As filed with the Securities and Exchange Commission
on February 4, 2000
Registration No. 333-89661; 811-09645
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. 1 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 1 [X]
(Check appropriate box or boxes)
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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
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this registration statement.
It is expected that the securities will be sold to the public as soon as
possible after the registration statement is effective.
<PAGE>
EXPLANATORY NOTE
This Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-1A (the "Registration Statement") of Nations Funds Trust (the "Trust") is
being filed in order to respond to the Securities and Exchange Commission
staff's comments and to file audited financial statements for the three series:
Nations MidCap Index Fund, Nations High Yield Bond Fund and Nations Kansas
Municipal Income Fund (collectively, the "Funds").
<PAGE>
NATIONS FUNDS TRUST
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
<S> <C>
Part A
Item No. Prospectus
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1. Front and Back Cover Pages ................................ Front and Back Cover Pages
2. Risk/Return Summary: Investments, Risks
and Performance............................................ About this Prospectus
3. Risk/Return Summary: Fee Tables............................ About the Funds; Financial Highlights
4. Investment Objectives, Principal
Investment Strategies, and Related Risks................... About the Funds; Other Important
Information
5. Management's Discussion of Fund
Performance................................................ About the Funds
6. Management, Organization, and
Capital Structure.......................................... What's Inside; About the Funds;
How the Funds Are Managed;
About your Investment
7. Shareholder Information.................................... About the Funds; About your
Investment
8. Distribution Arrangements.................................. Information for Investors
9. Financial Highlights Information........................... Financial Highlights; About the Funds
Part B
Item No.
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10. Cover Page and Table of Contents........................... Cover Page and Table of Contents
11. Fund History............................................... Introduction
<PAGE>
12. Description of the Fund and Its
Investments and Risks...................................... Additional Information on Portfolio
Investments
13. Management of the Funds.................................... Trustees And Officers; Investment
Advisory, Administration, Custody Transfer
Agency, Shareholder Servicing and
Distribution Agreements
14. Control Persons and Principal
Holders of Securities...................................... Not Applicable
15. Investment Advisory and Other Services..................... Investment Advisory,
Administration, Custody, Transfer Agency,
Shareholder Servicing And Distribution
Agreements
16. Brokerage Allocation and Other Practices................... Portfolio Transactions and
Brokerage--General Brokerage Policy
17. Capital Stock and Other
Securities................................................. Description Of Shares;
Investment Advisory, Administration,
Custody, Transfer Custody, Transfer
Agency, Shareholder Servicing And
Distribution Agreements
18. Purchase, Redemption and Pricing
of Shares.................................................. Net Asset Value -- Purchases
And Redemptions; Distributor
19. Taxation of the Fund....................................... Additional Information Concerning
Taxes
20. Underwriters............................................... Investment Advisory,
Administration Custody, Transfer Agency
Shareholder Servicing And Distribution
Agreements; Distributor
21. Calculation of Performance Data............................ Additional Information on
Performance
22. Financial Statements....................................... Independent Accountant and
Reports
<PAGE>
Part C
Item No. Other Information
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Information required to be included in
Part C is set forth under the appropriate
Item, so numbered, in Part C of this Document
</TABLE>
<PAGE>
[GRAPHIC]
Index, Fixed Income and State Municipal Bond Funds
Prospectus -- Primary A Shares
February 14, 2000
Index Fund
Nations MidCap Index Fund
Fixed Income Fund
Nations High Yield Bond Fund
State Municipal Bond Fund
Nations Kansas Municipal Income 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
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[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 24.
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 high yield debt 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.
High yield debt securities, like all 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 high yield debt securities, most importantly their credit
risk. The value of high yield debt securities is more sensitive to the
perceived creditworthiness of the security's issuer than other types of fixed
income securities.
Because State Municipal Bond Funds invest primarily in securities issued by
one state, Nations Kansas Municipal Income 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 it's part of a balanced portfolio
2
<PAGE>
o you want your portfolio to try to protect 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, 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, particularly high yield debt securities
o you're seeking preservation of capital and stability of share price
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 are a resident of Kansas and you want to reduce your state taxes on
your investments
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 5.
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
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[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 16.
<TABLE>
[GRAPHIC]
<S> <C>
About the Funds
Index Fund
Nations MidCap Index Fund 5
Sub-adviser: Banc of America Capital Management, Inc.
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Fixed Income Fund
Nations High Yield Bond Fund 8
Sub-adviser: MacKay Shields LLC
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State Municipal Bond Fund
Nations Kansas Municipal Income Fund 11
Sub-adviser: Banc of America Capital Management, Inc.
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Other important information 14
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How the Funds are managed 16
[GRAPHIC]
About your investment
Information for investors
Buying, selling and exchanging shares 19
Distributions and taxes 22
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Terms used in this prospectus 24
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Where to find more information back cover
</TABLE>
4
<PAGE>
About the Index Fund
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[GRAPHIC]
About the sub-adviser
Banc of America Capital Management, Inc. (BACAP) is this Fund's
sub-adviser. BACAP's Quantitative Strategies Management Team makes
the day-to-day investment decisions for the Fund.
[GRAPHIC]
You'll find more about
BACAP on page 17.
[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. As of the date of this prospectus, the
weighted average market capitalization of the compnies in the S&P 400
was $5.5 billion. 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 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 adversely 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 14 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
electronic trading systems such as crossing networks and other trading
strategies.
The team may sell a stock when its percentage weighting in the index is
reduced or when the stock is removed from the index, when the portfolio
management team believes the stock is not liquid enough, 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]
A look at the Fund's performance
Because the Fund has not been in operation for a full calendar year, no
risk/return bar chart or table is included in the prospectus.
[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(1) 0.40%
----
Total annual Fund operating expenses 0.80%
====
</TABLE>
(1)Other expenses are based on estimates for the current fiscal year.
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
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years
<S> <C> <C>
Primary A Shares $36 $210
</TABLE>
7
<PAGE>
About the Fixed Income Fund
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[GRAPHIC]
About the sub-adviser
The Fund does not have its own investment adviser or sub-adviser
because it's a "feeder" fund. A feeder fund typically invests all
of its assets in another fund, which is called a "master
portfolio." Master Portfolio and Fund are sometimes used
interchangeably.
MacKay Shields LLC (MacKay Shields) is the Master Portfolio's
sub-adviser. The High Yield Portfolio Management Team makes the
day-to-day investment decisions for the Master Portfolio.
[GRAPHIC]
You'll find more about
MacKay Shields and
its High Yield Portfolio
Management Team on
page 17.
[GRAPHIC]
High yield debt securities
This Fund invests primarily in high yield debt securities, which
are often referred to as "junk bonds." 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 Bond 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 invests all of its assets in Nations High Yield Bond Master
Portfolio (the Master Portfolio). The Master Portfolio has the same
investment objective as the Fund.
The Master Portfolio normally invests at least 65% of its assets in domestic
and foreign corporate high yield debt securities. These securities are not
rated investment grade, but generally will be rated "B" or better by Moody's
or S&P. The portfolio management team may choose unrated securities if it
believes they are of comparable quality at the time of investment. The
portfolio is not managed for any specific duration.
The Master Portfolio invests primarily in:
o Domestic corporate high yield debt securities, including private placements
o U.S. dollar-denominated foreign corporate high yield debt securities,
including private placements
o Zero-coupon bonds
o U.S. government obligations
o Equity securities (up to 25% of its assets), which may include convertible
securities
The Master Portfolio also may invest in securities that aren't part of its
principal investment strategies, but it won't hold more than 10% of its assets
in any one type of these securities. These securities are described in the
SAI.
When creating the portfolio, the portfolio management team:
o focuses on individual security selection (bottom up analysis)
o selects securities using fundamental credit analysis
o emphasizes current income while attempting to minimize risk to principal
o seeks to identify a catalyst for capital appreciation such as an
operational or financial restructuring
o tries to manage risk by diversifying the Master Portfolio's investments
across securities of many different issuers
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, such as earnings, sales or
management, or an issuer's credit quality, or for maintenance of portfolio
diversification.
8
<PAGE>
[GRAPHIC]
You'll find more about
other risks of investing in
this Fund starting on
page 14 and in the SAI.
[GRAPHIC]
Risks and other things to consider
Nations High Yield Bond 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 Master Portfolio
typically invests are not investment grade and 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 Liquidity risk - There is a risk that a security held by the Master
Portfolio cannot be sold at the time desired, or cannot be sold
without adversely affecting the price.
o Investing in the Master Portfolio - Other mutual funds and eligible
investors can buy shares in the Master Portfolio. All investors in
the Master Portfolio invest under the same terms and conditions as
the Fund and pay a proportionate share of the Master Portfolio's
expenses. Other feeder funds that invest in the Master Portfolio may
have different share prices and returns than the Funds because
different feeder funds typically have varying sales charges, and
ongoing administrative and other expenses.
The Fund can withdraw its entire investment from the Master Portfolio
if it believes it's in the best interest of the Fund to do so (for
example the Master Portfolio changed its investment objective). It is
unlikely that this would happen, but if it did, the Fund's portfolio
could be less diversified and therefore less liquid, and expenses
could increase. The Fund might also have to pay brokerage, tax or
other charges.
[GRAPHIC]
A look at the Fund's performance
Because the Fund commenced its operations on February 14, 2000 and
has not been in operation for a full calendar year, no risk/return bar
chart or table is included in this prospectus.
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 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)(1)
Management fees 0.55%
Other expenses(2) 0.38%
----
Total annual Fund operating expenses 0.93%
====
</TABLE>
(1)These fees and expenses include the Fund's portion of the fees and
expenses deducted from the assets of the Master Portfolio.
(2)Other expenses are based on estimates for the current fiscal year.
[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
Although your actual costs may be higher or lower, based on these
assumptions, your costs would be:
<TABLE>
<CAPTION>
1 year 3 years
<S> <C> <C>
Primary A Shares $95 $296
</TABLE>
10
<PAGE>
About the State Municipal Bond Fund
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[GRAPHIC]
About the sub-adviser
BACAP is this Fund's sub-adviser. BACAP's Municipal Fixed Income
Management Team makes the day-to-day investment decisions for the
Fund.
[GRAPHIC]
You'll find more about
BACAP on page 17.
[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 Municipal Income 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 eight 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, or when other investments are more attractive.
11
<PAGE>
[GRAPHIC]
You'll find more about
other risks of investing
in this Fund starting on
page 14 and in the SAI.
[GRAPHIC ]
Risks and other things to consider
Nations Kansas Municipal Income 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.
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.
o State specific risk - State specific risk is the chance that the Fund,
because it invests primarily in securities issued by Kansas and its
municipalities, is more vulnerable to unfavorable developments in
Kansas than funds that invest in municipal bonds of many different
states. For example, the state's economy relies significantly on its
agricultural resources. Adverse conditions affecting these resources
and the states agricultural industry could have a significant impact
on Kansas municipal securities.
[GRAPHIC]
A look at the Fund's performance
Because the Fund has not been in operation for a full calendar year, no
risk/return bar chart or table is included in the prospectus.
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 0.50%
Other expenses(1) 0.39%
----
Total annual Fund operating expenses 0.89%
====
</TABLE>
(1)Other expenses are based on estimated amounts for the current fiscal
year.
[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
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years
<S> <C> <C>
Primary A Shares $61 $255
</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 5. The following are
some other risks and information you should consider before you invest:
o Changing investment objectives and policies - The investment objective
and certain investment policies of any 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 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. The annual portfolio turnover rate for Nations
MidCap Index Fund, Nations High Yield Bond Fund and Nations Kansas
Municipal Income Fund is expected to be no more than 25%, 130%, and
35%, respectively.
14
<PAGE>
Year 2000 readiness - All of the Funds' primary service providers have
confirmed that they have not experienced any notable year 2000 issues. There
is no guarantee, however, that their computer systems will not encounter any
year 2000 issues as the year progresses. If a year 2000 issue does arise,
there could be a negative effect on portfolio operations. A Fund's performance
could also be affected if securities it holds decrease in value because of
year 2000 issues.
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 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:
Annual investment advisory fee, as a % of average daily net assets
<TABLE>
<CAPTION>
Maximum
advisory
fee
<S> <C>
Nations MidCap Index Fund 0.40%
Nations High Yield Bond Fund(1) 0.55%
Nations Kansas Municipal Income Fund 0.50%
</TABLE>
(1)This Fund doesn't have its own investment adviser because it invests in
Nations High Yield Bond Master Portfolio. BAAI is the investment adviser to
the Master Portfolio.
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]
Banc of America
Capital Management, Inc.
One Bank of America Plaza
Charlotte, North Carolina 28255
Banc of America Capital Management, Inc.
BACAP, the successor to TradeStreet Investment Associates, Inc., is a
registered investment adviser and a wholly-owned subsidiary of Bank of
America. Its management expertise covers all major domestic asset classes,
including equity and fixed income securities, and money market instruments.
Currently managing more than $90 billion, BACAP has over 200 institutional
clients and is sub-adviser to more than 50 mutual funds in the Nations Funds
family. BACAP takes a team approach to investment management. Each team has
access to the latest technology and analytical resources.
BACAP is the investment sub-adviser to the Funds shown in the table below. The
table also tells you which internal BACAP asset management team is responsible
for making the day-to-day investment decisions for each Fund.
<TABLE>
<CAPTION>
Fund BACAP Team
<S> <C>
Nations MidCap Index Fund Quantitative Strategies Management Team
Nations Kansas Municipal Municipal Fixed Income
Income Fund Management Team
</TABLE>
[GRAPHIC]
MacKay Shields LLC
9 West 57th Street
New York, New York 10019
MacKay Shields LLC
Founded in 1938, MacKay Shields is an independently-managed, wholly-owned
subsidiary of New York Life Insurance Company. The firm's 63 investment
professionals manage more than $30 billion in assets, including over $6
billion in high yield assets.
MacKay Shields' High Yield Portfolio Management Team is responsible for making
the day-to-day decisions for Nations High Yield Bond Master Portfolio.
Prior Performance of other high yield accounts managed by MacKay Shields
Nations High Yield Bond Fund commenced its operation on February 14, 2000. The
table below is designed to show you how a similar composite of high yield
accounts managed by MacKay Shields performed over various time periods in the
past.
The MacKay Shields composite's investment objective, policies and strategies
are substantially similar to those of Nations High Yield Bond Fund.
The table below shows the returns for the MacKay Shields composite compared
with the CS First Boston High Yield Index for the periods ending December 31,
1999. The returns reflect deduction of certain expenses, but not investment
advisory fees, and assume all dividends and distributions have been
reinvested.
Average annual total returns as of December 31, 1999
<TABLE>
<CAPTION>
CS First Boston
MacKay Shields High Yield
Composite (%) Index (%)
<S> <C> <C>
one year 11.2% 3.3%
three years 11.0% 5.4%
five years 14.9% 9.1%
since inception (7/1/91) 16.2% 10.8%
</TABLE>
17
<PAGE>
Annual total returns as of December 31, 1999
<TABLE>
<CAPTION>
CS First Boston
MacKay Shields High Yield
Composite (%) Index (%)
<S> <C> <C>
1999 11.2% 3.3%
1998 5.5% 0.6%
1997 16.5% 12.6%
1996 20.2% 12.4%
1995 21.8% 17.4%
1994 3.1% (1.0)%
1993 23.7% 18.9%
1992 24.0% 16.7%
1991 (since 7/1/91) 13.1% 12.9%
</TABLE>
This information is designed to demonstrate the historical track record of
MacKay Shields. It does not indicate how the Fund will perform in the future.
Performance will vary based on many factors, including market conditions, the
composition of the Fund's holdings and the Fund's fees and expenses.
The MacKay Shields composite includes high yield accounts managed by MacKay
Shields. The accounts don't pay the same expenses that mutual funds pay and
aren't subject to the diversification rules, tax restrictions and investment
limits under the 1940 Act or Subchapter M of the Internal Revenue Code.
Returns would have been lower if the composite had been subject to these
expenses and regulations and reflected a deduction for advisory fees.
Performance is expressed in U.S. dollars. The aggregate returns of the
accounts in the composite may not reflect the returns of any particular
account of MacKay Shields. For further information regarding the composite
performance, see the SAI.
[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 0.23%
State Municipal Bond Funds 0.22%
</TABLE>
[GRAPHIC]
PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
PFPC Inc. (PFPC) 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.
18
<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.
19
<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, PFPC 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, PFPC 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.
20
<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.
o We can 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).
21
<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 Bond Fund monthly
Nations Kansas Municipal Income 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.
22
<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.
23
<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.
24
<PAGE>
Corporate obligation - a money market instrument issued by a corporation or
commercial bank.
Crossing networks - an electronic system where anonymous parties can match buy
and sell transactions. These transactions don't affect the market, and
transaction costs are extremely low.
CS First Boston High Yield Index - the Credit Suisse First Boston Global High
Yield Index is an unmanaged, trader priced portfolio constructed to mirror the
high yield debt market. The index is not available for investment.
Debt security - when you invest in a debt security, you are typically lending
your money to a governmental body or company (the issuer) to help fund their
operations or major projects. The issuer pays interest at a specified rate on
a specified date or dates, and repays the principal when the security matures.
Short-term debt securities include money market instruments such as treasury
bills. Long-term debt securities include fixed income securities such as
government and corporate bonds, and mortgage-backed and asset-backed
securities.
Depositary receipts - evidence of the deposit of a security with a custodian
bank. American Depositary Receipts (ADRs), for example, are certificates
traded in U.S. markets representing an interest of a foreign company. They
were created to make it possible for foreign issuers to meet U.S. security
registration requirements. Other examples include ADSs, GDRs and EDRs.
Dividend yield - rate of return of dividends paid on a common or preferred
stock. It equals the amount of the annual dividend on a stock expressed as a
percentage of the stock's current market value.
Dollar roll transaction - the sale by a 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.
25
<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.
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.
26
<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.
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.
27
<PAGE>
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.
Private placement - a private placement is the sale of stocks, bonds or other
investments directly to a qualified investor without having to register the
offering with the U.S. Securities and Exchange Commission or other comparable
foreign regulatory authorities. Qualified investors are typically large
institutional investors rather than individuals. Securities acquired through
private placements generally may not be resold.
Quantitative analysis - an analysis of financial information about a company
or security to identify securities that have the potential for growth or are
otherwise suitable for a fund to buy.
28
<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.
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.
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.
29
<PAGE>
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.
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.
30
<PAGE>
[GRAPHIC]
Where to find more information
You'll find more information about the Index, 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.nations-funds.com
Information about the Funds can be reviewed and copied at the
Commission's Public Reference Room in Washington, D.C. Information on
the operation of the Public Reference Room may be obtained by calling
the Commission at 1-202-942-8090. The reports and other information
about the Funds are available on the EDGAR Database on the Commission's
Internet site at http://www.sec.gov, and copies of this information may
be obtained, after paying a duplicating fee, by electronic request at
the following E-mail address: [email protected], or by writing the
Commission's Public Reference Section, Washington, D.C. 20549-0102.
[GRAPHIC]
SEC file number:
Nations Funds Trust, 811-09645
NF-[ ]-2/00
Nations Funds
40
<PAGE>
[GRAPHIC]
Index Fund
Prospectus -- Investor A Shares
February 14, 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
<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 20.
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 it's part of a balanced portfolio
o you want your portfolio to try to protect 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 -- Banc of America
Capital Management, Inc. (BACAP), 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 8.
<TABLE>
[GRAPHIC]
<S> <C>
About the Index Fund
Nations MidCap Index Fund 4
Sub-adviser: BACAP
- ----------------------------------------------------------
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
BACAP is this Fund's sub-adviser. BACAP's Quantitative Strategies
Management Team makes the day-to-day investment decisions for the
Fund.
[GRAPHIC]
You'll find more about
BACAP on page 9.
[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. As of the date of this prospectus, the
weighted average market capitalization of the companies in the S&P 400
was $5.5 billion. 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 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 adversely 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 7 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
electronic trading systems such as crossing networks and other trading
strategies.
The team may sell a stock when its percentage weighting in the index is
reduced, or when the stock is removed from the index, when the portfolio
management team believes the stock is not liquid enough, 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]
A look at the Fund's performance
Because the Fund has not been in operation for a full calendar year, no
risk/return bar chart or table is included in the prospectus.
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]
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 0.00%
Other expenses(1) 0.33%
----
Total annual Fund operating expenses 0.73%
====
</TABLE>
(1) Other expenses are based on estimates for the current fiscal year.
[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 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
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years
<S> <C> <C>
Investor A Shares $36 $195
</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 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. The annual portfolio turnover rate for Nations
MidCap Index Fund is expected to be no more than 25%.
o Year 2000 readiness - All of the Funds' primary service providers
have confirmed that they have not experienced any notable year 2000
issues. There is no guarantee, however, that their computer systems
will not encounter any year 2000 issues as the year progresses. If a
year 2000 issue does arise, there could be a negative effect on
portfolio operations. A Fund's performance could also be affected if
securities it holds decrease in value because of year 2000 issues.
7
<PAGE>
[GRAPHIC]
How the Fund is 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 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. The Fund 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 the investment sub-adviser for the services it
provides 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 fee BAAI can receive:
Annual investment advisory fee, as a % of average daily net assets
<TABLE>
<CAPTION>
Maximum
advisory
fee
<S> <C>
Nations MidCap Index Fund 0.40%
</TABLE>
8
<PAGE>
Investment sub-adviser
Nations Funds and BAAI have engaged an investment sub-adviser, Banc of America
Capital Management, Inc., the successor to TradeStreet Investment Associates,
Inc., to provide day-to-day portfolio management for the Fund. BACAP functions
under the supervision of BAAI and the Board of Trustees of Nations Funds.
[GRAPHIC]
Banc of America Capital Management, Inc.
One Bank of America Plaza
Charlotte, North Carolina 28255
Banc of America Capital Management, Inc.
BACAP is a registered investment adviser and a wholly-owned subsidiary of Bank
of America. Its management expertise covers all major domestic asset classes,
including equity and fixed income securities and money market instruments.
Currently managing more than $90 billion, BACAP has over 200 institutional
clients and is sub-adviser to more than 50 mutual funds in the Nations Funds
family. BACAP takes a team approach to investment management. Each team has
access to the latest technology and analytical resources.
BACAP's Quantitative Strategies Management Team is responsible for making the
day-to-day investment decisions for the Fund.
[GRAPHIC]
Stephens Inc.
111 Center Street
Little Rock, Arkansas 72201
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.
[GRAPHIC]
PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
PFPC Inc. (PFPC) 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>
<S> <C>
Ways to
buy, sell or How much you can buy,
exchange sell or exchange Other things to know
-------------------- -------------------------------------- -----------------------------------------------
Buying shares In a lump sum 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
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 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 If you paid for your shares with a check that
o other restrictions may apply to wasn't certified, we'll hold the sale proceeds
withdrawals from retirement plan when you sell those shares for at least 15 days
accounts 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.
- ------------------------------------------------------------------------------------------------------------------------------------
Exchanging shares In a lump sum 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.
Using our o minimum $25 per exchange You must already have an investment in the
Automatic Funds you want to exchange. You can make
Exchange exchanges monthly or quarterly.
Feature
</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 the Fund's shares -- or its net
asset value per share. We calculate net asset value per share for each class
of the Fund at the end of each business day. First, we calculate the net asset
value for each class of the 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, PFPC 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 12.
[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, PFPC 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 PFPC. 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.
o We can 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 PFPC
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 PFPC 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]
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.
[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.
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 Services,
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]
Distributions and taxes
[GRAPHIC]
The power of compounding
Reinvesting your distributions buys you more shares of the
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 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 the 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 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>
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.
[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.
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>
[GRAPHIC]
Where to find more information
You'll find more information about the Index Fund 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
the Fund's performance during the period covered.
[GRAPHIC]
Statement of Additional Information
The SAI contains additional information about the Fund and its
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 Fund 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.nations-funds.com
Information about the Funds can be reviewed and copied at the
Commission's Public Reference Room in Washington, D.C. Information on
the operation of the Public Reference Room may be obtained by calling
the Commission at 1-202-942-8090. The reports and other information
about the Funds are available on the EDGAR Database on the Commission's
Internet site at http://www.sec.gov, and copies of this information may
be obtained, after paying a duplicating fee, by electronic request at
the following E-mail address: [email protected], or by writing the
Commission's Public Reference Section, Washington, D.C. 20549-0102.
[GRAPHIC]
SEC file number:
Nations Funds Trust, 811-09648
NF-[ ]-2/00 Nations Funds
41
<PAGE>
Fixed Income Fund and State Municipal Bond Funds
Prospectus -- Investor A, B and C Shares
February 14, 2000
Fixed Income Fund
Nations High Yield Bond Fund
State Municipal Bond Fund
Nations Kansas Municipal Income 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 42.
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 high yield debt securities.
High yield debt securities, like all 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 high yield
debt securities, most importantly their credit risk. The value of high yield
debt securities is more sensitive to the perceived creditworthiness of the
security's issuer than other types 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 State Municipal Bond Funds invest primarily in securities issued by one
state, Nations Kansas Municipal Income 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, particularly high yield debt securities
o you're seeking preservation of capital and stability of share price
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 are a resident of Kansas and you want to reduce your state 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 5.
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 15.
<TABLE>
[GRAPHIC]
About the Funds
<S> <C>
Fixed Income Fund
Nations High Yield Bond Fund 5
Sub-adviser: MacKay Shields LLC
- -------------------------------------------------------
State Municipal Bond Fund
Nations Kansas Municipal Income Fund 9
Sub-adviser: Banc of America Capital Management, Inc.
- -------------------------------------------------------
Other important information 13
- -------------------------------------------------------
How the Funds are managed 15
[GRAPHIC]
About your investment
Information for investors
Choosing a share class 18
Buying, selling and exchanging shares 29
How selling and servicing agents are paid 38
Distributions and taxes 40
- -------------------------------------------------------
Terms used in this prospectus 42
- -------------------------------------------------------
Where to find more information back cover
</TABLE>
4
<PAGE>
About the Fixed Income Fund
- --------------------------------------------------------------------------------
[GRAPHIC]
About the sub-adviser
The Fund does not have its own investment adviser or sub-adviser because it's a
"feeder" fund. A feeder fund typically invests all of its assets in another
fund, which is called a "master portfolio." Master Portfolio and Fund are
sometimes uses interchangeably.
MacKay Shields LLC (MacKay Shields) is the Master Portfolio's sub-adviser. The
High Yield Portfolio Management Team makes the day-to-day investment decisions
for the Master Portfolio.
[GRAPHIC]
You'll find more about MacKay Shields and the High Yield Portfolio Management
Team management team on page 15.
[GRAPHIC]
High yield debt securities
This Fund invests primarily in high yield debt securities, which are often
referred to as "junk bonds." 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 Bond 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 invests all of its assets in Nations High Yield Bond Master Portfolio
(the Master Portfolio). The Master Portfolio has the same investment objective
as the Fund.
The Master Portfolio normally invests at least 65% of its assets in domestic and
foreign corporate high yield debt securities. These securities are not rated
investment grade, but generally will be rated "B" or better by Moody's or S&P.
The portfolio management team may choose unrated securities if it believes they
are of comparable quality at the time of investment. The portfolio is not
managed for any specific duration.
The Master Portfolio invests primarily in:
o Domestic corporate high yield debt securities, including private placements
o U.S. dollar-denominated foreign corporate high yield debt securities,
including private placements
o Zero-coupon bonds
o U.S. government obligations
o Equity securities (up to 25% of its assets), which may include convertible
securities
The Master Portfolio also may invest in securities that aren't part of its
principal investment strategies, but it won't hold more than 10% of its assets
in any one type of these securities. These securities are described in the SAI.
When creating the portfolio, the portfolio management team:
o focuses on individual security selection (bottom up analysis)
o selects securities using fundamental credit analysis
o emphasizes current income while attempting to minimize risk to principal
o seeks to identify a catalyst for capital appreciation such as an operational
or financial restructuring
o tries to manage risk by diversifying the Master Portfolio's investments across
securities of many different issuers
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, such as earnings, sales or
management, or an issuer's credit quality, or for maintenance of portfolio
diversification.
5
<PAGE>
[GRAPHIC]
You'll find more about other risks of investing in this Fund starting on page 13
and in the SAI.
[GRAPHIC]
Risks and other things to consider
Nations High Yield Bond 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 Master Portfolio typically
invests are not investment grade and 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 Liquidity risk - There is a risk that a security held by the Master Portfolio
cannot be sold at the time desired, or cannot be sold without adversely
affecting the price.
o Investing in the Master Portfolio - Other mutual funds and eligible investors
can buy shares in the Master Portfolio. All investors in the Master Portfolio
invest under the same terms and conditions as the Fund and pay a proportionate
share of the Master Portfolio's expenses. Other feeder funds that invest in
the Master Portfolio may have different share prices and returns than the
Funds because different feeder funds typically have varying sales charges, and
ongoing administrative and other expenses.
The Fund can withdraw its entire investment from the Master Portfolio if it
believes it's in the best interest of the Fund to do so (for example, the Master
Portfolio changed its investment objective). It is unlikely that this would
happen, but if it did, the Fund's portfolio could be less diversified and
therefore less liquid, and expenses could increase. The Fund might also have to
pay brokerage, tax or other charges.
[GRAPHIC]
A look at the Fund's performance
Because the Fund commenced its operations on February 14, 2000 and has not been
in operation for a full calendar year, no risk/return bar chart or table is
included in the prospectus.
6
<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.
[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)(4)
Management fees 0.55% 0.55% 0.55%
Distribution (12b-1) and shareholder servicing fees 0.25% 1.00% 1.00%
Other expenses(5) 0.38% 0.38% 0.38%
----- ------ ------
Total annual Fund operating expenses 1.18% 1.93% 1.93%
===== ====== ======
</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 23 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 25 for details.
4 These fees and expenses include the Fund's portion of the fees and expenses
deducted from the assets of the Master Portfolio.
5 Other expenses are based on estimates for the current fiscal year.
7
<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
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<S> <C> <C>
1 year 3 years
Investor A Shares $590 $832
Investor B Shares $696 $906
Investor C Shares $296 $606
</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>
1 year 3 years
Investor B Shares $196 $606
Investor C Shares $196 $606
</TABLE>
8
<PAGE>
About the State Municipal Bond Fund
- --------------------------------------------------------------------------------
[GRAPHIC]
About the sub-adviser
Banc of America Capital Management, Inc. (BACAP) is this Fund's sub-adviser.
BACAP's Municipal Fixed Income Management Team makes the day-to-day investment
decisions for the Fund.
[GRAPHIC]
You'll find more about BACAP on page 16.
[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 Municipal Income 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 eight 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 or when other investments are more attractive.
9
<PAGE>
[GRAPHIC]
You'll find more about other risks of investing in this Fund starting on page 13
and in the SAI.
[GRAPHIC]
Risks and other things to consider
Nations Kansas Municipal Income 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.
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. o State
specific risk - State specific risk is the chance that the Fund, because it
invests primarily in securities issued by Kansas and its municipalities, is
more vulnerable to unfavorable developments in Kansas than funds that invest
in municipal bonds of many different states. For example, the state's economy
relies significantly on its agricultural resources. Adverse conditions
affecting the resources and the state's agricultural industry could have a
significant impact on Kansas municipal securities.
[GRAPHIC]
A look at the Fund's performance
Because the Fund has not been in operation for a full calendar year, no
risk/return bar chart or table is included in the prospectus.
10
<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
(Expenses that are deducted from the Fund's assets)
Management fees 0.50% 0.50% 0.50%
Distribution (12b-1) and shareholder
servicing fees 0.25% 1.00% 1.00%
Other expenses(4) 0.39% 0.39% 0.39%
------ ------ ------
Total annual Fund operating expenses 1.14% 1.89% 1.89%
Fee waivers and/or reimbursements (0.29)% (0.29)% (0.29)%
------ ------ ------
Total net expenses(5) 0.85% 1.60% 1.60%
====== ====== ======
</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 22 for details.
2 This charge decreases over time. Please see page 23 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 25 for details.
4 Other expenses are based on estimated amounts for the current fiscal year.
11
<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
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 year 3 years
<S> <C> <C>
Investor A Shares $ $
Investor B Shares $ $
Investor C Shares $ $
</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
<S> <C> <C>
Investor B Shares $ $
Investor C Shares $ $
</TABLE>
12
<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 5. The following are
some other risks and information you should consider before you invest:
o Changing investment objectives and policies - The investment objective and
certain investment policies of any 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 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. The annual portfolio turnover rate for Nations
High Yield Bond Fund and Nations Kansas Municipal Income Fund is expected to
be no more than 130% and 35%, respectively.
13
<PAGE>
o Year 2000 readiness - All of the Funds' primary service providers have
confirmed that they have not experienced any notable year 2000 issues. There
is no guarantee, however, that their computer systems will not encounter any
year 2000 issues as the year progresses. If a year 2000 issue does arise,
there could be a negative effect on portfolio operations. A Fund's performance
could also be affected if securities it holds decrease in value because of
year 2000 issues.
14
<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 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:
Annual investment advisory fee, as a % of average daily net assets
<TABLE>
<CAPTION>
Maximum
advisory
fee
<S> <C>
Nations High Yield Bond Fund(1) 0.55%
Nations Kansas Municipal Income Fund 0.40%
</TABLE>
1 This Fund doesn't have its own investment adviser because it invests in
Nations High Yield Bond Master Portfolio. BAAI is the investment adviser to
the Master Portfolio.
15
<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]
Banc of America Capital Management, Inc.
One Bank of America Plaza
Charlotte, North Carolina 28255
Banc of America Capital Management, Inc.
BACAP, the successor to TradeStreet Investment Associates, Inc., is a registered
investment adviser and a wholly-owned subsidiary of Bank of America. Its
management expertise covers all major domestic asset classes, including equity
and fixed income securities, and money market instruments.
Currently managing more than $90 billion, BACAP has over 200 institutional
clients and is sub-adviser to more than 50 mutual funds in the Nations Funds
family. BACAP takes a team approach to investment management. Each team has
access to the latest technology and analytical resources.
BACAP is the investment sub-adviser to the Funds shown in the table below. The
table also tells you which internal BACAP asset management team is responsible
for making the day-to-day investment decisions for each Fund.
<TABLE>
<CAPTION>
Fund BACAP Team
<S> <C>
Nations Kansas Municipal Income Fund Municipal Fixed Income
Management Team
</TABLE>
[GRAPHIC]
MacKay Shields LLC
9 West 57th Street
New York, New York 10019
MacKay Shields LLC
Founded in 1938, MacKay Shields is an independently-managed, wholly-owned
subsidiary of New York Life Insurance Company. The firm's 63 investment
professionals manage more than $30 billion in assets, including over $6 billion
in high yield assets.
MacKay Shields' High Yield Portfolio Management Team is responsible for making
the day-to-day decisions for Nations High Yield Bond Master Portfolio.
Prior performance of other high yield accounts managed by MacKay Shields
Nations High Yield Bond Fund commenced its operation on February 14, 2000. The
table below is designed to show you how a similar composite of high yield
accounts managed by MacKay Shields performed over various time periods in the
past.
The MacKay Shields composite's investment objective, policies and strategies are
substantially similar to those of Nations High Yield Bond Fund.
The table below shows the returns for the MacKay Shields composite compared with
the CS First Boston High Yield Index for the periods ending December 31, 1999.
The returns reflect deduction of certain expenses, but not investment advisory
fees, and assume all dividends and distributions have been reinvested.
Average annual total returns as of December 31, 1999
<TABLE>
<CAPTION>
CS First Boston
MacKay Shields High Yield
Composite (%) Index (%)
<S> <C> <C>
one year 11.2% 3.3%
three years 11.0% 5.4%
five years 14.9% 9.1%
since inception (7/1/91) 16.2% 10.8%
</TABLE>
16
<PAGE>
Annual total returns as of December 31, 1999
<TABLE>
<CAPTION>
CS First Boston
MacKay Shields High Yield
Composite (%) Index (%)
<S> <C> <C>
1999 11.2% 3.3%
1998 5.5% 0.6%
1997 16.5% 12.6%
1996 20.2% 12.4%
1995 21.8% 17.4%
1994 3.1% (1.0)%
1993 23.7% 18.9%
1992 24.0% 16.7%
1991 (since 7/1/91) 13.1% 12.9%
</TABLE>
This information is designed to demonstrate the historical track record of
MacKay Shields. It does not indicate how the Fund will perform in the future.
Performance will vary based on many factors, including market conditions, the
composition of the Fund's holdings and the Fund's fees and expenses.
The MacKay Shields composite includes high yield accounts managed by MacKay
Shields. The accounts don't pay the same expenses that mutual funds pay and
aren't subject to the diversification rules, tax restrictions and investment
limits under the 1940 Act or Subchapter M of the Internal Revenue Code. Returns
would have been lower if the composite had been subject to these expenses and
regulations and reflected a deduction for advisory fees. Performance is
expressed in U.S. dollars. The aggregate returns of the accounts in the
composite may not reflect the returns of any particular account of MacKay
Shields. For further information regarding the composite performance, see the
SAI.
[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. 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 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>
Fixed Income Funds 0.23%
State Municipal Bond Funds 0.22%
</TABLE>
[GRAPHIC]
PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
PFPC Inc. (PFPC) 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]
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 Nations Kansas
Investor A Shares Bond Fund Municipal Income Fund
<S> <C> <C>
Maximum amount you can buy no limit no limit
Maximum front-end sales charge 4.75% 3.25%
Maximum deferred sales charge(1) none none
Redemption fee(2) none none
Maximum annual distribution and shareholder 0.25% 0.25%
servicing fees distribution (12b-1)/ distribution (12b-1)/
service fee service fee
Conversion feature none none
</TABLE>
1 A 1.00% contingent 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 22 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
22 for details.
18
<PAGE>
<TABLE>
<CAPTION>
Nations High Yield Nations Kansas
Investor B Shares Bond Fund Municipal Income Fund
<S> <C> <C>
Maximum amount you can buy $250,000 $250,000
Maximum front-end sales charge none none
Maximum deferred sales charge(1) 5.00% 3.00%
Redemption fee none none
Maximum annual distribution and shareholder 0.75% 0.75%
servicing fees distribution distribution
(12b-1) fee (12b-1) fee
0.25% service fee 0.25% service fee
Conversion feature yes yes
</TABLE>
1 This charge decreases over time. Please see page 23 for details.
<TABLE>
<CAPTION>
Nations High Yield Bond
Fund, Nations Kansas
Investor C Shares Municipal Income Fund
<S> <C>
Maximum amount you can buy no limit
Maximum front-end sales charge none
Maximum deferred sales charge(1) 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. Different charges apply to Investor B shares
of certain funds bought before January 1, 1996 and after July 31, 1997. Please
see page 25 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.
19
<PAGE>
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]
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]
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.
20
<PAGE>
<TABLE>
<CAPTION>
Nations Kansas Municipal Income 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.
<TABLE>
<CAPTION>
Nations High Yield Bond Fund
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
<S> <C> <C> <C>
$0-$99,999 4.75% 4.99% 4.99%
$50,000- $99,999 4.50% 4.71% 4.00%
$100,000-$249,999 3.50% 3.63% 3.00%
$250,000- $499,999 2.50% 2.56% 2.25%
$500,000-$999,999 2.00% 2.04% 1.75%
$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.
21
<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 27
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.
22
<PAGE>
<TABLE>
<CAPTION>
Nations Kansas Municipal Income 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
------------ -------------------------- ------------- ---------
$500,000-
$0-$499,999 $999,999
<S> <C> <C> <C> <C> <C>
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>
<TABLE>
<CAPTION>
Nations High Yield Bond Fund
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
------------ ---------------------------------------- ------------- ---------
$250,000- $500,000-
$0-$249,999 $499,999 $999,999
<S> <C> <C> <C> <C> <C> <C>
the first year you
own them 5.0% 4.0% 3.0% 2.0% none 5.0%
the second year
you own them 4.0% 3.0% 2.0% 1.0% none 4.0%
the third year
you own them 3.0% 3.0% 1.0% none none 3.0%
the fourth year
you own them 3.0% 2.0% none none none 2.0%
the fifth year you
own them 2.0% 1.0% none none none 2.0%
the sixth year
you own them 1.0% none none none none 1.0%
after six years of
owning them none 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.
23
<PAGE>
About the conversion feature
Investor B Shares generally convert automatically to Investor A Shares according
to the following schedule:
<TABLE>
<CAPTION>
Nations Kansas Bond Municipal Income 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>
<TABLE>
<CAPTION>
Nations High Yield 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 nine years
$250,000-$499,999 six years
$500,000-$999,999 five years
before August 1, 1997 eight 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.
24
<PAGE>
[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 27
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.
[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.
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 in
order 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.
25
<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 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 and their family
members may buy Investor A Shares without paying a front-end sales charge
according to the internal policies and procedures of the employing
broker/dealer 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
26
<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
In addition, you can buy Investor A Shares without paying a sales charge if you
buy the shares with proceeds from the redemption of shares of a nonaffiliated
mutual fund as long as the redemption of the nonaffiliated fund shares occurred
within 45 days prior to the purchase of the Investor A Shares. We must receive a
copy of the confirmation of the redemption transaction in order for you to avoid
paying the sales charge.
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
27
<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. PFPC, Stephens or their agents must receive
your written request within 120 days after you sell your shares.
28
<PAGE>
[GRAPHIC]
Buying, selling and exchanging shares
[GRAPHIC]
When you sell shares of a mutual, fund, the fund is effectively "buying" them
back from you. This is called a redemption.
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.
29
<PAGE>
<TABLE>
<CAPTION>
Ways to
buy, sell or How much you can buy,
exchange sell or exchange Other things to know
------------------ --------------------------------------- ---------------------------------------------------
<S> <C> <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
Investor B Shares are not available for Nations
o $250 for certain fee-based accounts 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 limits 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 B Shares of Nations Reserves Money
Market Funds
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 Investor C Shares of Nations Reserves Money
Market Funds
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>
30
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[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, PFPC 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.
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[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.
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[GRAPHIC]
For more information about telephone orders, see page 29.
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, PFPC 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
PFPC. 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.
o We can 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.
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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]
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 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.
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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 PFPC
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.
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.
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<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 B Shares of Nations Reserves Money Market Funds
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 Investor C Shares of Nations Reserves Money Market Funds
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.
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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 PFPC 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.
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[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.
[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.
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.
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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 Investment Services,
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.
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[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 High Yield Bond Fund monthly
Nations Kansas Municipal Income Fund monthly
</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.
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.
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[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.
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.
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[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.
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CS First Boston High Yield Index - the Credit Suisse First Boston Global High
Yield Index is an unmanaged, trader priced portfolio constructed to mirror the
high yield debt market. The index is not available for investment.
Debt security - when you invest in a debt security, you are typically lending
your money to a governmental body or company (the issuer) to help fund their
operations or major projects. The issuer pays interest at a specified rate on a
specified date or dates, and repays the principal when the security matures.
Short-term debt securities include money market instruments such as treasury
bills. Long-term debt securities include fixed income securities such as
government and corporate bonds, and mortgage-backed and asset-backed securities.
Depositary receipts - evidence of the deposit of a security with a custodian
bank. American Depositary Receipts (ADRs), for example, are certificates traded
in U.S. markets representing an interest of a foreign company. They were created
to make it possible for foreign issuers to meet U.S. security registration
requirements. Other examples include ADSs, GDRs and EDRs.
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.
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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.
44
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Lehman Municipal Bond Index - a broad-based, unmanaged index of 8,000 investment
grade bonds with long-term maturities. All dividends are reinvested.
Liquidity - a measurement of how easily a security can be bought or sold at a
price that is close to its market value.
Merrill Lynch 1-3 Year Treasury Index - an index of U.S. Treasury bonds with
maturities of 1 to 3 years. All dividends are reinvested.
Money market instrument - a short-term debt security that matures in 13 months
or less. Money market instruments include U.S. Treasury obligations, U.S.
government obligations, certificates of deposit, bankers' acceptances,
commercial paper, repurchase agreements and certain municipal securities.
Mortgage-backed security or Mortgage-related security - a debt security that
gives you an interest in, and is backed by, a pool of residential mortgages
issued by the U.S. government or by financial institutions. The underlying
mortgages may be guaranteed by the U.S. government or one of its agencies,
authorities or instrumentalities. Mortgage-backed securities typically make
monthly payments, which are a combination of interest and a portion of the
principal of the underlying mortgages.
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.
45
<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.
Private placement - a private placement is the sale of stocks, bonds or other
investments directly to a qualified investor without having to register the
offering with the U.S. Securities and Exchange Commission or other comparable
foreign regulatory authorities. Qualified investors are typically large
institutional investors rather than individuals. Securities acquired through
private placements generally may not be resold.
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.
46
<PAGE>
[GRAPHIC]
Where to find more information
You'll find more information about the Fixed Income and State 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: 1.800.321.7854
By mail:
Nations Funds
c/o Stephens Inc.
One Bank of America Plaza
33rd Floor
Charlotte, NC 28255
On the Internet: www.nations-funds.com
Information about the Funds can be reviewed and copied at the Commission's
Public Reference Room in Washington, D.C. Information on the operation of the
Public Reference Room may be obtained by calling the Commission at
1-202-942-8090. The reports and other information about the Funds are available
on the EDGAR Database on the Commission's Internet site at http://www.sec.gov,
and copies of this information may be obtained, after paying a duplicating fee,
by electronic request at the following E-mail address: [email protected], or by
writing the Commission's Public Reference Section, Washington, D.C. 20549-0102.
SEC file number:
Nations Funds Trust, 811-09645 Nations Funds
NF-[ ]-2/00
<PAGE>
NATIONS FUNDS TRUST
Statement of Additional Information
Nations High Yield Bond Fund
Nations Kansas Municipal Income Fund
Nations MidCap Index Fund
Primary A, Investor A, Investor B and Investor C Shares
February 14, 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 of shares in which one is interested, dated February 14,
2000 (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
<TABLE>
<CAPTION>
<S> <C>
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
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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
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 Significant Shareholders...................................................... 66
SCHEDULE A - Description of Ratings.......................................................... A-1
</TABLE>
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 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 Bond Fund (the "High
Yield Fund"), Nations Kansas Municipal Income 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. Banc of America Capital Management, Inc. ("BACAP") is the investment
sub-adviser to the MidCap Index Fund and the Kansas Fund. MacKay Shields LLC
("MacKay Shields") is the investment sub-adviser to the High Yield Fund. As used
herein the term "Adviser" shall mean BAAI, BACAP and/or MacKay Shields 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 a Fund will achieve its
investment objective. The features of the Funds' principal investment strategies
and the principal risks associated with those investment strategies also are
discussed in the Prospectuses.
The 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 Trust, 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, the rules and regulations thereunder
and any exemptive relief obtained by the Funds.
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.
3
<PAGE>
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, commercial paper and U.S. government securities
(including obligations, such as repurchase agreements, secured by such
instruments). The debt securities in which the Fund invests may be in non-dollar
denominated foreign currency and may include debt issued by countries or
corporations located in emerging market countries. 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.
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.
Additional information on the particular types of securities in which
certain Funds may invest in is set forth below.
4
<PAGE>
Asset-Backed Securities
In General. Certain Funds may purchase 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 include multi-class pass-through securities.
Payments of principal of and interest on the Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distribution on the multi-class pass-through securities.
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Moreover, principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates, resulting in a loss of all or part of the premium if any has
been paid. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semiannual basis.
The principal and interest payments on the Mortgage Assets may be
allocated among the various classes of CMOs in several ways. Typically, payments
of principal, including any prepayments, on the underlying mortgages are applied
to the classes in the order of their respective stated maturities or final
distribution dates, so that no payment of principal is made on CMOs of a class
until all CMOs of other classes having earlier stated maturities or final
distribution dates have been paid in full.
Stripped mortgage-backed securities ("SMBS") are derivative multi-class
mortgage securities. A Fund will only invest in SMBS that are obligations backed
by the full faith and credit of the U.S. Government. SMBS are usually structured
with two classes that receive different proportions of the interest and
principal distributions from a pool of mortgage assets. A Fund will only invest
in SMBS whose mortgage assets are U.S. Government obligations.
A common type of SMBS will be structured so that one class receives
some of the interest and most of the principal from the mortgage assets, while
the other class receives most of the interest and the remainder of the
principal. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, a Fund may fail to fully recoup its initial investment
in these securities. The market value of any class which consists primarily or
entirely of principal payments generally is unusually volatile in response to
changes in interest rates.
The average life of mortgage-backed securities varies with the
maturities of the underlying mortgage instruments. The average life is likely to
be substantially less than the original maturity of the mortgage pools
underlying the securities as the result of mortgage prepayments, mortgage
refinancings, or foreclosures. The rate of mortgage prepayments, and hence the
average life of the certificates, will be a function of the level of interest
rates, general economic conditions, the location and age of the mortgage and
other social and demographic conditions. Such prepayments are passed through to
the registered holder with the regular monthly payments of principal and
interest and have the effect of reducing future payments. Estimated average life
will be determined by the Adviser and used for the purpose of determining the
average weighted maturity and duration of the Funds.
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.
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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.
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Returns on Mortgage-Backed Securities
Yields on mortgage-backed pass-through securities are typically quoted
based on the maturity of the underlying instruments and the associated average
life assumption. Actual prepayment experience may cause the yield to differ from
the assumed average life yield.
Reinvestment of prepayments may occur at higher or lower interest rates
than the original investment, thus affecting the yields of the 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.
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Commercial Instruments
Certain Funds may purchase commercial instruments. Commercial
Instruments consist of short-term U.S. dollar-denominated obligations issued by
domestic corporations or issued in the U.S. by foreign corporations and foreign
commercial banks. 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.
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Convertible Securities
Certain Funds may invest in convertible securities, such as bonds,
notes, debentures, preferred stocks and other securities that may be converted
into common stock. All convertible securities purchased by the Fund will be
rated in the top two categories by an 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 High Yield Fund will invest
will be rated BB or lower by Standard & Poor's Corporation ("S&P") or Ba or
below by Moody's Investors Services, Inc. ("Moody's").
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The corporate debt securities in which the Kansas Fund or the MidCap
Index Fund will invest will be rated investment grade by at least one NRSRO
(e.g., BBB or above by S&P or Baa or above by Moody's. Commercial paper
purchased by the Kansas Fund or the MidCap Index Fund 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, as described above, 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.
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.
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The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Fund's right to purchase
from the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Fund is able to purchase them.
Similarly, the Fund may be required to purchase securities in connection with a
dollar roll at a higher price than may otherwise be available on the open
market. Since, as noted above, the counterparty is required to deliver a
similar, but not identical security to the Fund, the security that the Fund is
required to buy under the dollar roll may be worth less than an identical
security. Finally, there can be no assurance that the Fund's use of the cash
that it receives from a dollar roll will provide a return that exceeds borrowing
costs.
Equity Swap Contracts
Certain Funds may from time to time enter into equity swap contracts.
The counterparty to an equity swap contract will typically be a bank, investment
banking firm or broker/dealer. For example, the counterparty will generally
agree to pay a Fund the amount, if any, by which the notional amount of the
Equity Swap Contract would have increased in value had it been invested in the
stocks comprising the S&P 500 Index in proportion to the composition of the
Index, plus the dividends that would have been received on those stocks. A Fund
will agree to pay to the counterparty a floating rate of interest (typically the
London Inter Bank Offered Rate) on the notional amount of the Equity Swap
Contract plus the amount, if any, by which that notional amount would have
decreased in value had it been invested in such stocks. Therefore, the return to
a Fund on any Equity Swap Contract should be the gain or loss on 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.
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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, 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).
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For more information about the risks associated with foreign
investments see "Investment Risks."
Futures, Options and Other Derivative Instruments
Futures Contracts in General. A futures contract is an agreement
between two parties for the future delivery of fixed income securities or equity
securities or for the payment or acceptance of a cash settlement in the case of
futures contracts on an index of fixed income or equity securities. A "sale" of
a futures contract means the contractual obligation to deliver the securities at
a specified price on a specified date, or to make the cash settlement called for
by the contract. Futures contracts have been designed by exchanges which have
been designated "contract markets" by the 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.
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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.
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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.
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.
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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.
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.
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Purchase and Sale of Interest Rate Futures. A Fund may purchase and
sell interest rate futures contracts on foreign government securities including,
but not limited to, debt securities of the governments and central banks of
France, Germany, Denmark and Japan for the purpose of hedging fixed income and
interest sensitive securities against the adverse effects of anticipated
movements in interest rates.
A Fund may sell interest rate futures contracts in anticipation of an
increase in the general level of interest rates. Generally, as interest rates
rise, the market value of the fixed income securities held by a Fund will fall,
thus reducing the net asset value of the Fund. This interest rate risk can be
reduced without employing futures as a hedge by selling long-term fixed income
securities and either reinvesting the proceeds in securities with shorter
maturities or by holding assets in cash. This strategy, however, entails
increased transaction costs to a Fund in the form of dealer spreads and
brokerage commissions.
The sale of interest rate futures contracts provides an alternative
means of hedging against rising interest rates. As rates increase, the value of
a Fund's short position in the futures contracts will also tend to increase,
thus offsetting all or a portion of the depreciation in the market value of a
Fund's investments that are being hedged. While a Fund will incur commission
expenses in selling and closing out futures positions (which is done by taking
an opposite position which operates to terminate the position in the futures
contract), commissions on futures transactions are lower than transaction costs
incurred in the purchase and sale of portfolio securities.
Options on Stock Index Futures Contracts and Interest Rate Futures
Contracts. A Fund may purchase and write call and put options on non-U.S. stock
index and interest rate futures contracts. A Fund may use such options on
futures contracts in connection with its hedging strategies in lieu of
purchasing and writing options directly on the underlying securities or stock
indices or purchasing and selling the underlying futures. For example, a Fund
may purchase put options or write call options on stock index futures, or
interest rate futures, rather than selling futures contracts, in anticipation of
a decline in general stock market prices or rise in interest rates,
respectively, or purchase call options or write put options on stock index or
interest rate futures, rather than purchasing such futures, to hedge against
possible increases in the price of equity securities or debt securities,
respectively, which the Fund intends to purchase.
Purchase and Sale of Currency Futures Contracts and Related Options. In
order to hedge its portfolio and to protect it against possible variations in
foreign exchange rates pending the settlement of securities transactions, a Fund
may buy or sell currency futures contracts and related options. If a fall in
exchange rates for a particular currency is anticipated, a Fund may sell a
currency futures contract or a call option thereon or purchase a put option on
such futures contract as a hedge. If it is anticipated that exchange rates will
rise, a Fund may purchase a currency futures contract or a call option thereon
or sell (write) a put option to protect against an increase in the price of
securities denominated in a particular currency a Fund intends to purchase.
These futures contracts and related options thereon will be used only as a hedge
against anticipated currency rate changes, and all options on currency futures
written by a Fund will be covered.
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.
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The Fund will write (sell) only covered put and call options on
currency futures. This means that a Fund will provide for its obligations upon
exercise of the option by segregating sufficient cash or short-term obligations
or by holding an offsetting position in the option or underlying currency
future, or a combination of the foregoing. A Fund will, so long as it is
obligated as the writer of a call option on currency futures, own on a
contract-for-contract basis an equal long position in currency futures with the
same delivery date or a call option on stock index futures with the difference,
if any, between the market value of the call written and the market value of the
call or long currency futures purchased maintained by a Fund in cash, Treasury
bills, or other high grade short-term obligations in a segregated account with
its custodian. If at the close of business on any day the market value of the
call purchased by a Fund falls below 100% of the market value of the call
written by the Fund, a Fund will so segregate an amount of cash, Treasury bills
or other high grade short-term obligations equal in value to the difference.
Alternatively, a Fund may cover the call option through segregating with the
custodian an amount of the particular foreign currency equal to the amount of
foreign currency per futures contract option times the number of options written
by a Fund. In the case of put options on currency futures written by the Fund,
the Fund will hold the aggregate exercise price in cash, Treasury bills, or
other high grade short-term obligations in a segregated account with its
custodian, or own put options on currency futures or short currency futures,
with the difference, if any, between the market value of the put written and the
market value of the puts purchased or the currency futures sold maintained by a
Fund in cash, Treasury bills or other high grade short-term obligations in a
segregated account with its custodian. If at the close of business on any day
the market value of the put options purchased or the currency futures by a Fund
falls below 100% of the market value of the put options written by the Fund, a
Fund will so segregate an amount of cash, Treasury bills or other high grade
short-term obligations equal in value to the difference.
If other methods of providing appropriate cover are developed, a Fund
reserves the right to employ them to the extent consistent with applicable
regulatory and exchange requirements. In connection with transactions in stock
index options, stock index futures, interest rate futures, foreign currency
futures and related options on such futures, a Fund will be required to deposit
as "initial margin" an amount of cash or short-term government securities equal
to from 5% to 8% of the contract amount. Thereafter, subsequent payments
(referred to as "variation margin") are made to and from the broker to reflect
changes in the value of the futures contract.
Limitations on Purchase of Options. The staff of the SEC has taken the
position that purchased over-the-counter options and assets used to cover
written over-the-counter options are illiquid and, therefore, together with
other illiquid securities, cannot exceed 15% of a Fund's assets. The Adviser
intends to limit a Fund's writing of over-the-counter options in accordance with
the following procedure. Each Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts which a Fund has in place with
such primary dealers will provide that the Fund has the absolute right to
repurchase an option it writes at any time at a price which represents the fair
market value, as determined in good faith through negotiation 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.
19
<PAGE>
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.
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.
20
<PAGE>
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.
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.)
21
<PAGE>
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.
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.
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<PAGE>
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.
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.
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<PAGE>
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).
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
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.
24
<PAGE>
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
<S> <C>
Portfolio Futures
-Day Hedge is Placed
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures = $62,500/Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 120
Actual Cost = $60,000 Value of Futures = $60,000/Contract
Decrease in Purchase Loss on Futures = $2,500/Contract
Price = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index - 1.0
Portfolio Futures
-Day Hedge is Placed
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Portfolio = $40,000 Loss of Futures = $40,000
Value = $40 000
</TABLE>
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.
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<PAGE>
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.
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.
26
<PAGE>
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.
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.
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A Fund will only purchase GICs from issuers which, at the time of
purchase, meet quality and credit standards established by the Adviser.
Generally, GICs are not assignable or transferable without the permission of the
issuing insurance companies, and an active secondary market in GICs does not
currently exist. Also, a Fund may not receive the principal amount of a GIC from
the insurance company on seven days' notice or less, at which point the GIC may
be considered to be an illiquid investment.
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.
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.
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Lower Rated (or High Yield) Debt Securities
The yields on lower rated debt and comparable unrated fixed-income
securities generally are higher than the yields available on higher-rated
securities. However, investments in lower rated debt and comparable unrated
securities generally involve greater volatility of price and risk of loss of
income and principal, including the probability of default by or bankruptcy of
the issuers of such securities. Lower rated debt and comparable unrated
securities (a) will likely have some quality and protective characteristics
that, in the judgment of the rating organization, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (b) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. Accordingly,
it is possible that these types of factors could, in certain instances, reduce
the value of securities held in a 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.
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.
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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.
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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.
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.
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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.
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.
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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.
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.
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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.
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.
34
<PAGE>
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.
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.
35
<PAGE>
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.
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.
36
<PAGE>
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.
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.
37
<PAGE>
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.
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.
38
<PAGE>
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.
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."
39
<PAGE>
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.
Because certain high yield debt instruments that the High Yield Fund
purchases may be instruments issued by foreign governments, agencies,
corporations or other entities of countries, some of which may be considered
emerging markets countries, there are certain additional risks associated with
such investments.
Investors should also understand and consider carefully the special
risks involved in foreign investing. Such risks include, but are not limited to:
(1) restrictions on foreign investment and repatriation of capital; (2)
fluctuations in currency exchange rates, which can significantly affect a Fund's
share price; (3) costs of converting foreign currency into U.S. dollars and U.S.
dollars into foreign currencies; (4) greater price volatility and less
liquidity; (5) settlement practices, including delays, which may differ from
those customary in U.S. markets; (6) exposure to political and economic risks,
including the risk of nationalization, expropriation of assets and war; (7)
possible impositions of foreign taxes and exchange control and currency
restrictions; (8) lack of uniform accounting, auditing and financial reporting
standards; (9) less governmental supervision of securities markets, brokers and
issuers of securities; (10) less financial information available to investors;
and (11) difficulty in enforcing legal rights outside the United States. Both
Funds are subject to these risks.
Certain of the risks associated with investments by the High Yield Fund
in foreign securities are heightened with respect to investment in emerging
markets countries. Political and economic structures in many emerging market
countries, especially those in Eastern Europe, the Pacific Basin, and the Far
East, may be undergoing significant evolution and rapid development, and may
lack the social, political and economic stability characteristic of more
developed countries. Investing in emerging markets securities also involves
risks which are in addition to the usual risks inherent in foreign investments.
For example, some emerging market countries may have fixed or managed currencies
that are not free-floating against the U.S. dollar. Further, certain currencies
may not be traded internationally and some countries with emerging securities
markets have sustained long periods of substantially high inflation or rapid
fluctuation in inflation rates which can have negative effects on a country's
economy or securities markets.
MANAGEMENT OF THE TRUST
The business and affairs of 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(*).
40
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
During Past 5 Years
Position with and Current
Name, Address, and Age the Trust Directorships
- ---------------------- ------------- ---------------------
<S> <C> <C>
Edmund L. Benson, III, 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.
William P. Carmichael, 66 Trustee Trustee - 231 Funds (investment company)
Succession Fund from 1993 to 1995, Time Horizon Fund
The Wrigley Building (investment company) from 1995 to 1999,
400 North Michigan Avenue Pacific Innovations Trust (investment
Suite 1016 company) from 1997 to 1999, Nations
Chicago, IL 60611 Annuity Trust (investment company) since
December 1999 Nations Master Investment
Trust (investment company) since
December 1999, and Nations Funds Trust
(investment company) since December
1999; Director- The Hain Food Group,
Inc. (specialty food products
distributor) until December 1998, Cobra
Electronics Corporation (electronic
equipment manufacturer), Opta Food
Ingredients, Inc. (food ingredients
manufacturer), Golden Rule Insurance
Company, Nations LifeGoal Funds, Inc.
(investment company) since December
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),
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
During Past 5 Years
Position with and Current
Name, Address, and Age the Trust Directorships
- ---------------------- ------------- ---------------------
<S> <C> <C>
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.
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.,
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
During Past 5 Years
Position with and Current
Name, Address, and Age the Trust Directorships
- ---------------------- ------------- ---------------------
<S> <C> <C>
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.
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
43
<PAGE>
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.
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
44
<PAGE>
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 receives 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 is compensated only for a maximum of six in-person meetings per calendar
year. In addition, the Chairman of the Board, currently A. Max Walker, receives
an additional fee of 20% of the base retainer fee; the Chairman of the Audit
Committees receives an additional fee of 10% of the base retainer fee. The
members of the Nominating Committees 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.
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. BACAP is the investment
sub-adviser to the MidCap Index Fund and the Kansas Fund. MacKay Shields is the
investment sub-adviser to the High Yield Fund.
The respective principal offices of BAAI and BACAP are located at One
Bank of America Plaza, Charlotte, N.C. 28255. MacKay Shields is located at 9
West 57th Street, New York, New York 10019.
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 more than $70 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.
45
<PAGE>
Investment Advisory and Sub-Advisory Agreements
Pursuant to the terms of the Trust's Investment Advisory Agreement and
Sub-Advisory Agreements (at times, the "Advisory Agreements") with BAAI, BACAP
and/or MacKay Shields, and subject at all times to the control of the Board of
Trustees and, in conformity with the stated policies of the Trust, BACAP and
MacKay Shields 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.
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.
46
<PAGE>
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.
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 0.25% (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.
47
<PAGE>
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.
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'
48
<PAGE>
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.
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,
respectively, on December 9, 1999.
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.
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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.
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, BACAP, MacKay Shields, 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, BACAP, MacKay Shields or the Administrator shall be
deducted from the monthly investment advisory and administration fees otherwise
payable to BAAI, BACAP, MacKay Shields and the Administrator during such fiscal
year. If required pursuant to such state securities regulations, BAAI, BACAP,
MacKay Shields 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
PFPC, Inc. 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") 100 Church 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.
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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 Trust or the
Transfer Agent. Additionally, the Distributor has agreed to use appropriate
efforts to solicit orders for the sale of shares and to undertake such
advertising and promotion as it believes appropriate in connection with such
solicitation. Pursuant to the Distribution Agreement, the Distributor, at its
own expense, finances those activities which are primarily intended to result in
the sale of shares of the 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 Trust pursuant to Rule 12b-1 under the 1940 Act.
The Distribution Agreement will continue year to year as long as such
continuance is approved at least annually by (i) the Board of 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 Trust issues unaudited financial information semi-annually and
audited financial statements annually. The Trust furnishes 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.
The statement of assets and liabilities of the Trust dated February 19,
2000, included herein, has been included in reliance upon the report of
PricewaterhouseCoopers LLP, given on the authority of said firm as experts in
auditing and accounting.
Counsel
Morrison & Foerster LLP serves as legal counsel to the Trust. Their
address is 2000 Pennsylvania Avenue, N.W., Washington, D.C. 20006.
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
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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.
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 Trust.
Commission rates are established pursuant to negotiations with the
broker based on the quality and quantity of execution services provided by the
broker in the light of generally prevailing rates. The allocation of orders
among brokers and the commission rates paid are reviewed periodically by the
Trustees of the Trust. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Transactions on foreign
stock exchanges involve payment of brokerage commissions which are generally
fixed. Transactions in both foreign and domestic over-the-counter markets are
generally principal transactions with dealers, and the costs of such
transactions involve dealer spreads rather than brokerage commissions. With
respect to over-the-counter transactions, the Adviser, where possible, will deal
directly with dealers who make a market in the securities involved except in
those circumstances in which better prices and execution are available
elsewhere.
In certain instances there may be securities which are suitable for
more than one 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 Trust believes 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
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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 Trust 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 Trust will not give preference to
correspondents of Bank of America or its affiliates, with respect to such
transactions or securities. (However, the Adviser is authorized to allocate
purchase and sale orders for portfolio securities to certain financial
institutions, including, in the case of agency transactions, financial
institutions which are affiliated with Bank of America or its affiliates, and to
take into account the sale of 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.
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
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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.
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 Trust by improving the quality of the Adviser's
investment advice. The advisory fees paid by the Trust are not reduced because
the Adviser receives such services.
Some broker/dealers may indicate that the provision of research
services is dependent upon the generation of certain specified levels of
commissions and underwriting concessions by the Adviser's clients, including the
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.
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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.
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
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value of such securities, the securities will be valued at
their fair market value as determined in good faith by the Trustees.
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.
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
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capital gain by the end of each calendar year and, thus, expects not to be
subject to the excise tax.
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.
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.
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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.
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
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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.
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
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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.
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
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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.
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
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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.
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
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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.
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.
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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.
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.
64
<PAGE>
Additional Information about MacKay Shields' Performance Appearing in the
Prospectuses for the High Yield Fund
The High Yield Composite contained in the Prospectuses includes all
discretionary high yield accounts managed by MacKay Shields with substantially
similar objectives for a full quarter. Composite performance reflects
reinvestment of income and dividends and is a market-weighted average of the
time-weighted return, before advisory fees, of each account for the period since
inception. Performance is expressed in US Dollars. The composite creation and
inception date is 7/1/91. Fees, which are described in MacKay Shields' ADV Part
II, and related expenses will reduce returns. For example, a .50% annual
investment advisory fee would have the effect of reducing the annual compound
return by .50% in the first year and by a cumulative 2.53% in the fifth year.
Non-fee paying portfolios are not included in the composite. Past performance is
not necessarily indicative of future results.
MacKay Shields, an SEC-registered investment adviser, has prepared and
presented the performance information in compliance with the Performance
Presentation Standards of the Association for Investment Management and Research
(AIMR-PPSTM). AIMR has not been involved with the preparation or review of this
report. MacKay Shields (and its High Yield composite) has received a Level 1
verification from an independent accounting firm for the period January 1, 1988
through the most recent quarter. An opinion is available on request, as is a
complete list and description of the firm's composites. Balanced segments may be
utilized within this composite. Each balanced segment includes its own cash
balance. No leverage has been used in this composite. The asset mix of high
yield accounts may not be precisely comparable to the CS First Boston High Yield
Index. One account was removed from the composite after 12/31/95 because it was
no longer representative of the style. The number of accounts, composite assets
(in millions), percentage of total firm assets, and standard deviation of annual
returns were as follows at year-ends 1991-1999, respectively: 1, $299, 3.7% N/A;
1, $510, 6.1%, 0.0; 1, $935, 8.8%, 0.0; 1, $1,126, 8.9%, 0.0; 4, $1,756, 9.6%,
0.0; 5, $261, 1.1%, 3.2; 6, $254, 0.9%, 2.2; 10, $670, 2.2%, 1.8; 17,$1,901,
5.6%, 2.4.
At December 31, 1999 MacKay Shields was managing a total of $6,750
million of High Yield assets. Of the total assets managed in the High Yield
style, $1,901 million, or 28.2% is represented in the High Yield Composite.
MISCELLANEOUS
Certain Record Holders
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 February 10, 2000 is:
<TABLE>
<CAPTION>
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
High Yield Fund Stephens Inc. Primary A; 1; 100% 25%
111 Center Street Record and
Little Rock, AR 72201 Beneficial
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
Stephens Inc. Investor A; 1; 100% 25%
111 Center Street Record and
Little Rock, AR 72201 Beneficial
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
Stephens Inc. Investor B; 1; 100% 25%
111 Center Street Record and
Little Rock, AR 72201 Beneficial
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
Stephens Inc. Investor C; 1; 100% 25%
111 Center Street Record and
Little Rock, AR 72201 Beneficial
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Kansas Fund Stephens Inc. Primary A; 1; 100% 25%
111 Center Street Record and
Little Rock, AR 72201 Beneficial
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
Stephens Inc. Investor A; 1; 100% 25%
111 Center Street Record and
Little Rock, AR 72201 Beneficial
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
Stephens Inc. Investor B; 1; 100% 25%
111 Center Street Record and
Little Rock, AR 72201 Beneficial
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
Stephens Inc. Investor C; 1; 100% 25%
111 Center Street Record and
Little Rock, AR 72201 Beneficial
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
MidCap Index Fund Stephens Inc. Primary A; 1; 100% 50%
111 Center Street Record and
Little Rock, AR 72201 Beneficial
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
Stephens Inc. Investor A; 1; 100% 50%
111 Center Street Record and
Little Rock, AR 72201 Beneficial
- ---------------------- -------------------------------- ----------------- ----------------- ----------------
</TABLE>
66
<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.
A-2
<PAGE>
The following summarizes the two highest ratings used by S&P for
short-term municipal notes:
SP-1 - Indicates very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety characteristics
are given a "plus" (+) designation.
SP-2 - Indicates satisfactory capacity to pay principal and interest.
The three highest rating categories of D&P for short-term debt, each of
which denotes that the securities are investment grade, are D-1, D-2, and D-3.
D&P employs three designations, D-1+, D-1 and D-1-, within the highest rating
category. D-1+ indicates highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of 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.
A-3
<PAGE>
AA - The second highest category; indicates a very strong ability
to repay principal and interest on a timely basis with limited incremental
risk versus issues rated in the highest category.
A - The third highest category; indicates the ability to repay
principal and interest is strong. Issues rated "A" could be more
vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
BBB - The lowest investment grade category; indicates an acceptable
capacity to repay principal and interest. Issues rated "BBB" are, however,
more vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
Long-term debt ratings may include a plus (+) or minus (-) sign to
indicate where within a category the issue is placed.
The BankWatch short-term ratings apply to commercial paper, other
senior short-term obligations and deposit obligations of the entities to which
the rating has been assigned. The BankWatch short-term ratings specifically
assess the likelihood of an untimely payment of principal or interest.
TBW-1 The highest category; indicates a very high
likelihood that principal and interest will be paid
on a timely basis.
TBW-2 The second highest category; while the degree of
safety regarding timely repayment of principal and
interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1".
TBW-3 The lowest investment grade category; indicates that
while more susceptible to adverse developments (both
internal and external) than obligations with higher
ratings, capacity to service principal and interest
in a timely fashion is considered adequate.
TBW-4 The lowest rating category; this rating is regarded
as non-investment grade and therefore speculative.
The following summarizes the four highest long-term debt ratings used
by IBCA Limited and its affiliate, IBCA Inc. (collectively "IBCA"):
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
Nations High Yield Bond Fund
Statement of Assets and Liabilities
January 19, 2000
Assets:
Cash..........................................................$ 100,000
Deferred offering costs....................................... 89,260
------------------
Total assets............................................. 189,260
------------------
Liabilities:
Offering costs payable........................................ (89,260)
------------------
Net Assets (Note 1)
Applicable to 10,000 shares of beneficial interest.......$ 100,000
==================
Calculation of Offering Price:
Primary A Shares:
Net asset value, offering and redemption price
per share ($100,000/10,000 shares outstanding) $ 10.00
==================
A-5
<PAGE>
Report of Independent Accountants
To the Shareholder and Trustees of Nations Funds Trust
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of Nations High Yield
Bond Fund (a fund of Nations Funds Trust, hereafter referred to as the "Fund")
at January 19, 2000, in conformity with accounting principles generally accepted
in the United States. This financial statement is the responsibility of the
Fund's management; our responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit of this financial statement
in accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statement, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
New York, New York
January 20, 2000
A-6
<PAGE>
Notes to financial statements
1. Organization of the Trust
Nations Funds Trust (the "Trust"), which was organized as a Delaware
business trust, is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end investment company. As of January 19,
2000, the Trust offered one portfolio: High Yield Bond Fund (the "Fund"). The
Fund currently offers one class of shares: Primary A Shares. The Fund plans to
offer Investor A Shares, Investor B Shares and Investor C Shares. The Fund has
had no significant operations other than matters relating to the organization
and registration of the Trust and the issuance of 10,000 shares of Primary A
Shares to Stephens Inc. ("Stephens").
The Fund seeks maximum income by investing in a diversified portfolio
of high-yield debt securities. The Fund seeks to achieve this investment
objective by investing substantially all of its assets in the High Yield Bond
Portfolio, a series of Nations Master Investment Trust, another open-end
investment company in the Nations fund family. The Master Portfolio has the same
investment objective as the Fund.
Certain costs incurred and to be incurred in connection with the
initial offering of shares of the Trust, estimated at $89,260, will be deferred
and amortized over the period of benefit, not to exceed twelve months from the
date the funds commence operations. Estimated organizational expenses of the
Trust in the amount of approximately $13,500 incurred prior to the offering of
the Trust's shares will be absorbed by the Master Portfolio's investment
advisor.
2. Investment advisory fee, administration fee and related party transactions
The Fund indirectly pays for investment advisory services through its
investment in its corresponding Master Trust Portfolio.
Stephens and Banc of America Advisors, Inc. ("BAAI") serve as
co-administrators of the Trust. Under the co-administration agreement, Stephens
and BAAI are entitled to receive a combined fee, computed daily and paid
monthly, at the maximum annual rate of 0.18% of the Fund's average daily net
assets.
The Bank of New York serves as custodian of the Trust's assets. PFPC
Inc. serves as the transfer agent for the Fund's shares.
Stephens also serves as distributor of the Fund's shares.
A-7
<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. 333-89661; 811-09645)]
<TABLE>
<CAPTION>
Exhibit Letter Description
- ---------------------- -------------------------------------------------------------------------------------
<S> <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"), to be filed by amendment.
(d)(2) Form of Sub-Advisory Agreement among Nations Funds Trust,
BAAI and Sub-Adviser on behalf of the Funds of Nations
Funds Trust, to be filed by amendment.
(e) Underwriting Contract:
Form of Distribution Agreement between Nations Funds
Trust and Stephens Inc., to be filed by amendment.
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, to be filed by amendment.
(h) Other Material Contracts:
(h)(1) Form of Co-Administration Agreement among Nations Funds Trust, Stephens Inc. and
BAAI, to be filed by amendment.
(h)(2) Form of Sub-Administration Agreement among Nations Funds
Trust, The Bank of New York and BAAI, to be filed by
amendment.
(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, to be filed by
amendment.
(h)(7) Form of Shareholder Servicing Plan relating to Investor C Shares, to be filed by
amendment.
(i) Legal Opinion
Opinion and Consent of Counsel, filed herewith.
(j) Other Opinions
Consent of Independent Accountant--PricewaterhouseCoopers LLP, filed herewith.
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,
to be filed by amendment.
(m)(2) Form of Distribution Plan relating to Investor B Shares, to be filed by
amendment.
(m)(3) Form of Distribution Plan relating to Investor C Shares, to be filed by amendment.
(n) Financial Data Schedule:
Not Applicable
(o) Rule 18f-3 Plan:
Form of Rule 18f-3 Multi-Class Plan, to be filed by amendment.
</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
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Little Rock, State of Arkansas on the 31st day of January, 2000.
NATIONS FUNDS TRUST
By: *
----------------------------------
A. Max Walker
President and Chairman
of the Board of Trustees
By: /s/ Richard H. Blank, Jr.
----------------------------------
Richard H. Blank, Jr.
*Attorney-in-Fact
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
* President and Chairman January 31, 2000
- ------------------------------- of the Board of Trustees
(A. Max Walker) (Principal Executive Officer)
/s/ Richard H. Blank, Jr. Treasurer January 31, 2000
- ------------------------------- Secretary
(Richard H. Blank, Jr.) (Principal Financial and
Accounting Officer)
* Trustee January 31, 2000
- -------------------------------
(Edmund L. Benson, III)
* Trustee January 31, 2000
- -------------------------------
(James Ermer)
* Trustee January 31, 2000
- -------------------------------
(William H. Grigg)
* Trustee January 31, 2000
- -------------------------------
(Thomas F. Keller)
* Trustee January 31, 2000
- -------------------------------
(Carl E. Mundy, Jr.)
* Trustee January 31, 2000
- -------------------------------
(Cornelius J. Pings)
* Trustee January 31, 2000
- -------------------------------
(Charles B. Walker)
* Trustee January 31, 2000
- -------------------------------
(Thomas S. Word)
* Trustee January 31, 2000
- -------------------------------
(James B. Sommers)
/s/ Richard H. Blank, Jr.
- -------------------------------
Richard H. Blank, Jr.
*Attorney-in-Fact
</TABLE>
<PAGE>
Nations Funds Trust
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -------------
<S> <C>
EX-99.23i Opinion and Consent of Counsel - Morrison & Foerster LLP
EX-99.23j Consent of Independent Accountants - PricewaterhouseCoopers LLP
</TABLE>
[MORRISON & FOERSTER LLP LETTERHEAD]
February 3, 2000
Nations Funds Trust
111 Center Street
Little Rock, Arkansas 72201
Re: Shares of Beneficial Interest of
Nations Funds Trust
Dear Ladies and Gentlemen:
We refer to Pre-Effective Amendment No. 1 to the Registration Statement
on Form N-1A (SEC File Nos. 333-89661; 811-09645) (the "Registration Statement")
of Nations Funds Trust (the "Trust") relating to the registration of an
indefinite number of Shares of Beneficial Interest of the Trust's Portfolios
(collectively, the "Shares").
We have been requested by the Trust to furnish this opinion as Exhibit
23i to the Registration Statement.
We have examined such records, documents, instruments, and certificates
of public officials and of the Trust, made such inquiries of the Trust, and
examined such questions of law as we have deemed necessary for the purpose of
rendering the opinion set forth herein. We have examined documents relating to
the organization of the Trust and the authorization for registration and sale of
Shares of each of the Portfolios. We have assumed the genuineness of all
signatures and the authenticity of all items submitted to us as originals and
the conformity with originals of all items submitted to us as copies.
Based upon and subject to the foregoing, we are of the opinion that:
The issuance and sale of the Shares by the Trust have been duly and
validly authorized by all appropriate action, and assuming delivery of the
Shares by sale or in accord with the Funds' dividend reinvestment plan in
accordance with the description set forth in the Registration Statement, as
amended, the Shares will be validly issued, fully paid and nonassessable.
We consent to the inclusion of this opinion as an exhibit to the
Registration Statement.
<PAGE>
In addition, we consent to the use of our name and to the reference to
our Firm under the heading "Counsel" in the Statement of Additional Information.
Very truly yours,
/s/ MORRISON & FOERSTER LLP
---------------------------
MORRISON & FOERSTER LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form N-1A of our
report dated January 20, 2000, relating to the statement of assets and
liabilities of Nations High Yield Bond Fund, which appears in such Registration
Statement. We also consent to the reference to us under the heading "Independent
Accountants and Reports" in such Registration Statement.
PricewaterhouseCoopers LLP
New York, New York
January 20, 2000