As filed with the Securities and Exchange Commission
on December 15, 1999
Registration No. 33-4038; 811-4614
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Post-Effective Amendment No. 45 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 46 [X]
(Check appropriate box or boxes)
------------------------
NATIONS FUND, INC.
(Exact Name of Registrant as specified in Charter)
111 Center Street
Little Rock, Arkansas 72201
(Address of Principal Executive Offices, including Zip Code)
--------------------------
Registrant's Telephone Number, including Area Code: (800) 321-7854
Richard H. Blank, Jr.
c/o Stephens Inc.
111 Center Street
Little Rock, Arkansas 72201
(Name and Address of Agent for Service)
With copies to:
Robert M. Kurucza, Esq. Carl Frischling, Esq.
Marco E. Adelfio, Esq. Kramer, Levin, Naftalis
Morrison & Foerster LLP & Frankel
2000 Pennsylvania Ave., N.W., Suite 5500 919 Third Avenue
Washington, D.C. 20006 New York, New York 10022
It is proposed that this filing will become effective (check appropriate box):
<TABLE>
<CAPTION>
<S> <C>
[ ] Immediately upon filing pursuant to Rule 485(b); or [ ] on (date) pursuant to Rule
485(b), or
[X] 60 days after filing pursuant to Rule 485(a), or [ ] on (date) pursuant to Rule
485(a)
[ ] 75 days after filing pursuant to paragraph (a)(2) [ ] on (date) pursuant to paragraph (a)(2) of
Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
</TABLE>
<PAGE>
EXPLANATORY NOTE
The Registrant is filing this Post-Effective Amendment No. 45 to the
Registration Statement of Nations Fund, Inc. (the "Company") for the purpose of
revising Nations U.S. Government Bond Fund's principal investment strategy.
<PAGE>
NATIONS FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Part A
Item No. Prospectus
- -------- ----------
<S> <C>
1. Front and Back Cover Pages ................................ Front and Back Cover Pages
2. Risk/Return Summary: Investments, Risks
and Performance............................................ About this Prospectus
3. Risk/Return Summary: Fee Tables............................ About the Funds; Financial Highlights
4. Investment Objectives, Principal
Investment Strategies, and Related Risks................... About the Funds; Other Important
Information
5. Management's Discussion of Fund
Performance................................................. About the Funds
6. Management, Organization, and
Capital Structure........................................... What's Inside; About the Funds;
How the Funds Are Managed;
About your Investment
7. Shareholder Information..................................... About the Funds; About your
Investment
8. Distribution Arrangements................................... Information for Investors
9. Financial Highlights Information............................ Financial Highlights; About the Funds
Part B
Item No.
- --------
10. Cover Page and Table of Contents............................ Cover Page and Table of Contents
11. Fund History................................................ Introduction
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
12. Description of the Fund and Its
Investments and Risks....................................... Additional Information on Portfolio
Investments
13. Management of the Funds..................................... Trustees And Officers; Investment
Advisory, Administration, Custody Transfer
Agency, Shareholder Servicing and
Distribution Agreements
14. Control Persons and Principal
Holders of Securities....................................... Not Applicable
15. Investment Advisory and Other Services...................... Investment Advisory,
Administration, Custody, Transfer Agency,
Shareholder Servicing And Distribution
Agreements
16. Brokerage Allocation and Other Practices.................... Portfolio Transactions and
Brokerage--General Brokerage Policy
17. Capital Stock and Other
Securities.................................................. Description Of Shares;
Investment Advisory, Administration,
Custody, Transfer Custody, Transfer
Agency, Shareholder Servicing And
Distribution Agreements
18. Purchase, Redemption and Pricing
of Shares................................................... Net Asset Value -- Purchases
And Redemptions; Distributor
19. Taxation of the Fund........................................ Additional Information Concerning
Taxes
20. Underwriters................................................ Investment Advisory,
Administration Custody, Transfer Agency
Shareholder Servicing And Distribution
Agreements; Distributor
21. Calculation of Performance Data............................. Additional Information on
Performance
22. Financial Statements........................................ Independent Accountant and
Reports
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Part C
Item No. Other Information
- -------- -----------------
<S> <C>
Information required to be included in
Part C is set forth under the
appropriate Item, so numbered, in Part C
of this Document
</TABLE>
<PAGE>
[GRAPHIC]
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
FIXED INCOME FUND
PROSPECTUS -- INVESTOR A, B AND C SHARES
FEBRUARY 14, 2000
Fixed Income Fund
NATIONS U.S. GOVERNMENT BOND FUND
THE SECURITIES AND EXCHANGE COMMISSION (SEC) HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NOT FDIC
INSURED
- --------------------
May Lose Value
- --------------------
No Bank Guarantee
- --------------------
[NATIONS FUNDS LOGO APPEARS HERE]
<PAGE>
AN OVERVIEW OF THE FUND
- --------------------------------------------------------------------------------
[GRAPHIC]
TERMS USED IN THIS PROSPECTUS
IN THIS PROSPECTUS, WE, US AND OUR REFER TO THE NATIONS FUNDS
FAMILY (NATIONS FUNDS). SOME OTHER IMPORTANT TERMS WE'VE USED MAY
BE NEW TO YOU. THESE ARE PRINTED IN ITALICS WHERE THEY FIRST APPEAR
IN A SECTION AND ARE DESCRIBED IN TERMS USED IN THIS PROSPECTUS.
[GRAPHIC]
YOU'LL FIND TERMS USED IN
THIS PROSPECTUS ON PAGE 37.
YOUR INVESTMENT IN THIS FUND IS NOT A BANK DEPOSIT AND IS NOT
INSURED OR GUARANTEED BY BANK OF AMERICA, N. A. (BANK OF AMERICA),
THE FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) OR ANY OTHER
GOVERNMENT AGENCY. YOUR INVESTMENT MAY LOSE MONEY.
AFFILIATES OF BANK OF AMERICA ARE PAID FOR THE SERVICES THEY
PROVIDE TO THE FUND.
This booklet, which is called a prospectus, tells you about one of the Nations
Funds Fixed Income Funds. Please read it carefully, because it contains
information that's designed to help you make informed investment decisions.
ABOUT THE FUND
The Fixed Income Fund seeks total return and presentation of capital by
investing in U.S. Government securities and REPURCHASE AGREEMENTS
collateralized by such securities.
Fixed income securities have the potential to increase in value because when
interest rates fall, the value of these securities tends to rise. When interest
rates rise, however, the value of these securities tends to fall. Other things
can also affect the value of fixed income securities. There's always a risk
that you'll lose money or you may not earn as much as you expect.
IS THIS FUND RIGHT FOR YOU?
Not every Fund is right for every investor. When you're choosing a Fund to
invest in, you should consider things like your investment goals, how much risk
you can accept and how long you're planning to hold your investment.
The Fixed Income Fund may be suitable for you if:
o you're looking for income
o you have longer-term investment goals
It may not be suitable for you if:
o you're not prepared to accept or are unable to bear the risks associated
with fixed income securities
You'll find a discussion of the Fund's principal investments, strategies and
risks in the Fund description that starts on page 4.
FOR MORE INFORMATION
If you have any questions about the Fund, please call us at 1.800.321.7854 or
contact your investment professional.
You'll find more information about the Fund in the Statement of Additional
Information (SAI). The SAI includes more detailed information about the Fund's
investments, policies, performance and management, among other things. Please
turn to the back cover to find out how you can get a copy.
2
<PAGE>
WHAT'S INSIDE
- --------------------------------------------------------------------------------
[GRAPHIC]
BANC OF AMERICA ADVISORS, INC.
BANC OF AMERICA ADVISORS, INC. (BAAI) IS THE INVESTMENT ADVISER TO
THE FUND. BAAI IS RESPONSIBLE FOR THE OVERALL MANAGEMENT AND
SUPERVISION OF THE INVESTMENT MANAGEMENT OF THE FUND. BAAI AND
NATIONS FUNDS HAVE ENGAGED A SUB-ADVISER, WHICH IS RESPONSIBLE FOR
THE DAY-TO-DAY INVESTMENT DECISIONS FOR THE FUND.
[GRAPHIC]
YOU'LL FIND MORE ABOUT
BAAI AND THE SUB-ADVISER
STARTING ON PAGE 9.
[GRAPHIC]
ABOUT THE FIXED INCOME FUND
<TABLE>
<CAPTION>
<S> <C>
NATIONS U.S. GOVERNMENT BOND FUND 4
Sub-adviser: Banc of America Capital Management, Inc.
- ---------------------------------------------------------------------
OTHER IMPORTANT INFORMATION 8
- ---------------------------------------------------------------------
HOW THE FUND IS MANAGED 9
[GRAPHIC]
ABOUT YOUR INVESTMENT
INFORMATION FOR INVESTORS
Choosing a share class 11
Buying, selling and exchanging shares 21
How selling and servicing agents are paid 30
Distributions and taxes 32
- ----------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 34
- ----------------------------------------------------------------------
TERMS USED IN THIS PROSPECTUS 37
- ----------------------------------------------------------------------
WHERE TO FIND MORE INFORMATION BACK COVER
</TABLE>
3
<PAGE>
ABOUT THE FIXED INCOME FUND
- --------------------------------------------------------------------------------
[GRAPHIC]
ABOUT THE SUB-ADVISER
BANC OF AMERICA CAPITAL MANAGEMENT, INC. (BACM) IS THIS FUND'S
SUB-ADVISER. BACM'S FIXED INCOME MANAGEMENT TEAM MAKES THE
DAY-TO-DAY INVESTMENT DECISIONS FOR THE FUND.
[GRAPHIC]
YOU'LL FIND MORE ABOUT
BACM ON PAGE 10.
[GRAPHIC]
MORTGAGE-BACKED SECURITIES
THIS FUND INVESTS IN MORTGAGE-BACKED SECURITIES. MORTGAGE-BACKED
SECURITIES TEND TO PAY HIGHER INCOME THAN U.S. TREASURY BONDS AND
OTHER GOVERNMENT-BACKED BONDS WITH SIMILAR MATURITIES, BUT ALSO
HAVE SPECIFIC RISKS ASSOCIATED WITH THEM. THEY PAY A MONTHLY
AMOUNT THAT INCLUDES A PORTION OF THE PRINCIPAL ON THE UNDERLYING
MORTGAGES, AS WELL AS INTEREST.
NATIONS U.S. GOVERNMENT BOND FUND
[GRAPHIC]
INVESTMENT OBJECTIVE
This Fund seeks total return and preservation of capital by investing in
U.S. Government securities and REPURCHASE AGREEMENTS collateralized by
such securities.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
This Fund normally invests at least 65% of its assets in U.S.
GOVERNMENT OBLIGATIONS AND REPURCHASE AGREEMENTS SECURED BY THESE
SECURITIES.
It may also invest in:
o mortgage-related securities issued by governments or corporations
o asset-backed securities or municipal securities rated investment grade at
the time of investment, or unrated if the portfolio management team
believes they are of comparable quality to investment grade securities at
the time of investment
o corporate debt securities, including bonds, notes and debentures rated
investment grade at the time of investment, or unrated if the portfolio
management team believes they are of comparable quality to investment
grade securities at the time of investment
The Fund may also invest in securities that aren't part of its principal
investment strategies, but it won't hold more than 10% of its assets in any one
type of these securities. These securities are described in the SAI.
Normally, the Fund's AVERAGE DOLLAR-WEIGHTED MATURITY will be between five and
30 years.
When selecting individual investments, the portfolio management team:
o looks at a FIXED INCOME SECURITY'S potential to generate both income and
price appreciation
o allocates assets primarily among U.S. government obligations, including
securities issued by government agencies, MORTGAGE-BACKED SECURITIES and
U.S. Treasury securities, based on how they have performed in the past,
and on how they are expected to perform under current market conditions.
The team may change the allocations when market conditions change
o selects securities using structure analysis, which evaluates the
characteristics of a security, including its call features, coupons and
expected timing of cash flows
The team may sell a security when it believes the security is overvalued, there
is a deterioration in the security's credit rating or in the issuer's financial
situation, when other investments are more attractive, or for other reasons.
4
<PAGE>
[GRAPHIC]
YOU'LL FIND MORE ABOUT OTHER RISKS OF INVESTING IN THIS FUND
STARTING ON PAGE 8 AND IN THE SAI.
[GRAPHIC]
MANY THINGS AFFECT A FUND'S PERFORMANCE, INCLUDING MARKET
CONDITIONS, THE COMPOSITION OF THE FUND'S HOLDINGS, AND FUND
EXPENSES.
CALL US AT 1.800.321.7854 OR CONTACT YOUR INVESTMENT PROFESSIONAL
FOR THE FUND'S CURRENT YIELD.
[GRAPHIC]
RISKS AND OTHER THINGS TO CONSIDER
Nations U.S. Government Bond Fund has the following risks:
o INVESTMENT STRATEGY RISK - There is a risk that the value of the
investments that the portfolio management team chooses will not rise
as high as the team expects, or will fall.
o INTEREST RATE RISK - The prices of fixed income securities will tend
to fall when interest rates rise. In general, fixed income securities
with longer terms tend to fall more in value when interest rates rise
than fixed income securities with shorter terms.
o CREDIT RISK - The Fund could lose money if the issuer of a fixed
income security is unable to pay interest or repay principal when
it's due. Credit risk usually applies to most fixed income
securities, but is generally not a factor for U.S. GOVERNMENT
OBLIGATIONS.
o DERIVATIVES RISK - This Fund may invest in derivatives. There is a
risk that these investments could result in losses, reduce returns,
increase transaction costs or increase the Fund's volatility.
o CHANGING DISTRIBUTION LEVELS - The level of monthly income
distributions paid by the Fund depends on the amount of income paid
by the securities the Fund holds. It is not guaranteed and will
change. Changes in the value of the securities, however, generally
should not affect the amount of income they pay.
o PREPAYMENT AND EXTENSION RISK - The value of the Fund's
MORTGAGE-BACKED SECURITIES can fall if the owners of the underlying
mortgages pay off their mortgages sooner than expected, which could
happen when interest rates fall, or later than expected, which could
happen when interest rates rise. If the underlying mortgages are paid
off sooner than expected, the Fund may have to reinvest this money in
mortgage-backed securities that have lower yields.
[GRAPHIC]
A LOOK AT THE FUND'S PERFORMANCE
The following bar chart and table show you how the Fund has performed in
the past, and can help you understand the risks of investing in the
Fund. A FUND'S PAST PERFORMANCE IS NO GUARANTEE OF HOW IT WILL PERFORM
IN THE FUTURE.
YEAR BY YEAR TOTAL RETURN FOR INVESTOR A SHARES (%) AS OF DECEMBER 31
EACH YEAR
The bar chart shows you how the performance of the Fund's Investor A
Shares has varied from year to year. These returns do not reflect
deductions of sales charges or account fees, and would be lower if they
did. Returns for Investor B and Investor C Shares are different because
they have their own expenses, pricing and sales charges.
[BAR CHART APPEARS HERE]
1995 1996 1997 1998
17.06% 1.76% 8.05% 8.11%
*Return is from inception (2-7-95) to 12-31-95.
YEAR-TO-DATE RETURN AS OF JUNE 30, 1999: -3.29%
5
<PAGE>
[GRAPHIC]
THE FUND'S RETURNS IN THIS TABLE REFLECT SALES CHARGES. THE
INDEX'S RETURN DOES NOT REFLECT SALES CHARGES.
[GRAPHIC]
THERE ARE TWO KINDS OF FEES -- SALES CHARGES YOU PAY DIRECTLY, AND
ANNUAL FUND OPERATING EXPENSES THAT ARE DEDUCTED FROM A FUND'S
ASSETS.
TOTAL NET EXPENSES ARE ACTUAL EXPENSES PAID BY THE FUND AFTER
WAIVERS AND/OR REIMBURSEMENTS.
BEST AND WORST QUARTERLY RETURNS DURING THIS PERIOD
<TABLE>
<CAPTION>
<S> <C>
Best: 2nd quarter 1995: 7.21%
Worst: 1st quarter 1996: -2.85%
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1998
The table shows the Fund's average annual total return for each period,
compared with the LEHMAN GOVERNMENT BOND INDEX, an index of government
bonds with an average maturity of approximately nine years. All
dividends are reinvested.
<CAPTION>
Since
1 year inception
<S> <C> <C>
Investor A Shares 2.97% 7.51 %
Investor B Shares 3.49% 9.02 %
Investor C Shares 6.68% 8.31 %
Lehman Government Bond Index 9.85% 9.71%**
**From inception of Investor A Shares. The inception dates for the
other classes shown may vary.
[GRAPHIC]
WHAT IT COSTS TO INVEST IN THE FUND
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<CAPTION>
SHAREHOLDER FEES Investor A Investor B Investor C
(Fees paid directly from your investment) Shares Shares Shares
<S> <C> <C> <C>
Maximum sales charge (load)
imposed on purchases,
as a % of offering price 4.75% none none
Maximum deferred sales charge
as a % of net asset value none(1) 5.00%(2) 1.00%(3)
Redemption fee, as a %
of the amount sold none(4) none none
ANNUAL FUND OPERATING EXPENSES(5)
(Expenses that are deducted from the Fund's assets)
Management fees 0.50% 0.50 % 0.50 %
Distribution (12b-1) and shareholder
servicing fees 0.25% 1.00 % 1.00 %
Other expenses 0.39% 0.39 % 0.39 %
------ -------- --------
Total annual Fund operating expenses 1.14% 1.89 % 1.89 %
Fee waivers and/or reimbursements (0.10)% (0.10) % (0.10) %
------ -------- --------
Total net expenses(6) 1.04% 1.79 % 1.79 %
====== ======== ========
</TABLE>
(1)A 1.00% maximum deferred sales charge applies to investors who buy $1
million or more of Investor A Shares and sell them within eighteen
months of buying them. Different charges may apply to purchases made
prior to August 1, 1999. Please see page 14 for details.
6
<PAGE>
[GRAPHIC]
THIS IS AN EXAMPLE ONLY. YOUR ACTUAL COSTS COULD BE HIGHER OR
LOWER, DEPENDING ON THE AMOUNT YOU INVEST, AND ON THE FUND'S
ACTUAL EXPENSES AND PERFORMANCE.
(2)This charge decreases over time. Please see page 42 for details.
Different charges apply to Investor B Shares bought before January 1,
1996 and after July 31, 1997. Please see page 14 for details.
(3)This charge applies to investors who buy Investor C Shares and sell
them within one year of buying them. Please see page 16 for details.
(4)A 1.00% redemption fee applies to investors who bought $1 million or
more of Investor A Shares between July 31, 1997 and November 15, 1998
and sell them within 18 months of buying them. The fee is paid to the
Fund. Please see page 14 for details.
(5)The figures contained in the above table are based on amounts
incurred during the Fund's most recent fiscal year and have been
adjusted, as necessary, to reflect current service provider fees.
(6)The Fund's investment adviser and/or some of its other service
providers have agreed to waive fees and/or reimburse expenses until
July 31, 2000. The figures shown here are after waivers and/or
reimbursements. There is no guarantee that these waivers and/or
reimbursements will continue after this date.
EXAMPLE
This example is intended to help you compare the cost of investing in
this Fund with the cost of investing in other mutual funds.
This example assumes:
o you invest $10,000 in Investor A, Investor B or Investor C Shares of
the Fund for the time periods indicated and then sell all of your
shares at the end of those periods
o you reinvest all dividends and distributions in the Fund
o your investment has a 5% return each year
o the Fund's operating expenses remain the same as shown in the table
above
o the waivers and/or reimbursements shown above expire July 31, 2000
and are not reflected in the 3, 5 and 10 year examples
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Investor A Shares $576 $811 $1,065 $1,789
Investor B Shares $682 $884 $1,212 $2,008
Investor C Shares $282 $584 $1,012 $2,203
If you bought Investor B or Investor C Shares, you would pay the
following expenses if you didn't sell your shares:
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Investor B Shares $182 $584 $1,012 $2,008
Investor C Shares $182 $584 $1,012 $2,203
</TABLE>
7
<PAGE>
[GRAPHIC]
OTHER IMPORTANT INFORMATION
You'll find specific information about the Fund's principal investments,
strategies and risks in the description starting on page 4. The following are
some other risks and information you should consider before you invest:
o CHANGING INVESTMENT OBJECTIVES AND POLICIES - The investment
objective and certain investment policies of any Fund can be changed
without shareholder approval. Other investment policies may be
changed only with shareholder approval.
o HOLDING OTHER KINDS OF INVESTMENTS - The Fund may hold investments
that aren't part of its principal investment strategies. Please refer
to the SAI for more information. The portfolio managers or management
team can also choose not to invest in specific securities described
in this prospectus and in the SAI.
o INVESTING DEFENSIVELY - The Fund may temporarily hold investments
that are not part of its investment objective or its principal
investment strategies to try to protect it during a market or
economic downturn or because of political or other conditions. The
Fund may not achieve its investment objective while it is investing
defensively.
o PORTFOLIO TURNOVER - A Fund that replaces -- or turns over -- more
than 100% of its investments in a year is considered to trade
frequently. Frequent trading can result in larger distributions of
short-term CAPITAL GAINS to shareholders. These gains are taxable at
higher rates than long-term capital gains. Frequent trading can also
mean higher brokerage and other transaction costs, which could reduce
the Fund's returns. The Fund generally buys securities for capital
appreciation, investment income, or both, and does not engage in
short-term trading. You'll find the portfolio turnover rate for the
Fund in FINANCIAL HIGHLIGHTS.
8
<PAGE>
[GRAPHIC]
BANC OF AMERICA ADVISORS, INC.
ONE BANK OF AMERICA PLAZA
CHARLOTTE, NORTH CAROLINA 28255
[GRAPHIC]
HOW THE FUND IS MANAGED
INVESTMENT ADVISER
BAAI is the investment adviser to over 60 mutual fund portfolios in the Nations
Funds family, including the Fixed Income Fund described in this prospectus.
BAAI is a registered investment adviser. It's a wholly-owned subsidiary of Bank
of America, which is owned by Bank of America Corporation. Nations Funds pays
BAAI an annual fee for its investment advisory services. The fee is calculated
daily based on the average net assets of each Fund and is paid monthly. BAAI
uses part of this money to pay investment sub-advisers for the services they
provide to each Fund.
BAAI has agreed to waive fees and/or reimburse expenses for certain Funds until
May 2000 or July 31, 2000. You'll find a discussion of any waiver and/or
reimbursement in the Fund description. There is no assurance that BAAI will
continue to waive and/or reimburse any fees and/or expenses after these dates.
The following chart shows the maximum advisory fees BAAI can receive, along
with the actual advisory fees it received during the Fund's last fiscal year,
after waivers and/or reimbursements:
ANNUAL INVESTMENT ADVISORY FEE, AS A % OF AVERAGE DAILY NET ASSETS
<TABLE>
<CAPTION>
Maximum Actual fee
advisory paid last
fee(1) fiscal year
<S> <C> <C>
Nations U.S. Government Bond Fund 0.50% 0.32%
</TABLE>
(1)These fees are the current contract levels, which in most cases have been
reduced from the contract levels in effect during the last fiscal year.
9
<PAGE>
[GRAPHIC]
BANC OF AMERICA CAPITAL
MANAGEMENT, INC.
ONE BANK OF AMERICA PLAZA
CHARLOTTE, NORTH CAROLINA 28255
[GRAPHIC]
STEPHENS INC.
111 CENTER STREET
LITTLE ROCK, ARKANSAS 72201
[GRAPHIC]
FIRST DATA INVESTOR
SERVICES GROUP, INC.
101 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
INVESTMENT SUB-ADVISER
Nations Funds and BAAI have engaged an investment sub-adviser to provide
day-to-day portfolio management for the Fund. This sub-adviser functions under
the supervision of BAAI and the Boards of Directors/Trustees of Nations Funds.
BANC OF AMERICA CAPITAL MANAGEMENT, INC.
BACM, the successor to TradeStreet Investment Associates, Inc., is a registered
investment adviser and a wholly-owned subsidiary of Bank of America. Its
management expertise covers all major domestic asset classes, including EQUITY
and FIXED INCOME SECURITIES, and MONEY MARKET INSTRUMENTS.
Currently managing more than $90 billion, BACM has over 200 institutional
clients and is sub-adviser to more than 50 mutual funds in the Nations Funds
family. BACM takes a team approach to investment management. Each team has
access to the latest technology and analytical resources.
BACM is the investment sub-adviser to the Fund shown in the table below. The
table also tells you which internal BACM asset management team is responsible
for making the day-to-day investment decisions for the Fund.
<TABLE>
<CAPTION>
Fund BACM Team
<S> <C>
Nations U.S. Government Bond Fund Fixed Income Management Team
</TABLE>
OTHER SERVICE PROVIDERS
The Fund is distributed and co-administered by Stephens Inc., a registered
broker/dealer. Stephens may pay commissions, distribution (12b-1) and
shareholder servicing fees, and/or other compensation to companies for selling
shares and providing services to investors.
BAAI is also co-administrator of the Fund, and assists in overseeing the
administrative operations of the Fund. The Fund pays BAAI and Stephens a
combined fee of 0.22% for their services, plus certain out-of-pocket expenses.
The fee is calculated as an annual percentage of the average daily net assets
of the Fund, and is paid monthly.
First Data Investor Services Group, Inc. (First Data) is the transfer agent for
the Fund's shares. Its responsibilities include processing purchases, sales and
exchanges, calculating and paying distributions, keeping shareholder records,
preparing account statements and providing customer service.
10
<PAGE>
ABOUT YOUR INVESTMENT
- --------------------------------------------------------------------------------
[GRAPHIC]
WE'VE USED THE TERM, INVESTMENT PROFESSIONAL, TO REFER TO THE
PERSON WHO HAS ASSISTED YOU WITH BUYING NATIONS FUNDS. SELLING
AGENT OR SERVICING AGENT (SOMETIMES REFERRED TO AS A SELLING AGENT)
MEANS THE COMPANY THAT EMPLOYS YOUR INVESTMENT PROFESSIONAL.
SELLING AND SERVICING AGENTS INCLUDE BANKS, BROKERAGE FIRMS, MUTUAL
FUND DEALERS AND OTHER FINANCIAL INSTITUTIONS, INCLUDING AFFILIATES
OF BANK OF AMERICA.
[GRAPHIC]
FOR MORE INFORMATION ABOUT HOW TO CHOOSE A SHARE CLASS, CONTACT
YOUR INVESTMENT PROFESSIONAL OR CALL US AT 1.800.321.7854.
[GRAPHIC]
BEFORE YOU INVEST, PLEASE NOTE THAT OVER TIME, DISTRIBUTION
(12B-1) AND SHAREHOLDER SERVICING FEES WILL INCREASE THE COST OF
YOUR INVESTMENT, AND MAY COST YOU MORE THAN ANY SALES CHARGES YOU
MAY PAY. FOR MORE INFORMATION, SEE HOW SELLING AND SERVICING
AGENTS ARE PAID.
[ABC LOGO APPEARS HERE]
CHOOSING A SHARE CLASS
Before you can invest in the Fund, you'll need to choose a share class. There
are three classes of shares for the Fund offered by this prospectus.
Each class has its own sales charges and fees. The table below compares the
charges and fees of the share classes.
<TABLE>
<CAPTION>
Nations
U.S. Government
Investor A Shares Bond Fund,
<S> <C>
Maximum amount you no limit
can buy
Maximum front-end 4.75%
sales charge
Maximum deferred none
sales charge(1)
Redemption fee(2) none
Maximum annual 0.25%
distribution distribution (12b-1)/
and shareholder service fee
servicing fees
Conversion feature none
(1)A 1.00% maximum deferred sales charge applies to investors who buy $1
million or more of Investor A Shares and sell them within eighteen months of
buying them. Different charges may apply to purchases made prior to August
1, 1999. Please see page 14 for details.
(2)A 1.00% redemption fee applies to investors who bought $1 million or more of
Investor A Shares between July 31, 1997 and November 15, 1998 and sell them
within 18 months of buying them. The fee is paid to the Fund. Please see
page 14 for details.
<CAPTION>
Nations
U.S. Government
Investor B Shares Bond Fund,
<S> <C>
Maximum amount you can buy $250,000
Maximum front-end sales charge none
Maximum deferred sales charge 5.00%(1)
Redemption fee none
Maximum annual 0.75%
distribution distribution
and shareholder (12b-1) fee
servicing fees 0.25% service fee
Conversion feature yes
</TABLE>
(1)This charge decreases over time. Please see page 42 for details. Different
charges apply to Investor B Shares of certain funds bought before January 1,
1996 and after July 31, 1997. Please see page 14 for details.
11
<PAGE>
<TABLE>
<CAPTION>
Nations
U.S. Government
Investor C Shares Bond Fund,
<S> <C>
Maximum amount you can buy no limit
Maximum front-end sales charge none
Maximum deferred sales charge(1) 1.00%
Redemption fee none
Maximum annual 0.75%
distribution distribution
and shareholder (12b-1) fee
servicing fees 0.25% service fee
Conversion feature none
</TABLE>
(1)This charge applies to investors who buy Investor C Shares and sell them
within one year of buying them. Please see page 16 for details.
The share class you choose will depend on how much you're investing, how long
you're planning to stay invested, and how you prefer to pay the sales charge.
The total cost of your investment over the time you expect to hold your shares
will be affected by the distribution (12b-1) and shareholder servicing fees, as
well as by the amount of any front-end sales charge or contingent deferred
sales charge (CDSC) that applies, and when you're required to pay the charge.
You should think about these things carefully before you invest.
Investor A Shares have a front-end sales charge, which is deducted when you buy
your shares. This means that a smaller amount is invested in the Fund, unless
you qualify for a waiver or reduction of the sales charge. However, Investor A
Shares have lower ongoing distribution (12b-1) and/or shareholder servicing
fees than Investor B and Investor C Shares. This means that Investor A Shares
can be expected to pay relatively higher dividends per share.
Investor B Shares have limits on how much you can invest. When you buy Investor
B or Investor C Shares, the full amount is invested in the Fund. However, you
may pay a CDSC when you sell your shares. Over time, Investor B and Investor C
Shares can incur distribution (12b-1) and shareholder servicing fees that are
equal to or more than the front-end sales charge, and the distribution (12b-1)
and shareholder servicing fees you would pay for Investor A Shares. Although
the full amount of your purchase is invested in the Fund, any positive
investment return on this money may be partially or fully offset by the
expected higher annual expenses of Investor B and Investor C Shares. You should
also consider the conversion feature for Investor B Shares, which is described
in ABOUT INVESTOR B SHARES.
12
<PAGE>
[GRAPHIC]
THE OFFERING PRICE PER SHARE IS THE NET ASSET VALUE PER SHARE PLUS
ANY SALES CHARGE THAT APPLIES.
THE NET ASSET VALUE PER SHARE IS THE PRICE OF A SHARE CALCULATED BY
A FUND EVERY BUSINESS DAY.
[A LOGO APPEARS HERE]
ABOUT INVESTOR A SHARES
There is no limit to the amount you can invest in Investor A Shares. You
generally will pay a front-end sales charge when you buy your shares, or
in some cases, a CDSC when you sell your shares.
FRONT-END SALES CHARGE
You'll pay a front-end sales charge when you buy Investor A Shares,
unless:
o you qualify for a waiver of the sales charge. You can find out if you
qualify for a waiver in the section, WHEN YOU MIGHT NOT HAVE TO PAY A
SALES CHARGE
o you're reinvesting distributions
The sales charge you'll pay depends on the Fund you're buying, and the
amount you're investing -- the larger the investment, the smaller the
sales charge.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Nations U.S. Government Bond Fund
Amount
retained
by selling
Amount you bought Sales charge Sales charge agents
as a % of the as a % of the as a % of the
offering price net asset value offering price
per share per share per share
$0-$49,999 4.75% 4.99% 4.25%
$50,000-$99,999 4.50% 4.71% 4.00%
$100,000-$249,999 3.50% 3.63% 3.00%
$250,000-$499,999 2.50% 2.56% 2.25%
$500,000-$999,999 2.00% 2.04% 1.75%
$1,000,000 or more 0.00% 0.00% 1.00%(1)
</TABLE>
(1)1.00% on the first $3,000,000, 0.50% on the next $47,000,000, 0.25% on
amounts over $50,000,000. Stephens pays the amount retained by selling
agents on investments of $1,000,000 or more, but may be reimbursed when
a CDSC is deducted if the shares are sold within eighteen months from
the time they were bought. Please see HOW SELLING AND SERVICING AGENTS
ARE PAID for more information.
13
<PAGE>
CONTINGENT DEFERRED SALES CHARGE
If you own or buy $1,000,000 or more of Investor A Shares, there are two
situations when you'll pay a CDSC:
o If you bought your shares before August 1, 1999, and you sell them:
o during the first year you own them, you'll pay a CDSC of 1.00%
o during the second year you own them, you'll pay a CDSC of 0.50%
o If you buy your shares on or after August 1, 1999 and sell them within
18 months of buying them, you'll pay a CDSC of 1.00%.
The CDSC is calculated from the day your purchase is accepted (the TRADE
DATE). We deduct the CDSC from the market value or purchase price of the
shares, whichever is lower.
You won't pay a CDSC on any increase in net asset value since you bought
your shares, or on any shares you receive from reinvested distributions.
We'll sell any shares that aren't subject to the CDSC first. We'll then
sell shares that result in the lowest CDSC.
REDEMPTION FEE
There are two situations when we'll charge a 1% redemption fee on the
sale of Investor A Shares:
o if you bought $1,000,000 or more Investor A Shares between July 31,
1997 and November 15, 1998 and sell them within 18 months of buying
them
o if an employee benefit plan made its initial investment in Investor A
Shares between July 31, 1997 and November 15, 1998 and sold those
shares within 18 months of buying them because the plan sold all of
its Nations Funds holdings
The fee is deducted from the amount sold and is paid to the Fund. The
Fund can reduce or cancel the fee at any time.
[GRAPHIC]
ABOUT INVESTOR B SHARES
You can buy up to $250,000 of Investor B Shares at a time. You don't pay
a sales charge when you buy Investor B Shares, but you may have to pay a
CDSC when you sell them.
CONTINGENT DEFERRED SALES CHARGE
You'll pay a CDSC when you sell your Investor B Shares, unless:
o you bought the shares on or after January 1, 1996 and before August
1, 1997
o you received the shares from reinvested distributions
o you qualify for a waiver of the CDSC. You can find out how to qualify
for a waiver on page 19
The CDSC you pay depends on the Fund you bought, when you bought your
shares, how much you bought in some cases, and how long you held them.
14
<PAGE>
<TABLE>
<CAPTION>
Nations U.S. Government Bond Fund
If you sell your shares
during the following year: You'll pay a CDSC of:
- --------------------------------- -----------------------------------------------------------------------
Shares
you
bought Shares
Shares on or after you
you bought Shares you bought between 1/1/1996 bought
after 8/1/1997 and 11/15/1998 and before before
11/15/1998 in the following amounts: 8/1/1997 1/1/1996
------------ ----------------------------------- ------------ ---------
$250,000- $500,000-
$0-$249,999 $499,999 $999,999
<S> <C> <C> <C> <C> <C> <C>
the first year you own them 5.0% 4.0% 3.0% 2.0% none 5.0%
the second year you own them 4.0% 3.0% 2.0% 1.0% none 4.0%
the third year you own them 3.0% 3.0% 1.0% none none 3.0%
the fourth year you own them 3.0% 2.0% none none none 2.0%
the fifth year you own them 2.0% 1.0% none none none 2.0%
the sixth year you own them 1.0% none none none none 1.0%
after six years of owning them none none none none none none
The CDSC is calculated from the trade date of your purchase. We deduct
the CDSC from the market value or purchase price of the shares,
whichever is lower. We'll sell any shares that aren't subject to the
CDSC first. We'll then sell shares that result in the lowest CDSC.
Your selling agent receives compensation when you buy Investor B Shares.
Please see HOW SELLING AND SERVICING AGENTS ARE PAID for more
information.
ABOUT THE CONVERSION FEATURE
Investor B Shares generally convert automatically to Investor A Shares
according to the following schedule:
<CAPTION>
Nations U.S. Government Bond Fund
Will convert to Investor A Shares
Investor B Shares you bought after you've owned them for
<S> <C>
after November 15, 1998 eight years
between August 1, 1997
and November 15, 1998
$ 0-$249,999 nine years
$250,000-$499,999 six years
$500,000-$999,999 five years
before August 1, 1997 eight years
</TABLE>
15
<PAGE>
The conversion feature allows you to benefit from the lower operating
costs of Investor A Shares, which can help increase total returns.
Here's how the conversion works:
o We won't convert your shares if you tell your investment
professional, selling agent or the transfer agent within 90 days
before the conversion date that you don't want your shares to be
converted. Remember, it's in your best interest to convert your
shares because Investor A Shares have lower expenses.
o Shares are converted at the end of the month in which they become
eligible for conversion. Any shares you received from reinvested
distributions on these shares will convert to Investor A Shares at
the same time.
o You'll receive the same dollar value of Investor A Shares as the
Investor B Shares that were converted. No sales charge or other
charges apply.
o Investor B Shares that you received from an exchange of Investor B
Shares of another Nations Fund will convert based on the day you
bought the original shares. Your conversion date may be later if you
exchanged to or from a Nations Funds Money Market Fund.
o Conversions are free from federal tax.
[GRAPHIC]
ABOUT INVESTOR C SHARES
There is no limit to the amount you can invest in Investor C Shares. You
don't pay a sales charge when you buy Investor C Shares, but you may pay
a CDSC when you sell them.
CONTINGENT DEFERRED SALES CHARGE
You'll pay a CDSC of 1.00% when you sell Investor C Shares within one
year of buying them, unless:
o you received the shares from reinvested distributions
o you qualify for a waiver of the CDSC. You can find out how to qualify
for a waiver on page 19
The CDSC is calculated from the trade date of your purchase. We deduct
the CDSC from the market value or purchase price of the shares,
whichever is lower. We'll sell any shares that aren't subject to the
CDSC first. We'll then sell shares that result in the lowest CDSC.
Your selling agent receives compensation when you buy Investor C Shares.
Please see HOW SELLING AND SERVICING AGENTS ARE PAID for more
information.
16
<PAGE>
[GRAPHIC]
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL FOR MORE INFORMATION
ABOUT REDUCTIONS AND WAIVERS OF SALES CHARGES.
YOU SHOULD TELL YOUR INVESTMENT PROFESSIONAL THAT YOU MAY QUALIFY
FOR A REDUCTION OR A WAIVER BEFORE BUYING SHARES.
WE CAN CHANGE OR CANCEL THESE TERMS AT ANY TIME. ANY CHANGE OR
CANCELLATION APPLIES ONLY TO FUTURE PURCHASES.
WHEN YOU MIGHT NOT HAVE TO PAY A SALES CHARGE
FRONT-END SALES CHARGES
(Investor A Shares)
There are three ways you can lower the front-end sales charge you pay on
Investor A Shares:
o COMBINE PURCHASES YOU'VE ALREADY MADE
Rights of accumulation allow you to combine the value of Investor A,
Investor B and Investor C Shares you already own with Investor A
Shares you're buying to calculate the sales charge. The sales charge
is based on the total value of the shares you already own, or the
original purchase cost, whichever is higher, plus the value of the
shares you're buying. Index Funds and Money Market Funds, except
Investor B and Investor C Shares of Nations Reserves Money Market
Funds, don't qualify for rights of accumulation.
o COMBINE PURCHASES YOU PLAN TO MAKE
By signing a letter of intent, you can combine the value of shares you
already own with the value of shares you plan to buy over a 13-month
period to calculate the sales charge.
o You can choose to start the 13-month period up to 90 days before
you sign the letter of intent.
o Each purchase you make will receive the sales charge that applies
to the total amount you plan to buy.
o If you don't buy as much as you planned within the period, you must
pay the difference between the charges you've paid and the charges
that actually apply to the shares you've bought.
o Your first purchase must be at least 5% of the minimum amount for
the sales charge level that applies to the total amount you plan to
buy.
o If the purchase you've made later qualifies for a reduced sales
charge through the 90-day backdating provisions, we'll make an
adjustment for the lower charge when the letter of intent expires.
Any adjustment will be used to buy additional shares at the reduced
sales charge.
o COMBINE PURCHASES WITH FAMILY MEMBERS
You can receive a quantity discount by combining purchases of Investor
A Shares that you, your spouse and children under age 21 make on the
same day. Some distributions or payments from the dissolution of
certain qualified plans also qualify for the quantity discount. Index
Funds and Money Market Funds, except Investor B and Investor C Shares
of Nations Reserves Money Market Funds, don't qualify.
17
<PAGE>
The following investors can buy Investor A Shares without paying a
front-end sales charge:
o full-time employees and retired employees of Bank of America
Corporation (and its predecessors), its affiliates and subsidiaries
and the immediate families of these people
o banks, trust companies and thrift institutions, acting as fiduciaries
o individuals receiving a distribution from a Bank of America trust or
other fiduciary account may use the proceeds of that distribution to
buy Investor A Shares without paying a front-end sales charge, as
long as the proceeds are invested through a trust account established
with certain trustees and invested in the Funds within 90 days
o Nations Funds' Trustees, Directors and employees of its investment
sub-advisers
o registered broker/dealers that have entered into a Nations Funds
dealer agreement with Stephens may buy Investor A Shares without
paying a front-end sales charge for their investment account only
o registered personnel and employees of these broker/dealers may buy
Investor A Shares without paying a front-end sales charge according
to the internal policies and procedures of their employer as long as
these purchases are made for their own investment purposes
o employees or partners of any service provider to the Funds
o investors who buy through accounts established with certain fee-based
investment advisers or financial planners, including Nations Funds
Personal Investment Planner accounts, wrap fee accounts and other
managed agency/asset allocation accounts
o shareholders of certain Funds that reorganized into the Nations Funds
who were entitled to buy shares at net asset value
The following plans can buy Investor A Shares without paying a front-end
sales charge:
o pension, profit-sharing or other employee benefit plans established
under Section 401 or Section 457 of the Internal Revenue Code of
1986, as amended (the tax code)
o employee benefit plans created according to Section 403(b) of the tax
code and sponsored by a non-profit organization qualified under
Section 501(c)(3) of the tax code. To qualify for the waiver, the
plan must:
o have at least $500,000 invested in Investor A Shares of Nations
Funds (except Money Market Funds), or
o sign a letter of intent to buy at least $500,000 of Investor A
Shares of Nations Funds (except Money Market Funds), or
o be an employer-sponsored plan with at least 100 eligible
participants, or
o be a participant in an alliance program that has signed an
agreement with the Fund or a selling agent
18
<PAGE>
You can also buy Investor A Shares without paying a sales charge if you
buy the shares within 120 days of selling the same Fund. This is called
the reinstatement privilege. You can invest up to the amount of the sale
proceeds. We'll credit your account with any CDSC paid when you sold the
shares. The reinstatement privilege does not apply to any shares you
bought through a previous reinstatement. First Data, Stephens or their
agents must receive your written request within 120 days after you sell
your shares.
Stephens may pay selling agents up to 1.00% of the net asset value of
Investor A Shares bought without a sales charge. Stephens may be
reimbursed through any CDSC that applies.
CONTINGENT DEFERRED SALES CHARGES
(Investor A, Investor B and Investor C Shares)
You won't pay a CDSC on the following transactions:
o shares sold following the death or disability (as defined in the tax
code) of a shareholder, including a registered joint owner
o the following retirement plan distributions:
o lump-sum or other distributions from a qualified corporate or
self-employed retirement plan following the retirement (or
following attainment of age 59 1/2 in the case of a "key employee"
of a "top heavy" plan)
o distributions from an IRA or Custodial Account under Section
403(b)(7) of the tax code, following attainment of age 59 1/2
o a tax-free return of an excess contribution to an IRA
o distributions from a qualified retirement plan that aren't subject
to the 10% additional federal withdrawal tax under Section
72(t)(2) of the tax code
o payments made to pay medical expenses which exceed 7.5% of income,
and distributions made to pay for insurance by an individual who has
separated from employment and who has received unemployment
compensation under a federal or state program for at least 12 weeks
o shares sold under our right to liquidate a shareholder's account,
including instances where the aggregate net asset value of Investor
A, Investor B or Investor C Shares held in the account is less than
the minimum account size
o withdrawals made under the Automatic Withdrawal Plan described in
BUYING, SELLING AND EXCHANGING SHARES, if the total withdrawals of
Investor A, Investor B or Investor C Shares made in a year are less
than 12% of the total value of those shares in your account. A CDSC
may only apply to Investor A Shares if you bought more than
$1,000,000
19
<PAGE>
We'll also waive the CDSC on the sale of Investor A or Investor C Shares
bought before September 30, 1994 by current or retired employees of Bank
of America and its affiliates, or by current or former trustees or
directors of the Nations Funds or other management companies managed by
Bank of America.
You won't pay a CDSC on the sale of Investor B or Investor C Shares if
you reinvest any of the proceeds in the same Fund within 120 days of the
sale. This is called the reinstatement privilege. You can invest up to
the amount of the sale proceeds. We'll credit your account with any CDSC
paid when you sold the shares. The reinstatement privilege does not
apply to any shares you bought through a previous reinstatement. First
Data, Stephens or their agents must receive your written request within
120 days after you sell your shares.
20
<PAGE>
[GRAPHIC]
WHEN YOU SELL SHARES OF A MUTUAL, FUND, THE FUND IS EFFECTIVELY
"BUYING" THEM BACK FROM YOU. THIS IS CALLED A REDEMPTION.
[GRAPHIC]
BUYING, SELLING AND EXCHANGING SHARES
You can invest in the Fund through your selling agent or directly from Nations
Funds.
We encourage you to consult with an investment professional who can open an
account for you with a selling agent and help you with your investment
decisions. Once you have an account, you can buy, sell and exchange shares by
contacting your investment professional or selling agent. They will look after
any paperwork that's needed to complete a transaction and send your order to
us.
You should also ask your selling agent about its limits, fees and policies for
buying, selling and exchanging shares, which may be different from those
described here, and about its related programs or services.
The table on the next page summarizes some key information about buying,
selling and exchanging shares. You'll find sales charges and other fees that
apply to these transactions in CHOOSING A SHARE CLASS.
The Fund also offers other classes of shares, with different features and
expense levels, which you may be eligible to buy. Please contact your
investment professional, or call us at 1.800.321.7854 if you have any questions
or you need help placing an order.
21
<PAGE>
<TABLE>
<CAPTION>
Ways to
buy, sell or How much you can buy,
exchange sell or exchange Other things to know
------------------ ---------------------------------------- --------------------------------------------------
<S> <C> <C> <C>
Buying shares In a lump sum minimum initial investment: There is no limit to the amount you can invest in
o $1,000 for regular accounts Investor A and C Shares. You can invest up to
o $500 for traditional and Roth IRA $250,000 in Investor B Shares at a time.
accounts
o $250 for certain fee-based accounts
o no minimum for certain retirement
plan accounts like 401(k) plans and
SEP accounts, but other restrictions
apply
minimum additional investment:
o $100 for all accounts
Using our minimum initial investment: You can buy shares monthly, twice a month or
Systematic o $100 quarterly, using automatic transfers from your
Investment Plan minimum additional investment: bank account.
o $50
Selling shares In a lump sum o you can sell up to $50,000 of your We'll deduct any CDSC from the amount you're
shares by telephone, otherwise there selling and send you or your selling agent the
are no limits to the amount you can balance, usually within three business days of
sell receiving your order. If you paid for your shares
o other restrictions may apply to with a check that wasn't certified, we'll hold the
withdrawals from retirement plan sale proceeds when you sell those shares for at
accounts least 15 days after the trade date of the
purchase, or until the check has cleared.
Using our o minimum $25 per withdrawal Your account balance must be at least $10,000
Automatic to set up the plan. You can make withdrawals
Withdrawal Plan monthly, twice a month or quarterly. We'll send
your money by check or deposit it directly to your
bank account. No CDSC is deducted if you withdraw
12% or less of the value of your shares in a
class.
Exchanging shares In a lump sum o minimum $1,000 per exchange You can exchange your Investor A Shares for
Investor A Shares of any other Nations Fund,
except Index Funds. You won't pay a front-end
sales charge, CDSC or redemption fee on the
shares you're exchanging.
You can exchange your Investor B Shares for:
o Investor B Shares of any other Nations Fund,
except Nations Funds Money Market Funds
o Investor C Shares of Nations Funds Money
Market Funds (before October 1, 1999)
o Investor B Shares of Nations Reserves Money
Market Funds (on or after October 1, 1999)
You won't pay a CDSC on the shares you're
exchanging.
You can exchange your Investor C Shares for:
o Investor C Shares of any other Nations Fund,
except Nations Funds Money Market Funds
o Investor C Shares of Nations Reserves Money
Market Funds
If you received Investor C Shares of a Fund from
an exchange of Investor A Shares of a Managed
Index Fund, you can also exchange these shares
for Investor A Shares of an Index Fund.
You won't pay a CDSC on the shares you're
exchanging.
Using our o minimum $25 per exchange This feature is not available for Investor B
Automatic Shares. You must already have an investment in
Exchange Feature the Funds you want to exchange. You can make
exchanges monthly or quarterly.
</TABLE>
22
<PAGE>
[GRAPHIC]
A BUSINESS DAY IS ANY DAY THAT THE NEW YORK STOCK EXCHANGE (NYSE)
IS OPEN. A BUSINESS DAY ENDS AT THE CLOSE OF REGULAR TRADING ON THE
NYSE, USUALLY AT 4:00 P.M. EASTERN TIME. IF THE NYSE CLOSES EARLY,
THE BUSINESS DAY ENDS AS OF THE TIME THE NYSE CLOSES.
THE NYSE IS CLOSED ON WEEKENDS AND ON THE FOLLOWING NATIONAL
HOLIDAYS: NEW YEAR'S DAY, MARTIN LUTHER KING, JR. DAY, PRESIDENTS'
DAY, GOOD FRIDAY, MEMORIAL DAY, INDEPENDENCE DAY, LABOR DAY,
THANKSGIVING DAY AND CHRISTMAS DAY.
HOW SHARES ARE PRICED
All transactions are based on the price of a Fund's shares -- or its net asset
value per share. We calculate net asset value per share for each class of each
Fund at the end of each business day. First, we calculate the net asset value
for each class of a Fund by determining the value of the Fund's assets in the
class and then subtracting its liabilities. Next, we divide this amount by the
number of shares that investors are holding in the class.
VALUING SECURITIES IN A FUND
The value of a Fund's assets is based on the total market value of all of the
securities it holds. The prices reported on stock exchanges and securities
markets around the world are usually used to value securities in a Fund. If
prices aren't readily available, we'll base the price of a security on its fair
market value. We use the amortized cost method, which approximates market
value, to value short-term investments maturing in 60 days or less.
HOW ORDERS ARE PROCESSED
Orders to buy, sell or exchange shares are processed on business days. Orders
received by Stephens, First Data or their agents before the end of a business
day (usually 4:00 p.m. Eastern time, unless the NYSE closes early) will receive
that day's net asset value per share. Orders received after the end of a
business day will receive the next business day's net asset value per share.
The business day that applies to your order is also called the TRADE DATE. We
may refuse any order to buy or exchange shares. If this happens, we'll return
any money we've received to your selling agent.
TELEPHONE ORDERS
You can place orders to buy, sell or exchange by telephone if you complete the
telephone authorization section of our account application and send it to us.
Here's how telephone orders work:
o If you sign up for telephone orders after you open your account, you
must have your signature guaranteed.
o Telephone orders may not be as secure as written orders. You may be
responsible for any loss resulting from a telephone order.
o We'll take reasonable steps to confirm that telephone instructions
are genuine. For example, we require proof of your identification
before we will act on instructions received by telephone and may
record telephone conversations. If we and our service providers don't
take these steps, we may be liable for any losses from unauthorized
or fraudulent instructions.
o Telephone orders may be difficult to complete during periods of
significant economic or market change.
23
<PAGE>
[GRAPHIC]
THE OFFERING PRICE PER SHARE IS THE NET ASSET VALUE PER SHARE PLUS
ANY SALES CHARGE THAT APPLIES.
THE NET ASSET VALUE PER SHARE IS THE PRICE OF A SHARE CALCULATED BY
A FUND EVERY BUSINESS DAY.
[GRAPHIC]
BUYING SHARES
Here are some general rules for buying shares:
o You buy Investor A Shares at the offering price per share. You buy
Investor B and Investor C Shares at net asset value per share.
o If we don't receive your money within three business days of
receiving your order, we'll refuse the order.
o Selling agents are responsible for sending orders to us and
ensuring we receive your money on time.
o Shares you buy are recorded on the books of the Fund. We don't
issue certificates unless you ask for them in writing, and we
don't issue certificates for fractions of shares.
MINIMUM INITIAL INVESTMENT
The minimum initial amount you can buy is usually $1,000.
If you're buying shares through one of the following accounts or plans,
the minimum initial amount you can buy is:
o $500 for traditional and Roth individual retirement accounts (IRAs)
o $250 for accounts set up with some fee-based investment advisers
or financial planners, including wrap fee accounts and other
managed accounts
o $100 using our Systematic Investment Plan
o There is no minimum for 401(k) plans, simplified employee pension
plans (SEPs), salary reduction-simplified employee pension plans
(SAR-SEPs), Savings Incentives Match Plans for Employees (SIMPLE
IRAs), salary reduction IRAs (SAR-IRAs) or other similar kinds of
accounts. However, if the value of your account falls below $1,000
for 401(k) plans or $500 for the other plans within one year after
you open your account, we may sell your shares. We'll give you 60
days notice in writing if we're going to do this
MINIMUM ADDITIONAL INVESTMENT
You can make additional purchases of $100, or $50 if you use our
Systematic Investment Plan.
24
<PAGE>
[GRAPHIC]
FOR MORE INFORMATION
ABOUT TELEPHONE ORDERS,
SEE PAGE 23.
SYSTEMATIC INVESTMENT PLAN
You can make regular purchases of $50 or more using automatic transfers from
your bank account to the Funds you choose. You can contact your investment
professional or us to set up the plan.
Here's how the plan works:
o You can buy shares twice a month, monthly or quarterly.
o You can choose to have us transfer your money on or about the 15th or the
last day of the month.
o Some exceptions may apply to employees of Bank of America and its
affiliates, and to plans set up before August 1, 1997. For details, please
contact your investment professional.
[GRAPHIC]
SELLING SHARES
Here are some general rules for selling shares:
o We'll deduct any CDSC from the amount you're selling and send you
the balance.
o If you're selling your shares through a selling agent, we'll
normally send the sale proceeds by federal funds wire within three
business days after Stephens, First Data or their agents receive
your order. Your selling agent is responsible for depositing the
sale proceeds to your account on time.
o If you're selling your shares directly through us, we'll send the
sale proceeds by mail or wire them to your bank account within
three business days after the Fund receives your order.
o You can sell up to $50,000 of shares by telephone if you qualify
for telephone orders.
o If you paid for your shares with a check that wasn't certified,
we'll hold the sale proceeds when you sell those shares for at
least 15 days after the trade date of the purchase, or until the
check has cleared.
o If you hold any shares in certificate form, you must sign the
certificates (or send a signed stock power with them) and send
them to First Data. Your signature must be guaranteed unless
you've made other arrangements with us. We may ask for any other
information we need to prove that the order is properly
authorized.
o Under certain circumstances allowed under the Investment Company
Act of 1940 (1940 Act), we can pay you in securities or other
property when you sell your shares.
o We can delay payment of the sale proceeds for up to seven days.
25
<PAGE>
[GRAPHIC]
YOU SHOULD MAKE SURE YOU UNDERSTAND THE INVESTMENT OBJECTIVES AND
POLICIES OF THE FUND YOU'RE EXCHANGING INTO. PLEASE READ ITS
PROSPECTUS CAREFULLY.
o Other restrictions may apply to retirement plan accounts. For more
information about these restrictions, please contact your
retirement plan administrator.
We may sell your shares:
o if the value of your account falls below $500. We'll give you 60
days notice in writing if we're going to do this
o if your selling agent tells us to sell your shares under
arrangements made between the selling agent and its customers
o under certain other circumstances allowed under the 1940 Act
AUTOMATIC WITHDRAWAL PLAN
The Automatic Withdrawal Plan lets you withdraw $25 or more every month, every
quarter or every year. You can contact your investment professional or us to
set up the plan.
Here's how the plan works:
o Your account balance must be at least $10,000 to set up the plan.
o If you set up the plan after you've opened your account, your
signature must be guaranteed.
o You can choose to have us transfer your money on or about the 15th
or the 25th of the month.
o You won't pay a CDSC on Investor A, Investor B or Investor C
Shares if you withdraw 12% or less of the value of those shares in
a year. Otherwise, we'll deduct any CDSC from the withdrawals.
o We'll send you a check or deposit the money directly to your bank
account.
o You can cancel the plan by giving your selling agent or us 30 days
notice in writing.
It's important to remember that if you withdraw more than your investment in
the Fund is earning, you'll eventually use up your original investment.
[GRAPHIC]
EXCHANGING SHARES
You can sell shares of one Fund to buy shares of another Nations Fund.
This is called an exchange. You might want to do this if your investment
goals or tolerance for risk changes.
Here's how exchanges work:
o You must exchange at least $1,000, or $25 if you use our Automatic
Exchange Feature.
o The rules for buying shares of a Fund, including any minimum
investment requirements, apply to exchanges into that Fund.
26
<PAGE>
o You may only make an exchange into a Fund that is legally sold in
your state of residence.
o You generally may only make an exchange into a Fund that is
accepting investments.
o We may limit the number of exchanges you can make within a
specified period of time.
o We may change or cancel your right to make an exchange by giving
the amount of notice required by regulatory authorities (generally
60 days for a material change or cancellation).
o You cannot exchange any shares you own in certificate form until
First Data has received the certificate and deposited the shares
to your account.
EXCHANGING INVESTOR A SHARES
You can exchange Investor A Shares of a Fund for Investor A Shares of
any other Nations Fund, except Index Funds.
Here are some rules for exchanging Investor A Shares:
o You won't pay a front-end sales charge on the shares of the Fund
you're exchanging.
o You won't pay a CDSC on the shares you're exchanging. Any CDSC
will be deducted later on when you sell the shares you received
from the exchange. The CDSC at that time will be based on the
period from when you bought the original shares until when you
sold the shares you received from the exchange.
o You won't pay a redemption fee on the shares you're exchanging.
Any redemption fee will be deducted later on when you sell the
shares you received from the exchange. Any redemption fee will be
paid to the original Fund.
o If you received Investor A Shares of Nations Short-Term Income
Fund directly or indirectly from an exchange of Investor B Shares
of another Fund, you can exchange these shares for:
o Investor B Shares of any other Nations Fund, except Nations Funds
Money Market Funds, or
o Investor B Shares of Nations Reserves Money Market Funds
A CDSC may apply to the shares you receive from the exchange, and to
any Investor B Shares you receive from an exchange of these shares.
The CDSC will be based on the period from when you bought your
original Investor B Shares until you sell the shares you received
from the exchange.
27
<PAGE>
EXCHANGING INVESTOR B SHARES
You can exchange Investor B Shares of a Fund for:
o Investor B Shares of any other Nations Fund, except Nations Funds
Money Market Funds
o Investor B Shares of Nations Reserves Money Market Funds
You won't pay a CDSC on the shares you're exchanging. Any CDSC will be
deducted later on when you sell the shares you received from the
exchange. The CDSC will be based on the period from when you bought the
original shares until you sold the shares you received from the
exchange.
If you received Investor C Shares of a Nations Funds Money Market Fund
from an exchange of Investor B Shares of a Fund before October 1, 1999,
a CDSC may apply when you sell your Investor C Shares. The CDSC will be
based on the period from when you bought the original shares until you
exchanged them.
EXCHANGING INVESTOR C SHARES
You can exchange Investor C Shares of a Fund for:
o Investor C Shares of any other Nations Fund, except Nations Funds
Money Market Funds
o Investor C Shares of Nations Reserves Money Market Funds
If you received Investor C Shares of a Fund from an exchange of Investor
A Shares of a Managed Index Fund, you can also exchange these shares for
Investor A Shares of an Index Fund.
You won't pay a CDSC on the shares you're exchanging. Any CDSC will be
deducted later on when you sell the shares you received from the
exchange. The CDSC will be based on the period from when you bought the
original shares until you sold the shares you received from the
exchange.
If you received Daily Shares of a Nations Funds Money Market Fund
through an exchange of Investor C Shares of a Fund before October 1,
1999, a CDSC may apply when you sell your Daily Shares. The CDSC will be
based on the period from when you bought the original shares until you
exchanged them.
28
<PAGE>
AUTOMATIC EXCHANGE FEATURE
The Automatic Exchange Feature lets you exchange $25 or more of Investor A or
Investor C Shares every month or every quarter. You can contact your investment
professional or us to set up the plan.
Here's how automatic exchanges work:
o Send your request to First Data in writing or call 1.800.321.7854.
o You must already have an investment in the Funds you want to
exchange.
o You can choose to have us transfer your money on or about the 15th
or the last day of the month.
o The rules for making exchanges apply to automatic exchanges.
29
<PAGE>
[GRAPHIC]
THE FINANCIAL INSTITUTION OR INTERMEDIARY THAT BUYS SHARES FOR YOU
IS ALSO SOMETIMES REFERRED TO AS A SELLING AGENT.
THE DISTRIBUTION FEE IS OFTEN REFERRED TO AS A "12B-1" FEE BECAUSE
IT'S PAID THROUGH A PLAN APPROVED UNDER RULE 12B-1 UNDER THE 1940
ACT.
YOUR SELLING AGENT MAY CHARGE OTHER FEES FOR SERVICES PROVIDED TO
YOUR ACCOUNT.
[GRAPHIC]
HOW SELLING AND SERVICING AGENTS ARE PAID
Selling and servicing agents usually receive compensation based on your
investment in the Fund. The kind and amount of the compensation depends on the
share class you invest in. Selling agents typically pay a portion of the
compensation they receive to their investment professionals.
COMMISSIONS
Your selling agent may receive an up-front commission (reallowance) when you
buy shares of a Fund. The amount of this commission depends on which share
class you choose:
o up to 4.25% of the offering price per share of Investor A Shares. The
commission is paid from the sales charge we deduct when you buy your
shares
o up to 4.00% of the net asset value per share of Investor B Shares. The
commission is not deducted from your purchase -- we pay your selling agent
directly
o up to 1.00% of the net asset value per share of Investor C Shares. The
commission is not deducted from your purchase -- we pay your selling agent
directly
If you buy Investor B or Investor C Shares you will be subject to higher
distribution (12b-1) and shareholder servicing fees and may be subject to a
CDSC when you sell your shares.
DISTRIBUTION (12B-1) AND SHAREHOLDER SERVICING FEES
Stephens and selling and servicing agents may be compensated for selling shares
and providing services to investors under distribution and shareholder
servicing plans.
The amount of the fee depends on the class of shares you own:
<TABLE>
<CAPTION>
Maximum annual distribution (12b-1)
and shareholder servicing fees
(as an annual % of average daily net assets)
<S> <C>
Investor A Shares 0.25% combined distribution (12b-1) and shareholder servicing fee
Investor B Shares 0.75% distribution (12b-1) fee, 0.25% shareholder servicing fee
Investor C Shares 0.75% distribution (12b-1) fee, 0.25% shareholder servicing fee
</TABLE>
Fees are calculated daily and deducted monthly. Because these fees are paid out
of the Fund's assets on an ongoing basis, they will increase the cost of your
investment over time, and may cost you more than any sales charges you may pay.
The Fund pays these fees to Stephens and to eligible selling and servicing
agents for as long as the plans continue. We may reduce or discontinue payments
at any time.
30
<PAGE>
OTHER COMPENSATION
Selling and servicing agents may also receive:
o a bonus, incentive or other compensation relating to the sale, promotion
and marketing of the Fund
o additional amounts on all sales of shares:
o up to 1.00% of the offering price per share of Investor A Shares
o up to 1.00% of the net asset value per share of Investor B Shares
o up to 1.00% of the net asset value per share of Investor C Shares
o non-cash compensation like trips to sales seminars or vacation
destinations, tickets to sporting events, theater or other entertainment,
opportunities to participate in golf or other outings and gift
certificates for meals or merchandise
This compensation, which is not paid by the Fund, is discretionary and may be
available only to selected selling and servicing agents. For example, Stephens
sometimes sponsors promotions involving Banc of America Investments, Inc., an
affiliate of BAAI, and certain other selling or servicing agents. Selected
selling and servicing agents also may receive compensation for opening a
minimum number of accounts.
BAAI also may pay amounts from its own assets to Stephens or to selling or
servicing agents for related services they provide.
31
<PAGE>
[GRAPHIC]
THE POWER OF COMPOUNDING
REINVESTING YOUR DISTRIBUTIONS BUYS YOU MORE SHARES OF A
FUND -- WHICH LETS YOU TAKE ADVANTAGE OF THE POTENTIAL FOR
COMPOUND GROWTH.
PUTTING THE MONEY YOU EARN BACK INTO YOUR INVESTMENT MEANS IT, IN
TURN, MAY EARN EVEN MORE MONEY. OVER TIME, THE POWER OF COMPOUNDING
HAS THE POTENTIAL TO SIGNIFICANTLY INCREASE THE VALUE OF YOUR
INVESTMENT. THERE IS NO ASSURANCE, HOWEVER, THAT YOU'LL EARN MORE
MONEY IF YOU REINVEST YOUR DISTRIBUTIONS.
[GRAPHIC]
DISTRIBUTIONS AND TAXES
ABOUT DISTRIBUTIONS
A mutual fund can make money two ways:
o It can earn income. Examples are interest paid on bonds and dividends paid
on COMMON STOCKS.
o A fund can also have CAPITAL GAIN if the value of its investments
increases. If a fund sells an investment at a gain, the gain is realized.
If a fund continues to hold the investment, any gain is unrealized.
A mutual fund is not subject to income tax as long as it distributes its net
investment income and realized capital gain to its shareholders. The Fund
intends to pay out a sufficient amount of its income and capital gain to its
shareholders so the Fund won't have to pay any income tax. When a Fund makes
this kind of a payment, it's split equally among all shares, and is called a
distribution.
The Fund distributes any net realized capital gain at least once a year. The
Fund declares distributions of net investment income daily and pay them
monthly.
A distribution is paid based on the number of shares you hold on the record
date, which is usually the day the distribution is declared (daily dividend
Funds) or the day before the distribution is declared (all other Funds). Shares
are eligible to receive distributions from the SETTLEMENT DATE (daily dividend
Funds) or the TRADE DATE (all other Funds) of the purchase up to and including
the day before the shares are sold.
Different share classes of a Fund usually pay different distribution amounts,
because each class has different expenses. Each time a distribution is made,
the net asset value per share of the share class is reduced by the amount of
the distribution.
We'll automatically reinvest distributions in additional shares of the same
Fund unless you tell us you want to receive your distributions in cash. You can
do this by writing to us at the address on the back cover, or by calling us at
1.800.321.7854.
We generally pay cash distributions within five business days after the end of
the month, quarter or year in which the distribution was made. If you sell all
of your shares, we'll pay any distribution that applies to those shares in cash
within five business days after the sale was made.
If you buy shares of a Fund shortly before it makes a distribution, you will,
in effect, receive part of your purchase back in the distribution, which is
subject to tax. Similarly, if you buy shares of a Fund that holds securities
with unrealized capital gain, you will, in effect, receive part of your
purchase back if and when the Fund sells those securities and distributes the
gain. This distribution is also subject to tax. Some Funds have built up, or
have the potential to build up, high levels of unrealized capital gain.
32
<PAGE>
[GRAPHIC]
THIS INFORMATION IS A SUMMARY OF HOW FEDERAL INCOME TAXES MAY
AFFECT YOUR INVESTMENT IN THE FUNDS. IT IS NOT INTENDED AS A
SUBSTITUTE FOR CAREFUL TAX PLANNING. YOU SHOULD CONSULT WITH YOUR
OWN TAX ADVISOR ABOUT YOUR SITUATION, INCLUDING ANY FOREIGN, STATE
AND LOCAL TAXES THAT MAY APPLY.
[GRAPHIC]
FOR MORE INFORMATION ABOUT
TAXES, PLEASE SEE THE SAI.
HOW TAXES AFFECT YOUR INVESTMENT
Distributions that come from a Fund's net investment income, net foreign
currency gain and any excess of net short-term capital gain over net long-term
capital loss generally are taxable to you as ordinary income.
Distributions that come from a Fund's net capital gain (generally the excess of
net long-term capital gain over net short-term capital loss), generally are
taxable to you as net capital gain. Corporate shareholders won't be able to
deduct any distributions from a Fund when determining their taxable income.
In general, all distributions are taxable to you when paid, whether they are
paid in cash or automatically reinvested in additional shares of the Fund.
However, any distributions declared in October, November or December of one
year and distributed in January of the following year will be taxable as if
they had been paid to you on December 31 of the first year.
We'll send you a notice every year that tells you how much you've received in
distributions during the year and their federal tax status. Foreign, state and
local taxes may also apply to these distributions.
WITHHOLDING TAX
We're required by federal law to withhold tax of 31% on any distributions and
redemption proceeds paid to you (including amounts deemed to be paid for "in
kind" redemptions and exchanges) if:
o you haven't given us a correct Taxpayer Identification Number (TIN) and
haven't certified that the TIN is correct and withholding doesn't apply
o the Internal Revenue Service (IRS) has notified us that the TIN listed on
your account is incorrect according to its records
o the IRS informs us that you're otherwise subject to backup withholding
The IRS may also impose penalties against you if you don't give us a correct
TIN.
Amounts we withhold are applied to your federal income tax liability. You may
receive a refund from the IRS if the withholding tax results in an overpayment
of taxes.
We're also normally required by federal law to withhold tax on distributions
paid to foreign shareholders.
TAXATION OF REDEMPTIONS AND EXCHANGES
Your redemptions (including redemptions "in kind") and exchanges of Fund shares
will usually result in a taxable capital gain or loss, depending on the amount
you receive for your shares (or are deemed to receive in the case of exchanges)
and the amount you paid (or are deemed to have paid) for them.
33
<PAGE>
[GRAPHIC]
FINANCIAL HIGHLIGHTS
The financial highlights table is designed to help you understand how the Fund
has performed for the past five years. Certain information reflects financial
results for a single Fund share. The total investment return line indicates how
much an investment in the Fund would have earned, assuming all dividends and
distributions had been reinvested.
This information, except as noted below, has been audited by
PricewaterhouseCoopers LLP. The independent accountant's report and Nations
Funds financial statements are incorporated by reference into the SAI. Please
see the back cover to find out how you can get a copy.
The financial highlights of Nations U.S. Government Bond Fund for the period
ended May 16, 1997 were audited by other independent accountants.
34
<PAGE>
NATIONS U.S. GOVERNMENT BOND
FUND FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
INVESTOR A SHARES* 3/31/99# 03/31/98 05/16/97 08/31/96 08/31/95(B)
<S> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net asset value, at the beginning of the period $ 10.37 $ 10.20 $ 10.54 $ 11.19 $ 10.48
Net investment income 0.50 0.46 0.39 0.59 0.37
Net realized and unrealized gain/(loss) on
investments 0.07 0.30 0.17 ( 0.20) 0.71
Net increase in net asset value from operations 0.57 0.76 0.56 0.39 1.08
DISTRIBUTIONS:
Dividends from net investment income ( 0.50) ( 0.46) ( 0.39) ( 0.59) ( 0.37)
Distributions from net realized capital gains ( 0.36) ( 0.13) ( 0.51) ( 0.45) --
Total dividends and distributions ( 0.86) ( 0.59) ( 0.90) ( 1.04) ( 0.37)
Net asset value, end of the period $ 10.08 $ 10.37 $ 10.20 $ 10.54 $ 11.19
TOTAL RETURN ++ 5.57% 7.51% 5.44% 3.44% 10.41%
==================================================== ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $2,311 $1,927 $ 734 $ 632 $ 87
Ratio of operating expenses to average net assets 0.84%(a)(c) 0.85%+(a) 0.87%+ 0.85% 0.82%+
Ratio of net investment income to average net
assets 4.81% 5.01%+ 5.35%+ 5.44% 5.76%+
Portfolio turnover rate 270% 188% 58% 87% 132%
Ratio of operating expenses to average net assets
without waivers and/or expense reimbursements 1.12%(a) 1.11%+(a) 1.07%+ 1.07% 1.12%+
* The financial information for the fiscal periods
prior to May 23, 1997 reflects the financial
information for the Pilot U.S. Government Securities
Fund's Class A Shares, which were reorganized into
the Investor A Shares of Nations U.S. Government Bond
Fund as of May 23, 1997.
+ Annualized
++ Total return represents aggregate total return for
the period indicated, assumes reinvestment of all
distributions, 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 the credits
allowed by the custodian on the expense ratio, with
and without waivers and/or expense reimbursements,
was less than 0.01%.
(b) Investor A Shares commenced operations on
February 7, 1995.
(c) The effect of interest expense on the operating
expense ratio was less than 0.01%.
NATIONS U.S. GOVERNMENT BOND
FUND FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<CAPTION>
YEAR ENDED PERIOD ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
INVESTOR B SHARES* 3/31/99# 03/31/98 05/16/97 08/31/96 08/31/95(B)
<S> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net asset value at the beginning of the period $ 10.37 $ 10.19 $ 10.52 $ 11.19 $ 10.05
Net investment income 0.44 0.41 0.34 0.51 0.46
Net realized and unrealized gain/(loss) on
investments 0.07 0.31 0.18 ( 0.22) 1.14
Net increase in net asset value from operations 0.51 0.72 0.52 0.29 1.60
DISTRIBUTIONS:
Dividends from net investment income ( 0.44) ( 0.41) ( 0.34) ( 0.51) ( 0.46)
Distributions from net realized capital gains ( 0.36) ( 0.13) ( 0.51) ( 0.45) --
Total dividends and distributions ( 0.80) ( 0.54) ( 0.85) ( 0.96) ( 0.46)
Net asset value at the end of the period $ 10.08 $ 10.37 $ 10.19 $ 10.52 $ 11.19
TOTAL RETURN++ 4.93% 7.14% 4.99% 2.43% 16.19%
==================================================== ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets at end of period (in 000's) $6,779 $1,004 $1,529 $1,237 $ 146
Ratio of operating expenses to average net assets 1.44%(a)(c) 1.40%+(a) 1.62%+ 1.65% 1.62%+
Ratio of net investment income to average net
assets 4.21% 4.46%+ 4.60%+ 4.60% 5.19%+
Portfolio turnover rate 270% 188% 58% 87% 132%
Ratio of operating expenses to average net assets
without waivers and/or expense reimbursements 1.87%(a) 1.66%+(a) 1.77%+ 1.82% 1.87%+
</TABLE>
* The financial information for the fiscal periods
prior to May 23, 1997 reflects the financial
information for the Pilot U.S. Government Securities
Fund's Class B Shares which were reorganized into the
Nations U.S. Government Bond Fund Investor B Shares
as of May 23, 1997.
+ Annualized.
++ Total return represents aggregate total return for
the period indicated, assumes reinvestment of all
distributions, 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) Investor B Shares commenced operations on
November 10, 1994.
(c) The effect of interest expense on the operating
expense ratio was less than 0.01%.
35
<PAGE>
NATIONS U.S. GOVERNMENT BOND
FUND FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
INVESTOR C SHARES YEAR ENDED PERIOD ENDED
3/31/99# 03/31/98(B)
<S> <C> <C>
OPERATING PERFORMANCE:
Net asset value at the beginning of the period $ 10.37 $ 10.41
Net investment income 0.44 0.25
Net realized and unrealized gain/(loss) on
investments 0.07 0.09
Net increase in net asset value from operations 0.51 0.34
DISTRIBUTIONS:
Dividends from net investment income ( 0.44) ( 0.25)
Distributions from net realized capital gains ( 0.36) ( 0.13)
Total dividends and distributions ( 0.80) ( 0.38)
Net asset value at the end of the period $ 10.08 $ 10.37
TOTAL RETURN++ 5.13% 3.50%
==================================================== ======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets at end of period (in 000's) $1,255 $1,332
Ratio of operating expenses to average net assets 1.34%(a)(c) 1.45%(a)+
Ratio of net investment income to average net
assets 4.31% 4.41%+
Portfolio turnover rate 270% 188%
Ratio of operating expenses to average net assets
without waivers and/or expense reimbursements 1.87%(a) 1.71%(a)+
</TABLE>
+ Annualized.
++ Total return represents aggregate total return for
the period indicated, assumes reinvestment of all
distributions, 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) Investor C Shares commenced operations on
September 19, 1997.
(c) The effect of interest expense on the operating
expense ratio was less than 0.01%.
36
<PAGE>
[GRAPHIC]
TERMS USED IN THIS PROSPECTUS
ASSET-BACKED SECURITY - a debt security that gives you an interest in a pool of
assets that is collateralized or "backed" by one or more kinds of assets,
including real property, receivables or mortgages, generally issued by banks,
credit card companies or other lenders. Some securities may be issued or
guaranteed by the U.S. government or its agencies, authorities or
instrumentalities. Asset-backed securities typically make periodic payments,
which may be interest or a combination of interest and a portion of the
principal of the underlying assets.
AVERAGE DOLLAR-WEIGHTED MATURITY - the average length of time until the debt
securities held by a Fund reach maturity. In general, the longer the average
dollar-weighted maturity, the more a Fund's share price will fluctuate in
response to changes in interest rates.
BANK OBLIGATION - a money market instrument issued by a bank, including
certificates of deposit, time deposits and bankers' acceptances.
CAPITAL GAIN OR LOSS - the difference between the purchase price of a security
and its selling price. You realize a capital gain when you sell a security for
more than you paid for it. You realize a capital loss when you sell a security
for less than you paid for it.
CASH EQUIVALENTS - short-term, interest-bearing instruments, including
obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities, bank obligations, asset-backed securities, foreign
government securities and commercial paper issued by U.S. and foreign issuers
which, at the time of investment, is rated at least Prime-2 by Moody's Investor
Services, Inc. (Moody's), A-2 by S&P, or F-1 by Fitch IBCA (Fitch).
COLLATERALIZED MORTGAGE OBLIGATION (CMO) - a debt security that is backed by
real estate mortgages. CMO payment obligations are covered by interest and/or
principal payments from a pool of mortgages. In addition, the underlying assets
of a CMO are typically separated into classes, called tranches, based on
maturity. Each tranche pays a different rate of interest. CMOs are not
generally issued by the U.S. government, its agencies or instrumentalities.
COMMERCIAL PAPER - a money market instrument issued by a large company.
COMMON STOCK - a security that represents part equity ownership in a company.
Common stock typically allows you to vote at shareholder meetings and to share
in the company's profits by receiving dividends.
CONVERTIBLE SECURITY - a security that can be exchanged for common stock (or
another type of security) at a specified rate. Convertible securities include
convertible debt, rights and warrants.
CORPORATE OBLIGATION - a money market instrument issued by a corporation or
commercial bank.
37
<PAGE>
DEBT SECURITY - when you invest in a debt security, you are typically lending
your money to a governmental body or company (the issuer) to help fund their
operations or major projects. The issuer pays interest at a specified rate on a
specified date or dates, and repays the principal when the security matures.
Short-term debt securities include money market instruments such as treasury
bills. Long-term debt securities include fixed income securities such as
government and corporate bonds, and mortgage-backed and asset-backed
securities.
DEPOSITARY RECEIPTS - evidence of the deposit of a security with a custodian
bank. American Depositary Receipts (ADRs), for example, are certificates traded
in U.S. markets representing an interest of a foreign company. They were
created to make it possible for foreign issuers to meet U.S. security
registration requirements. Other examples include ADSs, GDRs and EDRs.
DOLLAR ROLL TRANSACTION - the sale by a Fund of mortgage-backed or other
asset-backed securities, together with a commitment to buy similar, but not
identical, securities at a future date.
DURATION - a measure used to estimate a security's or portfolio's sensitivity
to changes in interest rates. For example, if interest rates rise by one
percentage point, the share price of a fund with a duration of five years would
decline by about 5%. If interest rates fall by one percentage point, the fund's
share price would rise by about 5%.
EQUITY SECURITY - an investment that gives you an equity ownership right in a
company. Equity securities (or "equities") include common and preferred stock,
rights and warrants.
FIRST-TIER SECURITY - under Rule 2a-7 under the 1940 Act, a debt security that
is an eligible investment for money market funds and has the highest short-term
rating from a nationally recognized statistical rating organization (NRSRO), or
if unrated, is determined by the fund's portfolio management team to be of
comparable quality, or is a money market fund issued by a registered investment
company, or is a government security.
FIXED INCOME SECURITY - an intermediate to long-term debt security that matures
in more than one year.
FOREIGN SECURITY - a debt or equity security issued by a foreign company or
government.
FUTURES CONTRACT - a contract to buy or sell an asset or an index of securities
at a specified price on a specified future date. The price is set through a
futures exchange.
GUARANTEED INVESTMENT CONTRACT - an investment instrument issued by a rated
insurance company in return for a payment by an investor.
38
<PAGE>
HIGH QUALITY - in the case of municipal securities, a long-term rating of A or
higher from Duff & Phelps Credit Rating Co. (D&P), Fitch, S&P, Thomson
BankWatch, Inc. (BankWatch), or Moody's in the case of certain bonds that are
lacking a short-term rating from the required number of NRSROS; rated D-1 or
higher by D&P, F-1 or higher by Fitch, SP-1 by S&P, or MIG-1 by Moody's in the
case of notes; rated D-1 or higher by D&P, F-1 or higher by Fitch, or VMIG-1 by
Moody's in the case of variable rate demand notes; or rated D-1 or higher by
D&P, F-1 or higher by Fitch, A-1 or higher by S&P or PRIME-1 by Moody's in the
case of tax-exempt commercial paper. The portfolio management team may consider
an unrated municipal security to be investment grade if the team believes it to
be of comparable quality, based on guidelines provided by the Fund's Board of
Directors. Please see the SAI for more information about credit ratings.
INVESTMENT GRADE - a debt security that has been given a medium to high credit
rating (Baa or higher by Moody's, BBB or higher by S&P or a comparable rating
by other NRSROs) based on the issuer's ability to pay interest and repay
principal on time. The portfolio management team may consider an unrated debt
security to be investment grade if the team believes it is of comparable
quality. Please see the SAI for more information about credit ratings.
LEHMAN 3-YEAR MUNICIPAL BOND INDEX - a broad-based, unmanaged index of
investment grade bonds with maturities of two to four years. All dividends are
reinvested.
LEHMAN 7-YEAR MUNICIPAL BOND INDEX - a broad-based, unmanaged index of
investment grade bonds with maturities of seven to eight years. All dividends
are reinvested.
LEHMAN AGGREGATE BOND INDEX - an index made up of the Lehman
Government/Corporate Index, the Asset-Backed Securities Index and the
Mortgage-Backed Securities Index. These indexes include U.S. government agency
and U.S. Treasury securities, corporate bonds and mortgage-backed securities.
All dividends are reinvested.
LEHMAN GOVERNMENT BOND INDEX - an index of government bonds with an average
maturity of approximately nine years. All dividends are reinvested.
LEHMAN GOVERNMENT/CORPORATE BOND INDEX - an index of U.S. government, U.S.
Treasury and agency securities, and corporate and Yankee bonds. All dividends
are reinvested.
LEHMAN INTERMEDIATE GOVERNMENT BOND INDEX - an index of U.S. government agency
and U.S. Treasury securities. All dividends are reinvested.
LEHMAN INTERMEDIATE TREASURY INDEX - an index of U.S. Treasury securities with
maturities of three to 10 years. All dividends are reinvested.
LEHMAN MUNICIPAL BOND INDEX - a broad-based, unmanaged index of 8,000
investment grade bonds with long-term maturities. All dividends are reinvested.
39
<PAGE>
LIQUIDITY - a measurement of how easily a security can be bought or sold at a
price that is close to its market value.
MERRILL LYNCH 1-3 YEAR TREASURY INDEX - an index of U.S. Treasury bonds with
maturities of 1 to 3 years. All dividends are reinvested.
MONEY MARKET INSTRUMENT - a short-term debt security that matures in 13 months
or less. Money market instruments include U.S. Treasury obligations, U.S.
government obligations, certificates of deposit, bankers' acceptances,
commercial paper, repurchase agreements and certain municipal securities.
MORTGAGE-BACKED SECURITY OR MORTGAGE-RELATED SECURITY - a debt security that
gives you an interest in, and is backed by, a pool of residential mortgages
issued by the U.S. government or by financial institutions. The underlying
mortgages may be guaranteed by the U.S. government or one of its agencies,
authorities or instrumentalities. Mortgage-backed securities typically make
monthly payments, which are a combination of interest and a portion of the
principal of the underlying mortgages.
MUNICIPAL SECURITY (OBLIGATION) - a debt security issued by state or local
governments or governmental authorities to pay for public projects and
services. "General obligations" are typically backed by the issuer's full
taxing and revenue-raising powers. "Revenue securities" depend on the income
earned by a specific project or authority, like road or bridge tolls, user fees
for water or revenues from a utility. Interest income from these securities is
exempt from federal income taxes and is generally exempt from state taxes if
you live in the state that issued the security. If you live in the municipality
that issued the security, interest income may also be exempt from local taxes.
NON-DIVERSIFIED - a fund that holds securities of fewer issuers or kinds of
issuers than other kinds of funds. Non-diversified funds tend to have greater
price swings than more diversified funds because events affecting one or more
of its securities may have a disproportionately large effect on the fund.
PARTICIPATION - a pass-through certificate representing a share in a pool of
debt obligations or other instruments.
PASS-THROUGH CERTIFICATE - securitized mortgages or other debt securities with
interest and principal paid by a servicing intermediary shortly after interest
payments are received from borrowers.
PRE-REFUNDED BOND - a bond that is repaid before its maturity date. The
repayment is generally financed by a new issue. Issuers generally pre-refund
bonds during periods of lower interest rates to reduce their interest costs.
40
<PAGE>
PRIVATE ACTIVITY BOND - a municipal security that is used to finance private
projects or other projects that aren't qualified for tax purposes. Private
activity bonds are generally taxable, unless their use is specifically
exempted, or may be treated as tax preference items.
REAL ESTATE INVESTMENT TRUST (REIT) - a portfolio of real estate investments
which may include office buildings, apartment complexes, hotels and shopping
malls, and real-estate-related loans or interests.
REPURCHASE AGREEMENT - a short-term (often overnight) investment arrangement.
The investor agrees to buy certain securities from the borrower and the
borrower promises to buy them back at a specified date and price. The
difference between the purchase price paid by the investor and the repurchase
price paid by the borrower represents the investor's return. Repurchase
agreements are popular because they provide very low-risk return and can
virtually eliminate credit difficulties.
REVERSE REPURCHASE AGREEMENT - a repurchase agreement in which an investor
sells a security to another party, like a bank or dealer, in return for cash,
and agrees to buy the security back at a specified date and price.
SALOMON BROTHERS MORTGAGE INDEX - an index of 30-year and 15-year GNMA, FNMA
and FHLMC securities, and FNMA and FHLMC balloon mortgages.
SECOND-TIER SECURITY - under Rule 2a-7 under the 1940 Act, a debt security that
is an eligible investment for money market funds, but is not a first-tier
security.
SETTLEMENT DATE - the date on which an order is settled either by payment or
delivery of securities.
SPECIAL PURPOSE ISSUER - an entity organized solely to issue asset-backed
securities on a pool of assets it owns.
TRADE DATE - the effective date of a purchase, sale or exchange transaction, or
other instructions sent to us. The trade date is determined by the day and time
we receive the order or instructions in a form that's acceptable to us.
U.S. GOVERNMENT OBLIGATIONS - a wide range of debt securities issued or
guaranteed by the U.S. government or its agencies, authorities or
instrumentalities.
U.S. TREASURY OBLIGATION - a debt security issued by the U.S. Treasury.
ZERO-COUPON BOND - a bond that makes no periodic interest payments. Zero coupon
bonds are sold at a deep discount to their face value and mature at face value.
The difference between the face value at maturity and the purchase price
represents the return.
41
<PAGE>
[GRAPHIC]
WHERE TO FIND MORE INFORMATION
You'll find more information about the Fixed Income Fund in the following
documents:
[GRAPHIC]
ANNUAL AND SEMI-ANNUAL REPORTS
The annual and semi-annual reports contain information about Fund
investments and performance, the financial statements and the auditor's
reports. The annual report also includes a discussion about the market
conditions and investment strategies that had a significant effect on
the Fund's performance during the period covered.
[GRAPHIC]
STATEMENT OF ADDITIONAL INFORMATION
The SAI contains additional information about the Fund and its policies.
The SAI is legally part of this prospectus (it's incorporated by
reference). A copy has been filed with the SEC.
You can obtain a free copy of these documents, request other information
about the Fund and make shareholder inquiries by contacting Nations
Funds:
By telephone: 1.800.321.7854
By mail:
NATIONS FUNDS
C/O STEPHENS INC.
ONE BANK OF AMERICA PLAZA
33RD FLOOR
CHARLOTTE, NC 28255
On the Internet: WWW.NATIONSBANK.COM/NATIONSFUNDS
If you prefer, you can write the SEC's Public Reference Room and ask
them to mail you copies of these documents. They'll charge you a fee for
this service. You can also download them from the SEC's website or visit
the Public Reference Section and copy the documents while you're there.
Please call the SEC for more information.
PUBLIC REFERENCE SECTION OF THE SEC
WASHINGTON, DC 20549-6009
1.800.SEC.0330
WWW.SEC.GOV
SEC file number:
Nations Fund Inc., 811-04614
NF-BONDPROIX-8/99
[NATIONS FUNDS LOGO APPEARS HERE]
<PAGE>
[GRAPHIC]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
FIXED INCOME FUND
- -----------------
Prospectus -- Primary A Shares
February 14, 2000
-----------------
Fixed Income Fund
Nations U.S. Government Bond Fund
The Securities and Exchange Commission (SEC) has not approved or disapproved
these securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
NOT FDIC
INSURED
- -------------------
May Lose Value
- -------------------
No Bank Guarantee
- -------------------
[NATIONS FUNDS LOGO APPEARS HERE]
<PAGE>
AN OVERVIEW OF THE FUND
- --------------------------------------------------------------------------------
[GRAPHIC]
TERMS USED IN THIS PROSPECTUS
IN THIS PROSPECTUS, WE, US AND OUR REFER TO THE NATIONS FUNDS
FAMILY (NATIONS FUNDS). SOME OTHER IMPORTANT TERMS WE'VE USED MAY
BE NEW TO YOU. THESE ARE PRINTED IN ITALICS WHERE THEY FIRST APPEAR
IN A SECTION AND ARE DESCRIBED IN TERMS USED IN THIS PROSPECTUS.
[GRAPHIC]
YOU'LL FIND TERMS USED
IN THIS PROSPECTUS ON
PAGE 19.
YOUR INVESTMENT IN THIS FUND IS NOT A BANK DEPOSIT AND IS NOT
INSURED OR GUARANTEED BY BANK OF AMERICA, N. A. (BANK OF AMERICA),
THE FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) OR ANY OTHER
GOVERNMENT AGENCY. YOUR INVESTMENT MAY LOSE MONEY.
AFFILIATES OF BANK OF AMERICA ARE PAID FOR THE SERVICES THEY
PROVIDE TO THE FUNDS.
This booklet, which is called a prospectus, tells you about one of the Nations
Funds Fixed Income Funds. Please read it carefully, because it contains
information that's designed to help you make informed investment decisions.
ABOUT THE FUND
The Fixed Income Fund seeks total return and preservation of capital by
investing in U.S. Government securities and repurchase agreements
collateralized by such securities.
Fixed income securities have the potential to increase in value because when
interest rates fall, the value of these securities tends to rise. When interest
rates rise, however, the value of these securities tends to fall. Other things
can also affect the value of fixed income securities. There's always a risk
that you'll lose money or you may not earn as much as you expect.
IS THIS FUND RIGHT FOR YOU?
Not every Fund is right for every investor. When you're choosing a Fund to
invest in, you should consider things like your investment goals, how much risk
you can accept and how long you're planning to hold your investment.
The Fixed Income Fund may be suitable for you if:
o you're looking for income
o you have longer-term investment goals
It may not be suitable for you if:
o you're not prepared to accept or are unable to bear the risks
associated with fixed income securities
You'll find a discussion of the Fund's principal investments, strategies and
risks in the Fund description that starts on page 4.
FOR MORE INFORMATION
If you have any questions about the Fund, please call us at 1.800.765.2668 or
contact your investment professional.
You'll find more information about the Fund in the Statement of Additional
Information (SAI). The SAI includes more detailed information about the Fund's
investments, policies, performance and management, among other things. Please
turn to the back cover to find out how you can get a copy.
2
<PAGE>
WHAT'S INSIDE
- --------------------------------------------------------------------------------
[GRAPHIC]
BANC OF AMERICA ADVISORS, INC.
BANC OF AMERICA ADVISORS, INC. (BAAI) IS THE INVESTMENT ADVISER TO
THE FUND. BAAI IS RESPONSIBLE FOR THE OVERALL MANAGEMENT AND
SUPERVISION OF THE INVESTMENT MANAGEMENT OF THE FUND. BAAI AND
NATIONS FUNDS HAVE ENGAGED A SUB-ADVISER, WHICH IS RESPONSIBLE FOR
THE DAY-TO-DAY INVESTMENT DECISIONS FOR THE FUND.
[GRAPHIC]
YOU'LL FIND MORE ABOUT BAAI AND THE SUB-ADVISER STARTING ON PAGE
10.
[GRAPHIC]
ABOUT THE FUND
<TABLE>
<CAPTION>
<S> <C>
FIXED INCOME FUND
NATIONS U.S. GOVERNMENT BOND FUND 4
Sub-adviser: Banc of America Capital Management, Inc. -
- --------------------------------------------------------------------
OTHER IMPORTANT INFORMATION 8
- --------------------------------------------------------------------
HOW THE FUND IS MANAGED 10
[GRAPHIC]
ABOUT YOUR INVESTMENT
INFORMATION FOR INVESTORS
Buying, selling and exchanging shares 12
Distributions and taxes 15
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 17
- --------------------------------------------------------------------
TERMS USED IN THIS PROSPECTUS 19
- --------------------------------------------------------------------
WHERE TO FIND MORE INFORMATION BACK COVER
</TABLE>
3
<PAGE>
ABOUT THE FIXED INCOME FUND
- --------------------------------------------------------------------------------
[GRAPHIC]
ABOUT THE SUB-ADVISER
BANC OF AMERICA CAPITAL MANAGMENT, INC. (BACM) IS THIS FUND'S
SUB-ADVISER. BACM'S FIXED INCOME MANAGEMENT TEAM MAKES THE
DAY-TO-DAY INVESTMENT DECISIONS FOR THE FUND.
[GRAPHIC]
YOU'LL FIND MORE ABOUT BACM ON PAGE 11.
[GRAPHIC]
MORTGAGE-BACKED SECURITIES
THIS FUND INVESTS IN MORTGAGE-BACKED SECURITIES. MORTGAGE-BACKED
SECURITIES TEND TO PAY HIGHER INCOME THAN U.S. TREASURY BONDS AND
OTHER GOVERNMENT-BACKED BONDS WITH SIMILAR MATURITIES BUT ALSO HAVE
SPECIFIC RISKS ASSOCIATED WITH THEM. THEY PAY A MONTHLY AMOUNT THAT
INCLUDES A PORTION OF THE PRINCIPAL ON THE UNDERLYING MORTGAGES, AS
WELL AS INTEREST.
NATIONS U.S. GOVERNMENT BOND FUND
[GRAPHIC]
INVESTMENT OBJECTIVE
This Fund seeks total return and preservation of capital by investing in
U.S. Government securities and repurchase agreements collateralized by
such securities.
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests at least 65% of its assets in U.S. government
obligations and repurchase agreements secured by these securities.
The Fund may also invest in:
o mortgage-related securities issued by governments or corporations
o asset-backed securities or municipal securities rated investment grade at
the time of investment, or unrated if the portfolio management team
believes they are of comparable quality to investment grade securities at
the time of investment
o corporate debt securities, including bonds, notes and debentures rated
investment grade at the time of investment, or unrated if the portfolio
management team believes they are of comparable quality to investment
grade securities at the time of investment
The Fund may also invest in securities that aren't part of its principal
investment strategies, but it won't hold more than 10% of its assets in any one
type of these securities. These securities are described in the SAI.
Normally, the Fund's average dollar-weighted maturity will be between five and
30 years.
When selecting individual investments, the portfolio management team:
o looks at a fixed income security's potential to generate both income and
price appreciation
o allocates assets primarily among U.S. government obligations, including
securities issued by government agencies, mortgage-backed securities and
U.S Treasury securities, based on how they have performed in the past, and
on how they are expected to perform under current market conditions. The
team may change the allocations when market conditions change
o selects securities using structure analysis, which evaluates the
characteristics of a security, including its call features, coupons, and
expected timing of cash flows
The team may sell a security when it believes the security is overvalued, there
is a deterioration in the security's credit rating or in the issuer's financial
situation, when other investments are more attractive, or for other reasons.
4
<PAGE>
[GRAPHIC]
YOU'LL FIND MORE ABOUT OTHER RISKS OF INVESTING IN THIS FUND
STARTING ON PAGE 8 AND IN THE SAI.
[GRAPHIC]
MANY THINGS AFFECT A FUND'S PERFORMANCE, INCLUDING MARKET
CONDITIONS, THE COMPOSITION OF THE FUND'S HOLDINGS, AND FUND
EXPENSES.
CALL US AT 1.800.765.2668 OR CONTACT YOUR INVESTMENT PROFESSIONAL
FOR THE FUND'S CURRENT YIELD.
[GRAPHIC]
RISKS AND OTHER THINGS TO CONSIDER
Nations U.S. Government Bond Fund has the following risks:
o INVESTMENT STRATEGY RISK - There is a risk that the value of the
investments that the portfolio management team chooses will not rise
as high as the team expects, or will fall.
o INTEREST RATE RISK - The prices of fixed income securities will tend
to fall when interest rates rise. In general, fixed income securities
with longer terms tend to fall more in value when interest rates rise
than fixed income securities with shorter terms.
o CREDIT RISK - The Fund could lose money if the issuer of a fixed
income security is unable to pay interest or repay principal when
it's due. Credit risk usually applies to most fixed income
securities, but is generally not a factor for U.S. government
obligations.
o DERIVATIVES RISK - This Fund may invest in derivatives. There is a
risk that these investments could result in losses, reduce returns,
increase transaction costs or increase the Fund's volatility.
o CHANGING DISTRIBUTION LEVELS - The level of monthly income
distributions paid by the Fund depends on the amount of income paid
by the securities the Fund holds. It is not guaranteed and will
change. Changes in the value of the securities, however, generally
should not affect the amount of income they pay.
o PREPAYMENT AND EXTENSION RISK - The value of the Fund's
mortgage-backed securities can fall if the owners of the underlying
mortgages pay off their mortgages sooner than expected, which could
happen when interest rates fall, or later than expected, which could
happen when interest rates rise. If the underlying mortgages are paid
off sooner than expected, the Fund may have to reinvest this money in
mortgage-backed securities that have lower yields.
[GRAPHIC]
A LOOK AT THE FUND'S PERFORMANCE
The following bar chart and table show you how the Fund has performed in
the past, and can help you understand the risks of investing in the
Fund. A FUND'S PAST PERFORMANCE IS NO GUARANTEE OF HOW IT WILL PERFORM
IN THE FUTURE.
YEAR BY YEAR TOTAL RETURN (%) AS OF DECEMBER 31 EACH YEAR
The bar chart shows you how the performance of the Fund's Primary A
Shares has varied from year to year. These returns do not reflect
deductions of sales charges or account fees, if any, and would be lower
if they did.
[BAR CHART APPEARS HERE]
1994 1995 1996 1997 1998
3.70% 20.75% 1.80% 8.43% 8.38%
*Return is from inception (11-7-94) to 12-31-94.
YEAR-TO-DATE RETURN AS OF JUNE 30, 1999: -3.17%
5
<PAGE>
[GRAPHIC]
THERE ARE TWO KINDS OF FEES -- SALES CHARGES YOU PAY DIRECTLY, AND
ANNUAL FUND OPERATING EXPENSES THAT ARE DEDUCTED FROM A FUND'S
ASSETS.
TOTAL NET EXPENSES ARE ACTUAL EXPENSES PAID BY THE FUND AFTER
WAIVERS AND/OR REIMBURSEMENTS.
BEST AND WORST QUARTERLY RETURNS DURING THIS PERIOD
<TABLE>
<CAPTION>
<S> <C>
Best: 2nd quarter 1995: 7.36%
Worst: 1st quarter 1996: -2.80%
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1998
The table shows the Fund's average annual total return for each period,
compared with the Lehman Government Bond Index, an index of government
bonds with an average maturity of approximately nine years. All
dividends are reinvested.
<CAPTION>
<S> <C> <C>
Since
1 year inception
Primary A Shares 8.38% 10.23%
Lehman Government Bond Index 9.85% 9.69%
[GRAPHIC]
WHAT IT COSTS TO INVEST IN THE FUND
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<CAPTION>
<S> <C>
Shareholder fees Primary A
(Fees paid directly from your investment) Shares
Maximum sales charge (load) imposed on purchases none
Maximum deferred sales charge (load) none
Annual Fund operating expenses(1)
(Expenses that are deducted from the Fund's assets)
Management fees 0.50%
Other expenses 0.39%
------
Total annual Fund operating expenses 0.89%
Fee waivers and/or reimbursements (0.10)%
------
Total net expenses(2) 0.79%
======
</TABLE>
(1)The figures contained in the above table are based on amounts
incurred during the Fund's most recent fiscal year and have been
adjusted, as needed, to reflect current service provider fees.
(2)The Fund's investment adviser and/or some of its other service
providers have agreed to waive fees and/or reimburse expenses until
July 31, 2000. The figure shown here is after waivers and/or
reimbursements. There is no guarantee that these waivers and/or
reimbursements will continue after this date.
6
<PAGE>
[GRAPHIC]
THIS IS AN EXAMPLE ONLY. YOUR ACTUAL COSTS COULD BE HIGHER OR
LOWER, DEPENDING ON THE AMOUNT YOU INVEST, AND ON THE FUND'S ACTUAL
EXPENSES AND PERFORMANCE.
EXAMPLE
This example is intended to help you compare the cost of investing in
this Fund with the cost of investing in other mutual funds.
This example assumes:
o you invest $10,000 in Primary A Shares of the Fund for the time
periods indicated and then sell all of your shares at the end of
those periods
o you reinvest all dividends and distributions in the Fund
o your investment has a 5% return each year
o the Fund's operating expenses remain the same as shown in the table
above
o the waivers and/or reimbursements included in above expire July 31,
2000 and are not reflected in the 3, 5 and 10 year examples
Although your actual costs may be higher or lower, based on these
assumptions, your costs would be:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1 year 3 years 5 years 10 years
Primary A Shares $81 $274 $483 $1,087
</TABLE>
7
<PAGE>
[GRAPHIC]
OTHER IMPORTANT INFORMATION
You'll find specific information about the Fund's principal investments,
strategies and risks in the description starting on page 4. The following are
some other risks and information you should consider before you invest:
o CHANGING INVESTMENT OBJECTIVES AND POLICIES - The investment
objective and certain investment policies of any Fund can be changed
without shareholder approval. Other investment policies may be
changed only with shareholder approval.
o HOLDING OTHER KINDS OF INVESTMENTS - The Fund may hold investments
that aren't part of its principal investment strategies. Please refer
to the SAI for more information. The portfolio managers or management
team can also choose not to invest in specific securities described
in this prospectus and in the SAI.
o FOREIGN INVESTMENT RISK - Funds that invest in foreign securities may
be affected by changes in currency exchange rates and the costs of
converting currencies; the implementation of the Euro; foreign
government controls on foreign investment, repatriation of capital,
and currency and exchange; foreign taxes; inadequate supervision and
regulation of some foreign markets; difficulty selling some
investments which may increase volatility; different settlement
practices or delayed settlements in some markets; difficulty getting
complete or accurate information about foreign companies; less strict
accounting, auditing and financial reporting standards than those in
the U.S.; political, economic or social instability; and difficulty
enforcing legal rights outside the U.S.
o EMERGING MARKETS RISK - Securities issued by companies in developing
or emerging market countries, like those in Eastern Europe, the
Middle East, Asia or Africa, may be more sensitive to the risks of
foreign investing. In particular, these countries may experience
instability resulting from rapid social, political and economic
development. Many of these countries are dependent on international
trade, which makes them sensitive to world commodity prices and
economic downturns in other countries. Some emerging countries have a
higher risk of currency devaluation, and some countries may
experience long periods of high inflation or rapid changes in
inflation rates.
o INVESTING DEFENSIVELY - The Fund may temporarily hold investments
that are not part of its investment objective or its principal
investment strategies to try to protect it during a market or
economic downturn or because of political or other conditions. The
Fund may not achieve its investment objective while it is investing
defensively.
8
<PAGE>
o PORTFOLIO TURNOVER - A Fund that replaces -- or turns over -- more
than 100% of its investments in a year is considered to trade
frequently. Frequent trading can result in larger distributions of
short-term capital gains to shareholders. These gains are taxable at
higher rates than long-term capital gains. Frequent trading can also
mean higher brokerage and other transaction costs, which could reduce
the Fund's returns. The Fund generally buys securities for capital
appreciation, investment income, or both, and doesn't engage in
short-term trading. You'll find the portfolio turnover rate for the
Fund in
FINANCIAL HIGHLIGHTS.
9
<PAGE>
[GRAPHIC]
BANC OF AMERICA ADVISORS, INC.
ONE BANK OF AMERICA PLAZA
CHARLOTTE, NORTH CAROLINA 28255
[GRAPHIC]
HOW THE FUND IS MANAGED
INVESTMENT ADVISER
BAAI is the investment adviser to over 60 mutual fund portfolios in the Nations
Funds family, including the Fixed Income Fund described in this prospectus.
BAAI is a registered investment adviser. It's a wholly-owned subsidiary of Bank
of America, which is owned by Bank of America Corporation. Nations Funds pay
BAAI an annual fee for its investment advisory services. The fee is calculated
daily based on the average net assets of each Fund and is paid monthly. BAAI
uses part of this money to pay investment sub-advisers for the services they
provide to each Fund.
BAAI has agreed to waive fees and/or reimburse expenses for certain Funds until
May 2000 or July 31, 2000. You'll find a discussion of any waiver and/or
reimbursement in the Fund description. There is no assurance that BAAI will
continue to waive and/or reimburse any fees and/or expenses after these dates.
The following chart shows the maximum advisory fees BAAI can receive, along
with the actual advisory fees it received during the Fund's last fiscal year,
after waivers and/or reimbursements:
ANNUAL INVESTMENT ADVISORY FEE, AS A % OF AVERAGE DAILY NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
Maximum Actual fee
advisory paid last
fee(1) fiscal year
Nations U.S. Government Bond Fund 0.50% 0.32%
</TABLE>
(1)These fees are the current contract levels, which in most cases have been
reduced from the contract levels that were in effect during the last fiscal
year.
10
<PAGE>
[GRAPHIC]
BANC OF AMERICA CAPITAL
MANAGEMENT, INC.
ONE BANK OF AMERICA PLAZA
CHARLOTTE, NORTH CAROLINA 28255
[GRAPHIC]
STEPHENS INC.
111 CENTER STREET
LITTLE ROCK, ARKANSAS 72201
[GRAPHIC]
FIRST DATA INVESTOR
SERVICES GROUP, INC.
101 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
INVESTMENT SUB-ADVISER
Nations Funds and BAAI have engaged an investment sub-adviser to provide
day-to-day portfolio management for the Fund. This sub-adviser functions under
the supervision of BAAI and the Boards of Directors/Trustees of Nations Funds.
BANC OF AMERICA CAPITAL MANAGEMENT, INC.
BACM, the successor to TradeStreet Investment Associates, Inc., is a registered
investment adviser and a wholly-owned subsidiary of Bank of America. Its
management expertise covers all major domestic asset classes, including equity
and fixed income securities, and money market instruments.
Currently managing more than $90 billion, BACM has over 200 institutional
clients and is sub-adviser to more than 50 mutual funds in the Nations Funds
family. BACM takes a team approach to investment management. Each team has
access to the latest technology and analytical resources.
BACM is the investment sub-adviser to the Fund shown in the table below. The
table also tells you which internal BACM asset management team is responsible
for making the day-to-day investment decisions for the Fund.
<TABLE>
<CAPTION>
<S> <C>
Fund BACM Team
Nations U.S. Government Bond Fund Fixed Income Management Team
OTHER SERVICE PROVIDERS
The Fund is distributed and co-administered by Stephens Inc., a registered
broker/dealer.
BAAI is also co-administrator of the Fund, and assists in overseeing the
administrative operations of the Fund. The Fund pays BAAI and Stephens a
combined fee for their services, plus certain out-of-pocket expenses. The fee
is calculated as an annual percentage of the average daily net assets of the
Fund and is paid monthly, as follows:
<CAPTION>
<S> <C>
Fixed Income Funds 0.22%
</TABLE>
First Data Investor Services Group, Inc. (First Data) is the transfer agent for
the Fund's shares. Its responsibilities include processing purchases, sales and
exchanges, calculating and paying distributions, keeping shareholder records,
preparing account statements and providing customer service.
11
<PAGE>
ABOUT YOUR INVESTMENT
- --------------------------------------------------------------------------------
[GRAPHIC]
WHEN YOU SELL SHARES OF A MUTUAL FUND, THE FUND IS EFFECTIVELY
"BUYING" THEM BACK FROM YOU. THIS IS CALLED A REDEMPTION.
[GRAPHIC]
A BUSINESS DAY IS ANY DAY THAT THE NEW YORK STOCK EXCHANGE (NYSE)
IS OPEN. A BUSINESS DAY ENDS AT THE CLOSE OF REGULAR TRADING ON THE
NYSE, USUALLY AT 4:00 P.M. EASTERN TIME. IF THE NYSE CLOSES EARLY,
THE BUSINESS DAY ENDS AS OF THE TIME THE NYSE CLOSES.
THE NYSE IS CLOSED ON WEEKENDS AND ON THE FOLLOWING NATIONAL
HOLIDAYS: NEW YEAR'S DAY, MARTIN LUTHER KING, JR. DAY, PRESIDENTS'
DAY, GOOD FRIDAY, MEMORIAL DAY, INDEPENDENCE DAY, LABOR DAY,
THANKSGIVING DAY AND CHRISTMAS DAY.
[GRAPHIC]
BUYING, SELLING AND EXCHANGING SHARES
This prospectus offers Primary A Shares of the Fund. Here are some general
rules about this class of shares:
o Primary A Shares are available to certain financial institutions and
intermediaries for their own accounts, and for certain client
accounts for which they act as a fiduciary, agent or custodian. These
include:
o Bank of America and certain of its affiliates
o certain other financial institutions and intermediaries, including
financial planners and investment advisers
o institutional investors
o charitable foundations
o endowments
o other Funds in Nations Funds Family
o The minimum initial investment is $250,000. Financial institutions or
intermediaries can total the investments they make on behalf of their
clients to meet the minimum initial investment amount.
o There is no minimum amount for additional investments.
o There are no sales charges for buying, selling or exchanging these
shares.
You'll find more information about buying, selling and exchanging Primary A
Shares on the pages that follow. You should also ask your financial institution
or intermediary about its limits, fees and policies for buying, selling and
exchanging shares, which may be different from those described here, and about
its related programs or services.
The Fund also offers other classes of shares, with different features and
expense levels, which you may be eligible to buy. Please contact your
investment professional, or call us at 1.800.765.2668 if you have any questions
or you need help placing an order.
HOW SHARES ARE PRICED
All transactions are based on the price of a Fund's shares -- or its net asset
value per share. We calculate net asset value per share for each class of each
Fund at the end of each business day. First, we calculate the net asset value
for each class of a Fund by determining the value of the Fund's assets in the
class and then subtracting its liabilities. Next, we divide this amount by the
number of shares that investors are holding in the class.
12
<PAGE>
VALUING SECURITIES IN A FUND
The value of a Fund's assets is based on the total market value of all of the
securities it holds. The prices reported on stock exchanges and securities
markets around the world are usually used to value securities in a Fund. If
prices aren't readily available, we'll base the price of a security on its fair
market value. We use the amortized cost method, which approximates market
value, to value short-term investments maturing in 60 days or less.
International markets may be open on days when U.S. markets are closed. The
value of foreign securities owned by a Fund could change on days when Fund
shares may not be bought or sold.
HOW ORDERS ARE PROCESSED
Orders to buy, sell or exchange shares are processed on business days. Orders
received by Stephens, First Data or their agents before the end of a business
day (usually 4:00 p.m. Eastern time, unless the NYSE closes early) will receive
that day's net asset value per share. Orders received after the end of a
business day will receive the next business day's net asset value per share.
The business day that applies to your order is also called the trade date. We
may refuse any order to buy or exchange shares. If this happens, we'll return
any money we've received.
[GRAPHIC]
BUYING SHARES
Here are some general rules for buying shares:
o Investors buy Primary A Shares at net asset value per share.
o If we don't receive payment within three business days of
receiving an order, we'll refuse the order. We'll return any
payment received for orders that we refuse.
o Financial institutions and intermediaries are responsible for
sending us orders for their clients and for ensuring that we
receive payment on time.
o Shares purchased are recorded on the books of the Fund. We don't
issue certificates.
o Financial institutions and intermediaries are responsible for
recording the beneficial ownership of the shares of their clients,
and for reporting this ownership on account statements they send
to their clients.
[GRAPHIC]
SELLING SHARES
Here are some general rules for selling shares:
o We normally send the sale proceeds by federal funds wire within
three business days after Stephens, First Data or their agents
receive the order.
o If shares were paid for with a check that wasn't certified, we'll
hold the sale proceeds when those shares are sold for at least 15
days after the trade date of the purchase, or until the check has
cleared.
o Financial institutions and intermediaries are responsible for
sending us orders for their clients and for depositing the sale
proceeds to their accounts on time.
13
<PAGE>
[GRAPHIC]
YOU SHOULD MAKE SURE YOU UNDERSTAND THE INVESTMENT OBJECTIVES AND
POLICIES OF THE FUND YOU'RE EXCHANGING INTO. PLEASE READ ITS
PROSPECTUS CAREFULLY.
o Under certain circumstances allowed under the Investment Company
Act of 1940 (1940 Act), we can pay investors in securities or
other property when they sell shares.
o We can delay payment of the sale proceeds for up to seven days.
o Other restrictions may apply to retirement plan accounts. For more
information about these restrictions, please contact your
retirement plan administrator.
We may sell shares:
o if the value of an investor's account falls below $500. We'll
provide 60 days notice in writing if we're going to do this
o if a financial institution or intermediary tells us to sell the
shares for a client under arrangements it has made with its
clients
o under certain other circumstances allowed under the 1940 Act
[GRAPHIC]
EXCHANGING SHARES
Investors can sell shares of a Fund to buy shares of another Nations
Fund. This is called an exchange, and may be appropriate if investment
goals or tolerance for risk change.
Here's how exchanges work:
o Investors can exchange Primary A Shares of a Fund for Primary A
Shares of any other Nations Fund. In some cases, the only Money
Market Fund option is Trust Class Shares of Nations Reserves Money
Market Funds.
o The rules for buying shares of a Fund, including any minimum
investment requirements, apply to exchanges into that Fund.
o Exchanges can only be made into a Fund that is legally sold in the
investor's state of residence.
o Exchanges can generally only be made into a Fund that is accepting
investments.
o We may limit the number of exchanges that can be made within a
specified period of time.
o We may change or cancel the right to make an exchange by giving
the amount of notice required by regulatory authorities (generally
60 days for a material change or cancellation).
14
<PAGE>
[GRAPHIC]
THE POWER OF COMPOUNDING
REINVESTING YOUR DISTRIBUTIONS BUYS YOU MORE SHARES OF A FUND --
WHICH LETS YOU TAKE ADVANTAGE OF THE POTENTIAL FOR COMPOUND GROWTH.
PUTTING THE MONEY YOU EARN BACK INTO YOUR INVESTMENT MEANS IT, IN
TURN, MAY EARN EVEN MORE MONEY. OVER TIME, THE POWER OF COMPOUNDING
HAS THE POTENTIAL TO SIGNIFICANTLY INCREASE THE VALUE OF YOUR
INVESTMENT. THERE IS NO ASSURANCE, HOWEVER, THAT YOU'LL EARN MORE
MONEY IF YOU REINVEST YOUR DISTRIBUTIONS.
[GRAPHIC]
DISTRIBUTIONS AND TAXES
ABOUT DISTRIBUTIONS
A mutual fund can make money two ways:
o It can earn income. Examples are interest paid on bonds and dividends paid
on common stocks.
o A fund can also have capital gain if the value of its investments
increases. If a fund sells an investment at a gain, the gain is realized.
If a fund continues to hold the investment, any gain is unrealized.
A mutual fund is not subject to income tax as long as it distributes its net
investment income and realized capital gain to its shareholders. The Fund
intends to pay out a sufficient amount of their income and capital gain to its
shareholders so the Fund won't have to pay any income tax. When a Fund makes
this kind of a payment, it's split equally among all shares, and is called a
distribution.
The Fund distributes any net realized capital gain at least once a year. The
frequency of distributions of net investment income varies by Fund:
<TABLE>
<CAPTION>
<S> <C>
Frequency of
Fund income distributions
Nations U.S. Government Bond Fund monthly
</TABLE>
A distribution is paid based on the number of shares you hold on the record
date, which is usually the day before the distribution is declared. Shares of
the Fixed Income Fund are eligible to receive distributions from the trade date
of the purchase up to and including the day before the shares are sold.
Different share classes of a Fund usually pay different distribution amounts,
because each class has different expenses. Each time a distribution is made,
the net asset value per share of the share class is reduced by the amount of
the distribution.
We'll automatically reinvest distributions in additional shares of the same
Fund unless you tell us you want to receive your distributions in cash. You can
do this by writing to us at the address on the back cover, or by calling us at
1.800.765.2668.
We generally pay cash distributions within five business days after the end of
the month, quarter or year in which the distribution was made. If you sell all
of your shares, we'll pay any distribution that applies to those shares in cash
within five business days after the sale was made.
If you buy shares of a Fund shortly before it makes a distribution, you will,
in effect, receive part of your purchase back in the distribution, which is
subject to tax. Similarly, if you buy shares of a Fund that holds securities
with unrealized capital gain, you will, in effect, receive part of your
purchase back if and when the Fund sells those securities and realizes and
distributes the gain. This distribution is also subject to tax. Some Funds have
built up, or have the potential to build up, high levels of unrealized capital
gain.
15
<PAGE>
[GRAPHIC]
THIS INFORMATION IS A SUMMARY OF HOW FEDERAL INCOME TAXES MAY
AFFECT YOUR INVESTMENT IN THE FUND. IT IS NOT INTENDED AS A
SUBSTITUTE FOR CAREFUL TAX PLANNING. YOU SHOULD CONSULT WITH YOUR
OWN TAX ADVISOR ABOUT YOUR SITUATION, INCLUDING ANY FOREIGN, STATE
AND LOCAL TAXES THAT MAY APPLY.
[GRAPHIC]
FOR MORE INFORMATION ABOUT TAXES, PLEASE SEE THE SAI.
HOW TAXES AFFECT YOUR INVESTMENT
Distributions that come from net investment income, net foreign currency gain
and any excess of net short-term capital gain over net long-term capital loss,
generally are taxable to you as ordinary income.
Distributions that come from net capital gain (generally the excess of net
long-term capital gain over net short-term capital loss) generally are taxable
to you as net capital gain.
In general, all distributions are taxable to you when paid, whether they are
paid in cash or automatically reinvested in additional shares of the Fund.
However, any distributions declared in October, November or December of one
year and distributed in January of the following year will be taxable as if
they had been paid to you on December 31 of the first year.
We'll send you a notice every year that tells you how much you've received in
distributions during the year and their federal tax status. Foreign, state and
local taxes may also apply to these distributions.
WITHHOLDING TAX
We're required by federal law to withhold tax of 31% on any distributions and
redemption proceeds paid to you (including amounts deemed to be paid for "in
kind" redemptions and exchanges) if:
o you haven't given us a correct Taxpayer Identification Number (TIN) and
haven't certified that the TIN is correct and withholding doesn't apply
o the Internal Revenue Service (IRS) has notified us that the TIN listed on
your account is incorrect according to its records
o the IRS informs us that you are otherwise subject to backup withholding
The IRS may also impose penalties against you if you don't give us a correct
TIN.
Amounts we withhold are applied to your federal income tax liability. You may
receive a refund from the IRS if the withholding tax results in an overpayment
of taxes.
We're also normally required by federal law to withhold tax on distributions
paid to foreign shareholders.
TAXATION OF REDEMPTIONS AND EXCHANGES
Your redemptions (including redemptions "in kind") and exchanges of Fund shares
will usually result in a taxable capital gain or loss to you, depending on the
amount you receive for your shares (or are deemed to receive in the case of
exchanges) and the amount you paid (or are deemed to have paid) for them.
16
<PAGE>
[GRAPHIC]
FINANCIAL HIGHLIGHTS
The financial highlights table is designed to help you understand how the Fund
has performed for the past five years. Certain information reflects financial
results for a single Fund share. The total investment return line indicates how
much an investment in the Fund would have earned, assuming all dividends and
distributions had been reinvested.
This information, except as noted below, has been audited by
PricewaterhouseCoopers LLP. The independent accountant's report and Nations
Funds financial statements are incorporated by reference into the SAI. Please
see the back cover to find out how you can get a copy.
The financial highlights of Nations U.S. Government Bond Fund for the period
ended May 16, 1997 were audited by other independent accountants.
17
<PAGE>
NATIONS U.S. GOVERNMENT BOND
FUND FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEAR ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
PRIMARY A SHARES 3/31/99# 03/31/98* 5/16/97 08/31/96 08/31/95(b)
Operating performance:
Net asset value at the beginning of the period $ 10.37 $ 10.19 $ 10.53 $ 11.20 $ 10.00
Net investment income 0.52 0.48 0.41 0.61 0.56
Net realized and unrealized gain/(loss) on
investments 0.07 0.31 0.17 ( 0.22) 1.20
Net increase in net asset value from operations 0.59 0.79 0.58 0.39 1.76
Distributions:
Dividends from net investment income ( 0.52) ( 0.48) ( 0.41) ( 0.61) ( 0.56)
Distributions from net realized capital gains ( 0.36) ( 0.13) ( 0.51) ( 0.45) --
Total dividends and distributions ( 0.88) ( 0.61) ( 0.92) ( 1.06) ( 0.56)
Net asset value at the end of the period $ 10.08 $ 10.37 $ 10.19 $ 10.53 $ 11.20
Total return++ 5.83% 7.84% 5.62% 3.46% 18.03%
====================================================== ======= ======== ======== ======== ========
Ratios to average net assets/supplemental data:
Net assets at end of period (in 000's) $109,028 $263,428 $148,082 $145,066 $137,261
Ratio of operating expenses to average net assets 0.59%(a)(c) 0.60%(a)+ 0.62%+ 0.65% 0.62%+
Ratio of net investment income to average net assets 5.06% 5.26%+ 5.60%+ 5.61% 6.45%+
Portfolio turnover rate 270% 188% 58% 87% 132%
Ratio of operating expenses to average net assets
without waivers and/or expense reimbursement 0.87%(a) 0.86%(a)+ 0.77%+ 0.82% 0.87%+
</TABLE>
* The financial information for the fiscal periods
prior to May 23, 1997 reflects the financial
information for the Pilot U.S. Government Securities
Fund's Pilot Shares, which were reorganized into the
Primary A Shares of Nations U.S. Government Bond
Fund as of May 23, 1997.
+ Annualized.
++ Total return represents aggregate total return for
the period indicated, assumes reinvestment of all
distributions, 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) Primary A Shares commenced operations on November
7, 1994.
(c) The effect of interest expense on the operating
expense ratio was less than 0.01%
18
<PAGE>
[GRAPHIC]
TERMS USED IN THIS PROSPECTUS
ASSET-BACKED SECURITY - a debt security that gives you an interest in a pool of
assets that is collateralized or "backed" by one or more kinds of assets,
including real property, receivables or mortgages, generally issued by banks,
credit card companies or other lenders. Some securities may be issued or
guaranteed by the U.S. government or its agencies, authorities or
instrumentalities. Asset-backed securities typically make periodic payments,
which may be interest or a combination of interest and a portion of the
principal of the underlying assets.
AVERAGE DOLLAR-WEIGHTED MATURITY - the average length of time until the debt
securities held by a Fund reach maturity. In general, the longer the average
dollar-weighted maturity, the more a Fund's share price will fluctuate in
response to changes in interest rates.
BANK OBLIGATION - a money market instrument issued by a bank, including
certificates of deposit, time deposits and bankers' acceptances.
CAPITAL GAIN OR LOSS - the difference between the purchase price of a security
and its selling price. You realize a capital gain when you sell a security for
more than you paid for it. You realize a capital loss when you sell a security
for less than you paid for it.
CASH EQUIVALENTS - short-term, interest-bearing instruments, including
obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities, bank obligations, asset-backed securities, foreign
government securities and commercial paper issued by U.S. and foreign issuers
which, at the time of investment, is rated at least Prime-2 by Moody's Investor
Services, Inc. (Moody's), A-2 by S&P, or F-1 by Fitch IBCA (Fitch).
COLLATERALIZED MORTGAGE OBLIGATION (CMO) - a debt security that is backed by
real estate mortgages. CMO payment obligations are covered by interest and/or
principal payments from a pool of mortgages. In addition, the underlying assets
of a CMO are typically separated into classes, called tranches, based on
maturity. Each tranche pays a different rate of interest. CMOs are not
generally issued by the U.S. government, its agencies or instrumentalities.
COMMERCIAL PAPER - a money market instrument issued by a large company.
COMMON STOCK - a security that represents part equity ownership in a company.
Common stock typically allows you to vote at shareholder meetings and to share
in the company's profits by receiving dividends.
CONVERTIBLE DEBT - a debt security that can be exchanged for common stock (or
another type of security) on a specified basis and date.
CONVERTIBLE SECURITY - a security that can be exchanged for common stock (or
another type of security) at a specified rate. Convertible securities include
convertible debt, rights and warrants.
19
<PAGE>
CORPORATE OBLIGATION - a money market instrument issued by a corporation or
commercial bank.
CROSSING NETWORKS - an electronic system where anonymous parties can match buy
and sell transactions. These transactions don't affect the market, and
transaction costs are extremely low.
DEBT SECURITY - when you invest in a debt security, you are typically lending
your money to a governmental body or company (the issuer) to help fund their
operations or major projects. The issuer pays interest at a specified rate on a
specified date or dates, and repays the principal when the security matures.
Short-term debt securities include money market instruments such as treasury
bills. Long-term debt securities include fixed income securities such as
government and corporate bonds, and mortgage-backed and asset-backed
securities.
DEPOSITARY RECEIPTS - evidence of the deposit of a security with a custodian
bank. American Depositary Receipts (ADRs), for example, are certificates traded
in U.S. markets representing an interest of a foreign company. They were
created to make it possible for foreign issuers to meet U.S. security
registration requirements. Other examples include ADSs, GDRs and EDRs.
DIVIDEND YIELD - rate of return of dividends paid on a common or preferred
stock. It equals the amount of the annual dividend on a stock expressed as a
percentage of the stock's current market value.
DOLLAR ROLL TRANSACTION - the sale by a Fund of mortgage-backed or other
asset-backed securities, together with a commitment to buy similar, but not
identical, securities at a future date.
DURATION - a security's or portfolio's sensitivity to changes in interest
rates. For example, if interest rates rise by one percentage point, the share
price of a fund with a duration of five years would decline by about 5%. If
interest rates fall by one percentage point, the fund's share price would rise
by about 5%.
EQUITY SECURITY - an investment that gives you an equity ownership right in a
company. Equity securities (or "equities") include common and preferred stock,
rights and warrants.
FIRST BOSTON CONVERTIBLE INDEX - a widely-used unmanaged index that measures
the performance of convertible securities. The index is not available for
investment.
FIRST-TIER SECURITY - under Rule 2a-7 under the 1940 Act, a debt security that
is an eligible investment for money market funds and has the highest short-term
rating from a nationally recognized statistical rating organization (NRSRO), or
if unrated, is determined by the fund's portfolio management team to be of
comparable quality, or is a money market fund issued by a registered investment
company, or is a government security.
20
<PAGE>
FIXED INCOME SECURITY - an intermediate to long-term debt security that matures
in more than one year.
FOREIGN SECURITY - a debt or equity security issued by a foreign company or
government.
FUNDAMENTAL ANALYSIS - a method of securities analysis that tries to evaluate
the intrinsic, or "true," value of a particular stock. It includes a study of
the overall economy, industry conditions and the financial condition and
management of a company.
FUTURES CONTRACT - a contract to buy or sell an asset or an index of securities
at a specified price on a specified future date. The price is set through a
futures exchange.
GUARANTEED INVESTMENT CONTRACT - an investment instrument issued by a rated
insurance company in return for a payment by an investor.
HIGH QUALITY - in the case of municipal securities, a long-term rating of A or
higher from Duff & Phelps Credit Rating Co. (D&P), Fitch, S&P, Thomson
BankWatch, Inc. (BankWatch), or Moody's in the case of certain bonds that are
lacking a short-term rating from the required number of NRSROs; rated D-1 or
higher by D&P, F-1 or higher by Fitch, SP-1 by S&P, or MIG-1 by Moody's in the
case of notes; rated D-1 or higher by D&P, F-1 or higher by Fitch, or VMIG-1 by
Moody's in the case of variable rate demand notes; or rated D-1 or higher by
D&P, F-1 or higher by Fitch, A-1 or higher by S&P or Prime-1 by Moody's in the
case of tax-exempt commercial paper. The portfolio management team may consider
an unrated municipal security to be investment grade if the team believes it to
be of comparable quality, based on guidelines provided by the Fund's Board of
Directors. Please see the SAI for more information about credit ratings.
IFC INVESTABLES INDEX - an unmanaged index that tracks more than 1,400 stocks
in 25 emerging markets in Asia, Latin America, Eastern Europe, Africa and the
Middle East. The index is weighted by market capitalization.
INVESTMENT GRADE - a debt security that has been given a medium to high credit
rating (Baa or higher by Moody's, BBB or higher by S&P or a comparable rating
by other NRSROs) based on the issuer's ability to pay interest and repay
principal on time. The portfolio management team may consider an unrated debt
security to be investment grade if the team believes it is of comparable
quality. Please see the SAI for more information about credit ratings.
LEHMAN 3-YEAR MUNICIPAL BOND INDEX - a broad-based, unmanaged index of
investment grade bonds with maturities of two to four years. All dividends are
reinvested.
LEHMAN 7-YEAR MUNICIPAL BOND INDEX - a broad-based, unmanaged index of
investment grade bonds with maturities of seven to eight years. All dividends
are reinvested.
21
<PAGE>
LEHMAN AGGREGATE BOND INDEX - an index made up of the Lehman
Government/Corporate Index, the Asset-Backed Securities Index and the
Mortgage-Backed Securities Index. These indexes include U.S. government agency
and U.S. Treasury securities, corporate bonds and mortgage-backed securities.
All dividends are reinvested.
LEHMAN GOVERNMENT BOND INDEX - an index of government bonds with an average
maturity of approximately nine years. All dividends are reinvested.
LEHMAN GOVERNMENT/CORPORATE BOND INDEX - an index of U.S. government, U.S.
Treasury and agency securities, and corporate and Yankee bonds. All dividends
are reinvested.
LEHMAN INTERMEDIATE GOVERNMENT BOND INDEX - an index of U.S. government agency
and U.S. Treasury securities. All dividends are reinvested.
LEHMAN INTERMEDIATE TREASURY INDEX - an index of U.S. Treasury securities with
maturities of three to 10 years. All dividends are reinvested.
LEHMAN MUNICIPAL BOND INDEX - a broad-based, unmanaged index of 8,000
investment grade bonds with long-term maturities. All dividends are reinvested.
LIQUIDITY - a measurement of how easily a security can be bought or sold at a
price that is close to its market value.
MERRILL LYNCH 1-3 YEAR TREASURY INDEX - an index of U.S. Treasury bonds with
maturities of 1 to 3 years. All dividends are reinvested.
MONEY MARKET INSTRUMENT - a short-term debt security that is considered to
mature in 13 months or less. Money market instruments include U.S. Treasury
obligations, U.S. government obligations, certificates of deposit, bankers'
acceptances, commercial paper, repurchase agreements and certain municipal
securities.
MORTGAGE-BACKED SECURITY OR MORTGAGE-RELATED SECURITY - a debt security that
gives you an interest in, and is backed by, a pool of residential mortgages
issued by the U.S. government or by financial institutions. The underlying
mortgages may be guaranteed by the U.S. government or one of its agencies,
authorities or instrumentalities. Mortgage-backed securities typically make
monthly payments, which are a combination of interest and a portion of the
principal of the underlying mortgages.
MSCI EAFE INDEX - Morgan Stanley Capital International Europe, Australasia and
Far East Index, an index of over 1,100 stocks from 21 developed markets in
Europe, Australia, New Zealand and Asia. The index reflects the relative size
of each market.
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MUNICIPAL SECURITY (OBLIGATION) - a debt security issued by state or local
governments or governmental authorities to pay for public projects and
services. "General obligations" are typically backed by the issuer's full
taxing and revenue-raising powers. "Revenue securities" depend on the income
earned by a specific project or authority, like road or bridge tolls, user fees
for water or revenues from a utility. Interest income from these securities is
exempt from federal income taxes and is generally exempt from state taxes if
you live in the state that issued the security. If you live in the municipality
that issued the security, interest income may also be exempt from local taxes.
NON-DIVERSIFIED - a fund that holds securities of fewer issuers or kinds of
issuers than other kinds of funds. Non-diversified funds tend to have greater
price swings than more diversified funds because events affecting one or more
of its securities may have a disproportionately large effect on the fund.
OVER-THE-COUNTER MARKET - a market where dealers trade securities through a
telephone or computer network rather than through a public stock exchange.
PARTICIPATION - a pass-through certificate representing a share in a pool of
debt obligations or other instruments.
PASS-THROUGH CERTIFICATE - securitized mortgages or other debt securities with
interest and principal paid by a servicing intermediary shortly after interest
payments are received from borrowers.
PREFERRED STOCK - a type of equity security that gives you a limited ownership
right in a company, with certain preferences or priority over common stock.
Preferred stock generally pays a fixed annual dividend. If the company goes
bankrupt, preferred shareholders generally receive their share of the company's
remaining assets before common shareholders and after bondholders and other
creditors.
PRE-REFUNDED BOND - a bond that is repaid before its maturity date. The
repayment is generally financed by a new issue. Issuers generally pre-refund
bonds during periods of lower interest rates to reduce their interest costs.
PRICE-TO-EARNINGS RATIO (P/E RATIO) - the current price of a share divided by
its actual or estimated earnings per share. The P/E ratio is one measure of the
value of a company.
PRIVATE ACTIVITY BOND - a municipal security that is used to finance private
projects or other projects that aren't qualified for tax purposes. Private
activity bonds are generally taxable, unless their use is specifically
exempted, or may be treated as tax preference items.
QUANTITATIVE ANALYSIS - an analysis of financial information about a company or
security to identify securities that have the potential for growth or are
otherwise suitable for a fund to buy.
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REAL ESTATE INVESTMENT TRUST (REIT) - a portfolio of real estate investments
which may include office buildings, apartment complexes, hotels and shopping
malls, and real-estate-related loans or interests.
REPURCHASE AGREEMENT - a short-term (often overnight) investment arrangement.
The investor agrees to buy certain securities from the borrower and the
borrower promises to buy them back at a specified date and price. The
difference between the purchase price paid by the investor and the repurchase
price paid by the borrower represents the investor's return. Repurchase
agreements are popular because they provide very low-risk return and can
virtually eliminate credit difficulties.
REVERSE REPURCHASE AGREEMENT - a repurchase agreement in which an investor
sells a security to another party, like a bank or dealer, in return for cash,
and agrees to buy the security back at a specified date and price.
RIGHT - a temporary privilege allowing investors who already own a common stock
to buy additional shares directly from the company at a specified price or
formula.
RUSSELL 2000 - an unmanaged index of 2,000 of the smallest stocks representing
approximately 11% of the U.S. equity market. The index is weighted by market
capitalization, and is not available for investment.
S&P 500(1) - Standard & Poor's 500 Composite Stock Price Index, an unmanaged
index of 500 widely held common stocks. It is not available for investment.
S&P MIDCAP 400(1) - an unmanaged index of 400 domestic stocks chosen for market
size, liquidity and industry representation. The index is weighted by market
value, and is not available for investment.
S&P SMALLCAP 600(1) - Standard & Poor's SmallCap 600 Index, an unmanaged index
of 600 common stocks, weighted by market capitalization. It is not available
for investment.
S&P/BARRA SMALLCAP VALUE INDEX(1) - an unmanaged index of a group of stocks
from the S&P SmallCap 600 that have low price-to-book ratios relative to the
S&P SmallCap 600 as a whole. It is weighted by market capitalization, and is
not available for investment.
S&P/BARRA VALUE INDEX(1) - an unmanaged index of a group of stocks from the S&P
500 that have low price-to-book ratios relative to the S&P 500 as a whole. It
is weighted by market capitalization, and is not available for investment.
SALOMON BROTHERS MORTGAGE INDEX - an index of 30-year and 15-year GNMA, FNMA
and FHLMC securities, and FNMA and FHLMC balloon mortgages.
SECOND-TIER SECURITY - under Rule 2a-7 under the 1940 Act, a debt security that
is an eligible investment for money market funds, but is not a first-tier
security.
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SENIOR SECURITY - a debt security that allows holders to receive their share of
a company's remaining assets in a bankruptcy before other bondholders,
creditors, and common and preferred shareholders.
SPECIAL PURPOSE ISSUER - an entity organized solely to issue asset-backed
securities on a pool of assets it owns.
TRADE DATE - the effective date of a purchase, sale or exchange transaction, or
other instructions sent to us. The trade date is determined by the day and time
we receive the order or instructions in a form that's acceptable to us.
U.S. GOVERNMENT OBLIGATIONS - a wide range of debt securities issued or
guaranteed by the U.S. government or its agencies, authorities or
instrumentalities.
U.S. TREASURY OBLIGATION - a debt security issued by the U.S. Treasury.
WARRANT - a certificate that gives you the right to buy common shares at a
specified price within a specified period of time.
WILSHIRE 5000 EQUITY INDEX - an index that measures the performance of the
equity securities of all companies headquartered in the U.S. that have readily
available price data -- over 7, 000 companies. The index is weighted by market
capitalization and is not available for investment.
ZERO-COUPON BOND - a bond that makes no periodic interest payments. Zero coupon
bonds are sold at a deep discount to their face value and mature at face value.
The difference between the face value at maturity and the purchase price
represents the return.
(1)S&P and BARRA have not reviewed any stock included in the S&P 500, S&P 600,
BARRA Index or BARRA SmallCap Index for its investment merit. S&P and BARRA
determine and calculate their indexes independently of the Funds and are not
a sponsor or affiliate of the Funds. S&P and BARRA give no information and
make no statements about the suitability of investing in the Funds or the
ability of their indexes to track stock market performance. S&P and BARRA
make no guarantees about the indexes, any data included in them and the
suitability of the indexes or their data for any purpose. "Standard and
Poor's," "S&P 500" and "S&P 600" are trademarks of the McGraw-Hill
Companies, Inc.
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[GRAPHIC]
WHERE TO FIND MORE INFORMATION
You'll find more information about the Fixed Income Fund in the following
documents:
[GRAPHIC]
ANNUAL AND SEMI-ANNUAL REPORTS
The annual and semi-annual reports contain information about Fund
investments and performance, the financial statements and the auditor's
reports. The annual report also includes a discussion about the market
conditions and investment strategies that had a significant effect on
each Fund's performance during the period covered.
[GRAPHIC]
STATEMENT OF ADDITIONAL INFORMATION
The SAI contains additional information about the Fund and its policies.
The SAI is legally part of this prospectus (it's incorporated by
reference). A copy has been filed with the SEC.
You can obtain a free copy of these documents, request other information
about the Fund and make shareholder inquiries by contacting Nations
Funds:
By telephone: 1.800.765.2668
By mail:
NATIONS FUNDS
C/O STEPHENS INC.
ONE BANK OF AMERICA PLAZA
33RD FLOOR
CHARLOTTE, NC 28255
On the Internet: WWW.NATIONSBANK.COM/NATIONSFUNDS
If you prefer, you can write the SEC's Public Reference Room and ask
them to mail you copies of these documents. They'll charge you a fee for
this service. You can also download them from the SEC's website or visit
the Public Reference Section and copy the documents while you're there.
Please call the SEC for more information.
PUBLIC REFERENCE SECTION OF THE SEC
WASHINGTON, DC 20549-6009
1.800.SEC.0330
WWW.SEC.GOV
SEC file number:
Nations Fund, Inc., 811-04614
NF-COMPROPA-8/99
[NATIONS FUNDS LOGO APPEARS]
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
NATIONS FUND, INC.
NATIONS U.S. GOVERNMENT BOND FUND
INVESTOR A, INVESTOR B, INVESTOR C, AND PRIMARY A SHARES
August 1, 1999, as supplemented on February 14, 2000
This Statement of Additional Information ("SAI") provides supplementary
information pertaining to the classes of shares representing interests in
Nations U.S. Government Bond Fund ("U.S. Government Bond Fund" or the "Fund") of
Nations Fund, Inc. (the "Company"). This SAI is not a prospectus, and should be
read only in conjunction with the current prospectuses for the aforementioned
Fund related to the class or series of shares in which one is interested, dated
February 14, 2000, as supplemented (each a "Prospectus"). All terms used in this
SAI that are defined in the Prospectuses will have the same meanings assigned in
the Prospectuses. Copies of the Prospectuses may be obtained without charge by
writing Nations Fund, Inc. c/o Stephens Inc., One Bank of America Plaza, 33rd
Floor, Charlotte, North Carolina 28255, or by calling Nations Fund, Inc. at
(800) 321-7854.
<PAGE>
TABLE OF CONTENTS
Page
----
HISTORY OF NATIONS NATIONS FUND, INC........................................ 1
DESCRIPTION OF THE COMPANIES AND THE INVESTMENTS AND RISKS
OF THEIR FUNDS ............................................................. 1
General.............................................................. 1
Investment Limitations .............................................. 1
The Fund's Fundamental Policy Restrictions........................... 2
The Fund's Non-Fundamental Policy Restrictions....................... 3
Permissible Fund Investments......................................... 4
Asset-Backed Securities.............................................. 4
Borrowings........................................................... 8
Commercial Instruments............................................... 9
Combined Transactions................................................ 9
Corporate Debt Securities............................................ 9
Custodial Receipts................................................... 10
Currency Swaps....................................................... 10
Delayed Delivery Transactions........................................ 10
Dollar Roll Transactions ............................................ 10
Foreign Currency Transactions ....................................... 11
Futures, Options and Other Derivative Instruments.................... 12
Guaranteed Investment Contracts...................................... 26
Insured Municipal Securities ........................................ 26
Interest Rate Transactions .......................................... 26
Options on Currencies................................................ 27
Other Investment Companies........................................... 27
Participation Interests and Company Receipts......................... 27
Real Estate Investment Trusts........................................ 28
Repurchase Agreements ............................................... 28
Reverse Repurchase Agreements ....................................... 28
Securities Lending................................................... 28
Stand-by Commitments ................................................ 29
Stripped Securities.................................................. 29
U.S. and Foreign Bank Obligations.................................... 30
U.S. Government Obligations.......................................... 30
Use of Segregated and Other Special Accounts......................... 31
Variable and Floating Rate Instruments .............................. 32
Investment Risks and Considerations.................................. 32
MANAGEMENT OF THE COMPANY................................................... 32
Nations Funds Retirement Plan........................................ 36
Nations Funds Deferred Compensation Plan............................. 36
INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY,
TRANSFER AGENCY, OTHER SERVICE PROVIDERS, SHAREHOLDER SERVICING AND
DISTRIBUTION AGREEMENTS .................................................... 38
Investment Adviser and Sub-Advisers.................................. 38
Co-Administrators and Sub-Administrator.............................. 40
Distribution Plans and Shareholder Servicing Arrangements for
Investor A Shares................................................ 42
Investor B/C Shares ............................................. 43
Investor C/B Shares.............................................. 45
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Expenses......................................................... 48
Transfer Agents and Custodians....................................... 49
Distributor.......................................................... 49
Independent Accountant and Reports................................... 50
Counsel.............................................................. 50
FUND TRANSACTIONS AND BROKERAGE............................................. 50
General Brokerage Policy............................................. 50
BROKERAGE COMMISSIONS....................................................... 52
Section 28(e) Standards.............................................. 52
DESCRIPTION OF SHARES....................................................... 53
Description of Shares of the Companies............................... 53
Net Asset Value Determination........................................ 54
ADDITIONAL INFORMATION CONCERNING TAXES..................................... 55
General.............................................................. 55
Excise Tax .......................................................... 56
Private Letter Ruling................................................ 56
Taxation of Fund Investments......................................... 56
Capital Gain Distributions........................................... 57
Disposition of Fund Shares........................................... 57
Federal Income Tax Rates............................................. 58
Corporate Shareholders............................................... 58
Foreign Shareholders................................................. 58
Backup Withholding................................................... 58
Tax-Deferred Plans................................................... 59
Other Matters........................................................ 59
ADDITIONAL INFORMATION ON PERFORMANCE....................................... 59
Yield Calculations................................................... 61
Total Return Calculations............................................ 63
MISCELLANEOUS .............................................................. 64
Certain Record Holders............................................... 64
SCHEDULE A - Description of Ratings......................................... A-1
ii
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HISTORY OF NATIONS FUND, INC.
Nations Fund, Inc. ("NFI"), the Company is an open-end registered
investment company in the Nations Funds family, which consists of the Company,
Nations Fund Trust ("NFT"), Nations Reserves ("NR"), Nations LifeGoal Funds,
Inc. ("LifeGoal"), Nations Annuity Trust ("Annuity Trust") and Nations Master
Investment Trust ("NMIT") (collectively, the "Companies"). The Nations Funds
family currently has more than 70 distinct investment portfolios and total
assets in excess of $70 billion.
NFI was organized as a Maryland corporation on December 13, 1983, but
had no operations prior to December 15, 1986. NFI has a fiscal year end of March
31.
DESCRIPTION OF THE COMPANY AND
THE INVESTMENTS AND RISKS OF THE
U.S. GOVERNMENT BOND FUND
GENERAL.
NFI currently consists of seven different investment portfolios. This
SAI pertains to the Primary A, Investor A, Investor B and Investor C Shares of
Nations U.S. Government Bond Fund (the "U.S. Government Bond Fund"). The Fund is
diversified.
As of the date of this SAI, the authorized capital stock of NFI
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. 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 NFI, less (b) the liabilities of NFI
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 NFI 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 NFI. Meetings of shareholders may be called upon the request of 10%
or more of the outstanding shares of NFI. There are no preemptive rights
applicable to any of NFI's shares. NFI's shares, when issued, will be fully paid
and non-assessable.
As of August 1, 1999, Bank of America and its affiliates possessed or
shared power to dispose of or vote with respect to more than 25% of the
outstanding shares of NFI and therefore could be considered to be a controlling
person of NFI for purposes of the 1940 Act. For more detailed information
concerning the percentage of each class or series of the Fund over which Bank of
America and its affiliates possessed or shared power to dispose or vote as of a
certain date, see the discussion on Certain Record Holders. It is anticipated
that NFI will not hold annual shareholder meetings on a regular basis unless
required by the 1940 Act or Maryland law.
INVESTMENT LIMITATIONS
Information concerning the Fund's investment objective is set forth in
each of the Prospectuses. There can be no assurance that the Fund will achieve
its objectives. The features of the Fund's principal investment strategies and
the principal risks associated with those investment strategies also are
discussed in the Prospectuses. The most significant investment restrictions
applicable to the Fund's investment programs are set forth below.
The investment limitations that are matters of fundamental policy may
not be changed without the affirmative vote of the Fund's shareholders. The
investment limitations that are matters of non-fundamental policy may be changed
without the affirmative vote of the Fund's shareholders.
In addition to the policies outlined below, the Fund is seeking or has
obtained permission from the SEC to borrow money from or lend money to other
funds of the Companies, and to other investment companies that permit such
transactions, and for which BAAI serves as investment adviser.
THE FUND'S FUNDAMENTAL POLICY RESTRICTIONS
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The 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 U.S. Government Obligations.
2. Make loans, except that the 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 U.S. Government
Obligations) if, immediately after such purchase, more than 5% of the
value of the 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 the Fund's assets, the Fund will not hold more than
10% of the voting securities of any issuer.
4. Borrow money or issue senior securities as defined in the 1940 Act
except that (a) the Fund may borrow money from banks for temporary
purposes in amounts up to one-third of the value of the Fund's total
assets at the time of borrowing, provided that borrowings in excess of
5% of the value of the Fund's total assets will be repaid prior to the
purchase of additional portfolio securities by the Fund, (b) the Fund
may enter into commitments to purchase securities in accordance with the
Fund's investment program, including delayed delivery and when-issued
securities, which commitments may be considered the issuance of senior
securities, and (c) the Fund may issue multiple classes of shares in
accordance with SEC regulations or exemptions under the 1940 Act. The
purchase or sale of futures contracts and related options shall not be
considered to involve the borrowing of money or issuance of senior
securities. The Fund may enter into reverse repurchase agreements or
dollar roll transactions. The purchase or sale of futures contracts and
related options shall not be considered to involve the borrowing of
money or issuance of senior securities.
5. Purchase any securities on margin (except for such short-term credits as
are necessary for the clearance of purchases and sales of portfolio
securities) or sell any securities short (except against the box.) For
purposes of this restriction, the deposit or payment by the Fund of
initial or maintenance margin connection with futures contracts and
related options and options on securities is not considered to be the
purchase of a security on margin.
6. Underwrite securities issued by any other person, except to the extent
that the purchase of securities and the later disposition of such
securities in accordance with the Fund's investment program may be
deemed an underwriting. This restriction shall not limit the Fund's
ability to invest in securities issued by other registered investment
companies.
7. Invest in real estate or real estate limited partnership interests. (The
Fund may, however, purchase and sell securities secured by real estate
or interests therein or issued by issuers which invest in real estate or
interests therein.) This restriction does not apply to real estate
limited partnerships listed on a national stock exchange (E.G., the New
York Stock Exchange).
8. Purchase or sell commodity contracts except that the Fund may, to the
extent appropriate under its investment policies, purchase publicly
traded securities of companies engaging in whole or in part in such
activities, may enter into futures contracts and related options, may
engage in transactions on a when-issued or forward commitment basis, and
may enter into forward currency contracts in accordance with its
investment policies.
The U.S. Government Bond Fund may not:
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 respective Fund will maintain asset
coverage of 300% for all borrowings.
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 the Fund's portfolio securities does not mean that the limitation has
been violated.
2
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In addition, the U.S. Government Bond Fund may not:
1. Purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalists or
certificates of deposit for any such securities) if, immediately after
such purchase, more than 5% of the value of the Fund's total assets
would be invested in the securities of such issuer, or more than 10% of
the issuer's outstanding voting securities would be owned by the Fund or
the Company; except that up to 25% of the value of a Fund's total assets
may be invested without regard to the foregoing limitations. For
purposes of this limitation, (a) a security is considered to be issued
by the entity (or entities) whose assets and revenues back the security
and (b) a guarantee of a security shall not be deemed to be a security
issued by the guarantor when the value of securities issued and
guaranteed by the guarantor, and owned by the Fund, does not exceed 10%
of the value of the Fund's total assets. Each Fund will maintain asset
coverage of 300% or maintain 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 borrowing.
2. Purchase any securities which would cause 25% or more of the value of
the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that: (a) there is no
limitation with respect to (i) instruments issued or guaranteed by the
United States, any state, territory or possession of the United States,
the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions and (ii) repurchase
agreements secured by the instruments described in clause (i); (b)
wholly-owned finance companies will be considered to be in the
industries of their parents if their activities are primarily related to
financing the activities of the parents; and (c) utilities will be
divided according to their services, for example, gas, gas transmission,
electric and gas, electric and telephone will each be considered a
separate industry or (iii) with respect to the Small Company Growth
Fund, instruments issued by domestic branches of U.S. Banks. Purchase or
sell real estate, except that the Fund may purchase securities of
issuers which deal in real estate and may purchase securities which are
secured by interest in real estate.
The investment objective and policies of the Fund, unless otherwise
specified, is non-fundamental and may be changed without shareholder approval.
Shareholders of the U.S. Government Bond 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 the Fund change, shareholders should
consider whether the Fund remains an appropriate investment in light of their
current position and needs.
THE FUND'S NON-FUNDAMENTAL POLICY RESTRICTIONS
In addition, certain non-fundamental investment restrictions are also
applicable to the Fund, including the following:
1. The Fund will not purchase or retain the securities of any issuer if the
officers, or directors of the Company, its advisers, or managers owning
beneficially more than one half of one percent of the securities of each
issuer together own beneficially more than five percent of such
securities.
2. The Fund will not purchase securities of unseasoned issuers, including
their predecessors, that have been in operation for less than three
years, if by reason thereof the value of the Fund's investment in such
classes of securities would exceed 5% of the Fund's total assets. For
purposes of this limitation, issuers include predecessors, sponsors,
controlling persons, general partners, guarantors and originators of
underlying assets which have less than three years of continuous
operation or relevant business experience.
3. The Fund will not purchase puts, calls, straddles, spreads and any
combination thereof if by reason thereof the value of its aggregate
investment in such classes of securities will exceed 5% of its total
assets except that: (a) this restriction shall not apply to standby
commitments, (b) this restriction shall not apply to the Fund's
transactions in futures contracts and related options, and (c) the Fund
may obtain short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities.
4. The Fund will not invest in warrants, valued at the lower of cost or
market, in excess of 5% of the value of the Fund's assets, and no more
than 2% of the value of the Fund's net assets may be invested in
warrants that are not listed on the New York or American Stock Exchange
(for purposes of this undertaking, warrants acquired by the Fund in
units or attached to securities will be deemed to have no value).
3
<PAGE>
5. The Fund will not purchase securities of companies for the purpose of
exercising control.
6. The Fund will not mortgage, pledge or hypothecate any assets except to
secure permitted borrowings and then only in an amount up to one-third
of the value of the Fund's total assets at the time of borrowing. For
purposes of this limitation, collateral arrangements with respect to the
writing of options, futures contracts, options on futures contracts, and
collateral arrangements with respect to initial and variation margin are
not considered to be a mortgage, pledge or hypothecation of assets.
7. The Fund will not invest in securities of other investment companies,
except as they may be acquired as part of a merger, consolidation or
acquisition of assets and except to the extent otherwise permitted by
the 1940 Act.
8. The Fund will not purchase oil, gas or mineral leases or other interests
(the Fund may, however, purchase and sell the securities of companies
engaged in the exploration, development, production, refining,
transporting and marketing of oil, gas or minerals).
PERMISSIBLE FUND INVESTMENTS
In addition to the principal investment strategies for the Fund, which
are outlined in the Fund's prospectuses, the Fund also may invest in other types
of securities in percentages of less than 10% of its total assets (E.G., the
Fund may invest in money market instruments without limit during temporary
defensive periods). These types of securities are listed below for each
portfolio and then are described in more detail after this sub-section.
U.S. Government Bond Fund: In addition to the types of securities
described in its Prospectuses, the Fund may invest in: dollar-denominated debt
obligations of foreign issuers, including foreign corporations and foreign
governments; mortgage-related securities of governmental issuers or of private
issuers, including mortgage pass-through certificates, CMOs, real estate
investment trust securities and municipal securities rated by one of the NRSROs
or if not so rated, determined by the Adviser to be of comparable quality. The
Fund also may invest in "high quality" money market instruments, repurchase
agreements and cash. Such obligations may include those issued by foreign banks
and foreign branches of U.S. banks.
General: The Fund may invest in certain specified derivative
securities, including: interest rate swaps, caps and floors for hedging
purposes, exchange-traded options, over-the-counter options executed with
primary dealers, including long term calls and puts and covered calls, and U.S.
and foreign exchange-traded financial futures and options thereon approved by
the CFTC for market exposure risk management. The Fund also may lend its
portfolio securities to qualified institutional investors and may invest in
repurchase agreements, restricted, private placement and other illiquid
securities. The Fund may engage in reverse repurchase agreements and in dollar
roll transactions. Additionally, the Fund may purchase securities issued by
other investment companies, consistent with the Fund's investment objectives and
policies. The Fund also may invest in instruments issued by trusts or certain
partnerships including pass-through certificates representing participations in,
or debt instruments backed by, the securities and other assets owned by such
trusts and partnerships.
ASSET-BACKED SECURITIES
IN GENERAL. Asset-backed securities arise through the grouping by
governmental, government-related, and private organizations of loans,
receivables, or other assets originated by various lenders. Asset-backed
securities consist of both mortgage- and non-mortgage-backed securities.
Interests in pools of these assets may differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal paid at maturity or specified call dates. Conversely,
asset-backed securities provide periodic payments which may consist of both
interest and principal payments.
The life of an asset-backed security varies depending upon the rate of
the prepayment of the underlying debt instruments. The rate of such prepayments
will be a function of current market interest rates, and other economic and
demographic factors. For example, falling interest rates generally result in an
increase in the rate of prepayments of mortgage loans while rising interest
rates generally decrease the rate of prepayments. An acceleration in prepayments
in response to sharply falling interest rates will shorten the security's
average maturity and limit the potential appreciation in the security's value
relative to a conventional debt security. Consequently, asset-backed securities
may not be as effective in locking in high, long-term yields. Conversely, in
periods of sharply rising rates, prepayments are generally slow, increasing the
security's average life and its potential for price depreciation.
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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 the Fund may
invest may include those issued or guaranteed by Government National Mortgage
Association ("Ginnie Mae" or "GNMA"), Federal National Mortgage Association
("Fannie Mae" or "FNMA") or Federal Home Loan Mortgage Corporation ("Freddie
Mac" or "FHLMC"). Such Certificates are mortgage-backed securities which
represent a partial ownership interest in a pool of mortgage loans issued by
lenders such as mortgage bankers, commercial banks and savings and loan
associations. Such mortgage loans may have fixed or adjustable rates of
interest.
The average life of a mortgage-backed security is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities. Prepayments of principal by mortgagors and mortgage foreclosures
will usually result in the return of the greater part of principal invested far
in advance of the maturity of the mortgages in the pool.
The yield which will be earned on mortgage-backed securities may vary
from their coupon rates for the following reasons: (i) Certificates may be
issued at a premium or discount, rather than at par; (ii) Certificates may trade
in the secondary market at a premium or discount after issuance; (iii) interest
is earned and compounded monthly, which has the effect of raising the effective
yield earned on the Certificates; and (iv) the actual yield of each Certificate
is affected by the prepayment of mortgages included in the mortgage pool
underlying the Certificates and the rate at which principal so prepaid is
reinvested. In addition, prepayment of mortgages included in the mortgage pool
underlying a GNMA Certificate purchased at a premium may result in a loss to the
Fund.
Mortgage-backed securities issued by private issuers, whether or not
such obligations are subject to guarantees by the private issuer, may entail
greater risk than obligations directly or indirectly guaranteed by the U.S.
Government.
Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities (collateral
collectively hereinafter referred to as "Mortgage Assets"). Multi-class
pass-through securities are interests in a trust composed of Mortgage Assets and
all references herein to CMOs will include multi-class pass-through securities.
Payments of principal of and interest on the Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distribution on the multi-class pass-through securities.
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. The 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. The Fund will only
invest in SMBS whose mortgage assets are U.S.
Government obligations.
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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, the Fund may fail to fully recoup its initial
investment in these securities. The market value of any class which consists
primarily or entirely of principal payments generally is unusually volatile in
response to changes in interest rates.
The average life of mortgage-backed securities varies with the
maturities of the underlying mortgage instruments. The average life is likely to
be substantially less than the original maturity of the mortgage pools
underlying the securities as the result of mortgage prepayments, mortgage
refinancings, or foreclosures. The rate of mortgage prepayments, and hence the
average life of the certificates, will be a function of the level of interest
rates, general economic conditions, the location and age of the mortgage and
other social and demographic conditions. Such prepayments are passed through to
the registered holder with the regular monthly payments of principal and
interest and have the effect of reducing future payments. Estimated average life
will be determined by the Adviser and used for the purpose of determining the
average weighted maturity and duration of the Fund.
ADDITIONAL INFORMATION ON MORTGAGE-BACKED SECURITIES.
Mortgage-backed securities represent an ownership interest in a pool of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. The mortgagor's monthly
payments to his/her lending institution are "passed-through" to an investor.
Most issuers or poolers provide guarantees of payments, regardless of whether or
not the mortgagor actually makes the payment. The guarantees made by issuers or
poolers are supported by various forms of credit collateral, guarantees or
insurance, including individual loan, title, pool and hazard insurance purchased
by the issuer. There can be no assurance that the private issuers or poolers can
meet their obligations under the policies. Mortgage-backed securities issued by
private issuers or poolers, whether or not such securities are subject to
guarantees, may entail greater risk than securities directly or indirectly
guaranteed by the U.S. Government.
Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential mortgage loans, net of any fees paid. Additional payments are caused
by repayments resulting from the sale of the underlying residential property,
refinancing or foreclosure net of fees or costs which may be incurred. Some
mortgage-backed securities are described as "modified pass-through." These
securities entitle the holders to receive all interest and principal payments
owed on the mortgages in the pool, net of certain fees, regardless of whether or
not the mortgagors actually make the payments.
Residential mortgage loans are pooled by the FHLMC. FHLMC is a
corporate instrumentality of the U.S. Government and was created by Congress in
1970 for the purpose of increasing the availability of mortgage credit for
residential housing. Its stock is owned by the twelve Federal Home Loan Banks.
FHLMC issues Participation Certificates ("PC's"), which represent interests in
mortgages from FHLMC's national portfolio. FHLMC guarantees the timely payment
of interest and ultimate collection of principal.
FNMA is a Government sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases residential mortgages from a list of
approved sellers/servicers which include state and federally-chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA.
The principal Government guarantor of mortgage-backed securities is the
GNMA. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by approved institutions and backed by pools of
FHA-insured or VA-guaranteed mortgages.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Pools
created by such non-governmental issuers generally offer a higher rate of
interest than Government and Government-related pools because there are no
direct or indirect Government guarantees of payments in the former pools.
However, timely payment of interest and principal of these pools is supported by
various forms of insurance or guarantees, including individual loan, title, pool
and hazard insurance purchased by the issuer. The insurance and guarantees are
issued by Governmental entities, private insurers, and the mortgage poolers.
There can be no assurance that the private insurers or mortgage poolers can meet
their obligations under the policies.
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The Fund expects that Governmental or private entities may create
mortgage loan pools offering pass-through investments in addition to those
described above. The mortgages underlying these securities may be alternative
mortgage instruments, that is, mortgage instruments whose principal or interest
payment may vary or whose terms to maturity may be shorter than previously
customary. As new types of mortgage-backed securities are developed and offered
to investors, certain Funds will, consistent with their investment objective and
policies, consider making investments in such new types of securities.
Underlying Mortgages
Pools consist of whole mortgage loans or participations in loans. The
majority of these loans are made to purchasers of 1-4 family homes. The terms
and characteristics of the mortgage instruments are generally uniform within a
pool but may vary among pools. For example, in addition to fixed-rate,
fixed-term mortgages, the Fund may purchase pools of variable-rate mortgages
(VRM), growing equity mortgages (GEM), graduated payment mortgages (GPM) and
other types where the principal and interest payment procedures vary. VRM's are
mortgages which reset the mortgage's interest rate periodically with changes in
open market interest rates. To the extent that the Fund is actually invested in
VRM's, the Fund's interest income will vary with changes in the applicable
interest rate on pools of VRM's. GPM and GEM pools maintain constant interest
rates, with varying levels of principal repayment over the life of the mortgage.
These different interest and principal payment procedures should not impact the
Fund's net asset value since the prices at which these securities are valued
will reflect the payment procedures.
All poolers apply standards for qualification to local lending
institutions which originate mortgages for the pools. Poolers also establish
credit standards and underwriting criteria for individual mortgages included in
the pools. In addition, some mortgages included in pools are insured through
private mortgage insurance companies.
Average Life
The average life of pass-through pools varies with the maturities of
the underlying mortgage instruments. In addition, a pool's term may be shortened
by unscheduled or early payments of principal and interest on the underlying
mortgages. The occurrence of mortgage prepayments is affected by factors
including the level of interest rates, general economic conditions, the location
and age of the mortgage, and other social and demographic conditions.
As prepayment rates of individual pools vary widely, it is not possible
to accurately predict the average life of a particular pool. For pools of
fixed-rated 30-year mortgages, common industry practice is to assume that
prepayments will result in a 12-year average life. Pools of mortgages with other
maturities or different characteristics will have varying assumptions for
average life.
Returns on Mortgage-Backed Securities
Yields on mortgage-backed pass-through securities are typically quoted
based on the maturity of the underlying instruments and the associated average
life assumption. Actual prepayment experience may cause the yield to differ from
the assumed average life yield.
Reinvestment of prepayments may occur at higher or lower interest rates
than the original investment, thus affecting the yields of the Fund. The
compounding effect from reinvestments of monthly payments received by the Fund
will increase its yield to shareholders, compared to bonds that pay interest
semi-annually.
NON-MORTGAGE ASSET-BACKED SECURITIES. Non-mortgage asset-backed
securities include interests in pools of receivables, such as motor vehicle
installment purchase obligations and credit card receivables. Such securities
are generally issued as pass-through certificates, which represent undivided
fractional ownership interests in the underlying pools of assets. Such
securities also may be debt instruments, which are also known as collateralized
obligations and are generally issued as the debt of a special purpose entity
organized solely for the purpose of owning such assets and issuing such debt.
Such securities also may include instruments issued by certain trusts,
partnerships or other special purpose issuers, including pass-through
certificates representing participations in, or debt instruments backed by, the
securities and other assets owned by such issuers.
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Non-mortgage-backed securities are not issued or guaranteed by the U.S.
Government or its agencies or instrumentalities; however, the payment of
principal and interest on such obligations may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution (such as a bank or insurance company) unaffiliated with
the issuers of such securities.
The purchase of non-mortgage-backed securities raises considerations
peculiar to the financing of the instruments underlying such securities. For
example, most organizations that issue asset-backed securities relating to motor
vehicle installment purchase obligations perfect their interests in their
respective obligations only by filing a financing statement and by having the
servicer of the obligations, which is usually the originator, take custody
thereof. In such circumstances, if the servicer were to sell the same
obligations to another party, in violation of its duty not to do so, there is a
risk that such party could acquire an interest in the obligations superior to
that of the holders of the asset-backed securities. Also, although most such
obligations grant a security interest in the motor vehicle being financed, in
most states the security interest in a motor vehicle must be noted on the
certificate of title to perfect such security interest against competing claims
of other parties. Due to the larger number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the obligations
underlying the asset-backed securities, usually is not amended to reflect the
assignment of the seller's security interest for the benefit of the holders of
the asset-backed securities. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on those securities. In addition, various state and Federal laws give
the motor vehicle owner the right to assert against the holder of the owner's
obligation certain defenses such owner would have against the seller of the
motor vehicle. The assertion of such defenses could reduce payments on the
related asset-backed securities. Insofar as credit card receivables are
concerned, credit card holders are entitled to the protection of a number of
state and Federal consumer credit laws, many of which give such holders the
right to set off certain amounts against balances owed on the credit card,
thereby reducing the amounts paid on such receivables. In addition, unlike most
other asset-backed securities, credit card receivables are unsecured obligations
of the card holder.
While the market for asset-backed securities is becoming increasingly
liquid, the market for mortgage-backed securities issued by certain private
organizations and non-mortgage-backed securities is not as well developed. As
stated above, the Adviser intends to limit its purchases of mortgage-backed
securities issued by certain private organizations and non-mortgage-backed
securities to securities that are readily marketable at the time of purchase.
BORROWINGS
NFI participates in an uncommitted line of credit provided by The Bank
of New York under a line of credit agreement (the "Agreement"). Advances under
the Agreement are taken primarily for temporary or emergency purposes, including
the meeting of redemption requests that otherwise might require the untimely
disposition of securities. Interest on borrowings is payable at the federal
funds rate plus .50% on an annualized basis. The Agreement requires, among other
things, that the Fund maintain a ratio of no less than 4 to 1 net assets (not
including funds borrowed pursuant to the Agreement) to the aggregate amount of
indebtedness pursuant to the Agreement. Specific borrowings by the Fund under
the Agreement over the last fiscal year, if any, can by found in the Fund's
Annual Report for the year ended March 31, 1999.
COMMERCIAL INSTRUMENTS
Commercial Instruments consist of short-term U.S. dollar-denominated
obligations issued by domestic corporations or issued in the U.S. by foreign
corporations and foreign commercial banks.
Investments by a Fund in commercial paper will consist of issues rated
in a manner consistent with the Fund's investment policies and objectives. In
addition, the 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 the Fund as previously
described.
Variable-rate master demand notes are unsecured instruments that permit
the indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate. Variable-rate instruments acquired by a Fund will be rated at a
level consistent with such Fund's investment objective and policies of high
quality as determined by a major rating agency or, if not rated, will be of
comparable quality as determined by the Adviser. See also the discussion of
variable- and floating-rate instruments in this SAI.
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Variable- and floating-rate instruments are unsecured instruments that
permit the indebtedness thereunder to vary. While there may be no active
secondary market with respect to a particular variable or floating rate
instrument purchased by the Fund, the Fund may, from time to time as specified
in the instrument, demand payment of the principal or may resell the instrument
to a third party. The absence of an active secondary market, however, could make
it difficult for the Fund to dispose of an instrument if the issuer defaulted on
its payment obligation or during periods when the Fund is not entitled to
exercise its demand rights, and the Fund could, for these or other reasons,
suffer a loss. The Fund may invest in variable and floating rate instruments
only when the Adviser deems the investment to involve minimal credit risk. If
such instruments are not rated, the Adviser will consider the earning power,
cash flows, and other liquidity ratios of the issuers of such instruments and
will continuously monitor their financial status to meet payment on demand. In
determining average weighted portfolio maturity, an instrument will be deemed to
have a maturity equal to the longer of the period remaining to the next interest
rate adjustment or the demand notice period specified in the instrument.
The Fund also may purchase short-term participation interests in loans
extended by banks to companies, provided that both such banks and such companies
meet the quality standards set forth above. In purchasing a loan participation
or assignment, the Fund acquires some or all of the interest of a bank or other
lending institution in a loan to a corporate borrower. Many such loans are
secured and most impose restrictive covenants which must be met by the borrower
and which are generally more stringent than the covenants available in publicly
traded debt securities. However, interests in some loans may not be secured, and
the Fund will be exposed to a risk of loss if the borrower defaults. Loan
participations also may be purchased by the Fund when the borrowing company is
already in default. In purchasing a loan participation, the Fund may have less
protection under the federal securities laws than it has in purchasing
traditional types of securities. The Fund's ability to assert its rights against
the borrower will also depend on the particular terms of the loan agreement
among the parties.
COMBINED TRANSACTIONS
The Fund may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple forward foreign
currency exchange contracts and any combination of futures, options and forward
foreign currency exchange contracts ("component" transactions), instead of a
single transaction, as part of a single hedging strategy when, in the opinion of
the Adviser, it is in the best interest of the Fund to do so and where
underlying hedging strategies are permitted by the Fund's investment policies. A
combined transaction, while part of a single hedging strategy, may contain
elements of risk that are present in each of its component transactions.
CORPORATE DEBT SECURITIES
The Fund may invest in corporate debt securities of domestic issuers of
all types and maturities, such as bonds, debentures, notes and commercial paper.
Corporate debt securities may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer, participation based on revenue, sales or profit, or the
purchase of common stock or warrants in a unit transaction (where corporate debt
obligations and common stock are offered as a unit). The Fund may also invest in
corporate debt securities of foreign issuers.
The corporate debt securities in which the Fund will invest will be
rated investment grade by at least one NRSRO (E.G., BBB or above by Standard &
Poor's Corporation ("S&P") or Baa or above by Moody's Investors Services, Inc.
("Moody's")). Commercial paper purchased by the Fund will be rated in the top
two categories by a NRSRO. Corporate debt securities that are not rated may be
purchased by the Fund if they are determined by the Adviser to be of comparable
quality under the direction of the Board of Directors of the Company. If the
rating of any corporate debt security held by the Fund falls below such ratings
or if the Adviser determines that an unrated corporate debt security is no
longer of comparable quality, then such security shall be disposed of in an
orderly manner as quickly as possible. A description of these ratings is
attached as Schedule A to this Statement of Additional Information.
CUSTODIAL RECEIPTS
The Fund may also acquire custodial receipts that evidence ownership of
future interest payments, principal payments or both on certain U.S. Government
notes or bonds. Such notes and bonds are held in custody by a bank on behalf of
the owners. These custodial receipts are known by various names, including
"Treasury Receipts," "Treasury Investors Growth Receipts" and "Certificates of
Accrual on Treasury Securities." Although custodial receipts are not considered
U.S. Government securities, they are indirectly issued or guaranteed as to
principal and interest by the U.S. Government, its agencies, authorities or
instrumentalities. Custodial receipts will be treated as illiquid securities.
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CURRENCY SWAPS
The Fund also may enter into currency swaps for hedging purposes and to
seek to increase total return. In as much as swaps are entered into for good
faith hedging purposes or are offset by a segregated account as described below,
the Fund and the Adviser believe that swaps do not constitute senior securities
as defined in the 1940 Act and, accordingly, will not treat them as being
subject to the Fund's borrowing restrictions. The net amount of the excess, if
any, of the Fund's obligations over its entitlement with respect to each
currency swap will be accrued on a daily basis and an amount of cash or liquid
high grade debt securities (I.E., securities rated in one of the top three
ratings categories by an NRSRO, or, if unrated, deemed by the Adviser to be of
comparable credit quality) having an aggregate net asset value at least equal to
such accrued excess will be maintained in a segregated account by the Fund's
custodian. The Fund will not enter into any currency swap unless the credit
quality of the unsecured senior debt or the claims-paying ability of the other
party thereto is considered to be investment grade by the Adviser.
DELAYED DELIVERY TRANSACTIONS
In a delayed delivery transaction, the Fund relies on the other party
to complete the transaction. If the transaction is not completed, the Fund may
miss a price or yield considered to be advantageous. In delayed delivery
transactions, delivery of the securities occurs beyond normal settlement
periods, but a Fund would not pay for such securities or start earning interest
on them until they are delivered. However, when the Fund purchases securities on
such a delayed delivery basis, it immediately assumes the risk of ownership,
including the risk of price fluctuation. Failure by a counterparty to deliver a
security purchased on a delayed delivery basis may result in a loss or missed
opportunity to make an alternative investment. Depending upon market conditions,
the Fund's delayed delivery purchase commitments could cause its net asset value
to be more volatile, because such securities may increase the amount by which
the Fund's total assets, including the value of when-issued and delayed delivery
securities held by the Fund, exceed its net assets.
DOLLAR ROLL TRANSACTIONS
The Fund may enter into "dollar roll" transactions, which consist of
the sale by the Fund to a bank or broker/dealer (the "counterparty") of GNMA
certificates or other mortgage-backed securities together with a commitment to
purchase from the counterparty similar, but not identical, securities at a
future date, at the same price. The counterparty receives all principal and
interest payments, including prepayments, made on the security while it is the
holder. The Fund receives a fee from the counterparty as consideration for
entering into the commitment to purchase. Dollar rolls may be renewed over a
period of several months with a different repurchase price and a cash settlement
made at each renewal without physical delivery of securities. Moreover, the
transaction may be preceded by a firm commitment agreement pursuant to which the
Fund agrees to buy a security on a future date. If the broker/dealer to whom the
Fund sells the security becomes insolvent, the Fund's right to purchase or
repurchase the security may be restricted; the value of the security may change
adversely over the term of the dollar roll; the security that the Fund is
required to repurchase may be worth less than the security that the Fund
originally held, and the return earned by the Fund with the proceeds of a dollar
roll may not exceed transaction costs.
The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Fund's right to purchase
from the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Fund is able to purchase them.
Similarly, the Fund may be required to purchase securities in connection with a
dollar roll at a higher price than may otherwise be available on the open
market. Since, as noted above, the counterparty is required to deliver a
similar, but not identical security to the Fund, the security that the Fund is
required to buy under the dollar roll may be worth less than an identical
security. Finally, there can be no assurance that the Fund's use of the cash
that it receives from a dollar roll will provide a return that exceeds borrowing
costs.
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FOREIGN CURRENCY TRANSACTIONS
The Fund may invest in foreign currency transactions. Foreign
securities involve currency risks. The U.S. dollar value of a foreign security
tends to decrease when the value of the U.S. dollar rises against the foreign
currency in which the security is denominated, and tends to increase when the
value of the U.S. dollar falls against such currency. The Fund may purchase or
sell forward foreign currency exchange contracts ("forward contracts") to
attempt to minimize the risk to the Fund from adverse changes in the
relationship between the U.S. dollar and foreign currencies. The Fund may also
purchase and sell foreign currency futures contracts and related options (see
"Purchase and Sale of Currency Futures Contracts and Related Options"). A
forward contract is an obligation to purchase or sell a specific currency for an
agreed price at a future date that is individually negotiated and privately
traded by currency traders and their customers.
Forward foreign currency exchange contracts establish an exchange rate
at a future date. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward foreign currency exchange contract generally has no
deposit requirement, and is traded at a net price without commission. The Fund
will direct its custodian to segregate high grade liquid assets in an amount at
least equal to its obligations under each forward foreign currency exchange
contract. Neither spot transactions nor forward foreign currency exchange
contracts eliminate fluctuations in the prices of the Fund's portfolio
securities or in foreign exchange rates, or prevent loss if the prices of these
securities should decline.
The Fund may enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of the security (a
"transaction hedge"). In addition, when the Adviser believes that a foreign
currency may suffer a substantial decline against the U.S. dollar, it may enter
into a forward sale contract to sell an amount of that foreign currency
approximating the value of some or all of the Fund's securities denominated in
such foreign currency, or when the Adviser believes that the U.S. dollar may
suffer a substantial decline against the foreign currency, it may enter into a
forward purchase contract to buy that foreign currency for a fixed dollar amount
(a "position hedge").
The Fund may, however, enter into a forward contract to sell a
different foreign currency for a fixed U.S. dollar amount where the Adviser
believes that the U.S. dollar value of the currency to be sold pursuant to the
forward contract will fall whenever there is a decline in the U.S. dollar value
of the currency in which the fund securities are denominated (a "cross-hedge").
Foreign currency hedging transactions are an attempt to protect the
Fund against changes in foreign currency exchange rates between the trade and
settlement dates of specific securities transactions or changes in foreign
currency exchange rates that would adversely affect a portfolio position or an
anticipated portfolio position. Although these transactions tend to minimize the
risk of loss due to a decline in the value of the hedged currency, at the same
time they tend to limit any potential gain that might be realized should the
value of the hedged currency increase. The precise matching of the forward
contract amount and the value of the securities involved will not generally be
possible because the future value of these securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and date it matures.
The Fund's custodian will segregate cash, U.S. Government securities or
other high-quality debt securities having a value equal to the aggregate amount
of the Fund's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the segregated securities
declines, additional cash or securities will be segregated on a daily basis so
that the value of the segregated securities will equal the amount of the Fund's
commitments with respect to such contracts. As an alternative to segregating all
or part of such securities, the Fund may purchase a call option permitting the
Fund to purchase the amount of foreign currency being hedged by a forward sale
contract at a price no higher than the forward contract price or the Fund may
purchase a put option permitting the Fund to sell the amount of foreign currency
subject to a forward purchase contract at a price as high or higher than the
forward contract price.
The Fund is a dollar-denominated mutual fund and therefore
consideration is given to hedging part or all of the portfolio back to U.S.
dollars from international currencies. All decisions to hedge are based upon an
analysis of the relative value of the U.S. dollar on an international purchasing
power parity basis (purchasing power parity is a method for determining the
relative purchasing power of different currencies by comparing the amount of
each currency required to purchase a typical bundle of goods and services to
domestic markets) and an estimation of short-term interest rate differentials
(which affect both the direction of currency movements and also the cost of
hedging).
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FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS
FUTURES CONTRACTS IN GENERAL. A futures contract is an agreement
between two parties for the future delivery of fixed income securities or equity
securities or for the payment or acceptance of a cash settlement in the case of
futures contracts on an index of fixed income or equity securities. A "sale" of
a futures contract means the contractual obligation to deliver the securities at
a specified price on a specified date, or to make the cash settlement called for
by the contract. Futures contracts have been designed by exchanges which have
been designated "contract markets" by the CFTC and must be executed through a
brokerage firm, known as a futures commission merchant, which is a member of the
relevant contract market. Futures contracts trade on these markets, and the
exchanges, through their clearing organizations, guarantee that the contracts
will be performed as between the clearing members of the exchange. Presently,
futures contracts are based on such debt securities as long-term U.S. Treasury
Bonds, Treasury Notes, GNMA modified pass-through mortgage-backed securities,
three-month U.S. Treasury Bills, bank certificates of deposit, and on indices of
municipal, corporate and government bonds.
While futures contracts based on securities do provide for the delivery
and acceptance of securities, such deliveries and acceptances are seldom made.
Generally, a futures contract is terminated by entering into an offsetting
transaction. The Fund will incur brokerage fees when it purchases and sells
futures contracts. At the time such a purchase or sale is made, the Fund must
provide cash or money market securities as a deposit known as "margin." The
initial deposit required will vary, but may be as low as 2% or less of a
contract's face value. Daily thereafter, the futures contract is valued through
a process known as "marking to market," and the Fund that engages in futures
transactions may receive or be required to pay "variation margin" as the futures
contract becomes more or less valuable. At the time of delivery of securities
pursuant to a futures contract based on securities, adjustments are made to
recognize differences in value arising from the delivery of securities with a
different interest rate than the specific security that provides the standard
for the contract. In some (but not many) cases, securities called for by a
futures contract may not have been issued when the contract was written.
Futures contracts on indices of securities are settled through the
making and acceptance of cash settlements based on changes in value of the
underlying rate or index between the time the contract is entered into and the
time it is liquidated.
FUTURES CONTRACTS ON FIXED INCOME SECURITIES AND RELATED INDICES. As
noted in their respective Prospectuses, the Fund may enter into transactions in
futures contracts for the purpose of hedging a relevant portion of their
portfolios. The Fund may enter into transactions in futures contracts that are
based on U.S. Government obligations, including any index of government
obligations that may be available for trading. Such transactions will be entered
into where movements in the value of the securities or index underlying a
futures contract can be expected to correlate closely with movements in the
value of securities held in the Fund. For example, the Fund may sell futures
contracts in anticipation of a general rise in the level of interest rates,
which would result in a decline in the value of its fixed income securities. If
the expected rise in interest rates occurs, the Fund may realize gains on its
futures position, which should offset all or part of the decline in value of
fixed income fund securities. The Fund could protect against such decline by
selling fixed income securities, but such a strategy would involve higher
transaction costs than the sale of futures contracts and, if interest rates
again declined, the Fund would be unable to take advantage of the resulting
market advance without purchases of additional securities.
The purpose of the purchase or sale of a futures contract on government
securities and indices of government securities, in the case of the
above-referenced Funds, which hold or intend to acquire long-term debt
securities, is to protect the Fund from fluctuations in interest rates without
actually buying or selling long-term debt securities. For example, if long-term
bonds are held by the Fund, and interest rates were expected to increase, the
Fund might enter into futures contracts for the sale of debt securities. Such a
sale would have much the same effect as selling an equivalent value of the
long-term bonds held by the Fund. If interest rates did increase, the value of
the debt securities in the Fund would decline, but the value of the futures
contracts to the Fund would increase at approximately the same rate thereby
keeping the net asset value of the Fund from declining as much as it otherwise
would have. When the Fund is not fully invested and a decline in interest rates
is anticipated, which would increase the cost of fixed income securities that
the Fund intends to acquire, it may purchase futures contracts. In the event
that the projected decline in interest rates occurs, the increased cost of the
securities acquired by the Fund should be offset, in whole or part, by gains on
the futures contracts by entering into offsetting transactions on the contract
market on which the initial purchase was effected. In a substantial majority of
transactions involving futures contracts on fixed income securities, the Fund
will purchase the securities upon termination of the long futures positions, but
under unusual market conditions, a long futures position may be terminated
without a corresponding purchase of securities.
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Similarly, when it is expected that interest rates may decline, futures
contracts on fixed income securities and indices of government securities may be
purchased for the purpose of hedging against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of such futures
contracts should be similar to that of long-term bonds, the Fund could take
advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Fund's cash reserves could then be used to
buy long-term bonds in the cash market. Similar results could be accomplished by
selling bonds with long maturities and investing in bonds with short maturities
when interest rates are expected to increase. However, since the futures market
is more liquid than the cash market, the use of these futures contracts as an
investment technique allows the Fund to act in anticipation of such an interest
rate decline without having to sell its portfolio securities. To the extent the
Fund enters into futures contracts for this purpose, the segregated assets
maintained by the Fund will consist of cash, cash equivalents or high quality
debt securities of the Fund in an amount equal to the difference between the
fluctuating market value of such futures contract and the aggregate value of the
initial deposit and variation margin payments made by the Fund with respect to
such futures contracts.
STOCK INDEX FUTURES CONTRACTS. The Fund may sell stock index futures
contracts in order to offset a decrease in market value of its securities that
might otherwise result from a market decline. The Fund may do so either to hedge
the value of its portfolio as a whole, or to protect against declines, occurring
prior to sales of securities, in the value of securities to be sold. Conversely,
the Fund may purchase stock index futures contracts in order to protect against
anticipated increases in the cost of securities to be acquired.
In addition, the Fund may utilize stock index futures contracts in
anticipation of changes in the composition of its portfolio. For example, in the
event that the Fund expects to narrow the range of industry groups represented
in its portfolio, it may, prior to making purchases of the actual securities,
establish a long futures position based on a more restricted index, such as an
index comprised of securities of a particular industry group. As such securities
are acquired, the Fund's futures positions would be closed out. The Fund may
also sell futures contracts in connection with this strategy, in order to
protect against the possibility that the value of the securities to be sold as
part of the restructuring of its portfolio will decline prior to the time of
sale.
OPTIONS ON FUTURES CONTRACTS. An option on a futures contract gives the
purchaser (the "holder") the right, but not the obligation, to purchase a
position in the underlying futures contract (I.E., a purchase of such futures
contract) in the case of an option to purchase (a "call" option), or a "short"
position in the underlying futures contract (I.E., a sale of such futures
contract) in the case of an option to sell (a "put" option), at a fixed price
(the "strike price") up to a stated expiration date. The holder pays a
non-refundable purchase price for the option, known as the "premium." The
maximum amount of risk the purchase of the option assumes is equal to the
premium plus related transaction costs, although this entire amount may be lost.
Upon exercise of the option by the holder, the exchange clearing corporation
establishes a corresponding long position in the case of a put option. In the
event that an option is exercised, the parties will be subject to all the risks
associated with the trading of futures contracts, such as payment of variation
margin deposits. In addition, the writer of an option on a futures contract,
unlike the holder, is subject to initial and variation margin requirements on
the option position.
OPTIONS ON FUTURES CONTRACTS ON FIXED INCOME SECURITIES AND RELATED
INDICES. The Fund may purchase put options on futures contracts in which the
Fund are permitted to invest for the purpose of hedging a relevant portion of
their portfolios against an anticipated decline in the values of portfolio
securities resulting from increases in interest rates, and may purchase call
options on such futures contracts as a hedge against an interest rate decline
when they are not fully invested. The Fund would write options on these futures
contracts primarily for the purpose of terminating existing positions.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS, OPTIONS ON STOCK INDICES AND
OPTIONS ON EQUITY SECURITIES. The Fund may purchase put options on stock index
futures contracts, stock indices or equity securities for the purpose of hedging
the relevant portion of their portfolio securities against an anticipated
market-wide decline or against declines in the values of individual portfolio
securities, and they may purchase call options on such futures contracts as a
hedge against a market advance when they are not fully invested. The Fund would
write options on such futures contracts primarily for the purpose of terminating
existing positions. In general, options on stock indices will be employed in
lieu of options on stock index futures contracts only where they present an
opportunity to hedge at lower cost. With respect to options on equity
securities, the Fund may, under certain circumstances, purchase a combination of
call options on such securities and U.S. Treasury bills. The Adviser believes
that such a combination may more closely parallel movements in the value of the
security underlying the call option than would the option itself.
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Further, while the Fund generally would not write options on individual
portfolio securities, it may do so under limited circumstances known as
"targeted sales" and "targeted buys," which involve the writing of call or put
options in an attempt to purchase or sell portfolio securities at specific
desired prices. The Fund would receive a fee, or a "premium," for the writing of
the option. For example, where the Fund seeks to sell portfolio securities at a
"targeted" price, it may write a call option at that price. In the event that
the market rises above the exercise price, it would receive its "targeted"
price, upon the exercise of the option, as well as the premium income. Also,
where it seeks to buy portfolio securities at a "targeted" price, it may write a
put option at that price for which it will receive the premium income. In the
event that the market declines below the exercise price, the Fund would pay its
"targeted" price upon the exercise of the option. In the event that the market
does not move in the direction or to the extent anticipated, however, the
targeted sale or buy might not be successful and the Fund could sustain a loss
on the transaction that may not be offset by the premium received. In addition,
the Fund may be required to forego the benefit of an intervening increase or
decline in value of the underlying security.
OPTIONS AND FUTURES STRATEGIES. The Adviser may seek to increase the
current return of the Fund by writing covered call or put options. In addition,
through the writing and purchase of options and the purchase and sale of U.S.
and certain foreign stock index futures contracts, interest rate futures
contracts, foreign currency futures contracts and related options on such
futures contracts, the Adviser may at times seek to hedge against a decline in
the value of securities included in the Fund or an increase in the price of
securities that it plans to purchase for the Fund. Expenses and losses incurred
as a result of such hedging strategies will reduce the Fund's current return.
The Fund's investment in foreign stock index futures contracts and foreign
interest rate futures contracts, and related options on such futures contracts,
are limited to only those contracts and related options that have been approved
by the CFTC for investment by U.S. investors. Additionally, with respect to the
Fund's investment in foreign options, unless such options are specifically
authorized for investment by order of the CFTC or meet the definition of trade
options as set forth in CFTC Rule 32.4, the Fund will not make these
investments.
The ability of the Fund to engage in the options and futures strategies
described below will depend on the availability of liquid markets in such
instruments. Markets in options and futures with respect to stock indices,
foreign government securities and foreign currencies are relatively new and
still developing. It is impossible to predict the amount of trading interest
that may exist in various types of options or futures. Therefore, no assurance
can be given that the Fund will be able to utilize these instruments effectively
for the purposes stated below. Furthermore, the Fund's ability to engage in
options and futures transactions may be limited by tax considerations. Although
the Fund will only engage in options and futures transactions for limited
purposes, these activities will involve certain risks which are described below
under "Risk Factors Associated with Futures and Options Transactions." The Fund
will not engage in options and futures transactions for leveraging purposes.
WRITING COVERED OPTIONS ON SECURITIES. The Fund may write covered call
options and covered put options on securities in which it is permitted to invest
from time to time as the Adviser determines is appropriate in seeking to attain
its objective. Call options written by the Fund give the holder the right to buy
the underlying securities from the Fund at a stated exercise price; put options
give the holder the right to sell the underlying security to the Fund at a
stated price.
The Fund may write only covered options, which means that, so long as
the Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, the Fund will
maintain in a separate account cash or short-term U.S. Government securities
with a value equal to or greater than the exercise price of the underlying
securities. The Fund may also write combinations of covered puts and calls on
the same underlying security.
The Fund will receive a premium from writing a put or call option,
which increases the Fund's return in the event the option expires unexercised or
is closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price of the underlying security to the
exercise price of the option, the term of the option and the volatility of the
market price of the underlying security. By writing a call option, the Fund
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, the Fund assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then current market
value, resulting in a potential capital loss if the purchase price exceeds the
market value plus the amount of the premium received, unless the security
subsequently appreciates in value.
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The Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written. The Fund will realize a
profit or loss from such transaction if the cost of such transaction is less or
more than the premium received from the writing of the option. In the case of a
put option, any loss so incurred may be partially or entirely offset by the
premium received from a simultaneous or subsequent sale of a different put
option. Because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option is likely to be offset in whole
or in part by unrealized appreciation of the underlying security owned by the
Fund.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES. The Fund may purchase
put options to protect its portfolio holdings in an underlying security against
a decline in market value. Such hedge protection is provided during the life of
the put option since the Fund, as holder of the put option, is able to sell the
underlying security at the put exercise price regardless of any decline in the
underlying security's market price. In order for a put option to be profitable,
the market price of the underlying security must decline sufficiently below the
exercise price to cover the premium and transaction costs. By using put options
in this manner, the Fund will reduce any profit it might otherwise have realized
in its underlying security by the premium paid for the put option and by
transaction costs.
The Fund may also purchase call options to hedge against an increase in
prices of securities that it wants ultimately to buy. Such hedge protection is
provided during the life of the call option since the Fund, as holder of the
call option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, the Fund will reduce
any profit it might have realized had it bought the underlying security at the
time it purchased the call option by the premium paid for the call option and by
transaction costs.
PURCHASE AND SALE OF OPTIONS AND FUTURES ON STOCK INDICES. The Fund may
purchase and sell options on non-U.S. stock indices and stock index futures as a
hedge against movements in the equity markets.
Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specific price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of that stock index is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option expressed in dollars multiplied by a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike options on specific securities, all settlements
of options on stock indices are in cash and gain or loss depends on general
movements in the stocks included in the index rather than price movements in
particular stocks. A stock index futures contract is an agreement in which one
party agrees to deliver to the other an amount of cash equal to a specific
amount multiplied by the difference between the value of a specific stock index
at the close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of securities is made.
If the Adviser expects general stock market prices to rise, the Fund
might purchase a call option on a stock index or a futures contract on that
index as a hedge against an increase in prices of particular equity securities
it wants ultimately to buy. If in fact the stock index does rise, the price of
the particular equity securities intended to be purchased may also increase, but
that increase would be offset in part by the increase in the value of the Fund's
index option or futures contract resulting from the increase in the index. If,
on the other hand, the Adviser expects general stock market prices to decline,
the Fund might purchase a put option or sell a futures contract on the index. If
that index does in fact decline, the value of some or all of the equity
securities in the Fund may also be expected to decline, but that decrease would
be offset in part by the increase in the value of the Fund's position in such
put option or futures contract.
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PURCHASE AND SALE OF INTEREST RATE FUTURES. The Fund may purchase and
sell interest rate futures contracts on foreign government securities including,
but not limited to, debt securities of the governments and central banks of
France, Germany, Denmark and Japan for the purpose of hedging fixed income and
interest sensitive securities against the adverse effects of anticipated
movements in interest rates.
The Fund may sell interest rate futures contracts in anticipation of an
increase in the general level of interest rates. Generally, as interest rates
rise, the market value of the fixed income securities held by the Fund will
fall, thus reducing the net asset value of the Fund. This interest rate risk can
be reduced without employing futures as a hedge by selling long-term fixed
income securities and either reinvesting the proceeds in securities with shorter
maturities or by holding assets in cash. This strategy, however, entails
increased transaction costs to the Fund in the form of dealer spreads and
brokerage commissions.
The sale of interest rate futures contracts provides an alternative
means of hedging against rising interest rates. As rates increase, the value of
the Fund's short position in the futures contracts will also tend to increase,
thus offsetting all or a portion of the depreciation in the market value of the
Fund's investments that are being hedged. While the Fund will incur commission
expenses in selling and closing out futures positions (which is done by taking
an opposite position which operates to terminate the position in the futures
contract), commissions on futures transactions are lower than transaction costs
incurred in the purchase and sale of portfolio securities.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS AND INTEREST RATE FUTURES
CONTRACTS. The Fund may purchase and write call and put options on non-U.S.
stock index and interest rate futures contracts. The Fund may use such options
on futures contracts in connection with its hedging strategies in lieu of
purchasing and writing options directly on the underlying securities or stock
indices or purchasing and selling the underlying futures. For example, the Fund
may purchase put options or write call options on stock index futures, or
interest rate futures, rather than selling futures contracts, in anticipation of
a decline in general stock market prices or rise in interest rates,
respectively, or purchase call options or write put options on stock index or
interest rate futures, rather than purchasing such futures, to hedge against
possible increases in the price of equity securities or debt securities,
respectively, which the Fund intends to purchase.
PURCHASE AND SALE OF CURRENCY FUTURES CONTRACTS AND RELATED OPTIONS. In
order to hedge its portfolio and to protect it against possible variations in
foreign exchange rates pending the settlement of securities transactions, the
Fund may buy or sell currency futures contracts and related options. If a fall
in exchange rates for a particular currency is anticipated, the Fund may sell a
currency futures contract or a call option thereon or purchase a put option on
such futures contract as a hedge. If it is anticipated that exchange rates will
rise, the Fund may purchase a currency futures contract or a call option thereon
or sell (write) a put option to protect against an increase in the price of
securities denominated in a particular currency the Fund intends to purchase.
These futures contracts and related options thereon will be used only as a hedge
against anticipated currency rate changes, and all options on currency futures
written by the Fund will be covered.
A currency futures contract sale creates an obligation by the Fund, as
seller, to deliver the amount of currency called for in the contract at a
specified future time for a special price. A currency futures contract purchase
creates an obligation by the Fund, as purchaser, to take delivery of an amount
of currency at a specified future time at a specified price. Although the terms
of currency futures contracts specify actual delivery or receipt, in most
instances the contracts are closed out before the settlement date without the
making or taking of delivery of the currency. Closing out of a currency futures
contract is effected by entering into an offsetting purchase or sale
transaction. Unlike a currency futures contract, which requires the parties to
buy and sell currency on a set date, an option on a currency futures contract
entitles its holder to decide on or before a future date whether to enter into
such a contract. If the holder decides not to enter into the contract, the
premium paid for the option is fixed at the point of sale.
The Fund will write (sell) only covered put and call options on
currency futures. This means that the Fund will provide for its obligations upon
exercise of the option by segregating sufficient cash or short-term obligations
or by holding an offsetting position in the option or underlying currency
future, or a combination of the foregoing. The Fund will, so long as it is
obligated as the writer of a call option on currency futures, own on a
contract-for-contract basis an equal long position in currency futures with the
same delivery date or a call option on stock index futures with the difference,
if any, between the market value of the call written and the market value of the
call or long currency futures purchased maintained by the Fund in cash, Treasury
bills, or other high grade short-term obligations in a segregated account with
its custodian. If at the close of business on any day the market value of the
call purchased by the Fund falls below 100% of the market value of the call
written by the Fund, the Fund will so
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segregate an amount of cash, Treasury bills or other high grade short-term
obligations equal in value to the difference. Alternatively, the Fund may cover
the call option through segregating with the custodian an amount of the
particular foreign currency equal to the amount of foreign currency per futures
contract option times the number of options written by the Fund. In the case of
put options on currency futures written by the Fund, the Fund will hold the
aggregate exercise price in cash, Treasury bills, or other high grade short-term
obligations in a segregated account with its custodian, or own put options on
currency futures or short currency futures, with the difference, if any, between
the market value of the put written and the market value of the puts purchased
or the currency futures sold maintained by the Fund in cash, Treasury bills or
other high grade short-term obligations in a segregated account with its
custodian. If at the close of business on any day the market value of the put
options purchased or the currency futures by the Fund falls below 100% of the
market value of the put options written by the Fund, the Fund will so segregate
an amount of cash, Treasury bills or other high grade short-term obligations
equal in value to the difference.
If other methods of providing appropriate cover are developed, the Fund
reserves the right to employ them to the extent consistent with applicable
regulatory and exchange requirements. In connection with transactions in stock
index options, stock index futures, interest rate futures, foreign currency
futures and related options on such futures, the Fund will be required to
deposit as "initial margin" an amount of cash or short-term government
securities equal to from 5% to 8% of the contract amount. Thereafter, subsequent
payments (referred to as "variation margin") are made to and from the broker to
reflect changes in the value of the futures contract.
LIMITATIONS ON PURCHASE OF OPTIONS. The staff of the SEC has taken the
position that purchased over-the-counter options and assets used to cover
written over-the-counter options are illiquid and, therefore, together with
other illiquid securities, cannot exceed 15% of the Fund's assets. The Adviser
intends to limit the Fund's writing of over-the-counter options in accordance
with the following procedure. The Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts which the Fund has in place with
such primary dealers will provide that the Fund has the absolute right to
repurchase an option it writes at any time at a price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by the Fund for writing the option, plus the
amount, if any, of the option's intrinsic value (I.E., the amount that the
option is in-the-money). The formula also may include a factor to account for
the difference between the price of the security and the strike price of the
option if the option is written out-of-the-money. The Fund will treat all or a
part of the formula price as illiquid for purposes of any limitation on illiquid
securities imposed by the SEC staff.
Risk Factors Associated with Futures and Options Transactions
The effective use of options and futures strategies depends on, among
other things, the Fund's ability to terminate options and futures positions at
times when its the Adviser deems it desirable to do so. Although the Fund will
not enter into an option or futures position unless the Adviser believes that a
liquid secondary market exists for such option or future, there is no assurance
that the Fund will be able to effect closing transactions at any particular time
or at an acceptable price. The Fund generally expects that its options and
futures transactions will be conducted on recognized U.S. and foreign securities
and commodity exchanges. In certain instances, however, the Fund may purchase
and sell options in the over-the-counter market. The Fund's ability to terminate
option positions established in the over-the-counter market may be more limited
than in the case of exchange-traded options and may also involve the risk that
securities dealers participating in such transactions would fail to meet their
obligations to the Fund.
Options and futures markets can be highly volatile and transactions of
this type carry a high risk of loss. Moreover, a relatively small adverse market
movement with respect to these types of transactions may result not only in loss
of the original investment but also in unquantifiable further loss exceeding any
margin deposited.
The use of options and futures involves the risk of imperfect
correlation between movements in options and futures prices and movements in the
price of securities which are the subject of the hedge. Such correlation,
particularly with respect to options on stock indices and stock index futures,
is imperfect, and such risk increases as the composition of the Fund diverges
from the composition of the relevant index. The successful use of these
strategies also depends on the ability of the Adviser to correctly forecast
interest rate movements, currency rate movements and general stock market price
movements.
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In addition to certain risk factors described above, the following sets
forth certain information regarding the potential risks associated with the
Funds' futures and options transactions.
RISK OF IMPERFECT CORRELATION. The Fund's ability effectively to hedge
all or a portion of its portfolio through transactions in futures, options on
futures or options on stock indices depends on the degree to which movements in
the value of the securities or index underlying such hedging instrument
correlate with movements in the value of the relevant portion of the Fund's
securities. If the values of the securities being hedged do not move in the same
amount or direction as the underlying security or index, the hedging strategy
for the Fund might not be successful and the Fund could sustain losses on its
hedging transactions which would not be offset by gains on its portfolio. It is
also possible that there may be a negative correlation between the security or
index underlying a futures or option contract and the portfolio securities being
hedged, which could result in losses both on the hedging transaction and the
fund securities. In such instances, the Fund's overall return could be less than
if the hedging transactions had not been undertaken. Stock index futures or
options based on a narrower index of securities may present greater risk than
options or futures based on a broad market index, as a narrower index is more
susceptible to rapid and extreme fluctuations resulting from changes in the
value of a small number of securities. The Fund would, however, effect
transactions in such futures or options only for hedging purposes.
The trading of futures and options on indices involves the additional
risk of imperfect correlation between movements in the futures or option price
and the value of the underlying index. The anticipated spread between the prices
may be distorted due to differences in the nature of the markets, such as
differences in margin requirements, the liquidity of such markets and the
participation of speculators in the futures and options market. The purchase of
an option on a futures contract also involves the risk that changes in the value
of underlying futures contract will not be fully reflected in the value of the
option purchased. The risk of imperfect correlation, however, generally tends to
diminish as the maturity date of the futures contract or termination date of the
option approaches. The risk incurred in purchasing an option on a futures
contract is limited to the amount of the premium plus related transaction costs,
although it may be necessary under certain circumstances to exercise the option
and enter into the underlying futures contract in order to realize a profit.
Under certain extreme market conditions, it is possible that the Fund will not
be able to establish hedging positions, or that any hedging strategy adopted
will be insufficient to completely protect the Fund.
The Fund will purchase or sell futures contracts or options only if, in
the Adviser's judgment, there is expected to be a sufficient degree of
correlation between movements in the value of such instruments and changes in
the value of the relevant portion of the Fund's portfolio for the hedge to be
effective. There can be no assurance that the Adviser's judgment will be
accurate.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET. The ordinary spreads
between prices in the cash and futures markets, due to differences in the
natures of those markets, are subject to distortions. First, all participants in
the futures market are subject to initial deposit and variation margin
requirements. This could require the Fund to post additional cash or cash
equivalents as the value of the position fluctuates. Further, rather than
meeting additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the liquidity of the
futures or options market may be lacking. Prior to exercise or expiration, a
futures or option position may be terminated only by entering into a closing
purchase or sale transaction, which requires a secondary market on the exchange
on which the position was originally established. While the Fund will establish
a futures or option position only if there appears to be a liquid secondary
market therefor, there can be no assurance that such a market will exist for any
particular futures or option contract at any specific time. In such event, it
may not be possible to close out a position held by the Fund, which could
require the Fund to purchase or sell the instrument underlying the position,
make or receive a cash settlement, or meet ongoing variation margin
requirements. The inability to close out futures or option positions also could
have an adverse impact on the Fund's ability effectively to hedge its
securities, or the relevant portion thereof.
The liquidity of a secondary market in a futures contract or an option
on a futures contract may be adversely affected by "daily price fluctuation
limits" established by the exchanges, which limit the amount of fluctuation in
the price of a contract during a single trading day and prohibit trading beyond
such limits once they have been reached. The trading of futures and options
contracts also is subject to the risk of trading halts, suspensions, exchange or
clearing house equipment failures, government intervention, insolvency of the
brokerage firm or clearing house or other disruptions of normal trading
activity, which could at times make it difficult or impossible to liquidate
existing positions or to recover excess variation margin payments.
18
<PAGE>
RISK OF PREDICTING INTEREST RATE MOVEMENTS. Investments in futures
contracts on fixed income securities and related indices involve the risk that
if the Adviser's investment judgment concerning the general direction of
interest rates is incorrect, the Fund's overall performance may be poorer than
if it had not entered into any such contract. For example, if the Fund has been
hedged against the possibility of an increase in interest rates which would
adversely affect the price of bonds held in its portfolio and interest rates
decrease instead, the Fund will lose part or all of the benefit of the increased
value of its bonds which have been hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell bonds from its portfolio to meet daily
variation margin requirements, possibly at a time when it may be disadvantageous
to do so. Such sale of bonds may be, but will not necessarily be, at increased
prices which reflect the rising market.
TRADING AND POSITION LIMITS. Each contract market on which futures and
option contracts are traded has established a number of limitations governing
the maximum number of positions which may be held by a trader, whether acting
alone or in concert with others. The Adviser does not believe that these trading
and position limits will have an adverse impact on the hedging strategies
regarding the Funds' investments.
REGULATIONS ON THE USE OF FUTURES AND OPTIONS CONTRACTS. Regulations of
the CFTC require that the Fund enters into transactions in futures contracts and
options thereon for hedging purposes only, in order to assure that they are not
deemed to be a "commodity pool" under such regulations. In particular, CFTC
regulations require that all short futures positions be entered into for the
purpose of hedging the value of investment securities held by the Fund, and that
all long futures positions either constitute bona fide hedging transactions, as
defined in such regulations, or have a total value not in excess of an amount
determined by reference to certain cash and securities positions maintained for
the Fund, and accrued profits on such positions. In addition, the Fund may not
purchase or sell such instruments if, immediately thereafter, the sum of the
amount of initial margin deposits on its existing futures positions and premiums
paid for options on futures contracts would exceed 5% of the market value of the
Fund's total assets.
When the Fund purchases a futures contract, an amount of cash or cash
equivalents or high quality debt securities will be segregated with the Fund's
custodian so that the amount so segregated, plus the initial deposit and
variation margin held in the account of its broker, will at all times equal the
value of the futures contract, thereby insuring that the use of such futures is
unleveraged.
The Fund's ability to engage in the hedging transactions described
herein may be limited by the current federal income tax requirement that the
Fund derive less than 30% of its gross income from the sale or other disposition
of stock or securities held for less than three months. The Fund may also
further limit its ability to engage in such transactions in response to the
policies and concerns of various Federal and state regulatory agencies. Such
policies may be changed by vote of the Board of Directors/Trustees.
Additional Information on Futures and Options
As stated in the Prospectuses, the Fund may enter into futures
contracts and options for hedging purposes. Such transactions are described in
this Schedule. During the current fiscal year, the Fund intends to limit its
transactions in futures contracts and options so that not more than 5% of the
Fund's net assets are at risk. Furthermore, in no event would the Fund purchase
or sell futures contracts, or related options thereon, for hedging purposes if,
immediately thereafter, the aggregate initial margin that is required to be
posted by the Fund under the rules of the exchange on which the futures contract
(or futures option) is traded, plus any premiums paid by the Fund on its open
futures options positions, exceeds 5% of the Fund's total assets, after taking
into account any unrealized profits and unrealized losses on the Fund's open
contracts and excluding the amount that a futures option is "in-the-money" at
the time of purchase. (An option to buy a futures contract is "in-the-money" if
the value of the contract that is subject to the option exceeds the exercise
price; an option to sell a futures contract is "in-the-money" if the exercise
Price exceeds the value of the contract that is subject of the option.)
I. Interest Rate Futures Contracts.
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<PAGE>
Use of Interest Rate Futures Contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures market have tended to move generally in the aggregate
in concert with the cash market prices and have maintained fairly predictable
relationships. Accordingly, the Fund may use interest rate futures as a defense,
or hedge, against anticipated interest rate changes and not for speculation. As
described below, this would include the use of futures contract sales to protect
against expected increases in interest rates and futures contract purchases to
offset the impact of interest rate declines.
The Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Fund, through using futures contracts.
Description of Interest Rates Futures Contracts. An interest rate
futures contract sale would create an obligation by the Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by the Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the Fund's entering
into a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment on
the floors of several exchanges - principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. The Fund would
deal only in standardized contracts on recognized changes. Each exchange
guarantees performance under contract provisions through a clearing corporation,
a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury Bonds and
Notes; GNMA modified pass-through mortgage-backed securities; three-month United
States Treasury Bills; and ninety-day commercial paper. The Fund may trade in
any futures contract for which there exists a public market, including, without
limitation, the foregoing instruments.
Examples of Futures Contract Sale. The Fund would engage in an interest
rate futures contract sale to maintain the income advantage from continued
holding of a long-term bond while endeavoring to avoid part or all of the loss
in market value that would otherwise accompany a decline in long-term securities
prices. Assume that the market value of a certain security in the Fund tends to
move in concert with the futures market prices of long-term United States
Treasury bonds ("Treasury Bonds"). The Adviser wishes to fix the current market
value of this portfolio security until some point in the future. Assume the
portfolio security has a market value of 100, and the Adviser believes that,
because of an anticipated rise in interest rates, the value will decline to 95.
The Fund might enter into futures contract sales of Treasury bonds for an
equivalent of 98. If the market value of the portfolio securities does indeed
decline from 100 to 95, the equivalent futures market price for the Treasury
bonds might also decline from 98 to 93.
20
<PAGE>
In that case, the five-point loss in the market value of the portfolio
security would be offset by the five-point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.
The Adviser could be wrong in its forecast of interest rates and the
equivalent futures market price could rise above 98. In this case, the market
value of the portfolio securities, including the portfolio security being
protected, would increase. The benefit of this increase would be reduced by the
loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example
might incur a loss of 2 points (which might be reduced by an offsetting
transaction prior to the settlement date). In each transaction, transaction
expenses would also be incurred.
Examples of Future Contract Purchase. The Fund would engage in an
interest rate futures contract purchase when it is not fully invested in
long-term bonds but wishes to defer for a time the purchase of long-term bonds
in light of the availability of advantageous interim investments, E.G.,
shorter-term securities whose yields are greater than those available on
long-term bonds. The Fund's basic motivation would be to maintain for a time the
income advantage from investing in the short-term securities; the Fund would be
endeavoring at the same time to eliminate the effect of all or part of an
expected increase in market price of the long-term bonds that the Fund may
purchase.
For example, assume that the market price of a long-term bond that the
Fund may purchase, currently yielding 10%, tends to move in concert with futures
market prices of Treasury bonds. The Adviser wishes to fix the current market
price (and thus 10% yield) of the long-term bond until the time (four months
away in this example) when it may purchase the bond. Assume the long-term bond
has a market price of 100, and the Adviser believes that, because of an
anticipated fall in interest rates, the price will have risen to 105 (and the
yield will have dropped to about 9-1/2%) in four months. The Fund might enter
into futures contracts purchases of Treasury bonds for an equivalent price of
98. At the same time, the Fund would assign a pool of investments in short-term
securities that are either maturing in four months or earmarked for sale in four
months, for purchase of the long-term bond at an assumed market price of 100.
Assume these short-term securities are yielding 15%. If the market price of the
long-term bond does indeed rise from 100 to 105, the equivalent futures market
price for Treasury bonds might also rise from 98 to 103. In that case, the
5-point increase in the price that the Fund pays for the long-term bond would be
offset by the 5-point gain realized by closing out the futures contract
Purchase.
The Adviser could be wrong in its forecast of interest rates; long-term
interest rates might rise to above 10%; and the equivalent futures market price
could fall below 98. If short-term rates at the same time fall to 10% or below,
it is possible that the Fund would continue with its purchase program for
long-term bonds. The market price of available long-term bonds would have
decreased. The benefit of this price decrease, and thus yield increase, will be
reduced by the loss realized on closing out the futures contract purchase.
If, however, short-term rates remained above available long-term rates,
it is possible that the Fund would discontinue its purchase program for
long-term bonds. The yield on short-term securities in the portfolio, including
those originally in the pool assigned to the particular long-term bond, would
remain higher than yields on long-term bonds. The benefit of this continued
incremental income will be reduced by the loss realized on closing out the
futures contract purchase.
In each transaction, expenses also would be incurred.
II. Index Futures Contracts.
A stock or bond index assigns relative values to the stocks or bonds
included in the index, and the index fluctuates with changes in the market
values of the stocks or bonds included. Some stock index futures contracts are
based on broad market indices, such as the Standard & Poor's 500 or the New York
Stock Exchange Composite Index. In contract, certain exchanges offer futures
contracts on narrower market indices, such as the Standard & Poor's 100, the
Bond Buyer Municipal Bond Index, an index composed of 40 term revenue and
general obligation bonds, or indices based on an industry or market segment,
such as oil and gas stocks. Futures contracts are traded on organized exchanges
regulated by the Commodity Futures Trading Commission. Transactions on such
exchanges are cleared through a clearing corporation, which guarantees the
performance of the parties to each contract.
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<PAGE>
The Fund will sell index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise result
from a market decline. The Fund may do so either to hedge the value of its
portfolio as a whole, or to protect against declines, occurring prior to sales
of securities, in the value of the securities to be sold. Conversely, the Fund
will purchase index futures contracts in anticipation of purchases of
securities. In a substantial majority of these transactions, the Fund will
purchase such securities upon termination of the long futures position, but a
long futures position may be terminated without a corresponding purchase of
securities.
In addition, the Fund may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that the Fund expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a long futures position based on a more restricted
index, such as an index comprised of securities of a particular industry group.
The Fund also may sell futures contracts in connection with this strategy, in
order to protect against the possibility that the value of the securities to be
sold as part of the restructuring of the portfolio will decline prior to the
time of sale.
The following are examples of transactions in stock index futures (net
of commissions and premiums, if any).
<TABLE>
<CAPTION>
<S> <C>
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
-Day Hedge is Placed
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures = $62,500/Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/Contract
Increase in Purchase Gain on Futures = $2,500
Price = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future Hedge
Objective: Protect Against Declining (Value of the Portfolio)
Factors
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index - 1.0
Portfolio Futures
-Day Hedge is Placed
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Gain on Futures = $40,000
Value = $40 000
</TABLE>
IF, HOWEVER, THE MARKET MOVED IN THE OPPOSITE DIRECTION, THAT IS, MARKET
VALUE DECREASED AND THE FUND HAD ENTERED INTO AN ANTICIPATORY PURCHASE HEDGE, OR
MARKET VALUE INCREASED AND THE FUND HAD HEDGED ITS STOCK PORTFOLIO, THE RESULTS
OF THE FUND'S TRANSACTIONS IN STOCK INDEX FUTURES WOULD BE AS SET FORTH BELOW.
22
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
-Day Hedge is Placed
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures = $62,500/Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 120
Actual Cost = $60,000 Value of Futures = $60,000/Contract
Decrease in Purchase Loss on Futures = $2,500/Contract
Price = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors
Value of Stock Portfolio = $1,000,000 Value of Futures Contract = 125 x $500 =
$62,500 Portfolio Beta Relative to the Index - 1.0
Portfolio Futures
-Day Hedge is Placed
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Portfolio = $40,000 Loss of Futures = $40,000
Value = $40 000
</TABLE>
III. Margin Payments
Unlike when the Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to deposit with the broker or in a segregated account
with the Fund's Custodian an amount of cash or cash equivalents, the value, of
which may vary but is generally equal to 10% or less of the value of the
contract. This amount is known as initial margin. The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin is
in the nature of a performance bond or good faith deposit on the contract which
is returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying security or index fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking to the market. For example, when the Fund has purchased a futures
contract and the price of the contract has risen in response to a rise in the
underlying instruments, that position will have increased in value and the Fund
will be entitled to receive from the broker a variation margin payment equal to
that increase in value. Conversely, where the Fund has purchased a futures
contract and the price of the futures contract has declined in response to a
decrease in the underlying instruments, the position would be less valuable, the
Fund would be required to make a variation margin payment to the broker. At any
time prior to expiration of the futures contract, the Adviser may elect to close
the position by taking an opposite position, subject to the availability of a
secondary market, which will operate to terminate the Fund's position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or gain.
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<PAGE>
IV. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by the
Fund as a hedging device. One risk arises because of the imperfect correlation
between movements in the price of the future and movements in the price of the
securities which are the subject of the hedge. The price of the future may move
more than or less than the price of the securities being hedged. If the price of
the future moves less than the price of the securities which are the subject of
the hedge, the hedge will not be fully effective but, if the price of securities
being hedged has moved in an unfavorable direction, the Fund would be in a
better position than if it had not hedged at Al. If the price of the securities
being hedged has moved in a favorable direction, this advance will be partially
offset by the loss on the future. If the price of the future moves more than the
price of the hedged securities, the Fund involved will experience either a loss
or gain on the future which will not be completely offset by movements in the
price of the securities which are the subject of the hedge.
To compensate for the imperfect correlation of movements in the price
of securities being hedged and movements in the price of futures contracts, the
Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the volatility over a particular
time period of the prices of such securities has been greater than the
volatility over such time period of the future, or if otherwise deemed to be
appropriate by the Adviser. Conversely, the Fund may buy or sell fewer futures
contracts if the volatility over a particular time period of the prices of the
securities being hedged is less than the volatility over such time period of the
futures contract being used, or if otherwise deemed to be appropriate by the
Adviser. It also is possible that, where the Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance, and the value
of securities held by the Fund may decline. If this occurred, the Fund would
lose money on the future and also experience a decline in value in its portfolio
securities.
Where futures are purchased to hedge against a possible increase in the
price of securities before the Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the Fund then concludes not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, the Fund will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In instances involving the purchase of futures contracts by the Fund,
an amount of cash and cash equivalents, equal to the market value of the futures
contracts, will be deposited in a segregated account with the Fund's Custodian
and/or in a margin account with a broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of Price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the Adviser still may not
result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Fund
intends to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
24
<PAGE>
Further, it should be noted that the liquidity of a secondary market in
a futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions.
Successful use of futures by the Fund also is subject to the Adviser's
ability to predict correctly movements in the direction of the market. For
example, if the Fund has hedged against the possibility of a decline in the
market adversely affecting securities held in its portfolio and securities
prices increase instead, the Fund will lose part or all of the benefit to the
increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it may be disadvantageous to do so.
V. Options on Futures Contracts.
The Fund may purchase options on the futures contracts described above.
A futures option gives the holder, in return for the premium paid, the right to
buy (call) from or sell (put) to the writer of the option a futures contract at
a specified price at any time during the period of the option. Upon exercise,
the writer of the option is obligated to pay the difference between the cash
value of the futures contract and the exercise price. Like the buyer or seller
of a futures contract, the holder, or writer, of an option has the right to
terminate its position prior to the scheduled expiration of the option by
selling, or purchasing, an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
of an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased. Depending on the pricing of the option compared to either the futures
contract upon which it is based, or upon the price of the securities being
hedged, an option may or may not be less risky than ownership of the futures
contract or such securities. In general, the market prices of options can be
expected to be more volatile than the market prices on the underlying futures
contract. Compared to the purchase or sale of futures contracts, however, the
purchase of call or put options on futures contracts may frequently involve less
potential risk to the Fund because the maximum amount at risk is the premium
paid for the options (plus transaction costs). Although permitted by their
fundamental investment policies, the Fund does not currently intend to write
future options, and will not do so in the future absent any necessary regulatory
approvals.
Accounting Treatment.
Accounting for futures contracts and options will be in accordance with
generally accepted accounting principles.
GUARANTEED INVESTMENT CONTRACTS
Guaranteed investment contracts, investment contracts or funding
agreements (each referred to as a "GIC") are investment instruments issued by
highly rated insurance companies. Pursuant to such contracts, the Fund may make
cash contributions to a deposit fund of the insurance company's general or
separate accounts. The insurance company then credits to the 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.
The 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, the 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.
25
<PAGE>
INSURED MUNICIPAL SECURITIES
Certain of the Municipal Securities held by the Fund may be insured at
the time of issuance as to the timely payment of principal and interest. The
insurance policies will usually be obtained by the issuer of the Municipal
Securities at the time of its original issuance. In the event that the issuer
defaults with respect to interest or principal payments, the insurer will be
notified and will be required to make payment to the bondholders. There is,
however, no guarantee that the insurer will meet its obligations. In addition,
such insurance will not protect against market fluctuations caused by changes in
interest rates and other factors.
INTEREST RATE TRANSACTIONS
Among the strategic transactions into which the Fund may enter are
interest rate swaps and the purchase or sale of related caps and floors. The
Fund expects to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio, to protect
against currency fluctuations, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, E.G. an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. A currency swap is an agreement
to exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them and an index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such floor to the
extent that a specified index falls below a predetermined interest rate or
amount.
The Fund will usually enter into swaps on a net basis, I.E., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. In as much as these swaps, caps and
floors are entered into for good faith hedging purposes, the Adviser and the
Fund believe such obligations do not constitute senior securities under the 1940
Act and, accordingly, will not treat them as being subject to its borrowing
restrictions. The Fund will not enter into any swap, cap and floor transaction
unless, at the time of entering into such transaction, the unsecured long-term
debt of the counterparty, combined with any credit enhancements, is rated at
least "A" by Standard & Poor's Corporation or Moody's Investors Service, Inc. or
has an equivalent rating from an NRSRO or is determined to be of equivalent
credit quality by the Adviser. If there is a default by the counterparty, the
Fund may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps and floors are more recent innovations
for which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
With respect to swaps, the Fund will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid high grade
securities having a value equal to the accrued excess. Caps and floors require
segregation of assets with a value equal to the Fund's net obligation, if any.
OPTIONS ON CURRENCIES
The Fund may purchase and sell options on currencies to hedge the value
of securities the Fund holds or intends to buy. Options on foreign currencies
may be traded on U.S. and foreign exchanges or over-the-counter.
26
<PAGE>
OTHER INVESTMENT COMPANIES
In seeking to attain their investment objectives, the Fund may invest
in securities issued by other investment companies within the limits prescribed
by the 1940 Act, its rules and regulations and any exemptive relief obtained by
the Fund. The Fund currently intends to limit its investments so that, as
determined immediately after a securities purchase is made: (a) not more than 5%
of the value of its total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
and (c) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund or by the Company as a whole. As a shareholder
of another investment company, the 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 the Fund bears in connection with its own operations. The
Adviser has agreed to remit to the respective investing Fund fees payable to it
under its respective Investment Advisory Agreement with an affiliated money
market Fund to the extent such fees are based upon the investing Fund's assets
invested in shares of the affiliated money market fund.
PARTICIPATION INTERESTS AND COMPANY RECEIPTS
The Government Bond Fund also may purchase from domestic financial
institutions and trusts created by such institutions participation interests and
trust receipts in high quality debt securities. A participation interest or
receipt gives the Fund an undivided interest in the security in the proportion
that the Fund's participation interest or receipt bears to the total principal
amount of the security. As to certain instruments for which the Fund will be
able to demand payment, the Fund intends to exercise its right to do so only
upon a default under the terms of the security, as needed to provide liquidity
or to maintain or improve the quality of its investment portfolio. It is
possible that a participation interest or trust receipt may be deemed to be an
extension of credit by the Fund to the issuing financial institution rather than
to the obligor of the underlying security and may not be directly entitled to
the protection of any collateral security provided by the obligor. In such
event, the ability of the Fund to obtain repayment could depend on the issuing
financial institution.
Participation interests and trust receipts may have fixed, floating or
variable rates of interest, and will have remaining maturities of thirteen
months or less (as defined by the SEC). If a participation interest or trust
receipt is unrated, the Adviser will have determined that the interest or
receipt is of comparable quality to those instruments in which the Fund may
invest pursuant to guidelines approved by the Board of Directors. For certain
participation interests or trust receipts the Fund will have the right to demand
payment, on not more than 30 days' notice, for all or any part of the Fund's
participation interest or trust receipt in the securities involved, plus accrued
interest.
REAL ESTATE INVESTMENT TRUSTS
A real estate investment trust ("REIT") is a managed portfolio of real
estate investments which may include office buildings, apartment complexes,
hotels and shopping malls. An equity REIT holds equity positions in real estate,
and it seeks to provide its shareholders with income from the leasing of its
properties, and with capital gains from any sales of properties. A mortgage REIT
specializes in lending money to developers of properties, and passes any
interest income it may earn to its shareholders.
REITs may be affected by changes in the value of the underlying
property owned or financed by the REIT, while Mortgage REITs also may be
affected by the quality of credit extended. Both equity and mortgage REITs are
dependent upon management skill and may not be diversified. REITs also may be
subject to heavy cash flow dependency, defaults by borrowers, self-liquidation,
and the possibility of failing to qualify for tax-free pass-through of income
under the Internal Revenue Code of 1986, as amended.
REPURCHASE AGREEMENTS
The repurchase price under any repurchase agreements described in the
Prospectuses generally equals the price paid by the Fund plus interest
negotiated on the basis of current short-term rates (which may be more or less
than the rate on the securities underlying the repurchase agreement). Securities
subject to repurchase agreements will be held by a Company's custodian in a
segregated account or in the Federal Reserve/Treasury book-entry system.
Repurchase agreements are considered to be loans by such Company under the 1940
Act.
27
<PAGE>
REVERSE REPURCHASE AGREEMENTS
At the time the 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. Reverse repurchase agreements are
speculative techniques involving leverage, and are subject to asset coverage
requirements if the Fund does not establish and maintain a segregated account
(as described above). In addition, some or all of the proceeds received by the
Fund from the sale of a portfolio instrument may be applied to the purchase of a
repurchase agreement. To the extent the proceeds are used in this fashion and a
common broker/dealer is the counterparty on both the reverse repurchase
agreement and the repurchase agreement, the arrangement might be recharacterized
as a swap transaction. Under the requirements of the 1940 Act, the 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,
the Fund's asset coverage and other factors at the time of a reverse repurchase,
the 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.
SECURITIES LENDING
To increase return on portfolio securities, the Fund may lend their
portfolio securities to broker/dealers and other institutional investors
pursuant to agreements requiring that the loans be continuously secured by
collateral equal at all times in value to at least the market value of the
securities loaned. Collateral for such loans may include cash, securities of the
U.S. Government, its agencies or instrumentalities, an irrevocable letter of
credit issued by (i) a U.S. bank that has total assets exceeding $1 billion and
that is a member of the Federal Deposit Insurance Corporation, or (ii) a foreign
bank that is one of the 75 largest foreign commercial banks in terms of total
assets, or any combination thereof. Such loans will not be made if, as a result,
the aggregate of all outstanding loans of the Fund involved exceeds 33% of the
value of its total assets which may include cash collateral received for
securities loaned. There may be risks of delay in receiving additional
collateral or in recovering the securities loaned or even a loss of rights in
the collateral should the borrower of the securities fail financially. However,
loans are made only to borrowers deemed by the Adviser to be of good standing
and when, in its judgment, the income to be earned from the loan justifies the
attendant risks. Pursuant to the securities loan agreement the Fund is able to
terminate the securities loan upon notice of not more than five business days
and thereby secure the return to the Fund of securities identical to the
transferred securities upon termination of the loan.
STAND-BY COMMITMENTS
The Fund may acquire "stand-by commitments" with respect to Municipal
Securities held in its portfolios. Under a "stand-by commitment," a dealer
agrees to purchase from the Fund, at the Fund's option, specified Municipal
Securities at a specified price. Stand-by commitments are exercisable by a Fund
at any time before the maturity of the underlying Municipal Securities, and may
be sold, transferred, or assigned by the Fund only with the underlying
instruments.
The amount payable to a Tax-Free Bond Fund upon its exercise of a
stand-by commitment will normally be (i) the Fund's acquisition cost of the
Municipal Securities (excluding any accrued interest which a Tax-Free Bond Fund
paid on their acquisition), less any amortized market premium or plus any
amortized market or original issue discount during the period a Tax-Free Bond
Fund owned the securities, plus (ii) all interest accrued on the securities
since the last interest payment date during that period. Under normal market
conditions, in determining net asset value a Tax-Free Bond Fund values the
underlying Municipal Securities on an amortized cost basis. Accordingly, the
amount payable by a dealer upon exercise of a stand-by commitment will normally
be substantially the same as the portfolio value of the underlying Municipal
Securities.
The Fund's right to exercise stand-by commitments will be unconditional
and unqualified. A stand-by commitment will not be transferable by the Fund,
although the Fund could sell the underlying Municipal Securities to a third
party at any time. Until the Fund exercises its stand-by commitment, it owns the
securities in its portfolio which are subject to the stand-by commitment.
28
<PAGE>
The Fund expects that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for the security being acquired
which will be subject to the commitment (thus reducing the yield to maturity
otherwise available for the same security). When the Fund pays any consideration
directly or indirectly for a stand-by commitment, its cost will be reflected as
unrealized depreciation for the period during which the commitment is held by
that Fund. The Tax-Free Bond Funds will not acquire a stand-by commitment unless
immediately after the acquisition not more than 5% of the Fund's total assets
will be subject to a demand feature, or in stand-by commitments, with the same
institution.
The Fund intends to enter into stand-by commitments only with banks and
broker/dealers which, in the Adviser's opinion, present minimal credit risks. In
evaluating the credit worthiness of the issuer of a stand-by commitment, the
Adviser will review periodically the issuer's assets, liabilities, contingent
claims, and other relevant financial information.
The Fund would acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. Stand-by commitments acquired by the Fund will be valued at
zero in determining net asset value. The Fund's reliance upon the credit of
these dealers, banks, and broker/dealers will be secured by the value of the
underlying Municipal Securities that are subject to the commitment. Thus, the
risk of loss to the Fund in connection with a "stand-by commitment" will not be
qualitatively different from the risk of loss faced by a person that is holding
securities pending settlement after having agreed to sell the securities in the
ordinary course of business.
STRIPPED SECURITIES
The Fund may purchase stripped securities issued or guaranteed by the
U.S. Government, where the principal and interest components are traded
independently under the Separate Trading of Registered Interest and Principal of
Securities program ("STRIPS"). Under STRIPS, the principal and interest
components are individually numbered and separately issued by the U.S. Treasury
at the request of depository financial institutions, which then trade the
component parts independently.
In addition, the Fund may purchase stripped mortgage-backed securities
("SMBS") issued by the U.S. Government (or a U.S. Government agency or
instrumentality) or by private issuers such as banks and other institutions. If
the underlying obligations experience greater than anticipated prepayments of
principal, the Fund may fail to fully recover its initial investment. The market
value of the class consisting entirely of principal payments can be extremely
volatile in response to changes in interest rates. The yields on a class of SMBS
that receives all or most of the interest are generally higher than prevailing
market yields on other mortgage-backed obligations because their cash flow
patterns are also volatile and there is a greater risk that the initial
investment will not be full recovered. SMBS issued by the U.S. Government (or a
U.S. Government agency or instrumentality) may be considered liquid under
guidelines established by the Company's Board of Directors if they can be
disposed of promptly in the ordinary course of business at a value reasonably
close to that used in the calculation of the Fund's per share net asset value.
Although stripped securities may not pay interest to holders prior to
maturity, Federal income tax regulations require a Fund to recognize as interest
income a portion of the bond's discount each year. This income must then be
distributed to shareholders along with other income earned by the Fund. To the
extent that any shareholders in the Fund elect to receive their dividends in
cash rather than reinvest such dividends in additional Fund shares, cash to make
these distributions will have to be provided from the assets of the Fund or
other sources such as proceeds of sales of Fund shares and/or sales of portfolio
securities. In such cases, the Fund will not be able to purchase additional
income producing securities with cash used to make such distributions and its
current income may ultimately be reduced as a result.
U.S. AND FOREIGN BANK OBLIGATIONS
These obligations include negotiable certificates of deposit, banker's
acceptances and fixed time deposits. The Fund limits its investments in domestic
bank obligations to banks having total assets in excess of $1 billion and
subject to regulation by the U.S. Government. The Fund may also invest in
certificates of deposit issued by members of the Federal Deposit Insurance
Corporation ("FDIC") having total assets of less than $1 billion, provided that
the Fund will at no time own more than $100,000 principal amount of certificates
of deposit (or any higher principal amount which in the future may be fully
covered by FDIC insurance) of any one of those issuers. Fixed time deposits are
obligations which are payable at a stated maturity date and bear a fixed rate of
interest. Generally, fixed time deposits may be withdrawn on demand by the Fund,
but they may be subject to early withdrawal penalties which vary depending upon
market conditions and the remaining maturity of the obligation. Although fixed
time deposits do not have a market, there are no contractual restrictions on the
Fund's right to transfer a beneficial interest in the deposit to a third party.
29
<PAGE>
The Fund limits its investments in foreign bank obligations (I.E.,
obligations of foreign branches and subsidiaries of domestic banks, and domestic
and foreign branches and agencies of foreign banks) to obligations of banks
which at the time of investment are branches or subsidiaries of domestic banks
which meet the criteria in the preceding paragraphs or are branches or agencies
of foreign banks which (i) have more than $10 billion, or the equivalent in
other currencies, in total assets; (ii) in terms of assets are among the 75
largest foreign banks in the world; (iii) have branches or agencies in the
United States; and (iv) in the opinion of the Adviser, pursuant to the
established by the Board of Directors of the Company, are of an investment
quality comparable to obligations of domestic banks which may be purchased by a
Fund. These obligations may be general obligations of the parent bank in
addition to the issuing branch or subsidiary, but the parent bank's obligations
may be limited by the terms of the specific obligation or by governmental
regulation. The Fund also limits its investments in foreign bank obligations to
banks, branches and subsidiaries located in Western Europe (United Kingdom,
France, Germany, Belgium, The Netherlands, Italy and Switzerland), Scandinavia
(Denmark and Sweden), Australia, Japan, the Cayman Islands, the Bahamas and
Canada. Each Fund will limit its investment in securities of foreign banks to
not more than 20% of total assets at the time of investment.
The Fund may also make interest-bearing savings deposits in commercial
and savings banks in amounts not in excess of 5% of the total assets of the
Fund.
U.S. GOVERNMENT OBLIGATIONS
The Fund may invest in U.S. Government obligations. Examples of the
types of U.S. Government obligations that may be held by the Fund include, in
addition to U.S. Treasury bonds, notes and bills, the obligations of the Federal
Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage Association,
Federal National Mortgage Association, General Services Administration, Student
Loan Marketing Association, Central Bank for Cooperatives, Federal Home Loan
Mortgage Corporation, Federal Intermediate Credit Banks, Tennessee Valley
Authority, Resolution Funding Corporation and Maritime Administration.
Obligations guaranteed as to principal or interest by the U.S. Government, its
agencies, authorities or instrumentalities are deemed to include: (a) securities
for which the payment of principal and interest is backed by an irrevocable
letter of credit issued by the U.S. Government, its agencies, authorities or
instrumentalities and (b) participations in loans made to foreign governments or
their agencies that are so guaranteed. The secondary market for certain of these
participations is limited. If such participations are illiquid they will not be
purchased.
U.S. Government obligations include principal and interest components
of securities issued or guaranteed by the U.S. Treasury if the components are
traded independently under the Separate Trading of Registered Interest and
Principal of Securities program. Obligations issued or guaranteed as to
principal or interest by the U.S. Government, its agencies, authorities or
instrumentalities may also be acquired in the form of custodial receipts. These
receipts evidence ownership of future interest payments, principal payments or
both on certain notes or bonds issued by the U.S. Government, its agencies,
authorities or instrumentalities.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Options, futures and forward foreign currency contracts that obligate
the Fund to provide cash, securities or currencies to complete such transactions
will entail that Fund to either segregate assets in an account with, or on the
books of, the Company's custodian, or otherwise "covering" the transaction as
described below. For example, a call option written by the Fund will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or liquid assets
sufficient to meet the obligation by purchasing and delivering the securities if
the call is exercised. A call option written on an index will require that Fund
to have portfolio securities that correlate with the index. A put option written
by the Fund also will require that Fund to have available assets sufficient to
purchase the securities the Fund would be obligated to buy if the put is
exercised.
30
<PAGE>
A forward foreign currency contract that obligates the Fund to provide
currencies will require the Fund to hold currencies or liquid securities
denominated in a foreign currency which will equal the Fund's obligations. Such
a contract requiring the purchase of currencies also requires segregation.
Unless a segregated account consists of the securities, cash or
currencies that are the subject of the obligation, the Fund will hold cash, U.S.
Government securities and other high grade liquid debt obligations in a
segregated account. These assets cannot be transferred while the obligation is
outstanding unless replaced with other suitable assets. In the case of an
index-based transaction, the Fund could own securities substantially replicating
the movement of the particular index.
In the case of a futures contract, the Fund must deposit initial margin
and variation margin, as often as daily, if the position moves adversely,
sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Similarly, options on futures contracts require the Fund to
deposit margin to the extent necessary to meet the Fund's commitments.
In lieu of such assets, such transactions may be covered by other means
consistent with applicable regulatory policies. The Fund may enter into
off-setting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
hedging transactions. For example, the Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by that Fund. Moreover, instead of segregating assets if the Fund
held a futures or forward contract, it could purchase a put option on the same
futures or forward contract with a strike price as high or higher than the price
of the contract held. Of course, the off-setting transaction must terminate at
the time of or after the primary transaction.
31
<PAGE>
VARIABLE- AND FLOATING-RATE INSTRUMENTS
The Fund may purchase variable-rate and floating rate obligations. If
such instrument is not rated, the Adviser will consider the earning power, cash
flows, and other liquidity ratios of the issuers and guarantors of such
obligations and, if the obligation is subject to a demand feature, will monitor
their financial status to meet payment on demand. In determining average
weighted portfolio maturity, a variable-rate demand instrument issued or
guaranteed by the U.S. Government or an agency or instrumentality thereof will
be deemed to have a maturity equal to the period remaining until the obligations
next interest rate adjustment. Other variable-rate obligations will be deemed to
have a maturity equal to the longer of the period remaining to the next interest
rate adjustment or the time a Fund can recover payment of principal as specified
in the instrument.
The variable- and-floating rate demand instruments that the Fund may
purchase includes participations in Municipal Securities purchased from and
owned by financial institutions, primarily banks. Participation interests
provide a Fund with a specified undivided interest (up to 100%) in the
underlying obligation and the right to demand payment of the unpaid principal
balance plus accrued interest on the participation interest from the institution
upon a specified number of days' notice, not to exceed 30 days. Each
participation interest is backed by an irrevocable letter of credit or guarantee
of a bank that the Adviser has determined meets the prescribed quality standards
for the Fund. The bank typically retains fees out of the interest paid on the
obligation for servicing the obligation, providing the letter of credit, and
issuing the repurchase commitment.
INVESTMENT RISKS AND CONSIDERATIONS
In addition to the investment risks and considerations identified in
certain of the securities descriptions above, there are additional investment
risks and considerations associated with an investment in the Fund.
The value of the Fund's investments in debt securities, including U.S.
Government Obligations, will tend to decrease when interest rates rise and
increase when interest rates fall. In general, longer-term debt instruments tend
to fluctuate in value more than shorter-term debt instruments in response to
interest rate movements. In addition, debt securities that are not backed by the
United States Government are subject to credit risk, which is the risk that the
issuer may not be able to pay principal and/or interest when due. In addition,
obligations with the lowest investment grade rating (E.G., "BBB" by Standard &
Poor's Corporation ("S&P") or "Baa" by Moody's Investors Service, Inc.
("Moody's")) have speculative characteristics and changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade debt
obligations. Subsequent to its purchase by the Fund, an issue of securities may
cease to be rated or its rating may be reduced below the minimum rating required
for purchase by the Fund. The Adviser will consider such an event in determining
whether the Fund should continue to hold the obligation. Unrated obligations may
be acquired by the Fund if they are determined by the Adviser to be of
comparable quality at the time of purchase to rated obligations that may be
acquired.
Certain of the Fund's investments constitute derivative securities,
which are securities whose value is derived, at least in part, from an
underlying index or reference rate. There are certain types of derivative
securities that can, under certain circumstances, significantly increase a
purchaser's exposure to market or other risks. The Adviser, however, only
purchases derivative securities in circumstances where it believes such
purchases are consistent with such Fund's investment objective and do not unduly
increase the Fund's exposure to market or other risks. For additional risk
information regarding the Funds' investments in particular instruments, see
"Appendix A -- Fund Securities."
The Fund may invest in securities of smaller and newer issuers.
Investments in such companies may present greater opportunities for capital
appreciation because of high potential earnings growth, but also present greater
risks than investments in more established companies with longer operating
histories and greater financial capacity.
MANAGEMENT OF THE COMPANY
The business and affairs of the Company are managed under the direction
of its respective Board of Directors. This SAI contains the names of and general
background information concerning each Director of the Company.
The Company and the Adviser have adopted codes of ethics which contain
policies on personal securities transactions by "access persons," including
portfolio managers and investment analysts. These policies substantially comply
in all material respects with the recommendations set forth in the May 9, 1994
Report of the Advisory Group on Personal Investing of the Investment Company
Institute.
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<PAGE>
The Directors and executive officers of the Company and their principal
occupations during the last five years are set forth below. The address of each,
unless otherwise indicated, is 111 Center Street, Little Rock, Arkansas 72201.
Those directors who are "interested persons" of a Company (as defined in the
1940 Act) are indicated by an asterisk(*).
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS
POSITION WITH AND CURRENT
NAME, ADDRESS, AND AGE THE COMPANIES DIRECTORSHIPS
- ---------------------- ------------- -------------
<S> <C> <C>
Edmund L. Benson, III, 62 Director/Trustee Director, President and Treasurer, Saunders & Benson, Inc.
Saunders & Benson, Inc. (Insurance), Insurance Managers, Inc. (insurance); Trustee, Nations
1510 Willow Lawn Drive Reserves, Master Investment Trust, Nations Annuity Trust and Nations
Suite 216 Fund Trust; Director, Nations Fund, Inc., and Nations LifeGoal
Richmond, VA 23230 Funds, Inc.; Director, Nations Fund Portfolios, Inc. through August,
1999.
James Ermer, 56 Director/Trustee Retired Executive Vice President, Corporate Development and Planning
11511 Compass Point Drive - Land America (title insurance); Senior Vice President, Finance -
Ft. Meyers, FL 33908 CSX Corporation (transportation and natural resources); Director
National Mine Service (mining supplies), Lawyers Title Corporation
(title insurance); Trustee, Nations Reserves, Nations Fund Trust,
Nations Annuity Trust and Nations Master Investment Trust; Director,
Nations Fund, Inc. and Nations LifeGoal Funds, Inc.; Director,
Nations Fund Portfolios, Inc. through August, 1999.
William H. Grigg, 66 Director/Trustee Chairman Emeritus since July 1997, Chairman and Chief Executive
Duke Power Co. Officer from April 1994 to July 1997 - Duke Power Co.; Director -
16092A Reap Road The Shaw Group, Inc.; Director and Vice Chairman, Aegis Insurance
Albermarle, NC 28001 Services, Ltd. (a mutual insurance company in Bermuda); Trustee,
Nations Reserves, Nations Fund Trust, Nations Annuity Trust and
Nations Master Investment Trust; Director, Hatteras Income
Securities, Inc., Nations Government Income Term Trust 2003, Inc.,
Nations Government Income Term Trust 2004, Inc., Nations Balanced
Target Maturity Fund, Inc., Nations Fund, Inc. and Nations LifeGoal
Funds, Inc.; Director, Nations Fund Portfolios, Inc. through August,
1999.
Thomas F. Keller, 67 Director/Trustee R.J. Reynolds Industries Professor of Business Administration and
Fuqua School of Business Former Dean - Fuqua School of Business, Duke University; Director -
P.O. Box 90120 LADD Furniture, Inc. (furniture), Wendy's International, Inc.
Duke University (restaurant operating and franchising), American Business Products,
Durham, NC 27708 Inc. (printing services), Dimon, Inc. (tobacco), Biogen, Inc.
(pharmaceutical biotechnology); Trustee, The Mentor Funds, Mentor
Institutional Trust, Cash Reserve Trust, Nations Reserves, Nations
Fund Trust, Nations Annuity Trust and Nations Master Investment
Trust; Director, Hatteras Income Securities, Inc., Nations
Government Income Term Trust 2003, Inc., Nations Government Income
Term Trust 2004, Inc., Nations Balanced Target Maturity Fund, Inc.
and Nations LifeGoal Funds, Inc.; Director, Nations Fund Portfolios,
Inc. through August, 1999.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS
POSITION WITH AND CURRENT
NAME, ADDRESS, AND AGE THE COMPANIES DIRECTORSHIPS
- ---------------------- ------------- -------------
<S> <C> <C>
Carl E. Mundy, Jr., 64 Director/Trustee President and CEO - USO from May 1996 to present; Commandant -
USO World Headquarters United States Marine Corps from July 1991 to July 1995; Director -
Washington Navy Yard Shering-Plough (pharmaceuticals and health care products); General
Building 198 Dynamics Corporation (defense systems); Trustee, Nations Reserves,
901 M Street, S.E. Nations Fund Trust, Nations Annuity Trust and Nations Master
Washington, D.C. 20374-5096 Investment Trust; Director, Nations Fund, Inc. and Nations LifeGoal
Funds, Inc.; Director, Nations Fund Portfolios, Inc. through August,
1999.
Dr. Cornelius J. Pings, 70* Director/Trustee President - Association of American Universities from February 1993
480 S. Orange Grove Blvd. to June 1998; Director - Farmers Group, Inc. (insurance company),
Pasadena, CA 91105 Nations Fund, Inc. and Nations LifeGoal Funds, Inc.; Trustee, Master
Investment Trust, Series I from 1995 to 1999, Master Investment
Trust, Series II from 1995 to 1997, Nations Reserves, Nations Fund
Trust, Nations Annuity Trust and Nations Master Investment Trust.;
Director/Trustee and Chairman - Pacific Horizon Funds, Inc. and
Master Investment Trust, Series I, from inception to May 1999;
Director - Time Horizon Funds and Pacific Innovations Trust;
Director, Nations Fund Portfolios, Inc. through August, 1999.
James B. Sommers*, 60 Director President - NationsBank Trust from January 1992 to September 1996;
237 Cherokee Road Executive Vice President - NationsBank Corporation from January 1992
Charlotte, NC 28207 to May 1997; Chairman - Central Piedmont Community College
Foundation; Board of Commissioners, Charlotte/ Mecklenberg Hospital
Authority; Director - Nations Fund, Inc. and Nations LifeGoal Funds,
Inc.; Trustee, Central Piedmont Community College; Mint Museum of
Art, Nations Reserves, Nations Fund Trust, Nations Annuity Trust and
Nations Master Investment Trust; Director, Nations Fund Portfolios,
Inc. through August, 1999.
A. Max Walker*, 77 President, Director and Independent Financial Consultant; Director and Chairman of the Board
4580 Windsor Gate Court Chairman of the Board - Hatteras Income Securities, Inc., Nations Government Income Term
Atlanta, GA 30342 Trust 2003, Inc., Nations Government Income Term Trust 2004, Inc.,
Nations Balanced Target Maturity Fund, Inc.; President, Director and
Chairman of the Board - Nations Fund, Inc. and Nations LifeGoal
Funds, Inc.; President, Trustee and Chairman of the Board - Nations
Reserves, Nations Fund Trust, Nations Annuity Trust and Nations
Master Investment Trust; Director, Nations Fund Portfolios, Inc.
through August, 1999.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS
POSITION WITH AND CURRENT
NAME, ADDRESS, AND AGE THE COMPANIES DIRECTORSHIPS
- ---------------------- ------------- -------------
<S> <C> <C>
Charles B. Walker, 60 Director Director-Ethyl Corporation (chemical manufacturing); Vice Chairman
Albermarle Corporation and Chief Financial Officer - Albemarle Corporation (chemical
Vice Chairman and CFO manufacturing); Director, Nations Fund, Inc. and Nations LifeGoal
330 South Fourth Street Funds, Inc.; Trustee, Nations Reserves, Nations Fund Trust, Nations
Richmond, VA 23219 Annuity Trust and Nations Master Investment Trust; Director, Nations
Fund Portfolios, Inc. through August, 1999.
Thomas S. Word, Jr.*, 61 Director Partner - McGuire, Woods, Battle & Boothe LLP (law firm); Director -
McGuire, Woods, Battle & Boothe LLP Vaughan-Bassett Furniture Companies, Inc. (furniture), Nations Fund,
One James Center Inc. and Nations LifeGoal Funds, Inc.; Trustee, Nations Reserves,
8th Floor Nations Fund Trust, Nations Annuity Trust and Nations Master
Richmond, VA 23219 Investment Trust; Director, Nations Fund Portfolios, Inc. through
August, 1999.
Richard H. Blank, Jr., 42 Secretary and Treasurer Senior Vice President since 1998, Vice President from 1994 to 1998
Stephens Inc. and Manager from 1990 to 1994 - Mutual Fund Services, Stephens Inc.;
111 Center Street Secretary since September 1993 and Treasurer since November 1998
Little Rock, AR 72201 Nations Fund, Inc., Nations LifeGoal Funds, Inc., Nations Reserves,
Nations Fund Trust, Nations Annuity Trust and Nations Master
Investment Trust.; Secretary and Treasurer, Nations Fund Portfolios,
Inc. through August, 1999.
Michael W. Nolte, 38 Assistant Secretary Assistant Secretary - Nations Fund Trust, Nations Fund, Inc.,
Stephens Inc. Nations Reserves, Nations LifeGoal Funds, Inc., Nations Annuity
Trust and Nations Master Investment Trust; Assistant Secretary,
Nations Fund Portfolios, Inc. through August, 1999.
James E. Banks, 43 Assistant Secretary Assistant Secretary - Nations Fund Trust, Nations Fund, Inc.,
Stephens Inc. Nations Reserves, Nations LifeGoal Funds, Inc., Nations Annuity
Trust and Nations Master Investment Trust; ; Director, Nations Fund
Portfolios, Inc. through August, 1999.
</TABLE>
Each Director is a board member of NFI, NFT, NR, Nations Annuity Trust,
Nations Master Investment Trust and Nations LifeGoal Funds, Inc., each a
registered investment company that is part of the Nations Funds family. Richard
H. Blank, Jr., Michael W. Nolte, and James E. Banks. Jr. also are officers of
NFI, NFT, NR, Nations Annuity Trust, Nations Master Investment Trust and Nations
LifeGoal Funds, Inc.
The Company has adopted a Code of Ethics which, among other things,
prohibits each access person of the Company from purchasing or selling
securities when such person knows or should have known that, at the time of the
transaction, the security (i) was being considered for purchase or sale by the
Fund, or (ii) was being purchased or sold by the Fund. For purposes of the Code
of Ethics, an access person means (i) a director or officer of the Company, (ii)
any employee of the Company (or any company in a control relationship with the
Company) who, in the course of his/her regular duties, obtains information
about, or makes recommendations with respect to, the purchase or sale of
securities by the Company, and (iii) any natural person in a control
relationship with the Company who obtains information concerning recommendations
made to the Company regarding the purchase or sale of securities. Portfolio
managers and other persons who assist in the investment process are subject to
additional restrictions, including a requirement that they disgorge to the
Company any profits realized on short-term trading (I.E., the purchase/sale or
sale/purchase of securities within any 60-day period). The above restrictions do
not apply to purchases or sales of certain types of securities, including mutual
fund shares, money market instruments and certain U.S. Government securities. To
facilitate enforcement, the Code of Ethics generally requires that the Company's
access persons, other than its "disinterested" directors or trustees, submit
reports to the Company's designated compliance person regarding transactions
involving securities which are eligible for purchase by a Fund.
35
<PAGE>
NATIONS FUNDS RETIREMENT PLAN
Under the terms of the Nations Funds Retirement Plan for Eligible
Directors/Trustees (the "Retirement Plan"), each Director/Trustee may be
entitled to certain benefits upon retirement from the Board of
Directors/Trustees. Pursuant to the Retirement Plan, the normal retirement date
is the date on which the eligible director/trustee has attained age 65 and has
completed at least five years of continuous service with one or more of the
open-end investment companies advised by the Adviser. If a director/trustee
retires before reaching age 65, no benefits are payable. Each eligible
director/trustee is entitled to receive an annual benefit from the Funds
commencing on the first day of the calendar quarter coincident with or next
following his date of retirement equal to 5% of the aggregate
director's/trustee's fees payable by the Funds during the calendar year in which
the director's/trustee's retirement occurs multiplied by the number of years of
service (not in excess of ten years of service) completed with respect to any of
the Funds. Such benefit is payable to each eligible director/trustee in
quarterly installments for a period of no more than five years. If an eligible
director/trustee's dies after attaining age 65, the director's/trustees
surviving spouse (if any) will be entitled to receive 50% of the benefits that
would have been paid (or would have continued to have been paid) to the
director/trustee if he had not died. The Retirement Plan is unfunded. The
benefits owed to each director/trustee are unsecured and subject to the general
creditors of the Funds.
NATIONS FUNDS DEFERRED COMPENSATION PLAN
Under the terms of the Nations Funds Deferred Compensation Plan for
Eligible Directors/Trustees (the "Deferred Compensation Plan"), each
director/trustee may elect, on an annual basis, to defer all or any portion of
the annual board fees (including the annual retainer and all attendance fees)
payable to the director/trustee for that calendar year. An application was
submitted to and approved by the SEC to permit deferring directors/trustees to
elect to tie the rate of return on fees deferred pursuant to the Deferred
Compensation Plan to one or more of certain investment portfolios of certain
Funds. Distributions from the deferring directors'/trustees deferral accounts
will be paid in cash, in generally equal quarterly installments over a period of
five years beginning on the date the deferring director's/trustees' retirement
benefits commence under the Retirement Plan. The Board of Directors/Trustees, in
its sole discretion, may accelerate or extend such payments after a
director's/trustee's termination of service. If a deferring director/trustee
dies prior to the commencement of the distribution of amounts in his deferral
account, the balance of the deferral account will be distributed to his
designated beneficiary in a lump sum as soon as practicable after the
director's/trustee's death. If a deferring director/trustee dies after the
commencement of such distribution, but prior to the complete distribution of his
deferral account, the balance of the amounts credited to his deferral account
will be distributed to his designated beneficiary over the remaining period
during which such amounts were distributable to the director/trustee. Amounts
payable under the Deferred Compensation Plan are not funded or secured in any
way and deferring directors/trustees have the status of unsecured creditors of
the Funds from which they are deferring compensation.
36
<PAGE>
Director Compensation Through July 1, 1999
<TABLE>
<CAPTION>
COMPENSATION TABLE
PENSION OR
AGGREGATE RETIREMENT
COMPENSATION BENEFITS ACCRUED ESTIMATED ANNUAL TOTAL COMPENSATION
NAME OF PERSON FROM AS PART OF FUND BENEFITS UPON FROM REGISTRANT
POSITION (1) REGISTRANT (2) EXPENSES RETIREMENT PLAN & FUND COMPLEX(3)(4)
------------ -------------- -------- --------------- --------------
<S> <C> <C> <C> <C>
Edmund L. Benson, III $46,000 $8,889 $35,000 $77,377
Trustee/Director
James Ermer 44,000 8,889 35,000 65,375
Trustee/Director
William H. Grigg 47,000 8,889 35,000 90,375
Trustee/Director
Thomas F. Keller 50,000 8,889 35,000 94,875
Trustee/Director
A. Max Walker 56,000 8,889 35,000 110,875
Chairman of the Board
Charles B. Walker 47,000 8,889 35,000 71,375
Trustee/Director
Thomas S. Word 50,000 8,889 35,000 77,375
Trustee/Director
James P. Sommers 47,500 8,889 35,000 73,375
Trustee/Director
Carl E. Mundy, Jr. 48,500 8,889 35,000 74,377
Trustee/Director
Dr. Cornelius Pings 0 0 0 0
Trustee/Director
</TABLE>
(1) All directors/trustees receive reimbursements for expenses related
to their attendance at meetings of the Board of Directors/Trustees. Officers of
the Companies receive no direct remuneration in such capacity from the
Companies. As of the date of this SAI, the directors and officers of each
Company as a group owned less than 1% of the outstanding shares of each of the
Funds.
(2) For the twelve-month period ending March 31, 1999, each
Director/Trustee receives (i) an annual retainer of $1,000 ($3,000 for the
Chairman of the Board) plus $500 for each Fund of the Companies, plus (ii) a fee
of $1,000 for attendance at each "in-person" meeting of the Board of Trustees
(or committee thereof) and $500 for attendance at each other meeting of the
Board of Directors/Trustees (or Committee thereof).
(3) Messrs. Grigg, Keller and A.M. Walker receive compensation from ten
investment companies that are deemed to be part of the Nations Funds "fund
complex," as that term is defined under Rule 14a-101 of the Securities Exchange
Act of 1934, as amended. Messrs. Benson, Ermer, C. Walker, Sommers, Mundy and
Word receive compensation from six investment companies deemed to be part of the
Nations Funds complex.
(4) Total compensation amounts include deferred compensation (including
interest) payable to or accrued for the following Directors/Trustees: Edmund L.
Benson, III $35,188; William H. Grigg $66,375; Thomas F. Keller $70,375; and
Thomas S. Word $70,375.
Director Compensation After July 1, 1999
The Board of Directors of the Company along with the Boards of
Directors/Trustees of the other open-end registered investment companies in the
Nations Funds family approved a new compensation structure for the Board
members, effective July 1, 1999. The new structure compensates the Board members
for their services to the Nations Funds family on a flat rate basis, and not on
a per registered investment company or per fund basis. The Nations Funds family
currently consists of Nations Fund Trust, Nations Fund, Inc., Nations Reserves,
Nations Annuity Trust, Nations LifeGoal Funds, Inc. and Nations Master
Investment Trust.
37
<PAGE>
Under the new structure, each Board member would receive a base
retainer fee in the amount of $65,000 per year, in addition to $5,000 for each
in-person meeting attended; in addition to $1,000 for each telephonic meeting
attended. Each Board member would be compensated only for a maximum of six
in-person meetings per calendar year. In addition, the Chairman of the Boards,
currently A. Max Walker, would receive an additional fee of 20% of the base
retainer fee; the Chairman of the Audit Committees would receive an additional
fee of 10% of the base retainer fee. The members of the Nominating Committees
will receive additional compensation at the rate of $1,000 per meeting attended.
INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY,
TRANSFER AGENCY, OTHER SERVICE PROVIDERS, SHAREHOLDER SERVICING AND
DISTRIBUTION AGREEMENTS
INVESTMENT ADVISER AND SUB-ADVISERS
Bank of America and its Investment Adviser and Sub-Adviser Affiliates
BAAI is the investment adviser to the Fund and Banc of America Capital
Management, Inc. ("BACM") is the investment sub-adviser to the Fund.
BAAI and BACM are both wholly owned subsidiaries of Bank of America,
which in turn is a wholly owned banking subsidiary of Bank of America
Corporation, a bank holding company organized as a Delaware corporation.
The respective principal offices of BAAI and BACM are located at One
Bank of America Plaza, Charlotte, N.C. 28255.
Since 1874, Bank of America and its predecessors have been managing
money for foundations, universities, corporations, institutions and individuals.
Today, Bank of America affiliates collectively manage in excess of $100 billion,
including the more than $40 billion in mutual fund assets. It is a company
dedicated to a goal of providing responsible investment management and superior
service. Bank of America is recognized for its sound investment approaches,
which place it among the nation's foremost financial institutions. Bank of
America and its affiliates organization makes available a wide range of
financial services to its over 6 million customers through over 1700 banking and
investment centers.
Investment Advisory and Sub-Advisory Agreements
Pursuant to the terms of the Company's Investment Advisory Agreement
and Sub-Advisory Agreement (at times, the "Advisory Agreements") with BAAI and
BACM, and subject at all times to the control of the Company's Board of
Directors and conformity with the stated policies of the Company, BAAI and
BACM, each selects and manages the investments of the Fund. Each such
advisory entity obtains and evaluates economic, statistical and financial
information to formulate and implement investment policies for the Fund that
they advise.
The Advisory Agreements provide that in the absence of willful
misfeasance, bad faith, negligence or reckless disregard of obligations or
duties thereunder on the part of an Adviser, respectively, or any of its
respective officers, directors, employees or agents, such Adviser shall not be
subject to liability to the Company or to any shareholder of the Company for any
act or omission in the course of, or connected with, rendering services under
thereunder or for any losses that may be sustained in the purchase, holding or
sale of any security.
Each Advisory Agreement became effective with respect to the Fund after
approved by the Board of a Company, and continues from year to year, provided
that such continuation of the Agreement is specifically approved at least
annually by (a) (i) a Company's Board of Directors or (ii) the vote of "a
majority of the outstanding voting securities" of the Fund (as defined in
Section 2(a)(42) of the 1940 Act), and (b) the affirmative vote of a majority of
the Company's Directors who are not parties to such Agreement or "interested
persons" (as defined in the 1940 Act) of a party to such Agreement (other than
as Directors of the Company), by votes cast in person at a meeting specifically
called for such purpose. The respective Advisory Agreement terminates
automatically in the event of its assignment, and is terminable with respect to
the Fund at any time without penalty by a Company (by vote of the Board of
Directors or by vote of a majority of the outstanding voting securities of the
Fund) or by BAAI on 60 days' written notice.
38
<PAGE>
The Fund, in any advertisement or sales literature, may advertise the
names, experience and/or qualifications of the portfolio manager(s) of any Fund,
or if the Fund is managed by team or committee, such Fund may advertise the
names, experience and/or qualifications of any such team or committee member.
The Adviser may waive a portion of its fees; however, any such waiver
may be discontinued at any time. As discussed below," an Adviser will be
required to reduce its fees charged to the Fund, in direct proportion to the
fees payable by such Fund to an Adviser and the Administrator, if the expenses
of the Fund exceeds the applicable expense limitation of any state in which the
Fund's shares are registered or qualified for sale.
Subject to reduction in accordance with the expense limitation
provisions which may be imposed by states in which the Fund's shares are
qualified for sale, BAAI received fees from the Fund for its services as
outlined in the following chart, which states the net advisory fees paid to
BAAI, the advisory fees waived and expense reimbursements where applicable for
the fiscal year ended March 31, 1999.
<TABLE>
<CAPTION>
ADVISORY FEES
Net Amount Paid Amount Waived Reimbursed by Adviser
--------------- ------------- ---------------------
<S> <C> <C> <C>
U.S. Government Bond Fund 598,363 479,333 (25,696.00)
</TABLE>
BAAI received fees from the Fund for its services as outlined in the
following chart, which states the net advisory fees paid to BAAI, the advisory
fees waived and expense reimbursements where applicable for the fiscal year
ended March 31, 1998.
<TABLE>
<CAPTION>
ADVISORY FEES
Net Amount Paid Amount Waived Reimbursed by Adviser
--------------- ------------- ---------------------
<S> <C> <C> <C>
U.S. Government Bond Fund 483,931 385,271 0.00
</TABLE>
The Pilot U.S. Government Fund (predecessor to the U.S. Government Bond
Fund) paid and waived the following advisory fees under a prior advisory
agreement with Boatmen's during the periods indicated.
ADVISORY FEES PAID
SEPTEMBER 1, 1996 - MAY 16, 1997
Advisory
Fee
Pilot US Government Fund
Advisory Fee $552,504
Advisory Waiver (125,674)
426,830
SUB-ADVISORY FEES
BACM assumed the responsibilities (the predecessor sub-adviser was
Boatmen's Capital Management, Inc.) as investment sub-adviser for the Nations
U.S. Government Bond Fund and assumed sole responsibility for the Fund under a
new sub-advisory agreement on .
<TABLE>
<CAPTION>
Period Ending Period Ending Period Ending
3/31/999 3/31/98 3/31/97
<S> <C> <C> <C>
Nations U.S. Government Bond Fund $263,059 $ ---- $ ----
</TABLE>
39
<PAGE>
CO-ADMINISTRATORS AND SUB-ADMINISTRATOR
Stephens Inc. and BAAI (the "Co-Administrators") serve as
co-administrators of the Company.
The Co-Administrators serve under co-administration agreements
("Co-Administration Agreements"), which were approved by the Board of Directors
on November 5-6, 1998. The Co-Administrators receive, as compensation for their
services rendered under the Co-Administration Agreements, administration fees,
computed daily and paid monthly, at the annual rate of: 0.10% of the money
market Funds; 0.12% of the fixed income and international Funds; and 0.13% of
the domestic equity Funds, of the average daily net assets of each such Fund.
Pursuant to the Co-Administration Agreement, Stephens has agreed to,
among other things, (i) maintain office facilities for the Fund, (ii) furnish
statistical and research data, data processing, clerical, and internal executive
and administrative services to the Company, (iii) furnish corporate secretarial
services to the Company, including coordinating the preparation and distribution
of materials for Board of Directors/Trustees meetings, (iv) coordinate the
provision of legal advice to the Company with respect to regulatory matters, (v)
coordinate the preparation of reports to the Company's shareholders and the SEC,
including annual and semi-annual reports, (vi) coordinating the provision of
services to the Company by the Transfer Agent, Sub-Transfer Agent and the
Custodian, and (vii) generally assist in all aspects of the Company's
operations. Stephens bears all expenses incurred in connection with the
performance of its services.
Also, pursuant to the Co-Administration Agreement, BAAI has agreed to,
among other things, (i) provide accounting and bookkeeping services for the
Fund, (ii) compute the Fund's net asset value and net income, (iii) accumulate
information required for the Company's reports to shareholders and the SEC, (iv)
prepare and file the Company's federal and state tax returns, (v) perform
monthly compliance testing for the Company, and (vi) prepare and furnish the
Company monthly broker security transaction summaries and transaction listings
and performance information. BAAI bears all expenses incurred in connection with
the performance of its services.
The Co-Administration Agreement may be terminated by a vote of a
majority of the respective Board of Directors, by Stephens or by BAAI,
respectively, on 60 days' written notice without penalty. The Co-Administration
Agreements are not assignable without the written consent of the other party.
Furthermore, the Co-Administration Agreements provide that Stephens and BAAI
shall not be liable to the Fund or to its shareholders except in the case of
Stephens' or BAAI's, willful misfeasance, bad faith, gross negligence or
reckless disregard of duty.
BNY serves as sub-administrator for the Fund pursuant to
sub-administration agreements. Pursuant to their terms, BNY assists Stephens and
BAAI in supervising, coordinating and monitoring various aspects of the Fund's
administrative operations. For providing such services, BNY is entitled to
receive a monthly fee from Stephens and BAAI based on an annual rate of 0.01% of
the Fund's average daily net assets.
The table set forth below states the net Co-Administration fees paid to
BAAI and waived for the fiscal period December 1, 1998 through March 31, 1999.
CO-ADMINISTRATION FEES
Fees Paid Fees Waived
U.S. Government Bond Fund 4,095 0
The table set forth below states the net Co-Administration fees paid to
Stephens and waived for the fiscal period December 1, 1998 through March 31,
1999.
CO-ADMINISTRATION FEES
Fees Paid Fees Waived
U.S. Government Bond Fund 22,681 ---
The table set forth below states the net Sub-Administration fees paid
to BNY and waived for the fiscal year period December 1, 1998 through March 31,
1999.
40
<PAGE>
SUB-ADMINISTRATION FEES
Fees Paid Fees Waived
U.S. Government Bond Fund 9,779 ---
The table set forth below states the net Administration fees paid to
Stephens and waived for the fiscal period April 1, 1998 through November 30,
1998, under the previous administration arrangements. The administration
arrangements have been revised and the fees set forth below are not reflective
of those changes. The new arrangements appointing Stephens and BAAI as
Co-Administrators and BNY as Sub-Administrator were effective on December 1,
1998.
ADMINISTRATION FEES
Fees Paid Fees Waived
U.S. Government Bond Fund 73,538 --
The table set forth below states the net Co-Administration fees paid to
First Data Investor Services, Inc. ("First Data") and waived for the fiscal
period April 1, 1998 through November 30, 1998, under the previous
co-administration arrangements.
CO-ADMINISTRATION FEES
Fees Paid Fees Waived
U.S. Government Bond Fund 51,881 --
The table set forth below states the net Sub-Administration fees paid
to BAAI (or its predecessor) and waived for the fiscal period April 1, 1998
through November 30, 1998, under the previous sub-administration arrangements.
SUB-ADMINISTRATION FEES
Fees Paid Fees Waived
U.S. Government Bond Fund 8,998 --
The table set forth below states the net Administration fees paid to
Stephens and waived for the fiscal year ended March 31, 1998, under the previous
administration arrangements.
ADMINISTRATION FEES
Net Fees Paid Fees Waived
U.S. Government Bond Fund 89,058 0.00
The table below sets forth the total co-administration fees paid to
First Data Investor Services Group, Inc. ("First Data") and waived by First Data
for the fiscal year ended March 31, 1998. First Data was the co-administrator
under the previous administration arrangements.
CO-ADMINISTRATION FEES
Net Fees Paid Fees Waived
U.S. Government Bond Fund 59,434 0.00
The table set forth below states the net Sub-Administration fees paid
and waived to Bank of America, or its affiliate BAAI (or their predecessors),
for the fiscal year ended March 31, 1998.
41
<PAGE>
SUB-ADMINISTRATION FEES
Net Fees Paid Fees Waived
U.S. Government Bond Fund 15,227 --
DISTRIBUTION PLANS AND SHAREHOLDER SERVICING ARRANGEMENTS
INVESTOR A SHARES
The Companies have adopted an Amended and Restated Shareholder
Servicing and Distribution Plan (the "Investor A Plan") pursuant to Rule 12b-1
under the 1940 Act with respect to each Fund's Investor A Shares. The Investor A
Plan provides that each Fund may pay the Distributor or banks, broker/dealers or
other financial institutions that offer shares of the Fund and that have entered
into a Sales Support Agreement with the Distributor ("Selling Agents") or a
Shareholder Servicing Agreement with the respective Company, ("Servicing
Agents"), up to 0.10% (on an annualized basis) of the average daily net asset
value of Investor A Shares of the Money Market Funds and up to 0.25% (on an
annualized basis) of the average daily net asset value of the Non-Money Market
Funds.
With respect to the Non-Money Market Funds, (except the Short-Term
Income Fund and the Short-Term Municipal Income Fund) payments under the
Investor A Plan may be made to the Distributor for providing the
distribution-related services described in (i) above or to Servicing Agents that
have entered into a Shareholder Servicing Agreement with each Company for
providing shareholder support services to their Customers which hold of record
or beneficially Investor A Shares of a Non-Money Market Fund. Such shareholder
support services provided by Servicing Agents to holders of Investor A Shares of
the Non-Money Market Funds may include (i) aggregating and processing purchase
and redemption requests for Investor A Shares from their Customers and
transmitting promptly net purchase and redemption orders to our distributor or
transfer agent; (ii) providing their Customers with a service that invests the
assets of their accounts in Investor A Shares pursuant to specific or
pre-authorized instructions; (iii) processing dividend and distribution payments
from the Company on behalf of their Customers; (iv) providing information
periodically to their Customers showing their positions in Investor A Shares;
(v) arranging for bank wires; (vi) responding to their Customers' inquiries
concerning their investment in Investor A Shares; (vii) providing sub-accounting
with respect to Investor A Shares beneficially owned by their Customers or the
information necessary to us for sub-accounting; (viii) if required by law,
forwarding shareholder communications from each Company (such as proxies,
shareholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to their Customers (ix) forwarding to their
Customers proxy statements and proxies containing any proposals regarding the
Shareholder Servicing Agreement; (x) providing general shareholder liaison
services; and (xi) providing such other similar services as each Company may
reasonably request to the extent the Selling Agent is permitted to do so under
applicable statutes, rules or regulations.
Expenses incurred by the Distributor pursuant to the Investor A Plan in
any given year may exceed the sum of the fees received under the Investor A
Plan. Any such excess may be recovered by the Distributor in future years so
long as the Investor A Plan is in effect. If the Investor A Plan were terminated
or not continued, a Fund would not be contractually obligated to pay the
Distributor for any expenses not previously reimbursed by the Fund.
Expenses incurred by the Distributor pursuant to the Investor A Plan in
any given year may exceed the sum of the fees received under the Investor A
Plan. Any such excess may be recovered by the Distributor in future years so
long as the Investor A Plan is in effect. If the Investor A Plan were terminated
or not continued, a Fund would not be contractually obligated to pay the
Distributor for any expenses not previously reimbursed by the Fund.
42
<PAGE>
INVESTOR B SHARES OF THE MONEY MARKET FUNDS AND INVESTOR C SHARES OF
THE NON-MONEY MARKET FUNDS.
The Directors of the Companies have approved an Amended and Restated
Distribution Plan in accordance with Rule 12b-1 under the 1940 Act for the
Investor B Shares of Money Market Funds and Investor C Shares of the Non-Money
Market Funds (the "Investor B/C Plan"). Pursuant to the Investor B/C Plan, each
Fund may pay the Distributor for certain expenses that are incurred in
connection with the distribution of shares. Payments under the Investor B/C Plan
will be calculated daily and paid monthly at a rate set from time to time by the
Board of Directors provided that the annual rate may not exceed 0.75% of the
average daily net asset value of Investor C Shares of a Non-Money Market Fund
and 0.10% of the average daily net asset value of Investor B Shares of a Money
Market Fund. Payments to the Distributor pursuant to the Investor B/C Plan will
be used (i) to compensate banks, other financial institutions or a securities
broker/dealer that have entered into a Sales Support Agreement with the
Distributor ("Selling Agents") for providing sales support assistance relating
to Investor B or Investor C Shares, for promotional activities intended to
result in the sale of Investor B or Investor C Shares such as to pay for the
preparation, printing and distribution of prospectuses to other than current
shareholders, and (ii) to compensate Selling Agents for providing sales support
services with respect to their Customers who are, from time to time, beneficial
and record holders of Investor B or Investor C Shares. Currently, substantially
all fees paid pursuant to the Investor B/C Plan are paid to compensate Selling
Agents for providing the services described in (i) and (ii) above, with any
remaining amounts being used by the Distributor to partially defray other
expenses incurred by the Distributor in distributing Investor B or Investor C
Shares. Fees received by the Distributor pursuant to the Investor B/C Plan will
not be used to pay any interest expenses, carrying charges or other financing
costs (except to the extent permitted by the SEC) and will not be used to pay
any general and administrative expenses of the Distributor.
Pursuant to the Investor B/C Plan, the Distributor may enter into Sales
Support Agreements with Selling Agents for providing sales support services to
their Customers who are the record or beneficial owners of Investor B Shares of
the Money Market Funds and Investor C Shares of the non-Money Market Funds. Such
Selling Agents will be compensated at the annual rate of up to 0.75% of the
average daily net asset value of the Investor C Shares of the Non-Money Market
Funds, and up to 0.10% of the average daily net asset value of the Investor B
Shares of the Money Market Funds held of record or beneficially by such
Customers. The sales support services provided by Setting Agents may include
providing distribution assistance and promotional activities intended to result
in the sales of shares such as paying for the preparation, printing and
distribution of prospectuses to other than current shareholders.
Fees paid pursuant to the Investor B/C Plan are accrued daily and paid
monthly, and are charged as expenses of the relevant shares of a Fund as
accrued. Expenses incurred by the Distributor pursuant to the Investor B/C Plan
in any given year may exceed the sum of the fees received under the Investor B/C
Plan and payments received pursuant to contingent deferred sales charges. Any
such excess may be recovered by the Distributor in future years so long as the
Investor B/C Plan is in effect. If the Investor B/C Plan were terminated or not
continued, a Fund would not be contractually obligated to pay the Distributor
for any expenses not previously reimbursed by the Fund or recovered through
contingent deferred sales charges.
In addition, the Directors have approved an Amended and Restated
Shareholder Servicing Plan ("Servicing Plan") with respect to the Investor B
Shares of the Money Market Funds and Investor C Shares of the Non-Money Market
Funds (the "Investor B/C Servicing Plan"). Pursuant to the Investor B/C
Servicing Plan, each Fund may pay banks, broker/dealers or other financial
institutions that have entered into a Shareholder Servicing Agreement with
Nations Funds ("Servicing Agents") for certain expenses that are incurred by the
Servicing Agents in connection with shareholder support services that are
provided by the Servicing Agents. Payments under the Investor B/C Servicing Plan
will be calculated daily and paid monthly at a rate set from time to time by the
Board of Directors, provided that the annual rate may not exceed 0.25% of the
average daily net asset value of the Money Market Funds' Investor B Shares and
the Non-Money Market Funds' Investor C Shares. The shareholder services provided
by the Servicing Agents may include (i) aggregating and processing purchase and
redemption requests for such Investor B or Investor C Shares from Customers and
transmitting promptly net purchase and redemption orders to our distributor or
transfer agent; (ii) providing Customers with a service that invests the assets
of their accounts in such Investor B or Investor C Shares pursuant to specific
or pre-authorized instructions; (iii) dividend and distribution payments from
the Company on behalf of Customers; (iv) providing information periodically to
Customers showing their positions in such Investor B or Investor C Shares; (v)
arranging for bank wires; (vi) responding to Customers' inquiries concerning
their investment in such Investor B or Investor C Shares; (vii) providing
sub-accounting
43
<PAGE>
with respect to such Investor B or Investor C Shares beneficially owned by
Customers or providing the information to us necessary for sub-accounting;
(viii) if required by law, forwarding shareholder communications from the
Company (such as proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to Customers; (ix)
forwarding to Customers proxy statements and proxies containing any proposals
regarding the Shareholder Servicing Agreement; (x) providing general shareholder
liaison services; and (xi) providing such other similar services as the Company
may reasonably request to the extent the Servicing Agent is permitted to do so
under applicable statutes, rules or regulations.
During the fiscal year ended March 31,1997, the Distributor received
the following amount from Rule 12b-1 fees in connection with Investor B Shares
of the NFI Money Market Funds: $4,403,155.44. Of this amount, the Distributor
retained $302.33.
During the fiscal year ended March 31,1997, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor C Shares of the NFI Non-Money Market Funds: $38,342.90 and $587.17,
respectively. Of these amounts, the Distributor retained $4,441.52 and $587.17,
respectively.
During the fiscal year ended March 31,1997, the Distributor received
the following amount from Rule 12b-1 fees in connection with Investor B Shares
of the NFT Money Market Funds: $488,455.68. Of this amount, the Distributor
retained $369.80.
During the fiscal year ended March 31,1997, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor C Shares of the NFT Non-Money Market Funds: $252,094.80 and $6,716.67,
respectively. Of these amounts, the Distributor retained $43,497.58 and
$6,716.67, respectively.
During the fiscal year ended March 31,1998, the Distributor received
the following amount from Rule 12b-1 fees in connection with Investor B Shares
of the NFI Money Market Funds: $3,466,866.65. Of this amount, the Distributor
retained $7,743.41.
During the fiscal year ended March 31,1998, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor C Shares of the NFI Non-Money Market Funds: $98,350.80 and $18,143.54
respectively. Of these amounts, the Distributor retained $33,051.16 and
$18,143.54, respectively.
During the fiscal year ended March 31,1998, the Distributor received
the following amount from Rule 12b-1 fees in connection with Investor B Shares
of the NFT Money Market Funds: $562,681.69. Of this amount, the Distributor
retained $730.94.
During the fiscal year ended March 31,1998, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor C Shares of the NFT Non-Money Market Funds: $369,785.35 and $18,619.52,
respectively. Of these amounts, the Distributor retained $148,710.43 and
$18,619.52, respectively.
During the fiscal year ended March 31,1999, the Distributor received
the following amount from Rule 12b-1 fees in connection with Investor B Shares
of the NFI Money Market Funds: $2,583,885. Of this amount, the Distributor
retained $0.
During the fiscal year ended March 31,1999, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor C Shares of the NFI Non-Money Market Funds: $105,900 and $35,425,
respectively. Of these amounts, the Distributor retained $30,890 and $35,425,
respectively.
During the fiscal year ended March 31,1999, the Distributor received
the following amount from Rule 12b-1 fees in connection with Investor B Shares
of the NFT Money Market Funds: $757,547. Of this amount, the Distributor
retained $0.
During the fiscal year ended March 31,1999, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor C Shares of the NFT Non-Money Market Funds: $363,700 and $32,180,
respectively. Of these amounts, the Distributor retained $196,144 and $32,180,
respectively.
44
<PAGE>
INVESTOR C SHARES OF THE MONEY MARKET FUNDS AND INVESTOR B SHARES OF
THE NON-MONEY MARKET FUNDS.
The Directors of the Company have approved a Distribution Plan (the
"Investor B Distribution Plan") with respect to Investor B Shares of the
Non-Money Market Funds. Pursuant to the Investor B Distribution Plan, a
Non-Money Market Fund may compensate or reimburse the Distributor for any
activities or expenses primarily intended to result in the sale of the Fund's
Investor B Shares, including for sales related services provided by banks,
broker/dealers or other financial institutions that have entered into a Sales
Support Agreement relating to the Investor B Shares with the Distributor
("Selling Agents"). Payments under a Fund's Investor B Distribution Plan will be
calculated daily and paid monthly at a rate or rates set from time to time by
the Board of Directors provided that the annual rate may not exceed 0.75% of the
average daily net asset value of each Non-Money Market Fund's Investor B Shares.
The fees payable under the Investor B Distribution Plan are used
primarily to compensate or reimburse the Distributor for distribution services
provided by it, and related expenses incurred, including payments by the
Distributor to compensate or reimburse Selling Agents, for sales support
services provided, and related expenses incurred, by such Selling Agents.
Payments under the Investor B Distribution Plan may be made with respect to
preparation, printing and distribution of prospectuses, sales literature and
advertising materials by the Distributor or, as applicable, Selling Agents,
attributable to distribution or sales support activities, respectively,
commissions, incentive compensation or other compensation to, and expenses of,
account executives or other employees of the Distributor or Selling Agents,
attributable to distribution or sales support activities, respectively; overhead
and other office expenses of the Distributor relating to the foregoing (which
may be calculated as a carrying charge in the Distributor's or Selling Agents'
unreimbursed expenses), incurred in connection with distribution or sales
support activities. The overhead and other office expenses referenced above may
include, without limitation, (i) the expenses of operating the Distributor's or
Selling Agents' offices in connection with the sale of Fund shares, including
lease costs, the salaries and employee benefit costs of administrative,
operations and support personnel, utility costs, communication costs and the
costs of stationery and supplies, (ii) the costs of client sales seminars and
travel related to distribution and sales support activities, and (iii) other
expenses relating to distribution and sales support activities.
In addition, the Directors have approved a Shareholder Servicing Plan
with respect to Investor C Shares of the Money Market Funds and Investor B
Shares of the Non-Money Market Funds ("Investor C/B Servicing Plan"). Pursuant
to the Investor C/B Servicing Plan, a Fund may compensate or reimburse banks,
broker/dealers or other financial institutions that have entered into a
Shareholder Servicing Agreement with the Company ("Servicing Agents") for
certain activities or expenses of the Servicing Agents in connection with
shareholder services that are provided by the Servicing Agents. Payments under
the Investor C/B Servicing Plan will be calculated daily and paid monthly at a
rate or rates set from time to time by the Board of Directors/Trustees, provided
that the annual rate may not exceed 0.25% of the average daily net asset value
of the Investor C Shares of the Money Market Funds and Investor B Shares of the
Non-Money Market Funds.
The fees payable under the Investor C/B Servicing Plan are used
primarily to compensate or reimburse Servicing Agents for shareholder services
provided, and related expenses incurred, by such Servicing Agents. The
shareholder services provided by Servicing Agents may include: (i) aggregating
and processing purchase and redemption requests for such Investor C or Investor
B Shares from Customers and transmitting promptly net purchase and redemption
orders to the Distributor or Transfer Agent; (ii) providing Customers with a
service that invests the assets of their accounts in such Investor C or Investor
B Shares pursuant to specific or pre-authorized instructions; (iii) processing
dividend and distribution payments from the Companies on behalf of Customers;
(iv) providing information periodically to Customers showing their positions in
such Investor C or Investor B Shares; (v) arranging for bank wires; (vi)
responding to Customers' inquiries concerning their investment in such Investor
C or Investor B Shares; (vii) providing sub-accounting with respect to such
Investor C or Investor B Shares beneficially owned by Customers or providing the
information to us necessary for sub-accounting; (viii) if required by law,
forwarding shareholder communications from the Companies (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 Investor C
Servicing Plan or related agreements; (x) providing general shareholder liaison
Services; and (xi) providing such other similar services as the Companies may
reasonably request to the extent such Servicing Agent is permitted to do so
under applicable statutes, rules or regulations.
45
<PAGE>
The fees payable under the Investor B Distribution Plan and Investor
C/B Servicing Plan (together, the "Investor C/B Plans") are treated by the Funds
as an expense in the year they are accrued. At any given time, a Selling Agent
and/or Servicing Agent may incur expenses in connection with services provided
pursuant to its agreements with the Distributor under the Investor C/B Plans
which exceed the total of (i) the payments made to the Selling Agents and
Servicing Agents by the Distributor or the Company and reimbursed by the Fund
pursuant to the Investor C/B Plans, and (ii) the proceeds of contingent deferred
sales charges paid to the Distributor and reallowed to the Selling Agent, upon
the redemption of their Customers' Investor C Shares. Any such excess expenses
may be recovered in future years, so long as the Investor C/B Plans are in
effect. Because there is no requirement under the Investor C/B Plans that the
Distributor be paid or the Selling Agents and Servicing Agents be compensated or
reimbursed for all their expenses or any requirement that the Investor C/B Plans
be continued from year to year, such excess amount, if any, does not constitute
a liability to a Fund or the Distributor. Although there is no legal obligation
for the Fund to pay expenses incurred by the Distributor, a Selling Agent or a
Servicing Agent in excess of payments previously made to the Distributor under
the Investor C/B Plans or in connection with contingent deferred sales charges,
if for any reason the Investor C/B Plans are terminated, the Directors will
consider at that time the manner in which to treat such expenses.
During the fiscal year ended March 31, 1997, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor B Shares of the Non-Money Market Funds of NFI: $0 and $0, respectively.
Of these amounts, the Distributor retained $0 and $0, respectively.
During the fiscal year ended March 31,1997, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor B Shares of the Non-Money Market Funds of NFT: $0 and $0, respectively.
Of these amounts, the Distributor retained $0 and $0, respectively.
During the fiscal year ended March 31, 1998, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor B Shares of the Non-Money Market Funds of NFI: $0 and $0, respectively.
Of these amounts, the Distributor retained $0 and $0, respectively.
During the fiscal year ended March 31,1998, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor B Shares of the Non-Money Market Funds of NFT: $0 and $0, respectively.
Of these amounts, the Distributor retained $0 and $0, respectively.
During the fiscal period ended March 31, 1999, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor B Shares of the Non-Money Market Funds of NFI: $1,329,398 and $455,023,
respectively. Of these amounts, the prior distributor retained $0 and $0,
respectively.
During the fiscal period ended March 31, 1999, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor B Shares of the Non-Money Market Funds of NFT: $5,531,784 and
$1,763,011, respectively. Of these amounts, the Distributor retained $0 and $0,
respectively.
INFORMATION APPLICABLE TO INVESTOR A, INVESTOR B AND INVESTOR C SHARES.
The Investor A Plan, the Investor B/C Plan, the Investor B/C Servicing
Plan, the Investor C Plan, the Daily Distribution Plan, the Daily Servicing Plan
and the Investor C/B Servicing Plan (each a "Plan" and collectively the "Plans")
may only be used for the purposes specified above and as stated in each such
Plan. Compensation payable to Selling Agents or Servicing Agents for shareholder
support services under the Investor A Plan, the Investor B/C Servicing Plan,
Daily Servicing Plan and the Investor C/B Servicing Plan is subject to, among
other things, the National Association of Securities Dealers, Inc. ("NASD")
Rules of Conduct governing receipt by NASD members of shareholder servicing plan
fees from registered investment companies (the "NASD Servicing Plan Rule"),
which became effective on July 7, 1993. Such compensation shall only be paid for
services determined to be permissible under the NASD Servicing Plan Rule.
Each Plan requires the officers of the Company or the Distributor to
provide the Board of Directors at least quarterly with a written report of the
amounts expended pursuant to the Plan and the purposes for which such
expenditures were made. The Board of Directors reviews these reports in
connection with its decisions with respect to the Plans.
46
<PAGE>
As required by Rule 12b-1 under the 1940 Act, each Plan was approved by
the Board of Directors, including a majority of the directors who are not
"interested persons" (as defined in the 1940 Act) of the Company and who have no
direct or indirect financial interest in the operation of the Plan or in any
agreements related to the Plan ("Qualified Directors") on February 6, 1997, with
respect to the Investor C Shares of the Money Market Funds, on March 22, 1991,
with respect to the Investor A Shares of the Equity Income and Government
Securities Funds, on June 24, 1992 with respect to the Investor A Shares of the
International Equity Fund, and on March 19, 1992, with respect to the Investor C
Shares of the Non-Money Market Funds. Additionally, each Plan with respect to
the Investor B Shares of the Money Market Funds and with respect to the Investor
B Shares of all the Non-Money Market Funds was approved by the Board of
Directors, including a majority of the Qualified Directors, on February 3, 1993.
The Plan with respect to the Investor C Shares of the Money Market Funds was
initially approved on August 4, 1993. The Plan with respect to the Daily Shares
of the Money Market Funds was initially approved on August 4, 1993. The Plans
continue in effect as long as such continuance is specifically approved at least
annually by the Board of Directors, including a majority of the Qualified
Directors. On October 12, 1996, the Board of Directors (including a majority of
the Qualified Directors) voted to continue each Plan for an additional one year
period.
In approving the Plans in accordance with the requirements of Rule
12b-1, the directors considered various factors and determined that there is a
reasonable likelihood that each Plan will benefit the respective Investor A,
Investor B, Investor C Shares or Investor B Shares and the holders of such
shares. The Investor A Plan was approved by the Shareholders of the Investor A
Shares of each of the Funds except the International Equity Fund on September 6,
1991, and the Investor B/C Plan applicable to Investor C Shares of the
International Equity and Equity Income Funds and the Investor A Plan applicable
to Investor A Shares of the International Equity Fund were approved on September
22, 1992 by the Investor C Shareholders of the respective International Equity
and Equity Income Funds with respect to the Investor B/C Plan and by the
Investor A Shareholders of the International Equity Fund with respect to the
Investor A Plan. The Plans applicable to the Investor B Shares of the Money
Market Funds and Investor B Shares of the Non-Money Market Funds were approved
by such Funds' initial shareholder of Investor B and Investor B Shares.
The Investor A Shares' Plans with respect to the Money Market Funds
originally became effective on December 4, 1989, and were amended February
12,1990, March 19, 1992 and February 3, 1993. The Investor A Shares' Plan with
respect to the Equity Income and Government Securities Funds became effective on
March 22, 1991, and was amended March 19, 1992. The Investor A Shares' Plan with
respect to the International Equity Fund became effective September 6, 1991 and
was amended March 19, 1992 and February 3, 1993.
The Investor A Plan, Investor B/C Plan and Investor C/B Plan may be
terminated with respect to their respective shares by vote of a majority of the
Qualified Directors, or by vote of a majority of the holders of the outstanding
voting securities of the Investor A, Investor B or Investor C, as appropriate.
Any change in such a Plan that would increase materially the distribution
expenses paid by the Investor A, Investor B or Investor C Shares requires
shareholder approval; otherwise, each Plan may be amended by the directors,
including a majority of the Qualified Directors, by vote cast in person at a
meeting called for the purpose of voting upon such amendment. The Money Market
Investor A Servicing Plan, the Investor B/C Servicing Plan and the Investor C/N
Servicing Plan may be terminated by a vote of a majority of the Qualified
Directors. As long as a Plan is in effect, the selection or nomination of the
Qualified Directors is committed to the discretion of the Qualified Directors.
Conflict of interest restrictions may apply to the receipt by Selling and/or
Servicing Agents of compensation from the Company in connection with the
investment of fiduciary assets in Investor Shares. Selling and/or Servicing
Agents, 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 Investor Shares.
<TABLE>
<CAPTION>
FEES PAID PURSUANT TO SHAREHOLDER SERVICING/DISTRIBUTION PLANS
INVESTOR A SHARES
NET FEES PAID
(SHAREHOLDER SERVICING
NET FEES PAID (12B-1 COMPONENT) COMPONENT)
FUND YEAR ENDED 3/31/99 YEAR ENDED 3/31/99 NET FEES PAID
- ---- ------------------ ------------------ -------------
<S> <C> <C> <C>
U.S. Government Bond Fund 6,517 -- 6,517
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
FEES PAID PURSUANT TO DISTRIBUTION PLANS
INVESTOR B SHARES - MONEY MARKET FUNDS
INVESTOR C SHARES - NON-MONEY MARKET FUNDS
NET FEES PAID
(SHAREHOLDER SERVICING
NET FEES PAID (12B-1 COMPONENT) COMPONENT)
FUND YEAR ENDED 3/31/99 YEAR ENDED 3/31/99 NET FEES PAID
- ---- ------------------ ------------------ -------------
<S> <C> <C> <C>
U.S. Government Bond Fund 21,803 9,084 30,887
</TABLE>
NOTE:All fees paid under the Investor A and Investor C/B Shares Distribution
Plans were accrued as payments to broker/dealers and financial institutions
offering such shares to their customers.
<TABLE>
<CAPTION>
INVESTOR B SHARES - NON-MONEY MARKET FUNDS
INVESTOR C SHARES - MONEY MARKET FUNDS
NET FEES PAID
(SHAREHOLDER SERVICING
NET FEES PAID (12B-1 COMPONENT) COMPONENT)
FUND YEAR ENDED 3/31/99 YEAR ENDED 3/31/99 NET FEES PAID
- ---- ------------------ ------------------ -------------
<S> <C> <C> <C>
U.S. Government Bond Fund 6,649 2,216 8,865
</TABLE>
EXPENSES
The Administrator furnishes, without additional cost to the Company,
the services of the Treasurer and Secretary of the Company and such other
personnel (other than the personnel of the Adviser) as are required for the
proper conduct of the Company's affairs. The Distributor bears the incremental
expenses of printing and distributing prospectuses used by the Distributor or
furnished by the Distributor to investors in connection with the public offering
of the Company's shares and the costs of any other promotional or sales
literature, except that to the extent permitted under the Plans relating to the
Investor A, Investor B or Investor C Shares of each Fund, sales-related expenses
incurred by the Distributor may be reimbursed by the Company.
The Company pays or causes to be paid all other expenses of the
Company, including, without limitation: the fees of the Adviser, the
Administrator and Co-Administrator; the charges and expenses of any registrar,
any custodian or depository appointed by the Company for the safekeeping of its
cash, fund securities and other property, and any stock transfer, dividend or
accounting agent or agents appointed by the Company; brokerage commissions
chargeable to the Company in connection with fund securities transactions to
which the Company is a party; all taxes, including securities issuance and
transfer taxes; corporate fees payable by each Company to federal, state or
other governmental agencies; all costs and expenses in connection with the
registration and maintenance of registration of the Company and its shares with
the SEC and various states and other jurisdictions (including filing fees, legal
fees and disbursements of counsel); the costs and expenses of typesetting
prospectuses and statements of additional information of the Company (including
supplements thereto) and periodic reports and of printing and distributing such
prospectuses and statements of additional information (including supplements
thereto) to the Company's shareholders; all expenses of shareholders' and
directors' meetings and of preparing, printing and mailing proxy statements and
reports to shareholders; fees and travel expenses of directors or director
members of any advisory board or committee; all expenses incident to the payment
of any dividend or distribution, whether in shares or cash; charges and expenses
of any outside service used for pricing of the Company's shares; fees and
expenses of legal counsel and of independent auditors in connection with any
matter relating to the Company; membership dues of industry associations;
interest payable on Company borrowings; postage and long-distance telephone
charges; insurance premiums on property or personnel (including officers and
directors) of the Company which inure to its benefit; extraordinary expenses
(including, but not limited to, legal claims and liabilities and litigation
costs and any indemnification related thereto); and all other charges and costs
of the Company's operation unless otherwise explicitly assumed by the Adviser),
the Administrator or Co-Administrator.
48
<PAGE>
Expenses of the Company which are not directly attributable to the
operations of any class of shares or Fund are allocated among all classes of
shares or Fund of the Company based upon the relative net assets of each class
or Fund. Expenses of the Company which are not directly attributable to a
specific class of shares but are directly attributable to a specific Fund are
prorated among all the classes of shares of such Fund based upon the relative
net assets of each such class of shares. Expenses of the Company which are
directly attributable to a class of shares are charged against the income
available for distribution as dividends to such class of shares.
The Advisory Agreement, the Sub-Advisory Agreement, and the
Administration Agreement require BAAI, BACM and the Administrator to reduce
their fees to the extent required to satisfy any expense limitations which may
be imposed by the securities laws or regulations thereunder of any state in
which the Fund's shares are registered or qualified for sale, as such
limitations may be raised or lowered from time to time, and the aggregate of all
such investment advisory, sub-advisory, and administration fees shall be reduced
by the amount of such excess. The amount of any such reduction to be borne by
BAAI, BACM or the Administrator shall be deducted from the monthly investment
advisory and administration fees otherwise payable to BAAI, BACM and the
Administrator during such fiscal year. If required pursuant to such state
securities regulations, BAAI, BACM and the Administrator will reimburse the
Company no later than the last day of the first month of the next succeeding
fiscal year, for any such annual operating expenses (after reduction of all
investment advisory and administration fees in excess of such limitation).
TRANSFER AGENTS AND CUSTODIANS
First Data is located at One Exchange Place, 53 State Street, Boston,
Massachusetts 02109, and acts as transfer agent for the Fund's Shares. Under the
transfer agency agreements, the transfer agent maintains shareholder account
records for the Company, handles certain communications between shareholders and
the Company, and distributes dividends and distributions payable by the Company
to shareholders, and produces statements with respect to account activity for
the Company and its shareholders for these services. The transfer agent receives
a monthly fee computed on the basis of the number of shareholder accounts that
it maintains for the Company during the month and is reimbursed for
out-of-pocket expenses.
Bank of America serves as sub-transfer agent for Fund's Primary A
Shares.
The Bank of New York ("BONY"), 90 Washington Street, New York, N.Y.
10286 serves as custodian for the Fund's assets. As custodian, BONY maintains
the Fund's securities cash and other property, delivers securities against
payment upon sale and pays for securities against delivery upon purchase, makes
payments on behalf of the Fund for payments of dividends, distributions and
redemptions, endorses and collects on behalf of the Fund all checks, and
receives all dividends and other distributions made on securities owned by the
Fund.
The SEC has amended Rule 17f-5 under the 1940 Act to permit boards to
delegate certain foreign custody matters to foreign custody managers and to
modify the criteria applied in the selection process. Accordingly, BONY serves
as Foreign Custody Manager, pursuant to a Foreign Custody Manager Agreement,
under which the Board of Directors retains the responsibility for selecting
foreign compulsory depositories, although BONY agrees to make certain findings
with respect to such depositories and to monitor such depositories.
DISTRIBUTOR
Stephens Inc. (the "Distributor") serves as the principal underwriter
and distributor of the shares of the Fund.
Pursuant to a distribution agreement (the "Distribution Agreement"),
the Distributor, as agent, sells shares of the Fund on a continuous basis and
transmits purchase and redemption orders that it receives to the Company or the
Transfer Agent. Additionally, the Distributor has agreed to use appropriate
efforts to solicit orders for the sale of shares and to undertake such
advertising and promotion as it believes appropriate in connection with such
solicitation. Pursuant to the Distribution Agreement, the Distributor, at its
own expense, finances those activities which are primarily intended to result in
the sale of shares of the Fund, including, but not limited to, advertising,
compensation of underwriters, dealers and sales personnel, the printing of
prospectuses to other than existing shareholders, and the printing and mailing
of sales literature. The Distributor, however, may be reimbursed for all or a
portion of such expenses to the extent permitted by a distribution plan adopted
by the Company pursuant to Rule 12b-1 under the 1940 Act.
49
<PAGE>
The Distribution Agreement will continue year to year as long as such
continuance is approved at least annually by (i) the Board of Directors or a
vote of the majority (as defined in the 1940 Act) of the outstanding voting
securities of the Fund and (ii) a majority of the directors who are not parties
to the Distribution Agreement or "interested persons" of any such party by a
vote cast in person at a meeting called for such purpose. The Distribution
Agreement is not assignable and is terminable with respect to a Fund, without
penalty, on 60 days' notice by the Board of Directors, the vote of a majority
(as defined in the 1940 Act) of the outstanding voting securities of the Fund,
or by the Distributor.
INDEPENDENT ACCOUNTANTS AND REPORTS
The Company issues unaudited financial information semi-annually and
audited financial statements annually. The Company furnish proxy statements and
other shareholder reports to shareholders of record.
The annual financial statements will be audited by the Company's
independent accountant. The Board of Directors has selected
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, as the Company's independent accountant to audit the Company's books and
review the Company's tax returns for the Fund's fiscal year ended March 31,
2000. PricewaterhouseCoopers LLP was the independent public accountants for the
Fund for the period ended March 31, 1999.
The Annual Report for the fiscal period ended March 31, 1999 and the
Semi-Annual Report for the period ended September 30, 1999 are hereby
incorporated herein by reference in this SAI. The Annual Report and/or
Semi-Annual Report will be sent free of charge with this SAI to any shareholder
who requests this SAI.
COUNSEL
Morrison & Foerster LLP serves as legal counsel to the Company. Its
address is 2000 Pennsylvania Avenue, N.W., Washington, D.C. 20006.
Morrison & Foerster LLP, counsel to the Company and special counsel to
Bank of America has advised the Company and Bank of America that Bank of America
and its affiliates may perform the services contemplated by the Investment
Advisory Agreement and this Prospectus without violation of the Glass-Steagall
Act. Such counsel has pointed out, however, that there are no controlling
judicial or administrative interpretations or decisions and that future judicial
or administrative interpretations of, or decisions relating to, present federal
or state statutes, including the Glass-Steagall Act, and regulations relating to
the permissible activities of banks and their subsidiaries or affiliates, as
well as future changes in such federal or state statutes, regulations and
judicial or administrative decisions or interpretations, could prevent such
entities from continuing to perform, in whole or in part, such services. If any
such entity were prohibited from performing any of such services, it is expected
that new agreements would be proposed or entered into with another entity or
entities qualified to perform such services.
FUND TRANSACTIONS AND BROKERAGE
GENERAL BROKERAGE POLICY
Subject to policies established by the Board of Directors of the
Company, the Adviser is responsible for decisions to buy and sell securities for
the Fund, for the selection of broker/dealers, for the execution of the Fund's
securities transactions, and for the allocation of brokerage fees in connection
with such transactions. The Adviser's primary consideration in effecting a
security transaction is to obtain the best net price and the most favorable
execution of the order. Purchases and sales of securities on a securities
exchange are effected through brokers who charge a negotiated commission for
their services. Orders may be directed to any broker to the extent and in the
manner permitted by applicable law.
In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without
stated commissions, although the price of a security usually includes a profit
to the dealer. In underwritten offerings, securities are purchased at a fixed
price that includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. On occasion, certain
money market instruments may be purchased directly from an issuer, in which case
no commissions or discounts are paid.
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In placing orders for portfolio securities of the Fund, the Adviser is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Adviser will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable in the circumstances. In seeking
such execution, the Adviser will use its best judgment in evaluating the terms
of a transaction, and will give consideration to various relevant factors,
including, without limitation, the size and type of the transaction, the nature
and character of the market for the security, the confidentiality, speed and
certainty of effective execution required for the transaction, the general
execution and operational capabilities of the broker-dealer, the reputation,
reliability, experience and financial condition of the firm, the value and
quality of the services rendered by the firm in this and other transactions and
the reasonableness of the spread or commission, if any. In addition, the Adviser
will consider research and investment services provided by brokers or dealers
who effect or are parties to portfolio transactions of the Fund, the Adviser or
its other clients. Such research and investment services are those which
brokerage houses customarily provide to institutional investors and include
statistical and economic data and research reports on particular companies and
industries. Such services are used by the Adviser in connection with all of its
investment activities, and some of such services obtained in connection with the
execution of transactions for the Fund may be used in managing other investment
accounts. Conversely, brokers furnishing such services may be selected for the
execution of transactions of such other accounts, whose aggregate assets are far
larger than those of the Fund. Services furnished by such brokers may be used by
the Adviser in providing investment advisory and investment management services
for the Companies.
Commission rates are established pursuant to negotiations with the
broker based on the quality and quantity of execution services provided by the
broker in the light of generally prevailing rates. The allocation of orders
among brokers and the commission rates paid are reviewed periodically by the
Directors of the Company. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Transactions on foreign
stock exchanges involve payment of brokerage commissions which are generally
fixed. Transactions in both foreign and domestic over-the-counter markets are
generally principal transactions with dealers, and the costs of such
transactions involve dealer spreads rather than brokerage commissions. With
respect to over-the-counter transactions, the Adviser, where possible, will deal
directly with dealers who make a market in the securities involved except in
those circumstances in which better prices and execution are available
elsewhere.
In certain instances there may be securities which are suitable for
more than one Fund as well as for one or more of the other clients of the
Adviser. Investment decisions for the Fund and for the Adviser's other clients
are made with the goal of achieving their respective investment objectives. It
may happen that a particular security is bought or sold for only one client even
though it may be held by, or bought or sold for, other clients. Likewise, a
particular security may be bought for one or more clients when one or more other
clients are selling that same security. Some simultaneous transactions are
inevitable when several clients receive investment advice from the same
investment adviser, particularly when the same security is suitable for the
investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security in a particular transaction as far
as the Fund is concerned. The Company believes that over time its ability to
participate in volume transactions will produce superior executions for the
Fund.
The portfolio turnover rate for the Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the reporting period by
the monthly average value of the portfolio securities owned during the reporting
period. The calculation excludes all securities, including options, whose
maturities or expiration dates at the time of acquisition are one year or less.
Portfolio turnover may vary greatly from year to year as well as within a
particular year, and may be affected by cash requirements for redemption of
shares and by requirements which enable the Fund to receive favorable tax
treatment.
The Fund may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Fund will engage in this practice, however, only when the Adviser, in its
sole discretion, believes such practice to be otherwise in the Fund's interests.
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The Company will not execute portfolio transactions through, or
purchase or sell portfolio securities from or to the distributor, the Adviser,
the administrator, the co-administrator or their affiliates, acting as principal
(including repurchase and reverse repurchase agreements), except to the extent
permitted by applicable law. In addition, the Company will not give preference
to correspondents of Bank of America or its affiliates, with respect to such
transactions or securities. (However, the Adviser is authorized to allocate
purchase and sale orders for portfolio securities to certain financial
institutions, including, in the case of agency transactions, financial
institutions which are affiliated with Bank of America or its affiliates, and to
take into account the sale of Fund shares if the Adviser believes that the
quality of the transaction and the commission are comparable to what they would
be with other qualified brokerage firms.) In addition, the Fund will not
purchase securities during the existence of any underwriting or selling group
relating thereto of which the distributor, the Adviser, the administrator, or
the co-administrator, or any of their affiliates, is a member, except to the
extent permitted by the SEC. Under certain circumstances, the Fund may be at a
disadvantage because of these limitations in comparison with other investment
companies which have similar investment objectives but are not subject to such
limitations.
Under the 1940 Act, persons affiliated with the Company are prohibited
from dealing with the Company as a principal in the purchase and sale of
securities unless an exemptive order allowing such transactions is obtained from
the SEC. The Fund may purchase securities from underwriting syndicates of which
Bank of America or any of its affiliates is a member under certain conditions,
in accordance with the provisions of a rule adopted under the 1940 Act and any
restrictions imposed by the Board of Governors of the Federal Reserve System.
Investment decisions for the Fund are made independently from those for
the Company's other investment portfolios, other investment companies, and
accounts advised or managed by the Adviser. Such other investment portfolios,
investment companies, and accounts may also invest in the same securities as the
Fund. When a purchase or sale of the same security is made at substantially the
same time on behalf of the Fund and another investment portfolio, investment
company, or account, the transaction will be averaged as to price and available
investments allocated as to amount, in a manner which the Adviser believes to be
equitable to the Fund and such other investment portfolio, investment company or
account. In some instances, this investment procedure may adversely affect the
price paid or received by the Fund or the size of the position obtained or sold
by the Fund. To the extent permitted by law, the Adviser may aggregate the
securities to be sold or purchased for the Fund with those to be sold or
purchased for other investment portfolios, investment companies, or accounts in
executing transactions.
BROKERAGE COMMISSIONS
Brokerage Commissions Paid to Affiliates
During the fiscal periods ended March 31, 1999, 1998, and 1997, NFI and
the Fund, did not pay brokerage commissions to Banc of America Investments, Inc.
(the Fund's investment adviser) (or its predecessors), Banc of America Capital
Markets, Inc. (a broker/dealer subsidiary of Bank of America) (or its
predecessors), or Stephens.
No other Funds, NFI paid brokerage fees during the fiscal years ended
March 31, 1999, 1998 and 1997.
SECTION 28(E) STANDARDS
Under Section 28(e) of the Securities Exchange Act of 1934, the Adviser
shall not be "deemed to have acted unlawfully or to have breached its fiduciary
duty" solely because under certain circumstances it has caused the account to
pay a higher commission than the lowest available. To obtain the benefit of
Section 28(e), the Adviser must make a good faith determination that the
commissions paid are "reasonable in relation to the value of the brokerage and
research services provided ...viewed in terms of either that particular
transaction or its overall responsibilities with respect to the accounts as to
which it exercises investment discretion and that the services provided by a
broker provide an adviser with lawful and appropriate assistance in the
performance of its investment decision making responsibilities." Accordingly,
the price to the Fund in any transaction may be less favorable than that
available from another broker/dealer if the difference is reasonably justified
by other aspects of the portfolio execution services offered.
Broker/dealers utilized by the Adviser may furnish statistical,
research and other information or services which are deemed by the Adviser to be
beneficial to the Fund's investment programs. Research services received from
brokers supplement the Adviser's own research and may include the following
types of information: statistical and background information on industry groups
and individual companies; forecasts and interpretations with respect to U.S and
foreign economies, securities, markets, specific industry groups and individual
companies; information on political developments; fund management strategies;
performance information on securities and information concerning prices of
securities; and information supplied by specialized services to the Adviser and
to the Company's Directors with respect to the performance, investment
activities and fees and expenses of other mutual funds. Such information may be
communicated electronically, orally or in written form. Research services may
also include the providing of equipment used to communicate research
information, the arranging of meetings with management of companies and the
providing of access to consultants who supply research information.
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The outside research assistance is useful to the Adviser since the
brokers utilized by the Adviser as a group tend to follow a broader universe of
securities and other matters than the Adviser's staff can follow. In addition,
this research provides the Adviser with a diverse perspective on financial
markets. Research services which are provided to the Adviser by brokers are
available for the benefit of all accounts managed or advised by the Adviser. In
some cases, the research services are available only from the broker providing
such services. In other cases, the research services may be obtainable from
alternative sources in return for cash payments. The Adviser is of the opinion
that because the broker research supplements rather than replaces its research,
the receipt of such research does not tend to decrease its expenses, but tends
to improve the quality of its investment advice. However, to the extent that the
Adviser would have purchased any such research services had such services not
been provided by brokers, the expenses of such services to the Adviser could be
considered to have been reduced accordingly. Certain research services furnished
by broker/dealers may be useful to the Adviser with clients other than the Fund.
Similarly, any research services received by the Adviser through the placement
of fund transactions of other clients may be of value to the Adviser in
fulfilling its obligations to the Fund. The Adviser is of the opinion that this
material is beneficial in supplementing its research and analysis; and,
therefore, it may benefit the Company by improving the quality of the Adviser's
investment advice. The advisory fees paid by the Company are not reduced because
the Adviser receives such services.
Some broker/dealers may indicate that the provision of research
services is dependent upon the generation of certain specified levels of
commissions and underwriting concessions by the Adviser's clients, including the
Fund.
DESCRIPTION OF SHARES
DESCRIPTION OF SHARES OF THE COMPANY
The Company's Board of Directors has authorized the issuance of the
classes of shares of the Fund indicated above and may, in the future, authorize
the creation of additional investment portfolios or classes of shares.
The Board may classify or reclassify any unissued shares of the Company
into shares of any class, classes or Fund in addition to those already
authorized by setting or changing in any one or more respects, from time to
time, prior to the issuance of such shares, the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption, of such shares and,
pursuant to such classification or reclassification to increase or decrease the
number of authorized shares of the Fund or class. Any such classification or
reclassification will comply with the provisions of the 1940 Act. Fractional
shares shall have the same rights as full shares to the extent of their
proportionate interest.
All shares of the Fund have equal voting rights and will be voted in
the aggregate, and not by series, except where voting by a series is required by
law or where the matter involved only affects one series. For example, a change
in the Fund's fundamental investment policy would be voted upon only by
shareholders of the Fund involved. Additionally, approval of an advisory
contract is a matter to be determined separately by Fund. Approval by the
shareholders of one Fund is effective as to that Fund whether or not sufficient
votes are received from the shareholders of the other Funds to approve the
proposal as to those Portfolios. As used in the Prospectus and in this SAI, the
term "majority," when referring to approvals to be obtained from shareholders of
the Fund, means the vote of the lesser of (i) 67% of the shares of the Fund
represented at a meeting if the shareholders of more than 50% of the outstanding
interests of the Fund are present in person or by proxy, or (ii) more than 50%
of the outstanding shares of the Fund. The term "majority," when referring to
the approvals to be obtained from shareholders of a Company as a whole, means
the vote of the lesser of (i) 67% of the Company's shares represented at a
meeting if the shareholders of more than 50% of the Company's outstanding shares
are present in person or by proxy, or (ii) more than 50% of the Company's
outstanding shares. Shareholders are entitled to one votE for each full share
held and fractional votes for fractional shares held.
The Company may dispense with an annual meeting of shareholders in any
year in which it is not required to elect Directors under the 1940 Act. However,
the Company has undertaken to hold a special meeting of its shareholders for the
purpose of voting on the question of removal of a Board member, if requested in
writing by the shareholders of at least 10% of the Company's outstanding voting
shares, and to assist in communicating with other shareholders as required by
Section 16(c) of the 1940 Act.
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Each share of the Fund represents an equal proportional interest in the
Fund with each other share and is entitled to such dividends and distributions
out of the income earned on the assets belonging to the Fund, as are declared in
the discretion of the Board members. In the event of the liquidation or
dissolution of the Company, shareholders of the Company's Fund are entitled to
receive the assets attributable to the Fund that are available for distribution,
and a distribution of any general assets not attributable to the Fund that are
available for distribution in such manner and on such basis as the Board members
in their sole discretion may determine.
Shareholders are not entitled to any preemptive rights. All shares,
when issued, will be fully paid and non-assessable by the Company.
Net investment income for the Fund for dividend purposes consists of
(i) interest accrued and original issue discount earned on the Fund's assets,
(ii) plus the amortization of market discount and minus the amortization of
market premium on such assets, (iii) less accrued expenses directly attributable
to the Fund and the general expenses of the Company prorated to the Fund on the
basis of its relative net assets, plus dividend or distribution income on the
Fund's assets.
Prior to purchasing shares in the Fund, the impact of dividends or
distributions which are expected to be or have been declared, but not paid,
should be carefully considered. Any dividend or distribution declared shortly
after a purchase of such shares prior to the record date will have the effect of
reducing the per share net asset value by the per share amount of the dividend
or distribution. All or a portion of such dividend or distribution, although in
effect a return of capital, may be subject to tax.
Shareholders receiving a distribution in the form of additional shares
will be treated as receiving an amount equal to the fair market value of the
shares received, determined as of the reinvestment date.
The Fund uses the so-called "equalization accounting method" to
allocate a portion of earnings and profits to redemption proceeds. This method
permits the fund to achieve more balanced distributions for both continuing and
departing shareholders. Continuing shareholders should realize tax savings or
deferrals through this method, and departing shareholders will not have their
tax obligations change. Although using this method will not affect the Fund's
total returns, it may reduce the amount that otherwise would be distributable to
continuing shareholders by reducing the effect of redemptions on dividend and
distribution amounts.
NET ASSET VALUE DETERMINATION
With respect to the Fund, a security listed or traded on an exchange is
valued at its last sales price on the exchange where the security is principally
traded or, lacking any sales on a particular day, the security is valued at the
mean between the closing bid and asked prices on that day. Each security traded
in the over-the-counter market (but not including securities reported on the
NASDAQ National Market System) is valued at the mean between the last bid and
asked prices based upon quotes furnished by market makers for such securities.
Each security reported on the NASDAQ National Market System is valued at the
last sales price on the valuation date. Securities are valued at the mean
between the last bid and asked prices based upon quotes furnished by market
makers for such securities.
With respect to the Fund, securities for which market quotations are
not readily available are valued at fair value as determined in good faith by or
under the supervision of the Company's officers in a manner specifically
authorized by the Board of Directors of the Company. Short-Term obligations
having 60 days or less to maturity are valued at amortized cost, which
approximates market value.
Generally, trading in foreign securities, as well as U.S. Government
securities, money market instruments and repurchase agreements, is substantially
completed each day at various times prior to the close of the New York Stock
Exchange. The values of such securities used in computing the net asset value of
the shares of the Fund are determined as of such times. Foreign currency
exchange rates are also generally determined prior to the close of the New York
Stock Exchange. Occasionally, events affecting the value of such securities and
such exchange rates may occur between the times at which they are determined and
the close of the New York Stock Exchange, which will not be reflected in the
computation of net asset value. If during such periods events occur which
materially affect the value of such securities, the securities will be valued at
their fair market value as determined in good faith by the directors/trustees.
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Under the 1940 Act, the Fund may suspend the right of redemption or
postpone the date of payment for Shares during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC. (The Fund may also suspend or postpone the recordation
of the transfer of its shares upon the occurrence of any of the foregoing
conditions.)
ADDITIONAL INFORMATION CONCERNING TAXES
The following information supplements and should be read in conjunction
with the Prospectuses. The Prospectuses of the Fund describe generally the tax
treatment of distributions by the Fund. This section of the SAI includes
additional information concerning Federal income taxes.
GENERAL
The Company's intend to qualify the Fund as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), as long as such qualification is in the best interest of the Fund's
shareholders. The Fund will be treated as a separate entity for tax purposes
and, thus, the provisions of the Code applicable to regulated investment
companies generally will be applied to the Fund, rather than to a Company as a
whole. In addition, net capital gain, net investment income, and operating
expenses will be determined separately for the Fund. As a regulated investment
company, the Fund will not be taxed on its net investment income and capital
gains distributed to shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) the Fund derive at least 90% of its
annual gross income from dividends, interest, certain payments with respect to
securities loans, gains from the sale or other disposition of stock or
securities or foreign currencies (to the extent such currency gains are directly
related to the regulated investment company's principal business of investing in
stock or securities) and other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; and (b) the Fund diversify
its holdings so that, at the end of each quarter of the taxable year, (i) at
least 50% of the market value of the Fund's assets is represented by cash,
government securities and other securities limited in respect of any one issuer
to an amount not greater than 5% of the Fund's assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government obligations and the securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
determined to be engaged in the same or similar trades or businesses.
The Fund also must distribute or be deemed to distribute to its
shareholders at least 90% of its net investment income which, for this purpose,
includes net short-term capital gains and certain other items earned in each
taxable year. In general, these distributions must actually or be deemed to be
made in the taxable year. However, in certain circumstances, such distributions
may be made in the 12 months following the taxable year. Furthermore,
distributions declared in October, November or December of one taxable year and
paid by January 31 of the following taxable year will be treated as paid by
December 31 the first taxable year. The Fund intends to pay out substantially
all of its net investment income and net capital gain (if any) for each year.
EXCISE TAX
A 4% nondeductible excise tax will be imposed on the Fund (other than
to the extent of its tax-exempt interest income) to the extent it does not meet
certain minimum distribution requirements by the end of each calendar year. The
Fund intends to actually or be deemed to distribute substantially all of its
income and gains by the end of each calendar year and, thus, expects not to be
subject to the excise tax.
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PRIVATE LETTER RULING
In order for the Fund to maintain regulated investment company status
under the Code, its dividends, including--for this purpose--capital gain
distributions, must not constitute "preferential dividends," within the meaning
of Section 562(c) of the Code. The Company has received a private letter ruling
from the Internal Revenue Service ("IRS") generally to the effect that the
following will not give rise to preferential dividends: differing fees imposed
on the different classes of shares with respect to servicing, distribution and
administrative support services, and transfer agency arrangements; differing
sales charges on purchases and redemptions of such shares; and conversion
features resulting in the Company paying different dividends or distributions on
the different classes of shares.
TAXATION OF FUND INVESTMENTS
Except as provided herein, gains and losses on the sale of portfolio
securities by the Fund will generally be capital gains and losses. Such gains
and losses will ordinarily be long-term capital gains and losses if the
securities have been held by the Fund for more than one year at the time of
disposition of the securities.
Gains recognized on the disposition of a debt obligation (including a
tax-exempt obligation) purchased by the Fund at a market discount (generally at
a price less than its principal amount) will be treated as ordinary income to
the extent of the portion of market discount which accrued, but was not
previously recognized pursuant to an available election, during the term the
Fund held the debt obligation.
If an option granted by the Fund lapses or is terminated through a
closing transaction, such as a repurchase by the Fund of the option from its
holder, the Fund will realize a short-term capital gain or loss, depending on
whether the premium income is greater or less than the amount paid by the Fund
in the closing transaction. Some realized capital losses may be deferred if they
result from a position which is part of a "straddle," discussed below. If
securities are sold by the Fund pursuant to the exercise of a call option
written by it, the Fund will add the premium received to the sale price of the
securities delivered in determining the amount of gain or loss on the sale. If
securities are purchased by the Fund pursuant to the exercise of a put option
written by it, such Fund will subtract the premium received from its cost basis
in the securities purchased.
The amount of any gain or loss realized by the Fund on closing out a
regulated futures contract will generally result in a realized capital gain or
loss for Federal income tax purposes. Regulated futures contracts held at the
end of each fiscal year will be required to be "marked to market" for Federal
income tax purposes pursuant to Section 1256 of the Code. In this regard, they
will be deemed to have been sold at market value. Sixty percent (60%) of any net
gain or loss recognized on these deemed sales and sixty percent (60%) of any net
realized gain or loss from any actual sales, will generally be treated as
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss. Transactions that qualify as designated hedges are
excepted from the "mark-to-market" rule and the "60%/40%" rule.
Under Section 988 of the Code, the Fund will generally recognize
ordinary income or loss to the extent gain or loss realized on the disposition
of portfolio securities is attributable to changes in foreign currency exchange
rates. In addition, gain or loss realized on the disposition of a foreign
currency forward contract, futures contract, option or similar financial
instrument, or of foreign currency itself, will generally be treated as ordinary
income or loss. The Fund will attempt to monitor Section 988 transactions, where
applicable, to avoid adverse tax impact.
Offsetting positions held by the Fund involving certain financial
forward, futures or options contracts may be considered, for tax purposes, to
constitute "straddles." "Straddles" are defined to include "offsetting
positions" in actively traded personal property. The tax treatment of
"straddles" is governed by Section 1092 of the Code which, in certain
circumstances, overrides or modifies the provisions of Section 1256. If the Fund
were treated as entering into "straddles" by engaging in certain financial
forward, futures or option contracts, such straddles could be characterized as
"mixed straddles" if the futures, forwards, or options comprising a part of such
straddles were governed by Section 1256 of the Code. The Fund may make one or
more elections with respect to "mixed straddles." Depending upon which election
is made, if any, the results with respect to the Fund may differ. Generally, to
the extent the straddle rules apply to positions established by the Fund, losses
realized by the Fund may be deferred to the extent of unrealized gain in any
offsetting positions. Moreover, as a result of the straddle and the conversion
transaction rules, short-term capital loss on straddle positions may be
recharacterized as long-term capital loss, and long-term capital gain may be
characterized as short-term capital gain or ordinary income.
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If the Fund enters into a "constructive sale" of any appreciated
position in stock, a partnership interest, or certain debt instruments, the Fund
must recognize gain (but not loss) with respect to that position. For this
purpose, a constructive sale occurs when the Fund enters into one of the
following transactions with respect to the same or substantially identical
property: (i) a short sale; (ii) an offsetting notional principal contract; or
(iii) a futures or forward contract.
If the Fund purchases shares in a "passive foreign investment company"
("PFIC"), the Fund may be subject to Federal income tax and an interest charge
imposed by the IRS upon certain distributions from the PFIC or the Fund's
disposition of its PFIC shares. If the Fund invests in a PFIC, the Fund intends
to make an available election to mark-to-market its interest in PFIC shares.
Under the election, the Fund will be treated as recognizing at the end of each
taxable year the difference, if any, between the fair market value of its
interest in the PFIC shares and its basis in such shares. In some circumstances,
the recognition of loss may be suspended. The Fund will adjust its basis in the
PFIC shares by the amount of income (or loss) recognized. Although such income
(or loss) will be taxable to the Fund as ordinary income (or loss)
notwithstanding any distributions by the PFIC, the Fund will not be subject to
Federal income tax or the interest charge with respect to its interest in the
PFIC under the election.
CAPITAL GAIN DISTRIBUTIONS
Distributions which are designated by the Fund as capital gain
distributions will be taxed to shareholders as long-term term capital gain (to
the extent such distributions equal or exceed the Fund's actual net capital
gains for the taxable year), regardless of how long a shareholder has held Fund
shares. Such distributions will be designated as capital gain distributions in a
written notice mailed by the Fund to its shareholders not later than 60 days
after the close of the Fund's taxable year.
DISPOSITION OF FUND SHARES
A disposition of Fund shares pursuant to a redemption (including a
redemption in-kind) or an exchange will ordinarily result in a taxable capital
gain or loss, depending on the amount received for the shares (or are deemed to
be received in the case of an exchange) and the cost of the shares.
If a shareholder exchanges or otherwise disposes of Fund shares within
90 days of having acquired such shares and if, as a result of having acquired
those shares, the shareholder subsequently pays a reduced sales charge on a new
purchase of shares of the Fund or a different regulated investment company, the
sales charge previously incurred in acquiring the Fund's shares shall not be
taken into account (to the extent such previous sales charges do not exceed the
reduction in sales charges on the new purchase) for the purpose of determining
the amount of gain or loss on the disposition, but will be treated as having
been incurred in the acquisition of such other shares. Also, any loss realized
on a redemption or exchange of shares of the Fund will be disallowed to the
extent that substantially identical shares are acquired within the 61-day period
beginning 30 days before and ending 30 days after the shares are disposed of.
If a shareholder receives a capital gain distribution with respect to
any Fund share and such Fund share is held for six months or less, then (unless
otherwise disallowed) any loss on the sale or exchange of that Fund share will
be treated as a long-term capital loss to the extent of the capital gain
distribution. In addition, if a shareholder holds Fund shares for six months or
less, any loss on the sale or exchange of those shares will be disallowed to the
extent of the amount of exempt-interest dividends (defined below) received with
respect to the shares. The Treasury Department is authorized to issue
regulations reducing the six months holding requirement to a period of not less
than the greater of 31 days or the period between regular distributions where a
Fund regularly distributes at least 90% of its net tax-exempt interest, if any.
No such regulations have been issued as of the date of this SAI. The loss
disallowance rules described in this paragraph do not apply to losses realized
under a periodic redemption plan.
FEDERAL INCOME TAX RATES
As of the printing of this SAI, the maximum individual tax rate
applicable to ordinary income is 39.6% (marginal tax rates may be higher for
some individuals to reduce or eliminate the benefit of exemptions and
deductions); the maximum individual marginal tax rate applicable to net capital
gain is 20%; and the maximum corporate tax rate applicable to ordinary income
and net capital gain is 35% (marginal tax rates may be higher for some
corporations to reduce or eliminate the benefit of lower marginal income tax
rates). Naturally, the amount of tax payable by an individual or corporation
will be affected by a combination of tax laws covering, for example, deductions,
credits, deferrals, exemptions, sources of income and other matters.
57
<PAGE>
CORPORATE SHAREHOLDERS
Corporate shareholders of the Fund may be eligible for the
dividends-received deduction on distributions attributable to dividends received
from domestic corporations, which, if received directly by the corporate
shareholder, would qualify for such deduction. A distribution by the Fund
attributable to dividends of a domestic corporation will only qualify for the
dividends-received deduction if (i) the corporate shareholder generally holds
the Fund shares upon which the distribution is made for at least 46 days during
the 90 day period beginning 45 days prior to the date upon which the shareholder
becomes entitled to the distribution; and (ii) the Fund generally holds the
shares of the domestic corporation producing the dividend income for at least 46
days during the 90 day period beginning 45 days prior to the date upon which the
Fund becomes entitled to such dividend income.
FOREIGN SHAREHOLDERS
Under the Code, distributions attributable to income on taxable
investments, net short-term capital gain and certain other items realized by the
Fund and paid to a nonresident alien individual, foreign trust (I.E., trust
which a U.S. court is able to exercise primary supervision over administration
of that trust and one or more U.S. persons have authority to control substantial
decisions of that trust), foreign estate (I.E., the income of which is not
subject to U.S. tax regardless of source), foreign corporation, or foreign
partnership (each, a "foreign shareholder") will be subject to U.S. withholding
tax (at a rate of 30% or a lower treaty rate, if applicable). Withholding will
not apply if a distribution paid by the Fund to a foreign shareholder is
"effectively connected" with a U.S. trade or business (or, if an income tax
treaty applies, is attributable to a U.S. permanent establishment of the foreign
shareholder), in which case the reporting and withholding requirements
applicable to U.S. persons will apply. Capital gain distributions generally are
not subject to tax withholding.
BACKUP WITHHOLDING
The Company may be required to withhold, subject to certain exemptions,
at a rate of 31% ("backup withholding") on all distributions and redemption
proceeds (including proceeds from exchanges and redemptions in-kind) paid or
credited to an individual Fund shareholder, unless the shareholder certifies
that the "taxpayer identification number" ("TIN") provided is correct and that
the shareholder is not subject to backup withholding, or the IRS notifies the
Company that the shareholder's TIN is incorrect or that the shareholder is
subject to backup withholding. Such tax withheld does not constitute any
additional tax imposed on the shareholder, and may be claimed as a tax payment
on the shareholder's Federal income tax return. An investor must provide a valid
TIN upon opening or reopening an account. Failure to furnish a valid TIN to the
Company also could subject the investor to penalties imposed by the IRS.
TAX-DEFERRED PLANS
The Fund is available for a variety of tax-deferred retirement and other plans,
including Individual Retirement Accounts ("IRA"), Simplified Employee Pension
Plans ("SEP-IRA"), Savings Incentive Match Plans for Employees ("SIMPLE plans"),
Roth IRAs, and Education IRAs, which permit investors to defer some of their
income from taxes.
OTHER MATTERS
Investors should be aware that the investments to be made by the Fund
may involve sophisticated tax rules that may result in income or gain
recognition by the Fund without corresponding current cash receipts. Although
the Fund will seek to avoid significant noncash income, such noncash income
could be recognized by the Fund, in which case the Fund may distribute cash
derived from other sources in order to meet the minimum distribution
requirements described above.
58
<PAGE>
The foregoing discussion and the discussions in the Prospectus
applicable to each shareholder address only some of the Federal tax
considerations generally affecting investments in the Fund. Each investor is
urged to consult his or her tax advisor regarding specific questions as to
Federal, state, local or foreign taxes.
ADDITIONAL INFORMATION ON PERFORMANCE
Yield information and other performance information for the Company's
Fund may be obtained by calling (800) 321-7854. From time to time, the yield and
total return of the Fund's Shares may be quoted in advertisements, shareholder
reports, and other communications to shareholders. Quotations of yield and total
return reflect only the performance of a hypothetical investment in the Fund or
class of shares during the particular time period shown. Yield and total return
vary based on changes in the market conditions and the level of the Fund's
expenses, and no reported performance figure should be considered an indication
of performance which may be expected in the future.
Standardized performance for the Fund, I.E., that required in both form
and content by Form N-1A, is shown below and may be advertised by the Fund. The
main purpose of standardized performance is to allow an investor to review the
performance of the Fund's class of shares and compare such performance with that
of investment alternatives, including other mutual funds.
Non-standardized performance also may be advertised by the Fund. One
purpose of providing non-standardized performance to an investor is to provide
that investor with a different snapshot of the Fund's performance that may not
be captured by standardized performance. The non-standardized performance of the
Fund's class of shares, however, may not be directly comparable to the
performance of investment alternatives because of differences in certain
variables (such as the length of time over which performance is shown and the
exclusion of certain charges or expenses) and methods used to value portfolio
securities, compute expenses and calculate performance. Non-standardized
performance may include, but is not limited to, performance for non-standardized
periods, including year-to-date and other periods less than a year, performance
not reflecting the deduction of certain charges, fees and/or expenses, and
performance reflecting the deduction of applicable state or federal taxes.
After-tax returns are generally calculated using the same methodology as that
used in calculating total return, except that such after-tax returns reflect the
deduction of taxes according to applicable federal income and capital gain tax
rates attributable to dividends, distributions and an investor's redemptions. Of
course, after-tax returns for individual investors will vary as the tax rates
applicable to such investors vary. In addition, the Fund may also advertise its
tax efficiency ratios and compare those ratios with other mutual funds. A tax
efficiency ratio is intended to let an investor know how tax efficient a fund
has been over a period of time, and is typically related to its portfolio
turnover rate. That is, an investor could expect that the higher the Fund's
portfolio turnover rate, the greater the percentage of its gains that would have
been realized and consequently, the less tax efficient it was over a given
period of time.
In general, comparisons to other mutual funds or investment
alternatives may be useful to investors who wish to compare past performance of
the Fund or a class with that of competitors. Of course, past performance cannot
be a guarantee of future results.
The Fund may quote information obtained from the Investment Company
Institute, national financial publications, trade journals and other industry
sources in its advertising and sales literature. In addition, the Fund also may
compare the performance and yield of a class or series of shares to those of
other mutual funds with similar investment objectives and to other relevant
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For example,
the performance and yield of a class of shares in the Fund may be compared to
data prepared by Lipper Analytical Services, Inc. Performance and yield data as
reported in national financial publications such as MONEY MAGAZINE, FORBES,
BARRON'S, THE WALL STREET JOURNAL, and THE NEW YORK TIMES, OR in publications of
a local or regional nature, also may be used in comparing the performance of a
class of shares in the Fund.
59
<PAGE>
The Fund also may use the following information in advertisements and
other types of literature, only to the extent the information is appropriate for
the Fund: (i) the Consumer Price Index may be used to assess the real rate of
return from an investment in the Fund; (ii) other government statistics,
including, but not limited to, The Survey of Current Business, may be used to
illustrate investment attributes of the Fund or the general economic, business,
investment, or financial environment in which the Fund operates; (iii) the
effect of tax-deferred compounding on the investment returns of the Fund, or on
returns in general, may be illustrated by graphs, charts, etc., where such
graphs or charts would compare, at various points in time, the return from an
investment in the Fund (or returns in general) on a tax-deferred basis (assuming
reinvestment of capital gains and dividends and assuming one or more tax rates)
with the return on a taxable basis; and (iv) the sectors or industries in which
the Fund invests may be compared to relevant indices of stocks or surveys (E.G.,
S&P Industry Surveys) to evaluate the Fund's historical performance or current
or potential value with respect to the particular industry or sector. In
addition, the performance of the Fund's class of shares may be compared to the
Standard & Poor's 500 Stock Index, an unmanaged index of a group of common
stocks, the Consumer Price Index, the Dow Jones Industrial Average, a recognized
unmanaged index of common stocks of 30 industrial companies listed on the New
York Stock Exchange, the Europe, Far East and Australia Index, a recognized
unmanaged index of international stocks, or any similar recognized index. The
performance of the Fund's class of shares also may be compared to a composite
index prepared by the Adviser, an affiliate of the Adviser, or an unaffiliated
party to the Adviser.
In addition, the Fund also may use, in advertisements and other types
of literature, information and statements: (1) showing that bank savings
accounts offer a guaranteed return of principal and a fixed rate of interest,
but no opportunity for capital growth; and (2) describing Bank of America, and
its affiliates and predecessors, as one of the first investment managers to
advise investment accounts using asset allocation and index strategies. The Fund
also may include in advertising and other types of literature information and
other data from reports and studies prepared by the Tax Foundation, including
information regarding federal and state tax levels and the related "Tax Freedom
Day."
The Fund also may discuss in advertising and other types of literature
that the Fund has been assigned a rating by an NRSRO, such as Standard & Poor's
Corporation. Such rating would assess the creditworthiness of the investments
held by the Fund. The assigned rating would not be a recommendation to purchase,
sell or hold the Fund's shares since the rating would not comment on the market
price of the Fund's shares or the suitability of the Fund for a particular
investor. In addition, the assigned rating would be subject to change,
suspension or withdrawal as a result of changes in, or unavailability of,
information relating to the Fund or its investments. The Fund may compare a
Fund's performance with other investments which are assigned ratings by NRSROs.
Any such comparisons may be useful to investors who wish to compare the Fund's
past performance with other rated investments.
The Fund also may disclose in sales literature the distribution rate on
the shares of the Fund. Distribution rate, which may be annualized, is the
amount determined by dividing the dollar amount per share of the most recent
dividend by the most recent NAV or maximum offering price per share as of a date
specified in the sales literature. Distribution rate will be accompanied by the
standard 30-day yield as required by the SEC.
In addition, certain potential benefits of investing in world
securities markets may be discussed in promotional materials. Such benefits
include, but are not limited to: a) the expanded opportunities for investment in
securities markets outside the U.S.; b) the growth of securities markets outside
the U.S. vis-a-vis U.S. markets; c) the relative return associated with foreign
securities markets vis-a-vis U.S. markets; and d) a reduced risk of portfolio
volatility resulting from a diversified securities portfolio consisting of both
U.S. and foreign securities.
IBBOTSON DATA. Ibbotson Associates of Chicago, Illinois, ("Ibbotson")
provides historical returns of the capital markets in the United States. The
Fund may compare the performance of its share classes or series to the long-term
performance of the U.S. capital markets in order to demonstrate general
long-term risk versus reward investment scenarios. Performance comparisons could
also include the value of a hypothetical investment in common stocks, long-term
bonds or treasuries.
The capital markets tracked by Ibbotson are common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, Treasury Bills, and the U.S. rate of
inflation. These capital markets are based on the returns of several different
indices. For common stocks, the S&P is used. For small capitalization stocks,
return is based on the return achieved by Dimensional Fund Advisors (DFA) Small
Company Fund. This fund is a market-value-weighted index of the ninth and tenth
deciles of the Exchange, plus stocks listed on the American Stock Exchange
(AMEX) and over-the-counter (OTC) with the same or less capitalization as the
upperbound of the Exchange ninth docile. At year-end 199, the DFA Small Company
Fund contained approximately 2,663 stocks, with a weighted average market
capitalization of $16.7 million. The unweighted average market capitalization
was $82.97 million, while the median was $6.0 million.
60
<PAGE>
Unlike an investment in a common stock mutual fund, an investment in
bonds that are held to maturity provides a fixed and stated rate of return.
Bonds have a senior priority in liquidation or bankruptcy to common stocks, and
interest on bonds is generally paid from assets of the corporation before any
distributions to common shareholders. Bonds rated in the two highest rating
categories are considered high quality and to present minimal risks of default.
See Schedule A for a more complete explanation of these ratings of corporate
bonds. An advantage of investing in government bonds is that, in many cases,
they are backed by the credit and taxing power of the United States government,
and therefore, such securities may present little or no risk of default.
Although government securities fluctuate in price, they are highly liquid and
may be purchased and sold with relatively small transaction costs (direct
purchase of Treasury securities can be made with no transaction costs).
Long-term corporate bond returns are based on the performance of the
Salomon Brothers Long-Term-High-Grade Corporate Bond Index and include nearly
all "Aaa-" and "Aa-" rated bonds. Returns on intermediate-term government bonds
are based on a one-bond portfolio constructed each year, containing a bond which
is the shortest noncallable bond available with a maturity not less than 5
years. This bond is held for the calendar year and returns are recorded. Returns
on long-term government bonds are based on a one-bond portfolio constructed each
year, containing a bond that meets several criteria, including having a term of
approximately 20 years. The bond is held for the calendar year and returns are
recorded. Returns on U.S. Treasury Bills are based on a one-bill portfolio
constructed each month, containing the shortest-term bill having not less than
one month to maturity. The total return on the bill is the month end price
divided by the previous month-end price, minus one. Data up to 1976 is from the
U.S. Government Bond file at the University of Chicago's Center for Research in
Security Prices; the Wall Street Journal is the source thereafter. Inflation
rates are based on the CPI. Ibbotson calculates total returns in the same method
as the Funds.
YIELD CALCULATIONS
Income calculated for the purposes of calculating the Fund's yield
differs from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed in
yield calculations, the yield quoted for the Fund may differ from the rate of
distributions the Fund paid over the same period or the rate of income reported
in the Fund's financial statements.
Yield is calculated separately for the Investor A, Investor C, Investor
B and Primary A Shares of the Fund by dividing the net investment income per
share for a particular class or series of shares (as described below) earned
during a 30-day period by the maximum offering price per share on the last day
of the period (for Primary A Shares, maximum offering price per share is the
same as the net asset value per share) and annualizing the result on a
semi-annual basis by adding one to the quotient, raising the sum to the power of
six, subtracting one from the result and then doubling the difference. For a
class or series of shares in the Fund, net investment income per share earned
during the period is based on the average daily number of shares outstanding
during the period entitled to receive dividends and includes dividends and
interest earned during the period minus expenses accrued for the period, net of
reimbursements. This calculation can be expressed as follows:
Yield = 2 [(a-b+ 1)6 - 1]
---
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = maximum offering price per share on the last day
of the period (again, for Primary A Shares, this
is equivalent to net asset value per share).
61
<PAGE>
For the purpose of determining net investment income earned during the
period (variable- "a" in the formula), dividend income on equity securities held
by the Fund is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is in the portfolio. The Fund calculates
interest earned on any debt obligations held in its portfolio by computing the
yield to maturity of each obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest) and dividing
the result by 360 and multiplying the quotient by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. For purposes of this calculation, it is assumed
that each month contains 30 days. The maturity of an obligation with a call
provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. With respect to debt
obligations purchased at a discount or premium, the formula generally calls for
amortization of the discount or premium. The amortization schedule will be
adjusted monthly to reflect changes in the market values of such debt
obligations.
Expenses accrued for the period (variable "b" in the formula) include
recurring fees charged by Nations Funds to shareholder accounts in proportion to
the length of the base period. Undeclared earned income will be subtracted from
the maximum offering price per share (which for Primary A Shares is net asset
value per share) (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter. The Fund's maximum offering price per share for
purposes of the formula includes the maximum sales charge, if any, imposed by
the Fund, as reflected in the Fund's prospectus.
The Fund may provide additional yield calculations in communications
(other than advertisements) to the holders of Investor A, Investor C or Investor
B Shares. These may be calculated based on the Investor A, Investor C or
Investor B Shares' net asset values per share (rather than their maximum
offering prices) on the last day of the period covered by the yield
computations. That is, some communications provided to the holders of Investor
A, Investor C or Investor B Shares may also include additional yield
calculations prepared for the holders of Primary A Shares. Such additional
quotations, therefore, will not reflect the effect of the sales charges
mentioned above.
There can be no assurance that all of a yield quoted by the Fund will
be tax-free since the Fund may invest in short-term taxable obligations for
temporary defensive periods as described in the Prospectuses. Also, the above
hypothetical examples are for illustration only. Tax laws and regulations may be
changed at any time by legislative or administrative actions and such changes
may make the information contained in such examples obsolete.
62
<PAGE>
Thirty Day Yield For The Period Ended 3/31/99
<TABLE>
<CAPTION>
Thirty Day Yield
----------------
Yield Without Fee
U.S. Government Bond Fund Yield Waivers
------------------------- ----- -------
<S> <C> <C>
Primary A Shares x x
Primary B Shares x x
Investor A Shares x x
Investor B Shares x x
Investor C Shares x x
</TABLE>
TOTAL RETURN CALCULATIONS
Total return measures both the net investment income generated by, and
the effect of any realized or unrealized appreciation or depreciation of the
underlying investments in the Fund. The Fund's average annual and cumulative
total return figures are computed in accordance with the standardized methods
prescribed by the SEC. Average annual total return figures are computed by
determining the average annual compounded rates of return over the periods
indicated in the advertisement, sales literature or shareholders' report that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period.
This calculation (i) assumes all dividends and distributions are
reinvested at net asset value on the appropriate reinvestment dates, and (ii)
deducts (a) the maximum sales charge from the hypothetical initial $1,000
investment, and (b) all recurring fees, such as advisory and administrative
fees, charged as expenses to all shareholder accounts. All performance
calculations for the period ended March 31, 1999, reflect the deduction of sales
charges, if any, that would have been deducted from a sale of shares.
Cumulative total return is based on the overall percentage change in
value of a hypothetical investment in the Fund, assuming all Fund dividends and
capital gain distributions are reinvested, without reflecting the effect of any
sales charge that would be paid by an investor, and is not annualized.
Cumulative total return is computed by finding the cumulative
compounded rate of return over the period indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
CTR = (ERV-P) 100
P -----
Where: CTR = Cumulative total return
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period
P = initial payment of $1,000.
This calculation (i) assumes all dividends and distributions are
reinvested at net asset value on the appropriate reinvestment dates, and (ii)
deducts (a) the maximum sales charge from the hypothetical initial $1,000
investment, and (b) all recurring fees, such as advisory and administrative
fees, charged as expenses to all shareholder accounts.
63
<PAGE>
<TABLE>
<CAPTION>
5 Year Period Ended
One Year 3/31/99 or Inception
Period Ended 3/31/99 through 3/31/99
-------------------- ---------------
<S> <C> <C>
Government Securities Fund
Primary A x x
Primary B x x
Investor A x x
Investor B x x
Investor C x x
</TABLE>
<TABLE>
<CAPTION>
10 Year Period 10 Year Period
Ended 3/31/99 Ended 3/31/99
or Inception or Inception
FYE FYE Year Period Year Period through through
3/31/99 3/31/99 Ended 3/31/99 Ended 3/31/99 3/31/99 3/31/99
Without Including Without Including Without Including
Sales Sales Sales Sales Sales Sales
Charges Charges Charges Charges Charges Charges
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Government Securities Fund
Primary A Shares x x x x x x
Primary B Shares x x x x x x
-
Investor A Shares x x x x x x
Investor B Shares x x x x x x
Investor C Shares x x x x x x
</TABLE>
MISCELLANEOUS
CERTAIN RECORD HOLDERS
The name, address and percentage of ownership of each person who is
known by the Registrant to have owned of record or beneficially five percent or
more of the Fund as of July 20, 1999 is:
<TABLE>
<CAPTION>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
<S> <C> <C> <C> <C>
U. S. Government Bank of America NA Primary A 100% 89.15%
Bond Fund Attn Tony Farrer 10,045,256.255;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Stephens Inc Primary B 100% 0%
Attn: Cindy Cole 1.116; record
111 Center Street
Little Rock, AR 72201
ISTCO Investor A 16.39% .44%
a Partnership 49,418.791;
PO Box 523 record
Belleville, IL 62222
Virginia United Methodist Investor A 7.13% .19%
Homes Inc 21,485.958;
7113 Three Chopt Rd Ste 300 record and
Richmond, VA 23226 beneficial
Gable & Gotwals Inc Profit Investor A 6.98% .19%
Sharing 21,032.371;
Plan Segregated FBO Adwan record and
Bank of Oklahoma NA TTEE beneficial
PO Box 2180
Tulsa, OK 74101
64
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
BA Investment Services, Inc. Investor A 6.78% .18%
FBO 583543251 20,437.445;
185 Berry St. record
3rd Floor #12640
San Francisco, CA 94107
BA Investment Services, Inc. Investor A 5.11% .14%
FBO 721753261 15,392.570;
185 Berry St. record
3rd Floor #12640
San Francisco, CA 94107
Commerce Bank N A Investor C 16.79% .21%
FBO Humphrey Farrington M/P 23,973.943;
Attn Mutual Fund Operations record
P O Box 13366 TBTS-2
Kansas City, MO 64199-3366
NFSC FEBO # W53-678562 Investor C 13.22% .17%
Ruth Lee Paar 18,875.364;
P O Box 102 record and
Warsaw, IL 62379 beneficial
Carla J Worley Investor C 12.86% .16%
CNSV William Cody Worley 18,363.028;
HC 62 Box 116 record and
Salem, MO 65560-8705 beneficial
NFSC FEBO # W52-004448 Investor C 8.01% .10%
Rodger N Lindgren TTEE 11,439.957;
Roger N Lindgren Revocable Tru record and
U/A 10/8/98 beneficial
1203 Geneva
Kearney, MO 64060
NFSC FEBO # W53-710237 Investor C 7.96% .10%
NFSC/FMTC IRA 11,370.151;
FBO Mildred Deluca record and
5512 Columbia Av beneficial
Saint Louis, MO 63139
NFSC FEBO # W65-054593 Investor C 7.21% .09%
Art Nachbar 10,287.742;
Gloria Nachbar record and
PO Box 6789 beneficial
Winter Springs, FL 32719
NFSC FEBO # W14-652571 Investor C 63.88% .35%
Letty C Cagle 51,641.107;
Douglas Cagle record and
Apt 318 8592 Roswell Rd beneficial
Atlanta, GA 30350
NFSC FEBO # W14-853925 Investor C 11.81% .07%
Charles D Davidson 9,544.726;
Judith L Davidson record and
580 Glen Hampton Dr beneficial
Alpharetta, GA 30004
</TABLE>
65
<PAGE>
As of August 1999, NationsBank Corporation and its affiliates owned of
record more than 25% of the outstanding shares of the Company acting as agent,
fiduciary, or custodian for its customers and may be deemed a controlling person
of the Company under the 1940 Act.
66
<PAGE>
SCHEDULE A
DESCRIPTION OF RATINGS
The following summarizes the highest six ratings used by Standard &
Poor's Corporation ("S&P") for corporate and municipal bonds. The first four
ratings denote investment-grade securities.
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest
and repay principal.
AA - Debt rated AA is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in a
small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for those
in higher-rated categories.
BB, B - Bonds rated BB and B are regarded, on balance as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. Debt
rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay
principal.
To provide more detailed indications of credit quality, the AA, A and
BBB, BB and B ratings may be modified by the addition of a plus or minus sign to
show relative standing within these major rating categories.
The following summarizes the highest six ratings used by Moody's
Investors Service, Inc. ("Moody's") for corporate and municipal bonds. The first
four denote investment grade securities.
Aaa - Bonds that are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term
risks appear somewhat larger than in Aaa securities.
A - Bonds that are rated A possess many favorable investment
attributes and are to be considered upper medium grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa - Bonds that are rated Baa are considered medium grade
obligations, I.E., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds that are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not as well safeguarded during both good times and bad times over
the future. Uncertainty of position characterizes bonds in this class.
A-1
<PAGE>
B - Bond that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Moody's applies numerical modifiers (1, 2 and 3) with respect to
corporate bonds rated Aa through B. The modifier 1 indicates that the bond being
rated ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the bond ranks
in the lower end of its generic rating category. With regard to municipal bonds,
those bonds in the Aa, A and Baa groups which Moody's believes possess the
strongest investment attributes are designated by the symbols Aal, A1 or Baal,
respectively.
The following summarizes the highest four ratings used by Duff & Phelps
Credit Rating Co. ("D&P") for bonds, each of which denotes that the securities
are investment grade.
AAA - Bonds that are rated AAA are of the highest credit quality.
The risk factors are considered to be negligible, being only slightly more
than for risk-free U.S. Treasury debt.
AA - Bonds that are rated AA are of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
A - Bonds that are rated A have protection factors which are
average but adequate. However risk factors are more variable and greater
in periods of economic stress.
BBB - Bonds that are rated BBB have below average protection
factors but still are considered sufficient for prudent investment.
Considerable variability in risk exists during economic cycles.
To provide more detailed indications of credit quality, the AA, A and
BBB ratings may modified by the addition of a plus or minus sign to show
relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch
Investors Service, Inc. ("Fitch") for bonds, each of which denotes that the
securities are investment grade:
AAA - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA - Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because
bonds rated in the AAA and AA categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
generally rated F-1+.
A - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
To provide more detailed indications of credit quality, the AA, A and
BBB ratings may be modified by the addition of a plus or minus sign to show
relative standing within these major rating categories.
The following summarizes the two highest ratings used by Moody's for
short-term municipal notes and variable-rate demand obligations:
MIG-1/VMIG-1 -- Obligations bearing these designations are of the best
quality, enjoying strong protection from established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2 -- Obligations bearing these designations are of high
quality, with ample margins of protection although not so large as in the
preceding group.
A-2
<PAGE>
The following summarizes the two highest ratings used by S&P for
short-term municipal notes:
SP-1 - Indicates very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety characteristics
are given a "plus" (+) designation.
SP-2 - Indicates satisfactory capacity to pay principal and interest.
The three highest rating categories of D&P for short-term debt, each of
which denotes that the securities are investment grade, are D-1, D-2, and D-3.
D&P employs three designations, D-1+, D-1 and D-1-, within the highest rating
category. D-1+ indicates highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is judged to be "outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations." D-1 indicates very high
certainty of timely payment. Liquidity factors are excellent and supported by
good fundamental protection factors. Risk factors are considered to be minor.
D-1 indicates high certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2 indicates good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small. D-3 indicates satisfactory liquidity and other protection factors which
qualify the issue as investment grade. Risk factors are larger and subject to
more variation. Nevertheless, timely payment is expected.
The following summarizes the two highest rating categories used by
Fitch for short-term obligations each of which denotes that the securities are
investment grade:
F-1+ securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
F-1 securities possess very strong credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in degree than
issues rated F-1+.
F-2 securities possess good credit quality. Issues carrying this rating
have a satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned the F-1+ and F-1 ratings.
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted A-1+. Capacity for timely payment on
commercial paper rated A-2 is satisfactory, but the relative degree of safety is
not as high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of senior short-term
promissory obligations. Issuers rated Prime-2 (or related supporting
institutions) are considered to have a strong capacity for repayment of senior
short-term promissory obligations. This will normally be evidenced by many of
the characteristics of issuers rated Prime-1, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
For commercial paper, D&P uses the short-term debt ratings described
above.
For commercial paper, Fitch uses the short-term debt ratings described
above.
Thomson BankWatch, Inc. ("BankWatch") ratings are based upon a
qualitative and quantitative analysis of all segments of the organization
including, where applicable, holding company and operating subsidiaries.
BankWatch ratings do not constitute a recommendation to buy or sell securities
of any of these companies. Further, BankWatch does not suggest specific
investment criteria for individual clients.
BankWatch long-term ratings apply to specific issues of long-term debt
and preferred stock. The long-term ratings specifically assess the likelihood of
untimely payment of principal or interest over the term to maturity of the rated
instrument. The following are the four investment grade ratings used by
BankWatch for long-term debt:
AAA - The highest category; indicates ability to repay principal
and interest on a timely basis is extremely high.
A-3
<PAGE>
AA - The second highest category; indicates a very strong ability
to repay principal and interest on a timely basis with limited incremental
risk versus issues rated in the highest category.
A - The third highest category; indicates the ability to repay
principal and interest is strong. Issues rated "A" could be more
vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
BBB - The lowest investment grade category; indicates an acceptable
capacity to repay principal and interest. Issues rated "BBB" are, however,
more vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
Long-term debt ratings may include a plus (+) or minus (-) sign to
indicate where within a category the issue is placed.
The BankWatch short-term ratings apply to commercial paper, other
senior short-term obligations and deposit obligations of the entities to which
the rating has been assigned. The BankWatch short-term ratings specifically
assess the likelihood of an untimely payment of principal or interest.
TBW-1 The highest category; indicates a very high
likelihood that principal and interest will be paid
on a timely basis.
TBW-2 The second highest category; while the degree of
safety regarding timely repayment of principal and
interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1".
TBW-3 The lowest investment grade category; indicates that
while more susceptible to adverse developments (both
internal and external) than obligations with higher
ratings, capacity to service principal and interest
in a timely fashion is considered adequate.
TBW-4 The lowest rating category; this rating is regarded
as non-investment grade and therefore speculative.
The following summarizes the four highest long-term debt ratings used
by IBCA Limited and its affiliate, IBCA Inc. (collectively "IBCA"):
AAA - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial such that adverse changes in business, economic
or financial conditions are unlikely to increase investment risk
significantly.
AA - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions may increase investment risk albeit not very
significantly.
A - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
BBB - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment
risk than for obligations in other categories.
A plus or minus sign may be appended to a rating below AAA to denote
relative status within major rating categories.
The following summarizes the two highest short-term debt ratings used by
IBCA:
A1+ When issues possess a particularly strong credit feature, a
rating of A1+ is assigned.
A1 - Obligations supported by the highest capacity for timely
repayment.
A2 - Obligations supported by a good capacity for timely repayment.
A-4
<PAGE>
NATIONS FUND, INC.
ONE BANK OF AMERICA PLAZA
33rd Floor
Charlotte, NC 28255
1-800-626-2275
FORM N-1A
PART C
OTHER INFORMATION
ITEM 23. Exhibits
All references to the "Registration Statement" in the following
list of Exhibits refer to the Registrant's Registration Statement on Form N-1A
(File Nos. 33-4038; 811-4614)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Exhibit Letter Description
- ------------------------------------------------------------------------------------------------------------
<S> <C>
(a) Articles of Incorporation:
(a)(1) Articles of Incorporation, dated December 9, 1983, filed December 13, 1983,
incorporated by reference to Post-Effective Amendment No. 29, filed March 19, 1996.
(a)(2) Articles of Amendment, dated March 10, 1986, filed March 11, 1986, incorporated by
reference to Post-Effective Amendment No. 29, filed March 19, 1996.
(a)(3) Articles of Amendment, dated July 31, 1986, incorporated by reference to
Post-Effective Amendment No. 29, filed March 19, 1996.
(a)(4) Articles Supplementary, dated July 31, 1986, incorporated by reference to
Post-Effective Amendment No. 29, filed March 19, 1996.
(a)(5) Articles of Amendment, dated October 4, 1989, incorporated by reference to
Post-Effective Amendment No. 29, filed March 19, 1996.
(a)(6) Articles Supplementary, dated November 30, 1989, incorporated by reference to
Post-Effective Amendment No. 29, filed March 19, 1996.
(a)(7) Articles Supplementary, dated March 26, 1991, incorporated by reference to
Post-Effective Amendment No. 29, filed March 19, 1996.
(a)(8) Articles Supplementary, dated April 15, 1992, filed April 24, 1992, incorporated by
reference to Post-Effective Amendment No. 29, filed March 19, 1996.
C-1
<PAGE>
- ------------------------------------------------------------------------------------------------------------
Exhibit Letter Description
- ------------------------------------------------------------------------------------------------------------
(a)(9) Articles Supplementary, dated September 22, 1992, incorporated by reference to
Post-Effective Amendment No. 29, filed March 19, 1996.
(a)(10) Articles Supplementary, dated February 18, 1993, incorporated by reference to
Post-Effective Amendment No. 29, filed March 19, 1996.
(a)(11) Articles Supplementary, dated July 9, 1993, filed July 12, 1993, incorporated by
reference to Post-Effective Amendment No. 29, filed March 19, 1996.
(a)(12) Articles Supplementary, dated March 21, 1994, incorporated by reference to
Post-Effective Amendment No. 29, filed March 19, 1996.
(a)(13) Articles Supplementary, dated December 21, 1994, incorporated by reference to
Post-Effective Amendment No. 29, filed March 19, 1996.
(a)(14) Articles Supplementary, dated March 18, 1996, incorporated by reference to
Post-Effective Amendment No. 29, filed March 19, 1996.
(a)(15) Articles Supplementary, dated March 1, 1998, to be filed by amendment.
(a)(16) Articles Supplementary, dated October 7, 1998, incorporated by reference to
Post-Effective Amendment No. 39, filed November 5, 1998.
- ------------------------------------------------------------------------------------------------------------
(b) By-Laws:
Amended and Restated Bylaws, incorporated by reference to Post-Effective Amendment
No. 36, filed June 1, 1998.
- ------------------------------------------------------------------------------------------------------------
(c) Instruments Defining Rights of Securities Holders:
Not Applicable
- ------------------------------------------------------------------------------------------------------------
(d) Investment Advisory Contracts:
(d)(1) Investment Advisory Agreement between Nations Fund, Inc. and NationsBanc Advisors,
Inc., ("NBAI"), incorporated by reference to Post-Effective Amendment No. 28, filed
January 29, 1996.
(d)(2) Sub-Advisory Agreement between NBAI, TradeStreet Investment Associates, Inc. and
Nations Fund, Inc., incorporated by reference to Post-Effective Amendment No. 28,
filed January 29, 1996.
C-2
<PAGE>
- ------------------------------------------------------------------------------------------------------------
Exhibit Letter Description
- ------------------------------------------------------------------------------------------------------------
(d)(3) Sub-Advisory Agreement between Nations Fund, Inc., Brandes Investment Partners,
L.P. and NBAI, incorporated by reference to Post-Effective Amendment No. 36, filed
on June 1, 1998.
(d)(4) Sub-Advisory Agreement between Nations Fund, Inc., NBAI and Gartmore Global
Partners, incorporated by reference to Post-Effective Amendment No. 28, filed
January 29, 1996.
(d)(5) Sub-Advisory Agreement between Boatman's Capital Management, Inc., Nations Fund,
Inc. and NBAI, incorporated by reference to Post-Effective Amendment No. 36, filed
June 1, 1998.
(d)(6) Co-Sub-Advisory Agreement between Nations Fund, Inc., NBAI and Gartmore Global
Partners, to be filed by amendment.
(d)(7) Co-Sub-Advisory Agreement between Nations Fund, Inc., NBAI and INVESCO Global Asset
Management (N.A.), Inc., to be filed by amendment.
(d)(8) Co-Sub-Advisory Agreement between Nations Fund, Inc., NBAI and Putnam Investment
Management, Inc., to be filed by amendment.
- ------------------------------------------------------------------------------------------------------------
(e) Underwriting Contract:
Distribution Agreement between Nations Fund, Inc. and Stephens Inc. dated September
1, 1993, incorporated by reference to Post-Effective Amendment No. 39, filed
November 5, 1998.
- ------------------------------------------------------------------------------------------------------------
(f) Bonus or Profit Sharing Contracts: Deferred Compensation Plan, to be filed by
amendment.
- ------------------------------------------------------------------------------------------------------------
(g) Custodian Agreements:
(g)(1) Custody Agreement between Nations Fund, Inc. and The Bank of New York, dated
October 19, 1998, incorporated by reference to Post-Effective Amendment No. 39,
filed November 5, 1998.
(g)(2) Global Custody Agreement between Nations Fund, Inc, on behalf of Nations
International Equity Fund, and Morgan Guaranty Trust Company of New York, dated
August 25, 1995, incorporated by reference to Post-Effective Amendment No. 2, filed
September 28, 1995.
C-3
<PAGE>
- ------------------------------------------------------------------------------------------------------------
Exhibit Letter Description
- ------------------------------------------------------------------------------------------------------------
(h) Other Material Contracts:
(h)(1) Co-Administration Agreement between Nations Fund, Inc., Stephens Inc. and NBAI, to
be filed by amendment.
(h)(2) Sub-Administration Agreement between Nations Fund, Inc., The Bank of New York and
NBAI, to be filed by amendment.
(h)(3) Transfer Agency Agreement, to be filed by amendment.
(h)(4) Supplement to Transfer Agency Agreement, to be filed by amendment.
(h)(5) Shareholder Servicing Plan, Primary B Shares, incorporated by reference to
Post-Effective Amendment No. 39, filed November 5, 1998.
(h)(6) Shareholder Servicing Plan, Investor A Shares, incorporated by reference to
Post-Effective Amendment No. 39, filed November 5, 1998.
(h)(7) Amended and Restated Shareholder Servicing Plan for Investor B Shares of the Money
Market Funds and Investor C Shares (formerly Investor B Shares) of the Non-Money
Market Funds, incorporated by reference to Post-Effective Amendment No. 39, filed
on November 5, 1998.
(h)(8) Shareholder Servicing Plan, Investor C Shares of the Money Market Funds and
Investor B Shares (formerly Investor N Shares) of the Non-Money Market Funds,
incorporated by reference to Post-Effective Amendment No. 39, filed November 5,
1998.
(h)(9) Daily Servicing Plan, to be filed by amendment.
(h)(10) Cross-Indemnification dated June 27, 1995 between the Company, Nations Fund Trust
and Nations Fund Portfolios, Inc. are incorporated by reference to Post-Effective
Amendment No. 39 filed on November 5, 1998.
- ------------------------------------------------------------------------------------------------------------
(i) Legal Opinion
Opinion and Consent of Counsel, filed herewith.
- ------------------------------------------------------------------------------------------------------------
(j) Other Opinions
Consent of Independent Accountant--PricewaterhouseCoopers LLP, filed herewith.
C-4
<PAGE>
- ------------------------------------------------------------------------------------------------------------
Exhibit Letter Description
- ------------------------------------------------------------------------------------------------------------
(k) Omitted Financial Statements
None
- ------------------------------------------------------------------------------------------------------------
(l) Initial Capital Agreements:
Not Applicable
- ------------------------------------------------------------------------------------------------------------
(m) Rule 12b-1 Plan:
(m)(1) Shareholder Administration Plan, Primary B Shares, incorporated by reference to
Post-Effective Amendment No. 28, filed January 29, 1996.
(m)(2) Amended and Restated Shareholder Servicing and Distribution Plan pursuant to Rule
12b-1, relating to Investor A Shares, incorporated by reference to the
Post-Effective Amendment No. 39, filed November 5, 1998.
(m)(3) Distribution Plan, Investor B Shares, relating to the Non-Money Market Funds,
incorporated by reference to Post-Effective Amendment No. 39 filed on November 5,
1998.
(m)(4) Amended and Restated Distribution Plan, relating to Investor B Shares of the Money
Market Funds and Investor C Shares (formerly Investor B Shares) of the Non-Money
Market Funds, incorporated by reference to Post-Effective Amendment No. 39, filed
November 5, 1998.
(m)(5) Daily Distribution Plan, to be filed by amendment.
- ------------------------------------------------------------------------------------------------------------
(n) Financial Data Schedule:
Not Applicable
- ------------------------------------------------------------------------------------------------------------
(o) Rule 18f-3 Plan:
Revised Form of Plan entered into by Nations Fund, Inc. pursuant to Rule 18f-3
under the Investment Company Act of 1940, is incorporated by reference to
Post-Effective Amendment No. 40, filed November 17, 1998.
- ------------------------------------------------------------------------------------------------------------
C-5
<PAGE>
- ------------------------------------------------------------------------------------------------------------
Exhibit Letter Description
- ------------------------------------------------------------------------------------------------------------
(p) Powers of Attorney for Edmund L. Benson, Charles B. Walker, A. Max Walker, Thomas
S. Word, Jr., William H. Grigg, James Ermer and Thomas F. Keller, incorporated by
reference to Amendment No. 15, filed December 23, 1992.
Power of Attorney for Carl E. Mundy, Jr., James B. Sommers and Cornelius J. Pings,
to be filed by amendment.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 24. Persons Controlled by of Under Common Control with the Fund
No person is controlled by or under common control with the Registrant.
ITEM 25. Indemnification
Under the terms of the Maryland Corporation Law and the
Registrant's Charter and By-Laws, incorporated by reference as Exhibits (1) and
2(a) hereto, provides for the indemnification of Registrant's directors and
employees. Indemnification of Registrant's principal underwriter, custodian, and
transfer agent is provided for, respectively, in the Registrant's:
1. Co-Administration Agreement with Stephens Inc. and NBAI;
2. Sub-Administration Agreement with The Bank of New York;
3. Distribution Agreement with Stephens;
4. Custody Agreement with Bank of New York;
5. Transfer Agency Agreement with First Data Investor Services Group,
Inc.; and
6. Sub-Transfer Agency and Services Agreement with NationsBank, N.A..
The Registrant has entered into a Cross Indemnification Agreement with
Nations Fund Trust (the "Trust") and Nations Portfolios, Inc.
("Portfolios") dated June 27, 1995. The Trust and/or the Portfolios will
indemnify and hold harmless the Company against any losses, claims,
damages or liabilities, to which the Company may become subject, under
the Securities Act of 1933 (the "Act") and the 1940 Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in any
Prospectuses, any Preliminary Prospectuses, the Registration Statements,
any other Prospectuses relating to the securities, or any amendments or
supplements to the foregoing (hereinafter referred to collectively as
the "Offering Documents"), or arise out of or are based upon the
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in the
Offering Documents in reliance upon and in conformity with written
information furnished to the Company by the Trust and/or Portfolios
expressly for use therein; and will reimburse the Company for any legal
or other expenses reasonably incurred by the Company in connection with
investigating or defending any such action or claim; provided, however,
that the Trust and/or Portfolios shall not be liable in any such case to
the extent that any such loss, claim, damage, or liability arises out of
or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in the Offering Documents in reliance
upon and in conformity with written information furnished to the Trust
and/or Portfolios by the Company expressly for use in the Offering
Documents.
C-6
<PAGE>
Promptly after receipt by an indemnified party above of notice of the
commencement of any action, such indemnified party shall, if a claim in
respect thereof is to be made against the indemnifying party under such
subsection, notify the indemnifying party in writing of the commencement
thereof; but the omission to so notify the indemnifying party shall not
relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be
brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party
shall be entitled to participate therein and, to the extent that it
shall wish, to assume the defense thereof, with counsel satisfactory to
such indemnified party, and, after notice from the indemnifying party to
such indemnified party of its election so to assume the defense thereof,
the indemnifying party shall not be liable to such indemnified party
under such subsection for any legal expenses of other counsel or any
other expenses, in each case subsequently incurred by such indemnified
party, in connection with the defense thereof other than reasonable
costs of investigation.
Registrant has obtained from a major insurance carrier a directors' and
officers' liability policy covering certain types of errors and
omissions. In no event will Registrant indemnify any of its directors,
officers, employees, or agents against any liability to which such
person would otherwise be subject by reason of his/her willful
misfeasance, bad faith, gross negligence in the performance of his/her
duties, or by reason of his/her reckless disregard of the duties
involved in the conduct of his/her office or arising under his agreement
with Registrant. Registrant will comply with Rule 484 under the Act and
Release No. 11330 under the 1940 Act, in connection with any
indemnification.
Insofar as indemnification for liability arising under the Act
may be permitted to directors, officers, and controlling persons of Registrant
pursuant to the foregoing provisions, or otherwise, Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer, or controlling person of Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
C-7
<PAGE>
ITEM 26. Business and Other Connections of the Investment Adviser
To the knowledge of the Registrant, none of the directors or officers
of NBAI, the adviser to the Registrant's portfolios, or TradeStreet, Gartmore,
INVESCO, Putnam, Brandes or Boatmen's, the investment sub-advisers, except those
set forth below, are or have been, at any time during the past two calendar
years, engaged in any other business, profession, vocation or employment of a
substantial nature, except that certain directors and officers also hold various
positions with, and engage in business for, the company that owns all the
outstanding stock (other than directors' qualifying shares) of NBAI,
TradeStreet, Gartmore, INVESCO, Putnam, Brandes or Boatmen's, respectively, or
other subsidiaries of Bank of America Corporation.
(a) NBAI performs investment advisory services for the Registrant and
certain other customers. NBAI is a wholly owned subsidiary of NationsBank, N.A.
("NationsBank"), which in turn is a wholly owned banking subsidiary of Bank of
America Corporation. Information with respect to each director and officer of
the investment adviser is incorporated by reference to Form ADV filed by NBAI
with the SEC pursuant to the Investment Advisers Act of 1940, as amended (the
"Advisers Act") (file no. 801-49874).
(b) TradeStreet performs investment sub-advisory services for the
Registrant and certain other customers. TradeStreet is a wholly owned subsidiary
of NationsBank, which in turn is a wholly owned banking subsidiary of Bank of
America Corporation. Information with respect to each director and officer of
the investment sub-adviser is incorporated by reference to Form ADV filed by
TradeStreet with the SEC pursuant to the Advisers Act (file no. 801-50372).
(c) Gartmore performs investment sub-advisory services for the
Registrant and certain other customers. Gartmore is a joint venture structured
as a general partnership between NB Partner Corp., a wholly owned subsidiary of
NationsBank, and Gartmore U.S. Limited, an indirect, wholly owned subsidiary of
Gartmore Investment Management plc, a UK Company which is the holding company
for a leading UK based international fund management group of companies.
Information with respect to each director and officer of the investment
sub-adviser is incorporated by reference to Form ADV filed by Gartmore with the
SEC pursuant to the Advisers Act (file no. 801-48811).
(d) INVESCO performs investment sub-advisory services for the
Registrant and certain other customers. INVESCO is a division of INVESCO Global,
a publicly traded investment management firm and a wholly owned subsidiary of
AMVESCAP PLC, a publicly traded UK financial holding company that engages
through its subsidiaries in the business of international investment management.
Information with respect to each director and officer of the investment
sub-adviser is incorporated by reference to Form ADV filed by INVESCO with the
SEC pursuant to the Advisers Act (file no. 801-54192).
C-8
<PAGE>
(e) Putnam performs investment sub-advisory services for the Registrant
and certain other customers. Putnam is a wholly owned subsidiary of Putnam
Investments, Inc., an investment management firm which, except for shares held
by employees is owned by Marsh & McLennan Companies, a publicly traded
professional services firm that engages through its subsidiaries in the business
of investment management. Information with respect to each director and officer
of the investment sub-adviser is incorporated by reference to Form ADV filed by
Putnam with the SEC pursuant to the Advisers Act (file no. 801-7974).
(f) Boatmen's performs investment sub-advisory services for the
Registrant (and certain other customers). Boatmen's is a wholly owned subsidiary
of NationsBank, N.A., which in turn is a wholly owned banking subsidiary of
NationsBank Corporation. Information with respect to each director and officer
of the sub-investment adviser is incorporated by reference to Forms filed by
Boatmen's with the Securities and Exchange Commission pursuant to the Investment
Advisers Act of 1940 (file no. 801-54630).
(g) Brandes performs investment sub-advisory services for the
Registrant (and certain other customers). Information with respect to each
director and officer of the sub-investment adviser is incorporated by reference
to Forms filed by Brandes with the Securities and Exchange Commission pursuant
to the Investment Advisers Act of 1940 (file no. 801-24896).
ITEM 27. Principal Underwriters
(a) Stephens, distributor for the Registrant, does not presently act as
investment adviser for any other registered investment companies, but does act
as principal underwriter for Nations Fund Trust, Nations Fund Portfolios, Inc.,
Nations Institutional Reserves, Nations LifeGoal Fund, Inc., Nations Annuity
Trust, the Overland Express Funds, Inc., Stagecoach Inc., Stagecoach Funds, Inc.
and Stagecoach Trust, and is the exclusive placement agent for Master Investment
Trust, Managed Series Investment Trust, Life & Annuity Trust and Master
Investment Portfolio, all of which are registered open-end management investment
companies, and has acted as principal underwriter for the Liberty Term Trust,
Inc., Nations Government Income Term Trust 2003, Inc., Nations Government Income
Term Trust 2004, Inc. and the Managed Balanced Target Maturity Fund, Inc.,
closed-end management investment companies.
(b) Information with respect to each director and officer of the
principal underwriter is incorporated by reference to Form ADV filed by Stephens
Inc. with the SEC pursuant to the Investment Company Act of 1940, as amended
(the "1940 Act") (file No. 501-15510).
C-9
<PAGE>
(c) Not applicable.
ITEM 28. Location of Accounts and Records
(1) NBAI, One Bank of America Plaza, Charlotte, NC 28255 (records
relating to its function as Investment Adviser and
Co-Administrator).
(2) TradeStreet, One Bank of America Plaza, Charlotte, NC 28255
(records relating to its function as Sub-Adviser).
(3) Gartmore, One Bank of America Plaza, Charlotte, NC 28255 (records
relating to its function as Sub-Adviser).
(4) Boatmen's, 100 North Broadway, St. Louis, Missouri 63102 (records
relating to its function as Sub-Adviser).
(5) Putnam, One Post Office Square, Boston, MA 02109 (records relating
to its function as Sub-Advisor).
(6) INVESCO, 1315 Peachtree Street, N.E., Atlanta GA 30309 (records
relating to its function as Sub-Advisor).
(7) Brandes, 12750 High Bluff Drive, San Diego, California 92130
(records relating to its function as Sub-Advisor).
(8) Stephens, 111 Center Street, Little Rock, AR 72201 (records
relating to its function as Distributor and Co-Administrator).
(9) First Data, One Exchange Place, Boston, MA 02109 (records relating
to its function as Transfer Agent).
(10) Bank of New York, 90 Washington Street, New York, NY 10286
(records relating to its function as Custodian and
Sub-Administrator)
ITEM 29. Management Services
Not Applicable
ITEM 30. Undertakings
Not Applicable
C-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Little Rock, State of Arkansas on the
15th day of December, 1999.
NATIONS FUND, INC.
By: *
----------------------------------
A. Max Walker
President and Chairman
of the Board of Directors
By: /s/ Richard H. Blank, Jr.
----------------------------------
Richard H. Blank, Jr.
*Attorney-in-Fact
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
* President and Chairman December 15, 1999
- ------------------------------------------- of the Board of Directors
(A. Max Walker) (Principal Executive Officer)
/s/ Richard H. Blank, Jr. Treasurer and Secretary December 15, 1999
- ------------------------------------------- (Principal Financial and
(Richard H. Blank, Jr.) Accounting Officer)
* Director December 15, 1999
- -------------------------------------------
(Edmund L. Benson, III)
* Director December 15, 1999
- -------------------------------------------
(James Ermer)
* Director December 15, 1999
- -------------------------------------------
(William H. Grigg)
* Director December 15, 1999
- -------------------------------------------
(Thomas F. Keller)
* Director December 15, 1999
- -------------------------------------------
(Carl E. Mundy, Jr.)
* Director December 15, 1999
- -------------------------------------------
(Cornelius J. Pings)
* Director December 15, 1999
- -------------------------------------------
(Charles B. Walker)
* Director December 15, 1999
- -------------------------------------------
(Thomas S. Word)
* Director December 15, 1999
- -------------------------------------------
(James B. Sommers)
/s/ Richard H. Blank, Jr.
- -------------------------------------------
Richard H. Blank, Jr.
*Attorney-in-Fact
</TABLE>
<PAGE>
NATIONS FUND, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
EX-99.23i Opinion and Consent of Counsel - Morrison & Foerster LLP
EX-99.23j Consent of Independent Accountants - PricewaterhouseCoopers LLP
</TABLE>
EX-99.23i
[MORRISON & FOERSTER LLP LETTERHEAD]
December 15, 1999
Nations Fund, Inc.
111 Center Street
Little Rock, AR 72201
Re: Shares of Common Stock of
Nations Fund, Inc.
Dear Ladies and Gentlemen:
We refer to Post-Effective Amendment No. 45 and Amendment No. 46 to the
Registration Statement on Form N-1A (SEC File Nos. 33-4038; 811-4614) (the
"Registration Statement") of Nations Fund, Inc. (the "Company"), relating to the
registration of an indefinite number of Shares of Common Stock in the Company
(collectively, the "Shares").
We have been requested by the Company to furnish this opinion as
Exhibit 23i to the Registration Statement.
We have examined such records, documents, instruments, and certificates
of public officials and of the Company, made such inquiries of the Company, and
examined such questions of law as we have deemed necessary for the purpose of
rendering the opinion set forth herein. We have also verified with the Company's
transfer agent the maximum number of Shares issued by the Company during the
fiscal period ended March 31, 1999. We have assumed the genuineness of all
signatures and the authenticity of all items submitted to us as originals and
the conformity with originals of all items submitted to us as copies.
Based upon and subject to the foregoing, we are of the opinion that:
The issuance and sale of the Shares by the Company have been duly and
validly authorized by all appropriate action, and assuming delivery of the
Shares by sale or in accord with the Company's dividend reinvestment plan in
accordance with the description set forth in the Registration Statement, as
amended, the Shares will be validly issued, fully paid and nonassessable.
<PAGE>
Nations Fund, Inc.
December 15, 1999
Page Two
We consent to the inclusion of this opinion as an exhibit to the
Registration Statement.
In addition, we hereby consent to the use of our name and to the
reference to our Firm under the heading "Counsel" in the Statement of Additional
Information.
Very truly yours,
/s/ MORRISON & FOERSTER LLP
MORRISON & FOERSTER LLP
EXHIBIT 99.23j
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 45 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated May 28, 1999, relating to the financial
statements and financial highlights appearing in the March 31, 1999 Annual
Report to Shareholders of Nations Fund, Inc., which is also incorporated by
reference into the Registration Statement. We also consent to the reference to
us under the heading "Financial highlights" in the Prospectuses and under the
heading "Independent Accountants and Reports" in the Statement of Additional
Information.
PricewaterhouseCoopers LLP
New York, New York
December 14, 1999
