As filed with the Securities and Exchange Commission
on January 12, 2001
Registration No. 333-89661; 811-09645
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Post-Effective Amendment No. 7 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 8 [X]
(Check appropriate box or boxes)
-----------------------
NATIONS FUNDS TRUST
(Exact Name of Registrant as specified in Charter)
111 Center Street
Little Rock, Arkansas 72201
(Address of Principal Executive Offices, including Zip Code)
--------------------------
Registrant's Telephone Number, including Area Code: (800) 321-7854
Richard H. Blank, Jr.
c/o Stephens Inc.
111 Center Street
Little Rock, Arkansas 72201
(Name and Address of Agent for Service)
With copies to:
Robert M. Kurucza, Esq. Carl Frischling, Esq.
Marco E. Adelfio, Esq. Kramer, Levin, Naftalis
Morrison & Foerster LLP & Frankel
2000 Pennsylvania Ave., N.W. 919 3rd Avenue
Suite 5500 New York, New York 10022
Washington, D.C. 20006
It is proposed that this filing will become effective (check appropriate box):
[ ] Immediately upon filing pursuant [ ] on July 19, 2000 pursuant
to Rule 485(b), or to Rule 485(b), or
[ ] 60 days after filing pursuant [ ] on (date) pursuant
to Rule 485(a), or to Rule 485(a).
[X] 75 days after filing pursuant to [ ] on (date) pursuant to
paragraph (a)(2) paragraph(a)(2) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
EXPLANATORY NOTE
----------------
The Registrant is filing this Post-Effective Amendment No. 7 to the
Nations Funds Trust (the "Trust") Registration Statement for the purpose of
registering Nations Marsico Technology Fund and Nations Financial Services Fund.
<PAGE>
NATIONS FUNDS TRUST
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Part A
Item No. Prospectus
-------- ----------
<S> <C>
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.
--------
10. Cover Page and Table of Contents........................... Cover Page and Table of Contents
11. Fund History............................................... Introduction
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
Part C
<PAGE>
Item No. Other Information
-------- -----------------
Information required to be included in Part C
is set forth under the appropriate Item, so
numbered, in Part C of this Document
<PAGE>
[GRAPHIC]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PRELIMINARY PROSPECTUS DATED JANUARY 12, 2001
SUBJECT TO COMPLETION
Domestic Stock Funds
Prospectus -- Primary A Shares
March 30, 2001
Nations Financial
Services Fund
Nations Marsico
Technology Fund
The Securities and
Exchange Commission
(SEC) has not approved
or disapproved these
securities or determined
if this prospectus is
truthful or complete.
Any representation to
the contrary is a criminal
offense.
Not FDIC Insured
May Lose Value
No Bank Guarantee
(Nations Funds logo)
<PAGE>
An overview of the Funds
--------------------------------------------------------------------------------
[GRAPHIC]
Terms used in this prospectus
In this prospectus, we, us and our refer to the Nations Funds
family (Nations Funds or Nations Funds Family). 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 22.
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 two Nations Funds
Domestic Stock Funds. Please read it carefully, because it contains
information that's designed to help you make informed investment decisions.
About the Funds
Domestic Stock Funds invest primarily in equity securities.
Equity securities have the potential to provide you with higher returns than
many other kinds of investments, but they also tend to have the highest risk.
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 Domestic Stock Funds focus on long-term growth. They may be suitable for
you if:
o you have longer-term investment goals
o they're part of a balanced portfolio
o you want to try to protect your portfolio against a loss of buying power
that inflation can cause over time
They may not be suitable for you if:
o you're not prepared to accept or are unable to bear the risks associated
with equity securities
o you have short-term investment goals
o you're looking for a regular stream of income
You'll find a discussion of each Fund's principal investments, strategies and
risks in the Fund descriptions that start on page 4.
For more information
If you have any questions about the Funds, please call us at 1.800.321.7854 or
contact your investment professional.
You'll find more information about the Funds in the Statement of Additional
Information (SAI). The SAI includes more detailed information about each
Fund's investments, policies, performance and management, among other things.
Please turn to the back cover to find out how you can get a copy.
2
<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 13.
[GRAPHIC] About the Funds
Nations Financial Services Fund 4
Sub-adviser: Banc of America Capital Management, Inc.
-------------------------------------------------------------
Nations Marsico Technology Fund 7
Sub-adviser: Marsico Capital Management, LLC
-------------------------------------------------------------
Other important information 11
-------------------------------------------------------------
How the Funds are managed 13
[GRAPHIC] About your investment
Information for investors
Buying, selling and exchanging shares 16
Distributions and taxes 19
-------------------------------------------------------------
Terms used in this prospectus 22
-------------------------------------------------------------
Where to find more information back cover
3
<PAGE>
[GRAPHIC]
About the sub-adviser
BAAI is the Fund's investment adviser, and Banc of America Capital
Management, Inc. (BACAP) is its sub-adviser. BACAP's Growth
Strategies Team makes the day-to-day investment decisions for the
Fund.
[GRAPHIC]
You'll find more about
BACAP on page 14.
[GRAPHIC]
What does a financial services fund invest in?
The financial services industry includes banks, brokerage firms,
asset management firms, insurance companies and transaction
processing companies, among others.
Nations Financial Services Fund
[GRAPHIC]
Investment objective
The Fund seeks growth of capital.
[GRAPHIC]
Principal investment strategies
The Fund normally invests at least 80% of its assets in equity
securities and convertible securities of companies that are
principally engaged in the banking or financial services industries.
The Fund, which is non-diversified, generally holds 40 to 60
securities. It may invest without limitation in foreign securities.
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.
The team identifies stocks using a disciplined analytical process. Starting
with a universe of companies across the entire financial sector, the team
assesses the investment potential of these companies by evaluating each
company's relative competitive position in the industry.
The team believes that this analysis identifies companies with favorable
long-term growth potential, competitive advantages and sensible business
strategies.
The team then uses quantitative analysis to decide when to invest, evaluating
each company's earnings trends and stock valuations, among other things, to
try to determine when its reasonably valued.
In managing the portfolio, the team places an emphasis on companies believed
to exhibit certain characteristics, such as companies that:
o are increasing their revenues along with their earnings
o can grow their revenues and earnings in a variety of interest rate
environments
o have both marketing expertise and superior technology
o appear to be positioned for a merger
The team may sell a security when it believes there is a deterioration in the
company's financial situation, the security is overvalued, when there is a
negative development in the company's competitive, regulatory or economic
environment, or for other reasons.
4
<PAGE>
[GRAPHIC]
You'll find more about
other risks of investing in
this Fund starting on
page 11 and in the SAI.
[GRAPHIC]
Risks and other things to consider
Nations Financial Services Fund has the following risks:
o Investment strategy risk - There is a risk that the value of the
Fund's investments will not rise as high as the team expects, or will
fall.
o Holding fewer investments - The Fund is considered to be
non-diversified because it may hold fewer investments than other kinds
of equity funds. This increases the risk that its value could go down
significantly if even only one of its investments performs poorly. The
value of the Fund will tend to have greater price swings than the
value of more diversified equity funds. The Fund may become a
diversified fund by limiting the investments in which more than 5% of
its total assets are invested.
o Stock market risk - The value of the stocks the 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 historically high levels. There
can be no guarantee that these levels will continue.
o Banking and financial services industries risks - The Fund will invest
in banks and financial services companies and will be subject to the
risks affecting the banking and financial services industries
generally. Legislative and regulatory developments may significantly
affect these industries and consequently may subject the Fund's
investments to greater market fluctuations. In addition, the Federal
Reserve may adjust interest rates which can have a significant impact
upon the profitability of banks and financial services companies, and
a corresponding impact upon the value of the Fund's investments.
o Foreign investment risk - Because the Fund may invest without
limitation in foreign securities, it can be affected by the risks of
foreign investing. Foreign investments may be riskier than U.S.
investments because of political and economic conditions, changes in
currency exchange rates, foreign controls on investment, difficulties
selling some securities and lack of or limited financial information.
Withholding taxes also may apply to some foreign investments.
[GRAPHIC]
A look at the Fund's performance
Because the Fund commenced operations on March 30, 2001 and has not
been in operation for a full calendar year, no performance information
is included in the prospectus.
5
<PAGE>
[GRAPHIC]
There are two kinds of fees --
shareholder fees 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>
Shareholder fees Primary A
(Fees paid directly from your investment) Shares
<S> <C>
Maximum sales charge (load) imposed on purchases, as a %
of offering price none
Maximum deferred sales charge (load),as a % of net asset value none
Annual Fund operating expenses
(Expenses that are deducted from the Fund's assets)
Management fees 0.75%
Other expenses1 0.53%
----
Total annual Fund operating expenses2 1.28%
====
</TABLE>
(1)Other expenses are based on estimates for the current fiscal year.
(2)The Fund's investment adviser and/or some of its other service
providers have agreed to limit total annual operating expenses to the
level shown above until March 31, 2002. There is no guarantee that
this limitation will continue after this date. The investment adviser
is entitled to reimbursement from the Fund of any fees waived or
expenses reimbursed under this agreement if such reimbursements do not
cause the Fund's total expenses to exceed the existing expense
limitation.
[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:
1 year 3 years
Primary A Shares $130 $406
6
<PAGE>
[GRAPHIC]
About the sub-adviser
BAAI is the Fund's investment adviser, and Marsico Capital
Management, LLC (Marsico Capital) is its sub-adviser. A team of
Marsico Capital's investment professionals makes the day-to-day
investment decisions for the Fund.
[GRAPHIC]
You'll find more about
Marsico Capital on page 14.
[GRAPHIC]
What size companies does the Fund invest in?
The Fund invests without regard to market capitalization allowing
it to benefit from larger established technology companies as well
as newer, emerging technologies.
Nations Marsico Technology Fund
[GRAPHIC]
Investment objective
The Fund seeks capital appreciation.
[GRAPHIC]
Principal investment strategies
The Fund normally invests at least 65% of its assets in equity
securities and convertible securities of companies in technology
industries that are selected for their growth potential. The Fund,
which is non-diversified, generally holds 35 to 50 securities. It may
invest without limitation in foreign securities.
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.
Marsico Capital uses an approach that combines top down economic analysis with
bottom up stock selection. The top down approach takes into consideration such
macroeconomic factors as interest rates, inflation, the regulatory environment
and the global competitive landscape. In addition, Marsico Capital also
examines such factors as the most attractive global investment opportunities,
industry consolidation and the sustainability of economic trends. As a result
of the top down analysis, Marsico Capital identifies industries and companies
which should benefit from the overall trends it has observed.
Marsico Capital then looks for individual companies with earnings growth
potential that may not be recognized by the market at large. In determining
whether a particular company is suitable for investment, it focuses on a
number of different attributes including the company's specific market
expertise or dominance, the durability and pricing power of its franchise,
solid fundamentals (strong balance sheet, improving returns on equity, ability
to generate free cash flow), strong management and reasonable valuations in
the context of projected growth rates.
As part of this fundamental, bottom up research, Marsico Capital may visit
with various levels of a company's management as well as with its customers,
suppliers and competitors. Marsico Capital also prepares detailed earnings and
cash flow models of companies. These models permit it to project earnings
growth and other important characteristics under different scenarios. Each
model is customized to follow a particular company and is intended to
replicate and describe a company's past, present and future performance. The
models are comprised of quantitative information and detailed narratives that
reflect updated interpretations of corporate data.
Securities are sold when there is deterioration in the company's financial
situation, the security is overvalued, when there is a negative development in
the company's competitive, regulatory or economic environment, or for other
reasons.
7
<PAGE>
[GRAPHIC]
You'll find more about
other risks of investing
in this Fund starting on
page 11 and in the SAI.
[GRAPHIC]
Risks and other things to consider
Nations Marsico Technology Fund has the following risks:
o Investment strategy risk - There is a risk that the value of the
Fund's investments will not rise as high as the team expects, or will
fall.
o Holding fewer investments - The Fund is considered to be
non-diversified because it may hold fewer investments than other kinds
of equity funds. This increases the risk that its value could go down
significantly if even only one of its investments performs poorly. The
value of the Fund will tend to have greater price swings than the
value of more diversified equity funds. The Fund may become a
diversified fund by limiting the investments in which more than 5% of
its total assets are invested.
o Stock market risk - The value of the stocks the 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 historically high levels. There
can be no guarantee that these levels will continue.
o Technology and technology risk - The Fund tends to focus its
investments in technology and technology-related companies, which can
be significantly affected by obsolescence of existing technology,
short product cycles, falling prices and profits, and competition from
new market entrants.
o Small company risk - Stocks of smaller companies tend to have greater
price swings than stocks of larger companies because they trade less
frequently and in lower volumes. These securities may have a higher
potential for gains but also carry more risk.
o Foreign investment risk - Because the Fund may invest without
limitation in foreign securities, it can be affected by the risks of
foreign investing. Foreign investments may be riskier than U.S.
investments because of political and economic conditions, changes in
currency exchange rates, foreign controls on investment, difficulties
selling some securities and lack of or limited financial information.
Withholding taxes also may apply to some foreign investments.
8
<PAGE>
[GRAPHIC]
A look at the Fund's performance
Because the Fund commenced operations on March 30, 2001 and has not
been in operation for a full calendar year, no performance information
is included in the prospectus.
[GRAPHIC]
There are two kinds of fees --
shareholder fees 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>
Shareholder fees Primary A
(Fees paid directly from your investment) Shares
<S> <C>
Maximum sales charge (load) imposed on purchases, as a %
of offering price none
Maximum deferred sales charge, as a % of net asset value none
Annual Fund operating expenses
(Expenses that are deducted from the Fund's assets)
Management fees 1.00%
Other expenses1 0.54%
----
Total annual Fund operating expenses2 1.54%
====
</TABLE>
(1)Other expenses are based on estimates for the current fiscal year.
(2)The Fund's investment adviser and/or some of its other service
providers have agreed to limit total annual operating expenses to the
level shown above until March 31, 2002. There is no guarantee that
this limitation will continue after this date. The investment adviser
is entitled to reimbursement from the Fund of any fees waived or
expenses reimbursed under this agreement if such reimbursements do not
cause the Fund's total expenses to exceed the existing expense
limitation.
9
<PAGE>
[GRAPHIC]
This is an example only. Your actual costs could be higher or
lower, depending on the amount you invest, and on the Fund's
actual expenses and performance.
Example
This example is intended to help you compare the cost of investing in
this Fund with the cost of investing in other mutual funds.
This example assumes:
o you invest $10,000 in Primary A Shares of the Fund for the time
periods indicated and then sell all of your shares at the end of those
periods
o you reinvest all dividends and distributions in the Fund
o your investment has a 5% return each year
o the Fund's operating expenses remain the same as shown in the table
above
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 year 3 years
Primary A Shares $157 $486
10
<PAGE>
[GRAPHIC]
Other important information
You'll find specific information about each Fund's principal investments,
strategies and risks in the descriptions starting on page 4. The following are
some other risks and information you should consider before you invest:
o Changing investment objectives and policies - The investment objective
and certain investment policies of either 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.
Each 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 management team can also
choose not to invest in specific securities described in this
prospectus and in the SAI.
o Foreign investment risk - Funds that invest in foreign securities may
be affected by changes in currency exchange rates and the costs of
converting currencies; foreign government controls on foreign
investment, repatriation of capital, and currency and exchange;
foreign taxes; inadequate supervision and regulation of some foreign
markets; difficulty selling some investments, which may increase
volatility; different settlement practices or delayed settlements in
some markets; difficulty getting complete or accurate information
about foreign companies; less strict accounting, auditing and
financial reporting standards than those in the U.S.; political,
economic or social instability; and difficulty enforcing legal rights
outside the U.S.
o Investing defensively - A 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.
11
<PAGE>
o Securities lending program - A Fund may lend portfolio securities to
approved broker-dealers or other financial institutions on a fully
collateralized basis in order to earn additional income for the Fund.
There may be delays in receiving additional collateral after the loan
is made or in recovering the securities loaned.
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 rates for Nations
Financial Services Fund and Nations Marsico Technology Fund are
expected to be no more than ----- % and ----- %, respectively.
12
<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 65 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 pays BAAI an annual fee for its investment advisory services.
The fee is calculated as a percentage of the average daily 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 each Fund.
The following chart shows the maximum advisory fees BAAI can receive:
Annual investment advisory fee, as a % of average daily net assets
Maximum
advisory
fee
Nations Financial Services Fund 0.75%
Nations Marsico Technology Fund 1.00%
13
<PAGE>
Investment sub-advisers
Nations Funds and BAAI engage one or more investment sub-advisers for each
Fund to make day-to-day investment decisions for the Fund. BAAI retains
ultimate responsibility (subject to Board oversight) for overseeing the
sub-advisers and evaluates the Funds' needs and available sub-advisers' skills
and abilities on an ongoing basis. Based on its evaluations, BAAI may at times
recommend to the Board of Trustees that the Fund:
o change, add or terminate one or more sub-advisers;
o continue to retain a sub-adviser even though the sub-adviser's
ownership or corporate structure has changed; or
o materially change a sub-advisory agreement with a sub-adviser.
Applicable law requires a Fund to obtain shareholder approval in order to act
on most of these types of recommendations, even if the Board of Trustees has
approved the proposed action and believes that the action is in shareholders'
best interests. BAAI and Nations Funds have applied for relief from the SEC to
permit the Funds to act on many of BAAI's recommendations with approval only
by the Board and not by Fund shareholders. BAAI or a Fund will inform the
Fund's shareholders of any actions taken in reliance on this relief. Until
BAAI and the Funds obtain the relief, each Fund will continue to submit these
matters to shareholders for their approval to the extent required by
applicable law.
[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 $125 billion, BACAP has over 200 institutional
clients and is sub-adviser to more than 65 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 Nations Financial Services Fund.
BACAP's Growth Strategies Team makes the day-to-day investment decisions for
the Fund.
[GRAPHIC]
Marsico Capital
Management, LLC
1200 17th Street
Suite 1300
Denver, Colorado 80202
Marsico Capital Management, LLC
Marsico Capital is a full service investment advisory firm founded by Thomas
F. Marsico in September 1997. It is a registered investment adviser and
currently has over $16 billion in assets under management.
Marsico Management Holdings, LLC, a wholly-owned subsidiary of Bank of America
Corporation, indirectly owns the equity of Marsico Capital.
Marsico Capital is the investment sub-adviser to Nations Marsico Technology
Fund. A team of Marsico Capital's investment professionals makes the
day-to-day decisions for the Fund.
14
<PAGE>
[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 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 Funds, and is paid monthly.
[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.
15
<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]
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 the 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. Client accounts
for which the financial institution or intermediary no longer acts as
fiduciary, agent or custodian may no longer be eligible to purchase or
hold Primary A Shares.
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.
16
<PAGE>
[GRAPHIC]
A business day is any day that the New York Stock Exchange (NYSE)
is open. A business day ends at the close of regular trading on
the NYSE, usually at 4:00 p.m. Eastern time. If the NYSE closes
early, the business day ends as of the time the NYSE closes.
The NYSE is closed on weekends and on the following national
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and
Christmas Day.
How shares are priced
All transactions are based on the price of a Fund's shares -- or its net asset
value per share. We calculate net asset value per share for each class of each
Fund at the end of each business day. First, we calculate the net asset value
for each class of a Fund by determining the value of the Fund's assets in the
class and then subtracting its liabilities. Next, we divide this amount by the
number of shares that investors are holding in the class.
Valuing securities in a Fund
The value of a Fund's assets is based on the total market value of all of the
securities it holds. The prices reported on stock exchanges and securities
markets around the world are usually used to value securities in a Fund. If
prices aren't readily available, or the value of a security has been
materially affected by events occurring after a foreign exchange closes, we'll
base the price of a security on its fair value. When a Fund uses fair value to
price securities it may value those securities higher or lower than another
fund that uses market quotations to price the same securities. We use the
amortized cost method, which approximates market value, to value short-term
investments maturing in 60 days or less. International markets may be open on
days when U.S. markets are closed. The value of foreign securities owned by a
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.
17
<PAGE>
[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,
whichever is later.
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.
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 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 objective and
principal investment strategies 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 changes.
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).
18
<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.
The Funds distribute any net realized capital gain, at least once a year. The
Funds declare and pay distributions of net investment income annually.
The distribution you receive is 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 recieve 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 normally pay any distribution that applies to those
shares in cash within five business days after the sale was made.
19
<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 Funds. It is not intended as a
substitute for careful tax planning. You should consult with your
own tax adviser 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 of net investment income, including 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. A portion of such
distributions to corporate shareholders may qualify for the dividends received
distribution.
Distributions of 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 to be paid for in
securities or other property 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 (at a rate of 30%,
or a lower rate if a treaty applies) on distributions paid to foreign
shareholders.
20
<PAGE>
Taxation of redemptions and exchanges
Your redemptions (including redemptions paid in securities or other property)
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.
21
<PAGE>
[GRAPHIC]
This glossary includes explanations of the important terms that
may be used in this prospectus. Some of the terms explained may
apply to Nations Funds not included in this prospectus.
[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.
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.
22
<PAGE>
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.
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.
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.
23
<PAGE>
Mortgage-backed security or mortgage-related security - a debt security that
gives you an interest in, and is backed by, a pool of residential mortgages
issued by the U.S. government or by financial institutions. The underlying
mortgages may be guaranteed by the U.S. government or one of its agencies,
authorities or instrumentalities. Mortgage-backed securities typically make
monthly payments, which are a combination of interest and a portion of the
principal of the underlying mortgages.
MSCI EAFE Index - Morgan Stanley Capital International Europe, Australasia and
Far East Index, an index of over 1,100 stocks from 21 developed markets in
Europe, Australia, New Zealand and Asia. The index reflects the relative size
of each market.
Non-diversified - a fund that holds securities of fewer 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.
Russell 1000 Growth Index - an unmanaged index which measures the performance
of the largest U.S. companies based on total market capitalization, with high
price-to-book ratios and forecasted growth rates relative to the Russell 1000
Index as a whole.
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 5001 - Standard & Poor's 500 Composite Stock Price Index, an unmanaged
index of 500 widely held common stocks. It is not available for investment.
24
<PAGE>
S&P/BARRA Value Index1 - 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.
S&P MidCap 4001 - 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 6001 - 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 SuperComposite 15001 - An index created by Standard & Poors combining the
companies represented in three other indices - S&P 500, MidCap 400, and
SmallCap 600. The index represents 87% of the total capitalization of U.S.
equity markets.
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.
1S&P and BARRA have not reviewed any stock included in the S&P Super Composite
1500, S&P 500, S&P SmallCap 600, S&P/BARRA Value or S&P MidCap SmallCap 400
Indices for their investment merit. S&P and BARRA determine and calculate
their indices 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 indices to
track stock market performance. S&P and BARRA make no guarantees about the
indices, any data included in them and the suitability of the indices or
their data for any purpose. "Standard and Poor's," "S&P 400," "S&P 500" and
"S&P 600" are trademarks of The McGraw-Hill Companies, Inc.
25
<PAGE>
[GRAPHIC]
Where to find more information
You'll find more information about the Domestic Stock Funds in the following
documents:
Annual and semi-annual reports
The annual and semi-annual reports contain information about Fund
investments and performance, the financial statements and the
independent accountants' 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 SEC's
Public Reference Room in Washington, D.C. Information on the operation
of the Public Reference Room may be obtained by calling the SEC at
1-202-942-8090. The reports and other information about the Funds are
available on the EDGAR Database on the SEC'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 SEC's Public
Reference Section, Washington, D.C. 20549-0102.
[GRAPHIC]
SEC file number:
Nations Funds Trust, 811-09645
[ ] (Nations Funds logo)
<PAGE>
[GRAPHIC]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PRELIMINARY PROSPECTUS DATED JANUARY 12, 2001
SUBJECT TO COMPLETION
Domestic Stock Funds
Prospectus -- Investor A, B and C Shares
March 30, 2001
Nations Financial
Services Fund Nations Marsico
Technology Fund
The Securities and
Exchange Commission
(SEC) has not approved
or disapproved these
securities or determined
if this prospectus is
truthful or complete.
Any representation to
the contrary is a criminal
offense.
---------------------------
Not FDIC Insured
---------------------------
May Lose Value
---------------------------
No Bank Guarantee
---------------------------
[Nations Funds Logo]
<PAGE>
An overview of the Funds
--------------------------------------------------------------------------------
[GRAPHIC]
Terms used in this prospectus
In this prospectus, we, us and our refer to the Nations Funds
family (Nations Funds or Nations Funds Family). 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 39.
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 two Nations Funds
Domestic Stock Funds. Please read it carefully, because it contains
information that's designed to help you make informed investment decisions.
About the Funds
Domestic Stock Funds invest primarily in equity securities.
Equity securities have the potential to provide you with higher returns than
many other kinds of investments, but they also tend to have the highest risk.
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 Domestic Stock Funds focus on long-term growth. They may be suitable for
you if:
o you have longer-term investment goals
o they're part of a balanced portfolio
o you want to try to protect your portfolio against a loss of buying power
that inflation can cause over time
They may not be suitable for you if:
o you're not prepared to accept or are unable to bear the risks associated
with equity securities
o you have short-term investment goals
o you're looking for a regular stream of income
You'll find a discussion of each Fund's principal investments, strategies and
risks in the Fund descriptions that start on page 4.
For more information
If you have any questions about the Funds, please call us at 1.800.321.7854 or
contact your investment professional.
You'll find more information about the Funds in the Statement of Additional
Information (SAI). The SAI includes more detailed information about each
Fund's investments, policies, performance and management, among other things.
Please turn to the back cover to find out how you can get a copy.
2
<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 14.
[GRAPHIC] About the Funds
Nations Financial Services Fund 4
Sub-adviser: Banc of America Capital Management, Inc.
------------------------------------------------------------
Nations Marsico Technology Fund 8
Sub-adviser: Marsico Capital Management, LLC
------------------------------------------------------------
Other important information 12
------------------------------------------------------------
How the Funds are managed 14
[GRAPHIC] About your investment
Information for investors
Choosing a share class 17
Buying, selling and exchanging shares 26
How selling and servicing agents are paid 34
Distributions and taxes 36
------------------------------------------------------------
Terms used in this prospectus 39
------------------------------------------------------------
Where to find more information back cover
3
<PAGE>
[GRAPHIC]
About the sub-adviser
BAAI is the Fund's investment adviser, and Banc of America Capital
Management, Inc. (BACAP) is its sub-adviser. BACAP's Growth
Strategies Team makes the day-to-day investment decisions for the
Fund.
[GRAPHIC]
You'll find more about
BACAP on page 15.
[GRAPHIC]
What does a financial services fund invest in?
The financial services industry includes banks, brokerage firms,
asset management firms, insurance companies and transaction
processing companies, among others.
Nations Financial Services Fund
[GRAPHIC] Investment objective
The Fund seeks growth of capital.
[GRAPHIC] Principal investment strategies
The Fund normally invests at least 80% of its assets in equity
securities and convertible securities of companies that are principally
engaged in the banking or financial services industries. The Fund, which
is non-diversified, generally holds 40 to 60 securities. It may invest
without limitation in foreign securities.
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.
The team identifies stocks using a disciplined analytical process. Starting
with a universe of companies across the entire financial sector, the team
assesses the investment potential of these companies by evaluating each
company's relative competitive position in the industry.
The team believes that this analysis identifies companies with favorable
long-term growth potential, competitive advantages and sensible business
strategies.
The team then uses quantitative analysis to decide when to invest, evaluating
each company's earnings trends and stock valuations, among other things, to
try to determine when its reasonably valued.
In managing the portfolio, the team places an emphasis on companies believed
to exhibit certain characteristics, such as companies that:
o are increasing their revenues along with their earnings
o can grow their revenues and earnings in a variety of interest rate
environments
o have both marketing expertise and superior technology
o appear to be positioned for a merger
The team may sell a security when it believes there is a deterioration in the
company's financial situation, the security is overvalued, when there is a
negative development in the company's competitive, regulatory or economic
environment, or for other reasons.
4
<PAGE>
[GRAPHIC]
You'll find more about
other risks of investing in
this Fund starting on
page 12 and in the SAI.
[GRAPHIC] Risks and other things to consider
Nations Financial Services Fund has the following risks:
o Investment strategy risk - There is a risk that the value of the Fund's
investments will not rise as high as the team expects, or will fall.
o Holding fewer investments - The Fund is considered to be non-diversified
because it may hold fewer investments than other kinds of equity funds.
This increases the risk that its value could go down significantly if
even only one of its investments performs poorly. The value of the Fund
will tend to have greater price swings than the value of more diversified
equity funds. The Fund may become a diversified fund by limiting the
investments in which more than 5% of its total assets are invested.
o Stock market risk - The value of the stocks the 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 historically high levels. There can be no guarantee that these levels
will continue.
o Banking and financial services industries risk - The Fund will invest in
banks and financial services companies and will be subject to the risks
affecting the banking and financial services industries generally.
Legislative and regulatory developments may significantly affect these
industries and consequently may subject the Fund's investments to greater
market fluctuations. In addition, the Federal Reserve may adjust interest
rates which can have a significant impact upon the profitability of banks
and financial services companies, and a corresponding impact upon the
value of the Fund's investment.
o Foreign investment risk - Because the Fund may invest without limitation
in foreign securities, it can be affected by the risks of foreign
investing. Foreign investments may be riskier than U.S. investments
because of political and economic conditions, changes in currency
exchange rates, foreign controls on investment, difficulties selling some
securities and lack of or limited financial information. Withholding
taxes also may apply to some foreign investments.
5
<PAGE>
[GRAPHIC]
There are two kinds of fees --
shareholder fees you pay directly, and annual fund operating
expenses that are deducted from a fund's assets.
[GRAPHIC] A look at the Fund's performance
Because the Fund commenced operations on March 30, 2001 and has not
been in operation for a full calendar year, no performance information
is included in the prospectus.
[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>
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 5.75% none none
Maximum deferred sales charge (load),
as a % of net asset value none(1) 5.00%(2) 1.00%(3)
Annual Fund operating expenses
(Expenses that are deducted from the
Fund's assets)
Management fees 0.75% 0.75 % 0.75 %
Distribution (12b-1) and shareholder
servicing fees 0.25% 1.00 % 1.00 %
Other expenses(4) 0.53% 0.53 % 0.53 %
----- -------- --------
Total annual Fund operating expenses(5) 1.53% 2.28 % 2.28 %
===== ======== ========
</TABLE>
(1) A 1.00% maximum deferred sales charge applies to investors who buy
$1 million or more of Investor A Shares and sell them within
eighteen months of buying them. Different charges may apply to
purchases made prior to August 1, 1999. Please see page 19 for
details.
(2) This charge decreases over time. Please see page 19 for details.
Different charges apply to Investor B Shares bought before January
1, 1996 and after July 31, 1997. Please see page 19 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 21 for details.
(4) Other expenses are based on estimates for the current fiscal year.
(5) The Fund's investment adviser and/or some of its other service
providers have agreed to limit total annual operating expenses to
the levels shown above until March 31, 2002. There is no guarantee
that these limitations will continue after this date. The investment
adviser is entitled to reimbursement from the Fund of any fees
waived or expenses reimbursed under this agreement if such
reimbursements do not cause the Fund's expenses to exceed the
existing expense limitations.
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 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:
1 year 3 years
Investor A Shares $722 $1,031
Investor B Shares $731 $1,012
Investor C Shares $331 $ 712
If you bought Investor B or Investor C Shares, you would pay the
following expenses if you didn't sell your shares:
1 year 3 years
Investor B Shares $231 $712
Investor C Shares $231 $712
7
<PAGE>
[GRAPHIC]
About the sub-adviser
BAAI is the Fund's investment adviser, and Marsico Capital
Management, LLC (Marsico Capital) is its sub-adviser. A team of
Marsico Capital's investment professionals makes the day-to-day
investment decisions for the Fund.
[GRAPHIC]
You'll find more about
Marsico Capital on page 15.
[GRAPHIC]
What size companies does the Fund invest in?
The Fund invests without regard to market capitalization allowing
it to benefit from larger established technology companies as well
as newer, emerging technologies.
Nations Marsico Technology Fund
[GRAPHIC] Investment objective
The Fund seeks capital appreciation.
[GRAPHIC] Principal investment strategies
The Fund normally invests at least 65% of its assets in equity
securities
and convertible securities of companies in technology industries that
are selected for their growth potential. The Fund, which is
non-diversified, generally holds 35 to 50 securities. It may invest
without limitation in foreign securities.
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.
Marsico Capital uses an approach that combines top down economic analysis with
bottom up stock selection. The top down approach takes into consideration such
macroeconomic factors as interest rates, inflation, the regulatory environment
and the global competitive landscape. In addition, Marsico Capital also
examines such factors as the most attractive global investment opportunities,
industry consolidation and the sustainability of economic trends. As a result
of the top down analysis, Marsico Capital identifies industries and companies
which should benefit from the overall trends it has observed.
Marsico Capital then looks for individual companies with earnings growth
potential that may not be recognized by the market at large. In determining
whether a particular company is suitable for investment, it focuses on a
number of different attributes including the company's specific market
expertise or dominance, the durability and pricing power of its franchise,
solid fundamentals (strong balance sheet, improving returns on equity, ability
to generate free cash flow), strong management and reasonable valuations in
the context of projected growth rates.
As part of this fundamental, bottom up research, Marsico Capital may visit
with various levels of a company's management as well as with its customers,
suppliers and competitors. Marsico Capital also prepares detailed earnings and
cash flow models of companies. These models permit it to project earnings
growth and other important characteristics under different scenarios. Each
model is customized to follow a particular company and is intended to
replicate and describe a company's past, present and future performance. The
models are comprised of quantitative information and detailed narratives that
reflect updated interpretations of corporate data.
Securities are sold when there is deterioration in the company's financial
situation, the security is overvalued, when there is a negative development in
the company's competitive, regulatory or economic environment, or for other
reasons.
8
<PAGE>
[GRAPHIC]
You'll find more about
other risks of investing
in this Fund starting on
page 12 and in the SAI.
[GRAPHIC] Risks and other things to consider
Nations Marsico Technology Fund has the following risks:
o Investment strategy risk - There is a risk that the value of the Fund's
investments will not rise as high as the team expects, or will fall.
o Holding fewer investments - The Fund is considered to be non-diversified
because it may hold fewer investments than other kinds of equity funds.
This increases the risk that its value could go down significantly if
even only one of its investments performs poorly. The value of the Fund
will tend to have greater price swings than the value of more diversified
equity funds. The Fund may become a diversified fund by limiting the
investments in which more than 5% of its total assets are invested.
o Stock market risk - The value of the stocks the 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 historically high levels. There can be no guarantee that these levels
will continue.
o Technology and technology risk - The Fund tends to focus its investments
in technology and technology-related companies, which can be
significantly affected by obsolescence of existing technology, short
product cycles, falling prices and profits, and competition from new
market entrants.
o Small company risk - Stocks of smaller companies tend to have greater
price swings than stocks of larger companies because they trade less
frequently and in lower volumes. These securities may have a higher
potential for gains but also carry more risk.
o Foreign investment risk - Because the Fund may invest without limitation
in foreign securities, it can be affected by the risks of foreign
investing. Foreign investments may be riskier than U.S. investments
because of political and economic conditions, changes in currency
exchange rates, foreign controls on investment, difficulties selling some
securities and lack of or limited financial information. Withholding
taxes also may apply to some foreign investments.
9
<PAGE>
[GRAPHIC]
There are two kinds of fees --
shareholder fees you pay directly, and annual fund operating
expenses that are deducted from a fund's assets.
[GRAPHIC] A look at the Fund's performance
Because the Fund commenced operations on March 30, 2001 and has not
been in operation for a full calendar year, no performance information
is included in the prospectus.
[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>
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 5.75% none none
Maximum deferred sales charge,
as a % of net asset value none(1) 5.00%(2) 1.00%(3)
Annual Fund operating expenses
(Expenses that are deducted from the
Fund's assets)
Management fees 1.00% 1.00 % 1.00 %
Distribution (12b-1) and shareholder
servicing fees 0.25% 1.00 % 1.00 %
Other expenses(4) 0.54% 0.54 % 0.54 %
----- -------- --------
Total annual Fund operating expenses(5) 1.79% 2.54 % 2.54 %
===== ======== ========
</TABLE>
(1) A 1.00% maximum deferred sales charge applies to investors who buy
$1 million or more of Investor A Shares and sell them within
eighteen months of buying them. Different charges may apply to
purchases made prior to August 1, 1999. Please see page 19 for
details.
(2) This charge decreases over time. Please see page 19 for details.
Different charges apply to Investor B Shares bought before January
1, 1996 and after July 31, 1997. Please see page 19 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 21 for details.
(4) Other expenses are based on estimates for the current fiscal year.
(5) The Fund's investment adviser and/or some of its other service
providers have agreed to limit total annual operating expenses to
the levels shown above until March 31, 2002. There is no guarantee
that these limitations will continue after this date. The investment
adviser is entitled to reimbursement from the Fund of any fees
waived or expenses reimbursed under this agreement if such
reimbursements do not cause the Fund's expenses to exceed the
existing expense limitations.
10
<PAGE>
[GRAPHIC]
This is an example only. Your actual costs could be higher or
lower, depending on the amount you invest, and on the Fund's
actual expenses and performance.
Example
This example is intended to help you compare the cost of investing in
this Fund with the cost of investing in other mutual funds.
This example assumes:
o you invest $10,000 in Investor A, Investor B or Investor C Shares of
the Fund for the time periods indicated and then sell all of your
shares at the end of those periods
o you reinvest all dividends and distributions in the Fund
o your investment has a 5% return each year
o the Fund's operating expenses remain the same as shown in the table
above
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 year 3 years
Investor A Shares $747 $1,107
Investor B Shares $757 $1,091
Investor C Shares $357 $ 791
If you bought Investor B or Investor C Shares, you would pay the
following expenses if you didn't sell your shares:
1 year 3 years
Investor B Shares $257 $791
Investor C Shares $257 $791
11
<PAGE>
[GRAPHIC] Other important information
You'll find specific information about each Fund's principal investments,
strategies and risks in the descriptions starting on page 4. The following are
some other risks and information you should consider before you invest:
o Changing investment objectives and policies - The investment objective
and certain investment policies of either 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.
Each 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 management team can also choose not to
invest in specific securities described in this prospectus and in the
SAI.
o Foreign investment risk - Funds that invest in foreign securities may be
affected by changes in currency exchange rates and the costs of
converting currencies; foreign government controls on foreign investment,
repatriation of capital, and currency and exchange; foreign taxes;
inadequate supervision and regulation of some foreign markets; difficulty
selling some investments, which may increase volatility; different
settlement practices or delayed settlements in some markets; difficulty
getting complete or accurate information about foreign companies; less
strict accounting, auditing and financial reporting standards than those
in the U.S.; political, economic or social instability; and difficulty
enforcing legal rights outside the U.S.
o Investing defensively - A 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.
12
<PAGE>
o Securities lending program - A Fund may lend portfolio securities to
approved broker-dealers or other financial institutions on a fully
collateralized basis in order to earn additional income for the Fund.
There may be delays in receiving additional collateral after the loan is
made or in recovering the securities loaned.
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 rates for Nations Financial Services Fund and Nations
Marsico Technology Fund are expected to be no more than -------- % and
-------- %, respectively.
13
<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 65 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 pays BAAI an annual fee for its investment advisory services.
The fee is calculated as a percentage of the average daily 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 each Fund.
The following chart shows the maximum advisory fees BAAI can receive:
Annual investment advisory fee, as a % of average daily net assets
Maximum
advisory
fee
Nations Financial Services Fund 0.75%
Nations Marsico Technology Fund 1.00%
14
<PAGE>
Investment sub-advisers
Nations Funds and BAAI engage one or more investment sub-advisers for each
Fund to make day-to-day investment decisions for the Fund. BAAI retains
ultimate responsibility (subject to Board oversight) for overseeing the
sub-advisers and evaluates the Funds' needs and available sub-advisers' skills
and abilities on an ongoing basis. Based on its evaluations, BAAI may at times
recommend to the Board of Trustees that the Fund:
o change, add or terminate one or more sub-advisers;
o continue to retain a sub-adviser even though the sub-adviser's ownership
or corporate structure has changed; or
o materially change a sub-advisory agreement with a sub-adviser.
Applicable law requires a Fund to obtain shareholder approval in order to act
on most of these types of recommendations, even if the Board of Trustees has
approved the proposed action and believes that the action is in shareholders'
best interests. BAAI and Nations Funds have applied for relief from the SEC to
permit the Funds to act on many of BAAI's recommendations with approval only
by the Board and not by Fund shareholders. BAAI or a Fund will inform the
Fund's shareholders of any actions taken in reliance on this relief. Until
BAAI and the Funds obtain the relief, each Fund will continue to submit these
matters to shareholders for their approval to the extent required by
applicable law.
[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 $125 billion, BACAP has over 200 institutional
clients and is sub-adviser to more than 65 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 Nations Financial Services Fund.
BACAP's Growth Strategies Team makes the day-to-day investment decisions for
the Fund.
[GRAPHIC]
Marsico Capital
Management, LLC
1200 17th Street
Suite 1300
Denver, Colorado 80202
Marsico Capital Management, LLC
Marsico Capital is a full service investment advisory firm founded by Thomas
F. Marsico in September 1997. It is a registered investment adviser and
currently has over $16 billion in assets under management.
Marsico Management Holdings, LLC, a wholly-owned subsidiary of Bank of America
Corporation, indirectly owns the equity of Marsico Capital.
Marsico Capital is the investment sub-adviser to Nations Marsico Technology
Fund. A team of Marsico Capital's investment professionals makes the
day-to-day decisions for the Fund.
15
<PAGE>
[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 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 Funds, and is paid monthly.
[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.
16
<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 of each Fund offered by this prospectus. Each
class has its own sales charges and fees. The table below compares the charges
and fees and other features of the share classes.
<TABLE>
<CAPTION>
Investor A Investor B Investor C
Shares Shares Shares
<S> <C> <C> <C>
Maximum amount no limit $250,000 no limit
you can buy
Maximum front-end 5.75% none none
sales charge
Maximum deferred none1 5.00%(2) 1.00%(3)
sales charge
Maximum annual 0.25% distribution 0.75% distribution 0.75% distribution
distribution (12b-1)/service (12b-1) fee and (12b-1) fee and
and shareholder fee 0.25% service fee 0.25% service fee
servicing fees
Conversion feature none yes none
</TABLE>
(1)A 1.00% maximum deferred sales charge applies to investors who buy $1 million
or more of Investor A Shares and sell them within eighteen months of buying
them. Different charges may apply to purchases made prior to August 1, 1999.
Please see page 19 for details.
(2)This charge decreases over time. Please see page 19 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 21 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.
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.
17
<PAGE>
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 amount you're investing --
generally, the larger the investment, the smaller the percentage sales
charge.
<TABLE>
Amount retained
Sales charge Sales charge by selling 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-$49,999 5.75% 6.10% 5.00%
$ 50,000-$99,999 4.50% 4.71% 3.75%
$100,000-$249,999 3.50% 3.63% 2.75%
$250,000-$499,999 2.50% 2.56% 2.00%
$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.
18
<PAGE>
Contingent deferred sales charge
If you own or buy $1,000,000 or more of Investor A Shares, there are
two situations when you'll pay a CDSC:
o If you bought your shares before August 1, 1999, and you sell them:
o during the first year you own them, you'll pay a CDSC of 1.00%
o during the second year you own them, you'll pay a CDSC of 0.50%
o If you buy your shares on or after August 1, 1999 and sell them within
18 months of buying them, you'll pay a CDSC of 1.00%.
The CDSC is calculated from the day your purchase is accepted (the
trade date). We deduct the CDSC from the market value or purchase price
of the shares, whichever is lower.
You won't pay a CDSC on any increase in net asset value since you
bought your shares, or on any shares you receive from reinvested
distributions. We'll sell any shares that aren't subject to the CDSC
first. We'll then sell shares that result in the lowest CDSC.
[GRAPHIC]
About Investor B Shares
You can buy up to $250,000 of Investor B Shares. 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 24
19
<PAGE>
The CDSC you pay depends on when you bought your shares, how much you
bought in some cases, and how long you held them.
<TABLE>
<CAPTION>
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
------------ ------------------------------------ ------------- ---------
$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% 5.0% 3.0% 2.0% none 5.0%
the second year you own them 4.0% 4.0% 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% 3.0% none none none 2.0%
the fifth year you own them 2.0% 2.0% none none none 2.0%
the sixth year you own them 1.0% 1.0% 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.
About the conversion feature
Investor B Shares generally convert automatically to Investor A Shares
according to the following schedule:
Will convert to Investor A Shares
Investor B Shares you bought after you've owned them for
after November 15, 1998 eight years
between August 1, 1997
and November 15, 1998
$ 0-$249,000 nine years
$250,000-$499,999 six years
$500,000-$999,999 five years
before August 1, 1997 nine years
The conversion feature allows you to benefit from the lower operating
costs of Investor A Shares, which can help increase total returns.
20
<PAGE>
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 Fund Money Market Fund.
o Conversions are free from federal tax.
[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 24
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.
21
<PAGE>
[GRAPHIC]
Please contact your investment professional for more information
about reductions and waivers of sales charges.
You should tell your investment professional that you may qualify
for a reduction or a waiver before buying shares.
We can change or cancel these terms at any time. Any change or
cancellation applies only to future purchases.
When you might not have to pay a sales charge
Front-end sales charges
(Investor A Shares)
There are three ways you can lower the front-end sales charge you pay
on Investor A Shares:
o Combine purchases you've already made
Rights of accumulation allow you to combine the value of Investor A,
Investor B and Investor C Shares you already own with Investor A
Shares you're buying to calculate the sales charge. The sales charge
is based on the total value of the shares you already own, or the
original purchase cost, whichever is higher, plus the value of the
shares you're buying. Index Funds and Money Market Funds, except
Investor B and Investor C Shares of Nations Reserves Money Market
Funds, don't qualify for rights of accumulation.
o Combine purchases you plan to make
By signing a letter of intent, you can combine the value of shares you
already own with the value of shares you plan to buy over a 13-month
period to calculate the sales charge.
o You can choose to start the 13-month period up to 90 days before you
sign the letter of intent.
o Each purchase you make will receive the sales charge that applies to
the total amount you plan to buy.
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
22
<PAGE>
o banks, trust companies and thrift institutions acting as fiducuaries
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 of the date
of distribution
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 former shareholders of Class B Shares of the Special Equity Portfolio
of The Capitol Mutual Funds who held these shares as of January 31,
1994 or received Investor A Shares of Nations Aggressive Growth Fund
may buy Investor A Shares of Nations Aggressive Growth Fund without
paying a front-end sales charge
o investors who buy through accounts established with certain fee-based
investment advisers or financial planners, 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
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
23
<PAGE>
You can also buy Investor A Shares without paying a sales charge if you
buy the shares within 120 days of selling the same Fund. This is called
the reinstatement privilege. You can invest up to the amount of the
sale proceeds. We'll credit your account with any CDSC paid when you
sold the shares. The reinstatement privilege does not apply to any
shares you bought through a previous reinstatement. PFPC, Stephens or
their agents must receive your written request within 120 days after
you sell your shares.
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.
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
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
24
<PAGE>
o if you exchange Investor B or Investor C Shares of a Nations Fund that
were bought through a Bank of America employee benefit plan for
Investor A Shares of a Nations Fund
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 Corporation (and its predecessors) 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.
25
<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 questions or
you need help placing an order.
26
<PAGE>
<TABLE>
Ways to
buy, sell or
exchange
-----------------
<S> <C>
Buying shares In a lump sum
-------------------
Using our
Systematic
Investment Plan
-----------------
Selling shares In a lump sum
-------------------
Using our
Automatic
Withdrawal Plan
-----------------
Exchanging shares In a lump sum
Using our
Automatic
Exchange
Feature
How much you can buy,
sell or exchange Other things to know
---------------------------------------- -----------------------------------------------------
<S> <C> <C>
Buying shares minimum initial investment: There is no limit to the amount you can invest in
o $1,000 for regular accounts Investor A and C Shares. You can invest up to
o $500 for traditional and Roth IRA $250,000 in Investor B Shares at a time.
accounts
o $250 for certain fee-based accounts
o no minimum for certain retirement
plan accounts like 401(k) plans and
SEP accounts, but other restrictions
apply
minimum additional investment:
o $100 for all accounts
minimum initial investment: You can buy shares monthly, twice a month or
o $100 quarterly, using automatic transfers from your
minimum additional investment: bank account.
o $50
------------------- ---------------------------------------- -----------------------------------------------------
Selling shares o you can sell up to $50,000 of your We'll 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.
o minimum $25 per withdrawal Your account balance must be at least $10,000
---------------------------------------- -----------------------------------------------------
to set up the plan. You can make withdrawals
monthly, twice a month or quarterly. We'll send
your money by check or deposit it directly to your
bank account. No CDSC is deducted if you
withdraw 12% or less of the value of your shares
in a class.
------------------- ---------------------------------------- -----------------------------------------------------
Exchanging shares 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 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.
o minimum $25 per exchange This feature is not available for Investor B
Shares.
You must already have an investment in the
Funds into which you want to exchange. You can
make exchanges monthly or quarterly.
</TABLE>
27
<PAGE>
[GRAPHIC]
A business day is any day that the New York Stock Exchange (NYSE)
is open. A business day ends at the close of regular trading on
the NYSE, usually at 4:00 p.m. Eastern time. If the NYSE closes
early, the business day ends as of the time the NYSE closes.
The NYSE is closed on weekends and on the following national
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
How shares are priced
All transactions are based on the price of a Fund's shares -- or its net asset
value per share. We calculate net asset value per share for each class of each
Fund at the end of each business day. First, we calculate the net asset value
for each class of a Fund by determining the value of the Fund's assets in the
class and then subtracting its liabilities. Next, we divide this amount by the
number of shares that investors are holding in the class.
Valuing securities in a Fund
The value of a Fund's assets is based on the total market value of all of the
securities it holds. The prices reported on stock exchanges and securities
markets around the world are usually used to value securities in a Fund. If
prices aren't readily available, or the value of a security has been
materially affected by events occurring after a foreign exchange closes, we'll
base the price of a security on its fair value. When a Fund uses fair value to
price securities it may value those securities higher or lower than another
fund that uses market quotations to price the same securities. We use the
amortized cost method, which approximates market value, to value short-term
investments maturing in 60 days or less. International markets may be open on
days when U.S. markets are closed. The value of foreign securities owned by a
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 to your selling agent.
Telephone orders
You can place orders to buy, sell or exchange by telephone if you complete the
telephone authorization section of our account application and send it to us.
Here's how telephone orders work:
o If you sign up for telephone orders after you open your account, you
must have your signature guaranteed.
o Telephone orders may not be as secure as written orders. You may be
responsible for any loss resulting from a telephone order.
o We'll take reasonable steps to confirm that telephone instructions are
genuine. For example, we require proof of your identification before
we will act on instructions received by telephone and may record
telephone conversations. If we and our service providers don't take
these steps, we may be liable for any losses from unauthorized or
fraudulent instructions.
o Telephone orders may be difficult to complete during periods of
significant economic or market change.
28
<PAGE>
[GRAPHIC]
The offering price per share is the net asset value per share plus
any sales charge that applies.
The net asset value per share is the price of a share calculated
by a Fund every business day.
[GRAPHIC]
Buying shares
Here are some general rules for buying shares:
o You buy Investor A Shares at the offering price per share. You buy
Investor B and Investor C Shares at net asset value per share.
o If we don't receive your money within three business days of receiving
your order, we'll refuse the order.
o Selling agents are responsible for sending orders to us and ensuring
we receive your money on time.
o Shares purchased are recorded on the books of the Fund. We don't issue
certificates.
Minimum initial investment
The minimum initial amount you can buy is usually $1,000.
If you're buying shares through one of the following accounts or plans,
the minimum initial amount you can buy is:
o $500 for traditional and Roth individual retirement accounts (IRAs)
o $250 for accounts set up with some fee-based investment advisers or
financial planners, including wrap fee accounts and other managed
accounts
o $100 using our Systematic Investment Plan
o There is no minimum for 401(k) plans, simplified employee pension
plans (SEPs), salary reduction-simplified employee pension plans
(SAR-SEPs), Savings Incentives Match Plans for Employees (SIMPLE
IRAs), salary reduction-IRAs (SAR-IRAs) or other similar kinds of
accounts. However, if the value of your account falls below $1,000 for
401(k) plans or $500 for the other plans within one year after you
open your account, we may sell your shares. We'll give you 60 days'
notice in writing if we're going to do this
Minimum additional investment
You can make additional purchases of $100, or $50 if you use our
Systematic Investment Plan.
29
<PAGE>
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]
For more information
about telephone orders,
see page 28.
[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,
whichever is later.
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 these restrictions, please contact your retirement plan
administrator.
30
<PAGE>
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 objective and
principal investment strategies of the Fund you're exchanging
into. Please read its prospectus carefully.
[GRAPHIC]
Exchanging shares
You can sell shares of a 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.
o You generally may only make an exchange into a Fund that is accepting
investments.
31
<PAGE>
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, if applicable, on the shares you're exchanging.
Any CDSC will be deducted 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 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 when you sell the shares you received
from the exchange. Any redemption fee will be paid to the original
Fund.
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 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
through 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.
32
<PAGE>
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 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.
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 If you set up your plan to exchange more than $50,000 you must have
your signature guaranteed.
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 1st or
the 15th day of the month.
o The rules for making exchanges apply to automatic exchanges.
33
<PAGE>
[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 in which you invest. 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 5.00% 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>
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.
34
<PAGE>
Other compensation
Selling and servicing agents may also receive:
o a bonus, incentive or other compensation relating to the sale,
promotion and marketing of the Funds
o additional amounts on all sales of shares:
o up to 1.00% of the offering price per share of Investor A Shares
o up to 1.00% of the net asset value per share of Investor B Shares
o up to 1.00% of the net asset value per share of Investor C Shares
o non-cash compensation like trips to sales seminars, 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 and Stephens may pay amounts from their own assets to selling or
servicing agents of the Funds for services they provide.
35
<PAGE>
[GRAPHIC]
The power of compounding
Reinvesting your distributions buys you more shares of a
Fund -- which lets you take advantage of the potential for
compound growth.
Putting the money you earn back into your investment means it, in
turn, may earn even more money. Over time, the power of
compounding has the potential to significantly increase the value
of your investment. There is no assurance, however, that you'll
earn more money if you reinvest your distributions.
[GRAPHIC]
Distributions and taxes
About distributions
A mutual fund can make money two ways:
o It can earn income. Examples are interest paid on bonds and dividends
paid on common stocks.
o A fund can also have capital gain if the value of its investments
increases. If a fund sells an investment at a gain, the gain is
realized. If a fund continues to hold the investment, any gain is
unrealized.
A mutual fund is not subject to income tax as long as it distributes its net
investment income and realized capital gain to its shareholders. The Funds
intend to pay out a sufficient amount of their income and capital gain to
their shareholders so the Funds won't have to pay any income tax. When a Fund
makes this kind of a payment, it's split equally among all shares, and is
called a distribution.
The Funds distribute any net realized capital gain, at least once a year. The
Funds declare and pay distributions of net investment income annually.
The distribution you receive is 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 recieve 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 normally pay any distribution that applies to those
shares in cash within five business days after the sale was made.
36
<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 Funds. It is not intended as a
substitute for careful tax planning. You should consult with your
own tax adviser 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 of net investment income, including 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. A portion of such
distributions to corporate shareholders may qualify for the dividends received
distribution.
Distributions of 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 to be paid for in
securities or other property 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 (at a rate of 30%,
or a lower rate if a treaty applies) on distributions paid to foreign
shareholders.
37
<PAGE>
Taxation of redemptions and exchanges
Your redemptions (including redemptions paid in securities or other property)
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.
38
<PAGE>
[GRAPHIC]
This glossary includes explanations of the important terms that
may be used in this prospectus. Some of the terms explained may
apply to Nations Funds not included in this prospectus.
[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.
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.
39
<PAGE>
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.
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.
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.
40
<PAGE>
Mortgage-backed security or mortgage-related security - a debt security that
gives you an interest in, and is backed by, a pool of residential mortgages
issued by the U.S. government or by financial institutions. The underlying
mortgages may be guaranteed by the U.S. government or one of its agencies,
authorities or instrumentalities. Mortgage-backed securities typically make
monthly payments, which are a combination of interest and a portion of the
principal of the underlying mortgages.
MSCI EAFE Index - Morgan Stanley Capital International Europe, Australasia and
Far East Index, an index of over 1,100 stocks from 21 developed markets in
Europe, Australia, New Zealand and Asia. The index reflects the relative size
of each market.
Non-diversified - a fund that holds securities of fewer 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.
Russell 1000 Growth Index - an unmanaged index which measures the performance
of the largest U.S. companies based on total market capitalization, with high
price-to-book ratios and forecasted growth rates relative to the Russell 1000
Index as a whole.
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 500(1) - Standard & Poor's 500 Composite Stock Price Index, an unmanaged
index of 500 widely held common stocks. It is not available for investment.
41
<PAGE>
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.
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 SuperComposite 1500(1) - An index created by Standard & Poors combining the
companies represented in three other indices - S&P 500, MidCap 400, and
SmallCap 600. The index represents 87% of the total capitalization of U.S.
equity markets.
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 Super Composite
1500, S&P 500, S&P SmallCap 600, S&P/BARRA Value or S&P MidCap SmallCap 400
Indices for their investment merit. S&P and BARRA determine and calculate
their indices 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 indices to
track stock market performance. S&P and BARRA make no guarantees about the
indices, any data included in them and the suitability of the indices or
their data for any purpose. "Standard and Poor's," "S&P 400," "S&P 500" and
"S&P 600" are trademarks of The McGraw-Hill Companies, Inc.
42
<PAGE>
[GRAPHIC]
Where to find more information
You'll find more information about the Domestic Stock Funds in the following
documents:
Annual and semi-annual reports
The annual and semi-annual reports contain information about Fund
investments and performance, the financial statements and the
independent accountants' 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 SEC's
Public Reference Room in Washington, D.C. Information on the operation
of the Public Reference Room may be obtained by calling the SEC at
1-202-942-8090. The reports and other information about the Funds are
available on the EDGAR Database on the SEC'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 SEC's Public
Reference Section, Washington, D.C. 20549-0102.
SEC file number:
Nations Funds Trust, 811-09645
[ ] [Nations Funds Logo]
<PAGE>
Statement of Additional Information
NATIONS FUNDS TRUST
Nations Financial Services Fund
Nations Marsico Technology Fund
Investor A, Investor B, Investor C and Primary A Shares
March 30, 2001
This Statement of Additional Information ("SAI") provides supplementary
information pertaining to the classes of shares representing interests in the
above listed two investment portfolios of Nations Funds Trust (each a "Fund" and
collectively, the "Funds"). This SAI is not a prospectus, and should be read
only in conjunction with the current prospectuses for the aforementioned Funds
related to the class or series of shares in which one is interested, dated March
30 2001, (each a "Prospectus"). Copies of the Prospectuses may be obtained
without charge by writing Nations Funds c/o Stephens Inc., One Bank of America
Plaza, 33rd Floor, Charlotte, North Carolina 28255, or by calling Nations Funds
at 1.800.321.7854.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
HISTORY OF NATIONS FUNDS TRUST............................................................... 1
DESCRIPTION OF THE COMPANY AND THE INVESTMENTS AND RISKS
OF ITS FUNDS ................................................................................ 1
General............................................................................... 1
Investment Limitations ............................................................... 2
NFST's Fundamental Policy Restrictions................................................ 2
NFST's Non-Fundamental Policy Restrictions............................................ 3
Permissible Fund Investments.......................................................... 4
Asset-Backed Securities............................................................... 4
Borrowings............................................................................ 8
Commercial Instruments................................................................ 8
Combined Transactions................................................................. 9
Convertible Securities................................................................ 9
Corporate Debt Securities............................................................. 10
Custodial Receipts.................................................................... 10
Currency Swaps........................................................................ 10
Delayed Delivery Transactions......................................................... 10
Dollar Roll Transactions ............................................................. 11
Equity Swap Contracts ................................................................ 11
Foreign Currency Forward Transactions ................................................ 12
Futures, Options and Other Derivative Instruments..................................... 13
Guaranteed Investment Contracts....................................................... 27
Illiquid and Restricted Securities.................................................... 27
Interest Rate Transactions ........................................................... 28
Lower Rated Debt Securities........................................................... 28
Options on Currencies................................................................. 29
Other Investment Companies............................................................ 29
Real Estate Investment Trusts......................................................... 30
Repurchase Agreements ................................................................ 30
Reverse Repurchase Agreements ........................................................ 30
Securities Lending.................................................................... 31
Short Sales........................................................................... 31
Special Situations.................................................................... 31
Standard & Poor's Depositary Receipts................................................. 31
Stripped Securities................................................................... 32
U.S. and Foreign Bank Obligations..................................................... 32
U.S. Government Obligations........................................................... 33
Use of Segregated and Other Special Accounts.......................................... 33
Variable and Floating Rate Instruments ............................................... 34
Warrants.............................................................................. 34
When-Issued Purchases and Forward Commitments ....................................... 34
Portfolio Turnover.................................................................... 35
Investment Risks and Considerations................................................... 35
MANAGEMENT OF THE COMPANY.................................................................... 36
Nations Funds Retirement Plan......................................................... 40
Nations Funds Deferred Compensation Plan.............................................. 40
Shareholder and Trustee Liability..................................................... 42
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY,
TRANSFER AGENCY, OTHER SERVICE PROVIDERS, SHAREHOLDER SERVICING AND
DISTRIBUTION AGREEMENTS ..................................................................... 43
Investment Adviser and Sub-Advisers................................................... 43
Co-Administrators and Sub-Administrator............................................... 44
Distribution Plans and Shareholder Servicing Arrangements for
Investor A Shares................................................................. 45
Investor C Shares ................................................................ 45
Investor B Shares................................................................. 47
Expenses.......................................................................... 48
Transfer Agents and Custodians........................................................ 49
Distributor........................................................................... 49
Independent Accountant and Reports.................................................... 50
Counsel............................................................................... 50
FUND TRANSACTIONS AND BROKERAGE.............................................................. 50
General Brokerage Policy.............................................................. 50
Section 28(e) Standards............................................................... 52
DESCRIPTION OF SHARES........................................................................ 52
Description of Shares of the Company.................................................. 52
Net Asset Value Determination......................................................... 54
ADDITIONAL INFORMATION CONCERNING TAXES...................................................... 54
General............................................................................... 54
Excise Tax ........................................................................... 55
Private Letter Ruling................................................................. 55
Taxation of Fund Investments.......................................................... 55
Foreign Taxes ........................................................................ 57
Capital Gain Distributions............................................................ 57
Other Distributions................................................................... 57
Disposition of Fund Shares............................................................ 57
Federal Income Tax Rates.............................................................. 58
Corporate Shareholders................................................................ 58
Foreign Shareholders.................................................................. 58
Backup Withholding.................................................................... 58
New Regulations....................................................................... 59
Tax-Deferred Plans.................................................................... 59
Other Matters......................................................................... 59
ADDITIONAL INFORMATION ON PERFORMANCE........................................................ 59
Yield Calculations.................................................................... 61
Total Return Calculations............................................................. 63
MISCELLANEOUS ............................................................................... 63
Certain Record and Beneficial Holders................................................. 63
SCHEDULE A - Description of Ratings.......................................................... A-1
</TABLE>
ii
<PAGE>
HISTORY OF NATIONS FUNDS TRUST
Nations Funds Trust ("NFST" or the "Company") is an open-end
registered investment company in the Nations Funds family of mutual funds (the
"Nations Funds Family"), which consists of Nations Fund, Inc., Nations Reserves,
Nations Fund Trust, Nations LifeGoal Funds, Inc., Nations Annuity Trust, Nations
Funds Trust and Nations Master Investment Trust. The Nations Funds Family
currently has more than 70 distinct investment portfolios and total assets in
excess of $90 billion.
NFST was organized as a Delaware business trust on October 22, 1999.
NFST has a fiscal year end of March 31.
DESCRIPTION OF THE COMPANY AND
THE INVESTMENTS AND RISKS OF ITS FUNDS
General.
NFST currently consists of fourteen different investment portfolios.
This SAI pertains to the Primary A, Investor A, Investor B and Investor C Shares
of the Nations Financial Services Fund (the "Financial Services Fund") and
Nations Marsico Technology Fund (the "Marsico Technology Fund"). All of the
Funds of NFST are diversified except the Financial Services Fund, the Marsico
Technology Fund and Nations Marsico Focused Equities Fund (which is not
addressed in this SAI).
Each share of NFST 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 NFST's
Board of Trustees. NFST'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 NFST 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, as amended (the
"1940 Act") requires voting by Fund.
The Declaration of Trust of NFST further provides that NFST
shareholders are only given the right to vote on matters to the extent that the
1940 Act or Delaware law so requires. Additionally, the Declaration of Trust
provides as follows: "Because this Declaration does not confer any independent
voting rights to shareholders not expressly granted under Delaware law or the
1940 Act, this Declaration may be amended without shareholder approval, and all
shareholders purchase shares with notice that it may be so amended unless
expressly required under Delaware law or the 1940 Act. The Trustees may, without
any shareholder vote, amend or otherwise supplement this Declaration by making
an amendment, a trust instrument supplemental hereto or an amended and restated
declaration of trust; provided, that shareholders shall have the right to vote
on any amendment if expressly required under Delaware law or the 1940 Act, or
submitted to them by the Trustees in their discretion."
As of the date of the SAI set forth on the cover page, 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 NFST and therefore could be
considered to be a controlling person of NFST for purposes of the 1940 Act. NFST
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 Financial Services Fund. Marsico Capital Management, LLC
("Marsico Capital") is investment sub-adviser to the Marsico Technology Fund. As
used herein the term "Adviser" shall mean BAAI, BACAP and/or Marsico Capital as
the context may require.
1
<PAGE>
This SAI is intended to furnish prospective investors with additional
information concerning the Company and the Funds. Some of the information
required to be in this SAI is also included in the Funds' current Prospectuses,
and, in order to avoid repetition, reference will be made to sections of the
Prospectuses. Additionally, the Prospectuses and this SAI omit certain
information contained in the registration statement filed with the United States
Securities and Exchange Commission (the "SEC"). Copies of the registration
statement, including items omitted from the Prospectuses and this SAI, may be
obtained from the SEC by paying the charges prescribed under its rules and
regulations. No investment in the Funds' Shares should be made without first
reading the related Prospectuses.
Investment Limitations
Information concerning a Fund's investment objective is set forth in
the applicable Prospectus. There can be no assurance that the Funds will achieve
their objectives. The features of the Funds' principal investment strategies and
the principal risks associated with those investment strategies also are
discussed in the Prospectuses.
The 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 invest in other Funds in the Nations Funds
family.
NFST's 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.
NFST's 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
<PAGE>
2. Not invest or hold more than 15% 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 Financial Services Fund and Marsico Technology 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.
The investment objective and policies of each Fund, unless otherwise
specified, are not-fundamental and may be changed without shareholder approval.
If the investment objective or policies of a Fund change, shareholders should
consider whether the Fund remains an appropriate investment in light of their
current position and needs.
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>
In addition to the types of securities described in their Prospectuses,
the Funds (in which the Funds invests all of their assets) may invest in:
preferred stock, warrants, convertible securities and debt securities; zero
coupon, pay-in-kind and step coupon securities, and may invest without limit in
indexed/structured securities. The Funds also may invest its assets in
high-yield/high-risk securities, such as lower grade debt securities, high-grade
commercial paper, certificates of deposit, and repurchase agreements, and may
invest in short-term debt securities as a means of receiving a return on idle
cash.
The Funds may hold cash or cash equivalents and invest without limit in
U.S. Government Obligations and short-term debt securities or money market
instruments when the Adviser: (i) believes that the market conditions are not
favorable for profitable investing, (ii) is unable to locate favorable
investment opportunities, or (iii) determines that a temporary defensive
position is advisable or necessary to meet anticipated redemption request. In
other words, the Funds do not always stay fully invested in stocks and bonds.
The Funds also may use options, futures, forward currency contracts and other
types of derivatives for hedging purposes or for non-hedging purposes such as
seeking to enhance return. The Funds also may purchase securities on a
when-issued, delayed delivery or forward commitment basis.
Each Fund discussed above also may invest in certain specified
derivative securities including: exchange-traded options; over-the-counter
options executed with primary dealers, including long calls and puts and covered
calls to enhance return; and U.S. and foreign exchange-traded financial futures
approved by the Commodity Futures Trading Commission ("CFTC") and options
thereon for market exposure risk management. Each Fund may lend its portfolio
securities to qualified institutional investors and may invest in repurchase
agreements, restricted, private placement and other illiquid securities. Each
Fund also may invest in real estate investment trust securities. In addition,
each Fund may invest in securities issued by other investment companies,
consistent with the Fund's investment objective and policies and repurchase
agreements. Each Fund may invest in forward foreign exchange contracts.
Asset-Backed Securities
In General. Asset-backed securities arise through the grouping by
governmental, government-related, and private organizations of loans,
receivables, or other assets originated by various lenders. Asset-backed
securities consist of both mortgage- and non-mortgage-backed securities.
Interests in pools of these assets may differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal paid at maturity or specified call dates. Conversely,
asset-backed securities provide periodic payments which may consist of both
interest and principal payments.
The life of an asset-backed security varies depending upon the rate of
the prepayment of the underlying debt instruments. The rate of such prepayments
will be a function of current market interest rates, and other economic and
demographic factors. For example, falling interest rates generally result in an
increase in the rate of prepayments of mortgage loans while rising interest
rates generally decrease the rate of prepayments. An acceleration in prepayments
in response to sharply falling interest rates will shorten the security's
average maturity and limit the potential appreciation in the security's value
relative to a conventional debt security. Consequently, asset-backed securities
may not be as effective in locking in high, long-term yields. Conversely, in
periods of sharply rising rates, prepayments are generally slow, increasing the
security's average life and its potential for price depreciation.
Mortgage-Backed Securities. Mortgage-backed securities represent an
ownership interest in a pool of mortgage loans.
Mortgage pass-through securities may represent participation interests
in pools of residential mortgage loans originated by U.S. Governmental or
private lenders and guaranteed, to the extent provided in such securities, by
the U.S. Government or one of its agencies, authorities or instrumentalities.
Such securities, which are ownership interests in the underlying mortgage loans,
differ from conventional debt securities, which provide for periodic payment of
interest in fixed amounts (usually semi-annually) and principal payments at
maturity or on specified call dates. Mortgage pass-through securities provide
for monthly payments that are a "pass-through" of the monthly interest and
principal payments (including any prepayments) made by the individual borrowers
on the pooled mortgage loans, net of any fees paid to the guarantor of such
securities and the servicer of the underlying mortgage loans.
The guaranteed mortgage pass-through securities in which a Fund may
invest may include those issued or guaranteed by Government National Mortgage
Association ("Ginnie Mae" or "GNMA"), Federal National Mortgage Association
("Fannie Mae" or "FNMA") or Federal Home Loan Mortgage Corporation ("Freddie
Mac" or "FHLMC"). Such Certificates are mortgage-backed securities which
represent a partial ownership interest in a pool of mortgage loans issued by
lenders such as mortgage bankers, commercial banks and savings and loan
associations. Such mortgage loans may have fixed or adjustable rates of
interest.
4
<PAGE>
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.
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.
5
<PAGE>
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.
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.
6
<PAGE>
Underlying Mortgages
Pools consist of whole mortgage loans or participations in loans. The
majority of these loans are made to purchasers of 1-4 family homes. The terms
and characteristics of the mortgage instruments are generally uniform within a
pool but may vary among pools. For example, in addition to fixed-rate,
fixed-term mortgages, a Fund may purchase pools of variable-rate mortgages
(VRM), growing equity mortgages (GEM), graduated payment mortgages (GPM) and
other types where the principal and interest payment procedures vary. VRM's are
mortgages which reset the mortgage's interest rate periodically with changes in
open market interest rates. To the extent that the Fund is actually invested in
VRM's, the Fund's interest income will vary with changes in the applicable
interest rate on pools of VRM's. GPM and GEM pools maintain constant interest
rates, with varying levels of principal repayment over the life of the mortgage.
These different interest and principal payment procedures should not impact the
Fund's net asset value since the prices at which these securities are valued
will reflect the payment procedures.
All poolers apply standards for qualification to local lending
institutions which originate mortgages for the pools. Poolers also establish
credit standards and underwriting criteria for individual mortgages included in
the pools. In addition, some mortgages included in pools are insured through
private mortgage insurance companies.
Average Life
The average life of pass-through pools varies with the maturities of
the underlying mortgage instruments. In addition, a pool's term may be shortened
by unscheduled or early payments of principal and interest on the underlying
mortgages. The occurrence of mortgage prepayments is affected by factors
including the level of interest rates, general economic conditions, the location
and age of the mortgage, and other social and demographic conditions.
As prepayment rates of individual pools vary widely, it is not possible
to accurately predict the average life of a particular pool. For pools of
fixed-rated 30-year mortgages, common industry practice is to assume that
prepayments will result in a 12-year average life. Pools of mortgages with other
maturities or different characteristics will have varying assumptions for
average life.
Returns on Mortgage-Backed Securities
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.
7
<PAGE>
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 Funds participate in an uncommitted line of credit provided by The
Bank of New York under a line of credit agreement (the "Uncommitted Line").
Advances under the Uncommitted Line 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
Uncommitted Line 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 Uncommitted Line) to the aggregate amount of indebtedness
pursuant to the Uncommitted Line.
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.
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. 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 shorter of the period remaining to the next interest rate
adjustment or the demand notice period specified in the instrument.
8
<PAGE>
Certain Funds also may purchase short-term participation interests in
loans extended by banks to companies, provided that both such banks and such
companies meet the quality standards set forth above. In purchasing a loan
participation or assignment, the Fund acquires some or all of the interest of a
bank or other lending institution in a loan to a corporate borrower. Many such
loans are secured and most impose restrictive covenants which must be met by the
borrower and which are generally more stringent than the covenants available in
publicly traded debt securities. However, interests in some loans may not be
secured, and the Fund will be exposed to a risk of loss if the borrower
defaults. Loan participations also may be purchased by the Fund when the
borrowing company is already in default. In purchasing a loan participation, the
Fund may have less protection under the federal securities laws than it has in
purchasing traditional types of securities. The Fund's ability to assert its
rights against the borrower will also depend on the particular terms of the loan
agreement among the parties.
Combined Transactions
Certain Funds may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple forward foreign
currency exchange contracts and any combination of futures, options and forward
foreign currency exchange contracts ("component" transactions), instead of a
single transaction, as part of a single hedging strategy when, in the opinion of
the Adviser, it is in the best interest of a Fund to do so and where underlying
hedging strategies are permitted by a Fund's investment policies. A combined
transaction, while part of a single hedging strategy, may contain elements of
risk that are present in each of its component transactions.
Convertible Securities
Certain Funds may invest in convertible securities, such as bonds,
notes, debentures, preferred stocks and other securities that may be converted
into common stock. The convertible securities purchased by a Fund will generally
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.
9
<PAGE>
As debt securities, convertible securities are investments which
provide for a stream of income or, in the case of zero coupon securities,
accretion of income with generally higher yields than common stocks. Of course,
like all debt securities, there can be no assurance of income or principal
payments because the issuers of the convertible securities may default on their
obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion
exchange features. Convertible securities generally are subordinated to other
similar debt securities but not to non-convertible securities of the same
issuer. Convertible bonds, as corporate debt obligations, are senior in right of
payment to all equity securities, and convertible preferred stock is senior to
common stock, of the same issuer. However, convertible bonds and convertible
preferred stock typically have lower coupon rates than similar non-convertible
securities. Convertible securities may be issued as fixed income obligations
that pay current income or as zero coupon notes and bonds, including Liquid
Yield Option Notes ("LYONs"). Zero coupon securities pay no cash income and are
sold at substantial discounts from their value at maturity. When held to
maturity, their entire income, which consists of accretion of discount, comes
from the difference between the issue price and their value at maturity. Zero
coupon convertible securities offer the opportunity for capital appreciation
because increases (or decreases) in the market value of such securities closely
follow the movements in the market value of the underlying common stock. Zero
coupon convertible securities generally are expected to be less volatile than
the underlying common stocks because they usually are issued with short
maturities (15 years or less) and are issued with options and/or redemption
features exercisable by the holder of the obligation entitling the holder to
redeem the obligation and receive a defined cash payment.
Corporate Debt Securities
Certain Funds may invest in corporate debt securities of domestic
issuers of all types and maturities, such as bonds, debentures, notes and
commercial paper. Corporate debt securities may involve equity features, such as
conversion or exchange rights or warrants for the acquisition of stock of the
same or a different issuer, participation based on revenue, sales or profit, or
the purchase of common stock or warrants in a unit transaction (where corporate
debt obligations and common stock are offered as a unit). Each Fund may also
invest in corporate debt securities of foreign issuers.
The corporate debt securities in which the Funds will invest will be
rated investment grade by at least one NRSRO (e.g., BBB or above by Standard &
Poor's Corporation ("S&P") or Baa or above by Moody's Investors Services, Inc.
("Moody's")). Commercial paper purchased by the Funds will be rated in the top
two categories by a NRSRO. Corporate debt securities that are not rated may be
purchased by such Funds if they are determined by the Adviser to be of
comparable quality under the direction of the Board of Trustees of the Company.
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.
10
<PAGE>
Delayed Delivery Transactions
In a delayed delivery transaction, the Fund relies on the other party
to complete the transaction. If the transaction is not completed, the Fund may
miss a price or yield considered to be advantageous. In delayed delivery
transactions, delivery of the securities occurs beyond normal settlement
periods, but a Fund would not pay for such securities or start earning interest
on them until they are delivered. However, when a Fund purchases securities on
such a delayed delivery basis, it immediately assumes the risk of ownership,
including the risk of price fluctuation. Failure by a counterparty to deliver a
security purchased on a delayed delivery basis may result in a loss or missed
opportunity to make an alternative investment. Depending upon market conditions,
a Fund's delayed delivery purchase commitments could cause its net asset value
to be more volatile, because such securities may increase the amount by which
the Fund's total assets, including the value of when-issued and delayed delivery
securities held by the Fund, exceed its net assets.
Dollar Roll Transactions
Certain Funds may enter into "dollar roll" transactions, which consist
of the sale by a Fund to a bank or broker/dealer (the "counterparty") of GNMA
certificates or other mortgage-backed securities together with a commitment to
purchase from the counterparty similar, but not identical, securities at a
future date, at the same price. The counterparty receives all principal and
interest payments, including prepayments, made on the security while it is the
holder. A Fund receives a fee from the counterparty as consideration for
entering into the commitment to purchase. Dollar rolls may be renewed over a
period of several months with a different repurchase price and a cash settlement
made at each renewal without physical delivery of securities. Moreover, the
transaction may be preceded by a firm commitment agreement pursuant to which the
Fund agrees to buy a security on a future date. If the broker/dealer to whom a
Fund sells the security becomes insolvent, the Fund's right to purchase or
repurchase the security may be restricted; the value of the security may change
adversely over the term of the dollar roll; the security that the Fund is
required to repurchase may be worth less than the security that the Fund
originally held, and the return earned by the Fund with the proceeds of a dollar
roll may not exceed transaction costs.
The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Fund's right to purchase
from the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Fund is able to purchase them.
Similarly, the Fund may be required to purchase securities in connection with a
dollar roll at a higher price than may otherwise be available on the open
market. Since, as noted above, the counterparty is required to deliver a
similar, but not identical security to the Fund, the security that the Fund is
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 make periodic payments to the Fund of 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. Therefore, the return to a Fund on any Equity Swap
Contract should be the gain or loss on the notional investment, plus dividends,
in the stocks comprising the S&P 500 Index, less the floating rate of interest
paid by the Fund on the notional amount. A Fund will only enter into Equity Swap
Contracts that provide for payments to be made 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.
11
<PAGE>
If there is a default by the counterparty to an Equity Swap Contract, a
Fund will be limited to contractual remedies pursuant to the agreements related
to the transaction. There is no assurance that Equity Swap Contract
counterparties will be able to meet their obligations pursuant to Equity Swap
Contracts or that, in the event of default, a Fund will succeed in pursuing
contractual remedies. A Fund thus assumes the risk that it may be delayed in or
prevented from obtaining payments owed to it pursuant to Equity Swap Contracts.
A Fund will closely monitor the credit of Equity Swap Contract counterparties in
order to minimize this risk.
Certain Funds may from time to time enter into the opposite side of
Equity Swap Contracts (i.e., where a Fund is obligated to pay the increase (net
of interest) or receive the decrease (plus interest) on the contract to reduce
the amount of the Fund's equity market exposure consistent with the Fund's
objective. These positions are sometimes referred to as Reverse Equity Swap
Contracts.
Equity Swap Contracts will not be used to leverage a Fund. A Fund will
not enter into any Equity Swap Contract or Reverse Equity Swap Contract unless,
at the time of entering into such transaction, the unsecured senior debt of the
counterparty is rated at least A by Moody's or S&P. Since the SEC considers
Equity Swap Contracts and Reverse Equity Swap Contracts to be illiquid
securities, a Fund will not invest in Equity Swap Contracts or Reverse Equity
Swap Contracts if the total value of such investments together with that of all
other illiquid securities which a Fund owns would exceed any limitation imposed
by the SEC Staff.
The Adviser does not believe that a Fund's obligations under Equity
Swap Contracts or Reverse Equity Swap Contracts are senior securities and,
accordingly, the Fund will not treat them as being subject to its borrowing
restrictions. However, the net amount of the excess, if any, of a Fund's
obligations over its respective entitlements with respect to each Equity Swap
Contract and each Reverse Equity Swap Contract will be accrued on a daily basis
and an amount of cash, U.S. Government securities or other liquid high quality
debt securities having an aggregate market value at least equal to the accrued
excess will be maintained in a segregated account by the Fund's custodian.
Foreign Currency Forward 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. 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.
12
<PAGE>
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 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).
SPECIAL CONSIDERATIONS REGARDING EUROPE and the EURO: On January 1,
1999, eleven of the fifteen member countries of the European Union (EU) fixed
their currencies irrevocably to the euro, the new unit of currency of the
European Economic and Monetary Union (EMU). At that time each member's currency
was converted at a fixed rate to the euro. Initially, use of the euro will be
confined mainly to the wholesale financial markets, while its widespread use in
the retail sector will follow the circulation of euro banknotes and coins on
January 1, 2002. At that time, the national banknotes and coins of participating
member countries will cease to be legal tender. In addition to adopting a single
currency, member countries will no longer control their own monetary policies.
Instead, the authority to direct monetary policy will be exercised by the new
European Central Bank. While economic and monetary convergence in the European
Union may offer new opportunities for those investing in the region, investors
should be aware that the success of the union is not wholly assured. Europe must
grapple with a number of challenges, any one of which could threaten the
survival of this monumental undertaking. Eleven disparate economies must adjust
to a unified monetary system, the absence of exchange rate flexibility, and the
loss of economic sovereignty. The Continent's economies are diverse, its
governments decentralized, and its cultures differ widely. Unemployment is
historically high and could pose political risk. One or more member countries
might exit the union, placing the currency and banking system in jeopardy.
For those Funds that invest in euro-denominated securities (including
currency contracts) there is the additional risk of being exposed to a new
currency that may not fully reflect the strengths and weaknesses of the
disparate economies that make up the Union. This was the case in the first six
months of 1999, when the initial exchange rates of the euro versus many of the
world's major currencies steadily declined. In this environment, U.S. and other
foreign investors experienced erosion of their investment returns in the region.
In addition, many European countries rely heavily upon export dependent
businesses and any strength in the exchange rate between the euro and the dollar
can have either a positive or a negative effect upon corporate profits.
13
<PAGE>
Futures, Options and Other Derivative Instruments
Futures Contracts in General. A financial futures contract entered into
by a Fund 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. Financial futures contracts can be 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 "initial margin."
The initial deposit required will vary, but may be as low as 2% or less of a
contract's face value. Thereafter, the futures contract is valued daily 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 and for separate purpose of yield enhancement. A Fund may
enter into transactions in futures contracts that are based on U.S. Government
obligations, including any index of Government obligations that may be available
for trading. Such transactions will be entered into where movements in the value
of the securities or index underlying a futures contract can be expected to
correlate closely with movements in the value of securities held in a Fund. For
example, a Fund may sell futures contracts in anticipation of a general rise in
the level of interest rates, which would result in a decline in the value of its
fixed income securities. If the expected rise in interest rates occurs, the Fund
may realize gains on its futures position, which should offset all or part of
the decline in value of fixed income fund securities. A Fund could protect
against such decline by selling fixed income securities, but such a strategy
would involve higher transaction costs than the sale of futures contracts and,
if interest rates again declined, the Fund would be unable to take advantage of
the resulting market advance without purchases of additional securities.
The purpose of the purchase or sale of a futures contract on government
securities and indices of government securities, in the case of the
above-referenced Funds, which hold or intend to acquire long-term debt
securities, is to protect a Fund from fluctuations in interest rates without
actually buying or selling long-term debt securities. For example, if long-term
bonds are held by a Fund, and interest rates were expected to increase, the Fund
might enter into futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling an equivalent value of the long-term
bonds held by the Fund. If interest rates did increase, the value of the debt
securities in the Fund would decline, but the value of the futures contracts to
the Fund would increase at approximately the same rate thereby keeping the net
asset value of the Fund from declining as much as it otherwise would have. When
a Fund is not fully invested and a decline in interest rates is anticipated,
which would increase the cost of fixed income securities that the Fund intends
to acquire, it may purchase futures contracts. In the event that the projected
decline in interest rates occurs, the increased cost of the securities acquired
by the Fund should be offset, in whole or part, by gains on the futures
contracts by entering into offsetting transactions on the contract market on
which the initial purchase was effected. In a substantial majority of
transactions involving futures contracts on fixed income securities, a Fund will
purchase the securities upon termination of the long futures positions, but
under unusual market conditions, a long futures position may be terminated
without a corresponding purchase of securities.
14
<PAGE>
Similarly, when it is expected that interest rates may decline, futures
contracts on fixed income securities and indices of government securities may be
purchased for the purpose of hedging against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of such futures
contracts should be similar to that of long-term bonds, a Fund could take
advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Fund's cash reserves could then be used to
buy long-term bonds in the cash market. Similar results could be accomplished by
selling bonds with long maturities and investing in bonds with short maturities
when interest rates are expected to increase. However, since the futures market
is more liquid than the cash market, the use of these futures contracts as an
investment technique allows a Fund to act in anticipation of such an interest
rate decline without having to sell its portfolio securities. To the extent a
Fund enters into futures contracts for this purpose, the segregated assets
maintained by a Fund will consist of cash, cash equivalents or high quality debt
securities of the Fund in an amount equal to the difference between the
fluctuating market value of such futures contract and the aggregate value of the
initial deposit and variation margin payments made by the Fund with respect to
such futures contracts.
Stock Index Futures Contracts. Certain Funds may sell stock index
futures contracts in order to offset a decrease in market value of its
securities that might otherwise result from a market decline. A Fund may do so
either to hedge the value of its portfolio as a whole, or to protect against
declines 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 to purchase
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 purchaser of the option assumes is equal to the
premium plus related transaction costs. 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.
15
<PAGE>
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.
16
<PAGE>
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 Non-U.S. 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.
17
<PAGE>
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.
18
<PAGE>
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 OTC 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 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.
20
<PAGE>
The liquidity of a secondary market in a futures contract or an option
on a futures contract may be adversely affected by "daily price fluctuation
limits" established by the exchanges, which limit the amount of fluctuation in
the price of a contract during a single trading day and prohibit trading beyond
such limits once they have been reached. The trading of futures and options
contracts also is subject to the risk of trading halts, suspensions, exchange or
clearing house equipment failures, government intervention, insolvency of the
brokerage firm or clearing house or other disruptions of normal trading
activity, which could at times make it difficult or impossible to liquidate
existing positions or to recover excess variation margin payments.
Risk of Predicting Interest Rate Movements. Investments in futures
contracts on fixed income securities and related indices involve the risk that
if the Adviser's investment judgment concerning the general direction of
interest rates is incorrect, a 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 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.
22
<PAGE>
In that case, the five-point loss in the market value of the portfolio
security would be offset by the five-point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.
The Adviser could be wrong in its forecast of interest rates and the
equivalent futures market price could rise above 98. In this case, the market
value of the portfolio securities, including the portfolio security being
protected, would increase. The benefit of this increase would be reduced by the
loss realized on closing out the futures contract sale.
If interest rate levels did not change, the 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 CFTC. Transactions on such exchanges are cleared through a
clearing corporation, which guarantees the performance of the parties to each
contract.
23
<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>
Portfolio Futures
<S> <C>
-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>
24
<PAGE>
If, however, the market moved in the opposite direction, that is, market
value decreased and the Fund had entered into an anticipatory purchase hedge, or
market value increased and the Fund had hedged its stock portfolio, the results
of the Fund's transactions in stock index futures would be as set forth below.
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
<S> <C>
-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.
25
<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.
26
<PAGE>
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, a Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in
a futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions.
Successful use of futures by a Fund also is subject to the Adviser's
ability to predict correctly movements in the direction of the market. For
example, if a Fund has hedged against the possibility of a decline in the market
adversely affecting securities held in its portfolio and securities prices
increase instead, the Fund will lose part or all of the benefit to the increased
value of its securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the Fund
has insufficient cash, it may have to sell securities to meet daily variation
margin requirements. Such sales of securities may be, but will not necessarily
be, at increased prices which reflect the rising market. A Fund may have to sell
securities at a time when it may be disadvantageous to do so.
V. Options on Futures Contracts.
The Funds may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer or
seller of a futures contract, the holder, or writer, of an option has the right
to terminate its position prior to the scheduled expiration of the option by
selling, or purchasing, an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss.
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.
27
<PAGE>
Guaranteed Investment Contracts
Guaranteed investment contracts, investment contracts or funding
agreements (each referred to as a "GIC") are investment instruments issued by
highly rated insurance companies. Pursuant to such contracts, a Fund may make
cash contributions to a deposit fund of the insurance company's general or
separate accounts. The insurance company then credits to a Fund guaranteed
interest. The insurance company may assess periodic charges against a GIC for
expense and service costs allocable to it, and the charges will be deducted from
the value of the deposit fund. The purchase price paid for a GIC generally
becomes part of the general assets of the issuer, and the contract is paid from
the general assets of the issuer.
A Fund will only purchase GICs from issuers which, at the time of
purchase, meet quality and credit standards established by the Adviser.
Generally, GICs are not assignable or transferable without the permission of the
issuing insurance companies, and an active secondary market in GICs does not
currently exist. Also, a Fund may not receive the principal amount of a GIC from
the insurance company on seven days' notice or less, at which point the GIC may
be considered to be an illiquid investment.
Illiquid and Restricted Securities
Certain Funds may invest in restricted and illiquid securities.
Illiquid securities are securities that may not be sold or disposed of in the
ordinary course of business within seven business days at approximately the
value at which they are being carried on the Fund's books. The Funds may invest
in restricted, privately placed securities that may be sold only to qualified
institutional buyers in accordance with Rule 144A under the 1933 Act, or which
were issued under section 4(2) of the 1933 Act. In the case of Rule 144A
restricted securities, because these securities can be resold only to qualified
institutional buyers or after they have been held for a number of years, they
may be considered illiquid securities--meaning that they could be difficult for
a Fund to convert to cash if needed. If a substantial market develops for a
restricted security held by a Fund, it will be treated as a liquid security, in
accordance with procedures and guidelines approved by such Fund's Board. While
the Adviser determines the liquidity of restricted securities on a daily basis,
the Board oversees and retains ultimate responsibility for the Adviser's
decisions. Several factors that the Board considers in monitoring these
decisions include the valuation of a security, the availability of qualified
institutional buyers, and the availability of information about the security's
issuer.
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.
28
<PAGE>
A Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. In as much as these swaps, caps and
floors are entered into for good faith hedging purposes, the Adviser and the
Fund believe such obligations do not constitute senior securities under the 1940
Act and, accordingly, will not treat them as being subject to its borrowing
restrictions. A Fund will not enter into any swap, cap and floor transaction
unless, at the time of entering into such transaction, the unsecured long-term
debt of the counterparty, combined with any credit enhancements, is rated at
least "A" by Standard & Poor's Corporation or Moody's Investors Service, Inc. or
has an equivalent rating from an NRSRO or is determined to be of equivalent
credit quality by the Adviser. If there is a default by the counterparty, the
Fund may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps and floors are more recent innovations
for which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
With respect to swaps, a Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high grade securities
having a value equal to the accrued excess. Caps and floors require segregation
of assets with a value equal to the Fund's net obligation, if any.
Lower Rated 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.
29
<PAGE>
Options on Currencies
Certain Funds may purchase and sell options on currencies to hedge the
value of securities the Fund holds or intends to buy. Options on foreign
currencies may be traded on U.S. and foreign exchanges or over-the-counter.
Other Investment Companies
In seeking to attain their investment objectives, certain Funds may
invest in securities issued by other investment companies within the limits
prescribed by the 1940 Act, its rules and regulations and any exemptive relief
obtained by the Funds. The Feeder Funds invest all of their assets in
corresponding 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 Company 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.
Each Fund is seeking or has obtained permission from the SEC to invest
in other Funds in the Nations Funds family.
Real Estate Investment Trusts
A real estate investment trust ("REIT") is a managed portfolio of real
estate investments which may include office buildings, apartment complexes,
hotels and shopping malls. An equity REIT holds equity positions in real estate,
and it seeks to provide its shareholders with income from the leasing of its
properties, and with capital gains from any sales of properties. A mortgage REIT
specializes in lending money to developers of properties, and passes any
interest income it may earn to its shareholders.
REITs may be affected by changes in the value of the underlying
property owned or financed by the REIT, while Mortgage REITs also may be
affected by the quality of credit extended. Both equity and mortgage REITs are
dependent upon management skill and may not be diversified. REITs also may be
subject to heavy cash flow dependency, defaults by borrowers, self-liquidation,
and the possibility of failing to qualify for tax-free pass-through of income
under the Internal Revenue Code of 1986, as amended.
The real estate industry is particularly sensitive to economic
downturns. The value of securities of issuers in the real estate industry is
sensitive to changes in real estate values and rental income, property taxes,
interest rates, tax and regulatory requirements, overbuilding, extended
vacancies of properties, and the issuer's management skill. In addition, the
value of a REIT can depend on the structure of and cash flow generated by the
REIT. REITs and mortgage-backed securities are subject to the risk that
mortgagors may not meet their payment obligations. Each investment also has its
unique interest rate and payment priority characteristics. In addition, REITs
are subject to unique tax requirements which, if not met, could adversely affect
dividend payments. Also, in the event of a default of an underlying borrower or
lessee, a REIT could experience delays in enforcing its rights as a mortgagee or
lessor and may incur substantial costs associated with protecting its
investments.
30
<PAGE>
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 Company's custodian in a segregated
account or in the Federal Reserve/Treasury book-entry system. Repurchase
agreements are considered to be loans by such Company under the 1940 Act.
Reverse Repurchase Agreements
At the time a 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.
31
<PAGE>
Special Situations
Certain Funds may invest in "special situations." A special situation
arises when, in the opinion of the Adviser, the securities of a particular
company will, within a reasonably estimable period of time, be accorded market
recognition at an appreciated value solely by reason of a development applicable
to that company, and regardless of general business conditions or movements of
the market as a whole. Developments creating special situations might include,
among others: liquidations, reorganizations, recapitalizations, mergers,
material litigation, technical breakthroughs and new management or management
policies. Although large and well known companies may be involved, special
situations more often involve comparatively small or unseasoned companies.
Investments in unseasoned companies and special situations often involve much
greater risk than is inherent in ordinary investment securities.
Standard & Poor's Depositary Receipts ("SPDRs")
Certain Funds may purchase Standard & Poor's Depositary Receipts, or
SPDRs, which are interests in a unit investment trust holding a portfolio of
securities linked to the S&P 500 Index. Because a unit investment trust is an
investment company under the 1940 Act, a Fund's investments in SPDRs are subject
to the limitations set forth in Section 12(d)(1)(A) of the 1940 Act.
SPDRs closely track the underlying portfolio of securities, trade like
a share of common stock and pay periodic dividends proportionate to those paid
by the portfolio of stocks that comprise the S&P 500 Index. As a holder of
interests in a unit investment trust, a Fund would indirectly bear its ratable
share of that unit investment trust's expenses. At the same time the Fund would
continue to pay its own management and advisory fees and other expenses, as a
result of which the Fund and its shareholders in effect will be absorbing
duplicate levels of fees with respect to investments in such unit investment
trusts.
SPDRs are subject to the risks of an investment in a broadly based
portfolio of large-capitalization common stocks, including the risk that the
general level of stock prices may decline, thereby adversely affecting the value
of such investment. In addition, because individual investments in SPDRs are not
redeemable, except upon termination of the unit investment trust, the liquidity
of small holdings of SPDRs will depend upon the existence of a secondary market.
Large holdings of SPDRs are called "creation unit size" and are redeemable in
kind only and are not redeemable for cash from the unit investment trust. The
price of SPDRs is derived and based upon the securities held by the unit
investment trust. Accordingly, the level of risk involved in the purchase or
sale of a SPDR is similar to the risk involved in the purchase or sale of
traditional common stock, with the exception that the pricing mechanism for
SPDRs is based on a basket of stocks. Disruptions in the markets for the
securities underlying SPDRs purchased or sold by a Fund could result in losses
on SPDRs.
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 Funds 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 Company'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.
32
<PAGE>
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 its investments in foreign bank obligations (i.e.,
obligations of foreign branches and foreign 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 Company, 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 25% of total assets at the time of investment.
Each Fund may also make interest-bearing savings deposits in commercial
and savings banks in amounts not in excess of 5% of the total assets of the
Fund.
U.S. Government Obligations
Each Fund may invest in U.S. Government obligations. Examples of the
types of U.S. Government obligations that may be held by the Funds include, in
addition to U.S. Treasury bonds, notes and bills, the obligations of the Federal
Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage Association,
Federal National Mortgage Association, General Services Administration, Student
Loan Marketing Association, Central Bank for Cooperatives, Federal Home Loan
Mortgage Corporation, Federal Intermediate Credit Banks, Tennessee Valley
Authority, Resolution Funding Corporation and Maritime Administration.
Obligations guaranteed as to principal or interest by the U.S. Government, its
agencies, authorities or instrumentalities are deemed to include: (a) securities
for which the payment of principal and interest is backed by an irrevocable
letter of credit issued by the U.S. Government, its agencies, authorities or
instrumentalities and (b) participations in loans made to foreign governments or
their agencies that are so guaranteed. The secondary market for certain of these
participations is limited. If such participations are illiquid they will not be
purchased.
33
<PAGE>
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 Company'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.
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 shorter 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.
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.
34
<PAGE>
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.
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 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.
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.
35
<PAGE>
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 Financial Services Fund and Marsico Technology Fund are
non-diversified funds, which means that they 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 their net asset values. The
Financial Services Fund and Marsico Technology Fund reserve the right to become
diversified funds by limiting the investments in which more than 5% of their
total assets are invested.
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" S&P or "Baa" by
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."
Certain of the Funds may invest in securities of smaller and newer
issuers. Investments in such companies may present greater opportunities for
capital appreciation because of high potential earnings growth, but also present
greater risks than investments in more established companies with longer
operating histories and greater financial capacity.
MANAGEMENT OF THE COMPANY
The business and affairs of the Company is managed under the direction
of the Board of Trustees. This SAI contains the names of and general background
information concerning each Trustee of the Company.
The Company and the Adviser have adopted codes of ethics which contain
policies on personal securities transactions by "access persons," including
portfolio managers and investment analysts. These policies substantially comply
in all material respects with the recommendations set forth in the May 9, 1994
Report of the Advisory Group on Personal Investing of the Investment Company
Institute.
The Trustees and executive officers of the Company 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 Company (as defined in the
1940 Act) are indicated by an asterisk(*).
36
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
During Past 5 Years
Position with and Current
Name, Address, and Age the Company Directorships
---------------------- ----------- -------------
<S> <C> <C>
Edmund L. Benson, III, 63 Trustee Director, President and Treasurer,
Saunders & Benson, Inc. Saunders & Benson, Inc. (Insurance),
1510 Willow Lawn Drive Insurance Managers, Inc.
Suite 216 (insurance); Trustee, Nations
Richmond, VA 23230 Reserves, Master Investment Trust,
Nations Annuity Trust and Nations
Fund Trust; Director, Nations Fund,
Inc., and Nations LifeGoal Funds,
Inc.; Director, Nations Fund
Portfolios, Inc. through August,
1999.
William P. Carmichael, 56 Trustee Trustee - 231 Funds (investment
Succession Fund company) from 1993 to 1995, Time
The Wrigley Building Horizon Fund (investment company)
400 North Michigan Avenue from 1995 to 1999, Pacific
Suite 1016 Innovations Trust (investment
Chicago, IL 60611 company) from 1997 to 1999, Nations
Annuity Trust (investment company)
since December 1999, Nations Master
Investment Trust (investment company)
since December 1999, and Nations
Funds Trust (investment company)
since December 1999; Director- The
Hain Food Group, Inc. (specialty food
products distributor) until December
1998, Cobra Electronics Corporation
(electronic equipment manufacturer),
Opta Food Ingredients, Inc. (food
ingredients manufacturer), Golden
Rule Insurance Company, Nations
LifeGoal Funds, Inc. (investment
company) since December 1999.
James Ermer, 57 Trustee Retired Executive Vice President,
11511 Compass Point Drive Corporate Development and Planning -
Ft. Meyers, FL 33908 Land America (title insurance);
Senior Vice President, Finance - CSX
Corporation (transportation and
natural resources); Director -
National Mine Service (mining
supplies), Lawyers Title Corporation
(title insurance); Trustee, Nations
Reserves, Nations Fund Trust,
Nations Annuity Trust and Nations
Master Investment Trust; Director,
Nations Fund, Inc. and Nations
LifeGoal Funds, Inc.; Director,
Nations Fund Portfolios, Inc.
through August, 1999.
William H. Grigg, 67 Trustee Chairman Emeritus since July 1997,
Duke Power Co. Chairman and Chief Executive Officer
16092A Reap Road from April 1994 to July 1997 - Duke
Albermarle, NC 28001 Power Co.; Director - The Shaw
Group, Inc.; Director and Vice
Chairman, Aegis Insurance Services,
Ltd. (a mutual insurance company in
Bermuda); Trustee, Nations
Reserves, Nations Fund Trust,
Nations Annuity Trust and Nations
Master Investment Trust; Director,
Hatteras Income Securities, Inc.,
Nations Government Income Term Trust
2003, Inc., Nations Government
Income Term Trust 2004, Inc.,
Nations Balanced Target Maturity
Fund, Inc., Nations Fund, Inc. and
Nations LifeGoal Funds, Inc.;
Director, Nations Fund Portfolios,
Inc. through August, 1999.
Thomas F. Keller, 68 Trustee R.J. Reynolds Industries Professor
Fuqua School of Business of Business Administration and
P.O. Box 90120 Former Dean - Fuqua School of
Duke University Business, Duke University; Director
Durham, NC 27708 - LADD Furniture, Inc. (furniture),
Wendy's International, Inc.
(restaurant operating and
franchising), American Business
Products, Inc. (printing services),
Dimon, Inc. (tobacco), Biogen, Inc.
(pharmaceutical biotechnology);
Trustee, The Mentor Funds, Mentor
Institutional Trust, Cash Reserve
Trust, Nations Reserves, Nations
Fund Trust, Nations Annuity Trust
and Nations Master Investment Trust;
Director, Hatteras Income
Securities, Inc., Nations Government
Income Term Trust 2003, Inc.,
Nations Government Income Term Trust
2004, Inc., Nations Balanced Target
Maturity Fund, Inc. and Nations
LifeGoal Funds, Inc.; Director,
Nations Fund Portfolios, Inc.
through August, 1999.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
During Past 5 Years
Position with and Current
Name, Address, and Age the Company Directorships
---------------------- ----------- -------------
<S> <C> <C>
Carl E. Mundy, Jr., 65 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, 71* Trustee President - Association of American
480 S. Orange Grove Blvd. Universities from February 1993 to
Pasadena, CA 91105 June 1998; Director - Farmers Group,
Inc. (insurance company), Nations
Fund, Inc. and Nations LifeGoal
Funds, Inc.; Trustee, Master
Investment Trust, Series I from 1995
to 1999, Master Investment Trust,
Series II from 1995 to 1997, Nations
Reserves, Nations Fund Trust,
Nations Annuity Trust and Nations
Master Investment Trust.;
Director/Trustee and Chairman -
Pacific Horizon Funds, Inc. and
Master Investment Trust, Series I,
from inception to May 1999;
Director - Time Horizon Funds and
Pacific Innovations Trust; Director,
Nations Fund Portfolios, Inc.
through August, 1999.
James B. Sommers*, 61 Trustee President - NationsBank Trust from
237 Cherokee Road January 1992 to September 1996;
Charlotte, NC 28207 Executive Vice President -
NationsBank Corporation from January
1992 to May 1997; Chairman - Central
Piedmont Community College
Foundation; Board of Commissioners,
Charlotte/ Mecklenberg Hospital
Authority; Director - Nations Fund,
Inc. and Nations LifeGoal Funds,
Inc.; Trustee, Central Piedmont
Community College; Mint Museum of
Art, Nations Reserves, Nations Fund
Trust, Nations Annuity Trust and
Nations Master Investment Trust;
Director, Nations Fund Portfolios,
Inc. through August, 1999.
A. Max Walker*, 78 President, Trustee and Independent Financial Consultant;
4580 Windsor Gate Court Chairman of the Board Director and Chairman of the Board -
Atlanta, GA 30342 Hatteras Income Securities, Inc.,
Nations Government Income Term Trust
2003, Inc., Nations Government
Income Term Trust 2004, Inc.,
Nations Balanced Target Maturity
Fund, Inc.; President, Director and
Chairman of the Board - Nations
Fund, Inc. and Nations LifeGoal
Funds, Inc.; President, Trustee and
Chairman of the Board - Nations
Reserves, Nations Fund Trust,
Nations Annuity Trust and Nations
Master Investment Trust; Director,
Nations Fund Portfolios, Inc.
through August, 1999.
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
During Past 5 Years
Position with and Current
Name, Address, and Age the Company Directorships
---------------------- ----------- -------------
<S> <C> <C>
Charles B. Walker, 61 Trustee Director-Ethyl Corporation (chemical
Albermarle Corporation manufacturing); Vice Chairman and
Vice Chairman and CFO Chief Financial Officer - Albemarle
330 South Fourth Street Corporation (chemical
Richmond, VA 23219 manufacturing); Director, Nations
Fund, Inc. and Nations LifeGoal
Funds, Inc.; Trustee, Nations
Reserves, Nations Fund Trust,
Nations Annuity Trust and Nations
Master Investment Trust; Director,
Nations Fund Portfolios, Inc.
through August, 1999.
Thomas S. Word, Jr.*, 62 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, 39 Assistant Secretary Assistant Secretary - Nations Fund
Stephens Inc. Trust, Nations Fund, Inc., Nations
Reserves, Nations LifeGoal Funds,
Inc., Nations Annuity Trust and
Nations Master Investment Trust;
Assistant Secretary, Nations Fund
Portfolios, Inc. through August,
1999.
Carolyn Wyse, 37 Assistant Secretary and Assistant Secretary and Assistant
Stephens Inc. Assistant Treasurer Treasurer since August 1999- Nations
Fund Trust, Nations Fund, Inc.,
Nations Reserves, Nations LifeGoal
Funds, Inc., Nations Annuity Trust,
Nations Master Investment Trust and
Nations Funds Trust.
</TABLE>
Each Trustee is a board member of NFST, Nations Fund Trust, Nations
Fund, Inc., Nations Reserves, Nations LifeGoal Funds, Inc., Nations Annuity
Trust and Nations Master Investment Trust, each a registered investment company
that is part of the Nations Funds Family, except William P. Carmichael, who is
only a board member of NFST, Nations LifeGoal Funds, Inc., Nations Annuity Trust
and Nations Master Investment Trust. Richard H. Blank, Jr., Michael W. Nolte,
and Carolyn Wyse also are officers of NFST, Nations Fund Trust, Nations Fund,
Inc., Nations Reserves, Nations LifeGoal Funds, Inc., Nations Annuity Trust and
Nations Master Investment Trust.
39
<PAGE>
The Company, each Adviser, and Stephens have adopted a code of ethics
which, contain policies on personal securities transactions by "access persons,"
including portfolio managers and investment analysts. These policies
substantially comply in all material respects with the amendments to Rule 17j-1
under the 1940 Act as set forth in the August 20, 1999 Release. Each code of
ethics, among other things, prohibits each access person of the Company 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 Company, (ii) any employee of the Company (or any company in a control
relationship with the Company) 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 Company, and (iii) any natural person in a
control relationship with the Company who obtains information concerning
recommendations made to the Company 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 Company 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 Company's access persons, other than its
"disinterested" trustees, submit reports to the Company's designated compliance
person regarding transactions involving securities which are eligible for
purchase by a Fund. The codes of ethics for the Company, Advisers, and Stephens
are on public file with, and are available from, the SEC.
Nations Funds Retirement Plan
Under the terms of the Nations Funds Retirement Plan for Eligible
Trustees (the "Retirement Plan"), each Trustee may be entitled to certain
benefits upon retirement from the Board of Trustees. Pursuant to the Retirement
Plan, the normal retirement date is the date on which the eligible Trustee has
attained age 65 and has completed at least five years of continuous service with
one or more of the open-end investment companies advised by the Adviser. If a
Trustee retires before reaching age 65, no benefits are payable. Each eligible
Trustee is entitled to receive an annual benefit from the 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 Trustee's fees payable by the Funds
during the calendar year in which the Trustee's retirement occurs multiplied by
the number of years of service (not in excess of ten years of service) completed
with respect to any of the Funds. Such benefit is payable to each eligible
Trustee in quarterly installments for a period of no more than five years. If an
eligible Trustee dies after attaining age 65, the Trustee's surviving spouse (if
any) will be entitled to receive 50% of the benefits that would have been paid
(or would have continued to have been paid) to the Trustee if he had not died.
The Retirement Plan is unfunded. The benefits owed to each 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 Trustees (the "Deferred Compensation Plan"), each Trustee may elect, on
an annual basis, to defer all or any portion of the annual board fees (including
the annual retainer and all attendance fees) payable to the Trustee for that
calendar year. An application was submitted to and approved by the SEC to permit
deferring trustees to elect to tie the rate of return on fees deferred pursuant
to the Deferred Compensation Plan, to one or more of certain investment
portfolios of certain Funds. Distributions from the deferring Trustees' deferral
accounts will be paid in cash, in generally equal quarterly installments over a
period of five years beginning on the date the deferring Trustees' retirement
benefits commence under the Retirement Plan. The Board of Trustees, in its sole
discretion, may accelerate or extend such payments after a Trustee's termination
of service. If a deferring Trustee dies prior to the commencement of the
distribution of amounts in his 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 Trustee's death. If a deferring 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 Trustee. Amounts payable
under the Deferred Compensation Plan are not funded or secured in any way and
deferring Trustees have the status of unsecured creditors of the Funds from
which they are deferring compensation.
40
<PAGE>
Trustee Compensation
Trustees of the Company are compensated for their services to the
Nations Funds Family on a flat rate basis, and not on a per registered
investment company or per fund basis as outlined in the following chart.
Board Member Compensation Arrangement
<TABLE>
<CAPTION>
<S> <C>
------------------------------------------------- -------------------------------------------------------------
Board Member Annual Retainer: $65,000
Board Chairman: Additional 20% of the base annual
retainer.
Payable in quarterly installments. Payable pro rata
for partial calendar year of service. Allocated across
multiple registrants.
Meeting Fees: $5,000 per meeting for in-person meetings
(up to six meetings per calendar year) and $1,000 for
telephone meetings. Allocated across multiple registrants
convened at meetings.
------------------------------------------------- -------------------------------------------------------------
Audit Committee Members Chairman: Additional 10% of the base annual retainer as
Board Member.
Meeting Fees: $1,000 per meeting if not held within one
calendar day before or after regularly scheduled Board
meetings. Allocated across multiple registrants convened
at meetings.
------------------------------------------------- -------------------------------------------------------------
Nominating Committee Members Meeting Fees: $1,000 per meeting if not held within one
calendar day before or after regularly scheduled Board
meetings. Allocated across multiple registrants convened
at meetings.
------------------------------------------------- -------------------------------------------------------------
</TABLE>
The following Compensation Table provides the compensation paid by the
Nations Funds Family to the Trustees for the year ended March 31, 2000. From
April 1, 1999 to June 30, 1999 each Trustee received (i) an annual retainer of
$1,000 ($3,000 for the Chairman of the Board) plus $500 for each Series of each
Company, plus (ii) a fee of $1,000 for attendance at each "in-person" meeting of
each respective Board (or Committee thereof) and $500 for attendance at each
other meeting of each respective Board (or Committee thereof). Beginning July 1,
1999 the Trustees were compensated according to the Compensation Arrangement as
outlined above.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Pension or
Aggregate Retirement
Compensation Benefits Accrued Estimated Annual Total Compensation
Name of Person from as Part of Fund Benefits Upon from Registrant
Position (1) Registrant (2) Expenses Retirement Plan & Fund Complex(3)(4)
------------ -------------- -------- --------------- --------------
<S> <C> <C> <C> <C>
Edmund L. Benson, III $76,708 $8,850 $48,000 $88,696
Trustee
James Ermer 73,241 8,850 48,000 76,391
Trustee
William H. Grigg 67,559 8,850 48,000 101,391
Trustee
Thomas F. Keller 71,453 8,850 51,000 106,331
Trustee
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Pension or
Aggregate Retirement
Compensation Benefits Accrued Estimated Annual Total Compensation
Name of Person from as Part of Fund Benefits Upon from Registrant
Position (1) Registrant (2) Expenses Retirement Plan & Fund Complex(3)(4)
------------ -------------- -------- --------------- --------------
<S> <C> <C> <C> <C>
A. Max Walker 98,230 8,850 54,000 125,000
Chairman of the Board
Charles B. Walker 84,856 8,850 48,000 92,000
Trustee
Thomas S. Word 67,009 8,850 48,000 84,391
Trustee
James P. Sommers 89,856 8,850 48,000 93,000
Trustee
Carl E. Mundy, Jr. 85,856 8,850 48,000 92,000
Trustee
Dr. Cornelius Pings 83,606 8,850 48,000 92,000
Trustee
William Carmichael -- -- 2,377 4,753
Trustee
</TABLE>
(1) All trustees receive reimbursements for expenses related to their
attendance at meetings of the Board of Trustees. Officers of the Company receive
no direct remuneration in such capacity from the Company. As of the date of this
SAI, the trustees and officers of the Company as a group owned less than 1% of
the outstanding shares of each of the Funds.
(2) For the twelve-month period ending March 31, 1999, each Trustee
received (i) an annual retainer of $1,000 ($3,000 for the Chairman of the Board)
plus $500 for each Fund of the Company, plus (ii) a fee of $1,000 for attendance
at each "in-person" meeting of the Board of Trustees (or committee thereof) and
$500 for attendance at each other meeting of the Board of Trustees (or Committee
thereof).
(3) Messrs. Grigg, Keller and A.M. Walker receive compensation from
eleven investment companies that are deemed to be part of the Nations Funds
"fund complex," as that term is defined under Rule 14a-101 of the Securities
Exchange Act of 1934, as amended. Messrs. Benson, Ermer, C. Walker, Sommers,
Mundy and Word receive compensation from seven investment companies deemed to be
part of the Nations Funds complex.
(4) Total compensation amounts include deferred compensation payable to
or accrued for the following Trustees: Edmund L. Benson, III $40,456; James
Ermer $4,803; William H. Grigg $80,912; Thomas F. Keller $85,588; and Thomas S.
Word $79,954.
Shareholder and Trustee Liability
NFST'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.
NFST's Declarations of Trust states further that no Trustee, officer,
or agent of NFST 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 NFST 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.
NFST's Declaration of Trust also provides that all persons having any claim
against the Trustees or NFST shall look solely to the trust property for
payment.
With the exceptions stated, NFST's 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 NFST unless any
such person would not be entitled to indemnification had he or she been a
Trustee.
42
<PAGE>
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.
Marsico Capital is investment sub-adviser to the Marsico Technology
Fund. BACAP is the investment sub-adviser to the Financial Services Fund.
BAAI also serves as the investment adviser to the other portfolios of
the Company and the portfolios of Nations Fund Trust, Nations Fund, Inc.,
Nations Reserves, Nations LifeGoal Funds, Inc. and Nations Annuity Trust, each a
registered investment company that is part of the Nations Funds Family. In
addition, BAAI serves as the investment adviser to Hatteras Income Securities,
Inc., Nations Government Income Term Trust 2003, Inc., Nations Government Income
Term Trust 2004, Inc. and Nations Balanced Target Maturity Fund, Inc., each a
closed-end diversified management investment company traded on the New York
Stock Exchange. BACAP also serves as the sub-investment adviser to Hatteras
Income Securities, Inc., Nations Government Income Term Trust 2003, Inc.,
Nations Government Income Term Trust 2004, Inc., and Nations Balanced Target
Maturity Fund, Inc.
BAAI and BACAP are each wholly owned subsidiaries of Bank of America,
which in turn is a wholly owned banking subsidiary of Bank of America
Corporation, a bank holding company organized as a Delaware corporation.
The respective principal offices of BAAI and BACAP are located at One
Bank of America Plaza, Charlotte, N.C. 28255.
Marsico Capital is located at 1200 17th Street, Suite 1300, Denver, CO
80202. Thomas F. Marsico is Chairman and Chief Executive Officer of Marsico
Capital. Prior to forming Marsico Capital in September 1997, Mr. Marsico had 18
years of experience as a securities analyst/portfolio manager. Bank of America
owns 50% of Marsico Capital.
Since 1874, Bank of America and its predecessors have been managing
money for foundations, universities, corporations, institutions and individuals.
Today, Bank of America affiliates collectively manage in excess of $100 billion,
including the more than $90 billion in mutual fund assets. It is a company
dedicated to a goal of providing responsible investment management and superior
service. Bank of America is recognized for its sound investment approaches,
which place it among the nation's foremost financial institutions. Bank of
America and its affiliates organization makes available a wide range of
financial services to its over 6 million customers through over 1700 banking and
investment centers.
Investment Advisory and Sub-Advisory Agreements
Pursuant to the terms of the Investment Advisory Agreement and
Sub-Advisory Agreements (at times, the "Advisory Agreements") with BAAI, BACAP
and/or Marsico Capital, on behalf of the Funds, and subject at all times to the
control of the Board of Trustees and conformity with the stated policies of the
Company, BAAI, BACAP and/or Marsico Capital each selects and manages the
investments of the 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 Company or to any shareholder of the Company 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.
43
<PAGE>
Each Advisory Agreement became effective with respect to a Fund after
approval by the Board of NFST, and continues from year to year, provided that
such continuation of the Agreement is specifically approved at least annually by
(a) (i) NFST's Board of Trustees 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 NFST's Trustees who are
not parties to such Agreement or "interested persons" (as defined in the 1940
Act) of a party to such Agreement (other than as Trustees of NFST), 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 NFST (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.
BAAI also may pay amounts from its own assets to Stephens or to selling
or servicing agents for services they provide. The investment advisory
agreements and the investment sub-advisory agreements for the Funds are
generally similar to the Advisory Agreements.
Because the Funds are new series, they have not yet completed a single
fiscal year. Accordingly, advisory fees and sub-advisory fees paid to their
adviser and sub-advisers, respectively, are not included.
Co-Administrators and Sub-Administrator
Stephens Inc. and BAAI (the "Co-Administrators") serve as
co-administrators of the Company.
The Co-Administrators serve under co-administration agreements
("Co-Administration Agreements"), which were approved by the Boards of Trustees
on December 9, 1999. The Co-Administrators receive, as compensation for their
services rendered under the Co-Administration Agreements, administration fees,
computed daily and paid monthly, at the annual combined rate of: 0.23% of the
average daily net assets of each such Fund. BAAI also may pay amounts from its
own assets to Stephens or to selling or servicing agents for services they
provide.
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 Company, (iii) furnish corporate secretarial
services to the Company, including coordinating the preparation and distribution
of materials for Board of Trustees meetings, (iv) coordinate the provision of
legal advice to the Company with respect to regulatory matters, (v) coordinate
the preparation of reports to the Company's shareholders and the SEC, including
annual and semi-annual reports, (vi) coordinating the provision of services to
the Company by the Transfer Agent, Sub-Transfer Agent and the Custodian, and
(vii) generally assist in all aspects of the Company'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 Company's reports to shareholders and the SEC, (iv)
prepare and file the Company's federal and state tax returns, (v) perform
monthly compliance testing for the Company, and (vi) prepare and furnish the
Company monthly broker security transaction summaries and transaction listings
and performance information. BAAI bears all expenses incurred in connection with
the performance of its services.
The Co-Administration Agreement may be terminated by a vote of a
majority of the respective Board of Trustees, by Stephens or by BAAI,
respectively, on 60 days' written notice without penalty. The Co-Administration
Agreements are not assignable without the written consent of the other party.
Furthermore, the Co-Administration Agreements provide that Stephens and BAAI
shall not be liable to the Funds or to their shareholders except in the case of
Stephens' or BAAI's, willful misfeasance, bad faith, gross negligence or
reckless disregard of duty.
44
<PAGE>
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 the
Funds' average daily net assets. Because the Funds are new series, they have not
yet completed a single fiscal year. Accordingly, co-administration fees and
sub-administration fees paid are not included .
Distribution Plans and Shareholder Servicing Arrangements
Investor A Shares
The Company 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 the Distributor or banks, broker/dealers or other financial institutions
that offer shares of the Fund and that have entered into a Sales Support
Agreement with the Distributor ("Selling Agents") or a Shareholder Servicing
Agreement with the Company, ("Servicing Agents"), up to 0.10% (on an annualized
basis) of the average daily net asset value of Investor A Shares.
Payments under the Investor A Plan may be made to the Distributor for
providing the distribution-related services described in (i) above or to
Servicing Agents that have entered into a Shareholder Servicing Agreement with
the Company for providing shareholder support services to their Customers which
hold of record or beneficially Investor A Shares. Such shareholder support
services provided by Servicing Agents to holders of Investor A Shares may
include (i) aggregating and processing purchase and redemption requests for
Investor A Shares from their Customers and transmitting promptly net purchase
and redemption orders to our distributor or transfer agent; (ii) providing their
Customers with a service that invests the assets of their accounts in Investor A
Shares pursuant to specific or pre-authorized instructions; (iii) processing
dividend and distribution payments from the Company on behalf of their
Customers; (iv) providing information periodically to their Customers showing
their positions in Investor A Shares; (v) arranging for bank wires; (vi)
responding to their Customers' inquiries concerning their investment in Investor
A Shares; (vii) providing sub-accounting with respect to Investor A Shares
beneficially owned by their Customers or the information necessary to us for
sub-accounting; (viii) if required by law, forwarding shareholder communications
from the Company (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to their
Customers (ix) forwarding to their Customers proxy statements and proxies
containing any proposals regarding the Shareholder Servicing Agreement; (x)
providing general shareholder liaison services; and (xi) providing such other
similar services as the Company may reasonably request to the extent the Selling
Agent is permitted to do so under applicable statutes, rules or regulations.
Because the Funds have not yet completed a fiscal year, fees paid are
not included here.
The Funds in the Nations Funds Family participate in joint distribution
activities with other Funds in the Nations Funds Family. The fees paid under
each Investor A Plan adopted by a Fund may be used to finance the distribution
of the shares of other Funds in the Nations Funds Family. Such distribution
costs are allocated based on the relative net asset size of the respective
Funds.
Expenses incurred by the Distributor pursuant to the Investor A Plan in
any given year may exceed the sum of the fees received under the Investor A
Plan. Any such excess may be recovered by the Distributor in future years so
long as the Investor A Plan is in effect. If the Investor A Plan were terminated
or not continued, a Fund would not be contractually obligated to pay the
Distributor for any expenses not previously reimbursed by the Fund.
45
<PAGE>
Investor C Shares
The Trustees of the Company have approved a Distribution Plan in
accordance with Rule 12b-1 under the 1940 Act for the Investor C Shares of the
Funds (the "Investor C Plan"). Pursuant to the Investor C Plan, each Fund may
pay the Distributor for certain expenses that are incurred in connection with
the distribution of shares. Payments under the Investor C Plan will be
calculated daily and paid monthly at a rate set from time to time by the Board
of Trustees provided that the annual rate may not exceed 0.75% of the average
daily net asset value of Investor C Shares of a Fund. Payments to the
Distributor pursuant to the Investor C Plan will be used (i) to compensate
banks, other financial institutions or a securities broker/dealer that have
entered into a Sales Support Agreement with the Distributor ("Selling Agents")
for providing sales support assistance relating to Investor C Shares, for
promotional activities intended to result in the sale of Investor C Shares such
as to pay for the preparation, printing and distribution of prospectuses to
other than current shareholders, and (ii) to compensate Selling Agents for
providing sales support services with respect to their Customers who are, from
time to time, beneficial and record holders of Investor C Shares. Currently,
substantially all fees paid pursuant to the Investor C Plan are paid to
compensate Selling Agents for providing the services described in (i) and (ii)
above, with any remaining amounts being used by the Distributor to partially
defray other expenses incurred by the Distributor in distributing Investor C
Shares. Fees received by the Distributor pursuant to the Investor C Plan will
not be used to pay any interest expenses, carrying charges or other financing
costs (except to the extent permitted by the SEC) and will not be used to pay
any general and administrative expenses of the Distributor.
Pursuant to the Investor C Plan, the Distributor may enter into Sales
Support Agreements with Selling Agents for providing sales support services to
their Customers who are the record or beneficial owners of Investor C Shares of
the Funds. Such Selling Agents will be compensated at the annual rate of up to
0.75% of the average daily net asset value of the Investor C Shares held of
record or beneficially by such Customers. The sales support services provided by
Setting Agents may include providing distribution assistance and promotional
activities intended to result in the sales of shares such as paying for the
preparation, printing and distribution of prospectuses to other than current
shareholders.
Fees paid pursuant to the Investor C Plan are accrued daily and paid
monthly, and are charged as expenses of the relevant shares of a Fund as
accrued. Expenses incurred by the Distributor pursuant to the Investor C Plan in
any given year may exceed the sum of the fees received under the Investor C Plan
and payments received pursuant to contingent deferred sales charges. Any such
excess may be recovered by the Distributor in future years so long as the
Investor C Plan is in effect. If the Investor C Plan were terminated or not
continued, a Fund would not be contractually obligated to pay the Distributor
for any expenses not previously reimbursed by the Fund or recovered through
contingent deferred sales charges.
The Funds in the Nations Funds Family participate in joint distribution
activities with other Funds in the Nations Funds Family. The fees paid under
each Investor C Plan adopted by a Fund may be used to finance the distribution
of the shares of other Funds in the Nations Funds Family. Such distribution
costs are allocated based on the relative net asset size of the respective
Funds.
In addition, the Trustees have approved a Shareholder Servicing Plan
("Servicing Plan") with respect to the Investor C Shares of the Funds (the
"Investor C Servicing Plan"). Pursuant to the Investor C Servicing Plan, each
Fund may pay banks, broker/dealers or other financial institutions that have
entered into a Shareholder Servicing Agreement with Nations Funds ("Servicing
Agents") for certain expenses that are incurred by the Servicing Agents in
connection with shareholder support services that are provided by the Servicing
Agents. Payments under the Investor C Servicing Plan will be calculated daily
and paid monthly at a rate set from time to time by the Board of Trustees,
provided that the annual rate may not exceed 0.25% of the average daily net
asset value of the Investor C Shares. The shareholder services provided by the
Servicing Agents may include (i) aggregating and processing purchase and
redemption requests for such Investor C Shares from Customers and transmitting
promptly net purchase and redemption orders to our distributor or transfer
agent; (ii) providing Customers with a service that invests the assets of their
accounts in such Investor C Shares pursuant to specific or pre-authorized
instructions; (iii) dividend and distribution payments from the Company on
behalf of Customers; (iv) providing information periodically to Customers
showing their positions in such Investor C Shares; (v) arranging for bank wires;
(vi) responding to Customers' inquiries concerning their investment in such
Investor C Shares; (vii) providing sub-accounting with respect to such Investor
C Shares beneficially owned by Customers or providing the information to us
necessary for sub-accounting; (viii) if required by law, forwarding shareholder
communications from the Company (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)
providing general shareholder liaison services; and (xi) providing such other
similar services as the Company may reasonably request to the extent the
Servicing Agent is permitted to do so under applicable statutes, rules or
regulations.
46
<PAGE>
Investor B Shares
The Trustees of the Company have approved a Distribution Plan (the
"Investor B Distribution Plan") with respect to Investor B Shares of the Funds.
Pursuant to the Investor B Distribution Plan, a Fund may compensate or reimburse
the Distributor for any activities or expenses primarily intended to result in
the sale of the Fund's Investor B Shares, including for sales related services
provided by banks, broker/dealers or other financial institutions that have
entered into a Sales Support Agreement relating to the Investor B Shares with
the Distributor ("Selling Agents"). Payments under a Fund's Investor B
Distribution Plan will be calculated daily and paid monthly at a rate or rates
set from time to time by the Board of Trustees provided that the annual rate may
not exceed 0.75% of the average daily net asset value of each Fund's Investor B
Shares.
The fees payable under the Investor B Distribution Plan are used
primarily to compensate or reimburse the Distributor for distribution services
provided by it, and related expenses incurred, including payments by the
Distributor to compensate or reimburse Selling Agents, for sales support
services provided, and related expenses incurred, by such Selling Agents.
Payments under the Investor B Distribution Plan may be made with respect to
preparation, printing and distribution of prospectuses, sales literature and
advertising materials by the Distributor or, as applicable, Selling Agents,
attributable to distribution or sales support activities, respectively,
commissions, incentive compensation or other compensation to, and expenses of,
account executives or other employees of the Distributor or Selling Agents,
attributable to distribution or sales support activities, respectively; overhead
and other office expenses of the Distributor relating to the foregoing (which
may be calculated as a carrying charge in the Distributor's or Selling Agents'
unreimbursed expenses), incurred in connection with distribution or sales
support activities. The overhead and other office expenses referenced above may
include, without limitation, (i) the expenses of operating the Distributor's or
Selling Agents' offices in connection with the sale of Fund shares, including
lease costs, the salaries and employee benefit costs of administrative,
operations and support personnel, utility costs, communication costs and the
costs of stationery and supplies, (ii) the costs of client sales seminars and
travel related to distribution and sales support activities, and (iii) other
expenses relating to distribution and sales support activities.
In addition, the Trustees have approved a Shareholder Servicing Plan
with respect to Investor B Shares of the Funds ("Investor B Servicing Plan").
Pursuant to the Investor B Servicing Plan, a Fund may compensate or reimburse
banks, broker/dealers or other financial institutions that have entered into a
Shareholder Servicing Agreement with the Company ("Servicing Agents") for
certain activities or expenses of the Servicing Agents in connection with
shareholder services that are provided by the Servicing Agents. Payments under
the Investor B Servicing Plan will be calculated daily and paid monthly at a
rate or rates set from time to time by the Board of Trustees, provided that the
annual rate may not exceed 0.25% of the average daily net asset value of the
Investor B Shares of the Funds.
47
<PAGE>
The fees payable under the Investor B Servicing Plan are used primarily
to compensate or reimburse Servicing Agents for shareholder services provided,
and related expenses incurred, by such Servicing Agents. The shareholder
services provided by Servicing Agents may include: (i) aggregating and
processing purchase and redemption requests for such Investor B Shares from
Customers 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 such Investor B Shares pursuant to
specific or pre-authorized instructions; (iii) processing dividend and
distribution payments from the Company on behalf of Customers; (iv) providing
information periodically to Customers showing their positions in such Investor B
Shares; (v) arranging for bank wires; (vi) responding to Customers' inquiries
concerning their investment in such Investor B Shares; (vii) providing
sub-accounting with respect to such Investor B Shares beneficially owned by
Customers or providing the information to us necessary for sub-accounting;
(viii) if required by law, forwarding shareholder communications from the
Company (such as proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to Customers; (ix)
providing general shareholder liaison Services; and (x) providing such other
similar services as the Company may reasonably request to the extent such
Servicing Agent is permitted to do so under applicable statutes, rules or
regulations.
The fees payable under the Investor B Distribution Plan and Investor B
Servicing Plan (together, the "Investor B Plans") are treated by the Funds as an
expense in the year they are accrued. At any given time, a Selling Agent and/or
Servicing Agent may incur expenses in connection with services provided pursuant
to its agreements with the Distributor under the Investor B Plans which exceed
the total of (i) the payments made to the Selling Agents and Servicing Agents by
the Distributor or the Company and reimbursed by the Fund pursuant to the
Investor B Plans. Any such excess expenses may be recovered in future years, so
long as the Investor B Plans are in effect. Because there is no requirement
under the Investor B Plans that the Distributor be paid or the Selling Agents
and Servicing Agents be compensated or reimbursed for all their expenses or any
requirement that the Investor B Plans be continued from year to year, such
excess amount, if any, does not constitute a liability to a Fund or the
Distributor. Although there is no legal obligation for the Fund to pay expenses
incurred by the Distributor, a Selling Agent or a Servicing Agent in excess of
payments previously made to the Distributor under the Investor B Plans or in
connection with contingent deferred sales charges, if for any reason the
Investor B Plans are terminated, the Trustees will consider at that time the
manner in which to treat such expenses.
The Funds in the Nations Funds Family participate in joint distribution
activities with other Funds in the Nations Funds Family. The fees paid under
each Investor B Distribution Plan adopted by a Fund may be used to finance the
distribution of the shares of other Funds in the Nations Funds Family. Such
distribution costs are allocated based on the relative net asset size of the
respective Funds.
Expenses
The Administrator furnishes, without additional cost to the Company,
the services of the Treasurer and Secretary of the Company and such other
personnel (other than the personnel of the Adviser) as are required for the
proper conduct of the Company'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 Company'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 Company.
The Company pays or causes to be paid all other expenses of the
Company, 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 Company for the safekeeping of its
cash, fund securities and other property, and any stock transfer, dividend or
accounting agent or agents appointed by the Company; brokerage commissions
chargeable to the Company in connection with fund securities transactions to
which the Company is a party; all taxes, including securities issuance and
transfer taxes; corporate fees payable by the Company to federal, state or other
governmental agencies; all costs and expenses in connection with the
registration and maintenance of registration of the Company 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 Company (including
supplements thereto) and periodic reports and of printing and distributing such
prospectuses and statements of additional information (including supplements
thereto) to the Company'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 Company's shares; fees and expenses of
legal counsel and of independent auditors in connection with any matter relating
to the Company; membership dues of industry associations; interest payable on
Company borrowings; postage and long-distance telephone charges; insurance
premiums on property or personnel (including officers and trustees) of the
Company 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
Company's operation unless otherwise explicitly assumed by the Adviser), the
Administrator or Co-Administrator.
Expenses of the Company 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 Company based upon the relative net assets of each class
or Fund. Expenses of the Company 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 Company which are
directly attributable to a class of shares are charged against the income
available for distribution as dividends to such class of shares.
48
<PAGE>
The Advisory Agreement, the Sub-Advisory Agreements, and the
Administration Agreement require the Advisers 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 the
Advisers or the Administrator shall be deducted from the monthly investment
advisory and administration fees otherwise payable to the Advisers and the
Administrator during such fiscal year. If required pursuant to such state
securities regulations, the Advisers and the Administrator will reimburse the
Company 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 400 Bellevue Parkway, Wilmington, Delaware
19809, and acts as transfer agent for each Fund's Shares. Under the transfer
agency agreements, the transfer agent maintains shareholder account records for
the Company, handles certain communications between shareholders and the
Company, and distributes dividends and distributions payable by the Company to
shareholders, and produces statements with respect to account activity for the
Company 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 Company 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
and Primary B Shares.
BNY 100 Church Street, New York, N.Y. 10286 serves as custodian for the
Funds' assets. As custodian, BNY maintains the Funds' securities cash and other
property, delivers securities against payment upon sale and pays for securities
against delivery upon purchase, makes payments on behalf of such Funds for
payments of dividends, distributions and redemptions, endorses and collects on
behalf of such Funds all checks, and receives all dividends and other
distributions made on securities owned by such Funds.
The SEC has amended Rule 17f-5 under the 1940 Act to permit boards to
delegate certain foreign custody matters to foreign custody managers and to
modify the criteria applied in the selection process. Accordingly, BNY serves as
Foreign Custody Manager, pursuant to a Foreign Custody Manager Agreement, under
which the Boards of Trustees retain the responsibility for selecting foreign
compulsory depositories, although BNY 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 Company 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 Company pursuant to Rule 12b-1 under the 1940 Act.
The Distribution Agreement will continue year to year as long as such
continuance is approved at least annually by (i) the Board of Trustees or a vote
of the majority (as defined in the 1940 Act) of the outstanding voting
securities of the 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 Trustees, the vote of a majority (as
defined in the 1940 Act) of the outstanding voting securities of the Fund, or by
the Distributor.
49
<PAGE>
Independent Accountants and Reports
The Company issues unaudited financial information semi-annually and
audited financial statements annually. The Company furnishes proxy statements
and other shareholder reports to shareholders of record.
The annual financial statements will be audited by the Company's
independent accountant. The Board of Trustees has selected
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, as the Company's independent accountant to audit the Company's books and
review the Company's tax returns for the Funds' fiscal year ended [March 31,
2001].
Counsel
Morrison & Foerster LLP serves as legal counsel to the Company. 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
Company, the Adviser is responsible for decisions to buy and sell securities for
each Fund, for the selection of broker/dealers, for the execution of such Fund's
securities transactions, and for the allocation of brokerage fees in connection
with such transactions. The Adviser's primary consideration in effecting a
security transaction is to obtain the best net price and the most favorable
execution of the order. Purchases and sales of securities on a securities
exchange are effected through brokers who charge a negotiated commission for
their services. Orders may be directed to any broker to the extent and in the
manner permitted by applicable law.
In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without
stated commissions, although the price of a security usually includes a profit
to the dealer. In underwritten offerings, securities are purchased at a fixed
price that includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. On occasion, certain
money market instruments may be purchased directly from an issuer, in which case
no commissions or discounts are paid.
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 Company.
50
<PAGE>
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 Company. 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 Company believes that over time its ability to
participate in volume transactions will produce superior executions for the
Funds.
The portfolio turnover rate for each Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the reporting period by
the monthly average value of the portfolio securities owned during the reporting
period. The calculation excludes all securities, including options, whose
maturities or expiration dates at the time of acquisition are one year or less.
Portfolio turnover may vary greatly from year to year as well as within a
particular year, and may be affected by cash requirements for redemption of
shares and by requirements which enable the Funds to receive favorable tax
treatment.
The Funds may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group. A
Fund will engage in this practice, however, only when the Adviser, in its sole
discretion, believes such practice to be otherwise in the Fund's interests.
The Company 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 Company 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.
Under the 1940 Act, persons affiliated with the Company are prohibited
from dealing with the Company 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.
51
<PAGE>
Investment decisions for each Fund are made independently from those
for the Company'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.
Section 28(e) Standards
Under Section 28(e) of the Securities Exchange Act of 1934, the Adviser
shall not be "deemed to have acted unlawfully or to have breached its fiduciary
duty" solely because under certain circumstances it has caused the account to
pay a higher commission than the lowest available. To obtain the benefit of
Section 28(e), the Adviser must make a good faith determination that the
commissions paid are "reasonable in relation to the value of the brokerage and
research services provided ...viewed in terms of either that particular
transaction or its overall responsibilities with respect to the accounts as to
which it exercises investment discretion and that the services provided by a
broker provide an adviser with lawful and appropriate assistance in the
performance of its investment decision making responsibilities." Accordingly,
the price to a Fund in any transaction may be less favorable than that available
from another broker/dealer if the difference is reasonably justified by other
aspects of the portfolio execution services offered.
Broker/dealers utilized by the Adviser may furnish statistical,
research and other information or services which are deemed by the Adviser to be
beneficial to the Funds' investment programs. Research services received from
brokers supplement the Adviser's own research and may include the following
types of information: statistical and background information on industry groups
and individual companies; forecasts and interpretations with respect to U.S. and
foreign economies, securities, markets, specific industry groups and individual
companies; information on political developments; fund management strategies;
performance information on securities and information concerning prices of
securities; and information supplied by specialized services to the Adviser and
to the Company's 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 Company by improving the quality of the Adviser's
investment advice. The advisory fees paid by the Company are not reduced because
the Adviser receives such services.
52
<PAGE>
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 Company
The Company's Board of Trustees have 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 Company
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. Additionally, approval of an advisory contract is a matter to
be determined separately by Fund. Approval by the shareholders of one Fund is
effective as to that Fund whether or not sufficient votes are received from the
shareholders of the other Funds to approve the proposal as to those Portfolios.
As used in the Prospectus and in this SAI, the term "majority," when referring
to approvals to be obtained from shareholders of a Fund, means the vote of the
lesser of (i) 67% of the shares of the Fund represented at a meeting if the
shareholders of more than 50% of the outstanding interests of the Fund are
present in person or by proxy, or (ii) more than 50% of the outstanding shares
of the Fund. The term "majority," when referring to the approvals to be obtained
from shareholders of the Company as a whole, means the vote of the lesser of (i)
67% of the Company's shares represented at a meeting if the shareholders of more
than 50% of the Company's outstanding shares are present in person or by proxy,
or (ii) more than 50% of the Company's outstanding shares. Shareholders are
entitled to one vote for each full share held and fractional votes for
fractional shares held.
The Company may dispense with an annual meeting of shareholders in any
year in which it is not required to elect Trustees under the 1940 Act.
Each share of a Fund represents an equal proportional interest in the
Fund with each other share and is entitled to such dividends and distributions
out of the income earned on the assets belonging to the Fund, as are declared in
the discretion of the Board members. In the event of the liquidation or
dissolution of the Company, shareholders of the Company'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 Company.
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 Company 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.
53
<PAGE>
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.
Shares in the Funds may be purchased pursuant to the policies outlined
in the Funds' prospectuses. In addition to the policies in such prospectuses the
following purchasing or buying policy shall also apply. The Funds will waive any
contingent deferred sales charge on the exchange or transfer of a shareholder's
investment in a Fund to any of the offshore funds in the Nations Funds family.
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 sale 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 sale price on the valuation date.
Securities for which market quotations are not readily available are
valued under procedures adopted by the Board of Trustees of the Company.
Short-Term obligations having 60 days or less to maturity are valued at
amortized cost, which approximates current market value.
Generally, trading in foreign securities, as well as U.S. Government
securities, money market instruments and repurchase agreements, is substantially
completed each day at various times prior to the close of the New York Stock
Exchange. The values of such securities used in computing the net asset value of
the shares of the Fund are determined as of such times. Foreign currency
exchange rates are also generally determined prior to the close of the New York
Stock Exchange. Occasionally, events affecting the value of such securities and
such exchange rates may occur between the times at which they are determined and
the close of the New York Stock Exchange, which will not be reflected in the
computation of net asset value. If during such periods events occur which
materially affect the value of such securities, the securities will be valued at
their fair value under procedures adopted by the Boards.
The Company 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 Company also may make payment for redemptions in readily
marketable securities or other property if it is appropriate to do so in light
of the Company'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; (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.)
54
<PAGE>
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 Company 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 Company 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 of its by the end of each calendar
year. Each Fund intends to actually or be deemed to distribute substantially all
of its income and gains by the end of each calendar year and, thus, expects not
to be subject to the excise tax.
Private Letter Ruling
In order for a Fund to maintain regulated investment company status
under the Code, its dividends, including--for this purpose--capital gain
distributions, must not constitute "preferential dividends," within the meaning
of Section 562(c) of the Code. The Company has received a private letter ruling
from the Internal Revenue Service ("IRS") generally to the effect that the
following will not give rise to preferential dividends: differing fees imposed
on the different classes of shares with respect to servicing, distribution and
administrative support services, and transfer agency arrangements; differing
sales charges on purchases and redemptions of such shares; and conversion
features resulting in the Company paying different dividends or distributions on
the different classes of shares.
55
<PAGE>
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 (including a
tax-exempt 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. Each Fund 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. A 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.
56
<PAGE>
If a Fund purchases shares in a "passive foreign investment company"
("PFIC"), the Fund may be subject to Federal income tax and an interest charge
imposed by the IRS upon certain distributions from the PFIC or the Fund's
disposition of its PFIC shares. If the Fund invests in a PFIC, the Fund intends
to make an available election to mark-to-market its interest in PFIC shares.
Under the election, the Fund will be treated as recognizing at the end of each
taxable year the difference, if any, between the fair market value of its
interest in the PFIC shares and its basis in such shares. In some circumstances,
the recognition of loss may be suspended. The Fund will adjust its basis in the
PFIC shares by the amount of income (or loss) recognized. Although such income
(or loss) will be taxable to the Fund as ordinary income (or loss)
notwithstanding any distributions by the PFIC, the Fund will not be subject to
Federal income tax or the interest charge with respect to its interest in the
PFIC under the election.
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. 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.
Other Distributions
For Federal income tax purposes, a Fund's earnings and profits will be
determined at the end of each taxable year and will be allocated pro rata over
the entire year. For Federal income tax purposes, only amounts paid out of
earnings and profits will qualify as dividends. Thus, if during a taxable year
the Fund's declared dividends exceed the Fund's net income (as determined at the
end of the year), only that portion of the year's distributions which equals the
year's earnings and profits (generally the Fund's net investment income and
capital gain) will be deemed to have constituted a dividend. Distributions in
excess of earnings and profits will first be treated as a return of capital up
to the amount of a shareholder's basis in its Fund shares and then capital gain.
It is expected that the Fund's net income, on an annual basis, will equal the
dividends declared during the 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.
57
<PAGE>
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 (defined below) received with
respect to the shares. The Treasury Department is authorized to issue
regulations reducing the six months holding requirement to a period of not less
than the greater of 31 days or the period between regular distributions where a
Fund regularly distributes at least 90% of its net tax-exempt interest, if any.
No such regulations have been issued as of the date of this SAI. The loss
disallowance rules described in this paragraph do not apply to losses realized
under a periodic redemption plan.
Federal Income Tax Rates
As of the printing of this SAI, the maximum individual tax rate
applicable to ordinary income is 39.6% (marginal tax rates may be higher for
some individuals to reduce or eliminate the benefit of exemptions and
deductions); the maximum individual marginal tax rate applicable to net capital
gain is 20%; and the maximum corporate tax rate applicable to ordinary income
and net capital gain is 35% (marginal tax rates may be higher for some
corporations to reduce or eliminate the benefit of lower marginal income tax
rates). Naturally, the amount of tax payable by an individual or corporation
will be affected by a combination of tax laws covering, for example, deductions,
credits, deferrals, exemptions, sources of income and other matters.
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 attributable to income on taxable
investments, net short-term capital gain and certain other items realized by a
Fund and paid to a nonresident alien individual, foreign trust (i.e., a trust
other than a 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 the 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. Capital gain distributions
generally are not subject to tax withholding.
58
<PAGE>
Backup Withholding
The Company may be required to withhold, subject to certain exemptions,
at a rate of 31% ("backup withholding") on all distributions and redemption
proceeds (including proceeds from exchanges and redemptions in-kind) paid or
credited to an individual Fund shareholder, unless the shareholder certifies
that the "taxpayer identification number" ("TIN") provided is correct and that
the shareholder is not subject to backup withholding, or the IRS notifies the
Company 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
Company also could subject the investor to penalties imposed by the IRS.
New Regulations
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the backup withholding,
U.S. income tax withholding and information reporting rules applicable to
foreign shareholders. The New Regulations will generally be effective for
payments made after December 31, 2000, subject to certain transition rules.
Among other things, the New Regulations will permit the Funds to estimate the
portion of their distributions qualifying as capital gain distributions for
purposes of determining the portion of such distributions paid to foreign
shareholders that will be subject to federal income tax withholding. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
Tax-Deferred Plans
The Funds are available for a variety of tax-deferred retirement and other
plans, including Individual Retirement Accounts ("IRA"), Simplified Employee
Pension Plans ("SEP-IRA"), Savings Incentive Match Plans for Employees ("SIMPLE
plans"), Roth IRAs, and Education IRAs, which permit investors to defer some of
their income from taxes.
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 and state tax consideration
ADDITIONAL INFORMATION ON PERFORMANCE
Yield information and other performance information for each Fund 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.
59
<PAGE>
Non-standardized performance also may be advertised by the Funds. One
purpose of providing non-standardized performance to an investor is to provide
that investor with a different snapshot of a Fund's performance that may not be
captured by standardized performance. The non-standardized performance of a
Fund's class of shares, however, may not be directly comparable to the
performance of investment alternatives because of differences in certain
variables (such as the length of time over which performance is shown and the
exclusion of certain charges or expenses) and methods used to value portfolio
securities, compute expenses and calculate performance. Non-standardized
performance may include, but is not limited to, performance for non-standardized
periods, including year-to-date and other periods less than a year, performance
not reflecting the deduction of certain charges, fees and/or expenses, and
performance reflecting the deduction of applicable state or federal taxes.
After-tax returns are generally calculated using the same methodology as that
used in calculating total return, except that such after-tax returns reflect the
deduction of taxes according to applicable federal income and capital gain tax
rates attributable to dividends, distributions and an investor's redemptions. Of
course, after-tax returns for individual investors will vary as the tax rates
applicable to such investors vary. In addition, the Funds may also advertise
their tax efficiency ratios and compare those ratios with other mutual funds. A
tax efficiency ratio is intended to let an investor know how tax efficient a
fund has been over a period of time, and is typically related to its portfolio
turnover rate. That is, an investor could expect that the higher a Fund's
portfolio turnover rate, the greater the percentage of its gains that would have
been realized and consequently, the less tax efficient it was over a given
period of time.
In general, comparisons to other mutual funds or investment
alternatives may be useful to investors who wish to compare past performance of
the Funds or a class with that of competitors. Of course, past performance
cannot be a guarantee of future results.
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 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."
60
<PAGE>
The Funds also may discuss in advertising and other types of literature
that a Fund has been assigned a rating by an NRSRO, such as Standard & Poor's
Corporation. Such rating would assess the creditworthiness of the investments
held by the Fund. The assigned rating would not be a recommendation to purchase,
sell or hold the Fund's shares since the rating would not comment on the market
price of the Fund's shares or the suitability of the Fund for a particular
investor. In addition, the assigned rating would be subject to change,
suspension or withdrawal as a result of changes in, or unavailability of,
information relating to the Fund or its investments. The Funds may compare a
Fund's performance with other investments which are assigned ratings by NRSROs.
Any such comparisons may be useful to investors who wish to compare the Fund's
past performance with other rated investments.
The Funds also may disclose in sales literature the distribution rate
on the shares of a Fund. Distribution rate, which may be annualized, is the
amount determined by dividing the dollar amount per share of the most recent
dividend by the most recent NAV or maximum offering price per share as of a date
specified in the sales literature. Distribution rate will be accompanied by the
standard 30-day yield as required by the SEC.
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.
61
<PAGE>
Yield Calculations
Income calculated for the purposes of calculating a Fund's yield
differs from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed in
yield calculations, the yield quoted for a Fund may differ from the rate of
distributions a Fund paid over the same period or the rate of income reported in
the Funds' financial statements.
Yield is calculated separately for the Investor A, Investor C, Investor
B and Primary A 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 Shares, 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 and Primary B
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. 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 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.
62
<PAGE>
The Funds may provide additional yield calculations in communications
(other than advertisements) to the holders of Investor A, Investor C or Investor
B Shares. These may be calculated based on the Investor A, Investor C or
Investor B 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 Investor
A, Investor C or Investor B 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.
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.
63
<PAGE>
This calculation (i) assumes all dividends and distributions are
reinvested at net asset value on the appropriate reinvestment dates, and (ii)
deducts (a) the maximum sales charge from the hypothetical initial $1,000
investment, and (b) all recurring fees, such as advisory and administrative
fees, charged as expenses to all shareholder accounts.
Because the Funds are new series, they do not yet have any historical
return performance.
MISCELLANEOUS
Certain Record and Beneficial Holders
The name, address and percentage of ownership of each person who is
known by the Company that will own of record or beneficially five percent or
more of the Funds as of their commencement of operations is:
<TABLE>
<CAPTION>
Class; Amount of Shares Percentage Percentage
Fund Name and Address Owned; Type of Ownership of Class of Fund
---- ---------------- ------------------------ -------- -------
<S> <C> <C> <C> <C>
Financial STEPHENS INC. Primary A; 1; 100% 25%
Services Fund 111 CENTER STREET Record and Beneficial
LITTLE ROCK, AR 72201
STEPHENS INC. Primary A; 1; 100% 25%
111 CENTER STREET Record and Beneficial
LITTLE ROCK, AR 72201
STEPHENS INC. Investor B; 1; 100% 25%
111 CENTER STREET Record and Beneficial
LITTLE ROCK, AR 72201
STEPHENS INC. Investor C; 1; 100% 25%
111 CENTER STREET Record and Beneficial
LITTLE ROCK, AR 72201
Marsico STEPHENS INC. Primary A; 1; 100% 25%
Technology Fund 111 CENTER STREET Record and Beneficial
LITTLE ROCK, AR 72201
STEPHENS INC. Primary A; 1; 100% 25%
111 CENTER STREET Record and Beneficial
LITTLE ROCK, AR 72201
STEPHENS INC. Investor B; 1; 100% 25%
111 CENTER STREET Record and Beneficial
LITTLE ROCK, AR 72201
STEPHENS INC. Investor C; 1; 100% 25%
111 CENTER STREET Record and Beneficial
LITTLE ROCK, AR 72201
</TABLE>
It is anticipated that Bank of America Corporation and its affiliates
will own of record more than 25% of the outstanding shares of the Company acting
as agent, fiduciary, or custodian for its customers and may be deemed a
controlling person of the Company under the 1940 Act.
64
<PAGE>
SCHEDULE A
DESCRIPTION OF RATINGS
The following summarizes the highest six ratings used by Standard &
Poor's Corporation ("S&P") for corporate and municipal bonds. The first four
ratings denote investment-grade securities.
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest
and repay principal.
AA - Debt rated AA is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in a
small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for those
in higher-rated categories.
BB, B - Bonds rated BB and B are regarded, on balance as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. Debt
rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay
principal.
To provide more detailed indications of credit quality, the AA, A and
BBB, BB and B ratings may be modified by the addition of a plus or minus sign to
show relative standing within these major rating categories.
The following summarizes the highest six ratings used by Moody's
Investors Service, Inc. ("Moody's") for corporate and municipal bonds. The first
four denote investment grade securities.
Aaa - Bonds that are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term
risks appear somewhat larger than in Aaa securities.
A - Bonds that are rated A possess many favorable investment
attributes and are to be considered upper medium grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa - Bonds that are rated Baa are considered medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds that are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not as well safeguarded during both good times and bad times over
the future. Uncertainty of position characterizes bonds in this class.
A-1
<PAGE>
B - Bond that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Moody's applies numerical modifiers (1, 2 and 3) with respect to
corporate bonds rated Aa through B. The modifier 1 indicates that the bond being
rated ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the bond ranks
in the lower end of its generic rating category. With regard to municipal bonds,
those bonds in the Aa, A and Baa groups which Moody's believes possess the
strongest investment attributes are designated by the symbols Aal, A1 or Baal,
respectively.
The following summarizes the highest four ratings used by Duff & Phelps
Credit Rating Co. ("D&P") for bonds, each of which denotes that the securities
are investment grade.
AAA - Bonds that are rated AAA are of the highest credit quality.
The risk factors are considered to be negligible, being only slightly more
than for risk-free U.S. Treasury debt.
AA - Bonds that are rated AA are of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
A - Bonds that are rated A have protection factors which are
average but adequate. However risk factors are more variable and greater
in periods of economic stress.
BBB - Bonds that are rated BBB have below average protection
factors but still are considered sufficient for prudent investment.
Considerable variability in risk exists during economic cycles.
To provide more detailed indications of credit quality, the AA, A and
BBB ratings may modified by the addition of a plus or minus sign to show
relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch
Investors Service, Inc. ("Fitch") for bonds, each of which denotes that the
securities are investment grade:
AAA - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA - Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because
bonds rated in the AAA and AA categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
generally rated F-1+.
A - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
To provide more detailed indications of credit quality, the AA, A and
BBB ratings may be modified by the addition of a plus or minus sign to show
relative standing within these major rating categories.
The following summarizes the two highest ratings used by Moody's for
short-term municipal notes and variable-rate demand obligations:
MIG-1/VMIG-1 -- Obligations bearing these designations are of the best
quality, enjoying strong protection from established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
A-2
<PAGE>
MIG-2/VMIG-2 -- Obligations bearing these designations are of high
quality, with ample margins of protection although not so large as in the
preceding group.
The following summarizes the two highest ratings used by S&P for
short-term municipal notes:
SP-1 - Indicates very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety characteristics
are given a "plus" (+) designation.
SP-2 - Indicates satisfactory capacity to pay principal and interest.
The three highest rating categories of D&P for short-term debt, each of
which denotes that the securities are investment grade, are D-1, D-2, and D-3.
D&P employs three designations, D-1+, D-1 and D-1-, within the highest rating
category. D-1+ indicates highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of 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:
A-3
<PAGE>
AAA - The highest category; indicates ability to repay principal
and interest on a timely basis is extremely high.
AA - The second highest category; indicates a very strong ability
to repay principal and interest on a timely basis with limited incremental
risk versus issues rated in the highest category.
A - The third highest category; indicates the ability to repay
principal and interest is strong. Issues rated "A" could be more
vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
BBB - The lowest investment grade category; indicates an acceptable
capacity to repay principal and interest. Issues rated "BBB" are, however,
more vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
Long-term debt ratings may include a plus (+) or minus (-) sign to
indicate where within a category the issue is placed.
The BankWatch short-term ratings apply to commercial paper, other
senior short-term obligations and deposit obligations of the entities to which
the rating has been assigned. The BankWatch short-term ratings specifically
assess the likelihood of an untimely payment of principal or interest.
TBW-1 The highest category; indicates a very high
likelihood that principal and interest will be paid
on a timely basis.
TBW-2 The second highest category; while the degree of
safety regarding timely repayment of principal and
interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1".
TBW-3 The lowest investment grade category; indicates that
while more susceptible to adverse developments (both
internal and external) than obligations with higher
ratings, capacity to service principal and interest
in a timely fashion is considered adequate.
TBW-4 The lowest rating category; this rating is regarded
as non-investment grade and therefore speculative.
The following summarizes the four highest long-term debt ratings used
by IBCA Limited and its affiliate, IBCA Inc. (collectively "IBCA"):
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:
A-4
<PAGE>
A1+ When issues possess a particularly strong credit feature, a
rating of A1+ is assigned.
A1 - Obligations supported by the highest capacity for timely
repayment.
A2 - Obligations supported by a good capacity for timely repayment.
A-5
<PAGE>
NATIONS 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)
---------------------- ---------------------------------------------------------
Exhibit Letter Description
---------------------- ---------------------------------------------------------
(a) Articles of Incorporation:
(a)(1) Certificate of Trust dated October 22, 1999, incorporated
by reference to Post-Effective Amendment No. 1, filed
February 10, 2000.
(a)(2) Declaration of Trust dated February 7, 2000, incorporated
by reference to Post-Effective Amendment No. 1, filed
February 10, 2000.
---------------------- ---------------------------------------------------------
(b) Bylaws:
Not Applicable
---------------------- ---------------------------------------------------------
(c) Instruments Defining Rights of Securities Holders:
Not Applicable
---------------------- ---------------------------------------------------------
(d) Investment Advisory Contracts:
(d)(1) Investment Advisory Agreement between Banc of America
Advisors, Inc. ("BAAI") and Nations Funds Trust
("Registrant") dated March 30, 2000, Schedule I dated
July 14, 2000, incorporated by reference to
Post-Effective Amendment No. 5, filed October 13, 2000.
---------------------- ---------------------------------------------------------
C-1
<PAGE>
---------------------- ---------------------------------------------------------
Exhibit Letter Description
---------------------- ---------------------------------------------------------
(d)(2) Investment Sub-Advisory Agreement among BAAI, Banc of
America Capital Management, Inc. ("BACAP") and the
Registrant dated March 30, 2000, Schedule I dated July
14, 2000, incorporated by reference to Post-Effective
Amendment No. 5, filed October 13, 2000.
---------------------- ---------------------------------------------------------
(e) Underwriting Contract:
(e)(1) Distribution Agreement between the Registrant and
Stephens Inc. ("Stephens") dated February 14, 2000,
Schedule I dated August 1, 2000, incorporated by
reference to Post-Effective Amendment No. 5, filed
October 13, 2000.
---------------------- ---------------------------------------------------------
(f) Bonus or Profit Sharing Contracts:
(f)(1) Deferred Compensation Plan, incorporated by reference to
Post-Effective Amendment No. 1, filed February 10, 2000.
---------------------- ---------------------------------------------------------
(g) Custodian Agreement:
(g)(1) Custody Agreement between the Registrant and The Bank of
New York ("BNY") dated February 14, 2000, Schedule I
dated August 1, 2000, incorporated by reference to
Post-Effective Amendment No. 5, filed October 13, 2000.
---------------------- ---------------------------------------------------------
(h) Other Material Contracts:
(h)(1) Co-Administration Agreement among the Registrant,
Stephens and BAAI dated February 14, 2000, Schedule I
dated August 1, 2000, incorporated by reference to
Post-Effective Amendment No. 5, filed October 13, 2000.
(h)(2) Sub-Administration Agreement among the Registrant, BNY
and BAAI dated February 14, 2000, Schedule I dated August
1, 2000, incorporated by reference to Post-Effective
Amendment No. 5, filed October 13, 2000.
(h)(3) Shareholder Servicing Plan relating to Investor B Shares,
Exhibit I amended August 1, 2000, incorporated by
reference to Post-Effective Amendment No. 5, filed
October 13, 2000.
---------------------- ---------------------------------------------------------
C-2
<PAGE>
---------------------- ---------------------------------------------------------
Exhibit Letter Description
---------------------- ---------------------------------------------------------
(h)(4) Shareholder Servicing Plan relating to Investor C Shares,
Exhibit I amended August 1, 2000, incorporated by
reference to Post-Effective Amendment No. 5, filed
October 13, 2000.
(h)(5) Transfer Agency and Services Agreement between PFPC Inc.
(formerly First Data Investor Services Group, Inc.)
("PFPC") and the Nations Funds family dated June 1, 1995,
Schedule G dated September 8, 2000, incorporated by
reference to Post-Effective Amendment No. 5, filed
October 13, 2000.
(h)(6) Adoption Agreement and Amendment to Transfer Agency and
Services Agreement dated February 14, 2000, incorporated
by reference to Post-Effective Amendment No. 1, filed
February 10, 2000.
(h)(7) Amendment to Transfer Agency and Services Agreement dated
January 1, 1999, incorporated by reference to
Post-Effective Amendment No. 1, filed February 10, 2000.
(h)(8) Sub-Transfer Agency Agreement between PFPC and Bank of
America, N.A. ("Bank of America") dated September 11,
1995, Schedule A dated September 8, 2000, incorporated by
reference to Post-Effective Amendment No. 5, filed
October 13, 2000.
(h)(9) Amendment No. 1 to the Sub-Transfer Agency and Services
Agreement dated January 3, 2000, incorporated by
reference to Post-Effective Amendment No. 6, filed
December 27, 2000.
(h)(10) Amendment No. 2 to the Sub-Transfer Agency and Services
Agreement dated December 1, 2000, incorporated by
reference to Post-Effective Amendment No. 6, filed
December 27, 2000.
(h)(11) Cross Indemnification Agreement among Nations Fund Trust,
Nations Fund, Inc., Nations Reserves, Nations Master
Investment Trust and the Registrant dated February 14,
2000, incorporated by reference to Post-Effective
Amendment No. 1, filed February 10, 2000.
---------------------- ---------------------------------------------------------
(i) Legal Opinion
(i)(1) Opinion and Consent of Counsel, filed herewith.
---------------------- ---------------------------------------------------------
C-3
<PAGE>
---------------------- ---------------------------------------------------------
Exhibit Letter Description
---------------------- ---------------------------------------------------------
(j) Other Opinions
Not Applicable
---------------------- ---------------------------------------------------------
(k) Omitted Financial Statements
Not Applicable
---------------------- ---------------------------------------------------------
(l) Initial Capital Agreements:
(l)(1) Investment Letter, incorporated by reference to
Post-Effective Amendment No. 1, filed February 10, 2000.
---------------------- ---------------------------------------------------------
(m) Rule 12b-1 Plans:
(m)(1) Shareholder Servicing and Distribution Plan relating to
Investor A Shares, Exhibit A amended August 1, 2000,
incorporated by reference to Post-Effective Amendment No.
5, filed October 13, 2000.
(m)(2) Distribution Plan relating to Investor B Shares, Exhibit
A amended August 1, 2000, incorporated by reference to
Post-Effective Amendment No. 5, filed October 13, 2000.
(m)(3) Distribution Plan relating to Investor C Shares, Exhibit
A amended August 1, 2000, incorporated by reference to
Post-Effective Amendment No. 5, filed October 13, 2000.
---------------------- ---------------------------------------------------------
(n) Financial Data Schedule:
Not Applicable
---------------------- ---------------------------------------------------------
(o) Rule 18f-3 Plan:
(o)(1) Rule 18f-3 Multi-Class Plan, amended August 1, 2000,
incorporated by reference to Post-Effective Amendment No.
5, filed October 13, 2000.
---------------------- ---------------------------------------------------------
(p) Codes of Ethics:
(p)(1) Nations Funds Family Code of Ethics, incorporated by
reference to Post-Effective Amendment No. 5, filed
October 13, 2000.
(p)(2) BAAI Code of Ethics, incorporated by reference to
Post-Effective Amendment No. 5, filed October 13, 2000.
---------------------- ---------------------------------------------------------
C-4
<PAGE>
---------------------- ---------------------------------------------------------
Exhibit Letter Description
---------------------- ---------------------------------------------------------
(p)(3) BACAP Code of Ethics, incorporated by reference to
Post-Effective Amendment No. 5, filed October 13, 2000.
(p)(4) Stephens Code of Ethics, incorporated by reference to
Post-Effective Amendment No. 5, filed October 13, 2000.
---------------------- ---------------------------------------------------------
(q) Powers of Attorney for Edmund L. Benson, Charles B.
Walker, A. Max Walker, Thomas S. Word, Jr., William H.
Grigg, James Ermer, Thomas F. Keller, Carl E. Mundy, Jr.,
James B. Sommers, Cornelius J. Pings and William P.
Carmichael, incorporated by reference to Post-Effective
Amendment No. 2, filed May 5, 2000.
---------------------- ---------------------------------------------------------
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 VII of the Declaration of Trust provides for the
indemnification of the Registrant's trustees, officers, employees and other
agents. Indemnification of the Registrant's administrators, distributor,
custodian and transfer agents is provided for, respectively, in the
Registrant's:
1. Co-Administration Agreement with Stephens and BAAI;
2. Sub-Administration Agreement with BNY and BAAI;
3. Distribution Agreement with Stephens;
4. Custody Agreement with BNY;
5. Transfer Agency and Services Agreement with PFPC; and
6. Sub-Transfer Agency and Services Agreement with PFPC and Bank
of America.
The Registrant has entered into a Cross Indemnification Agreement with
Nations Fund Trust (the "Trust") Nations Fund, Inc. (the "Company"), Nations
Reserves ("Reserves") and Nations Master Investment Trust ("Master Trust") dated
February 14, 2000. The Trust, the Company, Reserves and/or Master Trust will
indemnify and hold harmless the Registrant against any losses, claims, damages
or liabilities, to which the Registrant may become subject, under the Securities
Act of 1933, as amended (the "1933 Act") and the Investment Company Act of 1940,
as amended (the "1940 Act") or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of
C-5
<PAGE>
a material fact contained in any prospectuses, any preliminary prospectuses, the
registration statements, any other prospectuses relating to the securities, or
any amendments or supplements to the foregoing (hereinafter referred to
collectively as the "Offering Documents"), or arise out of or are based upon the
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Offering Documents in
reliance upon and in conformity with written information furnished to the
Registrant by the Trust, the Company, Reserves and/or Master Trust expressly for
use therein; and will reimburse the Registrant for any legal or other expenses
reasonably incurred by the Registrant in connection with investigating or
defending any such action or claim; provided, however, that the Trust, the
Company, Reserves and/or Master Trust shall not be liable in any such case to
the extent that any such loss, claim, damage, or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in the Offering Documents in reliance upon and in
conformity with written information furnished to the Trust, the Company,
Reserves and/or Master Trust by the Registrant expressly for use in the Offering
Documents.
Promptly after receipt by an indemnified party above of notice of the
commencement of any action, such indemnified party shall, if a claim in respect
thereof is to be made against the indemnifying party under such subsection,
notify the indemnifying party in writing of the commencement thereof; but the
omission to so notify the indemnifying party shall not relieve it from any
liability which it may have to any indemnified party otherwise than under such
subsection. In case any such action shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate therein and, to the
extent that it shall wish, to assume the defense thereof, with counsel
satisfactory to such indemnified party, and, after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party shall not be liable to such indemnified party
under such subsection for any legal expenses of other counsel or any other
expenses, in each case subsequently incurred by such indemnified party, in
connection with the defense thereof other than reasonable costs of
investigation.
The Registrant has obtained from a major insurance carrier a trustees'
and officers' liability policy covering certain types of errors and omissions.
In no event will the Registrant indemnify any of its trustees, officers,
employees, or agents against any liability to which such person would otherwise
be subject by reason of his/her willful misfeasance, bad faith, gross negligence
in the performance of his/her duties, or by reason of his/her reckless disregard
of the duties involved in the conduct of his/her office or arising under his
agreement with the Registrant. The Registrant will comply with Rule 484 under
the 1933 Act and Release No. 11330 under the 1940 Act, in connection with any
indemnification.
Insofar as indemnification for liabilities arising under the 1933 Act
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
C-6
<PAGE>
opinion of the Securities and Exchange Commission ("SEC") such indemnification
is against public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any act, suit or proceeding) is asserted by such trustee,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such 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 BACAP, the investment
sub-adviser, 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 BACAP, 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) BACAP performs investment sub-advisory services for the Registrant
and certain other customers. BACAP is a wholly-owned subsidiary of Bank of
America Corporation. Information with respect to each director and officer of
the investment sub-adviser is incorporated by reference to Form ADV filed by
BACAP (formerly TradeStreet Investment Associates, Inc.) with the SEC pursuant
to the Advisers Act (file no. 801-50372).
ITEM 27. Principal Underwriters
(a) Stephens, distributor for the Registrant, does not presently act as
investment adviser for any other registered investment companies, but does act
as distributor for Nations Fund Trust, Nations Fund, Inc., Nations Reserves,
Nations LifeGoal Funds, Inc., Nations Annuity Trust, Wells Fargo Funds Trust,
Wells Fargo Variable Trust, Barclays Global Investors Funds, Inc., and is the
exclusive placement agent for Wells Fargo Core Trust, Nations Master Investment
Trust and Master Investment Portfolio, all of which are registered open-end
management investment companies, and has acted as principal underwriter for the
Liberty Term Trust, Inc., Nations Government Income Term Trust 2003, Inc.,
Nations Government Income Term
C-7
<PAGE>
Trust 2004, Inc., Nations Balanced Target Maturity Fund, Inc., and Hatteras
Income Securities, Inc., closed-end management investment companies.
(b) Information with respect to each director and officer of the
principal underwriter is incorporated by reference to Form ADV filed by Stephens
with the SEC pursuant to the 1940 Act (file No. 501-15510).
(c) Not applicable.
ITEM 28. Location of Accounts and Records
(1) BAAI, One Bank of America Plaza, Charlotte, NC 28255 (records
relating to its function as investment adviser and
co-administrator).
(2) BACAP, One Bank of America Plaza, Charlotte, NC 28255 (records
relating to its function as investment sub-advisor).
(3) Stephens, 111 Center Street, Little Rock, AR 72201 (records
relating to its function as distributor and co-administrator).
(4) PFPC, 400 Bellevue Parkway, Wilmington, DE 19809 (records
relating to its function as transfer agent).
(5) BNY, 100 Church Street, New York, NY 10286 (records relating
to its function as custodian and sub-administrator).
(6) Bank of America, One Bank of America Plaza, Charlotte, NC
28255 (records relating to its function as sub-transfer
agent).
ITEM 29. Management Services
Not Applicable
ITEM 30. Undertakings
Not Applicable
C-8
<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 Amendment to
its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Little Rock, State of Arkansas on the
12th day of January, 2001.
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
Post-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 12, 2001
---------------------------------------- of the Board of Trustees
(A. Max Walker) (Principal Executive Officer)
/s/ Richard H. Blank, Jr. Treasurer and Secretary January 12, 2001
---------------------------------------- (Principal Financial and
(Richard H. Blank, Jr.) Accounting Officer)
* Trustee January 12, 2001
----------------------------------------
(Edmund L. Benson, III)
* Trustee January 12, 2001
----------------------------------------
(William P. Carmichael)
* Trustee January 12, 2001
----------------------------------------
(James Ermer)
* Trustee January 12, 2001
----------------------------------------
(William H. Grigg)
* Trustee January 12, 2001
----------------------------------------
(Thomas F. Keller)
* Trustee January 12, 2001
----------------------------------------
(Carl E. Mundy, Jr.)
* Trustee January 12, 2001
----------------------------------------
(Cornelius J. Pings)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
* Trustee January 12, 2001
----------------------------------------
(Charles B. Walker)
* Trustee January 12, 2001
----------------------------------------
(Thomas S. Word)
* Trustee January 12, 2001
----------------------------------------
(James B. Sommers)
/s/ Richard H. Blank, Jr.
----------------------------------------
Richard H. Blank, Jr.
*Attorney-in-Fact
</TABLE>
<PAGE>
Nations Funds Trust
Exhibit Index
Exhibit No. Description
----------- -----------
EX-99.23i(1) Opinion and Consent of Counsel--Morrison & Foerster LLP
