure of,
such provisions.
(e) Subject to the direction and approval of the Trust's Board and
appropriate officers and the provisions of this Agreement, BNY shall provide to
each Fund the administrative services set forth on Schedule II attached hereto.
In performing such services hereunder, BNY shall provide, at its expense, office
space, facilities, equipment and personnel. BNY shall not provide any services
relating to the management, investment advisory or sub-advisory functions of any
Fund, distribution of shares of any Fund, maintenance of any Fund's financial
records (except as otherwise agreed by the parties) or any services normally
performed by the Funds' counsel or independent accountants. Upon receipt of the
Trust's prior written consent, BNY may delegate any of its duties and
obligations hereunder to any delegee or agent whenever and on such terms and
conditions as it deems necessary or appropriate. Unless expressly agreed in
writing, BNY shall not be relieved of liability or responsibility for the
performance of any duties or obligations delegated to a delegee or agent,
provided that BNY shall have no liability for duties or obligations that are
delegated to a delegee or agent at the instruction of the Trust or BAAI. The
Trust and BAAI shall cause their respective officers, and shall use reasonable
efforts to cause the Trust's or BAAI's legal counsel, independent accountants,
and transfer agent to cooperate with BNY and to provide BNY, upon BNY's
reasonable written request, such
3
<PAGE>
information, documents and advice relating to such Fund as is within the
possession or knowledge of such persons, in order to enable BNY to perform its
duties hereunder. Such cooperation or provision of information, documents or
advice shall be at no cost to BNY, provided BNY's request is reasonable and BAAI
shall have been notified of the request. In connection with its duties
hereunder, BNY shall be entitled to reasonably rely upon any documents relating
to a Fund provided to BNY by any of the aforementioned persons. BNY may apply to
the Trust or BAAI for written instructions with respect to any matter arising in
connection with BNY's performance hereunder. If, after a reasonable period of
time, BNY receives no response to any such application, BNY may then notify the
Trust or BAAI of reasonable action that BNY shall take if written instructions
are not received within a stated period of time after such notice, and then BNY
shall not be liable for taking such reasonable action as if written instructions
had been provided. BNY is entitled to reasonably rely and act in accordance with
written instructions believed to have been given by authorized persons and shall
incur no costs for such reasonable reliance. BNY shall have no duties or
responsibilities whatsoever except such duties and responsibilities as are
specifically set forth in this Agreement and Schedule II hereto, and no covenant
or obligation shall be implied against BNY in connection with this Agreement.
(f) The Trust and BAAI, for itself and not for the others, hereby
represents and warrants to BNY, which representations and warranties shall be
deemed to be continuing, that: (i) it is duly organized and existing under the
laws of the jurisdiction of its organization, with full power to carry on its
business as now conducted, to enter into this Agreement and to perform its
obligations hereunder; (ii) this Agreement has been duly authorized, executed
and delivered by it in accordance with all requisite action and constitutes a
valid and legally binding obligation, enforceable in accordance with its terms;
(iii) it is conducting its business substantially in compliance with all
applicable laws and regulations, both state and federal, and has obtained all
regulatory licenses, approvals and consents necessary to carry on its business
as now conducted; (iv) there is no statute, regulation, rule, order or judgment
binding on it and no provision of its Declaration or Bylaws, nor of any
mortgage, indenture, credit agreement or other contract binding on it or
affecting its property which would prohibit its execution or performance of this
Agreement; and (v) the Trust and BAAI will use reasonable efforts to promptly
notify BNY of any errors or omissions contained in any reports, calculations,
valuations and other items of information, provided that any failure by the
Trust or BAAI to detect any such errors or omissions shall not relieve BNY of
any resulting liability therefrom. To the extent that BAAI has actual knowledge
of any such error or omission and fails to use reasonable efforts to promptly
notify BNY, BNY shall be relieved of any liability that BNY may have mitigated
had BAAI provided notice of such error or omission to BNY.
(g) BNY hereby represents and warrants to the Trust and BAAI, which
representations and warranties shall be deemed to be continuing, that: (i) it is
duly organized and existing under the laws of the jurisdiction of its
organization, with full power to carry on its business as now conducted, to
enter into this Agreement and to perform its obligations hereunder; (ii) this
Agreement has been duly authorized, executed and delivered by it in accordance
with all requisite action and constitutes a valid and legally binding
obligation, enforceable in accordance with its terms; and (iii) it is conducting
its business substantially in compliance with all applicable laws and
regulations, both state and federal, and has obtained all
4
<PAGE>
regulatory licenses, approvals and consents necessary to carry on its business
as now conducted; there is no statute, regulation, rule, order or judgment
binding on it and no provision of its Declaration or Bylaws, nor of any
mortgage, indenture, credit agreement or other contract binding on it or
affecting its property which would prohibit its execution or performance of this
Agreement.
2. Compensation. For the services to be rendered, the facilities to be
furnished and the compensation and other expenses to be borne by BNY, as
provided for in this Agreement, BNY shall be entitled to receive a monthly fee
from BAAI and reimbursement for out-of-pocket expenses as set forth in Schedule
IV to this Agreement. It is understood that BAAI shall be responsible for BNY's
monthly fee for its services hereunder, and BNY agrees that it shall have no
claim against the Trust or the Funds with respect to compensation under this
Agreement.
3. Recordkeeping. BNY shall, as agent for the Trust, and subject to the
direction and approval of the Trust's Board and the provisions of this
Agreement, maintain and keep current the books, accounts and other documents, if
any, pursuant to the services and duties provided by BNY as set forth in
Schedule II of this Agreement, and preserve any such books, accounts and other
documents in accordance with the applicable provisions of Rule 31a-2 of the 1940
Act. Such books, accounts and other documents shall be made available upon
reasonable request for inspection by officers, employees and auditors of the
Trust and BAAI during BNY's normal business hours. All records maintained and
preserved by BNY pursuant to this Agreement which the Trust is required to
maintain and preserve in accordance with Rule 31a-2 of the 1940 Act shall be and
remain the property of the Trust and shall be surrendered to the Trust promptly
upon request in the form in which such records have been maintained and
preserved. Upon reasonable request of the Trust, BNY shall provide in data files
or hard copy, whichever the Trust shall reasonably elect, any records included
in any such delivery which are maintained by BNY on a computer disc, or are
similarly maintained, and the Trust shall reimburse BNY for its expenses of
providing such hard copy.
4. Standard of Care; Indemnification.
(a) BNY shall at all times act in good faith and agrees to use its best
efforts to fulfill its obligations under this Agreement, but assumes no
responsibility for loss or damage to the Trust unless such loss or damages is
caused by BNY's own negligence, bad faith or willful misconduct or that of its
directors, officers or employees. BNY shall be responsible hereunder for all
direct damages resulting from its own negligence, bad faith or willful
misconduct, provided however that it shall not be responsible for lost profits
or lost business arising under or in connection with this Agreement. It is
understood and agreed that for purposes of this Section 4(a), "direct damages"
shall include, but shall not be limited to, all legal costs, penalties,
reimbursement for excess distribution and redemption payments, repurchasing
costs for servicing agents and reimbursement to the Funds for net asset value
breaks (as calculated under the Pricing Procedures).
(b) The Trust, on behalf of each Fund, will indemnify BNY against and
hold it harmless from any and all losses, claims, damages, liabilities or
expenses (including reasonable counsel fees and expenses of a defense against
any claim, demand, action or suit), relating to the
5
<PAGE>
particular Fund and arising from any one or more of the following: (i) errors in
records or instructions, explanations, information, specifications or
documentation of any kind, as the case may be, supplied to BNY by any person
described in Section 1 hereof or by any third party described in Section 5; (ii)
action or inaction taken or omitted to be taken by BNY pursuant to written or
oral instructions described in this Agreement (or otherwise without bad faith,
negligence or willful misconduct); (iii) any action taken or omitted to be taken
by BNY in good faith in accordance with the advice or opinion of counsel for a
Fund, the Trust, BAAI (obtained in accordance with the procedures set forth in
this Agreement) or its own counsel; (iv) any improper use by the Fund, the
Trust, BAAI or their respective agents, of any valuations or computations
supplied by BNY pursuant to this Agreement; (v) the method of valuation of the
securities and the method of computing a Fund's net asset value or any other
amount computed by BNY hereunder, provided BNY has followed the Pricing
Procedures; and (vi) any valuation of securities, net asset value or other
amount provided by a Fund or BAAI. BNY will not confess any claim or settle or
make any compromise in any instance in which the Trust will be asked to provide
indemnification, except with the Trust's prior written consent. Any amounts
payable by the Trust under this Section 4(b) shall be satisfied only against the
assets of the Fund involved in the claim, demand, action or suit and not against
the assets of any other investment portfolio of the Trust.
5. Fund Accounting Services.
(a) BNY, in performing the services required of it under the terms of
this Agreement, shall be entitled to rely fully on the accuracy and validity of
any and all instructions, explanations, information, specifications and
documentation furnished to it by a Fund and shall have no duty or obligation to
review the accuracy, validity or propriety of such instructions, explanations,
information, specifications or documentation, including, without limitation,
evaluations of securities; the amounts or formula for calculating the amounts
and times of accrual of Fund's liabilities and expenses; the amounts receivable
and the amounts payable on the sale or purchase of securities; and amounts
receivable or amounts payable for the sale or redemption of Fund shares effected
by or on behalf of the Fund. In the event BNY's computations hereunder rely, in
whole or in part, upon information, including, without limitation, bid, offer or
market values of securities or other assets, or accruals of interest or earnings
thereon, from a pricing or similar service utilized, or subscribed to, by BNY
which BNY in its judgment deems reliable, or any other third party pricing
source designated by the Trust, BNY shall not be responsible for, under any duty
to inquire into, or deemed to make any assurances with respect to, the accuracy
or completeness of such information. BNY shall not be required to inquire into
any valuation of securities or other assets by the Fund or any third party
described in this Section, even though BNY in performing services similar to the
services provided pursuant to this Agreement for others may receive different
valuations of the same or different securities of the same issuers.
(b) Subject to the provisions of this Agreement and the direction and
approval of the Trust's Board, BNY shall perform the computations described in
Schedule II at such times and dates and in the manner specified or described in
the then-current Prospectus(es) of a Fund. To the extent valuation of securities
or a computation specified or described in a Fund's Pricing Procedures or
then-current effective Prospectus is at any time inconsistent with any
applicable laws or regulations, the Trust or BAAI shall immediately so notify
BNY in writing and thereafter
6
<PAGE>
shall furnish BNY at all appropriate times with the values of such securities
and such Fund's net asset value or other amounts otherwise to be calculated by
BNY, or, subject to the prior approval of BNY, instruct BNY in writing to value
securities and make such computations in a manner which the Trust or BAAI then
represents in writing to be consistent with all applicable laws and regulations.
The Trust or BAAI may also from time to time, subject to the prior approval of
BNY, instruct BNY in writing to make computations other than as specified in
this Section of this Agreement. By giving such instruction, the Trust or BAAI
shall be deemed to have represented that such instruction is consistent with all
applicable laws and regulations and the then-current effective Prospectus of the
particular Fund. The Trust or BAAI shall have sole responsibility for
determining the method of valuation of securities and the method of
computations, and all computations, valuation of securities and the method of
computing each Fund's net asset value shall be subject to approval by the Trust
and BAAI. BNY shall not be liable for relying on any price provided by any
pricing service believed by BNY to be reliable, and the Trust or BAAI shall
furnish values when the same are not available from a pricing service utilized
by BNY, with such furnishing to constitute an instruction to BNY to rely on the
provided values.
(c) BNY shall be responsible for determining and properly reflecting in
the computations made by it made by it under this Agreement: (i) the taxable
nature of any distribution or amount received or deemed received by, or payable
to, a Fund; (ii) the taxable nature or effect on a Fund or its shareholders of
any corporate actions, class actions, tax reclaims, tax refunds, or similar
events; (iii) the taxable nature or taxable amount of any distribution or
dividend paid, payable or deemed paid, by a Fund to its shareholders; (iv) the
effect under any federal, state, or foreign income tax laws of a Fund making or
not making any distribution or dividend payment, or any election with respect
thereto; or (v) any tax accounting; provided, however, that if BNY is not
certain of the taxable nature, amount or effect of any such item, it may seek
instructions regarding the proper treatment of such item from the Trust or BAAI
in accordance with the procedures set forth in Section 1(e), above, and shall
have no liability for acting in reliance on such instructions.
6. Termination of Agreement.
(a) This Agreement shall become effective as of the date first set
forth above and shall remain in full force and effect unless terminated pursuant
to the provisions of Section 6(b).
(b) This Agreement may be terminated at any time without payment of any
penalty, upon 60 days' written notice to BNY by BAAI or by vote of the Board of
the Trust; or upon 180 days' written notice to BAAI and the Trust by BNY. Upon
any such termination, BNY will cooperate with and assist the Trust, BAAI, their
agents and any successor administrator(s) or sub-administrator(s) in the
substitution/conversion process. In connection with any termination of this
Agreement, unless BNY is in breach of this Agreement, the Funds and BAAI agree
to pay BNY any compensation and reimbursement for out-of-pocket expenses as may
then be due and payable, as well as agreed-upon out-of-pocket expenses incurred
in connection with a termination. If BNY is in breach of this Agreement, the
Funds and BAAI may offset any compensation or reimbursement amounts owed to BNY
by the amount of damages, costs and expenses incurred as a result of BNY's
breach, including costs, expenses and reasonable
7
<PAGE>
incremental fees for a period not to exceed one year incurred in connection with
a conversion by the Trust and BAAI to a successor service provider. In the event
of a dispute as to the amount of such damages, the Funds and BAAI agree to
escrow the set-off amount.
(c) Sections 4 and 8 shall survive this Agreement's termination.
7. Amendments. Except as expressly provided in the first paragraph of
Section 1, no provision of this Agreement may be amended or modified orally, but
only by an instrument in writing signed by the party against which enforcement
of the amendment or modification is sought.
8. Confidentiality. All books, records, information and data pertaining
to the business of the Trust, or its prior, present or potential shareholders
that are exchanged or received in connection with the performance of BNY's
duties under this Agreement shall remain confidential and shall not be disclosed
to any other person, except as specifically authorized by the Trust or as may be
required by law, and shall not be used for any purpose other than performance of
its responsibilities and duties hereunder, and except that BNY retains the right
to disclose matters subject to confidentiality to its examiners, regulators,
internal or external auditors, its accountants, its internal and external
counsel, and to any other entity whenever it is advised by its internal or
external counsel that it is reasonably likely that BNY would be liable for a
failure to do so. BNY will endeavor to provide written notice to the Trust and
BAAI at least five business days prior to any disclosures pursuant to this
Section 8, but, provided it shall have provided as much notice as is reasonably
practicable under the circumstances, BNY shall have no liability for any failure
to do so.
9. Service to Other Companies. The Trust and BAAI acknowledge that BNY
now provides, will continue to provide and may in the future provide
administrative or other services to other investment companies or series of
investment companies, and the Trust and BAAI have no objection to BNY so doing.
The Trust and BAAI further acknowledge that the persons employed by BNY to
assist in the performance of BNY's duties under this Agreement may not devote
their full time to such service and nothing contained in this Agreement shall be
deemed to limit or restrict the right of BNY or any affiliate of BNY to engage
in and devote time and attention to other businesses or to render services of
whatever kind or nature.
10. Conversion Schedule. If the Trust and BAAI, in the exercise of
their reasonable judgment, cannot meet the conversion schedule set forth in
Schedule VI as a result of BNY's inability to provide, or to confirm that it is
capable of providing, the services described in Schedule II or to meet the
quality of service standards set forth in Schedule III with respect to one or
more Funds in accordance with the conversion schedule attached as Schedule VI,
then BNY shall be obligated to pay any resulting incremental costs incurred by
the Trust or BAAI, including any incremental fees payable to First Data
Investors Services Group by the Trust or BAAI.
11. Miscellaneous.
(a) This Agreement shall be construed in accordance with the laws of
the State of New York, without regard to conflict of laws principles thereof.
Each Fund, the Trust and BAAI
8
<PAGE>
hereby consent to the jurisdiction of a state or federal court situated in New
York City, New York in connection with any dispute arising hereunder. To the
extent that in any such jurisdiction any of the aforementioned persons may now
or hereafter be entitled to claim, for itself or its assets, immunity from suit,
execution, attachment (before or after judgment) or other legal process, each
irrevocably agrees not to claim, and it hereby waives, such immunity.
(b) In case any provision in or obligation under this Agreement shall
be invalid, illegal or unenforceable in any jurisdiction, the validity, legality
and enforceability of the remaining provisions or obligations shall not in any
way be affected or impaired thereby, and if any provision is inapplicable to any
person or circumstances, it shall nevertheless remain applicable to all other
persons and circumstances.
(c) Each and every right granted to BNY, the Trust or BAAI hereunder or
under any other document delivered hereunder or in connection herewith, or
allowed it by law or equity, shall be cumulative and may be exercised from time
to time. No failure on the part of BNY, the Trust or BAAI to exercise, and no
delay in exercising, any right will operate as a waiver thereof, nor will any
single or partial exercise by BNY, the Trust or BAAI of any right preclude any
other or future exercise thereof or the exercise of any other right.
(d) BNY shall not be responsible for delays or errors that occur by
reason of circumstances beyond its reasonable control in the performance of its
duties under this Agreement, provided that reasonable back-up and disaster
recovery systems are in place, including, without limitation, labor
difficulties, mechanical breakdowns, computer breakdowns or malfunctions
(hardware or software), flood or catastrophe, acts of God, failures of
transportation, communication or power supply, or other similar circumstances.
Nor shall BNY be responsible for delays or failures to supply the information or
services specified in this Agreement where such delays or failures are caused by
the failure of any person(s) other than BNY to supply any instructions,
explanations, information, specifications or documentation deemed necessary by
BNY in the performance of its duties under this Agreement.
(e) Any notice or other instrument authorized or required by this
Agreement to be given in writing to the Trust, BNY and/or BAAI shall be
sufficiently given if addressed to that party and received by it at its office
set forth below or at such other place as it may from time to time designate in
writing.
To the Trust:
Nations Funds Trust
111 Center Street
Little Rock, Arkansas 72201
Attention: Richard H. Blank, Jr.
To BAAI:
Banc of America Advisors, Inc.
One Bank of America Plaza
9
<PAGE>
101 South Tryon Street, NC1-002-33-31
Charlotte, NC 28255-0001
Attention: Edward D. Bedard
To BNY:
The Bank of New York
90 Washington Street
22nd Floor
New York, NY 10286
Attention: Stephen E. Grunston
(f) This Agreement shall extend to and shall be binding upon the
parties hereto and their respective successors and assigns; provided, however,
that this Agreement may not be assigned by BNY, nor may BNY delegate
responsibility for the performance of any of its duties hereunder, without the
written consent of the other parties hereto.
(g) This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original and which collectively shall be
deemed to constitute only one instrument.
(h) The captions of this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
(i) This Agreement constitutes the entire agreement between the parties
hereto with respect to the provision by BNY of sub-administrative services and
the receipt of fees therefor, and supersedes all prior arrangements or
understandings, written or oral, with respect to the provision by BNY of such
services and the receipt of fees therefor.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be duly executed and delivered by their duly authorized officers as of the date
first written above.
THE BANK OF NEW YORK
By: _________________________________
Name: Stephen E. Grunston
Title: Vice President
BANC OF AMERICA ADVISORS, INC.
By: _________________________________
Name: Edward D. Bedard
Title: Senior Vice President and
Chief Operating Officer
NATIONS FUNDS TRUST
By: _________________________________
Name: James E. Banks, Jr.
Title: Assistant Secretary
11
<PAGE>
SCHEDULE I
1. Nations High Yield Fund
2. Nations Kansas Intermediate Municipal Bond Fund
3. Nations MidCap Index Fund
Approved: [______________]
II-1
<PAGE>
SCHEDULE II
FUND ADMINISTRATION SERVICES
BNY shall perform the following sub-administrative services, in
addition to any other services agreed to from time to time:
o Monitor and document compliance by the Funds with their policies and
restrictions as delineated in their Prospectuses and Statements of
Additional Information, including any supplements or amendments thereto,
and with the rules and regulations under the 1940 Act utilizing Charles
River Development's compliance monitoring system or by such other means as
the parties may agree. BAAI shall be responsible for communicating such
policies and restrictions, including any changes thereto, to BNY by such
means as the parties agree.
o Provide income attribution summary schedules necessary for year-end tax
reporting, including the attached examples. Provide a gross up for foreign
taxes on a per share basis and the redesignation of income and capital
gains on a per share basis.
o Prepare federal, state, excise and local income tax returns for the Funds
and file such returns upon the approval of the Funds' independent
accountants; monitor, report on and prepare periodic worksheet and tax
provision packages with respect to Sub-Chapter M qualifications; prepare
and file all Form 1099s with respect to the Funds' Trustees; monitor
compliance with Section 4982 of the Internal Revenue Code; calculate and
maintain records pertaining to original issue discount and premium
amortization as required; identify wash sales and all other book/tax
differences, and report results to the Funds' independent accountants and
Funds management; and such other duties relating to federal and/or state
tax compliance as the parties may agree. BNY shall be responsible for
providing all pertinent tax information to the Funds' independent
accountants.
o Prepare Return of Capital Statement of Position 93-2 adjustments.
o Support BAAI in its preparation of the schedules and provide BAAI unaudited
quarterly and semi-annual and audited annual financial statements and
schedules of Fund investments by providing, without limitation, each Funds'
schedule of investments and general ledger in electronic format and/or hard
copy, as required, and such other information as may be necessary to
complete such financial reports.
o Prepare statistical reports for outside information services (referenced in
Schedule V), and such other information services as the parties may agree,
including the ICI expense survey.
o Prepare calculations for capital gains pursuant to IRS rules in conjunction
with BAAI and the Funds' independent accountants.
o Attend Fund shareholder and Board of Trustees meetings as requested by
BAAI, including making such presentations as are appropriate, and, with
respect to the Fund administration
II-2
<PAGE>
services described herein, provide such periodic and special reports to the
Trust and BAAI as the Trust and BAAI shall reasonably request.
FUND ACCOUNTING SERVICES
BNY shall provide all accounting and recordkeeping services necessary
and appropriate for the business of the Funds, including but not limited to
those set forth below.
Required Records; Ledgers and Journals
--------------------------------------
BNY shall keep current the following accounts and records relating to
the business of the Funds, in such form as is required by the 1940 Act and the
rules thereunder, and generally accepted accounting principles, to support all
filings under applicable federal and state tax laws and regulations and as may
be mutually agreed to among the Trust, BAAI and BNY, and shall make available to
BAAI and/or the Trust upon request:
1. Cash Receipts Journal
2. Cash Disbursements Journal
3. Dividends Paid and Payable Schedule (book vs. tax basis)
4. Purchase and Sales Journals - Portfolio Securities
5. Realized/Unrealized Gain (Loss) Reports
6. Subscription and Redemption Journals
7. Security Ledgers - Transaction Report and Tax Lot Holdings Report
8. Broker Ledger - Commission Report
9. Daily Expense Accruals
10. Daily Interest Accruals
11. Daily Trial Balance
12. Portfolio Interest Receivable and Income Journal
13. Portfolio Dividend Receivable and Income Register
14. Listing of Portfolio Holdings - showing cost, market value and
percentage of portfolio comprised of each security
15. Aged Receivables (dividends, interest, tax reclaiming)
16. Portfolio Turnover Rate
17. Cash reconciliations
18. Position reconciliations
BNY will be responsible for maintaining, in accordance with Section 31
and the rules thereunder of the 1940 Act, all books and records so required and
generated in the course of performing their duties under this agreement.
Further, at a minimum, BNY shall maintain on-site the above referenced reports
as of each month end for the most recent fiscal year-ended and the current
fiscal year.
II-3
<PAGE>
Daily Accounting Services
BNY shall perform the following services on each Business Day:
1. Calculate Net Asset Value (NAV), and Public Offering Price (POP) Per Share
Pursuant to SEC formulas:
o Update the valuation of security positions held by each Fund's
portfolio in accordance with the Fund's Pricing Procedures and any
other appropriate procedures established by the Board and BAAI as BAAI
shall provide BNY in writing
o When instructed by BAAI, enter manual prices supplied by broker and
link to pricing procedures
o Calculate each Fund's NAV/POP in accordance with the applicable Pricing
Procedures approved by the Trust's Board of Trustees and prepare NAV
proof sheet. Review components of change in NAV for reasonableness
based on the tolerance levels as BAAI shall direct BNY in writing
o Review variance reporting for price changes in individual securities
using variance levels established by Fund and report to Fund portfolio
managers and to BAAI
o Review for ex-dividend items indicated by pricing sources; trace to
general ledger for agreement
o Communicate required pricing and yield information (NAV/POP), as
appropriate, to BAAI, the Funds' Transfer Agent and Sub-Transfer Agent
and, electronically, to NASDAQ and to such other third parties as
designated by the Funds with respect to its various distribution
channels. In addition, provide Fund share activity to BAAI.
2. Dividend Rates/Yields/Dollar Weighted Average Maturity:
o Calculate, subject to the approval of BAAI, net investment income
available for distribution daily as appropriate
o Calculate daily dividend rate, and 1, 7, 30-day yields/SEC yields
o Calculate dollar weighted average maturity
3. Determine and Report Cash Availability:
o Receive daily cash and transaction statements from the Funds' Custodian
o Complete daily bank cash reconciliations (including documentation of
any reconciling items) and notify the Funds' Custodian
o Report investable cash to BAAI and Fund sub-advisers
4. Daily Expense Accruals:
o Accrue individual expenses on a daily basis based on Instructions
provided by BAAI, except for those instances where such an adjustment
would cause a full penny break in NAV, in which case such adjustment
will be included in the calculation of NAV on the day received
o If applicable, accrue daily amortization of organization expense as
instructed by BAAI
II-4
<PAGE>
o If applicable, accrue daily Rule 12b-1 Plan expenses
o Adjust expense accruals as instructed by BAAI and provide reports as
requested by BAAI
5. Verify and Record All Daily Income Accruals for Debt Issues:
o Track income and provide year end tax schedules
o Review and verify all interest and amortization reports
o Periodic tie-out of receivables
o Ensure security masters denote proper interest and amortization methods
as per the fund set up sheets as instructed by BAAI
6. Monitor Securities:
o Review each funds portfolio holding and current days security trades
for dividend activity
o Interface with Funds' Custodian for timely collection and postings of
corporate actions, dividends and interest pre-payments
7. Enter All Security Trades:
o Review verification of trade and interest calculations
o Verify settlement through custodian statements
o Maintain security ledger transaction reporting
o Maintain tax lot holdings
o Determine realized gains or losses on security trades
o Provide broker commission information
8. Enter All Fund Share Transactions:
o Periodically reconcile dividend payable amounts with the Funds'
Transfer Agent
o Process activity identified on transfer agent reports
o Verify settlement through custodian statements
o Reconcile to transfer agency report balances
o Process and track capital stock gain/loss activity
9. Prepare Daily Trial Balance:
o Post manual entries to general ledger
o Post custodian bank activity
o Require automated settled transactions between custody and activity
records (prepare, clear and post)
o Post shareholder and security transactions
o Post and verify income and expense accruals and resolve differences
o Prepare general ledger
o Post corporate action activity
II-5
<PAGE>
10. Review and Reconcile Custodian Statements:
o Verify all posted interest, dividends, expenses, and shareholder and
security payments/receipts, etc. when requested
o Post all cash settlement activity to trial balance
o Reconcile to ending cash balance accounts
o Report to BAAI the status of past due items and failed trades with the
custodian
o Reconcile cash exception Income items, tax reclaims and past due income
items with custody area
11. Preparation of Accounting Reports:
o Price Variance Report
o Trial Balance
o Portfolio Valuation
o NAV Calculation Report
o Cash Availability
o Change in NAV
o Non-standard entries
o Stale Price Report
o Other such reports as may be reasonably be requested by BAAI
Monthly/Quarterly Services
--------------------------
BNY shall provide the following services on a monthly or quarterly
basis, within such timeframe as may be mutually agreed upon by BNY, the Trust
and BAAI:
1. Submission of Monthly Accounting Reports as mutually agreed upon
2. Reconcile Asset Listing to Custodian Asset Listing
3. Provide Monthly Analysis and Reconciliation of Trial Balance Accounts
4. Prepare Documentation Supporting the Preparation of:
o SEC yield reporting
o Income by state reporting
o Standard Industry Code Valuation Report (please provide BAAI's industry
code classifications/is there a standard for all funds)
o Alternative Minimum Tax Income segregation schedule
II-6
<PAGE>
5. Provide Upon Request Broker Commission and Net Trade Reports
Annual (and Semi-Annual) Accounting Services
--------------------------------------------
BNY shall provide the following services on an annual and semi-annual
basis:
1. Supply auditors InvestOne reports supporting securities and shareholder
transactions, income and expense accruals, etc. during the year in
accordance with standard audit assistance requirements
2. Provide BAAI with information to assist BAAI in the preparation of NSAR
filings
Other Core Services
-------------------
BNY shall provide the following services:
o Accrete discounts and amortize premiums to put and call events as
directed by BAAI and in a manner acceptable under generally accepted
accounting principles
o Process principal repayments on mortgage backed securities
o Update variable securities with current rates
o Process corporate action events through a primary vender feed, and
monitor results via Reuters, Bloomberg, or other available sources as
the parties may agree
o Perform automated portfolio pricing with a second vendor as requested
by BAAI
o Produce documents and respond to inquiries during account and SEC
examinations
Money Market Funds: Prepare daily mark to market reports and analysis
in compliance with Rule 2a-7
including:
o Calculating the daily portfolio weighted average maturity
o Report portfolio diversification based on trade/security information
provided by BAAI by:
Country, State, Tier, Liquidity, Asset Backed Securities,
Industry, Letter of Credit
o Listing percentage of portfolio maturing in specified intervals (I.E.,
number of days)
o Providing issuer and guarantor diversification exception reporting
International Funds: BNY shall provide the following services:
o Report in base and local currency
II-7
<PAGE>
o Processing of tax liability on foreign income subject to approval of
BAAI
o Daily variance analysis performed on FX rates for security position
held
o Produce automated bifurcation reporting in compliance with IRC Section
988
o Mark to market security receivables and payables on a daily basis
o Determine portfolio exposure by country and currency
In addition to the above, BNY will provide additional support as agreed
upon from time to time (i.e., financial statement production).
II-8
<PAGE>
SCHEDULE III
SERVICE LEVEL PERFORMANCE STANDARDS
<TABLE>
<CAPTION>
- ------------------------------------------------------------ ---------------------------------------------------------------
SERVICE STANDARD
- ------------------------------------------------------------ ---------------------------------------------------------------
<S> <C> <C>
1. Daily Cash Availability |_| 100% accuracy and delivery by 9:00 a.m. EST for
Money Market Funds and 9:30 a.m. EST for all
others
- ------------------------------------------------------------ ---------------------------------------------------------------
2. Calculation of daily NAVs |_| 100% accuracy by 5:00 p.m. EST including pricing,
expense accruals, cash activity, manual entries,
S/H activity. Delivery by 5:45 p.m. EST
- ------------------------------------------------------------ ---------------------------------------------------------------
3. Review of daily NAVs |_| 100% review by 5:30 p.m. EST
|_| Review of NAV components for reasonableness
including analysis of the change in the NAV
and the change in mill rates.
|_| Review of price variance report
|_| Review of manual proof
- ------------------------------------------------------------ ---------------------------------------------------------------
4. NASDAQ Reporting |_| 100% accuracy and communication by 5:45 p.m. EST
- ------------------------------------------------------------ ---------------------------------------------------------------
5. Daily Pricing and Rate Report (DPRR) |_| 100% accuracy in nightly transmission of DPRRs
|_| Money Market Funds-5:30 p.m. EST
|_| All other funds- 6:00 p.m. EST
- ------------------------------------------------------------ ---------------------------------------------------------------
6. FundStation Report (SubM) |_| 100% accuracy and nightly transmission by 7:00 p.m.
EST
- ------------------------------------------------------------ ---------------------------------------------------------------
7. Processing of trade tickets
|_| 100% accuracy and processed by T+1 if
received by the following cut-off times:
|_| All Funds (except International) - 10:00 am (T+1)
|_| International - 12:00 p.m. (T+1)
|_| Same day settlements - 1:30 p.m.
- ------------------------------------------------------------ ---------------------------------------------------------------
8. Problem Resolution (general) |_| NAV impact analysis within 1 day
|_| Clear and timely communication of 100%
- ------------------------------------------------------------ ---------------------------------------------------------------
</TABLE>
III-1
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------ ---------------------------------------------------------------
SERVICE STANDARD
- ------------------------------------------------------------ ---------------------------------------------------------------
<S> <C> <C>
of issues
|_| Ongoing Tracking
- ------------------------------------------------------------ ---------------------------------------------------------------
9. Cash reconciliations |_| Performed daily and sent daily to BAAI (Money
Market Funds) and sent weekly to BAAI(all other funds)
|_| Issues communicated to BAAI same day
|_| Outstanding items addressed within 1 business day
- ------------------------------------------------------------ ---------------------------------------------------------------
10. Position Reconciliations |_| Performed daily and sent weekly to BAAI
|_| Issues communicated to BAAI same day
|_| Open issues addressed within 2 business days
- ------------------------------------------------------------ ---------------------------------------------------------------
11. Tax reporting
|_| Federal, state, tax returns |_| Tax provision package prepared within time
parameters as set by BAAI/Independent tax
|_| Tax provision packages including personnel (PWC)
Sub-M and excise tax amounts/
distributions
|_| Estimates of tax requirements prepared as required
|_| Identification of all book/tax by BAAI for proper tax planning
differences
|_| Capital gain estimate preparations
- ------------------------------------------------------------ ---------------------------------------------------------------
12. Statistical Reports |_| Filed within the time parameters as set forth by
each statistical service
- ------------------------------------------------------------ ---------------------------------------------------------------
13. Expense accruals/payments |_| Payments made on the business day written
instructions from an authorized signator received
|_| Expense accruals made with 100% accuracy based upon
written instructions from BAAI
- ------------------------------------------------------------ ---------------------------------------------------------------
14. Management Reports |_| Provided to BAAI within 10 business days of month end
- ------------------------------------------------------------ ---------------------------------------------------------------
15. Year end tax reports |_| Provided to BAAI within the time frame agreed to
- ------------------------------------------------------------ ---------------------------------------------------------------
</TABLE>
III-2
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------ ---------------------------------------------------------------
SERVICE STANDARD
- ------------------------------------------------------------ ---------------------------------------------------------------
<S> <C> <C>
16. Annual/Semi-Annual Reports |_| Provide Trial Balance within 5 business days after
annual/semi-annual period
|_| Provide additional financial statement support as
agreed to
- ------------------------------------------------------------ ---------------------------------------------------------------
17. Daily Reports |_| To be provided on the following day
|_| Provide detailed portfolio valuation
|_| Trial Balance
- ------------------------------------------------------------ ---------------------------------------------------------------
18. Daily Cash Sweep |_| 100% accuracy and communication by 2:00 p.m. EST
|_| AIM
|_| Nuveen
- ------------------------------------------------------------ ---------------------------------------------------------------
19. Post Dividends / Corporate Actions |_| 100% accuracy and posted on effective date
- ------------------------------------------------------------ ---------------------------------------------------------------
20. Monthly Reconciliations |_| Complete reconciliations within 10 business days
- ------------------------------------------------------------ ---------------------------------------------------------------
21. Reporting to Sub-Advisors |_| Provide nightly and other periodic reporting to
Nations Funds Sub-Advisors
- ------------------------------------------------------------ ---------------------------------------------------------------
22. Compliance |_| Provide compliance reports as requested by BAAI
- ------------------------------------------------------------ ---------------------------------------------------------------
</TABLE>
III-3
<PAGE>
SCHEDULE IV
(ATTACHED)
IV-1
<PAGE>
SCHEDULE V
All Database Companies Quarterly List
---------------------- --------------
AMG Data Services Lipper
Barron's Morningstar
Bloomberg CDA Wiesenberger
CDA Wiesenberger Investment Company Institute
Commerce Clearing House (CCH) S&P Micropal
Forbes Institute for Economic Research
Institute for Economic Research Value Line
Interactive Data Services Media General Financial Services
Investment Company Institute LCG Associates
LCG Associates Closed End Fund Digest (Closed
Lipper End Only)
Media General Lipper - International (Closed
Moody's Investors Service End Only)
Morningstar
S&P Micropal
Strategic Insights
Value Line
V-1
<PAGE>
SCHEDULE VI
Conversion Schedule
- ---------------------------- ------------------- ----------------
Fund Type Number of Funds No Later Than
- ---------------------------- ------------------- ----------------
Money Market Funds
- ---------------------------- ------------------- ----------------
Variable Annuity Funds
- ---------------------------- ------------------- ----------------
International Funds:
- ---------------------------- ------------------- ----------------
All Remaining Funds
- ---------------------------- ------------------- ----------------
VI-1
Exhibit 99.H6
FORM OF
NATIONS FUNDS TRUST
SHAREHOLDER SERVICING PLAN ("PLAN")
INVESTOR B SHARES
Section 1. Each of the proper officers of Nations Funds Trust (the
"Trust") is authorized to execute and deliver, in the name and on behalf of the
Trust, written agreements based substantially on the form attached hereto as
Appendix A or any other form duly approved by the Trust's Board of Trustees
("Agreements") with broker/dealers, banks and other financial institutions that
are dealers of record or holders of record or which have a servicing
relationship ("Servicing Agents") with the beneficial owners of Investor B
Shares of the Trust (collectively, "Shares") provided that any material
modifications of services listed in the Agreement shall be presented for
approval or ratification by the Trustees at the next regularly scheduled Board
Meeting. Pursuant to such Agreements, Servicing Agents shall provide shareholder
support services as set forth therein to their clients who beneficially own
Shares of the portfolios listed on Exhibit I (the "Funds") in consideration of a
fee, computed monthly in the manner set forth in the applicable Fund's then
current prospectus, at an annual rate of up to [___%] of the average daily net
asset value of the Shares beneficially owned by or attributable to such clients.
Affiliates of the Trust's distributor, administrator, co-administrator and
adviser are eligible to become Servicing Agents and to receive fees under this
Plan. All expenses incurred by a Fund in connection with the Agreements and the
implementation of this Plan shall be borne either by the holders of the Shares
of the particular Fund involved. If more than one Fund is involved and these
expenses are not directly attributable to Shares of a particular Fund, then the
expenses may be allocated between or among the Shares of the Funds in a fair and
equitable manner.
Section 2. The Trust's administrator and/or co-administrator shall
monitor the arrangements pertaining to the Trust's Agreements with Servicing
Agents. The Trust's administrator and co-administrator shall not, however, be
obligated by this Plan to recommend, and the Trust shall not be obligated to
execute, any Agreement with any qualifying Servicing Agents.
Section 3. So long as this Plan is in effect, the Trust's
distributor shall provide to the Trust's Board of Trustees, and the Trustees
shall review, at least quarterly, a written report of the amounts expended
pursuant to this Plan and the purposes for which such expenditures were made.
Section 4. Unless sooner terminated, this Plan shall continue in
effect for a period of one year from its date of execution and shall continue
thereafter for successive annual periods, provided that such continuance is
specifically approved by a majority of the Board of Trustees, including a
majority of the Trustees who are not "interested persons," as defined in the
Investment Company Act of 1940, of the Trust and have no direct or indirect
financial interest in the operation of this Plan or in any Agreement related to
this Plan (the "Disinterested Trustees") cast in person at a meeting called for
the purpose of voting on this Plan.
<PAGE>
Section 5. This Plan may be amended at any time with respect to
any Fund by the Trust's Board of Trustees, provided that any material amendment
of the terms of this Plan (including a material increase of the fee payable
hereunder) shall become effective only upon the approvals set forth in
Section 4.
Section 6. This Plan is terminable at any time with respect to any
Fund by vote of a majority of the Disinterested Trustees.
Section 7. While this Plan is in effect, the selection and
nomination of the Disinterested Trustees shall be committed to the discretion of
such Disinterested Trustees.
Section 8. The Trust will preserve copies of this Plan,
Agreements, and any written reports regarding this Plan presented to the Board
of Trustees for a period of not less than six years.
2
<PAGE>
EXHIBIT I
Nations High Yield Fund
Nations Kansas Intermediate Municipal Bond Fund
Nations MidCap Index Fund
Dated: [________________]
Last Amended: [________________]
3
Exhibit 99.H7
FORM OF
NATIONS FUNDS TRUST
SHAREHOLDER SERVICING PLAN ("PLAN")
INVESTOR C SHARES
Section 1. Each of the proper officers of Nations Funds Trust (the
"Trust") is authorized to execute and deliver, in the name and on behalf of the
Trust, written agreements based substantially on the form attached hereto as
Appendix A or any other form duly approved by the Trust's Board of Trustees
("Agreements") with broker/dealers, banks and other financial institutions that
are dealers of record or holders of record or which have a servicing
relationship ("Servicing Agents") with the beneficial owners of Investor C
Shares of the Trust (as listed on Schedule 1) (collectively, the "Shares") in
any of the Trust's portfolios listed on Schedule 1 (the "Funds") provided that
any material modifications of services listed in the Agreement shall be
presented for approval or ratification by the Trustees at the next regularly
scheduled Board Meeting. Pursuant to such Agreements, Servicing Agents shall
provide shareholder support services as set forth therein to their clients who
beneficially own Shares of the Funds in consideration of a fee, computed monthly
in the manner set forth in the applicable Fund's then current prospectus, at an
annual rate of up to [___%] of the average daily net asset value of the Shares
beneficially owned by or attributable to such clients. Affiliates of the Trust's
distributor, administrator, co-administrator and adviser are eligible to become
Servicing Agents and to receive fees under this Plan. All expenses incurred by a
Fund in connection with the Agreements and the implementation of this Plan shall
be borne entirely by the holders of the Shares of the particular Fund involved.
If more than one Fund is involved and these expenses are not directly
attributable to Shares of a particular Fund, then the expenses may be allocated
between or among the Shares of the Funds in a fair and equitable manner.
Section 2. The Trust's administrator and/or co-administrator shall
monitor the arrangements pertaining to the Trust's Agreements with Servicing
Agents. The Trust's administrator and co-administrator shall not, however, be
obligated by this Plan to recommend, and the Trust shall not be obligated to
execute, any Agreement with any qualifying Servicing Agents.
Section 3. So long as this Plan is in effect, the Trust's
distributor shall provide to the Trust's Board of Trustees, and the Trustees
shall review, at least quarterly, a written report of the amounts expended
pursuant to this Plan and the purposes for which such expenditures were made.
Section 4. Unless sooner terminated, this Plan shall continue in
effect for a period of one year from its date of execution and shall continue
thereafter for successive annual periods, provided that such continuance is
specifically approved by a majority of the Board of Trustees, including a
majority of the Trustees who are not "interested persons," as defined in the
Investment Company Act of 1940, of the Trust and have no direct or indirect
financial interest in
1
<PAGE>
the operation of this Plan or in any Agreement related to this Plan (the
"Disinterested Trustees") cast in person at a meeting called for the purpose of
voting on this Plan.
Section 5. This Plan may be amended at any time with respect to
any Fund by the Trust's Board of Trustees, provided that any material amendment
of the terms of this Plan (including a material increase of the fee payable
hereunder) shall become effective only upon the approvals set forth in Section
4.
Section 6. This Plan is terminable at any time with respect to any
Fund by vote of a majority of the Disinterested Trustees.
Section 7. While this Plan is in effect, the selection and
nomination of the Disinterested Trustees shall be committed to the discretion of
such Disinterested Trustees.
Section 8. The Trust will preserve copies of this Plan,
Agreements, and any written reports regarding this Plan presented to the Board
of Trustees for a period of not less than six years.
2
<PAGE>
SCHEDULE I
Nations High Yield Fund
Nations Kansas Intermediate Municipal Bond Fund
Nations MidCap Index Fund
Dated: [________________]
Last Amended: [________________]
3
Exhibit 99.M1
FORM OF
NATIONS FUNDS TRUST
SHAREHOLDER SERVICING AND DISTRIBUTION PLAN
INVESTOR A SHARES
This amended and restated Investor A Shareholder Servicing and
Distribution Plan (the "Plan") has been adopted by the Board of Trustees of
Nations Funds Trust (the "Trust") in conformance with Rule 12b-1 under the
Investment Company Act of 1940 (the "1940 Act").
Section 1. Payments for Services. Under the terms of this Plan,
the Trust may act as a distributor of the Shares of which a Fund is the issuer,
pursuant to Rule 12b-1 under the 1940 Act. The Trust may incur as a distributor
of the Investor A Shares of each Fund ("Shares") expenses of up to
[________________________] per annum of the average daily net assets of the
Trust attributable to the Shares of the Funds (as defined on Exhibit A).
Section 2. Expenses Covered by the Plan. Amounts set forth in
Section 1 may be expended when and if authorized in advance by the Trust's Board
of Trustees. Such amounts may be used to finance any activity which is primarily
intended to result in the sale of the Shares, including, but not limited to,
expenses of organizing and conducting sales seminars, printing of prospectuses
and statements of additional information (and supplements thereto) and reports
for other than existing shareholders, preparation and distribution of
advertising material and sales literature, supplemental payments to the Trust's
distributor (the "Distributor") and the cost of administering this Plan, as well
as, with respect to payments made under Section 1, above, the shareholder
servicing activities described below. All amounts expended pursuant to this Plan
shall be paid:
(i) to the Distributor for reimbursements of distribution-related
expenses actually incurred by the Distributor, including, but not limited
to, expenses of organizing and conducting sales seminars, printing of
prospectuses and statements of additional information (and supplements
thereto) and reports for other than existing shareholders, preparation and
distribution of advertising material and sales literature and costs of
administering this Plan, or
(ii) to certain broker/dealers and other financial institutions
("Agents") who offer shares to their customers and who have entered into
Shareholder Servicing Agreements substantially in the form of Exhibit C, and
Sales Support Agreements substantially in the form of Exhibit B with respect
to the Funds, for providing the services contemplated thereunder.
The shareholder servicing activities for which compensation may be
received under this Plan may include, among other things: (i) aggregating and
processing purchase and redemption requests and transmitting promptly net
purchase and redemption orders to the Distributor or transfer agent; (ii)
providing customers with a service that invests the assets of their accounts in
Shares pursuant to specific or pre-authorized instructions; (iii) processing
dividend and distribution payments; (iv) providing information periodically to
customers
1
<PAGE>
showing their positions in Shares; (v) arranging for bank wires; (vi) responding
to customers' inquiries concerning their investment in Shares; (vii) providing
subaccounting with respect to Shares beneficially owned by customers or the
information to the Trust necessary for subaccounting; (viii) if required by law,
forwarding shareholder communications (such as proxies, shareholder reports,
annual and semi-annual financial statements and dividend, distribution and tax
notices) to customers; (ix) forwarding to customers proxy statements and proxies
containing any proposals regarding the Shareholder Servicing Agreement; (x)
general shareholder liaison services; and (xi) providing such other similar
services as the Trust may reasonably request to the extent such firms are
permitted to do so under applicable statutes, rules or regulations.
Section 3. Limitations on Payments. No additional payments are to
be made by the Trust on behalf of the Funds with respect to the Shares under
this Plan, provided that the Funds shall not be precluded from making the
payments such Fund is otherwise obligated to make (i) to Bank of America, N.A.
("Bank of America"), pursuant to the Investment Advisory Agreement, (ii) to The
Bank of New York ("BNY"), pursuant to the Custody Agreement, (iii) to "First
Data Investor Services Group, Inc. ("First Data"), pursuant to the Transfer
Agency and Registrar Agreement, (iv) to Stephens Inc. ("Stephens"), pursuant to
the Co-Administration Agreement, (v) to Banc of America Advisors, Inc. ("BAAI"),
pursuant to the Co-Administration Agreement, (vi) to Servicing Agents, pursuant
to Shareholder Servicing Agreements and (vii) for the expenses otherwise
incurred by a Fund and the Trust on behalf of the Shares in the normal conduct
of such Fund's business pursuant to the Investment Advisory Agreement, the
Custody Agreement, the Transfer Agency and Registrar Agreement, the
Co-Administration Agreement and the Shareholder Servicing Agreements. However,
to the extent any payments by the Trust on behalf of a Fund to Bank of America,
BNY, First Data, Stephens, BAAI or Servicing Agents; by Bank of America, BNY,
First Data, Stephens, BAAI or Servicing Agents or any affiliate thereof, to any
party, pursuant to any agreement; or, generally, by the Trust on behalf of a
Fund to any party, are deemed to be payments for the financing of any activity
primarily intended to result in the sale of the Shares within the context of
Rule 12b-1 under the 1940 Act, then such payments shall be deemed to be approved
pursuant to this Plan as set forth herein.
Section 4. Reports of Distributor. The officers of the Trust shall
report quarterly in writing to the Board of Trustees on the amounts and purpose
of payments for any of the activities in Section 2 and shall furnish the Board
of Trustees with such other information as the Board may reasonably request in
connection with such payments in order to enable the Board to make an informed
determination on the nature and value of such expenditures.
Section 5. Approval of Plan. This Plan shall continue in effect
for a period of more than one year from the date written below only so long as
such continuance is specifically approved at least annually by the Trust's Board
of Trustees, including the Trustees who are not interested persons of the Trust
and have no direct or indirect financial interest in the operation of this Plan
or in any Agreements related to this Plan ("Disinterested Trustees"), by vote
cast in person at a meeting called for the purpose of voting on this Plan.
2
<PAGE>
Section 6. Termination. This Plan may be terminated at any time by
vote of a majority of the Disinterested Trustees or with respect to a particular
Fund by vote of a majority of the outstanding voting securities of the Shares of
such Fund, on not more than sixty (60) days' written notice to any other party
to the Plan, and shall terminate automatically in the event of any act that
constitutes an assignment of the Distribution Agreement or the Investment
Advisory Agreement.
Section 7. Amendments. This Plan may be amended at any time by the
Board of Trustees provided that (a) any amendment to increase materially the
costs which a Fund's Investor A Shares may bear for distribution pursuant to
this Plan shall be effective only upon approval by a vote of a majority of the
outstanding Investor A Shares of such Fund, and (b) any material amendments of
the terms of this Plan shall become effective only upon approval as provided in
Section 6 thereof.
Section 8. Selection/Nomination of Trustees. So long as this Plan
is in effect, the selection and nomination of the Trust's Disinterested Trustees
shall be committed to the discretion of such Disinterested Trustees.
Section 9. Governing Law. This Plan shall be subject to the laws
of The State of Delaware and shall be interpreted and construed to further
promote the operation of the Trust as an open-end management investment company.
As used herein the terms "open-end management investment company," "assignment,"
"principal underwriter," "interested person," and "majority of the outstanding
voting securities" shall have the meanings set forth in the Securities Act of
1933, as amended or the 1940 Act, and the rules and regulations thereunder.
Section 10. Scope of Liability. Nothing herein shall be deemed to
protect the parties to any Agreement entered into pursuant to this Plan against
any liability to the Trust or its shareholders to which they would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence in the
performance of their duties hereunder, or by reason of their reckless disregard
of their obligations and duties hereunder.
Section 11. Records. The Trust will preserve copies of this Plan,
Agreements and any written reports regarding this Plan presented to the Board of
Trustees for a period of not less than six years.
Section 12. Limitation of Liability. The names "Nations Funds
Trust" and "Trustees of Nations Funds Trust" refer respectively to the trust
created and the Trustees, as trustees but not individually or personally, acting
from time to time under a Declaration of Trust dated [_______], which is hereby
referred to and a copy of which is on file at the office of the State Secretary
of Delaware and at the principal office of the Trust. The obligations of
"Nations Funds Trust" entered into in the name or on behalf thereof by any of
the Trustees, officers, representatives or agents are made not individually, but
in such capacities, and are not binding upon any of the Trustees, Shareholders,
officers, representatives or agents of the Trust personally, but bind only the
Trust Property (as defined in the Declaration of Trust), and all persons dealing
3
<PAGE>
with any class of shares of the Trust must look solely to the Trust Property
belonging to such class for the enforcement of any claims against the Trust.
4
<PAGE>
EXHIBIT A
Nations High Yield Fund
Nations Kansas Intermediate Municipal Bond Fund
Nations MidCap Index Fund
Dated: [_________________]
Last Amended: [_________________]
5
Exhibit 99.M2
FORM OF
NATIONS FUNDS TRUST
INVESTOR B DISTRIBUTION PLAN
This Investor B Distribution Plan (the "Plan") has been adopted by the
Board of Trustees of Nations Funds Trust (the "Trust") in conformance with Rule
12b-1 under the Investment Company Act of 1940 (the "1940 Act").
Section 1. Payments for Distribution-Related Services. The Trust may
compensate or reimburse its Distributor for any activities or expenses primarily
intended to result in the sale of Investor B Shares of the Trust's Funds, as
listed on Exhibit A (collectively, the "Funds" or, individually, a "Fund").
Payments by the Trust under this Section of this Plan will be calculated daily
and paid monthly at a rate or rates set from time to time by the Trust's Board
of Trustees, provided that no rate set by the Board for any Fund may exceed, on
an annual basis, [___%] of the average daily net asset value of a Fund's
Investor B Shares.
Section 2. Expenses Covered by Plan. The fees payable under Section 1 of
this Plan shall be used primarily to compensate or reimburse the Distributor for
distribution services provided by it, and related expenses incurred, including
payments by the Distributor to compensate or reimburse banks, broker/dealers or
other financial institutions that have entered into Sales Support Agreements
with the Distributor ("Selling Agents"), for sales support services provided,
and related expenses incurred, by such Selling Agents. Payments under Section 1
of this Plan may be made with respect to: preparation, printing and distribution
of prospectuses, sales literature and advertising materials by the Distributor
or, as applicable, Selling Agents, attributable to distribution or sales support
activities, respectively; commissions, incentive compensation or other
compensation to, and expenses of, account executives or other employees of the
Distributor or Selling Agents, attributable to distribution or sales support
activities, respectively; overhead and other office expenses of the Distributor
or Selling Agents, attributable to distribution or sales support activities,
respectively; opportunity costs relating to the foregoing (which may be
calculated as a carrying charge on the Distributor's or Selling Agents'
unreimbursed expenses incurred in connection with distribution or sales support
activities, respectively); and any other costs and expenses relating to
distribution or sales support activities. The overhead and other office expenses
referenced in this Section 2 may include, without limitation, (i) the expenses
of operating the Distributor's or Selling Agents' offices in connection with the
sale of Fund shares, including lease costs, the salaries and employee benefit
costs of administrative, operations and support personnel, utility costs,
communication costs and the costs of stationery and supplies, (ii) the costs of
client sales seminars and travel related to distribution and sales support
activities, and (iii) other expenses relating to distribution and sales support
activities.
Section 3. Distribution and Sales Support Agreements. Any officer of the
Trust is authorized to execute and deliver, in the name and on behalf of the
Trust, a written agreement with the Distributor in a form duly approved from
time to time by the Trust's Board of Trustees.
1
<PAGE>
Such agreement shall authorize the Distributor to enter into written Sales
Support Agreements, in substantially the form attached hereto as Exhibit B
("Agreements"), with Selling Agents.
Section 4. Limitations on Payments. Payment made by a particular Fund
under Section 1 must be for distribution or sales support services rendered for
or on behalf of such Fund. However, joint distribution or sales support
financing with respect to the Funds (which financing may also involve other
investment portfolios or companies that are affiliated persons of such a person,
or affiliated persons of the Distributor) shall be permitted in accordance with
applicable regulations of the Securities and Exchange Commission as in effect
from time to time.
Except for the payments specified in Section 1, no additional payments are
to be made by the Trust under this Plan, provided that nothing herein shall be
deemed to preclude the payments such Funds are otherwise obligated to make (i)
to Bank of America, N.A. ("Bank of America") pursuant to the Investment Advisory
Agreement, (ii) to The Bank of New York ("BNY"), pursuant to the Custody
Agreement, (iii) to First Data Investor Services Group, Inc. ("First Data"),
pursuant to the Transfer Agency and Registrar Agreement, (iv) to Stephens Inc.
("Stephens"), pursuant to the Administration Agreement, (v) to Banc of America
Advisors, Inc. ("BAAI"), pursuant to the Co-Administration Agreement, (vi) to
Servicing Agents pursuant to Shareholder Servicing Agreements and (vii) for the
expenses otherwise incurred by a Fund and the Trust on behalf of the Investor B
Shares in the normal conduct of such Fund's business pursuant to the Investment
Advisory Agreement, the Custody Agreement, the Transfer Agency and Registrar
Agreement, the Co-Administration Agreement and the Shareholder Servicing
Agreements. To the extent any such payments by the Trust on behalf of a Fund to
Bank of America, BNY, First Data, BAAI, Stephens or Servicing Agents; by BNY,
First Data, BAAI, Stephens or Servicing Agents, or any affiliate thereof, to any
party pursuant to any agreement; or, generally, by the Trust on behalf of a Fund
to any party, are deemed to be payments for the financing of any activity
primarily intended to result in the sale of the Investor B Shares within the
context of Rule 12b-1 under the 1940 Act, then such payments shall be deemed to
have been approved pursuant to this Plan without regard to Section 1.
With respect to Investor B Shares, actual distribution expenses incurred
by the Distributor (or sales support expenses incurred by Selling Agents) in a
given year may exceed the sum of the fees received by the Distributor pursuant
to this Plan and payments received by the Distributor pursuant to contingent
deferred sales charges. Any such excess may be recovered by the Distributor, and
retained by it or paid over to Selling Agents, as applicable, in future years as
long as this Plan is in effect. If this Plan is terminated or not continued, the
Trust shall not be obligated to pay the Distributor (or Selling Agents) for any
expenses not previously reimbursed by the Trust or recovered through contingent
deferred sales charges.
Notwithstanding anything herein to the contrary, no Fund shall be
obligated to make any payments under this Plan that exceed the maximum amounts
payable under Rule 2830, of the National Association of Securities Dealers, Inc.
Conduct Rules.
Section 5. Reports of Distributor. So long as this Plan is in effect, the
Distributor shall provide to the Trust's Officers and Board of Trustees, and the
Trustees shall review at least
2
<PAGE>
quarterly, a written report of the amounts expended by it pursuant to the
Distribution Agreement, or by Selling Agents pursuant to Sales Support
Agreements, and the purposes for which such expenditures were made.
Section 6. Approval of Plan. This Plan will become effective immediately,
as to any Fund's Investor B Shares, upon its approval by (a) a majority of the
outstanding Investor B Shares of such Fund, and (b) a majority of the Board of
Trustees, including a majority of the Trustees who are not "interested persons"
(as defined in the 1940 Act) of the Trust and who have no direct or indirect
financial interest in the operation of this Plan or in any agreements entered
into in connection with this Plan, pursuant to a vote cast in person at a
meeting called for the purpose of voting on the approval of this Plan.
Section 7. Continuance of Plan. This Plan shall continue in effect for so
long as its continuance is specifically approved at least annually by the
Trust's Board of Trustees in the manner described in Section 6.
Section 8. Amendments. This Plan may be amended at any time by the Board
of Trustees provided that (a) any amendment to increase materially the costs
which a Fund's Investor B Shares may bear for distribution pursuant to this Plan
shall be effective only upon approval by a vote of a majority of the outstanding
Investor B Shares of such Fund, and (b) any material amendments of the terms of
this Plan shall become effective only upon approval as provided in Section 6
hereof.
Section 9. Termination. This Plan is terminable, as to a Fund's Investor B
Shares, without penalty at any time by (a) a vote of a majority of the Trustees
who are not "interested persons" (as defined in the 1940 Act) of the Trust and
who have no direct or indirect financial interest in the operation of this Plan
or in any agreements entered into in connection with this Plan, or (b) a vote of
a majority of the outstanding Investor B Shares of such Fund.
Section 10. Selection/Nomination of Trustees. While this Plan is in
effect, the selection and nomination of those Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Trust shall be committed to the
discretion of such non-interested Trustees.
Section 11. Limitation of Liability. The names "Nations Funds Trust" and
"Trustees of Nations Funds Trust" refer respectively to the trust created and
the Trustees, as Trustees but not individually or personally, acting from time
to time under a Declaration of Trust dated [________________], which is hereby
referred to and a copy of which is on file at the office of the State Secretary
of Delaware and at the principal office of the Trust. The obligations of
"Nations Funds Trust" entered into in the name or on behalf thereof by any of
the Trustees, officers, representatives or agents are made not individually, but
in such capacities, and are not binding upon any of the Trustees, Shareholders,
officers, representatives or agents of the Trust personally, but bind only the
Trust Property (as defined in the Declaration of Trust), and all persons dealing
with a Fund's Investor B Shares of the Trust must look solely to the Trust
property belonging to such Fund's Investor B Shares for the enforcement of any
claims against the Trust.
3
<PAGE>
Section 12. Records. The Trust will preserve copies of this Plan, and any
Agreements and written reports regarding this Plan presented to the Board of
Trustees for a period of not less than six years.
Section 13. Miscellaneous. The captions in this Plan are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
4
<PAGE>
EXHIBIT A
Nations High Yield Fund
Nations Kansas Intermediate Municipal Bond Fund
Nations MidCap Index Fund
Dated: [________________]
Last Amended: [________________]
5
Exhibit 99.M3
FORM OF
NATIONS FUNDS TRUST
DISTRIBUTION PLAN
INVESTOR C SHARES
This Distribution Plan (this "Plan") has been adopted by the Board of
Trustees of Nations Funds Trust (the "Trust") in conformance with Rule 12b-1
under the Investment Company Act of 1940 (the "1940 Act").
Section 1. Payments for Distribution-Related Services. The Trust may pay
its Distributor for certain expenses that are incurred in connection with the
support and distribution of Investor C Shares (the "Shares") of the Trust's
Funds (collectively the "Funds"). Payments by the Trust under the Plan will be
calculated daily and paid monthly at a rate or rates set from time to time by
the Trust's Board of Trustees, provided that no rate set by the Board for any
Fund may exceed the annual rate of 0.75% of the average daily net asset value of
the Investor C Shares of the Funds. For purposes of determining the payments
payable under this Plan, the net asset value of the outstanding Shares of the
respective Funds shall be computed in the manner specified in the Trust's then
current prospectuses and statement of additional information as amended or
supplemented from time to time for such Shares.
Section 2. Expenses Covered by Plan. Payments to the Distributor under
Section 1 of this Plan will be used by the Distributor (i) to compensate banks,
broker/dealers or other financial institutions that have entered into Sales
Support Agreements with the Distributor ("Selling Agents") for providing
distribution assistance relating to Shares, (ii) for promotional activities
intended to result in the sale of Shares such as by paying for the preparation,
printing and distribution of prospectuses for other than current Shareholders,
and (iii) to compensate Selling Agents for providing distribution services with
regard to their Customers who are, from time to time, beneficial, and record
owners of Shares.
Section 3. Distribution and Sales Support Agreements. Any officer of the
Trust is authorized to execute and deliver, in the name and on behalf of the
Trust, a written agreement with the Distributor in a form duly approved from
time to time by the Trust's Board of Trustees. Such agreement shall authorize
the Distributor to enter into written Sales Support Agreements, in substantially
the form attached hereto as Exhibit B ("Agreements"), with Selling Agents.
As used herein, promotional activities include, but are not limited to,
advertising via radio, television, newspapers, magazines and otherwise;
preparing, printing and mailing sales materials, brochures and prospectuses
(except for prospectuses used for regulatory purposes or for distribution to
existing shareholders).
Section 4. Limitations on Payments. Payment made by a particular Fund
under Section 1 must be for distribution or sales support services rendered for
or on behalf of such Fund. However, joint distribution or sales support
financing with respect to the Funds (which financing may also involve other
investment portfolios or companies that are affiliated persons of such a
<PAGE>
person, or affiliated persons of the Distributor) shall be permitted in
accordance with applicable regulations of the Securities and Exchange Commission
("SEC") as in effect from time to time.
Upon proper authorization by the Trust's Trustees in accordance with Rule
12b-1 under the Act, expenses covered by this Plan may also include other
expenses the Distributor (or any other person) may incur in connection with the
distribution of the Trust's Shares including, without limitation, expenditures
for telephone facilities and in-house telemarketing, or in connection with
shareholder servicing. Distribution service fees will not be used to pay any
interest expenses, carrying charges or other financing costs (except to the
extent permitted by the SEC). Distribution service fees will not be used to pay
any general or administrative expenses of the Distributor.
Except for the payments specified in Section 1, no additional payments are
to be made by the Trust under this Plan, provided that nothing herein shall be
deemed to preclude the payments such Funds are otherwise obligated to make to
(i) Bank of America, N.A. ("Bank of America"), pursuant to the Investment
Advisory Agreement (ii) The Bank of New York ("BNY"), pursuant to the Custody
Agreement, (iii) First Data Investor Services Group, Inc. ("First Data"),
pursuant to the Transfer Agency and Registrar Agreement, (iv) Stephens Inc.
("Stephens"), pursuant to the Co-Administration Agreement, (v) Banc of America
Advisors, Inc. ("BAAI"), pursuant to the Co-Administration Agreement, (vi)
Servicing Agents, pursuant to Shareholder Servicing Agreements and (vii) for the
expenses otherwise incurred by a Fund and the Trust on behalf of the Shares in
the normal conduct of such Fund's business pursuant to the Investment Advisory
Agreement, the Custody Agreement, the Transfer Agency and Registrar Agreement,
the Co-Administration Agreement and the Shareholder Servicing Agreements. To the
extent any such payments by the Trust on behalf of a Fund to Bank of America,
BNY, First Data, BAAI, Stephens or Servicing Agents; by Bank of America, Bank of
America Texas, TSSG, Stephens or Servicing Agents, or any affiliate thereof, to
any party pursuant to any agreement; or, generally, by the Trust on behalf of a
Fund to any party, are deemed to be payments for the financing of any activity
primarily intended to result in the sale of the Shares within the context of
Rule 12b-1 under the 1940 Act, then such payments shall be deemed to have been
approved pursuant to this Plan without regard to Section 1.
With respect to Shares, actual distribution expenses incurred by the
Distributor (or sales support expenses incurred by the Selling Agents) in a
given year may exceed the sum of the fees received by the Distributor pursuant
to this Plan and payments received by the Distributor pursuant to contingent
deferred sales charges. Any such excess may be recovered by the Distributor, and
retained by it or paid over to the Selling Agents, as applicable, in future
years as long as this Plan is in effect. If this Plan is terminated or not
continued, the Trust shall not be obligated to pay the Distributor (or Selling
Agents) for any expenses not previously reimbursed by the Trust or recovered
through contingent deferred sales charges.
Notwithstanding anything herein to the contrary, no Fund shall be
obligated to make any payments under this Plan that exceed the maximum amounts
payable under Rule 2830 of the National Association of Securities Dealers, Inc.
Conduct Rules.
2
<PAGE>
Section 5. Reports of Distributor. So long as this Plan is in effect, the
Distributor shall provide to the Trust's Officers and Board of Trustees, and the
Trustees shall review, at least quarterly, a written report of the amounts
expended by it pursuant to the Distribution Agreement, or by Selling Agents
pursuant to Sales Support Agreements, and the purposes for which such
expenditures were made.
Section 6. Approval of Plan. The Plan will become effective immediately,
as to any Fund's Shares, upon its approval by (a) a majority of the outstanding
Shares of such Fund, and (b) a majority of the Board of Trustees, including a
majority of the Trustees who are not "interested persons" (as defined in the
1940 Act) of the Trust and who have no direct or indirect financial interest in
the operation of this Plan or in any agreements entered into in connection with
this Plan, pursuant to a vote cast in person at a meeting called for the purpose
of voting on the approval of this Plan.
Section 7. Continuance of Plan. The Plan shall continue in effect for so
long as its continuance is specifically approved at least annually by the
Trust's Board of Trustees in the manner described in Section 6.
Section 8. Amendments. The Plan may be amended at any time by the Board of
Trustees provided that (a) any amendment to increase materially the costs which
a Fund's Shares may bear for distribution pursuant to this Plan shall be
effective only upon approval by a vote of a majority of the outstanding Shares
of such Fund, and (b) any material amendments of the terms of this Plan shall
become effective only upon approval as provided in Section 6 hereof.
Section 9. Termination. The Plan is terminable, as to a Fund's Shares,
without penalty at any time by (a) a vote of a majority of the Trustees who are
not "interested persons" (as defined in the 1940 Act) of the Trust and who have
no direct or indirect financial interest in the operation of this Plan or in any
agreements entered into in connection with this Plan, or (b) a vote of a
majority of the outstanding Shares of such Fund.
Section 10. Selection/Nomination of Trustees. While this Plan is in
effect, the selection and nomination of those Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Trust shall be committed to the
discretion of such non-interested Trustees.
Section 11. Limitation of Liability. The names "Nations Funds Trust" and
"Trustees of Nations Funds Trust" refer respectively to the trust created and
the Trustees, as Trustees but not individually or personally, acting from time
to time under a Declaration of Trust dated [_________], which is hereby referred
to and a copy of which is on file at the office of the State Secretary of
Delaware and at the principal office of the Trust. The obligations of "Nations
Funds Trust" entered into in the name or on behalf thereof by any of the
Trustees, officers, representatives or agents are made not individually, but in
such capacities, and are not binding upon any of the Trustees, Shareholders,
officers, representatives or agents of the Trust personally, but bind only the
Trust Property (as defined in the Declaration of Trust), and all persons dealing
with a Fund's Shares of the Trust must look solely to the Trust property
belonging to such Fund's Shares for the enforcement of any claims against the
Trust.
3
<PAGE>
Section 12. Records. The Trust will preserve copies of this Plan,
Agreements, and any written reports regarding this Plan presented to the Board
of Trustees for a period of not less than six years.
Section 13. Miscellaneous. The captions in this Plan are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
4
<PAGE>
EXHIBIT A
Nations High Yield Fund
Nations Kansas Intermediate Municipal Bond Fund
Nations MidCap Index Fund
Dated: [________________]
Last Amended: [________________]
5
Exhibit 99.O
FORM OF
NATIONS FUNDS TRUST
RULE 18F-3 MULTI-CLASS PLAN
I. INTRODUCTION.
Pursuant to Rule 18f-3 under the Investment Company Act of 1940, as
amended (the "1940 Act"), the following sets forth the method for allocating
fees and expenses among each class of shares in the investment portfolios of
Nations Funds Trust (the "Trust"). In addition, this Rule 18f-3 Multi-Class Plan
(the "Plan") sets forth the maximum initial sales loads, contingent deferred
sales charges, Rule 12b-1 distribution fees, shareholder servicing fees,
conversion features, exchange privileges and other shareholder services, if any,
applicable to a particular class of shares of the portfolios. The Plan also
identifies expenses that may be allocated to a particular class of shares to the
extent that they are actually incurred in a different amount by the class or
relate to a different kind or degree of services provided to the class.
The Trust is an open-end series investment company registered under the
1940 Act, the shares of which are registered on Form N-1A under the Securities
Act of 1933 [(REGISTRATION NOS. ____________ AND ____________)]. The Trust
elects to offer multiple classes of shares in its investment portfolios pursuant
to the provisions of Rule 18f-3 and this Plan.
The Trust currently consists of the following three separate investment
portfolios: Nations High Yield Fund, Nations Kansas Intermediate Municipal Bond
Fund and Nations MidCap Index Fund.
The above-listed investment portfolios of the Trust (the "Funds") are
authorized to issue the following classes of shares representing interests in
the Funds: Primary A Shares, Investor A Shares, Investor B Shares and Investor C
Shares.
II. ALLOCATION OF EXPENSES.
A. Pursuant to Rule 18f-3 under the 1940 Act, the Trust shall allocate
to each class of shares in a Fund (i) any fees and expenses incurred by the
Trust in connection with the distribution of such class of shares under a
distribution plan adopted for such class of shares pursuant to Rule 12b-1, and
(ii) any fees and expenses incurred by the Trust under a shareholder servicing
plan in connection with the provision of shareholder services to the holders of
such class of shares.
B. In addition, pursuant to Rule 18f-3, the Trust may allocate the
following fees and expenses, if any, to a particular class of shares in a single
Fund:
1
<PAGE>
(i) transfer agent fees identified by the transfer agent as
being attributable to such class of shares;
(ii) printing and postage expenses related to preparing and
distributing materials such as shareholder reports,
prospectuses, reports, and proxies to current shareholders
of such class of shares or to regulatory agencies with
respect to such class of shares;
(iii) blue sky registration or qualification fees incurred by
such class of shares;
(iv) Securities and Exchange Commission registration fees
incurred by such class of shares;
(v) the expense of administrative personnel and services
(including, but not limited to, those of a portfolio
accountant, custodian or dividend paying agent charged
with calculating net asset values or determining or paying
dividends) as required to support the shareholders of such
class of shares;
(vi) litigation or other legal expenses relating solely to such
class of shares;
(vii) fees of the Trustees of the Trust incurred as result of
issues relating to such class of shares;
(viii) independent accountants' fees relating solely to such
class of shares; and
(ix) any other fees and expenses, not including advisory or
custodial fees or other expenses related to the management
of the Fund's assets, relating to (as defined below) such
class of shares.
C. For all purposes under this Plan, fees and expenses "relating to" a
class of shares are those fees and expenses that are actually incurred in a
different amount by the class or that relate to a different kind or degree of
services provided to the class. The proper officers of the Trust shall have the
authority to determine whether any or all of the fees and expenses described in
Section B of this Part II should be allocated to a particular class of shares.
The Board of Trustees will monitor such allocation to ensure that they comply
with the requirements of the Plan.
D. Income, realized and unrealized capital gains and losses, and any
expenses of a Fund shall be allocated to each class of the Fund on the basis of
the relative net assets (settled shares), as defined in Rule 18f-3, of that
class in relation to the net assets of the Fund.
E. In certain cases, Banc of America Advisors, Inc., TradeStreet
Investment Associates, Inc., [_______________________], Bank of America, N.A.,
Stephens Inc., First Data Investor Services Group, Inc., or another service
provider for a Fund may waive or reimburse all or a portion of the expenses of a
specific class of shares of the Fund. The Board of Trustees will monitor any
such waivers or reimbursements to ensure that they do not provide a means for
cross-subsidization between classes.
2
<PAGE>
III. CLASS ARRANGEMENTS.
The following summarizes the maximum front-end sales charges,
contingent deferred sales charges, Rule 12b-1 distribution fees, shareholder
servicing fees, conversion features, exchange privileges and other shareholder
services, if any, applicable to each class of shares of the Trust. Additional
details regarding such fees and services are set forth in the relevant Funds'
current Prospectus(es) and Statement of Additional Information.
A. PRIMARY A SHARES.
1. Maximum Initial Sales Load: None
2. Contingent Deferred Sales Charge: None
3. Maximum Rule 12b-1 Distribution Fees: None
4. Maximum Shareholder Servicing Fees: None
5. Conversion Features: None
6. Exchange Privileges:
(a) Primary A Shares of a Fund may be exchanged for Primary A
Shares of any other Nations Fund.
(b) From time to time, the Board of Trustees of the Trust may
modify, or ratify modifications to, the exchange
privileges of Primary A Shares of a Fund without amending
this Plan, provided that such exchange privileges, as
modified, are described in the then-current prospectus for
such shares of such Fund.
7. Other Shareholder Services: None
B. INVESTOR A SHARES.
1. Maximum Initial Sales Load:
(a) Nations High Yield Fund, Nations Kansas Intermediate
Municipal Bond Fund and Nations MidCap Index Fund: maximum
of [____%].
2. Contingent Deferred Sales Charge (as a percentage of the lower
of the original purchase price or redemption proceeds):
(a) 1.00% of purchases made before August 1, 1999 in amounts
over $1 million if redeemed within one year of purchase,
declining to 0.50% in the second year after purchase and
eliminated thereafter.
(b) 1.00% of purchases made on or after August 1, 1999 in
amounts over $1 million if redeemed within 18 months of
purchase and eliminated thereafter.
3
<PAGE>
3. Redemption Fee:
(a) 1.00% of the current net asset value of shares purchased
in amounts of $1 million or more between July 31, 1997 and
November 15, 1998, and redeemed within 18 months of
purchase.
(b) 1.00% of the current net asset value of shares purchased
by an employee benefit plan that initially invested in
Investor A Shares between July 31, 1997 and November 15,
1998, and redeemed within 18 months of purchase in
connection with redemption of all Nations Funds holdings
of the employee benefit plan.
4. Maximum Rule 12b-1 Distribution/Shareholder Servicing Fees:
Pursuant to a Shareholder Servicing and Distribution Plan
adopted under Rule 12b-1, Investor A Shares may pay a combined
distribution and shareholder servicing fee of up to [___%] of
the average daily net assets of such shares.
5. Conversion Features: Investor A Shares of a Fund shall have
such conversion features, if any, as are determined by or
ratified by the Board of Trustees of the Trust and described
in the then-current prospectus for such shares of such Fund.
6. Exchange Privileges:
(a) Investor A Shares of a Fund may be exchanged for Investor
A Shares of any other Nations Fund, except Index Funds.
(b) From time to time, the Board of Trustees of the Trust may
modify, or ratify modifications to, the exchange
privileges of Investor A Shares of a Fund without amending
this Plan, provided that such exchange privileges, as
modified, are described in the then-current prospectus for
such shares of such Fund.
7. Other Shareholder Services. The Trust offers a Systematic
Investment Plan, an Automatic Withdrawal Plan and an Automatic
Exchange Feature to holders of Investor A Shares of the Funds.
4
<PAGE>
C. INVESTOR B SHARES.
1. Maximum Initial Sales Load: None
2. Contingent Deferred Sales Charge (as a percentage of the lower
of the original purchase price or redemption proceeds):
(a) Nations High Yield Fund, Nations Kansas Intermediate
Municipal Bond Fund and Nations MidCap Index Fund: [___%]
if redeemed within one year of purchase, declining to
[___%] in the sixth year after purchase and eliminated
thereafter.
3. Maximum Rule 12b-1 Distribution Fees: Pursuant to a
Distribution Plan adopted under Rule 12b-1, Investor B Shares
of each Fund may pay distribution fees of up to [___%] of the
average daily net assets of such shares.
4. Maximum Shareholder Servicing Fees: Pursuant to a Shareholder
Servicing Plan, Investor B Shares of each Fund may pay
shareholder servicing fees of up to [___%] of the average
daily net assets of such shares.
5. Conversion Features: Investor B Shares of a Fund shall have
such conversion features, if any, as are determined by or
ratified by the Board of Trustees of the Trust and described
in the then-current prospectus for such shares of such Fund.
6. Exchange Privileges:
(a) Investor B Shares of a Fund may be exchanged for Investor
B Shares of any other Nations Fund, except Money Market
Funds.
(b) From time to time, the Board of Trustees of the Trust may
modify, or ratify modifications to, the exchange
privileges of Investor B Shares of a Fund without amending
this Plan, provided that such exchange privileges, as
modified, are described in the then-current prospectus for
such shares of such Fund.
7. Other Shareholder Services: the Trust offers a Systematic
Investment Plan, an Automatic Withdrawal Plan and an Automatic
Exchange Feature to holders of Investor B Shares of the Funds.
5
<PAGE>
D. INVESTOR C SHARES.
1. Maximum Initial Sales Load: None
2. Contingent Deferred Sales Charge (as a percentage of the lower
of the original purchase price or redemption proceeds): [___%]
if redeemed within one year of purchase and eliminated
thereafter.
3. Maximum Rule 12b-1 Distribution Fees: Pursuant to a
Distribution Plan adopted under Rule 12b-1, Investor C Shares
of each Fund may pay distribution fees of up to [___%] of the
average daily net assets of such shares.
4. Maximum Shareholder Servicing Fees: Pursuant to a Shareholder
Servicing Plan, Investor C Shares of each Fund may pay
shareholder servicing fees of up to [___%] of the average
daily net assets of such shares.
5. Conversion Features: Investor C Shares of a Fund shall have
such conversion features, if any, as are determined by or
ratified by the Board of Trustees of the Trust and described
in the then-current prospectus for such shares of such Fund.
6. Exchange Privileges:
(a) Investor C Shares of a Fund may be exchanged for Investor
C Shares of any other Nations Fund, except Money Market
Funds.
(b) Investor C Shares of a Fund that were originally obtained
in an exchange of Investor A Shares of a Managed Index
Fund for Investor C Shares of a Non-Money Market Fund may
be exchanged for Investor A Shares of an Index Fund.
(c) From time to time, the Board of Trustees of the Trust may
modify, or ratify modifications to, the exchange
privileges of Investor C Shares of a Fund without amending
this Plan, provided that such exchange privileges, as
modified, are described in the then-current prospectus for
such shares of such Fund.
7. Other Shareholder Services. The Trust offers a Systematic
Investment Plan, an Automatic Withdrawal Plan and an Automatic
Exchange Feature to holders of Investor C Shares of the Funds.
IV. BOARD REVIEW.
The Board of Trustees of the Trust shall review this Plan as frequently
as it deems necessary. Prior to any material amendment(s) to this Plan, the
Board of Trustees of the Trust,
6
<PAGE>
including a majority of the Trustees who are not interested persons of the
Trust, shall find that the Plan, as proposed to be amended (including any
proposed amendments to the method of allocating class and/or fund expenses), is
in the best interests of each class of shares of the Fund individually, and the
Fund as a whole. In considering whether to approve any proposed amendment(s) to
the Plan, the Trustees of the Trust shall request and evaluate such information
as they consider reasonably necessary to evaluate the proposed amendment(s) to
the Plan.
Adopted: [________________]
Amended: [________________]
7
EX-99.P
POWER OF ATTORNEY
Marco E. Adelfio, whose signature appears below, does hereby
constitute and appoint Richard H. Blank, Jr., his true and lawful agent, with
power of substitution or resubstitution, to do any and all acts and things and
to execute any and all instruments which said agent, may deem necessary or
advisable or which may be required to enable Nations Funds Trust (the "Trust"),
to comply with the Investment Company Act of 1940, as amended, and the
Securities Act of 1933 (the "1933 Act"), and any other applicable federal
securities laws, or rules, regulations or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the filing and
effectiveness of the Trust's Registration Statement on Form N-14 pursuant to the
1933 Act, and any and all amendments thereto, and to determine the states in
which appropriate filings should be made and to take any and all necessary and
appropriate actions to make any and all such filings, and any and all amendments
thereto, including specifically, but without limiting the generality of the
foregoing, the power and authority to sign in the name and on behalf of the
undersigned as a Trustee of the Trust, such Registration Statement and filings,
any and all exemptive applications under the 1933 Act, and any and all
amendments and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said agent shall do or cause
to be done by virtue hereof.
Dated: October 25, 1999
/s/ Marco E. Adelfio
---------------------
Marco E. Adelfio
<PAGE>
EX-99.P
POWER OF ATTORNEY
Steven G. Cravath, whose signature appears below, does hereby
constitute and appoint Richard H. Blank, Jr., his true and lawful agent, with
power of substitution or resubstitution, to do any and all acts and things and
to execute any and all instruments which said agent, may deem necessary or
advisable or which may be required to enable Nations Funds Trust (the "Trust"),
to comply with the Investment Company Act of 1940, as amended, and the
Securities Act of 1933 (the "1933 Act"), and any other applicable federal
securities laws, or rules, regulations or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the filing and
effectiveness of the Trust's Registration Statement on Form N-14 pursuant to the
1933 Act, and any and all amendments thereto, and to determine the states in
which appropriate filings should be made and to take any and all necessary and
appropriate actions to make any and all such filings, and any and all amendments
thereto, including specifically, but without limiting the generality of the
foregoing, the power and authority to sign in the name and on behalf of the
undersigned as a Trustee of the Trust, such Registration Statement and filings,
any and all exemptive applications under the 1933 Act, and any and all
amendments and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said agent shall do or cause
to be done by virtue hereof.
Dated: October 25, 1999
/s/ Steven G. Cravath
---------------------
Steven G. Cravath
<PAGE>
EX-99.P
POWER OF ATTORNEY
Barry I. Pershkow, whose signature appears below, does hereby
constitute and appoint Richard H. Blank, Jr., his true and lawful agent, with
power of substitution or resubstitution, to do any and all acts and things and
to execute any and all instruments which said agent, may deem necessary or
advisable or which may be required to enable Nations Funds Trust (the "Trust"),
to comply with the Investment Company Act of 1940, as amended, and the
Securities Act of 1933 (the "1933 Act"), and any other applicable federal
securities laws, or rules, regulations or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the filing and
effectiveness of the Trust's Registration Statement on Form N-14 pursuant to the
1933 Act, and any and all amendments thereto, and to determine the states in
which appropriate filings should be made and to take any and all necessary and
appropriate actions to make any and all such filings, and any and all amendments
thereto, including specifically, but without limiting the generality of the
foregoing, the power and authority to sign in the name and on behalf of the
undersigned as a Trustee of the Trust, such Registration Statement and filings,
any and all exemptive applications under the 1933 Act, and any and all
amendments and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said agent shall do or cause
to be done by virtue hereof.
Dated: October 25, 1999
/s/ Barry I. Pershkow
---------------------
Barry I. Pershkow
