<PAGE>
Prospectus
Primary B Shares
December 7, 1998
This Prospectus describes the investment portfolios listed in the column to the
right (each a "Fund") of Nations Fund Trust and Nations Fund, Inc., each an
open-end management investment company in the Nations Funds Family ("Nations
Funds" or "Nations Funds Family"). This Prospectus describes one class of
shares of each Fund -- Primary B Shares.
This Prospectus sets forth concisely the information about each Fund that a
prospective purchaser of Primary B Shares should consider before investing.
Investors should read this Prospectus and retain it for future reference.
Additional information about Nations Fund Trust and Nations Fund, Inc. is
contained in a separate Statement of Additional Information (the "SAI"), that
has been filed with the Securities and Exchange Commission (the "SEC") and is
available upon request without charge by writing or calling Nations Funds at
its address or telephone number shown below. The SAI for Nations Funds, dated
August 1, 1998, is incorporated by reference in its entirety into this
Prospectus. The SEC maintains a Web site (http://www.sec.gov) that contains the
SAI, material incorporated by reference in this Prospectus and other
information regarding registrants that file electronically with the SEC.
NationsBanc Advisors, Inc. ("NBAI") is the investment adviser to each of the
Funds. Marsico Capital Management, LLC ("Marsico Capital") is the investment
sub-adviser to Nations Marsico Focused Equities Fund and Nations Marsico Growth
& Income Fund. Brandes Investment Partners, L.P. ("Brandes") is the investment
sub-adviser to Nations International Value Fund. TradeStreet Investment
Associates, Inc. ("TradeStreet") is the investment sub-adviser to all other
Nations Funds. As used herein the term "Adviser" shall mean NBAI, TradeStreet,
Marsico Capital and/or Brandes as the context may require, see "How The Funds
Are Managed."
SHARES OF NATIONS FUNDS ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED,
ENDORSED OR GUARANTEED BY, NATIONSBANK, N.A. ("NATIONSBANK") OR ANY OF ITS
AFFILIATES. SUCH SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. AN INVESTMENT IN THE FUNDS INVOLVES CERTAIN RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
NATIONSBANK AND CERTAIN OF ITS AFFILIATES PROVIDE SERVICES TO NATIONS FUNDS,
FOR WHICH THEY ARE COMPENSATED. STEPHENS INC., WHICH IS NOT AFFILIATED WITH
NATIONSBANK, IS THE SPONSOR AND ADMINISTRATOR AND SERVES AS THE DISTRIBUTOR FOR
NATIONS FUNDS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
EQUITY FUNDS:
Nations Value Fund
Nations Small Company Growth Fund
Nations Disciplined Equity Fund
Nations Capital Growth Fund
Nations Marsico Focused Equities Fund
Nations Marsico Growth & Income Fund
Nations International Value Fund
INDEX FUNDS:
Nations Managed Index Fund
Nations Managed SmallCap Index Fund
Nations Managed Value Index Fund
Nations Managed SmallCap Value Index Fund
For Fund information call:
1-800-621-2192
Nations Funds
c/o Stephens Inc.
One NationsBank Plaza
33rd Floor
Charlotte, NC 28255
[NATIONS FUNDS logo]
TR-15987-12/98
<PAGE>
Table Of Contents
About The Prospectus Summary 3
Funds ------------------------------------------------------
Expenses Summary 4
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Objectives 6
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How Objectives Are Pursued 7
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How Performance Is Shown 17
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How The Funds Are Managed 20
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Organization And History 23
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About Your How To Buy Shares 24
Investment -------------------------------------------------------
How To Redeem Shares 25
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How To Exchange Shares 25
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Shareholder Servicing Arrangements 26
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How The Funds Value Their Shares 27
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How Dividends And Distributions Are Made;
Tax Information 27
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Financial Highlights 28
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Appendix A -- Portfolio Securities 31
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Appendix B -- Description Of Ratings 40
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No person has been authorized to give any information
or to make any representations not contained in this
Prospectus, or in the Funds' SAI incorporated herein
by reference, in connection with the offering made by
this Prospectus and, if given or made, such
information or representations must not be relied
upon as having been authorized by Nations Funds or
its distributor. This Prospectus does not constitute
an offering by Nations Funds or by the distributor in
any jurisdiction in which such offering may not
lawfully be made.
2
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About The Funds
Prospectus Summary
o Type of Companies: Open-end management investment companies.
o Investment Objectives and Policies:
o Equity Funds:
o Nations Value Fund's investment objective is to seek growth of capital by
investing in companies that are believed to be undervalued.
o Nations Small Company Growth Fund's investment objective is to seek
long-term capital growth by investing primarily in equity securities.
o Nations Disciplined Equity Fund's investment objective is to seek growth of
capital by investing in companies that are expected to produce significant
increases in earnings per share.
o Nations Capital Growth Fund's investment objective is to seek growth of
capital by investing in companies that are believed to have superior
earnings growth potential.
o Nations Marsico Focused Equities Fund's investment objective is to seek
long-term growth of capital. It is a non-diversified fund that pursues its
objective by normally investing in a core position of 20-30 common stocks.
o Nations Marsico Growth & Income Fund's investment objective is to seek
long-term growth of capital with a limited emphasis on income. Under
normal circumstances, the Fund pursues its objective by investing up to
75% of its assets in equity securities selected primarily for their growth
potential and at least 25% of its assets in securities that have income
potential.
o Nations International Value Fund's investment objective is to seek long-term
capital appreciation by investing primarily in equity securities of
foreign issuers, including emerging markets countries.
o Index Funds:
o Nations Managed Index Fund's investment objective is to seek, over the
long-term, to provide a total return that (gross of fees and expenses)
exceeds the total return of the Standard & Poor's 500 Composite Stock
Price Index.
o Nations Managed SmallCap Index Fund's investment objective is to seek, over
the long-term, to provide a total return that (gross of fees and expenses)
exceeds the total return of the Standard & Poor's SmallCap 600 Index.
o Nations Managed Value Index Fund's investment objective is to seek, over the
long-term, to provide a total return that (gross of fees and expenses)
exceeds the total return of the S&P 500/BARRA Value Index.
o Nations Managed SmallCap Value Index Fund's investment objective is to seek,
over the long-term, to provide a total return that (gross of fees and
expenses) exceeds the total return of the S&P SmallCap 600/BARRA Value
Index.
o Investment Adviser: NationsBanc Advisors, Inc. serves as the investment
adviser to the Funds. NBAI provides investment management services to more
than 60 investment company portfolios in the Nations Funds Family.
TradeStreet Investment Associates, Inc., an affiliate of NBAI, provides
investment sub-advisory services to certain of the Funds. Marsico Capital
Management, LLC provides investment sub-advisory services to Nations Marsico
Focused Equities Fund and Nations Marsico Growth & Income Fund. Brandes
Investment Partners, L.P. provides investment sub-advisory services to Nations
International Value Fund. For more information about the investment adviser
and investment sub-advisers to the Nations Funds, see "How The Funds Are
Managed."
o Dividends and Distributions: Dividends from net investment income are
declared and paid monthly by Nations Capital Growth Fund, Nations
Disciplined Equity Fund, Nations Managed Index Fund, Nations Value Fund and
Nations Small Company Growth Fund. Dividends from net investment income are
declared and paid annually by
3
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Nations International Value Fund. All other Equity Funds and Index Funds
declare and pay dividends from net investment income each calendar quarter.
Each Fund's net realized capital gains, including net short-term capital gains
are distributed at least annually.
o Risk Factors: Although NBAI, together with the sub-advisers, seek to achieve
the investment objective of each Fund, there is no assurance that they will
be able to do so. Investments in a Fund are not insured against loss of
principal. Investments by a Fund in common stocks and other equity
securities are subject to stock market risk, which is the risk that the
value of the stocks the Fund holds may decline over short or even extended
periods. The U.S. stock markets tend to be cyclical, with periods when stock
prices generally rise and periods when prices generally decline. As of the
date of this Prospectus, the stock markets, as measured by the S&P 500 Index
(as defined below) and other commonly used indices, were trading at or close
to record levels. There can be no guarantee that these levels will continue.
In addition, 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.
Investments by a Fund in debt securities are subject to interest rate risk,
which is the risk that increases in market interest rates will adversely
affect a Fund's investments in debt securities. The value of a Fund's
investments in debt securities, including U.S. Government Obligations (as
defined below), 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 which are not issued
or guaranteed by the U.S. Government are subject to credit risk, which is
the risk that the issuer may not not be able to pay principal and/or
interest when due. Certain of the Funds' investments may constitute
derivative securities. Certain types of derivative securities can, under
particular circumstances, significantly increase an investor's exposure to
market and other risks. Certain of the Funds invest in foreign securities
which present additional risks associated with international investing,
including, among others, heightened economic and political risk, as well as
foreign currency risk. For a discussion of these and other factors, see "How
Objectives Are Pursued -- Risk Considerations", "How Objectives are Pursued
-- Special Risk Considerations Relevant to an Investment in Nations Marsico
Focused Equities Fund and Nations Marsico Growth & Income Fund", "How
Objectives are Pursued -- Special Risk Considerations Relevant to Foreign
Investing", "How Objectives are Pursued -- Special Risk Considerations
Relevant to an Investment in the Index Funds" and "Appendix A."
o Minimum Purchase: $1,000 minimum initial investment per record holder. See
"How To Buy Shares."
Expenses Summary
Expenses are one of several factors to consider when investing in the Funds.
The following tables summarize shareholder transaction and operating expenses
for Primary B Shares of the Funds. The Examples show the cumulative expenses
attributable to a hypothetical $1,000 investment in the Funds over specified
periods.
NATIONS FUNDS EQUITY FUNDS PRIMARY B SHARES
<TABLE>
<CAPTION>
Nations Nations Nations
Small Nations Nations Marsico Marsico Nations
Nations Company Disciplined Capital Focused Growth & International
Shareholder Transaction Value Growth Equity Growth Equities Income Value
Expenses Fund Fund Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C> <C> <C>
Sales Load Imposed on Purchases None None None None None None None
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred Sales Charge None None None None None None None
Annual Fund Operating
Expenses
(as a percentage of average net assets)
Management Fees
(After Fee Waivers) .75% .75% .75% .75% .85% .85% .90%
- ------------------------------------------------------------------------------------------------------------------------------------
Other Expenses
(After Expense Reimbursements) .69% .70% .73% .70% .90% .90% .72%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers and
Expense Reimbursements) 1.44% 1.45% 1.48% 1.45% 1.75% 1.75% 1.62%
</TABLE>
4
<PAGE>
NATIONS FUNDS INDEX FUNDS PRIMARY B SHARES
<TABLE>
<CAPTION>
Nations
Nations Nations Managed
Nations Managed Managed SmallCap
Managed SmallCap Value Index Value Index
Shareholder Transaction Expenses Index Fund Index Fund Fund Fund
<S> <C> <C> <C> <C>
Sales Load Imposed on Purchases None None None None
- ---------------------------------------------------------------------------------------------------
Deferred Sales Charge None None None None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees
(After Fee Waivers) .30% .30% .30% .30%
- ---------------------------------------------------------------------------------------------------
Other Expenses
(After Expense Reimbursements) .70% .70% .70% .70%
- ---------------------------------------------------------------------------------------------------
Total Operating Expenses (After Fee Waivers
and Expense Reimbursements) 1.00% 1.00% 1.00% 1.00%
</TABLE>
Examples: You would pay the following expenses on a $1,000 investment in
Primary B Shares of the indicated Fund, assuming (1) a 5% annual return and (2)
redemption at the end of each time period.
<TABLE>
<CAPTION>
Nations
Marsico Nations
Nations Nations Nations Focused Marsico Growth
Nations Small Company Disciplined Capital Equities & Income
Value Fund Growth Fund Equity Fund Growth Fund Fund Fund
<S> <C> <C> <C> <C> <C> <C>
1 Year $ 15 $ 15 $ 15 $ 15 $ 18 $ 18
3 Years $ 46 $ 48 $ 47 $ 46 $ 55 $ 55
5 Years $ 79 $ 79 $ 81 $ 79 $ 95 $ 95
10 Years $172 $174 $177 $174 $206 $206
</TABLE>
<TABLE>
<CAPTION>
Nations
Nations Nations Managed
International Nations Managed Nations SmallCap
Value Managed SmallCap Managed Value Value
Fund Index Fund Index Fund Index Fund Index Fund
<S> <C> <C> <C> <C> <C>
1 Year $ 16 $ 10 $ 10 $ 10 $ 10
3 Years $ 51 $ 32 $ 32 $ 32 $ 32
5 Years $ 88 $ 55 $ 55 $ 55 $ 55
10 Years $192 $122 $122 $122 $122
</TABLE>
The purpose of the foregoing tables is to assist an investor in understanding
the various shareholder transaction and operating expenses that an investor in
Primary B Shares will bear either directly or indirectly. The figures contained
in the above tables are based on amounts incurred during each Fund's most
recent fiscal year and have been adjusted as necessary to reflect current
service provider fees. There is no assurance that any fee waivers and/or
reimbursements will continue. In particular, to the extent Other Expenses are
less than those shown, waivers and/or reimbursements of Management Fees, if
any, may decrease. Shareholders will be notified of any decrease that
materially increases Total Operating Expenses. If fee waivers and/or
reimbursements are decreased or discontinued, the amounts contained in the
"Examples" above may increase. Long-term shareholders of the Funds could pay
more in sales charges than the economic equivalent of the maximum front-end
sales charges applicable to mutual funds sold by members of the National
Association of Securities Dealers, Inc. For more complete descriptions of the
Funds' operating expenses, see "How The Funds Are Managed."
Absent fee waivers and expense reimbursements, "Management Fees," "Other
Expenses" and "Total Operating Expenses" for Primary B Shares of the indicated
Fund would have been as follows: Nations Managed Index Fund -- .50%, .90% and
1.40%, respectively; Nations International Value Fund -- 1.00%, .82% and 1.82%,
respectively; Nations Managed SmallCap Index Fund -- .50%, 1.13% and 1.63%,
respectively; Nations Managed Value Index Fund -- .50%, 1.67% and 2.17%,
respectively; Nations Managed SmallCap Value Index Fund -- .50%, 2.31% and
2.81%, respectively; and Nations Small Company Growth Fund -- 1.00%, .86% and
1.86%, respectively.
5
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Absent fee waivers, "Other Expenses" and "Total Operating Expenses" for Primary
B Shares of the indicated Fund would have been as follows: Nations Capital
Growth Fund -- .80% and 1.55%, respectively; Nations Disciplined Equity Fund --
.83% and 1.58%, respectively; Nations Value Fund -- .80% and 1.55%,
respectively; Nations Marsico Focused Equities Fund -- 1.27% and 2.12%,
respectively; and Nations Marsico Growth & Income Fund -- 1.72% and 2.57%,
respectively.
Effective May 1999, it is anticipated that certain voluntary Total Operating
Expenses limits put in place in connection with the reorganization of The Pilot
Funds into the Nations Funds will terminate with respect to the following
Funds: Nations Value Fund, Nations Small Company Growth Fund and Nations
Disciplined Equity Fund. For more information, see the SAI.
THE FOREGOING SHOULD NOT BE CONSIDERED TO BE AN ACTUAL REPRESENTATION OF PAST
OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES AND RATES OF RETURN MAY BE
GREATER OR LESS THAN THOSE SHOWN.
Objectives
Equity Funds:
Nations Value Fund: Nations Value Fund's investment objective is to seek growth
of capital by investing in companies that are believed to be undervalued.
Nations Small Company Growth Fund: Nations Small Company Growth Fund's
investment objective is to seek long-term capital growth by investing primarily
in equity securities.
Nations Disciplined Equity Fund: Nations Disciplined Equity Fund's investment
objective is to seek growth of capital by investing in companies that are
expected to produce significant increases in earnings per share.
Nations Capital Growth Fund: Nations Capital Growth Fund's investment objective
is to seek growth of capital by investing in companies that are believed to
have superior earnings growth potential.
Nations Marsico Focused Equities Fund: Nations Marsico Focused Equities Fund's
investment objective is to seek long-term growth of capital.
Nations Marsico Growth & Income Fund: Nations Marsico Growth & Income Fund's
investment objective is to seek long-term growth of capital with a limited
emphasis on income.
Nations International Value Fund: Nations International Value Fund's investment
objective is to seek long-term capital appreciation by investing primarily in
equity securities of foreign issuers, including emerging markets countries.
Index Funds:
Nations Managed Index Fund: Nations Managed Index Fund's investment objective
is to seek, over the long-term, to provide a total return that (gross of fees
and expenses) exceeds the total return of Standard & Poor's 500 Composite Stock
Price Index ("S&P 500 Index.").1
Nations Managed SmallCap Index Fund: Nations Managed SmallCap Index Fund's
investment objective is to seek, over the long-term, to provide a total return
that (gross of fees and expenses) exceeds the total return of Standard & Poor's
SmallCap 600 Index ("S&P 600 Index").2
Nations Managed Value Index Fund: Nations Managed Value Index Fund's investment
objective is to seek, over the long-term, to provide a total return that (gross
of fees and expenses) exceeds the total return of the S&P 500/BARRA Value Index
("S&P/BARRA Value Index").
Nations Managed SmallCap Value Index Fund: Nations Managed SmallCap Value Index
Fund's investment objective is to seek, over the long-term, to provide a total
return that (gross of fees and expenses) exceeds the total return of the S&P
SmallCap 600/BARRA Value Index ("S&P/BARRA SmallCap Value Index").
Although the Adviser seeks to achieve the investment objective of each Fund,
there is no assurance that it will be able to do so. No single Fund should be
considered, by itself, to provide a complete investment program for any
investor. The net asset value of the shares of each Fund will fluctuate based
on market conditions. Therefore, investors should not rely upon the Funds for
short-term financial needs nor are the Funds meant to provide a vehicle for
participating in short-term swings in the stock market. Investments in the
Funds are not insured against loss of principal.
- --------
1 "Standard & Poor's" and "Standard & Poor's 500" are trademarks of The
McGraw-Hill Companies, Inc.
2 "Standard & Poor's" and "Standard & Poor's SmallCap 600" are trademarks of
The McGraw-Hill Companies, Inc.
6
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How Objectives Are Pursued
Equity Funds:
Nations Value Fund: The Fund invests in stocks drawn from a broad universe of
companies monitored by the Adviser. The Adviser closely monitors these
companies, rating them for quality and projecting their future earnings and
dividends as well as other factors. To qualify for purchase, an issuer would
normally have a market capitalization of $500 million or more and have an
average daily trading volume of at least $3 million. These requirements are
generally considered by the Adviser to be adequate to support normal purchase
and sale activity without materially affecting prevailing market prices of the
issuer's shares. The Adviser also analyzes key financial ratios that measure
the growth, profitability, and leverage of such issuers that it believes will
help maintain a portfolio of above-average quality.
Stocks are selected from this universe based on the Adviser's judgment of their
total return potential. The Adviser buys stocks that it believes are
undervalued relative to the overall stock market. The principal factor
considered by the Adviser in making these determinations is the ratio of a
stock's price-to-earnings relative to corresponding ratios of other stocks
issued by companies in the same industry or economic sector. The Adviser
believes that companies with lower price-to-earnings ratios are more likely to
provide better opportunities for capital appreciation. This "value" approach
typically produces a dividend yield greater than the market average. The
Adviser will attempt to temper risk by broad diversification among economic
sectors and industries. Through this strategy, the Fund pursues above-average
returns while seeking to avoid above-average risks.
The Fund invests under normal market conditions at least 65% of its total
assets in common stocks. In addition to common stocks, the Fund also may invest
in preferred stocks, securities convertible into common stock, and other types
of securities having common stock characteristics (such as rights and warrants
to purchase equity securities). Although the Fund invests primarily in
publicly-traded common stocks of companies incorporated in the United States,
the Fund may invest up to 20% of its assets in foreign securities. The Fund
also may hold up to 20% of its total assets in obligations issued or guaranteed
as to payment of principal and interest by the U.S. Government, its agencies or
instrumentalities ("U.S. Government Obligations"), and investment grade
securities of domestic companies. Obligations with the lowest investment grade
rating (e.g. rated "BBB" by Standard & Poor's Corporation ("S&P") or "Baa" by
Moody's Investors Services, Inc. ("Moody's")), have speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case with higher grade debt obligations. Subsequent to its
purchase by the Fund, an issue of securities may cease to be rated or its
rating may be reduced below the minimum rating required for purchase by the
Fund. The Adviser will consider such an event in determining whether the Fund
should continue to hold the obligation. Unrated obligations may be acquired by
the Fund if they are determined by the Adviser to be of comparable quality at
the time of purchase to rated obligations that may be acquired.
The Fund may invest in various money market instruments and repurchase
agreements. The Fund may invest without limitation in such instruments pending
investment, to meet anticipated redemption requests, or as a temporary
defensive measure if market conditions warrant.
Nations Small Company Growth Fund: In pursuing its investment objective, under
normal market conditions, the Fund will invest at least 65% of its total assets
in equity securities, consisting of common stocks, preferred stocks and
convertible securities, such as warrants, rights and convertible debt. In
addition, the Fund will invest at least 65% of its total assets in companies
with a market capitalization of $1 billion or less.
The investment philosophy of Nations Small Company Growth Fund is based on the
premise that stock prices are driven by earnings growth and that superior stock
market returns occur when a company experiences rapid and accelerating earnings
growth due to improving fundamentals.
In managing the Fund, the Adviser applies a disciplined process with rigorous
fundamental analysis providing the basis for stock selection. Its methodology
combines fundamental, valuation and momentum-based disciplines in portfolio
construction. First, the Adviser evaluates nearly 5000 stocks by using
quantitative modeling techniques. Companies with a market capitalization of
less than $1 billion are analyzed using the following criteria: earnings growth
trends, earnings momentum, earnings estimate trends, relative price performance
and importantly, valuation or price- to-earnings ratios relative to forecasted
earnings growth. Next, the Adviser conducts a bottom-up, fundamental analysis
of each candidate company. This process, which involves using both internal and
external research and conducting one on one conversations with senior company
executives, requires several steps: gaining an understanding of the business,
evaluating its growth potential, risks and competitive strengths, discussing
the growth strategy with company management, and validating that strategy with
third parties and the Adviser's network of regional brokerage research
resources.
Overall, the Fund's strategy is to own those investments offering both
attractive fundamental valuation and relatively good prospects for earnings
improvement. Typically, two types of companies are candidates for purchase: (i)
mature companies which may have fallen from a larger market value due to
business difficulties, but which now exhibit improving prospects; and (ii)
smaller or younger
7
<PAGE>
companies which are experiencing strong trends in earnings growth, but remain
reasonably valued and therefore offer premium growth at a discount in
comparison to other companies.
The Fund's weighted median capitalization generally is not expected to exceed
125% of the weighted median capitalization of the Russell 2000 Small Stock
Index (the "Russell 2000") as measured on a quarterly basis, although this may
vary from time to time. The volatility of the small cap growth stocks in which
the Fund invests is greater than that of larger companies. Many of these stocks
trade over-the-counter and may not have widespread interest among institutional
investors. These securities may have larger potential for gains but also carry
more risk if unexpected company developments adversely affect the stock prices.
To help reduce risk, the Fund is diversified and typically invests in 75 to 130
companies which represent a broad range of industries and sectors, both in the
United States and abroad.
The Fund may invest up to 35% of its total assets in securities of issuers with
a market capitalization greater than $1 billion and in debt securities.
However, the Fund will not invest more than 10% of its total assets in debt
securities, unless the Fund assumes a temporary defensive position as discussed
below. Debt securities, if any, purchased by the Fund will be rated "AA" or
above by S&P or "Aa" or above by Moody's or, if unrated, determined by the
Adviser to be of comparable quality. For temporary defensive purposes, the Fund
may invest up to 100% of its assets in debt securities. Debt securities in
which the Fund may invest include short-term and intermediate-term obligations
of corporations, the U.S. and foreign governments and international
organizations (such as the International Bank for Reconstruction and
Development (the "World Bank")) and money market instruments.
The Fund may invest in common stocks (including securities convertible into
common stocks) of foreign issuers and rights to purchase common stock, options
and futures contracts on securities, securities indexes and foreign currencies,
securities lending, forward foreign exchange contracts and repurchase
agreements. The Fund currently intends to limit any investment in foreign
securities to 20% of total assets.
Nations Disciplined Equity Fund: The investment philosophy of the Fund is based
on the premise that companies with positive earnings trends also should
experience positive trends in their share price. Based on this philosophy, the
Fund invests primarily in the common stocks of companies that the Adviser
believes are likely to experience significant increases in earnings. By
pursuing this investment philosophy, the Fund seeks to provide investors with
long-term capital appreciation which exceeds that of the S&P 500 Index.
In selecting stocks for the Fund, the Adviser utilizes quantitative analysis
and optimization tools. This approach seeks to identify companies with
improving profit potential through analysis of earnings forecasts issued by
investment banks, broker/dealers and other investment professionals. The
Adviser believes that companies experiencing such earnings trends have the
potential to generate significant increases in per share earnings. The Adviser
also believes that companies with increasing earnings should experience
positive trends in their stock price. The quantitative analysis also includes
ranking the attractiveness of equity securities according to a multi-factor
valuation model. Both value and growth factors are considered in the ranking
process. Value factors such as book value, earnings yield and cash flow measure
a stock's intrinsic worth versus its market price, while growth characteristics
such as price momentum, earnings growth and earnings acceleration measure a
stock relative to others in the same industry. The objective is to maintain a
broadly diversified portfolio which ranks in the top quartile on earnings
momentum and in the top third on valuation. This approach generally produces a
dividend yield less than the market average. Although this Fund seeks to invest
in attractively priced securities with increasing earnings, its investment
objective focuses on long-term capital appreciation; income is not an objective
of this Fund.
Under normal market conditions, the Fund invests at least 65% of its total
assets in common stocks of domestic issuers. With respect to the remainder of
the Fund's assets, the Fund may invest in a broad range of equity and debt
instruments, including preferred stocks, securities (debt and preferred stock)
convertible into common stock, warrants and rights to purchase common stocks,
options, U.S. government and corporate debt securities and various money market
instruments. The Fund will invest primarily in medium- and large-sized
companies (i.e. companies with market capitalizations of $1 billion or greater)
that are determined to have favorable price-to-earnings ratios. The Fund also
may invest in securities issued by companies with market capitalizations of
less than $1 billion. The volatility of small-capitalization stocks is
typically greater than that of larger companies. To help reduce risk, the Fund
will invest in the securities of companies representing a broad range of
industries and economic sectors.
The Fund's investments in debt securities, including convertible securities,
will be limited to securities rated investment grade (e.g. securities rated in
one of the top four investment categories by a nationally recognized
statistical rating organization (an "NRSRO") or, if not rated, are of
equivalent quality as determined by the Adviser.) Obligations rated in the
lowest of the top four investment grade rating categories 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.
The Fund may invest up to 20% of its total assets in foreign securities. For
temporary defensive purposes, if market conditions warrant, the Fund may invest
without limitation in preferred stocks, investment grade debt instruments,
money market instruments and repurchase agreements.
8
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Nations Capital Growth Fund: The investment philosophy of the Fund is based on
the belief that companies with superior growth characteristics selling at
reasonable prices will, over time, outperform the market. Therefore, the Fund
will generally seek to invest in larger capitalization, high-quality companies
which possess above average earnings growth potential.
The Fund's equity investments will generally be made in companies which share
some of the following characteristics:
o above-average earnings growth relative to the S&P 500 Index;
o established operating histories, strong balance sheets and favorable
financial characteristics; and
o above-average return on equity relative to the S&P 500 Index.
In addition, the Fund's investment program enables it to invest in the
following types of companies:
o companies that generate or apply new technologies, new and improved
distribution techniques, or new services, such as those in the business
equipment, electronics, specialty merchandising and health service
industries;
o companies that own or develop natural resources, such as energy exploration
companies;
o companies that may benefit from changing consumer demands and lifestyles,
such as financial service organizations and telecommunication
companies;
o foreign companies, including those in countries with more rapid economic
growth than the U.S.;
o companies whose earnings growth is projected at a pace in excess of the
average company (i.e., growth companies); and
o companies whose earnings are temporarily depressed and are currently out of
favor with most investors.
Through intensive research, visits to many companies each year, and efficient
response to changing market conditions, the Adviser seeks to make the most of
the Fund's flexible charter.
Under normal market conditions, the Fund invests at least 65% of its total
assets in common stocks. In addition to common stocks, the Fund also may invest
in preferred stocks, securities convertible into common stocks and other types
of securities having common stock characteristics (such as rights and warrants
to purchase equity securities). Although the Fund invests primarily in publicly
traded common stocks of companies incorporated in the United States, the Fund
may invest up to 20% of its total assets in foreign securities.
The Fund may invest in various money market instruments and repurchase
agreements. The Fund may invest without limitation in such instruments pending
investment, to meet anticipated redemption requests, or as a temporary
defensive measure if market conditions warrant.
Nations Marsico Focused Equities Fund: Nations Marsico Focused Equities Fund is
a non-diversified fund that pursues its objective by normally investing in a
core position of 20-30 common stocks. Under normal circumstances, the Fund
invests at least 65% of its assets in large capitalization common stocks
selected for their growth potential. The Fund may invest to a lesser degree in
other types of securities, including preferred stock, warrants, convertible
securities and debt securities.
In building the portfolio, the Adviser seeks to identify individual companies
with earnings growth potential that may not be recognized by the market at
large. To identify such opportunities, the Adviser looks for a combination of
four characteristics:
o Change -- The Adviser believes that extraordinary growth derives from
products, markets and technologies that are in flux.
o Franchise -- The Adviser looks for strong brand franchises that can be
leveraged in a changing global environment.
o Global reach -- The Adviser selects securities without geographic bias in
the belief that the global market is both a source of growth
opportunity and a hedge against fluctuations and dislocations of local
markets.
o Themes -- The Adviser seeks companies that are moving with, not against,
the major social, economic and cultural shifts taking place in the
world.
Once an opportunity is identified, it is subjected to a disciplined analytic
process including both "top-down" and "bottom-up" elements. The "top-down"
element of the process takes into consideration such macroeconomic factors as
interest rates, inflation, the regulatory environment and the global
competitive landscape, and also analyzes such factors as the most attractive
global opportunities, industry consolidation and the sustainability of economic
trends. With respect to the "bottom-up" element, the Adviser considers company
fundamentals such as commitment to research, market franchise and management's
strength and vision to determine the present and future value of the company as
an investment.
Realization of income is not a significant investment consideration. Any income
realized on the Fund's investments will be incidental to its objective.
Nations Marsico Growth & Income Fund: Under normal circumstances, Nations
Marsico Growth & Income Fund pursues its objective by investing up to 75% of
its assets in equity securities selected primarily for their growth potential
and at least 25% of its assets in securities that have income potential. The
Fund typically emphasizes the growth component. However, in adverse market
conditions, the Fund may reduce the growth component of its portfolio to 25% of
its assets. The Fund may invest in any combination of common stock, preferred
stock, warrants, convertible securities and debt securities. However, it is
expected that the Fund will emphasize investments in large capi-
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talization common stocks. The Fund may shift assets between the growth and
income components of its portfolio based on the Adviser's analysis of relevant
market, financial and economic conditions. If the Adviser believes that growth
securities will provide better returns than the yields then available or
expected on income-producing securities, then the Fund will place a greater
emphasis on the growth component. In building the portfolio, the Adviser seeks
to identify individual companies with earnings growth potential that may not be
recognized by the market at large. To identify such opportunities, the Adviser
looks for a combination of four characteristics:
o Change -- The Adviser believes that extraordinary growth derives from
products, markets and technologies that are in flux.
o Franchise -- The Adviser looks for strong brand franchises that can be
leveraged in a changing global environment.
o Global reach -- The Adviser selects securities without geographic bias in
the belief that the global market is both a source of growth
opportunity and a hedge against fluctuations and dislocations of local
markets.
o Themes -- The Adviser seeks companies that are moving with, not against,
the major social, economic and cultural shifts taking place in the
world.
Once an opportunity is identified, it is subjected to a disciplined analytic
process including both "top-down" and bottom-up" elements. The "top-down"
element of the process takes into consideration such macroeconomic factors as
interest rates, inflation, the regulatory environment and the global
competitive landscape, and also analyzes such factors as the most attractive
global opportunities, industry consolidation and the sustainability of economic
trends. With respect to the "bottom-up" element, the Adviser considers company
fundamentals such as commitment to research, market franchise and management's
strength and vision to determine the present and future value of the company as
an investment.
Because income is a part of the investment objective of the Fund, the Adviser
may also consider dividend-paying characteristics in selecting equity
securities for the Fund. The Fund may also find opportunities for capital
growth from debt securities because of anticipated changes in interest rates,
credit standing, currency relationships or other factors. Investors in the Fund
should keep in mind that the Fund is not designed to produce a consistent level
of income.
Nations International Value Fund: The Fund will pursue its investment
objective, under normal market conditions, by investing its assets in the
securities of issuers located in at least three different foreign countries.
Although the Fund may earn income from dividends, interest and other sources,
income will be incidental to the Fund's investment objective. The Fund
emphasizes investments in established companies, although it may invest in
companies of various sizes as measured by assets, sales and capitalization.
The Fund intends to invest at least 65% of its total assets in equity
securities of non-United States issuers whose market capitalizations exceed $1
billion at the time of purchase. These securities may include common stocks,
preferred stocks, securities convertible into common stocks, shares of
closed-end investment companies, American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs"), and/or Global Depository Receipts
("GDRs"). Although the Fund intends to invest primarily in equity securities
listed on stock exchanges, the Fund may also invest in equity securities traded
in over the counter markets and in private placements. The Fund is not subject
to any specific geographic diversification requirements. Countries in which the
Fund may invest include, but are not limited to, the nations of Western Europe,
North and South America, Australia, Africa, and Asia.
The Adviser's approach in selecting investments for the Fund is oriented to
individual stock selection and is value driven as described below. Typically,
no more than 5% of total Fund assets will be invested in any one equity
security at the time of purchase. With respect to Fund investments in any
particular country or industry, the Fund may typically invest up to the greater
of either (a) 20% of its total assets in any particular country or industry at
the time of purchase or (b) 150% of the weighting of such country or industry
as represented in the Morgan Stanley Capital International ("MSCI") EAFE Index
at the time of purchase, but in no event may the Fund invest more than 25% of
its total assets, calculated at the time of purchase and taken at market value,
in any one industry (other than U.S. Government securities). Generally, no more
than 20% of the value of the Fund's total assets, measured at the time of
purchase, may be invested in securities of companies located in emerging or
developing countries. As used in this Prospectus, the term "emerging" or
"developing" country applies to any country which is generally considered to be
an emerging or developing country by the international financial community,
which includes the World Bank and the International Finance Corporation. There
are currently over 130 countries which are generally considered to be emerging
or developing countries by the international financial community, approximately
40 of which currently have stock markets. These countries generally include
every nation in the world except the United States, Canada, Japan, Australia,
New Zealand, Hong Kong, Singapore and most nations located in Western Europe.
Currently, investing in many emerging countries is not feasible or may involve
unacceptable political risks. Emerging markets securities pose greater
liquidity and other risks than securities of companies located in developed
countries and traded in more established markets.
The Adviser to the Fund is committed to the use of the Graham and Dodd-style
value investing approach as introduced in the classic book Security Analysis.
Using this philosophy, the Adviser views stocks as small pieces of businesses
which are for sale. It seeks to purchase a diversified group of these
businesses at prices its research indicates are below their true long-term, or
intrinsic, value. By purchasing stocks whose current prices are believed to be
below
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their intrinsic values, the Adviser seeks to secure not only a possible margin
of safety against price declines, but also an attractive opportunity for profit
over the business cycle.
In analyzing a company's long-term value, the Adviser uses sources of
information such as company reports, filings with the SEC, computer databases,
industry publications, general and business publications, brokerage firm
research reports, and interviews with company management. Its focus is on
fundamental characteristics of a company, including, but not limited to, book
value, cash flow and capital structure, as well as management's record and
broad industry issues. Once the intrinsic value of a company is estimated, this
value is compared to the current price of the stock. If the price is
appreciably lower than the indicated intrinsic value, the stock may be
purchased.
During temporary defensive periods in response to unusual and adverse
conditions affecting the equity markets, the Fund's assets may be invested
without limitation in short-term debt instruments and in securities of United
States issuers. In addition, when the Fund experiences large cash inflows from
the issuance of new shares or the sale of portfolio securities, and desirable
equity securities that are consistent with the Fund's investment objective are
unavailable in sufficient quantities, the Fund may hold more than 35% of its
assets in short-term debt instruments for a limited time pending availability
of suitable equity securities. During normal market conditions, no more than
35% of the Fund's total assets will be invested in short-term debt instruments.
Subject to applicable securities regulations, the Fund may, for the purpose of
hedging its portfolio, purchase and write covered call options on specific
portfolio securities and may purchase and write put and call options on foreign
stock indices listed on foreign and domestic stock exchanges. See "Appendix A"
for additional information concerning the investment practices of the Fund.
General: Each Equity Fund 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 (the "CFTC") and options
thereon for market exposure risk management. Each Equity Fund may lend its
portfolio securities to qualified institutional investors and may invest in
repurchase agreements, restricted, private placement and other illiquid
securities. Each Equity Fund also may invest in real estate investment trust
securities. In addition, each Equity Fund may invest in securities issued by
other investment companies, consistent with the Fund's investment objective and
policies. Nations International Value Fund may invest in forward foreign
exchange contracts. For more information concerning these and other investments
in which the Funds may invest and their investment practices, see "Appendix A."
Nations Value Fund, Nations Small Company Growth Fund, Nations Disciplined
Equity Fund and Nations Capital Growth Fund are managed with careful
consideration to the overall tax implications of portfolio activity.
The Adviser considers employing various techniques to minimize the distribution
of capital gains to shareholders. These techniques, which the Adviser uses when
consistent with each Fund's overall objectives and policies, may include:
o Managing portfolio turnover. By appropriately limiting the number of buy
and sell transactions, each Fund attempts to effectively manage its
distribution of capital gains.
o Selling share lots that generate the lowest tax burden to the shareholder.
After the decision is made to sell a specific security, each Fund will
endeavor to sell the shares that create the lowest potential tax burden
to shareholders, as a general matter.
o Offsetting capital gains with capital losses. Each Fund may, when prudent,
sell securities in order to realize capital losses. Capital losses can
be used to offset capital gains thus reducing capital gains
distributions.
While each Fund seeks to minimize the distribution of capital gains, consistent
with its investment objective, there can be no assurance that all taxable
distributions to shareholders can be avoided. In addition, the ability to
utilize these tax management techniques may be reduced or eliminated by future
legislation, regulation, administrative interpretations or court decisions.
Index Funds:
Nations Managed Index Fund: In seeking to achieve its investment objective, the
Fund will invest in selected equity securities that are included in the S&P 500
Index. The S&P 500 Index is a market capitalization weighted index consisting
of 500 common stocks chosen for market size, liquidity and industry group
representation.
Unlike traditional index funds, the Fund has a "managed" overlay. The Adviser
believes that a managed equity index portfolio can provide investors with
positive incremental performance relative to the S&P 500 Index while minimizing
the downside risk of underperforming the S&P 500 Index over time.
The initial stock universe considered by the Adviser is the S&P 500 Index. The
Adviser ranks the attractiveness of each security according to a multi-factor
valuation model. Both value and momentum factors are considered in the ranking
process. Value factors such as book value, earnings yield and cash flow measure
a stock's intrinsic worth versus its market price, while momentum
characteristics such as price momentum, earnings growth and earnings
acceleration measure a stock relative to others in the same industry. A second
quantitative model which measures the earnings momentum of each security is
added to the screening process to serve as a validity check in the portfolio
construction process. Each stock is assigned a ranking from 1 to 10 (best to
worst). The Adviser then either underweights or eliminates the less attractive
securities and modestly emphasizes the most attractive stocks resulting in a
portfolio of 300 to 400 holdings that capture the investment characteristics of
the S&P 500 Index.
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Under normal conditions, the Adviser will attempt to invest as much of the
Fund's assets as is practical and, in any event, the Fund will invest at least
80% of its total assets in common stocks that are included in the S&P 500
Index. The Fund is expected, however, to maintain a position in high-quality
short-term debt securities and money market instruments to meet redemption
requests. If the Adviser believes that market conditions warrant a temporary
defensive posture, the Fund may invest without limitation in high-quality
short-term debt securities and money market instruments. These securities and
money market instruments may include domestic and foreign commercial paper,
certificates of deposit, bankers' acceptances and time deposits, U.S.
Government Obligations and repurchase agreements.
Nations Managed SmallCap Index Fund: In seeking to achieve its investment
objective, the Fund will invest in selected equity securities that are included
in the S&P 600 Index. The S&P 600 Index is a market capitalization weighted
index consisting of 600 domestic stocks that capture the economic and industry
characteristics of small stock performance. Most of these stocks are listed on
either the New York, American or NASDAQ stock exchanges.
Unlike traditional index funds, the Fund has a "managed" overlay. The Adviser
believes that a managed equity index portfolio can provide investors with
positive incremental performance relative to the S&P 600 Index while minimizing
the downside risk of underperforming the S&P 600 Index over time.
From the initial S&P 600 Index stock universe the Adviser ranks the
attractiveness of each security according to a multi-factor valuation model.
Both value and momentum factors are considered in the ranking process. Value
factors such as book value, earnings yield and cash flow measure a stock's
intrinsic worth versus its market price, while momentum characteristics such as
price momentum, earnings growth and earnings acceleration measure a stock
relative to others in the same industry. A second quantitative model which
measures the earnings momentum of each security is added to the screening
process to serve as a validity check in the portfolio construction process.
Each stock is assigned a ranking from 1 to 10 (best to worst). The Adviser then
either underweights or eliminates the less attractive securities and modestly
emphasizes the most attractive stocks resulting in a portfolio of approximately
400 to 500 holdings that capture the investment characteristics of the S&P 600
Index.
Under normal conditions, substantially all of the Fund's assets, and, in any
event at least 80% of its total assets, will be invested in common stocks that
are included in the S&P 600 Index. The Fund is expected, however, to maintain a
position in high-quality short-term debt securities and money market
instruments to meet redemption requests. If the Adviser believes that market
conditions warrant a temporary defensive posture, the Fund may invest without
limitation in high-quality short-term debt securities and money market
instruments. These securities and money market instruments may include domestic
and foreign commercial paper, certificates of deposit, bankers' acceptances and
time deposits, U.S. Government Obligations and repurchase agreements.
Nations Managed Value Index Fund: In seeking to achieve its investment
objective, the Fund will invest in selected equity securities that are included
in the S&P/ BARRA Value Index. The S&P/BARRA Value Index is a subset of the
S&P 500 Index. The S&P 500 Index is a market capitalization weighted index
consisting of 500 common stocks chosen for market size, liquidity and industry
group representation. The S&P/BARRA Value Index is a market capitalization
weighted index consisting of approximately 340 common stocks selected from the
S&P 500 Index on the basis of a higher than average price-to-book ratio.
Because of their higher than average price-to-book ratios, stocks in the
S&P/BARRA Value Index, on average, typically exhibit higher yields than stocks
in the S&P 500 Index. Historically, stocks in the S&P/BARRA Value Index, on
average, have exhibited less short-term volatility than stocks in the S&P 500
Index.
S&P constructs the S&P/BARRA Value Index semi-annually by ranking all common
stocks included in the S&P 500 Index by their price-to-book ratios. The
resulting list is then divided in half by market capitalization. Stocks in the
half of the list that have higher price-to-book ratios are included in the
S&P/BARRA Value Index.
Unlike traditional index funds, the Fund has a "managed" overlay. The Adviser
believes that a managed equity value index portfolio can provide investors with
positive incremental performance relative to the S&P/BARRA Value Index while
reducing the downside risk of underperforming the S&P/BARRA Value Index over
time.
The initial stock universe considered by the Adviser is the S&P/BARRA Value
Index. The Adviser ranks the attractiveness of each security according to a
multi-factor valuation model. Although the universe consists exclusively of
value stocks, both value and momentum factors are considered in the ranking
process. Value factors such as book value, earnings yield and cash flow measure
a stock's intrinsic worth versus its market price, while momentum
characteristics such as price momentum, earnings growth and earnings
acceleration are useful in determining a stock's value in relation to others in
the same industry. A second quantitative model which measures the earnings
momentum of each security is added to the screening process to serve as a
validity check in the portfolio construction process. Each stock is assigned a
ranking from 1 to 10 (best to worst). The Adviser then either underweights or
eliminates the less attractive securities and modestly emphasizes the most
attractive stocks resulting in a portfolio of 100 to 200 holdings that capture
the overall investment characteristics of the S&P/BARRA Value Index.
Under normal conditions, the Adviser will invest at least 80% of its total
assets in common stocks that are included in the S&P/BARRA Value Index. The
Fund is expected, however, to maintain a position in high-quality short-term
debt securities and money market instruments to meet redemption requests. If
the Adviser believes that mar-
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ket conditions warrant a temporary defensive posture, the Fund may invest
without limitation in high-quality short-term debt securities and money market
instruments. These securities and money market instruments may include domestic
and foreign commercial paper, certificates of deposit, bankers' acceptances and
time deposits, U.S. Government Obligations and repurchase agreements.
Nations Managed SmallCap Value Index Fund: In seeking to achieve its investment
objective, the Fund will invest in selected equity securities that are included
in the S&P/BARRA SmallCap Value Index. The S&P/BARRA SmallCap Value Index is a
subset of the S&P 600 Index. The S&P 600 Index is a market capitalization
weighted index consisting of 600 domestic stocks which capture the economic and
industry characteristics of small stock performance. The S&P/BARRA SmallCap
Value Index is a market capitalization weighted index consisting of
approximately 375 companies selected from the S&P 600 Index on the basis of
price-to-book ratios. Those companies with lower price-to-book ratios make up
the S&P/BARRA SmallCap Value Index. The S&P/BARRA SmallCap Value Index is
rebalanced semi-annually to reflect changes in the S&P 600 Index. Most of these
stocks are listed on either the New York, American or NASDAQ stock exchanges.
Unlike traditional index funds, the Fund has a "managed" overlay. The Adviser
believes that a managed equity index portfolio can provide investors with
positive incremental performance relative to the S&P/BARRA SmallCap Value Index
while reducing the downside risk of underperforming the S&P/BARRA SmallCap
Value Index over time.
The initial stock universe considered by the Adviser is the S&P/BARRA SmallCap
Value Index. The Adviser ranks the attractiveness of each security according to
a multi-factor valuation model. Although the universe consists exclusively of
value stocks, both value and momentum factors are considered in the ranking
process. Value factors such as book value, earnings yield and cash flow measure
a stock's intrinsic worth versus its market price, while momentum
characteristics such as price momentum, earnings growth and earnings
acceleration are useful in determining a stock's value in relation to others in
the same industry. A second quantitative model which measures the earnings
momentum of each security is added to the screening process to serve as a
validity check in the portfolio construction process. Each stock is assigned a
ranking from 1 to 10 (best to worst). The Adviser then either underweights or
eliminates the less attractive securities and modestly emphasizes the most
attractive stocks resulting in a portfolio of 200 to 300 holdings that capture
the overall investment characteristics of the S&P/BARRA SmallCap Value Index.
Under normal conditions, the Adviser will invest at least 80% of its total
assets in common stocks that are included in the S&P/BARRA SmallCap Value
Index. The Fund is expected, however, to maintain a position in high-quality
short-term debt securities and money market instruments to meet redemption
requests. If the Adviser believes that market conditions warrant a temporary
defensive posture, the Fund may invest without limitation in high-quality
short-term debt securities and money market instruments. These securities and
money market instruments may include domestic and foreign commercial paper,
certificates of deposit, bankers' acceptances and time deposits, U.S.
Government Obligations and repurchase agreements.
About the Indexes: The S&P 500 Index is composed of 500 common stocks, chosen
by S&P on a statistical basis to be included in the Index. The S&P SmallCap 600
Index is composed of 600 domestic stocks, chosen by S&P based on, among other
things, market size, liquidity and industry group representation. The S&P
SmallCap 600 Index is designed to be a benchmark of small capitalization stock
performance. Most of these stocks are listed on either the New York, American
or NASDAQ stock exchanges.
The S&P/BARRA Value Index and the S&P/BARRA SmallCap Value Index (collectively,
the "BARRA Value Indexes") are constructed by dividing the stocks in the S&P
500 Index and the S&P 600 Index, respectively, according to a single attribute:
price-to-book ratios. The BARRA Value Indexes are capitalization-weighted,
meaning that each stock is weighted in the appropriate index in proportion to
its market value. Additionally, price-to-book ratios tend to be more stable
over time than alternative measures such as price-to-earnings ratios,
historical earnings growth rates, or return on equity. This results in indexes
with relatively low turnover. Generally, the companies in the BARRA Value
Indexes also exhibit characteristics associated with "value" stocks: lower
price-to-earnings ratios, higher dividend yields, and lower historical and
predicted earnings growth than the S&P 500 Index or the S&P 600 Index,
respectively.
The S&P/BARRA Value Index and the S&P/BARRA SmallCap Value Index are relatively
concentrated. The S&P/BARRA Value Index tends to be more heavily concentrated
in the Energy, Utility, and Financial sectors than the S&P 500 Index.
Additionally, the S&P/BARRA SmallCap Value Index tends to be more heavily
concentrated in the Utility and Financial sectors than the S&P 600 Index.
The inclusion of a stock in the S&P 500 Index, the S&P 600 Index, the S&P/BARRA
Value Index or the S&P/BARRA SmallCap Value Index in no way implies that S&P
or BARRA believes the stock to be an attractive investment. The Indexes are
determined, composed and calculated by S&P and BARRA without regard to the
Funds. Neither S&P nor BARRA is a sponsor of, or in any way affiliated with,
the Funds, and neither S&P or BARRA makes any representation or warranty,
expressed or implied, on the advisability of investing in the Funds or as to
the ability of the Indexes to track general stock market performance. S&P and
BARRA disclaim all warranties of merchantability or fitness for a particular
purpose or use with respect to the Indexes or any data included therein.
General: Each Index Fund also may invest in certain specified derivative
securities including: exchange-traded options; over-the-counter options
executed with primary dealers, including long calls and puts and covered calls
to enhance return; and U.S. exchange-traded financial futures
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<PAGE>
approved by the 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. In addition, the Funds may invest in
securities issued by other investment companies, consistent with a Fund's
investment objective and policies.
In addition, when consistent with an Index Fund's respective investment
objective, each of the Index Funds will employ various techniques to manage
capital gain distributions. These techniques include utilizing a share
identification methodology whereby the Fund will specifically identify each lot
of shares of portfolio securities that it holds, which will allow the Fund to
sell first those specific shares with the highest tax basis in order to reduce
the amount of recognized capital gains as compared with a sale of identical
portfolio securities, if any, with a lower tax basis. The Fund will sell first
those shares with the highest tax basis only when it is in the best interest of
the Fund to do so, and reserves the right to sell other shares when
appropriate. In addition, the Fund may, at times, sell portfolio securities in
order to realize capital losses. Such capital losses would be used to offset
realized capital gains thereby reducing capital gain distributions.
Additionally, the Adviser will, consistent with the portfolio construction
process discussed above, employ a low portfolio turnover strategy designed to
defer the realization of capital gains.
NationsBank Corporation is currently included in the S&P 500 Index. Nations
Managed Index Fund and Nations Managed Value Index Fund cannot presently
purchase stock in NationsBank Corporation unless relief from certain SEC
restrictions is obtained or confirmed.
Equity mutual funds, like other investors in equity securities, incur
transaction (brokerage) costs in connection with the purchase and sale of
portfolio securities. For some funds, these costs can have a material negative
impact on performance. With respect to the Index Funds, the Adviser to the
Funds will attempt to minimize these transaction costs by utilizing program
trades and computerized exchanges called "crossing networks" which allow
institutions to execute trades at the mid-point of the bid/ask spread and at a
reduced commission rate.
For more information concerning these and other instruments in which the Funds
may invest and their investment practices, see "Appendix A."
Portfolio Turnover: Generally, the Equity Funds and the Index 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 Fund and its shareholders. While it is not
possible to predict exactly annual portfolio turnover rates, it is expected
that under normal market conditions, the annual portfolio turnover rate for
each Index Fund will not exceed 25%. For the Funds' portfolio turnover rates,
see "Financial Highlights."
Risk Considerations: Investments by a Fund in common stocks and other equity
securities are subject to stock market risk. 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 Prospectus the stock market, as measured by the S&P 500 Index
and other commonly used indices, was trading at or close to record levels.
There can be no guarantee that these levels will continue.
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, i.e., that the issuer may not be
able to pay principal and/or interest when due.
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.
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 particular 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 the 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."
Special Risk Considerations Relevant to an Investment in Nations Marsico
Focused Equities and Nations Marsico Growth & Income Fund: Nations Marsico
Focused Equities Fund, as a non-diversified fund, may invest in fewer issuers
than diversified funds, such as Nations Marsico Growth & Income Fund.
Therefore, appreciation or depreciation of an investment in a single issuer
could have a greater impact on the Fund's net asset value. Nations Marsico
Focused Equities Fund reserves the right to become a diversified fund by
limiting the investments in which more than 5% of its total assets are
invested. The techniques employed by the Adviser in managing this Fund
generally result in a portfolio of fewer holdings than that of other equity
mutual funds. As a result, the net asset value of a share in the Fund tends to
fluctuate more greatly than would otherwise be the case with an equity fund
that invested more broadly. In other words, an investment in the Fund
represents both greater risks and potential rewards than may be the case with
an equity fund whose portfolio is more diversified.
14
<PAGE>
Nations Marsico Focused Equities Fund and Nations Marsico Growth & Income Fund
(the "Marsico Funds") may also invest up to 25% of their assets in mortgage-
and asset-backed securities, up to 10% of their assets in zero coupon,
pay-in-kind and step coupon securities, and may invest without limit in
indexed/structured securities. The Marsico Funds will invest no more than 35%
of their assets in high-yield/high-risk securities. The Marsico Funds may also
purchase high-grade commercial paper, certificates of deposit, and repurchase
agreements. The Marsico Funds may also invest in short-term debt securities as
a means of receiving a return on idle cash. See "Appendix B" for a description
of these ratings designations.
When the Adviser believes that market conditions are not favorable for
profitable investing or when the Adviser is otherwise unable to locate
favorable investment opportunities, the Marsico 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 if the Adviser
determines that a temporary defensive position is advisable or to meet
anticipated redemption requests. In other words, the Marsico Funds do not
always stay fully invested in stocks and bonds. Cash or similar investments are
a residual -- they represent the assets that remain after the Adviser has
committed available assets to desirable investment opportunities. When the
Marsico Funds' cash position increases, it may not participate in stock market
advances or declines to the extent that it would if it remained more fully
invested in common stocks.
The Marsico Funds may invest up to 25% of their assets in foreign equity and
debt securities. The Funds may invest directly in foreign securities
denominated in a foreign currency and not publicly traded in the United States.
Other ways of investing in foreign securities include depositary receipts or
shares, and passive foreign investment companies. Foreign securities are
generally selected on a company-by-company basis without regard to any defined
allocation among countries or geographic regions. However, certain factors such
as expected levels of inflation, government policies influencing business
conditions, the outlook for currency relationships, and prospects for economic
growth among countries, regions or geographic areas may warrant greater
consideration in selecting foreign securities. The Marsico Funds may use
options, futures, forward currency contracts and other types of derivatives for
hedging purposes. The Funds may purchase securities on a when-issued, delayed
delivery or forward commitment basis.
For more information concerning these and other investments in which the Funds
may invest and their investment practices, see "Appendix A."
Special Risks Considerations Relevant to Foreign Investing: Investors should
understand and consider carefully the special risks involved in foreign
investing. Such risks include, but are not limited to: (1) restrictions on
foreign investment and repatriation of capital; (2) fluctuations in currency
exchange rates, which can significantly affect a Fund's share price; (3) costs
of converting foreign currency into U.S. dollars and U.S. dollars into foreign
currencies; (4) greater price volatility and less liquidity; (5) settlement
practices, including delays, which may differ from those customary in United
States markets; (6) exposure to political and economic risks, including the
risk of nationalization, expropriation of assets and war; (7) possible
impositions of foreign taxes and exchange control and currency restrictions;
(8) lack of uniform accounting, auditing and financial reporting standards; (9)
less governmental supervision of securities markets, brokers and issuers of
securities; (10) less financial information available to investors; and (11)
difficulty in enforcing legal rights outside the United States.
The expenses to individual investors of investing directly in foreign
securities are very high relative to similar costs for investing in U.S.
securities. While Nations International Value Fund offers a more efficient way
for individual investors to participate in foreign markets, their expenses,
including custodial fees, are also typically higher than those of domestic
equity mutual funds.
Certain of the risks associated with investments by Nations International Value
Fund in foreign securities are heightened with respect to investment in
developing countries and emerging markets countries. Political and economic
structures in many emerging markets countries may be undergoing significant
evolution and rapid development, and may lack the social, political and
economic stability characteristic of more developed countries. Investing in
emerging markets securities also involves risks which are in addition to the
usual risks inherent in foreign investments. Some emerging markets countries
may have fixed or managed currencies that are not free-floating against the
U.S. dollar. Further, certain currencies may not be traded internationally and
some countries with emerging securities markets have sustained long periods of
substantially high inflation or rapid fluctuation in inflation rates which can
have negative effects on a country's economy or securities markets.
In addition to the general risks inherent in foreign investing, investors
should understand and consider carefully the special risks involved in
investing in Eastern Europe, the Pacific Basin and the Far East. Economic and
political reforms in Eastern Europe are still in their infancy. As a result,
investment in such countries could be deemed to be highly speculative and could
result in losses to a Fund and, thus, to its shareholders. Countries in the
Pacific Basin and Far East are in various stages of economic development,
ranging from emerging markets to mature economies, but each has unique risks.
Most countries in this region are heavily dependent on international trade, and
some are especially vulnerable to recessions in other countries. Many of these
countries are also sensitive to world commodity prices. Some countries that
have experienced rapid growth may still have obsolete financial systems,
economic problems or archaic legal systems. In addition, many of these nations
are experiencing political and social uncertainties. See "Appendix A" for
additional discussion of the
15
<PAGE>
risks associated with an investment in Nations International Value Fund.
Special Risk Considerations Relevant to an Investment in the Index Funds: The
techniques employed by the Adviser for the Index Funds to seek to manage
capital gain distributions will generally only have the effect of deferring the
realization of capital gains. For example, to the extent that the capital gains
recognized on a sale of portfolio securities arise from the sale of
specifically-identified securities with higher tax basis, subsequent sales of
the same portfolio securities will be calculated by reference to the lower tax
basis securities that remain in the portfolio. Under this scenario, an investor
who purchases shares of a Fund after the first sale could receive capital gain
distributions that are higher than the distributions that would have been
received if this methodology had not been used. Therefore, certain investors
actually could be disadvantaged by the techniques employed by the Fund to seek
to manage capital gain distributions, depending on the timing of their purchase
of Fund shares. Even if there are no subsequent sales, upon a redemption or
exchange of Fund shares an investor will have to recognize gain to the extent
that the net asset value of Fund shares at such time exceeds such investor's
tax basis in his or her Fund shares.
The various techniques employed by the Index Funds to manage capital gain
distributions may result in the accumulation of substantial unrealized gains in
the Funds' portfolios. Moreover, the realization of capital gains is not
entirely within a Fund's control because it is at least partly dependent on
shareholder purchase and redemption activity. Capital gain distributions may
vary considerably from year to year.
Furthermore, the U.S. Treasury has proposed legislation which would require
holders of substantially identical securities to determine their tax basis
using the average cost of all of their holdings in such securities. If enacted,
the legislation would prevent the Funds from specifically identifying each lot
of shares that they hold and from selling first those specific shares with the
highest tax basis. Thus, the legislation would restrict the Funds' ability to
manage capital gains.
Year 2000 Issue: Many computer programs employed throughout the world use two
digits to identify the year. Unless modified, these programs may not correctly
handle the change from "99" to "00" on January 1, 2000, and may not be able to
perform necessary functions. Any failure to adapt these programs in time could
hamper the Funds' operations. The Funds' principal service providers have
advised the Funds that they have been actively working on implementing
necessary changes to their systems, and that they expect that their systems
will be adapted in time, although there can be no assurance of success. Because
the Year 2000 issue affects virtually all organizations, the companies or
governmental entities in which the Funds invest could be adversely impacted by
the Year 2000 issue, although the extent of such impact cannot be predicted. To
the extent the impact on a portfolio holding is negative, a Fund's return could
be adversely affected.
Investment Limitations: Each Fund is subject to a number of investment
limitations. The following investment limitations are matters of fundamental
policy and may not be changed without the affirmative vote of the holders of a
majority of the Fund's outstanding shares. Other investment limitations that
cannot be changed without such a vote of shareholders are described in the SAI.
Each Fund may not:
1. Purchase any securities which would cause 25% or more of the value of the
Fund's total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal activities in the
same industry, provided that this limitation does not apply to investments in
obligations issued or guaranteed by the U.S. Government or its agencies and
instrumentalities. In addition, this limitation does not apply to investments
by "money market funds" as that term is used under the 1940 Act, as amended in
obligations of domestic banks.
2. Make loans, except that a Fund may purchase and hold debt instruments
(whether such instruments are part of a public offering or privately placed),
may enter into repurchase agreements and may lend portfolio securities in
accordance with its investment policies.
3. Purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after such purchase, more than 5% of the value of such Fund's total
assets would be invested in the securities of such issuer, except that up to
25% of the value of the Fund's total assets may be invested without regard to
these limitations and with respect to 75% of such Fund's total assets, such
Fund will not hold more than 10% of the voting securities of any issuer.
Nations Small Company Growth Fund may not:
1. Borrow money except as a temporary measure for extraordinary or emergency
purposes or except in connection with reverse repurchase agreements and
mortgage rolls; provided that the Fund will maintain asset coverage of 300% for
all borrowings.
The Marsico Funds may not:
1. Purchase any securities which would cause 25% or more of the value of the
Fund's total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal activities in the
same industry, provided that this limitation does not apply to investments U.S.
Government Obligations.
2. Make loans, except that a Fund may purchase and hold debt instruments
(whether such instruments are part of a public offering or privately placed),
may enter into repurchase agreements and may lend portfolio securities in
accordance with its investment policies.
16
<PAGE>
Nations Marsico Growth & Income Fund may not:
1. Purchase securities of any one issuer (other than U.S. Government
Obligations) if, immediately after such purchase, more than 5% of the value of
such Fund's total assets would be invested in the securities of such issuer,
except that up to 25% of the value of the Fund's total assets may be invested
without regard to these limitations and with respect to 75% of such Fund's
total assets, such Fund will not hold more than 10% of the voting securities of
any issuer.
Nations Marsico Focused Equities Fund may not:
1. 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.
Nations International Value Fund may not:
1. Invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry (with certain
exceptions).
2. Purchase securities of any one issuer (with certain exceptions, including
U.S. Government securities) if more than 5% of the Fund's total assets will be
invested in the securities of any one issuer, except that up to 25% of the
value of the Fund's total assets may be invested without regard to the 5%
limitation. The Fund may not purchase more than 10% of the outstanding voting
securities of any issuer subject, however, to the foregoing 25% exception.
3. Borrow money except for temporary purposes in amounts up to one-third of the
value of its total assets at the time of such borrowing. Whenever borrowings
exceed 5% of the Fund's total assets, the Fund will not make any investments.
If a percentage limitation has been met at the time an investment is made, a
subsequent change in that percentage that is the result of a change in value of
a Fund's portfolio securities does not mean that the limitation has been
violated.
The investment objective and policies of each Fund, unless otherwise specified,
are non-fundamental and may be changed without shareholder approval.
Shareholders of Nations Small Company Growth Fund, however, must receive at
least 30 days' prior written notice in the event an investment objective is
changed. If the investment objective or policies of a Fund change, shareholders
should consider whether the Fund remains an appropriate investment in light of
their then current position and needs.
How Performance Is Shown
From time to time, the Funds may advertise the "total return" and "yield" on a
class of shares. Total return and yield figures are based on historical data
and are not intended to indicate future performance. The "total return" of a
class of shares of a Fund may be calculated on an average annual total return
basis or an aggregate total return basis. Average annual total return refers to
the average annual compounded rates of return over one-, five-, and ten-year
periods or the life of the Fund (as stated in a Fund's advertisement) that
would equate an initial amount invested at the beginning of a stated period to
the ending redeemable value of the investment, assuming the reinvestment of all
dividend and capital gain distributions. Aggregate total return reflects the
total percentage change in the value of the investment over the measuring
period again assuming the reinvestment of all dividends and capital gain
distributions. Total return may also be presented for other periods.
"Yield" is calculated by dividing the annualized net investment income per
share during a recent 30-day (or one month) period of a class of shares of a
Fund by the maximum public offering price per share on the last day of that
period.
Marsico Prior Performance: Mr. Thomas Marsico is responsible for the investment
program of the Marsico Funds. Prior to forming Marsico Capital, Mr. Marsico
served as Portfolio Manager of the Janus Twenty Fund from January 31, 1988
through August 11, 1997, and served in the same capacity for the Janus Growth
and Income Fund from May 31, 1991 (inception) through August 11, 1997. The
average annual returns for the Janus Twenty Fund and the Janus Growth and
Income Fund ("Janus Funds") from the date on which Mr. Marsico began serving as
Portfolio Manager of each Janus Fund through August 7, 1997 were 22.38% and
21.19%, respectively. On August 11, 1997, the date on which Mr. Marsico ceased
serving as the Portfolio Manager to both the Janus Twenty Fund and the Janus
Growth and Income Fund, the Janus Twenty Fund had approximately $6 billion in
net assets, and the Janus Growth and Income Fund had approximately $1.7 billion
in net assets. As Executive Vice President and Portfolio Manager of the Janus
Twenty Fund and the Janus Growth and Income Fund, Mr. Marsico had full
discretionary authority over the selection of investments for those funds.
Average annual returns for the one-year, three-year and five-year periods ended
August 7, 1997, and for the period during which Mr. Marsico managed those funds
compared with the performance of the S&P 500 Index were:
17
<PAGE>
<TABLE>
<CAPTION>
Janus Janus
Twenty Growth and S&P 500
Fund (a) Income Fund (a) Index (b)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
One Year (8/8/96-8/7/97) 48.21% 47.77% 46.41%
- --------------------------------------------------------------------------------
Three Years (8/11/94-8/7/97) 32.07% 31.13% 30.63%
- --------------------------------------------------------------------------------
Five Years (8/13/92-8/7/97) 20.02% 21.16% 20.98%
- --------------------------------------------------------------------------------
During Period of 22.38% 21.19% Janus Twenty:
Management by 18.20%(c)
Mr. Marsico Janus Growth
(through 8/7/97) and Income:
18.59%(d)
</TABLE>
(a) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses.
(b) The S&P 500 Index is adjusted to reflect reinvestment of dividends.
(c) This figure represents the average annual return of the S&P 500 Index
during the period that Mr. Marsico managed the Janus Twenty Fund through
August 7, 1997.
(d) This figure represents the average annual return of the S&P 500 Index
during the period that Mr. Marsico managed the Janus Growth and Income
Fund through August 7, 1997.
The Janus Twenty Fund has substantially similar investment policies,
strategies, and objectives as those of Nations Marsico Focused Equities Fund,
while the investment policies, strategies, and objectives of the Janus Growth
and Income Fund are substantially similar to those of Nations Marsico Growth &
Income Fund. Historical performance is not indicative of future performance.
For a majority of the periods shown above, the expenses of the Janus Twenty
Fund and the Janus Growth and Income Fund were lower than the anticipated
expenses of Nations Marsico Focused Equities Fund and Nations Marsico Growth &
Income Fund, respectively. Higher expenses, of course, would have resulted in
lower performance. The Janus Twenty Fund and the Janus Growth and Income Fund
are separate funds and their historical performance is not indicative of the
potential performance of Nations Marsico Focused Equities Fund and Nations
Marsico Growth & Income Fund, respectively. The Janus Twenty Fund and the Janus
Growth and Income Fund were the only investment vehicles that Mr. Marsico
managed during the period he was employed at Janus Capital Corporation that
have substantially similar objectives, policies, and strategies as those of the
Funds. Share prices and investment returns will fluctuate reflecting market
conditions, as well as changes in company-specific fundamentals of portfolio
securities.
Brandes Composite Performance: Set forth below is certain performance data
relating to Nations International Value Fund; the composite of certain
international equity accounts of clients of Brandes and the Brandes
Institutional International Equity Fund, an open-end management investment
company (the "Brandes Composite"); and the Morgan Stanley Capital International
European, Australasian and Far Eastern Index (the "MSCI EAFE Index"). The
performance data for the Brandes Composite is deemed relevant because the
accounts and mutual fund in the Brandes Composite have investment objectives
and policies that are substantially similar to those of Nations International
Value Fund, and are managed by Brandes using substantially similar, but not
identical, investment strategies, policies and techniques as those used in
managing Nations International Value Fund. The data below regarding Nations
International Value Fund, the Brandes Composite and the MSCI EAFE Index should
not be considered as an indication of future performance of Nations
International Value Fund or of Brandes. The accounts that are included in the
Brandes Composite are not subject to the same types of expenses to which
Nations International Value Fund is subject nor to the diversification
requirements, specific tax restrictions and investment limitations imposed on
Nations International Value Fund by the 1940 Act or Subchapter M of the
Internal Revenue Code. Consequently, the performance results for the Brandes
Composite could have been adversely affected if the accounts included in the
Brandes Composite had been regulated as investment companies or subject to the
Fund's expenses. In addition, the results presented below for the Brandes
Composite may not necessarily equate with the return experienced by any
particular account of Brandes.
Average Annual Total Returns for the
Periods Indicated through
March 31, 1998
<TABLE>
<CAPTION>
One Three Five Since
Year Years Years Inception
<S> <C> <C> <C> <C>
Nations
International
Value Fund* 34.29% N/A N/A 24.08%
- --------------------------------------------------------------------
Brandes
Composite** 32.81% 23.15% 18.85% 18.56%
- --------------------------------------------------------------------
MSCI EAFE
Index*** 18.61% 10.57% 11.93% 6.98%
</TABLE>
Annual Total Returns
<TABLE>
<CAPTION>
Nations MSCI
International Brandes EAFE
Value Fund Composite** Index***
<S> <C> <C> <C>
1997 20.41% 20.00% 1.78%
- ---------------------------------------------------
1996 15.32% 16.34% 6.05%
- ---------------------------------------------------
1995 N/A 13.75% 11.21%
- ---------------------------------------------------
1994 N/A -2.98% 7.78%
- ---------------------------------------------------
1993 N/A 40.86% 32.56%
- ---------------------------------------------------
1992 N/A 6.28% -12.17%
- ---------------------------------------------------
1991 N/A 40.17% 12.13%
</TABLE>
* For the periods indicated, the prior performance for Nations International
Value Fund reflects the performance for the Emerald International Equity
Fund, (inception December 27, 1995), managed by Brandes and having
substantially the same investment objectives, policies, techniques and
restrictions, which was reorganized into Nations International Value Fund
on May 22, 1998.
** The returns above were calculated on a time- and asset-weighted total
return basis, assuming reinvestment of all dividends, interest and income,
realized and unrealized gains or losses and are net of all applicable
expenses, including investment advisory fees, brokerage commission and
execution costs, custodial fees and any applicable foreign withholding
taxes, without provision for any federal or state income taxes. The
Brandes Composite results include all actual, fee-paying and
non-fee-paying, fully discretionary accounts under management by Brandes
for at least one month beginning July 1, 1990, having substantially the
same investment objectives, policies, techniques and restrictions, other
than client accounts denominated in currencies other than U.S. dollars.
The Brandes Composite results also include performance data relating to
the Brandes Institutional International Equity Fund since its inception on
January 2, 1997.
*** The MSCI EAFE index is an unmanaged index consisting of securities listed
on exchanges in European, Australasian and Far Eastern markets and
includes dividends and distributions, but does not reflect fees, brokerage
commissions or other expenses of investing.
Index Composite Performance: Set forth below is certain performance data for
Nations Managed Index Fund,
18
<PAGE>
Nations Managed SmallCap Index Fund, the Enhanced S&P 500 Index Composite and
the Enhanced Small Cap Index Composite (the "Composites"), which are each
composites of accounts and commingled funds managed by TradeStreet. (Prior to
TradeStreet's formation in 1995, the Composites were managed by NationsBank.)
The performance data for the Composites is deemed relevant because the accounts
and commingled funds in the Enhanced S&P 500 Index Composite and Enhanced Small
Cap Index Composite have investment objectives and policies that are
substantially similar to those of Nations Managed Index Fund and Nations
Managed SmallCap Index Fund, respectively. Moreover, the management team at
TradeStreet (which currently manages the accounts and commingled funds in the
Composites, and Nations Managed Index Fund and Nations Managed SmallCap Index
Fund) employs the same quantitative investment process for Nations Managed
Index Fund and Nations Managed SmallCap Index Fund that has, and continues to
be, utilized in connection with the Composites. THIS PERFORMANCE DATA
REPRESENTS PAST PERFORMANCE OF NATIONS MANAGED INDEX FUND, NATIONS MANAGED
SMALLCAP INDEX FUND AND THE COMPOSITES AND IS NOT NECESSARILY INDICATIVE OF THE
FUTURE PERFORMANCE OF THE COMPOSITES, NATIONS MANAGED INDEX FUND OR NATIONS
MANAGED SMALLCAP INDEX FUND. The commingled funds and accounts that are
included in the Composites are not subject to the same types of expenses to
which the Funds are subject nor to the diversification requirements, specific
tax restrictions and investment limitations imposed by the 1940 Act or
Subchapter M of the Internal Revenue Code. Consequently, the performance
results for the Composites could have been adversely affected if the accounts
included in the Composites had been regulated as investment companies. In
addition, the results presented below for the Composites may not necessarily
equate with the return experienced by any particular account of TradeStreet.
Average Annual Total Returns for the Periods Indicated through March 31, 1998
<TABLE>
<CAPTION>
One Three Five Since
Year Year Year Inception***
<S> <C> <C> <C> <C>
Nations
Managed
Index Fund 46.88% N/A N/A 40.66%
- ---------------------------------------------------------------------
Enhanced S&P
500 Index
Composite* 48.19% 33.25% 22.53% 19.72%
- ---------------------------------------------------------------------
S&P 500 Index 47.99% 37.78% 22.37% 19.32%
- ---------------------------------------------------------------------
Lipper S&P 500
Index Funds
Average** 47.07% 32.14% 21.86% 18.72%
</TABLE>
Annual Total Returns
<TABLE>
<CAPTION>
Enhanced Lipper
Nations S&P 500 Equity
Managed Index S&P 500 Index Funds
Year Index Fund Composite* Index Average**
<S> <C> <C> <C> <C>
1989 N/A 34.28% 31.55% 30.58%
- ---------------------------------------------------------
1990 N/A -1.52% -3.15% -3.57%
- ---------------------------------------------------------
1991 N/A 30.86% 30.56% 29.65%
- ---------------------------------------------------------
1992 N/A 5.55% 7.64% 7.12%
- ---------------------------------------------------------
1993 N/A 10.52% 9.99% 9.52%
- ---------------------------------------------------------
1994 N/A 0.69% 1.31% 0.90%
- ---------------------------------------------------------
1995 N/A 37.84% 37.45% 36.82%
- ---------------------------------------------------------
1996 N/A 24.12% 23.08% 22.30%
- ---------------------------------------------------------
1997 33.07% 33.42% 33.23% 32.61%
</TABLE>
Average Annual Total Returns for the Periods Indicated through March 31, 1998
<TABLE>
<CAPTION>
One Since
Year Inception***
<S> <C> <C>
Nations Managed SmallCap Index Fund 47.04% 28.88%
- --------------------------------------------------------------
Enhanced Small Cap Index Composite* 47.67% 22.85%
- --------------------------------------------------------------
S&P 600 Index 47.69% 21.31%
</TABLE>
* The total returns reflect the deduction of 0.50% of fees and expenses per
annum, the reinvestment of all dividends, interest and income, and
realized or unrealized gains or losses. The Composites are comprised of
equity only accounts and the equity portion of balanced accounts that are
valued in excess of $5 million.
** The Lipper S&P 500 Index Funds Average represents the average performance
of mutual funds with similar objectives monitored by Lipper Analytical
Services, Inc. during the periods shown.
*** Nations Managed Index Fund's inception was July 31, 1996; the Enhanced S&P
500 Index Composite's inception was December 31, 1988; Nations Managed
SmallCap Index Fund's inception was October 15, 1996; and the Enhanced
Small Cap Index Composite's inception was October 1, 1995.
Investment performance, which will vary, is based on many factors, including
market conditions, the composition of a Fund's portfolio and the Fund's
operating expenses. Investment performance also often reflects the risks
associated with such Fund's investment objective and policies. These factors
should be considered when comparing a Fund's investment results to those of
other mutual funds and other investment vehicles. Since yields fluctuate, yield
data cannot necessarily be used to compare an investment in the Funds with bank
deposits, savings accounts, and similar investment alternatives which often
provide an agreed-upon or guaranteed fixed yield for a stated period of time.
Any fees charged by an institution directly to its customers' accounts in
connection with investments in the Funds will not be included in calculations
of total return or yield.
In addition to Primary B Shares, the Funds offer Primary A, Investor A,
Investor B and Investor C Shares. Each class of shares may bear different sales
charges, shareholder servicing fees and other expenses, which may cause the
performance of a class to differ from the performance of the other classes.
Performance quotations will be computed separately for each class of a Fund's
shares. Each Fund's annual report contains additional performance information
and is available upon request without charge from the Funds' distributor or an
Investor's Institution, as defined below, or by calling Nations Funds at the
toll-free number indicated on the cover.
19
<PAGE>
How The Funds Are Managed
The business and affairs of each of Nations Fund Trust and Nations Fund, Inc.
are managed under the direction of their Board of Trustees and Board of
Directors, respectively. The SAI contains the names of and general background
information concerning each Director/Trustee of Nations Fund, Inc. and Nations
Fund Trust, respectively.
As described below, each Fund is advised by NBAI which is responsible for the
overall management and supervision of the investment management of each Fund.
Each Fund also is sub-advised by a separate investment sub-adviser, which as a
general matter is responsible for the day-to-day investment decisions for the
respective Fund.
Nations Funds 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.
Investment Adviser: NationsBanc Advisors, Inc. serves as investment adviser to
the Funds. NBAI is a wholly owned subsidiary of NationsBank, which in turn is a
wholly owned banking subsidiary of BankAmerica Corporation, a bank holding
company organized as a Delaware corporation. NBAI has its principal offices at
One NationsBank Plaza, Charlotte, North Carolina 28255.
TradeStreet Investment Associates, Inc., with principal offices at One
NationsBank Plaza, Charlotte, North Carolina 28255, serves as investment
sub-adviser to all of the Funds except for those Funds listed below, for which
Marsico Capital or Brandes serve as investment sub-adviser. TradeStreet is a
wholly owned subsidiary of NationsBank. TradeStreet provides investment
management services to individuals, corporations and institutions.
Marsico Capital Management, LLC, located at 1200 17th Street, Suite 1300,
Denver Colorado 80202, serves as the investment sub-adviser to Nations Marsico
Focused Equities Fund and Nations Marsico Growth & Income Fund pursuant to an
investment sub-advisory agreement. On November 10, 1998, NationsBank announced
its intention to exercise an option to purchase 50% ownership of Marsico
Capital. Pursuant to the 1940 Act, the exercise of that option would be deemed
to cause a "change in control" of Marsico Capital, resulting in the automatic
termination of Marsico Capital's investment sub-advisory agreement. In order
for Marsico Capital to continue serving as the investment sub-adviser to
Nations Marsico Focused Equities Fund and Nations Marsico Growth & Income Fund
after the option is exercised, the shareholders of Nations Marsico Focused
Equities Fund and Nations Marsico Growth & Income Fund must approve the
continuation of the investment sub-advisory agreement. Early in 1999, it is
expected that the Trust will call a special meeting of shareholders seeking
their approval for the continuation of the Marsico Capital investment
sub-advisory agreement.
Brandes Investment Partners, L.P., with principal offices at 12750 High Bluff
Drive, San Diego, California 92130, serves as investment sub-adviser to Nations
International Value Fund pursuant to an investment sub-advisory agreement.
Subject to the general supervision of Nations Fund Trust's Board of Trustees
and Nations Fund, Inc.'s Board of Directors, and in accordance with each Fund's
investment policies, the Adviser formulates guidelines and lists of approved
investments for each Fund, makes decisions with respect to and places orders
for each Fund's purchases and sales of portfolio securities and maintains
records relating to such purchases and sales. 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 the Adviser or which have sold shares
in the Funds, if the Adviser believes that the quality of the transactions and
the commissions are comparable to what they would be with other qualified
brokerage firms. From time to time, to the extent consistent with its
investment objective, policies and restrictions, each Fund may invest in
securities of companies with which NationsBank has a lending relationship.
For the services provided and expenses assumed pursuant to various investment
advisory agreements, NBAI is entitled to receive advisory fees, computed daily
and paid monthly, at the annual rates of: .50% of the average daily net assets
of each of Nations Managed Index Fund, Nations Managed SmallCap Index Fund,
Nations Managed Value Index Fund and Nations Managed SmallCap Value Index Fund;
1.00% of the average daily net assets of each of Nations Small Company Growth
and Nations International Value Fund; .75% of the average daily net assets of
each of Nations Value Fund, Nations Capital Growth Fund and Nations Disciplined
Equity Fund; .85% of the average daily net assets of Nations Marsico Focused
Equities Fund and of Nations Marsico Growth & Income Fund.
For the services provided pursuant to investment sub-advisory agreements, NBAI
will pay to TradeStreet sub-advisory fees, computed daily and paid monthly, at
the annual rates of: .10% of the average daily net assets of each of Nations
Managed Index Fund, Nations Managed SmallCap Index Fund, Nations Managed Value
Index Fund and Nations Managed SmallCap Value Index Fund; and .25% of the
average daily net assets of each of Nations Value Fund, Nations Capital Growth
Fund, Nations Small Company Growth Fund, and Nations Disciplined Equity Fund.
For the services provided pursuant to an investment sub-advisory agreement,
NBAI will pay Marsico Capital sub-advisory fees, computed daily and paid
monthly, at the annual rate of .45% of Nations Marsico Focused Equities Fund's
and of Nations Marsico Growth & Income Fund's average daily net assets.
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For services provided and expenses assumed pursuant to an investment
sub-advisory agreement, NBAI will pay Brandes sub-advisory fees, computed daily
and paid monthly, at the annual rate of .50% of Nations International Value
Fund's average daily net assets.
From time to time, NBAI (and/or TradeStreet or Marsico Capital or Brandes) may
waive or reimburse (either voluntarily or pursuant to applicable state
limitations) advisory or sub-advisory fees and/or expenses payable by a Fund.
For the fiscal period from April 1, 1997 to March 31, 1998, after waivers,
Nations Fund Trust paid NBAI under the investment advisory agreement, advisory
fees at the indicated rates of the following Fund's average daily net assets:
Nations Value Fund -- .75%, Nations Capital Growth Fund -- .75%, Nations
Disciplined Equity Fund -- .75%, Nations Managed Index Fund -- .22%, Nations
Managed SmallCap Index Fund -- .00%, Nations Managed Value Index Fund -- .03%
and Nations Managed SmallCap Value Index Fund -- .02%.
For the fiscal period from December 31, 1997 to March 31, 1998, after waivers,
Nations Fund Trust paid NBAI under the investment advisory agreement, advisory
fees at the indicated rates of the following Funds' average daily net assets:
Nations Marsico Focused Equities Fund -- .85% and Nations Marsico Growth &
Income Fund -- .00%.
For the fiscal period from April 1, 1997 to March 31, 1998, after waivers,
Nations Fund, Inc. paid NBAI under the investment advisory agreement, advisory
fees at the indicated rate of the following Fund's average daily net assets:
Nations Small Company Growth Fund -- .70%.
For the fiscal period from December 1, 1997 to May 15, 1998, after waivers, the
Emerald Funds paid Barnett Capital Advisors, Inc., ("Barnett") under a previous
investment advisory agreement, advisory fees of .90% of Nations International
Value Fund's average daily net assets (formerly called the Emerald
International Equity Fund).
For the fiscal period from April 1, 1997 to March 31, 1998, after waivers, NBAI
paid TradeStreet under the investment sub-advisory agreements, sub-advisory
fees at the indicated rates of the following Funds' average daily net assets:
Nations Value Fund -- .25%, Nations Disciplined Equity Fund -- .25%, Nations
Capital Growth Fund -- .25%, Nations Small Company Growth Fund -- .25%, Nations
Managed SmallCap Index Fund -- .10%, Nations Managed Index Fund -- .10%,
Nations Managed Value Index Fund -- .10% and Nations Managed SmallCap Value
Index Fund -- .10%.
For the fiscal period from December 31, 1997 to March 31, 1998, after waivers,
NBAI paid Marsico Capital under the investment sub-advisory agreement, sub-
advisory fees at the indicated rates of the following Funds' average daily net
assets: Nations Marsico Focused Equities Fund -- .45% and Nations Marsico
Growth & Income Fund -- .45%.
For the fiscal period from December 1, 1997 to May 15, 1998, after waivers,
Barnett paid Brandes, under a previous investment sub-advisory agreement,
sub-advisory fees of .50% of Nations International Value Fund.
The Structured Products Management Team of TradeStreet is responsible for the
day-to-day management of Nations Managed Index Fund, Nations Managed SmallCap
Index Fund, Nations Managed Value Index Fund, Nations Managed SmallCap Value
Index Fund and Nations Disciplined Equity Fund.
The Value Management Team of TradeStreet is responsible for the day-to-day
management of Nations Value Fund.
The Core Growth Management Team of TradeStreet is responsible for the
day-to-day management of Nations Capital Growth Fund.
The Strategic Growth Management Team of TradeStreet is responsible for the
day-to-day management of Nations Small Company Growth Fund.
Thomas F. Marsico is the Chief Executive Officer of Marsico Capital and has
been the Portfolio Manager of both Nations Marsico Focused Equities Fund and
Nations Marsico Growth & Income Fund since each Fund's respective inception.
Prior to forming Marsico Capital, Mr. Marsico was a portfolio manager with
Janus Funds for 11 years and was responsible for the day-to-day management of
Janus Twenty Fund and Janus Growth and Income Fund. Overall, Mr. Marsico had 18
years of experience as a securities analyst/portfolio manager before becoming
the Portfolio Manager of Nations Marsico Focused Equities Fund and Nations
Marsico Growth & Income Fund.
Brandes' Investment Committee is responsible for the day-to-day management of
Nations International Value Fund.
Morrison & Foerster LLP, counsel to Nations Funds and special counsel to
NationsBank, has advised Nations Funds and NationsBank that NationsBank and its
affiliates may perform the services contemplated by the various investment
advisory agreements, and this Prospectus without violation of the
Glass-Steagall Act. Such counsel has pointed out, however, that there are no
controlling judicial or administrative interpretations or decisions and that
future judicial or administrative interpretations of, or decisions relating to,
present federal or state statutes, and regulations relating to the permissible
activities of banks and their subsidiaries or affiliates, as well as future
changes in federal or state statutes, including the Glass-Steagall Act, and
regulations and judicial or administrative decisions or interpretations
thereof, could prevent such entities from continuing to perform, in whole or in
part, such services. If any such entity were prohibited from performing any
such services, it is expected that new agreements would be proposed or entered
into with another entity or entities qualified to perform such services.
Other Service Providers: Stephens Inc. ("Stephens"), with principal offices at
111 Center Street, Little Rock, Arkansas 72201, serves as the administrator of
Nations
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Funds pursuant to administration agreements. Pursuant to the terms of the
administration agreements, Stephens provides various administrative and
corporate secretarial services to the Funds, including providing general
oversight of other service providers, office space, utilities and various legal
and administrative services in connection with the satisfaction of various
regulatory requirements applicable to the Funds.
First Data Investor Services Group, Inc. ("First Data"), a wholly owned
subsidiary of First Data Corporation, with principal offices at One Exchange
Place, Boston, Massachusetts 02109, serves as the co-administrator of Nations
Funds pursuant to co-administration agreements. Under the co-administration
agreements, First Data provides various administrative and accounting services
to the Funds including performing the calculations necessary to determine the
net asset value per share and dividends of each class of the Funds, preparing
tax returns and financial statements and maintaining the portfolio records and
certain of the general accounting records for the Funds. For the services
rendered pursuant to the administration and co-administration agreements,
Stephens and First Data are entitled to receive a combined fee at the annual
rate of up to .10% of each Fund's average daily net assets.
For the fiscal period from April 1, 1997 to March 31, 1998, after waivers,
Nations Fund Trust paid its administrators combined fees at the indicated rates
of the following Funds' average daily net assets: Nations Value Fund -- .10%,
Nations Capital Growth Fund -- .10%, Nations Disciplined Equity Fund -- .10%,
Nations Managed Index Fund -- .10%, Nations Managed SmallCap Index Fund --
.10%, Nations Managed Value Index Fund -- .10%, and Nations Managed SmallCap
Value Index Fund -- .10%.
For the fiscal period from December 31, 1997 to March 31, 1998, after waivers,
Nations Fund Trust paid its administrators combined fees at the indicated rates
of the following Funds' average daily net assets: Nations Marsico Focused
Equities Fund -- .10% and Nations Marsico Growth & Income Fund -- .10%.
For the fiscal period from April 1, 1997 to March 31, 1998, after waivers,
Nations Fund, Inc. paid its administrators combined fees at the indicated rate
of the following Fund's average daily net assets: Nations Small Company Growth
Fund -- .10%.
NBAI serves as sub-administrator for Nations Funds pursuant to
sub-administration agreements. Pursuant to the terms of the sub-administration
agreements, NBAI assists Stephens in supervising, coordinating and monitoring
various aspects of the Funds' administrative operations. For providing such
services, NBAI shall be entitled to receive a monthly fee from Stephens based
on an annual rate of .01% of the Funds' average daily net assets.
Shares of the Funds are sold on a continuous basis by Stephens, as the Funds'
sponsor and distributor. Stephens is a registered broker/dealer. Nations Funds
has entered into distribution agreements with Stephens which provide that
Stephens has the exclusive right to distribute shares of the Funds. Stephens
may pay service fees or commissions to Institutions which assist customers in
purchasing Primary B Shares of the Funds.
The Bank of New York ("BNY" or the "Custodian"), located at 90 Washington
Street, New York, New York 10286, provides custodial services for the assets of
all Nations Funds, except the international funds. In return for providing
custodial services to the Nations Funds Family, BNY is entitled to receive, in
addition to out-of-pocket expenses, fees at the rate of (i) 3/4 of one basis
point per annum on the aggregate net assets of all Nations Funds' non-money
market funds up to $10 billion; and (ii) 1/2 of one basis point on the excess,
including all Nations Funds' money market funds.
BNY, located at Avenue des Arts, 35 1040 Brussels, Belgium, provides custodial
services for the assets of Nations International Value Fund.
First Data serves as transfer agent (the "Transfer Agent") for the Funds'
Primary Shares. NationsBank also serves as the sub-transfer agent for each
Fund's Primary Shares and is entitled to receive an annual fee of $251,000 from
First Data for performing such services.
PricewaterhouseCoopers LLP serves as independent accountants to Nations Funds.
Their address is 160 Federal Street, Boston, Massachusetts 02110.
Expenses: The accrued expenses of each Fund are deducted from the Fund's total
accrued income before dividends are declared. These expenses include, but are
not limited to: fees paid to the Adviser, Stephens and First Data; taxes;
interest; fees (including fees paid to Nations Funds' Directors, Trustees and
officers); federal and state securities registration and qualification fees;
brokerage fees and commissions; costs of preparing and printing prospectuses
for regulatory purposes and for distribution to existing shareholders; charges
of the Custodians and Transfer Agent; certain insurance premiums; outside
auditing and legal expenses; costs of shareholder reports and shareholder
meetings; other expenses, which are not expressly assumed by the Adviser,
Stephens or First Data under their respective agreements with Nations Funds;
and any extraordinary expenses. Primary B Shares also bear certain shareholder
servicing and shareholder administration costs. Any general expenses of Nations
Fund Trust and/or Nations Fund, Inc. that are not readily identifiable as
belonging to a particular investment portfolio are allocated among all
portfolios in the proportion that the assets of a portfolio bears to the assets
of Nations Fund Trust and/or Nations Fund, Inc. or in such other manner as the
Board of Trustees or Board of Directors deems appropriate.
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Organization And History
The Funds are members of the Nations Funds Family, which consists of Nations
Fund Trust, Nations Fund, Inc., Nations Fund Portfolios, Inc., Nations
Institutional Reserves, Nations Annuity Trust and Nations LifeGoal Funds, Inc.
The Nations Funds Family currently has more than 60 distinct investment
portfolios and total assets in excess of $40 billion.
Nations Fund Trust: Nations Fund Trust was organized as a Massachusetts
business trust on May 6, 1985. Nations Fund Trust's fiscal year end is March
31; prior to 1996, Nations Fund Trust's fiscal year end was November 30. The
Funds currently offer five classes of shares -- Primary A Shares, Primary B
Shares, Investor A Shares, Investor B Shares and Investor C Shares. Certain
funds, however, do not offer shares in every class. This Prospectus relates
only to the Primary B Shares of the following Funds of Nations Fund Trust:
Nations Value Fund, Nations Capital Growth Fund, Nations Disciplined Equity
Fund, Nations Marsico Focused Equities Fund, Nations Marsico Growth & Income
Fund, Nations Managed Index Fund, Nations Managed SmallCap Index Fund, Nations
Managed Value Index Fund and Nations Managed SmallCap Value Index Fund. To
obtain additional information regarding the Funds' other classes of shares
which may be available to you, contact your Institution (as defined below) or
Nations Funds at 1-800-621-2192.
Each share of Nations Fund Trust is without par value, represents an equal
proportionate interest in the related fund with other shares of the same class,
and is entitled to such dividends and distributions out of the income earned on
the assets belonging to such fund as are declared in the discretion of Nations
Fund Trust's Board of Trustees. Nations Fund Trust's Declaration of Trust
authorizes the Board of Trustees to classify or reclassify any class of shares
into one or more series of shares.
Shareholders are entitled to one vote for each full share held and a
proportionate fractional vote for each fractional share held. Shareholders of
each fund of Nations Fund Trust will vote in the aggregate and not by fund, and
shareholders of each fund will vote in the aggregate and not by class except as
otherwise expressly required by law or when the Board of Trustees determines
that the matter to be voted on affects only the interests of shareholders of a
particular fund or class. See the SAI for examples of when the 1940 Act
requires voting by fund.
As of November 16, 1998, NationsBank and its affiliates possessed or shared
power to dispose or vote with respect to more than 25% of the outstanding
shares of Nations Fund Trust and, therefore, could be considered to be a
controlling person of Nations Fund Trust for purposes of the 1940 Act. For more
detailed information concerning the percentage of each class or series of
shares over which NationsBank and its affiliates possessed or shared power to
dispose or vote as of a certain date, see the SAI.
Nations Fund Trust does not presently intend to hold annual meetings except as
required by the 1940 Act. Shareholders will have the right to remove Trustees.
Nations Fund Trust's Code of Regulations provides that special meetings of
shareholders shall be called at the written request of the shareholders
entitled to vote at least 10% of the outstanding shares of Nations Fund Trust
entitled to be voted at such meeting.
Nations Fund, Inc.: Nations Fund, Inc. was incorporated in Maryland on December
13, 1983, but had no operations prior to December 15, 1986. Nations Fund,
Inc.'s fiscal year end is March 31; prior to 1996, Nations Fund, Inc.'s fiscal
year end was May 31. As of the date of this Prospectus, the authorized capital
stock of Nations Fund, Inc. consists of 460,000,000,000 shares of common stock,
par value of $.001 per share, which are divided into series or funds each of
which consists of separate classes of shares. This Prospectus relates only to
the Primary B Shares of the following Funds of Nations Fund, Inc.: Nations
Small Company Growth Fund and Nations International Value Fund. To obtain
additional information regarding the Funds' other classes of shares which may
be available to you, contact your Institution (as defined below) or Nations
Funds at 1-800-621-2192.
Shares of each fund and class have equal rights with respect to voting, except
that the holders of shares of a particular fund or class will have the
exclusive right to vote on matters affecting only the rights of the holders of
such fund or class. In the event of dissolution or liquidation, holders of each
class will receive pro rata, subject to the rights of creditors, (a) the
proceeds of the sale of that portion of the assets allocated to that class held
in the respective fund of Nations Fund, Inc., less (b) the liabilities of
Nations Fund, Inc. attributable to the respective fund or class or allocated
among the funds or classes based on the respective liquidation value of each
fund or class.
Shareholders of Nations Fund, Inc. do not have cumulative voting rights, and,
therefore, the holders of more than 50% of the outstanding shares of all funds
voting together for election of directors may elect all of the members of the
Board of Directors of Nations Fund, Inc. Meetings of shareholders may be called
upon the request of 10% or more of the outstanding shares of Nations Fund, Inc.
There are no preemptive rights applicable to any of Nations Fund, Inc.'s
shares. Nations Fund, Inc.'s shares, when issued, will be fully paid and
non-assessable.
As of November 16, 1998, NationsBank and its affiliates possessed or shared
power to dispose of or vote with respect to more than 25% of the outstanding
shares of Nations Fund, Inc. and therefore could be considered to be a
controlling person of Nations Fund, Inc. for purposes of the 1940 Act. For more
detailed information concerning the percentage of each class or series over
which NationsBank and its affiliates possessed or shared power to dispose or
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vote as of a certain date, see the SAI. It is anticipated that Nations Fund,
Inc. will not hold annual shareholder meetings on a regular basis unless
required by the 1940 Act or Maryland law.
Because this Prospectus combines disclosure on two separate investment
companies, there is a possibility that one investment company could become
liable for a misstatement, inaccuracy or incomplete disclosure in this
Prospectus concerning another investment company. Nations Fund Trust and
Nations Fund, Inc. have entered into an indemnification agreement that creates
a right of indemnification from the investment company responsible for any such
misstatement, inaccuracy or incomplete disclosure that may appear in this
Prospectus.
About Your Investment
How To Buy Shares
There is a minimum initial investment of $1,000 for each record holder; there
is no minimum subsequent investment.
Primary B Shares may be purchased through banks, broker/
dealers or other financial institutions (including certain affiliates of
NationsBank) ("Institutions") that have entered into a shareholder
administration agreement (an "Administration Agreement") or a shareholder
servicing agreement (a "Servicing Agreement") with Nations Funds and/or a
selling agreement with Stephens.
The Funds reserve the right, in their discretion, to make Primary B Shares
available to other categories of investors, including those who become eligible
in connection with a merger or reorganization.
Primary B Shares are sold at net asset value without the imposition of a sales
charge, according to procedures established by the Institution. Institutions,
acting on behalf of their customers ("Customers") may establish certain
procedures for processing Customers' purchase orders and may charge their
Customers for services provided in connection with the purchase of shares.
Purchases of the Funds may be effected on days on which the New York Stock
Exchange (the "Exchange") is open for business (a "Business Day").
Pursuant to the Administration and Servicing Agreements, Institutions will
provide various shareholder services for their Customers that own Primary B
Shares. From time to time, Nations Funds may voluntarily reduce the maximum
fees payable for shareholder services.
Nations Funds and Stephens reserve the right to reject any purchase order. The
issuance of Primary B Shares is recorded on the books of the Funds, and share
certificates are not issued. It is the responsibility of Institutions, when
applicable, to record beneficial ownership of Primary B Shares and to reflect
such ownership in the account statements provided to their Customers.
Effective Time of Purchases: Purchase orders for Primary B Shares in the Funds
which are received by Stephens, the Transfer Agent or their respective agents
before the close of regular trading on the Exchange (currently 4:00 p.m.,
Eastern time) on any Business Day are priced according to the net asset value
determined on that day. In the event that the Exchange closes early, purchase
orders received prior to closing will be priced as of the time the Exchange
closes and purchase orders received after the Exchange closes will be deemed
received on the next Business Day and priced according to the net asset value
determined on the next Business Day. Purchase orders are not executed until
4:00 p.m., Eastern time, on the Business Day on which immediately available
funds in payment of the purchase price are received by the Fund's Custodian.
Such payment must be received no later than 4:00 p.m., Eastern time, by the
third Business Day following the receipt of the order, as determined above. If
funds are not received by such date, the order will not be accepted and notice
thereof will be given to the Institution placing the order. Payment for orders
which are not received or accepted will be returned after prompt inquiry to the
sending Institution or investor.
Primary B Shares are purchased at the net asset value per share next determined
after receipt of the order by Stephens, the Transfer Agent or their respective
agents. Institutions are responsible for transmitting orders for purchases of
Primary B Shares by their Customers, and for delivering required funds, on a
timely basis. It is the responsibility of Stephens to transmit orders it
receives to Nations Funds. Institutions should be aware that during periods of
significant economic or market change, telephone transactions may be difficult
to complete.
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How To Redeem Shares
Redemption orders for Primary B Shares of the Funds which are received by
Stephens, the Transfer Agent or their respective agents before the close of
regular trading on the Exchange (currently 4:00 p.m., Eastern time) on any
Business Day are priced according to the net asset value next determined after
acceptance of the order. In the event that the Exchange closes early,
redemption orders received prior to closing will be priced as of the time the
Exchange closes and redemption orders received after the Exchange closes will
be deemed received on the next Business Day and priced according to the net
asset value determined on the next Business Day.
Redemption proceeds are normally remitted in federal funds wired to the
redeeming Institution within three Business Days following receipt of the
order.
Institutions are responsible for transmitting redemption orders to Stephens,
the Transfer Agent or by their respective agents and for crediting their
Customers' accounts with the redemption proceeds on a timely basis. It is the
responsibility of Stephens to transmit orders it receives to Nations Funds. No
charge for wiring redemption payments is imposed by Nations Funds, although
Institutions may charge their Customer accounts for these or other services
provided in connection with the redemption of Primary B Shares and may
establish additional procedures. Information concerning any charges or
procedures is available from the Institutions. Redemption orders are effected
at the net asset value per share next determined after acceptance of the order
by Stephens, the Transfer Agent or by their respective agents.
Nations Funds may redeem a shareholder's Primary B Shares if the balance in
such shareholder's account drops below $500 as a result of redemptions, and the
shareholder does not increase his or her balance to at least $500 on 60 days'
written notice. Share balances may also be redeemed at the direction of an
Institution pursuant to arrangements between the Institution and its customers.
Nations Funds also may redeem shares involuntarily or make payment for
redemption in readily marketable securities or other property under certain
circumstances in accordance with the 1940 Act.
How To Exchange Shares
The exchange feature enables a shareholder of Primary B Shares of a Fund to
acquire Primary B Shares of another Nations Fund when that shareholder believes
that a shift between Funds is an appropriate investment decision. An exchange
of Primary B Shares for Primary B Shares of another fund is made on the basis
of the next calculated net asset value per share of each fund after the
exchange order is received.
Primary B Shares may be exchanged by directing a request directly to the
Institution, if any, through which the original Primary B Shares were purchased
or in other cases Stephens, the Transfer Agent or their respective agents.
Investors should consult their Institution, Stephens, or the Transfer Agent for
further information regarding exchanges. Your exchange feature may be governed
by your account agreement with your Institution.
The Funds and each of the other funds of Nations Funds may limit the number of
times this exchange feature may be exercised by a shareholder within a
specified period of time. Also, the exchange feature may be terminated or
revised at any time by Nations Funds upon such notice as may be required by
applicable regulatory agencies (presently 60 days for termination or material
revision), provided that the exchange feature may be terminated or materially
revised without notice under certain unusual circumstances.
The current prospectus for each Fund describes its investment objective and
policies, and shareholders should obtain a copy and examine it carefully before
investing. Exchanges are subject to the minimum investment requirement and any
other conditions imposed by each fund. In the case of any shareholder holding a
share certificate or certificates, no exchanges may be made until all
applicable share certificates have been received by the Transfer Agent and
deposited in the shareholder's account. An exchange will be treated for Federal
income tax purposes the same as a redemption of shares, on which the
shareholder may realize a capital gain or loss. However, the ability to deduct
capital losses on an exchange may be limited in situations where there is an
exchange of shares within 90 days after the shares are purchased.
Nations Funds and Stephens reserve the right to reject any exchange request.
Only shares that may legally be sold in the state of the investor's residence
may be acquired in an exchange. Only shares of a class that is accepting
investments generally may be acquired in an exchange. During periods of
significant economic or market change, telephone exchanges may be difficult to
complete. In such event, shareholders should consider communicating their
exchange requests by mail.
Provided your Institution allows telephone exchanges, during periods of
significant economic or market change, such telephone exchanges may be
difficult to complete. In such event, shares may be exchanged by mailing your
request directly to the Institution through which the original shares were
purchased. Investors should consult their Institution or Stephens for further
information regarding exchanges.
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Primary B Shares may be exchanged by directing a request directly to the
Institution through which the original Primary B Shares were purchased or in
some cases Stephens or the Transfer Agent. Investors should consult their
Institution or Stephens for further information regarding exchanges. Your
exchange feature may be governed by your account agreement with your
Institution.
Shareholder Servicing Arrangements
The Funds have adopted a Shareholder Administration Plan (the "Administration
Plan") pursuant to which Institutions provide shareholder administration
services to their Customers who from time to time beneficially own Primary B
Shares. Payments under the Administration Plan are calculated daily and paid
monthly at a rate or rates set from time to time by the Funds, provided that
the annual rate may not exceed .60% of the average daily net asset value of the
Primary B Shares beneficially owned by Customers with whom the Institutions
have a servicing relationship. Additionally, in no event may the portion of the
shareholder administration fee that constitutes a "service fee," as that term
is defined in Article III, Section 26(b)(9) of the Rules of Fair Practice of
the NASD, exceed .25% of the average daily net asset value of such Primary B
Shares of a Fund. Holders of Primary B Shares will bear all fees paid to
Institutions under the Administration Plan.
Such shareholder administration services supplement the services provided by
Stephens, First Data and the Transfer Agent to shareholders of record. The
shareholder administration services provided by Institutions may include: (i)
aggregating and processing purchase and redemption requests for Primary B
Shares from Customers and transmitting promptly net purchase and redemption
orders to Stephens or the Transfer Agent; (ii) providing Customers with a
service that invests the assets of their accounts in Primary B Shares pursuant
to specific or pre-authorized instructions; (iii) processing dividend and
distribution payments from the Funds on behalf of Customers; (iv) providing
information periodically to Customers showing their positions in Primary B
Shares; (v) arranging for bank wires; (vi) responding to Customers' inquiries
concerning their investment in Primary B Shares; (vii) providing sub-accounting
with respect to Primary B Shares beneficially owned by Customers or the
information necessary for sub-accounting; (viii) if required by law, forwarding
shareholder communications (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
Customers; (ix) forwarding to Customers proxy statements and proxies containing
any proposals regarding the Administration Agreement; (x) employee benefit plan
recordkeeping, administration, custody and trustee services; (xi) general
shareholder liaison services; and (xii) providing such other similar services
as may be reasonably requested.
Nations Funds may suspend or reduce payments under the Servicing or
Administration Plan at any time, and payments are subject to the continuation
of the Servicing or Administration Plan described above and the terms of the
Servicing or Administration Agreement, as the case may be, between Institutions
and Nations Funds. See the SAI for more details on the Servicing or
Administration Plan.The Administration Plan also provides that, to the extent
any portion of the fees payable under the Administration Plan is deemed to be
for services primarily intended to result in the sale of Fund shares, such fees
are deemed approved and may be paid under the Administration Plan.
Nations Funds understands that Institutions may charge fees to their Customers
who are the owners of Primary B Shares in connection with their Customers'
accounts. These fees would be in addition to any amounts which may be received
by an Institution under its Servicing or Administration Agreement with Nations
Funds. The Servicing or Administration Agreement requires an Institution to
disclose to its Customers any compensation payable to the Institution by
Nations Funds and any other compensation payable by the Customers in connection
with the investment of their assets in Primary B Shares. Customers of
Institutions should read this Prospectus in light of the terms governing their
accounts with their Institutions.
The Adviser may also put out of its own assets amounts to Stephens or other
broker/dealers in connection with the provision of administrative and/or
distribution related services to shareholders.
In addition, Stephens has established a non-cash compensation program, pursuant
to which broker/dealers or financial institutions that sell shares of the Funds
may earn additional compensation in the form of trips to sales seminars or
vacation destinations, tickets to sporting events, theater or other
entertainment, opportunities to participate in golf or other outings and gift
certificates for meals or merchandise. This non-cash compensation program may
be amended or terminated at any time by Stephens.
Conflict of interest restrictions may apply to the receipt by Institutions of
compensation from Nations Funds in connection with the investment of fiduciary
assets in Primary B Shares. Institutions, including banks regulated by the
Comptroller of the Currency, the Federal Reserve Board, or the Federal Deposit
Insurance Corporation, and investment advisers and other money managers subject
to the jurisdiction of the SEC, the Department of Labor, or state securities
commissions, are urged to consult their legal advisers before investing such
assets in Primary B Shares.
26
<PAGE>
How The Funds Value Their Shares
The net asset value of a share of each class is calculated by dividing the
total value of its assets, less liabilities, by the number of shares in the
class outstanding. Shares of the Funds are valued as of the close of regular
trading hours on the Exchange (currently 4:00 p.m., Eastern time) on each
Business Day. In the event that the Exchange closes early, shares of the Funds
will be priced as of the time the Exchange closes. Currently, the days on which
the Exchange is closed (other than weekends) are: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day (observed),
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Portfolio securities for which market quotations are readily available are
valued at market value. Short-term investments that will mature in 60 days or
less are valued at amortized cost, which approximates market value. All other
securities and assets are valued at their fair value following procedures
approved by the Trustees or Directors.
How Dividends And Distributions Are Made; Tax Information
Dividends from net investment income are also declared and paid monthly by
Nations Capital Growth Fund, Nations Disciplined Equity Fund, Nations Managed
Index Fund, Nations Value Fund and Nations Small Company Growth Fund. Dividends
from net investment income are declared and paid annually by Nations
International Value Fund. Dividends from net investment income are declared and
paid each calendar quarter by the Marsico Funds, Nations Managed SmallCap Index
Fund, Nations Managed Value Index and Nations Managed SmallCap Value Index
Fund. Each Fund's net realized capital gains (including net short-term capital
gains) are distributed at least annually. Distributions from capital gains are
made after applying any available capital loss carryovers. Distributions paid
by the Funds with respect to one class of shares may be greater or less than
those paid with respect to another class of shares due to the different
expenses of the different classes.
Primary B Shares of the Funds are eligible to receive dividends when declared,
provided however, that the purchase order for such shares is received at least
one day prior to the dividend declaration and such shares continue to be
eligible for dividends through and including the day before the redemption
order is executed.
The net asset value of Primary B Shares will be reduced by the amount of any
dividend or distribution. Accordingly, dividends and distributions on newly
purchased shares represent, in substance, a return of capital. Dividends and
distributions are paid in cash within five Business Days of the end of the
month, quarter or year to which the payment relates. However, such dividends
and distributions would nevertheless be taxable. Dividends and distributions
payable to a shareholder are paid in cash within five Business Days after a
shareholder's complete redemption of his or her Primary B Shares in a Fund.
Each Fund's net investment income available for distribution to the holders of
Primary B Shares will be reduced by the amount of administration fees payable
to Institutions under the Administration Agreements.
Tax Information: Each Fund intends to continue to qualify as a separate
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"). Such qualification relieves a Fund of liability for
Federal income tax to the extent its earnings are distributed in accordance
with the Code.
Each Fund intends to distribute substantially all of its net investment income
each taxable year. Except as provided below, such distributions by a Fund of
its net investment income (including net foreign currency gains) and the
excess, if any, of its net short-term capital gain over its net long-term
capital loss generally will be taxable as ordinary income to shareholders,
whether such income is received in cash or reinvested in additional shares.
Corporate shareholders in the Funds may be entitled to the dividends-received
deduction for distributions from those Funds investing in the stock of domestic
corporations to the extent of the total qualifying dividends received by the
distributing Fund.
Substantially all of the net realized long-term capital gains of the Funds, if
any, will be distributed at least annually to such Funds' shareholders. The
Funds generally will have no tax liability with respect to such gains, and the
distributions will be taxable to such shareholders as net capital gain,
regardless of how long the shareholders have held such Funds' shares and
whether such distributions are received in cash or reinvested in additional
shares. Noncorporate shareholders may be taxed on such distributions at
preferential rates.
Portions of Nations International Value Fund and the Marsico Funds' investment
income may be subject to foreign income taxes withheld at their source. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. Generally, if more than 50% of the value of the total
assets of each Fund consists of securities it may elect to "pass through" to
its shareholders these foreign taxes, if any. Upon such an election, each
share-
27
<PAGE>
holder will be required to include his or her pro rata portion thereof in his
or her gross income, but will be able to deduct or (subject to various
limitations) claim a foreign tax credit against U.S. income tax for such
amount.
Each year, shareholders will be notified as to the amount and Federal tax
status of all dividends and distributions paid during the prior year.
Dividends and distributions declared in October, November or December of any
year payable to shareholders of record on a specified date in such months will
be deemed to have been received by shareholders and paid by a Fund on December
31 of such year in the event such dividends and distributions are actually paid
during January of the following year.
Federal law requires Nations Funds to withhold 31% from any distributions
(other than exempt-interest dividends) paid by Nations Funds and/or redemptions
(including exchanges and redemptions in-kind) that occur in certain shareholder
accounts if the shareholder has not properly furnished a certified correct
Taxpayer Identification Number and has not certified that withholding does not
apply. If the Internal Revenue Service has notified Nations Funds that the
Taxpayer Identification Number listed on a shareholder account is incorrect
according to its records, or that the shareholder is subject to backup
withholding, the Fund is required by the Internal Revenue Service to withhold
31% of any dividend (other than exempt-interest dividends) and/or redemption
(including exchange redemptions). Amounts withheld are applied to the
shareholder's Federal tax liability, and a refund may be obtained from the
Internal Revenue Service if withholding results in overpayment of taxes.
Federal law also requires the Funds to withhold tax on dividends paid to
certain foreign shareholders.
The foregoing discussion is based on tax laws and regulations which were in
effect as of the date of this Prospectus and summarizes only some of the
important Federal tax considerations generally affecting the Funds and their
shareholders. It is not intended as a substitute for careful tax planning,
investors should consult their tax advisors with respect to their specific tax
situations as well as with respect to foreign, state and local taxes. Further
tax information is contained in the SAI.
Financial Highlights
The following financial information has been derived from the audited financial
statements of Nations Fund Trust, and Nations Fund, Inc. PricewaterhouseCoopers
LLP is the independent accountant to Nations Fund Trust and Nations Fund, Inc.
The reports of PricewaterhouseCoopers LLP for the most recent fiscal period of
Nations Fund Trust and Nations Fund, Inc., accompany the financial statements
for such period and are incorporated by reference in the SAI, which is
available upon request. For more information see "Organization and History."
Shareholders of a Fund will receive unaudited semi-annual reports describing
the Fund's investment operations and annual financial statements audited by the
Funds' independent accountant. Financial Highlights for Nations Small Company
Growth Fund, Nations Managed Value Index Fund, Nations Managed SmallCap Value
Index Fund, Nations Marsico Focused Equities Fund, Nations Marsico Growth &
Income Fund and Nations International Value Fund are not provided because the
Primary B Shares for these Funds had not commenced operations during the period
indicated below.
28
<PAGE>
FOR A PRIMARY B SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Nations Value Fund
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
Primary B Shares 03/31/98# 03/31/97*
<S> <C> <C>
Operating performance:
Net asset value, beginning of period $ 17.87 $ 17.19
- ---------------------------------------------------------------------------------------------------------------
Net investment income 0.11 0.14
- ---------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain/(loss) on investments 6.01 2.10
- ---------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net asset value from operations 6.12 2.24
- ---------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income ( 0.07) ( 0.14)
- ---------------------------------------------------------------------------------------------------------------
Distributions from net realized capital gains ( 3.94) ( 1.42)
- ---------------------------------------------------------------------------------------------------------------
Total dividends and distributions ( 4.01) ( 1.56)
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 19.98 $ 17.87
- ---------------------------------------------------------------------------------------------------------------
Total return++ 38.09% 13.20%
- ---------------------------------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 0(b) $27,586
- ---------------------------------------------------------------------------------------------------------------
Ratio of operating expenses to average net assets 1.45%(a) 1.47%+(a)
- ---------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 0.54% 1.01%+
- ---------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 79% 47%
- ---------------------------------------------------------------------------------------------------------------
Ratio of operating expenses to average net assets without waivers and/or expense
reimbursements 1.45%(a) 1.47%+(a)
</TABLE>
* Nations Value Fund Primary B Shares commenced operations on June 28, 1996.
+ Annualized.
++ Total return represents aggregate total return for the period indicated and
does not reflect the deduction of any applicable sales charges.
# Per share net investment income has been calculated using the monthly
average share method.
(a) The effect of the fees reduced by credits allowed by the custodian on the
operating expense ratio, with and without waivers and/or expense
reimbursments, was less than 0.01%.
(b) Amount represents less than $1,000.
FOR A PRIMARY B SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Nations Capital Growth Fund
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
Primary B Shares 03/31/98# 03/31/97*#
<S> <C> <C>
Operating performance:
Net asset value, beginning of period $ 11.68 $ 13.96
- --------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) ( 0.05) ( 0.01)
- --------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 5.25 1.12
- --------------------------------------------------------------------------------------------------------------------
Net increase in net asset value from operations 5.20 1.11
- --------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- --
- --------------------------------------------------------------------------------------------------------------------
Distributions from net realized capital gains ( 3.68) ( 3.39)
- --------------------------------------------------------------------------------------------------------------------
Total dividends and distributions ( 3.68) ( 3.39)
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 13.20 $ 11.68
- --------------------------------------------------------------------------------------------------------------------
Total return++ 52.99% 7.07%
- --------------------------------------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 271 $12,367
- --------------------------------------------------------------------------------------------------------------------
Ratio of operating expenses to average net assets 1.45%(a)(b) 1.46%+(b)
- --------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets ( 0.37)% ( 0.11)%+
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 113% 75%
- --------------------------------------------------------------------------------------------------------------------
Ratio of operating expenses to average net assets without waivers and/or expense 1.45%(a) 1.46%+
reimbursements
</TABLE>
* Nations Capital Growth Fund Primary B Shares commenced operations on
June 28, 1996.
+ Annualized.
++ Total return represents aggregate total return for the period indicated and
does not reflect the deduction of any applicable sales charges.
# Per share net investment income has been calculated using the monthly
average share method.
(a) The effect of the fees reduced by credits allowed by the custodian on the
operating expense ratio, with and without waivers and/or expense
reimbursements, was less than 0.01%.
(b) The effect of interest expense on the operating expense ratio was less than
0.01%.
29
<PAGE>
FOR A PRIMARY B SHARE OUTSTANDING THROUGH EACH PERIOD
Nations Disciplined Equity Fund
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
Primary B Shares 03/31/98# 03/31/97*
<S> <C> <C>
Operating performance:
Net asset value, beginning of period $ 18.47 $ 17.84
- ---------------------------------------------------------------------------------------------------------------------
Net investment income/(loss) ( 0.03) 0.03
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain/(loss) on investments 7.96 2.15
- ---------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net asset value from operations 7.93 2.18
- ---------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income -- ( 0.04)
- ---------------------------------------------------------------------------------------------------------------------
Distributions from net realized capital gains ( 4.23) ( 1.51)
- ---------------------------------------------------------------------------------------------------------------------
Return of capital -- --
- ---------------------------------------------------------------------------------------------------------------------
Total dividends and distributions ( 4.23) ( 1.55)
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 22.17 $ 18.47
- ---------------------------------------------------------------------------------------------------------------------
Total return++ 48.44% 12.13%
- ---------------------------------------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 0(c) $1,121
- ---------------------------------------------------------------------------------------------------------------------
Ratio of operating expenses to average net assets 1.48%(a)(b) 1.54%+(a)
- ---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income/(loss) to average net assets ( 0.13%) 0.20%+
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 79% 120%
- ---------------------------------------------------------------------------------------------------------------------
Ratio of operating expenses to average net assets without waivers and/or expense 1.48%(a)(b) 1.54%+
reimbursements
</TABLE>
* Nations Disciplined Equity Fund Primary B Shares commenced operations on
June 28, 1996.
+ Annualized.
++ Total return represents aggregate total return for the period indicated and
does not reflect the deduction of any applicable sales charges.
# Per share net investment income has been calculated using the monthly
average share method.
(a) The effect of interest expense on the operating expense ratio was less than
0.01%.
(b) The effect of the fees reduced by credits allowed by the custodian on the
operating expense ratio, with and without waivers and/or expense
reimbursements, was less than 0.01%.
(c) Amount represents less than $1,000.
FOR A PRIMARY B SHARE OUTSTANDING THROUGH EACH PERIOD
Nations Managed Index Fund
<TABLE>
<CAPTION>
PERIOD
ENDED
Primary B Shares 03/31/98*
<S> <C>
Operating performance:
Net asset value, beginning of period $ 14.52
- ---------------------------------------------------------------------------------------------------
Net investment income 0.14
- ---------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 2.73
- ---------------------------------------------------------------------------------------------------
Net increase in net asset value from operations 2.87
- ---------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income ( 0.13)
- ---------------------------------------------------------------------------------------------------
Distributions from net realized capital gains ( 0.15)
- ---------------------------------------------------------------------------------------------------
Total dividends and distributions ( 0.28)
- ---------------------------------------------------------------------------------------------------
Net asset value, end of period $ 17.11
- ---------------------------------------------------------------------------------------------------
Total return++ 18.24%
- ---------------------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 3
- ---------------------------------------------------------------------------------------------------
Ratio of operating expenses to average net assets 1.00%+(a)(b)
- ---------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 0.76%+
- ---------------------------------------------------------------------------------------------------
Portfolio turnover rate 30%
- ---------------------------------------------------------------------------------------------------
Ratio of operating expenses to average net assets without waivers and/or expense 1.30%+(a)
reimbursements
</TABLE>
* Nations Managed Index Fund Primary B Shares commenced operations on
September 4, 1997.
+ Annualized.
++ Total return represents aggregate total return for the period indicated and
does not reflect the deduction of any applicable sales charges.
(a) The effect of the fees reduced by credits allowed by the custodian on the
operating expense ratio, with and without waivers and/or expense
reimbursements, was less than 0.01%.
(b) The effect of interest expense on the operating expense ratio was less than
0.01%.
30
<PAGE>
FOR A PRIMARY B SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Nations Managed SmallCap Index Fund
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
Primary B Shares 03/31/98 03/31/97*
<S> <C> <C>
Operating performance:
Net asset value, beginning of period $ 9.83 $ 10.00
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 0.00 0.02
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain/(loss) on investments 4.58 ( 0.17)
- ---------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net asset value from operations 4.58 ( 0.15)
- ---------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income ( 0.01) ( 0.02)
- ---------------------------------------------------------------------------------------------------------------------
Distributions from net realized capital gains ( 0.31) --
- ---------------------------------------------------------------------------------------------------------------------
Total dividends and distributions ( 0.32) ( 0.02)
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 14.09 $ 9.83
- ---------------------------------------------------------------------------------------------------------------------
Total return++ 47.04% ( 1.51)%
- ---------------------------------------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 160 $ 86
- ---------------------------------------------------------------------------------------------------------------------
Ratio of operating expenses to average net assets 1.00%(a)(b) 1.00%+
- ---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 0.02% 0.55%+
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 62% 18%
- ---------------------------------------------------------------------------------------------------------------------
Ratio of operating expenses to average net assets without waivers and/or expense 1.52%(a) 1.71%+
reimbursements
</TABLE>
* Nations Managed SmallCap Index Fund Primary B Shares commenced operations on
October 15, 1996.
+ Annualized.
++ Total return represents aggregate total return for the period indicated and
does not reflect the deduction of any applicable sales charges.
(a) The effect of the fees reduced by credits allowed by the custodian on the
operating expense ratio, with and without waivers and/or expense
reimbursements, was less than 0.01%.
(b) The effect of interest expense on the operating expense ratio was less than
0.01%.
Appendix A -- Portfolio Securities
The following are summary descriptions of certain types of instruments in which
a Fund may invest. The "How Objectives Are Pursued" section of this Prospectus
identifies each Fund's permissible investments, and the SAI contains more
information concerning such investments.
Asset-Backed Securities: 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 (see
below). 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
31
<PAGE>
("GNMA"), by the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC"). Such Certificates are mortgage-backed
securities which represent a partial ownership interest in a pool of mortgage
loans issued by lenders such as mortgage bankers, commercial banks and savings
and loan associations. Such mortgage loans may have fixed or adjustable rates
of interest.
The average life of a mortgage-backed security is likely to be substantially
less than the original maturity of the mortgage pools underlying the
securities. Prepayments of principal by mortgagors and mortgage foreclosures
will usually result in the return of the greater part of principal invested far
in advance of the maturity of the mortgages in the pool.
The yield which will be earned on mortgage-backed securities may vary from
their coupon rates for the following reasons: (i) Certificates may be issued at
a premium or discount, rather than at par; (ii) Certificates may trade in the
secondary market at a premium or discount after issuance; (iii) interest is
earned and compounded monthly which has the effect of raising the effective
yield earned on the Certificates; and (iv) the actual yield of each Certificate
is affected by the prepayment of mortgages included in the mortgage pool
underlying the Certificates and the rate at which principal so prepaid is
reinvested. In addition, prepayment of mortgages included in the mortgage pool
underlying a GNMA Certificate purchased at a premium may result in a loss to
the Fund.
Mortgage-backed securities issued by private issuers, whether or not such
obligations are subject to guarantees by the private issuer, may entail greater
risk than obligations directly or indirectly guaranteed by the U.S. Government.
Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities
(collateral collectively hereinafter referred to as "Mortgage Assets").
Multi-class pass-through securities are interests in a trust composed of
Mortgage Assets and all references herein to CMOs will include multi-class
pass-through securities. Payments of principal of and interest on the Mortgage
Assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs or make scheduled distribution on the multi-class
pass-through securities.
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, which have maximum maturities of 40 years.
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 dollar-weighted maturity and
duration of the Funds. For additional information concerning mortgage-backed
securities, see the SAI.
The mortgage-backed securities in which the Funds invest are subject to
extension risk. This is the risk that when interest rates rise, prepayments of
the underlying obligations slow thereby lengthening duration and potentially
reducing the value of these securities. The debt securities held by the Funds
also may be subject to credit risk. Credit risk is the risk that the issuers of
securities in which a Fund invests may default in the payment of principal
and/or interest. Any such defaults or adverse changes in an issuer's financial
condition or credit rating may adversely affect the value of the Funds'
portfolio investments and, hence, the value of your investment in the
corresponding Fund.
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
32
<PAGE>
underlying pools of assets. Such securities also may be debt instruments, which
are also known as collateralized obligations and are generally issued as the
debt of a special purpose entity organized solely for the purpose of owning
such assets and issuing such debt. Such securities also may include instruments
issued by certain trusts, partnerships or other special purpose issuers,
including pass-through certificates representing participations in, or debt
instruments backed by, the securities and other assets owned by such issuers.
Non-mortgage-backed securities are not issued or guaranteed by the U.S.
Government or its agencies or instrumentalities; however, the payment of
principal and interest on such obligations may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution (such as a bank or insurance company) unaffiliated with
the issuers of such securities.
The purchase of non-mortgage-backed securities raises considerations unique 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.
Bank Instruments: Bank instruments consist mainly of certificates of deposit,
time deposits and bankers' acceptances.
The Funds will limit their investments in bank obligations so they do not
exceed 25% of each Fund's total assets at the time of purchase. Nations Small
Company Growth Fund will limit its investments in interest-bearing savings
deposits of commercial and savings banks to 5% of total assets.
U.S. dollar-denominated obligations issued by foreign branches of domestic
banks ("Eurodollar" obligations) and domestic branches of foreign banks
("Yankee dollar" obligations) and other foreign obligations involve special
investment risks, including the possibility that liquidity could be impaired
because of future political and economic developments, the obligations may be
less marketable than comparable domestic obligations of domestic issuers, a
foreign jurisdiction might impose withholding taxes on interest income payable
on such obligations, deposits may be seized or nationalized, foreign
governmental restrictions such as exchange controls may be adopted which might
adversely affect the payment of principal of and interest on such obligations,
the selection of foreign obligations may be more difficult because there may be
less publicly available information concerning foreign issuers, there may be
difficulties in enforcing a judgment against a foreign issuer or the
accounting, auditing and financial reporting standards, practices and
requirements applicable to foreign issuers may differ from those applicable to
domestic issuers. In addition, foreign banks are not subject to examination by
U.S. Government agencies or instrumentalities.
Borrowings: When a Fund borrows money, the net asset value of a share may be
subject to greater fluctuation until the borrowing is paid off. Reverse
repurchase agreements may be considered to be borrowings. The Funds may borrow
money from banks for temporary purposes in amounts of up to one-third of their
respective total assets, provided that borrowings in excess of 5% of the value
of the Funds' total assets must be repaid prior to the purchase of portfolio
securities. Pursuant to line of credit arrangements with BNY, the Funds may
borrow primarily for temporary or emergency purposes, including the meeting of
redemption requests that otherwise might require the untimely disposition of
securities.
Reverse repurchase agreements and dollar roll transactions may be considered to
be borrowings. When a Fund invests in a reverse repurchase agreement, it sells
a portfolio security to another party, such as a bank or broker/dealer, in
return for cash, and agrees to buy the security back at a future date and
price. Reverse repurchase agreements may be used to provide cash to satisfy
unusually heavy redemption requests without having to sell portfolio
securities, or for other temporary or emergency purposes. Generally, the effect
of such a transaction is that a Fund can recover all or most of the cash
invested in the portfolio securities involved during the term of the reverse
repurchase agreement, while it will be able to keep the interest income
associated with those portfolio securities. Such transactions are only
advantageous if the interest cost to the Funds of the reverse repurchase
transaction is less than the cost of obtaining the cash otherwise.
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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 Fund is 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 Fund's 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 Fund's
obligation to repurchase the securities. In addition, there is a risk of delay
in receiving collateral or securities or in repurchasing the securities covered
by the reverse repurchase agreement or even of a loss of rights in the
collateral or securities in the event the buyer of the securities under the
reverse repurchase agreement files for bankruptcy or becomes insolvent. A Fund
only enters into reverse repurchase agreements (and repurchase agreements) with
counterparties that are deemed by the Adviser to be creditworthy. Reverse
repurchase agreements are speculative techniques involving leverage, and are
subject to asset coverage requirements if a Fund does not establish and
maintain a segregated account (as described above). Under the requirements of
the 1940 Act, a Fund is required to maintain an asset coverage (including the
proceeds of the borrowings) of at least 300% of all borrowings. Depending on
market conditions, a Fund's asset coverage and other factors at the time of a
reverse repurchase, a Fund may not establish a segregated account when the
Adviser believes it is not in the best interests of the Fund to do so. In this
case, such reverse repurchase agreements will be considered borrowings subject
to the asset coverage described above.
Dollar roll transactions consist of the sale by a Fund of mortgage-backed or
other asset-backed securities, together with a commitment to purchase similar,
but not identical, securities at a future date, at the same price. In addition,
a Fund is paid a fee as consideration for entering into the commitment to
purchase. 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.
Commercial Instruments: Commercial instruments consist of short-term U.S.
dollar-denominated obligations issued by domestic corporations or 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 objective. In addition, a Fund 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 a Fund. Commercial instruments include variable-rate master demand
notes, which are unsecured instruments that permit the indebtedness thereunder
to vary and provide for periodic adjustments in the interest rate, and
variable- and floating-rate instruments.
Convertible Securities, Preferred Stock, and Warrants: Certain of the Funds may
invest in debt securities convertible into or exchangeable for equity
securities, preferred stocks or warrants. Preferred stocks are securities that
represent an ownership interest in a corporation providing the owner with
claims on a company's earnings and assets before common stock owners, but after
bond or other debt security owners. Warrants are options to buy a stated number
of shares of common stock at a specified price any time during the life of the
warrants.
Fixed Income Investing: The performance of the fixed income debt component of a
Fund's portfolio depends primarily on interest rate changes, the average
weighted maturity of the portfolio and the quality of the securities held. The
debt component of a Fund's portfolio will tend to decrease in value when
interest rates rise and increase when interest rates fall. A Fund's share price
and yield depend, in part, on the maturity and quality of its debt instruments.
Foreign Currency Transactions: Certain of the Funds may enter into foreign
currency exchange transactions to convert foreign currencies to and from the
U.S. dollar. A Fund either enters into these transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange
market, or uses forward contracts to purchase or sell foreign currencies. A
forward foreign currency exchange contract is an obligation by a Fund to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract.
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. Neither spot transactions nor
forward foreign currency exchange contracts eliminate fluctuations in the
prices of a Fund's portfolio securities or in foreign exchange rates, or
prevent loss if the prices of these securities should decline.
A Fund will generally enter into forward currency exchange contracts only under
two circumstances: (i) when the Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, to "lock" in the U.S.
dollar price of the security; and (ii) when the Adviser believes that the
currency of a particular foreign country may experience a substantial movement
against another currency. Under certain circumstances, the Fund may commit a
substantial portion of its portfolio to the execution
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of these contracts. The Adviser will consider the effects such a commitment
would have on the investment program of the Fund and the flexibility of the
Fund to purchase additional securities. Although forward contracts will be used
primarily to protect the Fund from adverse currency movements, they also
involve the risk that anticipated currency movements will not be accurately
predicted.
In addition, the Euro will become the single currency in at least 11 European
nations used in many financial transactions. Accordingly, the German mark,
French franc and other national currencies will no longer be used. Although the
impact of implementing the Euro is not possible to predict, the transition
could have an effect on the financial markets and economic environment in
Europe and other parts of the world. For example, investors may begin to view
those countries participating in the Economic Monetary Union as a single
combined entity and may alter their investment behavior accordingly. In
response to any such effect of the Euro implementation, the Adviser may need to
adapt its investment policies and strategy.
Foreign Securities: Foreign securities include debt and equity obligations
(dollar- and non-dollar-denominated) of foreign corporations and banks as well
as obligations of foreign governments and their political subdivisions (which
will be limited to direct government obligations and government-guaranteed
securities). Such investments may subject a Fund to special investment risks,
including future political and economic developments, the possible imposition
of withholding taxes on income (including interest, distributions and
disposition proceeds), possible imposition of withholding taxes on interest
income, possible seizure or nationalization of foreign deposits, the possible
establishment of exchange controls, or the adoption of other foreign
governmental restrictions which might adversely affect the payment of principal
and interest on such obligations. In addition, foreign issuers in general may
be subject to different accounting, auditing, reporting, and record keeping
standards than those applicable to domestic companies, and securities of
foreign issuers may be less liquid and their prices more volatile than those of
comparable domestic issuers.
Investments in foreign securities may present additional risks, whether made
directly or indirectly, including the political or economic instability of the
issuer or the country of issue and the difficulty of predicting international
trade patterns. In addition, there may be less publicly available information
about a foreign company than about a U.S. company. Further, foreign securities
markets are generally not as developed or efficient as those in the U.S., and
in most foreign markets volume and liquidity are less than in the United
States. Fixed commissions on foreign securities exchanges are generally higher
than the negotiated commissions on U.S. exchanges, and there is generally less
government supervision and regulation of foreign securities exchanges, brokers,
and companies than in the United States. With respect to certain foreign
countries, there is a possibility of expropriation or confiscatory taxation,
limitations on the removal of funds or other assets, or diplomatic developments
that could affect investments within those countries. Because of these and
other factors, securities of foreign companies acquired by a Fund may be
subject to greater fluctuation in price than securities of domestic companies.
Certain Funds may invest indirectly in the securities of foreign issuers
through sponsored or unsponsored ADRs, ADSs, GDRs and EDRs or other securities
representing securities of companies based in countries other than the United
States. Transactions in these securities may not necessarily be settled in the
same currency as the underlying securities which they represent. Ownership of
unsponsored ADRs, American Depository Shares ("ADSs"), GDRs and EDRs may not
entitle the Funds to financial or other reports from the issuer, to which it
would be entitled as the owner of sponsored ADRs, ADSs, GDRs or EDRs.
Generally, ADRs and ADSs in registered form, are designed for use in the U.S.
securities markets. GDRs are designed for use in both the U.S. and European
securities markets. EDRs, in bearer form, are designed for use in European
securities markets. ADRs, ADSs, GDRs and EDRs also involve certain risks of
other investments in foreign securities.
Futures, Options and Other Derivative Instruments: Certain of the Funds may
attempt to reduce the overall level of investment risk of particular securities
and attempt to protect a Fund against adverse market movements by investing in
futures, options and other derivative instruments. These include the purchase
and writing of options on securities (including index options) and options on
foreign currencies, and investing in futures contracts for the purchase or sale
of instruments based on financial indices, including interest rate indices or
indices of U.S. or foreign government, equity or fixed income securities
("futures contracts"), options on futures contracts, forward contracts and
swaps and swap-related products such as equity swap contracts, interest rate
swaps, currency swaps, caps, collars and floors.
The use of futures, options, forward contracts and swaps exposes a Fund to
additional investment risks and transaction costs. If the Adviser incorrectly
analyzes market conditions or does not employ the appropriate strategy with
respect to these instruments, a Fund could be left in a less favorable
position. Additional risks inherent in the use of futures, options, forward
contracts and swaps include: imperfect correlation between the price of
futures, options and forward contracts and movements in the prices of the
securities or currencies being hedged; the possible absence of a liquid
secondary market for any particular instrument at any time; and the possible
need to defer closing out certain hedged positions to avoid adverse tax
consequences. A Fund may not purchase put and call options which are traded on
a national stock exchange in an amount exceeding 5% of its net assets. Further
information on the use of futures, options and other derivative instruments,
and the associated risks, is contained in the SAI.
Guaranteed Investment Contracts: Guaranteed investment contracts, investment
contracts or funding agreements (each referred to as a "GIC") are investment
instru-
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ments 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 as 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 Securities: Certain securities may be sold only pursuant to certain
legal restrictions, and may be difficult to sell. Nations International Value
Fund will not hold more than 10% of the value of its respective net assets in
securities that are illiquid. The other Funds will not hold more than 15% of
the value of their respective net assets in securities that are illiquid.
Repurchase agreements, time deposits and GICs that do not provide for payment
to a Fund within seven days after notice, and illiquid restricted securities,
are subject to the limitation on illiquid securities.
If otherwise consistent with their investment objectives and policies, certain
Funds may purchase securities that are not registered under the Securities Act
of 1933, as amended (the "1933 Act") but which can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the 1933 Act, or which
are issued under Section 4(2) of the 1933 Act. Any such security will not be
considered illiquid so long as it is determined by a Fund's Board of Trustees
or Board of Directors or the Adviser, acting under guidelines approved and
monitored by such Fund's Board of Directors/Trustees, after considering trading
activity, availability of reliable price information and other relevant
information, that an adequate trading market exists for that security. To the
extent that, for a period of time, qualified institutional or other buyers
cease purchasing such restricted securities pursuant to Rule 144A or otherwise
the level of illiquidity of a Fund holding such securities may increase during
such period.
Indexed/Structured Securities: Indexed/structured securities are typically
short- to intermediate-term debt securities whose value at maturity or interest
rate is linked to currencies, interest rates, equity securities, indices,
commodity prices or other financial indicators. Such securities may be
positively or negatively indexed (i.e., their value may increase or decrease if
the reference index or instrument appreciates). Indexed/structured securities
may have return characteristics similar to direct investments in the underlying
instruments and may be more volatile than the underlying instruments. A Fund
bears the market risk of an investment in the underlying instruments, as well
as the credit risk of the issuer.
Interest Rate Transactions: In order to attempt to protect the value of its
portfolio from interest rate fluctuations, certain of the Funds may enter into
various hedging transactions, such as interest rate swaps and the purchase or
sale of interest rate caps and floors. 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.
A Fund will enter into a swap transaction on a net basis, i.e. the payment
obligations of the Fund and the counterparty will be netted out with the Fund
receiving or paying, as the case may be, only the net amount of the two payment
obligations. A Fund will segregate, on a daily basis, cash or liquid high
quality debt securities with a value at least equal to the Fund's net
obligations, if any, under a swap agreement.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index is below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling such interest rate floor. The Adviser expects to enter into these
transactions on behalf of a Fund primarily to preserve a return or spread on a
particular investment or portion of its portfolio or to protect against any
increase in the price of securities the Fund anticipated purchasing at a later
date rather than for speculative purposes. A Fund will not sell interest rate
caps or floors that it does not own.
Lower-Rated Debt Securities: Certain of the Funds may invest in lower-rated
debt securities. Lower-rated, high-yielding securities are those rated "Ba" or
"B" by Moody's or "BB" or "B" by S&P which are commonly referred to as "junk
bonds." These bonds provide poor protection for payment of principal and
interest. Lower-quality bonds involve greater risk of default or price changes
due to changes in the issuer's creditworthiness than securities assigned a
higher quality rating. These securities are considered to have speculative
characteristics and indicate an aggressive approach to income investing. The
Marsico Funds will not purchase debt securities rated below "CCC-" by S&P or
"Caa" by Moody's. Subsequent to its purchase by a Fund, an issue of debt
securities may cease to be rated, or its ratings may be reduced below the
minimum rating required for purchase by a Fund. The Adviser will consider such
an event in determining whether a Fund should continue to hold the security.
The Marsico Funds may also purchase unrated bonds of foreign and domestic
issuers.
The market for lower-rated securities may be thinner and less active than that
for higher quality securities, which can adversely affect the price at which
these securities can
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be sold. If market quotations are not available, these lower-rated securities
will be valued in accordance with procedures established by the Funds' Board,
including the use of outside pricing services. Adverse publicity and changing
investor perceptions may affect the ability of outside pricing services used by
a Fund to value its portfolio securities, and a Fund's ability to dispose of
these lower-rated bonds.
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 is not fundamental and may be changed at
any time without shareholder approval.
Money Market Instruments: Money market instruments may include, among other
instruments, certain U.S. Treasury Obligations, U.S. Government Obligations,
bank instruments, commercial instruments, repurchase agreements and municipal
securities. Such instruments are described in this Appendix A.
Municipal Securities: The two principal classifications of municipal securities
are "general obligation" securities and "revenue" securities. General
obligation securities are secured by the issuer's pledge of its full faith,
credit, and taxing power for the payment of principal and interest. Revenue
securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Private activity bonds held by a Fund are in most
cases revenue securities and are not payable from the unrestricted revenues of
the issuer. Consequently, the credit quality of private activity bonds is
usually directly related to the credit standing of the corporate user of the
facility involved.
Municipal securities may include "moral obligation" bonds, which are normally
issued by special purpose public authorities. If the issuer of moral obligation
bonds is unable to meet its debt service obligations from current revenues, it
may draw on a reserve fund, the restoration of which is a moral commitment but
not a legal obligation of the state or municipality which created the issuer.
Municipal securities may include variable- or floating-rate instruments issued
by industrial development authorities and other governmental entities. While
there may not be an active secondary market with respect to a particular
instrument purchased by a Fund, a Fund may demand payment of the principal and
accrued interest on the instrument or may resell it to a third party as
specified in the instruments. The absence of an active secondary market,
however, could make it difficult for a Fund to dispose of the instrument if the
issuer defaulted on its payment obligation or during periods the Fund is not
entitled to exercise its demand rights, and the Fund could, for these or other
reasons, suffer a loss.
Some of these instruments may be unrated, but unrated instruments purchased by
a Fund will be determined by the Adviser to be of comparable quality at the
time of purchase to instruments rated "high quality" by any major rating
service. Where necessary to ensure that an instrument is of comparable "high
quality," a Fund will require that an issuer's obligation to pay the principal
of the note may be backed by an unconditional bank letter or line of credit,
guarantee, or commitment to lend.
Municipal Securities may include participations in privately arranged loans to
municipal borrowers, some of which may be referred to as "municipal leases."
Generally such loans are unrated, in which case they will be determined by the
Adviser to be of comparable quality at the time of purchase to rated
instruments that may be acquired by a Fund. Frequently, privately arranged
loans have variable interest rates and may be backed by a bank letter of
credit. In other cases, they may be unsecured or may be secured by assets not
easily liquidated. Moreover, such loans in most cases are not backed by the
taxing authority of the issuers and may have limited marketability or may be
marketable only by virtue of a provision requiring repayment following demand
by the lender. Such loans made by a Fund may have a demand provision permitting
the Fund to require payment within seven days. Participations in such loans,
however, may not have such a demand provision and may not be otherwise
marketable. To the extent these securities are illiquid, they will be subject
to each Fund's limitation on investments in illiquid securities. Recovery of an
investment in any such loan that is illiquid and payable on demand may depend
on the ability of the municipal borrower to meet an obligation for full
repayment of principal and payment of accrued interest within the demand
period, normally seven days or less (unless a Fund determines that a particular
loan issue, unlike most such loans, has a readily available market). As it
deems appropriate, the Adviser will establish procedures to monitor the credit
standing of each such municipal borrower, including its ability to meet
contractual payment obligations.
Municipal Securities may include units of participation in trusts holding pools
of tax-exempt leases. Municipal participation interests may be purchased from
financial institutions, and give the purchaser an undivided interest in
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one or more underlying municipal security. To the extent that municipal
participation interests are considered to be "illiquid securities," such
instruments are subject to each Fund's limitation on the purchase of illiquid
securities. Municipal leases and participating interests therein which may take
the form of a lease or an installment sales contract, are issued by state and
local governments and authorities to acquire a wide variety of equipment and
facilities. Interest payments on qualifying leases are exempt from Federal
income tax.
In addition, certain of the Funds may acquire "stand-by commitments" from banks
or broker/dealers with respect to municipal securities held in their
portfolios. Under a stand-by commitment, a dealer would agree to purchase at a
Fund's option specified Municipal Securities at a specified price. A Fund will
acquire stand-by commitments solely to facilitate portfolio liquidity and does
not intend to exercise its rights thereunder for trading purposes.
A Fund may invest in short-term securities, in commitments to purchase such
securities on a "when-issued" basis, and reserves the right to engage in "put"
transactions on a daily, weekly or monthly basis. Securities purchased on a
"when-issued" basis are subject to settlement within 45 days of the purchase
date. The interest rate realized on these securities is fixed as of the
purchase date and no interest accrues to the Fund before settlement. These
securities are subject to market fluctuation due to changes in market interest
rates. The Funds will only commit to purchase a security on a when-issued basis
with the intention of actually acquiring the security and will segregate
sufficient liquid assets to meet its purchase obligation.
A "put" feature permits a Fund to sell a security at a fixed price prior to
maturity. The underlying Municipal Securities subject to a put may be sold at
any time at the market rates. However, unless the put was an integral part of
the security as originally issued, it may not be marketable or assignable.
Therefore, the put would only have value to the Fund. In certain cases a
premium may be paid for put features. A premium paid will have the effect of
reducing the yield otherwise payable on the underlying security. The purpose of
engaging in transactions involving puts is to maintain flexibility and
liquidity to permit the Fund to meet redemptions and remain as fully invested
as possible in municipal securities. The Funds will limit their put
transactions to institutions which the Adviser believes present minimal credit
risk, pursuant to guidelines adopted by the Boards of Directors/Trustees.
Although the Funds do not presently intend to do so on a regular basis, each
may invest more than 25% of its total assets in Municipal Securities the
interest on which is paid solely from revenues of similar projects if such
investment is deemed necessary or appropriate by the Adviser. To the extent
that more than 25% of a Fund's total assets are invested in Municipal
Securities that are payable from the revenues of similar projects, a Fund will
be subject to the peculiar risks presented by such projects to a greater extent
than it would be if its assets were not so concentrated.
Other Investment Companies: Each Fund may invest in securities issued by other
investment companies to the extent that such investments are consistent with
the Fund's investment objective and policies and permissible under the 1940
Act. 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 directly in connection with its
own operations. Pursuant to an exemptive order issued by the SEC, the Nations
Funds' non-money market funds may purchase shares of Nations Funds' money
market funds.
Passive Foreign Investment Companies: Passive foreign investment companies
("PFICs") are any foreign corporations which generate certain amounts of
passive income or hold certain amounts of assets for the production of passive
income. Passive income includes dividends, interest, royalties, rents and
annuities. Income tax regulations may require the Fund to recognize income
associated with the PFIC prior to the actual receipt of any such income.
Pay-in-Kind Bonds: Pay-in-kind bonds are debt securities that normally give the
issuer an option to pay cash at a coupon payment date or give the holder of the
security a similar bond with the same coupon rate and a face value equal to the
amount of the coupon payment that would have been made.
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
Code.
Repurchase Agreements: A repurchase agreement involves the purchase of a
security by a Fund and a simultaneous agreement (generally with a bank or
broker/dealer) to repurchase that security from the Fund at a specified price
and date or upon demand. This technique offers a method of earning income on
uninvested cash. A risk associated with repurchase agreements is the failure of
the seller to repurchase the securities as agreed, which may cause a Fund to
suffer a loss if the market value of such securities declines before they can
be liquidated on the open market. Repurchase agreements with a maturity of more
than seven days are considered illiquid securities and are subject to the limit
stated above. A Fund
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may enter into joint repurchase agreements jointly with other investment
portfolios of Nations Funds.
Securities Lending: To increase return on portfolio securities, the 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. There is a risk of delay in receiving 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 creditworthy and when, in
their judgment, the income to be earned from the loan justifies the attendant
risks. The aggregate of all outstanding loans of a Fund may not exceed 33% of
the value of its total assets, which may include cash collateral received for
securities loans. Cash collateral received by a Nations Fund may be invested in
a Nations Funds' money market fund.
Step Coupon Bonds: Step coupon bonds are debt securities that trade at a
discount from their face value and pay coupon interest. The discount from the
face value depends on the time remaining until cash payments begin, prevailing
interest rates, liquidity of the security and the perceived credit quality of
the issuer.
Short-Term Trust Obligations: Certain of the Funds may invest in short-term
obligations issued by special purpose trusts established to acquire specific
issues of government or corporate securities. Such obligations entitle a Fund
to a proportional fractional interest in payments received by the trust, either
from the underlying securities owned by the trust or pursuant to other
arrangements entered into by the trust. A trust may enter into a swap
arrangement with a highly rated investment firm, pursuant to which the trust
grants to the counterparty certain of its rights with respect to the securities
owned by the trust in exchange for the obligation of the counterparty to make
payments to the trust according to an established formula. The trust
obligations purchased by a Fund must satisfy the quality and maturity
requirements generally applicable to the Fund pursuant to Rule 2a-7 under the
1940 Act.
Stock Index, Interest Rate and Currency Futures Contracts: Certain of the Funds
may purchase and sell futures contracts and related options with respect to
non-U.S. stock indices, non-U.S. interest rates and foreign currencies, that
have been approved by the CFTC for investment by U.S. investors, for the
purpose of hedging against changes in values of a Fund's securities or changes
in the prevailing levels of interest rates or currency exchange rates. These
contracts entail certain risks, including but not limited to the following: no
assurance that futures contracts transactions can be offset at favorable
prices; possible reduction of a Fund's total return due to the use of hedging;
possible lack of liquidity due to daily limits on price fluctuation; imperfect
correlation between the contracts and the securities or currencies being
hedged; and potential losses in excess of the amount invested in the futures
contracts themselves.
Trading on foreign commodity exchanges presents additional risks. Unlike
trading on domestic commodity exchanges, trading on foreign commodity exchanges
is not regulated by the CFTC and may be subject to greater risks than trading
on domestic exchanges. For example, some foreign exchanges are principal
markets for which no common clearing facility exists and a trader may look only
to the broker for performance of the contract. In addition, unless a Fund
hedges against fluctuations in the exchange rate between the U.S. dollar and
the currencies in which trading is done on foreign exchanges, any profits that
such Fund might realize could be eliminated by adverse changes in the exchange
rate, or the Fund could incur losses as a result of those changes.
U.S. Government Obligations: U.S. Government Obligations consist of marketable
securities and instruments issued or guaranteed by the U.S. Government or any
of its agencies, authorities or instrumentalities. Direct obligations are
issued by the U.S. Treasury and include all U.S. Treasury instruments. U.S.
Treasury Obligations differ only in their interest rates, maturities and time
of issuance. Obligations of U.S. Government agencies, authorities and
instrumentalities are issued by government-sponsored agencies and enterprises
acting under authority of Congress. Although obligations of federal agencies,
authorities and instrumentalities are not debts the U.S. Treasury, some are
backed by the full faith and credit of the U.S. Treasury, such as direct
pass-through certificates of the Government National Mortgage Association; some
are supported by the right of the issuer to borrow from the U.S. Government,
such as obligations of Federal Home Loan Banks and some are backed only by the
credit of the issuer itself, such as obligations of the Federal National
Mortgage Association. No assurance can be given that the U.S. Government would
provide financial support to government-sponsored instrumentalities if it is
not obligated to do so by law.
The market value of U.S. Government Obligations may fluctuate due to
fluctuations in market interest rates. As a general matter, the value of debt
instruments, including U.S. Government Obligations, declines when market
interest rates increase and rises when market interest rates decrease. Certain
types of U.S. Government Obligations are subject to fluctuations in yield or
value due to their structure or contract terms.
Variable- and Floating-Rate Instruments: Certain instruments issued, guaranteed
or sponsored by the U.S. Government or its agencies, state and local government
issuers, and certain debt instruments issued by domestic and foreign banks and
corporations may carry variable or floating rates of interest. Such instruments
bear interest rates which are not fixed, but which vary with changes in
specified market rates or indices, such as a Federal Reserve composite index. A
variable-rate demand instrument is an obligation with a variable or floating
interest rate and an unconditional right of demand on the part of the holder
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to receive payment of unpaid principal and accrued interest. An instrument with
a demand period exceeding seven days may be considered illiquid if there is no
secondary market for such security.
When-Issued, Delayed Delivery and Forward Commitment Securities: The purchase
of new issues of securities on a "when-issued," "delayed delivery" or "forward
commitment" basis occurs when the payment for and delivery of securities takes
place at a future date. Because actual payment for and delivery of such
securities generally take place 15 to 45 days after the purchase date,
purchasers of such securities bear the risk that interest rates on debt
securities at the time of delivery may be higher or lower than those contracted
for on the security purchased.
Zero Coupon Bonds: Zero coupon bonds are debt securities that do not pay
interest at regular intervals, but are issued at a discount from face value.
The discount approximates the total amount of interest the security will accrue
from the date of issuance to maturity. The market value of these securities
generally fluctuates more in response to changes in interest rates than
interest-paying securities of comparable maturity.
Appendix B -- Description Of Ratings
The following summarizes the highest eight ratings used by 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. BB represents the lowest
degree of speculation and B a higher degree of speculation. While such
bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
CCC, CC -- An obligation rated CCC is vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the
event of adverse conditions, the obligor is not likely to have the
capacity to meet its financial commitments on the obligation; an
obligation rated CC is highly vulnerable to nonpayment.
To provide more detailed indications of credit quality, the AA, A, BBB and CCC
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 eight ratings used by Moody's for
corporate and municipal bonds. The first four ratings 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.
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Ba -- Bonds which 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
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B -- Bonds which 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.
Caa, Ca -- Bonds that are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest. Bonds that are rated Ca represent obligations that
are speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
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 Aa1, A1 or
Baa1, 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 be 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 IBCA ("Fitch")
for bonds, each of which denotes that the securities are investment grade:
AAA -- "AAA" ratings denote the lowest expectation of credit risk. They
are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA -- "AA" ratings denote a very low expectation of credit risk. They
indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A -- "A" ratings denote a low expectation of credit risk. The capacity
for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB -- "BBB" ratings indicate that there is currently a low expectation
of credit risk. The capacity for timely payment of financial commitments
is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
The following summarizes the two highest ratings used by Moody's for short-term
municipal notes and variable-rate demand obligations:
MIG-1/VMIG-1 -- Obligations bearing these designations are of the best
quality, enjoying strong protection from established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2 -- Obligations bearing these designations are of high
quality, with ample margins of protection although not so large as in the
preceding group.
The following summarizes the two highest ratings used by S&P for short-term
municipal notes:
SP-1 -- 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 -- 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-
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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:
F1+ securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F1 securities possess very strong credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in
degree than issues rated F1+.
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. Commercial paper rated A-3
exhibits adequate protection parameters. However, adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation. Commercial paper
rated A-3 or B correlates with the S&P Bond rankings (described above) of
BBB/BBB- and BB+, respectively.
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 obligations.
Issuers rated Prime-2 (or related supporting institutions) are considered to
have a strong capacity for repayment of senior short-term 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. Issuers rated Prime-3 have an acceptable ability for
repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt
protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
For commercial paper, D&P uses the short-term debt ratings described above.
For commercial paper, Fitch uses the short-term debt ratings described above.
Thomson BankWatch, Inc. ("BankWatch") ratings are based upon a qualitative and
quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries. BankWatch ratings do
not constitute a recommendation to buy or sell securities of any of these
companies. Further, BankWatch does not suggest specific investment criteria for
individual clients.
BankWatch long-term ratings apply to specific issues of long-term debt and
preferred stock. The long-term ratings specifically assess the likelihood of
untimely payment of principal or interest over the term to maturity of the
rated instrument. The following are the four investment grade ratings used by
BankWatch for long-term debt:
AAA -- The highest category; indicates ability to repay principal and
interest on a timely basis is extremely high.
AA -- The second highest category; indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental
risk versus issues rated in the highest category.
A -- 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.
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.
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AAA -- "AAA" ratings denote the lowest expectation of credit risk. They
are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA -- "AA" ratings denote a very low expectation of credit risk. They
indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A -- "A" ratings denote a low expectation of credit risk. The capacity
for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB -- "BBB" ratings indicate that there is currently a low expectation
of credit risk. The capacity for timely payment of financial commitments
is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
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