485APOS 1 0001.txt NATIONS FUNDS TRUST As filed with the Securities and Exchange Commission on October 13, 2000 Registration No. 333-89661; 811-09645 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-1A* REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ] Post-Effective Amendment No. 5 [X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ] Amendment No. 6 [X] (Check appropriate box or boxes) ----------------------- NATIONS FUNDS TRUST (Exact Name of Registrant as specified in Charter) 111 Center Street Little Rock, Arkansas 72201 (Address of Principal Executive Offices, including Zip Code) -------------------------- Registrant's Telephone Number, including Area Code: (800) 321-7854 Richard H. Blank, Jr. c/o Stephens Inc. 111 Center Street Little Rock, Arkansas 72201 (Name and Address of Agent for Service) With copies to: Robert M. Kurucza, Esq. Carl Frischling, Esq. Marco E. Adelfio, Esq. Kramer, Levin, Naftalis Morrison & Foerster LLP & Frankel 2000 Pennsylvania Ave., N.W. 919 3rd Avenue Suite 5500 New York, New York 10022 Washington, D.C. 20006 It is proposed that this filing will become effective (check appropriate box): [ ] Immediately upon filing pursuant [ ] on July 19, 2000 pursuant to Rule 485(b), or to Rule 485(b), or [ ] 60 days after filing pursuant [ ] on (date) pursuant to Rule 485(a), or to Rule 485(a). [X] 75 days after filing pursuant to [ ] on (date) pursuant to paragraph (a)(2) paragraph(a)(2) of Rule 485 If appropriate, check the following box: [ ] this post-effective amendment designates a new effective date for a previously filed post-effective amendment. *This post-effective amendment is being executed by the Trustees and principal officers of Nations Master Investment Trust. EXPLANATORY NOTE ---------------- The Registrant is filing this Post-Effective Amendment No. 5 to the Nations Funds Trust (the "Trust") Registration Statement for the purpose of registering the following shell funds: Nations Government Securities Fund, Nations Asset Allocation Fund, Nations Marsico Focused Equities Fund, Nations Marsico Growth & Income Fund, Nations LifeGoal Growth Portfolio, Nations LifeGoal Balanced Growth Portfolio and Nations LifeGoal Income and Growth Portfolio. NATIONS FUNDS TRUST CROSS REFERENCE SHEET
Part A Item No. Prospectus -------- ---------- 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
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
Part C Item No. Other Information -------- ----------------- Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C of this Document
[GRAPHIC] Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. PRELIMINARY PROSPECTUS DATED OCTOBER 13, 2000 SUBJECT TO COMPLETION LifeGoal Portfolios Prospectus -- Primary A Shares June 8, 2001 LifeGoal Growth Portfolio LifeGoal Balanced Growth Portfolio LifeGoal Income and Growth Portfolio 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] An overview of the Portfolios -------------------------------------------------------------------------------- [GRAPHIC] Terms used in this prospectus In this prospectus, we, us and our refer to the Nations Funds family (Nations Funds or Nations Funds Family). Some other important terms we've used may be new to you. These are printed in italics where they first appear in a section and are described in Terms used in this prospectus. [GRAPHIC] You'll find Terms used in this prospectus on page 37. Your investment in a Portfolio 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 Portfolios and the underlying Funds. This booklet, which is called a prospectus, tells you about Nations Funds LifeGoal Portfolios. Please read it carefully because it contains information that's designed to help you make informed investment decisions. Unlike traditional mutual funds, which invest in individual securities, the Portfolios invest in a mix of Nations Funds Domestic Stock, International Stock, Government & Corporate Bond and Money Market Funds using an asset allocation approach. This kind of mutual fund is sometimes called a "fund of funds." About asset allocation Asset allocation is the process of creating a diversified portfolio by investing in different asset classes -- for example, equity securities, fixed income securities and money market instruments -- in varying proportions. The mix of asset classes and how much is invested in each may be the most important factor in how a Portfolio performs and the amount of risk involved. Each asset class, and market segments within a class, like large, mid- and small capitalization stocks, has different return and risk characteristics, and reacts in different ways to changes in the economy. An investment approach that combines asset classes and market segments may help to reduce overall Portfolio volatility. About the Portfolios Each Portfolio has its own asset allocation strategy, which gives it distinctive risk/return characteristics. The performance of each Portfolio depends on many factors, including its allocation strategy and the performance of the Nations Funds it invests in. In general, the more a LifeGoal Portfolio allocates to Domestic Stock and International Stock Funds, the greater the potential return and the greater the risk of a decline in share price. The more a LifeGoal Portfolio allocates to Government & Corporate Bond Funds, the greater the potential for price stability and the lower the potential return. There's always a risk, however, that you'll lose money or you may not earn as much as you expect. LifeGoal Growth Portfolio focuses on long-term growth by normally allocating all of its assets to a mix of Funds that invest primarily in equity securities. Equities have the potential to provide higher returns than many other kinds of investments, but they also tend to have the highest risk. LifeGoal Balanced Growth Portfolio focuses on long-term growth by normally allocating its assets to a balanced mix of Funds that invest in equity and fixed income securities. Fixed income securities have the potential to increase in value, because, when interest rates fall, the value of these securities tends to rise. When interest rates rise, however, the value of these securities tends to fall. Other things can also affect the value of fixed income securities. 2 LifeGoal Income and Growth Portfolio focuses on current income and modest growth. It normally allocates most of its assets to Funds that invest in fixed income securities, but may also allocate some assets to Funds that invest in equity securities. Over time, the return on this Portfolio may be lower than the return on the other Portfolios. Is LifeGoal right for you? When you're choosing a Portfolio 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 LifeGoal Portfolios may be suitable for you if: o you have longer-term investment goals o they're part of a balanced portfolio They may not be suitable for you if: o you're not prepared to accept or are unable to bear the risks associated with equity and fixed income securities o you have short-term investment goals o you're looking for a regular stream of income You'll find a discussion of each Portfolio's principal investments, strategies and risks in the Portfolio descriptions that start on page 5. For more information If you have any questions about the Portfolios, please call us at 1.800.765.2668 or contact your investment professional. You'll find more information about the Portfolios in the Statement of Additional Information (SAI). The SAI includes more detailed information about each Portfolio's investments, policies, performance and management, among other things. Please turn to the back cover to find out how you can get a copy. 3 What's inside -------------------------------------------------------------------------------- [GRAPHIC] Banc of America Advisors, Inc. Banc of America Advisors, Inc. (BAAI) is the investment adviser to each of the Portfolios. BAAI is responsible for the overall management and supervision of the investment management of each Portfolio. BAAI and Nations Funds have engaged a sub-adviser -- Banc of America Capital Management, Inc. (BACAP) -- which is responsible for the day-to-day investment decisions for each of the Portfolios. [GRAPHIC] You'll find more about BAAI and BACAP starting on page 23. [GRAPHIC] About the Portfolios LifeGoal Growth Portfolio 5 Sub-adviser: BACAP ------------------------------------------------------ LifeGoal Balanced Growth Portfolio 9 Sub-adviser: BACAP ------------------------------------------------------ LifeGoal Income and Growth Portfolio 14 Sub-adviser: BACAP ------------------------------------------------------ About the Nations Funds 19 ------------------------------------------------------ Other important information 22 ------------------------------------------------------ How the Portfolios are managed 23 [GRAPHIC] About your investment Information for investors Buying, selling and exchanging shares 29 Distributions and taxes 32 ------------------------------------------------------ Financial highlights 34 ------------------------------------------------------ Terms used in this prospectus 37 ------------------------------------------------------ Where to find more information back cover
4 [GRAPHIC] About the sub-adviser BACAP is this Portfolio's sub-adviser. BACAP's Investment Strategies Team makes the day-to-day investment decisions for the Portfolio. [GRAPHIC] You'll find more about BACAP on page 24. [GRAPHIC] About the underlying Nations Funds You'll find more information about the Funds in which the Portfolio invests, including their objectives and strategies, in About the Nations Funds and in the SAI. LifeGoal Growth Portfolio [GRAPHIC] Investment objective The Portfolio seeks capital appreciation through exposure to a variety of equity market segments. [GRAPHIC] Investment strategies The Portfolio normally invests most of its assets in Primary A Shares of Nations Funds Domestic Stock and International Stock Funds. The team uses asset allocation as its principal investment approach. It: o allocates assets among Fund categories, within the target allocations set for the Portfolio. It bases its allocations on the Portfolio's investment objective, historical returns for each asset class and on its outlook for the economy o chooses individual Funds within each category and the amount it will allocate to each, looking at each Fund's historical returns, as well as the expected performance of the mix of Funds o reviews the allocations to Fund categories and individual Funds at least monthly, and may change these allocations when it believes it's appropriate to do so The actual amount in each Fund or category of Funds may vary from the allocations set by the team, depending on how the Funds perform, and for other reasons. The team may use various strategies to try to manage how much the actual amount varies, and for how long. For example: o if there are more assets in a Fund category than in the target allocation, the team may allocate money coming into the Portfolio to the other Fund categories o if there are fewer assets in a Fund category than in the target allocation, it may allocate money coming into the Portfolio to that Fund category The Portfolio normally sells a proportionate amount of the shares it owns in each Nations Fund to meet its redemption requests. 5
LifeGoal Growth Portfolio Target allocation for each can invest in: Fund category: Large-capitalization domestic stock funds 40-75% Nations Value Fund Nations Blue Chip Fund Nations Strategic Growth Fund Nations Marsico Focused Equities Fund Small-capitalization domestic stock fund 15-35% Nations Small Company Fund International stock funds 10-30% Nations International Value Fund Nations International Equity Fund Nations Marsico International Opportunities Fund Nations Emerging Markets Fund
The team can substitute or add other Funds to this list at any time, including Funds introduced after the date of this prospectus. [GRAPHIC] You'll find detailed information about each Fund's investment strategies and risks in its prospectus, and in its SAI. Please call us at 1.800.765.2668 for a copy. [GRAPHIC] You'll find more about other risks of investing in this Portfolio starting on page 22 and in the SAI. [GRAPHIC] Risks and other things to consider LifeGoal Growth Portfolio has the following risks: o Investment strategy risk - The team uses an asset allocation strategy to try to achieve the highest total return. There is a risk that the mix of investments will not produce the returns they expect, or that the Portfolio will fall in value. There is also the risk that the Funds the Portfolio invests in will not produce the returns the team expects, or will fall in value. o Stock market risk - The Portfolio allocates assets to Funds that invest in stocks. The value of the stocks a Fund holds can be affected by changes in U.S. or foreign economies and financial markets, and the companies that issue the stocks, among other things. Stock prices can rise or fall over short as well as long periods. In general, stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. As of the date of this prospectus, the stock markets, as measured by the S&P 500 and other commonly used indices, were trading at historically high levels. There can be no guarantee that these levels will continue. o Small company risk - The Portfolio allocates assets to Funds that may invest in smaller companies. Stocks of smaller companies tend to have greater price swings than stocks of larger companies because they trade less frequently and in lower volumes. These securities may have a higher potential for gains, but also carry more risk. o Foreign investment risk - The Portfolio allocates assets to Funds that invest in foreign securities. Foreign investments may be riskier than U.S. investments because of political and economic conditions, changes in currency exchange rates, foreign controls on investment, difficulties selling some securities and lack of or limited financial information. Withholding taxes also may apply to some foreign investments. 6 o Emerging markets risk - The Portfolio allocates assets to Funds that invest in securities of companies in emerging markets. 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 Rebalancing policy - The actual amount in each Fund or category of Funds may vary from the allocations set by the team. This could continue for some time. [GRAPHIC] Many things affect a Portfolio's performance, including market conditions, the composition of the Portfolio's holdings and Portfolio expenses. [GRAPHIC] A look at the Portfolio's performance The following bar chart and table show you how the Portfolio has performed in the past, and can help you understand the risks of investing in the Portfolio. A Portfolio'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 Portfolio's Primary 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. [BAR GRAPH] 14.70% 12.74% 25.89% 1997 1998 1999 *Year-to-date return as of June 30, 2000: 6.37% Best and worst quarterly returns during this period Best: 4th quarter 1998: 23.67% Worst: 3rd quarter 1998: -16.67%
Average annual total return as of December 31, 1999 The table shows the Portfolio's average annual total return for each period, compared with the S&P 500, an unmanaged index of 500 widely held common stocks, weighted by market capitalization. The index is not available for investment.
Since 1 year inception* Primary A Shares 25.89% 17.65% S&P 500 21.04% 28.06%
*The inception date of Primary A Shares is October 15, 1996. The return for the index shown is from inception of Primary A Shares. 7 [GRAPHIC] There are two kinds of fees -- shareholder fees you pay directly and annual fund operating expenses that are deducted from a portfolio's assets and from the assets of the Nations Funds the Portfolio invests in. [GRAPHIC] What it costs to invest in the Portfolio This table describes the fees and expenses that you may pay if you buy and hold shares of the Portfolio.
Shareholder fees (Fees paid directly from your investment) Primary A Shares Maximum sales charge (load) none Maximum deferred sales charge (load) none Annual Portfolio operating expenses (Expenses that are deducted from the Portfolio's assets) Management fees 0.25% ---- Total annual Portfolio operating expenses 0.25% ====
Indirect Expenses The Portfolio's annual operating expenses include a portion of the annual Fund operating expenses of the Nations Funds in which the Portfolio invests. This portion is estimated to be between 0.99% and 1.18% (expressed as a weighted average, including any fee waiver and/or reimbursement commitments that will expire July 31, 2001), and is based on: o the amount the Portfolio expects to invest in each Fund, based on the target allocation o each Fund's annualized expense ratio for the period ended March 31, 2000, adjusted as necessary to reflect current service provider fees [GRAPHIC] This is an example only. Your actual costs could be higher or lower, depending on the amount you invest, and on the Portfolio's actual expenses and performance. Example This example is intended to help you compare the cost of investing in this Portfolio with the cost of investing in other mutual funds. This example assumes: o you invest $10,000 in Primary A Shares of the Portfolio 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 Portfolio o your investment has a 5% return each year o the Portfolio's operating expenses remain the same as shown in the table above o the Portfolio's indirect expenses remain at the average of the range as shown above for the 1 year example, excluding any fee waivers and/or reimbursements for the 3, 5 and 10 year examples Although your actual costs may be higher or lower, based on these assumptions, your costs would be:
1 year 3 years 5 years 10 years Primary A Shares $135 $428 $742 $1,632
8 [GRAPHIC] About the sub-adviser BACAP is this Portfolio's sub-adviser. BACAP's Investment Strategies Team makes the day-to-day investment decisions for the Portfolio. [GRAPHIC] You'll find more about BACAP on page 24. [GRAPHIC] About the underlying Nations Funds You'll find more information about the Funds in which the Portfolio invests, including their objectives and strategies, in About the Nations Funds and in the SAI. LifeGoal Balanced Growth Portfolio [GRAPHIC] Investment objective The Portfolio seeks total return through a balanced portfolio of equity and fixed income securities. [GRAPHIC] Investment strategies The Portfolio normally invests all of its assets in Primary A Shares of a balanced mix of Nations Funds Domestic Stock and International Stock and Government & Corporate Bond Funds. The team uses asset allocation as its principal investment approach. It: o allocates assets among Fund categories, within the target allocations set for the Portfolio. It bases its allocations on the Portfolio's investment objective, historical returns for each asset class and on its outlook for the economy o chooses individual Funds within each category and the amount it will allocate to each, looking at each Fund's historical returns, as well as the expected performance of the mix of Funds o reviews the allocations to Fund categories and individual Funds at least monthly, and may change these allocations when it believes it's appropriate to do so The actual amount in each Fund or category of Funds may vary from the allocations set by the team, depending on how the Funds perform, and for other reasons. The team may use various strategies to try to manage how much the actual amount varies, and for how long. For example: o if there are more assets in a Fund category than in the target allocation, the team may allocate money coming into the Portfolio to the other Fund categories o if there are fewer assets in a Fund category than in the target allocation, it may allocate money coming into the Portfolio to that Fund category The Portfolio normally sells a proportionate amount of the shares it owns in each Nations Fund to meet its redemption requests. 9 [GRAPHIC] You'll find more about other risks of investing in this Portfolio starting on page 22 and in the SAI. [GRAPHIC] You'll find detailed information about each Fund's investment strategies and risks in its prospectus, and in its SAI. Please call us at 1.800.765.2668 for a copy.
LifeGoal Balanced Growth Target allocation for each Portfolio can invest in: Fund category: Large-capitalization domestic stock funds 20-40% Nations Value Fund Nations Blue Chip Fund Nations Strategic Growth Fund Nations Marsico Focused Equities Fund Nations MidCap Growth Fund Small-capitalization domestic stock fund 10-20% Nations Small Company Fund International stock funds 5-15% Nations International Value Fund Nations International Equity Fund Nations Marsico International Opportunities Fund Government & corporate bond funds 40-60% Nations Bond Fund Nations Strategic Income Fund Nations High Yield Bond Fund
The team can substitute or add other Funds to this list at any time, including Funds introduced after the date of this prospectus. [GRAPHIC] Risks and other things to consider LifeGoal Balanced Growth Portfolio has the following risks: o Investment strategy risk - The team uses an asset allocation strategy to try to achieve the highest total return. There is a risk that the mix of investments will not produce the returns they expect, or that the Portfolio will fall in value. There is also the risk that the Funds the Portfolio invests in will not produce the returns the team expects, or will fall in value. o Stock market risk - The Portfolio allocates assets to Funds that invest in stocks. The value of the stocks a Fund holds can be affected by changes in U.S. or foreign economies and financial markets, and the companies that issue the stocks, among other things. Stock prices can rise or fall over short as well as long periods. In general, stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. As of the date of this prospectus, the stock markets, as measured by the S&P 500 and other commonly used indices, were trading at historically high levels. There can be no guarantee that these levels will continue. o Small company risk - The Portfolio allocates assets to Funds that may invest in smaller companies. Stocks of smaller companies tend to have greater price swings than stocks of larger companies because they trade less frequently and in lower volumes. These securities may have a higher potential for gains, but also carry more risk. 10 o Foreign investment risk - The Portfolio allocates assets to Funds that invest in foreign securities. Foreign investments may be riskier than U.S. investments because of political and economic conditions, changes in currency exchange rates, foreign controls on investment, difficulties selling some securities and lack of or limited financial information. Withholding taxes may also apply to some foreign investments. Funds that invest in securities of companies in emerging markets have high growth potential, but can be more volatile than securities in more developed markets. o Interest rate risk - The Portfolio allocates assets to Funds that may invest in fixed income securities. 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 - A Fund that invests in fixed income securities 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 generally is not a factor for U.S. government obligations. The Portfolio allocates assets to Funds that typically invest in securities that are not investment grade and are generally considered speculative because they present a greater risk of loss, including default, than higher quality debt securities. These securities typically pay a premium -- a high interest rate or yield -- because of the increased risk of loss. These securities also can be subject to greater price volatility. o Rebalancing policy - The actual amount in each Fund or category of Funds may vary from the allocations set by the team. This could continue for some time. 11 [GRAPHIC] Many things affect a Portfolio's performance, including market conditions, the composition of the Portfolio's holdings and Portfolio expenses. [GRAPHIC] A look at the Portfolio's performance The following bar chart and table show you how the Portfolio has performed in the past, and can help you understand the risks of investing in the Portfolio. A Portfolio'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 Portfolio's Primary 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. [BAR CHART APPEARS HERE] 11.42% 11.76% 14.56% 1997 1998 1999 *Year-to-date return as of June 30, 2000: 4.28% Best and worst quarterly returns during this period Best: 4th quarter 1998: 12.48% Worst: 3rd quarter 1998: -8.92%
Average annual total return as of December 31, 1999 The table shows the Portfolio's average annual total return for each period, compared with the S&P 500 and the Lehman Aggregate Bond Index. The S&P 500 is an unmanaged index of 500 widely held common stocks, weighted by market capitalization. The Lehman Aggregate Bond Index is an index of fixed income securities issued by the U.S. government and its agencies, and by corporations. These indices are not available for investment.
1 year Since inception* Primary A Shares 14.56% 12.55% S&P 500 21.04% 28.06% Lehman Aggregate Bond Index -0.83% 5.68%
*The inception date of Primary A Shares is October 15, 1996. The returns for the indices shown are from inception of Primary A Shares. 12 [GRAPHIC] There are two kinds of fees -- shareholder fees you pay directly and annual fund operating expenses that are deducted from a portfolio's assets and from the assets of the Nations Funds the Portfolio invests in. [GRAPHIC] What it costs to invest in the Portfolio This table describes the fees and expenses that you may pay if you buy and hold shares of the Portfolio.
Shareholder fees (Fees paid directly from your investment) Primary A Shares Maximum sales charge (load) imposed on purchases none Maximum deferred sales charge (load) none Annual Portfolio operating expenses (Expenses that are deducted from the Portfolio's assets) Management fees 0.25% ---- Total annual Portfolio operating expenses 0.25% ====
Indirect Expenses The Portfolio's annual operating expenses include a portion of the annual Fund operating expenses of the Nations Funds in which the Portfolio invests. This portion is estimated to be between 0.77% and 1.08% (expressed as a weighted average, including any fee waiver and/or reimbursement commitments that will expire in July 31, 2001), and is based on: o the amount the Portfolio expects to invest in each Fund, based on the target allocation o each Fund's annualized expense ratio for the period ended March 31, 2000, adjusted as necessary to reflect current service provider fees [GRAPHIC] This is an example only. Your actual costs could be higher or lower, depending on the amount you invest, and on the Portfolio's actual expenses and performance. Example This example is intended to help you compare the cost of investing in this Portfolio with the cost of investing in other mutual funds. This example assumes: o you invest $10,000 in Primary A Shares of the Portfolio 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 Portfolio o your investment has a 5% return each year o the Portfolio's operating expenses remain the same as shown in the table above o the Portfolio's indirect expenses remain at the average of the range as shown above for the 1 year example, excluding any fee waivers and/or reimbursements for the 3, 5 and 10 year examples Although your actual costs may be higher or lower, based on these assumptions, your costs would be:
1 year 3 years 5 years 10 years Primary A Shares $120 $379 $658 $1,453
13 [GRAPHIC] About the sub-adviser BACAP is this Portfolio's sub-adviser. BACAP Investment Strategies Team makes the day-to-day investment decisions for the Portfolio. [GRAPHIC] You'll find more about BACAP on page 24. [GRAPHIC] About the underlying Nations Funds You'll find more information about the Funds in which the Portfolio invests, including their objectives and strategies, in About the Nations Funds and in the SAI. LifeGoal Income and Growth Portfolio [GRAPHIC] Investment objective The Portfolio seeks current income and modest growth to protect against inflation and to preserve purchasing power. [GRAPHIC] Investment strategies The Portfolio normally invests most of its assets in Primary A Shares of Nations Funds Government & Corporate Bond Funds, but may also invest in Nations Funds Domestic Stock and International Stock Funds, and Nations Funds Money Market Funds. The team uses asset allocation as its principal investment approach. It: o allocates assets among Fund categories, within the target allocations set for the Portfolio. It bases its allocations on the Portfolio's investment objective, historical returns for each asset class and on its outlook for the economy o chooses individual Funds within each category and the amount they will allocate to each, looking at each Fund's historical returns, as well as the expected performance of the mix of Funds o reviews the allocations to Fund categories and individual Funds at least monthly, and may change these allocations when it believes it's appropriate to do so The actual amount in each Fund or category of Funds may vary from the allocations set by the team, depending on how the Funds perform, and for other reasons. The team may use various strategies to try to manage how much the actual amount varies, and for how long. For example: o if there are more assets in a Fund category than in the target allocation, the team may allocate money coming into the Portfolio to the other Fund categories o if there are fewer assets in a Fund category than in the target allocation, it may allocate money coming into the Portfolio to that Fund category The Portfolio normally sells a proportionate amount of the shares it owns in each Nations Fund to meet its redemption requests. 14 [GRAPHIC] You'll find more about other risks of investing in this Portfolio starting on page 22 and in the SAI. [GRAPHIC] You'll find detailed information about each Fund's investment strategies and risks in its prospectus, and in its SAI. Please call us at 1.800.765.2668 for a copy.
LifeGoal Income and Growth Target allocation for each can invest in: Fund category: Large-capitalization domestic stock funds 10-30% Nations Value Fund Nations Blue Chip Fund Nations Strategic Growth Fund Nations Marsico Focused Equities Fund Small-capitalization domestic stock fund 0-10% Nations Small Company Fund International stock funds 0-10% Nations International Value Fund Nations International Equity Fund Government & corporate bond funds 50-90% Nations Short-Term Income Fund Nations Bond Fund Nations Strategic Income Fund Nations High Yield Bond Fund Money market fund 0-20% Nations Prime Fund
LifeGoal Income and Growth's target allocation for total investments in domestic stock and international stock funds is 30%. The team can substitute or add other Funds to this list at any time, including Funds introduced after the date of this prospectus. [GRAPHIC] Risks and other things to consider LifeGoal Income and Growth Portfolio has the following risks: o Investment strategy risk - The team use an asset allocation strategy to try to achieve the highest total return. There is a risk that the mix of investments will not produce the returns they expect, or that the Portfolio will fall in value. There is also the risk that the Funds the Portfolio invests in will not produce the returns the team expects, or will fall in value. o Stock market risk - The Portfolio allocates assets to Funds that invest in stocks. The value of the stocks a Fund holds can be affected by changes in U.S. or foreign economies and financial markets, and the companies that issue the stocks, among other things. Stock prices can rise or fall over short as well as long periods. In general, stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. As of the date of this prospectus, the stock markets, as measured by the S&P 500 and other commonly used indices, were trading at historically high levels. There can be no guarantee that these levels will continue. o Small company risk - The Portfolio allocates assets to Funds that may invest in smaller companies. Stocks of smaller companies tend to have greater price swings than stocks of larger companies because they trade less frequently and in lower volumes. These securities may have a higher potential for gains, but also carry more risk. 15 o Foreign investment risk - The Portfolio allocates assets to Funds that invest in foreign securities. Foreign investments may be riskier than U.S. investments because of political and economic conditions, changes in currency exchange rates, foreign controls on investment, difficulties selling some securities and lack of or limited financial information. Withholding taxes also may apply to some foreign investments. Funds that invest in securities of companies in emerging markets have high growth potential, but can be more volatile than securities in more developed markets. o Interest rate risk - The Portfolio allocates assets to Funds that may invest in fixed income securities. 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 - A Fund that invests in fixed income securities 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 generally is not a factor for U.S. government obligations. The Portfolio allocates assets to Funds that typically invest in securities that are not investment grade and are generally considered speculative because they present a greater risk of loss, including default, than higher quality debt securities. These securities typically pay a premium -- a high interest rate or yield -- because of the increased risk of loss. These securities also can be subject to greater price volatility. o Rebalancing policy - The actual amount in each Fund or category of Funds may vary from the allocations set by the team. This could continue for some time. 16 [GRAPHIC] Many things affect a Portfolio's performance, including market conditions, the composition of the Portfolio's holdings and Portfolio expenses. [GRAPHIC] A look at the Portfolio's performance The following bar chart and table show you how the Portfolio has performed in the past, and can help you understand the risks of investing in the Portfolio. A Portfolio'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 Portfolio's Primary 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. [BAR CHART APPEARS HERE] 10.17% 6.11% 1998 1999 *Year-to-date return as of June 30, 2000: 1.89% Best and worst quarterly returns during this period Best: 4th quarter 1998: 6.23% Worst: 3rd quarter 1998: -2.33% Average annual total return as of December 31, 1999 The table shows the Portfolio's average annual total return for each period, compared with the S&P 500 and the Lehman Aggregate Bond Index. The S&P 500 is an unmanaged index of 500 widely held common stocks, weighted by market capitalization. The Lehman Aggregate Bond Index is an index of fixed income securities issued by the U.S. government and its agencies, and by corporations. These indices are not available for investment. Since 1 year inception* Primary A Shares 6.11% 8.45% S&P 500 21.04% 28.06% Lehman Aggregate Bond Index -0.83% 5.68% *The inception date of Primary A Shares is October 15, 1996. The returns for the indices shown are from inception of Primary A Shares. 17 [GRAPHIC] There are two kinds of fees -- shareholder fees you pay directly and annual fund operating expenses that are deducted from a portfolio's assets and from the assets of the Nations Funds the Portfolio invests in. [GRAPHIC] What it costs to invest in the Portfolio This table describes the fees and expenses that you may pay if you buy and hold shares of the Portfolio.
Shareholder fees (Fees paid directly from your investment) Primary A Shares Maximum sales charge (load) imposed on purchases none Maximum deferred sales charge (load) none Annual Portfolio operating expenses (Expenses that are deducted from the Portfolio's assets) Management fees 0.25% ---- Total annual Portfolio operating expenses 0.25% ====
Indirect Expenses The Portfolio's annual operating expenses include a portion of the annual Fund operating expenses of the Nations Funds in which the Portfolio invests. This portion is estimated to be between 0.46% and 0.98% (expressed as a weighted average, including any fee waiver and/or reimbursement commitments that will expire July 31, 2001), and is based on: o the amount the Portfolio expects to invest in each Fund, based on the target allocation o each Fund's annualized expense ratio for the period ended March 31, 2000, adjusted as necessary to reflect current service provider fees [GRAPHIC] This is an example only. Your actual costs could be higher or lower, depending on the amount you invest, and on the Portfolio's actual expenses and performance. Example This example is intended to help you compare the cost of investing in this Portfolio with the cost of investing in other mutual funds. This example assumes: o you invest $10,000 in Primary A Shares of the Portfolio 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 Portfolio o your investment has a 5% return each year o the Portfolio's operating expenses remain the same as shown in the table above o the Portfolio's indirect expenses remain at the average of the range as shown above for the 1 year example, excluding any fee waivers and/or reimbursements for the 3, 5 and 10 year examples Although your actual costs may be higher or lower, based on these assumptions, your costs would be:
1 year 3 years 5 years 10 years Primary A Shares $99 $326 $572 $1,275
18 About the Nations Funds The table starting on the next page is a brief overview of the objectives and principal investments of the Nations Funds in which the LifeGoal Portfolios invest in. Each Portfolio invests in a different mix of Nations Funds. You'll find the mix of Nations Funds and target allocations for each Portfolio starting on page 5. The team can substitute or add other Funds to this table at any time, including Funds introduced after the date of this prospectus. For more information You'll find more detailed information about each Fund's investment strategies and risks in its prospectus and in its SAI. Please call us at 1.800.765.2668 for copies. 19
The Fund's investment objective --------------------------------------------------- Domestic Stock Funds Nations Value Fund Growth of capital by investing in companies that are believed to be undervalued. ----------------------------------------------------------------------------------- Nations Blue Chip Fund Long-term capital appreciation through investments in blue chip stocks. ----------------------------------------------------------------------------------- Nations Strategic Growth Fund Long-term, after-tax returns by investing in a diversified portfolio of common stocks. ----------------------------------------------------------------------------------- Nations Marsico Focused Long-term growth of capital. Equities Fund ----------------------------------------------------------------------------------- Nations MidCap Growth Fund Capital appreciation by investing in emerging growth companies that are believed to have superior long-term earnings growth prospects. ----------------------------------------------------------------------------------- Nations Small Company Fund Long-term capital growth by investing primarily in equity securities. ----------------------------------------------------------------------------------- International Stock Funds Nations International Value Long-term capital appreciation by investing Fund primarily in equity securities of foreign issuers, including emerging markets countries. ----------------------------------------------------------------------------------- Nations International Equity Long-term capital growth by investing primarily Fund in equity securities of non-United States companies in Europe, Australia, the Far East and other regions, including developing countries. ----------------------------------------------------------------------------------- What the Fund invests in ----------------------------------------------------------- Domestic Stock Funds Nations Value Fund o at least 65% of its assets in common stocks of U.S. companies. The Fund generally invests in companies in a broad range of industries with market capitalizations of at least $1 billion and daily trading volumes of at least $3 million. ------------------------------------------------------------------------------------------- Nations Blue Chip Fund Nations Blue Chip Master Portfolio. The Master Portfolio invests: o at least 65% of its assets in blue chip stocks o primarily in blue chip stocks that are included in the S&P 500 Index ------------------------------------------------------------------------------------------- Nations Strategic Growth Fund o at least 65% of its assets in common stocks of companies selected from most major industry sectors ------------------------------------------------------------------------------------------- Nations Marsico Focused Nations Marsico Focused Equities Master Portfolio. The Equities Fund Master Portfolio invests in: o at least 65% of its assets in common stocks of large companies. The Master Portfolio, which is non-diversified, generally holds a core position of 20 to 30 common stocks o up to 25% of its assets in foreign securities ------------------------------------------------------------------------------------------- Nations MidCap Growth Fund o at least 65% of its assets in companies chosen from a universe of emerging growth companies. The Fund generally holds securities of between 75 and 130 issuers, which include common stocks, preferred stocks and convertible securities like warrants, rights and convertible debt ------------------------------------------------------------------------------------------- Nations Small Company Fund o at least 65% of its assets in companies with a market capitalization of $1 billion or less. The Fund usually holds 75 to 130 securities, which include common stocks, preferred stocks and convertible securities like warrants, rights and convertible debt ------------------------------------------------------------------------------------------- International Stock Funds Nations International Value Nations International Value Master Portfolio. The Master Fund Portfolio invests: o at least 65% of its assets in foreign companies anywhere in the world that have a market capitalization of more than $1 billion at the time of investment. The Fund typically invests in at least three countries other than the United States at any one time o primarily in common stocks, preferred stocks, convertible securities, either directly or indirectly through closed-end investment companies and depositary receipts ------------------------------------------------------------------------------------------- Nations International Equity Nations International Equity Master Portfolio. The Master Fund Portfolio invests: o at least 65% of its assets in established companies located in at least three countries other than the United States. The investment managers select countries, including emerging market or developing countries, that they believe have the potential for growth o primarily in equity securities, which may include equity interests in foreign investment funds or trusts, convertible securities, real estate investment trust securities and depositary receipts -------------------------------------------------------------------------------------------
20
The Fund's investment objective ---------------------------------------------------------------------------------- Nations Marsico International Long-term growth of capital. Opportunities Fund ---------------------------------------------------------------------------------- Nations Emerging Markets Long-term capital growth by investing primarily Fund in equity securities of companies in emerging market countries, such as those in Latin America, Eastern Europe, the Pacific Basin, the Far East and India. ---------------------------------------------------------------------------------- Government & Corporate Bond Funds Nations Short-Term Income High current income consistent with minimal Fund fluctuations of principal. ---------------------------------------------------------------------------------- Nations Bond Fund Total return by investing in investment grade fixed income securities. ---------------------------------------------------------------------------------- Nations Strategic Income Fund Total return with an emphasis on current income by investing in a diversified portfolio of fixed income securities. ---------------------------------------------------------------------------------- Nations High Yield Bond Fund Maximum income by investing in a diversified portfolio of high yield debt securities. ---------------------------------------------------------------------------------- Money Market Fund Nations Prime Fund Maximization of current income to the extent consistent with the preservation of capital and the maintenance of liquidity. ---------------------------------------------------------------------------------- What the Fund invests in ----------------------------------------------------------------------------------------- Nations Marsico International Nations Marsico International Opportunities Master Opportunities Fund Portfolio. The Master Portfolio invests: o at least 65% of its assets in common stocks of foreign companies. The Fund typically invests in issuers from at least three different countries not including the United States and generally holds a core position of 35 to 50 common stocks o in common stocks of companies operating in emerging markets ----------------------------------------------------------------------------------------- Nations Emerging Markets o at least 65% of its assets in companies in emerging Fund markets or developing countries. The Fund intends to invest in securities of companies in at least three of these countries at any one time ----------------------------------------------------------------------------------------- Government & Corporate Bond Funds Nations Short-Term Income o at least 65% of its total assets in investment grade Fund fixed income securities. The team may choose unrated securities if it believes they are of comparable quality to investment grade securities at the time of investment o corporate debt securities, including bonds, notes and debentures, mortgage-related securities issued by governments, asset-backed securities or U.S. government obligations ----------------------------------------------------------------------------------------- Nations Bond Fund o at least 65% of its assets in investment grade fixed income securities. The portfolio management team may choose unrated securities if it believes they are of comparable quality to investment grade securities at the time of investment o corporate debt securities, including bonds, notes and debentures, U.S. government obligations, foreign debt securities denominated in U.S. dollars, mortgage-related securities, asset-backed securities or municipal securities ----------------------------------------------------------------------------------------- Nations Strategic Income Fund o at least 65% of its assets in investment grade debt securities, including corporate debt securities, U.S. government obligations, foreign debt securities denominated in U.S. dollars or foreign currencies, and mortgage-related securities issued by governments and non-government issuers o up to 35% of its assetsin lower-quality fixed income securities ("junk bonds" or "high yield bonds") rated "B" or better by Moody's or S&P. The portfolio management team may choose unrated securities if it believes they are of comparable quality at the time of investment ----------------------------------------------------------------------------------------- Nations High Yield Bond Fund Nations High Yield Bond Master Portfolio. The Master Portfolio invests: o at least 65% of its assets in domestic and foreign corporate high yield debt securities which are not rated investment grade, but generally will be rated "B" or better by Moody's Investor Services, Inc. or Standard & Poor's Corporation ----------------------------------------------------------------------------------------- Money Market Fund Nations Prime Fund o money market instruments, including commercial paper, bank obligations, short-term debt securities, guaranteed investment contracts, short-term taxable municipal securities, repurchase agreements secured by first-tier securities or U.S. government obligations -----------------------------------------------------------------------------------------
21 [GRAPHIC] You'll find specific information about each Portfolio's principal investments, strategies and risks in the descriptions starting on page 5. [GRAPHIC] Other important information 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 Portfolio or Fund can be changed without shareholder approval. Other investment policies may be changed only with shareholder approval. o Holding other kinds of investments - The Portfolios or any Fund may hold investments that aren't part of their principal investment strategies. Please refer to the SAI for more information. The portfolio managers or management team can also choose not to invest in specific securities described in this prospectus and in the SAI. o Foreign investment risk - Funds that invest in foreign securities may be affected by changes in currency exchange rates and the costs of converting currencies; foreign government controls on foreign investment, repatriation of capital, and currency and exchange; foreign taxes; inadequate supervision and regulation of some foreign markets; difficulties selling some investments, which may increase volatility; different settlement practices or delayed settlements in some markets; difficulty getting complete or accurate information about foreign companies; less strict accounting, auditing and financial reporting standards than those in the U.S.; political, economic or social instability; and difficulty enforcing legal rights outside the U.S. o Investing defensively - A Portfolio may temporarily hold up to 100% of its assets in Nations Prime Fund, a money market fund, to try to protect it during a market or economic downturn or because of political or other conditions. A Portfolio may not achieve its investment objective while it is investing defensively. o Securities lending program - A Fund may lend portfolio securities to approved broker-dealers or other financial institutions on a fully collateralized basis in order to earn additional income. There may be delays in receiving additional collateral after the loan is made or in recovering the securities loaned. o Portfolio turnover - A Portfolio or 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 Portfolio's returns. The Portfolios generally buy securities for capital appreciation, investment income, or both, and don't engage in short-term trading. You'll find the portfolio turnover rate for each Portfolio in Financial highlights. 22 [GRAPHIC] Banc of America Advisors, Inc. One Bank of America Plaza Charlotte, North Carolina 28255 [GRAPHIC] How the Portfolios are managed Investment adviser BAAI is the investment adviser to over 60 mutual fund portfolios in the Nations Funds Family, including the Portfolios described in this prospectus. BAAI is a registered investment adviser. It's a wholly-owned subsidiary of Bank of America, which is owned by Bank of America Corporation. Nations Funds pays BAAI an annual fee for its investment advisory services. The fee is calculated as a percentage of the average daily net assets of each Portfolio and is paid monthly. BAAI uses part of this money to pay the investment sub-adviser for the services it provides to each Portfolio. BAAI has also agreed to pay all other Portfolio expenses, except taxes, brokerage fees and commissions, extraordinary expenses, and any distribution (12b-1), shareholder servicing or shareholder administration fees. The following chart shows the maximum advisory fees BAAI can receive, along with the actual advisory fees it received during the Portfolios' last fiscal year: Annual investment advisory fee, as a % of average daily net assets
Maximum Actual fee advisory paid last fee fiscal year Nations LifeGoal Growth Portfolio 0.25% 0.25% Nations LifeGoal Balanced Growth Portfolio 0.25% 0.25% Nations LifeGoal Income and Growth Portfolio 0.25% 0.25%
23 Investment sub-advisers Nations Funds and BAAI engage one or more investment sub-advisers for each Portfolio to make day-to-day investment decisions for the Portfolio. BAAI retains ultimate responsibility (subject to Board oversight) for overseeing the sub-advisers and evaluates the Portfolios' needs and available sub-advisers' skills and abilities on an ongoing basis. Based on its evaluations, BAAI may at times recommended to a Portfolio's Board that the Portfolio: o change, add or terminate one or more sub-advisers; o continue to retain a sub-adviser even though the sub-adviser's ownership or corporate structure has changed; or o materially change a sub-advisory agreement with a sub-adviser. Applicable law requires a Portfolio to obtain shareholder approval in order to act on most of these types of recommendations, even if the Portfolio's Board has approved the proposed action and believes that the action is in shareholders' best interests. BAAI and the Portfolios plan to apply for relief from the SEC to permit the Portfolios to act on many of BAAI's recommendations with approval only by the Portfolios' Board and not by Portfolios shareholders. BAAI or a Portfolio would inform the Portfolio's shareholders of any actions taken in reliance on this relief. Until BAAI and the Portfolios obtain the relief, each Portfolio will continue to submit these matters to shareholders for their approval to the extent required by applicable law. [GRAPHIC] Banc of America Capital Management, Inc. One Bank of America Plaza Charlotte, North Carolina 28255 Banc of America Capital Management, Inc. BACAP is a registered investment adviser and a wholly-owned subsidiary of Bank of America. Its management expertise covers all major domestic asset classes, including equity and fixed income securities and money market instruments. Currently managing more than $125 billion, BACAP has over 200 institutional clients and is sub-adviser to more than 65 mutual funds in the Nations Funds Family. BACAP generally takes a team approach to investment management. Each team or individual portfolio manager has access to the latest technology and analytical resources. BACAP is the investment sub-adviser to all of the LifeGoal Portfolios. BACAP's Investment Strategies Team is responsible for making the day-to-day investment decisions for each Portfolio. BACAP is also the investment sub-adviser to the Nations Funds that appear in the table below. The table tells you which internal BACAP asset management team is responsible for making the day-to-day investment decisions for each Fund. 24
Fund BACAP Team Nations Value Fund Value Strategies Team Nations Small Company Fund SmallCap Strategies Team Nations Short-Term Income Fund Fixed Income Management Team Nations Bond Fund Fixed Income Management Team Nations Strategic Income Fund Fixed Income Management Team Nations Prime Fund Taxable Money Market Management Team Nations Strategic Growth Fund Growth Strategies Team Nations MidCap Growth Fund Growth Strategies Team
Nations Funds and BAAI have engaged investment sub-advisers to provide day-to-day portfolio management for the underlying Nations Funds in which the Portfolios invest. These sub-advisers function under the supervision of BAAI and the Boards of Nations Funds. [GRAPHIC] Marsico Capital Management, LLC 1200 17th Street Suite 1300 Denver, Colorado 80202 Marsico Capital Management, LLC Marsico Capital is a full service investment advisory firm founded by Thomas F. Marsico in September 1997. It is a registered investment adviser, specializing in large capitalization stocks, and currently has over $16 billion in assets under management. Marsico Management Holdings, LLC, a wholly-owned subsidiary of Bank of America Corporation, indirectly owns the equity of Marsico Capital. Marsico Capital is the investment sub-adviser to Nations Marsico Focused Equities Master Portfolio and Nations Marsico International Opportunities Master Portfolio. Thomas F. Marsico, Chairman and Chief Executive Officer of Marsico Capital, is the portfolio manager responsible for making the day-to-day investment decisions for Nations Marsico Focused Equities Master Portfolio. Mr. Marsico was an executive vice president and portfolio manager at Janus Capital Corporation from 1988 until he formed Marsico Capital in September 1997. He has more than 20 years of experience as a securities analyst and portfolio manager. James G. Gendelman is the portfolio manager of Nations Marsico International Opportunities Master Portfolio. Prior to joining Marsico Capital in May, 2000, Mr. Gendelman spent thirteen years as a Vice President of International Sales for Goldman, Sachs & Co. He holds a Bachelors degree in Accounting from Michigan State University and an MBA in Finance from the University of Chicago. Mr. Gendelman was an accountant for Ernst & Young from 1983 to 1985. 25 [GRAPHIC] Brandes Investment Partners, L.P. 12750 High Bluff Drive San Diego, California 92130 Brandes Investment Partners, L.P. Founded in 1974, Brandes is an investment advisory firm with 53 investment professionals who manage more than $40 billion in assets. Brandes uses a value-oriented approach to managing international investments, seeking to build wealth by buying high quality, undervalued stocks. Brandes is the investment sub-adviser to Nations International Value Master Portfolio. Brandes' Large Cap Investment Committee is responsible for making the day-to-day investment decisions for the Master Portfolio. [GRAPHIC] Chicago Equity Partners LLC 180 North LaSalle Suite 3800 Chicago, Illinois 60601 Chicago Equity Partners LLC Chicago Equity is a registered investment adviser and is owned by the firm's senior management. Chicago Equity is the investment sub-adviser to Nations Blue Chip Master Portfolio. Chicago Equity's Equity Management Team is responsible for making the day-to-day investment decisions for Nations Blue Chip Master Portfolio. [GRAPHIC] Gartmore Global Partners Gartmore House 8 Fenchurch Place London EC3M 4PH, England Gartmore Global Partners Gartmore is a global asset manager dedicated to serving the needs of U.S. based investors. Gartmore was formed in 1995 as a registered investment adviser and manages more than $1 billion in assets. Gartmore is a general partnership which is an indirect wholly-owned subsidiary of Nationwide Mutual Insurance Company. Gartmore generally follows a growth philosophy, which is reflected in its active management of market allocation and stock selection. Gartmore is co-investment sub-adviser to: o Nations International Equity Master Portfolio Gartmore is investment sub-adviser to: o Nations Emerging Markets Fund Gartmore's portion of Nations International Equity Master Portfolio is co-managed by five portfolio managers: Christopher Palmer has been responsible since May 1999 for investments in developing countries, and has been the principal portfolio manager of Nations Emerging Markets Fund since that time. He joined Gartmore in 1995 and is a senior investment manager on the Gartmore Emerging Markets Team. Before he joined Gartmore, Mr. Palmer worked for Unifund, S.A., a private investment bank, in its Mexico City and Hong Kong offices, and managed global derivatives, credit and counterparty credit risk as vice president in the Institutional Credit Department of Bear Stearns & Co. He graduated from Colgate University in 1986 with a BA Honors degree in History and completed an MBA in Finance at New York University in 1988. Mr. Palmer was awarded the CFA designation by the Association of Investment Management and Research in 1993. 26 Seok Teoh has been responsible since June 1998 for investments in Asia. Ms. Teoh has been with Gartmore since 1990 as the London based manager of its Far East Team. Previously, she managed four equity funds for Rothschild Asset Management in Tokyo and Singapore, and was also responsible for Singaporean and Malaysian equity sales at Overseas Union Bank Securities in Singapore. Ms. Teoh is native to Singapore and is fluent in Mandarin and Cantonese. She received an Economics degree from the University of Durham. Nick Reid has been responsible (or has shared responsibility) for investments in Japan since August 1999. He has been investment manager for the Gartmore Japanese Equities Team since he joined Gartmore in 1994 and has specific responsibility for managing retail funds. Before he joined Gartmore, Mr. Reid was a United Kingdom Smaller Companies Analyst with Panmure Gordon and a fund manager covering Japanese and other Asian markets with Refuge Assurance. He graduated from Cambridge University in 1989 with an honors degree in History. Mr. Reid is also an associate member of the Institute of Investment Management and Research. Stephen Jones has been responsible for investments in Europe since 1998. He is also head of Gartmore European Equities. Mr. Jones joined Gartmore in 1994 and was appointed head of the European equity team in 1995. He began his career at The Prudential in 1984, and became a European equities investment manager in 1987, focusing on France, Belgium and Switzerland. He graduated from Manchester University in 1984 with an honors degree in Economics. Stephen Watson has been responsible since June 1998 for allocating assets among the various regions, and for determining investments in regions not covered by the other portfolio managers. He was the sole portfolio manager of Nations International Equity Fund from February 1995 to June 1998. Mr. Watson joined Gartmore in 1993 as a global fund manager, and is the chief investment officer of Gartmore Global Partners and a member of Gartmore's global policy group. Before joining Gartmore, he was a director and global fund manager with James Capel Fund Managers, London, as well as client service manager for international clients. He was in Capel-Cure Myers' portfolio management division from 1980 to 1987, and began his career in 1976 with Samuel Motagu. He is a member of the Securities Institute. Nations Emerging Markets Fund is managed by Christopher Palmer, a senior investment manager on the Gartmore Emerging Markets Team. He has managed the Fund since August 1999. He also co-manages Nations International Equity Master Portfolio. [GRAPHIC] INVESCO Global Asset Management (N.A.), Inc. 1360 Peachtree Street, N.E. Atlanta, Georgia 30309 INVESCO Global Asset Management (N.A.), Inc. INVESCO Global is a division of AMVESCAP PLC, a publicly traded UK financial holding company located in London. INVESCO Global is one of the three investment sub-advisers to Nations International Equity Master Portfolio. INVESCO's International Equity Portfolio Management Team is responsible for making the day-to-day investment decisions for its portion of the Master Portfolio. 27 [GRAPHIC] Putnam Investment Management, Inc. One Post Office Square Boston, Massachusetts 02109 Putnam Investment Management, Inc. Putnam is a wholly-owned subsidiary of Putnam Investments, Inc., which, except for shares held by employees, is owned by Marsh & McLennan Companies. Putnam is one of three investment sub-advisers to Nations International Equity Master Portfolio. Putnam's Core International Equity Group is responsible for making the day-to-day investment decisions for its portion of the Master Portfolio. [GRAPHIC] MacKay Shields LLC 9 West 57th Street New York, New York 10019 MacKay Shields LLC Founded in 1938, MacKay Shields is an independently-managed, wholly-owned subsidiary of New York Life Insurance Company. The firm's 63 investment professionals manage more than $30 billion in assets, including over $6 billion in high yield assets. MacKay Shields' High Yield Portfolio Management Team is responsible for making the day-to-day decisions for Nations High Yield Bond Master Portfolio. [GRAPHIC] Stephens Inc. 111 Center Street Little Rock, Arkansas 72201 Other service providers The Portfolios are distributed and co-administered by Stephens Inc., a registered broker/dealer. Stephens does not receive any fees for the administrative services it provides to the Portfolios. BAAI is also co-administrator of the Portfolios, and assists in overseeing the administrative operations of the Funds. BAAI and Stephens may pay amounts from their own assets to selling or servicing agents of the Funds for services they provide. [GRAPHIC] PFPC Inc. 400 Bellevue Parkway Wilmington, Delaware 19809 PFPC Inc. (PFPC) is the transfer agent for the Portfolios' shares. Its responsibilities include processing purchases, sales and exchanges, calculating and paying distributions, keeping shareholder records, preparing account statements and providing customer service. 28 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 Portfolios. Here are some general rules about this class of shares: o Primary A Shares are available to certain financial institutions and intermediaries for their own accounts, and for certain client accounts for which they act as a fiduciary, agent or custodian. These include: o Bank of America and certain of its affiliates o certain other financial institutions and intermediaries, including financial planners and investment advisers o institutional investors o charitable foundations o endowments o other Funds in the Nations Funds Family o The minimum initial investment is $250,000. Financial institutions or intermediaries can total the investments they make on behalf of their clients to meet the minimum initial investment amount. Client accounts for which the financial institution or intermediary no longer acts as fiduciary, agent or custodian may no longer be eligible to purchase or hold Primary A Shares. o There is no minimum amount for additional investments. o There are no sales charges for buying, selling or exchanging these shares. You'll find more information about buying, selling and exchanging Primary A Shares on the pages that follow. You should also ask your financial institution or intermediary about its limits, fees and policies for buying, selling and exchanging shares, which may be different from those described here, and about its related programs and services. The Portfolios also offer other classes of shares, with different features and expense levels, which you may be eligible to buy. Please contact your investment professional, or call us at 1.800.765.2668 if you have any questions, or you need help placing an order. How shares are priced All transactions are based on the price of a Portfolio's shares -- or its net asset value per share. We calculate net asset value per share for each class of each Portfolio at the end of each business day. The net asset value per share of a Portfolio is based on the net asset value per share of the Nations Funds the Portfolio invests in. 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. 29 Valuing securities in an underlying Fund The value of a Fund's assets is based on the total market value of all of the securities it holds. The prices reported on stock exchanges and securities markets around the world are usually used to value securities in a Fund. If prices aren't readily available, or the value of a security has been materially affected by events occurring after a foreign exchange closes, we'll base the price of a security on its fair value. When a Fund uses fair value to price securities it may value those securities higher or lower than another fund that uses market quotations to price the same securities. We use the amortized cost method, which approximates market value, to value short-term investments maturing in 60 days or less. International markets may be open on days when U.S. markets are closed. The value of foreign securities owned by a Fund could change on days when Fund shares may not be bought or sold. How orders are processed Orders to buy, sell or exchange shares are processed on business days. Orders received by Stephens, PFPC or their agents before the end of a business day (usually 4:00 p.m. Eastern time, unless the NYSE closes early) will receive that day's net asset value per share. Orders received after the end of a business day will receive the next business day's net asset value per share. The business day that applies to your order is also called the trade date. We may refuse any order to buy or exchange shares. If this happens, we'll return any money we've received. [GRAPHIC] Buying shares Here are some general rules for buying shares: o Investors buy Primary A Shares at net asset value per share. o If we don't receive payment within three business days of receiving an order, we'll refuse the order. We'll return any payment received for orders that we refuse. o Financial institutions and intermediaries are responsible for sending us orders for their clients and for ensuring that we receive payment on time. o Shares purchased are recorded on the books of the Portfolio. We don't issue certificates. o Financial institutions and intermediaries are responsible for recording the beneficial ownership of the shares of their clients, and for reporting this ownership on account statements they send to their clients. [GRAPHIC] Selling shares Here are some general rules for selling shares: o We normally send the sale proceeds by federal funds wire within three business days after Stephens, PFPC or their agents receive the order. o If you paid for your shares with a check that wasn't certified, we'll hold the sale proceeds when you sell those shares for at least 15 days after the trade date of the purchase, or until the check has cleared, whichever is later. 30 o Financial institutions and intermediaries are responsible for sending us orders for their clients and for depositing the sale proceeds to their accounts on time. o Under certain circumstances allowed under the Investment Company Act of 1940 (1940 Act), we can pay you in securities or other property when you sell shares. o We can delay payment of the sale proceeds for up to seven days. o Other restrictions may apply to retirement plan accounts. For more information about these restrictions, please contact your retirement plan administrator. We may sell shares: o if the value of an investor's account falls below $500. We'll provide 60 days notice in writing if we're going to do this o if a financial institution or intermediary tells us to sell the shares for a client under arrangements it has made with its clients o under certain other circumstances allowed under the 1940 Act [GRAPHIC] You should make sure you understand the investment objective and principal investment strategies of the Portfolio or Fund you're exchanging into. Please read its prospectus carefully. [GRAPHIC] Exchanging shares Investors can sell shares of a Portfolio to buy shares of another Portfolio or 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 Portfolio for Primary A Shares of any other Portfolio or 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 Portfolio or Fund, including any minimum investment requirements, apply to exchanges into that Portfolio or Fund. o Exchanges can only be made into a Portfolio or Fund that is legally sold in the investor's state of residence. o Exchanges can generally only be made into a Portfolio or 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). 31 [GRAPHIC] Distributions and taxes [GRAPHIC] The power of compounding Reinvesting your distributions buys you more shares of a Portfolio -- which lets you take advantage of the potential for compound growth. Putting the money you earn back into your investment means it, in turn, may earn even more money. Over time, the power of compounding has the potential to significantly increase the value of your investment. There is no assurance, however, that you'll earn more money if you reinvest your distributions. About distributions A mutual fund can make money two ways: o It can earn income. Examples are interest paid on bonds and dividends paid on common stocks. o A fund can also have capital gain if the value of its investments increases. If a fund sells an investment at a gain, the gain is realized. If a fund continues to hold the investment, any gain is unrealized. A mutual fund is not subject to income tax as long as it distributes its net investment income and realized capital gain to its shareholders. The Portfolios intend to pay out a sufficient amount of their income and capital gain to their shareholders so the Portfolios won't have to pay any income tax. When a Portfolio makes this kind of a payment, it's split equally among all shares, and is called a distribution. All of the Portfolios distribute net investment income quarterly, and any net realized capital gain at least once a year. The distribution you receive is based on the number of shares you hold on the record date, which is usually the day the distribution is declared (daily dividend Funds) or the day before the distribution is declared (all other Funds). Shares are eligible to 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 Portfolio 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 Portfolio 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 normally 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 Portfolio 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 Portfolio that holds securities with unrealized capital gain, you will, in effect, receive part of your purchase back if and when the Portfolio sells those securities and distributes the gain. This distribution is also subject to tax. Some Portfolios have built up, or have the potential to build up, high levels of unrealized capital gain. 32 [GRAPHIC] This information is a summary of how federal income taxes may affect your investment in the Funds. It is not intended as a substitute for careful tax planning. You should consult with your own tax adviser about your situation, including any foreign, state and local taxes that may apply. [GRAPHIC] For more information about taxes, please see the SAI. How taxes affect your investment Distributions that come from net investment income and any net short-term capital gain over net long-term capital loss generally are taxable to you as ordinary income. A portion of such distributions to corporate shareholders may qualify for the dividends received deduction. 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 Portfolio. However, any distributions declared in October, November or December of one year and distributed in January of the following year will be taxable as if they had been paid to you on December 31 of the first year. We'll send you a notice every year that tells you how much you've received in distributions during the year and their federal tax status. Foreign, state and local taxes may also apply to these distributions. Withholding tax We're required by federal law to withhold tax of 31% on any distributions and redemption proceeds paid to you (including amounts to be paid for in securities or other property and exchanges) if: o you haven't given us a correct Taxpayer Identification Number (TIN) and haven't certified that the TIN is correct and withholding doesn't apply o the Internal Revenue Service (IRS) has notified us that the TIN listed on your account is incorrect according to its records o the IRS informs us that you 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 (at a rate of 30%, or a lower rate if a treaty applies) on distributions paid to foreign shareholders. Taxation of redemptions and exchanges Your redemptions (including redemptions paid in securities or other property) and exchanges of Portfolio 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. 33 [GRAPHIC] Financial highlights The financial highlights table is designed to help you understand how the Portfolios have performed for the past five years or, if shorter, the period of the Portfolio's operations. Certain information reflects financial results for a single Portfolio share. The total investment return line indicates how much an investment in the Portfolio would have earned, assuming all dividends and distributions had been reinvested. This information has been audited by PricewaterhouseCoopers LLP. The independent accountants' 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. 34
LifeGoal Growth Portfolio For a Share outstanding throughout each period Primary A Shares Year ended Year ended Year ended Period ended 03/31/00(a) 03/31/99 03/31/98(a) 03/31/97* Operating performance: Net asset value, beginning of period $ 12.15 $ 12.49 $ 10.15 $ 10.06 Net investment income 0.04 0.04 0.08 0.12 Net realized and unrealized gain on investments 3.88 0.31 2.87 0.09 Net increase in net assets resulting from investment operations 3.92 0.35 2.95 0.21 Distributions: Dividends from net investment income -- -- (0.01) (0.12) Distributions in excess of net investment income (0.18) (0.09) (0.39) -- Distributions from net realized capital gains (0.39) (0.60) (0.21) -- Total dividends and distributions (0.57) (0.69) (0.61) (0.12) Net asset value, end of period $ 15.50 $ 12.15 $ 12.49 $ 10.15 Total return++ 32.94% 3.04% 29.80% 2.10% ============================================================================================================= Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $15,265 $4,291 $ 289 $ 929 Ratio of operating expenses to average net assets+++ 0.25% 0.25% 0.25% 0.25%+ Ratio of net investment income to average net assets 0.34% 0.46% 0.65% 1.11%+ Portfolio turnover rate 161% 159% 69% 25%
* LifeGoal Growth Portfolio Primary A Shares commenced investment operations on October 2, 1996. Shares were offered to the public on October 15, 1996. + Annualized. ++ Total return represents aggregate total return for the period indicated and does not reflect the deduction of any applicable sales charges. +++ The Portfolio's expenses do not include the expenses of the underlying Funds. (a) Per share net investment income has been calculated using the monthly average shares method.
LifeGoal Balanced Growth Portfolio For a Share outstanding throughout each period Primary A Shares Year ended Year ended Year ended Period ended 03/31/00(a) 03/31/99 03/31/98(a) 03/31/97* Operating performance: Net asset value, beginning of period $ 10.80 $ 10.92 $ 9.95 $ 10.05 Net investment income 0.36 0.26 0.33 0.19 Net realized and unrealized gain/(loss) on investments 1.54 0.23 1.74 (0.10) Net increase/(decrease) in net assets resulting from investment operations 1.90 0.49 2.07 0.09 Distributions: Dividends from net investment income (0.40) (0.28) (0.28) (0.19) Distributions in excess of net investment income (0.04) -- (0.32) -- Distributions from net realized capital gains (0.29) (0.33) (0.50) -- Total dividends and distributions (0.73) (0.61) (1.10) (0.19) Net asset value, end of period $ 11.97 $ 10.80 $ 10.92 $ 9.95 Total return++ 18.34% 4.77% 21.74% 0.90% ============================================================================================================= Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $13,325 $14,844 $ 103 $2,114 Ratio of operating expenses to average net assets+++ 0.25% 0.25% 0.25% 0.25%+ Ratio of net investment income to average net assets 3.37% 2.77% 2.87% 3.94%+ Portfolio turnover rate 124% 121% 94% 1%
* LifeGoal Balanced Growth Portfolio Primary A Shares commenced investment operations on October 2, 1996. Shares were offered to the public on October 15, 1996. + Annualized. ++ Total return represents aggregate total return for the period indicated and does not reflect the deduction of any applicable sales charges. +++ The Portfolio's expenses do not include the expenses of the underlying Funds. (a) Per share net investment income has been calculated using the monthly average shares method. 35
LifeGoal Income and Growth Portfolio For A Share outstanding throughout each period Primary A Shares Year ended Year ended Year ended Period ended 03/31/00(a) 03/31/99 03/31/98(a) 03/31/97* Operating performance: Net asset value, beginning of period $ 10.86 $ 10.70 $ 9.97 $ 10.03 Net investment income 0.49 0.35 0.43 0.32 Net realized and unrealized gain/(loss) on investments 0.02 0.37 0.89 (0.06) Net increase in net assets resulting from investment operations 0.51 0.72 1.32 0.26 Distributions: Dividends from net investment income (0.51) (0.36) (0.40) (0.32) Distributions in excess of net investment income -- -- (0.12) -- Distributions from net realized capital gains (0.23) (0.20) (0.07) -- Total dividends and distributions (0.74) (0.56) (0.59) (0.32) Net asset value, end of period $ 10.63 $ 10.86 $ 10.70 $ 9.97 Total return++ 4.91% 6.98% 13.56% 2.59% ============================================================================================================= Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $4,736 $8,489 $ 476 $ 223 Ratio of operating expenses to average net assets+++ 0.25% 0.25% 0.25% 0.25%+ Ratio of net investment income to average net assets 4.78% 3.99% 4.17% 6.34%+ Portfolio turnover rate 96% 107% 64% 2%
* LifeGoal Income and Growth Portfolio Primary A Shares commenced investment operations on October 2, 1996. Shares were offered to the public on October 15, 1996. + Annualized. ++ Total return represents aggregate total return for the period indicated and does not reflect the deduction of any applicable sales charges. +++ The Portfolio's expenses do not include the expenses of the underlying Funds. (a) Per share net investment income has been calculated using the monthly average shares method. 36 [GRAPHIC] This glossary includes explanations of the important terms that may be used in this prospectus. Some of the terms explained may apply to Nations Funds not included in this prospectus. [GRAPHIC] Terms used in this prospectus Asset-backed security - a debt security that gives you an interest in a pool of assets that is collateralized or "backed" by one or more kinds of assets, including real property, receivables or mortgages, generally issued by banks, credit card companies or other lenders. Some securities may be issued or guaranteed by the U.S. government or its agencies, authorities or instrumentalities. Asset-backed securities typically make periodic payments, which may be interest or a combination of interest and a portion of the principal of the underlying assets. 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). 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. Corporate obligation - a money market instrument issued by a corporation or commercial bank. 37 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. 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. 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 - 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. 38 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 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 indices include U.S. government agency and U.S. Treasury securities, corporate bonds and mortgage-backed securities. All dividends are reinvested. Liquidity - a measurement of how easily a security can be bought or sold at a price that is close to its market value. Money market instrument - a short-term debt security that is considered to mature in 13 months or less. Money market instruments include U.S. Treasury obligations, U.S. government obligations, certificates of deposit, bankers' acceptances, commercial paper, repurchase agreements and certain municipal securities. Mortgage-backed security or Mortgage-related security - a debt security that gives you an interest in, and is backed by, a pool of residential mortgages issued by the U.S. government or by financial institutions. The underlying mortgages may be guaranteed by the U.S. government or one of its agencies, authorities or instrumentalities. Mortgage-backed securities typically make monthly payments, which are a combination of interest and a portion of the principal of the underlying mortgages. Municipal security (obligation) - a debt security issued by state or local governments or governmental authorities to pay for public projects and services. "General obligations" are typically backed by the issuer's full taxing and revenue-raising powers. "Revenue securities" depend on the income earned by a specific project or authority, like road or bridge tolls, user fees for water or revenues from a utility. Interest income from these securities is exempt from federal income taxes and is generally exempt from state taxes if you live in the state that issued the security. If you live in the municipality that issued the security, interest income may also be exempt from local taxes. Non-diversified - a fund that holds securities of fewer issuers than other kinds of funds. Non-diversified funds tend to have greater price swings than more diversified funds because events affecting one or more of its securities may have a disproportionately large effect on the fund. 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. 39 Quantitative analysis - an analysis of financial information about a company or security to identify securities that have the potential for growth or are otherwise suitable for a fund to buy. Real Estate Investment Trust (REIT) - a portfolio of real estate investments which may include office buildings, apartment complexes, hotels and shopping malls, and real-estate-related loans or interests. 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. Right - a temporary privilege allowing investors who already own a common stock to buy additional shares directly from the company at a specified price or formula. S&P 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. Second-tier security - under Rule 2a-7 under the 1940 Act, a debt security that is an eligible investment for money market funds, but is not a first-tier security. Senior security - a debt security that allows holders to receive their share of a company's remaining assets in a bankruptcy before other bondholders, creditors, and common and preferred shareholders. Settlement date - the date on which an order is settled either by payment or delivery of securities. Trade date - the effective date of a purchase, sale or exchange transaction, or other instructions sent to us. The trade date is determined by the day and time we receive the order or instructions in a form that's acceptable to us. U.S. government obligations - a wide range of debt securities issued or guaranteed by the U.S. government or its agencies, authorities or instrumentalities. 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. (1)S&P has not reviewed any stock included in the S&P 500 for its investment merit. S&P determines and calculates its index independently of the Funds and is not a sponsor or affiliate of the Funds. S&P gives no information and makes no statements about the suitability of investing in the Funds or the ability of its index to track stock market performance. S&P makes no guarantees about the index, any data included in it and the suitability of the index or its data for any purpose. "Standard and Poor's" and "S&P 500" are trademarks of The McGraw-Hill Companies, Inc. 40 (THIS PAGE INTENTIONALLY LEFT BLANK) (THIS PAGE INTENTIONALLY LEFT BLANK) (THIS PAGE INTENTIONALLY LEFT BLANK) [GRAPHIC] Where to find more information You'll find more information about the LifeGoal Portfolios in the following documents: Annual and semi-annual reports The annual and semi-annual reports contain information about Portfolio investments and performance, the financial statements and the independent accountants' reports. The annual report also includes a discussion about the market conditions and investment strategies that had a significant effect on each Portfolio's performance during the period covered. [GRAPHIC] Statement of Additional Information The SAI contains additional information about the Portfolios and their policies. The SAI is legally part of this prospectus (it's incorporated by reference). A copy has been filed with the SEC. You can obtain a free copy of these documents, request other information about the Portfolios and make shareholder inquiries by contacting Nations Funds: By telephone: 1.800.765.2668 By mail: Nations Funds c/o Stephens Inc. One Bank of America Plaza 33rd Floor Charlotte, NC 28255 On the Internet: www.nations-funds.com Information about the Portfolios can be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-202-942-8090. The reports and other information about the Portfolios are available on the EDGAR Database on the SEC's Internet site at http://www.sec.gov, and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Section, Washington, D.C. 20549-0102. NATIONS FUNDS SEC file number: Nations Funds Trust, 811-09645 LGPROPA-10/00 [GRAPHIC] Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. PRELIMINARY PROSPECTUS DATED OCTOBER 13, 2000 SUBJECT TO COMPLETION LifeGoal Portfolios Prospectus -- Primary B Shares June 8, 2001 LifeGoal Growth Portfolio LifeGoal Balanced Growth Portfolio LifeGoal Income and Growth Portfolio 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 An overview of the Portfolios -------------------------------------------------------------------------------- [GRAPHIC] Terms used in this prospectus In this prospectus, we, us and our refer to the Nations Funds family (Nations Funds or Nations Funds Family). Some other important terms we've used may be new to you. These are printed in italics where they first appear in a section and are described in Terms used in this prospectus. [GRAPHIC] You'll find Terms used in this prospectus on page 37. Your investment in a Portfolio 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 Portfolios and the underlying Funds. This booklet, which is called a prospectus, tells you about Nations Funds LifeGoal Portfolios. Please read it carefully because it contains information that's designed to help you make informed investment decisions. Unlike traditional mutual funds, which invest in individual securities, the Portfolios invest in a mix of Nations Funds Domestic Stock, International Stock, Government & Corporate Bond and Money Market Funds using an asset allocation approach. This kind of mutual fund is sometimes called a "fund of funds." About asset allocation Asset allocation is the process of creating a diversified portfolio by investing in different asset classes -- for example, equity securities, fixed income securities and money market instruments -- in varying proportions. The mix of asset classes and how much is invested in each may be the most important factor in how a Portfolio performs and the amount of risk involved. Each asset class, and market segments within a class, like large, mid- and small capitalization stocks, has different return and risk characteristics, and reacts in different ways to changes in the economy. An investment approach that combines asset classes and market segments may help to reduce overall Portfolio volatility. About the Portfolios Each Portfolio has its own asset allocation strategy, which gives it distinctive risk/return characteristics. The performance of each Portfolio depends on many factors, including its allocation strategy and the performance of the Nations Funds it invests in. In general, the more a LifeGoal Portfolio allocates to Domestic Stock and International Stock Funds, the greater the potential return and the greater the risk of a decline in share price. The more a LifeGoal Portfolio allocates to Government & Corporate Bond Funds, the greater the potential for price stability and the lower the potential return. There's always a risk, however, that you'll lose money or you may not earn as much as you expect. LifeGoal Growth Portfolio focuses on long-term growth by normally allocating all of its assets to a mix of Funds that invest primarily in equity securities. Equities have the potential to provide higher returns than many other kinds of investments, but they also tend to have the highest risk. LifeGoal Balanced Growth Portfolio focuses on long-term growth by normally allocating its assets to a balanced mix of Funds that invest in equity and fixed income securities. Fixed income securities have the potential to increase in value, because, when interest rates fall, the value of these securities tends to rise. When interest rates rise, however, the value of these securities tends to fall. Other things can also affect the value of fixed income securities. 2 LifeGoal Income and Growth Portfolio focuses on current income and modest growth. It normally allocates most of its assets to Funds that invest in fixed income securities, but may also allocate some assets to Funds that invest in equity securities. Over time, the return on this Portfolio may be lower than the return on the other Portfolios. Is LifeGoal right for you? When you're choosing a Portfolio 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 LifeGoal Portfolios may be suitable for you if: o you have longer-term investment goals o they're part of a balanced portfolio They may not be suitable for you if: o you're not prepared to accept or are unable to bear the risks associated with equity and fixed income securities o you have short-term investment goals o you're looking for a regular stream of income You'll find a discussion of each Portfolio's principal investments, strategies and risks in the Portfolio descriptions that start on page 5. For more information If you have any questions about the Portfolios, please call us at 1.800.321.7854 or contact your investment professional. You'll find more information about the Portfolios in the Statement of Additional Information (SAI). The SAI includes more detailed information about each Portfolio's investments, policies, performance and management, among other things. Please turn to the back cover to find out how you can get a copy. 3 What's inside -------------------------------------------------------------------------------- [GRAPHIC] Banc of America Advisors, Inc. Banc of America Advisors, Inc. (BAAI) is the investment adviser to each of the Portfolios. BAAI is responsible for the overall management and supervision of the investment management of each Portfolio. BAAI and Nations Funds have engaged a sub-adviser -- Banc of America Capital Management, Inc. (BACAP), which is responsible for the day-to-day investment decisions for each of the Portfolios. [GRAPHIC] You'll find more about BAAI and BACAP starting on page 23. [GRAPHIC] About the Portfolios LifeGoal Growth Portfolio 5 Sub-adviser: BACAP ---------------------------------------------------------- LifeGoal Balanced Growth Portfolio 9 Sub-adviser: BACAP ---------------------------------------------------------- LifeGoal Income and Growth Portfolio 14 Sub-adviser: BACAP ---------------------------------------------------------- About the Nations Funds 19 ---------------------------------------------------------- Other important information 22 ---------------------------------------------------------- How the Portfolios are managed 23 [GRAPHIC] About your investment Information for investors Buying, selling and exchanging shares 29 How selling and servicing agents are paid 32 Distributions and taxes 33 ---------------------------------------------------------- Financial highlights 35 ---------------------------------------------------------- Terms used in this prospectus 37 ---------------------------------------------------------- Where to find more information back cover 4 [GRAPHIC] About the sub-adviser BACAP is this Portfolio's sub-adviser. BACAP's Investment Strategies Team makes the day-to-day investment decisions for the Portfolio. [GRAPHIC] You'll find more about BACAP on page 24. [GRAPHIC] About the underlying Nations Funds You'll find more information about the Funds in which the Portfolio invests, including their objectives and strategies, in About the Nations Funds and in the SAI. LifeGoal Growth Portfolio [GRAPHIC] Investment objective The Portfolio seeks capital appreciation through exposure to a variety of equity market segments. [GRAPHIC] Investment strategies The Portfolio normally invests most of its assets in Primary A Shares of Nations Funds Domestic Stock and International Stock Funds. The team uses asset allocation as its principal investment approach. It: o allocates assets among Fund categories, within the target allocations set for the Portfolio. It bases its allocations on the Portfolio's investment objective, historical returns for each asset class and on its outlook for the economy o chooses individual Funds within each category and the amount it will allocate to each, looking at each Fund's historical returns, as well as the expected performance of the mix of Funds o reviews the allocations to Fund categories and individual Funds at least monthly, and may change these allocations when it believes it's appropriate to do so The actual amount in each Fund or category of Funds may vary from the allocations set by the team, depending on how the Funds perform, and for other reasons. The team may use various strategies to try to manage how much the actual amount varies, and for how long. For example: o if there are more assets in a Fund category than in the target allocation, the team may allocate money coming into the Portfolio to the other Fund categories o if there are fewer assets in a Fund category than in the target allocation, it may allocate money coming into the Portfolio to that Fund category The Portfolio normally sells a proportionate amount of the shares it owns in each Nations Fund to meet its redemption requests. 5 [GRAPHIC] You'll find more about other risks of investing in this Portfolio starting on page 22 and in the SAI. [GRAPHIC] You'll find detailed information about each Fund's investment strategies and risks in its prospectus, and in its SAI. Please call us at 1.800.321.7854 for a copy.
LifeGoal Growth Portfolio Target allocation for each can invest in: Fund category: Large-capitalization domestic stock funds 40-75% Nations Value Fund Nations Blue Chip Fund Nations Strategic Growth Fund Nations Marsico Focused Equities Fund Small-capitalization domestic stock fund 15-35% Nations Small Company Fund International stock funds 10-30% Nations International Value Fund Nations International Equity Fund Nations Marsico International Opportunities Fund Nations Emerging Markets Fund
The team can substitute or add other Funds to this list at any time, including Funds introduced after the date of this prospectus. [GRAPHIC] Risks and other things to consider LifeGoal Growth Portfolio has the following risks: o Investment strategy risk - The team uses an asset allocation strategy to try to achieve the highest total return. There is a risk that the mix of investments will not produce the returns they expect, or that the Portfolio will fall in value. There is also the risk that the Funds the Portfolio invests in will not produce the returns the team expects, or will fall in value. o Stock market risk - The Portfolio allocates assets to Funds that invest in stocks. The value of the stocks a Fund holds can be affected by changes in U.S. or foreign economies and financial markets, and the companies that issue the stocks, among other things. Stock prices can rise or fall over short as well as long periods. In general, stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. As of the date of this prospectus, the stock markets, as measured by the S&P 500 and other commonly used indices, were trading at historically high levels. There can be no guarantee that these levels will continue. o Small company risk - The Portfolio allocates assets to Funds that may invest in smaller companies. Stocks of smaller companies tend to have greater price swings than stocks of larger companies because they trade less frequently and in lower volumes. These securities may have a higher potential for gains, but also carry more risk. o Foreign investment risk - The Portfolio allocates assets to Funds that invest in foreign securities. Foreign investments may be riskier than U.S. investments because of political and economic conditions, changes in currency exchange rates, foreign controls on investment, difficulties selling some securities and lack of or limited financial information. Withholding taxes may also apply to some foreign investments. 6 o Emerging markets risk - The Portfolio allocates assets to Funds that invest in securities of companies in emerging markets. 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 Rebalancing policy - The actual amount in each Fund or category of Funds may vary from the allocations set by the team. This could continue for some time. [GRAPHIC] Many things affect a Portfolio's performance, including market conditions, the composition of the Portfolio's holdings and Portfolio expenses. [GRAPHIC] A look at the Portfolio's performance The following bar chart and table show you how the Portfolio has performed in the past, and can help you understand the risks of investing in the Portfolio. A Portfolio'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 Portfolio's Primary B 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. [BAR CHART APPEARS HERE] 8.73% 10.17% 25.31% 1997 1998 1999 *Year-to-date return as of June 30, 2000: 6.32% Best and worst quarterly returns during this period Best: 4th quarter 1998: 23.37% Worst: 3rd quarter 1998: -16.68%
Average annual total return as of December 31, 1999 The table shows the Portfolio's average annual total return for each period, compared with the S&P 500, an unmanaged index of 500 widely held common stocks, weighted by market capitalization. The index is not available for investment.
Since 1 year inception* Primary B Shares 25.31% 13.71% S&P 500 21.04% 23.27%
*The inception date of Primary B Shares is September 19, 1997. The return for the index shown is from inception of Primary B Shares. 7 [GRAPHIC] There are two kinds of fees -- shareholder fees you pay directly and annual fund operating expenses that are deducted from a portfolio's assets and from the assets of the Nations Funds the Portfolio invests in. [GRAPHIC] What it costs to invest in the Portfolio This table describes the fees and expenses that you may pay if you buy and hold shares of the Portfolio.
Shareholder fees (Fees paid directly from your investment) Primary B Shares Maximum sales charge (load) imposed on purchases none Maximum deferred sales charge (load) none Annual Portfolio operating expenses (Expenses that are deducted from the Portfolio's assets) Management fees 0.25% Shareholder administration fees(1) 0.60% ---- Total annual Portfolio operating expenses 0.85% ====
(1)Shareholder administration fees of 0.10% are voluntarily waived on Primary B Shares; however, there is no guarantee that these waivers will continue for any specified period of time. This waiver is not reflected in the table above. Indirect Expenses The Portfolio's annual operating expenses include a portion of the annual Fund operating expenses of the Nations Funds in which the Portfolio invests. This portion is estimated to be between 0.99% and 1.18% (expressed as a weighted average, including any fee waiver and/or reimbursement commitments that will expire July 31, 2001), and is based on: o the amount the Portfolio expects to invest in each Fund, based on the target allocation o each Fund's annualized expense ratio for the period ended March 31, 2000, adjusted as necessary to reflect current service provider fees [GRAPHIC] This is an example only. Your actual costs could be higher or lower, depending on the amount you invest, and on the Portfolio's actual expenses and performance. Example This example is intended to help you compare the cost of investing in this Portfolio with the cost of investing in other mutual funds. This example assumes: o you invest $10,000 in Primary B Shares of the Portfolio 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 Portfolio o your investment has a 5% return each year o the Portfolio's operating expenses remain the same as shown in the table above o the Portfolio's indirect expenses remain at the average of the range as shown above for the 1 year example, excluding any fee waivers and/or reimbursements for the 3, 5 and 10 year examples Although your actual costs may be higher or lower, based on these assumptions, your costs would be:
1 year 3 years 5 years 10 years Primary B Shares $196 $612 $1,054 $2,283
8 [GRAPHIC] About the sub-adviser BACAP is this Portfolio's sub-adviser. BACAP's Investment Strategies Team makes the day-to-day investment decisions for the Portfolio. [GRAPHIC] You'll find more about BACAP on page 24. [GRAPHIC] About the underlying Nations Funds You'll find more information about the Funds in which the Portfolio invests, including their objectives and strategies, in About the Nations Funds and in the SAI. LifeGoal Balanced Growth Portfolio [GRAPHIC] Investment objective The Portfolio seeks total return through a balanced portfolio of equity and fixed income securities. [GRAPHIC] Investment strategies The Portfolio normally invests all of its assets in Primary A Shares of a balanced mix of Nations Funds Domestic Stock and International Stock and Government & Corporate Bond Funds. The team uses asset allocation as its principal investment approach. It: o allocates assets among Fund categories, within the target allocations set for the Portfolio. It bases its allocations on the Portfolio's investment objective, historical returns for each asset class and on its outlook for the economy o chooses individual Funds within each category and the amount it will allocate to each, looking at each Fund's historical returns, as well as the expected performance of the mix of Funds o reviews the allocations to Fund categories and individual Funds at least monthly, and may change these allocations when it believes it's appropriate to do so The actual amount in each Fund or category of Funds may vary from the allocations set by the team, depending on how the Funds perform, and for other reasons. The team may use various strategies to try to manage how much the actual amount varies, and for how long. For example: o if there are more assets in a Fund category than in the target allocation, the team may allocate money coming into the Portfolio to the other Fund categories o if there are fewer assets in a Fund category than in the target allocation, it may allocate money coming into the Portfolio to that Fund category The Portfolio normally sells a proportionate amount of the shares it owns in each Nations Fund to meet its redemption requests. 9 [GRAPHIC] You'll find more about other risks of investing in this Portfolio starting on page 22 and in the SAI. [GRAPHIC] You'll find detailed information about each Fund's investment strategies and risks in its prospectus, and in its SAI. Please call us at 1.800.321.7854 for a copy.
LifeGoal Balanced Growth Portfolio Target allocation for each can invest in: Fund category: Large-capitalization domestic stock funds 20-40% Nations Value Fund Nations Blue Chip Fund Nations Strategic Growth Fund Nations Marsico Focused Equities Fund Nations MidCap Growth Fund Small-capitalization domestic stock fund 10-20% Nations Small Company Fund International stock funds 5-15% Nations International Value Fund Nations International Equity Fund Nations Marsico International Opportunities Fund Government & corporate bond funds 40-60% Nations Bond Fund Nations Strategic Income Fund Nations High Yield Bond Fund
The team can substitute or add other Funds to this list at any time, including Funds introduced after the date of this prospectus. [GRAPHIC] Risks and other things to consider LifeGoal Balanced Growth Portfolio has the following risks: o Investment strategy risk - The team uses an asset allocation strategy to try to achieve the highest total return. There is a risk that the mix of investments will not produce the returns they expect, or that the Portfolio will fall in value. There is also the risk that the Funds the Portfolio invests in will not produce the returns the team expects, or will fall in value. o Stock market risk - The Portfolio allocates assets to Funds that invest in stocks. The value of the stocks a Fund holds can be affected by changes in U.S. or foreign economies and financial markets, and the companies that issue the stocks, among other things. Stock prices can rise or fall over short as well as long periods. In general, stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. As of the date of this prospectus, the stock markets, as measured by the S&P 500 and other commonly used indices, were trading at historically high levels. There can be no guarantee that these levels will continue. o Small company risk - The Portfolio allocates assets to Funds that may invest in smaller companies. Stocks of smaller companies tend to have greater price swings than stocks of larger companies because they trade less frequently and in lower volumes. These securities may have a higher potential for gains, but also carry more risk. 10 o Foreign investment risk - The Portfolio allocates assets to Funds that invest in foreign securities. Foreign investments may be riskier than U.S. investments because of political and economic conditions, changes in currency exchange rates, foreign controls on investment, difficulties selling some securities and lack of or limited financial information. Withholding taxes may also apply to some foreign investments. Funds that invest in securities of companies in emerging markets have high growth potential, but can be more volatile than securities in more developed markets. o Interest rate risk - The Portfolio allocates assets to Funds that may invest in fixed income securities. 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 - A Fund that invests in fixed income securities 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 generally is not a factor for U.S. government obligations. The Portfolio allocates assets to Funds that typically invest in securities that are not investment grade and are generally considered speculative because they present a greater risk of loss, including default, than higher quality debt securities. These securities typically pay a premium -- a high interest rate or yield -- because of the increased risk of loss. These securities also can be subject to greater price volatility. o Rebalancing policy - The actual amount in each Fund or category of Funds may vary from the allocations set by the team. This could continue for some time. [GRAPHIC] Many things affect a Portfolio's performance, including market conditions, the composition of the Portfolio's holdings and Portfolio expenses. [GRAPHIC] A look at the Portfolio's performance The following bar chart and table show you how the Portfolio has performed in the past, and can help you understand the risks of investing in the Portfolio. A Portfolio'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 Portfolio's Primary B 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. [BAR CHART APPEARS HERE] 11.27% 14.03% 1998 1999 *Year-to-date return as of June 30, 2000: 3.96% Best and worst quarterly returns during this period Best: 4th quarter 1998: 12.22% Worst: 3rd quarter 1998: -9.02%
11 Average annual total return as of December 31, 1999 The table shows the Portfolio's average annual total return for each period, compared with the S&P 500 and the Lehman Aggregate Bond Index. The S&P 500 is an unmanaged index of 500 widely held common stocks, weighted by market capitalization. The Lehman Aggregate Bond Index is an index of fixed income securities issued by the U.S. government and its agencies, and by corporations. These indices are not available for investment.
1 year Since inception* Primary B Shares 14.03% 11.05% S&P 500 21.04% 21.28% Lehman Aggregate Bond Index -0.83% 4.66%
*The inception date of Primary B Shares is August 4, 1997. The returns for the indices shown are from inception of Primary B Shares. [GRAPHIC] There are two kinds of fees -- shareholder fees you pay directly, and annual fund operating expenses that are deducted from a portfolio's assets and from the assets of the Nations Funds the Portfolio invests in. [GRAPHIC] What it costs to invest in the Portfolio This table describes the fees and expenses that you may pay if you buy and hold shares of the Portfolio.
Shareholder fees (Fees paid directly from your investment) Primary B Shares Maximum sales charge (load) imposed on purchases none Maximum deferred sales charge (load) none Annual Portfolio operating expenses (Expenses that are deducted from the Portfolio's assets) Management fees 0.25% Shareholder administration fees(1) 0.60% ---- Total annual Portfolio operating expenses 0.85% ====
(1)Shareholder administration fees of 0.10% are voluntarily waived on Primary B Shares; however, there is no guarantee that these waivers will continue for any specified period of time. This waiver is not reflected in the table above. Indirect Expenses The Portfolio's annual operating expenses include a portion of the annual Fund operating expenses of the Nations Funds in which the Portfolio invests. This portion is estimated to be between 0.77% and 1.08% (expressed as a weighted average, including any fee waiver and/or reimbursement commitments that will expire in July 31, 2001), and is based on: o the amount the Portfolio expects to invest in each Fund, based on the target allocation o each Fund's annualized expense ratio for the period ended March 31, 2000, adjusted as necessary to reflect current service provider fees 12 [GRAPHIC] This is an example only. Your actual costs could be higher or lower, depending on the amount you invest, and on the Portfolio's actual expenses and performance. Example This example is intended to help you compare the cost of investing in this Portfolio with the cost of investing in other mutual funds. This example assumes: o you invest $10,000 in Primary B Shares of the Portfolio 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 Portfolio o your investment has a 5% return each year o the Portfolio's operating expenses remain the same as shown above o the Portfolio's indirect expenses remain at the average of the range as shown above for the 1 year example, excluding any fee waivers and/or reimbursements for the 3, 5 and 10 year examples Although your actual costs may be higher or lower, based on these assumptions, your costs would be:
1 year 3 years 5 years 10 years Primary B Shares $181 $564 $973 $2,114
13 [GRAPHIC] About the sub-adviser BACAP is this Portfolio's sub-adviser. BACAP's Investment Strategies Team makes the day-to-day investment decisions for the Portfolio. [GRAPHIC] You'll find more about BACAP on page 24. [GRAPHIC] About the underlying Nations Funds You'll find more information about the Funds in which the Portfolio invests, including their objectives and strategies, in About the Nations Funds and in the SAI. LifeGoal Income and Growth Portfolio [GRAPHIC] Investment objective The Portfolio seeks current income and modest growth to protect against inflation and to preserve purchasing power. [GRAPHIC] Investment strategies The Portfolio normally invests most of its assets in Primary A Shares of Nations Funds Government & Corporate Bond Funds, but may also invest in Nations Funds Domestic Stock and International Stock Funds, and Nations Funds Money Market Funds. The team uses asset allocation as its principal investment approach. It: o allocates assets among Fund categories, within the target allocations set for the Portfolio. It bases its allocations on the Portfolio's investment objective, historical returns for each asset class and on its outlook for the economy o chooses individual Funds within each category and the amount it will allocate to each, looking at each Fund's historical returns, as well as the expected performance of the mix of Funds o reviews the allocations to Fund categories and individual Funds at least monthly, and may change these allocations when it believes it's appropriate to do so The actual amount in each Fund or category of Funds may vary from the allocations set by the team, depending on how the Funds perform, and for other reasons. The team may use various strategies to try to manage how much the actual amount varies, and for how long. For example: o if there are more assets in a Fund category than in the target allocation, the team may allocate money coming into the Portfolio to the other Fund categories o if there are fewer assets in a Fund category than in the target allocation, it may allocate money coming into the Portfolio to that Fund category The Portfolio normally sells a proportionate amount of the shares it owns in each Nations Fund to meet its redemption requests. 14 [GRAPHIC] You'll find more about other risks of investing in this Portfolio starting on page 22 and in the SAI. [GRAPHIC] You'll find detailed information about each Fund's investment strategies and risks in its prospectus, and in its SAI. Please call us at 1.800.321.7854 for a copy.
LifeGoal Income and Growth Target allocation for each can invest in: Fund category: Large-capitalization domestic stock funds 10-30% Nations Value Fund Nations Blue Chip Fund Nations Strategic Growth Fund Nations Marsico Focused Equities Fund Small-capitalization domestic stock fund 0-10% Nations Small Company Fund International stock funds 0-10% Nations International Value Fund Nations International Equity Fund Government & corporate bond funds 50-90% Nations Short-Term Income Fund Nations Bond Fund Nations Strategic Income Fund Nations High Yield Bond Fund Money market funds 0-20% Nations Prime Fund
LifeGoal Income and Growth's target allocation for total investments in domestic stock and international stock funds is 30%. The team can substitute or add other Funds to this list at any time, including Funds introduced after the date of this prospectus. [GRAPHIC] Risks and other things to consider LifeGoal Income and Growth Portfolio has the following risks: o Investment strategy risk - The team uses an asset allocation strategy to try to achieve the highest total return. There is a risk that the mix of investments will not produce the returns they expect, or that the Portfolio will fall in value. There is also the risk that the Funds the Portfolio invests in will not produce the returns the team expects, or will fall in value. o Stock market risk - The Portfolio allocates assets to Funds that invest in stocks. The value of the stocks a Fund holds can be affected by changes in U.S. or foreign economies and financial markets, and the companies that issue the stocks, among other things. Stock prices can rise or fall over short as well as long periods. In general, stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. As of the date of this prospectus, the stock markets, as measured by the S&P 500 and other commonly used indices, were trading at historically high levels. There can be no guarantee that these levels will continue. o Small company risk - The Portfolio allocates assets to Funds that may invest in smaller companies. Stocks of smaller companies tend to have greater price swings than stocks of larger companies because they trade less frequently and in lower volumes. These securities may have a higher potential for gains, but also carry more risk. 15 o Foreign investment risk - The Portfolio allocates assets to Funds that invest in foreign securities. Foreign investments may be riskier than U.S. investments because of political and economic conditions, changes in currency exchange rates, foreign controls on investment, difficulties selling some securities and lack of or limited financial information. Withholding taxes may also apply to some foreign investments. Funds that invest in securities of companies in emerging markets have high growth potential, but can be more volatile than securities in more developed markets. o Interest rate risk - The Portfolio allocates assets to Funds that may invest in fixed income securities. 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 - A Fund that invests in fixed income securities 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 generally is not a factor for U.S. government obligations. The Portfolio allocates assets to Funds that typically invest in securities that are not investment grade and are generally considered speculative because they present a greater risk of loss, including default, than higher quality debt securities. These securities typically pay a premium -- a high interest rate or yield -- because of the increased risk of loss. These securities also can be subject to greater price volatility. o Rebalancing policy - The actual amount in each Fund or category of Funds may vary from the allocations set by the team. This could continue for some time. 16 [GRAPHIC] Many things affect a Portfolio's performance, including market conditions, the composition of the Portfolio's holdings and Portfolio expenses. The returns shown are for a class not offered in this prospectus that has similar annual returns because the shares are invested in the same portfolio of securities. The annual returns differ only to the extent that the classes do not have the same expenses. [GRAPHIC] A look at the Portfolio's performance The following bar chart and table show you how the Portfolio has performed in the past, and can help you understand the risks of investing in the Portfolio. A Portfolio'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 Portfolio'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. [BAR GRAPH APPEARS HERE] 8.50% 10.25% 6.15% 1997 1998 1999 *Year-to-date return as of June 30, 2000: 1.77% Best and worst quarterly returns during this period Best: 4th quarter 1998: 6.25% Worst: 3rd quarter 1998: -2.38%
Average annual total return as of December 31, 1999 The table shows the Portfolio's average annual total return for each period, compared with the S&P 500 and the Lehman Aggregate Bond Index. The S&P 500 is an unmanaged index of 500 widely held common stocks, weighted by market capitalization. The Lehman Aggregate Bond Index is an index of fixed income securities issued by the U.S. government and its agencies, and by corporations. These indices are not available for investment.
Since 1 year inception* Investor A Shares 6.15% 8.36% S&P 500 21.04% 28.31% Lehman Aggregate Bond Index -0.83% 6.24%
*The inception date of Investor A Shares is October 15, 1996. The returns for the indices shown are from inception of Investor A Shares. 17 [GRAPHIC] There are two kinds of fees -- shareholder fees you pay directly and annual fund operating expenses that are deducted from a portfolio's assets and from the assets of the Nations Funds the Portfolio invests in. [GRAPHIC] What it costs to invest in the Portfolio This table describes the fees and expenses that you may pay if you buy and hold shares of the Portfolio.
Shareholder fees (Fees paid directly from your investment) Primary B Shares Maximum sales charge (load) imposed on purchases none Maximum deferred sales charge (load) none Annual Portfolio operating expenses (Expenses that are deducted from the Portfolio's assets) Management fees 0.25% Shareholder administration fees(1) 0.60% ---- Total annual Portfolio operating expenses 0.85% ====
(1)Shareholder administration fees of 0.10% are voluntarily waived on Primary B Shares; however, there is no guarantee that these waivers will continue for any specified period of time. This waiver is not reflected in the table above. Indirect Expenses The Portfolio's annual operating expenses include a portion of the annual Fund operating expenses of the Nations Funds in which the Portfolio invests. This portion is estimated to be between 0.46% and 0.98% (expressed as a weighted average, including any fee waiver and/or reimbursement commitments that will expire July 31, 2001), and is based on: o the amount the Portfolio expects to invest in each Fund, based on the target allocation o each Fund's annualized expense ratio for the period ended March 31, 2000, adjusted as necessary to reflect current service provider fees [GRAPHIC] This is an example only. Your actual costs could be higher or lower, depending on the amount you invest, and on the Portfolio's actual expenses and performance. Example This example is intended to help you compare the cost of investing in this Portfolio with the cost of investing in other mutual funds. This example assumes: o you invest $10,000 in Primary B Shares of the Portfolio 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 Portfolio o your investment has a 5% return each year o the Portfolio's operating expenses remain the same as shown above o the Portfolio's indirect expenses remain at the average of the range as shown above for the 1 year example, excluding any fee waivers and/or reimbursements for the 3, 5 and 10 year examples Although your actual costs may be higher or lower, based on these assumptions, your costs would be:
1 year 3 years 5 years 10 years Primary B Shares $160 $513 $889 $1,948
18 About the Nations Funds The table starting on the next page is a brief overview of the objectives and principal investments of the Nations Funds in which the LifeGoal Portfolios invest. Each Portfolio invests in a different mix of Nations Funds. You'll find the mix of Nations Funds and target allocations for each Portfolio starting on page 5. The team can substitute or add other Funds to this table at any time, including Funds introduced after the date of this prospectus. For more information You'll find more detailed information about each Fund's investment strategies and risks in its prospectus and in its SAI. Please call us at 1.800.321.7854 for copies. 19
The Fund's investment objective --------------------------------------------------------------------------------- Domestic Stock Funds Growth of capital by investing in companies Nations Value Fund that are believed to be undervalued. --------------------------------------------------------------------------------- Nations Blue Chip Fund Long-term capital appreciation through investments in blue chip stocks. --------------------------------------------------------------------------------- Nations Strategic Growth Fund Long-term, after-tax returns by investing in a diversified portfolio of common stocks. --------------------------------------------------------------------------------- Nations Marsico Focused Long-term growth of capital. Equities Fund --------------------------------------------------------------------------------- Nations MidCap Growth Fund Capital appreciation by investing in emerging growth companies that are believed to have superior long-term earnings growth prospects. --------------------------------------------------------------------------------- Nations Small Company Fund Long-term capital growth by investing primarily in equity securities. --------------------------------------------------------------------------------- International Stock Funds Long-term capital appreciation by investing Nations International Value primarily in equity securities of foreign Fund issuers, including emerging markets countries. --------------------------------------------------------------------------------- Nations International Equity Long-term capital growth by investing Fund primarily in equity securities of non-United States companies in Europe, Australia, the Far East and other regions, including developing countries. --------------------------------------------------------------------------------- What the Fund invests in ------------------------------------------------------------------------------------------- Domestic Stock Funds o at least 65% of its assets in common stocks of U.S. Nations Value Fund companies. The Fund generally invests in companies in a broad range of industries with market capitalizations of at least $1 billion and daily trading volumes of at least $3 million ------------------------------------------------------------------------------------------- Nations Blue Chip Fund Nations Blue Chip Master portfolio. The Master Portfolio invests: o at least 65% of its assets in blue chip stocks o primarily in blue chip stocks that are included in the S&P 500 Index ------------------------------------------------------------------------------------------- Nations Strategic Growth Fund At least 65% of its assets in common stocks of companies selected from most major industry sectors. ------------------------------------------------------------------------------------------- Nations Marsico Focused Nations Marsico Focused Equities Master Portfolio. The Equities Fund Master Portfolio invests: o at least 65% of its assets in common stocks of large companies. The Master Portfolio, which is non-diversified, generally holds a core position of 20 to 30 common stocks o up to 25% of its assets in foreign securities ------------------------------------------------------------------------------------------- Nations MidCap Growth Fund o at least 65% of its assets in companies chosen from a universe of emerging growth companies. The Fund generally holds securities of between 75 and 130 issuers, which include common stocks, preferred stocks and convertible securities like warrants, rights and convertible debt ------------------------------------------------------------------------------------------- Nations Small Company Fund o at least 65% of its assets in companies with a market capitalization of $1 billion or less. The Fund usually holds 75 to 130 securities, which include common stocks, preferred stocks and convertible securities like warrants, rights and convertible debt ------------------------------------------------------------------------------------------- International Stock Funds Nations International Value Master Portfolio. The Master Nations International Value Portfolio invests: Fund o at least 65% of its assets in foreign companies anywhere in the world that have a market capitalization of more than $1 billion at the time of investment. The Fund typically invests in at least three countries other than the United States at any one time o primarily in common stocks, preferred stocks, convertible securities, either directly or indirectly through closed-end investment companies and depositary receipts ------------------------------------------------------------------------------------------- Nations International Equity Nations International Equity Master Portfolio. The Master Fund Portfolio invests: o at least 65% of its assets in established companies located in at least three countries other than the United States. The investment managers select countries, including emerging market or developing countries, that they believe have the potential for growth o primarily in equity securities, which may include equity interests in foreign investment funds or trusts, convertible securities, real estate investment trust ecurities and depositary receipts -------------------------------------------------------------------------------------------
20
The Fund's investment objective -------------------------------------------------------------------------------- Nations Marsico International Long-term growth of capital. Opportunities Fund -------------------------------------------------------------------------------- Nations Emerging Markets Long-term capital growth by investing Fund primarily in equity securities of companies in emerging market countries, such as those in Latin America, Eastern Europe, the Pacific Basin, the Far East and India. -------------------------------------------------------------------------------- Government & Corporate Bond High current income consistent with Funds minimal fluctuations of principal. Nations Short-Term Income Fund -------------------------------------------------------------------------------- Nations Bond Fund Total return by investing in investment grade fixed income securities. -------------------------------------------------------------------------------- Nations Strategic Income Fund Total return with an emphasis on current income by investing in a diversified portfolio of fixed income securities. -------------------------------------------------------------------------------- Nations High Yield Bond Fund Maximum income by investing in a diversified portfolio of high yield debt securities. -------------------------------------------------------------------------------- Money Market Fund Maximization of current income to the Nations Prime Fund extent consistent with the preservation of capital and the maintenance of liquidity. -------------------------------------------------------------------------------- What the Fund invests in ------------------------------------------------------------------------------------------ Nations Marsico International Nations Marsico International Opportunities Master Opportunities Fund Portfolio. The Master Portfolio invests: o at least 65% of its assets in common stocks of foreign companies. The Fund typically invests in issuers from at least three different countries not including the United States and generally holds a core position of 35 to 50 common stocks o in common stocks of companies operating in emerging markets ------------------------------------------------------------------------------------------ Nations Emerging Markets o at least 65% of its assets in companies in emerging Fund markets or developing countries. The Fund intends to invest in securities of companies in at least three of these countries at any one time ------------------------------------------------------------------------------------------ Government & Corporate Bond o at least 65% of its total assets in investment grade Funds fixed income securities. The team may choose unrated Nations Short-Term Income securities if it believes they are of comparable quality Fund to investment grade securities at the time of investment o corporate debt securities, including bonds, notes and debentures, mortgage-related securities issued by governments, asset-backed securities or U.S. government obligations ------------------------------------------------------------------------------------------ Nations Bond Fund o at least 65% of its assets in investment grade fixed income securities. The portfolio management team may choose unrated securities if it believes they are of comparable quality to investment grade securities at the time of investment o corporate debt securities, including bonds, notes and debentures, U.S. government obligations, foreign debt securities denominated in U.S. dollars, mortgage-related securities, asset-backed securities or municipal securities ------------------------------------------------------------------------------------------ Nations Strategic Income Fund o at least 65% of its assets in investment grade debt securities, including corporate debt securities, U.S. government obligations, foreign debt securities denominated in U.S. dollars or foreign currencies, and mortgage-related securities issued by governments and non-government issuers o up to 35% of its assets in lower-quality fixed income securities ("junk bonds" or "high yield bonds") rated "B" or better by Moody's or S&P. The portfolio management team may choose unrated securities if it believes they are of comparable quality at the time of investment ------------------------------------------------------------------------------------------ Nations High Yield Bond Fund Nations High Yield Bond Master Portfolio. The Master Portfolio invests: o at least 65% of its assets in domestic and foreign corporate high yield debt securities which are not rated investment grade, but generally will be rated "B" or better by Moody's Investor Services, Inc. or Standard & Poor's Corporation ------------------------------------------------------------------------------------------ Money Market Fund o money market instruments, including commercial Nations Prime Fund paper, bank obligations, short-term debt securities, guaranteed investment contracts, short-term taxable municipal securities, repurchase agreements secured by first-tier securities or U.S. government obligations ------------------------------------------------------------------------------------------
21 [GRAPHIC] You'll find specific information about each Portfolio's principal investments, strategies and risks in the descriptions starting on page 5. [GRAPHIC] Other important information 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 Portfolio or Fund can be changed without shareholder approval. Other investment policies may be changed only with shareholder approval. o Holding other kinds of investments - The Portfolios or any Fund may hold investments that aren't part of their principal investment strategies. Please refer to the SAI for more information. The portfolio managers or management team can also choose not to invest in specific securities described in this prospectus and in the SAI. o Foreign investment risk - Funds that invest in foreign securities may be affected by changes in currency exchange rates and the costs of converting currencies; foreign government controls on foreign investment, repatriation of capital, and currency and exchange; foreign taxes; inadequate supervision and regulation of some foreign markets; difficulties selling some investments, which may increase volatility; different settlement practices or delayed settlements in some markets; difficulty getting complete or accurate information about foreign companies; less strict accounting, auditing and financial reporting standards than those in the U.S.; political, economic or social instability; and difficulty enforcing legal rights outside the U.S. o Investing defensively - A Portfolio may temporarily hold up to 100% of its assets in Nations Prime Fund, a money market fund, to try to protect it during a market or economic downturn or because of political or other conditions. A Portfolio may not achieve its investment objective while it is investing defensively. o Securities lending program - A Fund may lend portfolio securities to approved broker-dealers or other financial institutions on a fully collateralized basis in order to earn additional income. There may be delays in receiving additional collateral after the loan is made or in recovering the securities loaned. o Portfolio turnover - A Portfolio or 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 Portfolio's returns. The Portfolios generally buy securities for capital appreciation, investment income, or both, and don't engage in short-term trading. You'll find the portfolio turnover rate for each Portfolio in Financial highlights. 22 [GRAPHIC] How the Portfolios are managed [GRAPHIC] Banc of America Advisors, Inc. One Bank of America Plaza Charlotte, North Carolina 28255 Investment adviser BAAI is the investment adviser to over 60 mutual fund portfolios in the Nations Funds Family, including the Portfolios described in this prospectus. BAAI is a registered investment adviser. It's a wholly-owned subsidiary of Bank of America, which is owned by Bank of America Corporation. Nations Funds pays BAAI an annual fee for its investment advisory services. The fee is calculated as a percentage of the average daily net assets of each Portfolio and is paid monthly. BAAI uses part of this money to pay the investment sub-adviser for the services it provides to each Portfolio. BAAI has also agreed to pay all other Portfolio expenses, except taxes, brokerage fees and commissions, extraordinary expenses, and any distribution (12b-1), shareholder servicing or shareholder administration fees. The following chart shows the maximum advisory fees BAAI can receive, along with the actual advisory fees it received during the Portfolios' last fiscal year: Annual investment advisory fee, as a % of average daily net assets
Maximum Actual fee advisory paid last fee fiscal year Nations LifeGoal Growth Portfolio 0.25% 0.25% Nations LifeGoal Balanced Growth Portfolio 0.25% 0.25% Nations LifeGoal Income and Growth Portfolio 0.25% 0.25%
23 Investment sub-advisers Nations Funds and BAAI engage one or more investment sub-advisers for each Portfolio to make day-to-day investment decisions for the Portfolio. BAAI retains ultimate responsibility (subject to Board oversight) for overseeing the sub-advisers and evaluates the Portfolios' needs and available sub-advisers' skills and abilities on an ongoing basis. Based on its evaluations, BAAI may at times recommend to a Portfolio's Board that the Portfolio: o change, add or terminate one or more sub-advisers; o continue to retain a sub-adviser even though the sub-adviser's ownership or corporate structure has changed; or o materially change a sub-advisory agreement with a sub-adviser. Applicable law requires a Portfolio to obtain shareholder approval in order to act on most of these types of recommendations, even if the Portfolio's Board has approved the proposed action and believes that the action is in shareholders' best interests. BAAI and the Portfolios plan to apply for relief from the SEC to permit the Portfolios to act on many of BAAI's recommendations with approval only by the Portfolios' Board and not by Portfolio shareholders. BAAI or a Portfolio would inform the Portfolio's shareholders of any actions taken in reliance on this relief. Until BAAI and the Portfolios obtain the relief, each Portfolio will continue to submit these matters to shareholders for their approval to the extent required by applicable law. [GRAPHIC] Banc of America Capital Management, Inc. One Bank of America Plaza Charlotte, North Carolina 28255 Banc of America Capital Management, Inc. BACAP is a registered investment adviser and a wholly-owned subsidiary of Bank of America. Its management expertise covers all major domestic asset classes, including equity and fixed income securities, and money market instruments. Currently managing more than $125 billion, BACAP has over 200 institutional clients and is sub-adviser to more than 65 mutual funds in the Nations Funds Family. BACAP generally takes a team approach to investment management. Each team or individual portfolio manager has access to the latest technology and analytical resources. BACAP is the investment sub-adviser to all of the LifeGoal Portfolios. BACAP's Investment Strategies Team is responsible for making the day-to-day investment decisions for each Portfolio. BACAP is also the investment sub-adviser to the Nations Funds that appear in the table below. The table tells you which internal BACAP asset management team is responsible for making the day-to-day investment decisions for each Fund. 24
Fund BACAP Team Nations Value Fund Value Strategies Team Nations Small Company Fund SmallCap Strategies Team Nations Short-Term Income Fund Fixed Income Management Team Nations Bond Fund Fixed Income Management Team Nations Strategic Income Fund Fixed Income Management Team Nations Prime Fund Taxable Money Market Management Team Nations Strategic Growth Fund Growth Strategies Team Nations MidCap Growth Fund Growth Strategies Team
Nations Funds and BAAI have engaged investment sub-advisers to provide day-to-day portfolio management for the underlying Nations Funds in which the Portfolios invest. These sub-advisers function under the supervision of BAAI and the Boards of Nations Funds. [GRAPHIC] Marsico Capital Management, LLC 1200 17th Street Suite 1300 Denver, Colorado 80202 Marsico Capital Management, LLC Marsico Capital is a full service investment advisory firm founded by Thomas F. Marsico in September 1997. It is a registered investment adviser, specializing in large capitalization stocks, and currently has over $16 billion in assets under management. Marsico Management Holdings, LLC, a wholly-owned subsidiary of Bank of America Corporation, indirectly owns the equity of Marsico Capital. Marsico Capital is the investment sub-adviser to Nations Marsico Focused Equities Master Portfolio and Nations Marsico International Opportunities Master Portfolio. Thomas F. Marsico, Chairman and Chief Executive Officer of Marsico Capital, is the portfolio manager responsible for making the day-to-day investment decisions for Nations Marsico Focused Equities Master Portfolio. Mr. Marsico was an executive vice president and portfolio manager at Janus Capital Corporation from 1988 until he formed Marsico Capital in September 1997. He has more than 20 years of experience as a securities analyst and portfolio manager. James G. Gendelman is the portfolio manager of Nations Marsico International Opportunities Master Portfolio. Prior to joining Marsico Capital in May, 2000, Mr. Gendelman spent thirteen years as a Vice President of International Sales for Goldman, Sachs & Co. He holds a Bachelors degree in Accounting from Michigan State University and an MBA in Finance from the University of Chicago. Mr. Gendelman was an accountant for Ernst & Young from 1983 to 1985. 25 [GRAPHIC] Brandes Investment Partners, L.P. 12750 High Bluff Drive San Diego, California 92130 Brandes Investment Partners, L.P. Founded in 1974, Brandes is an investment advisory firm with 53 investment professionals who manage more than $40 billion in assets. Brandes uses a value-oriented approach to managing international investments, seeking to build wealth by buying high quality, undervalued stocks. Brandes is the investment sub-adviser to Nations International Value Master Portfolio. Brandes' Large Cap Investment Committee is responsible for making the day-to-day investment decisions for the Master Portfolio. [GRAPHIC] Chicago Equity Partners LLC 180 North LaSalle Suite 3800 Chicago, Illinois 60601 Chicago Equity Partners LLC Chicago Equity is a registered investment adviser and is owned by the firm's senior management. Chicago Equity is the investment sub-adviser to Nations Blue Chip Master Portfolio. Chicago Equity's Equity Management Team is responsible for making the day-to-day investment decisions for Nations Blue Chip Master Portfolio. [GRAPHIC] Gartmore Global Partners Gartmore House 8 Fenchurch Place London EC3M 4PH, England Gartmore Global Partners Gartmore is a global asset manager dedicated to serving the needs of U.S. based investors. Gartmore was formed in 1995 as a registered investment adviser and manages more than $1 billion in assets. Gartmore is a general partnership which is an indirect wholly-owned subsidiary of Nationwide Mutual Insurance Company. Gartmore generally follows a growth philosophy, which is reflected in its active management of market allocation and stock selection. Gartmore is co-investment sub-adviser to: o Nations International Equity Master Portfolio Gartmore is the investment sub-adviser to: o Nations Emerging Markets Fund Gartmore's portion of Nations International Equity Master Portfolio is co-managed by five portfolio managers: Christopher Palmer has been responsible since May 1999 for investments in developing countries, and has been the principal portfolio manager of Nations Emerging Markets Fund since that time. He joined Gartmore in 1995 and is a senior investment manager on the Gartmore Emerging Markets Team. Before he joined Gartmore, Mr. Palmer worked for Unifund, S.A., a private investment bank, in its Mexico City and Hong Kong offices, and managed global derivatives, credit and counterparty credit risk as vice president in the Institutional Credit Department of Bear Stearns & Co. He graduated from Colgate University in 1986 with a BA Honors degree in History and completed an MBA in Finance at New York University in 1988. Mr. Palmer was awarded the CFA designation by the Association of Investment Management and Research in 1993. 26 Seok Teoh has been responsible since June 1998 for investments in Asia. Ms. Teoh has been with Gartmore since 1990 as the London based manager of its Far East Team. Previously, she managed four equity funds for Rothschild Asset Management in Tokyo and Singapore, and was also responsible for Singaporean and Malaysian equity sales at Overseas Union Bank Securities in Singapore. Ms. Teoh is native to Singapore and is fluent in Mandarin and Cantonese. She received an Economics degree from the University of Durham. Nick Reid has been responsible (or has shared responsibility) for investments in Japan since August 1999. He has been investment manager for the Gartmore Japanese Equities Team since he joined Gartmore in 1994 and has specific responsibility for managing retail funds. Before he joined Gartmore, Mr. Reid was a United Kingdom Smaller Companies Analyst with Panmure Gordon and a fund manager covering Japanese and other Asian markets with Refuge Assurance. He graduated from Cambridge University in 1989 with an honors degree in History. Mr. Reid is also an associate member of the Institute of Investment Management and Research. Stephen Jones has been responsible for investments in Europe since 1998. He is also head of Gartmore European Equities. Mr. Jones joined Gartmore in 1994 and was appointed head of the European equity team in 1995. He began his career at The Prudential in 1984, and became a European equities investment manager in 1987, focusing on France, Belgium and Switzerland. He graduated from Manchester University in 1984 with an honors degree in Economics. Stephen Watson has been responsible since June 1998 for allocating assets among the various regions, and for determining investments in regions not covered by the other portfolio managers. He was the sole portfolio manager of Nations International Equity Fund from February 1995 to June 1998. Mr. Watson joined Gartmore in 1993 as a global fund manager, and is the chief investment officer of Gartmore Global Partners and a member of Gartmore's global policy group. Before joining Gartmore, he was a director and global fund manager with James Capel Fund Managers, London, as well as client service manager for international clients. He was in Capel-Cure Myers' portfolio management division from 1980 to 1987, and began his career in 1976 with Samuel Motagu. He is a member of the Securities Institute. Nations Emerging Markets Fund is managed by Christopher Palmer, a senior investment manager on the Gartmore Emerging Markets Team. He has managed the Fund since August 1999. He also co-manages Nations International Equity Master Portfolio. [GRAPHIC] INVESCO Global Asset Management (N.A), Inc. 1360 Peachtree Street, N.E. Atlanta, Georgia 30309 INVESCO Global Asset Management (N.A.), Inc. INVESCO Global is a division of AMVESCAP PLC, a publicly traded UK financial holding company located in London. INVESCO Global is one of the three investment sub-advisers to Nations International Equity Master Portfolio. INVESCO's International Equity Portfolio Management Team is responsible for making the day-to-day investment decisions for its portion of the Master Portfolio. 27 [GRAPHIC] Putnam Investment Management, Inc. One Post Office Square Boston, Massachusetts 02109 Putnam Investment Management, Inc. Putnam is a wholly-owned subsidiary of Putnam Investments, Inc., which, except for shares held by employees, is owned by Marsh & McLennan Companies. Putnam is one of three investment sub-advisers to Nations International Equity Master Portfolio. Putnam's Core International Equity Group is responsible for making the day-to-day investment decisions for its portion of the Master Portfolio. [GRAPHIC] MacKay Shields LLC 9 West 57th Street New York, New York 10019 MacKay Shields LLC Founded in 1938, MacKay Shields is an independently-managed, wholly-owned subsidiary of New York Life Insurance Company. The firm's 63 investment professionals manage more than $30 billion in assets, including over $6 billion in high yield assets. MacKay Shields' High Yield Portfolio Management Team is responsible for making the day-to-day decisions for Nations High Yield Bond Master Portfolio. [GRAPHIC] Stephens Inc. 111 Center Street Little Rock, Arkansas 72201 Other service providers The Portfolios are distributed and co-administered by Stephens Inc., a registered broker/dealer. Stephens does not receive any fees for the administrative services it provides to the Portfolios. The Portfolios pay shareholder administration fees to BAAI or financial institutions for providing services to investors. BAAI is also co-administrator of the Portfolios, and assists in overseeing the administrative operations of the Funds. [GRAPHIC] PFPC Inc. 400 Bellevue Parkway Wilmington, Delaware 19809 PFPC Inc. (PFPC) is also the transfer agent for the Portfolios' shares. Its responsibilities include processing purchases, sales and exchanges, calculating and paying distributions, keeping shareholder records, preparing account statements and providing customer service. 28 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 B Shares of the Portfolios. Here are some general rules about this class of shares: o Primary B Shares are generally available only to financial institutions and intermediaries that sign an account with us or Stephens. These include: o Bank of America and certain of its affiliates o brokerage firms o other financial institutions o The minimum initial investment is $1,000. 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 B 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 Portfolios also offer other classes of shares, with different features and expense levels, which you may be eligible to buy. Please contact your investment professional, or call us at 1.800.321.7854 if you have any questions or you need help placing an order. How shares are priced All transactions are based on the price of a Portfolio's shares -- or its net asset value per share. We calculate net asset value per share for each class of each Portfolio at the end of each business day. The net asset value per share of a Portfolio is based on the net asset value per share of the Nations Funds the Portfolio invests in. 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 an underlying Fund The value of a Fund's assets is based on the total market value of all of the securities it holds. The prices reported on stock exchanges and securities markets around the world are usually used to value securities in a Fund. If prices aren't readily available, or the value of a security has been materially affected by events occurring after a foreign exchange closes, we'll base the price of a security on its fair value. When a Fund uses fair value to price securities it may value those securities higher or lower than another fund that uses market quotations to price the same securities. We use the amortized cost method, which approximates market value, to value short-term investments maturing in 60 days or less. International markets may be open on days when U.S. markets are closed. The value of foreign securities owned by a Fund could change on days when Fund shares may not be bought or sold. 29 How orders are processed Orders to buy, sell or exchange shares are processed on business days. Orders received by Stephens, PFPC or their agents before the end of a business day (usually 4:00 p.m. Eastern time, unless the NYSE closes early) will receive that day's net asset value per share. Orders received after the end of a business day will receive the next business day's net asset value per share. The business day that applies to your order is also called the trade date. We may refuse any order to buy or exchange shares. If this happens, we'll return any money we've received. [GRAPHIC] Buying shares Here are some general rules for buying shares: o Investors buy Primary B 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 Portfolio. We don't issue certificates. o Financial institutions and intermediaries are responsible for recording the beneficial ownership of the shares of their clients, and for reporting this ownership on account statements they send to their clients. [GRAPHIC] Selling shares Here are some general rules for selling shares: o We normally send the sale proceeds by federal funds wire within three business days after Stephens, PFPC or their agents receive the order. o Financial institutions and intermediaries are responsible for sending us orders for their clients and for depositing the sale proceeds to their accounts on time. o If you paid for your shares with a check that wasn't certified, we'll hold the sale proceeds when you sell those shares for at least 15 days after the trade date of the purchase, or until the check has cleared, whichever is later. o 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 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 on these restrictions, please contact your retirement plan administrator. 30 We may sell shares: o if the value of an investor's account falls below $500. We'll provide 60 days notice in writing if we're going to do this o if a financial institution or intermediary tells us to sell the shares for a client under arrangements it has made with its clients o under certain other circumstances allowed under the 1940 Act [GRAPHIC] You should make sure you understand the investment objective and principal investment strategies of the Portfolio or Fund you're exchanging into. Please read its prospectus carefully. [GRAPHIC] Exchanging shares Investors can sell shares of a Portfolio to buy shares of another Portfolio or 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 B Shares of a Portfolio for Primary B Shares of any other Portfolio or Nations Fund. o The rules for buying shares of a Portfolio or Fund, including any minimum investment requirements, apply to exchanges into that Portfolio or Fund. o Exchanges can only be made into a Portfolio or Fund that is legally sold in the investor's state of residence. o Exchanges can generally only be made into a Portfolio or 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). 31 [GRAPHIC] How selling and servicing agents are paid [GRAPHIC] The financial institution or intermediary that buys shares for you is also sometimes referred to as a selling agent. The selling agent may charge other fees for services provided to your account. Selling and servicing agents usually receive compensation when you invest in the Portfolios. The kind and amount of the compensation depends on the share class in which you invest. Selling agents typically pay a portion of the compensation they receive to their investment professionals. Shareholder administration fees BAAI, its affiliates and/or other financial institutions and intermediaries may receive a maximum annual shareholder administration fee of up to 0.60% of the average daily net assets of Primary B Shares of the Portfolios under a shareholder administration plan. Fees are calculated daily and deducted monthly. Because these fees are paid out of the Portfolios' assets on an ongoing basis they will increase the cost of your investment over time, and may cost you more than any sales charge you may pay. The Portfolios pay these fees to eligible financial institutions for as long as the plan continues. We may reduce or discontinue payments at any time. Other compensation Selling and servicing agents may also receive 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 Portfolios, 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 may also receive compensation for opening a minimum number of accounts. BAAI and Stephens may pay amounts from their own assets to selling or servicing agents of the Funds for services they provide. 32 [GRAPHIC] Distributions and taxes [GRAPHIC] The power of compounding Reinvesting your distributions buys you more shares of a Portfolio -- which lets you take advantage of the potential for compound growth. Putting the money you earn back into your investment means it, in turn, may earn even more money. Over time, the power of compounding has the potential to significantly increase the value of your investment. There is no assurance, however, that you'll earn more money if you reinvest your distributions. About distributions A mutual fund can make money two ways: o It can earn income. Examples are interest paid on bonds and dividends paid on common stocks. o A fund can also have capital gain if the value of its investments increases. If a fund sells an investment at a gain, the gain is realized. If a fund continues to hold the investment, any gain is unrealized. A mutual fund is not subject to income tax as long as it distributes its net investment income and realized capital gain to its shareholders. The Portfolios intend to pay out a sufficient amount of their income and capital gain to their shareholders so the Portfolios won't have to pay any income tax. When a Portfolio makes this kind of a payment, it's split equally among all shares, and is called a distribution. All of the Portfolios distribute net investment income quarterly, and any net realized capital gain at least once a year. The distribution you receive 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 Portfolio 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 Portfolio unless you tell us you want to receive your distributions in cash. You can do this by writing to us at the address on the back cover or by calling us at 1.800.321.7854. We generally pay cash distributions within five business days after the end of the month, quarter or year in which the distribution was made. If you sell all of your shares, we'll normally pay any distribution that applies to those shares in cash within five business days after the sale was made. If you buy shares of a Portfolio 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 Portfolio that holds securities with unrealized capital gain, you will, in effect, receive part of your purchase back if and when the Portfolio sells those securities and distributes the gain. This distribution is also subject to tax. Some Portfolios have built up, or have the potential to build up, high levels of unrealized capital gain. 33 [GRAPHIC] This information is a summary of how federal income taxes may affect your investment in the Portfolios. It is not intended as a substitute for careful tax planning. You should consult with your own tax adviser about your situation, including any foreign, state and local taxes that may apply. [GRAPHIC] For more information about taxes, please see the SAI. How taxes affect your investment Distributions that come from net investment income and any net short-term capital gain (generally the excess of net short-term capital gain over net long-term capital loss) generally are taxable to you as ordinary income. A portion of such distributions to corporate shareholders may qualify for the dividends received distribution. Distributions 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 Portfolio. However, any distributions declared in October, November or December of one year and distributed in January of the following year will be taxable as if they had been paid to you on December 31 of the first year. We'll send you a notice every year that tells you how much you've received in distributions during the year and their federal tax status. Foreign, state and local taxes may also apply to these distributions. Withholding tax We're required by federal law to withhold tax of 31% on any distributions and redemption proceeds paid to you (including amounts to be paid for in securities or other property and exchanges) if: o you haven't given us a correct Taxpayer Identification Number (TIN) and haven't certified that the TIN is correct and withholding doesn't apply o the Internal Revenue Service (IRS) has notified us that the TIN listed on your account is incorrect according to its records o the IRS informs us that you 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 (at a rate of 30%, or a lower rate if a treaty applies) on distributions paid to foreign shareholders. Taxation of redemptions and exchanges Your redemptions (including redemptions paid in securities or other property) and exchanges of Portfolio or 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. 34 [GRAPHIC] Financial highlights The financial highlights table is designed to help you understand how the Portfolios have performed for the past five years or, if shorter, the period of the Portfolio's operations. Certain information reflects financial results for a single Portfolio share. The total investment return line indicates how much an investment in the Portfolio would have earned, assuming all dividends and distributions had been reinvested. Financial highlights for Primary B Shares of LifeGoal Income and Growth Portfolio are not provided because this class of shares had not yet commenced operations during the period indicated. This information has been audited by PricewaterhouseCoopers LLP. The independent accountants' 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. 35
LifeGoal Growth Portfolio For a Share outstanding throughout each period Primary B Shares Year ended Year ended Period ended 03/31/00(a) 03/31/99 03/31/98*(a) Operating performance: Net asset value, beginning of period $ 12.14 $ 12.49 $ 12.25 Net investment income/(loss) (0.02) 0.00 0.01 Net realized and unrealized gain on investments 3.86 0.30 0.70 Net increase in net assets resulting from investment operations 3.84 0.30 0.71 Distributions: Dividends from net investment income -- -- (0.01) Distributions in excess of net investment income (0.16) (0.05) (0.25) Distributions from net realized capital gains (0.39) (0.60) (0.21) Total dividends and distributions (0.55) (0.65) (0.47) Net asset value, end of period $ 15.43 $ 12.14 $ 12.49 Total return++ 32.40% 2.58% 6.24% ============================================================================================= Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $ 9 $ 7 $ 6 Ratio of operating expenses to average net assets+++ 0.75% 0.75% 0.75%+ Ratio of net investment income to average net assets (0.16)% (0.04)% 0.15%+ Ratio of operating expenses to average net assets without waivers and/or expense reimbursements 0.85% -- -- Portfolio turnover rate 161% 159% 69%
* LifeGoal Growth Portfolio Primary B Shares commenced investment operations on September 19, 1997. + Annualized. ++ Total return represents aggregate total return for the period indicated and does not reflect the deduction of any applicable sales charges. +++ The Portfolio's expenses do not include the expenses of the underlying Funds. (a) Per share net investment income has been calculated using the monthly average shares method.
LifeGoal Balanced Growth Portfolio For a Share outstanding throughout each period Primary B Shares Year ended Year ended Period ended 03/31/00(a) 03/31/99 03/31/98*(a) Operating performance: Net asset value, beginning of period $ 10.82 $ 10.94 $ 10.95 Net investment income 0.32 0.23 0.16 Net realized and unrealized gain/(loss) on investments 1.52 0.20 0.77 Net increase/(decrease) in net assets resulting from investment operations 1.84 0.43 0.93 Distributions: Dividends from net investment income (0.34) (0.22) (0.20) Distributions in excess of net investment income (0.04) -- (0.24) Distributions from net realized capital gains (0.29) (0.33) (0.50) Total dividends and distributions (0.67) (0.55) (0.94) Net asset value, end of period $ 11.99 $ 10.82 $ 10.94 Total return++ 17.73% 4.15% 9.24% ================================================================================================ Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $ 322 $ 276 $ 26 Ratio of operating expenses to average net assets+++ 0.75% 0.75% 0.75%+ Ratio of net investment income to average net assets 2.87% 2.27% 2.37%+ Ratio of operating expenses to average net assets without waivers and/or expense reimbursements 0.85% -- -- Portfolio turnover rate 124% 121% 94%
* LifeGoal Balanced Growth Portfolio Primary B Shares commenced investment operations on August 4, 1997. + Annualized. ++ Total return represents aggregate total return for the period indicated and does not reflect the deduction of any applicable sales charges. +++ The Portfolio's expenses do not include the expenses of the underlying Funds. (a) Per share net investment income has been calculated using the monthly average shares method. 36 [GRAPHIC] This glossary includes explanations of the important terms that may be used in this prospectus. Some of the terms explained may apply to Nations Funds not included in this prospectus. [GRAPHIC] Terms used in this prospectus Asset-backed security - a debt security that gives you an interest in a pool of assets that is collateralized or "backed" by one or more kinds of assets, including real property, receivables or mortgages, generally issued by banks, credit card companies or other lenders. Some securities may be issued or guaranteed by the U.S. government or its agencies, authorities or instrumentalities. Asset-backed securities typically make periodic payments, which may be interest or a combination of interest and a portion of the principal of the underlying assets. 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). 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. Corporate obligation - a money market instrument issued by a corporation or commercial bank. 37 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. 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. 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 - 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. 38 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 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 indices include U.S. government agency and U.S. Treasury securities, corporate bonds and mortgage-backed securities. All dividends are reinvested. Liquidity - a measurement of how easily a security can be bought or sold at a price that is close to its market value. Money market instrument - a short-term debt security that is considered to mature in 13 months or less. Money market instruments include U.S. Treasury obligations, U.S. government obligations, certificates of deposit, bankers' acceptances, commercial paper, repurchase agreements and certain municipal securities. Mortgage-backed security or Mortgage-related security - a debt security that gives you an interest in, and is backed by, a pool of residential mortgages issued by the U.S. government or by financial institutions. The underlying mortgages may be guaranteed by the U.S. government or one of its agencies, authorities or instrumentalities. Mortgage-backed securities typically make monthly payments, which are a combination of interest and a portion of the principal of the underlying mortgages. Municipal security (obligation) - a debt security issued by state or local governments or governmental authorities to pay for public projects and services. "General obligations" are typically backed by the issuer's full taxing and revenue-raising powers. "Revenue securities" depend on the income earned by a specific project or authority, like road or bridge tolls, user fees for water or revenues from a utility. Interest income 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 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. 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. 39 Quantitative analysis - an analysis of financial information about a company or security to identify securities that have the potential for growth or are otherwise suitable for a fund to buy. Real Estate Investment Trust (REIT) - a portfolio of real estate investments which may include office buildings, apartment complexes, hotels and shopping malls, and real-estate-related loans orinterests. 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. Right - a temporary privilege allowing investors who already own a common stock to buy additional shares directly from the company at a specified price or formula. S&P 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. Second-tier security - under Rule 2a-7 under the 1940 Act, a debt security that is an eligible investment for money market funds, but is not a first-tier security. Senior security - a debt security that allows holders to receive their share of a company's remaining assets in a bankruptcy before other bondholders, creditors, and common and preferred shareholders. Settlement Date - the date on which an order is settled either by payment or delivery of securities. Trade date - the effective date of a purchase, sale or exchange transaction, or other instructions sent to us. The trade date is determined by the day and time we receive the order or instructions in a form that's acceptable to us. U.S. government obligations - a wide range of debt securities issued or guaranteed by the U.S. government or its agencies, authorities or instrumentalities. 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. (1)S&P has not reviewed any stock included in the S&P 500 for its investment merit. S&P determines and calculates its index independently of the Funds and is not a sponsor or affiliate of the Funds. S&P gives no information and makes no statements about the suitability of investing in the Funds or the ability of its index to track stock market performance. S&P makes no guarantees about the index, any data included in it and the suitability of the index or its data for any purpose. "Standard and Poor's" and "S&P 500" are trademarks of The McGraw-Hill Companies, Inc. 40 (THIS PAGE INTENTIONALLY LEFT BLANK) (THIS PAGE INTENTIONALLY LEFT BLANK) (THIS PAGE INTENTIONALLY LEFT BLANK) [GRAPHIC] Where to find more information You'll find more information about the LifeGoal Portfolios in the following documents: Annual and semi-annual reports The annual and semi-annual reports contain information about Portfolio investments and performance, the financial statements and the independent accountants' reports. The annual report also includes a discussion about the market conditions and investment strategies that had a significant effect on each Portfolio's performance during the period covered. [GRAPHIC] Statement of Additional Information The SAI contains additional information about the Portfolios and their policies. The SAI is legally part of this prospectus (it's incorporated by reference). A copy has been filed with the SEC. You can obtain a free copy of these documents, request other information about the Portfolios and make shareholder inquiries by contacting Nations Funds: By telephone: 1.800.321.7854 By mail: Nations Funds c/o Stephens Inc. One Bank of America Plaza 33rd Floor Charlotte, NC 28255 On the Internet: www.nations-funds.com Information about the Portfolios can be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-202-942-8090. The reports and other information about the Portfolios are available on the EDGAR Database on the SEC's Internet site at http://www.sec.gov, and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Section, Washington, D.C. 20549-0102. SEC file number: Nations Funds Trust, 811-09645 LGPROPB - 10/00 NATIONS FUNDS [GRAPHIC] Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. PRELIMINARY PROSPECTUS DATED OCTOBER 13, 2000 SUBJECT TO COMPLETION LifeGoal Portfolios Prospectus -- Investor A, B and C Shares June 8, 2001 LifeGoal Growth Portfolio LifeGoal Balanced Growth Portfolio LifeGoal Income and Growth Portfolio 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 An overview of the Portfolios -------------------------------------------------------------------------------- [GRAPHIC] Terms used in this prospectus In this prospectus, we, us and our refer to the Nations Funds family (Nations Funds or Nations Funds Family). Some other important terms we've used may be new to you. These are printed in italics where they first appear in a section and are described in Terms used in this prospectus. [GRAPHIC] You'll find Terms used in this prospectus on page 59. Your investment in a Portfolio 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 Portfolios and the underlying Funds. This booklet, which is called a prospectus, tells you about Nations Funds LifeGoal Portfolios. Please read it carefully because it contains information that's designed to help you make informed investment decisions. Unlike traditional mutual funds, which invest in individual securities, the Portfolios invest in a mix of Nations Funds Domestic Stock, International Stock, Government & Corporate Bond and Money Market Funds using an asset allocation approach. This kind of mutual fund is sometimes called a "fund of funds." About asset allocation Asset allocation is the process of creating a diversified portfolio by investing in different asset classes -- for example, equity securities, fixed income securities and money market instruments -- in varying proportions. The mix of asset classes and how much is invested in each may be the most important factor in how a Portfolio performs and the amount of risk involved. Each asset class, and market segments within a class, like large, mid- and small capitalization stocks, has different return and risk characteristics, and reacts in different ways to changes in the economy. An investment approach that combines asset classes and market segments may help to reduce overall Portfolio volatility. About the Portfolios Each Portfolio has its own asset allocation strategy, which gives it distinctive risk/return characteristics. The performance of each Portfolio depends on many factors, including its allocation strategy and the performance of the Nations Funds it invests in. In general, the more a LifeGoal Portfolio allocates to Domestic Stock and International Stock Funds, the greater the potential return and the greater the risk of a decline in share price. The more a LifeGoal Portfolio allocates to Government & Corporate Bond Funds, the greater the potential for price stability and the lower the potential return. There's always a risk, however, that you'll lose money or you may not earn as much as you expect. LifeGoal Growth Portfolio focuses on long-term growth by normally allocating all of its assets to a mix of Funds that invest primarily in equity securities. Equities have the potential to provide higher returns than many other kinds of investments, but they also tend to have the highest risk. LifeGoal Balanced Growth Portfolio focuses on long-term growth by normally allocating its assets to a balanced mix of Funds that invest in equity and fixed income securities. Fixed income securities have the potential to increase in value, because, when interest rates fall, the value of these securities tends to rise. When interest rates rise, however, the value of these securities tends to fall. Other things can also affect the value of fixed income securities. 2 LifeGoal Income and Growth Portfolio focuses on current income and modest growth. It normally allocates most of its assets to Funds that invest in fixed income securities, but may also allocate some assets to Funds that invest in equity securities. Over time, the return on this Portfolio may be lower than the return on the other Portfolios. Is LifeGoal right for you? When you're choosing a Portfolio 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 LifeGoal Portfolios may be suitable for you if: o you have longer-term investment goals o they're part of a balanced portfolio They may not be suitable for you if: o you're not prepared to accept or are unable to bear the risks associated with equity and fixed income securities o you have short-term investment goals o you're looking for a regular stream of income You'll find a discussion of each Portfolio's principal investments, strategies and risks in the Portfolio descriptions that start on page 5. For more information If you have any questions about the Portfolios, please call us at 1.800.321.7854 or contact your investment professional. You'll find more information about the Portfolios in the Statement of Additional Information (SAI). The SAI includes more detailed information about each Portfolio's investments, policies, performance and management, among other things. Please turn to the back cover to find out how you can get a copy. 3 What's inside -------------------------------------------------------------------------------- [GRAPHIC] Banc of America Advisors, Inc. Banc of America Advisors, Inc. (BAAI) is the investment adviser to each of the Portfolios. BAAI is responsible for the overall management and supervision of the investment management of each Portfolio. BAAI and Nations Funds have engaged a sub-adviser -- Banc of America Capital Management, Inc. (BACAP), which is responsible for the day-to-day investment decisions for each of the Portfolios. [GRAPHIC] You'll find more about BAAI and BACAP starting on page 27. [GRAPHIC] About the Portfolios LifeGoal Growth Portfolio 5 Sub-adviser: BACAP ---------------------------------------------------------- LifeGoal Balanced Growth Portfolio 10 Sub-adviser: BACAP ---------------------------------------------------------- LifeGoal Income and Growth Portfolio 16 Sub-adviser: BACAP ---------------------------------------------------------- About the Nations Funds 22 ---------------------------------------------------------- Other important information 25 ---------------------------------------------------------- How the Portfolios are managed 26 [GRAPHIC] About your investment Information for investors Choosing a share class 32 Buying, selling and exchanging shares 41 How selling and servicing agents are paid 49 Distributions and taxes 51 ---------------------------------------------------------- Financial highlights 53 ---------------------------------------------------------- Terms used in this prospectus 59 ---------------------------------------------------------- Where to find more information back cover
4 [GRAPHIC] About the sub-adviser BACAP is this Portfolio's sub-adviser. BACAP's Investment Strategies Team makes the day-to-day investment decisions for the Portfolio. [GRAPHIC] You'll find more about BACAP on page 27. [GRAPHIC] About the underlying Nations Funds You'll find more information about the Funds in which the Portfolio invests, including their objectives and strategies, in About the Nations Funds and in the SAI. LifeGoal Growth Portfolio [GRAPHIC] Investment objective The Portfolio seeks capital appreciation through exposure to a variety of equity market segments. [GRAPHIC] Investment strategies The Portfolio normally invests most of its assets in Primary A Shares of Nations Funds Domestic Stock and International Stock Funds. The team uses asset allocation as its principal investment approach. It: o allocates assets among Fund categories, within the target allocations set for the Portfolio. It bases its allocations on the Portfolio's investment objective, historical returns for each asset class and on its outlook for the economy o chooses individual Funds within each category and the amount it will allocate to each, looking at each Fund's historical returns, as well as the expected performance of the mix of Funds o reviews the allocations to Fund categories and individual Funds at least monthly, and may change these allocations when it believes it's appropriate to do so The actual amount in each Fund or category of Funds may vary from the allocations set by the team, depending on how the Funds perform, and for other reasons. The team may use various strategies to try to manage how much the actual amount varies, and for how long. For example: o if there are more assets in a Fund category than in the target allocation, the team may allocate money coming into the Portfolio to the other Fund categories o if there are fewer assets in a Fund category than in the target allocation, it may allocate money coming into the Portfolio to that Fund category The Portfolio normally sells a proportionate amount of the shares it owns in each Nations Fund to meet its redemption requests. 5
LifeGoal Growth Portfolio Target allocation for each can invest in: Fund category: Large-capitalization domestic stock funds 40-75% Nations Value Fund Nations Blue Chip Fund Nations Strategic Growth Fund Nations Marsico Focused Equities Fund Small-capitalization domestic stock fund 15-35% Nations Small Company Fund International stock funds 10-30% Nations International Value Fund Nations International Equity Fund Nations Marsico International Opportunities Fund Nations Emerging Markets Fund
The team can substitute or add other Funds to this list at any time, including Funds introduced after the date of this prospectus. [GRAPHIC] You'll find more about other risks of investing in this Portfolio starting on page 25 and in the SAI. [GRAPHIC] You'll find detailed information about each Fund's investment strategies and risks in its prospectus, and in its SAI. Please call us at 1.800.321.7584 for a copy. [GRAPHIC] Risks and other things to consider LifeGoal Growth Portfolio has the following risks: o Investment strategy risk - The team uses an asset allocation strategy to try to achieve the highest total return. There is a risk that the mix of investments will not produce the returns they expect, or that the Portfolio will fall in value. There is also the risk that the Funds the Portfolio invests in will not produce the returns the team expects, or will fall in value. o Stock market risk - The Portfolio allocates assets to Funds that invest in stocks. The value of the stocks a Fund holds can be affected by changes in U.S. or foreign economies and financial markets, and the companies that issue the stocks, among other things. Stock prices can rise or fall over short as well as long periods. In general, stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. As of the date of this prospectus, the stock markets, as measured by the S&P 500 and other commonly used indices, were trading at historically high levels. There can be no guarantee that these levels will continue. o Small company risk - The Portfolio allocates assets to Funds that may invest in smaller companies. Stocks of smaller companies tend to have greater price swings than stocks of larger companies because they trade less frequently and in lower volumes. These securities may have a higher potential for gains, but also carry more risk. o Foreign investment risk - The Portfolio allocates assets to Funds that invest in foreign securities. Foreign investments may be riskier than U.S. investments because of political and economic conditions, changes in currency exchange rates, foreign controls on investment, difficulties selling some securities and lack of or limited financial information. Withholding taxes may also apply to some foreign investments. 6 o Emerging markets risk - The Portfolio allocates assets to Funds that invest in securities of companies in emerging markets. 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 Rebalancing policy - The actual amount in each Fund or category of Funds may vary from the allocations set by the team. This could continue for some time. [GRAPHIC] Many things affect a Portfolio's performance, including market conditions, the composition of the Portfolio's holdings and Portfolio expenses. [GRAPHIC] A look at the Portfolio's performance The following bar chart and table show you how the Portfolio has performed in the past, and can help you understand the risks of investing in the Portfolio. A Portfolio'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 Portfolio's Investor 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. Returns for Investor B and Investor C Shares are different because they have their own expenses, pricing and sales charges. [BAR CHART APPEARS HERE] 14.57% 12.64% 25.61% 1997 1998 1999 *Year-to-date return as of June 30, 2000: 6.34% Best and worst quarterly returns during this period Best: 4th quarter 1998: 23.55% Worst: 3rd quarter 1998: -16.68%
7 [GRAPHIC] The Portfolio's returns in this table reflect sales charges. The index's return does not reflect sales charges. Average annual total return as of December 31, 1999 The table shows the Portfolio's average annual total return for each period, compared with the S&P 500, an unmanaged index of 500 widely held common stocks, weighted by market capitalization. The index is not available for investment.
Since 1 year inception* Investor A Shares 18.37% 15.35% Investor B Shares 19.64% 12.62% Investor C Shares 23.68% 16.75% S&P 500 21.04% 28.31%
*The inception dates of Investor A Shares, Investor B Shares and Investor C Shares are October 15, 1996, August 12, 1997 and October 15, 1996, respectively. The return for the index shown is from inception of Investor A Shares. [GRAPHIC] There are two kinds of fees -- shareholder fees you pay directly and annual portfolio operating expenses that are deducted from a portfolio's assets and from the assets of the Nations Funds the Portfolio invests in. [GRAPHIC] What it costs to invest in the Portfolio This table describes the fees and expenses that you may pay if you buy and hold shares of the Portfolio.
Shareholder fees Investor A Investor B Investor C (Fees paid directly from your investment) Shares Shares Shares Maximum sales charge (load) imposed on purchases, as a % of offering price 5.75% none none Maximum deferred sales charge (load) as a % of net asset value none(1) 5.00%(2) 1.00%(3) Annual Fund operating expenses (Expenses that are deducted from the Portfolio's assets) Management fees 0.25% 0.25% 0.25% Distribution (12b-1) and shareholder servicing fees 0.25% 1.00% 1.00% ----- -------- -------- Total annual Fund operating expenses 0.50% 1.25% 1.25% ===== ======== ========
(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 33 for details. (2)This charge decreases over time. Please see page 34 for details. Different charges apply to Investor B Shares bought before January 1, 1996 and after July 31, 1997. Please see page 34 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 36 for details. Indirect Expenses The Portfolio's annual Fund operating expenses include a portion of the annual Fund operating expenses of the Nations Funds in which the Portfolio invests. This portion is estimated to be between 0.99% and 1.18% (expressed as a weighted average, including any fee waiver and/or reimbursement commitments that will expire July 31, 2001), and is based on: o the amount the Portfolio expects to invest in each Fund, based on the target allocation o each Fund's annualized expense ratio for the period ended March 31, 2000, adjusted as necessary to reflect current service provider fees 8 [GRAPHIC] This is an example only. Your actual costs could be higher or lower, depending on the amount you invest, and on the Portfolio's actual expenses and performance. Example This example is intended to help you compare the cost of investing in this Portfolio 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 Portfolio 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 Portfolio o your investment has a 5% return each year o the Portfolio's operating expenses remain the same as shown in the table above o the Portfolio's indirect expenses remain at the average of the range as shown above for the 1 year example, excluding any fee waivers and/or reimbursements for the 3, 5 and 10 year examples Although your actual costs may be higher or lower, based on these assumptions, your costs would be:
1 year 3 years 5 years 10 years Investor A Shares $727 $1,052 $1,400 $2,377 Investor B Shares $736 $1,034 $1,458 $2,507 Investor C Shares $336 $ 734 $1,258 $2,694
If you bought Investor B or Investor C Shares, you would pay the following expenses if you didn't sell your shares:
1 year 3 years 5 years 10 years Investor B Shares $236 $734 $1,258 $2,507 Investor C Shares $236 $734 $1,258 $2,694
9 [GRAPHIC] About the sub-adviser BACAP is this Portfolio's sub-adviser. BACAP's Investment Strategies Team makes the day-to-day investment decisions for the Portfolio. [GRAPHIC] You'll find more about BACAP on page 27. [GRAPHIC] About the underlying Nations Funds You'll find more information about the Funds in which the Portfolio invests, including their objectives and strategies, in About the Nations Funds and in the SAI. LifeGoal Balanced Growth Portfolio [GRAPHIC] Investment objective The Portfolio seeks total return through a balanced portfolio of equity and fixed income securities. [GRAPHIC] Investment strategies The Portfolio normally invests all of its assets in Primary A Shares of a balanced mix of Nations Funds Domestic Stock, International Stock and Government & Corporate Bond Funds. The team uses asset allocation as its principal investment approach. It: o allocates assets among Fund categories, within the target allocations set for the Portfolio. It bases its allocations on the Portfolio's investment objective, historical returns for each asset class and on its outlook for the economy o chooses individual Funds within each category and the amount it will allocate to each, looking at each Fund's historical returns, as well as the expected performance of the mix of Funds o reviews the allocations to Fund categories and individual Funds at least monthly, and may change these allocations when it believes it's appropriate to do so The actual amount in each Fund or category of Funds may vary from the allocations set by the team, depending on how the Funds perform, and for other reasons. The team may use various strategies to try to manage how much the actual amount varies, and for how long. For example: o if there are more assets in a Fund category than in the target allocation, the team may allocate money coming into the Portfolio to the other Fund categories o if there are fewer assets in a Fund category than in the target allocation, it may allocate money coming into the Portfolio to that Fund category The Portfolio normally sells a proportionate amount of the shares it owns in each Nations Fund to meet its redemption requests. 10
LifeGoal Balanced Growth Target allocation for each Portfolio can invest in: Fund category: Large-capitalization domestic stock funds 20-40% Nations Value Fund Nations Blue Chip Fund Nations Strategic Growth Fund Nations Marsico Focused Equities Fund Nations MidCap Growth Fund Small-capitalization domestic stock fund 10-20% Nations Small Company Fund International stock funds 5-15% Nations International Value Fund Nations International Equity Fund Nations Marsico International Opportunities Fund Government & corporate bond funds 40-60% Nations Bond Fund Nations Strategic Income Fund Nations High Yield Bond Fund
The team can substitute or add other Funds to this list at any time, including Funds introduced after the date of this prospectus. [GRAPHIC] You'll find more about other risks of investing in this Portfolio starting on page 25 and in the SAI. [GRAPHIC] You'll find detailed information about each Fund's investment strategies and risks in its prospectus, and in its SAI. Please call us at 1.800.321.7854 for a copy. [GRAPHIC] Risks and other things to consider LifeGoal Balanced Growth Portfolio has the following risks: o Investment strategy risk - The team uses an asset allocation strategy to try to achieve the highest total return. There is a risk that the mix of investments will not produce the returns they expect, or that the Portfolio will fall in value. There is also the risk that the Funds the Portfolio invests in will not produce the returns the team expects, or will fall in value. o Stock market risk - The Portfolio allocates assets to Funds that invest in stocks. The value of the stocks a Fund holds can be affected by changes in U.S. or foreign economies and financial markets, and the companies that issue the stocks, among other things. Stock prices can rise or fall over short as well as long periods. In general, stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. As of the date of this prospectus, the stock markets, as measured by the S&P 500 and other commonly used indices, were trading at historically high levels. There can be no guarantee that these levels will continue. o Small company risk - The Portfolio allocates assets to Funds that may invest in smaller companies. Stocks of smaller companies tend to have greater price swings than stocks of larger companies because they trade less frequently and in lower volumes. These securities may have a higher potential for gains, but also carry more risk. 11 o Foreign investment risk - The Portfolio allocates assets to Funds that invest in foreign securities. Foreign investments may be riskier than U.S. investments because of political and economic conditions, changes in currency exchange rates, foreign controls on investment, difficulties selling some securities and lack of or limited financial information. Withholding taxes may also apply to some foreign investments. Funds that invest in securities of companies in emerging markets have high growth potential, but can be more volatile than securities in more developed markets. o Interest rate risk - The Portfolio allocates assets to Funds that may invest in fixed income securities. 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 - A Fund that invests in fixed income securities 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 generally is not a factor for U.S. government obligations. The Portfolio allocates assets to Funds that typically invest in securities that are not investment grade and are generally considered speculative because they present a greater risk of loss, including default, than higher quality debt securities. These securities typically pay a premium -- a high interest rate or yield -- because of the increased risk of loss. These securities also can be subject to greater price volatility. o Rebalancing policy - The actual amount in each Fund or category of Funds may vary from the allocations set by the team. This could continue for some time. 12 [GRAPHIC] Many things affect a Portfolio's performance, including market conditions, the composition of the Portfolio's holdings and Portfolio expenses. [GRAPHIC] A look at the Portfolio's performance The following bar chart and table show you how the Portfolio has performed in the past, and can help you understand the risks of investing in the Portfolio. A Portfolio'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 Portfolio'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] 11.20% 11.66% 14.38% 1997 1998 1988 *Year-to-date return as of June 30, 2000: 4.08% Best and worst quarterly returns during this period Best: 4th quarter 1998: 12.39% Worst: 3rd quarter 1998: -8.96%
[GRAPHIC] The Portfolio's returns in this table reflect sales charges. The indices' returns do not reflect sales charges. Average annual total return as of December 31, 1999 The table shows the Portfolio's average annual total return for each period, compared with the S&P 500 and the Lehman Aggregate Bond Index. The S&P 500 is an unmanaged index of 500 widely held common stocks, weighted by market capitalization. The Lehman Aggregate Bond Index is an index of fixed income securities issued by the U.S. government and its agencies, and by corporations. These indices are not available for investment.
1 year Since inception* Investor A Shares 7.77% 10.35% Investor B Shares 8.45% 9.96% Investor C Shares 12.45% 11.97% S&P 500 21.04% 28.31% Lehman Aggregate Bond Index -0.83% 6.24%
*The inception dates of Investor A Shares, Investor B Shares and Investor C Shares are October 15, 1996, August 13, 1997 and October 15, 1996, respectively. The returns for the indices shown are from inception of Investor A Shares. 13 [GRAPHIC] There are two kinds of fees -- shareholder fees you pay directly and annual portfolio operating expenses that are deducted from a Portfolio's assets and from the assets of the Nations Funds the Portfolio invests in. [GRAPHIC] What it costs to invest in the Portfolio This table describes the fees and expenses that you may pay if you buy and hold shares of the Portfolio.
Shareholder fees Investor A Investor B Investor C (Fees paid directly from your investment) Shares Shares Shares Maximum sales charge (load) imposed on purchases, as a % of offering price 5.75% none none Maximum deferred sales charge (load) as a % of net asset value none(1) 5.00%(2) 1.00%(3) Annual Fund operating expenses (Expenses that are deducted from the Portfolio's assets) Management fees 0.25% 0.25% 0.25% Distribution (12-b1) and shareholder servicing fees 0.25% 1.00% 1.00% ----- -------- -------- Total annual Fund operating expenses 0.50% 1.25 % 1.25 % ===== ======== ========
(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 33 for details. (2)This charge decreases over time. Please see page 34 for details. Different charges apply to Investor B Shares bought before January 1, 1996 and after July 31, 1997. Please see page 34 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 36 for details. Indirect Expenses The Portfolio's annual Fund operating expenses include a portion of the annual Fund operating expenses of the Nations Funds in which the Portfolio invests. This portion is estimated to be between 0.77% and 1.08% (expressed as a weighted average, including any fee waiver and/or reimbursement commitments that will expire July 31, 2001), and is based on: o the amount the Portfolio expects to invest in each Fund, based on the target allocation o each Fund's annualized expense ratio for the period ended March 31, 2000, adjusted as necessary to reflect current service provider fees 14 [GRAPHIC] This is an example only. Your actual costs could be higher or lower, depending on the amount you invest, and on the Portfolio's actual expenses and performance. Example This example is intended to help you compare the cost of investing in this Portfolio 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 Portfolio 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 Portfolio o your investment has a 5% return each year o the Portfolio's operating expenses remain the same as shown in the table above o the Portfolio's indirect expenses remain at the average of the range as shown above for the 1 year example, excluding any fee waivers and/or reimbursements for the 3, 5 and 10 year examples Although your actual costs may be higher or lower, based on these assumptions, your costs would be:
1 year 3 years 5 years 10 years Investor A Shares $712 $1,006 $1,321 $2,212 Investor B Shares $721 $ 986 $1,378 $2,343 Investor C Shares $321 $ 686 $1,178 $2,532
If you bought Investor B or Investor C Shares, you would pay the following expenses if you didn't sell your shares:
1 year 3 years 5 years 10 years Investor B Shares $221 $686 $1,178 $2,343 Investor C Shares $221 $686 $1,178 $2,532
15 [GRAPHIC] About the sub-adviser BACAP is this Portfolio's sub-adviser. BACAP's Investment Strategies Team makes the day-to-day investment decisions for the Portfolio. [GRAPHIC] You'll find more about BACAP on page 27. [GRAPHIC] About the underlying Nations Funds You'll find more information about the Funds in which the Portfolio invests, including their objectives and strategies, in About the Nations Funds and in the SAI. LifeGoal Income and Growth Portfolio [GRAPHIC] Investment objective The Portfolio seeks current income and modest growth to protect against inflation and to preserve purchasing power. [GRAPHIC] Investment strategies The Portfolio normally invests most of its assets in Primary A Shares of Nations Funds Government & Corporate Bond Funds, but may also invest in Nations Funds Domestic Stock, International Stock and Money Market Funds. The team uses asset allocation as its principal investment approach. It: o allocates assets among Fund categories, within the target allocations set for the Portfolio. It bases its allocations on the Portfolio's investment objective, historical returns for each asset class and on its outlook for the economy o chooses individual Funds within each category and the amount it will allocate to each, looking at each Fund's historical returns, as well as the expected performance of the mix of Funds o reviews the allocations to Fund categories and individual Funds at least monthly, and may change these allocations when it believes it's appropriate to do so The actual amount in each Fund or category of Funds may vary from the allocations set by the team, depending on how the Funds perform, and for other reasons. The team may use various strategies to try to manage how much the actual amount varies, and for how long. For example: o if there are more assets in a Fund category than in the target allocation, the team may allocate money coming into the Portfolio to the other Fund categories o if there are fewer assets in a Fund category than in the target allocation, it may allocate money coming into the Portfolio to that Fund category The Portfolio normally sells a proportionate amount of the shares it owns in each Nations Fund to meet its redemption requests. 16
LifeGoal Income and Growth Target allocation for each can invest in: Fund category: Large-capitalization domestic stock funds 10-30% Nations Value Fund Nations Blue Chip Fund Nations Strategic Growth Fund Nations Marsico Focused Equities Fund Small-capitalization domestic stock fund 0-10% Nations Small Company Fund International stock funds 0-10% Nations International Value Fund Nations International Equity Fund Government & corporate bond funds 50-90% Nations Short-Term Income Fund Nations Bond Fund Nations Strategic Income Fund Nations High Yield Bond Fund Money market fund 0-20% Nations Prime Fund
LifeGoal Income and Growth Portfolio's target allocation for total investments in domestic stock and international stock funds is 30%. The team can substitute or add other Funds to this list at any time, including Funds introduced after the date of this prospectus. [GRAPHIC] You'll find more about other risks of investing in this Portfolio starting on page 25 and in the SAI. [GRAPHIC] You'll find detailed information about each Fund's investment strategies and risks in its prospectus, and in its SAI. Please call us at 1.800.321.7854 for a copy. [GRAPHIC] Risks and other things to consider LifeGoal Income and Growth Portfolio has the following risks: o Investment strategy risk - The team uses an asset allocation strategy to try to achieve the highest total return. There is a risk that the mix of investments will not produce the returns they expect, or that the Portfolio will fall in value. There is also the risk that the Funds the Portfolio invests in will not produce the returns the team expects, or will fall in value. o Stock market risk - The Portfolio allocates assets to Funds that invest in stocks. The value of the stocks a Fund holds can be affected by changes in U.S. or foreign economies and financial markets, and the companies that issue the stocks, among other things. Stock prices can rise or fall over short as well as long periods. In general, stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. As of the date of this prospectus, the stock markets, as measured by the S&P 500 and other commonly used indices, were trading at historically high levels. There can be no guarantee that these levels will continue. o Small company risk - The Portfolio allocates assets to Funds that may invest in smaller companies. Stocks of smaller companies tend to have greater price swings than stocks of larger companies because they trade less frequently and in lower volumes. These securities may have a higher potential for gains, but also carry more risk. 17 o Foreign investment risk - The Portfolio allocates assets to Funds that invest in foreign securities. Foreign investments may be riskier than U.S. investments because of political and economic conditions, changes in currency exchange rates, foreign controls on investment, difficulties selling some securities and lack of or limited financial information. Withholding taxes may also apply to some foreign investments. Funds that invest in securities of companies in emerging markets have high growth potential, but can be more volatile than securities in more developed markets. o Interest rate risk - The Portfolio allocates assets to Funds that may invest in fixed income securities. 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 - A Fund that invests in fixed income securities 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 generally is not a factor for U.S. government obligations. The Portfolio allocates assets to Funds that typically invest in securities that are not investment grade and are generally considered speculative because they present a greater risk of loss, including default, than higher quality debt securities. These securities typically pay a premium -- a high interest rate or yield -- because of the increased risk of loss. These securities also can be subject to greater price volatility. o Rebalancing policy - The actual amount in each Fund or category of Funds may vary from the allocations set by the team. This could continue for some time. 18 [GRAPHIC] Many things affect a Portfolio's performance, including market conditions, the composition of the Portfolio's holdings and Portfolio expenses. [GRAPHIC] A look at the Portfolio's performance The following bar chart and table show you how the Portfolio has performed in the past, and can help you understand the risks of investing in the Portfolio. A Portfolio'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 Portfolio'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] 8.50% 10.25% 6.15% 1997 1998 1999 *Year-to-date return as of June 30, 2000: 1.77% Best and worst quarterly returns during this period Best: 4th quarter 1998: 6.25% Worst: 3rd quarter 1998: -2.38%
[GRAPHIC] The Portfolio's returns in this table reflect sales charges. The indices' returns do not reflect sales charges. Average annual total return as of December 31, 1999 The table shows the Portfolio's average annual total return for each period, compared with the S&P 500 and the Lehman Aggregate Bond Index. The S&P 500 is an unmanaged index of 500 widely held common stocks, weighted by market capitalization. The Lehman Aggregate Bond Index is an index of fixed income securities issued by the U.S. government and its agencies, and by corporations. These indices are not available for investment.
Since 1 year inception* Investor A Shares 0.01% 6.39% Investor B Shares 0.53% 5.19% Investor C Shares 4.28% 7.73% S&P 500 21.04% 28.31% Lehman Aggregate Bond Index -0.83% 6.24%
*The inception dates of Investor A Shares, Investor B Shares and Investor C Shares are October 15, 1996, August 7, 1997 and October 15, 1996, respectively. The returns for the indices shown are from inception of Investor A Shares. 19 [GRAPHIC] There are two kinds of fees -- shareholder fees you pay directly and annual portfolio operating expenses that are deducted from a portfolio's assets and from the assets of the Nations Funds the Portfolio invests in. [GRAPHIC] What it costs to invest in the Portfolio This table describes the fees and expenses that you may pay if you buy and hold shares of the Portfolio.
Shareholder fees Investor A Investor B Investor C (Fees paid directly from your investment) Shares Shares Shares Maximum sales charge (load) imposed on purchases, as a % of offering price 5.75% none none Maximum deferred sales charge (load) as a % of net asset value none(1) 5.00%(2) 1.00%(3) Annual Fund operating expenses (Expenses that are deducted from the Portfolio's assets) Management fees 0.25% 0.25% 0.25% Distribution (12b-1) and shareholder servicing fees 0.25% 1.00% 1.00% ----- ------ ------ Total annual Fund operating expenses 0.50% 1.25% 1.25% ===== ====== ======
(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 33 for details. (2)This charge decreases over time. Please see page 34 for details. Different charges apply to Investor B Shares bought before January 1, 1996 and after July 31, 1997. Please see page 34 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 36 for details. Indirect Expenses The Portfolio's annual Fund operating expenses include a portion of the annual Fund operating expenses of the Nations Funds in which the Portfolio invests. This portion is estimated to be between 0.46% and 0.98% (expressed as a weighted average, including any fee waiver and/or reimbursement commitments that will expire July 31, 2001), and is based on: o the amount the Portfolio expects to invest in each Fund, based on the target allocation o each Fund's annualized expense ratio for the period ended March 31, 2000, adjusted as necessary to reflect current service provider fees 20 [GRAPHIC] This is an example only. Your actual costs could be higher or lower, depending on the amount you invest, and on the Portfolio's actual expenses and performance. Example This example is intended to help you compare the cost of investing in this Portfolio 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 Portfolio 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 Portfolio o your investment has a 5% return each year o the Portfolio's operating expenses remain the same as shown in the table above o the Portfolio's indirect expenses remain at the average of the range shown above for the 1 year example, excluding any fee waivers and/or reimbursements for the 3, 5 and 10 year examples Although your actual costs may be higher or lower, based on these assumptions, your costs would be:
1 year 3 years 5 years 10 years Investor A Shares $692 $957 $1,241 $2,049 Investor B Shares $700 $935 $1,296 $2,180 Investor C Shares $300 $635 $1,096 $2,373
If you bought Investor B or Investor C Shares, you would pay the following expenses if you didn't sell your shares:
1 year 3 years 5 years 10 years Investor B Shares $200 $635 $1,096 $2,180 Investor C Shares $200 $635 $1,096 $2,373
21 About the Nations Funds The table starting on the next page is a brief overview of the objectives and principal investments of the Nations Funds in which the LifeGoal Portfolios invest. Each Portfolio invests in a different mix of Nations Funds. You'll find the mix of Nations Funds and target allocations for each Portfolio starting on page 5. The team can substitute or add other Funds to this table at any time, including Funds introduced after the date of this prospectus. For more information You'll find more detailed information about each Fund's investment strategies and risks in its prospectus and in its SAI. Please call us at 1.800.321.7854 for copies. 22
The Fund's investment objective ------------------------------------------------------------------------------- Domestic Stock Funds Nations Value Fund Growth of capital by investing in companies that are believed to be undervalued. ------------------------------------------------------------------------------- Nations Blue Chip Fund Long-term capital appreciation through investments in blue chip stocks. ------------------------------------------------------------------------------- Nations Strategic Growth Fund Long-term, after-tax returns by investing in a diversified portfolio of common stocks. ------------------------------------------------------------------------------- Nations Marsico Focused Long-term growth of capital. Equities Fund ------------------------------------------------------------------------------- Nations MidCap Growth Fund Capital appreciation by investing in emerging growth companies that are believed to have superior long-term earnings growth prospects. ------------------------------------------------------------------------------- Nations Small Company Fund Long-term capital growth by investing primarily in equity securities. ------------------------------------------------------------------------------- International Stock Funds Nations International Value Long-term capital appreciation by investing Fund primarily in equity securities of foreign issuers, including emerging markets countries. ------------------------------------------------------------------------------- Nations International Equity Long-term capital growth by investing Fund primarily in equity securities of non-United States companies in Europe, Australia, the Far East and other regions, including developing countries. ------------------------------------------------------------------------------- What the Fund invests in ------------------------------------------------------------------------------------------- Domestic Stock Funds Nations Value Fund o at least 65% of its assets in common stocks of U.S. companies. The Fund generally invests in companies in a broad range of industries with market capitali- zations of at least $1 billion and daily trading volumes of at least $3 million ------------------------------------------------------------------------------------------- Nations Blue Chip Fund Nations Blue Chip Master portfolio. The Master Portfolio invests: o at least 65% of its assets in blue chip stocks o primarily in blue chip stocks that are included in the S&P 500 Index ------------------------------------------------------------------------------------------- Nations Strategic Growth Fund o at least 65% of its assets in common stocks of companies selected from most major industry sectors ------------------------------------------------------------------------------------------- Nations Marsico Focused Nations Marsico Focused Equities Master Portfolio. The Equities Fund Master Portfolio invests: o at least 65% of its assets in common stocks of large companies. The Master Portfolio, which is non-diversified, generally holds a core position of 20 to 30 common stocks o up to 25% of its assets in foreign securities ------------------------------------------------------------------------------------------- Nations MidCap Growth Fund o at least 65% of its assets in companies chosen from a universe of emerging growth companies. The Fund generally holds securities of between 75 and 130 issuers, which include common stocks, preferred stocks and convertible securities like warrants, rights and convertible debt. ------------------------------------------------------------------------------------------- Nations Small Company Fund o at least 65% of its assets in companies with a market capitalization of $1 billion or less. The Fund usually holds 75 to 130 securities, which include common stocks, preferred stocks and convertible securities like warrants, rights and convertible debt ------------------------------------------------------------------------------------------- International Stock Funds Nations International Value Nations International Value Master Portfolio. The Master Fund Portfolio invests: o at least 65% of its assets in foreign companies anywhere in the world that have a market capitalization of more than $1 billion at the time of investment. The Fund typically invests in at least three countries other than the United States at any one time o primarily in common stocks, preferred stocks, convertible securities, either directly or indirectly through closed-end investment companies and depositary receipts ------------------------------------------------------------------------------------------- Nations International Equity Nations International Equity Master Portfolio. The Master Fund Portfolio invests: o at least 65% of its assets in established companies located in at least three countries other than the United States. The investment managers select countries, including emerging market or developing countries, that they believe have the potential for growth o primarily in equity securities, which may include equity interests in foreign investment funds or trusts, convertible securities, real estate investment trust securities and depositary receipts -------------------------------------------------------------------------------------------
23
The Fund's investment objective ------------------------------------------------------------------------------- Nations Marsico International Long-term growth of capital. Opportunities Fund ------------------------------------------------------------------------------- Nations Emerging Markets Long-term capital growth by investing Fund primarily in equity securities of companies in emerging market countries, such as those in Latin America, Eastern Europe, the Pacific Basin, the Far East and India. ------------------------------------------------------------------------------- Government & Corporate Bond Funds Nations Short-Term Income High current income consistent with Fund minimal fluctuations of principal. ------------------------------------------------------------------------------- Nations Bond Fund Total return by investing in investment grade fixed income securities. ------------------------------------------------------------------------------- Nations Strategic Income Fund Total return with an emphasis on current income by investing in a diversified portfolio of fixed income securities. ------------------------------------------------------------------------------- Nations High Yield Bond Fund Maximum income by investing in a diversified portfolio of high yield debt securities. ------------------------------------------------------------------------------- Money Market Fund Nations Prime Fund Maximization of current income to the extent consistent with the preservation of capital and the maintenance of liquidity. What the Fund invests in ----------------------------------------------------------------------------------------- Nations Marsico International Nations Marsico International Opportunities Master Opportunities Fund Portfolio. The Master Portfolio invests: o at least 65% of its assets in common stocks of foreign companies. The Fund typically invests in issuers from at least three different countries not including the United States and generally holds a core position of 35 to 50 common stocks o in common stocks of companies operating in emerging markets ----------------------------------------------------------------------------------------- Nations Emerging Markets o at least 65% of its assets in companies in emerging Fund markets or developing countries. The Fund intends to invest in securities of companies in at least three of these countries at any one time ----------------------------------------------------------------------------------------- Government & Corporate Bond Funds Nations Short-Term Income o at least 65% of its total assets in investment grade Fund fixed income securities. The team may choose unrated securities if it believes they are of comparable quality to investment grade securities at the time of investment o corporate debt securities, including bonds, notes and debentures, mortgage-related securities issued by governments, asset-backed securities or U.S. government obligations ----------------------------------------------------------------------------------------- Nations Bond Fund o at least 65% of its assets in investment grade fixed income securities. The portfolio management team may choose unrated securities if it believes they are of comparable quality to investment grade securities at the time of investment o corporate debt securities, including bonds, notes and debentures, U.S. government obligations, foreign debt securities denominated in U.S. dollars, mortgage-related securities, asset-backed securities or municipal securities ----------------------------------------------------------------------------------------- Nations Strategic Income Fund o at least 65% of its assets in investment grade debt securities, including corporate debt securities, U.S. government obligations, foreign debt securities denominated in U.S. dollars or foreign currencies, and mortgage-related securities issued by governments and non-government issuers o up to 35% of its assets in lower-quality fixed income securities ("junk bonds" or "high yield bonds") rated "B" or better by Moody's or S&P. The portfolio management team may choose unrated securities if it believes they are of comparable quality at the time of investment ----------------------------------------------------------------------------------------- Nations High Yield Bond Fund Nations High Yield Bond Master Portfolio. The Master Portfolio invests: o at least 65% of its assets in domestic and foreign corporate high yield debt securities which are not rated investment grade, but generally will be rated "B" or better by Moody's Investor Services, Inc. or Standard & Poor's Corporation ----------------------------------------------------------------------------------------- Money Market Fund Nations Prime Fund o money market instruments, including commercial paper, bank obligations, short-term debt securities, guaranteed investment contracts, short-term taxable municipal securities, repurchase agreements secured by first-tier securities or U.S. government obligations
24 [GRAPHIC] Other important information [GRAPHIC] You'll find specific information about each Portfolio's principal investments, strategies and risks in the descriptions starting on page 5. The following are some other risks and information you should consider before you invest: o Changing investment objectives and policies - The investment objective and certain investment policies of any Portfolio or Fund can be changed without shareholder approval. Other investment policies may be changed only with shareholder approval. o Holding other kinds of investments - The Portfolios or any Fund may hold investments that aren't part of their principal investment strategies. Please refer to the SAI for more information. The portfolio managers or management team can also choose not to invest in specific securities described in this prospectus and in the SAI. o Foreign investment risk - Funds that invest in foreign securities may be affected by changes in currency exchange rates and the costs of converting currencies; foreign government controls on foreign investment, repatriation of capital, and currency and exchange; foreign taxes; inadequate supervision and regulation of some foreign markets; difficulties selling some investments, which may increase volatility; different settlement practices or delayed settlements in some markets; difficulty getting complete or accurate information about foreign companies; less strict accounting, auditing and financial reporting standards than those in the U.S.; political, economic or social instability; and difficulty enforcing legal rights outside the U.S. o Investing defensively - A Portfolio may temporarily hold up to 100% of its assets in Nations Prime Fund, a money market fund, to try to protect it during a market or economic downturn or because of political or other conditions. A Portfolio may not achieve its investment objective while it is investing defensively. o Securities lending program - A Fund may lend portfolio securities to approved broker-dealers or other financial institutions on a fully collateralized basis in order to earn additional income. There may be delays in receiving additional collateral after the loan is made or in recovering the securities loaned. o Portfolio turnover - A Portfolio or 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 Portfolio's returns. The Portfolios generally buy securities for capital appreciation, investment income, or both, and don't engage in short-term trading. You'll find the portfolio turnover rate for each Portfolio in Financial highlights. 25 [GRAPHIC] How the Portfolios are managed [GRAPHIC] Banc of America Advisors, Inc. One Bank of America Plaza Charlotte, North Carolina 28255 Investment adviser BAAI is the investment adviser to over 60 mutual fund portfolios in the Nations Funds Family, including the Portfolios described in this prospectus. BAAI is a registered investment adviser. It's a wholly-owned subsidiary of Bank of America, which is owned by Bank of America Corporation. Nations Funds pays BAAI an annual fee for its investment advisory services. The fee is calculated as a percentage of the average daily net assets of each Portfolio and is paid monthly. BAAI uses part of this money to pay the investment sub-adviser for the services it provides to each Portfolio. BAAI has also agreed to pay all other Portfolio expenses, except taxes, brokerage fees and commissions, extraordinary expenses, and any distribution (12b-1), shareholder servicing or shareholder administration fees. The following chart shows the maximum advisory fee BAAI can receive, along with the actual advisory fees it received during the Portfolios' last fiscal year: Annual investment advisory fee, as a % of average daily net assets
Maximum Actual fee advisory paid last fee fiscal year Nations LifeGoal Growth Portfolio 0.25% 0.25% Nations LifeGoal Balanced Growth Portfolio 0.25% 0.25% Nations LifeGoal Income and Growth Portfolio 0.25% 0.25%
26 Investment sub-advisers Nations Funds and BAAI engage one or more investment sub-advisers for each Portfolio to make day-to-day investment decisions for the Portfolio. BAAI retains ultimate responsibility (subject to Board oversight) for overseeing the sub-advisers and evaluates the Portfolio's needs and available sub-advisers' skills and abilities on an ongoing basis. Based on its evaluations, BAAI may at times recommend to a Portfolio's Board that the Portfolio: o change, add or terminate one or more sub-advisers; o continue to retain a sub-adviser even though the sub-adviser's ownership or corporate structure has changed; or o materially change a sub-advisory agreement with a sub-adviser. Applicable law requires a Portfolio to obtain shareholder approval in order to act on most of these types of recommendations, even if the Portfolio's Board has approved the proposed action and believes that the action is in shareholders' best interests. BAAI and the Portfolios plan to apply for relief from the SEC to permit the Portfolios to act on many of BAAI's recommendations with approval only by the Portfolios' Board and not by Portfolio shareholders. BAAI or a Portfolio would inform the Portfolio's shareholders of any actions taken in reliance on this relief. Until BAAI and the Portfolios obtain the relief, each Portfolio will continue to submit these matters to shareholders for their approval to the extent required by applicable law. [GRAPHIC] Banc of America Capital Management, Inc. One Bank of America Plaza Charlotte, North Carolina 28255 Banc of America Capital Management, Inc. BACAP is a registered investment adviser and a wholly-owned subsidiary of Bank of America. Its management expertise covers all major domestic asset classes, including equity and fixed income securities, and money market instruments. Currently managing more than $125 billion, BACAP has over 200 institutional clients and is sub-adviser to more than 65 mutual funds in the Nations Funds Family. BACAP generally takes a team approach to investment management. Each team or individual portfolio manager has access to the latest technology and analytical resources. BACAP is the investment sub-adviser to all of the LifeGoal Portfolios. BACAP's Investment Strategies Team is responsible for making the day-to-day investment decisions for each Portfolio. BACAP is also the investment sub-adviser to the Nations Funds that appear in the table below. The table tells you which internal BACAP asset management team is responsible for making the day-to-day investment decisions for each Fund.
Fund BACAP Team Nations Value Fund Value Strategies Team Nations Small Company Fund SmallCap Strategies Team Nations Short-Term Income Fund Fixed Income Management Team Nations Bond Fund Fixed Income Management Team Nations Strategic Income Fund Fixed Income Management Team Nations Prime Fund Taxable Money Market Management Team Nations Strategic Growth Fund Growth Strategies Team Nations MidCap Growth Fund Growth Strategies Team
27 Nations Funds and BAAI have engaged investment sub-advisers to provide day-to-day portfolio management for the underlying Nations Funds in which the Portfolios invest. These sub-advisers function under the supervision of BAAI and the Boards of Nations Funds. [GRAPHIC] Marsico Capital Management, LLC 1200 17th Street Suite 1300 Denver, Colorado 80202 Marsico Capital Management, LLC Marsico Capital is a full service investment advisory firm founded by Thomas F. Marsico in September 1997. It is a registered investment adviser, specializing in large capitalization stocks, and currently has over $16 billion in assets under management. Marsico Management Holdings, LLC, a wholly-owned subsidiary of Bank of America Corporation, indirectly owns the equity of Marsico Capital. Marsico Capital is the investment sub-adviser to Nations Marsico Focused Equities Master Portfolio and Nations Marsico International Opportunities Master Portfolio. Thomas F. Marsico, Chairman and Chief Executive Officer of Marsico Capital, is the portfolio manager responsible for making the day-to-day investment decisions for Nations Marsico Focused Equities Master Portfolio. Mr. Marsico was an executive vice president and portfolio manager at Janus Capital Corporation from 1988 until he formed Marsico Capital in September 1997. He has more than 20 years of experience as a securities analyst and portfolio manager. James G. Gendelman is the portfolio manager of Nations Marsico International Opportunities Master Portfolio. Prior to joining Marsico Capital in May, 2000, Mr. Gendelman spent thirteen years as a Vice President of International Sales for Goldman, Sachs & Co. He holds a Bachelors degree in Accounting from Michigan State University and an MBA in Finance from the University of Chicago. Mr. Gendelman was an accountant for Ernst & Young from 1983 to 1985. [GRAPHIC] Brandes Investment Partners, L.P. 12750 High Bluff Drive San Diego, California 92130 Brandes Investment Partners, L.P. Founded in 1974, Brandes is an investment advisory firm with 53 investment professionals who manage more than $40 billion in assets. Brandes uses a value-oriented approach to managing international investments, seeking to build wealth by buying high quality, undervalued stocks. Brandes is the investment sub-adviser to Nations International Value Master Portfolio. Brandes' Large Cap Investment Committee is responsible for making the day-to-day investment decisions for the Master Portfolio. [GRAPHIC] Chicago Equity Partners LLC 180 North LaSalle Suite 3800 Chicago, Illinois 60601 Chicago Equity Partners LLC Chicago Equity is a registered investment adviser and is owned by the firm's senior management. Chicago Equity is the investment sub-adviser to Nations Blue Chip Master Portfolio. Chicago Equity's Equity Management Team is responsible for making the day-to-day investment decisions for Nations Blue Chip Master Portfolio. 28 [GRAPHIC] Gartmore Global Partners Gartmore House 8 Fenchurch Place London EC3M 4PH, England Gartmore Global Partners Gartmore is a global asset manager dedicated to serving the needs of U.S. based investors. Gartmore was formed in 1995 as a registered investment adviser and manages more than $1 billion in assets. Gartmore is a general partnership which is an indirect wholly-owned subsidiary of Nationwide Mutual Insurance Company. Gartmore generally follows a growth philosophy, which is reflected in its active management of market allocation and stock selection. Gartmore is co-investment sub-adviser to: o Nations International Equity Master Portfolio Gartmore is investment sub-adviser to: o Nations Emerging Markets Fund Gartmore's portion of Nations International Equity Master Portfolio is co-managed by five portfolio managers: Christopher Palmer has been responsible since May 1999 for investments in developing countries, and has been the principal portfolio manager of Nations Emerging Markets Fund since that time. He joined Gartmore in 1995 and is a senior investment manager on the Gartmore Emerging Markets Team. Before he joined Gartmore, Mr. Palmer worked for Unifund, S.A., a private investment bank, in its Mexico City and Hong Kong offices, and managed global derivatives, credit and counterparty credit risk as vice president in the Institutional Credit Department of Bear Stearns & Co. He graduated from Colgate University in 1986 with a BA Honors degree in History and completed an MBA in Finance at New York University in 1988. Mr. Palmer was awarded the CFA designation by the Association of Investment Management and Research in 1993. Seok Teoh has been responsible since June 1998 for investments in Asia. Ms. Teoh has been with Gartmore since 1990 as the London based manager of its Far East Team. Previously, she managed four equity funds for Rothschild Asset Management in Tokyo and Singapore, and was also responsible for Singaporean and Malaysian equity sales at Overseas Union Bank Securities in Singapore. Ms. Teoh is native to Singapore and is fluent in Mandarin and Cantonese. She received an Economics degree from the University of Durham. Nick Reid has been responsible (or has shared responsibility) for investments in Japan since August 1999. He has been investment manager for the Gartmore Japanese Equities Team since he joined Gartmore in 1994 and has specific responsibility for managing retail funds. Before he joined Gartmore, Mr. Reid was a United Kingdom Smaller Companies Analyst with Panmure Gordon and a fund manager covering Japanese and other Asian markets with Refuge Assurance. He graduated from Cambridge University in 1989 with an honors degree in History. Mr. Reid is also an associate member of the Institute of Investment Management and Research. 29 Stephen Jones has been responsible for investments in Europe since 1998. He is also head of Gartmore European Equities. Mr. Jones joined Gartmore in 1994 and was appointed head of the European equity team in 1995. He began his career at The Prudential in 1984, and became a European equities investment manager in 1987, focusing on France, Belgium and Switzerland. He graduated from Manchester University in 1984 with an honors degree in Economics. Stephen Watson has been responsible since June 1998 for allocating assets among the various regions, and for determining investments in regions not covered by the other portfolio managers. He was the sole portfolio manager of Nations International Equity Fund from February 1995 to June 1998. Mr. Watson joined Gartmore in 1993 as a global fund manager, and is the chief investment officer of Gartmore Global Partners and a member of Gartmore's global policy group. Before joining Gartmore, he was a director and global fund manager with James Capel Fund Managers, London, as well as client service manager for international clients. He was in Capel-Cure Myers' portfolio management division from 1980 to 1987, and began his career in 1976 with Samuel Motagu. He is a member of the Securities Institute. Nations Emerging Markets Fund is managed by Christopher Palmer, a senior investment manager on the Gartmore Emerging Markets Team. He has managed the Fund since August 1999. He also co-manages Nations International Equity Master Portfolio. [GRAPHIC] INVESCO Global Asset Management (N.A), Inc. 1360 Peachtree Street, N.E. Atlanta, Georgia 30309 INVESCO Global Asset Management (N.A), Inc. INVESCO Global is a division of AMVESCAP PLC, a publicly traded UK financial holding company located in London. INVESCO Global is one of the three investment sub-advisers to Nations International Equity Master Portfolio. INVESCO's International Equity Portfolio Management Team is responsible for making the day-to-day investment decisions for its portion of the Master Portfolio. [GRAPHIC] Putnam Investment Management, Inc. One Post Office Square Boston, Massachusetts 02109 Putnam Investment Management, Inc. Putnam is a wholly-owned subsidiary of Putnam Investments, Inc., which, except for shares held by employees, is owned by Marsh & McLennan Companies. Putnam is one of three investment sub-advisers to Nations International Equity Master Portfolio. Putnam's Core International Equity Group is responsible for making the day-to-day investment decisions for its portion of the Master Portfolio. [GRAPHIC] MacKay Shields LLC 9 West 57th Street New York, New York 10019 MacKay Shields LLC Founded in 1938, MacKay Shields is an independently-managed, wholly-owned subsidiary of New York Life Insurance Company. The firm's 63 investment professionals manage more than $30 billion in assets, including over $6 billion in high yield assets. MacKay Shields' High Yield Portfolio Management Team is responsible for making the day-to-day decisions for Nations High Yield Bond Master Portfolio. 30 [GRAPHIC] Stephens Inc. 111 Center Street Little Rock, Arkansas 72201 Other service providers The Portfolios are distributed and co-administered by Stephens Inc., a registered broker/dealer. Stephens does not receive any fees for the administrative services it provides to the Portfolios. 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 Portfolios, and assists in overseeing the administrative operations of the Portfolios. [GRAPHIC] PFPC Inc. 400 Bellevue Parkway Wilmington, Delaware 19809 PFPC Inc. (PFPC) is the transfer agent for the Portfolios' shares. Its responsibilities include processing purchases, sales and exchanges, calculating and paying distributions, keeping shareholder records, preparing account statements and providing customer service. 31 About your investment -------------------------------------------------------------------------------- [GRAPHIC] We've used the term, investment professional, to refer to the person who has assisted you with buying Nations Funds. Selling agent or servicing agent (sometimes referred to as a selling agent) means the company that employs your investment professional. Selling and servicing agents include banks, brokerage firms, mutual fund dealers and other financial institutions, including affiliates of Bank of America. [GRAPHIC] For more information about how to choose a share class, contact your investment professional or call us at 1.800.321.7854. [GRAPHIC] Before you invest, please note that over time, distribution (12b-1) and shareholder servicing fees will increase the cost of your investment, and may cost you more than any sales charges you may pay. For more information, see How selling and servicing agents are paid. [GRAPHIC] Choosing a share class Before you can invest in the Portfolios, you'll need to choose a share class. There are three classes of shares of each Portfolio offered by this prospectus. Each class has its own sales charges and fees. The table below compares the charges and fees and other features of the share classes.
Investor A Investor B Investor C Shares Shares Shares Maximum amount you can buy no limit $250,000 no limit Maximum front-end sales charge 5.75% none none Maximum deferred sales charge none(1) 5.00%(2) 1.00%(3) Maximum annual 0.25% 0.75% 0.75% distribution and distribution distribution distribution shareholder servicing fees (12b-1)/service (12b-1) fee and (12b-1) fee and fee 0.25% 0.25% service fee service fee Conversion feature none yes 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 33 for details. (2)This charge decreases over time. Please see page 34 for details. Different charges apply to Investor B Shares bought before January 1, 1996 and after July 31, 1997. Please see page 34 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 36 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 Portfolios, 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. 32 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 Portfolios. 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 Portfolios, any positive investment return on this money may be partially or fully offset by the expected higher annual expenses of Investor B and Investor C Shares. You should also consider the conversion feature for Investor B Shares, which is described in About Investor B Shares. [GRAPHIC] The offering price per share is the net asset value per share plus any sales charge that applies. The net asset value per share is the price of a share calculated by a Portfolio every business day. [GRAPHIC] About Investor A Shares There is no limit to the amount you can invest in Investor A Shares. You generally will pay a front-end sales charge when you buy your shares, or in some cases, a CDSC when you sell your shares. Front-end sales charge You'll pay a front-end sales charge when you buy Investor A Shares, unless: o you qualify for a waiver of the sales charge. You can find out if you qualify for a waiver in the section When you might not have to pay a sales charge o you're reinvesting distributions The sales charge you'll pay depends on the amount you're investing -- generally, the larger the investment, the smaller the percentage sales charge.
Amount retained Sales charge Sales charge by selling agents as a % of the as a % of the as a % of the offering price net asset value offering price Amount you bought per share per share per share $0-$49,999 5.75% 6.10% 5.00% $50,000-$99,999 4.50% 4.71% 3.75% $100,000-$249,999 3.50% 3.63% 2.75% $250,000-$499,999 2.50% 2.56% 2.00% $500,000-$999,999 2.00% 2.04% 1.75% $1,000,000 or more 0.00% 0.00% 1.00%(1)
(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. 33 Contingent deferred sales charge If you own or buy $1,000,000 or more of Investor A Shares, there are two situations when you'll pay a CDSC: o If you bought your shares before August 1, 1999, and you sell them: o during the first year you own them, you'll pay a CDSC of 1.00% o during the second year you own them, you'll pay a CDSC of 0.50% o If you buy your shares on or after August 1, 1999 and sell them within 18 months of buying them, you'll pay a CDSC of 1.00%. The CDSC is calculated from the day your purchase is accepted (the trade date). We deduct the CDSC from the market value or purchase price of the shares, whichever is lower. You won't pay a CDSC on any increase in net asset value since you bought your shares, or on any shares you receive from reinvested distributions. We'll sell any shares that aren't subject to the CDSC first. We'll then sell shares that result in the lowest CDSC. [GRAPHIC] About Investor B Shares You can buy up to $250,000 of Investor B Shares 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 39 34 The CDSC you pay depends on when you bought your shares, how much you bought in some cases, and how long you held them.
If you sell your shares during the following year: You'll pay a CDSC of: ---------------------------------- ------------------------------------------------------------------------- Shares you bought Shares on or after Shares you bought Shares you bought between 1/1/1996 you 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 the first year you own them 5.0% 5.0% 3.0% 2.0% none 5.0% the second year you own them 4.0% 4.0% 2.0% 1.0% none 4.0% the third year you own them 3.0% 3.0% 1.0% none none 3.0% the fourth year you own them 3.0% 3.0% none none none 2.0% the fifth year you own them 2.0% 2.0% none none none 2.0% the sixth year you own them 1.0% 1.0% none none none 1.0% after six years of owning them none none none none none none
The CDSC is calculated from the trade date of your purchase. We deduct the CDSC from the market value or purchase price of the shares, whichever is lower. We'll sell any shares that aren't subject to the CDSC first. We'll then sell shares that result in the lowest CDSC. Your selling agent receives compensation when you buy Investor B Shares. Please see How selling and servicing agents are paid for more information. About the conversion feature Investor B Shares generally convert automatically to Investor A Shares according to the following schedule:
Will convert to Investor A Shares Investor B Shares you bought after you've owned them for after November 15, 1998 eight years between August 1, 1997 and November 15, 1998 $0-$249,000 nine years $250,000-$499,999 six years $500,000-$999,999 five years before August 1, 1997 nine years
The conversion feature allows you to benefit from the lower operating costs of Investor A Shares, which can help increase total returns. 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. 35 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 39 The CDSC is calculated from the trade date of your purchase. We deduct the CDSC from the market value or purchase price of the shares, whichever is lower. We'll sell any shares that aren't subject to the CDSC first. We'll then sell shares that result in the lowest CDSC. Your selling agent receives compensation when you buy Investor C Shares. Please see How selling and servicing agents are paid for more information. [GRAPHIC] Please contact your investment professional for more information about reductions and waivers of sales charges. You should tell your investment professional that you may qualify for a reduction or a waiver before buying shares. We can change or cancel these terms at any time. Any change or cancellation applies only to future purchases. When you might not have to pay a sales charge Front-end sales charges (Investor A Shares) There are three ways you can lower the front-end sales charge you pay on Investor A Shares: o Combine purchases you've already made Rights of accumulation allow you to combine the value of Investor A, Investor B and Investor C Shares you already own with Investor A Shares you're buying 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. 36 o Combine purchases you plan to make By signing a letter of intent, you can combine the value of shares you already own with the value of shares you plan to buy over a 13-month period to calculate the sales charge. o You can choose to start the 13-month period up to 90 days before you sign the letter of intent. o Each purchase you make will receive the sales charge that applies to the total amount you plan to buy. o If you don't buy as much as you planned within the period, you must pay the difference between the charges you've paid and the charges that actually apply to the shares you've bought. o Your first purchase must be at least 5% of the minimum amount for the sales charge level that applies to the total amount you plan to buy. o If the purchase you've made later qualifies for a reduced sales charge through the 90-day backdating provisions, we'll make an adjustment for the lower charge when the letter of intent expires. Any adjustment will be used to buy additional shares at the reduced sales charge. o Combine purchases with family members You can receive a quantity discount by combining purchases of Investor A Shares that you, your spouse and children under age 21 make on the same day. Some distributions or payments from the dissolution of certain qualified plans also qualify for the quantity discount. Index Funds and Money Market Funds, except Investor B and Investor C Shares of Nations Reserves Money Market Funds, don't qualify. The following investors can buy Investor A Shares without paying a front-end sales charge: o full-time employees and retired employees of Bank of America Corporation (and its predecessors), its affiliates and subsidiaries and the immediate families of these people o banks, trust companies and thrift institutions, acting as fiduciaries o individuals receiving a distribution from a Bank of America trust or other fiduciary account may use the proceeds of that distribution to buy Investor A Shares without paying a front-end sales charge, as long as the proceeds are invested in the Portfolios within 90 days of the date of distribution o Nations Funds' Trustees, Directors and employees of its investment sub-advisers o registered broker/dealers that have entered into a Nations Funds dealer agreement with Stephens may buy Investor A Shares without paying a front-end sales charge for their investment account only 37 o registered personnel and employees of these broker/dealers and their family members may buy Investor A Shares without paying a front-end sales charge according to the internal policies and procedures of the employing broker/dealer as long as these purchases are made for their own investment purposes o employees or partners of any service provider to the Portfolios o investors who buy through accounts established with certain fee-based investment advisers or financial planners, wrap fee accounts and other managed agency/asset allocation accounts o shareholders of certain Funds that reorganized into the Nations Funds who were entitled to buy shares at net asset value The following plans can buy Investor A Shares without paying a front-end sales charge: o pension, profit-sharing or other employee benefit plans established under Section 401 or Section 457 of the Internal Revenue Code of 1986, as amended (the tax code) o employee benefit plans created according to Section 403(b) of the tax code and sponsored by a non-profit organization qualified under Section 501(c)(3) of the tax code. To qualify for the waiver, the plan must: o have at least $500,000 invested in Investor A Shares of Nations Funds (except Money Market Funds), or o sign a letter of intent to buy at least $500,000 of Investor A Shares of Nations Funds (except Money Market Funds), or o be an employer-sponsored plan with at least 100 eligible participants, or o be a participant in an alliance program that has signed an agreement with the Portfolio or a selling agent You can also buy Investor A Shares without paying a sales charge if you buy the shares within 120 days of selling the same Portfolio. This is called the reinstatement privilege. You can invest up to the amount of the sale proceeds. We'll credit your account with any CDSC paid when you sold the shares. The reinstatement privilege does not apply to any shares you bought through a previous reinstatement. PFPC, Stephens or their agents must receive your written request within 120 days after you sell your shares. In addition, you can buy Investor A Shares without paying a sales charge if you buy the shares with proceeds from the redemption of shares of a nonaffiliated mutual fund as long as the redemption of the nonaffiliated fund shares occurred within 45 days prior to the purchase of the Investor A Shares. We must receive a copy of the confirmation of the redemption transaction in order for you to avoid paying the sales charge. 38 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 shares bought through accounts established with certain fee-based investment advisers or financial planners, wrap fee accounts and other managed agency/asset allocation accounts o if you exchange Investor B or Investor C Shares of a Nations Fund that were bought through a Bank of America employee benefit plan for Investor A Shares of a Nations Fund o withdrawals made under the Automatic Withdrawal Plan described in Buying, selling and exchanging shares, if the total withdrawals of Investor A, Investor B or Investor C Shares made in a year are less than 12% of the total value of those shares in your account. A CDSC may only apply to Investor A Shares if you bought more than $1,000,000 39 We'll also waive the CDSC on the sale of Investor A or Investor C Shares bought before September 30, 1994 by current or retired employees of Bank of America Corporation (and its predecessors) and its affiliates, or by current or former trustees or directors of the Nations Funds or other management companies managed by Bank of America. You won't pay a CDSC on the sale of Investor B or Investor C Shares if you reinvest any of the proceeds in the same Portfolio within 120 days of the sale. This is called the reinstatement privilege. You can invest up to the amount of the sale proceeds. We'll credit your account with any CDSC paid when you sold the shares. The reinstatement privilege does not apply to any shares you bought through a previous reinstatement. PFPC, Stephens or their agents must receive your written request within 120 days after you sell your shares. 40 [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 Portfolios through your selling agent or directly from Nations Funds. We encourage you to consult with an investment professional who can open an account for you with a selling agent and help you with your investment decisions. Once you have an account, you can buy, sell and exchange shares by contacting your investment professional or selling agent. They will look after any paperwork that's needed to complete a transaction and send your order to us. You should also ask your selling agent about its limits, fees and policies for buying, selling and exchanging shares, which may be different from those described here, and about its related programs or services. The table on the next page summarizes some key information about buying, selling and exchanging shares. You'll find sales charges and other fees that apply to these transactions in Choosing a share class. The Funds also offer other classes of shares, with different features and expense levels, which you may be eligible to buy. Please contact your investment professional, or call us at 1.800.321.7854 if you have any questions or you need help placing an order. 41
Ways to buy, sell or exchange --------------------------------------- Buying shares In a lump sum --------------------------------------- Using our Systematic Investment Plan --------------------------------------- Selling shares In a lump sum --------------------------------------- Using our Automatic Withdrawal Plan --------------------------------------- Exchanging shares In a lump sum --------------------------------------- Using our Automatic Exchange Feature How much you can buy, sell or exchange Other things to know -------------------------------------------------------------------------------------------------------------------------- Buying shares minimum initial investment: There is no limit to the amount you can invest in o $1,000 for regular accounts Investor A and C Shares. You can invest up to o $500 for traditional and Roth IRA $250,000 in Investor B Shares at a time. accounts o $250 for certain fee-based accounts o no minimum for certain retirement plan accounts like 401(k) plans and SEP accounts, but other restrictions apply minimum additional investment: o $100 for all accounts -------------------------------------------------------------------------------------------------------------------------- minimum initial investment: You can buy shares monthly, twice a month or o $100 quarterly, using automatic transfers from your bank minimum additional investment: account. o $50 -------------------------------------------------------------------------------------------------------------------------- Selling shares o you can sell up to $50,000 of your We'll deduct any CDSC from the amount you're shares by telephone, otherwise there selling and send you or your selling agent the are no limits to the amount you can sell balance, usually within three business days of o other restrictions may apply to receiving your order. withdrawals from retirement plan If you paid for your shares with a check that wasn't accounts 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 minimum $25 per withdrawal Your account balance must be at least $10,000 to set up the plan. You can make withdrawals monthly, twice a month or quarterly. We'll send your money by check or deposit it directly to your bank account. No CDSC is deducted if you withdraw 12% or less of the value of your shares in a class. -------------------------------------------------------------------------------------------------------------------------- Exchanging shares o minimum $1,000 per exchange You can exchange your Investor A Shares for Investor A shares of any other Portfolio or 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 Portfolio or Nations Fund, except Nations Funds Money Market Funds o Investor B Shares of Nations Reserves Money Market Funds You can exchange your Investor C Shares for: o Investor C Shares of any other Portfolio or 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 Portfolio from an exchange of Investor A Shares of a Managed Index Fund, you can also exchange these shares for Investor A Shares of an Index Fund. You won't pay a CDSC on the shares you're exchanging. -------------------------------------------------------------------------------------------------------------------------- o minimum $25 per exchange This feature is not available for Investor B Shares. You must already have an investment in the Portfolios or Funds into which you want to exchange. You can make exchanges monthly or quarterly.
42 [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 Portfolio's shares -- or its net asset value per share. We calculate net asset value per share for each class of each Portfolio at the end of each business day. The net asset value per share of a Portfolio is based on the net asset value per share of the Nations Funds the Portfolio invests in. 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 an underlying Fund The value of a Fund's assets is based on the total market value of all of the securities it holds. The prices reported on stock exchanges and securities markets around the world are usually used to value securities in a Fund. If prices aren't readily available, or the value of a security has been materially affected by events occurring after a foreign exchange closes, we'll base the price of a security on its fair value. When a Fund uses fair value to price securities it may value those securities higher or lower than another fund that uses market quotations to price the same securities. We use the amortized cost method, which approximates market value, to value short-term investments maturing in 60 days or less. International markets may be open on days when U.S. markets are closed. The value of foreign securities owned by a Fund could change on days when Fund shares may not be bought or sold. How orders are processed Orders to buy, sell or exchange shares are processed on business days. Orders received by Stephens, PFPC or their agents before the end of a business day (usually 4:00 p.m. Eastern time, unless the NYSE closes early) will receive that day's net asset value per share. Orders received after the end of a business day will receive the next business day's net asset value per share. The business day that applies to your order is also called the trade date. We may refuse any order to buy or exchange shares. If this happens, we'll return any money we've received to your selling agent. 43 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. [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 Portfolio every business day. [GRAPHIC] Buying shares Here are some general rules for buying shares: o You buy Investor A Shares at the offering price per share. You buy Investor B and Investor C Shares at net asset value per share. o If we don't receive your money within three business days of receiving your order, we'll refuse the order. o Selling agents are responsible for sending orders to us and ensuring we receive your money on time. o Shares purchased are recorded on the books of the Portfolio. We don't issue certificates. Minimum initial investment The minimum initial amount you can buy is usually $1,000. If you're buying shares through one of the following accounts or plans, the minimum initial amount you can buy is: o $500 for traditional and Roth individual retirement accounts (IRAs) o $250 for accounts set up with some fee-based investment advisers or financial planners, including wrap fee accounts and other managed accounts o $100 using our Systematic Investment Plan o There is no minimum for 401(k) plans, simplified employee pension plans (SEPs), salary reduction-simplified employee pension plans (SAR-SEPs), Savings Incentives Match Plans for Employees (SIMPLE IRAs), salary reduction-IRAs (SAR-IRAs) or other similar kinds of accounts. However, if the value of your account falls below $1,000 for 401(k) plans or $500 for the other plans within one year after you open your account, we may sell your shares. We'll give you 60 days notice in writing if we're going to do this Minimum additional investment You can make additional purchases of $100, or $50 if you use our Systematic Investment Plan. 44 [GRAPHIC] For more information about telephone orders, see page 44. Systematic Investment Plan You can make regular purchases of $50 or more using automatic transfers from your bank account to the Portfolios you choose. You can contact your investment professional or us to set up the plan. Here's how the plan works: o You can buy shares twice a month, monthly or quarterly. o You can choose to have us transfer your money on or about the 15th or the last day of the month. o Some exceptions may apply to employees of Bank of America and its affiliates, and to plans set up before August 1, 1997. For details, please contact your investment professional. [GRAPHIC] Selling shares Here are some general rules for selling shares: o We'll deduct any CDSC from the amount you're selling and send you the balance. o If you're selling your shares through a selling agent, we'll normally send the sale proceeds by federal funds wire within three business days after Stephens, PFPC or their agents receive your order. Your selling agent is responsible for depositing the sale proceeds to your account on time. o If you're selling your shares directly through us, we'll normally send the sale proceeds by mail or wire them to your bank account within three business days after the Portfolio receives your order. o You can sell up to $50,000 of shares by telephone if you qualify for telephone orders. o If you paid for your shares with a check that wasn't certified, we'll hold the sale proceeds when you sell those shares for at least 15 days after the trade date of the purchase, or until the check has cleared, whichever is later. o If you hold any shares in certificate form, you must sign the certificates (or send a signed stock power with them) and send them to PFPC. Your signature must be guaranteed unless you've made other arrangements with us. We may ask for any other information we need to prove that the order is properly authorized. o Under certain circumstances allowed under the Investment Company Act of 1940 (1940 Act), we can pay you in securities or other property when you sell your shares. o We can delay payment of the sale proceeds for up to seven days. o Other restrictions may apply to retirement plan accounts. For more information about these restrictions, please contact your retirement plan administrator. 45 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 Portfolio is earning, you'll eventually use up your original investment. [GRAPHIC] You should make sure you understand the investment objective and principal investment strategies of the Portfolio or Fund you're exchanging into. Please read its prospectus carefully. [GRAPHIC] Exchanging shares You can sell shares of a Portfolio to buy shares of another Portfolio or 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 Portfolio or Fund, including any minimum investment requirements, apply to exchanges into that Portfolio or Fund. o You may only make an exchange into a Portfolio or Fund that is legally sold in your state of residence. 46 o You generally may only make an exchange into a Portfolio or Fund that is accepting investments. o We may limit the number of exchanges you can make within a specified period of time. o We may change or cancel your right to make an exchange by giving the amount of notice required by regulatory authorities (generally 60 days for a material change or cancellation). o You cannot exchange any shares you own in certificate form until PFPC has received the certificate and deposited the shares to your account. Exchanging Investor A Shares You can exchange Investor A Shares of a Portfolio for Investor A Shares of any other Portfolio or 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 Portfolio or Fund you're exchanging. o You won't pay a CDSC, if applicable, 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 Portfolio or Fund. Exchanging Investor B Shares You can exchange Investor B Shares of a Portfolio for: o Investor B Shares of any other Portfolio or Nations Fund, except Nations Funds Money Market Funds o Investor B Shares of Nations Reserves Money Market Funds You won't pay a CDSC on the shares you're exchanging. Any CDSC will be deducted when you sell the shares you received from the exchange. The CDSC will be based on the period from when you bought the original shares until you sold the shares you received from the exchange. If you received Investor C Shares of a Nations Funds Money Market Fund 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 Portfolio for: o Investor C Shares of any other Portfolio or Nations Fund, except Nations Funds Money Market Funds 47 o Investor C Shares of Nations Reserves Money Market Funds If you received Investor C Shares of a Portfolio 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 Portfolio before October 1, 1999, a CDSC may apply when you sell your Daily Shares. The CDSC will be based on the period from when you bought the original shares until you exchanged them. Automatic Exchange Feature The Automatic Exchange Feature lets you exchange $25 or more of Investor A or Investor C Shares every month or every quarter. You can contact your investment professional or us to set up the plan. Here's how automatic exchanges work: o Send your request to PFPC in writing or call 1.800.321.7854. o You must already have an investment in the Portfolios or Funds you want to exchange. o You can choose to have us transfer your money on or about the 1st or the 15th day of the month. o The rules for making exchanges apply to automatic exchanges. 48 [GRAPHIC] How selling and servicing agents are paid Your selling and servicing agents usually receive compensation based on your investment in the Portfolios. The kind and amount of the compensation depends on the share class in which you invest. Selling agents typically pay a portion of the compensation they receive to their investment professionals. Commissions Your selling agent may receive an up-front commission (reallowance) when you buy shares of a Portfolio. The amount of this commission depends on which share class you choose: o up to 5.00% of the offering price per share of Investor A Shares. The commission is paid from the sales charge we deduct when you buy your shares o up to 4.00% of the net asset value per share of Investor B Shares. The commission is not deducted from your purchase -- we pay your selling agent directly o up to 1.00% of the net asset value per share of Investor C Shares. The commission is not deducted from your purchase -- we pay your selling agent directly If you buy Investor B or Investor C Shares you will be subject to higher distribution (12b-1) and shareholder servicing fees and may be subject to a CDSC when you sell your shares. [GRAPHIC] The financial institution or intermediary that buys shares for you is also sometimes referred to as a selling agent. The distribution fee is often referred to as a "12b-1" fee because it's paid through a plan approved under Rule 12b-1 under the 1940 Act. Your selling agent may charge other fees for services provided to your account. Distribution (12b-1) and shareholder servicing fees Stephens and selling and servicing agents may be compensated for selling shares and providing services to investors under distribution and shareholder servicing plans. The amount of the fee depends on the class of shares you own:
Maximum annual distribution (12b-1) and shareholder servicing fees (as an annual % of average daily net assets) 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
Fees are calculated daily and deducted monthly. Because these fees are paid out of the Portfolios' 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 Portfolios pay these fees to Stephens and to eligible selling and servicing agents for as long as the plans continue. We may reduce or discontinue payments at any time. 49 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 Portfolios o additional amounts on all sales of shares: o up to 1.00% of the offering price per share of Investor A Shares o up to 1.00% of the net asset value per share of Investor B Shares o up to 1.00% of the net asset value per share of Investor C Shares o non-cash compensation like trips to sales seminars, tickets to sporting events, theater or other entertainment, opportunities to participate in golf or other outings and gift certificates for meals or merchandise This compensation, which is not paid by the Portfolios, is discretionary and may be available only to selected selling and servicing agents. For example, Stephens sometimes sponsors promotions involving Banc of America Investment Services, Inc., an affiliate of BAAI, and certain other selling or servicing agents. Selected selling and servicing agents also may receive compensation for opening a minimum number of accounts. BAAI and Stephens may pay amounts from their own assets to selling or servicing agents of the Funds for services they provide. 50 [GRAPHIC] Distributions and taxes [GRAPHIC] The power of compounding Reinvesting your distributions buys you more shares of a Portfolio -- which lets you take advantage of the potential for compound growth. Putting the money you earn back into your investment means it, in turn, may earn even more money. Over time, the power of compounding has the potential to significantly increase the value of your investment. There is no assurance, however, that you'll earn more money if you reinvest your distributions. About distributions A mutual fund can make money two ways: o It can earn income. Examples are interest paid on bonds and dividends paid on common stocks. o A fund can also have capital gain if the value of its investments increases. If a fund sells an investment at a gain, the gain is realized. If a fund continues to hold the investment, any gain is unrealized. A mutual fund is not subject to income tax as long as it distributes its net investment income and realized capital gain to its shareholders. The Portfolios intend to pay out a sufficient amount of their income and capital gain to their shareholders so the Portfolios won't have to pay any income tax. When a Portfolio makes this kind of a payment, it's split equally among all shares, and is called a distribution. All of the Portfolios distribute net investment income quarterly, and any net realized capital gain at least once a year. The distribution you receive is based on the number of shares you hold on the record date, which is usually the day the distribution is declared (daily dividend Funds) or the day before the distribution is declared (all other Funds). Shares are eligible to 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 Portfolio 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 Portfolio unless you tell us you want to receive your distributions in cash. You can do this by writing to us at the address on the back cover or by calling us at 1.800.321.7854. We generally pay cash distributions within five business days after the end of the month, quarter or year in which the distribution was made. If you sell all of your shares, we'll normally pay any distribution that applies to those shares in cash within five business days after the sale was made. If you buy shares of a Portfolio 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 Portfolio that holds securities with unrealized capital gain, you will, in effect, receive part of your purchase back if and when the Portfolio sells those securities and distributes the gain. This distribution is also subject to tax. Some Portfolios have built up, or have the potential to build up, high levels of unrealized capital gain. 51 [GRAPHIC] This information is a summary of how federal income taxes may affect your investment in the Portfolios. It is not intended as a substitute for careful tax planning. You should consult with your own tax advisor about your situation, including any foreign, state and local taxes that may apply. [GRAPHIC] For more information about taxes, please see the SAI. How taxes affect your investment Distributions that come from net investment income and net short-term capital gain over net long-term capital loss generally are taxable to you as ordinary income. A portion of such distributions to corporate shareholders may qualify for the dividends received deduction. 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 Portfolio. However, any distributions declared in October, November or December of one year and distributed in January of the following year will be taxable as if they had been paid to you on December 31 of the first year. We'll send you a notice every year that tells you how much you've received in distributions during the year and their federal tax status. Foreign, state and local taxes may also apply to these distributions. Withholding tax We're required by federal law to withhold tax of 31% on any distributions and redemption proceeds paid to you (including amounts to be paid for in securities or other property and exchanges) if: o you haven't given us a correct Taxpayer Identification Number (TIN) and haven't certified that the TIN is correct and withholding doesn't apply o the Internal Revenue Service (IRS) has notified us that the TIN listed on your account is incorrect according to its records o the IRS informs us that you 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 (at a rate of 30%, or a lower rate if a treaty applies) on distributions paid to foreign shareholders. Taxation of redemptions and exchanges Your redemptions (including redemptions paid in securities or other property) and exchanges of Portfolio 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. 52 [GRAPHIC] Financial highlights The financial highlights table is designed to help you understand how the Portfolios have performed for the past five years or, if shorter, the period of the Portfolio's operations. Certain information reflects financial results for a single Portfolio share. The total investment return line indicates how much an investment in the Portfolio would have earned, assuming all dividends and distributions had been reinvested. This information has been audited by PricewaterhouseCoopers LLP. The independent accountants' 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. 53
LifeGoal Growth Portfolio For a Share outstanding throughout each period Investor A Shares Year ended Year ended Year ended Period ended 03/31/00(a) 03/31/99 03/31/98(a) 03/31/97* Operating performance: Net asset value, beginning of period $ 12.16 $ 12.50 $ 10.15 $ 10.06 Net investment income 0.01 0.04 0.05 0.12 Net realized and unrealized gain on investments 3.87 0.30 2.89 0.09 Net increase in net assets resulting from investment operations 3.88 0.34 2.94 0.21 Distributions: Distributions from net investment income -- -- (0.01) (0.12) Distributions in excess of net investment income (0.17) (0.08) (0.37) -- Distributions from net realized capital gains (0.39) (0.60) (0.21) -- Total distributions (0.56) (0.68) (0.59) (0.12) Net asset value, end of period $ 15.48 $ 12.16 $ 12.50 $ 10.15 Total return++ 32.67% 2.87% 29.68% 2.05% ============================================================================================================= Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $4,528 $3,404 $1,526 $ 681 Ratio of operating expenses to average net assets+++ 0.50% 0.50% 0.50% 0.50%+ Ratio of net investment income to average net assets 0.09% 0.21% 0.40% 0.86%+ Portfolio turnover rate 161% 159% 69% 25%
* LifeGoal Growth Portfolio Investor A Shares commenced investment operations on October 2, 1996. Shares were offered to the public on October 15, 1996. + Annualized. ++ Total return represents aggregate total return for the period indicated and does not reflect the deduction of any applicable sales charges. +++ The Portfolio's expenses do not include the expenses of the underlying funds. (a) Per share net investment income has been calculated using the monthly average shares method.
LifeGoal Growth Portfolio For a Share outstanding throughout each period Investor B Shares Year ended Year ended Period ended 03/31/00(a) 03/31/99 03/31/98(a)* Operating performance: Net asset value, beginning of period $ 12.13 $ 12.49 $ 11.98 Net investment income/(loss) (0.08) (0.06) (0.02) Net realized and unrealized gain on investments 3.84 0.31 0.99 Net increase in net assets resulting from investment operations 3.76 0.25 0.97 Distributions: Distributions from net investment income -- -- (0.01) Distributions in excess of net investment income (0.15) (0.01) (0.24) Distributions from net realized capital gains (0.39) (0.60) (0.21) Total distributions (0.54) (0.61) (0.46) Net asset value, end of period $ 15.35 $ 12.13 $ 12.49 Total return++ 31.68% 2.14% 8.55% ============================================================================================= Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $ 8,972 $8,531 $5,829 Ratio of operating expenses to average net assets+++ 1.25% 1.25% 1.25%+ Ratio of net investment income/(loss) to average net assets (0.66)% (0.54)% (0.35)%+ Portfolio turnover rate 161% 159% 69%
* LifeGoal Growth Portfolio Investor B Shares commenced investment operations on August 12, 1997. + Annualized. ++ Total return represents aggregate total return for the period indicated and does not reflect the deduction of any applicable sales charges. +++ The Portfolio's expenses do not include the expenses of the underlying funds. (a) Per share net investment income has been calculated using the monthly average shares method. 54
LifeGoal Growth Portfolio For a Share outstanding throughout each period Investor C Shares Year ended Year ended Year ended Period ended 03/31/00(a) 03/31/99 03/31/98(a) 03/31/97* Operating performance: Net asset value, beginning of period $ 12.09 $ 12.46 $ 10.15 $ 10.06 Net investment income/(loss) (0.08) (0.05) (0.02) 0.11 Net realized and unrealized gain on investments 3.83 0.30 2.89 0.09 Net increase in net assets resulting from investment operations 3.75 0.25 2.87 0.20 Distributions: Distributions from net investment income -- -- (0.01) (0.11) Distributions in excess of net investment income (0.15) (0.02) (0.34) -- Distributions from net realized capital gains (0.39) (0.60) (0.21) -- Total distributions (0.54) (0.62) (0.56) (0.11) Net asset value, end of period $ 15.30 $ 12.09 $ 12.46 $ 10.15 Total return++ 31.65% 2.07% 28.89% 2.01% ============================================================================================================= Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $ 1,485 $ 473 $ 342 $ 82 Ratio of operating expenses to average net assets+++ 1.25% 1.25% 1.09% 0.75%+ Ratio of net investment income/(loss) to average net assets (0.66)% (0.54)% (0.19)% 0.61%+ Portfolio turnover rate 161% 159% 69% 25%
* LifeGoal Growth Portfolio Investor C Shares commenced investment operations on October 2, 1996. Shares were offered to the public on October 15, 1996. + Annualized. ++ Total return represents aggregate total return for the period indicated and does not reflect the deduction of any applicable sales charges. +++ The Portfolio's expenses do not include the expenses of the underlying funds. (a) Per share net investment income has been calculated using the monthly average shares method.
LifeGoal Balanced Growth Portfolio For a Share outstanding throughout each period Investor A Shares Year ended Year ended Year ended Period ended 03/31/00(a) 03/31/99 03/31/98(a) 03/31/97* Operating performance: Net asset value, beginning of period $ 10.82 $ 10.94 $ 9.95 $ 10.05 Net investment income 0.34 0.25 0.28 0.19 Net realized and unrealized gain/(loss) on investments 1.53 0.21 1.79 (0.10) Net increase in net assets resulting from investment operations 1.87 0.46 2.07 0.09 Distributions: Distributions from net investment income (0.37) (0.25) (0.27) (0.19) Distributions in excess of net investment income (0.04) -- (0.31) -- Distributions from net realized capital gains (0.29) (0.33) (0.50) -- Total distributions (0.70) (0.58) (1.08) (0.19) Net asset value, end of period $ 11.99 $ 10.82 $ 10.94 $ 9.95 Total return++ 18.03% 4.44% 21.76% 0.86% ============================================================================================================= Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $2,298 $ 1,308 $ 489 $ 94 Ratio of operating expenses to average net assets+++ 0.50% 0.50% 0.50% 0.50%+ Ratio of net investment income to average net assets 3.12% 2.52% 2.62% 3.69%+ Portfolio turnover rate 124% 121% 94% 1%
* LifeGoal Balanced Growth Portfolio Investor A Shares commenced investment operations on October 2, 1996. Shares were offered to the public on October 15, 1996. + Annualized. ++ Total return represents aggregate total return for the period indicated and does not reflect the deduction of any applicable sales charges. +++ The Portfolio's expenses do not include the expenses of the underlying funds. (a) Per share net investment income has been calculated using the monthly average shares method. 55
LifeGoal Balanced Growth Portfolio For a Share outstanding throughout each period Investor B Shares Year ended Year ended Period ended 03/31/00(a) 03/31/99 03/31/98(a)* Operating performance: Net asset value, beginning of period $ 10.82 $ 10.92 $ 10.88 Net investment income 0.26 0.17 0.11 Net realized and unrealized gain on investments 1.54 0.22 0.87 Net increase in net assets resulting from investment operations 1.80 0.39 0.98 Distributions: Distributions from net investment income (0.29) (0.16) (0.20) Distributions in excess of net investment income (0.04) -- (0.24) Distributions from net realized capital gains (0.29) (0.33) (0.50) Total distributions (0.62) (0.49) (0.94) Net asset value, end of period $ 12.00 $ 10.82 $ 10.92 Total return++ 17.26% 3.78% 9.70% ============================================================================================= Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $ 9,789 $ 8,925 $ 4,917 Ratio of operating expenses to average net assets+++ 1.25% 1.25% 1.25%+ Ratio of net investment income to average net assets 2.37% 1.77% 1.87%+ Portfolio turnover rate 124% 121% 94%
* LifeGoal Balanced Growth Portfolio Investor B Shares commenced investment operations on August 13, 1997. + Annualized. ++ Total return represents aggregate total return for the period indicated and does not reflect the deduction of any applicable sales charges. +++ The Portfolio's expenses do not include the expenses of the underlying funds. (a) Per share net investment income has been calculated using the monthly average shares method.
LifeGoal Balanced Growth Portfolio For a Share outstanding throughout each period Investor C Shares Year ended Year ended Year ended Period ended 03/31/00(a) 03/31/99 03/31/98(a) 03/31/97* Operating performance: Net asset value, beginning of period $ 10.92 $ 10.92 $ 9.95 $ 10.05 Net investment income 0.26 0.20 0.23 0.19 Net realized and unrealized gain/(loss) on investments 1.55 0.26 1.78 (0.10) Net increase in net assets resulting from investment operations 1.81 0.46 2.01 0.09 Distributions: Distributions from net investment income (0.31) (0.13) (0.25) (0.19) Distributions in excess of net investment income (0.04) -- (0.29) -- Distributions from net realized capital gains (0.29) (0.33) (0.50) -- Total distributions (0.64) (0.46) (1.04) (0.19) Net asset value, end of period $ 12.09 $ 10.92 $ 10.92 $ 9.95 Total return++ 17.22% 4.43% 21.10% 0.85% ============================================================================================================= Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $ 2,092 $ 266 $ 737 $ 18 Ratio of operating expenses to average net assets+++ 1.25% 1.25% 1.09% 0.75%+ Ratio of net investment income to average net assets 2.37% 1.77% 2.03% 3.44%+ Portfolio turnover rate 124% 121% 94% 1%
* LifeGoal Balanced Growth Portfolio Investor C Shares commenced investment operations on October 2, 1996. Shares were offered to the public on October 15, 1996. + Annualized. ++ Total return represents aggregate total return for the period indicated and does not reflect the deduction of any applicable sales charges. +++ The Portfolio's expenses do not include the expenses of the underlying funds. (a) Per share net investment income has been calculated using the monthly average shares method. 56
LifeGoal Income and Growth Portfolio For a Share outstanding throughout each period Investor A Shares Year ended Year ended Year ended Period ended 03/31/00(a) 03/31/99 03/31/98(a) 03/31/97* Operating performance: Net asset value, beginning of period $ 10.89 $ 10.71 $ 9.97 $ 10.03 Net investment income 0.48 0.36 0.41 0.31 Net realized and unrealized gain/(loss) on investments 0.03 0.35 0.89 (0.06) Net increase in net assets resulting from investment operations 0.51 0.71 1.30 0.25 Distributions: Distributions from net investment income (0.48) (0.33) (0.38) (0.31) Distributions in excess of net investment income -- -- (0.11) -- Distributions from net realized capital gains (0.23) (0.20) (0.07) -- Total distributions (0.71) (0.53) (0.56) (0.31) Net asset value, end of period $ 10.69 $ 10.89 $ 10.71 $ 9.97 Total return++ 4.93% 6.92% 13.38% 2.54% ============================================================================================================= Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $ 789 $ 1,347 $ 126 $ 131 Ratio of operating expenses to average net assets+++ 0.50% 0.50% 0.50% 0.50%+ Ratio of net investment income to average net assets 4.53% 3.74% 3.92% 6.09%+ Portfolio turnover rate 96% 107% 64% 2%
* LifeGoal Income and Growth Portfolio Investor A Shares commenced investment operations on October 2, 1996. Shares were offered to the public on October 15, 1996. + Annualized. ++ Total return represents aggregate total return for the period indicated and does not reflect the deduction of any applicable sales charges. +++ The Portfolio's expenses do not include the expenses of the underlying funds. (a) Per share net investment income has been calculated using the monthly average shares method.
LifeGoal Income and Growth Portfolio For a Share outstanding throughout each period Investor B Shares Year ended Year ended Period ended 03/31/00(a) 03/31/99 03/31/98(a)* Operating performance: Net asset value, beginning of period $ 10.89 $ 10.70 $ 10.51 Net investment income 0.41 0.28 0.19 Net realized and unrealized gain on investments 0.03 0.35 0.36 Net increase in net assets resulting from investment operations 0.44 0.63 0.55 Distributions: Distributions from net investment income (0.40) (0.24) (0.22) Distributions in excess of net investment income -- -- (0.07) Distributions from net realized capital gains (0.23) (0.20) (0.07) Total distributions (0.63) (0.44) (0.36) Net asset value, end of period $ 10.70 $ 10.89 $ 10.70 Total return++ 4.25% 6.16% 5.33% ============================================================================================= Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $ 4,645 $ 4,806 $ 1,212 Ratio of operating expenses to average net assets+++ 1.25% 1.25% 1.25%+ Ratio of net investment income to average net assets 3.78% 2.99% 3.17%+ Portfolio turnover rate 96% 107% 64%
* LifeGoal Income and Growth Portfolio Investor B Shares commenced investment operations on August 7, 1997. + Annualized. ++ Total return represents aggregate total return for the period indicated and does not reflect the deduction of any applicable sales charges. +++ The Portfolio's expenses do not include the expenses of the underlying funds. (a) Per share net investment income has been calculatedusing the monthly average shares method. 57
LifeGoal Income and Growth Portfolio For a Share outstanding throughout each period Investor C Shares Year ended Year ended Year ended Period ended 03/31/00(a) 03/31/99 03/31/98(a) 03/31/97* Operating performance: Net asset value, beginning of period $ 10.90 $ 10.70 $ 9.97 $ 10.03 Net investment income 0.40 0.31 0.36 0.31 Net realized and unrealized gain/(loss) on investments 0.03 0.31 0.89 (0.06) Net increase in net assets resulting from investment operations 0.43 0.62 1.25 0.25 Distributions: Distributions from net investment income (0.43) (0.22) (0.35) (0.31) Distributions in excess of net investment income -- -- (0.10) -- Distributions from net realized capital gains (0.23) (0.20) (0.07) -- Total distributions (0.66) (0.42) (0.52) (0.31) Net asset value, end of period $ 10.67 $ 10.90 $ 10.70 $ 9.97 Total return++ 4.11% 6.02% 12.83% 2.54% ============================================================================================================= Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $ 848 $ 100 $ 87 $ 1 Ratio of operating expenses to average net assets+++ 1.25% 1.25% 1.09% 0.75%+ Ratio of net investment income to average net assets 3.78% 2.99% 3.33% 5.84%+ Portfolio turnover rate 96% 107% 64% 2%
* LifeGoal Income and Growth Portfolio Investor C Shares commenced investment operations on October 2, 1996. Shares were offered to the public on October 15, 1996. + Annualized. ++ Total return represents aggregate total return for the period indicated and does not reflect the deduction of any applicable sales charges. +++ The Portfolio's expenses do not include the expenses of the underlying funds. (a) Per share net investment income has been calculated using the monthly average shares method. 58 [GRAPHIC] This glossary includes explanations of the important terms that may be used in this prospectus. Some of the terms explained may apply to Nations Funds not included in this prospectus. [GRAPHIC] Terms used in this prospectus Asset-backed security - a debt security that gives you an interest in a pool of assets that is collateralized or "backed" by one or more kinds of assets, including real property, receivables or mortgages, generally issued by banks, credit card companies or other lenders. Some securities may be issued or guaranteed by the U.S. government or its agencies, authorities or instrumentalities. Asset-backed securities typically make periodic payments, which may be interest or a combination of interest and a portion of the principal of the underlying assets. 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). 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. Corporate obligation - a money market instrument issued by a corporation or commercial bank. 59 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. 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. 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 - 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. 60 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 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 indices include U.S. government agency and U.S. Treasury securities, corporate bonds and mortgage-backed securities. All dividends are reinvested. Liquidity - a measurement of how easily a security can be bought or sold at a price that is close to its market value. Money market instrument - a short-term debt security that is considered to mature in 13 months or less. Money market instruments include U.S. Treasury obligations, U.S. government obligations, certificates of deposit, bankers' acceptances, commercial paper, repurchase agreements and certain municipal securities. Mortgage-backed security or Mortgage-related security - a debt security that gives you an interest in, and is backed by, a pool of residential mortgages issued by the U.S. government or by financial institutions. The underlying mortgages may be guaranteed by the U.S. government or one of its agencies, authorities or instrumentalities. Mortgage-backed securities typically make monthly payments, which are a combination of interest and a portion of the principal of the underlying mortgages. Municipal security (obligation) - a debt security issued by state or local governments or governmental authorities to pay for public projects and services. "General obligations" are typically backed by the issuer's full taxing and revenue-raising powers. "Revenue securities" depend on the income earned by a specific project or authority, like road or bridge tolls, user fees for water or revenues from a utility. Interest income 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 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. 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. 61 Quantitative analysis - an analysis of financial information about a company or security to identify securities that have the potential for growth or are otherwise suitable for a fund to buy. Real Estate Investment Trust (REIT) - a portfolio of real estate investments which may include office buildings, apartment complexes, hotels and shopping malls, and real-estate-related loans or interests. 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. Right - a temporary privilege allowing investors who already own a common stock to buy additional shares directly from the company at a specified price or formula. S&P 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. Second-tier security - under Rule 2a-7 under the 1940 Act, a debt security that is an eligible investment for money market funds, but is not a first-tier security. Senior security - a debt security that allows holders to receive their share of a company's remaining assets in a bankruptcy before other bondholders, creditors, and common and preferred shareholders. Settlement date - The date on which an order is settled either by payment or delivery of securities. Trade date - the effective date of a purchase, sale or exchange transaction, or other instructions sent to us. The trade date is determined by the day and time we receive the order or instructions in a form that's acceptable to us. U.S. government obligations - a wide range of debt securities issued or guaranteed by the U.S. government or its agencies, authorities or instrumentalities. 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. (1)S&P has not reviewed any stock included in the S&P 500 for its investment merit. S&P determines and calculates its index independently of the Funds and is not a sponsor or affiliate of the Funds. S&P gives no information and makes no statements about the suitability of investing in the Funds or the ability of its index to track stock market performance. S&P makes no guarantees about the index, any data included in it and the suitability of the index or its data for any purpose. "Standard and Poor's" and "S&P 500" are trademarks of The McGraw-Hill Companies, Inc. 62 (THIS PAGE INTENTIONALLY LEFT BLANK) [GRAPHIC] Where to find more information You'll find more information about the LifeGoal Portfolios in the following documents: Annual and semi-annual reports The annual and semi-annual reports contain information about Portfolio investments and performance, the financial statements and the independent accountants' reports. The annual report also includes a discussion about the market conditions and investment strategies that had a significant effect on each Portfolio's performance during the period covered. [GRAPHIC] Statement of Additional Information The SAI contains additional information about the Portfolios and their policies. The SAI is legally part of this prospectus (it's incorporated by reference). A copy has been filed with the SEC. You can obtain a free copy of these documents, request other information about the Portfolios and make shareholder inquiries by contacting Nations Funds: By telephone: 1.800.321.7854 By mail: Nations Funds c/o Stephens Inc. One Bank of America Plaza 33rd Floor Charlotte, NC 28255 On the Internet: www.nations-funds.com Information about the Portfolios can be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-202-942-8090. The reports and other information about the Portfolios are available on the EDGAR Database on the SEC's Internet site at http://www.sec.gov, and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Section, Washington, D.C. 20549-0102. SEC file number: Nations Funds Trust, 811-09645 LGPROIX-10/00 NATIONS FUNDS [GRAPHIC] Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. PRELIMINARY PROSPECTUS DATED OCTOBER 13, 2000 SUBJECT TO COMPLETION Prospectus Primary A Shares June 8, 2001 Domestic Stock Funds Nations Asset Allocation Fund Nations Marsico Growth & Income Fund Nations Marsico Focused Equities Fund Government & Corporate Bond Funds Nations Government Securities 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 An overview of the Funds -------------------------------------------------------------------------------- [GRAPHIC] Terms used in this prospectus In this prospectus, we, us and our refer to the Nations Funds family (Nations Funds or Nations Funds Family). Some other important terms we've used may be new to you. These are printed in italics where they first appear in a section and are described in Terms used in this prospectus. [GRAPHIC] You'll find Terms used in this prospectus on page 36. Your investment in these Funds is not a bank deposit and is not insured or guaranteed by Bank of America, N. A. (Bank of America), the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Your investment may lose money. Affiliates of Bank of America are paid for the services they provide to the Funds. This booklet, which is called a prospectus, tells you about two types of Nations Funds -- Domestic Stock and Government & Corporate Bond Funds. Please read it carefully, because it contains information that's designed to help you make informed investment decisions. About the Funds Each type of Fund has a different investment focus: o Domestic Stock Funds invest primarily in equity securities of U.S. companies o Government & Corporate Bond Funds focus on the potential to earn income by investing primarily in fixed income securities The Funds also have different risk/return characteristics because they invest in different kinds of securities. Equity securities have the potential to provide you with higher returns than many other kinds of investments, but they also tend to have the highest risk. 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 and municipal securities. In every case, there's a risk that you'll lose money or you may not earn as much as you expect. Choosing the right Funds for you Not every Fund is right for every investor. When you're choosing a Fund to invest in, you should consider things like your investment goals, how much risk you can accept and how long you're planning to hold your investment. The Domestic Stock Funds all focus on long-term growth. They may be suitable for you if: o you have longer-term investment goals o they're part of a balanced portfolio o you want to try to protect your portfolio against a loss of buying power that inflation can cause over time 2 They may not be suitable for you if: o you're not prepared to accept or are unable to bear the risks associated with equity securities, including foreign securities o you have short-term investment goals o you're looking for a regular stream of income The Government & Corporate Fund focuses on the potential to earn income. It may be suitable for you if: o you're looking for income o you have longer-term investment goals The Government & Corporate Fund may not be suitable for you if: o you're not prepared to accept or are unable to bear the risks associated with fixed income securities You'll find a discussion of each Fund's principal investments, strategies and risks in the Fund descriptions that start on page 5. For more information If you have any questions about the Funds, please call us at 1.800.765.2668 or contact your investment professional. You'll find more information about the Funds in the Statement of Additional Information (SAI). The SAI includes more detailed information about each Fund's investments, policies, performance and management, among other things. Please turn to the back cover to find out how you can get a copy. 3 What's inside -------------------------------------------------------------------------------- [GRAPHIC] Banc of America Advisors, Inc. Banc of America Advisors, Inc. (BAAI) is the investment adviser to each of the Funds. BAAI is responsible for the overall management and supervision of the investment management of each Fund. BAAI and Nations Funds have engaged sub-advisers, which are responsible for the day-to-day investment decisions for each of the Funds. [GRAPHIC] You'll find more about BAAI and the sub-advisers starting on page 22. [GRAPHIC] About the Funds Nations Asset Allocation Fund 5 Sub-advisers: Banc of America Capital Management, Inc. and Chicago Equity Partners LLC ------------------------------------------------------------------------ Nations Marsico Growth & Income Fund 9 Sub-adviser: Marsico Capital Management, LLC ------------------------------------------------------------------------ Nations Marsico Focused Equities Fund 13 Sub-adviser: Marsico Capital Management, LLC ------------------------------------------------------------------------ Nations Government Securities Fund 17 Sub-adviser: Banc of America Capital Management, Inc. ------------------------------------------------------------------------ Other important information 21 ------------------------------------------------------------------------ How the Funds are managed 22 [GRAPHIC] About your investment Information for investors Buying, selling and exchanging shares 27 Distributions and taxes 30 ------------------------------------------------------------------------ Financial highlights 32 ------------------------------------------------------------------------ Terms used in this prospectus 36 ------------------------------------------------------------------------ Where to find more information back cover
4 [GRAPHIC] About the sub-advisers This Fund is managed by two sub-advisers: BACAP and Chicago Equity Partners LLC (Chicago Equity). Chicago Equity's Equity Management Team makes the day-to-day investment decisions for the equity portion of the Fund. BACAP's Fixed Income Management Team makes the day-to-day investment decisions for the fixed income and money market portions of the Fund. [GRAPHIC] You'll find more about BACAP and Chicago Equity, starting on page 23. [GRAPHIC] What is an asset allocation fund? This asset allocation fund invests in a mix of equity and fixed income securities, and cash equivalents. Each of these "asset classes" has different risk/return characteristics. The portfolio management team changes the mix based on its assessment of the expected risks and returns of each class. Asset allocation funds like this one can provide a diversified asset mix for you in a single investment. Nations Asset Allocation Fund [GRAPHIC] Investment objective The Fund seeks to obtain long-term growth from capital appreciation, and dividend and interest income. [GRAPHIC] Principal investment strategies The Fund invests in a mix of equity and fixed income securities, as well as cash equivalents, including U.S. government obligations, commercial paper and other short-term, interest-bearing instruments. The equity securities the Fund invests in are primarily common stock of blue chip companies. These companies are well established, nationally known companies that have a long record of profitability and a reputation for quality management, products and services. The fixed income securities the Fund invests in are primarily investment grade bonds and notes. The Fund normally invests at least 25% of its assets in senior securities. The Fund may also invest up to 35% of its assets in mortgage-backed and asset-backed securities. The Fund may also invest in securities that aren't part of its principal investment strategies, but it won't hold more than 10% of its assets in any one type of these securities. These securities are described in the SAI. The team uses asset allocation as its principal investment approach. The team actively allocates assets among the three asset classes based on its assessment of the expected risks and returns of each class. For the equity portion of the Fund, the team uses quantitative analysis to analyze fundamental information about securities and identify value. Starting with a universe of approximately 2,000 common stocks, the team uses a multi-factor computer model to rank securities, based on the following criteria, among others: o changes in actual and expected earnings o unexpected changes in earnings o price-to-earnings ratio o dividend discount model o price-to-cash flow The team tries to manage risk by matching the market capitalization, style and industry weighting characteristics of the S&P SuperComposite 1500. The team focuses on selecting individual stocks to try to provide higher returns than the S&P SuperComposite 1500 while maintaining a level of risk similar to the index. The team may sell a security when the Fund's asset allocation changes, there is a deterioration in the issuer's financial situation, when the team believes other investments are more attractive, or for other reasons. 5 [GRAPHIC] You'll find more about other risks of investing in this Fund starting on page 21 and in the SAI. [GRAPHIC] Risks and other things to consider Nations Asset Allocation Fund has the following risks: o Investment strategy risk - The team uses an asset allocation strategy to try to achieve the highest total return. There is a risk that the mix of investments will not produce the returns the team expects, or will fall in value. o Stock market risk - The value of the stocks the Fund holds can be affected by changes in U.S. or foreign economies and financial markets, and the companies that issue the stocks, among other things. Stock prices can rise or fall over short as well as long periods. In general, stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. As of the date of this prospectus, the stock markets, as measured by the S&P 500 and other commonly used indices, were trading at historically high levels. There can be no guarantee that these levels will continue. o Interest rate risk - The prices of the Fund's 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 Mortgage-related 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 or other securities that have lower yields. o Asset-backed securities risk - Payment of interest and repayment of principal may be impacted by the cash flows generated by the assets backing these securities. The value of the Fund's asset-backed securities may also be affected by changes in interest rates, the availability of information concerning the interests in and structure of the pools of purchase contracts, financing leases or sales agreements that are represented by these securities, the creditworthiness of the servicing agent for the pool, the originator of the loans or receivables, or the entities that provide any supporting letters of credit, surety bonds, or other credit enhancements. 6 [GRAPHIC] Many things affect a Fund's performance, including market conditions, the composition of the Fund's holdings and Fund expenses. The returns shown are for a class not offered in this prospectus that has similar annual returns because the shares are invested in the same portfolio of securities. The annual returns differ only to the extent that the classes do not have the same expenses. [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 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. [BAR CHART APPEARS HERE] 26.90% 15.66% 21.38% 21.09% 11.11% 1995 1996 1997 1998 1999 *Year-to-date return as of June 30, 2000: 2.01% Best and worst quarterly returns during this period Best: 4th quarter 1998: 12.77% Worst: 3rd quarter 1998: -4.34%
Average annual total return as of December 31, 1999 The table shows the Fund's average annual total return for each period, compared with the S&P 500 and the Lehman Aggregate Bond Index. The S&P 500 is an unmanaged index of 500 widely held common stocks, weighted by market capitalization. The Lehman Aggregate Bond Index is an index of fixed income securities issued by the U.S. government and its agencies, and by corporations. These indices are not available for investment.
Since 1 year 5 years inception* Investor A Shares 11.11% 19.10% 15.55% S&P 500 21.04% 28.55% 23.22% Lehman Aggregate Bond Index -0.83% 7.73% 5.72%
*The inception date of Investor A Shares is January 18, 1994. The returns for the indices shown are from inception of Investor A Shares. 7 [GRAPHIC] There are two kinds of fees -- shareholder fees you pay directly, and annual fund operating expenses that are deducted from a fund's assets. [GRAPHIC] What it costs to invest in the Fund This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
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 0.65% Other expenses 0.37% ---- Total annual Fund operating expenses 1.02% ====
(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 necessary, to reflect current service provider fees. [GRAPHIC] This is an example only. Your actual costs could be higher or lower, depending on the amount you invest, and on the Fund's actual expenses and performance. Example This example is intended to help you compare the cost of investing in this Fund with the cost of investing in other mutual funds. This example assumes: o you invest $10,000 in Primary A Shares of the Fund for the time periods indicated and then sell all of your shares at the end of those periods o you reinvest all dividends and distributions in the Fund o your investment has a 5% return each year o the Fund's operating expenses remain the same as shown in the table above Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 year 3 years 5 years 10 years Primary A Shares $104 $325 $563 $1,248
8 [GRAPHIC] About the sub-adviser The Fund does not have its own investment adviser or sub-adviser because it's a "feeder" fund. A feeder fund typically invests all of its assets in another fund, which is called a "master portfolio." Master Portfolio and Fund are sometimes used interchangeably. BAAI is the Master Portfolio's investment adviser, and Marsico Capital Management, LLC (Marsico Capital) is its sub-adviser. Thomas F. Marsico is its portfolio manager and makes the day-to-day investment decisions for the Master Portfolio. [GRAPHIC] You'll find more about Marsico Capital and Mr. Marsico on page 24. [GRAPHIC] Why invest in a growth and income fund? Growth and income funds can invest in a mix of equity and fixed income securities. This can help reduce volatility and provide the Fund with the flexibility to shift among securities that offer the potential for higher returns. While this Fund invests in a wide range of companies and industries, it holds fewer investments than other kinds of funds. This means it can have greater price swings than more diversified funds. It also means it may have relatively higher returns when one of its investments performs well, or relatively lower returns when an investment performs poorly. Nations Marsico Growth & Income Fund [GRAPHIC] Investment objective The Fund seeks long-term growth of capital with a limited emphasis on income. [GRAPHIC] Principal investment strategies The Fund invests all of its assets in Nations Marsico Growth & Income Master Portfolio (the Master Portfolio). The Master Portfolio has the same investment objective as the Fund. The Master Portfolio invests primarily in equity securities of large capitalization companies that are selected for their growth potential. It invests at least 25% of its assets in securities that are believed to have income potential, and generally holds 35 to 50 securities. It may hold up to 25% of its assets in foreign securities. Marsico Capital may shift assets between growth and income securities based on its assessment of market, financial and economic conditions. The Master Portfolio, however, is not designed to produce a consistent level of income. The Master Portfolio may also invest in securities that aren't part of its principal investment strategies, but it won't hold more than 10% of its assets in any one type of these securities. These securities are described in the SAI. Marsico Capital looks for companies with earnings growth potential that may not be recognized by other investors, focusing on companies that have some of the following characteristics: o products, markets or technologies in flux that can result in extraordinary growth o strong brand franchises that can take advantage of a changing global environment o global reach that allows the company to generate sales and earnings both in the United States and abroad. This can give the company added growth potential and also means the company may be less affected by changes in local markets o movement with, not against, the major social, economic and cultural shifts taking place in the world Once an investment opportunity is identified, Marsico Capital uses a disciplined analytical process to assess its potential as an investment. This process includes a "top-down" analysis that takes into account economic factors like interest rates, inflation, the regulatory environment, the industry and global competition. The process also includes a "bottom-up" analysis of a company's financial situation, as well as individual company characteristics like commitment to research, market franchise and quality of management. Marsico Capital may sell a security when it believes there is a deterioration in the company's financial situation, the security is overvalued, when there is a negative development in the company's competitive, regulatory or economic environment, or for other reasons. 9 [GRAPHIC] You'll find more about other risks of investing in this Fund starting on page 21 and in the SAI. [GRAPHIC] Risks and other things to consider Nations Marsico Growth & Income Fund has the following risks: o Investment strategy risk - Marsico Capital uses an investment strategy that tries to identify equities with growth or income potential. There is a risk that the value of these investments will not rise as high as Marsico Capital expects, or will fall. o Stock market risk - The value of the stocks the Master Portfolio holds can be affected by changes in U.S. or foreign economies and financial markets, and the companies that issue the stocks, among other things. Stock prices can rise or fall over short as well as long periods. In general, stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. As of the date of this prospectus, the stock markets, as measured by the S&P 500 and other commonly used indices, were trading at historically high levels. There can be no guarantee that these levels will continue. o Technology and technology-related risk - The Master Portfolio may invest in technology and technology-related companies, which can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, and competition from new market entrants. o Interest rate risk - The prices of the Master Portfolio's fixed income securities will tend to fall when interest rates rise and to rise when interest rates fall. 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 Master Portfolio 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 Foreign investment risk - Because the Master Portfolio may invest up to 25% of its assets in foreign securities, it can be affected by the risks of foreign investing. Foreign investments may be riskier than U.S. investments because of political and economic conditions, changes in currency exchange rates, foreign controls on investment, difficulties selling some securities and lack of or limited financial information. Withholding taxes also may apply to some foreign investments. o Investing in the Master Portfolio - Other mutual funds and eligible investors can buy shares in the Master Portfolio. All investors in the Master Portfolio invest under the same terms and conditions as the Fund and pay a proportionate share of the Master Portfolio's expenses. Other feeder funds that invest in the Master Portfolio may have different share prices and returns than the Fund because different feeder funds typically have varying sales charges, and ongoing administrative and other expenses. The Fund could withdraw its entire investment from the Master Portfolio if it believes it's in the best interests of the Fund to do so (for example, if the Master Portfolio changed its investment objective). It is unlikely that this would happen, but if it did, the Fund's portfolio could be less diversified and therefore less liquid, and expenses could increase. The Fund might also have to pay brokerage, tax or other charges. 10 [GRAPHIC] Many things affect a Fund's performance, including market conditions, the composition of the Fund's holdings and Fund expenses. For information about the performance of other domestic stock funds managed by Thomas Marsico, see How the Funds are managed. [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, and would be lower if they did. [BAR CHART APPEARS HERE] 38.22% 52.48% 1998 1999 *Year-to-date return as of June 30, 2000: -6.25% Best and worst quarterly returns during this period Best: 4th quarter 1999: 35.30% Worst: 3rd quarter 1998: -12.34%
Average annual total return as of December 31, 1999 The table shows the Fund's average annual total return for each period, compared with the S&P 500, an unmanaged index of 500 widely held common stocks, weighted by market capitalization. The S&P 500 is not available for investment.
Since 1 year inception* Primary A Shares 52.48% 45.18% S&P 500 21.04% 24.75%
*The inception date of Primary A Shares is December 31, 1997. The return for the index shown is from inception of Primary A Shares. 11 [GRAPHIC] There are two kinds of fees -- shareholder fees you pay directly, and annual fund operating expenses that are deducted from a fund's assets. [GRAPHIC] What it costs to invest in the Fund This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
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)(2) Management fees 0.75% Other expenses 0.48% ---- Total annual Fund operating expenses 1.23% ====
(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 necessary, to reflect current service provider fees. (2)These fees and expenses and the example below include the Fund's portion of the fees and expenses deducted from the assets of the Master Portfolio. [GRAPHIC] This is an example only. Your actual costs could be higher or lower, depending on the amount you invest, and on the Fund's actual expenses and performance. Example This example is intended to help you compare the cost of investing in this Fund with the cost of investing in other mutual funds. This example assumes: o you invest $10,000 in Primary A Shares of the Fund for the time periods indicated and then sell all of your shares at the end of those periods o you reinvest all dividends and distributions in the Fund o your investment has a 5% return each year o the Fund's operating expenses remain the same as shown in the table above Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 year 3 years 5 years 10 years Primary A Shares $125 $390 $676 $1,489
12 [GRAPHIC] About the sub-adviser The Fund does not have its own investment adviser or sub-adviser because it's a "feeder" fund. A feeder fund typically invests all of its assets in another fund, which is called a "master portfolio." Master Portfolio and Fund are sometimes used interchangeably. BAAI is the Master Portfolio's investment adviser, and Marsico Capital is its sub-adviser. Thomas F. Marsico is its portfolio manager and makes the day-to-day investment decisions for the Master Portfolio. [GRAPHIC] You'll find more about Marsico Capital and Mr. Marsico on page 24. [GRAPHIC] What is a focused fund? A focused fund invests in a small number of companies with earnings that are believed to have the potential to grow significantly. This Fund focuses on large, established and well-known U.S. companies. Because a focused fund holds fewer investments than other kinds of funds, it can have greater price swings than more diversified funds. It may earn relatively higher returns when one of its investments performs well, or relatively lower returns when an investment performs poorly. Nations Marsico Focused Equities Fund [GRAPHIC] Investment objective The Fund seeks long-term growth of capital. [GRAPHIC] Principal investment strategies The Fund invests all of its assets in Nations Marsico Focused Equities Master Portfolio (the Master Portfolio). The Master Portfolio has the same investment objective as the Fund. The Master Portfolio normally invests at least 65% of its assets in common stocks of large companies. The Master Portfolio, which is non-diversified, generally holds a core position of 20 to 30 common stocks. It may invest up to 25% of its assets in foreign securities. The Master Portfolio may also invest in securities that aren't part of its principal investment strategies, but it won't hold more than 10% of its assets in any one type of these securities. These securities are described in the SAI. Marsico Capital looks for companies with earnings growth potential that may not be recognized by other investors, focusing on companies that have some of the following characteristics: o products, markets or technologies in flux that can result in extraordinary growth o strong brand franchises that can take advantage of a changing global environment o global reach that allows the company to generate sales and earnings both in the United States and abroad. This can give the company added growth potential and also means the company may be less affected by changes in local markets o movement with, not against, the major social, economic and cultural shifts taking place in the world Once an investment opportunity is identified, Marsico Capital uses a disciplined analytical process to assess its potential as an investment. This process includes a "top-down" analysis that takes into account economic factors like interest rates, inflation, the regulatory environment, the industry and global competition. The process also includes a "bottom-up" analysis of a company's financial situation, as well as individual company characteristics like commitment to research, market franchise and quality of management. Marsico Capital may sell a security when it believes there is a deterioration in the company's financial situation, the security is overvalued, when there is a negative development in the company's competitive, regulatory or economic environment, or for other reasons. 13 [GRAPHIC] You'll find more about other risks of investing in this Fund starting on page 21 and in the SAI. [GRAPHIC] Risks and other things to consider Nations Marsico Focused Equities Fund has the following risks: o Investment strategy risk - There is a risk that the value of the Master Portfolio's investments will not rise as high as Marsico Capital expects, or will fall. o Holding fewer investments - This Master Portfolio is considered to be non-diversified because it may hold fewer investments than other kinds of equity funds. This increases the risk that its value could go down significantly if even only one of its investments performs poorly. The value of the Master Portfolio will tend to have greater price swings than the value of more diversified equity funds. The Master Portfolio may become a diversified fund by limiting the investments in which more than 5% of its total assets are invested. o Stock market risk - The value of the stocks the Master Portfolio holds can be affected by changes in U.S. or foreign economies and financial markets, and the companies that issue the stocks, among other things. Stock prices can rise or fall over short as well as long periods. In general, stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. As of the date of this prospectus, the stock markets, as measured by the S&P 500 and other commonly used indices, were trading at historically high levels. There can be no guarantee that these levels will continue. o Technology and technology-related risk - The Master Portfolio may invest in technology and technology-related companies,which can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, and competition from new market entrants. o Foreign investment risk - Because the Master Portfolio may invest up to 25% of its assets in foreign securities, it can be affected by the risks of foreign investing. Foreign investments may be riskier than U.S. investments because of political and economic conditions, changes in currency exchange rates, foreign controls on investment, difficulties selling some securities and lack of or limited financial information. Withholding taxes also may apply to some foreign investments. o Investing in the Master Portfolio - Other mutual funds and eligible investors can buy shares in the Master Portfolio. All investors in the Master Portfolio invest under the same terms and conditions as the Fund and pay a proportionate share of the Master Portfolio's expenses. Other feeder funds that invest in the Master Portfolio may have different share prices and returns than the Fund because different feeder funds typically have varying sales charges, and ongoing administrative and other expenses. The Fund could withdraw its entire investment from the Master Portfolio if it believes it's in the best interests of the Fund to do so (for example, if the Master Portfolio changed its investment objective). It is unlikely that this would happen, but if it did, the Fund's portfolio could be less diversified and therefore less liquid, and expenses could increase. The Fund might also have to pay brokerage, tax or other charges. 14 [GRAPHIC] Many things affect a Fund's performance, including market conditions, the composition of the Fund's holdings and Fund expenses. For information about the performance of other domestic stock funds managed by Thomas Marsico, see How the Funds are managed. [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, and would be lower if they did. [BAR CHART APPEARS HERE] 49.64% 53.43% 1998 1999 *Year-to-date return as of June 30, 2000: -8.10% Best and worst quarterly returns during this period Best: 4th quarter 1999: 33.16% Worst: 3rd quarter 1998: -9.08%
Average annual total return as of December 31, 1999 The table shows the Fund's average annual total return for each period, compared with the S&P 500, an unmanaged index of 500 widely held common stocks, weighted by market capitalization. The S&P 500 is not available for investment.
Since 1 year inception* Primary A Shares 53.43% 51.53% S&P 500 21.04% 24.75%
*The inception date of Primary A Shares is December 31, 1997. The return for the index shown is from inception of Primary A Shares. 15 [GRAPHIC] There are two kinds of fees -- shareholder fees you pay directly, and annual fund operating expenses that are deducted from a fund's assets. [GRAPHIC] What it costs to invest in the Fund This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
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)(2) Management fees 0.75% Other expenses 0.41% ---- Total annual Fund operating expenses 1.16% ====
(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 necessary, to reflect current service provider fees. (2)These fees and expenses and the example below include the Fund's portion of the fees and expenses deducted from the assets of the Master Portfolio. [GRAPHIC] This is an example only. Your actual costs could be higher or lower, depending on the amount you invest, and on the Fund's actual expenses and performance. Example This example is intended to help you compare the cost of investing in this Fund with the cost of investing in other mutual funds. This example assumes: o you invest $10,000 in Primary A Shares of the Fund for the time periods indicated and then sell all of your shares at the end of those periods o you reinvest all dividends and distributions in the Fund o your investment has a 5% return each year o the Fund's operating expenses remain the same as shown in the table above Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 year 3 years 5 years 10 years Primary A Shares $118 $368 $638 $1,409
16 [GRAPHIC] About the sub-adviser BACAP is this Fund's sub-adviser. BACAP's Fixed Income Management Team makes the day-to-day investment decisions for the Fund. [GRAPHIC] You'll find more about BACAP on page 23. [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 Government Securities Fund [GRAPHIC] Investment objective The Fund seeks high current income consistent with moderate fluctuation of principal. [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 the following securities rated investment grade at the time of investment: o mortgage-related securities issued by governments, their agencies or instrumentalities, or corporations. o asset-backed securities or municipal securities. o corporate debt securities, including bonds, notes and debentures. 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 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. 17 [GRAPHIC] You'll find more about other risks of investing in this Fund starting on page 21 and in the SAI. [GRAPHIC] Risks and other things to consider Nations Government Securities Fund has the following risks: o Investment strategy risk - There is a risk that the value of the investments that the 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 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 Mortgage-related 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 or other securities that have lower yields. o Asset-backed securities risk - Payment of interest and repayment of principal may be impacted by the cash flows generated by the assets backing these securities. The value of the Fund's asset-backed securities may also be affected by changes in interest rates, the availability of information concerning the interests in and structure of the pools of purchase contracts, financing leases or sales agreements that are represented by these securities, the creditworthiness of the servicing agent for the pool, the originator of the loans or receivables, or the entities that provide any supporting letters of credit, surety bonds, or other credit enhancements. 18 [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] 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, and would be lower if they did. [BAR CHART APPEARS HERE] 5.41% 7.67% -5.11% 15.28% 2.53% 8.55% 8.43% -2.95% 1992 1993 1994 1995 1996 1997 1998 1999 *Year-to-date return as of June 30, 2000: 4.12% Best and worst quarterly returns during this period Best: 1st quarter 1995: 4.97% Worst: 3rd quarter 1994: -3.01%
Average annual total return as of December 31, 1999 The table shows the Fund's average annual total return for each period, compared with the Lehman Government Bond Index, an unmanaged index of government bonds with an average maturity of approximately nine years. All dividends are reinvested. Prior to March 31, 2000, the Fund compared its performance to the Lehman Intermediate Treasury Index and the Salomon Brothers Mortgage Index. The Fund changed the index to which it compares its performance because the Lehman Government Bond Index is considered to be a more appropriate comparison.
Since 1 year 5 years inception* Primary A Shares -2.95% 6.19% 5.73% Lehman Government Bond Index -2.23% 7.44% 7.24% Lehman Intermediate Treasury Index 0.40% 6.92% 6.71% Salomon Brothers Mortgage Index 1.83% 7.93% 6.83%
*The inception date of Primary A Shares is April 11, 1991. The returns for the indices shown are from inception of Primary A Shares. 19 [GRAPHIC] There are two kinds of fees -- shareholder fees you pay directly, and annual fund operating expenses that are deducted from a fund's assets. Total net expenses are actual expenses paid by the Fund after waivers and/or reimbursements. [GRAPHIC] What it costs to invest in the Fund This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
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% ======
(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 necessary, 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, 2001. The figure shown here is after waivers and/or reimbursements. There is no guarantee that these waivers and/or reimbursements will continue after this date. [GRAPHIC] This is an example only. Your actual costs could be higher or lower, depending on the amount you invest, and on the Fund's actual expenses and performance. Example This example is intended to help you compare the cost of investing in this Fund with the cost of investing in other mutual funds. This example assumes: o you invest $10,000 in Primary A Shares of the Fund for the time periods indicated and then sell all of your shares at the end of those periods o you reinvest all dividends and distributions in the Fund o your investment has a 5% return each year o the Fund's operating expenses remain the same as shown in the table above o the waivers and/or reimbursements shown above expire July 31, 2001 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:
1 year 3 years 5 years 10 years Primary A Shares $81 $274 $483 $1,087
20 [GRAPHIC] Other important information You'll find specific information about each Fund's principal investments, strategies and risks in the descriptions starting on page 5. The following are some other risks and information you should consider before you invest: o Changing investment objectives and policies - The investment objective and certain investment policies of any Fund can be changed without shareholder approval. Other investment policies may be changed only with shareholder approval. o Holding other kinds of investments - The Funds may hold investments that aren't part of their principal investment strategies. Please refer to the SAI for more information. The portfolio managers or management team can also choose not to invest in specific securities described in this prospectus and in the SAI. o Foreign investment risk - Funds that invest in foreign securities may be affected by changes in currency exchange rates and the costs of converting currencies; foreign government controls on foreign investment, repatriation of capital, and currency and exchange; foreign taxes; inadequate supervision and regulation of some foreign markets; difficulty selling some investments which may increase volatility; different settlement practices or delayed settlements in some markets; difficulty getting complete or accurate information about foreign companies; less strict accounting, auditing and financial reporting standards than those in the U.S.; political, economic or social instability; and difficulty enforcing legal rights outside the U.S. o Investing defensively - A Fund may temporarily hold investments that are not part of its investment objective or its principal investment strategies to try to protect it during a market or economic downturn or because of political or other conditions. A Fund may not achieve its investment objective while it is investing defensively. o Securities lending program - A Fund may lend portfolio securities to approved broker-dealers or other financial institutions on a fully collateralized basis in order to earn additional income. There may be delays in receiving additional collateral after the loan is made or in recovering the securities loaned. o Portfolio turnover - A Fund that replaces -- or turns over -- more than 100% of its investments in a year is considered to trade frequently. Frequent trading can result in larger distributions of short-term capital gains to shareholders. These gains are taxable at higher rates than long-term capital gains. Frequent trading can also mean higher brokerage and other transaction costs, which could reduce the Fund's returns. The Funds generally buy securities for capital appreciation, investment income, or both, and don't engage in short-term trading. You'll find the portfolio turnover rate for each Fund in Financial highlights. 21 [GRAPHIC] How the Funds are managed [GRAPHIC] Banc of America Advisors, Inc. One Bank of America Plaza Charlotte, North Carolina 28255 Investment adviser BAAI is the investment adviser to over 60 mutual fund portfolios in the Nations Funds Family, including the Funds described in this prospectus. BAAI is a registered investment adviser. It's a wholly-owned subsidiary of Bank of America, which is owned by Bank of America Corporation. Nations Funds pay BAAI an annual fee for its investment advisory services. The fee is calculated as a percentage of the average daily net assets of each Fund and is paid monthly. BAAI uses part of this money to pay investment sub-advisers for the services they provide to each Fund. BAAI has agreed to waive fees and/or reimburse expenses for certain Funds until July 31, 2001. You'll find a discussion of any waiver and/or reimbursement in the Fund descriptions. There is no assurance that BAAI will continue to waive and/or reimburse any fees and/or expenses after this date. The following chart shows the maximum advisory fees BAAI can receive, along with the actual advisory fees it received during the Funds' last fiscal year, after waivers and/or reimbursements: Annual investment advisory fee, as a % of average daily net assets
Maximum Actual fee advisory paid last fee(1) fiscal year Nations Asset Allocation Fund 0.65% 0.58% Nations Marsico Growth & Income Fund(2) 0.75% 0.76% Nations Marsico Focused Equities Fund(2) 0.75% 0.76% Nations Government Securities Fund 0.50% 0.40%
(1)These fees are the current contract levels which in some cases, have been reduced from the contract levels that were in effect during the last fiscal year. (2)These funds don't have their own investment adviser because they invest in Nations Marsico Growth & Income Master Portfolio and Nations Marsico Focused Equities Master Portfolio, respectively. BAAI is the investment adviser to these Master Portfolios. 22 Investment sub-advisers Nations Funds and BAAI engage one or more investment sub-advisers for each Fund to make day-to-day investment decisions for the Fund. BAAI retains ultimate responsibility (subject to Board oversight) for overseeing the sub-advisers and evaluates the Funds' needs and available sub-advisers' skills and abilities on an ongoing basis. Based on its evaluations, BAAI may at times recommend to a Fund's Board that the Fund: o change, add or terminate one or more sub-advisers; o continue to retain a sub-adviser even though the sub-adviser's ownership or corporate structure has changed; or o materially change a sub-advisory agreement with a sub-adviser. Applicable law requires a Fund to obtain shareholder approval in order to act on most of these types of recommendations, even if the Fund's Board has approved the proposed action and believes that the action is in shareholders' best interests. BAAI and the Funds plan to apply for relief from the SEC to permit the Funds to act on many of BAAI's recommendations with approval only by the Funds' Board and not by Fund shareholders. BAAI or a Fund would inform the Fund's shareholders of any actions taken in reliance on this relief. Until BAAI and the Funds obtain the relief, each Fund will continue to submit these matters to shareholders for their approval to the extent required by applicable law. [GRAPHIC] Banc of America Capital Management, Inc. One Bank of America Plaza Charlotte, North Carolina 28255 Banc of America Capital Management, Inc. BACAP is a registered investment adviser and a wholly-owned subsidiary of Bank of America. Its management expertise covers all major domestic asset classes, including equity and fixed income securities, and money market instruments. Currently managing more than $125 billion, BACAP has over 200 institutional clients and is sub-adviser to more than 65 mutual funds in the Nations Funds Family. BACAP takes a team approach to investment management. Each team has access to the latest technology and analytical resources. BACAP is the investment sub-adviser to the Funds shown in the table below. The table also tells you which internal BACAP asset management team is responsible for making the day-to-day investment decisions for each Fund.
Fund BACAP Team Nations Asset Allocation Fund Fixed Income Management Team for the fixed income and money market portions of the Fund Nations Government Securities Fund Fixed Income Management Team
23 [GRAPHIC] Marsico Capital Management, LLC 1200 17th Street Suite 1300 Denver, Colorado 80202 Marsico Capital Management, LLC Marsico Capital is a full service investment advisory firm founded by Thomas F. Marsico in September 1997. It is a registered investment adviser and currently has over $16 billion in assets under management. Marsico Management Holdings, LLC, a wholly-owned subsidiary of Bank of America Corporation, indirectly owns the equity of Marsico Capital. Marsico Capital is the investment sub-adviser to: o Nations Marsico Growth & Income Master Portfolio o Nations Marsico Focused Equities Master Portfolio Thomas F. Marsico, Chairman and Chief Executive Officer of Marsico Capital, is the portfolio manager responsible for making the day-to-day investment decisions for Nations Marsico Growth & Income Master Portfolio and Nations Marsico Focused Equities Master Portfolio. Mr. Marsico was an executive vice president and portfolio manager at Janus Capital Corporation from 1988 until he formed Marsico Capital in September 1997. He has more than 20 years of experience as a securities analyst and portfolio manager. Performance of other domestic stock funds managed by Thomas Marsico Nations Marsico Focused Equities Fund and Nations Marsico Growth & Income Fund have been in operation since December 31, 1997, so they have a relatively short performance history. The tables below are designed to show you how similar domestic stock funds managed by Thomas Marsico performed in the past. The Janus Twenty Fund has an investment objective, policies and strategies that are substantially similar to Nations Marsico Focused Equities Fund. Mr. Marsico managed the Janus Twenty Fund from January 31, 1988 through August 11, 1997. He had full discretionary authority for selecting investments for that fund, which had approximately $6 billion in net assets on August 11, 1997. 24 The table below shows the returns for the Janus Twenty Fund compared with the S&P 500 for the periods ending August 7, 1997. The returns reflect deductions of fees and expenses, and assume all dividends and distributions have been reinvested. Average annual total returns as of August 7, 1997
Janus Twenty Fund (%) S&P 500 (%) one year 48.21 46.41 three years 32.07 30.63 five years 20.02 20.98 during the period of Mr. Marsico's management (January 31, 1988 to August 7, 1997) 23.38 18.20
This information is designed to show the historical track record of Mr. Marsico. It does not indicate how the Fund has performed or will perform in the future. Performance will vary based on many factors, including market conditions, the composition of the Fund's holdings and the Fund's expenses. The Janus Growth and Income Fund has an investment objective, policies and strategies that are substantially similar to Nations Marsico Growth & Income Fund. Mr. Marsico managed the Janus Growth and Income Fund from its inception on May 31, 1991 through August 11, 1997. He had full discretionary authority for selecting investments for that fund, which had approximately $1.7 billion in net assets on August 11, 1997. The table below shows the returns for the Janus Growth and Income Fund compared with the S&P 500 for the period ending August 7, 1997. The returns reflect deductions of fees and expenses, and assume all dividends and distributions have been reinvested. Average annual total returns as of August 7, 1997
Janus Growth and Income Fund (%) S&P 500 (%) one year 47.77 46.41 three years 31.13 30.63 five years 21.16 20.98 during the period of Mr. Marsico's management (May 31, 1991 to August 7, 1997) 21.19 18.59
This information is designed to show the historical track record of Mr. Marsico. It does not indicate how the Fund has performed or will perform in the future. Performance will vary based on many factors, including market conditions, the composition of the Fund's holdings and the Fund's expenses. 25 [GRAPHIC] Chicago Equity Partners LLC 180 North LaSalle Suite 3800 Chicago, Illinois 60601 Chicago Equity Partners LLC Chicago Equity is a registered investment adviser and is owned by the firm's senior management. Chicago Equity is the investment sub-adviser to Nations Blue Chip Master Portfolio, and is one of two sub-advisers to Nations Asset Allocation Fund. Chicago Equity's Equity Management Team is responsible for making the day-to-day investment decisions for the equity portion of Nations Asset Allocation Fund. [GRAPHIC] Stephens Inc. 111 Center Street Little Rock, Arkansas 72201 Other service providers The Funds are distributed and co-administered by Stephens Inc., a registered broker/dealer. BAAI is also co-administrator of the Funds, and assists in overseeing the administrative operations of the Funds. The Funds pay BAAI and Stephens a combined fee for their services, plus certain out-of-pocket expenses. The fee is calculated as an annual percentage of the average daily net assets of the Funds and is paid monthly, as follows: Domestic Stock Funds 0.23% Government and Corporate Bond Fund 0.22%
BAAI and Stephens may pay amounts from their own assets to selling or servicing agents of the Funds for services they provide. [GRAPHIC] PFPC Inc. 400 Bellevue Parkway Wilmington, Delaware 19809 PFPC Inc. (PFPC) is the transfer agent for the Funds' shares. Its responsibilities include processing purchases, sales and exchanges, calculating and paying distributions, keeping shareholder records, preparing account statements and providing customer service. 26 About your investment -------------------------------------------------------------------------------- [GRAPHIC] When you sell shares of a mutual fund, the fund is effectively "buying" them back from you. This is called a redemption. [GRAPHIC] Buying, selling and exchanging shares This prospectus offers Primary A Shares of the Funds. Here are some general rules about this class of shares: o Primary A Shares are available to certain financial institutions and intermediaries for their own accounts, and for certain client accounts for which they act as a fiduciary, agent or custodian. These include: o Bank of America and certain of its affiliates o certain other financial institutions and intermediaries, including financial planners and investment advisers o institutional investors o charitable foundations o endowments o other Funds in Nations Funds Family o The minimum initial investment is $250,000. Financial institutions or intermediaries can total the investments they make on behalf of their clients to meet the minimum initial investment amount. Client accounts for which the financial institution or intermediary no longer acts as fiduciary, agent or custodian may no longer be eligible to purchase or hold Primary A Shares. o There is no minimum amount for additional investments. o There are no sales charges for buying, selling or exchanging these shares. You'll find more information about buying, selling and exchanging Primary A Shares on the pages that follow. You should also ask your financial institution or intermediary about its limits, fees and policies for buying, selling and exchanging shares, which may be different from those described here, and about its related programs or services. The Funds also offer other classes of shares, with different features and expense levels, which you may be eligible to buy. Please contact your investment professional, or call us at 1.800.765.2668 if you have any questions, or you need help placing an order. 27 [GRAPHIC] A business day is any day that the New York Stock Exchange (NYSE) is open. A business day ends at the close of regular trading on the NYSE, usually at 4:00 p.m. Eastern time. If the NYSE closes early, the business day ends as of the time the NYSE closes. The NYSE is closed on weekends and on the following national holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. How shares are priced All transactions are based on the price of a Fund's shares -- or its net asset value per share. We calculate net asset value per share for each class of each Fund at the end of each business day. First, we calculate the net asset value for each class of a Fund by determining the value of the Fund's assets in the class and then subtracting its liabilities. Next, we divide this amount by the number of shares that investors are holding in the class. Valuing securities in a Fund The value of a Fund's assets is based on the total market value of all of the securities it holds. The prices reported on stock exchanges and securities markets around the world are usually used to value securities in a Fund. If prices aren't readily available, or the value of a security has been materially affected by events occurring after a foreign exchange closes, we'll base the price of a security on its fair value. When a Fund uses fair value to price securities it may value those securities higher or lower than another fund that uses market quotations to price the same securities. We use the amortized cost method, which approximates market value, to value short-term investments maturing in 60 days or less. International markets may be open on days when U.S. markets are closed. The value of foreign securities owned by a Fund could change on days when Fund shares may not be bought or sold. How orders are processed Orders to buy, sell or exchange shares are processed on business days. Orders received by Stephens, PFPC or their agents before the end of a business day (usually 4:00 p.m. Eastern time, unless the NYSE closes early) will receive that day's net asset value per share. Orders received after the end of a business day will receive the next business day's net asset value per share. The business day that applies to your order is also called the trade date. We may refuse any order to buy or exchange shares. If this happens, we'll return any money we've received. [GRAPHIC] Buying shares Here are some general rules for buying shares: o Investors buy Primary A Shares at net asset value per share. o If we don't receive payment within three business days of receiving an order, we'll refuse the order. We'll return any payment received for orders that we refuse. o Financial institutions and intermediaries are responsible for sending us orders for their clients and for ensuring that we receive payment on time. o Shares purchased are recorded on the books of the Fund. We don't issue certificates. o Financial institutions and intermediaries are responsible for recording the beneficial ownership of the shares of their clients, and for reporting this ownership on account statements they send to their clients. 28 [GRAPHIC] Selling shares Here are some general rules for selling shares: o We normally send the sale proceeds by federal funds wire within three business days after Stephens, PFPC or their agents receive the order. o If shares were paid for with a check that wasn't certified, we'll hold the sale proceeds when those shares are sold for at least 15 days after the trade date of the purchase, or until the check has cleared, whichever is later. o Financial institutions and intermediaries are responsible for sending us orders for their clients and for depositing the sale proceeds to their accounts on time. o Under certain circumstances allowed under the Investment Company Act of 1940 (1940 Act), we can pay you in securities or other property when you sell your shares. o We can delay payment of the sale proceeds for up to seven days. o Other restrictions may apply to retirement plan accounts. For more information about these restrictions, please contact your retirement plan administrator. We may sell shares: o if the value of an investor's account falls below $500. We'll provide 60 days notice in writing if we're going to do this o if a financial institution or intermediary tells us to sell the shares for a client under arrangements it has made with its clients o under certain other circumstances allowed under the 1940 Act [GRAPHIC] You should make sure you understand the investment objective and principal investment strategies of the Fund you're exchanging into. Please read its prospectus carefully. [GRAPHIC] Exchanging shares Investors can sell shares of a Fund to buy shares of another Nations Fund. This is called an exchange, and may be appropriate if investment goals or tolerance for risk changes. Here's how exchanges work: o Investors can exchange Primary A Shares of a Fund for Primary A Shares of any other Nations Fund. In some cases, the only Money Market Fund option is Trust Class Shares of Nations Reserves Money Market Funds. o The rules for buying shares of a Fund, including any minimum investment requirements, apply to exchanges into that Fund. o Exchanges can only be made into a Fund that is legally sold in the investor's state of residence. o Exchanges can generally only be made into a Fund that is accepting investments. o We may limit the number of exchanges that can be made within a specified period of time. o We may change or cancel the right to make an exchange by giving the amount of notice required by regulatory authorities (generally 60 days for a material change or cancellation). 29 [GRAPHIC] Distributions and taxes [GRAPHIC] The power of compounding Reinvesting your distributions buys you more shares of a Fund -- which lets you take advantage of the potential for compound growth. Putting the money you earn back into your investment means it, in turn, may earn even more money. Over time, the power of compounding has the potential to significantly increase the value of your investment. There is no assurance, however, that you'll earn more money if you reinvest your distributions. About distributions A mutual fund can make money two ways: o It can earn income. Examples are interest paid on bonds and dividends paid on common stocks. o A fund can also have capital gain if the value of its investments increases. If a fund sells an investment at a gain, the gain is realized. If a fund continues to hold the investment, any gain is unrealized. A mutual fund is not subject to income tax as long as it distributes its net investment income and realized capital gain to its shareholders. The Funds intend to pay out a sufficient amount of their income and capital gain to their shareholders so the Funds won't have to pay any income tax. When a Fund makes this kind of a payment, it's split equally among all shares, and is called a distribution. All of the Funds distribute any net realized capital gain at least once a year. The frequency of distributions of net investment income varies by Fund:
Frequency of Fund income distributions Nations Asset Allocation Fund quarterly Nations Marsico Growth & Income Fund quarterly Nations Marsico Focused Equities Fund quarterly Nations Government Securities Fund monthly
The distribution you receive is based on the number of shares you hold on the record date, which is usually the day the distribution is declared (daily dividend Funds) or the day before the distribution is declared (all other Funds). Shares are eligible to 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 1.800.765.2668. 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 normally pay any distribution that applies to those shares in cash within five business days after the sale was made. 30 If you buy shares of a Fund shortly before it makes a distribution, you will, in effect, receive part of your purchase back in the distribution, which is subject to tax. Similarly, if you buy shares of a Fund that holds securities with unrealized capital gain, you will, in effect, receive part of your purchase back if and when the Fund sells those securities and realizes and distributes the gain. This distribution is also subject to tax. Some Funds have built up, or have the potential to build up, high levels of unrealized capital gain. [GRAPHIC] This information is a summary of how federal income taxes may affect your investment in the Funds. It is not intended as a substitute for careful tax planning. You should consult with your own tax adviser about your situation, including any foreign, state and local taxes that may apply. [GRAPHIC] For more information about taxes, please see the SAI. How taxes affect your investment Distributions 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. A portion of such distributions to corporate shareholders may qualify for the dividends received deduction. 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 to be paid for in securities or other property and exchanges) if: o you haven't given us a correct Taxpayer Identification Number (TIN) and haven't certified that the TIN is correct and withholding doesn't apply o the Internal Revenue Service (IRS) has notified us that the TIN listed on your account is incorrect according to its records o the IRS informs us that you 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 (at a rate of 30%, or a lower rate if a treaty applies) on distributions paid to foreign shareholders. Taxation of redemptions and exchanges Your redemptions (including redemptions paid in securities or other property) and exchanges of Fund shares will usually result in a taxable capital gain or loss 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. 31 [GRAPHIC] Financial highlights The financial highlights table is designed to help you understand how the Funds have 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 has been audited by PricewaterhouseCoopers LLP. The independent accountants' 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. 32
Nations Asset Allocation Fund For a Share outstanding throughout the period Period ended Primary A Shares 03/31/00*# Operating performance: Net asset value, beginning of period $ 23.06 Net investment income 0.49 Net realized and unrealized gain/(loss) on investments 1.93 Net increase (decrease) in net asset value from operations 2.42 Distributions: Dividends from net investment income (0.41) Distributions from net realized capital gains (0.72) Total dividends and distributions (1.13) Net asset value, end of period $ 24.35 Total return++ 10.88% ================================================================= Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $15,532 Ratio of operating expenses to average net assets 0.95%+(a)(b) Ratio of net investment income to average net assets 1.85%+ Portfolio turnover rate 84% Ratio of operating expenses to average net assets without waivers and/or expense reimbursements 1.02%+(a)
*Asset Allocation Fund Primary A Shares commenced operations on May 21, 1999. + 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 shares method. (a) The effect of the custodial expense offset on the operating expense ratio, with and without waivers and/or expense reimbursements, was less than 0.01%. (b) The effect of interest expense on the operating expense ratio was less than 0.01%. 33
Nations Marsico Growth & Income Fund For a Share outstanding throughout each period Year ended Year ended Period ended Primary A Shares 03/31/00 03/31/99# 03/31/98*# Operating performance: Net asset value, beginning of period $ 14.91 $ 12.03 $ 10.00 Net investment income/(loss) (0.07) 0.00(b) 0.01 Net realized and unrealized gain on investments 6.81 2.89 2.02 Net increase in net asset value from operations 6.74 2.89 2.03 Distributions: Dividends from net investment income -- -- -- Distributions from net realized capital gains (0.04) (0.01) -- Total dividends and distributions (0.04) (0.01) -- Net asset value, end of period $ 21.61 $ 14.91 $ 12.03 Total return++ 45.33% 24.05% 20.30% ===================================================================================================== Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $113,028 $52,229 $2,517 Ratio of operating expenses to average net assets 1.23%(a) 1.25%(a) 1.09%+(a) Ratio of net investment income/(loss) to average net assets (0.37)% 0.05% 0.38%+ Portfolio turnover rate 55%(c) 150% 22% Ratio of operating expenses to average net assets without waivers and/or expense reimbursements 1.23%(a) 1.25%(a) 1.97%+(a)
* Nations Marsico Growth & Income Fund Primary A Shares commenced operations on December 31, 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 shares method. (a) The effect of the custodial expense offset on the operating expense ratio, with and without waivers and/or expense reimbursements, was less than 0.01%. (b) Amount represents less than $0.01 per share. (c) Amount represents results prior to conversion to a master-feeder structure.
Nations Marsico Focused Equities Fund For a Share outstanding throughout each period Year ended Year ended Period ended Primary A Shares 03/31/00# 03/31/99# 03/31/98*# Operating performance: Net asset value, beginning of period $ 16.69 $ 12.13 $ 10.00 Net investment income/(loss) (0.01) (0.01) (0.01) Net realized and unrealized gain on investments 6.14 4.58 2.14 Net increase in net asset value from operations 6.13 4.57 2.13 Distributions: Distributions from net realized capital gains (0.23) (0.01) -- Total dividends and distributions (0.23) (0.01) -- Net asset value, end of period $ 22.59 $ 16.69 $ 12.13 Total return++ 37.13% 37.73% 21.30% ==================================================================================================== Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $326,745 $105,458 $8,808 Ratio of operating expenses to average net assets 1.16%(a) 1.06%(a) 1.52%+(a) Ratio of net investment income/(loss) to average net assets (0.35)% 0.05% (0.30)%+ Portfolio turnover rate 53%(b) 177% 25% Ratio of operating expenses to average net assets without waivers and/or expense reimbursements 1.16%(a) 1.06%(a) 1.52%+(a)
* Nations Marsico Focused Equities Fund Primary A Shares commenced operations on December 31, 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 charge. # Per share net investment income has been calculated using the monthly average shares method. (a) The effect of the custodial expense offset on the operating expense ratio, with and without waivers and/or expense reimbursements, was 0.01%. (b) Amount represents results prior to conversion to a master-feeder structure. 34
Nations Government Securities Fund For a Share outstanding throughout each period Year Year ended ended Primary A Shares 03/31/00 03/31/99# Operating performance: Net asset value, beginning of period $ 9.86 $ 9.90 Net investment income 0.58 0.58 Net realized and unrealized gain/(loss) on investments (0.48) (0.05) Net increase/(decrease) in net asset value from operations 0.10 0.53 Distributions: Dividends from net investment income (0.58) (0.57) Distributions in excess of net investment income -- -- Distributions from capital -- -- Total dividends and distributions (0.58) (0.57) Net asset value, end of period $ 9.38 $ 9.86 Total return++ 1.12% 5.41% =================================================================================== Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $108,798 $119,659 Ratio of operating expenses to average net assets 0.78%(c) 0.73%(d) Ratio of net investment income to average net assets 6.17% 5.70% Portfolio turnover rate 348% 600% Ratio of operating expenses to average net assets without waivers and/or expense reimbursements 0.90% 0.84%(d) Year Year Period Year Primary A Shares ended ended ended ended 03/31/98 03/31/97# 03/31/96(a)# 05/31/95# Operating performance: Net asset value, beginning of period $ 9.39 $ 9.67 $ 9.86 $ 9.80 Net investment income 0.55 0.60 0.52 0.64 Net realized and unrealized gain/(loss) on investments 0.51 (0.30) (0.19) 0.06 Net increase/(decrease) in net asset value from operations 1.06 0.30 0.33 0.70 Distributions: Dividends from net investment income (0.55) (0.58) (0.50) (0.60) Distributions in excess of net investment income -- -- (0.02) -- Distributions from capital -- (0.00)(b) -- (0.04) Total dividends and distributions (0.55) (0.58) (0.52) (0.64) Net asset value, end of period $ 9.90 $ 9.39 $ 9.67 $ 9.86 Total return++ 11.65% 3.18% 3.41% 7.55% ========================================================================================================================= Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $75,796 $52,606 $55,962 $39,909 Ratio of operating expenses to average net assets 0.85%(c)(d) 0,80% 0.80%+ 0.76% Ratio of net investment income to average net assets 5.63% 6.28% 6.36%+ 6.69% Portfolio turnover rate 303% 468% 199% 413% Ratio of operating expenses to average net assets without waivers and/or expense reimbursements 0.99%(d) 0.94% 0.95%+ 0.94%
+ 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 shares method. (a) Fiscal year end changed to March 31. Prior to this, the fiscal year end was May 31. (b) Amount represents less than $0.01. (c) The effect of interest expense on the operating expense ratio was less than 0.01%. (d) The effect of the custodial expense offset on the operating expense ratio, with and without waivers and/or expense reimbursements, was less than 0.01%. 35 [GRAPHIC] This glossary includes explanations of the important terms that may be used in this prospectus. Some of the terms explained may apply to Nations Funds not included in this prospectus. [GRAPHIC] Terms used in this prospectus Asset-backed security - a debt security that gives you an interest in a pool of assets that is collateralized or "backed" by one or more kinds of assets, including real property, receivables or mortgages, generally issued by banks, credit card companies or other lenders. Some securities may be issued or guaranteed by the U.S. government or its agencies, authorities or instrumentalities. Asset-backed securities typically make periodic payments, which may be interest or a combination of interest and a portion of the principal of the underlying assets. 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. 36 Corporate obligation - a money market instrument issued by a corporation or commercial bank. Crossing networks - an electronic system where anonymous parties can match buy and sell transactions. These transactions don't affect the market, and transaction costs are extremely low. CS First Boston High Yield Index - the Credit Suisse First Boston Global High Yield Index is an unmanaged, trader priced portfolio constructed to mirror the high yield debt market. The index is not available for investment. Debt security - when you invest in a debt security, you are typically lending your money to a governmental body or company (the issuer) to help fund their operations or major projects. The issuer pays interest at a specified rate on a specified date or dates, and repays the principal when the security matures. Short-term debt securities include money market instruments such as treasury bills. Long-term debt securities include fixed income securities such as government and corporate bonds, and mortgage-backed and asset-backed securities. Depositary receipts - evidence of the deposit of a security with a custodian bank. American Depositary Receipts (ADRs), for example, are certificates traded in U.S. markets representing an interest of a foreign company. They were created to make it possible for foreign issuers to meet U.S. security registration requirements. Other examples include ADSs, GDRs and EDRs. Dividend yield - rate of return of dividends paid on a common or preferred stock. It equals the amount of the annual dividend on a stock expressed as a percentage of the stock's current market value. Dollar roll transaction - the sale by a Fund of mortgage-backed or other asset-backed securities, together with a commitment to buy similar, but not identical, securities at a future date. Duration - a security's or portfolio's sensitivity to changes in interest rates. For example, if interest rates rise by one percentage point, the share price of a fund with a duration of five years would decline by about 5%. If interest rates fall by one percentage point, the fund's share price would rise by about 5%. Equity security - an investment that gives you an equity ownership right in a company. Equity securities (or "equities") include common and preferred stock, rights and warrants. First Boston Convertible Index - a widely-used unmanaged index that measures the performance of convertible securities. The index is not available for investment. First-tier security - under Rule 2a-7 under the 1940 Act, a debt security that is an eligible investment for money market funds and has the highest short-term rating from a nationally recognized statistical rating organization (NRSRO), or if unrated, is determined by the fund's portfolio management team to be of 37 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. Forward foreign currency contracts - a forward foreign currency contract includes an obligation to purchase or sell a foreign currency at a specified future date. 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 - includes municipal securities that are rated in the top two highest short-term debt categories according to NRSROs such as S&P and Moody's. The portfolio management team may consider an unrated municipal security if it is determined to be of comparable quality, based upon guidelines approved by the Fund's Board of Trustees. Please see the SAI for more information about credit ratings. High-yield debt security - debt securities that, at the time of investment by the sub-adviser, are rated "BB" or below by S&P or "Ba" or below by Moody's, or that are unrated and determined to be of comparable quality. Interest rate swap - an agreement between two parties to exchange periodic interest payments based on some predetermined dollar principal. 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. 38 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 indices 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. 39 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 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. Options - An option is the right to buy or sell a security based on an agreed upon price at a specified time. For example, an option may give the holder of a stock the right to sell the stock to another party, allowing the seller to profit if the price has fallen below the agreed price. Options may also be based on the movement of an index such as the S&P 500. 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. 40 Private placement - a private placement is the sale of stocks, bonds or other investments directly to a qualified investor without having to register the offering with the U.S. Securities and Exchange Commission or other comparable foreign regulatory authorities. Qualified investors are typically large institutional investors rather than individuals. Securities acquired through private placements generally may not be resold. Quantitative analysis - an analysis of financial information about a company or security to identify securities that have the potential for growth or are otherwise suitable for a fund to buy. 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 1000 Growth Index - an unmanaged index which measures the performance of the largest U.S. companies based on total market capitalization, with high price-to-book ratios and forecasted growth rates relative to the Russell 1000 Index as a whole. Russell 2000 - an unmanaged index of 2,000 of the smallest stocks representing approximately 11% of the U.S. equity market. The index is weighted by market capitalization, and is not available for investment. S&P 500(1) - Standard & Poor's 500 Composite Stock Price Index, an unmanaged index of 500 widely held common stocks. It is not available for investment. S&P/BARRA Value Index(1) - an unmanaged index of a group of stocks from the S&P 500 that have low price-to-book ratios relative to the S&P 500 as a whole. S&P/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. 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. 41 S&P SmallCap 600(1) - Standard & Poor's SmallCap 600 Index, an unmanaged index of 600 common stocks, weighted by market capitalization. It is not available for investment. S&P SuperComposite 1500(1) - an index created by Standard & Poors combining the companies represented in three other indices -- the S&P 500, MidCap 400, and SmallCap 600. The index represents 87% of the total capitalization of U.S. equity markets. Salomon Brothers Mortgage Index - an index of 30-year and 15-year GNMA, FNMA and FHLMC securities, and FNMA and FHLMC balloon mortgages. Second-tier security - under Rule 2a-7 under the 1940 Act, a debt security that is an eligible investment for money market funds, but is not a first-tier security. Senior security - a debt security that allows holders to receive their share of a company's remaining assets in a bankruptcy before other bondholders, creditors, and common and preferred shareholders. 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. 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 SuperComposite 1500, S&P 500, S&P SmallCap 600, S&P MidCap 400 Index or BARRA Value Index for its investment merit. S&P and BARRA determine and calculate their indices independently of the Funds and are not a sponsor or affiliate of the Funds. S&P and BARRA give no information and make no statements about the suitability of investing in the Funds or the ability of their indices to track stock market performance. S&P and BARRA make no guarantees about the indices, any data included in them and the suitability of the indices or their data for any purpose. "Standard and Poor's," "S&P 500" and "S&P 600" are trademarks of The McGraw-Hill Companies, Inc. 42 (THIS PAGE INTENTIONALLY LEFT BLANK) (THIS PAGE INTENTIONALLY LEFT BLANK) [GRAPHIC] Where to find more information You'll find more information about the Domestic Stock and Government & Corporate Bond Funds in the following documents: Annual and semi-annual reports The annual and semi-annual reports contain information about Fund investments and performance, the financial statements and the independent accountants' reports. The annual report also includes a discussion about the market conditions and investment strategies that had a significant effect on each Fund's performance during the period covered. [GRAPHIC] Statement of Additional Information The SAI contains additional information about the Funds and their policies. The SAI is legally part of this prospectus (it's incorporated by reference). A copy has been filed with the SEC. You can obtain a free copy of these documents, request other information about the Funds and make shareholder inquiries by contacting Nations Funds: By telephone: 1.800.765.2668 By mail: Nations Funds c/o Stephens Inc. One Bank of America Plaza 33rd Floor Charlotte, NC 28255 On the Internet: www.nations-funds.com Information about the Funds can be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-202-942-8090. The reports and other information about the Funds are available on the EDGAR Database on the SEC's Internet site at http://www.sec.gov, and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Section, Washington, D.C. 20549-0102. NATIONS FUNDS SEC file number: Nations Funds Trust, 811-09645 COMPROPA-10/00 [GRAPHIC] Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. PRELIMINARY PROSPECTUS DATED OCTOBER 13, 2000 SUBJECT TO COMPLETION Prospectus Investor A, B and C Shares June 8, 2001 Domestic Stock Funds Nations Asset Allocation Fund Marsico Growth & Income Fund Nations Marsico Focused Equities Fund Government & Corporate Bond Fund Nations Government Securities 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 An overview of the Funds -------------------------------------------------------------------------------- [GRAPHIC] Terms used in this prospectus In this prospectus, we, us and our refer to the Nations Funds family (Nations Funds or Nations Funds Family). Some other important terms we've used may be new to you. These are printed in italics where they first appear in a section and are described in Terms used in this prospectus. [GRAPHIC] You'll find Terms used in this prospectus on page 64. Your investment in these Funds is not a bank deposit and is not insured or guaranteed by Bank of America, N.A. (Bank of America), the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Your investment may lose money. Affiliates of Bank of America are paid for the services they provide to the Funds. This booklet, which is called a prospectus, tells you about two types of Nations Funds -- Domestic Stock and Government & Corporate Bond Funds. Please read it carefully, because it contains information that's designed to help you make informed investment decisions. About the Funds Each type of Fund has a different investment focus: o Domestic Stock Funds invest primarily in equity securities of U.S. companies o Government & Corporate Bond Funds focus on the potential to earn income by investing primarily in fixed income securities The Funds also have different risk/return characteristics because they invest in different kinds of securities. Equity securities have the potential to provide you with higher returns than many other kinds of investments, but they also tend to have the highest risk. 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 and municipal securities. In every case, there's a risk that you'll lose money or you may not earn as much as you expect. Choosing the right Funds for you Not every Fund is right for every investor. When you're choosing a Fund to invest in, you should consider things like your investment goals, how much risk you can accept and how long you're planning to hold your investment. The Domestic Stock Funds all focus on long-term growth. They may be suitable for you if: o you have longer-term investment goals o they're part of a balanced portfolio o you want to try to protect your portfolio against a loss of buying power that inflation can cause over time 2 They may not be suitable for you if: o you're not prepared to accept or are unable to bear the risks associated with equity securities, including foreign securities o you have short-term investment goals o you're looking for a regular stream of income The Government & Corporate Fund focuses on the potential to earn income. They may be suitable for you if: o you're looking for income o you have longer-term investment goals The Government & Corporate Bond Fund may not be suitable for you if: o you're not prepared to accept or are unable to bear the risks associated with fixed income securities You'll find a discussion of each Fund's principal investments, strategies and risks in the Fund descriptions that start on page 5. For more information If you have any questions about the Funds, please call us at 1.800.321.7854 or contact your investment professional. You'll find more information about the Funds in the Statement of Additional Information (SAI). The SAI includes more detailed information about each Fund's investments, policies, performance and management, among other things. Please turn to the back cover to find out how you can get a copy. 3 What's inside -------------------------------------------------------------------------------- [GRAPHIC] Banc of America Advisors, Inc. Banc of America Advisors, Inc. (BAAI) is the investment adviser to each of the Funds. BAAI is responsible for the overall management and supervision of the investment management of each Fund. BAAI and Nations Funds have engaged sub-advisers, which are responsible for the day-to-day investment decisions for each of the Funds. [GRAPHIC] You'll find more about BAAI and the sub-advisers starting on page 28. [GRAPHIC] About the Funds Nations Asset Allocation Fund 5 Sub-advisers: Banc of America Capital Management, Inc. and Chicago Equity Partners LLC ---------------------------------------------------------------- Nations Marsico Growth & Income Fund 10 Sub-adviser: Marsico Capital Management, LLC ---------------------------------------------------------------- Nations Marsico Focused Equities Fund 16 Sub-adviser: Marsico Capital Management, LLC ---------------------------------------------------------------- Nations Government Securities Fund 21 Sub-adviser: Banc of America Capital Management, Inc. ---------------------------------------------------------------- Other important information 26 ---------------------------------------------------------------- How the Funds are managed 27
[GRAPHIC] About your investment Information for investors Choosing a share class 31 Buying, selling and exchanging shares 45 How selling and servicing agents are paid 50 Distributions and taxes 52 ---------------------------------------------------------------- Financial highlights 54 ---------------------------------------------------------------- Terms used in this prospectus 63 ---------------------------------------------------------------- Where to find more information back cover
4 [GRAPHIC] About the sub-advisers This Fund is managed by two sub-advisers: BACAP and Chicago Equity Partners LLC (Chicago Equity). Chicago Equity's Equity Management Team makes the day-to-day investment decisions for the equity portion of the Fund. BACAP's Fixed Income Management Team makes the day-to-day investment decisions for the fixed income and money market portions of the Fund. [GRAPHIC] You'll find more about BACAP and Chicago Equity, starting on page 5. [GRAPHIC] What is an asset allocation fund? This asset allocation fund invests in a mix of equity and fixed income securities, and cash equivalents. Each of these "asset classes" has different risk/return characteristics. The portfolio management team changes the mix based on its assessment of the expected risks and returns of each class. Asset allocation funds like this one can provide a diversified asset mix for you in a single investment. Nations Asset Allocation Fund [GRAPHIC] Investment objective The Fund seeks to obtain long-term growth from capital appreciation, and dividend and interest income. [GRAPHIC] Principal investment strategies The Fund invests in a mix of equity and fixed income securities, as well as cash equivalents, including U.S. government obligations, commercial paper and other short-term, interest-bearing instruments. The equity securities the Fund invests in are primarily common stock of blue chip companies. These companies are well established, nationally known companies that have a long record of profitability and a reputation for quality management, products and services. The fixed income securities the Fund invests in are primarily investment grade bonds and notes. The Fund normally invests at least 25% of its assets in senior securities. The Fund may also invest up to 35% of its assets in mortgage-backed and asset-backed securities. The Fund may also invest in securities that aren't part of its principal investment strategies, but it won't hold more than 10% of its assets in any one type of these securities. These securities are described in the SAI. The team uses asset allocation as its principal investment approach. The team actively allocates assets among the three asset classes based on its assessment of the expected risks and returns of each class. For the equity portion of the Fund, the team uses quantitative analysis to analyze fundamental information about securities and identify value. Starting with a universe of approximately 2000 common stocks, the team uses a multi-factor computer model to rank securities, based on the following criteria, among others: o changes in actual and expected earnings o unexpected changes in earnings o price-to-earnings ratio o dividend discount model o price-to-cash flow The team tries to manage risk by matching the market capitalization, style and industry weighting characteristics of the S&P SuperComposite 1500. The team focuses on selecting individual stocks to try to provide higher returns than the S&P SuperComposite 1500 while maintaining a level of risk similar to the index. The team may sell a security when the Fund's asset allocation changes, there is a deterioration in the issuer's financial situation, when the team believes other investments are more attractive, or for other reasons. 5 [GRAPHIC] You'll find more about other risks of investing in this Fund starting on page 26 and in the SAI. [GRAPHIC] Risks and other things to consider Nations Asset Allocation Fund has the following risks: o Investment strategy risk - The team uses an asset allocation strategy to try to achieve the highest total return. There is a risk that the mix of investments will not produce the returns the team expects, or will fall in value. o Stock market risk - The value of the stocks the Fund holds can be affected by changes in U.S. or foreign economies and financial markets, and the companies that issue the stocks, among other things. Stock prices can rise or fall over short as well as long periods. In general, stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. As of the date of this prospectus, the stock markets, as measured by the S&P 500 and other commonly used indices, were trading at historically high levels. There can be no guarantee that these levels will continue. o Interest rate risk - The prices of the Fund's 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 Mortgage-related 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 or other securities that have lower yields. o Asset-backed securities risk - Payment of interest and repayment of principal may be impacted by the cash flows generated by the assets backing these securities. The value of the Fund's asset-backed securities may also be affected by changes in interest rates, the availability of information concerning the interests in and structure of the pools of purchase contracts, financing leases or sales agreements that are represented by these securities, the creditworthiness of the servicing agent for the pool, the originator of the loans or receivables, or the entities that provide any supporting letters of credit, surety bonds, or other credit enhancements. 6 [GRAPHIC] Many things affect a Fund's performance, including market conditions, the composition of the Fund's holdings and Fund expenses. [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 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] 26.90% 15.66% 21.38% 21.09% 11.11% 1995 1996 1997 1998 1999 *Year-to-date return as of June 30, 2000: 2.01% Best and worst quarterly returns during this period Best: 4th quarter 1998: 12.77% Worst: 3rd quarter 1998: -4.34%
[GRAPHIC] The Fund's returns in this table reflect sales charges. The indices' returns do not reflect sales charges. Average annual total return as of December 31, 1999 The table shows the Fund's average annual total return for each period, compared with the S&P 500 and the Lehman Aggregate Bond Index. The S&P 500 is an unmanaged index of 500 widely held common stocks, weighted by market capitalization. The Lehman Aggregate Bond Index is an index of fixed income securities issued by the U.S. government and its agencies, and by corporations. These indices are not available for investment.
Since 1 year 5 years inception* Investor A Shares 4.70% 17.70% 14.41% Investor B Shares 5.29% -- 7.90% Investor C Shares 9.33% -- 16.63% S&P 500 21.04% 28.55% 23.22% Lehman Aggregate Bond Index -0.83% 7.73% 5.72%
*The inception dates of Investor A Shares, Investor B Shares and Investor C Shares are January 18, 1994, July 15, 1998 and November 11, 1996, respectively. The returns for the indices shown are from inception of Investor A Shares. 7 [GRAPHIC] There are two kinds of fees -- shareholder fees you pay directly and annual fund operating expenses that are deducted from a fund's assets. [GRAPHIC] What it costs to invest in the Fund This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
Shareholder fees Investor A Investor B Investor C (Fees paid directly from your investment) Shares Shares Shares Maximum sales charge (load) imposed on purchases, as a % of offering price 5.75% none none Maximum deferred sales charge (load), as a % of net asset value none(1) 5.00%(2) 1.00%(3) Annual Fund operating expenses(4) (Expenses that are deducted from the Fund's assets) Management fees 0.65% 0.65% 0.65% Distribution (12b-1) and shareholder servicing fees 0.25% 1.00% 1.00% Other expenses 0.37% 0.37% 0.37% ----- -------- -------- Total annual Fund operating expenses 1.27% 2.02% 2.02% ===== ======== ========
(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 33 for details. (2)This charge decreases over time. Please see page 34 for details. Different charges apply to Investor B Shares bought before January 1, 1996 and after July 31, 1997. Please see page 34 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 37 for details. (4)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. 8 [GRAPHIC] This is an example only. Your actual costs could be higher or lower, depending on the amount you invest, and on the Fund's actual expenses and performance. Example This example is intended to help you compare the cost of investing in this Fund with the cost of investing in other mutual funds. This example assumes: o you invest $10,000 in Investor A, Investor B or Investor C Shares of the Fund for the time periods indicated and then sell all of your shares at the end of those periods o you reinvest all dividends and distributions in the Fund o your investment has a 5% return each year o the Fund's operating expenses remain the same as shown in the table above Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 year 3 years 5 years 10 years Investor A Shares $697 $955 $1,233 $2,024 Investor B Shares $705 $934 $1,288 $2,155 Investor C Shares $305 $634 $1,088 $2,348
If you bought Investor B or Investor C Shares, you would pay the following expenses if you didn't sell your shares:
1 year 3 years 5 years 10 years Investor B Shares $205 $634 $1,088 $2,155 Investor C Shares $205 $634 $1,088 $2,348
9 [GRAPHIC] About the sub-adviser The Fund does not have its own investment adviser or sub-adviser because it's a "feeder" fund. A feeder fund typically invests all of its assets in another fund, which is called a "master portfolio." Master Portfolio and Fund are sometimes used interchangeably. BAAI is the Master Portfolio's investment adviser, and Marsico Capital Management, LLC (Marsico Capital) is its sub-adviser. Thomas F. Marsico is its portfolio manager and makes the day-to-day investment decisions for the Master Portfolio. [GRAPHIC] You'll find more about Marsico Capital and Mr. Marsico on page 28. [GRAPHIC] Why invest in a growth and income fund? Growth and income funds can invest in a mix of equity and fixed income securities. This can help reduce volatility and provide the Fund with the flexibility to shift among securities that offer the potential for higher returns. While this Fund invests in a wide range of companies and industries, it holds fewer investments than other kinds of funds. This means it can have greater price swings than more diversified funds. It also means it may have relatively higher returns when one of its investments performs well, or relatively lower returns when an investment performs poorly. Nations Marsico Growth & Income Fund [GRAPHIC] Investment objective The Fund seeks long-term growth of capital with a limited emphasis on income. [GRAPHIC] Principal investment strategies The Fund invests all of its assets in Nations Marsico Growth & Income Master Portfolio (the Master Portfolio). The Master Portfolio has the same investment objective as the Fund. The Master Portfolio invests primarily in equity securities of large capitalization companies that are selected for their growth potential. It invests at least 25% of its assets in securities that are believed to have income potential, and generally holds 35 to 50 securities. It may hold up to 25% of its assets in foreign securities. Marsico Capital may shift assets between growth and income securities based on its assessment of market, financial and economic conditions. The Master Portfolio, however, is not designed to produce a consistent level of income. The Master Portfolio may also invest in securities that aren't part of its principal investment strategies, but it won't hold more than 10% of its assets in any one type of these securities. These securities are described in the SAI. Marsico Capital looks for companies with earnings growth potential that may not be recognized by other investors, focusing on companies that have some of the following characteristics: o products, markets or technologies in flux that can result in extraordinary growth o strong brand franchises that can take advantage of a changing global environment o global reach that allows the company to generate sales and earnings both in the United States and abroad. This can give the company added growth potential and also means the company may be less affected by changes in local markets o movement with, not against, the major social, economic and cultural shifts taking place in the world Once an investment opportunity is identified, Marsico Capital uses a disciplined analytical process to assess its potential as an investment. This process includes a "top-down" analysis that takes into account economic factors like interest rates, inflation, the regulatory environment, the industry and global competition. 10 [GRAPHIC] You'll find more about other risks of investing in this Fund starting on page 26 and in the SAI. The process also includes a "bottom-up" analysis of a company's financial situation, as well as individual company characteristics like commitment to research, market franchise and quality of management. Marsico Capital may sell a security when it believes there is a deterioration in the company's financial situation, the security is overvalued, when there is a negative development in the company's competitive, regulatory or economic environment, or for other reasons. [GRAPHIC] Risks and other things to consider Nations Marsico Growth & Income Fund has the following risks: o Investment strategy risk - Marsico Capital uses an investment strategy that tries to identify equities with growth or income potential. There is a risk that the value of these investments will not rise as high as Marsico Capital expects, or will fall. o Stock market risk - The value of the stocks the Master Portfolio holds can be affected by changes in U.S. or foreign economies and financial markets, and the companies that issue the stocks, among other things. Stock prices can rise or fall over short as well as long periods. In general, stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. As of the date of this prospectus, the stock markets, as measured by the S&P 500 and other commonly used indices, were trading at historically high levels. There can be no guarantee that these levels will continue. o Technology and technology-related risk - The Master Portfolio may invest in technology and technology-related companies, which can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, and competition from new market entrants. o Interest rate risk - The prices of the Master Portfolio's fixed income securities will tend to fall when interest rates rise and to rise when interest rates fall. 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 Master Portfolio 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 Foreign investment risk - Because the Master Portfolio may invest up to 25% of its assets in foreign securities, it can be affected by the risks of foreign investing. Foreign investments may be riskier than U.S. investments because of political and economic conditions, changes in currency exchange rates, foreign controls on investment, difficulties selling some securities and lack of or limited financial information. Withholding taxes also may apply to some foreign investments. 11 o Investing in the Master Portfolio - Other mutual funds and eligible investors can buy shares in the Master Portfolio. All investors in the Master Portfolio invest under the same terms and conditions as the Fund and pay a proportionate share of the Master Portfolio's expenses. Other feeder funds that invest in the Master Portfolio may have different share prices and returns than the Fund because different feeder funds typically have varying sales charges, and ongoing administrative and other expenses. The Fund could withdraw its entire investment from the Master Portfolio if it believes it's in the best interests of the Fund to do so (for example, if the Master Portfolio changed its investment objective). It is unlikely that this would happen, but if it did, the Fund's portfolio could be less diversified and therefore less liquid, and expenses could increase. The Fund might also have to pay brokerage, tax or other charges. 12 [GRAPHIC] Many things affect a Fund's performance, including market conditions, the composition of the Fund's holdings and Fund expenses. For information about the performance of other domestic stock funds managed by Thomas Marsico, see How the Funds are managed. [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 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] 38.62% 52.11% 1998 1999 *Year-to-date return as of June 30, 2000: -6.34% Best and worst quarterly returns during this period Best: 4th quarter 1999: 35.19% Worst: 3rd quarter 1998: -12.24%
[GRAPHIC] The Fund's returns in this table reflect sales charges. The index's return does not reflect sales charges. Average annual total return as of December 31, 1999 The table shows the Fund's average annual total return for each period, compared with the S&P 500, an unmanaged index of 500 widely held common stocks, weighted by market capitalization. The S&P 500 is not available for investment.
Since 1 year inception* Investor A Shares 43.41% 40.97% Investor B Shares 45.99% 42.92% Investor C Shares 49.81% 44.38% S&P 500 21.04% 24.75%
*The inception date of Investor A Shares, Investor B Shares and Investor C Shares is December 31, 1997. The return for the index shown is from that date. 13 [GRAPHIC] There are two kinds of fees -- shareholder fees you pay directly, and annual fund operating expenses that are deducted from a fund's assets. [GRAPHIC] What it costs to invest in the Fund This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
Shareholder fees Investor A Investor B Investor C (Fees paid directly from your investment) Shares Shares Shares Maximum sales charge (load) imposed on purchases, as a % of offering price 5.75% none none Maximum deferred sales charge, as a % of net asset value none(1) 5.00%(2) 1.00%(3) Annual Fund operating expenses(4) (Expenses that are deducted from the Fund's assets)(5) Management fees 0.75% 0.75% 0.75% Distribution (12b-1) and shareholder servicing fees 0.25% 1.00% 1.00% Other expenses 0.48% 0.48% 0.48% ----- ------ ------ Total annual Fund operating expenses 1.48% 2.23% 2.23% ===== ====== ======
(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 33 for details. (2)This charge decreases over time. Please see page 34 for details. Different charges apply to Investor B Shares bought before January 1, 1996 and after July 31, 1997. Please see page 34 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 37 for details. (4)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. (5)These fees and expenses and the example below include the Fund's portion of the fees and expenses deducted from the assets of the Master Portfolio. 14 [GRAPHIC] This is an example only. Your actual costs could be higher or lower, depending on the amount you invest, and on the Fund's actual expenses and performance. Example This example is intended to help you compare the cost of investing in this Fund with the cost of investing in other mutual funds. This example assumes: o you invest $10,000 in Investor A, Investor B or Investor C Shares of the Fund for the time periods indicated and then sell all of your shares at the end of those periods o you reinvest all dividends and distributions in the Fund o your investment has a 5% return each year o the Fund's operating expenses remain the same as shown in the table above Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 year 3 years 5 years 10 years Investor A Shares $717 $1,017 $1,338 $2,245 Investor B Shares $726 $ 997 $1,395 $2,376 Investor C Shares $326 $ 697 $1,195 $2,565
If you bought Investor B or Investor C Shares, you would pay the following expenses if you didn't sell your shares:
1 year 3 years 5 years 10 years Investor B Shares $226 $697 $1,195 $2,376 Investor C Shares $226 $697 $1,195 $2,565
15 [GRAPHIC] About the sub-adviser The Fund does not have its own investment adviser or sub-adviser because it's a "feeder" fund. A feeder fund typically invests all of its assets in another fund, which is called a "master portfolio." Master Portfolio and Fund are sometimes used interchangeably. BAAI is the Master Portfolio's investment adviser, and Marsico Capital is its sub-adviser. Thomas F. Marsico is its portfolio manager and makes the day-to-day investment decisions for the Master Portfolio. [GRAPHIC] You'll find more about Marsico Capital and Mr. Marsico on page 28. [GRAPHIC] What is a focused fund? A focused fund invests in a small number of companies with earnings that are believed to have the potential to grow significantly. This Fund focuses on large, established and well-known U.S. companies. Because a focused fund holds fewer investments than other kinds of funds, it can have greater price swings than more diversified funds. It may earn relatively higher returns when one of its investments performs well, or relatively lower returns when an investment performs poorly. Nations Marsico Focused Equities Fund [GRAPHIC] Investment objective The Fund seeks long-term growth of capital. [GRAPHIC] Principal investment strategies The Fund invests all of its assets in Nations Marsico Focused Equities Master Portfolio (the Master Portfolio). The Master Portfolio has the same investment objective as the Fund. The Master Portfolio normally invests at least 65% of its assets in common stocks of large companies. The Master Portfolio, which is non-diversified, generally holds a core position of 20 to 30 common stocks. It may invest up to 25% of its assets in foreign securities. The Master Portfolio may also invest in securities that aren't part of its principal investment strategies, but it won't hold more than 10% of its assets in any one type of these securities. These securities are described in the SAI. Marsico Capital looks for companies with earnings growth potential that may not be recognized by other investors, focusing on companies that have some of the following characteristics: o products, markets or technologies in flux that can result in extraordinary growth o strong brand franchises that can take advantage of a changing global environment o global reach that allows the company to generate sales and earnings both in the United States and abroad. This can give the company added growth potential and also means the company may be less affected by changes in local markets o movement with, not against, the major social, economic and cultural shifts taking place in the world Once an investment opportunity is identified, Marsico Capital uses a disciplined analytical process to assess its potential as an investment. This process includes a "top-down" analysis that takes into account economic factors like interest rates, inflation, the regulatory environment, the industry and global competition. The process also includes a "bottom-up" analysis of a company's financial situation, as well as individual company characteristics like commitment to research, market franchise and quality of management. Marsico Capital may sell a security when it believes there is a deterioration in the company's financial situation, the security is overvalued, when there is a negative development in the company's competitive, regulatory or economic environment, or for other reasons. 16 [GRAPHIC] You'll find more about other risks of investing in this Fund starting on page 26 and in the SAI. [GRAPHIC] Risks and other things to consider Nations Marsico Focused Equities Fund has the following risks: o Investment strategy risk - There is a risk that the value of the Master Portfolio's investments will not rise as high as Marsico Capital expects, or will fall. o Holding fewer investments - The Master Portfolio is considered to be non-diversified because it may hold fewer investments than other kinds of equity funds. This increases the risk that its value could go down significantly if even only one of its investments performs poorly. The value of the Master Portfolio will tend to have greater price swings than the value of more diversified equity funds. The Master Portfolio may become a diversified fund by limiting the investments in which more than 5% of its total assets are invested. o Stock market risk - The value of the stocks the Master Portfolio holds can be affected by changes in U.S. or foreign economies and financial markets, and the companies that issue the stocks, among other things. Stock prices can rise or fall over short as well as long periods. In general, stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. As of the date of this prospectus, the stock markets, as measured by the S&P 500 and other commonly used indices, were trading at historically high levels. There can be no guarantee that these levels will continue. o Technology and technology-related risk - The Master Portfolio may invest in technology and technology-related companies, which can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, and competition from new market entrants. o Foreign investment risk - Because the Master Portfolio may invest up to 25% of its assets in foreign securities, it can be affected by the risks of foreign investing. Foreign investments may be riskier than U.S. investments because of political and economic conditions, changes in currency exchange rates, foreign controls on investment, difficulties selling some securities and lack of or limited financial information. Withholding taxes also may apply to some foreign investments. o Investing in the Master Portfolio - Other mutual funds and eligible investors can buy shares in the Master Portfolio. All investors in the Master Portfolio invest under the same terms and conditions as the Fund and pay a proportionate share of the Master Portfolio's expenses. Other feeder funds that invest in the Master Portfolio may have different share prices and returns than the Fund because different feeder funds typically have varying sales charges, and ongoing administrative and other expenses. The Fund could withdraw its entire investment from the Master Portfolio if it believes it's in the best interests of the Fund to do so (for example, if the Master Portfolio changed its investment objective). It is unlikely that this would happen, but if it did, the Fund's portfolio could be less diversified and therefore less liquid, and expenses could increase. The Fund might also have to pay brokerage, tax or other charges. 17 [GRAPHIC] Many things affect a Fund's performance, including market conditions, the composition of the Fund's holdings and Fund expenses. For information about the performance of other domestic stock funds managed by Thomas Marsico, see How the Funds are managed. [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 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] 50.14% 52.85% 1998 1999 *Year-to-date return as of June 30, 2000: -8.23% Best and worst quarterly returns during this period Best: 4th quarter 1999: 33.11% Worst: 3rd quarter 1998: -8.99%
18 [GRAPHIC] The Fund's returns in this table reflect sales charges. The index's return does not reflect sales charges. Average annual total return as of December 31, 1999 The table shows the Fund's average annual total return for each period, compared with the S&P 500, an unmanaged index of 500 widely held common stocks, weighted by market capitalization. The S&P 500 is not available for investment.
Since 1 year inception* Investor A Shares 44.02% 47.07% Investor B Shares 46.99% 49.33% Investor C Shares 51.59% 50.86% S&P 500 21.04% 24.75%
*The inception date of Investor A Shares, Investor B Shares and Investor C Shares is December 31, 1997. The return for the index shown is from that date. [GRAPHIC] There are two kinds of fees -- shareholder fees you pay directly, and annual fund operating expenses that are deducted from a fund's assets. [GRAPHIC] What it costs to invest in the Fund This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
Shareholder fees Investor A Investor B Investor C (Fees paid directly from your investment) Shares Shares Shares Maximum sales charge (load) imposed on purchases, as a % of offering price 5.75% none none Maximum deferred sales charge (load), as a % of net asset value none(1) 5.00%(2) 1.00%(3) Annual Fund operating expenses(4) (Expenses that are deducted from the Fund's assets)(5) Management fees 0.75% 0.75% 0.75% Distribution (12b-1) and shareholder servicing fees 0.25% 1.00% 1.00% Other expenses 0.41% 0.41% 0.41% ----- ------ ------ Total annual Fund operating expenses 1.41% 2.16% 2.16% ===== ====== ======
(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 33 for details. (2)This charge decreases over time. Please see page 34 for details. Different charges apply to Investor B Shares bought before January 1, 1996 and after July 31, 1997. Please see page 34 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 37 for details. (4)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. (5)These fees and expenses and the example below include the Fund's portion of the fees and expenses deducted from the assets of the Master Portfolio. 19 [GRAPHIC] This is an example only. Your actual costs could be higher or lower, depending on the amount you invest, and on the Fund's actual expenses and performance. Example This example is intended to help you compare the cost of investing in this Fund with the cost of investing in other mutual funds. This example assumes: o you invest $10,000 in Investor A, Investor B or Investor C Shares of the Fund for the time periods indicated and then sell all of your shares at the end of those periods o you reinvest all dividends and distributions in the Fund o your investment has a 5% return each year o the Fund's operating expenses remain the same as shown in the table above Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 year 3 years 5 years 10 years Investor A Shares $710 $996 $1,303 $2,172 Investor B Shares $719 $976 $1,359 $2,303 Investor C Shares $319 $676 $1,159 $2,493
If you bought Investor B or Investor C Shares, you would pay the following expenses if you didn't sell your shares:
1 year 3 years 5 years 10 years Investor B Shares $219 $676 $1,159 $2,303 Investor C Shares $219 $676 $1,159 $2,493
20 [GRAPHIC] About the sub-adviser BACAP is this Fund's sub-adviser. BACAP's Fixed Income Management Team makes the day-to-day investment decisions for the Fund. [GRAPHIC] You'll find more about BACAP on page 28. [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 Government Securities Fund [GRAPHIC] Investment objective The Fund seeks high current income consistent with moderate fluctuation of principal. [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. It may also invest in the following securities rated investment grade at the time of investment: o mortgage-related securities issued by governments, their agencies or instrumentalities, or corporations. o asset-backed securities or municipal securities. o corporate debt securities, including bonds, notes and debentures. 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 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. 21 [GRAPHIC] You'll find more about other risks of investing in this Fund starting on page 26 and in the SAI. [GRAPHIC] Risks and other things to consider Nations Government Securities Fund has the following risks: o Investment strategy risk - There is a risk that the value of the investments that the 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 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 Mortgage-related 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 or other securities that have lower yields. o Asset-backed securities risk - Payment of interest and repayment of principal may be impacted by the cash flows generated by the assets backing these securities. The value of the Fund's asset-backed securities may also be affected by changes in interest rates, the availability of information concerning the interests in and structure of the pools of purchase contracts, financing leases or sales agreements that are represented by these securities, the creditworthiness of the servicing agent for the pool, the originator of the loans or receivables, or the entities that provide any supporting letters of credit, surety bonds, or other credit enhancements. 22 [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] 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 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 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] 5.08% 7.61% -5.32% 14.99% 2.28% 8.29% 8.16% -3.29% 1992 1993 1994 1995 1996 1997 1998 1999 *Year-to-date return as of June 30, 2000: 4.03% Best and worst quarterly returns during this period Best: 1st quarter 1995: 4.91% Worst: 1st quarter 1994: -3.04%
[GRAPHIC] The Fund's returns in this table reflect sales charges. The indices' returns do not reflect sales charges. Average annual total return as of December 31, 1999 The table shows the Fund's average annual total return for each period, compared with the Lehman Government Bond Index, an unmanaged index of government bonds with an average maturity of approximately nine years. All dividends are reinvested. Prior to March 31, 2000, the Fund compared its performance to the Lehman Intermediate Treasury Index and the Salomon Brothers Mortgage Index. The Fund changed the index to which it compares its performance because the Lehman Government Bond Index is considered to be a more appropriate comparison.
Since 1 year 5 years inception* Investor A Shares -7.91% 4.88% 4.88% Investor B Shares -7.47% 5.23% 3.60% Investor C Shares -5.09% 5.34% 3.89% Lehman Government Bond Index -2.23% 7.44% 7.24% Lehman Intermediate Treasury Index 0.50% 6.94% 6.71% Salomon Brothers Mortgage Index 1.83% 7.93% 6.78%
*The inception dates of Investor A Shares, Investor B Shares, and Investor C Shares are April 17, 1991, June 7, 1993, and July 6, 1992, respectively. The returns for the indices shown are from inception of Investor A Shares. 23 [GRAPHIC] There are two kinds of fees -- shareholder fees you pay directly and annual fund operating expenses that are deducted from a fund's assets. Total net expenses are actual expenses paid by the Fund after waivers and/or reimbursements. [GRAPHIC] What it costs to invest in the Fund This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
Shareholder fees Investor A Investor B Investor C (Fees paid directly from your investment) Shares Shares Shares Maximum sales charge (load) imposed on purchases as a % of offering price per share 4.75% none none Maximum deferred sales charge (load) as a % of net asset value none(1) 5.00%(2) 1.00%(3) Annual Fund operating expenses(4) (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(5) 1.04% 1.79% 1.79% ====== ====== =====
(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 33 for details. (2)This charge decreases over time. Please see page 34 for details. Different charges apply to Investor B Shares bought before January 1, 1996 and after July 31, 1997. Please see page 34 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 37 for details. (4)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. (5)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, 2001. 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. 24 [GRAPHIC] This is an example only. Your actual costs could be higher or lower, depending on the amount you invest, and on the Fund's actual expenses and performance. Example This example is intended to help you compare the cost of investing in this Fund with the cost of investing in other mutual funds. This example assumes: o you invest $10,000 in Investor A, Investor B or Investor C Shares of the Fund for the time periods indicated and then sell all of your shares at the end of those periods o you reinvest all dividends and distributions in the Fund o your investment has a 5% return each year o the Fund's operating expenses remain the same as shown in the table above o the waivers and/or reimbursements shown above expire July 31, 2001 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: 1 year 3 years 5 years 10 years 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: 1 year 3 years 5 years 10 years Investor B Shares $182 $584 $1,012 $2,008 Investor C Shares $182 $584 $1,012 $2,203
25 [GRAPHIC] Other important information You'll find specific information about each Fund's principal investments, strategies and risks in the descriptions starting on page 5. The following are some other risks and information you should consider before you invest: o Changing investment objectives and policies - The investment objective and certain investment policies of any Fund can be changed without shareholder approval. Other investment policies may be changed only with shareholder approval. o Holding other kinds of investments - The Funds may hold investments that aren't part of their principal investment strategies. Please refer to the SAI for more information. The portfolio managers or management team can also choose not to invest in specific securities described in this prospectus and in the SAI. o Foreign investment risk - Funds that invest in foreign securities may be affected by changes in currency exchange rates and the costs of converting currencies; foreign government controls on foreign investment, repatriation of capital, and currency and exchange; foreign taxes; inadequate supervision and regulation of some foreign markets; difficulty selling some investments which may increase volatility; different settlement practices or delayed settlements in some markets; difficulty getting complete or accurate information about foreign companies; less strict accounting, auditing and financial reporting standards than those in the U.S.; political, economic or social instability; and difficulty enforcing legal rights outside the U.S. o Investing defensively - A Fund may temporarily hold investments that are not part of its investment objective or its principal investment strategies to try to protect it during a market or economic downturn or because of political or other conditions. A Fund may not achieve its investment objective while it is investing defensively. o Securities lending program - A Fund may lend portfolio securities to approved broker-dealers or other financial institutions on a fully collateralized basis in order to earn additional income for the Fund. There may be delays in receiving additional collateral after the loan is made or in recovering the securities loaned. o Portfolio turnover - A Fund that replaces -- or turns over -- more than 100% of its investments in a year is considered to trade frequently. Frequent trading can result in larger distributions of short-term capital gains to shareholders. These gains are taxable at higher rates than long-term capital gains. Frequent trading can also mean higher brokerage and other transaction costs, which could reduce the Fund's returns. The Funds generally buy securities for capital appreciation, investment income, or both, and don't engage in short-term trading. You'll find the portfolio turnover rate for each Fund in Financial highlights. 26 [GRAPHIC] How the Funds are managed [GRAPHIC] Banc of America Advisors, Inc. One Bank of America Plaza Charlotte, North Carolina 28255 Investment adviser BAAI is the investment adviser to over 60 mutual fund portfolios in the Nations Funds Family, including the Funds described in this prospectus. BAAI is a registered investment adviser. It's a wholly-owned subsidiary of Bank of America, which is owned by Bank of America Corporation. Nations Funds pays BAAI an annual fee for its investment advisory services. The fee is calculated as a percentage of the average daily net assets of each Fund and is paid monthly. BAAI uses part of this money to pay investment sub-advisers for the services they provide to each Fund. BAAI has agreed to waive fees and/or reimburse expenses for certain Funds until July 31, 2001. You'll find a discussion of any waiver and/or reimbursement in the Fund descriptions. There is no assurance that BAAI will continue to waive and/or reimburse any fees and/or expenses after this date. The following chart shows the maximum advisory fees BAAI can receive, along with the actual advisory fees it received during the Funds' last fiscal year, after waivers and/or reimbursements: Annual investment advisory fee, as a % of average daily net assets
Maximum Actual fee advisory paid last fee(1) fiscal year Nations Asset Allocation Fund 0.65% 0.58% Nations Marsico Growth & Income Fund2 0.75% 0.76% Nations Marsico Focused Equities Fund2 0.75% 0.76% Nations Government Securities Fund 0.50% 0.40%
(1)These fees are the current contract levels, which in some cases have been reduced from the contract levels that were in effect during the last fiscal year. (2)These Funds don't have their own investment adviser because they invest in Nations Marsico Growth & Income Master Portfolio and Nations Marsico Focused Equities Master Portfolio, respectively. BAAI is the investment adviser to each Master Portfolio. Investment sub-advisers Nations Funds and BAAI engage one or more investment sub-advisers for each Fund to make day-to-day investment decisions for the Fund. BAAI retains ultimate responsibility (subject to Board oversight) for overseeing the sub-advisers and evaluates the Funds' needs and available sub-advisers' skills and abilities on an ongoing basis. Based on its evaluations, BAAI may at times recommend to a Fund's Board that the Fund: o change, add or terminate one or more sub-advisers; o continue to retain a sub-adviser even though the sub-adviser's ownership or corporate structure has changed; or o materially change a sub-advisory agreement with a sub-adviser. 27 Applicable law requires a Fund to obtain shareholder approval in order to act on most of these types of recommendations, even if the Fund's Board has approved the proposed action and believes that the action is in shareholders' best interests. BAAI and the Funds plan to apply for relief from the SEC to permit the Funds to act on many of BAAI's recommendations with approval only by the Funds' Board and not by Fund shareholders. BAAI or a Fund would inform the Fund's shareholders of any actions taken in reliance on this relief. Until BAAI and the Funds obtain the relief, each Fund will continue to submit these matters to shareholders for their approval to the extent required by applicable law. [GRAPHIC] Banc of America Capital Management, Inc. One Bank of America Plaza Charlotte, North Carolina 28255 Banc of America Capital Management, Inc. BACAP is a registered investment adviser and a wholly-owned subsidiary of Bank of America. Its management expertise covers all major domestic asset classes, including equity and fixed income securities, and money market instruments. Currently managing more than $125 billion, BACAP has over 200 institutional clients and is sub-adviser to more than 65 mutual funds in the Nations Funds Family. BACAP takes a team approach to investment management. Each team has access to the latest technology and analytical resources. BACAP is the investment sub-adviser to the Funds shown in the table below. The table also tells you which internal BACAP asset management team is responsible for making the day-to-day investment decisions for each Fund.
Fund BACAP Team Nations Asset Allocation Fund Fixed Income Management Team for the fixed income and money market portions of the fund Nations Government Securities Fund Fixed Income Management Team
[GRAPHIC] Marsico Capital Management, LLC 1200 17th Street Suite 1300 Denver, Colorado 80202 Marsico Capital Management, LLC Marsico Capital is a full service investment advisory firm founded by Thomas F. Marsico in September 1997. It is a registered investment adviser and currently has over $16 billion in assets under management. Marsico Management Holdings, LLC, a wholly-owned subsidiary of Bank of America Corporation, indirectly owns the equity of Marsico Capital. 28 Marsico Capital is the investment sub-adviser to: o Nations Marsico Growth & Income Master Portfolio o Nations Marsico Focused Equities Master Portfolio Thomas F. Marsico, Chairman and Chief Executive Officer of Marsico Capital, is the portfolio manager responsible for making the day-to-day investment decisions for Nations Marsico Growth & Income Master Portfolio and Nations Marsico Focused Equities Master Portfolio. Mr. Marsico was an executive vice president and portfolio manager at Janus Capital Corporation from 1988 until he formed Marsico Capital in September 1997. He has more than 20 years of experience as a securities analyst and portfolio manager. Performance of other domestic stock funds managed by Thomas Marsico Nations Marsico Focused Equities Fund and Nations Marsico Growth & Income Fund have been in operation since December 31, 1997, so they have a relatively short performance history. The tables below are designed to show you how similar domestic stock funds managed by Thomas Marsico performed in the past. The Janus Twenty Fund has an investment objective, policies and strategies that are substantially similar to Nations Marsico Focused Equities Fund. Mr. Marsico managed the Janus Twenty Fund from January 31, 1988 through August 11, 1997. He had full discretionary authority for selecting investments for that fund, which had approximately $6 billion in net assets on August 11, 1997. The table below shows the returns for the Janus Twenty Fund compared with the S&P 500 for the periods ending August 7, 1997. The returns reflect deductions of fees and expenses, and assume all dividends and distributions have been reinvested. Average annual total returns as of August 7, 1997
Janus Twenty Fund (%) S&P 500 (%) one year 48.21 46.41 three years 32.07 30.63 five years 20.02 20.98 during the period of Mr. Marsico's management (January 31, 1988 to August 7, 1997) 23.38 18.20
This information is designed to show the historical track record of Mr. Marsico. It does not indicate how the Fund has performed or will perform in the future. Performance will vary based on many factors, including market conditions, the composition of the Fund's holdings and the Fund's expenses. The Janus Growth and Income Fund has an investment objective, policies and strategies that are substantially similar to Nations Marsico Growth & Income Fund. Mr. Marsico managed the Janus Growth and Income Fund from its inception on May 31, 1991 through August 11, 1997. He had full discretionary authority for selecting investments for that fund, which had approximately $1.7 billion in net assets on August 11, 1997. 29 The table below shows the returns for the Janus Growth and Income Fund compared with the S&P 500 for the period ending August 7, 1997. The returns reflect deductions of fees and expenses, and assume all dividends and distributions have been reinvested. Average annual total returns as of August 7, 1997
Janus Growth and Income Fund (%) S&P 500 (%) one year 47.77 46.41 three years 31.13 30.63 five years 21.16 20.98 during the period of Mr. Marsico's management (May 31, 1991 to August 7, 1997) 21.19 18.59
This information is designed to show the historical track record of Mr. Marsico. It does not indicate how the Fund has performed or will perform in the future. Performance will vary based on many factors, including market conditions, the composition of the Fund's holdings and the Fund's expenses. [GRAPHIC] Chicago Equity Partners LLC 180 North LaSalle Suite 3800 Chicago, Illinois 60601 Chicago Equity Partners LLC Chicago Equity is a registered investment adviser and is owned by the firm's senior management. Chicago Equity is the investment sub-adviser to Nations Blue Chip Master Portfolio and is one of two sub-advisers to Nations Asset Allocation Fund. Chicago Equity's Equity Management Team is responsible for making the day-to-day investment decisions for the equity portion of Nations Asset Allocation Fund. [GRAPHIC] Stephens Inc. 111 Center Street Little Rock, Arkansas 72201 Other service providers The Funds are distributed and co-administered by Stephens Inc., a registered broker/dealer. Stephens may pay commissions, distribution (12b-1) and shareholder servicing fees, and/or other compensation to companies for selling shares and providing services to investors. BAAI is also co-administrator of the Funds, and assists in overseeing the administrative operations of the Funds. The Funds pay BAAI and Stephens a combined fee for their services, plus certain out-of-pocket expenses. The fee is calculated as an annual percentage of the average daily net assets of the Funds and is paid monthly, as follows: Domestic Stock Funds 0.23% Government and Corporate Bond Fund 0.22%
[GRAPHIC] PFPC Inc. 400 Bellevue Parkway Wilmington, Delaware 19809 PFPC Inc. (PFPC) is the transfer agent for the Funds' shares. Its responsibilities include processing purchases, sales and exchanges, calculating and paying distributions, keeping shareholder records, preparing account statements and providing customer service. 30 About your investment -------------------------------------------------------------------------------- [GRAPHIC] We've used the term, investment professional, to refer to the person who has assisted you with buying Nations Funds. Selling agent or servicing agent (sometimes referred to as a selling agent) means the company that employs your investment professional. Selling and servicing agents include banks, brokerage firms, mutual fund dealers and other financial institutions, including affiliates of Bank of America. [GRAPHIC] For more information about how to choose a share class, contact your investment professional or call us at 1.800.321.7854. [GRAPHIC] Before you invest, please note that, over time,distribution (12b-1) and shareholder servicing fees will increase the cost of your investment, and may cost you more than any sales charges you may pay. For more information, see How selling and servicing agents are paid. [GRAPHIC] Choosing a share class Before you can invest in the Funds, you'll need to choose a share class. There are three classes of shares for each Fund offered by this prospectus. Each class has its own sales charges and fees. The table below compares the charges and fees and other features of the share classes.
Nations Government Stock Funds Investor A Shares Securities Fund All Domestic Maximum amount you no limit no limit can buy Maximum front-end 4.75% 5.75% sales charge Maximum deferred none none sales charge(1) Maximum annual 0.25% 0.25% distribution distribution distribution and shareholder (12b-1)/ (12b-1)/ servicing fees service fee service fee Conversion feature none 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 33 for details.
Nations Government Stock Funds Investor B Shares Securities Fund All Domestic Maximum amount you can $250,000 $250,000 buy Maximum front-end sales none none charge Maximum deferred sales 5.00%(1) 5.00%(1) charge Redemption fee none none Maximum annual 0.75% 0.75% distribution and distribution distribution shareholder servicing fees (12b-1) fee and (12b-1) fee and 0.25% service fee 0.25% service fee Conversion feature yes yes
(1)This charge decreases over time. Please see page 34 for details. Different charges apply to Investor B Shares bought before January 1, 1996 and after July 31, 1997. Please see page 34 for details. 31
Nations Government Stock Funds Investor C Shares Securities Fund All Domestic Maximum amount you can no limit no limit buy Maximum front-end sales none none charge Maximum deferred sales 1.00% 1.00% charge(1) Redemption fee none none Maximum annual 0.75% 0.75% distribution and distribution distribution shareholder servicing fees (12b-1) fee and (12b-1) fee and 0.25% service fee 0.25% service fee Conversion feature none none
(1)This charge applies to investors who buy Investor C Shares and sell them within one year of buying them. Please see page 37 for details. The share class you choose will depend on how much you're investing, how long you're planning to stay invested, and how you prefer to pay the sales charge. The total cost of your investment over the time you expect to hold your shares will be affected by the distribution (12b-1) and shareholder servicing fees, as well as by the amount of any front-end sales charge or contingent deferred sales charge (CDSC) that applies, and when you're required to pay the charge. You should think about these things carefully before you invest. Investor A Shares have a front-end sales charge, which is deducted when you buy your shares. This means that a smaller amount is invested in the Funds, unless you qualify for a waiver or reduction of the sales charge. However, Investor A Shares have lower ongoing distribution (12b-1) and/or shareholder servicing fees than Investor B and Investor C Shares. This means that Investor A Shares can be expected to pay relatively higher dividends per share. Investor B Shares have limits on how much you can invest. When you buy Investor B or Investor C Shares, the full amount is invested in the Funds. However, you may pay a CDSC when you sell your shares. Over time, Investor B and Investor C Shares can incur distribution (12b-1) and shareholder servicing fees that are equal to or more than the front-end sales charge, and the distribution (12b-1) and shareholder servicing fees you would pay for Investor A Shares. Although the full amount of your purchase is invested in the Funds, any positive investment return on this money may be partially or fully offset by the expected higher annual expenses of Investor B and Investor C Shares. You should also consider the conversion feature for Investor B Shares, which is described in About Investor B Shares. 32 [GRAPHIC] The offering price per share is the net asset value per share plus any sales charge that applies. The net asset value per share is the price of a share calculated by a Fund every business day. [GRAPHIC] About Investor A Shares There is no limit to the amount you can invest in Investor A Shares. You generally will pay a front-end sales charge when you buy your shares, or in some cases, a CDSC when you sell your shares. Front-end sales charge You'll pay a front-end sales charge when you buy Investor A Shares, unless: o you qualify for a waiver of the sales charge. You can find out if you qualify for a waiver in the section, When you might not have to pay a sales charge o you're reinvesting distributions The sales charge you'll pay depends on the Fund you're buying, and the amount you're investing -- generally, the larger the investment, the smaller the percentage sales charge.
Nations Government Securities Fund Amount retained by selling Sales charge Sales charge agents as a % of the as a % of the as a % of the offering price net asset value offering price Amount you bought per share per share per share $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)
(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. 33
All Domestic Stock Funds Amount retained Sales charge Sales charge by selling agents as a % of the as a % of the as a % of the offering price net asset value offering price Amount you bought per share per share per share $0-$49,999 5.75% 6.10% 5.00% $50,000-$99,999 4.50% 4.71% 3.75% $100,000-$249,999 3.50% 3.63% 2.75% $250,000-$499,999 2.50% 2.56% 2.00% $500,000-$999,999 2.00% 2.04% 1.75% $1,000,000 or more 0.00% 0.00% 1.00%(1)
(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. Contingent deferred sales charge If you own or buy $1,000,000 or more of Investor A Shares, there are two situations when you'll pay a CDSC: o If you bought your shares before August 1, 1999, and you sell them: o during the first year you own them, you'll pay a CDSC of 1.00% o during the second year you own them, you'll pay a CDSC of 0.50% o If you buy your shares on or after August 1, 1999 and sell them within 18 months of buying them, you'll pay a CDSC of 1.00%. The CDSC is calculated from the day your purchase is accepted (the trade date). We deduct the CDSC from the market value or purchase price of the shares, whichever is lower. You won't pay a CDSC on any increase in net asset value since you bought your shares, or on any shares you receive from reinvested distributions. We'll sell any shares that aren't subject to the CDSC first. We'll then sell shares that result in the lowest CDSC. [GRAPHIC] About Investor B Shares You can buy up to $250,000 of Investor B Shares 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 40 34 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.
Nations Government Securities 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 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
All Domestic Stock Funds
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 the first year you own them 5.0% 5.0% 3.0% 2.0% none 5.0% the second year you own them 4.0% 4.0% 2.0% 1.0% none 4.0% the third year you own them 3.0% 3.0% 1.0% none none 3.0% the fourth year you own them 3.0% 3.0% none none none 2.0% the fifth year you own them 2.0% 2.0% none none none 2.0% the sixth year you own them 1.0% 1.0% none none none 1.0% after six years of owning them none none none none none none
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. 35 About the conversion feature Investor B Shares generally convert automatically to Investor A Shares according to the following schedule:
Nations Government Securities Fund Will convert to Investor A Shares Investor B Shares you bought after you've owned them for after November 15, 1998 eight years between August 1, 1997 and November 15, 1998 $0-$249,999 nine years $250,000-$499,999 six years $500,000-$999,999 five years before August 1, 1997 eight years
All Domestic Stock Funds
Will convert to Investor A Shares Investor B Shares you bought after you've owned them for after November 15, 1998 eight years between August 1, 1997 and November 15, 1998 $0-$249,000 nine years $250,000-$499,999 six years $500,000-$999,999 five years before August 1, 1997 nine years
The conversion feature allows you to benefit from the lower operating costs of Investor A Shares, which can help increase total returns. Here's how the conversion works: o We won't convert your shares if you tell your investment professional, selling agent or the transfer agent within 90 days before the conversion date that you don't want your shares to be converted. Remember, it's in your best interest to convert your shares because Investor A Shares have lower expenses. o Shares are converted at the end of the month in which they become eligible for conversion. Any shares you received from reinvested distributions on these shares will convert to Investor A Shares at the same time. o You'll receive the same dollar value of Investor A Shares as the Investor B Shares that were converted. No sales charge or other charges apply. o Investor B Shares that you received from an exchange of Investor B Shares of another Nations Fund will convert based on the day you bought the original shares. Your conversion date may be later if you exchanged to or from a Nations Fund Money Market Fund. o Conversions are free from federal tax. 36 [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 40 The CDSC is calculated from the trade date of your purchase. We deduct the CDSC from the market value or purchase price of the shares, whichever is lower. We'll sell any shares that aren't subject to the CDSC first. We'll then sell shares that result in the lowest CDSC. Your selling agent receives compensation when you buy Investor C Shares. Please see How selling and servicing agents are paid for more information. [GRAPHIC] Please contact your investment professional for more information about reductions and waivers of sales charges. You should tell your investment professional that you may qualify for a reduction or a waiver before buying shares. We can change or cancel these terms at any time. Any change or cancellation applies only to future purchases. When you might not have to pay a sales charge Front-end sales charges (Investor A Shares) There are three ways you can lower the front-end sales charge you pay on Investor A Shares: o Combine purchases you've already made Rights of accumulation allow you to combine the value of Investor A, Investor B and Investor C Shares you already own with Investor A Shares you're buying 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. 37 o If you don't buy as much as you planned within the period, you must pay the difference between the charges you've paid and the charges that actually apply to the shares you've bought. o Your first purchase must be at least 5% of the minimum amount for the sales charge level that applies to the total amount you plan to buy. o If the purchase you've made later qualifies for a reduced sales charge through the 90-day backdating provisions, we'll make an adjustment for the lower charge when the letter of intent expires. Any adjustment will be used to buy additional shares at the reduced sales charge. o Combine purchases with family members You can receive a quantity discount by combining purchases of Investor A Shares that you, your spouse and children under age 21 make on the same day. Some distributions or payments from the dissolution of certain qualified plans also qualify for the quantity discount. Index Funds and Money Market Funds, except Investor B and Investor C Shares of Nations Reserves Money Market Funds, don't qualify. The following investors can buy Investor A Shares without paying a front-end sales charge: o full-time employees and retired employees of Bank of America Corporation (and its predecessors), its affiliates and subsidiaries and the immediate families of these people o banks, trust companies and thrift institutions acting as fiducuaries o individuals receiving a distribution from a Bank of America trust or other fiduciary account may use the proceeds of that distribution to buy Investor A Shares without paying a front-end sales charge, as long as the proceeds are invested in the Funds within 90 days of the date of distribution o Nations Funds' Trustees, Directors and employees of its investment sub-advisers o registered broker/dealers that have entered into a Nations Funds dealer agreement with Stephens may buy Investor A Shares without paying a front-end sales charge for their investment account only o registered personnel and employees of these broker/dealers and their family members may buy Investor A Shares without paying a front-end sales charge according to the internal policies and procedures of the employing broker/dealer as long as these purchases are made for their own investment purposes o employees or partners of any service provider to the Funds o former shareholders of Class B Shares of the Special Equity Portfolio of The Capitol Mutual Funds who held these shares as of January 31, 1994 or received Investor A Shares of Nations Aggressive Growth Fund may buy Investor A Shares of Nations Aggressive Growth Fund without paying a front-end sales charge 38 o investors who buy through accounts established with certain fee-based investment advisers or financial planners, including Nations Funds 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 You can also buy Investor A Shares without paying a sales charge if you buy the shares within 120 days of selling the same Fund. This is called the reinstatement privilege. You can invest up to the amount of the sale proceeds. We'll credit your account with any CDSC paid when you sold the shares. The reinstatement privilege does not apply to any shares you bought through a previous reinstatement. PFPC, Stephens or their agents must receive your written request within 120 days after you sell your shares. In addition, you can buy Investor A Shares without paying a sales charge if you buy the shares with proceeds from the redemption of shares of a nonaffiliated mutual fund as long as the redemption of the nonaffiliated fund shares occurred within 45 days prior to the purchase of the Investor A Shares. We must receive a copy of the confirmation of the redemption transaction in order for you to avoid paying the sales charge. 39 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 if you exchange Investor B or Investor C Shares of a Nations Fund that were bought through a Bank of America employee benefit plan for Investor A Shares of a Nations Fund o withdrawals made under the Automatic Withdrawal Plan described in Buying, selling and exchanging shares, if the total withdrawals of Investor A, Investor B or Investor C Shares made in a year are less than 12% of the total value of those shares in your account. A CDSC may only apply to Investor A Shares if you bought more than $1,000,000 We'll also waive the CDSC on the sale of Investor A or Investor C Shares bought before September 30, 1994 by current or retired employees of Bank of America Corporation (and its predecessors) and its affiliates, or by current or former trustees or directors of the Nations Funds or other management companies managed by Bank of America. 40 You won't pay a CDSC on the sale of Investor B or Investor C Shares if you reinvest any of the proceeds in the same Fund within 120 days of the sale. This is called the reinstatement privilege. You can invest up to the amount of the sale proceeds. We'll credit your account with any CDSC paid when you sold the shares. The reinstatement privilege does not apply to any shares you bought through a previous reinstatement. PFPC, Stephens or their agents must receive your written request within 120 days after you sell your shares. 41 [GRAPHIC] Buying, selling and exchanging shares [GRAPHIC] When you sell shares of a mutual fund, the fund is effectively "buying" them back from you. This is called a redemption. You can invest in the Funds through your selling agent or directly from Nations Funds. We encourage you to consult with an investment professional who can open an account for you with a selling agent and help you with your investment decisions. Once you have an account, you can buy, sell and exchange shares by contacting your investment professional or selling agent. They will look after any paperwork that's needed to complete a transaction and send your order to us. You should also ask your selling agent about its limits, fees and policies for buying, selling and exchanging shares, which may be different from those described here, and about its related programs or services. The table on the next page summarizes some key information about buying, selling and exchanging shares. You'll find sales charges and other fees that apply to these transactions in Choosing a share class. The Funds also offer other classes of shares, with different features and expense levels, which you may be eligible to buy. Please contact your investment professional, or call us at 1.800.321.7854 if you have questions or you need help placing an order. 42
Ways to buy, sell or exchange ----------------- Buying shares In a lump sum Using our Systematic Investment Plan ------------------------------------- Selling shares In a lump sum Using our Automatic Withdrawal Plan ------------------------------------- Exchanging shares In a lump sum Using our Automatic Exchange Feature How much you can buy, sell or exchange Other things to know ---------------------------------------- ----------------------------------------------------- Buying shares minimum initial investment: There is no limit to the amount you can invest in o $1,000 for regular accounts Investor A and C Shares. You can invest up to o $500 for traditional and Roth IRA $250,000 in Investor B Shares at a time. accounts o $250 for certain fee-based accounts o no minimum for certain retirement plan accounts like 401(k) plans and SEP accounts, but other restrictions apply minimum additional investment: o $100 for all accounts minimum initial investment: You can buy shares monthly, twice a month or o $100 quarterly, using automatic transfers from your minimum additional investment: bank account. o $50 ------------------------------------------------------------------------------------------------------------------ Selling shares o you can sell up to $50,000 of your We'll deduct any CDSC from the amount you're shares by telephone, otherwise there selling and send you or your selling agent the are no limits to the amount you can balance, usually within three business days of sell receiving your order. o other restrictions may apply to If you paid for your shares with a check that withdrawals from retirement plan wasn't certified, we'll hold the sale proceeds accounts when you sell those shares for at least 15 days after the trade date of the purchase, or until the check has cleared. o minimum $25 per withdrawal Your account balance must be at least $10,000 to set up the plan. You can make withdrawals monthly, twice a month or quarterly. We'll send your money by check or deposit it directly to your bank account. No CDSC is deducted if you withdraw 12% or less of the value of your shares in a class. ----------------------------------------------------------------------------------------------------------------- Exchanging shares o minimum $1,000 per exchange You can exchange your Investor A Shares for Investor A shares of any other Nations Fund, except Index Funds. You won't pay a front-end sales charge, CDSC or redemption fee on the shares you're exchanging. You can exchange your Investor B Shares for: o Investor B Shares of any other Nations Fund, except Nations Funds Money Market Funds o Investor B Shares of Nations Reserves Money Market Funds You can exchange your Investor C Shares for: o Investor C Shares of any other Nations Fund, except Nations Funds Money Market Funds o Investor C Shares of Nations Reserves Money Market Funds If you received Investor C Shares of a Fund from an exchange of Investor A Shares of a Managed Index Fund, you can also exchange these shares for Investor A Shares of an Index Fund. You won't pay a CDSC on the shares you're exchanging. o minimum $25 per exchange This feature is not available for Investor B Shares. You must already have an investment in the Funds into which you want to exchange. You can make exchanges monthly or quarterly.
43 [GRAPHIC] A business day is any day that the New York Stock Exchange (NYSE) is open. A business day ends at the close of regular trading on the NYSE, usually at 4:00 p.m. Eastern time. If the NYSE closes early, the business day ends as of the time the NYSE closes. The NYSE is closed on weekends and on the following national holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. How shares are priced All transactions are based on the price of a Fund's shares -- or its net asset value per share. We calculate net asset value per share for each class of each Fund at the end of each business day. First, we calculate the net asset value for each class of a Fund by determining the value of the Fund's assets in the class and then subtracting its liabilities. Next, we divide this amount by the number of shares that investors are holding in the class. Valuing securities in a Fund The value of a Fund's assets is based on the total market value of all of the securities it holds. The prices reported on stock exchanges and securities markets around the world are usually used to value securities in a Fund. If prices aren't readily available, or the value of a security has been materially affected by events occurring after a foreign exchange closes, we'll base the price of a security on its fair value. When a Fund uses fair value to price securities it may value those securities higher or lower than another fund that uses market quotations to price the same securities. We use the amortized cost method, which approximates market value, to value short-term investments maturing in 60 days or less. International markets may be open on days when U.S. markets are closed. The value of foreign securities owned by a Fund could change on days when Fund shares may not be bought or sold. How orders are processed Orders to buy, sell or exchange shares are processed on business days. Orders received by Stephens, PFPC or their agents before the end of a business day (usually 4:00 p.m. Eastern time, unless the NYSE closes early) will receive that day's net asset value per share. Orders received after the end of a business day will receive the next business day's net asset value per share. The business day that applies to your order is also called the trade date. We may refuse any order to buy or exchange shares. If this happens, we'll return any money we've received to your selling agent. Telephone orders You can place orders to buy, sell or exchange by telephone if you complete the telephone authorization section of our account application and send it to us. Here's how telephone orders work: o If you sign up for telephone orders after you open your account, you must have your signature guaranteed. o Telephone orders may not be as secure as written orders. You may be responsible for any loss resulting from a telephone order. o We'll take reasonable steps to confirm that telephone instructions are genuine. For example, we require proof of your identification before we will act on instructions received by telephone and may record telephone conversations. If we and our service providers don't take these steps, we may be liable for any losses from unauthorized or fraudulent instructions. o Telephone orders may be difficult to complete during periods of significant economic or market change. 44 [GRAPHIC] The offering price per share is the net asset value per share plus any sales charge that applies. The net asset value per share is the price of a share calculated by a Fund every business day. [GRAPHIC] Buying shares Here are some general rules for buying shares: o You buy Investor A Shares at the offering price per share. You buy Investor B and Investor C Shares at net asset value per share. o If we don't receive your money within three business days of receiving your order, we'll refuse the order. o Selling agents are responsible for sending orders to us and ensuring we receive your money on time. o Shares purchased are recorded on the books of the Fund. We don't issue certificates. Minimum initial investment The minimum initial amount you can buy is usually $1,000. If you're buying shares through one of the following accounts or plans, the minimum initial amount you can buy is: o $500 for traditional and Roth individual retirement accounts (IRAs) o $250 for accounts set up with some fee-based investment advisers or financial planners, including wrap fee accounts and other managed accounts o $100 using our Systematic Investment Plan o There is no minimum for 401(k) plans, simplified employee pension plans (SEPs), salary reduction-simplified employee pension plans (SAR-SEPs), Savings Incentives Match Plans for Employees (SIMPLE IRAs), salary reduction-IRAs (SAR-IRAs) or other similar kinds of accounts. However, if the value of your account falls below $1,000 for 401(k) plans or $500 for the other plans within one year after you open your account, we may sell your shares. We'll give you 60 days notice in writing if we're going to do this Minimum additional investment You can make additional purchases of $100, or $50 if you use our Systematic Investment Plan. 45 Systematic Investment Plan You can make regular purchases of $50 or more using automatic transfers from your bank account to the Funds you choose. You can contact your investment professional or us to set up the plan. Here's how the plan works: o You can buy shares twice a month, monthly or quarterly. o You can choose to have us transfer your money on or about the 15th or the last day of the month. o Some exceptions may apply to employees of Bank of America and its affiliates, and to plans set up before August 1, 1997. For details, please contact your investment professional. [GRAPHIC] For more information about telephone orders, see page 44. [GRAPHIC] Selling shares Here are some general rules for selling shares: o We'll deduct any CDSC from the amount you're selling and send you the balance. o If you're selling your shares through a selling agent, we'll normally send the sale proceeds by federal funds wire within three business days after Stephens, PFPC or their agents receive your order. Your selling agent is responsible for depositing the sale proceeds to your account on time. o If you're selling your shares directly through us, we'll normally send the sale proceeds by mail or wire them to your bank account within three business days after the Fund receives your order. o You can sell up to $50,000 of shares by telephone if you qualify for telephone orders. o If you paid for your shares with a check that wasn't certified, we'll hold the sale proceeds when you sell those shares for at least 15 days after the trade date of the purchase, or until the check has cleared, whichever is later. o If you hold any shares in certificate form, you must sign the certificates (or send a signed stock power with them) and send them to PFPC. Your signature must be guaranteed unless you've made other arrangements with us. We may ask for any other information we need to prove that the order is properly authorized. o Under certain circumstances allowed under the Investment Company Act of 1940 (1940 Act), we can pay you in securities or other property when you sell your shares. o We can delay payment of the sale proceeds for up to seven days. o Other restrictions may apply to retirement plan accounts. For more information these restrictions, please contact your retirement plan administrator. 46 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. 47 [GRAPHIC] You should make sure you understand the investment objective and principal investment strategies of the Fund you're exchanging into. Please read its prospectus carefully. [GRAPHIC] Exchanging shares You can sell shares of a Fund to buy shares of another Nations Fund. This is called an exchange. You might want to do this if your investment goals or tolerance for risk changes. Here's how exchanges work: o You must exchange at least $1,000, or $25 if you use our Automatic Exchange Feature. o The rules for buying shares of a Fund, including any minimum investment requirements, apply to exchanges into that Fund. o You may only make an exchange into a Fund that is legally sold in your state of residence. o You generally may only make an exchange into a Fund that is accepting investments. o We may limit the number of exchanges you can make within a specified period of time. o We may change or cancel your right to make an exchange by giving the amount of notice required by regulatory authorities (generally 60 days for a material change or cancellation). o You cannot exchange any shares you own in certificate form until PFPC has received the certificate and deposited the shares to your account. Exchanging Investor A Shares o If you received Investor A Shares of a Managed Index Fund through a conversion of Investor C Shares originally bought through a 401(k) plan, you can exchange your 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 o You can exchange Investor A Shares of the other Funds for Investor A Shares of any other Nations Fund, except Index Funds. Here are some rules for exchanging Investor A Shares: o You won't pay a front-end sales charge on the shares of the Fund you're exchanging. o You won't pay a CDSC, if applicable, on the shares you're exchanging. Any CDSC will be deducted when you sell the shares you received from the exchange. The CDSC at that time will be based on the period from when you bought the original shares until you sold the shares you received from the exchange. o You won't pay a redemption fee on the shares you're exchanging. Any redemption fee will be deducted when you sell the shares you received from the exchange. Any redemption fee will be paid to the original Fund. 48 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. Exchanging Investor B Shares You can exchange Investor B Shares of a Fund for: o Investor B Shares of any other Nations Fund, except Nations Funds Money Market Funds o Investor B Shares of Nations Reserves Money Market Funds You won't pay a CDSC on the shares you're exchanging. Any CDSC will be deducted when you sell the shares you received from the exchange. The CDSC will be based on the period from when you bought the original shares until you sold the shares you received from the exchange. Exchanging Investor C Shares You can exchange Investor C Shares of a Fund for: o Investor C Shares of any other Nations Fund, except Nations Funds Money Market Funds o Investor C Shares of Nations Reserves Money Market Funds If you received Investor C Shares of a Fund from an exchange of Investor A Shares of a Managed Index Fund, you can also exchange these shares for Investor A Shares of an Index Fund. You won't pay a CDSC on the shares you're exchanging. Any CDSC will be deducted when you sell the shares you received from the exchange. The CDSC will be based on the period from when you bought the original shares until you sold the shares you received from the exchange. Automatic Exchange Feature The Automatic Exchange Feature lets you exchange $25 or more of Investor A or Investor C Shares every month or every quarter. You can contact your investment professional or us to set up the plan. Here's how automatic exchanges work: o Send your request to PFPC in writing or call 1.800.321.7854. o If you set up your plan to exchange more than $50,000 you must have your signature guaranteed. o You must already have an investment in the Funds you want to exchange. o You can choose to have us transfer your money on or about the 1st or the 15th day of the month. o The rules for making exchanges apply to automatic exchanges. 49 [GRAPHIC] How selling and servicing agents are paid Selling and servicing agents usually receive compensation based on your investment in the Funds. The kind and amount of the compensation depends on the share class in which you invest. Selling agents typically pay a portion of the compensation they receive to their investment professionals. Commissions Your selling agent may receive an up-front commission (reallowance) when you buy shares of a Fund. The amount of this commission depends on which share class you choose: o up to 5.00% of the offering price per share of Investor A Shares of the Domestic Stock Funds. The commission is paid from the sales charge we deduct when you buy your shares o up to 4.25% of the offering price per share of Investor A Shares of the Government & Corporate Bond Fund. The commission is paid from the sales charge we deduct when you buy your shares o up to 4.00% of the net asset value per share of Investor B Shares. The commission is not deducted from your purchase -- we pay your selling agent directly o up to 1.00% of the net asset value per share of Investor C Shares. The commission is not deducted from your purchase -- we pay your selling agent directly If you buy Investor B or Investor C Shares you will be subject to higher distribution (12b-1) and shareholder servicing fees and may be subject to a CDSC when you sell your shares. [GRAPHIC] The financial institution or intermediary that buys shares for you is also sometimes referred to as a selling agent. The distribution fee is often referred to as a "12b-1" fee because it's paid through a plan approved under Rule 12b-1 under the 1940 Act. Your selling agent may charge other fees for services provided to your account. Distribution (12b-1) and shareholder servicing fees Stephens and selling and servicing agents may be compensated for selling shares and providing services to investors under distribution and shareholder servicing plans. The amount of the fee depends on the class of shares you own:
Maximum annual distribution (12b-1) and shareholder servicing fees (as an annual % of average daily net assets) 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
Fees are calculated daily and deducted monthly. Because these fees are paid out of the Funds' assets on an ongoing basis, they will increase the cost of your investment over time, and may cost you more than any sales charges you may pay. 50 The Funds pay these fees to Stephens and to eligible selling and servicing agents for as long as the plans continue. We may reduce or discontinue payments at any time. Other compensation Selling and servicing agents may also receive: o a bonus, incentive or other compensation relating to the sale, promotion and marketing of the Funds o additional amounts on all sales of shares: o up to 1.00% of the offering price per share of Investor A Shares o up to 1.00% of the net asset value per share of Investor B Shares o up to 1.00% of the net asset value per share of Investor C Shares o non-cash compensation like trips to sales seminars, tickets to sporting events, theater or other entertainment, opportunities to participate in golf or other outings and gift certificates for meals or merchandise This compensation, which is not paid by the Funds, is discretionary and may be available only to selected selling and servicing agents. For example, Stephens sometimes sponsors promotions involving Banc of America Investment Services, Inc., an affiliate of BAAI, and certain other selling or servicing agents. Selected selling and servicing agents also may receive compensation for opening a minimum number of accounts. BAAI and Stephens may pay amounts from their own assets to selling or servicing agents of the Funds for services they provide. 51 [GRAPHIC] Distributions and taxes [GRAPHIC] The power of compounding Reinvesting your distributions buys you more shares of a Fund -- which lets you take advantage of the potential for compound growth. Putting the money you earn back into your investment means it, in turn, may earn even more money. Over time, the power of compounding has the potential to significantly increase the value of your investment. There is no assurance, however, that you'll earn more money if you reinvest your distributions. About distributions A mutual fund can make money two ways: o It can earn income. Examples are interest paid on bonds and dividends paid on common stocks. o A fund can also have capital gain if the value of its investments increases. If a fund sells an investment at a gain, the gain is realized. If a fund continues to hold the investment, any gain is unrealized. A mutual fund is not subject to income tax as long as it distributes its net investment income and realized capital gain to its shareholders. The Funds intend to pay out a sufficient amount of their income and capital gain to their shareholders so the Funds won't have to pay any income tax. When a Fund makes this kind of a payment, it's split equally among all shares, and is called a distribution. All of the Funds distribute any net realized capital gain, at least once a year. The frequency of distributions of net investment income varies by Fund:
Frequency of Fund income distributions Nations Asset Allocation Fund quarterly Nations Marsico Growth & Income Fund quarterly Nations Marsico Focused Equities Fund quarterly Nations Government Securities Fund monthly
The distribution you receive is based on the number of shares you hold on the record date, which is usually the day the distribution is declared (daily dividend Funds) or the day before the distribution is declared (all other Funds). Shares are eligible to 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 normally pay any distribution that applies to those shares in cash within five business days after the sale was made. 52 If you buy shares of a Fund shortly before it makes a distribution, you will, in effect, receive part of your purchase back in the distribution, which is subject to tax. Similarly, if you buy shares of a Fund that holds securities with unrealized capital gain, you will, in effect, receive part of your purchase back if and when the Fund sells those securities and realizes and distributes the gain. This distribution is also subject to tax. Some Funds have built up, or have the potential to build up, high levels of unrealized capital gain. [GRAPHIC] This information is a summary of how federal income taxes may affect your investment in the Funds. It is not intended as a substitute for careful tax planning. You should consult with your own tax adviser about your situation, including any foreign, state and local taxes that may apply. [GRAPHIC] For more information about taxes, please see the SAI. How taxes affect your investment Distributions 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. A portion of such distributions to corporate shareholders may qualify for the dividends received deduction. 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 to be paid for in securities or other property and exchanges) if: o you haven't given us a correct Taxpayer Identification Number (TIN) and haven't certified that the TIN is correct and withholding doesn't apply o the Internal Revenue Service (IRS) has notified us that the TIN listed on your account is incorrect according to its records o the IRS informs us that you 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 (at a rate of 30%, or a lower rate if a treaty applies) on distributions paid to foreign shareholders. 53 Taxation of redemptions and exchanges Your redemptions (including redemptions paid for in securities or other property) and exchanges of Fund shares will usually result in a taxable capital gain or loss, depending on the amount you receive for your shares (or are deemed to receive in the case of exchanges) and the amount you paid (or are deemed to have paid) for them. [GRAPHIC] Financial highlights The financial highlights table is designed to help you understand how the Funds have performed for the past five years or, if shorter, the period of the Fund's operations. 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 has been audited by PricewaterhouseCoopers LLP. The independent accountants' 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. 54
Nations Asset Allocation Fund For a Share outstanding throughout each period Period ended Period ended Investor A Shares* 03/31/00# 05/14/99 Operating performance: Net asset value, beginning of period $ 23.40 $ 22.50 Net investment income 0.43 0.10 Net realized and unrealized gain (loss) on investments 1.59 0.91 Net increase in net asset value from operations 2.02 1.01 Distributions: Dividends from net investment income (0.35) (0.11) Distributions from net realized capital gains (0.72) -- Total dividends and distributions (1.07) (0.11) Net asset value, end of period $ 24.35 $ 23.40 Total return++ 8.99% 4.50% ========================================================================================= Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $83,412 $72,000 Ratio of operating expenses to average net assets 1.20%+(a)(b) 1.18%+ Ratio of net investment income (loss) to average net assets 1.60%+ 2.01%+ Portfolio turnover rate 84% 20% Ratio of operating expenses to average net assets without waivers and/or expense reimbursements 1.27%+(a) 1.20%+ Year ended Year ended Year ended Year ended Investor A Shares* 02/28/99 02/28/98 02/28/97** 02/29/96 Operating performance: Net asset value, beginning of period $ 21.41 $ 19.40 $ 17.52 $ 15.15 Net investment income 0.55 0.52 0.48 0.52 Net realized and unrealized gain (loss) on investments 2.48 3.72 2.50 2.86 Net increase in net asset value from operations 3.03 4.24 2.98 3.38 Distributions: Dividends from net investment income (0.45) (0.47) (0.46) (0.53) Distributions from net realized capital gains (1.49) (1.76) (0.64) (0.48) Total dividends and distributions (1.94) (2.23) (1.10) (1.01) Net asset value, end of period $ 22.50 $ 21.41 $ 19.40 $ 17.52 Total return++ 14.72% 23.07% 17.64% 22.80% ====================================================================================================== Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $72,000 $49,000 $35,000 $22,000 Ratio of operating expenses to average net assets 0.94% 1.03% 1.25% 0.62% Ratio of net investment income (loss) to average net assets 2.64% 2.67% 2.59% 3.49% Portfolio turnover rate 114% 67% 116% 157% Ratio of operating expenses to average net assets without waivers and/or expense reimbursements 0.94% 1.09% 1.94% 2.92%
* The financial information for the fiscal periods through May 14, 1999 reflect the financial information for the Pacific Horizon Asset Allocation Fund A Shares, which were reorganized into the Asset Allocation Investor A Shares, as of May 21, 1999. Prior to May 21, 1999, the Fund's investment adviser was Bank of America National Trust and Savings Association. Effective May 21, 1999, its investment adviser became Banc of America Advisors, Inc. and its investment sub-adviser became Banc of America Capital Management, Inc. ** As of July 22, 1996, the Fund designated the existing series of shares as "A" Shares. + 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 shares method. (a) The effect of the custodial expense offset on the operating expense ratio, with and without waivers and/or expense reimbursements, was less than 0.01%. (b) The effect of interest expense on the operating expense ratio was less than 0.01%. 55 Nations Asset Allocation Fund For a Share outstanding throughout each period
Period ended Period ended Period ended Investor B Shares* 03/31/00# 05/14/99 02/28/99** Operating performance: Net asset value, beginning of period $ 23.32 $ 22.45 $ 23.17 Net investment income 0.47 0.06 0.22 Net realized and unrealized gain on investments 1.39 0.89 0.75 Net increase in net asset value from operations 1.86 0.95 0.97 Distributions: Dividends from net investment income (0.22) (0.08) (0.20) Distributions from net realized capital gains (0.72) -- (1.49) Total dividends and distributions (0.94) (0.08) (1.69) Net asset value, end of period $ 24.24 $ 23.32 $ 22.45 Total return++ 8.31% 4.26% 4.59% =========================================================================================================== Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $121,644 $10,000 $6,000 Ratio of operating expenses to average net assets 1.95%+(a)(b) 1.95%+ 1.74%+ Ratio of net investment income to average net assets 0.85%+ 1.26%+ 1.92%+ Portfolio turnover rate 84% 20% 114% Ratio of operating expenses to average net assets without waivers and/or expense reimbursements 2.02%+(a) 1.97%+ 1.74%+
* The financial information for the fiscal periods through May 14, 1999 reflect the financial information for the Pacific Horizon Asset Allocation Fund B Shares, which were reorganized into the Asset Allocation Investor B Shares, as of May 21, 1999. Prior to May 21, 1999, the Fund's investment adviser was Bank of America National Trust and Savings Association. Effective May 21, 1999, its investment adviser became Banc of America Advisors, Inc. and its investment sub-adviser became Banc of America Capital Management, Inc. ** Asset Allocation Investor B Shares commenced operations on July 15, 1998. + 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 shares method. (a) The effect of the custodial expense offset on the operating expense ratio, with and without waivers and/or expense reimbursements, was less than 0.01%. (b) The effect of interest expense on the operating expense ratio was less than 0.01%. 56 Nations Asset Allocation Fund For a Share outstanding throughout each period
Period ended Period ended Year ended Year ended Period ended Investor C Shares* 03/31/00# 05/14/99 02/28/99 02/28/98 02/28/97** Operating performance: Net asset value, beginning of period $ 23.33 $ 22.45 $ 21.36 $ 19.40 $ 17.23 Net investment income 0.42 0.05 0.44 0.41 0.19 Net realized and unrealized gain/(loss) on investments 1.43 0.92 2.49 3.66 2.80 Net increase in net asset value from operations 1.85 0.97 2.93 4.07 2.99 Distributions: Dividends from net investment income (0.19) (0.09) (0.35) (0.36) (0.18) Distributions from net realized capital gains (0.72) -- (1.49) (1.75) (0.64) Total dividends and distributions (0.91) (0.09) (1.84) (2.11) (0.82) Net asset value, end of period $ 24.27 $ 23.33 $ 22.45 $ 21.36 $ 19.40 Total return++ 8.24% 4.31% 14.23% 22.10% 17.69% =========================================================================================================================== Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $2,305 $2,000 $2,000 $2,000 $1,000 Ratio of operating expenses to average net assets 1.95%+(a)(b) 1.67%+ 1.44% 1.52% 1.94%+ Ratio of net investment income to average net assets 0.85%+ 1.52%+ 2.14% 2.17% 2.31%+ Portfolio turnover rate 84% 20% 114% 67% 116% Ratio of operating expenses to average net assets without waivers and/or expense reimbursements 2.02%+(a) 1.96%+ 1.69% 1.58% 3.26%+
* The financial information for the fiscal periods through May 14, 1999 reflect the financial information for the Pacific Horizon Asset Allocation Fund K Shares, which were reorganized into the Asset Allocation Investor C Shares, as of May 21, 1999. Prior to May 21, 1999, the Fund's investment adviser was Bank of America National Trust and Savings Association. Effective May 21, 1999, its investment adviser became Banc of America Advisors, Inc. and its investment sub-adviser became Banc of America Capital Management, Inc. ** Asset Allocation Investor C Shares commenced operations on November 11, 1996. + 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 shares method. (a) The effect of the custodial expense offset on the operating expense ratio, with and without waivers and/or expense reimbursements, was less than 0.01%. (b) The effect of interest expense on the operating expense ratio was less than 0.01%. 57
Nations Marsico Growth & Income Fund For a Share outstanding throughout each period Year ended Year ended Period ended Investor A Shares 03/31/00 03/31/99# 03/31/98*# Operating performance: Net asset value, beginning of period $ 14.95 $ 12.02 $ 10.00 Net investment income (0.11) (0.03) 0.00 (b) Net realized and unrealized gain on investments 6.82 2.97 2.02 Net increase in net asset value from operations 6.71 2.94 2.02 Distributions: Dividends from net investment income -- -- -- Distributions from net realized capital gains (0.04) (0.01) -- Total dividends and distributions (0.04) (0.01) -- Net asset value, end of the period $ 21.62 $ 14.95 $ 12.02 Total return++ 45.01% 24.38% 20.20% ========================================================================================================= Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $175,859 $43,392 $1,141 Ratio of operating expenses to average net assets 1.48%(a) 1.50%(a) 1.34%+(a) Ratio of net investment income/(loss) to average net assets (0.62)% (0.20)% 0.13%+ Portfolio turnover rate 55%(c) 150% 22% Ratio of operating expenses to average net assets without waivers and/or expense reimbursements 1.48%(a) 1.50%(a) 2.22%+(a)
* Nations Marsico Growth & Income Fund Investor A Shares commenced operations on December 31, 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 shares method. (a) The effect of the custodial expense offset on the operating expense ratio, with and without waivers and/or expense reimbursements, was less than 0.01%. (b) Amount represents less than $0.01 per share. (c) Amount represents results prior to conversion to a master-feeder structure.
Nations Marsico Growth & Income Fund For a Share outstanding throughout each period Year ended Year ended Period ended Investor B Shares 03/31/00 03/31/99# 03/31/98*# Operating performance: Net asset value, beginning of period $ 14.85 $ 12.02 $ 10.00 Net investment income (0.24) (0.12) (0.02) Net realized and unrealized gain on investments 6.74 2.96 2.04 Net increase in net asset value from operations 6.50 2.84 2.02 Distributions: Dividends from net investment income -- -- -- Distributions from net realized capital gains (0.04) (0.01) -- Total dividends and distributions (0.04) (0.01) -- Net asset value, end of period $ 21.31 $ 14.85 $ 12.02 Total return++ 43.90% 23.55% 20.20% ======================================================================================================= Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $305,607 $99,257 $7,907 Ratio of operating expenses to average net assets 2.23%(a) 2.25%(a) 2.09%+(a) Ratio of net investment income/(loss) to average net assets (1.37)% (0.95)% (0.62)%+ Portfolio turnover rate 55%(b) 150% 22% Ratio of operating expenses to average net assets without waivers and/or expense reimbursements 2.23%(a) 2.25%(a) 2.97%+(a)
* Nations Marsico Growth & Income Fund Investor B Shares commenced operations on December 31, 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 shares method. (a) The effect of the custodial expense offset on the operating expense ratio, with and without waivers and/or expense reimbursements, was less than 0.01%. (b) Amount represents results prior to conversion to a master-feeder structure. 58
Nations Marsico Growth & Income Fund For a Share outstanding throughout each period Year ended Year ended Period ended Investor C Shares 03/31/00 03/31/99# 03/31/98*# Operating performance: Net asset value, beginning of period $ 14.86 $ 12.02 $ 10.00 Net investment income (0.25) (0.12) (0.02) Net realized and unrealized gain on investments 6.77 2.97 2.04 Net increase in net asset value from operations 6.52 2.85 2.02 Distributions: Dividends from net investment income -- -- -- Distributions from net realized capital gains (0.04) (0.01) -- Total dividends and distributions (0.04) (0.01) -- Net asset value, end of period $ 21.34 $ 14.86 $ 12.02 Total return++ 43.93% 23.63% 20.20% ========================================================================================================= Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $34,785 $3,233 $ 518 Ratio of operating expenses to average net assets 2.23%(a) 2.25%(a) 2.09%+(a) Ratio of net investment income/(loss) to average net assets (1.37)% (0.95)% (0.62)%+ Portfolio turnover rate 55%(b) 150% 22% Ratio of operating expenses to average net asset without waivers and/or expense reimbursements 2.23%(a) 2.25%(a) 2.97%+(a)
* Nations Marsico Growth & Income Fund Investor C Shares commenced operations on December 31, 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 shares method. (a) The effect of the custodial expense offset on the operating expense ratio, with and without waivers and/or expense reimbursements, was less than 0.01%. (b) Amount represents results prior to conversion to a master-feeder structure.
Nations Marsico Focused Equities Fund For a Share outstanding throughout each period Year ended Year ended Period ended Investor A Shares 03/31/00# 03/31/99# 03/31/98*# Operating performance: Net asset value, beginning of period $ 16.73 $ 12.14 $ 10.00 Net investment income/(loss) (0.03) (0.04) (0.01) Net realized and unrealized gain on investments 6.09 4.64 2.15 Net increase in net asset value from operations 6.06 4.60 2.14 Distributions: Dividends from net investment income -- -- -- Distributions from net realized capital gains (0.23) (0.01) -- Total dividends and distributions (0.23) (0.01) -- Net asset value, end of period $ 22.56 $ 16.73 $ 12.14 Total return++ 36.62% 37.94% 21.40% ======================================================================================================== Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $690,166 $238,137 $6,056 Ratio of operating expenses to average net assets 1.41%(a) 1.31%(a) 1.77%+(a) Ratio of net investment income/(loss) to average net assets (0.60)% (0.20)% (0.55)%+ Portfolio turnover rate 53%(b) 177% 25% Ratio of operating expenses to average net assets without waivers and/or expense reimbursements 1.41%(a) 1.31%(a) 1.77%+(a)
* Nations Marsico Focused Equities Fund Investor A Shares commenced operations on December 31, 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 shares method. (a) The effect of the custodial expense offset on the operating expense ratio, with and without waivers and/or expense reimbursements, was less than 0.01%. (b) Amount represents results prior to conversion to a master-feeder structure. 59
Nations Marsico Focused Equities Fund For a Share outstanding throughout each period Year ended Year ended Period ended Investor B Shares 03/31/00# 03/31/99# 03/31/98*# Operating performance: Net asset value, beginning of period $ 16.62 $ 12.13 $ 10.00 Net investment income/(loss) (0.09) (0.12) (0.04) Net realized and unrealized gain on investments 5.96 4.62 2.17 Net increase in net asset value from operations 5.87 4.50 2.13 Distributions: Dividends from net investment income -- -- -- Distributions from net realized capital gains (0.23) (0.01) -- Total dividends and distributions (0.23) (0.01) -- Net asset value, end of period $ 22.26 $ 16.62 $ 12.13 Total return ++ 35.71% 37.15% 21.30% ========================================================================================================== Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $1,003,840 $306,365 $20,446 Ratio of operating expenses to average net assets 2.16%(a) 2.06%(a) 2.52%+(a) Ratio of net investment income/(loss) to average net assets (1.35)% (0.95)% (1.30)%+ Portfolio turnover rate 53%(b) 177% 25% Ratio of operating expenses to average net assets without waivers and/or expense reimbursements 2.16%(a) 2.06%(a) 2.52%+(a)
* Nations Marsico Focused Equities Fund Investor B Shares commenced operations on December 31, 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 shares method. (a) The effect of the custodial expense offset on the operating expense ratio, with and without waivers and/or expense reimbursements, was less than 0.01%. (b) Amount represents results prior to conversion to a master-feeder structure. 60
Nations Marsico Focused Equities Fund For a Share outstanding throughout each period Year ended Year ended Period ended Investor C Shares 03/31/00# 03/31/99# 03/31/98*# Operating performance: Net asset value, beginning of period $ 16.67 $ 12.13 $ 10.00 Net investment income/(loss) (0.08) (0.14) (0.04) Net realized and unrealized gain on investments 5.97 4.69 2.17 Net increase in net asset value from operations 5.89 4.55 2.13 Distributions: Dividends from net investment income -- -- -- Distributions from net realized capital gains (0.23) (0.01) -- Total dividends and distributions (0.23) (0.01) -- Net asset value, end of period $ 22.33 $ 16.67 $ 12.13 Total return++ 35.72% 37.56% 21.30% ========================================================================================================= Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $247,509 $13,682 $ 469 Ratio of operating expenses to average net assets 2.16%(a) 2.06%(a) 2.52%+(a) Ratio of net investment income/(loss) to average net assets (1.35)% (0.95)% (1.30)%+ Portfolio turnover rate 53%(b) 177% 25% Ratio of operating expenses to average net assets without waivers and/or expense reimbursements 2.16%(a) 2.06%(a) 2.52%+(a)
* Nations Marsico Focused Equities Fund Investor C Shares commenced operations on December 31, 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 charge. # Per share net investment income has been calculated using the monthly average shares method. (a) The effect of the custodial expense offset on the operating expense ratio, with and without waivers and/or expense reimbursements, was less than 0.01%. (b) Amount represents results prior to conversion to a master-feeder structure.
Nations Government Securities Fund For a Share outstanding throughout each period Year ended Year ended Investor A Shares 03/31/00 03/31/99# Operating performance: Net asset value, beginning of period $ 9.86 $ 9.90 Net investment income 0.57 0.56 Net realized and unrealized gain/(loss) on investments (0.50) (0.05) Net increase/(decrease) in net asset value from operations 0.07 0.51 Distributions: Dividends from net investment income (0.56) (0.55) Distributions in excess of net investment income -- -- Distributions from capital -- -- Total dividends and distributions (0.56) (0.55) Net asset value, end of period $ 9.37 $ 9.86 Total return++ 0.80% 5.16% ==================================================================================== Ratios to average net assets/ supplemental data: Net assets, end of period (in 000's) $57,485 $19,167 Ratio of operating expenses to average net assets 1.03%(c) 0.98%(d) Ratio of net investment income to average net assets 5.92% 5.45% Portfolio turnover rate 348% 600% Ratio of operating expenses to average net assets without waivers and/or expense reimbursements 1.15% 1.09%(d) Investor A Shares Year ended Year ended Period ended Year ended 03/31/98 03/31/97# 03/31/96(a)# 05/31/95# Operating performance: Net asset value, beginning of period $ 9.39 $ 9.67 $ 9.86 $ 9.80 Net investment income 0.52 0.58 0.50 0.61 Net realized and unrealized gain/(loss) on investments 0.51 (0.30) (0.19) 0.06 Net increase/(decrease) in net asset value from operations 1.03 0.28 0.31 0.67 Distributions: Dividends from net investment income (0.52) (0.56) (0.48) (0.57) Distributions in excess of net investment income -- -- (0.02) -- Distributions from capital -- (0.00)(b) -- (0.04) Total dividends and distributions (0.52) (0.56) (0.50) (0.61) Net asset value, end of period $ 9.90 $ 9.39 $ 9.67 $ 9.86 Total return++ 11.37% 2.92% 3.20% 7.29% ========================================================================================================================= Ratios to average net assets/ supplemental data: Net assets, end of period (in 000's) $8,509 $9,852 $11,662 $10,928 Ratio of operating expenses to average net assets 1.10%(c)(d) 1.05% 1.05%+ 1.01% Ratio of net investment income to average net assets 5.38% 6.03% 6.11%+ 6.44% Portfolio turnover rate 303% 468% 199% 413% Ratio of operating expenses to average net assets without waivers and/or expense reimbursements 1.24%(d) 1.19% 1.20%+ 1.19%
+ 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 shares method. (a) Fiscal year ended changed to March 31. Prior to this, the fiscal year ended was May 31. (b) Amount represents less than $0.01. (c) The effect of interest expense on the operating expense ratio was less than 0.01%. (d) The effect of the custodial expense offset on the operating expense ratio, with and without waivers and/or expense reimbursements, was less than 0.01%. 61
Nations Government Securities Fund For a Share outstanding throughout each period Year ended Year ended Investor B Shares* 03/31/00 03/31/99# Operating performance: Net asset value, beginning of period $ 9.86 $ 9.90 Net investment income 0.49 0.49 Net realized and unrealized gain/(loss) on investments (0.48) (0.04) Net increase/(decrease) in net asset value from operations 0.01 0.45 Distributions: Dividends from net investment income (0.49) (0.49) Distributions in excess of net investment income -- -- Distributions from capital -- -- Total dividends and distributions (0.49) (0.49) Net asset value, end of period $ 9.38 $ 9.86 Total return++ 0.22% 4.53% ==================================================================================== Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $26,988 $30,109 Ratio of operating expenses to average net assets 1.72%(c) 1.58%(d) Ratio of net investment income to average net assets 5.23% 4.85% Portfolio turnover rate 348% 600% Ratio of operating expenses to average net assets without waivers and/or expense reimbursements 1.90% 1.84%(d) Investor B Shares* Year ended Year ended Period ended Year ended 03/31/98 03/31/97# 03/31/96(a)# 05/31/95# Operating performance: Net asset value, beginning of period $ 9.39 $ 9.67 $ 9.86 $ 9.80 Net investment income 0.47 0.54 0.47 0.58 Net realized and unrealized gain/(loss) on investments 0.51 (0.30) (0.19) 0.06 Net increase/(decrease) in net asset value from operations 0.98 0.24 0.28 0.64 Distributions: Dividends from net investment income (0.47) (0.52) (0.45) (0.54) Distributions in excess of net investment income -- -- (0.02) -- Distributions from capital -- (0.00)(b) -- (0.04) Total dividends and distributions (0.47) (0.52) (0.47) (0.58) Net asset value, end of period $ 9.90 $ 9.39 $ 9.67 $ 9.86 Total return++ 10.78% 2.51% 2.85% 6.86% ===================================================================================================================== Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $32,391 $38,807 $50,958 $56,155 Ratio of operating expenses to average net assets 1.63%(c)(d) 1.45% 1.45%+ 1.41% Ratio of net investment income to average net assets 4.85% 5.63% 5.71%+ 6.04% Portfolio turnover rate 303% 468% 199% 413% Ratio of operating expenses to average net assets without waivers and/or expense reimbursements 1.77%(d) 1.59% 1.60%+ 1.59%
+ 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 shares method. (a) Fiscal year end changed to March 31. Prior to this, the fiscal year end was May 31. (b) Amount represents less than $0.01. (c) The effect of interest expense on the operating expense ratio was less than 0.01%. (d) The effect of the custodial expense offset on the operating expense ratio, with and without waivers and/or expense reimbursements, was less than 0.01%.
Nations Government Securities Fund For a Share outstanding throughout each period Year ended Year ended Investor C Shares 03/31/00 03/31/99# Operating performance: Net asset value, beginning of period $ 9.86 $ 9.90 Net investment income 0.49 0.49 Net realized and unrealized gain/(loss) on investments (0.52) (0.04) Net increase/(decrease) in net asset value from operations (0.03) 0.45 Distributions: Dividends from net investment income (0.49) (0.49) Distributions in excess of net investment income -- -- Distributions from capital -- -- Total dividends and distributions (0.49) (0.49) Net asset value, end of period $ 9.34 $ 9.86 Total return++ (0.22)% 4.52% ============================================================================== Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $ 238 $ 213 Ratio of operating expenses to average net assets 1.78% 1.59%(d) Ratio of net investment income to average net assets 5.17% 4.84% Portfolio turnover rate 348% 600% Ratio of operating expenses to average net assets without waivers and/or expense reimbursements 1.90% 1.84%(d) Investor C Shares Year ended Year ended Period ended Year ended 03/31/98 03/31/97# 03/31/96(a)# 05/31/95# Operating performance: Net asset value, beginning of period $ 9.39 $ 9.67 $ 9.86 $ 9.80 Net investment income 0.48 0.55 0.47 0.57 Net realized and unrealized gain/(loss) on investments 0.51 (0.30) (0.19) 0.06 Net increase/(decrease) in net asset value from operations 0.99 0.25 0.28 0.63 Distributions: Dividends from net investment income (0.48) (0.53) (0.45) (0.53) Distributions in excess of net investment income -- -- (0.02) -- Distributions from capital -- (0.00)(b) -- (0.04) Total dividends and distributions (0.48) (0.53) (0.47) (0.57) Net asset value, end of period $ 9.90 $ 9.39 $ 9.67 $ 9.86 Total return++ 10.84% 2.67% 2.83% 6.76% ======================================================================================================================= Ratios to average net assets/supplemental data: Net assets, end of period (in 000's) $ 735 $1,835 $2,558 $2,945 Ratio of operating expenses to average net assets 1.58%(c)(d) 1.30% 1.48%+ 1.51% Ratio of net investment income to average net assets 4.90% 5.78% 5.68%+ 5.94% Portfolio turnover rate 303% 468% 199% 413% Ratio of operating expenses to average net assets without waivers and/or expense reimbursements 1.72%(d) 1.44% 1.63%+ 1.69%
+ 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 shares method. (a) Fiscal year end changed to March 31. Prior to this, the fiscal year end was May 31. (b) Amount represents less than $0.01. (c) The effect of interest expense on the operating expense ratio was less than 0.01%. (d) The effect of the custodial expense offset on the operating expense ratio, with and without waivers and/or expense reimbursements, was less than 0.01%. 62 [GRAPHIC] This glossary includes explanations of the important terms that may be used in this prospectus. Some of the terms explained may apply to Nations Funds not included in this prospectus. [GRAPHIC] Terms used in this prospectus Asset-backed security - a debt security that gives you an interest in a pool of assets that is collateralized or "backed" by one or more kinds of assets, including real property, receivables or mortgages, generally issued by banks, credit card companies or other lenders. Some securities may be issued or guaranteed by the U.S. government or its agencies, authorities or instrumentalities. Asset-backed securities typically make periodic payments, which may be interest or a combination of interest and a portion of the principal of the underlying assets. 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. 63 Corporate obligation - a money market instrument issued by a corporation or commercial bank. Crossing networks - an electronic system where anonymous parties can match buy and sell transactions. These transactions don't affect the market, and transaction costs are extremely low. CS First Boston High Yield Index - the Credit Suisse First Boston Global High Yield Index is an unmanaged, trader priced portfolio constructed to mirror the high yield debt market. The index is not available for investment. Debt security - when you invest in a debt security, you are typically lending your money to a governmental body or company (the issuer) to help fund their operations or major projects. The issuer pays interest at a specified rate on a specified date or dates, and repays the principal when the security matures. Short-term debt securities include money market instruments such as treasury bills. Long-term debt securities include fixed income securities such as government and corporate bonds, and mortgage-backed and asset-backed securities. Depositary receipts - evidence of the deposit of a security with a custodian bank. American Depositary Receipts (ADRs), for example, are certificates traded in U.S. markets representing an interest of a foreign company. They were created to make it possible for foreign issuers to meet U.S. security registration requirements. Other examples include ADSs, GDRs and EDRs. Dividend yield - rate of return of dividends paid on a common or preferred stock. It equals the amount of the annual dividend on a stock expressed as a percentage of the stock's current market value. Dollar roll transaction - the sale by a Fund of mortgage-backed or other asset-backed securities, together with a commitment to buy similar, but not identical, securities at a future date. Duration - a security's or portfolio's sensitivity to changes in interest rates. For example, if interest rates rise by one percentage point, the share price of a fund with a duration of five years would decline by about 5%. If interest rates fall by one percentage point, the fund's share price would rise by about 5%. Equity security - an investment that gives you an equity ownership right in a company. Equity securities (or "equities") include common and preferred stock, rights and warrants. First Boston Convertible Index - a widely-used unmanaged index that measures the performance of convertible securities. The index is not available for investment. First-tier security - under Rule 2a-7 under the 1940 Act, a debt security that is an eligible investment for money market funds and has the highest short-term rating from a nationally recognized statistical rating organization (NRSRO), or if unrated, is determined by the fund's portfolio management team to be of 64 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. Forward foreign currency contracts - a forward foreign currency contract includes an obligation to purchase or sell a foreign currency at a specified future date. 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 - includes municipal securities that are rated in the top two highest short-term debt categories according to NRSROs such as S&P and Moody's. The portfolio management team may consider an unrated municipal security if it is determined to be of comparable quality, based upon guidelines approved by the Fund's Board of Trustees. Please see the SAI for more information about credit ratings. High-yield debt security - debt securities that, at the time of investment by the sub-adviser, are rated "BB" or below by S&P or "Ba" or below by Moody's, or that are unrated and determined to be of comparable quality. Interest rate swap - an agreement between two parties to exchange periodic interest payments based on some predetermined dollar principal. 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. 65 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 indices 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. 66 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 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. Options - An option is the right to buy or sell a security based on an agreed upon price at a specified time. For example, an option may give the holder of a stock the right to sell the stock to another party, allowing the seller to profit if the price has fallen below the agreed price. Options may also be based on the movement of an index such as the S&P 500. 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. 67 Private placement - a private placement is the sale of stocks, bonds or other investments directly to a qualified investor without having to register the offering with the U.S. Securities and Exchange Commission or other comparable foreign regulatory authorities. Qualified investors are typically large institutional investors rather than individuals. Securities acquired through private placements generally may not be resold. Quantitative analysis - an analysis of financial information about a company or security to identify securities that have the potential for growth or are otherwise suitable for a fund to buy. 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 1000 Growth Index - an unmanaged index which measures the performance of the largest U.S. companies based on total market capitalization, with high price-to-book ratios and forecasted growth rates relative to the Russell 1000 Index as a whole. Russell 2000 - an unmanaged index of 2,000 of the smallest stocks representing approximately 11% of the U.S. equity market. The index is weighted by market capitalization, and is not available for investment. S&P 500(1) - Standard & Poor's 500 Composite Stock Price Index, an unmanaged index of 500 widely held common stocks. It is not available for investment. S&P 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. 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. 68 S&P SmallCap 600(1) - Standard & Poor's SmallCap 600 Index, an unmanaged index of 600 common stocks, weighted by market capitalization. It is not available for investment. S&P SuperComposite 1500(1) - an index created by Standard & Poors combining the companies represented in three other indices -- the S&P 500, MidCap 400, and SmallCap 600. The index represents 87% of the total capitalization of U.S. equity markets. Salomon Brothers Mortgage Index - an index of 30-year and 15-year GNMA, FNMA and FHLMC securities, and FNMA and FHLMC balloon mortgages. Second-tier security - under Rule 2a-7 under the 1940 Act, a debt security that is an eligible investment for money market funds, but is not a first-tier security. Senior security - a debt security that allows holders to receive their share of a company's remaining assets in a bankruptcy before other bondholders, creditors, and common and preferred shareholders. 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 has not reviewed any stock included in the S&P SuperComposite 1500, S&P 500, S&P SmallCap 600, or S&P MidCap 400 Index for its investment merit. S&P determines and calculates its indices independently of the Funds and is not a sponsor or affiliate of the Funds. S&P gives no information and makes no statements about the suitability of investing in the Funds or the ability of its indices to track stock market performance. S&P makes no guarantees about the indices, any data included in them and the suitability of the indices or its data for any purpose. "Standard and Poor's," "S&P 500" and "S&P 600" are trademarks of The McGraw-Hill Companies, Inc. 69 [GRAPHIC] Where to find more information You'll find more information about the Domestic Stock and Government & Corporate Bond Funds in the following documents: Annual and semi-annual reports The annual and semi-annual reports contain information about Fund investments and performance, the financial statements and the independent accountants' reports. The annual report also includes a discussion about the market conditions and investment strategies that had a significant effect on each Fund's performance during the period covered. [GRAPHIC] Statement of Additional Information The SAI contains additional information about the Funds and their policies. The SAI is legally part of this prospectus (it's incorporated by reference). A copy has been filed with the SEC. You can obtain a free copy of these documents, request other information about the Funds and make shareholder inquiries by contacting Nations Funds: By telephone: 1.800.321.7854 By mail: Nations Funds c/o Stephens Inc. One Bank of America Plaza 33rd Floor Charlotte, NC 28255 On the Internet: www.nations-funds.com Information about the Funds can be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-202-942-8090. The reports and other information about the Funds are available on the EDGAR Database on the SEC's Internet site at http://www.sec.gov, and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Section, Washington, D.C. 20549-0102. SEC file numbers: Nations Funds Trust, 811-09645 COMBOPROIX-10/00 [GRAPHIC] NATIONS FUNDS NATIONS LIFEGOAL FUNDS, INC. Statement of Additional Information NATIONS LIFEGOAL GROWTH PORTFOLIO NATIONS LIFEGOAL BALANCED GROWTH PORTFOLIO NATIONS LIFEGOAL INCOME AND GROWTH PORTFOLIO Primary A, Primary B, Investor A, Investor B and Investor C Shares June 8, 2001 This Statement of Additional Information ("SAI") provides supplementary information pertaining to shares representing interests in the above listed three investment portfolios of Nations Funds Trust (individually, a "LifeGoal Portfolio" and collectively, the "LifeGoal Portfolios"). This SAI is not a prospectus and should be read only in conjunction with the current prospectuses for the aforementioned LifeGoal Portfolios related to the class or series of shares in which one is interested, dated June 8, 2001, for the Primary A, Primary B, Investor A, Investor B and Investor C Shares (each a "Prospectus"). All terms used in this SAI that are defined in the Prospectuses will have the same meanings assigned in the Prospectuses. The financial statements for the LifeGoal Portfolios contained in their annual reports dated March 31, 2001, are hereby incorporated into this SAI by reference. Copies of the Prospectuses and Annual Reports for the LifeGoal Portfolios may be obtained without charge by writing Nations Funds c/o Stephens Inc., One Bank of America Plaza, 33rd Floor, Charlotte, North Carolina 28255, or by calling Nations Funds at 1-800-982-2271. i TABLE OF CONTENTS
Page HISTORY OF THE COMPANY...................................................... 1 DESCRIPTION OF THE COMPANY AND THE LIFEGOAL PORTFOLIOS ..................... 1 General............................................................. 1 Investment Limitations ............................................. 2 ADDITIONAL INFORMATION ABOUT THE UNDERLYING NATIONS FUNDS................... 4 Permissible Fund Investments........................................ 4 Asset-Backed Securities............................................. 7 Borrowings.......................................................... 11 Commercial Instruments.............................................. 12 Combined Transactions............................................... 13 Convertible Securities.............................................. 13 Corporate Debt Securities........................................... 14 Custodial Receipts.................................................. 14 Currency Swaps...................................................... 14 Delayed Delivery Transactions....................................... 15 Dollar Roll Transactions ........................................... 15 Equity Swap Contracts .............................................. 15 Foreign Currency Transactions ...................................... 16 Futures, Options and Other Derivative Instruments................................................... 17 Risk Factors Associated with Futures and Options Transactions....... 23 Guaranteed Investment Contracts..................................... 33 Insured Municipal Securities ....................................... 33 Interest Rate Transactions ......................................... 33 Lower Rated Debt Securities......................................... 34 Municipal Securities ............................................... 35 Options on Currencies............................................... 38 Other Investment Companies.......................................... 38 Participation Interests and Company Receipts........................ 38 Real Estate Investment Trusts....................................... 38 Repurchase Agreements .............................................. 39 Reverse Repurchase Agreements ...................................... 39 Securities Lending.................................................. 39 Short Sales......................................................... 39 Special Situations.................................................. 40 Stand-By Commitments ............................................... 40 Stripped Securities................................................. 41 U.S. and Foreign Bank Obligations................................... 41 U.S. Government Obligations......................................... 42 Use of Segregated and Other Special Accounts........................ 42 Variable and Floating Rate Instruments ............................. 43 Warrants............................................................ 43 When-Issued Purchases and Forward Commitments ..................... 44 Portfolio Turnover.................................................. 44 Investment Risks.................................................... 44 MANAGEMENT OF THE COMPANY................................................... 46 Nations Funds Retirement Plan....................................... 50 Nations Funds Deferred Compensation Plan............................ 50 Compensation Table.................................................. 51
ii
INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY, TRANSFER AGENCY, OTHER SERVICE PROVIDERS, SHAREHOLDER SERVICING AND DISTRIBUTION ARRANGEMENTS.............................................................. 53 Investment Adviser and Sub-Adviser of the LifeGoal Portfolios.................. 53 Investment Adviser and Sub-Adviser of the Underlying Nations Funds............. 55 Administrator, Co-Administrator and Sub-Administrator.......................... 57 Distributor.................................................................... 60 Distribution Plans and Shareholder Servicing Arrangements for Investor Shares.. 60 Information Applicable to Investor A, Investor B and Investor C Shares......... 63 Shareholder Administration Plan (Primary B Shares)............................. 64 Expenses....................................................................... 65 Transfer Agents and Custodian.................................................. 67 Independent Accountants and Reports............................................ 67 Counsel........................................................................ 67 DESCRIPTION OF SHARES.................................................................. 67 Net Asset Value Determination.................................................. 69 Exchanges...................................................................... 70 Dividends and Distributions.................................................... 70 ADDITIONAL INFORMATION CONCERNING TAXES................................................ 71 General........................................................................ 71 Excise Tax .................................................................... 71 Taxation of Investments of a Regulated Investment Company...................... 72 Capital Gain Distributions..................................................... 73 Other Distributions............................................................ 73 Disposition of Fund Shares..................................................... 73 Federal Income Tax Rates....................................................... 74 Backup Withholding............................................................. 74 Corporate Shareholders and Dividends Received Deduction........................ 74 Foreign Shareholders........................................................... 75 New Regulations................................................................ 75 Foreign Taxes.................................................................. 75 Other Matters.................................................................. 75 SECURITY HOLDERS....................................................................... 75 ADDITIONAL INFORMATION ON PERFORMANCE.................................................. 77 Yield Calculations............................................................. 78 Total Return Calculations...................................................... 78 SCHEDULE A - Description of Ratings.................................................... A-1
iii HISTORY OF THE COMPANY Nations Funds Trust ("NFST" or the "Company") is an open-end registered investment company in the Nations Funds family of mutual funds (the "Nations Funds Family"), which consists of Nations Fund Inc., Nations Reserves, Nations Fund Trust, Nations Annuity Trust, Nations Funds Trust and Nations Master Investment Trust. The Nations Funds Family currently has more than 70 distinct investment portfolios and total assets in excess of $90 billion. NFST was organized as a Delaware business trust on October 22, 1999. NFST has a fiscal year end of March 31. DESCRIPTION OF THE COMPANY AND THE LIFEGOAL PORTFOLIOS General NFST currently consists of twelve different investment portfolios. This SAI pertains to the shares of Nations LifeGoal Growth Portfolio, Nations LifeGoal Balanced Growth Portfolio and Nations LifeGoal Income and Growth Portfolio. The Primary A and Primary B Shares are collectively referred to herein as "Primary Shares" and the Investor A, Investor B and Investor C Shares are collectively referred to as "Investor Shares". All of the Funds of NFST are diversified. Each share of NFST is without par value, represents an equal proportionate interest in the related fund with other shares of the same class, and is entitled to such dividends and distributions out of the income earned on the assets belonging to such fund as are declared in the discretion of NFST's Board of Trustees. NFST's Declaration of Trust authorizes the Board of Trustees to classify or reclassify any class of shares into one or more series of shares. Shareholders are entitled to one vote for each full share held and a proportionate fractional vote for each fractional share held. Shareholders of each Fund of NFST will vote in the aggregate and not by fund, and shareholders of each fund will vote in the aggregate and not by class except as otherwise expressly required by law or when the Board of Trustees determines that the matter to be voted on affects only the interests of shareholders of a particular fund or class. See the discussion on Investment Limitations and Description of Shares for examples of when the 1940 Act requires voting by fund. The Declaration of Trust of NFST further provides that NFST shareholders are only given the right to vote on matters to the extent that the 1940 Act or Delaware law so requires. Additionally, the Declaration of Trust provides as follows: "Because this Declaration does not confer any independent voting rights to Shareholders not expressly granted under Delaware law or the 1940 Act, this Declaration may be amended without Shareholder approval, and all Shareholders purchase Shares with notice that it may be so amended unless expressly required under Delaware law or the 1940 Act. The Trustees may, without any Shareholder vote, amend or otherwise supplement this Declaration by making an amendment, a trust instrument supplemental hereto or an amended and restated declaration of trust; provided, that Shareholders shall have the right to vote on any amendment if expressly required under Delaware law or the 1940 Act, or submitted to them by the Trustees in their discretion." As of the date of the SAI set forth on the cover page, Bank of America and its affiliates possessed or shared power to dispose or vote with respect to more than 25% of the outstanding shares of NFST and therefore could be considered to be a controlling person of NFST for purposes of the 1940 Act. For more detailed information concerning the percentage of each class or series of shares over which Bank of America and its affiliates possessed or shared power to dispose or vote as of a certain date, see the discussion on Certain Record Holders. NFST does not presently intend to hold annual meetings except as required by the 1940 Act. Banc of America Advisors, Inc. ("BAAI") is the investment adviser to the LifeGoal Portfolios. Banc of America Capital Management, Inc. ("BACAP") is investment Sub-adviser to the LifeGoal Portfolios. As used herein the term "Adviser" shall mean BAAI, or BACAP as the context may require. This SAI is intended to furnish prospective investors with additional information concerning NFST and the LifeGoal Portfolios. Some of the information required to be in this SAI is also included in the LifeGoal Portfolios' current Prospectuses, and, in order to avoid repetition, reference will be made to sections of the Prospectuses. Additionally, the Prospectuses and this SAI omit certain information contained in the registration statement filed with the United States Securities and Exchange Commission (the "SEC"). Copies of the registration statement, including items omitted from the Prospectuses and this SAI, may be obtained from the SEC by paying the charges prescribed under its rules and regulations. No investment in the LifeGoal Portfolios' Shares should be made without first reading the related Prospectuses. 1 Investment Limitations Information concerning a LifeGoal Portfolio's investment objective is set forth in the applicable Prospectus. There can be no assurance that the LifeGoal Portfolios will achieve their objectives. The features of the LifeGoal Portfolios' principal investment strategies and the principal risks associated with those investment strategies also are discussed in the Prospectuses. The fundamental and non-fundamental investment restrictions applicable to the LifeGoal Portfolios' investment programs are set forth below. The investment limitations that are matters of fundamental policy may not be changed without the affirmative vote of a LifeGoal Portfolio's shareholders. The investment limitations that are matters of non-fundamental policy may be changed without the affirmative vote of a LifeGoal Portfolio's shareholders. In addition to the policies outlined below, each LifeGoal Portfolio is seeking or has obtained permission from the SEC to invest in other Funds in the Nations Funds Family. NFST's Fundamental Policy Restrictions Each LifeGoal Portfolio may not: 1. Underwrite any issue of securities within the meaning of the 1933 Act except when it might technically be deemed to be an underwriter either (a) in connection with the disposition of a portfolio security, or (b) in connection with the purchase of securities directly from the issuer thereof in accordance with its investment objective. This restriction shall not limit the LifeGoal Portfolio's ability to invest in securities issued by other registered investment companies. 2. Purchase or sell real estate, except a LifeGoal Portfolio may purchase securities of issuers which deal or invest in real estate and may purchase securities which are secured by real estate or interests in real estate. 3. Purchase or sell commodities, except that a LifeGoal Portfolio may to the extent consistent with its investment objective, invest in securities of companies that purchase or sell commodities or which invest in such programs, and purchase and sell options, forward contracts, futures contracts, and options on futures contracts. This limitation does not apply to foreign currency transactions including without limitation forward currency contracts. 4. Purchase any securities which would cause 25% or more of the value of its total assets at the time of purchase to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that: (a) there is no limitation with respect to obligations issued or guaranteed by the U.S. Government, any state or territory of the United States, or any of their agencies, instrumentalities or political subdivisions, and (b) notwithstanding this limitation or any other fundamental investment limitation, assets may be invested in the securities of one or more management investment companies to the extent permitted by the 1940 Act, the rules and regulations thereunder and any exemptive relief obtained by the Funds. 5. Make loans, except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any exemptive relief obtained by the LifeGoal Portfolios. 6. Borrow money or issue senior securities except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any exemptive relief obtained by the Funds. 7. Purchase securities (except securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities) of any one issuer if, as a result, more than 5% of its total assets will be invested in the securities of such issuer or it would own more than 10% of the voting securities of such issuer, except that (a) up to 25% of its total assets may be invested without regard to these limitations and (b) a LifeGoal's assets may be invested in the securities of one or more management investment companies to the extent permitted by the 1940 Act, the rules and regulations thereunder and any exemptive relief obtained by the LifeGoal. 2 NFST's Non-Fundamental Policy Restrictions Each LifeGoal Portfolio may: 1. Invest in shares of other open-end management investment companies, subject to the limitations of the 1940 Act, the rules thereunder, and any orders obtained thereunder now or in the future. LifeGoal Portfolios in a master/feeder structure generally invest in the securities of one or more open-end management investment companies pursuant to various provisions of the 1940 Act. 2. Not invest or hold more than 15% (10% in the case of a money market fund) of the LifeGoal Portfolio's net assets in illiquid securities. For this purpose, illiquid securities include, among others, (a) securities that are illiquid by virtue of the absence of a readily available market or legal or contractual restrictions on resale, (b) fixed time deposits that are subject to withdrawal penalties and that have maturities of more than seven days, and (c) repurchase agreements not terminable within seven days. 3. Invest in futures or options contracts regulated by the CFTC for (i) bona fide hedging purposes within the meaning of the rules of the CFTC and (ii) for other purposes if, as a result, no more than 5% of a LifeGoal's net assets would be invested in initial margin and premiums (excluding amounts "in-the-money") required to establish the contracts. A LifeGoal Portfolio (i) will not hedge more than 50% of its total assets by selling futures contracts, buying put options, and writing call options (so called "short positions"), (ii) will not buy futures contracts or write put options whose underlying value exceeds 25% of the LifeGoal Portfolio's total assets, and (iii) will not buy call options with a value exceeding 5% of the LifeGoal's total assets. 4. Lend securities from its portfolio to brokers, dealers and financial institutions, in amounts not to exceed (in the aggregate) one-third of the LifeGoal Portfolio's total assets. Any such loans of portfolio securities will be fully collateralized based on values that are marked to market daily. 5. Not make investments for the purpose of exercising control of management. (Investments by the LifeGoal Portfolio in entities created under the laws of foreign countries solely to facilitate investment in securities in that country will not be deemed the making of investments for the purpose of exercising control.) 6. Not sell securities short, unless it owns or has the right to obtain securities equivalent in kind and amount to the securities sold short (short sales "against the box"), and provided that transactions in futures contracts and options are not deemed to constitute selling securities short. Notwithstanding the foregoing restrictions, the underlying mutual funds in which LifeGoal Portfolios may invest have adopted their own investment restrictions which may be more or less restrictive than those listed above, thereby allowing a LifeGoal Portfolio to participate in certain investment strategies indirectly that are prohibited under the fundamental and non-fundamental investment restrictions listed above and in a LifeGoal Portfolio Prospectus. The investment restrictions of these underlying mutual funds are set forth in their respective statements of additional information. 3 ADDITIONAL INFORMATION ABOUT THE UNDERLYING NATIONS FUNDS Permissible Fund Investments In addition to the principal investment strategies for each underlying Nations Fund (each a "Fund"), which are outlined in such Funds' prospectuses, each Fund also may invest in other types of securities in percentages of less than 10% of its total assets (unless otherwise indicated, e.g., most Funds may invest in money market instruments without limit during temporary defensive periods). These types of securities are listed below for each portfolio and then are described in more detail after this sub-section. Nations Intermediate Bond Fund (the "Intermediate Bond Fund"), Nations Blue Chip Fund (the "Blue Chip Fund"), Nations Marsico Focused Equities Fund (the "Marsico Focused Equities Fund"), Nations International Equity Fund (the "International Equity Fund"), Nations High Yield Bond Fund (the "High Yield Bond Fund"), Nations International Value Fund (the "International Value Fund") and Nations Marsico International Opportunities Fund (the "Marsico International Opportunities Fund") are sometimes referred to herein as "Feeder Funds." The Feeder Funds seek to achieve their respective investment objectives by investing substantially all of their assets in diversified investment portfolios having the same investment objective as corresponding master portfolios (each a "Master Portfolio" and collectively, the "Master Portfolios") of Nations Master Investment Trust ("NMIT"), an open-end management investment company in the Nations Funds Family. The Intermediate Bond Fund invests substantially all of its assets in Nations Intermediate Bond Master Portfolio (the "Intermediate Bond Master Portfolio"). The Blue Chip Fund invests substantially all of its assets in Nations Blue Chip Master Portfolio (the "Blue Chip Master Portfolio"). The Marsico Focused Equities Fund invests substantially all of its assets in Nations Marsico Focused Equities Master Portfolio (the "Marsico Focused Equities Master Portfolio"). The International Equity Fund invests substantially all of its assets in Nations International Equity Master Portfolio (the "International Equity Master Portfolio"). The High Yield Bond Fund invests substantially all of its assets in Nations High Yield Bond Master Portfolio (the "High Yield Bond Master Portfolio"). The International Value Fund invests substantially all of its assets in Nations International Value Master Portfolio (the "International Value Master Portfolio"). The Marsico International Opportunities Fund invests substantially all of its assets in Nations Marsico International Opportunities LifeGoal Portfolio (the "Marsico International Opportunities Master Portfolio"). The Domestic Stock Funds Nations Value Fund (the "Value Fund"): In addition to the types of securities described in its Prospectus, the Fund may invest in: U.S. Treasury bills, notes and bonds and other instruments issued directly by the U.S. Government ("U.S. Treasury Obligations"), other obligations issued or guaranteed as to payment of principal and interest by the U.S. Government, its agencies and instrumentalities (together with U.S. Treasury Obligations, "U.S. Government Obligations"); investment grade debt securities of domestic companies; various money market instruments and repurchase agreements. Nations MidCap Growth Fund (the "MidCap Growth Fund"): See General Section below. Nations Small Company Fund (the "Small Company Fund"): In addition to the types of securities described in the Fund's Prospectus, the Fund may invest in: debt securities, unless the Fund assumes a temporary defensive position. Debt securities, if any, purchased by the Fund will be rated "AA" or above by S&P or "Aa" or above by Moody's or, if unrated, determined by the Adviser to be of comparable quality. For temporary defensive purposes, the Fund may invest up to 100% of its assets in debt securities, including short-term and intermediate-term obligations of corporations, the U.S. and foreign governments and international organizations such as the World Bank, and money market instruments. The Fund may invest in common stocks (including convertible into common stocks) of foreign issuers and rights to purchase common stock, options and futures contracts on securities, securities indexes and foreign currencies, securities lending, forward foreign exchange contracts and repurchase agreements. Nations Strategic Growth Fund (the "Strategic Growth Fund"): In addition to the types of securities described in the Fund's Prospectus, the Fund may invest in those securities described in the general section below. 4 Marsico Focused Equities Fund and Marsico International Opportunities Fund: In addition to the types of securities described in the Fund's Prospectuses, the Master Portfolios (in which the Funds invest all of their assets) may invest in: preferred stock, warrants, convertible securities and debt securities; zero coupon, pay- in-kind and step coupon securities, and may invest without limit in indexed/structured securities. The Master Portfolios also may invest their assets in high-yield/high-risk securities, such as lower grade debt securities, high-grade commercial paper, certificates of deposit, and repurchase agreements, and may invest in short-term debt securities as a means of receiving a return on idle cash. The Master Portfolios may hold cash or cash equivalents and invest without limit in U.S. Government Obligations and short-term debt securities or money market instruments when the Adviser: (i) believes that market conditions are not favorable for profitable investing; (ii) is unable to local favorable opportunities; or (iii) determines that a temporary defensive position is advisable or necessary to meet anticipated redemption requests. In other words, the Master Portfolios do not always stay fully invested in stocks and bonds. The Master Portfolios also may use options, futures, forward currency contracts and other types of derivatives for hedging purposes or for non-hedging purposes such as seeking to enhance return. The Master Portfolios also may purchase securities on a when-issued, delayed delivery or forward commitment basis. Blue Chip Fund: In addition to the types of securities described in the Fund's Prospectus, the Blue Chip Master Portfolio (in which the Fund invests all of its assets) may invest in cash equivalents, which include the following short-term interest rate bearing instruments--obligations issued or guaranteed by the U.S. Government, its agencies and instrumentalities (some of which may be subject to repurchase agreements), certificates of deposit, bankers' acceptances, time deposits and other interest-bearing deposits issued by domestic and foreign banks and foreign branches of U.S. banks, foreign government securities and commercial papers issued by U.S. and foreign issuers which is rated at the time of purchase at least Prime-2 by Moody's or A-2 by S&P, Duff & Phelps and Fitch IBCA. For a description of ratings, see Appendix A to this SAI. The Master Portfolio also may invest in certain specified derivative securities including: exchange-traded options, over-the-counter options executed with primary dealers, including long calls and puts and covered calls to enhance return; and CFTC-approved U.S. and foreign exchange-traded financial futures and options thereon for market exposure risk-management. The Master Portfolio also may lend its portfolios securities to qualified institutional investors and may invest in repurchase agreements, restricted, private placement and other illiquid securities. It also may invest in real estate investment trust securities, securities issued by other investment companies, consistent with the Master Portfolio's investment objective and policies. General: Notwithstanding that each Domestic Stock Fund may invest in each type of security listed above in percentages of less that 10% of that Fund's total assets, each Equity Fund (except Marsico Focused Equities Fund) may invest up to 20% of its assets in foreign securities. While each Equity Fund reserves the right to so invest, investing in foreign securities is not considered a principal investment strategy of the Equity Funds. In addition each Equity Fund discussed above also may invest in certain specified derivative securities including: exchange-traded options; over-the-counter options executed with primary dealers, including long calls and puts and covered calls to enhance return; and U.S. and foreign exchange-traded financial futures approved by the Commodity Futures Trading Commission ("CFTC") and options thereon for market exposure risk management. Each Equity Fund may lend its portfolio securities to qualified institutional investors and may invest in repurchase agreements, restricted, private placement and other illiquid securities. Each Equity Fund also may invest in real estate investment trust securities. In addition, each Equity Fund may invest in securities issued by other investment companies, consistent with the Fund's investment objective and policies and repurchase agreements. The Marsico Focused Equities Fund may invest in forward foreign exchange contracts. The International Stock Funds International Equity Fund: In addition to the types of securities described in the Fund's Prospectus, the Master Portfolio (in which the Fund invests all of its assets) may invest in: real estate investment trust securities and, for temporary defensive purposes, substantially all of its assets in U.S. financial markets or U.S. dollar-denominated instruments. The Master Portfolio also may invest in convertible securities, preferred stocks, bonds, notes and other fixed-income securities, including Eurodollar and foreign government securities. 5 The International Value Fund: In addition to the types of securities described in the Fund's Prospectus, the Fund may invest in: short-term debt instruments; purchase and write covered call options on specific portfolio securities and may purchase and write put and call options on foreign stock indices listed on foreign and domestic exchanges options and futures contracts on securities, securities lending, forward foreign exchange contracts and repurchase agreements. The Master Portfolio also may invest in ADRs, GDRs, EDRs and ADSs and invest in foreign currency exchange contracts to convert foreign currencies to and from the U.S. dollar and to hedge against changes in foreign currency exchange rates. Emerging Markets Fund: In addition to the types of securities described in its Prospectus, the Fund may invest in: debt instruments; foreign investment funds or trusts, real estate investment trust securities, ADRs, GDRs, EDRs and ADSs. For temporary defensive purposes, substantially all of its assets in U.S. financial markets or U.S. dollar-denominated instruments. General: Each Fund also may invest in certain specified derivative securities including: exchange-traded options; over-the-counter options executed with primary dealers, including long calls and puts and covered calls to enhance return; and U.S. and foreign exchange-traded financial futures approved by the CFTC and options thereon for market exposure risk management. Each Fund may lend its portfolio securities to qualified institutional investors and may invest in repurchase agreements, restricted, private placement and other illiquid securities. Each International Stock Fund also may invest in real estate investment trust securities. In addition, each International Stock Fund may invest in securities issued by other investment companies, consistent with the Fund's investment objective and policies and repurchase agreements. Each Fund also may invest in forward foreign exchange contracts. Government Corporate Bond Funds Nations Short-Term Income Fund (the "Short-Term Income Fund"): In addition to the types of securities described in the Fund's Prospectus, the Fund may invest in: foreign securities, dollar-denominated debt obligations of foreign issuers, including foreign corporations and foreign governments, real estate investment trust securities, municipal securities rated by one nationally recognized statistical rating organization ("NRSRO"), or if not so rated, determined by the Adviser to be of comparable quality to instruments so rated, high quality money market instruments, repurchase agreements and cash. Nations Investment Grade Bond Fund (the "Investment Grade Bond Fund"): In addition to the types of securities described in the Fund's Prospectus, the Fund may invest in: foreign securities, corporate convertible and non-convertible debt obligations, including bonds, notes and debentures rated investment grade at the time of purchase by one of the NRSROs, or if not so rated, determined by the Adviser to be of comparable quality to instruments so rated.; 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, an real estate investment trust securities. 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. Nations Strategic Income Fund (the "Strategic Income Fund"): In addition to the types of securities described in the Fund's Prospectus, the Fund may invest in: foreign securities, asset-backed 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. High Yield Bond Fund: In addition to the types of securities described in its Prospectuses, the Master Portfolio (in which the Fund invests all of its assets) may invest in: debt securities, which include all types of debt obligations of both domestic and foreign issuers, such as bonds, debentures, notes, equipment lease certificates, equipment trust certificates, conditional sales contracts, commercial paper and U.S. government securities (including obligations, such as repurchase agreements, secured by such instruments). The debt securities in which the Master Portfolio invests may be in non-dollar denominated foreign currency and may include debt issued by countries or corporations located in emerging market countries. The Master Portfolio may invest in participation interests in loans and high yield convertible securities. Such participation interests, which may take the form of interests in, or assignments of, loans, are acquired from banks which have made loans or are members of lending syndicates. The Master Portfolio's investments in loan participation interests will be subject to its limitation on investments in illiquid securities and, to the extent applicable, its limitation on investments in securities rated below investment grade. 6 General: Each of the Government Corporate Bond Funds 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. Each of the Funds also may lend their portfolio securities to qualified institutional investors and may invest in repurchase agreements, restricted, private placement and other illiquid securities. Each of the Funds may engage in reverse repurchase agreements and in dollar roll transactions. Additionally, each Fund may purchase securities issued by other investment companies, consistent with the Funds' investment objectives and policies. The Funds 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. Money Market Fund Nations Prime Fund (the "Prime Fund"): In addition to the types of securities described in the Prospectus, the Fund may lend its portfolios securities to qualified institutional investors and may invest in reverse repurchase agreements. The Fund may also invest in securities issued by other investment companies that invest in securities consistent with the Fund's investment objective and policies. Additional information on the particular types of securities in which certain Funds may invest in is set forth below. Asset-Backed Securities In General. Asset-backed securities arise through the grouping by governmental, government-related, and private organizations of loans, receivables, or other assets originated by various lenders. Asset-backed securities consist of both mortgage- and non-mortgage-backed securities. Interests in pools of these assets may differ from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal paid at maturity or specified call dates. Conversely, asset-backed securities provide periodic payments which may consist of both interest and principal payments. The life of an asset-backed security varies depending upon the rate of the prepayment of the underlying debt instruments. The rate of such prepayments will be a function of current market interest rates, and other economic and demographic factors. For example, falling interest rates generally result in an increase in the rate of prepayments of mortgage loans while rising interest rates generally decrease the rate of prepayments. An acceleration in prepayments in response to sharply falling interest rates will shorten the security's average maturity and limit the potential appreciation in the security's value relative to a conventional debt security. Consequently, asset-backed securities may not be as effective in locking in high, long-term yields. Conversely, in periods of sharply rising rates, prepayments are generally slow, increasing the security's average life and its potential for price depreciation. Mortgage-Backed Securities. Mortgage-backed securities represent an ownership interest in a pool of mortgage loans. Mortgage pass-through securities may represent participation interests in pools of residential mortgage loans originated by U.S. governmental or private lenders and guaranteed, to the extent provided in such securities, by the U.S. Government or one of its agencies, authorities or instrumentalities. Such securities, which are ownership interests in the underlying mortgage loans, differ from conventional debt securities, which provide for periodic payment of interest in fixed amounts (usually semi-annually) and principal payments at maturity or on specified call dates. Mortgage pass-through securities provide for monthly payments that are a "pass-through" of the monthly interest and principal payments (including any prepayments) made by the individual borrowers on the pooled mortgage loans, net of any fees paid to the guarantor of such securities and the servicer of the underlying mortgage loans. 7 The guaranteed mortgage pass-through securities in which a Fund may invest may include those issued or guaranteed by Government National Mortgage Association ("Ginnie Mae" or "GNMA"), Federal National Mortgage Association ("Fannie Mae" or "FNMA") or Federal Home Loan Mortgage Corporation ("Freddie Mac" or "FHLMC"). Such Certificates are mortgage-backed securities which represent a partial ownership interest in a pool of mortgage loans issued by lenders such as mortgage bankers, commercial banks and savings and loan associations. Such mortgage loans may have fixed or adjustable rates of interest. The average life of a mortgage-backed security is likely to be substantially less than the original maturity of the mortgage pools underlying the securities. Prepayments of principal by mortgagors and mortgage foreclosures will usually result in the return of the greater part of principal invested far in advance of the maturity of the mortgages in the pool. The yield which will be earned on mortgage-backed securities may vary from their coupon rates for the following reasons: (i) Certificates may be issued at a premium or discount, rather than at par; (ii) Certificates may trade in the secondary market at a premium or discount after issuance; (iii) interest is earned and compounded monthly, which has the effect of raising the effective yield earned on the Certificates; and (iv) the actual yield of each Certificate is affected by the prepayment of mortgages included in the mortgage pool underlying the Certificates and the rate at which principal so prepaid is reinvested. In addition, prepayment of mortgages included in the mortgage pool underlying a GNMA Certificate purchased at a premium may result in a loss to the Fund. Mortgage-backed securities issued by private issuers, whether or not such obligations are subject to guarantees by the private issuer, may entail greater risk than obligations directly or indirectly guaranteed by the U.S. Government. Collateralized mortgage obligations or "CMOs" are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collateral collectively hereinafter referred to as "Mortgage Assets"). Multi-class pass-through securities are interests in a trust composed of Mortgage Assets and all references herein to CMOs will include multi-class pass-through securities. Payments of principal of and interest on the Mortgage Assets, and any reinvestment income thereon, provide the funds to pay debt service on the CMOs or make scheduled distribution on the multi-class pass-through securities. Moreover, principal prepayments on the Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates, resulting in a loss of all or part of the premium if any has been paid. Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly or semiannual basis. The principal and interest payments on the Mortgage Assets may be allocated among the various classes of CMOs in several ways. Typically, payments of principal, including any prepayments, on the underlying mortgages are applied to the classes in the order of their respective stated maturities or final distribution dates, so that no payment of principal is made on CMOs of a class until all CMOs of other classes having earlier stated maturities or final distribution dates have been paid in full. Stripped mortgage-backed securities ("SMBS") are derivative multi-class mortgage securities. A Fund will only invest in SMBS that are obligations backed by the full faith and credit of the U.S. Government. SMBS are usually structured with two classes that receive different proportions of the interest and principal distributions from a pool of mortgage assets. A Fund will only invest in SMBS whose mortgage assets are U.S. Government obligations. A common type of SMBS will be structured so that one class receives some of the interest and most of the principal from the mortgage assets, while the other class receives most of the interest and the remainder of the principal. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a Fund may fail to fully recoup its initial investment in these securities. The market value of any class which consists primarily or entirely of principal payments generally is unusually volatile in response to changes in interest rates. The average life of mortgage-backed securities varies with the maturities of the underlying mortgage instruments. The average life is likely to be substantially less than the original maturity of the mortgage pools underlying the securities as the result of mortgage prepayments, mortgage refinancings, or foreclosures. The rate of mortgage prepayments, and hence the average life of the certificates, will be a function of the level of interest rates, general economic conditions, the location and age of the mortgage and other social and demographic conditions. Such prepayments are passed through to the registered holder with the regular monthly payments of principal and interest and have the effect of reducing future payments. Estimated average life will be determined by the Adviser and used for the purpose of determining the average weighted maturity and duration of the Funds. 8 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. 9 A Fund expects that Governmental or private entities may create mortgage loan pools offering pass-through investments in addition to those described above. The mortgages underlying these securities may be alternative mortgage instruments, that is, mortgage instruments whose principal or interest payment may vary or whose terms to maturity may be shorter than previously customary. As new types of mortgage-backed securities are developed and offered to investors, certain Funds will, consistent with their investment objective and policies, consider making investments in such new types of securities. Underlying Mortgages Pools consist of whole mortgage loans or participations in loans. The majority of these loans are made to purchasers of 1-4 family homes. The terms and characteristics of the mortgage instruments are generally uniform within a pool but may vary among pools. For example, in addition to fixed-rate, fixed-term mortgages, a Fund may purchase pools of variable-rate mortgages (VRM), growing equity mortgages (GEM), graduated payment mortgages (GPM) and other types where the principal and interest payment procedures vary. VRM's are mortgages which reset the mortgage's interest rate periodically with changes in open market interest rates. To the extent that the Fund is actually invested in VRM's, the Fund's interest income will vary with changes in the applicable interest rate on pools of VRM's. GPM and GEM pools maintain constant interest rates, with varying levels of principal repayment over the life of the mortgage. These different interest and principal payment procedures should not impact the Fund's net asset value since the prices at which these securities are valued will reflect the payment procedures. All poolers apply standards for qualification to local lending institutions which originate mortgages for the pools. Poolers also establish credit standards and underwriting criteria for individual mortgages included in the pools. In addition, some mortgages included in pools are insured through private mortgage insurance companies. Average Life The average life of pass-through pools varies with the maturities of the underlying mortgage instruments. In addition, a pool's term may be shortened by unscheduled or early payments of principal and interest on the underlying mortgages. The occurrence of mortgage prepayments is affected by factors including the level of interest rates, general economic conditions, the location and age of the mortgage, and other social and demographic conditions. As prepayment rates of individual pools vary widely, it is not possible to accurately predict the average life of a particular pool. For pools of fixed-rated 30-year mortgages, common industry practice is to assume that prepayments will result in a 12-year average life. Pools of mortgages with other maturities or different characteristics will have varying assumptions for average life. Returns on Mortgage-Backed Securities 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. 10 Non-mortgage-backed securities are not issued or guaranteed by the U.S. Government or its agencies or instrumentalities; however, the payment of principal and interest on such obligations may be guaranteed up to certain amounts and for a certain time period by a letter of credit issued by a financial institution (such as a bank or insurance company) unaffiliated with the issuers of such securities. The purchase of non-mortgage-backed securities raises considerations peculiar to the financing of the instruments underlying such securities. For example, most organizations that issue asset-backed securities relating to motor vehicle installment purchase obligations perfect their interests in their respective obligations only by filing a financing statement and by having the servicer of the obligations, which is usually the originator, take custody thereof. In such circumstances, if the servicer were to sell the same obligations to another party, in violation of its duty not to do so, there is a risk that such party could acquire an interest in the obligations superior to that of the holders of the asset-backed securities. Also, although most such obligations grant a security interest in the motor vehicle being financed, in most states the security interest in a motor vehicle must be noted on the certificate of title to perfect such security interest against competing claims of other parties. Due to the larger number of vehicles involved, however, the certificate of title to each vehicle financed, pursuant to the obligations underlying the asset-backed securities, usually is not amended to reflect the assignment of the seller's security interest for the benefit of the holders of the asset-backed securities. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on those securities. In addition, various state and Federal laws give the motor vehicle owner the right to assert against the holder of the owner's obligation certain defenses such owner would have against the seller of the motor vehicle. The assertion of such defenses could reduce payments on the related asset-backed securities. Insofar as credit card receivables are concerned, credit card holders are entitled to the protection of a number of state and Federal consumer credit laws, many of which give such holders the right to set off certain amounts against balances owed on the credit card, thereby reducing the amounts paid on such receivables. In addition, unlike most other asset-backed securities, credit card receivables are unsecured obligations of the card holder. While the market for asset-backed securities is becoming increasingly liquid, the market for mortgage-backed securities issued by certain private organizations and non-mortgage-backed securities is not as well developed. As stated above, the Adviser intends to limit its purchases of mortgage-backed securities issued by certain private organizations and non-mortgage-backed securities to securities that are readily marketable at the time of purchase. Borrowings The Nations Funds Family 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 each participating Fund maintain a ratio of no less than 4 to 1 net assets (not including funds borrowed pursuant to the Agreement) to the aggregate amount of indebtedness pursuant to the Agreement. Specific borrowings by a Fund under the Agreement over the last fiscal year, if any, can be found in the Funds' Annual Reports for the year ended March 31, 2000. Commercial Instruments Commercial Instruments consist of short-term U.S. dollar-denominated obligations issued by domestic corporations or issued in the U.S. by foreign corporations and foreign commercial banks. The Prime Fund will limit purchases of commercial instruments to instruments which: (a) if rated by at least two NRSROs, are rated in the highest rating category for short-term debt obligations given by such organizations, or if only rated by one such organization, are rated in the highest rating category for short-term debt obligations given by such organization; or (b) if not rated, are (i) comparable in priority and security to a class of short-term instruments of the same issuer that has such rating(s), or (ii) of comparable quality to such instruments as determined by Nations Fund Inc.'s Board of Directors on the advice of the Adviser. 11 Investments by a Fund in commercial paper will consist of issues rated in a manner consistent with such Fund's investment policies and objectives. In addition, the Funds may acquire unrated commercial paper and corporate bonds that are determined by the Adviser at the time of purchase to be of comparable quality to rated instruments that may be acquired by such Funds as previously described. Variable-rate master demand notes are unsecured instruments that permit the indebtedness thereunder to vary and provide for periodic adjustments in the interest rate. While some of these notes are not rated by credit rating agencies, issuers of variable rate master demand notes must satisfy the Adviser that similar criteria to that set forth above with respect to the issuers of commercial paper purchasable by the Prime Fund are met. Variable-rate instruments acquired by a Fund will be rated at a level consistent with such Fund's investment objective and policies of high quality as determined by a major rating agency or, if not rated, will be of comparable quality as determined by the Adviser. See also the discussion of variable- and floating-rate instruments in this SAI. Variable- and floating-rate instruments are unsecured instruments that permit the indebtedness thereunder to vary. While there may be no active secondary market with respect to a particular variable or floating rate instrument purchased by a Fund, a Fund may, from time to time as specified in the instrument, demand payment of the principal or may resell the instrument to a third party. The absence of an active secondary market, however, could make it difficult for a Fund to dispose of an instrument if the issuer defaulted on its payment obligation or during periods when a Fund is not entitled to exercise its demand rights, and a Fund could, for these or other reasons, suffer a loss. A Fund may invest in variable and floating rate instruments only when the Adviser deems the investment to involve minimal credit risk. If such instruments are not rated, the Adviser will consider the earning power, cash flows, and other liquidity ratios of the issuers of such instruments and will continuously monitor their financial status to meet payment on demand. In determining average weighted portfolio maturity, an instrument will be deemed to have a maturity equal to the longer of the period remaining to the next interest rate adjustment or the demand notice period specified in the instrument. Certain Funds also may purchase short-term participation interests in loans extended by banks to companies, provided that both such banks and such companies meet the quality standards set forth above. In purchasing a loan participation or assignment, the Fund acquires some or all of the interest of a bank or other lending institution in a loan to a corporate borrower. Many such loans are secured and most impose restrictive covenants which must be met by the borrower and which are generally more stringent than the covenants available in publicly traded debt securities. However, interests in some loans may not be secured, and the Fund will be exposed to a risk of loss if the borrower defaults. Loan participations also may be purchased by the Fund when the borrowing company is already in default. In purchasing a loan participation, the Fund may have less protection under the federal securities laws than it has in purchasing traditional types of securities. The Fund's ability to assert its rights against the borrower will also depend on the particular terms of the loan agreement among the parties. Combined Transactions Certain Funds may enter into multiple transactions, including multiple options transactions, multiple futures transactions, multiple forward foreign currency exchange contracts and any combination of futures, options and forward foreign currency exchange contracts ("component" transactions), instead of a single transaction, as part of a single hedging strategy when, in the opinion of the Adviser, it is in the best interest of a Fund to do so and where underlying hedging strategies are permitted by a Fund's investment policies. A combined transaction, while part of a single hedging strategy, may contain elements of risk that are present in each of its component transactions. Convertible Securities Certain Funds may invest in convertible securities, such as bonds, notes, debentures, preferred stocks and other securities that may be converted into common stock. All convertible securities purchased by the Fund will be rated in the top two categories by an NRSRO or, if unrated, determined by the Adviser to be of comparable quality. Investments in convertible securities can provide income through interest and dividend payments, as well as, an opportunity for capital appreciation by virtue of their conversion or exchange features. 12 The convertible securities in which a Fund may invest include fixed-income and zero coupon debt securities, and preferred stock that may be converted or exchanged at a stated or determinable exchange ratio into underlying shares of common stock. The exchange ratio for any particular convertible security may be adjusted from time to time due to stock splits, dividends, spin-offs, other corporate distributions or scheduled changes in the exchange ratio. Convertible debt securities and convertible preferred stocks, until converted, have general characteristics similar to both debt and equity securities. Although to a lesser extent than with debt securities, generally, the market value of convertible securities tends to decline as interest rates increase and, conversely, tends to increase as interest rates decline. In addition, because of the conversion exchange feature, the market value of convertible securities typically changes as the market value of the underlying common stock changes, and, therefore, also tends to follow movements in the general market for equity securities. A unique feature of convertible securities is that as the market price of the underlying common stock declines, convertible securities tend to trade increasingly on a yield basis, and so may not experience market value declines to the same extent as the underlying common stock. When the market price of the underlying common stock increases, the price of a convertible security tends to rise as a reflection of the value of the underlying common stock, although typically not as much as the price of the underlying common stock. While no securities investments are without risk, investments in convertible securities generally entail less risk than investments in common stock of the same issuer. As debt securities, convertible securities are investments which provide for a stream of income or, in the case of zero coupon securities, accretion of income with generally higher yields than common stocks. Of course, like all debt securities, there can be no assurance of income or principal payments because the issuers of the convertible securities may default on their obligations. Convertible securities generally offer lower yields than non-convertible securities of similar quality because of their conversion exchange features. Convertible securities generally are subordinated to other similar debt securities but not to non-convertible securities of the same issuer. Convertible bonds, as corporate debt obligations, are senior in right of payment to all equity securities, and convertible preferred stock is senior to common stock, of the same issuer. However, convertible bonds and convertible preferred stock typically have lower coupon rates than similar non-convertible securities. Convertible securities may be issued as fixed income obligations that pay current income or as zero coupon notes and bonds, including Liquid Yield Option Notes ("LYONs"). Zero coupon securities pay no cash income and are sold at substantial discounts from their value at maturity. When held to maturity, their entire income, which consists of accretion of discount, comes from the difference between the issue price and their value at maturity. Zero coupon convertible securities offer the opportunity for capital appreciation because increases (or decreases) in the market value of such securities closely follow the movements in the market value of the underlying common stock. Zero coupon convertible securities generally are expected to be less volatile than the underlying common stocks because they usually are issued with short maturities (15 years or less) and are issued with options and/or redemption features exercisable by the holder of the obligation entitling the holder to redeem the obligation and receive a defined cash payment. Corporate Debt Securities Certain Funds may invest in corporate debt securities of domestic issuers of all types and maturities, such as bonds, debentures, notes and commercial paper. Corporate debt securities may involve equity features, such as conversion or exchange rights or warrants for the acquisition of stock of the same or a different issuer, participation based on revenue, sales or profit, or the purchase of common stock or warrants in a unit transaction (where corporate debt obligations and common stock are offered as a unit). Each Fund may also invest in corporate debt securities of foreign issuers. The corporate debt securities in which the Funds will invest will be rated investment grade by at least one NRSRO (e.g., BBB or above by Standard & Poor's Corporation ("S&P") or Baa or above by Moody's Investors Services, Inc. ("Moody's")). Commercial paper purchased by the Funds will be rated in the top two categories by a NRSRO. Corporate debt securities that are not rated may be purchased by such Funds if they are determined by the Adviser to be of comparable quality under the direction of the Board of Directors of the Company. If the rating of any corporate debt security held by a Fund falls below such ratings or if the Adviser determines that an unrated corporate debt security is no longer of comparable quality, then such security shall be disposed of in an orderly manner as quickly as possible. A description of these ratings is attached as Schedule A to this Statement of Additional Information. Custodial Receipts Certain Funds may also acquire custodial receipts that evidence ownership of future interest payments, principal payments or both on certain U.S. Government notes or bonds. Such notes and bonds are held in custody by a bank on behalf of the owners. These custodial receipts are known by various names, including "Treasury Receipts," "Treasury Investors Growth Receipts" and "Certificates of Accrual on Treasury Securities." Although custodial receipts are not considered U.S. Government securities, they are indirectly issued or guaranteed as to principal and interest by the U.S. Government, its agencies, authorities or instrumentalities. Custodial receipts will be treated as illiquid securities. 13 Currency Swaps Certain Funds also may enter into currency swaps for hedging purposes and to seek to increase total return. In as much as swaps are entered into for good faith hedging purposes or are offset by a segregated account as described below, the Fund and the Adviser believe that swaps do not constitute senior securities as defined in the 1940 Act and, accordingly, will not treat them as being subject to the Fund's borrowing restrictions. The net amount of the excess, if any, of the Fund's obligations over its entitlement with respect to each currency swap will be accrued on a daily basis and an amount of cash or liquid high grade debt securities (i.e., securities rated in one of the top three ratings categories by an NRSRO, or, if unrated, deemed by the Adviser to be of comparable credit quality) having an aggregate net asset value at least equal to such accrued excess will be maintained in a segregated account by the Fund's custodian. The Fund will not enter into any currency swap unless the credit quality of the unsecured senior debt or the claims-paying ability of the other party thereto is considered to be investment grade by the Adviser. Delayed Delivery Transactions In a delayed delivery transaction, the Fund relies on the other party to complete the transaction. If the transaction is not completed, the Fund may miss a price or yield considered to be advantageous. In delayed delivery transactions, delivery of the securities occurs beyond normal settlement periods, but a Fund would not pay for such securities or start earning interest on them until they are delivered. However, when a Fund purchases securities on such a delayed delivery basis, it immediately assumes the risk of ownership, including the risk of price fluctuation. Failure by a counterparty to deliver a security purchased on a delayed delivery basis may result in a loss or missed opportunity to make an alternative investment. Depending upon market conditions, a Fund's delayed delivery purchase commitments could cause its net asset value to be more volatile, because such securities may increase the amount by which the Fund's total assets, including the value of when-issued and delayed delivery securities held by the Fund, exceed its net assets. Dollar Roll Transactions Certain Funds may enter into "dollar roll" transactions, which consist of the sale by a Fund to a bank or broker/dealer (the "counterparty") of GNMA certificates or other mortgage-backed securities together with a commitment to purchase from the counterparty similar, but not identical, securities at a future date, at the same price. The counterparty receives all principal and interest payments, including prepayments, made on the security while it is the holder. A Fund receives a fee from the counterparty as consideration for entering into the commitment to purchase. Dollar rolls may be renewed over a period of several months with a different repurchase price and a cash settlement made at each renewal without physical delivery of securities. Moreover, the transaction may be preceded by a firm commitment agreement pursuant to which the Fund agrees to buy a security on a future date. If the broker/dealer to whom a Fund sells the security becomes insolvent, the Fund's right to purchase or repurchase the security may be restricted; the value of the security may change adversely over the term of the dollar roll; the security that the Fund is required to repurchase may be worth less than the security that the Fund originally held, and the return earned by the Fund with the proceeds of a dollar roll may not exceed transaction costs. The entry into dollar rolls involves potential risks of loss that are different from those related to the securities underlying the transactions. For example, if the counterparty becomes insolvent, the Fund's right to purchase from the counterparty might be restricted. Additionally, the value of such securities may change adversely before the Fund is able to purchase them. Similarly, the Fund may be required to purchase securities in connection with a dollar roll at a higher price than may otherwise be available on the open market. Since, as noted above, the counterparty is required to deliver a similar, but not identical security to the Fund, the security that the Fund is 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. 14 Equity Swap Contracts Certain Funds may from time to time enter into equity swap contracts. The counterparty to an equity swap contract will typically be a bank, investment banking firm or broker/dealer. For example, the counterparty will generally agree to pay a Fund the amount, if any, by which the notional amount of the Equity Swap Contract would have increased in value had it been invested in the stocks comprising the S&P 500 Index in proportion to the composition of the Index, plus the dividends that would have been received on those stocks. A Fund will agree to pay to the counterparty a floating rate of interest (typically the London Inter Bank Offered Rate) on the notional amount of the Equity Swap Contract plus the amount, if any, by which that notional amount would have decreased in value had it been invested in such stocks. Therefore, the return to a Fund on any Equity Swap Contract should be the gain or loss on the notional amount plus dividends on the stocks comprising the S&P 500 Index less the interest paid by the Fund on the notional amount. A Fund will only enter into Equity Swap Contracts on a net basis, i.e., the two parties' obligations are netted out, with the Fund paying or receiving, as the case may be, only the net amount of any payments. Payments under the Equity Swap Contracts may be made at the conclusion of the contract or periodically during its term. If there is a default by the counterparty to an Equity Swap Contract, a Fund will be limited to contractual remedies pursuant to the agreements related to the transaction. There is no assurance that Equity Swap Contract counterparties will be able to meet their obligations pursuant to Equity Swap Contracts or that, in the event of default, a Fund will succeed in pursuing contractual remedies. A Fund thus assumes the risk that it may be delayed in or prevented from obtaining payments owed to it pursuant to Equity Swap Contracts. A Fund will closely monitor the credit of Equity Swap Contract counterparties in order to minimize this risk. Certain Funds may from time to time enter into the opposite side of Equity Swap Contracts (i.e., where a Fund is obligated to pay the increase (net of interest) or receive the decrease (plus interest) on the contract to reduce the amount of the Fund's equity market exposure consistent with the Fund's objective. These positions are sometimes referred to as Reverse Equity Swap Contracts. Equity Swap Contracts will not be used to leverage a Fund. A Fund will not enter into any Equity Swap Contract or Reverse Equity Swap Contract unless, at the time of entering into such transaction, the unsecured senior debt of the counterparty is rated at least A by Moody's or S&P. Since the SEC considers Equity Swap Contracts and Reverse Equity Swap Contracts to be illiquid securities, a Fund will not invest in Equity Swap Contracts or Reverse Equity Swap Contracts if the total value of such investments together with that of all other illiquid securities which a Fund owns would exceed any limitation imposed by the SEC Staff. The Adviser does not believe that a Fund's obligations under Equity Swap Contracts or Reverse Equity Swap Contracts are senior securities and, accordingly, the Fund will not treat them as being subject to its borrowing restrictions. However, the net amount of the excess, if any, of a Fund's obligations over its respective entitlements with respect to each Equity Swap Contract and each Reverse Equity Swap Contract will be accrued on a daily basis and an amount of cash, U.S. Government securities or other liquid high quality debt securities having an aggregate market value at least equal to the accrued excess will be maintained in a segregated account by the Fund's custodian. Foreign Currency Transactions Certain Funds may invest in foreign currency transactions. Foreign securities involve currency risks. The U.S. dollar value of a foreign security tends to decrease when the value of the U.S. dollar rises against the foreign currency in which the security is denominated, and tends to increase when the value of the U.S. dollar falls against such currency. A Fund may purchase or sell forward foreign currency exchange contracts ("forward contracts") to attempt to minimize the risk to the Fund from adverse changes in the relationship between the U.S. dollar and foreign currencies. A Fund may also purchase and sell foreign currency futures contracts and related options (see "Purchase and Sale of Currency Futures Contracts and Related Options"). A forward contract is an obligation to purchase or sell a specific currency for an agreed price at a future date that is individually negotiated and privately traded by currency traders and their customers. 15 Forward foreign currency exchange contracts establish an exchange rate at a future date. These contracts are transferable in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward foreign currency exchange contract generally has no deposit requirement, and is traded at a net price without commission. A Fund will direct its custodian to segregate high grade liquid assets in an amount at least equal to its obligations under each forward foreign currency exchange contract. Neither spot transactions nor forward foreign currency exchange contracts eliminate fluctuations in the prices of a Fund's portfolio securities or in foreign exchange rates, or prevent loss if the prices of these securities should decline. A Fund may enter into a forward contract, for example, when it enters into a contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of the security (a "transaction hedge"). In addition, when the Adviser believes that a foreign currency may suffer a substantial decline against the U.S. dollar, it may enter into a forward sale contract to sell an amount of that foreign currency approximating the value of some or all of the Fund's securities denominated in such foreign currency, or when the Adviser believes that the U.S. dollar may suffer a substantial decline against the foreign currency, it may enter into a forward purchase contract to buy that foreign currency for a fixed dollar amount (a "position hedge"). A Fund may, however, enter into a forward contract to sell a different foreign currency for a fixed U.S. dollar amount where the Adviser believes that the U.S. dollar value of the currency to be sold pursuant to the forward contract will fall whenever there is a decline in the U.S. dollar value of the currency in which the fund securities are denominated (a "cross-hedge"). Foreign currency hedging transactions are an attempt to protect a Fund against changes in foreign currency exchange rates between the trade and settlement dates of specific securities transactions or changes in foreign currency exchange rates that would adversely affect a portfolio position or an anticipated portfolio position. Although these transactions tend to minimize the risk of loss due to a decline in the value of the hedged currency, at the same time they tend to limit any potential gain that might be realized should the value of the hedged currency increase. The precise matching of the forward contract amount and the value of the securities involved will not generally be possible because the future value of these securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and date it matures. The Fund's custodian will segregate cash, U.S. Government securities or other high-quality debt securities having a value equal to the aggregate amount of the Fund's commitments under forward contracts entered into with respect to position hedges and cross-hedges. If the value of the segregated securities declines, additional cash or securities will be segregated on a daily basis so that the value of the segregated securities will equal the amount of the Fund's commitments with respect to such contracts. As an alternative to segregating all or part of such securities, the Fund may purchase a call option permitting the Fund to purchase the amount of foreign currency being hedged by a forward sale contract at a price no higher than the forward contract price or the Fund may purchase a put option permitting the Fund to sell the amount of foreign currency subject to a forward purchase contract at a price as high or higher than the forward contract price. The Funds are dollar-denominated mutual funds and therefore consideration is given to hedging part or all of the portfolio back to U.S. dollars from international currencies. All decisions to hedge are based upon an analysis of the relative value of the U.S. dollar on an international purchasing power parity basis (purchasing power parity is a method for determining the relative purchasing power of different currencies by comparing the amount of each currency required to purchase a typical bundle of goods and services to domestic markets) and an estimation of short-term interest rate differentials (which affect both the direction of currency movements and also the cost of hedging). 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. 16 While futures contracts based on securities do provide for the delivery and acceptance of securities, such deliveries and acceptances are seldom made. Generally, a futures contract is terminated by entering into an offsetting transaction. A Fund will incur brokerage fees when it purchases and sells futures contracts. At the time such a purchase or sale is made, a Fund must provide cash or money market securities as a deposit known as "margin." The initial deposit required will vary, but may be as low as 2% or less of a contract's face value. Daily thereafter, the futures contract is valued through a process known as "marking to market," and a Fund that engages in futures transactions may receive or be required to pay "variation margin" as the futures contract becomes more or less valuable. At the time of delivery of securities pursuant to a futures contract based on securities, adjustments are made to recognize differences in value arising from the delivery of securities with a different interest rate than the specific security that provides the standard for the contract. In some (but not many) cases, securities called for by a futures contract may not have been issued when the contract was written. Futures contracts on indices of securities are settled through the making and acceptance of cash settlements based on changes in value of the underlying rate or index between the time the contract is entered into and the time it is liquidated. Futures Contracts on Fixed Income Securities and Related Indices. As noted in their respective Prospectuses, certain Funds may enter into transactions in futures contracts for the purpose of hedging a relevant portion of their portfolios. A Fund may enter into transactions in futures contracts that are based on U.S. Government obligations, including any index of government obligations that may be available for trading. Such transactions will be entered into where movements in the value of the securities or index underlying a futures contract can be expected to correlate closely with movements in the value of securities held in a Fund. For example, a Fund may sell futures contracts in anticipation of a general rise in the level of interest rates, which would result in a decline in the value of its fixed income securities. If the expected rise in interest rates occurs, the Fund may realize gain on its futures position, which should offset all or part of the decline in value of fixed income fund securities. A Fund could protect against such decline by selling fixed income securities, but such a strategy would involve higher transaction costs than the sale of futures contracts and, if interest rates again declined, the Fund would be unable to take advantage of the resulting market advance without purchases of additional securities. The purpose of the purchase or sale of a futures contract on government securities and indices of government securities, in the case of the above-referenced Funds, which hold or intend to acquire long-term debt securities, is to protect a Fund from fluctuations in interest rates without actually buying or selling long-term debt securities. For example, if long-term bonds are held by a Fund, and interest rates were expected to increase, the Fund might enter into futures contracts for the sale of debt securities. Such a sale would have much the same effect as selling an equivalent value of the long-term bonds held by the Fund. If interest rates did increase, the value of the debt securities in the Fund would decline, but the value of the futures contracts to the Fund would increase at approximately the same rate thereby keeping the net asset value of the Fund from declining as much as it otherwise would have. When a Fund is not fully invested and a decline in interest rates is anticipated, which would increase the cost of fixed income securities that the Fund intends to acquire, it may purchase futures contracts. In the event that the projected decline in interest rates occurs, the increased cost of the securities acquired by the Fund should be offset, in whole or part, by gain on the futures contracts by entering into offsetting transactions on the contract market on which the initial purchase was effected. In a substantial majority of transactions involving futures contracts on fixed income securities, a Fund will purchase the securities upon termination of the long futures positions, but under unusual market conditions, a long futures position may be terminated without a corresponding purchase of securities. 17 Similarly, when it is expected that interest rates may decline, futures contracts on fixed income securities and indices of government securities may be purchased for the purpose of hedging against anticipated purchases of long-term bonds at higher prices. Since the fluctuations in the value of such futures contracts should be similar to that of long-term bonds, a Fund could take advantage of the anticipated rise in the value of long-term bonds without actually buying them until the market had stabilized. At that time, the futures contracts could be liquidated and the Fund's cash reserves could then be used to buy long-term bonds in the cash market. Similar results could be accomplished by selling bonds with long maturities and investing in bonds with short maturities when interest rates are expected to increase. However, since the futures market is more liquid than the cash market, the use of these futures contracts as an investment technique allows a Fund to act in anticipation of such an interest rate decline without having to sell its portfolio securities. To the extent a Fund enters into futures contracts for this purpose, the segregated assets maintained by a Fund will consist of cash, cash equivalents or high quality debt securities of the Fund in an amount equal to the difference between the fluctuating market value of such futures contract and the aggregate value of the initial deposit and variation margin payments made by the Fund with respect to such futures contracts. Stock Index Futures Contracts. Certain Funds may sell stock index futures contracts in order to offset a decrease in market value of its securities that might otherwise result from a market decline. A Fund may do so either to hedge the value of its portfolio as a whole, or to protect against declines, occurring prior to sales of securities, in the value of securities to be sold. Conversely, a Fund may purchase stock index futures contracts in order to protect against anticipated increases in the cost of securities to be acquired. In addition, a Fund may utilize stock index futures contracts in anticipation of changes in the composition of its portfolio. For example, in the event that a Fund expects to narrow the range of industry groups represented in its portfolio, it may, prior to making purchases of the actual securities, establish a long futures position based on a more restricted index, such as an index comprised of securities of a particular industry group. As such securities are acquired, a Fund's futures positions would be closed out. A Fund may also sell futures contracts in connection with this strategy, in order to protect against the possibility that the value of the securities to be sold as part of the restructuring of its portfolio will decline prior to the time of sale. Options on Futures Contracts. An option on a futures contract gives the purchaser (the "holder") the right, but not the obligation, to purchase a position in the underlying futures contract (i.e., a purchase of such futures contract) in the case of an option to purchase (a "call" option), or a "short" position in the underlying futures contract (i.e., a sale of such futures contract) in the case of an option to sell (a "put" option), at a fixed price (the "strike price") up to a stated expiration date. The holder pays a non-refundable purchase price for the option, known as the "premium." The maximum amount of risk the purchase of the option assumes is equal to the premium plus related transaction costs, although this entire amount may be lost. Upon exercise of the option by the holder, the exchange clearing corporation establishes a corresponding long position in the case of a put option. In the event that an option is exercised, the parties will be subject to all the risks associated with the trading of futures contracts, such as payment of variation margin deposits. In addition, the writer of an option on a futures contract, unlike the holder, is subject to initial and variation margin requirements on the option position. Options on Futures Contracts on Fixed Income Securities and Related Indices. Certain Funds may purchase put options on futures contracts in which such Funds are permitted to invest for the purpose of hedging a relevant portion of their portfolios against an anticipated decline in the values of portfolio securities resulting from increases in interest rates, and may purchase call options on such futures contracts as a hedge against an interest rate decline when they are not fully invested. A Fund would write options on these futures contracts primarily for the purpose of terminating existing positions. Options on Stock Index Futures Contracts, Options on Stock Indices and Options on Equity Securities. Certain Funds may purchase put options on stock index futures contracts, stock indices or equity securities for the purpose of hedging the relevant portion of their portfolio securities against an anticipated market-wide decline or against declines in the values of individual portfolio securities, and they may purchase call options on such futures contracts as a hedge against a market advance when they are not fully invested. A Fund would write options on such futures contracts primarily for the purpose of terminating existing positions. In general, options on stock indices will be employed in lieu of options on stock index futures contracts only where they present an opportunity to hedge at lower cost. With respect to options on equity securities, a Fund may, under certain circumstances, purchase a combination of call options on such securities and U.S. Treasury bills. The Adviser believes that such a combination may more closely parallel movements in the value of the security underlying the call option than would the option itself. 18 Further, while a Fund generally would not write options on individual portfolio securities, it may do so under limited circumstances known as "targeted sales" and "targeted buys," which involve the writing of call or put options in an attempt to purchase or sell portfolio securities at specific desired prices. A Fund would receive a fee, or a "premium," for the writing of the option. For example, where the Fund seeks to sell portfolio securities at a "targeted" price, it may write a call option at that price. In the event that the market rises above the exercise price, it would receive its "targeted" price, upon the exercise of the option, as well as the premium income. Also, where it seeks to buy portfolio securities at a "targeted" price, it may write a put option at that price for which it will receive the premium income. In the event that the market declines below the exercise price, a Fund would pay its "targeted" price upon the exercise of the option. In the event that the market does not move in the direction or to the extent anticipated, however, the targeted sale or buy might not be successful and a Fund could sustain a loss on the transaction that may not be offset by the premium received. In addition, a Fund may be required to forego the benefit of an intervening increase or decline in value of the underlying security. Options and Futures Strategies. The Adviser may seek to increase the current return of certain Funds by writing covered call or put options. In addition, through the writing and purchase of options and the purchase and sale of U.S. and certain foreign stock index futures contracts, interest rate futures contracts, foreign currency futures contracts and related options on such futures contracts, the Adviser may at times seek to hedge against a decline in the value of securities included in the Fund or an increase in the price of securities that it plans to purchase for the Fund. Expenses and loss incurred as a result of such hedging strategies will reduce the Fund's current return. A Fund's investment in foreign stock index futures contracts and foreign interest rate futures contracts, and related options on such futures contracts, are limited to only those contracts and related options that have been approved by the CFTC for investment by U.S. investors. Additionally, with respect to a Fund's investment in foreign options, unless such options are specifically authorized for investment by order of the CFTC or meet the definition of trade options as set forth in CFTC Rule 32.4, a Fund will not make these investments. The ability of a Fund to engage in the options and futures strategies described below will depend on the availability of liquid markets in such instruments. Markets in options and futures with respect to stock indices, foreign government securities and foreign currencies are relatively new and still developing. It is impossible to predict the amount of trading interest that may exist in various types of options or futures. Therefore, no assurance can be given that a Fund will be able to utilize these instruments effectively for the purposes stated below. Furthermore, a Fund's ability to engage in options and futures transactions may be limited by tax considerations. Although a Fund will only engage in options and futures transactions for limited purposes, these activities will involve certain risks which are described below under "Risk Factors Associated with Futures and Options Transactions." A Fund will not engage in options and futures transactions for leveraging purposes. Writing Covered Options on Securities. Certain Funds may write covered call options and covered put options on securities in which it is permitted to invest from time to time as the Adviser determines is appropriate in seeking to attain its objective. Call options written by a Fund give the holder the right to buy the underlying securities from a Fund at a stated exercise price; put options give the holder the right to sell the underlying security to the Fund at a stated price. A Fund may write only covered options, which means that, so long as the Fund is obligated as the writer of a call option, it will own the underlying securities subject to the option (or comparable securities satisfying the cover requirements of securities exchanges). In the case of put options, a Fund will maintain in a separate account cash or short-term U.S. Government securities with a value equal to or greater than the exercise price of the underlying securities. A Fund may also write combinations of covered puts and calls on the same underlying security. A Fund will receive a premium from writing a put or call option, which increases the Fund's return in the event the option expires unexercised or is closed out at a profit. The amount of the premium will reflect, among other things, the relationship of the market price of the underlying security to the exercise price of the option, the term of the option and the volatility of the market price of the underlying security. By writing a call option, a Fund limits its opportunity to profit from any increase in the market value of the underlying security above the exercise price of the option. By writing a put option, the Fund assumes the risk that it may be required to purchase the underlying security for an exercise price higher than its then current market value, resulting in a potential capital loss if the purchase price exceeds the market value plus the amount of the premium received, unless the security subsequently appreciates in value. 19 A Fund may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction in which it purchases an option having the same terms as the option written. A Fund will realize a profit or loss from such transaction if the cost of such transaction is less or more than the premium received from the writing of the option. In the case of a put option, any loss so incurred may be partially or entirely offset by the premium received from a simultaneous or subsequent sale of a different put option. Because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, any loss resulting from the repurchase of a call option is likely to be offset in whole or in part by unrealized appreciation of the underlying security owned by a Fund. Purchasing Put and Call Options on Securities. A Fund may purchase put options to protect its portfolio holdings in an underlying security against a decline in market value. Such hedge protection is provided during the life of the put option since a Fund, as holder of the put option, is able to sell the underlying security at the put exercise price regardless of any decline in the underlying security's market price. In order for a put option to be profitable, the market price of the underlying security must decline sufficiently below the exercise price to cover the premium and transaction costs. By using put options in this manner, a Fund will reduce any profit it might otherwise have realized in its underlying security by the premium paid for the put option and by transaction costs. A Fund may also purchase call options to hedge against an increase in prices of securities that it wants ultimately to buy. Such hedge protection is provided during the life of the call option since the Fund, as holder of the call option, is able to buy the underlying security at the exercise price regardless of any increase in the underlying security's market price. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs. By using call options in this manner, a Fund will reduce any profit it might have realized had it bought the underlying security at the time it purchased the call option by the premium paid for the call option and by transaction costs. Purchase and Sale of Options and Futures on Stock Indices. A Fund may purchase and sell options on non-U.S. stock indices and stock index futures as a hedge against movements in the equity markets. Options on stock indices are similar to options on specific securities except that, rather than the right to take or make delivery of the specific security at a specific price, an option on a stock index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of that stock index is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. This amount of cash is equal to such difference between the closing price of the index and the exercise price of the option expressed in dollars multiplied by a specified multiple. The writer of the option is obligated, in return for the premium received, to make delivery of this amount. Unlike options on specific securities, all settlements of options on stock indices are in cash and gain or loss depends on general movements in the stocks included in the index rather than price movements in particular stocks. A stock index futures contract is an agreement in which one party agrees to deliver to the other an amount of cash equal to a specific amount multiplied by the difference between the value of a specific stock index at the close of the last trading day of the contract and the price at which the agreement is made. No physical delivery of securities is made. If the Adviser expects general stock market prices to rise, a Fund might purchase a call option on a stock index or a futures contract on that index as a hedge against an increase in prices of particular equity securities it wants ultimately to buy. If in fact the stock index does rise, the price of the particular equity securities intended to be purchased may also increase, but that increase would be offset in part by the increase in the value of a Fund's index option or futures contract resulting from the increase in the index. If, on the other hand, the Adviser expects general stock market prices to decline, a Fund might purchase a put option or sell a futures contract on the index. If that index does in fact decline, the value of some or all of the equity securities in a Fund may also be expected to decline, but that decrease would be offset in part by the increase in the value of the Fund's position in such put option or futures contract. 20 Purchase and Sale of Interest Rate Futures. A Fund may purchase and sell interest rate futures contracts on foreign government securities including, but not limited to, debt securities of the governments and central banks of France, Germany, Denmark and Japan for the purpose of hedging fixed income and interest sensitive securities against the adverse effects of anticipated movements in interest rates. A Fund may sell interest rate futures contracts in anticipation of an increase in the general level of interest rates. Generally, as interest rates rise, the market value of the fixed income securities held by a Fund will fall, thus reducing the net asset value of the Fund. This interest rate risk can be reduced without employing futures as a hedge by selling long-term fixed income securities and either reinvesting the proceeds in securities with shorter maturities or by holding assets in cash. This strategy, however, entails increased transaction costs to a Fund in the form of dealer spreads and brokerage commissions. The sale of interest rate futures contracts provides an alternative means of hedging against rising interest rates. As rates increase, the value of a Fund's short position in the futures contracts will also tend to increase, thus offsetting all or a portion of the depreciation in the market value of a Fund's investments that are being hedged. While a Fund will incur commission expenses in selling and closing out futures positions (which is done by taking an opposite position which operates to terminate the position in the futures contract), commissions on futures transactions are lower than transaction costs incurred in the purchase and sale of portfolio securities. Options on Stock Index Futures Contracts and Interest Rate Futures Contracts. A Fund may purchase and write call and put options on non-U.S. stock index and interest rate futures contracts. A Fund may use such options on futures contracts in connection with its hedging strategies in lieu of purchasing and writing options directly on the underlying securities or stock indices or purchasing and selling the underlying futures. For example, a Fund may purchase put options or write call options on stock index futures, or interest rate futures, rather than selling futures contracts, in anticipation of a decline in general stock market prices or rise in interest rates, respectively, or purchase call options or write put options on stock index or interest rate futures, rather than purchasing such futures, to hedge against possible increases in the price of equity securities or debt securities, respectively, which the Fund intends to purchase. Purchase and Sale of Currency Futures Contracts and Related Options. In order to hedge its portfolio and to protect it against possible variations in foreign exchange rates pending the settlement of securities transactions, a Fund may buy or sell currency futures contracts and related options. If a fall in exchange rates for a particular currency is anticipated, a Fund may sell a currency futures contract or a call option thereon or purchase a put option on such futures contract as a hedge. If it is anticipated that exchange rates will rise, a Fund may purchase a currency futures contract or a call option thereon or sell (write) a put option to protect against an increase in the price of securities denominated in a particular currency a Fund intends to purchase. These futures contracts and related options thereon will be used only as a hedge against anticipated currency rate changes, and all options on currency futures written by a Fund will be covered. A currency futures contract sale creates an obligation by a Fund, as seller, to deliver the amount of currency called for in the contract at a specified future time for a special price. A currency futures contract purchase creates an obligation by a Fund, as purchaser, to take delivery of an amount of currency at a specified future time at a specified price. Although the terms of currency futures contracts specify actual delivery or receipt, in most instances the contracts are closed out before the settlement date without the making or taking of delivery of the currency. Closing out of a currency futures contract is effected by entering into an offsetting purchase or sale transaction. Unlike a currency futures contract, which requires the parties to buy and sell currency on a set date, an option on a currency futures contract entitles its holder to decide on or before a future date whether to enter into such a contract. If the holder decides not to enter into the contract, the premium paid for the option is fixed at the point of sale. 21 The Fund will write (sell) only covered put and call options on currency futures. This means that a Fund will provide for its obligations upon exercise of the option by segregating sufficient cash or short-term obligations or by holding an offsetting position in the option or underlying currency future, or a combination of the foregoing. A Fund will, so long as it is obligated as the writer of a call option on currency futures, own on a contract-for-contract basis an equal long position in currency futures with the same delivery date or a call option on stock index futures with the difference, if any, between the market value of the call written and the market value of the call or long currency futures purchased maintained by a Fund in cash, Treasury bills, or other high grade short-term obligations in a segregated account with its custodian. If at the close of business on any day the market value of the call purchased by a Fund falls below 100% of the market value of the call written by the Fund, a Fund will so segregate an amount of cash, Treasury bills or other high grade short-term obligations equal in value to the difference. Alternatively, a Fund may cover the call option through segregating with the custodian an amount of the particular foreign currency equal to the amount of foreign currency per futures contract option times the number of options written by a Fund. In the case of put options on currency futures written by the Fund, the Fund will hold the aggregate exercise price in cash, Treasury bills, or other high grade short-term obligations in a segregated account with its custodian, or own put options on currency futures or short currency futures, with the difference, if any, between the market value of the put written and the market value of the puts purchased or the currency futures sold maintained by a Fund in cash, Treasury bills or other high grade short-term obligations in a segregated account with its custodian. If at the close of business on any day the market value of the put options purchased or the currency futures by a Fund falls below 100% of the market value of the put options written by the Fund, a Fund will so segregate an amount of cash, Treasury bills or other high grade short-term obligations equal in value to the difference. If other methods of providing appropriate cover are developed, a Fund reserves the right to employ them to the extent consistent with applicable regulatory and exchange requirements. In connection with transactions in stock index options, stock index futures, interest rate futures, foreign currency futures and related options on such futures, a Fund will be required to deposit as "initial margin" an amount of cash or short-term government securities equal to from 5% to 8% of the contract amount. Thereafter, subsequent payments (referred to as "variation margin") are made to and from the broker to reflect changes in the value of the futures contract. Limitations on Purchase of Options. The staff of the SEC has taken the position that purchased over-the-counter options and assets used to cover written over-the-counter options are illiquid and, therefore, together with other illiquid securities, cannot exceed 15% of a Fund's assets. The Adviser intends to limit a Fund's writing of over-the-counter options in accordance with the following procedure. Each Fund intends to write over-the-counter options only with primary U.S. Government securities dealers recognized by the Federal Reserve Bank of New York. Also, the contracts which a Fund has in place with such primary dealers will provide that the Fund has the absolute right to repurchase an option it writes at any time at a price which represents the fair market value, as determined in good faith through negotiation between the parties, but which in no event will exceed a price determined pursuant to a formula in the contract. Although the specific formula may vary between contracts with different primary dealers, the formula will generally be based on a multiple of the premium received by a Fund for writing the option, plus the amount, if any, of the option's intrinsic value (i.e., the amount that the option is in-the-money). The formula also may include a factor to account for the difference between the price of the security and the strike price of the option if the option is written out-of-the-money. A Fund will treat all or a part of the formula price as illiquid for purposes of any limitation on illiquid securities imposed by the SEC staff. Risk Factors Associated with Futures and Options Transactions The effective use of options and futures strategies depends on, among other things, a Fund's ability to terminate options and futures positions at times when its the Adviser deems it desirable to do so. Although a Fund will not enter into an option or futures position unless the Adviser believes that a liquid secondary market exists for such option or future, there is no assurance that a Fund will be able to effect closing transactions at any particular time or at an acceptable price. A Fund generally expects that its options and futures transactions will be conducted on recognized U.S. and foreign securities and commodity exchanges. In certain instances, however, a Fund may purchase and sell options in the over-the-counter market. A Fund's ability to terminate option positions established in the over-the-counter market may be more limited than in the case of exchange-traded options and may also involve the risk that securities dealers participating in such transactions would fail to meet their obligations to the Fund. Options and futures markets can be highly volatile and transactions of this type carry a high risk of loss. Moreover, a relatively small adverse market movement with respect to these types of transactions may result not only in loss of the original investment but also in unquantifiable further loss exceeding any margin deposited. 22 The use of options and futures involves the risk of imperfect correlation between movements in options and futures prices and movements in the price of securities which are the subject of the hedge. Such correlation, particularly with respect to options on stock indices and stock index futures, is imperfect, and such risk increases as the composition of a Fund diverges from the composition of the relevant index. The successful use of these strategies also depends on the ability of the Adviser to correctly forecast interest rate movements, currency rate movements and general stock market price movements. In addition to certain risk factors described above, the following sets forth certain information regarding the potential risks associated with the Funds' futures and options transactions. Risk of Imperfect Correlation. A Fund's ability effectively to hedge all or a portion of its portfolio through transactions in futures, options on futures or options on stock indices depends on the degree to which movements in the value of the securities or index underlying such hedging instrument correlate with movements in the value of the relevant portion of the Fund's securities. If the values of the securities being hedged do not move in the same amount or direction as the underlying security or index, the hedging strategy for a Fund might not be successful and the Fund could sustain loss on its hedging transactions which would not be offset by gain on its portfolio. It is also possible that there may be a negative correlation between the security or index underlying a futures or option contract and the portfolio securities being hedged, which could result in losses both on the hedging transaction and the fund securities. In such instances, a Fund's overall return could be less than if the hedging transactions had not been undertaken. Stock index futures or options based on a narrower index of securities may present greater risk than options or futures based on a broad market index, as a narrower index is more susceptible to rapid and extreme fluctuations resulting from changes in the value of a small number of securities. A Fund would, however, effect transactions in such futures or options only for hedging purposes. The trading of futures and options on indices involves the additional risk of imperfect correlation between movements in the futures or option price and the value of the underlying index. The anticipated spread between the prices may be distorted due to differences in the nature of the markets, such as differences in margin requirements, the liquidity of such markets and the participation of speculators in the futures and options market. The purchase of an option on a futures contract also involves the risk that changes in the value of underlying futures contract will not be fully reflected in the value of the option purchased. The risk of imperfect correlation, however, generally tends to diminish as the maturity date of the futures contract or termination date of the option approaches. The risk incurred in purchasing an option on a futures contract is limited to the amount of the premium plus related transaction costs, although it may be necessary under certain circumstances to exercise the option and enter into the underlying futures contract in order to realize a profit. Under certain extreme market conditions, it is possible that a Fund will not be able to establish hedging positions, or that any hedging strategy adopted will be insufficient to completely protect the Fund. A Fund will purchase or sell futures contracts or options only if, in the Adviser's judgment, there is expected to be a sufficient degree of correlation between movements in the value of such instruments and changes in the value of the relevant portion of the Fund's portfolio for the hedge to be effective. There can be no assurance that the Adviser's judgment will be accurate. Potential Lack of a Liquid Secondary Market. The ordinary spreads between prices in the cash and futures markets, due to differences in the natures of those markets, are subject to distortions. First, all participants in the futures market are subject to initial deposit and variation margin requirements. This could require a Fund to post additional cash or cash equivalents as the value of the position fluctuates. Further, rather than meeting additional variation margin requirements, investors may close futures contracts through offsetting transactions which could distort the normal relationship between the cash and futures markets. Second, the liquidity of the futures or options market may be lacking. Prior to exercise or expiration, a futures or option position may be terminated only by entering into a closing purchase or sale transaction, which requires a secondary market on the exchange on which the position was originally established. While a Fund will establish a futures or option position only if there appears to be a liquid secondary market therefor, there can be no assurance that such a market will exist for any particular futures or option contract at any specific time. In such event, it may not be possible to close out a position held by a Fund, which could require the Fund to purchase or sell the instrument underlying the position, make or receive a cash settlement, or meet ongoing variation margin requirements. The inability to close out futures or option positions also could have an adverse impact on a Fund's ability effectively to hedge its securities, or the relevant portion thereof. 23 The liquidity of a secondary market in a futures contract or an option on a futures contract may be adversely affected by "daily price fluctuation limits" established by the exchanges, which limit the amount of fluctuation in the price of a contract during a single trading day and prohibit trading beyond such limits once they have been reached. The trading of futures and options contracts also is subject to the risk of trading halts, suspensions, exchange or clearing house equipment failures, government intervention, insolvency of the brokerage firm or clearing house or other disruptions of normal trading activity, which could at times make it difficult or impossible to liquidate existing positions or to recover excess variation margin payments. Risk of Predicting Interest Rate Movements. Investments in futures contracts on fixed income securities and related indices involve the risk that if the Adviser's investment judgment concerning the general direction of interest rates is incorrect, a Fund's overall performance may be poorer than if it had not entered into any such contract. For example, if a Fund has been hedged against the possibility of an increase in interest rates which would adversely affect the price of bonds held in its portfolio and interest rates decrease instead, the Fund will lose part or all of the benefit of the increased value of its bonds which have been hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if a Fund has insufficient cash, it may have to sell bonds from its portfolio to meet daily variation margin requirements, possibly at a time when it may be disadvantageous to do so. Such sale of bonds may be, but will not necessarily be, at increased prices which reflect the rising market. Trading and Position Limits. Each contract market on which futures and option contracts are traded has established a number of limitations governing the maximum number of positions which may be held by a trader, whether acting alone or in concert with others. The Adviser does not believe that these trading and position limits will have an adverse impact on the hedging strategies regarding the Funds' investments. Regulations on the Use of Futures and Options Contracts. Regulations of the CFTC require that the Funds enter into transactions in futures contracts and options thereon for hedging purposes only, in order to assure that they are not deemed to be a "commodity pool" under such regulations. In particular, CFTC regulations require that all short futures positions be entered into for the purpose of hedging the value of investment securities held by a Fund, and that all long futures positions either constitute bona fide hedging transactions, as defined in such regulations, or have a total value not in excess of an amount determined by reference to certain cash and securities positions maintained for the Fund, and accrued profits on such positions. In addition, a Fund may not purchase or sell such instruments if, immediately thereafter, the sum of the amount of initial margin deposits on its existing futures positions and premiums paid for options on futures contracts would exceed 5% of the market value of the Fund's total assets. When a Fund purchases a futures contract, an amount of cash or cash equivalents or high quality debt securities will be segregated with the Fund's custodian so that the amount so segregated, plus the initial deposit and variation margin held in the account of its broker, will at all times equal the value of the futures contract, thereby insuring that the use of such futures is unleveraged. The Funds' ability to engage in the hedging transactions described herein may be limited by the current federal income tax requirement that a Fund derive less than 30% of its gross income from the sale or other disposition of stock or securities held for less than three months. The Funds may also further limit their ability to engage in such transactions in response to the policies and concerns of various Federal and state regulatory agencies. Such policies may be changed by vote of the Board of Directors/Trustees. 24 Additional Information on Futures and Options As stated in the Funds' Prospectuses, each non-money market Fund, may enter into futures contracts and options for hedging purposes. Such transactions are described in this Schedule. During the current fiscal year, each of these Funds intends to limit its transactions in futures contracts and options so that not more than 5% of the Fund's net assets are at risk. Furthermore, in no event would any Fund purchase or sell futures contracts, or related options thereon, for hedging purposes if, immediately thereafter, the aggregate initial margin that is required to be posted by the Fund under the rules of the exchange on which the futures contract (or futures option) is traded, plus any premiums paid by the Fund on its open futures options positions, exceeds 5% of the Fund's total assets, after taking into account any unrealized profits and unrealized loss on the Fund's open contracts and excluding the amount that a futures option is "in-the-money" at the time of purchase. (An option to buy a futures contract is "in-the-money" if the value of the contract that is subject to the option exceeds the exercise price; an option to sell a futures contract is "in-the-money" if the exercise Price exceeds the value of the contract that is subject of the option.) I. Interest Rate Futures Contracts. Use of Interest Rate Futures Contracts. Bond prices are established in both the cash market and the futures market. In the cash market, bonds are purchased and sold with payment for the full purchase price of the bond being made in cash, generally within five business days after the trade. In the futures market, only a contract is made to purchase or sell a bond in the future for a set price on a certain date. Historically, the prices for bonds established in the futures market have tended to move generally in the aggregate in concert with the cash market prices and have maintained fairly predictable relationships. Accordingly, a Fund may use interest rate futures as a defense, or hedge, against anticipated interest rate changes and not for speculation. As described below, this would include the use of futures contract sales to protect against expected increases in interest rates and futures contract purchases to offset the impact of interest rate declines. A Fund presently could accomplish a similar result to that which it hopes to achieve through the use of futures contracts by selling bonds with long maturities and investing in bonds with short maturities when interest rates are expected to increase, or conversely, selling short-term bonds and investing in long-term bonds when interest rates are expected to decline. However, because of the liquidity that is often available in the futures market the protection is more likely to be achieved, perhaps at a lower cost and without changing the rate of interest being earned by the Fund, through using futures contracts. Description of Interest Rates Futures Contracts. An interest rate futures contract sale would create an obligation by a Fund, as seller, to deliver the specific type of financial instrument called for in the contract at a specific future time for a specified price. A futures contract purchase would create an obligation by the Fund, as purchaser, to take delivery of the specific type of financial instrument at a specific future time at a specific price. The specific securities delivered or taken, respectively, at settlement date, would not be determined until at or near that date. The determination would be in accordance with the rules of the exchange on which the futures contract sale or purchase was made. Although interest rate futures contracts by their terms call for actual delivery or acceptance of securities, in most cases the contracts are closed out before the settlement date without the making or taking of delivery of securities. Closing out a futures contract sale is effected by the Fund's entering into a futures contract purchase for the same aggregate amount of the specific type of financial instrument and the same delivery date. If the price in the sale exceeds the price in the offsetting purchase, the Fund is paid the difference and thus realizes a gain. If the offsetting purchase price exceeds the sale price, the Fund pays the difference and realizes a loss. Similarly, the closing out of a futures contract purchase is effected by the Fund's entering into a futures contract sale. If the offsetting sale price exceeds the purchase price, the Fund realizes a gain, and if the purchase price exceeds the offsetting sale price, the Fund realizes a loss. Interest rate futures contracts are traded in an auction environment on the floors of several exchanges - principally, the Chicago Board of Trade, the Chicago Mercantile Exchange and the New York Futures Exchange. A Fund would deal only in standardized contracts on recognized changes. Each exchange guarantees performance under contract provisions through a clearing corporation, a nonprofit organization managed by the exchange membership. 25 A public market now exists in futures contracts covering various financial instruments including long-term United States Treasury Bonds and Notes; GNMA modified pass-through mortgage-backed securities; three-month United States Treasury Bills; and ninety-day commercial paper. The Funds may trade in any futures contract for which there exists a public market, including, without limitation, the foregoing instruments. Examples of Futures Contract Sale. A Fund would engage in an interest rate futures contract sale to maintain the income advantage from continued holding of a long-term bond while endeavoring to avoid part or all of the loss in market value that would otherwise accompany a decline in long-term securities prices. Assume that the market value of a certain security in a Fund tends to move in concert with the futures market prices of long-term United States Treasury bonds ("Treasury Bonds"). The Adviser wishes to fix the current market value of this portfolio security until some point in the future. Assume the portfolio security has a market value of 100, and the Adviser believes that, because of an anticipated rise in interest rates, the value will decline to 95. The Fund might enter into futures contract sales of Treasury bonds for an equivalent of 98. If the market value of the portfolio securities does indeed decline from 100 to 95, the equivalent futures market price for the Treasury bonds might also decline from 98 to 93. In that case, the five-point loss in the market value of the portfolio security would be offset by the five-point gain realized by closing out the futures contract sale. Of course, the futures market price of Treasury bonds might well decline to more than 93 or to less than 93 because of the imperfect correlation between cash and futures prices mentioned below. The Adviser could be wrong in its forecast of interest rates and the equivalent futures market price could rise above 98. In this case, the market value of the portfolio securities, including the portfolio security being protected, would increase. The benefit of this increase would be reduced by the loss realized on closing out the futures contract sale. If interest rate levels did not change, the Fund in the above example might incur a loss of 2 points (which might be reduced by an offsetting transaction prior to the settlement date). In each transaction, transaction expenses would also be incurred. Examples of Future Contract Purchase. A Fund would engage in an interest rate futures contract purchase when it is not fully invested in long-term bonds but wishes to defer for a time the purchase of long-term bonds in light of the availability of advantageous interim investments, e.g., shorter-term securities whose yields are greater than those available on long-term bonds. The Fund's basic motivation would be to maintain for a time the income advantage from investing in the short-term securities; the Fund would be endeavoring at the same time to eliminate the effect of all or part of an expected increase in market price of the long-term bonds that the Fund may purchase. 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. 26 If, however, short-term rates remained above available long-term rates, it is possible that the Fund would discontinue its purchase program for long-term bonds. The yield on short-term securities in the portfolio, including those originally in the pool assigned to the particular long-term bond, would remain higher than yields on long-term bonds. The benefit of this continued incremental income will be reduced by the loss realized on closing out the futures contract purchase. In each transaction, expenses also would be incurred. II. Index Futures Contracts. A stock or bond index assigns relative values to the stocks or bonds included in the index, and the index fluctuates with changes in the market values of the stocks or bonds included. Some stock index futures contracts are based on broad market indices, such as the Standard & Poor's 500 or the New York Stock Exchange Composite Index. In contract, certain exchanges offer futures contracts on narrower market indices, such as the Standard & Poor's 100, the Bond Buyer Municipal Bond Index, an index composed of 40 term revenue and general obligation bonds, or indices based on an industry or market segment, such as oil and gas stocks. Futures contracts are traded on organized exchanges regulated by the Commodity Futures Trading Commission. Transactions on such exchanges are cleared through a clearing corporation, which guarantees the performance of the parties to each contract. A Fund will sell index futures contracts in order to offset a decrease in market value of its portfolio securities that might otherwise result from a market decline. The Fund may do so either to hedge the value of its portfolio as a whole, or to protect against declines, occurring prior to sales of securities, in the value of the securities to be sold. Conversely, a Fund will purchase index futures contracts in anticipation of purchases of securities. In a substantial majority of these transactions, the Fund will purchase such securities upon termination of the long futures position, but a long futures position may be terminated without a corresponding purchase of securities. In addition, a Fund may utilize index futures contracts in anticipation of changes in the composition of its portfolio holdings. For example, in the event that a Fund expects to narrow the range of industry groups represented in its holdings it may, prior to making purchases of the actual securities, establish a long futures position based on a more restricted index, such as an index comprised of securities of a particular industry group. A Fund also may sell futures contracts in connection with this strategy, in order to protect against the possibility that the value of the securities to be sold as part of the restructuring of the portfolio will decline prior to the time of sale. The following are examples of transactions in stock index futures (net of commissions and premiums, if any). 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/ Increase in Purchase Contract Price = $2,500 Gain on Futures = $2,500 27 HEDGING A STOCK PORTFOLIO: Sell the Future Hedge Objective: Protect Against Declining (Value of the Portfolio) Factors Value of Stock Portfolio = $1,000,000 Value of Futures Contract = 125 x $500 = $62,500 Portfolio Beta Relative to the Index - 1.0 Portfolio Futures -Day Hedge is Placed Anticipate Selling $1,000,000 Sell 16 Index Futures at 125 Equity Portfolio Value of Futures = $1,000,000 -Day Hedge is Lifted- Equity Portfolio-Own Buy 16 Index Futures at 120 Stock with Value = $960,000 Value of Futures = $960,000 Loss in Portfolio Gain on Futures = $40,000 Value = $40 000 If, however, the market moved in the opposite direction, that is, market value decreased and the Fund had entered into an anticipatory purchase hedge, or market value increased and the Fund had hedged its stock portfolio, the results of the Fund's transactions in stock index futures would be as set forth below. 28 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 Price = $2,500 Contract 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 III. Margin Payments Unlike when a Fund purchases or sells a security, no price is paid or received by the Fund upon the purchase or sale of a futures contract. Initially, the Fund will be required to deposit with the broker or in a segregated account with the Fund's Custodian an amount of cash or cash equivalents, the value, of which may vary but is generally equal to 10% or less of the value of the contract. This amount is known as initial margin. The nature of initial margin in futures transactions is different from that of margin in security transactions in that futures contract margin does not involve the borrowing of funds by the customer to finance the transactions. Rather, the initial margin is in the nature of a performance bond or good faith deposit on the contract which is returned to the Fund upon termination of the futures contract assuming all contractual obligations have been satisfied. Subsequent payments, called variation margin, to and from the broker, will be made on a daily basis as the price of the underlying security or index fluctuates making the long and short positions in the futures contract more or less valuable, a process known as marking to the market. For example, when a Fund has purchased a futures contract and the price of the contract has risen in response to a rise in the underlying instruments, that position will have increased in value and the Fund will be entitled to receive from the broker a variation margin payment equal to that increase in value. Conversely, where a Fund has purchased a futures contract and the price of the futures contract has declined in response to a decrease in the underlying instruments, the position would be less valuable, the Fund would be required to make a variation margin payment to the broker. At any time prior to expiration of the futures contract, the Adviser may elect to close the position by taking an opposite position, subject to the availability of a secondary market, which will operate to terminate the Fund's position in the futures contract. A final determination of variation margin is then made, additional cash is required to be paid by or released to the Fund, and the Fund realizes a loss or gain. 29 IV. Risks of Transactions in Futures Contracts There are several risks in connection with the use of futures by a Fund as a hedging device. One risk arises because of the imperfect correlation between movements in the price of the future and movements in the price of the securities which are the subject of the hedge. The price of the future may move more than or less than the price of the securities being hedged. If the price of the future moves less than the price of the securities which are the subject of the hedge, the hedge will not be fully effective but, if the price of securities being hedged has moved in an unfavorable direction, the Fund would be in a better position than if it had not hedged at Al. If the price of the securities being hedged has moved in a favorable direction, this advance will be partially offset by the loss on the future. If the price of the future moves more than the price of the hedged securities, the Fund involved will experience either a loss or gain on the future which will not be completely offset by movements in the price of the securities which are the subject of the hedge. To compensate for the imperfect correlation of movements in the price of securities being hedged and movements in the price of futures contracts, a Fund may buy or sell futures contracts in a greater dollar amount than the dollar amount of securities being hedged if the volatility over a particular time period of the prices of such securities has been greater than the volatility over such time period of the future, or if otherwise deemed to be appropriate by the Adviser. Conversely, a Fund may buy or sell fewer futures contracts if the volatility over a particular time period of the prices of the securities being hedged is less than the volatility over such time period of the futures contract being used, or if otherwise deemed to be appropriate by the Adviser. It also is possible that, where a Fund has sold futures to hedge its portfolio against a decline in the market, the market may advance, and the value of securities held by the Fund may decline. If this occurred, the Fund would lose money on the future and also experience a decline in value in its portfolio securities. Where futures are purchased to hedge against a possible increase in the price of securities before a Fund is able to invest its cash (or cash equivalents) in securities (or options) in an orderly fashion, it is possible that the market may decline instead; if the Fund then concludes not to invest in securities or options at that time because of concern as to possible further market decline or for other reasons, the Fund will realize a loss on the futures contract that is not offset by a reduction in the price of securities purchased. In instances involving the purchase of futures contracts by a Fund, an amount of cash and cash equivalents, equal to the market value of the futures contracts, will be deposited in a segregated account with the Fund's Custodian and/or in a margin account with a broker to collateralize the position and thereby insure that the use of such futures is unleveraged. In addition to the possibility that there may be an imperfect correlation, or no correlation at all, between movements in the futures and the securities being hedged, the price of futures may not correlate perfectly with movement in the cash market due to certain market distortions. Rather than meeting additional margin deposit requirements, investors may close futures contracts through off-setting transactions which could distort the normal relationship between the cash and futures markets. Second, with respect to financial futures contracts, the liquidity of the futures market depends on participants entering into off-setting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced thus producing distortions. Third, from the point of view of speculators, the deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may also cause temporary price distortions. Due to the possibility of Price distortion in the futures market, and because of the imperfect correlation between the movements in the cash market and movements in the price of futures, a correct forecast of general market trends or interest rate movements by the Adviser still may not result in a successful hedging transaction over a short time frame. 30 Positions in futures may be closed out only on an exchange or board of trade which provides a secondary market for such futures. Although the Funds intend to purchase or sell futures only on exchanges or boards of trade where there appear to be active secondary markets, there is no assurance that a liquid secondary market on any exchange or board of trade will exist for any particular contract or at any particular time. In such event, it may not be possible to close a futures investment position, and in the event of adverse price movements, a Fund would continue to be required to make daily cash payments of variation margin. However, in the event futures contracts have been used to hedge portfolio securities, such securities will not be sold until the futures contract can be terminated. In such circumstances, an increase in the price of the securities, if any, may partially or completely offset loss on the futures contract. However, as described above, there is no guarantee that the price of the securities will in fact correlate with the price movements in the futures contract and thus provide an offset on a futures contract. Further, it should be noted that the liquidity of a secondary market in a futures contract may be adversely affected by "daily price fluctuation limits" established by commodity exchanges which limit the amount of fluctuation in a futures contract price during a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open futures positions. Successful use of futures by a Fund also is subject to the Adviser's ability to predict correctly movements in the direction of the market. For example, if a Fund has hedged against the possibility of a decline in the market adversely affecting securities held in its portfolio and securities prices increase instead, the Fund will lose part or all of the benefit to the increased value of its securities which it has hedged because it will have offsetting loss in its futures positions. In addition, in such situations, if the Fund has insufficient cash, it may have to sell securities to meet daily variation margin requirements. Such sales of securities may be, but will not necessarily be, at increased prices which reflect the rising market. A Fund may have to sell securities at a time when it may be disadvantageous to do so. V. Options on Futures Contracts. The Funds may purchase options on the futures contracts described above. A futures option gives the holder, in return for the premium paid, the right to buy (call) from or sell (put) to the writer of the option a futures contract at a specified price at any time during the period of the option. Upon exercise, the writer of the option is obligated to pay the difference between the cash value of the futures contract and the exercise price. Like the buyer or seller of a futures contract, the holder, or writer, of an option has the right to terminate its position prior to the scheduled expiration of the option by selling, or purchasing, an option of the same series, at which time the person entering into the closing transaction will realize a gain or loss. Investments in futures options involve some of the same considerations that are involved in connection with investments in futures contracts (for example, the existence of a liquid secondary market). In addition, the purchase of an option also entails the risk that changes in the value of the underlying futures contract will not be fully reflected in the value of the option purchased. Depending on the pricing of the option compared to either the futures contract upon which it is based, or upon the price of the securities being hedged, an option may or may not be less risky than ownership of the futures contract or such securities. In general, the market prices of options can be expected to be more volatile than the market prices on the underlying futures contract. Compared to the purchase or sale of futures contracts, however, the purchase of call or put options on futures contracts may frequently involve less potential risk to a Fund because the maximum amount at risk is the premium paid for the options (plus transaction costs). Although permitted by their fundamental investment policies, the Funds do not currently intend to write future options, and will not do so in the future absent any necessary regulatory approvals. 31 Accounting Treatment. Accounting for futures contracts and options will be in accordance with generally accepted accounting principles. Guaranteed Investment Contracts Guaranteed investment contracts, investment contracts or funding agreements (each referred to as a "GIC") are investment instruments issued by highly rated insurance companies. Pursuant to such contracts, a Fund may make cash contributions to a deposit fund of the insurance company's general or separate accounts. The insurance company then credits to a Fund guaranteed interest. The insurance company may assess periodic charges against a GIC for expense and service costs allocable to it, and the charges will be deducted from the value of the deposit fund. The purchase price paid for a GIC generally becomes part of the general assets of the issuer, and the contract is paid from the general assets of the issuer. A Fund will only purchase GICs from issuers which, at the time of purchase, meet quality and credit standards established by the Adviser. Generally, GICs are not assignable or transferable without the permission of the issuing insurance companies, and an active secondary market in GICs does not currently exist. Also, a Fund may not receive the principal amount of a GIC from the insurance company on seven days' notice or less, at which point the GIC may be considered to be an illiquid investment. The Prime Fund may acquire GICs so that it, together with other instruments in its portfolio which are not readily marketable, will not exceed applicable limitations on such Fund's investments in illiquid securities. The Prime Fund will restrict its investments in GICs to those having a term of 397 days or less. In determining average weighted portfolio maturity, a GIC will be deemed to have a maturity equal to the period of time remaining under the next readjustment of the guaranteed interest rate. Insured Municipal Securities Certain of the municipal securities held by the Funds may be insured at the time of issuance as to the timely payment of principal and interest. The insurance policies will usually be obtained by the issuer of the municipal securities at the time of its original issuance. In the event that the issuer defaults with respect to interest or principal payments, the insurer will be notified and will be required to make payment to the bondholders. There is, however, no guarantee that the insurer will meet its obligations. In addition, such insurance will not protect against market fluctuations caused by changes in interest rates and other factors. Interest Rate Transactions Among the strategic transactions into which certain Funds may enter are interest rate swaps and the purchase or sale of related caps and floors. The Funds expect to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its portfolio, to protect against currency fluctuations, as a duration management technique or to protect against any increase in the price of securities the Fund anticipates purchasing at a later date. A Fund intends to use these transactions as hedges and not as speculative investments and will not sell interest rate caps or floors where it does not own securities or other instruments providing the income stream the Fund may be obligated to pay. Interest rate swaps involve the exchange by a Fund with another party of their respective commitments to pay or receive interest, e.g. an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. A currency swap is an agreement to exchange cash flows on a notional amount of two or more currencies based on the relative value differential among them and an index swap is an agreement to swap cash flows on a notional amount based on changes in the values of the reference indices. The purchase of a cap entitles the purchaser to receive payments on a notional principal amount from the party selling such floor to the extent that a specified index falls below a predetermined interest rate or amount. 32 A Fund will usually enter into swaps on a net basis, i.e., the two payment streams are netted out in a cash settlement on the payment date or dates specified in the instrument, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. In as much as these swaps, caps and floors are entered into for good faith hedging purposes, the Adviser and the Fund believe such obligations do not constitute senior securities under the 1940 Act and, accordingly, will not treat them as being subject to its borrowing restrictions. A Fund will not enter into any swap, cap and floor transaction unless, at the time of entering into such transaction, the unsecured long-term debt of the counterparty, combined with any credit enhancements, is rated at least "A" by Standard & Poor's Corporation or Moody's Investors Service, Inc. or has an equivalent rating from a NRSRO or is determined to be of equivalent credit quality by the Adviser. If there is a default by the counterparty, the Fund may have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid. Caps and floors are more recent innovations for which standardized documentation has not yet been fully developed and, accordingly, they are less liquid than swaps. With respect to swaps, a Fund will accrue the net amount of the excess, if any, of its obligations over its entitlements with respect to each swap on a daily basis and will segregate an amount of cash or liquid high grade securities having a value equal to the accrued excess. Caps and floors require segregation of assets with a value equal to the Fund's net obligation, if any. Lower Rated Debt Securities The yields on lower rated debt and comparable unrated fixed-income securities generally are higher than the yields available on higher-rated securities. However, investments in lower rated debt and comparable unrated securities generally involve greater volatility of price and risk of loss of income and principal, including the probability of default by or bankruptcy of the issuers of such securities. Lower rated debt and comparable unrated securities (a) will likely have some quality and protective characteristics that, in the judgment of the rating organization, are outweighed by large uncertainties or major risk exposures to adverse conditions and (b) are predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligation. Accordingly, it is possible that these types of factors could, in certain instances, reduce the value of securities held in a Fund's portfolio, with a commensurate effect on the value of the Fund's shares. Therefore, an investment in the Fund should not be considered as a complete investment program and may not be appropriate for all investors. The market prices of lower rated securities may fluctuate more than higher rated securities and may decline significantly in periods of general economic difficulty which may follow periods of rising interest rates. During an economic downturn or a prolonged period of rising interest rates, the ability of issuers of lower quality debt to service their payment obligations, meet projected goals, or obtain additional financing may be impaired. Since the risk of default is higher for lower rated securities, the Adviser will try to minimize the risks inherent in investing in lower rated debt securities by engaging in credit analysis, diversification, and attention to current developments and trends affecting interest rates and economic conditions. The Adviser will attempt to identify those issuers of high-yielding securities whose financial condition is adequate to meet future obligations, have improved, or are expected to improve in the future. Unrated securities are not necessarily of lower quality than rated securities, but they may not be attractive to as may buyers. Each Fund's policies regarding lower rated debt securities is not fundamental and may be changed at any time without shareholder approval. While the market values of lower rated debt and comparable unrated securities tend to react less to fluctuations in interest rate levels than the market values of higher-rated securities, the market values of certain lower rated debt and comparable unrated securities also tend to be more sensitive to individual corporate developments and changes in economic conditions than higher-rated securities. In addition, lower rated debt securities and comparable unrated securities generally present a higher degree of credit risk. Issuers of lower rated debt and comparable unrated securities often are highly leveraged and may not have more traditional methods of financing available to them so that their ability to service their debt obligations during an economic downturn or during sustained periods of rising interest rates may be impaired. The risk of loss due to default by such issuers is significantly greater because lower rated debt and comparable unrated securities generally are unsecured and frequently are subordinated to the prior payment of senior indebtedness. A Fund may incur additional expenses to the extent that it is required to seek recovery upon a default in the payment of principal or interest on its portfolio holdings. The existence of limited markets for lower rated debt and comparable unrated securities may diminish a Fund's ability to (a) obtain accurate market quotations for purposes of valuing such securities and calculating its net asset value and (b) sell the securities at fair value either to meet redemption requests or to respond to changes in the economy or in financial markets. 33 Fixed-income securities, including lower rated debt securities and comparable unrated securities, frequently have call or buy-back features that permit their issuers to call or repurchase the securities from their holders, such as a Fund. If an issuer exercises these rights during periods of declining interest rates, a Fund may have to replace the security with a lower yielding security, thus resulting in a decreased return to a Fund. The market for certain lower rated debt and comparable unrated securities is relatively new and has not weathered a major economic recession. The effect that such a recession might have on such securities is not known. Any such recession, however, could disrupt severely the market for such securities and adversely affect the value of such securities. Any such economic downturn also could adversely affect the ability of the issuers of such securities to repay principal and pay interest thereon. Municipal Securities Generally. The two principal classifications of municipal securities are "general obligation" securities and "revenue" securities. General obligation securities are secured by the issuer's pledge of its full faith, credit, and taxing power for the payment of principal and interest. Revenue securities are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue source such as the user of the facility being financed. Private activity bonds held by a Fund are in most cases revenue securities and are not payable from the unrestricted revenues of the issuer. Consequently, the credit quality of private activity bonds is usually directly related to the credit standing of the corporate user of the facility involved. Municipal securities may include "moral obligation" bonds, which are normally issued by special purpose public authorities. If the issuer of moral obligation bonds is unable to meet its debt service obligations from current revenues, it may draw on a reserve fund, the restoration of which is a moral commitment but not a legal obligation of the state or municipality which created the issuer. Municipal securities may include variable- or floating- rate instruments issued by industrial development authorities and other governmental entities. While there may not be an active secondary market with respect to a particular instrument purchased by a Fund, a Fund may demand payment of the principal and accrued interest on the instrument or may resell it to a third party as specified in the instruments. The absence of an active secondary market, however, could make it difficult for a Fund to dispose of the instrument if the issuer defaulted on its payment obligation or during periods the Fund is not entitled to exercise its demand rights, and the Fund could, for these or other reasons, suffer a loss. Some of these instruments may be unrated, but unrated instruments purchased by a Fund will be determined by the Adviser to be of comparable quality at the time of purchase to instruments rated "high quality" by any major rating service. Where necessary to ensure that an instrument is of comparable "high quality," a Fund will require that an issuer's obligation to pay the principal of the note may be backed by an unconditional bank letter or line of credit, guarantee, or commitment to lend. Municipal securities may include participations in privately arranged loans to municipal borrowers, some of which may be referred to as "municipal leases." Generally such loans are unrated, in which case they will be determined by the Adviser to be of comparable quality at the time of purchase to rated instruments that may be acquired by a Fund. Frequently, privately arranged loans have variable interest rates and may be backed by a bank letter of credit. In other cases, they may be unsecured or may be secured by assets not easily liquidated. Moreover, such loans in most cases are not backed by the taxing authority of the issuers and may have limited marketability or may be marketable only by virtue of a provision requiring repayment following demand by the lender. Such loans made by a Fund may have a demand provision permitting the Fund to require payment within seven days. Participations in such loans, however, may not have such a demand provision and may not be otherwise marketable. 34 Although lease obligations do not constitute general obligations of the municipality for which the municipality's taxing power is pledged, a lease obligation is ordinarily backed by the municipality's covenant to budget for, appropriate, and make the payments due under the lease obligation. However, certain lease obligations contain "non-appropriation" clauses which provide that the municipality has no obligation to make lease or installment purchase payments in future years unless money is appropriated for such purpose on a yearly basis. In addition to the "non-appropriation" risk, these securities represent a relatively new type of financing that has not yet developed the depth of marketability associated with more conventional bonds. In the case of a "non-appropriation" lease, the Funds' ability to recover under the lease in the event of non-appropriation or default will be limited solely to the repossession of the leased property in the event foreclosure might prove difficult. The Funds will not invest more than 5% of their total investment assets in lease obligations that contain "non-appropriation" clauses where (1) the nature of the leased equipment or property is such that its ownership or use is essential to a governmental function of the municipality, (2) the lease payments will commence amortization of principal at an early date resulting in an average life of seven years or less for the lease obligation, (3) appropriate covenants will be obtained from the municipal obligor prohibiting the substitution or purchase of similar equipment if lease payments are not appropriated, (4) the lease obligor has maintained good market acceptability in the past, (5) the investment is of a size that will be attractive to institutional investors, and (6) the underlying leased equipment has elements of probability and/or use that enhance its marketability in the event foreclosure on the underlying equipment were ever required. The Funds have not imposed any percentage limitations with respect to their investment in lease obligations not subject to the "non-appropriation" risk. To the extent municipal leases are illiquid, they will be subject to each Fund's limitation on investments in illiquid securities. Recovery of an investment in any such loan that is illiquid and payable on demand may depend on the ability of the municipal borrower to meet an obligation for full repayment of principal and payment of accrued interest within the demand period, normally seven days or less (unless a Fund determines that a particular loan issue, unlike most such loans, has a readily available market). As it deems appropriate, the Adviser will establish procedures to monitor the credit standing of each such municipal borrower, including its ability to meet contractual payment obligations. In evaluating the credit quality of a municipal lease obligation and determining whether such lease obligation will be considered "liquid," the Adviser for each Fund will consider: (1) whether the lease can be canceled; (2) what assurance there is that the assets represented by the lease can be sold; (3) the strength of the lessee's general credit (e.g., its debt, administrative, economic, and financial characteristics); (4) the likelihood that the municipality will discontinue appropriating funding for the leased property because the property is no longer deemed essential to the operations of the municipality (e.g., the potential for an "event of non-appropriation"); and (5) the legal recourse in the event of failure to appropriate. Municipal securities may include units of participation in trusts holding pools of tax-exempt leases. Municipal participation interests may be purchased from financial institutions, and give the purchaser an undivided interest in one or more underlying municipal security. To the extent that municipal participation interests are considered to be "illiquid securities," such instruments are subject to each Fund's limitation on the purchase of illiquid securities. Municipal leases and participating interests therein, which may take the form of a lease or an installment sales contract, are issued by state and local governments and authorities to acquire a wide variety of equipment and facilities. Interest payments on qualifying leases are exempt from Federal income taxes. In addition, certain of the Funds may acquire "stand-by commitments" from banks or broker/dealers with respect to municipal securities held in their portfolios. Under a stand-by commitment, a dealer would agree to purchase at a Fund's option specified municipal securities at a specified price. The Funds will acquire stand-by commitments solely to facilitate portfolio liquidity and do not intend to exercise their rights thereunder for trading purposes. Although the Funds do not presently intend to do so on a regular basis, each may invest more than 25% of its total assets in municipal securities the interest on which is paid solely from revenues of similar projects if such investment is deemed necessary or appropriate by the Adviser. To the extent that more than 25% of a Fund's total assets are invested in municipal securities that are payable from the revenues of similar projects, a Fund will be subject to the peculiar risks presented by such projects to a greater extent than it would be if its assets were not so concentrated. 35 There are, of course, variations in the quality of municipal securities, both within a particular classification and between classifications, and the yields on municipal securities depend upon a variety of factors, including general money market conditions, the financial condition of the issuer, general conditions of the municipal bond market, the size of a particular offering, the maturity of the obligation, and the rating of the issue. The ratings of NRSROs represent their opinions as to the quality of municipal securities. It should be emphasized, however, that these ratings are general and are not absolute standards of quality, and municipal securities with the same maturity, interest rate, and rating may have different yields while municipal securities of the same maturity and interest rate with different ratings may have the same yield. Subsequent to its purchase by a Fund, an issue of municipal securities may cease to be rated, or its rating may be reduced below the minimum rating required for purchase by that Fund. The Adviser will consider such an event in determining whether a Fund should continue to hold the obligation. Opinions relating to the validity of municipal securities and to the exemption of interest thereon from regular Federal income tax or state income tax are rendered by counsel to the issuer or bond counsel at the time of issuance. Neither the Funds nor the Adviser will review the proceedings relating to the issuance of municipal securities or the bases for opinions relating to the validity of such issuance. The payment of principal and interest on most securities purchased by a Fund will depend upon the ability of the issuers to meet their obligations. Each state, each of their political subdivisions, municipalities, and public authorities, as well as the District of Columbia, Puerto Rico, Guam, and the Virgin Islands are a separate "issuer" as that term is used in the Prospectuses and this SAI. The non-governmental user of facilities financed by private activity bonds is also considered to be an "issuer." An issuer's obligations under its municipal securities are subject to the provisions of bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be enacted by Federal or state legislatures extending the time for payment of principal or interest, or both, or imposing other constraints upon enforcement of such obligations or upon the ability of municipalities to levy taxes. The power or ability of an issuer to meet its obligations for the payment of interest on and principal of its municipal securities may be materially adversely affected by litigation or other conditions. Certain types of municipal securities (private activity bonds) have been or are issued to obtain funds to provide, among other things, privately operated housing facilities, pollution control facilities, convention or trade show facilities, mass transit, airport, port or parking facilities, and certain local facilities for water supply, gas, electricity, or sewage or solid waste disposal. Private activity bonds are also issued for privately held or publicly owned corporations in the financing of commercial or industrial facilities. Most governments are authorized to issue private activity bonds for such purposes in order to encourage corporations to locate within their communities. The principal and interest on these obligations may be payable from the general revenues of the users of such facilities. From time to time, proposals have been introduced before Congress for the purpose of restricting or eliminating the Federal income tax exemption for interest on municipal securities. Moreover, with respect to municipal securities issued by states, the Funds cannot predict which legislation, if any, may be proposed in the state legislatures or which proposals, if any, might be enacted. Such proposals, while pending or if enacted, might materially and adversely affect the availability of municipal securities for investment by one of these Funds and the liquidity and value of such portfolios. In such an event, a Fund impacted would re-evaluate its investment objective and policies and consider possible changes in its structure or possible dissolution. Options on Currencies Certain Funds may purchase and sell options on currencies to hedge the value of securities the Fund holds or intends to buy. Options on foreign currencies may be traded on U.S. and foreign exchanges or over-the-counter. 36 Other Investment Companies In seeking to attain their investment objectives, certain Funds may invest in securities issued by other investment companies within the limits prescribed by the 1940 Act. Each Fund currently intends to limit its investments so that, as determined immediately after a securities purchase is made: (a) not more than 5% of the value of its total assets will be invested in the securities of any one investment company; (b) not more than 10% of the value of its total assets will be invested in the aggregate in securities of investment companies as a group; and (c) not more than 3% of the outstanding voting stock of any one investment company will be owned by the Fund or by the Company as a whole. As a shareholder of another investment company, a Fund would bear, along with other shareholders, its pro rata portion of the other investment company's expenses, including Advisory fees. These expenses would be in addition to the Advisory and other expenses that a Fund bears in connection with its own operations. The Adviser has agreed to remit to the respective investing Fund fees payable to it under its respective Investment Advisory Agreement with an affiliated money market Fund to the extent such fees are based upon the investing Fund's assets invested in shares of the affiliated money market fund. Participation Interests and Company Receipts Certain Funds may purchase from domestic financial institutions and trusts created by such institutions participation interests and trust receipts in high quality debt securities. A participation interest or receipt gives the Fund an undivided interest in the security in the proportion that the Fund's participation interest or receipt bears to the total principal amount of the security. As to certain instruments for which the Fund will be able to demand payment, the Fund intends to exercise its right to do so only upon a default under the terms of the security, as needed to provide liquidity or to maintain or improve the quality of its investment portfolio. It is possible that a participation interest or trust receipt may be deemed to be an extension of credit by the Fund to the issuing financial institution rather than to the obligor of the underlying security and may not be directly entitled to the protection of any collateral security provided by the obligor. In such event, the ability of the Fund to obtain repayment could depend on the issuing financial institution. Participation interests and trust receipts may have fixed, floating or variable rates of interest, and will have remaining maturities of thirteen months or less (as defined by the SEC). If a participation interest or trust receipt is unrated, the Adviser will have determined that the interest or receipt is of comparable quality to those instruments in which the Fund may invest pursuant to guidelines approved by the Board of Directors/Trustees. For certain participation interests or trust receipts the Fund will have the right to demand payment, on not more than 30 days' notice, for all or any part of the Fund's participation interest or trust receipt in the securities involved, plus accrued interest. Real Estate Investment Trusts A real estate investment trust ("REIT") is a managed portfolio of real estate investments which may include office buildings, apartment complexes, hotels and shopping malls. An equity REIT holds equity positions in real estate, and it seeks to provide its shareholders with income from the leasing of its properties, and with capital gain from any sales of properties. A mortgage REIT specializes in lending money to developers of properties, and passes any interest income it may earn to its shareholders. REITs may be affected by changes in the value of the underlying property owned or financed by the REIT, while Mortgage REITs also may be affected by the quality of credit extended. Both equity and mortgage REITs are dependent upon management skill and may not be diversified. REITs also may be subject to heavy cash flow dependency, defaults by borrowers, self-liquidation, and the possibility of failing to qualify for tax-free pass-through of income under the Internal Revenue Code of 1986, as amended. Repurchase Agreements The repurchase price under any repurchase agreements described in the Prospectuses generally equals the price paid by a Fund plus interest negotiated on the basis of current short-term rates (which may be more or less than the rate on the securities underlying the repurchase agreement). Securities subject to repurchase agreements will be held by a Fund's custodian in a segregated account or in the Federal Reserve/Treasury book-entry system. Repurchase agreements are considered to be loans by such Fund under the 1940 Act. 37 Reverse Repurchase Agreements At the time a Fund enters into a reverse repurchase agreement, it may establish a segregated account with its custodian bank in which it will maintain cash, U.S. Government securities or other liquid high grade debt obligations equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Funds are obligated to repurchase under the agreement may decline below the repurchase price. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Funds' use of proceeds of the agreement may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the Funds' obligation to repurchase the securities. Reverse repurchase agreements are speculative techniques involving leverage, and are subject to asset coverage requirements if the Funds do not establish and maintain a segregated account (as described above). In addition, some or all of the proceeds received by a Fund from the sale of a portfolio instrument may be applied to the purchase of a repurchase agreement. To the extent the proceeds are used in this fashion and a common broker/dealer is the counterparty on both the reverse repurchase agreement and the repurchase agreement, the arrangement might be recharacterized as a swap transaction. Under the requirements of the 1940 Act, the Funds are required to maintain an asset coverage (including the proceeds of the borrowings) of at least 300% of all borrowings. Depending on market conditions, the Funds' asset coverage and other factors at the time of a reverse repurchase, the Funds may not establish a segregated account when the Adviser believes it is not in the best interests of the Funds to do so. In this case, such reverse repurchase agreements will be considered borrowings subject to the asset coverage described above. Securities Lending To increase return on portfolio securities, certain Funds may lend their portfolio securities to broker/dealers and other institutional investors pursuant to agreements requiring that the loans be continuously secured by collateral equal at all times in value to at least the market value of the securities loaned. Collateral for such loans may include cash, securities of the U.S. Government, its agencies or instrumentalities, an irrevocable letter of credit issued by (i) a U.S. bank that has total assets exceeding $1 billion and that is a member of the Federal Deposit Insurance Corporation, or (ii) a foreign bank that is one of the 75 largest foreign commercial banks in terms of total assets, or any combination thereof. Such loans will not be made if, as a result, the aggregate of all outstanding loans of the Fund involved exceeds 33% of the value of its total assets which may include cash collateral received for securities loaned. There may be risks of delay in receiving additional collateral or in recovering the securities loaned or even a loss of rights in the collateral should the borrower of the securities fail financially. However, loans are made only to borrowers deemed by the Adviser to be of good standing and when, in its judgment, the income to be earned from the loan justifies the attendant risks. Pursuant to the securities loan agreement a Fund is able to terminate the securities loan upon notice of not more than five business days and thereby secure the return to the Fund of securities identical to the transferred securities upon termination of the loan. Short Sales Certain Funds may from time to time enter into short sales transactions. A Fund will not make short sales of securities nor maintain a short position unless at all times when a short position is open, such Fund owns an equal amount of such securities or securities convertible into or exchangeable, without payment of any further consideration, for securities of the same issue as, and equal in amount to, the securities sold short. This is a technique known as selling short "against the box." Such short sales will be used by a Fund for the purpose of deferring recognition of gain or loss for federal income tax purposes. Special Situations Certain Funds may invest in "special situations." A special situation arises when, in the opinion of the Adviser, the securities of a particular company will, within a reasonably estimable period of time, be accorded market recognition at an appreciated value solely by reason of a development applicable to that company, and regardless of general business conditions or movements of the market as a whole. Developments creating special situations might include, among others: liquidations, reorganizations, recapitalizations, mergers, material litigation, technical breakthroughs and new management or management policies. Although large and well known companies may be involved, special situations more often involve comparatively small or unseasoned companies. Investments in unseasoned companies and special situations often involve much greater risk than is inherent in ordinary investment securities. 38 Stand-By Commitments Certain Funds may acquire "stand-by commitments" with respect to municipal securities held in their portfolios. Under a "stand-by commitment," a dealer agrees to purchase from a Fund, at a Fund's option, specified municipal securities at a specified price. Stand-by commitments are exercisable by a Fund at any time before the maturity of the underlying municipal securities, and may be sold, transferred, or assigned by a Fund only with the underlying instruments. The amount payable to a Government Corporate 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 Government Corporate Bond Fund paid on their acquisition), less any amortized market premium or plus any amortized market or original issue discount during the period a Government Corporate 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 Government Corporate 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. A Fund's right to exercise stand-by commitments will be unconditional and unqualified. A stand-by commitment will not be transferable by a Fund, although the Fund could sell the underlying municipal securities to a third party at any time. Until a Fund exercises its stand-by commitment, it owns the securities in its portfolio which are subject to the stand-by commitment. The Funds expect that stand-by commitments will generally be available without the payment of any direct or indirect consideration. However, if necessary or advisable, a Fund may pay for a stand-by commitment either separately in cash or by paying a higher price for the security being acquired which will be subject to the commitment (thus reducing the yield to maturity otherwise available for the same security). When a Fund pays any consideration directly or indirectly for a stand-by commitment, its cost will be reflected as unrealized depreciation for the period during which the commitment is held by that Fund. Each Fund intends to enter into stand-by commitments only with banks and broker/dealers which, in the Adviser's opinion, present minimal credit risks. In evaluating the credit worthiness of the issuer of a stand-by commitment, the Adviser will review periodically the issuer's assets, liabilities, contingent claims, and other relevant financial information. The Funds would acquire stand-by commitments solely to facilitate portfolio liquidity and do not intend to exercise their rights thereunder for trading purposes. Stand-by commitments acquired by a Fund will be valued at zero in determining net asset value. A Fund's reliance upon the credit of these dealers, banks, and broker/dealers will be secured by the value of the underlying municipal securities that are subject to the commitment. Thus, the risk of loss to the Fund in connection with a "stand-by commitment" will not be qualitatively different from the risk of loss faced by a person that is holding securities pending settlement after having agreed to sell the securities in the ordinary course of business. Stripped Securities Certain Funds may purchase stripped securities issued or guaranteed by the U.S. Government, where the principal and interest components are traded independently under the Separate Trading of Registered Interest and Principal of Securities program ("STRIPS"). Under STRIPS, the principal and interest components are individually numbered and separately issued by the U.S. Treasury at the request of depository financial institutions, which then trade the component parts independently. 39 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. Each Fund limits its investments in domestic bank obligations to banks having total assets in excess of $1 billion and subject to regulation by the U.S. Government. Each Fund may also invest in certificates of deposit issued by members of the Federal Deposit Insurance Corporation ("FDIC") having total assets of less than $1 billion, provided that the Fund will at no time own more than $100,000 principal amount of certificates of deposit (or any higher principal amount which in the future may be fully covered by FDIC insurance) of any one of those issuers. Fixed time deposits are obligations which are payable at a stated maturity date and bear a fixed rate of interest. Generally, fixed time deposits may be withdrawn on demand by a Fund, but they may be subject to early withdrawal penalties which vary depending upon market conditions and the remaining maturity of the obligation. Although fixed time deposits do not have a market, there are no contractual restrictions on a Fund's right to transfer a beneficial interest in the deposit to a third party. Each Fund limits its investments in foreign bank obligations (i.e., obligations of foreign branches and 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 criteria established by the Board of Directors/Trustees of the respective Company, are of an investment quality comparable to obligations of domestic banks which may be purchased by a Fund. These obligations may be general obligations of the parent bank in addition to the issuing branch or subsidiary, but the parent bank's obligations may be limited by the terms of the specific obligation or by governmental regulation. Each Fund also limits its investments in foreign bank obligations to banks, branches and subsidiaries located in Western Europe (United Kingdom, France, Germany, Belgium, The Netherlands, Italy and Switzerland), Scandinavia (Denmark and Sweden), Australia, Japan, the Cayman Islands, the Bahamas and Canada. Each Fund will limit its investment in securities of foreign banks to not more than 20% of total assets at the time of investment. Each Fund may also make interest-bearing savings deposits in commercial and savings banks in amounts not in excess of 5% of the total assets of the Fund. 40 U.S. Government Obligations Each Fund may invest in U.S. Government obligations. Examples of the types of U.S. Government obligations that may be held by the Funds include, in addition to U.S. Treasury bonds, notes and bills, the obligations of the Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, Government National Mortgage Association, Federal National Mortgage Association, General Services Administration, Student Loan Marketing Association, Central Bank for Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate Credit Banks, Tennessee Valley Authority, Resolution Funding Corporation and Maritime Administration. Obligations guaranteed as to principal or interest by the U.S. Government, its agencies, authorities or instrumentalities are deemed to include: (a) securities for which the payment of principal and interest is backed by an irrevocable letter of credit issued by the U.S. Government, its agencies, authorities or instrumentalities and (b) participations in loans made to foreign governments or their agencies that are so guaranteed. The secondary market for certain of these participations is limited. If such participations are illiquid they will not be purchased. U.S. Government obligations include principal and interest components of securities issued or guaranteed by the U.S. Treasury if the components are traded independently under the Separate Trading of Registered Interest and Principal of Securities program. Obligations issued or guaranteed as to principal or interest by the U.S. Government, its agencies, authorities or instrumentalities may also be acquired in the form of custodial receipts. These receipts evidence ownership of future interest payments, principal payments or both on certain notes or bonds issued by the U.S. Government, its agencies, authorities or instrumentalities. Use of Segregated and Other Special Accounts Options, futures and forward foreign currency contracts that obligate a Fund to provide cash, securities or currencies to complete such transactions will entail that Fund to either segregate assets in an account with, or on the books of, the Company's custodian, or otherwise "covering" the transaction as described below. For example, a call option written by a Fund will require the Fund to hold the securities subject to the call (or securities convertible into the needed securities without additional consideration) or liquid assets sufficient to meet the obligation by purchasing and delivering the securities if the call is exercised. A call option written on an index will require that Fund to have portfolio securities that correlate with the index. A put option written by a Fund also will require that Fund to have available assets sufficient to purchase the securities the Fund would be obligated to buy if the put is exercised. A forward foreign currency contract that obligates a Fund to provide currencies will require the Fund to hold currencies or liquid securities denominated in a foreign currency which will equal the Fund's obligations. Such a contract requiring the purchase of currencies also requires segregation. Unless a segregated account consists of the securities, cash or currencies that are the subject of the obligation, a Fund will hold cash, U.S. Government securities and other high grade liquid debt obligations in a segregated account. These assets cannot be transferred while the obligation is outstanding unless replaced with other suitable assets. In the case of an index-based transaction, a Fund could own securities substantially replicating the movement of the particular index. In the case of a futures contract, a Fund must deposit initial margin and variation margin, as often as daily, if the position moves adversely, sufficient to meet its obligation to purchase or provide securities or currencies, or to pay the amount owed at the expiration of an index-based futures contract. Similarly, options on futures contracts require a Fund to deposit margin to the extent necessary to meet the Fund's commitments. In lieu of such assets, such transactions may be covered by other means consistent with applicable regulatory policies. A Fund may enter into off-setting transactions so that its combined position, coupled with any segregated assets, equals its net outstanding obligation in related options and hedging transactions. For example, a Fund could purchase a put option if the strike price of that option is the same or higher than the strike price of a put option sold by that Fund. Moreover, instead of segregating assets if a Fund held a futures or forward contract, it could purchase a put option on the same futures or forward contract with a strike price as high or higher than the price of the contract held. Of course, the off-setting transaction must terminate at the time of or after the primary transaction. 41 Variable- and Floating-Rate Instruments Certain Funds may purchase variable-rate and floating rate obligations. If such instrument is not rated, the Adviser will consider the earning power, cash flows, and other liquidity ratios of the issuers and guarantors of such obligations and, if the obligation is subject to a demand feature, will monitor their financial status to meet payment on demand. In determining average weighted portfolio maturity, a variable-rate demand instrument issued or guaranteed by the U.S. Government or an agency or instrumentality thereof will be deemed to have a maturity equal to the period remaining until the obligations next interest rate adjustment. Other variable-rate obligations will be deemed to have a maturity equal to the longer of the period remaining to the next interest rate adjustment or the time a Fund can recover payment of principal as specified in the instrument. Variable-rate demand notes held by a Money Market Fund may have maturities of more than 397 days, provided (i) the Fund is entitled to payment principal on not more than 30 days' notice, or at specified intervals not exceeding 397 days (upon not more than 30 days' notice), and (ii) the rate of interest on such note is adjusted automatically at periodic intervals which may extend up to 397 days. The variable- and-floating rate demand instruments that the Funds may purchase include participations in municipal securities purchased from and owned by financial institutions, primarily banks. Participation interests provide a Fund with a specified undivided interest (up to 100%) in the underlying obligation and the right to demand payment of the unpaid principal balance plus accrued interest on the participation interest from the institution upon a specified number of days' notice, not to exceed 30 days. Each participation interest is backed by an irrevocable letter of credit or guarantee of a bank that the Adviser has determined meets the prescribed quality standards for the Funds. The bank typically retains fees out of the interest paid on the obligation for servicing the obligation, providing the letter of credit, and issuing the repurchase commitment. Warrants Certain Funds are permitted to invest in warrants. Warrants are privileges issued by corporations enabling the owner to subscribe to and purchase a specified number of shares of the corporation at a specified price during a specified period of time. The prices of warrants do not necessarily correlate with the prices of the underlying securities. The purchase of warrants involves the risk that the purchaser could lose the purchase value of the warrant if the right to subscribe to additional shares is not exercised prior to the warrant's expiration. Also, the purchase of warrants involves the risk that the effective price paid for the warrant added to the subscription price of the related security may exceed the value of the subscribed security's market price such as when there is no movement in the level of the underlying security. When-Issued Purchases and Forward Commitments A Fund may agree to purchase securities on a when-issued basis or enter into a forward commitment to purchase securities. When a Fund engages in these transactions, its custodian will segregate cash, U.S. government securities or other high quality debt obligations equal to the amount of the commitment. Normally, the custodian will segregate portfolio securities to satisfy a purchase commitment, and in such a case a Fund may be required subsequently to segregate additional assets in order to ensure that the value of the segregated assets remains equal to the amount of the Fund's commitment. Because a Fund will segregate cash or liquid assets to satisfy its purchase commitments in the manner described, the Fund's liquidity and ability to manage its portfolio might be adversely affected in the event its commitments to purchase when-issued securities ever exceeded 25% of the value of its assets. In the case of a forward commitment to sell portfolio securities, the Fund's custodian will hold the portfolio securities themselves in a segregated account while the commitment is outstanding. A Fund will make commitments to purchase securities on a when-issued basis or to purchase or sell securities on a forward commitment basis only with the intention of completing the transaction and actually purchasing or selling the securities. If deemed advisable as a matter of investment strategy, however, a Fund may dispose of or renegotiate a commitment after it is entered into, and may sell securities it has committed to purchase before those securities are delivered to the Fund on the settlement date. In these cases the Fund may realize a capital gain or loss. 42 When a Fund engages in when-issued and forward commitment transactions, it relies on the other party to consummate the trade. Failure of such party to do so may result in the Fund's incurring a loss or missing an opportunity to obtain a price considered to be advantageous. The value of the securities underlying a when-issued purchase or a forward commitment to purchase securities, and any subsequent fluctuations in their value, is taken into account when determining the net asset value of a Fund starting on the date the Fund agrees to purchase the securities. The Fund does not earn dividends on the securities it has committed to purchase until they are paid for and delivered on the settlement date. When the Fund makes a forward commitment to sell securities it owns, the proceeds to be received upon settlement are included in the Fund's assets. Fluctuations in the value of the underlying securities are not reflected in the Fund's net asset value as long as the commitment remains in effect. Portfolio Turnover Generally, the Domestic Stock Funds will purchase portfolio securities for capital appreciation or investment income, or both, and not for short-term trading profits. If a Fund's annual portfolio turnover rate exceeds 100%, it may result in higher brokerage costs and possible tax consequences for the Portfolio and its shareholders. For the Funds' portfolio turnover rates, see the "Financial Highlights" in the Prospectus. Investment Risks In addition to the risks identified in certain of the securities descriptions above, there also are general investment risks associated with an investment in any of the Funds. In addition to the investment risks and considerations identified in certain of the securities descriptions above, there are additional investment risks and considerations associated with an investment in certain of the Funds. Investments by a Fund in common stocks and other equity securities are subject to stock market risks. The value of the stocks that the Fund holds, like the broader stock market, may decline over short or even extended periods. The U.S. stock market tends to be cyclical, with periods when stock prices generally rise and periods when prices generally decline. As of the date of this SAI, the stock market, as measured by the S&P 500 Index and other commonly used indexes, was trading at or close to record levels. There can be no guarantee that these levels will continue. Marsico Focused Equities Fund is a non-diversified fund, which means that it typically invest in fewer issuers than diversified funds. Therefore, appreciation or depreciation of an investment in a single issuer could have a greater impact on these Funds' net asset value. Marsico Focused Equities Fund reserves the right to become a diversified fund by limiting the investments in which more than 5% of its total assets are invested. The value of a Fund's investments in debt securities, including U.S. Government Obligations, will tend to decrease when interest rates rise and increase when interest rates fall. In general, longer-term debt instruments tend to fluctuate in value more than shorter-term debt instruments in response to interest rate movements. In addition, debt securities that are not backed by the United States Government are subject to credit risk, which is the risk that the issuer may not be able to pay principal and/or interest when due. In addition, obligations with the lowest investment grade rating (e.g., "BBB" S&P or "Baa" by Moody's) have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case with higher grade debt obligations. Subsequent to its purchase by the Fund, an issue of securities may cease to be rated or its rating may be reduced below the minimum rating required for purchase by the Fund. The Adviser will consider such an event in determining whether the Fund should continue to hold the obligation. Unrated obligations may be acquired by the Fund if they are determined by the Adviser to be of comparable quality at the time of purchase to rated obligations that may be acquired. 43 Certain of the Funds' investments constitute derivative securities, which are securities whose value is derived, at least in part, from an underlying index or reference rate. There are certain types of derivative securities that can, under certain circumstances, significantly increase a purchaser's exposure to market or other risks. The Adviser, however, only purchases derivative securities in circumstances where it believes such purchases are consistent with such Fund's investment objective and do not unduly increase the Fund's exposure to market or other risks. For additional risk information regarding the Funds' investments in particular instruments, see "Appendix A -- Fund Securities." Certain of the Funds may invest in securities of smaller and newer issuers. Investments in such companies may present greater opportunities for capital appreciation because of high potential earnings growth, but also present greater risks than investments in more established companies with longer operating histories and greater financial capacity. Master Feeder Structure. The Feeder Funds are open-end mutual funds that seek to achieve their investment objectives by investing all of its investable assets in corresponding Master Portfolios which have the same investment objectives. The Feeder Funds may withdraw their investment in the Master Portfolios at any time if the Board of Directors/Trustees of the appropriate Company determines that it is in the best interest of such Feeder Fund to do so. Upon such withdrawal, the Board of Directors/Trustees would consider what action might be taken, including the investment of all of the assets of the Fund in another pooled investment entity having the same investment objective as the Feeder Fund or the hiring of an investment adviser to manage the Feeder Fund's assets in accordance with its investment policies. The Master Portfolios are separate series of Nations Master Investment Trust, which is organized as a business trust under the laws of Delaware. The Feeder Fund and other entities that may investment in the Master Portfolios from time to time (e.g., other investment companies and commingled trust funds) will each be liable for all obligations of the Master Portfolios. However, the risk of the Feeder Fund's incurring financial loss on account of such liability is limited to circumstances in which both inadequate insurance exists and a LifeGoal Portfolio itself is unable to meet its obligations. Accordingly, the Boards of Directors/Trustees of Nations Fund, Inc., Nations Fund Trust, Nations Reserves and Nations Funds Trust believe that neither a Feeder Fund nor its shareholders will be adversely affected by reason of a Feeder Fund's investing in a Master Portfolio. As with any mutual fund, other investors in the Master Portfolios could control the results of voting at the Master Portfolio level in certain instances (e.g., a change in fundamental policies by the Master Portfolio which was not approved by the Fund's shareholders). This could result in a Feeder Fund's withdrawal of its investment in the Master Portfolio. Further, the withdrawal of other entities that may from time to time invest in the Master Portfolios could have an adverse effect on the performance of such Master Portfolios and the corresponding Feeder Fund, such as decreased economies of scale, and increased per share operating expenses. In addition, the total withdrawal by another investment company as an investor in a Master Portfolio will cause the such Master Portfolio to terminate automatically in 120 days unless a Feeder Fund and any other investors in the Master Portfolio unanimously agree to continue the business of the Master Portfolio. If unanimous agreement is not reached to continue the Master Portfolio, the Board of Directors/Trustees of a Nations Funds company would need to consider alternative arrangements for the Feeder Fund, such as those described above. When the Fund is required to vote as an interestholder of the Master Portfolio, current regulations provide that in those circumstances the Feeder Fund may either seek instructions from its security holders with regard to voting such proxies and vote such proxies in accordance with such instructions or the Feeder Fund may vote its shares in the Master Portfolio in the same proportion of all other security holders in the Master Portfolio. There may also be other investment companies through which you can invest in the Master Portfolio which may have higher or lower fees and expense than those of its corresponding Fund and which may therefore have different performance results than the Feeder Fund. MANAGEMENT OF THE COMPANY The business and affairs of the Company are managed under the direction of its Board of Trustees. This SAI contains the names of and general background information concerning each Trustee. 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 Trustees who are "interested persons" of the Company (as defined in the 1940 Act) are indicated by an asterisk (*). 44
Principal Occupations During Past 5 Years Position with and Current Name, Address, and Age the Company Trusteeships ---------------------- ------------- ---------------------- Edmund L. Benson, III, 63 Trustee Director, President and Treasurer, Saunders & Benson, Saunders & Benson, Inc. Inc. (Insurance), Insurance Managers, Inc. 1510 Willow Lawn Drive (insurance); Trustee, Nations Reserves, Nations Master Suite 216 Investment Trust, Nations Annuity Trust and Nations Richmond, VA 23230 Fund Trust; Director, Nations Fund, Inc., and Nations LifeGoal Funds, Inc. through June 2001; Director, Nations Fund Portfolios, Inc. through August, 1999. William P. Carmichael, 56 Trustee Trustee - 231 Funds (investment company) from 1993 Succession Fund to 1995, Time Horizon Fund (investment company) from 1995 The Wrigley Building to 1999, Pacific Innovations Trust (investment company) 400 North Michigan Avenue from 1997 to 1999, Nations Annuity Trust company) Suite 1016 since December 1999, Nations Master Investment Chicago, IL 60611 Trust (investment company) since December 1999, and Nations Funds Trust (investment company) since December 1999; Director- The Hain Food Group, Inc. (specialty food products distributor) until December 1998, Cobra Electronics Corporation (electronic equipment manufacturer), Opta Food Ingredients, Inc. (food ingredients manufacturer), Golden Rule Insurance Company, Nations LifeGoal Funds, Inc. (investment company) December 1999 through June 2001. James Ermer, 57 Trustee Retired Executive Vice President, Corporate Development 11511 Compass Point Drive and Planning - Land America (title insurance); Ft. Meyers, FL 33908 Senior Vice President, Finance - CSX Corporation (transportation and natural resources); Director - National Mine Service (mining supplies), Lawyers Title Corporation (title insurance); Trustee, Nations Reserves, Nations Fund Trust, Nations Annuity Trust and Nations Master Investment Trust; Director, Nations Fund, Inc. and Nations LifeGoal Funds, Inc. through June 2001; Director, Nations Fund Portfolios, Inc. through August, 1999. William H. Grigg, 67 Trustee Chairman Emeritus since July 1997, Chairman and Chief Duke Power Co. Executive Officer from April 1994 to July 1997 - Duke 16092A Reap Road Power Co.; Director - The Shaw Group, Inc.; Director Albermarle, NC 28001 and Vice Chairman, Aegis Insurance Services, Ltd. (a mutual insurance company in Bermuda); Trustee, Nations Reserves, Nations Fund Trust, Nations Annuity Trust and Nations Master Investment Trust; Director, Hatteras Income Securities, Inc., Nations Government Income Term Trust 2003, Inc., Nations Government Income Term Trust 2004, Inc., Nations Balanced Target Maturity Fund, Inc., Nations Fund, Inc. and Nations LifeGoal Funds, Inc. through June 2001 through June 2001; Director, Nations Fund Portfolios, Inc. through August, 1999.
45
Principal Occupations During Past 5 Years Position with and Current Name, Address, and Age the Company Trusteeships ---------------------- ------------- ---------------------- Thomas F. Keller, 68 Trustee R.J. Reynolds Industries Professor of Business Fuqua School of Business Administration and Former Dean - Fuqua School of P.O. Box 90120 Business, Duke University; Director - LADD Furniture, Duke University Inc. (furniture), Wendy's International, Inc. Durham, NC 27708 (restaurant operating and franchising), American Business Products, Inc. (printing services), Dimon, Inc. (tobacco), Biogen, Inc. (pharmaceutical biotechnology); Trustee, The Mentor Funds, Mentor Institutional Trust, Cash Reserve Trust, Nations Reserves, Nations Fund Trust, Nations Annuity Trust and Nations Master Investment Trust; Director, Hatteras Income Securities, Inc., Nations Government Income Term Trust 2003, Inc., Nations Government Income Term Trust 2004, Inc., Nations Balanced Target Maturity Fund, Inc. and Nations LifeGoal Funds, Inc. through June 2001; Director, Nations Fund Portfolios, Inc. through August, 1999. Carl E. Mundy, Jr., 65 Trustee President and CEO - USO from May 1996 to present; USO World Headquarters Commandant - United States Marine Corps from July 1991 Washington Navy Yard to July 1995; Director - Shering-Plough (pharmaceuticals Building 198 and health care products); General Dynamics Corporation 901 M Street, S.E. (defense systems); Trustee, Nations Reserves, Nations Fund Washington, D.C. 20374-5096 Trust, Nations Annuity Trust and Nations Master Investment Trust; Director, Nations Fund, Inc. and Nations LifeGoal Funds, Inc. through June 2001; Director, Nations Fund Portfolios, Inc. through August, 1999. Dr. Cornelius J. Pings, 71* Trustee President - Association of American Universities from 480 S. Orange Grove Blvd. February 1993 to June 1998; Director - Farmers Group, Pasadena, CA 91105 Inc. (insurance company), Nations Fund, Inc. and Nations LifeGoal Funds, Inc. through June 2001; Trustee, Master Investment Trust, Series I from 1995 to 1999, Master Investment Trust, Series II from 1995 to 1997, Nations Reserves, Nations Fund Trust, Nations Annuity Trust and Nations Master Investment Trust.; Director/Trustee and Chairman - Pacific Horizon Funds, Inc. and Master Investment Trust, Series I, from inception to May 1999; Director - Time Horizon Funds and Pacific Innovations Trust; Director, Nations Fund Portfolios, Inc. through August, 1999. James B. Sommers*, 61 Trustee President - NationsBank Trust from January 1992 237 Cherokee Road to September 1996; Executive Vice President - Charlotte, NC 28207 NationsBank Corporation from January 1992 to May 1997; Chairman - Central Piedmont Community College Foundation; Board of Commissioners, Charlotte/ Mecklenberg Hospital Authority; Director - Nations Fund, Inc. and Nations LifeGoal Funds, Inc. through June 2001; 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.
46
Principal Occupations During Past 5 Years Position with and Current Name, Address, and Age the Company Trusteeships ---------------------- ------------- ---------------------- A. Max Walker*, 78 President, Trustee and Independent Financial Consultant; Director and Chairman 4580 Windsor Gate Court Chairman of the Board of the Board - Hatteras Income Securities, Inc., Atlanta, GA 30342 Nations Government Income Term Trust 2003, Inc., Nations Government Income Term Trust 2004, Inc., Nations Balanced Target Maturity Fund, Inc.; President, Director and Chairman of the Board - Nations Fund, Inc. and Nations LifeGoal Funds, Inc. through June 2001; President, Trustee and Chairman of the Board - Nations Reserves, Nations Fund Trust, Nations Annuity Trust and Nations Master Investment Trust; Director, Nations Fund Portfolios, Inc. through August, 1999. Charles B. Walker, 61 Trustee Director-Ethyl Corporation (chemical manufacturing); Vice Albermarle Corporation Chairman and Chief Financial Officer - Albemarle Vice Chairman and CFO Corporation (chemical manufacturing); Director, Nations 330 South Fourth Street Fund, Inc. and Nations LifeGoal Funds, Inc. through June Richmond, VA 23219 2001; Trustee, Nations Reserves, Nations Fund Trust, Nations Annuity Trust and Nations Master Investment Trust; Director, Nations Fund Portfolios, Inc. through August, 1999. Thomas S. Word, Jr.*, 62 Trustee Partner - McGuire, Woods, Battle & Boothe LLP (law firm); McGuire, Woods, Battle & Boothe LLP Director - Vaughan-Bassett Furniture Companies, One James Center Inc. (furniture), Nations Fund, Inc. and Nations 8th Floor LifeGoal Funds, Inc. through June 2001; Trustee, Nations Richmond, VA 23219 Reserves, Nations Fund Trust, Nations Annuity Trust and Nations Master Investment Trust; Director, Nations Fund Portfolios, Inc. through August, 1999. Richard H. Blank, Jr., 42 Secretary and Treasurer Senior Vice President since 1998, Vice President from 1994 Stephens Inc. to 1998 and Manager from 1990 to 1994 - Mutual Fund 111 Center Street Services, Stephens Inc.; Secretary since September 1993 and Little Rock, AR 72201 Treasurer since November 1998 - Nations Fund, Inc., Nations LifeGoal Funds, Inc. through June 2001; Nations Reserves, Nations Fund Trust, Nations Annuity Trust and Nations Master Investment Trust.; Secretary and Treasurer, Nations Fund Portfolios, Inc. through August, 1999. Michael W. Nolte, 39 Assistant Secretary Assistant Secretary - Nations Fund Trust, Nations Fund, Stephens Inc. Inc., Nations Reserves, Nations LifeGoal Funds, Inc. through June 2001; Nations Annuity Trust and Nations Master Investment Trust; Assistant Secretary, Nations Fund Portfolios, Inc. through August, 1999. Carolyn Wyse, 37 Assistant Secretary and Assistant Secretary and Assistant Treasurer since August Stephens Inc. Assistant Treasurer 1999- Nations Fund Trust, Nations Fund, Inc., Nations Reserves, Nations LifeGoal Funds, Inc. through June 2001; Nations Annuity Trust, Nations Master Investment Trust and Nations Funds Trust.
47 Mr. Blank serves as Secretary and Treasurer to other investment companies for which Stephens Inc. serves as administrator. Each Trustee of the Company is also a Director of Nations Fund, Inc. and a Trustee of Nations Fund Trust, Nations Annuity Trust, Nations Master Investment Trust, Nations Reserves and Nations Funds Trust, each an open-end registered investment company that is part of the Nations Funds Family, except William P. Carmichael, who is only a board member of Nations Annuity Trust, Nations Master Investment Trust and the Company. Richard H. Blank, Jr., Michael W. Nolte and Carolyn Wyse are also officers of Nations Fund, Inc., Nations Fund Trust, Nations Annuity Trust, Nations Master Investment Trust and Nations Reserves. As of the date of this SAI, the directors and officers of the Company as a group owned less than 1% of the outstanding shares of each of the LifeGoal Portfolios. Each Company, each Adviser, and Stephens have adopted a code of ethics which, contain policies on personal securities transactions by "access persons," including portfolio managers and investment analysts. These policies substantially comply in all material respects with the amendments to Rule 17j-1 under the 1940 Act as set forth in the August 20, 1999 Release. Each code of ethics, among other things, prohibits each access person of the Company from purchasing or selling securities when such person knows or should have known that, at the time of the transaction, the security (i) was being considered for purchase or sale by a Fund, or (ii) was being purchased or sold by a Fund. For purposes of the code of ethics, an access person means (i) a director or officer of a Company, (ii) any employee of a Company (or any company in a control relationship with a 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 a Company, and (iii) any natural person in a control relationship with a Company who obtains information concerning recommendations made to a 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 a 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 a Company's access persons, other than its "disinterested" directors or trustees, submit reports to a Company's designated compliance person regarding transactions involving securities which are eligible for purchase by a Fund. The codes of ethics for the Company, Adviser, and Stephens are on public file with, and are available from, the SEC. Nations Funds Retirement Plan Under the terms of the Nations Funds Retirement Plan for Eligible 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 There is no deferred compensation plan for the Company; however, there is a deferred compensation plan in place for the other fund companies in the Nations Funds Family. 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 48 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. Director Compensation The Directors/Trustees of the all the open-end fund companies in the Nations Funds Family are compensated for their services to the such companies on a flat rate basis, and not on a per registered investment company or per fund basis as outlined in the following chart. Board Member Compensation Arrangement ------------------------------------------------- ------------------------------------------------------------- Board Member Annual Retainer: $65,000 Board Chairman: Additional 20% of the base annual retainer. Payable in quarterly installments. Payable pro rata for partial calendar year of service. Allocated across multiple registrants. Meeting Fees: $5,000 per meeting for in-person meetings (up to six meetings per calendar year) and $1,000 for telephone meetings. Allocated across multiple registrants convened at meetings. ------------------------------------------------- ------------------------------------------------------------- ------------------------------------------------- ------------------------------------------------------------- Audit Committee Members Chairman: Additional 10% of the base annual retainer as Board Member. Meeting Fees: $1,000 per meeting if not held within one calendar day before or after regularly scheduled Board meetings. Allocated across multiple registrants convened at meetings. ------------------------------------------------- ------------------------------------------------------------- ------------------------------------------------- ------------------------------------------------------------- Nominating Committee Members Meeting Fees: $1,000 per meeting if not held within one calendar day before or after regularly scheduled Board meetings. Allocated across multiple registrants convened at meetings. ------------------------------------------------- -------------------------------------------------------------
The following Compensation Table provides the compensation paid by the companies to the Directors/Trustees for the year ended March 31, 2000. From April 1, 1999 to June 30, 1999 each Director/Trustee received (i) an annual retainer of $1,000 ($3,000 for the Chairman of the Board) plus $500 for each Series of each Company, plus (ii) a fee of $1,000 for attendance at each "in-person" meeting of each respective Board (or Committee thereof) and $500 for attendance at each other meeting of each respective Board (or Committee thereof). Beginning July 1, 1999 the Trustees were compensated according to the Compensation Arrangement as outlined above. 49 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) ------------ -------------- -------- --------------- -------------- Edmund L. Benson, III $4,479 $0 $0 $88,696 Trustee/Director James Ermer 4,479 0 0 76,391 Trustee/Director William H. Grigg 4,479 0 0 101,391 Trustee/Director Thomas F. Keller $4,743 0 0 $94,875 Trustee/Director A. Max Walker 5,007 0 0 110,875 Chairman of the Board Charles B. Walker 4,479 0 0 92,000 Trustee/Director Thomas S. Word 4,437 0 0 84,391 Trustee/Director James P. Sommers 4,479 0 0 93,000 Trustee/Director Carl E. Mundy, Jr. 4,479 0 0 92,000 Trustee/Director William Carmichael 339 0 0 4,753 Trustee/Director Dr. Cornelius Pings 4,479 0 0 92,000 Trustee/Director
(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, 2000, 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 11 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, Word, Pings and Carmichael receive compensation from seven investment companies deemed to be part of the Nations Funds complex. (4) Total compensation amounts include deferred compensation payable to or accrued for the following Directors/Trustees: Edmund L. Benson, III $40,456; James Ermer $4,803; William H. Grigg $80,912; Thomas F. Keller $85,588; and Thomas S. Word $79,954. 50 INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY, TRANSFER AGENCY, OTHER SERVICE PROVIDERS, SHAREHOLDER SERVICING AND DISTRIBUTION ARRANGEMENTS* Investment Adviser and Sub-Adviser of the LifeGoal Portfolios BAAI serves as investment adviser to the LifeGoal Portfolios pursuant to an Investment Advisory Agreement dated December 9, 1999. BAAI is a wholly owned subsidiary 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. BAAI has its principal offices at One Bank of America Plaza, Charlotte, North Carolina 28255. BAAI also serves as investment adviser to the funds of Nations Fund, Inc., Nations Fund Trust, Nations Annuity Trust, Nations Master Investment Trust and Nations Reserves, each a registered investment company that is part of the Nations Funds Family. In addition, BAAI serves as the investment adviser to Hatteras Income Securities, Inc., Nations Government Income Term Trust 2003, Inc., Nations Government Income Term Trust 2004, Inc. and Nations Balanced Target Maturity Fund, Inc., each a closed-end diversified management investment company traded on the New York Stock Exchange. The Investment Advisory Agreement was originally approved by the Company's Board of Trustees at the December 9, 1999 Meeting of the Board of Trustees and by the initial shareholder. It provides that BAAI may delegate its duties to a sub-adviser. The Investment Advisory Agreement provides that in the absence of willful misfeasance, bad faith, negligence or reckless disregard of obligations or duties thereunder on the part of BAAI, or any of its officers, directors, employees or agents, BAAI 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 thereunder or for any loss that may be sustained in the purchase, holding or sale of any security. BAAI will receive fees for providing advisory services at the annual rate of 0.25% of the average daily value of each LifeGoal Portfolio's net assets during the preceding month. BAAI also has agreed to absorb all other expenses of the LifeGoal Portfolios (except taxes, brokerage fees and commissions, extraordinary expenses, and any applicable Rule 12b-1 fees, shareholder servicing fees and/or shareholder administration fees). BAAI also is compensated for providing advisory services to the underlying Nations Funds in which the LifeGoal Portfolios invest. The Investment Advisory Agreement shall become effective with respect to a LifeGoal Portfolio if and when approved by the Trustees of the Company, and if so approved, shall thereafter continue from year to year, provided that such continuation of the Agreement is specifically approved at least annually by (a) (i) the Company's Board of Trustees or (ii) the vote of "a majority of the outstanding voting securities" of a LifeGoal Portfolio (as defined in Section 2(a)(42) of the 1940 Act), and (b) the affirmative vote of a majority of the Company's Trustees who are not parties to such Agreement or "interested persons" (as defined in the 1940 Act) of a party to such Agreement (other than as Trustees of the Company), by votes cast in person at a meeting specifically called for such purpose. The Investment Advisory Agreement will terminate automatically in the event of its assignment, and is terminable with respect to a LifeGoal Portfolio at any time without penalty by the Company (by vote of the Board of Trustees or by vote of a majority of the outstanding voting securities of a LifeGoal Portfolio) or by BAAI on 60 days' written notice. The dollar amount of investment advisory fees paid by each LifeGoal Portfolio of the Company to BAAI and the dollar amount of advisory fees voluntarily reduced by BAAI for the Company's fiscal period ended March 31, 2000, were as follows: -------- * Prior to June 8, 2001, the LifeGoal Portfolios were a series of Nations LifeGoal Funds, Inc., a former company of the Nations Funds Family. Accordingly, all of the agreements and plans discussed in this section, and the fees paid pursuant to such agreement and plans, were contracted with Nations LifeGoal Funds, Inc. Such agreements and plans are substantially similar to those discussed below. 51
Advisory Net Fees Expenses Advisory Voluntarily Reimbursed Fees Waived by Adviser --------- -------------- ------------- LifeGoal Growth Portfolio $59,433 0 0 LifeGoal Balanced Growth Portfolio $63,702 0 0 LifeGoal Income and Growth Portfolio $29,068 0 0
The dollar amount of investment advisory fees paid by each LifeGoal Portfolio of the Company to BAAI and the dollar amount of advisory fees voluntarily reduced by BAAI for the Company's fiscal period ended March 31, 1999 were as follows:
Advisory Net Fees Expenses Advisory Voluntarily Reimbursed Fees Waived by Adviser ---------- ------------ ------------- LifeGoal Growth Portfolio $ 33,010 $ 0 $ 0 LifeGoal Balanced Growth Portfolio 49,521 0 0 LifeGoal Income and Growth Portfolio 17,390 0 0
The dollar amount of investment advisory fees paid by each LifeGoal Portfolio of the Company to BAAI and the dollar amount of advisory fees voluntarily reduced by BAAI for the Company's fiscal period ended March 31, 1998 were as follows:
Advisory Net Fees Expenses Advisory Voluntarily Reimbursed Fees Waived by Adviser ------------- -------------- ---------------- LifeGoal Growth Portfolio $ 10,146 $ 0 $ 0 LifeGoal Balanced Growth Portfolio 8,202 0 0 LifeGoal Income and Growth Portfolio 2,167 0 0
BACAP, with principal offices at One Bank of America Plaza, Charlotte, North Carolina serves as investment sub-adviser to the LifeGoal Portfolios. BACAP is a wholly owned subsidiary of Bank of America. BACAP provides investment management services to individuals, corporations and institutions. The Sub-Advisory Agreement was approved by the Company's Board of Trustees on December 9, 1999 and by the initial shareholder. It provides that BACAP, subject to the supervision of BAAI and the Board of Trustees of the Company, will be primarily responsible for managing the assets of each LifeGoal Portfolio. BACAP will receive fees for providing such services at the annual rate of 0.05% of the average daily value of each LifeGoal Portfolio's net assets during the preceding month. BACAP is also compensated for providing sub-advisory services to most of the underlying Nations Funds in which the LifeGoal Portfolios invest. The Sub-Advisory Agreement will continue in effect for an initial term of two years from its effective date and continues in effect from year to year thereafter only if such continuance is specifically approved at least annually by the Company's Board of Trustees and the affirmative vote of a majority of the directors who are not parties to the Sub-Advisory Agreement or "interested persons" of any such party by votes cast in person at a meeting called for such purpose. The respective LifeGoal Portfolios, BAAI or BACAP may terminate the Sub-Advisory Agreement, on 60 days' written notice without penalty. The Sub-Advisory Agreement terminates automatically in the event of its "assignment," as defined in the 1940 Act. Since 1874, Bank of America and its predecessors have been managing money for foundations, universities, corporations, institutions and individuals. Today, Bank of America affiliates collectively manage in excess of $100 billion, including the more than $90 billion in mutual fund assets. It is a company dedicated to a 52 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 Adviser and Sub-Adviser of the Underlying Nations Funds BAAI serves as investment adviser to all of the underlying Nations Funds. Brandes Investment Partners L.P. ("Brandes") serves as investment sub-adviser to the International Value Master Portfolio. Brandes Investment Partners, Inc. owns a controlling interest in Brandes Investment Partners, L.P. and serves as its General Partner. Charles Brandes is the controlling shareholder of Brandes Investment Partners, Inc. The principal offices of Brandes are located at 12750 High Bluff Drive, San Diego, CA 92130. Gartmore Global Partners ("Gartmore"), INVESCO Global Asset Management (N.A.), Inc. ("INVESCO") and Putnam Investment Management, Inc. ("Putnam") are the co-investment sub-advisers to the International Equity Master Portfolio. Gartmore is registered as an investment adviser under the Investment Advisers Act of 1940, with principal offices at Gartmore House, 8 Fenchurch Place, London EC3M 4PH England. It currently serves as investment sub-adviser to the Emerging Markets Fund, International Growth Fund and International Equity Master Portfolio. Gartmore's former indirect parent was Bank of America Corporation. As of May 31, 2000, Gartmore's indirect parent became Nationwide Mutual Insurance Company ("Nationwide"). Nationwide is an Ohio mutual insurance company with its principal executive offices located at One Nationwide Plaza, Columbus, Ohio 43215. Nationwide is the controlling company of the Nationwide Insurance Enterprise, an insurance and financial services organization (the "Enterprise"). In 1997, Nationwide had $5.1 billion of net written premium. Nationwide is a party to the Nationwide Intercompany Pooling Agreement (the "Nationwide Pooling Agreement") with 12 other property and casualty insurance companies within the Enterprise which provides that Nationwide shares in a specified percentage of the combined underwriting results and dividends to policyholders incurred by such companies (the "Nationwide Pool"). The insurance companies comprising the Nationwide Pool were the sixth largest property and casualty insurance group and were the fourth largest automobile insurance group in the United States, with approximately $8.4 billion in total net written premium at December 31, 1997 and approximately a 3.3% market share. Nationwide was originally chartered in the State of Ohio in 1925 as the Farm Bureau Mutual Automobile Insurance Company and it adopted its present name in 1955. INVESCO Global Asset Management (N.A.), Inc., with principal offices located at 1315 Peachtree Street, N.E., Atlanta, Georgia 30309, was founded in 1997 as a division of INVESCO Global a publicly traded investment management firm located in London, England, and a wholly owned subsidiary of AMVESCAP PLC, a publicly traded UK financial holding company also located in London, England that, through its subsidiaries, engages in international investment management. The "management team" responsible for the day-to-day investment decisions for INVESCO's managed portion of the assets of the International Equity Fund are: John D. Rogers, CFA; W. Linsay Davidson; Michele T. Garren, CFA; Erik B. Granade, CFA; Kent A. Stark; and Ingrid Baker, CFA. Putnam Investment Management, Inc., with principal offices located at One Post Office Square, Boston, Massachusetts 02109, is a wholly owned subsidiary of Putnam Investments, Inc., an investment management firm founded in 1937 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 insurance brokerage, investment management and consulting. The "management team" responsible for the day-to-day investment decisions for Putnam's managed portion of the assets of the International Equity Fund are: Omid Kamshad, CFA; Mark D. Pollard, Justin M. Scott and Paul C. Warren. Marsico Capital Management LLC ("Marsico") serves as investment sub-adviser to the Marsico Focused Equities Master Portfolio and the Marsico International Opportunities Fund. Marsico Capital is located at 1200 17th Street, Suite 1300, Denver, CO 80202. Thomas F. Marsico is currently Chairman and Chief Executive Officer of Marsico Capital. Prior to forming Marsico Capital in September 1997, Mr. Marsico had 18 years of experience as a securities analyst/portfolio manager. Bank of America currently owns 50% of Marsico Capital. On June 28, 2000, Bank of America announced its intention to purchase the remaining 50% equity interest in Marsico Capital. Chicago Equity Partners, LLC ("Chicago Equity") serves as investment sub-adviser to the Blue Chip Master Portfolio. Chicago Equity Partners Corporation was established in 1998 as a wholly owned subsidiary of 53 Bank of America and is the successor to the Bank of America Institutional Equity Group. On April 30, 2000, Chicago Equity Partners Corporation merged into Chicago Equity, a limited liability company formed in the state of Delaware. Chicago Equity is an investment adviser registered under the Investment Advisers Act of 1940, as amended. It serves as the investment sub-adviser for the Blue Chip Master Portfolio and the equity portion of the Asset Allocation Fund. The principal source of Chicago Equity's income is professional fees received from the management of client portfolios. Chicago Equity manages the assets of fiduciary and other institutional accounts. Chicago Equity is located at 231 South LaSalle Street, Chicago, Illinois 60697. MacKay Shields is the investment sub-adviser to the High Yield Bond Master Portfolio. MacKay Shields is located at 9 West 57th Street, New York, NY 10019. BACAP serves as investment sub-adviser to all the other underlying Funds. BAAI also serves as the investment adviser to the portfolios of Nations Fund Trust, Nations Fund, Inc., Nations Reserves, Nations Annuity Trust, each a registered investment company that is part of the Nations Funds Family. In addition, BAAI serves as the investment advisor to Hatteras Income Securities, Inc., Nations Government Income Term Trust 2003, Inc., Nations Government Income Term Trust 2004, Inc. and Nations Balanced Target Maturity Fund, Inc., each a closed-end diversified management investment company traded on the New York Stock Exchange. BACAP also serves as the sub-investment adviser to Nations Reserves, Nations Annuity Trust, Hatteras Income Securities, Inc., Nations Government Income Term Trust 2003, Inc., Nations Government Income Term Trust 2004, Inc. and Nations Balanced Target Maturity Fund, Inc. For the services provided and expenses assumed pursuant to various Investment Advisory Agreements, BAAI is entitled to receive advisory fees, computed daily and paid monthly, at the annual rates of: 0.65% of the average daily net assets of the Value Fund; 0.65% of the average daily net assets of the Blue Chip Master Portfolio; 0.65% of the average daily net assets of the Strategic Growth Fund; 0.75% of the average daily net assets of the Marsico Focused Equities Master Portfolio; 0.90% of the average daily net assets of the Small Company Fund; 0.90% of the average daily net assets of the International Value Master Portfolio; 0.80% of the average daily net assets of the International Equity Master Portfolio; 0.40% of the average daily net assets of the Bond Fund; 0.50% of the average daily net assets of the Strategic Income Fund; 0.30% of the average daily net assets of the Short-Term Income Fund; 0.65% of the average daily net assets of the MidCap Growth fund; 0.80% of the average daily net assets of the Marsico International Opportunities Master Portfolio; 1.00% of the average daily net assets of the Emerging Markets Fund; and 0.20% of the average daily net assets of the Prime Fund. For the services provided and expenses assumed pursuant to sub-advisory agreements, BACAP is entitled to receive from BAAI sub-advisory fees computed daily and paid monthly, at the annual rates of 0.25% of the average daily net assets of the Value Fund; 0.25% of the average daily net assets of the Strategic Growth Fund; 0.25% of the average daily net assets of the Small Company Fund; 0.15% of the average daily net assets of the Bond Fund; 0.15% of the average daily net assets of the Strategic Income Fund; 0.15% of the average daily net assets of the Short-Term Income Fund; 0.25% of the average daily net assets of the MidCap Growth Fund; and 0.055% of the average daily net assets of the Prime Fund. For services provided and expenses assumed pursuant to a sub-advisory agreement, Gartmore is entitled to receive from BAAI sub-advisory fees, for the portion of the assets of the International Equity Master Portfolio that it manages, computed daily and paid monthly at the annual rate of 0.65%. Gartmore is entitled to receive from BAAI sub-advisory fees computed daily and paid monthly at the annual rate of 0.85% of Emerging Markets Fund's average daily net assets. INVESCO is entitled to receive from BAAI sub-advisory fees, for the portion of the assets of the International Equity Master Portfolio that it manages, computed daily and paid monthly at the annual rates of 0.65%. Putnam is entitled to receive from BAAI sub-advisory fees, for the portion of the assets of the International Equity Master Portfolio that it manages, computed daily and paid monthly at the annual rates of 0.65%. The rates indicated for Gartmore, INVESCO and Putnam are maximum rates payable; however, each such sub-adviser is paid according to a tiered rate structure in which such sub-adviser may actually be compensated at a lower rate than indicated. 54 For services provided and expenses assumed pursuant to a sub-advisory agreement, Brandes is entitled to receive from BAAI sub-advisory fees, computed daily and paid monthly at the annual rate of 0.50% of the International Value Fund's average daily net assets. For services provided and expenses assumed pursuant to a sub-advisory agreement, Marsico Capital is entitled to receive from BAAI sub-advisory fees, computed daily and paid monthly at the annual rate of 0.45% of the Marsico Focused Equities Master Portfolio's average daily net assets and 0.45% of the Marsico International Opportunities Master Portfolio's average daily net assets. For services provided and expenses assumed pursuant to a sub-advisory agreement, Chicago Equity is entitled to receive from BAAI sub-advisory fees, computed daily and paid monthly at the annual rate of 0.25% of the Blue Chip Master Portfolio's average daily net assets. For services provided and expenses assumed pursuant to a sub-advisory agreement, MacKay Shields is entitled to receive from BAAI sub-advisory fees, computed daily and paid monthly at the annual rate of 0.40% of the High Yield Bond Master Portfolio's average daily net assets. From time to time, BAAI (and/or BACAP, Gartmore, INVESCO, Putnam, Brandes, Chicago Equity, MacKay Shields or Marsico Capital) may waive or reimburse (either voluntarily or pursuant to applicable state limitations) advisory fees or expenses payable by a Fund. Administrator, Co-Administrator and Sub-Administrator Stephens Inc. and BAAI (the "Co-Administrators") serve as co-administrators of the Company. The Co-Administrators serve under co-administration agreements ("Co-Administration Agreements"), which were approved by the Boards of Trustees on December 9, 1999. The Co-Administrators receive, as compensation for their services rendered under the Co-Administration Agreements, administration fees, computed daily and paid monthly, at the annual rate of: 0.10% of the average daily net assets of the Prime Fund; 0.22% of the of the average daily net assets of the Government and Corporate Bond Funds and the International Stock Funds; and 0.23% of the of the average daily net assets of the Domestic Stock 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 Funds, (ii) furnish statistical and research data, data processing, clerical, and internal executive and administrative services to each Company, (iii) furnish corporate secretarial services to each Company, including coordinating the preparation and distribution of materials for Board of Trustees meetings, (iv) coordinate the provision of legal advice to each Company with respect to regulatory matters, (v) coordinate the preparation of reports to each Company's shareholders and the SEC, including annual and semi-annual reports, (vi) coordinating the provision of services to each Company by the Transfer Agent, Sub-Transfer Agent and the Custodian, and (vii) generally assist in all aspects of each Company's operations. Stephens bears all expenses incurred in connection with the performance of its services. Also, pursuant to the Co-Administration Agreement, BAAI has agreed to, among other things, (i) provide accounting and bookkeeping services for the Funds, (ii) compute each Fund's net asset value and net income, (iii) accumulate information required for the Company's reports to shareholders and the SEC, (iv) prepare and file each Company's federal and state tax returns, (v) perform monthly compliance testing for the Company, and (vi) prepare and furnish the Company monthly broker security transaction summaries and transaction listings and performance information. BAAI bears all expenses incurred in connection with the performance of its services. The Co-Administration Agreement may be terminated by a vote of a majority of the respective Board of Trustees, by Stephens or by BAAI, respectively, on 60 days' written notice without penalty. The Co-Administration Agreements are not assignable without the written consent of the other party. Furthermore, the Co-Administration Agreements provide that Stephens and BAAI shall not be liable to the Funds or to their shareholders except in the case of Stephens' or BAAI's willful misfeasance, bad faith, gross negligence or reckless disregard of duty. 55 The Bank of New York ("BNY") serves as sub-administrator for the Funds pursuant to sub-administration agreements. Pursuant to their terms, BNY assists Stephens and BAAI in supervising, coordinating and monitoring various aspects of the Funds' administrative operations. For providing such services, BNY is entitled to receive a monthly fee which is paid by BAAI from the management fees they receive from the Funds. The Company had, under the previous agreements, retained Stephens, Inc. ("Administrator") as the administrator and PFPC, Inc. (the "Co-Administrator") as the co-administrator of the LifeGoal Portfolios. Under the previous agreements, the Administrator and Co-Administrator served under an administration agreement ("Administration Agreement") and co-administration agreement ("Co-Administration Agreement"), respectively, each of which was approved by the Board of Trustees on December 9, 1999. The Administrator received, as compensation for its services rendered under the Administration Agreement and as agent for the Co-Administrator for the services it provided under the Co-Administration Agreement, an administrative fee of $10,000 per year per underlying fund in the LifeGoal Portfolio, which was absorbed by BAAI. Pursuant to the previous Administration Agreement, the Administrator had agreed to, among other things, (i) maintain office facilities for the LifeGoal Portfolios, (ii) furnish statistical and research data, data processing, clerical, and internal executive and administrative services to the Company, (iii) furnish corporate secretarial services to the Company, including coordinating the preparation and distribution of materials for Board of Trustees meetings, (iv) coordinate the provision of legal advice to the Company with respect to regulatory matters, (v) coordinate the preparation of reports to the Company's shareholders and the SEC, including annual and semi-annual reports, (vi) coordinate the provision of services to the Company by the Co-Administrator, the Transfer Agents and the Custodians, and (vii) generally assist in all aspects of the Company's operations. Additionally, the Administrator is authorized to receive, as agent for the Co-Administrator, the fees payable to the Co-Administrator by the Company for its services rendered under the Co-Administration Agreement. The Administrator bears all expenses incurred in connection with the performance of its services. Pursuant to the Co-Administration Agreement, the Co-Administrator has agreed to, among other things, (i) provide accounting and bookkeeping services for the LifeGoal Portfolios, (ii) compute each LifeGoal Portfolio'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 The Co-Administrator bears all expenses incurred in connection with the performance of its services. The table set forth below states the net Co-Administration fees paid to BAAI and waived for the fiscal period ended March 31, 2000:
Net Co-Administration Co-Administration Fees Fees Voluntarily Waived -------------------- ------------------------ LifeGoal Growth Portfolio $0 $0 LifeGoal Balanced Growth Portfolio 0 0 LifeGoal Income and Growth Portfolio 0 0
The table set forth below states the net Co-Administration fees paid to Stephens and waived for the fiscal period ended March 31, 2000:
56 Net Co-Administration Co-Administration Fees Fees Voluntarily Waived ------------------ ---------------------- LifeGoal Growth Portfolio $0 $0 LifeGoal Balanced Growth Portfolio 0 0 LifeGoal Income and Growth Portfolio 0 0
Under the previous administration agreement, Stephens (the previous administrator for the LifeGoal Portfolios) received no compensation from the LifeGoal Portfolios for serving as Administrator for the periods ended March 31, 1999, March 31, 1998. Under the previous co-administration agreement, the dollar amount of combined Co-Administration fees paid to PFPC, Inc. (the former co-administrator for the LifeGoal Portfolios), being absorbed by BAAI as stated above, for the periods ending February 11, 1999 was as follows:
Net Co-Administration Co-Administration Fees Fees Voluntarily Waived ------------------- --------------------- LifeGoal Growth Portfolio $ 20,000 $0 LifeGoal Balanced Growth Portfolio 20,000 0 LifeGoal Income and Growth Portfolio 20,000 0
Under the previous co-administration agreement, the dollar amount of combined Co-Administration fees paid to PFPC, Inc. (the former co-administrator for the LifeGoal Portfolios), being absorbed by BAAI as stated above, for the periods ended March 31, 1998 and March 31, 1997 was as follows:
Net Co-Administration Co-Administration Fees Fees Voluntarily Waived ----------------- -------------------- LifeGoal Growth Portfolio $ 4,959 $0 LifeGoal Balanced Growth Portfolio 4,959 0 LifeGoal Income and Growth Portfolio 4,959 0
Distributor Stephens Inc. (the "Distributor") serves as the principal underwriter and distributor of the shares of the LifeGoal Portfolios. At a meeting held on December 9, 1999, the Board of Trustees selected Stephens Inc. as Distributor, and approved a distribution agreement ("Distribution Agreement") with the Distributor. Pursuant to the Distribution Agreement, the Distributor, as agent, sells shares of the LifeGoal Portfolios on a continuous basis and transmits purchase and redemption orders that its receives to the Company or the Transfer Agent (as defined under the caption "Transfer Agents and Custodian"). 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, 57 finances those activities which are primarily intended to result in the sale of shares of the LifeGoal Portfolios, including, but not limited to, advertising, compensation of underwriters, dealers and sales personnel, the printing of prospectuses to other than existing shareholders, and the printing and mailing of sales literature. The Distributor, however, may be reimbursed for all or a portion of such expenses to the extent permitted by a distribution plan adopted by the Company pursuant to Rule 12b-1 under the 1940 Act. The Distribution Agreement will continue year to year as long as such continuance is approved at least annually by (i) the Board of Trustees or a vote of the majority (as defined in the 1940 Act) of the outstanding voting securities of a LifeGoal Portfolio and (ii) a majority of the Trustees who are not parties to the Distribution Agreement or "interested persons" of any such party by a vote cast in person at a meeting called for such purpose. The Distribution Agreement is not assignable and is terminable with respect to a LifeGoal Portfolio, without penalty, on 60 days' notice by the Board of Trustees, the vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of such LifeGoal Portfolio, or by the Distributor. Distribution Plans And Shareholder Servicing Arrangements For Investor Shares Investor A Shares ------------------- The Company has adopted a Shareholder Servicing and Distribution Plan (the "Investor A Plan") pursuant to Rule 12b-1 under the 1940 Act with respect to each LifeGoal Portfolio's Investor A Shares. The Investor A Plan provides that each LifeGoal Portfolio may pay the Distributor or banks, broker/dealers or other financial institutions that offer shares of the Fund and that have entered into a Sales Support Agreement with the Distributor ("Selling Agents") or a Shareholder Servicing Agreement with the Company ("Servicing Agents"), up to 0.25% (on an annualized basis) of the average daily net asset value of such LifeGoal Portfolio. Payments under the Investor A Plan may be made to the Distributor for reimbursements of distribution-related expenses actually incurred by the Distributor, including, but not limited to, expenses of organizing and conducting sales seminars, printing of prospectuses and statements of additional information (and supplements thereto) and reports for other than existing shareholders, preparation and distribution of advertising material and sales literature and costs of administering the Investor A Plan, or to Servicing Agents that have entered into a Shareholder Servicing Agreement with the Company for providing shareholder support services to their customers ("Customers") which hold of record or beneficially Investor A Shares of a Fund. Such shareholder support services provided by Servicing Agents to holders of Investor A Shares of the LifeGoal Portfolios 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 the Company's 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 subaccounting with respect to Investor A Shares beneficially owned by their Customers or the information necessary for subaccounting; (viii) if required by law, forwarding shareholder communications from the Company (such as proxies, shareholder reports, annual and semi-annual financial statements and dividend, distribution and tax notices) to their Customers; (ix) forwarding to their Customers proxy statements and proxies containing any proposals regarding the Shareholder Servicing Agreement; (x) providing general shareholder liaison services; and (xi) providing such other similar services as the Company may reasonably request to the extent the Selling Agent is permitted to do so under applicable statutes, rules or regulations. 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 LifeGoal Portfolio would not be contractually obligated to pay the Distributor for any expenses not previously reimbursed by the LifeGoal Portfolio. For the fiscal periods ended March 31, 1999 and March 31, 1998, the Distributor received the following amount from Rule 12b-1 fees and CDSC fees in connection with the Investor A Shares of the LifeGoal Portfolios: $0 and $0, respectively. Of these amounts the Distributor retained $0 and $0, respectively. For the fiscal periods ended March 31, 2000, the Distributor received the following amount from Rule 12b-1 fees and CDSC fees in connection with the Investor A Shares of the LifeGoal Portfolios: $6259 and $0, respectively. Of these amounts the Distributor retained $0 and $0, respectively. 58 Investor B Shares ------------------ The Directors of the Company have approved a Distribution Plan in accordance with Rule 12b-1 under the 1940 Act for the Investor B Shares of the LifeGoal Portfolios (the "Investor B Plan"). Pursuant to the Investor B Plan, each LifeGoal Portfolio may pay the Distributor for certain expenses that are incurred in connection with the distribution of shares. Payments under the Investor B Plan will be calculated daily and paid monthly at a rate set from time to time by the Board of Trustees provided that the annual rate may not exceed 0.75% of the average daily net asset value of Investor B Shares of a LifeGoal Portfolio. Payments to the Distributor pursuant to the Investor B Plan will be used (i) to compensate Selling Agents for providing sales support assistance relating to Investor B Shares, (ii) for promotional activities intended to result in the sale of Investor B Shares such as to pay for the preparation, printing and distribution of prospectuses to other than current shareholders, and (iii) 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 Shares. Currently, substantially all fees paid pursuant to the Investor B Plan are paid to compensate Selling Agents for providing the services described in (i) and (iii) above, with any remaining amounts being used by the Distributor to partially defray other expenses incurred by the Distributor in distributing Investor B Shares. Fees received by the Distributor pursuant to the Investor B 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 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 LifeGoal Portfolios. 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 B Shares of the LifeGoal Portfolios held of record or beneficially by such Customers. The sales support services provided by Selling 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 Plan are accrued daily and paid monthly, and are charged as expenses of the relevant shares of a LifeGoal Portfolio as accrued. Expenses incurred by the Distributor pursuant to the Investor B Plan in any given year may exceed the sum of the fees received under the Investor B 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 Plan is in effect. If the Investor B Plan were terminated or not continued, a LifeGoal Portfolio would not be contractually obligated to pay the Distributor for any expenses not previously reimbursed by the LifeGoal Portfolio or recovered through contingent deferred sales charges. In addition, the Trustees have approved a Shareholder Servicing Plan ("Servicing Plan") with respect to the Investor B Shares of the LifeGoal Portfolios (the "Investor B Servicing Plan"). Pursuant to the Investor B Servicing Plan, each LifeGoal Portfolio may pay banks, broker/dealers or other financial institutions that have entered into a Shareholder Servicing Agreement with Nations Fund ("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 Servicing Plan will be calculated daily and paid monthly at a rate set from time to time by the Board of Trustees, provided that the annual rate may not exceed 0.25% of the average daily net asset value of the LifeGoal Portfolios' Investor B Shares. The shareholder services provided by the Servicing Agents may include (i) aggregating and processing purchase and redemption requests for such Investor B Shares from Customers and transmitting promptly net purchase and redemption orders to the Company's distributor or transfer agent; (ii) providing Customers with a service that invests the assets of their accounts in such Investor B Shares pursuant to specific or pre-authorized instructions; (iii) processing dividend and distribution payments from the Company on behalf of Customers; (iv) providing information periodically to Customers showing their positions in such Investor B Shares; (v) arranging for bank wires; (vi) responding to Customers' inquiries concerning their investment in such Investor B Shares; (vii) providing subaccounting with respect to such Investor B Shares beneficially owned by Customers or providing the information necessary for subaccounting; (viii) if required by 59 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. For the fiscal periods ended March 31, 1999 and March 31, 1998, the Distributor received the following amount from Rule 12b-1 fees and CDSC fees in connection with the Investor B Shares of the LifeGoal Portfolios: $0 and $0, respectively. Of these amounts the Distributor retained $0 and $0, respectively. For the fiscal periods ended March 31, 2000, the Distributor received the following amount from Rule 12b-1 fees and CDSC fees in connection with the Investor B Shares of the LifeGoal Portfolios: $130,949 and $95,495, respectively. Of these amounts the Distributor retained $0 and $0, respectively. Investor C Shares -------------------- The Trustees of the Company have approved a Distribution Plan in accordance with Rule 12b-1 under the 1940 Act for the Investor C Shares of the LifeGoal Portfolios (the "Investor C Plan"). Pursuant to the Investor C Plan, each LifeGoal Portfolio may pay the Distributor for certain expenses that are incurred in connection with the distribution of shares. Payments under the Investor C Plan will be calculated daily and paid monthly at a rate set from time to time by the Board of Directors provided that the annual rate may not exceed 0.75% of the average daily net asset value of Investor C Shares of a LifeGoal Portfolio. Payments to the Distributor pursuant to the Investor C Plan will be used (i) to compensate Selling Agents for providing sales support assistance relating to Investor C Shares, (ii) for promotional activities intended to result in the sale of Investor C Shares such as to pay for the preparation, printing and distribution of prospectuses to other than current shareholders, and (iii) to compensate Selling Agents for providing sales support services with respect to their Customers who are, from time to time, beneficial and record holders of Investor C Shares. Currently, substantially all fees paid pursuant to the Investor C Plan are paid to compensate Selling Agents for providing the services described in (i) and (iii) above, with any remaining amounts being used by the Distributor to partially defray other expenses incurred by the Distributor in distributing Investor C Shares. Fees received by the Distributor pursuant to the Investor C Plan will not be used to pay any interest expenses, carrying charges or other financing costs (except to the extent permitted by the SEC) and will not be used to pay any general and administrative expenses of the Distributor. Pursuant to the Investor C Plan, the Distributor may enter into Sales Support Agreements with Selling Agents for providing sales support services to their Customers who are the record or beneficial owners of Investor C Shares of the LifeGoal Portfolios. 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 LifeGoal Portfolios held of record or beneficially by such Customers. The sales support services provided by Selling Agents may include providing distribution assistance and promotional activities intended to result in the sales of shares such as paying for the preparation, printing and distribution of prospectuses to other than current shareholders. Fees paid pursuant to the Investor C Plan are accrued daily and paid monthly, and are charged as expenses of the relevant shares of a Fund as accrued. Expenses incurred by the Distributor pursuant to the Investor C Plan in any given year may exceed the sum of the fees received under the Investor C Plan and payments received pursuant to contingent deferred sales charges. Any such excess may be recovered by the Distributor in future years so long as the Investor C Plan is in effect. If the Investor C Plan were terminated or not continued, a LifeGoal Portfolio would not be contractually obligated to pay the Distributor for any expenses not previously reimbursed by the LifeGoal Portfolio or recovered through contingent deferred sales charges. In addition, the Trustees have approved a Shareholder Servicing Plan ("Servicing Plan") with respect to the Investor C Shares of the LifeGoal Portfolios (the "Investor C Servicing Plan"). Pursuant to the Investor C Servicing Plan, each LifeGoal Portfolio may pay banks, broker/dealers or other financial institutions that have entered into a Shareholder Servicing Agreement with the Company ("Servicing Agents") for certain expenses that are incurred by the Servicing Agents in connection with shareholder support services that are provided by the Servicing Agents. Payments under the Investor C Servicing Plan will be calculated daily and paid monthly at a rate set from time to 60 time by the Board of Trustees, provided that the annual rate may not exceed 0.25% of the average daily net asset value of the LifeGoal Portfolios' Investor C Shares. The shareholder services provided by the Servicing Agents may include (i) aggregating and processing purchase and redemption requests for such Investor C Shares from Customers and transmitting promptly net purchase and redemption orders to the Company's distributor or transfer agent; (ii) providing Customers with a service that invests the assets of their accounts in such Investor C Shares pursuant to specific or pre-authorized instructions; (iii) processing dividend and distribution payments from the Company on behalf of Customers; (iv) providing information periodically to Customers showing their positions in such Investor C Shares; (v) arranging for bank wires; (vi) responding to Customers' inquiries concerning their investment in such Investor C Shares; (vii) providing subaccounting with respect to such Investor C Shares beneficially owned by Customers or providing the information necessary for subaccounting; (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. For the fiscal periods ended March 31, 1999 and March 31, 1998, the Distributor received the following amount from Rule 12b-1 fees and CDSC fees in connection with the Investor C Shares of the LifeGoal Portfolios: $0 and $0, respectively. Of these amounts the Distributor retained $0 and $0, respectively. For the fiscal periods ended March 31, 2000, the Distributor received the following amount from Rule 12b-1 fees and CDSC fees in connection with the Investor C Shares of the LifeGoal Portfolios: $25,351 and $1,182, 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 Plan, the Investor B Servicing Plan, the Investor C Plan and the Investor C 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 Plans is subject to, among other things, the National Association of Securities Dealers, Inc.'s ("NASD") Conduct Rules 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 Trustees at least quarterly with a written report of the amounts expended pursuant to the Plan and the purposes for which such expenditures were made. The Board of Trustees reviews these reports in connection with their decisions with respect to the Plans. As required by Rule 12b-1 under the 1940 Act, each Plan was approved by the Board of Trustees, 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 Trustees") on December 9, 1999 (except for the Investor B Plan and Investor B Servicing Plan, approved on June 4, 1997). The Plans continue in effect as long as such continuance is specifically approved at least annually by the Board of Trustees, including a majority of the Qualified Trustees. 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 or Investor C Shares and the holders of such shares. The Plans have been approved by the initial shareholder. Each Plan may be terminated with respect to its shares by vote of a majority of the Qualified Trustees or by vote of a majority of holders of its outstanding voting securities. Any change in 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 Trustees, by 61 vote cast in person at a meeting called for the purpose of voting upon such amendment. The Investor B Servicing Plan and Investor C Servicing Plan may be terminated by a vote of a majority of the Qualified Trustees. As long as a Plan is in effect, the selection or nomination of the Qualified Trustees is committed to the discretion of the Qualified Trustees. 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 or the Department of Labor, are urged to consult their legal advisers before investing such assets in Investor Shares. Shareholder Administration Plan (Primary B Shares) As stated in the Prospectus describing the Primary B Shares, the Company has a separate Shareholder Administration Plan (the "Administration Plan") with respect to such shares. Pursuant to the Administration Plan, the Company may enter into agreements ("Administration Agreements") with broker/dealers, banks and other financial institutions that are dealers of record or holders of record or which have a servicing relationship with the beneficial owners of Primary B Shares ("Servicing Agents"). The Administration Plan provides that pursuant to the Administration Agreements, Servicing Agents shall provide the shareholder support services as set forth therein to their Customers who may from time to time own of record or beneficially Primary B Shares in consideration for the payment of up to 0.60% (on an annualized basis) of the net asset value of such shares. Such services may include: (i) aggregating and processing purchase, exchange and redemption requests for Primary B Shares from Customers and transmitting promptly net purchase and redemption orders with the Distributor or the transfer agents; (ii) providing Customers with a service that invests the assets of their accounts in Primary B Shares pursuant to specific or pre-authorized instructions; (iii) processing dividend and distribution payments from the Company on behalf of Customers; (iv) providing information periodically to Customers showing their positions in Primary B Shares; (v) arranging for bank wires; (vi) responding to Customer inquiries concerning their investment in Primary B Shares; (vii) providing sub-accounting with respect to Primary B Shares beneficially owned by Customers or the information necessary for sub-accounting; (viii) if required by law, forwarding shareholder communications (such as proxies, shareholder reports annual and semi-annual financial statements and dividend, distribution and tax notices) to Customers; (ix) forwarding to Customers proxy statements and proxies containing any proposals regarding an Administration Agreement; (x) employee benefit plan recordkeeping, administration, custody and trustee services; (xi) general shareholder liaison services; and (xii) providing such other similar services as may reasonably be requested to the extent permitted under applicable statutes, rules, or regulations. The Administration Plan also provides that in no event may the portion of the shareholder administration fee that constitutes a "service fee," as the term is defined in the NASD Servicing Plan Rule, exceed 0.25% of the average daily net asset value of the Primary B Shares of a LifeGoal Portfolio. In addition, to the extent any portion of the fees payable under the Plan is deemed to be for services primarily intended to result in the sale of LifeGoal Portfolio Primary B Shares, such fees are deemed approved and may be paid under the Administration Plan. Accordingly, the Administration Plan has been approved and will be operated pursuant to Rule 12b-1 under the 1940 Act. Such Plan shall continue in effect as long as the Board of Trustees, including a majority of the Qualified Directors, specifically approves the Plan at least annually. Fees Paid Pursuant to Shareholder Servicing/Distribution Plans --------------------------------- Investor A Shares Net Fees Paid (12b-1 Component) FUND Year ended 3/31/2000 ---- -------------------- LifeGoal Growth Portfolio $9,430 LifeGoal Balanced Growth Portfolio 4,803 LifeGoal Income and Growth Portfolio 2,262 62 Fees Paid Pursuant to Distribution Plans Investor B Shares
Net Net Fees Paid (Shareholder Net Fees Paid (12b-1 Component) Servicing Component) Fees FUND Year ended 3/31/2000 Year ended 3/31/2000 Paid --------------------------- ---------------------- -------- LifeGoal Growth Portfolio $61,231 $20,410 $81,641 LifeGoal Balanced Growth Portfolio 70,493 23,497 93,990 LifeGoal Income and Growth Portfolio 37,663 12,554 50,217
Fees Paid Pursuant to Distribution Plans Investor C Shares
Net Net Net Fees Paid (Shareholder Fees Fees Paid (12b-1 Component) Servicing Component) FUND Year ended 3/31/2000 Year ended 3/31/2000 Paid --------------------------- ----------------------- -------- LifeGoal Growth Portfolio $6,892 $2,297 $9,189 LifeGoal Balanced Growth Portfolio 11,817 3,939 15,756 LifeGoal Income and Growth Portfolio 3,860 1,287 5,147
Fees Paid Pursuant to the Administration Plan Primary B Shares
Net Admin Net Admin Fees Paid Fees Waived Year ended Year ended 3/31/2000 3/31/2000 ---------- ------------ LifeGoal Growth Portfolio $37 $7 LifeGoal Balanced Growth Portfolio 1,458 288 LifeGoal Income and Growth Portfolio 0 0
Expenses The Administrator and/or Co-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 or Sub-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 and Investor C Shares of each LifeGoal Portfolio, sales-related expenses incurred by the Distributor may be reimbursed by the Company. 63 The Company pays, or causes to be paid, all other expenses of the Company, including without limitation: the fees of the Adviser, the Sub-Adviser, the Administrator and Co-Administrator; the charges and expenses of any registrar, any custodian or depository appointed by the Company for the safekeeping of its cash, fund securities and other property, and any stock transfer, dividend or accounting agent or agents appointed by the Company; brokerage commissions chargeable to the Company in connection with fund securities transactions to which the Company is a party; all taxes, including securities issuance and transfer taxes; corporate fees payable by the Company to federal, state or other governmental agencies; all costs and expenses in connection with the registration and maintenance of registration of the Company and its shares with the SEC and 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 relative 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 (and/or the Sub-Adviser), the Administrator or Co-Administrator. The Adviser, under its investment advisory agreement with the LifeGoal Portfolios, has agreed to absorb all expenses of the LifeGoal Portfolios, included those listed above, except for taxes, brokerage fees and commissions, extraordinary expenses and any applicable Rule 12b-1 fees, shareholder servicing fees and/or shareholder administration fees. Expenses of the Company which are not directly attributable to the operations of any class of shares of LifeGoal Portfolio are pro-rated among all classes of shares of LifeGoal Portfolios of the Company based upon the relative net assets of each class or LifeGoal Portfolio. Expenses of the Company which are not directly attributable to a specific class of shares but are directly attributable to a specific LifeGoal Portfolio are prorated among all the classes of shares of such LifeGoal Portfolio 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. Transfer Agents And Custodians PFPC Inc., is located at 400 Bellevue Parkway, Wilmington, Delaware 19809, and serves as transfer agent (the "Transfer Agent") for each LifeGoal Portfolio's Shares. Under a transfer agency agreement, the Transfer Agent maintains shareholder account records for the Company, handles certain communications between shareholders and the Company, distributes dividends and distributions payable by the Company to shareholders, produces statements with respect to account activity for the Company and its shareholders for these services. Bank of America serves as custodian (the "Custodian") for the portfolio securities (and for shares of underlying Nations Funds) and cash of the LifeGoal Portfolios. Except with respect to shares of underlying Nations Funds, the Custodian maintains custody of the LifeGoal Portfolios' 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 LifeGoal Portfolios for payments of dividends, distributions and redemptions, endorses and collects on behalf of the LifeGoal Portfolios all checks, and receives all dividends and other distributions made on securities owned by the LifeGoal Portfolios. The Company maintains direct custody of the LifeGoal Portfolios' shares of underlying Nations Funds. Independent Accountants and Reports The Board of Trustees has selected PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York, 10036, as the Company's independent accountant to audit the Company's books and review the Company's tax returns for the LifeGoal Portfolios' fiscal year ending March 31, 2001. 64 The financial statements and financial highlights for the fiscal period ended March 31, 2000, is hereby incorporated by reference in this SAI. The 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. DESCRIPTION OF SHARES The Company's Boards of Trustees has authorized the issuance of the classes of shares of the LifeGoal Portfolios 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 LifeGoal Portfolio in addition to those already authorized by setting or changing in any one or more respects, from time to time, prior to the issuance of such shares, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or terms or conditions of redemption, of such shares and, pursuant to such classification or reclassification to increase or decrease the number of authorized shares of any LifeGoal Portfolio or class. Any such classification or reclassification will comply with the provisions of the 1940 Act. Fractional shares shall have the same rights as full shares to the extent of their proportionate interest. All shares of a LifeGoal Portfolio have equal voting rights and will be voted in the aggregate, and not by series, except where voting by a series is required by law or where the matter involved only affects one series. For example, a change in a LifeGoal Portfolio's LifeGoal Portfolio a mental investment policy would be voted upon only by shareholders of the LifeGoal Portfolio involved. Additionally, approval of an advisory contract is a matter to be determined separately by LifeGoal Portfolio. Approval by the shareholders of one LifeGoal Portfolio is effective as to that LifeGoal Portfolio whether or not sufficient votes are received from the shareholders of the other LifeGoal Portfolios to approve the proposal as to those LifeGoal Portfolios. As used in the Prospectus and in this SAI, the term "majority," when referring to approvals to be obtained from shareholders of a LifeGoal Portfolio, means the vote of the lesser of (i) 67% of the shares of the LifeGoal Portfolio represented at a meeting if the shareholders of more than 50% of the outstanding interests of the LifeGoal Portfolio are present in person or by proxy, or (ii) more than 50% of the outstanding shares of the LifeGoal Portfolio. 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 Trustees 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. 65 Each share of a LifeGoal Portfolio represents an equal proportional interest in the LifeGoal Portfolio with each other share and is entitled to such dividends and distributions out of the income earned on the assets belonging to the LifeGoal Portfolio, 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 LifeGoal Portfolios are entitled to receive the assets attributable to the LifeGoal Portfolio that are available for distribution, and a distribution of any general assets not attributable to a particular LifeGoal Portfolio 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 LifeGoal Portfolios for dividend purposes consists of (i) interest accrued and original issue discount earned on a LifeGoal Portfolio'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 LifeGoal Portfolio and the general expenses of the Company prorated to a LifeGoal Portfolio on the basis of its relative net assets, plus dividend or distribution income on a LifeGoal Portfolio's assets. Prior to purchasing shares in one of the LifeGoal Portfolios, 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 LifeGoal Portfolios use the so-called "equalization accounting method" to allocate a portion of earnings and profits to redemption proceeds. This method permits a LifeGoal Portfolio to achieve more balanced distributions for both continuing and departing shareholders. Continuing shareholders should realize tax savings or deferrals through this method, and departing shareholders will not have their tax obligations change. Although using this method will not affect a LifeGoal Portfolio'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. The following table provides the expected expense ratios for Primary A Shares of each of the selected underlying Nations Funds appearing in each of the underlying Funds' prospectuses dated August 1, 2000.
------------------------------------------------------------------ ----------------------- -------------------- (before fee (after fee waivers waivers and/or and/or expense expense LifeGoal Portfolios Underlying Funds reimbursements) reimbursements) ------------------------------------------------------------------ ----------------------- -------------------- Value Fund 0.93% 0.93% ------------------------------------------------------------------ ----------------------- -------------------- Blue Chip Fund 0.98% 0.98% ------------------------------------------------------------------ ----------------------- -------------------- Strategic Growth Fund 0.97% 0.97% ------------------------------------------------------------------ ----------------------- -------------------- Small Company Fund 1.15% 1.22% ------------------------------------------------------------------ ----------------------- -------------------- Marsico Focused Equities Fund 1.16% 1.16% ------------------------------------------------------------------ ----------------------- -------------------- International Equity Fund 1.18% 1.18% ------------------------------------------------------------------ ----------------------- -------------------- International Value Fund 1.24% 1.34% ------------------------------------------------------------------ ----------------------- -------------------- Bond Fund 0.67% 0.67% ------------------------------------------------------------------ ----------------------- -------------------- Prime Fund 0.30% 0.35% ------------------------------------------------------------------ ----------------------- -------------------- Strategic Income Fund 0.79% 0.89% ------------------------------------------------------------------ ----------------------- -------------------- Short-Term Income Fund 0.50% 0.60% ------------------------------------------------------------------ ----------------------- -------------------- Marsico International Opportunities Fund 1.41% 1.41% ------------------------------------------------------------------ ----------------------- -------------------- High Yield Bond Fund 0.93% 0.93% ------------------------------------------------------------------ ----------------------- -------------------- 66 Emerging Markets Fund 1.90% 1.90% ------------------------------------------------------------------ ----------------------- -------------------- MidCap Growth Fund 1.00% 1.00% ------------------------------------------------------------------ ----------------------- --------------------
Net Asset Value Determination Shares of the common stock of each class of shares of each LifeGoal Portfolio that are offered by the Prospectuses are sold at their respective net asset value next determined after the receipt of the purchase order. Shareholders may at any time redeem all or a portion of their shares at net asset value next determined following receipt of a redemption order, less any contingent deferred sales charge applicable to Investor C Shares. The net asset value per share of each of the LifeGoal Portfolios is determined at the times and in the manner described in the Prospectuses. LifeGoal Portfolio securities of a LifeGoal Portfolio for which market quotations are not readily available, if any, 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 Trustees 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 U.S. Government securities and money market instruments is substantially completed each day at various times prior to the close of the New York Stock Exchange. The values of such securities, if any, used in computing the net asset value of the shares of a LifeGoal Portfolio are determined as of such times. Occasionally, events affecting the value of such securities may occur between the times at which they are determined and the close of the New York Stock Exchange, which will not be reflected in the computation of net asset value. If during such periods events occur which materially affect the value of such securities, the securities will be valued at their fair market value as determined in good faith by the Trustees. Exchanges By use of the exchange privilege, the holder of Investor Shares and/or Primary Shares authorizes the transfer agent or the shareholder's financial institution to rely on telephonic instructions from any person representing himself to be the investor and reasonably believed to be genuine. The transfer agent's or a financial institution's records of such instructions are binding. Exchanges are taxable transactions for federal income tax purposes; therefore, a shareholder will realize a capital gain or loss depending on whether the Investor Shares and/or Primary Shares being exchanged have a value which is more or less than their adjusted cost basis. The Company may limit the number of times the exchange privilege may be exercised by a shareholder within a specified period of time. Also, the exchange privilege may be terminated or revised at any time by the Company upon such notice as may be required by applicable regulatory agencies (presently sixty days for termination or material revision), provided that the exchange privilege may be terminated or materially revised without notice under certain unusual circumstances. The Prospectuses for the Investor Shares and Primary Shares of each LifeGoal Portfolio describe the exchange privileges available to holders of such Investor Shares and Primary Shares, respectively. Dividends And Distributions Each LifeGoal Portfolio anticipates distributing substantially all of its investment company taxable income for each taxable year. Such distributions will be taxable to shareholders as ordinary income and treated as dividends for federal income tax purposes. A LifeGoal Portfolio may either retain or distribute to shareholders its net capital gain for each taxable year. Each LifeGoal Portfolio currently intends to distribute any such amounts. If net capital gain is distributed and 67 designated as a capital gain dividend, it will be taxable to shareholders as long-term capital gain, regardless of the length of time the shareholder has held his/her Shares or whether such gain was recognized by the LifeGoal Portfolio prior to the date on which the shareholder acquired his/her shares. Conversely, if a LifeGoal Portfolio elects to retain its net capital gain, the LifeGoal Portfolio will be taxed thereon (except to the extent of any available capital loss carryovers) at the applicable corporate tax rate. If a LifeGoal Portfolio elects to retain its net capital gain, it is expected that the LifeGoal Portfolio also will elect to have shareholders treated as if each received a distribution of his or her pro rata share of such gain, with the result that each shareholder will be required to report his or her pro rata share of such gain on his or her tax return as long-term capital gain, will receive a refundable tax credit for his or her share of tax paid by the LifeGoal Portfolio on the gain and will increase the basis for his or her Shares by an amount equal to the deemed distribution less the tax credit. Dividends and distributions from net investment income, for each LifeGoal Portfolio are declared and paid quarterly, and capital gain distributions are declared and paid annually. The Investor A, Investor B, Investor C and Primary B Shares of the LifeGoal Portfolios accrue additional expense, not borne by the Primary A Shares, as a result of the applicable Rule 12b-1 Plan, Shareholder Servicing Plan and/or Shareholder Administration Plan. Consequently, a separate calculation is made to arrive at the net asset value per share and dividends of each class of shares of the LifeGoal Portfolios. Net investment income for the LifeGoal Portfolios for dividend purposes consists of (i) interest accrued and original issue discount earned on a LifeGoal Portfolio's assets, (ii) less accrued expenses directly attributable to the LifeGoal Portfolio and the general expenses of the Company prorated to a LifeGoal Portfolio on the basis of its relative net assets, plus dividend or distribution income on a LifeGoal Portfolio's assets. ADDITIONAL INFORMATION CONCERNING TAXES The following information supplements and should be read in conjunction with the Prospectus. The Prospectus of each LifeGoal Portfolio describes generally the tax treatment of distributions by the LifeGoal Portfolios. This section of the SAI includes additional information concerning Federal income taxes. General Each LifeGoal Portfolio intends to qualify as a regulated investment company under Subchapter M of the Code, as long as such qualification is in the best interest of the LifeGoal Portfolio's shareholders. Each LifeGoal Portfolio will be treated as a separate entity for Federal income tax purposes. Thus, the provisions of the Code applicable to regulated investment companies generally will be applied to each LifeGoal Portfolio, rather than to the Company as a whole. In addition, net capital gain, net investment income, and operating expenses will be determined separately for each LifeGoal Portfolio. As a regulated investment company, each LifeGoal Portfolio will not be taxed on its net investment income and capital gain distributed to its shareholders. Qualification as a regulated investment company under the Code requires, among other things, that each LifeGoal Portfolio derive at least 90% of its annual gross income from dividends, interest, certain payments with respect to securities loans, gain from the sale or other disposition of stock or securities or foreign currencies (to the extent such currency gain are directly related to the LifeGoal Portfolio's principal business of investing in stock or securities) and other income (including but not limited to gain from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies. In addition, the Code requires that each LifeGoal Portfolio 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 LifeGoal Portfolio'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 LifeGoal Portfolio'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 LifeGoal Portfolio controls and which are determined to be engaged in the same or similar trades or businesses. The LifeGoal Portfolios also must distribute or be deemed to distribute to their shareholders at least 90% of their net investment income (which, for this purpose, includes net short-term capital gain) earned in each taxable year. In general, these distributions must actually or be deemed to be made in the taxable year. However, in certain 68 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 of the first taxable year. The LifeGoal Portfolios intend to pay out substantially all of their net investment income and net realized capital gain (if any) for each year. In addition, a regulated investment company must, in general, derive less than 30% of its gross income from the sale or other disposition of securities or options thereon held for less than three months. However, this restriction has been repealed with respect to a regulated investment company's taxable years beginning after August 5, 1997. As described above, the Code permits a LifeGoal Portfolio to invest greater than 25% of the value of its assets in the securities of other regulated investment companies, such as a Nations Fund. In this regard, each Nations Fund also must meet the requirements set forth above for regulated investment companies. Failure of a Nations Fund to qualify could cause a LifeGoal Portfolio investing therein to fail to qualify as a regulated investment company. Excise Tax A 4% nondeductible excise tax will be imposed on each LifeGoal Portfolio (other than to the extent of its tax-exempt interest income) to the extent it does not meet certain minimum distribution requirements by the end of each calendar year. Each LifeGoal Portfolio intends to actually or be deemed to distribute substantially all of its net investment income and net capital gain by the end of each calendar year and, thus, expects not to be subject to the excise tax. Taxation of Investments of a Regulated Investment Company Although the LifeGoal Portfolios may invest directly in portfolio securities, the LifeGoal Portfolios intends to invest primarily in the securities of an underlying Nations Fund. The following discussion regarding investments of a regulated investment company therefore applies equally to investments made by a LifeGoal Portfolio, and to investments made by a Nations Fund. Except as provided herein, gain and loss on the sale of portfolio securities by a regulated investment company generally will be capital gain and loss. Such gain and loss will ordinarily be long-term capital gain and loss if the securities have been held by the regulated investment company for more than one year at the time of disposition of the securities. Gain recognized on the disposition of a debt obligation (including tax-exempt obligations purchased after April 30, 1993) purchased by a regulated investment company 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 regulated investment company held the debt obligation. If an option granted by a regulated investment company lapses or is terminated through a closing transaction, such as a repurchase by the regulated investment company of the option from its holder, the regulated investment company 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 regulated investment company in the closing transaction. Some realized capital loss may be deferred if they result from a position which is part of a "straddle," discussed below. If securities are sold by a regulated investment company pursuant to the exercise of a call option written by it, the regulated investment company will add the premium received to the sale price of the securities delivered in determining the amount of gain or loss on the sale. If securities are purchased by a regulated investment company pursuant to the exercise of a put option written by it, such regulated investment company will subtract the premium received from its cost basis in the securities purchased. The amount of any gain or loss realized by a regulated investment company 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 69 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, generally will be treated as long-term capital gain or loss, and the remaining forty percent (40%) of deemed and actual sales will be treated as short-term capital gain or loss. Transactions that qualify as designated hedges are excepted from the "mark-to-market" rule and the "60%/40%" rule. Under Section 988 of the Code, a regulated investment company 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, generally will be treated as ordinary income or loss. The LifeGoal Portfolios will attempt to monitor Section 988 transactions, where applicable, to avoid adverse Federal tax impact. Offsetting positions held by a regulated investment company involving certain financial forward, futures or options contracts may be considered, for tax purposes, to constitute "straddles." "Straddles" are defined to include "offsetting positions" in actively traded personal property. The tax treatment of "straddles" is governed by Section 1092 of the Code which, in certain circumstances, overrides or modifies the provisions of Section 1256. If a regulated investment company 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 regulated investment company 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 regulated investment company may differ. Generally, to the extent the straddle rules apply to positions established by the regulated investment company, loss realized by the regulated investment company may be deferred to the extent of unrealized gain in any offsetting positions. Moreover, as a result of the straddle and the conversion transaction rules, short-term capital loss on straddle positions may be recharacterized as long-term capital loss, and long-term capital gain may be characterized as short-term capital gain or ordinary income. If a regulated investment company enters into a "constructive sale" of any appreciated position in stock, a partnership interest, or certain debt instruments, the regulated investment company must recognize gain (but not loss) with respect to that position. For this purpose, a constructive sale occurs when the regulated investment company enters into one of the following transactions with respect to the same or substantially identical property: (i) a short sale; (ii) an offsetting notional principal contract; or (iii) a futures or forward contract. If a regulated investment company purchases shares in a "passive foreign investment company" ("PFIC"), the regulated investment company may be subject to Federal income tax and an interest charge imposed by the Internal Revenue Service ("IRS") upon certain distributions from the PFIC or the regulated investment company's disposition of its PFIC shares. If a LifeGoal Portfolio invests in a PFIC, the LifeGoal Portfolio intends to make an available election to mark-to-market its interest in PFIC shares. Under the election, the LifeGoal Portfolio 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 LifeGoal Portfolio 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 LifeGoal Portfolio as ordinary income (or loss) notwithstanding any distributions by the PFIC, the LifeGoal Portfolio 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 a LifeGoal Portfolio as capital gain distributions will be taxed to shareholders as long-term term capital gain (to the extent such distributions equal or exceed the LifeGoal Portfolio's actual net capital gain for the taxable year), regardless of how long a shareholder has held LifeGoal Portfolio shares. Such distributions will be designated as capital gain distributions in a written notice mailed by the LifeGoal Portfolio to its shareholders not later than 60 days after the close of the LifeGoal Portfolio's taxable year. 70 Other Distributions For Federal income tax purposes, a LifeGoal Portfolio's earnings and profits will be determined at the end of each taxable year and will be allocated pro rata over the entire year. For Federal income tax purposes, only amounts paid out of earnings and profits will qualify as dividends. Thus, if during a taxable year the LifeGoal Portfolio's declared dividends exceed the LifeGoal Portfolio's net income (as determined at the end of the year), only that portion of the year's distributions which equals the year's earnings and profits (generally the LifeGoal Portfolio's net investment income and capital gain) will be deemed to have constituted a dividend. Distributions in excess of earnings and profits will first be treated as a return of capital up to the amount of a shareholder's basis in its LifeGoal Portfolio shares and then capital gain. It is expected that the LifeGoal Portfolio's net income, on an annual basis, will equal the dividends declared during the year. Disposition of Fund Shares A disposition of LifeGoal Portfolio shares pursuant to a redemption (including a redemption in-kind) or an exchange ordinarily will result in a taxable capital gain or loss, depending on the amount received for the shares (or are deemed to receive in the case of an exchange) and the cost of the shares. If a shareholder exchanges or otherwise disposes of LifeGoal Portfolio 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 LifeGoal Portfolio or a different regulated investment company, the sales charge previously incurred acquiring the LifeGoal Portfolio'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 LifeGoal Portfolio 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. Accordingly, the basis of substantially identical shares acquired will be increased by the loss disallowed. If a shareholder receives a capital gain distribution with respect to any LifeGoal Portfolio share and such LifeGoal Portfolio share is held for six months or less, then (unless otherwise disallowed) any loss on the sale or exchange of that LifeGoal Portfolio share will be treated as a long-term capital loss to the extent of the capital gain distribution. In addition, if a shareholder holds LifeGoal Portfolio shares for six months or less, any loss on the sale or exchange of those shares will be disallowed to the extent of the amount of exempt-interest dividends received with respect to the shares. The Treasury Department is authorized to issue regulations reducing the six-month holding requirement to a period of not less than the greater of 31 days or the period between regular dividend distributions where a LifeGoal Portfolio 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 loss 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. Backup Withholding The Company may be required to withhold, subject to certain exemptions, at a rate of 31% ("backup withholding") on dividends, capital gain distributions, and redemption proceeds (including proceeds from exchanges and redemptions in-kind) paid or credited to an individual LifeGoal Portfolio shareholder, if the shareholder fails to certify that the Taxpayer Identification Number ("TIN") provided is correct and that the 71 shareholder is not subject to backup withholding, or if 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. Corporate Shareholders and Dividends Received Deduction Corporate shareholders of the LifeGoal Portfolios may be eligible for the dividends-received deduction on distributions attributable to a LifeGoal Portfolio's dividends received from domestic corporations, which, if received directly by the corporate shareholder, would qualify for such deduction. A distribution by a LifeGoal Portfolio attributable to dividends of a domestic corporation will only qualify for the dividends-received deduction if (i) the corporate shareholder generally holds the LifeGoal Portfolio 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 LifeGoal Portfolio 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 LifeGoal Portfolio becomes entitled to such dividend income. To the extent a LifeGoal Portfolio receives from a regulated investment company dividends designated by such regulated investment company as other than capital gain dividends, corporate shareholders of the LifeGoal Portfolio also may be eligible for the dividends-received deduction. Like the requirements described above, a distribution by a regulated investment company attributable to dividends of a domestic corporation will only qualify for the dividends-received deduction if (i) the corporate shareholder generally holds the LifeGoal Portfolio 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; (ii) the LifeGoal Portfolio generally holds the shares of the regulated investment company producing the dividend income for at least 46 days during the 90 day period beginning 45 days prior to the date upon which the LifeGoal Portfolio becomes entitled to such dividend income; and (iii) the regulated investment company 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 regulated investment company becomes entitled to such dividend income. Foreign Shareholders Under the Code, distributions of net investment income by a LifeGoal Portfolio to a nonresident alien individual, foreign trust (i.e., a trust other than a trust which a U.S. court is able to exercise primary supervision over administration of that trust and one or more U.S. persons have authority to control substantial decisions of that trust), foreign estate (i.e., the income of which is not subject to U.S. tax regardless of source), foreign corporation, or foreign partnership (each, a "foreign shareholder") will be subject to U.S. withholding tax (at a rate of 30% or a lower treaty rate, if applicable). Withholding will not apply if a distribution paid by the LifeGoal Portfolio to a foreign shareholder is "effectively connected" with a U.S. trade or business (or, if an income tax treaty applies, is attributable to a U.S. permanent establishment of the foreign shareholder), in which case the reporting and withholding requirements applicable to U.S. persons will apply. Distributions of capital gain are generally not subject to tax withholding. New Regulations On October 6, 1997, the Treasury Department issued new regulations (the "New Regulations") which make certain modifications to the backup withholding, U.S. income tax withholding and information reporting rules applicable to foreign shareholders. The New Regulations will generally be effective for payments made after December 31, 1999, subject to certain transition rules. Among other things, the New Regulations will permit the LifeGoal Portfolios to estimate the portion of their distributions qualifying as capital gain distributions for purposes of determining the portion of such distributions paid to foreign shareholders which will be subject to U.S. income tax withholding. Prospective investors are urged to consult their own tax advisors regarding the New Regulations. 72 Foreign Taxes Income and dividends received by a LifeGoal Portfolio from foreign securities and gain realized by the LifeGoal Portfolio on the disposition of foreign securities may be subject to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. Although in some circumstances a regulated investment company can elect to "pass through" foreign tax credits to its shareholders, the LifeGoal Portfolios do not expect to be eligible to make such an election. Other Matters Investors should be aware that the investments to be made by the LifeGoal Portfolios may involve sophisticated tax rules that may result in income or gain recognition by the LifeGoal Portfolios without corresponding current cash receipts. Although the LifeGoal Portfolios will seek to avoid significant noncash income, such noncash income could be recognized by the LifeGoal Portfolios, in which case the LifeGoal Portfolios may distribute cash derived from other sources in order to meet the minimum distribution requirements described above. The foregoing discussion and the discussions in the Prospectus applicable to each shareholder address only some of the Federal tax considerations generally affecting investments in the LifeGoal Portfolios. Each investor is urged to consult his or her tax advisor regarding specific questions as to Federal, state, local or foreign taxes. SECURITY HOLDERS The name, address and percentage of ownership of each person who is known by the Registrant to have owned of record or beneficially five percent or more of any of the LifeGoal Portfolios as of July 7, 2000 is:
Class; Amount of Shares Percentage Percentage Fund Name and Address Owned; Type of Ownership of Class of Fund ---- ---------------- ------------------------ -------- ------- Lifegoal Growth NFSC FEBO # W52-011681 Investor A; 26,451.981; B 6.48 0.96 Portfolio NFSC/FMTC IRA ROLLOVER FBO BETTY J DOHRMAN 3229 SW 100TH ST AUGUSTA KS 67010 STATE STREET BANK & TRUST CO TTEE Investor A; 26,309.609; R 6.44 0.94 FBO COASTGEAR & COMPANY ATTN: KEVIN SMITH 105 ROSEMONT AVE WESTWOOD MA 02090 STATE STREET BANK & TRUST CO TTEE Investor C; 78,095.010; R 59.03 2.79 FBO COASTGEAR & COMPANY ATTN: KEVIN SMITH 105 ROSEMONT AVE WESTWOOD MA 02090 BANK OF AMERICA NA TTEE Primary A; 98.47 56.03 NB 401K PLAN 1,571,063.036; R U/A DTD 01/01/1983 P O BOX 2518/TX4-213-06-14 HOUSTON TX 77252-2518 BNY CUST IRA FBO FRANK W TIMPA Primary B; 651.055; R 99.79 0.00 PO BOX 612 FORT MYERS FL 33902-0000 Lifegoal Income & STATE STREET BANK & TRUST CO TTEE Investor A; 20,439.895; R 25.81 2.08 Growth Portfolio FBO COASTGEAR & COMPANY ATTN: KEVIN SMITH 105 ROSEMONT AVE
73 WESTWOOD MA 02090 BNY CUST FBO MARSHA L BREWER Investor A; 9,693.300; R 12.24 0.92 SEP IRA PLAN 9907 FLOYD ST OVERLAND PARK KS 66212 NFSC FEBO # W69-005061 Investor B; 36,858.154; B 8.68 3.49 CLAIRE ECKSTEIN TOD SIGRID MARCUS TOD ROSA ECKSTEIN 465 OCEAN DRIVE # 609 MIAMI BEACH FL 33139 2NFSC FEBO # W16-747378 JACK OVERCASH Investor B; 29,787.574; B 7.02 2.94 HIGHWAY 21 NORTH BOX 539 MOORESVILLE NC 28115 STATE STREET BANK & TRUST CO TTEE Investor C; 71,297.599; R 81.20 6.71 FBO COASTGEAR & COMPANY ATTN: KEVIN SMITH 105 ROSEMONT AVE WESTWOOD MA 02090 DONALD R ATKINS AND DAVID R MORGAN Investor C; 7,665.983; R 8.73 0.72 TTEES LYNDON STEEL 401K PROFIT SHARING PL 1947 UNION CROSS ROAD WINSTON-SALEM NC 27107 BANK OF AMERICA NA TTEE Primary A; 466,684.203; R 98.95 43.43 NB 401K PLAN U/A DTD 01/01/1983 P O BOX 2518/TX4-213-06-14 HOUSTON TX 77252-2518 STATE STREET BANK & TRUST CO TTEE Investor A; 103,587.263; 46.84 3.92 FBO COASTGEAR & COMPANY R ATTN: KEVIN SMITH 105 ROSEMONT AVE WESTWOOD MA 02090 NFSC FEBO # W38-750468 BALTIMORE C Investor B; 56,627.086; B 6.26 2.15 FOUNDATION TTEE ROSELLA M WIMMER CHAR AGREEMENT REMAINDER TR, U/A 6/25/98 2 E READ ST BALTIMORE MD 21202 STATE STREET BANK & TRUST CO TTEE Investor C; 169,355.346; 88.92 6.46 FBO COASTGEAR & COMPANY R ATTN: KEVIN SMITH 105 ROSEMONT AVE WESTWOOD MA 02090 BANK OF AMERICA NA TTEE Primary A; 99.97 49.56 NB 401K PLAN 26,602,843.930; R U/A DTD 01/01/1983 P O BOX 2518/TX4-213-06-14 HOUSTON TX 77252-2518 BNY CUST ROLLOVER IRA FBO Primary B; 25,484.944; R 85.36 0.96
74 MICHAEL CARDELINO 1712 FLATWOOD DRIVE FLOWER MOUND TX 75028 BNY CUST SEP IRA FBO RONALD E ROSS Primary B; 4,365.683; R 14.62 0.16 4004 NEW TOWN RD WAXHAW NC 28173-9759
ADDITIONAL INFORMATION ON PERFORMANCE Yield information and other performance information for the Company's LifeGoal Portfolios may be obtained by calling the Company at (800) 321-7854. From time to time, the yield and total return of a LifeGoal Portfolio's Investor Shares and Primary Shares may be quoted in advertisements, shareholder reports, and other communications to shareholders. Each LifeGoal Portfolio of the Company also may quote information obtained from the Investment Company Institute, national financial publications, trade journals and other industry sources in its advertising materials and sales literature. Performance information is available by calling 1-800-321-7854 with respect to Investor Shares and 1-800-621-2192 with respect to Primary Shares. The international investment philosophy of certain of the underlying Nation Funds is based on the premise that significant opportunities exist outside of the United States. In fact, two-thirds of the world's investment opportunities are outside of the United States and foreign stock markets have consistently outperformed the U.S. stock market. Adding foreign stocks to a domestic portfolio can help reduce risk and lower portfolio volatility because world markets do not move in sync. From time to time, the LifeGoal Portfolios might point out these opportunities and the differences that exist through investing in overseas countries in marketing materials that reference underlying Nations Funds. Yield Calculations The yield of the Primary Shares and Investor Shares of the LifeGoal Portfolios is a measure of the net investment income per share (as defined) earned over a 30-day period expressed as a percentage of the maximum offering price of a share of such classes at the end of the period. Yield figures are determined by dividing the net investment income per share earned during the specified 30-day period by the maximum offering price per share on the last day of the period, according to the following formula: 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 = 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
For purposes of yield quotation, income is calculated in accordance with standardized methods applicable to all stock and bond mutual funds. In general, interest income is reduced with respect to bonds trading at a premium over their par value by subtracting a portion of the premium from income on a daily basis, and is increased with respect to bonds trading at a discount by adding a portion of the discount to daily income. Capital gain and loss are excluded from the calculation. Income calculated for the purposes of calculating a LifeGoal Portfolio's yield differs from income as determined for other accounting purposes. Because of the different accounting methods used, and because of the 75 compounding assumed in yield calculations, the yield quoted for a LifeGoal Portfolio may differ from the rate of distributions a LifeGoal Portfolio paid over the same period or the rate of income reported in the LifeGoal Portfolios' financial statements. Total Return Calculations Total return measures both the net investment income generated by, and the effect of any realized or unrealized appreciation or depreciation of the underlying investments in a LifeGoal Portfolio. The LifeGoal Portfolios' 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 as described in the Prospectuses, and (ii) deducts (a) the maximum sales charge from the hypothetical initial $1,000 investment, and (b) all recurring fees, such as advisory and administrative fees, charged as expenses to all shareholder accounts. Cumulative total return is 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 as described in the Prospectuses, 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. For the year ended March 31, 2000, and since the LifeGoal Portfolios' inception, the average annual total return for the LifeGoal Portfolios was as follows: Note: Earliest inception date for the LifeGoal Portfolios is October 15, 1996 and therefore five and ten year numbers are not available. 76 Average Annual Returns 1 Year (as of Since 3/31/2000) Inception Including Including LifeGoal Portfolio/Class Sales Charges Sales Charges ------------- -------------- a) Growth Portfolio Primary A Shares 32.94% 18.82% Primary B Shares 32.40% 18.48% Investor A Shares 25.06% 16.65% Investor B Shares 26.68% 14.55% Investor C Shares 30.65% 17.89% b) Balanced Growth Portfolio Primary A Shares 18.34% 12.94% Primary B Shares 17.73% 12.58% Investor A Shares 11.25% 10.84% Investor B Shares 12.26% 10.63% Investor C Shares 16.22% 12.33% c) Income and Growth Portfolio Primary A Shares 4.91% 8.06% Investor A Shares -1.07% 6.14% Investor B Shares -0.66% 4.91% Investor C Shares 3.13% 7.33% For the period ended March 31, 2000, the aggregate total return for each LifeGoal Portfolio of the Company was: Note: Earliest inception date for the LifeGoal Portfolios is October 15, 1996 and therefore five and ten year numbers are not available. Aggregate Total Returns Inception Inception Through Through 3/31/2000 3/31/2000 Without Sales Including LifeGoal Portfolio/Class Charges Sales Charges ------- ------------- d) Growth Portfolio Primary A Shares 81.54% 81.54% Primary B Shares 79.52% 79.72% Investor A Shares 80.63% 70.30% Investor B Shares 45.99% 42.99% Investor C Shares 76.67% 76.67% e) Balanced Growth Portfolio Primary A Shares 52.30% 52.30% Primary B Shares 50.65% 50.65% Investor A Shares 51.39% 42.73% Investor B Shares 33.45% 30.45% Investor C Shares 49.50% 49.50% 77 f) Income and Growth Portfolio Primary A Shares 30.75% 30.75% Primary B Shares Investor A Shares 30.36% 22.88% Investor B Shares 16.52% 13.52% Investor C Shares 27.70% 27.70% The Primary Shares and Investor Shares of the LifeGoal Portfolios also may quote their distribution rates, which express the historical amount of income dividends paid to their shareholders during a three-month period as a percentage of the maximum offering price per share on the last day of such period. The performance figures of the LifeGoal Portfolios as described above will vary from time to time depending upon market and economic conditions, the composition of their portfolios and operating expenses. These factors should be considered when comparing the performance figures of the LifeGoal Portfolios with those of other investment companies and investment vehicles. The LifeGoal Portfolios 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 LifeGoal Portfolios may compare the performance and yield of a class or series of shares to those of other mutual funds with similar investment objectives and to other relevant indices or to rankings prepared by independent services or other financial or industry publications that monitor the performance of mutual funds. For example, the performance and yield of a class of shares in a LifeGoal Portfolio may be compared to data prepared by Lipper Analytical Services, Inc. Performance and yield data as reported in national financial publications such as Money Magazine, Forbes, Barron's, The Wall Street Journal, and The New York Times, or in publications of a local or regional nature, also may be used in comparing the performance of a class of shares in a LifeGoal Portfolio. 78 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. BB represents the lowest degree of speculation and B a higher degree of speculation. While such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposure to adverse conditions. 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 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. A-1 Ba - Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not as well safeguarded during both good times and bad times over the future. Uncertainty of position characterizes bonds in this class. B - Bond which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Moody's applies numerical modifiers (1, 2 and 3) with respect to corporate bonds rated Aa through B. The modifier 1 indicates that the bond being rated ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the bond ranks in the lower end of its generic rating category. With regard to municipal bonds, those bonds in the Aa, A and Baa groups which Moody's believes possess the strongest investment attributes are designated by the symbols Aa1, A1 or Baa1, respectively. The following summarizes the highest four ratings used by Duff & Phelps Credit Rating Co. ("D&P") for bonds, each of which denotes that the securities are investment grade. AAA - Bonds that are rated AAA are of the highest credit quality. The risk factors are considered to be negligible, being only slightly more than for risk-free U.S. Treasury debt. AA - Bonds that are rated AA are of high credit quality. Protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. A - Bonds that are rated A have protection factors which are average but adequate. However, risk factors are more variable and greater in periods of economic stress. BBB - Bonds that are rated BBB have below average protection factors but still are considered sufficient for prudent investment. Considerable variability in risk exists during economic cycles. To provide more detailed indications of credit quality, the AA, A and BBB ratings may 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. A-2 The following summarizes the two highest ratings used by Moody's for short-term municipal notes and variable-rate demand obligations: MIG-1/VMIG-1 -- Obligations bearing these designations are of the best quality, enjoying strong protection from established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing. MIG-2/VMIG-2 -- Obligations bearing these designations are of high quality, with ample margins of protection although not so large as in the preceding group. The following summarizes the two highest ratings used by S&P for short-term municipal notes: SP-1 -- Very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics are given a "plus" (+) designation. SP-2 -- Satisfactory capacity to pay principal and interest. The three highest rating categories of D&P for short-term debt, each of which denotes that the securities are investment grade, are D-1, D-2, and D-3. D&P employs three designations, D-1+, D-1 and D-1-, within the highest rating category. D-1+ indicates highest certainty of timely payment. Short-term liquidity, including internal operating factors and/or access to alternative sources of LifeGoal Portfolios, 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 three 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. A-3 For commercial paper, D&P uses the short-term debt ratings described above. For commercial paper, Fitch uses the short-term debt ratings described above. Thomson BankWatch, Inc. ("BankWatch") ratings are based upon a qualitative and quantitative analysis of all segments of the organization including, where applicable, holding company and operating subsidiaries. BankWatch ratings do not constitute a recommendation to buy or sell securities of any of these companies. Further, BankWatch does not suggest specific investment criteria for individual clients. BankWatch long-term ratings apply to specific issues of long-term debt and preferred stock. The long-term ratings specifically assess the likelihood of untimely payment of principal or interest over the term to maturity of the rated instrument. The following are the four investment grade ratings used by BankWatch for long-term debt: AAA - The highest category; indicates ability to repay principal and interest on a timely basis is extremely high. AA - The second highest category; indicates a very strong ability to repay principal and interest on a timely basis with limited incremental risk versus issues rated in the highest category. A - The third highest category; indicates the ability to repay principal and interest is strong. Issues rated "A" could be more vulnerable to adverse developments (both internal and external) than obligations with higher ratings. BBB - The lowest investment grade category; indicates an acceptable capacity to repay principal and interest. Issues rated "BBB" are, however, more vulnerable to adverse developments (both internal and external) than obligations with higher ratings. The BankWatch short-term ratings apply to commercial paper, other senior short-term obligations and deposit obligations of the entities to which the rating has been assigned. The BankWatch short-term ratings specifically assess the likelihood of an untimely payment of principal or interest. TBW-1 The highest category; indicates a very high likelihood that principal and interest will be paid on a timely basis. TBW-2 The second highest category; while the degree of safety regarding timely repayment of principal and interest is strong, the relative degree of safety is not as high as for issues rated "TBW-1". TBW-3 The lowest investment grade category; indicates that while more susceptible to adverse developments (both internal and external) than obligations with higher ratings, capacity to service principal and interest in a timely fashion is considered adequate. TBW-4 The lowest rating category; this rating is regarded as non-investment grade and therefore speculative. 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. A-4 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 three highest short-term debt ratings used by IBCA: A-1+ Where issues possess a particularly strong credit feature. A-1 Obligations supported by the highest capacity for timely repayment. A-2 Obligations supported by a good capacity for timely repayment. A-5 Statement of Additional Information NATIONS FUNDS TRUST Nations Government Securities Fund Nations Asset Allocation Fund Nations Marsico Focused Equities Fund Nations Marsico Growth & Income Fund Investor A, Investor B, Investor C and Primary A Shares June 8, 2001 This Statement of Additional Information ("SAI") provides supplementary information pertaining to the classes of shares representing interests in the above listed four investment portfolios of Nations Funds Trust (individually, a "Fund" and collectively, the "Funds"). The financial statements for the Funds contained in their annual reports dated March 31, 2000, are hereby incorporated into this SAI by reference. This SAI is not a prospectus, and should be read only in conjunction with the current prospectuses for the aforementioned Funds related to the class or series of shares in which one is interested, dated June 8, 2000, (each a "Prospectus"). Copies of the Prospectuses may be obtained without charge by writing Nations Funds c/o Stephens Inc., One Bank of America Plaza, 33rd Floor, Charlotte, North Carolina 28255, or by calling Nations Funds at 1.800.321.7854 and 1.800.626.2275 (for institutional money market investors). TABLE OF CONTENTS Page HISTORY OF NATIONS FUNDS TRUST.............................................. 1 DESCRIPTION OF THE COMPANY AND THE INVESTMENTS AND RISKS OF ITS FUNDS ............................................................... 1 General.............................................................. 2 Investment Limitations .............................................. 2 NFST's Fundamental Policy Restrictions............................... 2 NFST's Non-Fundamental Policy Restrictions........................... 3 Permissible Fund Investments......................................... 4 The Domestic Stock Funds............................................. 4 Government and Corporate Bond Fund................................... 4 Asset-Backed Securities.............................................. 5 Borrowings........................................................... 9 Commercial Instruments............................................... 9 Combined Transactions................................................ 10 Convertible Securities............................................... 10 Corporate Debt Securities............................................ 11 Custodial Receipts................................................... 11 Currency Swaps....................................................... 11 Delayed Delivery Transactions........................................ 12 Dollar Roll Transactions ............................................ 12 Equity Swap Contracts ............................................... 12 Foreign Currency Forward Transactions ............................... 13 Futures, Options and Other Derivative Instruments.................... 14 Guaranteed Investment Contracts...................................... 28 Illiquid and Restricted Securities................................... 29 Insured Municipal Securities ........................................ 29 Interest Rate Transactions .......................................... 29 Lower Rated Debt Securities.......................................... 30 Options on Currencies................................................ 31 Other Investment Companies........................................... 31 Real Estate Investment Trusts........................................ 31 Repurchase Agreements ............................................... 32 Reverse Repurchase Agreements ....................................... 32 Securities Lending................................................... 32 Short Sales.......................................................... 32 Special Situations................................................... 33 Standard & Poor's Depositary Receipts................................ 33 Stand-by Commitments ................................................ 33 Stripped Securities.................................................. 34 U.S. and Foreign Bank Obligations.................................... 34 U.S. Government Obligations.......................................... 35 Use of Segregated and Other Special Accounts......................... 35 Variable and Floating Rate Instruments .............................. 36 Warrants............................................................. 36 When-Issued Purchases and Forward Commitments ...................... 37 Portfolio Turnover................................................... 37 Investment Risks and Considerations.................................. 37 MANAGEMENT OF THE COMPANY................................................... 39 Nations Funds Retirement Plan........................................ 42 Nations Funds Deferred Compensation Plan............................. 42 i Shareholder and Trustee Liability.................................... 45 INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY, TRANSFER AGENCY, OTHER SERVICE PROVIDERS, SHAREHOLDER SERVICING AND DISTRIBUTION AGREEMENTS .................................................... 46 Investment Adviser and Sub-Advisers.................................. 46 Co-Administrators and Sub-Administrator.............................. 48 Distribution Plans and Shareholder Servicing Arrangements for Investor A Shares................................................ 52 Investor C Shares ............................................... 53 Investor B Shares................................................ 54 Expenses......................................................... 56 Transfer Agents and Custodians....................................... 57 Distributor.......................................................... 57 Independent Accountant and Reports................................... 58 Counsel.............................................................. 58 FUND TRANSACTIONS AND BROKERAGE............................................. 58 General Brokerage Policy............................................. 58 Brokerage Commissions Paid to Affiliates............................. 60 Securities of Regular Broker/Dealers Held by the Funds............... 60 Directed Brokerage................................................... 61 Monies Paid to Broker/Dealers From the Adviser's Profits............. 61 Section 28(e) Standards.............................................. 61 DESCRIPTION OF SHARES....................................................... 62 Description of Shares of the Company................................. 62 Net Asset Value Determination........................................ 63 ADDITIONAL INFORMATION CONCERNING TAXES..................................... 64 General.............................................................. 64 Excise Tax .......................................................... 64 Private Letter Ruling................................................ 65 Investment through Master Portfolios................................. 65 Taxation of Fund/Master Portfolio Investments........................ 65 Foreign Taxes ....................................................... 66 Capital Gain Distributions........................................... 67 Other Distributions.................................................. 67 Disposition of Fund Shares........................................... 67 Federal Income Tax Rates............................................. 68 Corporate Shareholders............................................... 68 Foreign Shareholders................................................. 68 Backup Withholding................................................... 68 New Regulations...................................................... 68 Tax-Deferred Plans................................................... 69 Other Matters.................................................... 69 ADDITIONAL INFORMATION ON PERFORMANCE....................................... 69 Yield Calculations................................................... 71 Total Return Calculations............................................ 74 MISCELLANEOUS .............................................................. 76 Certain Record and Beneficial Holders................................ 76 SCHEDULE A - Description of Ratings......................................... A-1 ii HISTORY OF NATIONS FUNDS TRUST Nations Funds Trust ("NFST" or the "Company") is an open-end registered investment company in the Nations Funds family of mutual funds (the "Nations Funds Family"), which consists of Nations Fund, Inc., Nations Reserves, Nations Fund Trust, Nations Annuity Trust, Nations Funds Trust and Nations Master Investment Trust. The Nations Funds Family currently has more than 70 distinct investment portfolios and total assets in excess of $90 billion. NFST was organized as a Delaware business trust on October 22, 1999. NFST has a fiscal year end of March 31. DESCRIPTION OF THE COMPANY AND THE INVESTMENTS AND RISKS OF ITS FUNDS General. NFST currently consists of twelve different investment portfolios. This SAI pertains to the Primary A, Investor A, Investor B and Investor C Shares of the Nations Government Securities Fund (the "Government Securities Fund"), Nations Asset Allocation Fund (the "Asset Allocation Fund"), Nations Marsico Focused Equities Fund (the "Marsico Focused Equities Fund) and Nations Marsico Growth & Income Fund (the "Marsico Growth & Income Fund"). All of the Funds of NFST are diversified except the Marsico Focused Equities Fund. Each share of NFST is without par value, represents an equal proportionate interest in the related fund with other shares of the same class, and is entitled to such dividends and distributions out of the income earned on the assets belonging to such fund as are declared in the discretion of NFST's Board of Trustees. NFST's Declaration of Trust authorizes the Board of Trustees to classify or reclassify any class of shares into one or more series of shares. Shareholders are entitled to one vote for each full share held and a proportionate fractional vote for each fractional share held. Shareholders of each Fund of NFST will vote in the aggregate and not by fund, and shareholders of each fund will vote in the aggregate and not by class except as otherwise expressly required by law or when the Board of Trustees determines that the matter to be voted on affects only the interests of shareholders of a particular fund or class. See the discussion on Investment Limitations and Description of Shares for examples of when the 1940 Act requires voting by fund. The Declaration of Trust of NFST further provides that NFST shareholders are only given the right to vote on matters to the extent that the 1940 Act or Delaware law so requires. Additionally, the Declaration of Trust provides as follows: "Because this Declaration does not confer any independent voting rights to Shareholders not expressly granted under Delaware law or the 1940 Act, this Declaration may be amended without Shareholder approval, and all Shareholders purchase Shares with notice that it may be so amended unless expressly required under Delaware law or the 1940 Act. The Trustees may, without any Shareholder vote, amend or otherwise supplement this Declaration by making an amendment, a trust instrument supplemental hereto or an amended and restated declaration of trust; provided, that Shareholders shall have the right to vote on any amendment if expressly required under Delaware law or the 1940 Act, or submitted to them by the Trustees in their discretion." As of the date of the SAI set forth on the cover page, Bank of America and its affiliates possessed or shared power to dispose or vote with respect to more than 25% of the outstanding shares of NFST and therefore could be considered to be a controlling person of NFST for purposes of the 1940 Act. For more detailed information concerning the percentage of each class or series of shares over which Bank of America and its affiliates possessed or shared power to dispose or vote as of a certain date, see the discussion on Certain Record Holders. NFST does not presently intend to hold annual meetings except as required by the 1940 Act. The Marsico Focused Equities Fund and Marsico Growth & Income Fund are sometimes referred to herein as "Feeder Funds." The Feeder Funds seek to achieve their respective investment objectives by investing substantially all of their assets in diversified investment portfolios having the same investment objective as corresponding master portfolios (each a "Master Portfolio" and collectively, the "Master Portfolios") of Nations Master Investment Trust ("NMIT"), an open-end management investment company in the Nations Funds Family. Feeder Fund and Master Fund are sometimes used interchangeably. The Marsico Focused Equities Fund invests substantially all of its assets in Nations Marsico Focused Equities Master Portfolio (the "Marsico Focused Equities Master Portfolio"). The Marsico Growth & Income Fund invests substantially all of its assets in Nations Marsico Growth & Income Master Portfolio (the "Marsico Growth & Income Master Portfolio"). 1 Banc of America Advisors, Inc. ("BAAI") is the investment adviser to the Funds. Chicago Equity Partners, LLC ("Chicago Equity") is co-investment sub-adviser with Banc of America Capital Management, Inc. ("BACAP") to the Asset Allocation Fund. Marsico Capital Management, LLC ("Marsico Capital") is investment sub-adviser to the Marsico Focused Equities Fund, Marsico Growth & Income Fund. BACAP is the investment sub-adviser to the Government Securities Fund. As used herein the term "Adviser" shall mean BAAI, Chicago Equity, BACAP, and/or Marsico Capital as the context may require. This SAI is intended to furnish prospective investors with additional information concerning the Company and the Funds. Some of the information required to be in this SAI is also included in the Funds' current Prospectuses, and, in order to avoid repetition, reference will be made to sections of the Prospectuses. Additionally, the Prospectuses and this SAI omit certain information contained in the registration statement filed with the United States Securities and Exchange Commission (the "SEC"). Copies of the registration statement, including items omitted from the Prospectuses and this SAI, may be obtained from the SEC by paying the charges prescribed under its rules and regulations. No investment in the Funds' Shares should be made without first reading the related Prospectuses. Investment Limitations Information concerning a Fund's investment objective is set forth in the applicable Prospectus. There can be no assurance that the Funds will achieve their objectives. The features of the Funds' principal investment strategies and the principal risks associated with those investment strategies also are discussed in the Prospectuses. The fundamental and non-fundamental investment restrictions applicable to the Funds' investment programs are set forth below. The investment limitations that are matters of fundamental policy may not be changed without the affirmative vote of a Fund's shareholders. The investment limitations that are matters of non-fundamental policy may be changed without the affirmative vote of a Fund's shareholders. In addition to the policies outlined below, each Fund is seeking or has obtained permission from the SEC to invest in other Funds in the Nations Funds family. NFST's Fundamental Policy Restrictions Each Fund may not: 1. Underwrite any issue of securities within the meaning of the 1933 Act except when it might technically be deemed to be an underwriter either (a) in connection with the disposition of a portfolio security, or (b) in connection with the purchase of securities directly from the issuer thereof in accordance with its investment objective. This restriction shall not limit the Fund's ability to invest in securities issued by other registered investment companies. 2. Purchase or sell real estate, except a Fund may purchase securities of issuers which deal or invest in real estate and may purchase securities which are secured by real estate or interests in real estate. 3. Purchase or sell commodities, except that a Fund may to the extent consistent with its investment objective, invest in securities of companies that purchase or sell commodities or which invest in such programs, and purchase and sell options, forward contracts, futures contracts, and options on futures contracts. This limitation does not apply to foreign currency transactions including without limitation forward currency contracts. 4. Purchase any securities which would cause 25% or more of the value of its total assets at the time of purchase to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that: (a) there is no limitation with respect to obligations issued or guaranteed by the U.S. Government, any state or territory of the United States, or any of their agencies, instrumentalities or political subdivisions, and (b) notwithstanding this limitation or any other fundamental investment limitation, assets may be invested in the securities of one or more management investment companies to the extent permitted by the 1940 Act, the rules and regulations thereunder and any exemptive relief obtained by the Funds. 2 5. Make loans, except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any exemptive relief obtained by the Funds. 6. Borrow money or issue senior securities except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any exemptive relief obtained by the Funds. 7. Purchase securities (except securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities) of any one issuer if, as a result, more than 5% of its total assets will be invested in the securities of such issuer or it would own more than 10% of the voting securities of such issuer, except that (a) up to 25% of its total assets may be invested without regard to these limitations and (b) a Fund's assets may be invested in the securities of one or more management investment companies to the extent permitted by the 1940 Act, the rules and regulations thereunder and any exemptive relief obtained by the Funds. NFST's Non-Fundamental Policy Restrictions Each Fund may: 1. Invest in shares of other open-end management investment companies, subject to the limitations of the 1940 Act, the rules thereunder, and any orders obtained thereunder now or in the future. Funds in a master/feeder structure generally invest in the securities of one or more open-end management investment companies pursuant to various provisions of the 1940 Act. 2. Not invest or hold more than 15% of the Fund's net assets in illiquid securities. For this purpose, illiquid securities include, among others, (a) securities that are illiquid by virtue of the absence of a readily available market or legal or contractual restrictions on resale, (b) fixed time deposits that are subject to withdrawal penalties and that have maturities of more than seven days, and (c) repurchase agreements not terminable within seven days. 3. Invest in futures or options contracts regulated by the CFTC for (i) bona fide hedging purposes within the meaning of the rules of the CFTC and (ii) for other purposes if, as a result, no more than 5% of a Fund's net assets would be invested in initial margin and premiums (excluding amounts "in-the-money") required to establish the contracts. A Fund (i) will not hedge more than 50% of its total assets by selling futures contracts, buying put options, and writing call options (so called "short positions"), (ii) will not buy futures contracts or write put options whose underlying value exceeds 25% of the Fund's total assets, and (iii) will not buy call options with a value exceeding 5% of the Fund's total assets. 4. Lend securities from its portfolio to brokers, dealers and financial institutions, in amounts not to exceed (in the aggregate) one-third of the Fund's total assets. Any such loans of portfolio securities will be fully collateralized based on values that are marked to market daily. 5. Not make investments for the purpose of exercising control of management. (Investments by the Fund in entities created under the laws of foreign countries solely to facilitate investment in securities in that country will not be deemed the making of investments for the purpose of exercising control.) 6. Not sell securities short, unless it owns or has the right to obtain securities equivalent in kind and amount to the securities sold short (short sales "against the box"), and provided that transactions in futures contracts and options are not deemed to constitute selling securities short. For purposes of the foregoing limitations, any limitation that involves a maximum percentage shall not be considered violated unless an excess over the percentage occurs immediately after, and is caused by, an acquisition or encumbrance of securities or assets of, or borrowings on behalf of, a Fund. 3 The investment objective and policies of each Fund, unless otherwise specified, are not-fundamental and may be changed without shareholder approval. If the investment objective or policies of a Fund change, shareholders should consider whether the Fund remains an appropriate investment in light of their current position and needs. Permissible Fund Investments In addition to the principal investment strategies for each Fund, which are outlined in the Funds' prospectuses, each Fund also may invest in other types of securities in percentages of less than 10% of its total assets (unless otherwise indicated, e.g., most Funds may invest in money market instruments without limit during temporary defensive periods). These types of securities are listed below for each portfolio and then are described in more detail after this sub-section. The Domestic Stock Funds Marsico Focused Equities Fund and Marsico Growth & Income Fund: In addition to the types of securities described in their Prospectuses, the Master Portfolios (in which the Funds invests all of their assets) may invest in: preferred stock, warrants, convertible securities and debt securities; zero coupon, pay-in-kind and step coupon securities, and may invest without limit in indexed/structured securities. The Master Portfolios also may invest its assets in high-yield/high-risk securities, such as lower grade debt securities, high-grade commercial paper, certificates of deposit, and repurchase agreements, and may invest in short-term debt securities as a means of receiving a return on idle cash. The Master Portfolios may hold cash or cash equivalents and invest without limit in U.S. Government Obligations and short-term debt securities or money market instruments when the Adviser: (i) believes that the market conditions are not favorable for profitable investing, (ii) is unable to locate favorable investment opportunities, or (iii) determines that a temporary defensive position is advisable or necessary to meet anticipated redemption request. In other words, the Master Portfolios do not always stay fully invested in stocks and bonds. The Master Portfolios also may use options, futures, forward currency contracts and other types of derivatives for hedging purposes or for non-hedging purposes such as seeking to enhance return. The Master Portfolios also may purchase securities on a when-issued, delayed delivery or forward commitment basis. Each Fund discussed above also may invest in certain specified derivative securities including: exchange-traded options; over-the-counter options executed with primary dealers, including long calls and puts and covered calls to enhance return; and U.S. and foreign exchange-traded financial futures approved by the Commodity Futures Trading Commission ("CFTC") and options thereon for market exposure risk management. Each Fund may lend its portfolio securities to qualified institutional investors and may invest in repurchase agreements, restricted, private placement and other illiquid securities. Each Fund also may invest in real estate investment trust securities. In addition, each Fund may invest in securities issued by other investment companies, consistent with the Fund's investment objective and policies and repurchase agreements. The Marsico Focused Equities Master Portfolio and Marsico Growth & Income Master Portfolio may invest in forward foreign exchange contracts. Asset Allocation Fund: In addition to the types of securities described in the Fund's Prospectus, 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 calls and puts and covered calls to enhance return; and CFTC-approved U.S. and foreign exchange-traded financial futures and options thereon for market exposure risk-management. The Fund may lend its Fund 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 dollar roll transactions. Additionally, the Fund may purchase securities issued by other investment companies, consistent with the Fund's investment objective and policies. The Fund also may invest in instruments issued by trusts or certain partnerships including pass-through certificates representing participations in, or debt investments backed by, the securities and other assets owned by such trusts and partnerships. Government and Corporate Bond Fund Government Securities Fund: In addition to the types of securities described in its Prospectus, 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. 4 The Fund may invest in certain specified derivative securities, including: interest rate swaps, caps and floors, exchange-traded options, over-the-counter options executed with primary dealers, including long term calls and puts and covered calls, U.S. and foreign exchange-traded financial futures and options thereon approved by the CFTC for market exposure risk management, eurodollar contracts, certain private placements and certain non-U.S. dollar denominated fixed-income securities. 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. Mortgage-Backed Securities. Mortgage-backed securities represent an ownership interest in a pool of mortgage loans. Mortgage pass-through securities may represent participation interests in pools of residential mortgage loans originated by U.S. Governmental or private lenders and guaranteed, to the extent provided in such securities, by the U.S. Government or one of its agencies, authorities or instrumentalities. Such securities, which are ownership interests in the underlying mortgage loans, differ from conventional debt securities, which provide for periodic payment of interest in fixed amounts (usually semi-annually) and principal payments at maturity or on specified call dates. Mortgage pass-through securities provide for monthly payments that are a "pass-through" of the monthly interest and principal payments (including any prepayments) made by the individual borrowers on the pooled mortgage loans, net of any fees paid to the guarantor of such securities and the servicer of the underlying mortgage loans. The guaranteed mortgage pass-through securities in which a Fund may invest may include those issued or guaranteed by Government National Mortgage Association ("Ginnie Mae" or "GNMA"), Federal National Mortgage Association ("Fannie Mae" or "FNMA") or Federal Home Loan Mortgage Corporation ("Freddie Mac" or "FHLMC"). Such Certificates are mortgage-backed securities which represent a partial ownership interest in a pool of mortgage loans issued by lenders such as mortgage bankers, commercial banks and savings and loan associations. Such mortgage loans may have fixed or adjustable rates of interest. The average life of a mortgage-backed security is likely to be substantially less than the original maturity of the mortgage pools underlying the securities. Prepayments of principal by mortgagors and mortgage foreclosures will usually result in the return of the greater part of principal invested far in advance of the maturity of the mortgages in the pool. 5 The yield which will be earned on mortgage-backed securities may vary from their coupon rates for the following reasons: (i) Certificates may be issued at a premium or discount, rather than at par; (ii) Certificates may trade in the secondary market at a premium or discount after issuance; (iii) interest is earned and compounded monthly, which has the effect of raising the effective yield earned on the Certificates; and (iv) the actual yield of each Certificate is affected by the prepayment of mortgages included in the mortgage pool underlying the Certificates and the rate at which principal so prepaid is reinvested. In addition, prepayment of mortgages included in the mortgage pool underlying a GNMA Certificate purchased at a premium may result in a loss to the Fund. Mortgage-backed securities issued by private issuers, whether or not such obligations are subject to guarantees by the private issuer, may entail greater risk than obligations directly or indirectly guaranteed by the U.S. Government. Collateralized mortgage obligations or "CMOs" are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collateral collectively hereinafter referred to as "Mortgage Assets"). Multi-class pass-through securities are interests in a trust composed of Mortgage Assets and all references herein to CMOs will include multi-class pass-through securities. Payments of principal of and interest on the Mortgage Assets, and any reinvestment income thereon, provide the funds to pay debt service on the CMOs or make scheduled distribution on the multi-class pass-through securities. Moreover, principal prepayments on the Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates, resulting in a loss of all or part of the premium if any has been paid. Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly or semiannual basis. The principal and interest payments on the Mortgage Assets may be allocated among the various classes of CMOs in several ways. Typically, payments of principal, including any prepayments, on the underlying mortgages are applied to the classes in the order of their respective stated maturities or final distribution dates, so that no payment of principal is made on CMOs of a class until all CMOs of other classes having earlier stated maturities or final distribution dates have been paid in full. Stripped mortgage-backed securities ("SMBS") are derivative multi-class mortgage securities. A Fund will only invest in SMBS that are obligations backed by the full faith and credit of the U.S. Government. SMBS are usually structured with two classes that receive different proportions of the interest and principal distributions from a pool of mortgage assets. A Fund will only invest in SMBS whose mortgage assets are U.S. Government obligations. A common type of SMBS will be structured so that one class receives some of the interest and most of the principal from the mortgage assets, while the other class receives most of the interest and the remainder of the principal. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a Fund may fail to fully recoup its initial investment in these securities. The market value of any class which consists primarily or entirely of principal payments generally is unusually volatile in response to changes in interest rates. The average life of mortgage-backed securities varies with the maturities of the underlying mortgage instruments. The average life is likely to be substantially less than the original maturity of the mortgage pools underlying the securities as the result of mortgage prepayments, mortgage refinancings, or foreclosures. The rate of mortgage prepayments, and hence the average life of the certificates, will be a function of the level of interest rates, general economic conditions, the location and age of the mortgage and other social and demographic conditions. Such prepayments are passed through to the registered holder with the regular monthly payments of principal and interest and have the effect of reducing future payments. Estimated average life will be determined by the Adviser and used for the purpose of determining the average weighted maturity and duration of the Funds. 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. 6 Interests in pools of mortgage-backed securities differ from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities provide a monthly payment which consists of both interest and principal payments. In effect, these payments are a "pass-through" of the monthly payments made by the individual borrowers on their residential mortgage loans, net of any fees paid. Additional payments are caused by repayments resulting from the sale of the underlying residential property, refinancing or foreclosure net of fees or costs which may be incurred. Some mortgage-backed securities are described as "modified pass-through." These securities entitle the holders to receive all interest and principal payments owed on the mortgages in the pool, net of certain fees, regardless of whether or not the mortgagors actually make the payments. Residential mortgage loans are pooled by the FHLMC. FHLMC is a corporate instrumentality of the U.S. Government and was created by Congress in 1970 for the purpose of increasing the availability of mortgage credit for residential housing. Its stock is owned by the twelve Federal Home Loan Banks. FHLMC issues Participation Certificates ("PC's"), which represent interests in mortgages from FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and ultimate collection of principal. FNMA is a Government sponsored corporation owned entirely by private stockholders. It is subject to general regulation by the Secretary of Housing and Urban Development. FNMA purchases residential mortgages from a list of approved sellers/servicers which include state and federally-chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA. The principal Government guarantor of mortgage-backed securities is the GNMA. GNMA is a wholly-owned U.S. Government corporation within the Department of Housing and Urban Development. GNMA is authorized to guarantee, with the full faith and credit of the U.S. Government, the timely payment of principal and interest on securities issued by approved institutions and backed by pools of FHA-insured or VA-guaranteed mortgages. Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional residential mortgage loans. Pools created by such non-governmental issuers generally offer a higher rate of interest than Government and Government-related pools because there are no direct or indirect Government guarantees of payments in the former pools. However, timely payment of interest and principal of these pools is supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance purchased by the issuer. The insurance and guarantees are issued by Governmental entities, private insurers, and the mortgage poolers. There can be no assurance that the private insurers or mortgage poolers can meet their obligations under the policies. The Fund expects that Governmental or private entities may create mortgage loan pools offering pass-through investments in addition to those described above. The mortgages underlying these securities may be alternative mortgage instruments, that is, mortgage instruments whose principal or interest payment may vary or whose terms to maturity may be shorter than previously customary. As new types of mortgage-backed securities are developed and offered to investors, certain Funds will, consistent with their investment objective and policies, consider making investments in such new types of securities. Underlying Mortgages Pools consist of whole mortgage loans or participations in loans. The majority of these loans are made to purchasers of 1-4 family homes. The terms and characteristics of the mortgage instruments are generally uniform within a pool but may vary among pools. For example, in addition to fixed-rate, fixed-term mortgages, a Fund may purchase pools of variable-rate mortgages (VRM), growing equity mortgages (GEM), graduated payment mortgages (GPM) and other types where the principal and interest payment procedures vary. VRM's are mortgages which reset the mortgage's interest rate periodically with changes in open market interest rates. To the extent that the Fund is actually invested in VRM's, the Fund's interest income will vary with changes in the applicable interest rate on pools of VRM's. GPM and GEM pools maintain constant interest rates, with varying levels of principal repayment over the life of the mortgage. These different interest and principal payment procedures should not impact the Fund's net asset value since the prices at which these securities are valued will reflect the payment procedures. 7 All poolers apply standards for qualification to local lending institutions which originate mortgages for the pools. Poolers also establish credit standards and underwriting criteria for individual mortgages included in the pools. In addition, some mortgages included in pools are insured through private mortgage insurance companies. Average Life The average life of pass-through pools varies with the maturities of the underlying mortgage instruments. In addition, a pool's term may be shortened by unscheduled or early payments of principal and interest on the underlying mortgages. The occurrence of mortgage prepayments is affected by factors including the level of interest rates, general economic conditions, the location and age of the mortgage, and other social and demographic conditions. As prepayment rates of individual pools vary widely, it is not possible to accurately predict the average life of a particular pool. For pools of fixed-rated 30-year mortgages, common industry practice is to assume that prepayments will result in a 12-year average life. Pools of mortgages with other maturities or different characteristics will have varying assumptions for average life. Returns on Mortgage-Backed Securities Yields on mortgage-backed pass-through securities are typically quoted based on the maturity of the underlying instruments and the associated average life assumption. Actual prepayment experience may cause the yield to differ from the assumed average life yield. Reinvestment of prepayments may occur at higher or lower interest rates than the original investment, thus affecting the yields of the Fund. The compounding effect from reinvestments of monthly payments received by the Fund will increase its yield to shareholders, compared to bonds that pay interest semi-annually. Non-Mortgage Asset-backed Securities. Non-mortgage asset-backed securities include interests in pools of receivables, such as motor vehicle installment purchase obligations and credit card receivables. Such securities are generally issued as pass-through certificates, which represent undivided fractional ownership interests in the underlying pools of assets. Such securities also may be debt instruments, which are also known as collateralized obligations and are generally issued as the debt of a special purpose entity organized solely for the purpose of owning such assets and issuing such debt. Such securities also may include instruments issued by certain trusts, partnerships or other special purpose issuers, including pass-through certificates representing participations in, or debt instruments backed by, the securities and other assets owned by such issuers. Non-mortgage-backed securities are not issued or guaranteed by the U.S. Government or its agencies or instrumentalities; however, the payment of principal and interest on such obligations may be guaranteed up to certain amounts and for a certain time period by a letter of credit issued by a financial institution (such as a bank or insurance company) unaffiliated with the issuers of such securities. 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. 8 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 Certain Funds participate in a committed line of credit agreement (the "Committed Line") with The Bank of New York as administrative agent and Commerzbank, A.G. and Grand Cayman Branches as syndication agents. The Committed Line affords an open line of credit of up to $500,000,000 to the participating Funds for emergency purposes or otherwise. Interest on borrowings is generally payable at the federal funds rate plus .50% on an annualized basis. The borrowing Funds are also charged an administrative fee by The Bank of New York generally at a rate of 0.09% of the daily amount of the commitment under the Committed Line, regardless of usage. Unless renewed by the relevant Boards of Trustees, the Committed Line will expire on November 18, 2000. Specific borrowings by a Fund under the Committed Line over the last fiscal year, if any, can by found in the Funds' Annual Reports for the year ended March 31, 2000. The Funds also participate in an uncommitted line of credit provided by The Bank of New York under a line of credit agreement (the "Uncommitted Line"). Advances under the Uncommitted Line are taken primarily for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. Interest on borrowings is payable at the federal funds rate plus .50% on an annualized basis. The Agreement requires, among other things, that each participating Fund maintain a ratio of no less than 4 to 1 net assets (not including funds borrowed pursuant to the Agreement) to the aggregate amount of indebtedness pursuant to the Agreement. Specific borrowings by a Fund under the Uncommitted Line over the last fiscal year, if any, can by found in the Funds' Annual Reports for the year ended March 31, 2000. Commercial Instruments Certain Funds may purchase commercial instruments. Commercial Instruments consist of short-term U.S. dollar-denominated obligations issued by domestic corporations or issued in the U.S. by foreign corporations and foreign commercial banks. Investments by a Fund in commercial paper will consist of issues rated in a manner consistent with such Fund's investment policies and objectives. In addition, the Funds may acquire unrated commercial paper and corporate bonds that are determined by the Adviser at the time of purchase to be of comparable quality to rated instruments that may be acquired by such Funds as previously described. Variable-rate master demand notes are unsecured instruments that permit the indebtedness thereunder to vary and provide for periodic adjustments in the interest rate. Variable-rate instruments acquired by a Fund will be rated at a level consistent with such Fund's investment objective and policies of high quality as determined by a major rating agency or, if not rated, will be of comparable quality as determined by the Adviser. See also the discussion of variable- and floating-rate instruments in this SAI. Variable- and floating-rate instruments are unsecured instruments that permit the indebtedness thereunder to vary. While there may be no active secondary market with respect to a particular variable or floating rate instrument purchased by a Fund, a Fund may, from time to time as specified in the instrument, demand payment of the principal or may resell the instrument to a third party. The absence of an active secondary market, however, could make it difficult for a Fund to dispose of an instrument if the issuer defaulted on its payment obligation or during periods when a Fund is not entitled to exercise its demand rights, and a Fund could, for these or other reasons, suffer a loss. A Fund may invest in variable and floating rate instruments only when the Adviser deems the investment to involve minimal credit risk. If such instruments are not rated, the Adviser will consider the earning power, cash flows, and other liquidity ratios of the issuers of such instruments and will continuously monitor their financial status to meet payment on demand. In determining average weighted portfolio maturity, an instrument will be deemed to have a maturity equal to the shorter of the period remaining to the next interest rate adjustment or the demand notice period specified in the instrument. Certain Funds also may purchase short-term participation interests in loans extended by banks to companies, provided that both such banks and such companies meet the quality standards set forth above. In purchasing a loan participation or assignment, the Fund acquires some or all of the interest of a bank or other lending institution in a loan to a corporate borrower. Many such loans are secured and most impose restrictive covenants which must be met by the borrower and which are generally more stringent than the covenants available in publicly traded debt securities. However, interests in some loans may not be secured, and the Fund will be exposed to a risk of loss if the borrower defaults. Loan participations also may be purchased by the Fund when the borrowing company is already in default. In purchasing a loan participation, the Fund may have less protection under the federal securities laws than it has in purchasing traditional types of securities. The Fund's ability to assert its rights against the borrower will also depend on the particular terms of the loan agreement among the parties. 9 Combined Transactions Certain Funds may enter into multiple transactions, including multiple options transactions, multiple futures transactions, multiple forward foreign currency exchange contracts and any combination of futures, options and forward foreign currency exchange contracts ("component" transactions), instead of a single transaction, as part of a single hedging strategy when, in the opinion of the Adviser, it is in the best interest of a Fund to do so and where underlying hedging strategies are permitted by a Fund's investment policies. A combined transaction, while part of a single hedging strategy, may contain elements of risk that are present in each of its component transactions. Convertible Securities Certain Funds may invest in convertible securities, such as bonds, notes, debentures, preferred stocks and other securities that may be converted into common stock. The convertible securities purchased by a Fund will generally be rated in the top two categories by an NRSRO or, if unrated, determined by the Adviser to be of comparable quality. Investments in convertible securities can provide income through interest and dividend payments, as well as, an opportunity for capital appreciation by virtue of their conversion or exchange features. The convertible securities in which a Fund may invest include fixed-income and zero coupon debt securities, and preferred stock that may be converted or exchanged at a stated or determinable exchange ratio into underlying shares of common stock. The exchange ratio for any particular convertible security may be adjusted from time to time due to stock splits, dividends, spin-offs, other corporate distributions or scheduled changes in the exchange ratio. Convertible debt securities and convertible preferred stocks, until converted, have general characteristics similar to both debt and equity securities. Although to a lesser extent than with debt securities, generally, the market value of convertible securities tends to decline as interest rates increase and, conversely, tends to increase as interest rates decline. In addition, because of the conversion exchange feature, the market value of convertible securities typically changes as the market value of the underlying common stock changes, and, therefore, also tends to follow movements in the general market for equity securities. A unique feature of convertible securities is that as the market price of the underlying common stock declines, convertible securities tend to trade increasingly on a yield basis, and so may not experience market value declines to the same extent as the underlying common stock. When the market price of the underlying common stock increases, the price of a convertible security tends to rise as a reflection of the value of the underlying common stock, although typically not as much as the price of the underlying common stock. While no securities investments are without risk, investments in convertible securities generally entail less risk than investments in common stock of the same issuer. As debt securities, convertible securities are investments which provide for a stream of income or, in the case of zero coupon securities, accretion of income with generally higher yields than common stocks. Of course, like all debt securities, there can be no assurance of income or principal payments because the issuers of the convertible securities may default on their obligations. Convertible securities generally offer lower yields than non-convertible securities of similar quality because of their conversion exchange features. Convertible securities generally are subordinated to other similar debt securities but not to non-convertible securities of the same issuer. Convertible bonds, as corporate debt obligations, are senior in right of payment to all equity securities, and convertible preferred stock is senior to common stock, of the same issuer. However, convertible bonds and convertible preferred stock typically have lower coupon rates than similar non-convertible securities. Convertible securities may be issued as fixed income obligations that pay current income or as zero coupon notes and bonds, including Liquid Yield Option Notes ("LYONs"). Zero coupon securities pay no cash income and are sold at substantial discounts from their value at maturity. When held to maturity, their entire income, which consists of accretion of discount, comes from the difference between the issue price and their value at maturity. Zero coupon convertible securities offer the opportunity for capital appreciation because increases (or decreases) in the market value of such securities closely follow the movements in the market value of the underlying common stock. Zero coupon convertible securities generally are expected to be less volatile than the underlying common stocks because they usually are issued with short maturities (15 years or less) and are issued with options and/or redemption features exercisable by the holder of the obligation entitling the holder to redeem the obligation and receive a defined cash payment. 10 Corporate Debt Securities Certain Funds may invest in corporate debt securities of domestic issuers of all types and maturities, such as bonds, debentures, notes and commercial paper. Corporate debt securities may involve equity features, such as conversion or exchange rights or warrants for the acquisition of stock of the same or a different issuer, participation based on revenue, sales or profit, or the purchase of common stock or warrants in a unit transaction (where corporate debt obligations and common stock are offered as a unit). Each Fund may also invest in corporate debt securities of foreign issuers. The corporate debt securities in which the Funds will invest will be rated investment grade by at least one NRSRO (e.g., BBB or above by Standard & Poor's Corporation ("S&P") or Baa or above by Moody's Investors Services, Inc. ("Moody's")). Commercial paper purchased by the Funds will be rated in the top two categories by a NRSRO. Corporate debt securities that are not rated may be purchased by such Funds if they are determined by the Adviser to be of comparable quality under the direction of the Board of Trustees of the Company. If the rating of any corporate debt security held by a Fund falls below such ratings or if the Adviser determines that an unrated corporate debt security is no longer of comparable quality, then such security shall be disposed of in an orderly manner as quickly as possible. A description of these ratings is attached as Schedule A to this Statement of Additional Information. Custodial Receipts Certain Funds may also acquire custodial receipts that evidence ownership of future interest payments, principal payments or both on certain U.S. Government notes or bonds. Such notes and bonds are held in custody by a bank on behalf of the owners. These custodial receipts are known by various names, including "Treasury Receipts," "Treasury Investors Growth Receipts" and "Certificates of Accrual on Treasury Securities." Although custodial receipts are not considered U.S. Government securities, they are indirectly issued or guaranteed as to principal and interest by the U.S. Government, its agencies, authorities or instrumentalities. Custodial receipts will be treated as illiquid securities. Currency Swaps Certain Funds also may enter into currency swaps for hedging purposes and to seek to increase total return. In as much as swaps are entered into for good faith hedging purposes or are offset by a segregated account as described below, the Fund and the Adviser believe that swaps do not constitute senior securities as defined in the 1940 Act and, accordingly, will not treat them as being subject to the Fund's borrowing restrictions. The net amount of the excess, if any, of the Fund's obligations over its entitlement with respect to each currency swap will be accrued on a daily basis and an amount of cash or liquid high grade debt securities (i.e., securities rated in one of the top three ratings categories by an NRSRO, or, if unrated, deemed by the Adviser to be of comparable credit quality) having an aggregate net asset value at least equal to such accrued excess will be maintained in a segregated account by the Fund's custodian. The Fund will not enter into any currency swap unless the credit quality of the unsecured senior debt or the claims-paying ability of the other party thereto is considered to be investment grade by the Adviser. Delayed Delivery Transactions In a delayed delivery transaction, the Fund relies on the other party to complete the transaction. If the transaction is not completed, the Fund may miss a price or yield considered to be advantageous. In delayed delivery transactions, delivery of the securities occurs beyond normal settlement periods, but a Fund would not pay for such securities or start earning interest on them until they are delivered. However, when a Fund purchases securities on such a delayed delivery basis, it immediately assumes the risk of ownership, including the risk of price fluctuation. Failure by a counterparty to deliver a security purchased on a delayed delivery basis may result in a loss or missed opportunity to make an alternative investment. Depending upon market conditions, a Fund's delayed delivery purchase commitments could cause its net asset value to be more volatile, because such securities may increase the amount by which the Fund's total assets, including the value of when-issued and delayed delivery securities held by the Fund, exceed its net assets. 11 Dollar Roll Transactions Certain Funds may enter into "dollar roll" transactions, which consist of the sale by a Fund to a bank or broker/dealer (the "counterparty") of GNMA certificates or other mortgage-backed securities together with a commitment to purchase from the counterparty similar, but not identical, securities at a future date, at the same price. The counterparty receives all principal and interest payments, including prepayments, made on the security while it is the holder. A Fund receives a fee from the counterparty as consideration for entering into the commitment to purchase. Dollar rolls may be renewed over a period of several months with a different repurchase price and a cash settlement made at each renewal without physical delivery of securities. Moreover, the transaction may be preceded by a firm commitment agreement pursuant to which the Fund agrees to buy a security on a future date. If the broker/dealer to whom a Fund sells the security becomes insolvent, the Fund's right to purchase or repurchase the security may be restricted; the value of the security may change adversely over the term of the dollar roll; the security that the Fund is required to repurchase may be worth less than the security that the Fund originally held, and the return earned by the Fund with the proceeds of a dollar roll may not exceed transaction costs. The entry into dollar rolls involves potential risks of loss that are different from those related to the securities underlying the transactions. For example, if the counterparty becomes insolvent, the Fund's right to purchase from the counterparty might be restricted. Additionally, the value of such securities may change adversely before the Fund is able to purchase them. Similarly, the Fund may be required to purchase securities in connection with a dollar roll at a higher price than may otherwise be available on the open market. Since, as noted above, the counterparty is required to deliver a similar, but not identical security to the Fund, the security that the Fund is required to buy under the dollar roll may be worth less than an identical security. Finally, there can be no assurance that the Fund's use of the cash that it receives from a dollar roll will provide a return that exceeds borrowing costs. Equity Swap Contracts Certain Funds may from time to time enter into equity swap contracts. The counterparty to an equity swap contract will typically be a bank, investment banking firm or broker/dealer. For example, the counterparty will generally agree to make periodic payments to the Fund of the amount, if any, by which the notional amount of the Equity Swap Contract would have increased in value had it been invested in the stocks comprising the S&P 500 Index in proportion to the composition of the Index, plus the dividends that would have been received on those stocks. A Fund will agree to pay to the counterparty a floating rate of interest (typically the London Inter Bank Offered Rate) on the notional amount of the Equity Swap Contract. Therefore, the return to a Fund on any Equity Swap Contract should be the gain or loss on the notional investment, plus dividends, in the stocks comprising the S&P 500 Index, less the floating rate of interest paid by the Fund on the notional amount. A Fund will only enter into Equity Swap Contracts that provide for payments to be made on a net basis, i.e., the two parties' obligations are netted out, with the Fund paying or receiving, as the case may be, only the net amount of any payments. Payments under the Equity Swap Contracts may be made at the conclusion of the contract or periodically during its term. If there is a default by the counterparty to an Equity Swap Contract, a Fund will be limited to contractual remedies pursuant to the agreements related to the transaction. There is no assurance that Equity Swap Contract counterparties will be able to meet their obligations pursuant to Equity Swap Contracts or that, in the event of default, a Fund will succeed in pursuing contractual remedies. A Fund thus assumes the risk that it may be delayed in or prevented from obtaining payments owed to it pursuant to Equity Swap Contracts. A Fund will closely monitor the credit of Equity Swap Contract counterparties in order to minimize this risk. Certain Funds may from time to time enter into the opposite side of Equity Swap Contracts (i.e., where a Fund is obligated to pay the increase (net of interest) or receive the decrease (plus interest) on the contract to reduce the amount of the Fund's equity market exposure consistent with the Fund's objective. These positions are sometimes referred to as Reverse Equity Swap Contracts. Equity Swap Contracts will not be used to leverage a Fund. A Fund will not enter into any Equity Swap Contract or Reverse Equity Swap Contract unless, at the time of entering into such transaction, the unsecured senior debt of the counterparty is rated at least A by Moody's or S&P. Since the SEC considers Equity Swap Contracts and Reverse Equity Swap Contracts to be illiquid securities, a Fund will not invest in Equity Swap Contracts or Reverse Equity Swap Contracts if the total value of such investments together with that of all other illiquid securities which a Fund owns would exceed any limitation imposed by the SEC Staff. The Adviser does not believe that a Fund's obligations under Equity Swap Contracts or Reverse Equity Swap Contracts are senior securities and, accordingly, the Fund will not treat them as being subject to its borrowing restrictions. However, the net amount of the excess, if any, of a Fund's obligations over its respective entitlements with respect to each Equity Swap Contract and each Reverse Equity Swap Contract will be accrued on a daily basis and an amount of cash, U.S. Government securities or other liquid high quality debt securities having an aggregate market value at least equal to the accrued excess will be maintained in a segregated account by the Fund's custodian. 12 Foreign Currency Forward Transactions Certain Funds may invest in foreign currency transactions. Foreign securities involve currency risks. The U.S. dollar value of a foreign security tends to decrease when the value of the U.S. dollar rises against the foreign currency in which the security is denominated, and tends to increase when the value of the U.S. dollar falls against such currency. A Fund may purchase or sell forward foreign currency exchange contracts ("forward contracts") to attempt to minimize the risk to the Fund from adverse changes in the relationship between the U.S. dollar and foreign currencies. A Fund may also purchase and sell foreign currency futures contracts and related options (see "Purchase and Sale of Currency Futures Contracts and Related Options"). A forward contract is an obligation to purchase or sell a specific currency for an agreed price at a future date that is individually negotiated and privately traded by currency traders and their customers. Forward foreign currency exchange contracts establish an exchange rate at a future date. These contracts are transferable in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward foreign currency exchange contract generally has no deposit requirement, and is traded at a net price without commission. A Fund will direct its custodian to segregate high grade liquid assets in an amount at least equal to its obligations under each forward foreign currency exchange contract. Neither spot transactions nor forward foreign currency exchange contracts eliminate fluctuations in the prices of a Fund's portfolio securities or in foreign exchange rates, or prevent loss if the prices of these securities should decline. The Fund's custodian will segregate cash, U.S. Government securities or other high-quality debt securities having a value equal to the aggregate amount of the Fund's commitments under forward contracts entered into with respect to position hedges and cross-hedges. If the value of the segregated securities declines, additional cash or securities will be segregated on a daily basis so that the value of the segregated securities will equal the amount of the Fund's commitments with respect to such contracts. As an alternative to segregating all or part of such securities, the Fund may purchase a call option permitting the Fund to purchase the amount of foreign currency being hedged by a forward sale contract at a price no higher than the forward contract price or the Fund may purchase a put option permitting the Fund to sell the amount of foreign currency subject to a forward purchase contract at a price as high or higher than the forward contract price. A Fund may enter into a forward contract, for example, when it enters into a contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of the security (a "transaction hedge"). In addition, when the Adviser believes that a foreign currency may suffer a substantial decline against the U.S. dollar, it may enter into a forward sale contract to sell an amount of that foreign currency approximating the value of some or all of the Fund's securities denominated in such foreign currency, or when the Adviser believes that the U.S. dollar may suffer a substantial decline against the foreign currency, it may enter into a forward purchase contract to buy that foreign currency for a fixed dollar amount (a "position hedge"). A Fund may, however, enter into a forward contract to sell a different foreign currency for a fixed U.S. dollar amount where the Adviser believes that the U.S. dollar value of the currency to be sold pursuant to the forward contract will fall whenever there is a decline in the U.S. dollar value of the currency in which the fund securities are denominated (a "cross-hedge"). Foreign currency hedging transactions are an attempt to protect a Fund against changes in foreign currency exchange rates between the trade and settlement dates of specific securities transactions or changes in foreign currency exchange rates that would adversely affect a portfolio position or an anticipated portfolio position. Although these transactions tend to minimize the risk of loss due to a decline in the value of the hedged currency, at the same time they tend to limit any potential gain that might be realized should the value of the hedged currency increase. The precise matching of the forward contract amount and the value of the securities involved will not generally be possible because the future value of these securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and date it matures. The Funds are dollar-denominated mutual funds and therefore consideration is given to hedging part or all of the portfolio back to U.S. dollars from international currencies. All decisions to hedge are based upon an analysis of the relative value of the U.S. dollar on an international purchasing power parity basis (purchasing power parity is a method for determining the relative purchasing power of different currencies by comparing the amount of each currency required to purchase a typical bundle of goods and services to domestic markets) and an estimation of short-term interest rate differentials (which affect both the direction of currency movements and also the cost of hedging). 13 SPECIAL CONSIDERATIONS REGARDING EUROPE and the EURO: On January 1, 1999, eleven of the fifteen member countries of the European Union (EU) fixed their currencies irrevocably to the euro, the new unit of currency of the European Economic and Monetary Union (EMU). At that time each member's currency was converted at a fixed rate to the euro. Initially, use of the euro will be confined mainly to the wholesale financial markets, while its widespread use in the retail sector will follow the circulation of euro banknotes and coins on January 1, 2002. At that time, the national banknotes and coins of participating member countries will cease to be legal tender. In addition to adopting a single currency, member countries will no longer control their own monetary policies. Instead, the authority to direct monetary policy will be exercised by the new European Central Bank. While economic and monetary convergence in the European Union may offer new opportunities for those investing in the region, investors should be aware that the success of the union is not wholly assured. Europe must grapple with a number of challenges, any one of which could threaten the survival of this monumental undertaking. Eleven disparate economies must adjust to a unified monetary system, the absence of exchange rate flexibility, and the loss of economic sovereignty. The Continent's economies are diverse, its governments decentralized, and its cultures differ widely. Unemployment is historically high and could pose political risk. One or more member countries might exit the union, placing the currency and banking system in jeopardy. For those Funds that invest in euro-denominated securities (including currency contracts) there is the additional risk of being exposed to a new currency that may not fully reflect the strengths and weaknesses of the disparate economies that make up the Union. This has been the case in the first six months of 1999, when the initial exchange rates of the euro versus many of the world's major currencies steadily declined. In this environment, U.S. and other foreign investors experienced erosion of their investment returns in the region. In addition, many European countries rely heavily upon export dependent businesses and any strength in the exchange rate between the euro and the dollar can have either a positive or a negative effect upon corporate profits. Futures, Options and Other Derivative Instruments Futures Contracts in General. A financial futures contract entered into by a Fund is an agreement between two parties for the future delivery of fixed income securities or equity securities or for the payment or acceptance of a cash settlement in the case of futures contracts on an index of fixed income or equity securities. A "sale" of a futures contract means the contractual obligation to deliver the securities at a specified price on a specified date, or to make the cash settlement called for by the contract. Futures contracts have been designed by exchanges which have been designated "contract markets" by the CFTC and must be executed through a brokerage firm, known as a futures commission merchant, which is a member of the relevant contract market. Futures contracts trade on these markets, and the exchanges, through their clearing organizations, guarantee that the contracts will be performed as between the clearing members of the exchange. Financial futures contracts can be based on such debt securities as long-term U.S. Treasury Bonds, Treasury Notes, GNMA modified pass-through mortgage-backed securities, three-month U.S. Treasury Bills, bank certificates of deposit, and on indices of municipal, corporate and government bonds. While futures contracts based on securities do provide for the delivery and acceptance of securities, such deliveries and acceptances are seldom made. Generally, a futures contract is terminated by entering into an offsetting transaction. A Fund will incur brokerage fees when it purchases and sells futures contracts. At the time such a purchase or sale is made, a Fund must provide cash or money market securities as a deposit known as "initial margin." The initial deposit required will vary, but may be as low as 2% or less of a contract's face value. Thereafter, the futures contract is valued daily through a process known as "marking to market," and a Fund that engages in futures transactions may receive or be required to pay "variation margin" as the futures contract becomes more or less valuable. At the time of delivery of securities pursuant to a futures contract based on securities, adjustments are made to recognize differences in value arising from the delivery of securities with a different interest rate than the specific security that provides the standard for the contract. In some (but not many) cases, securities called for by a futures contract may not have been issued when the contract was written. 14 Futures contracts on indices of securities are settled through the making and acceptance of cash settlements based on changes in value of the underlying rate or index between the time the contract is entered into and the time it is liquidated. Futures Contracts on Fixed Income Securities and Related Indices. As noted in their respective Prospectuses, certain Funds may enter into transactions in futures contracts for the purpose of hedging a relevant portion of their portfolios and for separate purpose of yield enhancement. A Fund may enter into transactions in futures contracts that are based on U.S. Government obligations, including any index of Government obligations that may be available for trading. Such transactions will be entered into where movements in the value of the securities or index underlying a futures contract can be expected to correlate closely with movements in the value of securities held in a Fund. For example, a Fund may sell futures contracts in anticipation of a general rise in the level of interest rates, which would result in a decline in the value of its fixed income securities. If the expected rise in interest rates occurs, the Fund may realize gains on its futures position, which should offset all or part of the decline in value of fixed income fund securities. A Fund could protect against such decline by selling fixed income securities, but such a strategy would involve higher transaction costs than the sale of futures contracts and, if interest rates again declined, the Fund would be unable to take advantage of the resulting market advance without purchases of additional securities. The purpose of the purchase or sale of a futures contract on government securities and indices of government securities, in the case of the above-referenced Funds, which hold or intend to acquire long-term debt securities, is to protect a Fund from fluctuations in interest rates without actually buying or selling long-term debt securities. For example, if long-term bonds are held by a Fund, and interest rates were expected to increase, the Fund might enter into futures contracts for the sale of debt securities. Such a sale would have much the same effect as selling an equivalent value of the long-term bonds held by the Fund. If interest rates did increase, the value of the debt securities in the Fund would decline, but the value of the futures contracts to the Fund would increase at approximately the same rate thereby keeping the net asset value of the Fund from declining as much as it otherwise would have. When a Fund is not fully invested and a decline in interest rates is anticipated, which would increase the cost of fixed income securities that the Fund intends to acquire, it may purchase futures contracts. In the event that the projected decline in interest rates occurs, the increased cost of the securities acquired by the Fund should be offset, in whole or part, by gains on the futures contracts by entering into offsetting transactions on the contract market on which the initial purchase was effected. In a substantial majority of transactions involving futures contracts on fixed income securities, a Fund will purchase the securities upon termination of the long futures positions, but under unusual market conditions, a long futures position may be terminated without a corresponding purchase of securities. Similarly, when it is expected that interest rates may decline, futures contracts on fixed income securities and indices of government securities may be purchased for the purpose of hedging against anticipated purchases of long-term bonds at higher prices. Since the fluctuations in the value of such futures contracts should be similar to that of long-term bonds, a Fund could take advantage of the anticipated rise in the value of long-term bonds without actually buying them until the market had stabilized. At that time, the futures contracts could be liquidated and the Fund's cash reserves could then be used to buy long-term bonds in the cash market. Similar results could be accomplished by selling bonds with long maturities and investing in bonds with short maturities when interest rates are expected to increase. However, since the futures market is more liquid than the cash market, the use of these futures contracts as an investment technique allows a Fund to act in anticipation of such an interest rate decline without having to sell its portfolio securities. To the extent a Fund enters into futures contracts for this purpose, the segregated assets maintained by a Fund will consist of cash, cash equivalents or high quality debt securities of the Fund in an amount equal to the difference between the fluctuating market value of such futures contract and the aggregate value of the initial deposit and variation margin payments made by the Fund with respect to such futures contracts. Stock Index Futures Contracts. Certain Funds may sell stock index futures contracts in order to offset a decrease in market value of its securities that might otherwise result from a market decline. A Fund may do so either to hedge the value of its portfolio as a whole, or to protect against declines in the value of securities to be sold. Conversely, a Fund may purchase stock index futures contracts in order to protect against anticipated increases in the cost of securities to be acquired. 15 In addition, a Fund may utilize stock index futures contracts in anticipation of changes in the composition of its portfolio. For example, in the event that a Fund expects to narrow the range of industry groups represented in its portfolio, it may, prior to making purchases of the actual securities, establish a long futures position based on a more restricted index, such as an index comprised of securities of a particular industry group. As such securities are acquired, a Fund's futures positions would be closed out. A Fund may also sell futures contracts in connection with this strategy, in order to protect against the possibility that the value of the securities to be sold as part of the restructuring of its portfolio will decline prior to the time of sale. Options on Futures Contracts. An option on a futures contract gives the purchaser (the "holder") the right, but not the obligation, to purchase a position in the underlying futures contract (i.e., a purchase of such futures contract) in the case of an option to purchase (a "call" option), or to purchase a "short" position in the underlying futures contract (i.e., a sale of such futures contract) in the case of an option to sell (a "put" option), at a fixed price (the "strike price") up to a stated expiration date. The holder pays a non-refundable purchase price for the option, known as the "premium." The maximum amount of risk the purchaser of the option assumes is equal to the premium plus related transaction costs. Upon exercise of the option by the holder, the exchange clearing corporation establishes a corresponding long position in the case of a put option. In the event that an option is exercised, the parties will be subject to all the risks associated with the trading of futures contracts, such as payment of variation margin deposits. In addition, the writer of an option on a futures contract, unlike the holder, is subject to initial and variation margin requirements on the option position. Options on Futures Contracts on Fixed Income Securities and Related Indices. Certain Funds may purchase put options on futures contracts in which such Funds are permitted to invest for the purpose of hedging a relevant portion of their portfolios against an anticipated decline in the values of portfolio securities resulting from increases in interest rates, and may purchase call options on such futures contracts as a hedge against an interest rate decline when they are not fully invested. A Fund would write options on these futures contracts primarily for the purpose of terminating existing positions. Options on Stock Index Futures Contracts, Options on Stock Indices and Options on Equity Securities. Certain Funds may purchase put options on stock index futures contracts, stock indices or equity securities for the purpose of hedging the relevant portion of their portfolio securities against an anticipated market-wide decline or against declines in the values of individual portfolio securities, and they may purchase call options on such futures contracts as a hedge against a market advance when they are not fully invested. A Fund would write options on such futures contracts primarily for the purpose of terminating existing positions. In general, options on stock indices will be employed in lieu of options on stock index futures contracts only where they present an opportunity to hedge at lower cost. With respect to options on equity securities, a Fund may, under certain circumstances, purchase a combination of call options on such securities and U.S. Treasury bills. The Adviser believes that such a combination may more closely parallel movements in the value of the security underlying the call option than would the option itself. Further, while a Fund generally would not write options on individual portfolio securities, it may do so under limited circumstances known as "targeted sales" and "targeted buys," which involve the writing of call or put options in an attempt to purchase or sell portfolio securities at specific desired prices. A Fund would receive a fee, or a "premium," for the writing of the option. For example, where the Fund seeks to sell portfolio securities at a "targeted" price, it may write a call option at that price. In the event that the market rises above the exercise price, it would receive its "targeted" price, upon the exercise of the option, as well as the premium income. Also, where it seeks to buy portfolio securities at a "targeted" price, it may write a put option at that price for which it will receive the premium income. In the event that the market declines below the exercise price, a Fund would pay its "targeted" price upon the exercise of the option. In the event that the market does not move in the direction or to the extent anticipated, however, the targeted sale or buy might not be successful and a Fund could sustain a loss on the transaction that may not be offset by the premium received. In addition, a Fund may be required to forego the benefit of an intervening increase or decline in value of the underlying security. Options and Futures Strategies. The Adviser may seek to increase the current return of certain Funds by writing covered call or put options. In addition, through the writing and purchase of options and the purchase and sale of U.S. and certain foreign stock index futures contracts, interest rate futures contracts, foreign currency futures contracts and related options on such futures contracts, the Adviser may at times seek to hedge against a decline in the value of securities included in the Fund or an increase in the price of securities that it plans to purchase for the Fund. Expenses and losses incurred as a result of such hedging strategies will reduce the Fund's current return. A Fund's investment in foreign stock index futures contracts and foreign interest rate futures contracts, and related options on such futures contracts, are limited to only those contracts and related options that have been approved by the CFTC for investment by U.S. investors. Additionally, with respect to a Fund's investment in foreign options, unless such options are specifically authorized for investment by order of the CFTC or meet the definition of trade options as set forth in CFTC Rule 32.4, a Fund will not make these investments. 16 The ability of a Fund to engage in the options and futures strategies described below will depend on the availability of liquid markets in such instruments. Markets in options and futures with respect to stock indices, foreign government securities and foreign currencies are relatively new and still developing. It is impossible to predict the amount of trading interest that may exist in various types of options or futures. Therefore, no assurance can be given that a Fund will be able to utilize these instruments effectively for the purposes stated below. Furthermore, a Fund's ability to engage in options and futures transactions may be limited by tax considerations. Although a Fund will only engage in options and futures transactions for limited purposes, these activities will involve certain risks which are described below under "Risk Factors Associated with Futures and Options Transactions." A Fund will not engage in options and futures transactions for leveraging purposes. Writing Covered Options on Securities. Certain Funds may write covered call options and covered put options on securities in which it is permitted to invest from time to time as the Adviser determines is appropriate in seeking to attain its objective. Call options written by a Fund give the holder the right to buy the underlying securities from a Fund at a stated exercise price; put options give the holder the right to sell the underlying security to the Fund at a stated price. A Fund may write only covered options, which means that, so long as the Fund is obligated as the writer of a call option, it will own the underlying securities subject to the option (or comparable securities satisfying the cover requirements of securities exchanges). In the case of put options, a Fund will maintain in a separate account cash or short-term U.S. Government securities with a value equal to or greater than the exercise price of the underlying securities. A Fund may also write combinations of covered puts and calls on the same underlying security. A Fund will receive a premium from writing a put or call option, which increases the Fund's return in the event the option expires unexercised or is closed out at a profit. The amount of the premium will reflect, among other things, the relationship of the market price of the underlying security to the exercise price of the option, the term of the option and the volatility of the market price of the underlying security. By writing a call option, a Fund limits its opportunity to profit from any increase in the market value of the underlying security above the exercise price of the option. By writing a put option, the Fund assumes the risk that it may be required to purchase the underlying security for an exercise price higher than its then current market value, resulting in a potential capital loss if the purchase price exceeds the market value plus the amount of the premium received, unless the security subsequently appreciates in value. A Fund may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction in which it purchases an option having the same terms as the option written. A Fund will realize a profit or loss from such transaction if the cost of such transaction is less or more than the premium received from the writing of the option. In the case of a put option, any loss so incurred may be partially or entirely offset by the premium received from a simultaneous or subsequent sale of a different put option. Because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, any loss resulting from the repurchase of a call option is likely to be offset in whole or in part by unrealized appreciation of the underlying security owned by a Fund. Purchasing Put and Call Options on Securities. A Fund may purchase put options to protect its portfolio holdings in an underlying security against a decline in market value. Such hedge protection is provided during the life of the put option since a Fund, as holder of the put option, is able to sell the underlying security at the put exercise price regardless of any decline in the underlying security's market price. In order for a put option to be profitable, the market price of the underlying security must decline sufficiently below the exercise price to cover the premium and transaction costs. By using put options in this manner, a Fund will reduce any profit it might otherwise have realized in its underlying security by the premium paid for the put option and by transaction costs. A Fund may also purchase call options to hedge against an increase in prices of securities that it wants ultimately to buy. Such hedge protection is provided during the life of the call option since the Fund, as holder of the call option, is able to buy the underlying security at the exercise price regardless of any increase in the underlying security's market price. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs. By using call options in this manner, a Fund will reduce any profit it might have realized had it bought the underlying security at the time it purchased the call option by the premium paid for the call option and by transaction costs. 17 Purchase and Sale of Options and Futures on Non-U.S. Stock Indices. A Fund may purchase and sell options on non-U.S. stock indices and stock index futures as a hedge against movements in the equity markets. Options on stock indices are similar to options on specific securities except that, rather than the right to take or make delivery of the specific security at a specific price, an option on a stock index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of that stock index is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. This amount of cash is equal to such difference between the closing price of the index and the exercise price of the option expressed in dollars multiplied by a specified multiple. The writer of the option is obligated, in return for the premium received, to make delivery of this amount. Unlike options on specific securities, all settlements of options on stock indices are in cash and gain or loss depends on general movements in the stocks included in the index rather than price movements in particular stocks. A stock index futures contract is an agreement in which one party agrees to deliver to the other an amount of cash equal to a specific amount multiplied by the difference between the value of a specific stock index at the close of the last trading day of the contract and the price at which the agreement is made. No physical delivery of securities is made. If the Adviser expects general stock market prices to rise, a Fund might purchase a call option on a stock index or a futures contract on that index as a hedge against an increase in prices of particular equity securities it wants ultimately to buy. If in fact the stock index does rise, the price of the particular equity securities intended to be purchased may also increase, but that increase would be offset in part by the increase in the value of a Fund's index option or futures contract resulting from the increase in the index. If, on the other hand, the Adviser expects general stock market prices to decline, a Fund might purchase a put option or sell a futures contract on the index. If that index does in fact decline, the value of some or all of the equity securities in a Fund may also be expected to decline, but that decrease would be offset in part by the increase in the value of the Fund's position in such put option or futures contract. Purchase and Sale of Interest Rate Futures. A Fund may purchase and sell interest rate futures contracts on foreign government securities including, but not limited to, debt securities of the governments and central banks of France, Germany, Denmark and Japan for the purpose of hedging fixed income and interest sensitive securities against the adverse effects of anticipated movements in interest rates. A Fund may sell interest rate futures contracts in anticipation of an increase in the general level of interest rates. Generally, as interest rates rise, the market value of the fixed income securities held by a Fund will fall, thus reducing the net asset value of the Fund. This interest rate risk can be reduced without employing futures as a hedge by selling long-term fixed income securities and either reinvesting the proceeds in securities with shorter maturities or by holding assets in cash. This strategy, however, entails increased transaction costs to a Fund in the form of dealer spreads and brokerage commissions. The sale of interest rate futures contracts provides an alternative means of hedging against rising interest rates. As rates increase, the value of a Fund's short position in the futures contracts will also tend to increase, thus offsetting all or a portion of the depreciation in the market value of a Fund's investments that are being hedged. While a Fund will incur commission expenses in selling and closing out futures positions (which is done by taking an opposite position which operates to terminate the position in the futures contract), commissions on futures transactions are lower than transaction costs incurred in the purchase and sale of portfolio securities. Options on Stock Index Futures Contracts and Interest Rate Futures Contracts. A Fund may purchase and write call and put options on non-U.S. stock index and interest rate futures contracts. A Fund may use such options on futures contracts in connection with its hedging strategies in lieu of purchasing and writing options directly on the underlying securities or stock indices or purchasing and selling the underlying futures. For example, a Fund may purchase put options or write call options on stock index futures, or interest rate futures, rather than selling futures contracts, in anticipation of a decline in general stock market prices or rise in interest rates, respectively, or purchase call options or write put options on stock index or interest rate futures, rather than purchasing such futures, to hedge against possible increases in the price of equity securities or debt securities, respectively, which the Fund intends to purchase. Purchase and Sale of Currency Futures Contracts and Related Options. In order to hedge its portfolio and to protect it against possible variations in foreign exchange rates pending the settlement of securities transactions, a Fund may buy or sell currency futures contracts and related options. If a fall in exchange rates for a particular currency is anticipated, a Fund may sell a currency futures contract or a call option thereon or purchase a put option on such futures contract as a hedge. If it is anticipated that exchange rates will rise, a Fund may purchase a currency futures contract or a call option thereon or sell (write) a put option to protect against an increase in the price of securities denominated in a particular currency a Fund intends to purchase. These futures contracts and related options thereon will be used only as a hedge against anticipated currency rate changes, and all options on currency futures written by a Fund will be covered. 18 A currency futures contract sale creates an obligation by a Fund, as seller, to deliver the amount of currency called for in the contract at a specified future time for a special price. A currency futures contract purchase creates an obligation by a Fund, as purchaser, to take delivery of an amount of currency at a specified future time at a specified price. Although the terms of currency futures contracts specify actual delivery or receipt, in most instances the contracts are closed out before the settlement date without the making or taking of delivery of the currency. Closing out of a currency futures contract is effected by entering into an offsetting purchase or sale transaction. Unlike a currency futures contract, which requires the parties to buy and sell currency on a set date, an option on a currency futures contract entitles its holder to decide on or before a future date whether to enter into such a contract. If the holder decides not to enter into the contract, the premium paid for the option is fixed at the point of sale. The Fund will write (sell) only covered put and call options on currency futures. This means that a Fund will provide for its obligations upon exercise of the option by segregating sufficient cash or short-term obligations or by holding an offsetting position in the option or underlying currency future, or a combination of the foregoing. A Fund will, so long as it is obligated as the writer of a call option on currency futures, own on a contract-for-contract basis an equal long position in currency futures with the same delivery date or a call option on stock index futures with the difference, if any, between the market value of the call written and the market value of the call or long currency futures purchased maintained by a Fund in cash, Treasury bills, or other high grade short-term obligations in a segregated account with its custodian. If at the close of business on any day the market value of the call purchased by a Fund falls below 100% of the market value of the call written by the Fund, a Fund will so segregate an amount of cash, Treasury bills or other high grade short-term obligations equal in value to the difference. Alternatively, a Fund may cover the call option through segregating with the custodian an amount of the particular foreign currency equal to the amount of foreign currency per futures contract option times the number of options written by a Fund. In the case of put options on currency futures written by the Fund, the Fund will hold the aggregate exercise price in cash, Treasury bills, or other high grade short-term obligations in a segregated account with its custodian, or own put options on currency futures or short currency futures, with the difference, if any, between the market value of the put written and the market value of the puts purchased or the currency futures sold maintained by a Fund in cash, Treasury bills or other high grade short-term obligations in a segregated account with its custodian. If at the close of business on any day the market value of the put options purchased or the currency futures by a Fund falls below 100% of the market value of the put options written by the Fund, a Fund will so segregate an amount of cash, Treasury bills or other high grade short-term obligations equal in value to the difference. If other methods of providing appropriate cover are developed, a Fund reserves the right to employ them to the extent consistent with applicable regulatory and exchange requirements. In connection with transactions in stock index options, stock index futures, interest rate futures, foreign currency futures and related options on such futures, a Fund will be required to deposit as "initial margin" an amount of cash or short-term government securities equal to from 5% to 8% of the contract amount. Thereafter, subsequent payments (referred to as "variation margin") are made to and from the broker to reflect changes in the value of the futures contract. Limitations on Purchase of OTC Options. The staff of the SEC has taken the position that purchased over-the-counter options and assets used to cover written over-the-counter options are illiquid and, therefore, together with other illiquid securities, cannot exceed 15% of a Fund's assets. The Adviser intends to limit a Fund's writing of over-the-counter options in accordance with the following procedure. Each Fund intends to write over-the-counter options only with primary U.S. Government securities dealers recognized by the Federal Reserve Bank of New York. Also, the contracts which a Fund has in place with such primary dealers will provide that the Fund has the absolute right to repurchase an option it writes at any time at a price which represents the fair market value, as determined in good faith through negotiation between the parties, but which in no event will exceed a price determined pursuant to a formula in the contract. Although the specific formula may vary between contracts with different primary dealers, the formula will generally be based on a multiple of the premium received by a Fund for writing the option, plus the amount, if any, of the option's intrinsic value (i.e., the amount that the option is in-the-money). The formula also may include a factor to account for the difference between the price of the security and the strike price of the option if the option is written out-of-the-money. A Fund will treat all or a part of the formula price as illiquid for purposes of any limitation on illiquid securities imposed by the SEC staff. 19 Risk Factors Associated with Futures and Options Transactions The effective use of options and futures strategies depends on, among other things, a Fund's ability to terminate options and futures positions at times when its the Adviser deems it desirable to do so. Although a Fund will not enter into an option or futures position unless the Adviser believes that a liquid secondary market exists for such option or future, there is no assurance that a Fund will be able to effect closing transactions at any particular time or at an acceptable price. A Fund generally expects that its options and futures transactions will be conducted on recognized U.S. and foreign securities and commodity exchanges. In certain instances, however, a Fund may purchase and sell options in the over-the-counter market. A Fund's ability to terminate option positions established in the over-the-counter market may be more limited than in the case of exchange-traded options and may also involve the risk that securities dealers participating in such transactions would fail to meet their obligations to the Fund. Options and futures markets can be highly volatile and transactions of this type carry a high risk of loss. Moreover, a relatively small adverse market movement with respect to these types of transactions may result not only in loss of the original investment but also in unquantifiable further loss exceeding any margin deposited. The use of options and futures involves the risk of imperfect correlation between movements in options and futures prices and movements in the price of the subject of the hedge. Such correlation, particularly with respect to options on stock indices and stock index futures, is imperfect, and such risk increases as the composition of a Fund diverges from the composition of the relevant index. The successful use of these strategies also depends on the ability of the Adviser to correctly forecast interest rate movements, currency rate movements and general stock market price movements. In addition to certain risk factors described above, the following sets forth certain information regarding the potential risks associated with the Funds' futures and options transactions. Risk of Imperfect Correlation. A Fund's ability effectively to hedge all or a portion of its portfolio through transactions in futures, options on futures or options on stock indices depends on the degree to which movements in the value of the securities or index underlying such hedging instrument correlate with movements in the value of the relevant portion of the Fund's securities. If the values of the securities being hedged do not move in the same amount or direction as the underlying security or index, the hedging strategy for a Fund might not be successful and the Fund could sustain losses on its hedging transactions which would not be offset by gains on its portfolio. It is also possible that there may be a negative correlation between the security or index underlying a futures or option contract and the portfolio securities being hedged, which could result in losses both on the hedging transaction and the fund securities. In such instances, a Fund's overall return could be less than if the hedging transactions had not been undertaken. Stock index futures or options based on a narrower index of securities may present greater risk than options or futures based on a broad market index, as a narrower index is more susceptible to rapid and extreme fluctuations resulting from changes in the value of a small number of securities. A Fund would, however, effect transactions in such futures or options only for hedging purposes. The trading of futures and options on indices involves the additional risk of imperfect correlation between movements in the futures or option price and the value of the underlying index. The anticipated spread between the prices may be distorted due to differences in the nature of the markets, such as differences in margin requirements, the liquidity of such markets and the participation of speculators in the futures and options market. The purchase of an option on a futures contract also involves the risk that changes in the value of underlying futures contract will not be fully reflected in the value of the option purchased. The risk of imperfect correlation, however, generally tends to diminish as the maturity date of the futures contract or termination date of the option approaches. The risk incurred in purchasing an option on a futures contract is limited to the amount of the premium plus related transaction costs, although it may be necessary under certain circumstances to exercise the option and enter into the underlying futures contract in order to realize a profit. Under certain extreme market conditions, it is possible that a Fund will not be able to establish hedging positions, or that any hedging strategy adopted will be insufficient to completely protect the Fund. A Fund will purchase or sell futures contracts or options only if, in the Adviser's judgment, there is expected to be a sufficient degree of correlation between movements in the value of such instruments and changes in the value of the relevant portion of the Fund's portfolio for the hedge to be effective. There can be no assurance that the Adviser's judgment will be accurate. 20 Potential Lack of a Liquid Secondary Market. The ordinary spreads between prices in the cash and futures markets, due to differences in the natures of those markets, are subject to distortions. First, all participants in the futures market are subject to initial deposit and variation margin requirements. This could require a Fund to post additional cash or cash equivalents as the value of the position fluctuates. Further, rather than meeting additional variation margin requirements, investors may close futures contracts through offsetting transactions which could distort the normal relationship between the cash and futures markets. Second, the liquidity of the futures or options market may be lacking. Prior to exercise or expiration, a futures or option position may be terminated only by entering into a closing purchase or sale transaction, which requires a secondary market on the exchange on which the position was originally established. While a Fund will establish a futures or option position only if there appears to be a liquid secondary market therefor, there can be no assurance that such a market will exist for any particular futures or option contract at any specific time. In such event, it may not be possible to close out a position held by a Fund, which could require the Fund to purchase or sell the instrument underlying the position, make or receive a cash settlement, or meet ongoing variation margin requirements. The inability to close out futures or option positions also could have an adverse impact on a Fund's ability effectively to hedge its securities, or the relevant portion thereof. The liquidity of a secondary market in a futures contract or an option on a futures contract may be adversely affected by "daily price fluctuation limits" established by the exchanges, which limit the amount of fluctuation in the price of a contract during a single trading day and prohibit trading beyond such limits once they have been reached. The trading of futures and options contracts also is subject to the risk of trading halts, suspensions, exchange or clearing house equipment failures, government intervention, insolvency of the brokerage firm or clearing house or other disruptions of normal trading activity, which could at times make it difficult or impossible to liquidate existing positions or to recover excess variation margin payments. Risk of Predicting Interest Rate Movements. Investments in futures contracts on fixed income securities and related indices involve the risk that if the Adviser's investment judgment concerning the general direction of interest rates is incorrect, a Fund's overall performance may be poorer than if it had not entered into any such contract. For example, if a Fund has been hedged against the possibility of an increase in interest rates which would adversely affect the price of bonds held in its portfolio and interest rates decrease instead, the Fund will lose part or all of the benefit of the increased value of its bonds which have been hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if a Fund has insufficient cash, it may have to sell bonds from its portfolio to meet daily variation margin requirements, possibly at a time when it may be disadvantageous to do so. Such sale of bonds may be, but will not necessarily be, at increased prices which reflect the rising market. Trading and Position Limits. Each contract market on which futures and option contracts are traded has established a number of limitations governing the maximum number of positions which may be held by a trader, whether acting alone or in concert with others. The Adviser does not believe that these trading and position limits will have an adverse impact on the hedging strategies regarding the Funds' investments. Regulations on the Use of Futures and Options Contracts. Regulations of the CFTC require that the Funds enter into transactions in futures contracts and options thereon for hedging purposes only, in order to assure that they are not deemed to be a "commodity pool" under such regulations. In particular, CFTC regulations require that all short futures positions be entered into for the purpose of hedging the value of investment securities held by a Fund, and that all long futures positions either constitute bona fide hedging transactions, as defined in such regulations, or have a total value not in excess of an amount determined by reference to certain cash and securities positions maintained for the Fund, and accrued profits on such positions. In addition, a Fund may not purchase or sell such instruments if, immediately thereafter, the sum of the amount of initial margin deposits on its existing futures positions and premiums paid for options on futures contracts would exceed 5% of the market value of the Fund's total assets. When a Fund purchases a futures contract, an amount of cash or cash equivalents or high quality debt securities will be segregated with the Fund's custodian so that the amount so segregated, plus the initial deposit and variation margin held in the account of its broker, will at all times equal the value of the futures contract, thereby insuring that the use of such futures is unleveraged. The Funds' ability to engage in the hedging transactions described herein may be limited by the current federal income tax requirement that a Fund derive less than 30% of its gross income from the sale or other disposition of stock or securities held for less than three months. The Funds may also further limit their ability to engage in such transactions in response to the policies and concerns of various Federal and state regulatory agencies. Such policies may be changed by vote of the Board of Trustees. 21 Additional Information on Futures and Options As stated in the Prospectus, each Fund, may enter into futures contracts and options for hedging purposes. Such transactions are described in this Schedule. During the current fiscal year, each of these Funds intends to limit its transactions in futures contracts and options so that not more than 5% of the Fund's net assets are at risk. Furthermore, in no event would any Fund purchase or sell futures contracts, or related options thereon, for hedging purposes if, immediately thereafter, the aggregate initial margin that is required to be posted by the Fund under the rules of the exchange on which the futures contract (or futures option) is traded, plus any premiums paid by the Fund on its open futures options positions, exceeds 5% of the Fund's total assets, after taking into account any unrealized profits and unrealized losses on the Fund's open contracts and excluding the amount that a futures option is "in-the-money" at the time of purchase. (An option to buy a futures contract is "in-the-money" if the value of the contract that is subject to the option exceeds the exercise price; an option to sell a futures contract is "in-the-money" if the exercise Price exceeds the value of the contract that is subject of the option.) I. Interest Rate Futures Contracts. Use of Interest Rate Futures Contracts. Bond prices are established in both the cash market and the futures market. In the cash market, bonds are purchased and sold with payment for the full purchase price of the bond being made in cash, generally within five business days after the trade. In the futures market, only a contract is made to purchase or sell a bond in the future for a set price on a certain date. Historically, the prices for bonds established in the futures market have tended to move generally in the aggregate in concert with the cash market prices and have maintained fairly predictable relationships. Accordingly, a Fund may use interest rate futures as a defense, or hedge, against anticipated interest rate changes and not for speculation. As described below, this would include the use of futures contract sales to protect against expected increases in interest rates and futures contract purchases to offset the impact of interest rate declines. A Fund presently could accomplish a similar result to that which it hopes to achieve through the use of futures contracts by selling bonds with long maturities and investing in bonds with short maturities when interest rates are expected to increase, or conversely, selling short-term bonds and investing in long-term bonds when interest rates are expected to decline. However, because of the liquidity that is often available in the futures market the protection is more likely to be achieved, perhaps at a lower cost and without changing the rate of interest being earned by the Fund, through using futures contracts. Description of Interest Rates Futures Contracts. An interest rate futures contract sale would create an obligation by a Fund, as seller, to deliver the specific type of financial instrument called for in the contract at a specific future time for a specified price. A futures contract purchase would create an obligation by the Fund, as purchaser, to take delivery of the specific type of financial instrument at a specific future time at a specific price. The specific securities delivered or taken, respectively, at settlement date, would not be determined until at or near that date. The determination would be in accordance with the rules of the exchange on which the futures contract sale or purchase was made. Although interest rate futures contracts by their terms call for actual delivery or acceptance of securities, in most cases the contracts are closed out before the settlement date without the making or taking of delivery of securities. Closing out a futures contract sale is effected by the Fund's entering into a futures contract purchase for the same aggregate amount of the specific type of financial instrument and the same delivery date. If the price in the sale exceeds the price in the offsetting purchase, the Fund is paid the difference and thus realizes a gain. If the offsetting purchase price exceeds the sale price, the Fund pays the difference and realizes a loss. Similarly, the closing out of a futures contract purchase is effected by the Fund's entering into a futures contract sale. If the offsetting sale price exceeds the purchase price, the Fund realizes a gain, and if the purchase price exceeds the offsetting sale price, the Fund realizes a loss. Interest rate futures contracts are traded in an auction environment on the floors of several exchanges - principally, the Chicago Board of Trade, the Chicago Mercantile Exchange and the New York Futures Exchange. A Fund would deal only in standardized contracts on recognized changes. Each exchange guarantees performance under contract provisions through a clearing corporation, a nonprofit organization managed by the exchange membership. 22 A public market now exists in futures contracts covering various financial instruments including long-term United States Treasury Bonds and Notes; GNMA modified pass-through mortgage-backed securities; three-month United States Treasury Bills; and ninety-day commercial paper. The Funds may trade in any futures contract for which there exists a public market, including, without limitation, the foregoing instruments. Examples of Futures Contract Sale. A Fund would engage in an interest rate futures contract sale to maintain the income advantage from continued holding of a long-term bond while endeavoring to avoid part or all of the loss in market value that would otherwise accompany a decline in long-term securities prices. Assume that the market value of a certain security in a Fund tends to move in concert with the futures market prices of long-term United States Treasury bonds ("Treasury Bonds"). The Adviser wishes to fix the current market value of this portfolio security until some point in the future. Assume the portfolio security has a market value of 100, and the Adviser believes that, because of an anticipated rise in interest rates, the value will decline to 95. The Fund might enter into futures contract sales of Treasury bonds for an equivalent of 98. If the market value of the portfolio securities does indeed decline from 100 to 95, the equivalent futures market price for the Treasury bonds might also decline from 98 to 93. In that case, the five-point loss in the market value of the portfolio security would be offset by the five-point gain realized by closing out the futures contract sale. Of course, the futures market price of Treasury bonds might well decline to more than 93 or to less than 93 because of the imperfect correlation between cash and futures prices mentioned below. The Adviser could be wrong in its forecast of interest rates and the equivalent futures market price could rise above 98. In this case, the market value of the portfolio securities, including the portfolio security being protected, would increase. The benefit of this increase would be reduced by the loss realized on closing out the futures contract sale. If interest rate levels did not change, the Fund in the above example might incur a loss of 2 points (which might be reduced by an offsetting transaction prior to the settlement date). In each transaction, transaction expenses would also be incurred. Examples of Future Contract Purchase. A Fund would engage in an interest rate futures contract purchase when it is not fully invested in long-term bonds but wishes to defer for a time the purchase of long-term bonds in light of the availability of advantageous interim investments, e.g., shorter-term securities whose yields are greater than those available on long-term bonds. The Fund's basic motivation would be to maintain for a time the income advantage from investing in the short-term securities; the Fund would be endeavoring at the same time to eliminate the effect of all or part of an expected increase in market price of the long-term bonds that the Fund may purchase. 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. 23 In each transaction, expenses also would be incurred. II. Index Futures Contracts. A stock or bond index assigns relative values to the stocks or bonds included in the index, and the index fluctuates with changes in the market values of the stocks or bonds included. Some stock index futures contracts are based on broad market indices, such as the Standard & Poor's 500 or the New York Stock Exchange Composite Index. In contract, certain exchanges offer futures contracts on narrower market indices, such as the Standard & Poor's 100, the Bond Buyer Municipal Bond Index, an index composed of 40 term revenue and general obligation bonds, or indices based on an industry or market segment, such as oil and gas stocks. Futures contracts are traded on organized exchanges regulated by the Commodity Futures Trading Commission. Transactions on such exchanges are cleared through a clearing corporation, which guarantees the performance of the parties to each contract. A Fund will sell index futures contracts in order to offset a decrease in market value of its portfolio securities that might otherwise result from a market decline. The Fund may do so either to hedge the value of its portfolio as a whole, or to protect against declines, occurring prior to sales of securities, in the value of the securities to be sold. Conversely, a Fund will purchase index futures contracts in anticipation of purchases of securities. In a substantial majority of these transactions, the Fund will purchase such securities upon termination of the long futures position, but a long futures position may be terminated without a corresponding purchase of securities. In addition, a Fund may utilize index futures contracts in anticipation of changes in the composition of its portfolio holdings. For example, in the event that a Fund expects to narrow the range of industry groups represented in its holdings it may, prior to making purchases of the actual securities, establish a long futures position based on a more restricted index, such as an index comprised of securities of a particular industry group. A Fund also may sell futures contracts in connection with this strategy, in order to protect against the possibility that the value of the securities to be sold as part of the restructuring of the portfolio will decline prior to the time of sale. The following are examples of transactions in stock index futures (net of commissions and premiums, if any). 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 24 Portfolio Futures -Day Hedge is Placed Anticipate Selling $1,000,000 Sell 16 Index Futures at 125 Equity Portfolio Value of Futures = $1,000,000 -Day Hedge is Lifted- Equity Portfolio-Own Buy 16 Index Futures at 120 Stock with Value = $960,000 Value of Futures = $960,000 Loss in Portfolio Gain on Futures = $40,000 Value = $40 000 If, however, the market moved in the opposite direction, that is, market value decreased and the Fund had entered into an anticipatory purchase hedge, or market value increased and the Fund had hedged its stock portfolio, the results of the Fund's transactions in stock index futures would be as set forth below. ANTICIPATORY PURCHASE HEDGE: Buy the Future Hedge Objective: Protect Against Increasing Price Portfolio Futures -Day Hedge is Placed Anticipate Buying $62,500 Buying 1 Index Futures at 125 Equity Portfolio Value of Futures = $62,500/Contract -Day Hedge is Lifted- Buy Equity Portfolio with Sell 1 Index Futures at 120 Actual Cost = $60,000 Value of Futures = $60,000/Contract Decrease in Purchase Loss on Futures = $2,500/Contract Price = $2,500 HEDGING A STOCK PORTFOLIO: Sell the Future Hedge Objective: Protect Against Declining Value of the Portfolio Factors Value of Stock Portfolio = $1,000,000 Value of Futures Contract = 125 x $500 = $62,500 Portfolio Beta Relative to the Index - 1.0 Portfolio Futures -Day Hedge is Placed Anticipate Selling $1,000,000 Sell 16 Index Futures at 125 Equity Portfolio Value of Futures = $1,000,000 -Day Hedge is Lifted- Equity Portfolio-Own Buy 16 Index Futures at 130 Stock with Value = $1,040,000 Value of Futures = $1,040,000 Gain in Portfolio = $40,000 Loss of Futures = $40,000 Value = $40 000 III. Margin Payments Unlike when a Fund purchases or sells a security, no price is paid or received by the Fund upon the purchase or sale of a futures contract. Initially, the Fund will be required to deposit with the broker or in a segregated account with the Fund's Custodian an amount of cash or cash equivalents, the value, of which may vary but is generally equal to 10% or less of the value of the contract. This amount is known as initial margin. The nature of initial margin in futures transactions is different from that of margin in security transactions in that futures contract margin does not involve the borrowing of funds by the customer to finance the transactions. Rather, the initial margin is in the nature of a performance bond or good faith deposit on the contract which is returned to the Fund upon termination of the futures contract assuming all contractual obligations have been satisfied. Subsequent payments, called variation margin, to and from the broker, will be made on a daily basis as the price of the underlying security or index fluctuates making the long and short positions in the futures contract more or less valuable, a process known as marking to the market. For example, when a Fund has purchased a futures contract and the price of the contract has risen in response to a rise in the underlying instruments, that position will have increased in value and the Fund will be entitled to receive from the broker a variation margin payment equal to that increase in value. Conversely, where a Fund has purchased a futures contract and the price of the futures contract has declined in response to a decrease in the underlying instruments, the position would be less valuable, the Fund would be required to make a variation margin payment to the broker. At any time prior to expiration of the futures contract, the Adviser may elect to close the position by taking an opposite position, subject to the availability of a secondary market, which will operate to terminate the Fund's position in the futures contract. A final determination of variation margin is then made, additional cash is required to be paid by or released to the Fund, and the Fund realizes a loss or gain. 25 IV. Risks of Transactions in Futures Contracts There are several risks in connection with the use of futures by a Fund as a hedging device. One risk arises because of the imperfect correlation between movements in the price of the future and movements in the price of the securities which are the subject of the hedge. The price of the future may move more than or less than the price of the securities being hedged. If the price of the future moves less than the price of the securities which are the subject of the hedge, the hedge will not be fully effective but, if the price of securities being hedged has moved in an unfavorable direction, the Fund would be in a better position than if it had not hedged at Al. If the price of the securities being hedged has moved in a favorable direction, this advance will be partially offset by the loss on the future. If the price of the future moves more than the price of the hedged securities, the Fund involved will experience either a loss or gain on the future which will not be completely offset by movements in the price of the securities which are the subject of the hedge. To compensate for the imperfect correlation of movements in the price of securities being hedged and movements in the price of futures contracts, a Fund may buy or sell futures contracts in a greater dollar amount than the dollar amount of securities being hedged if the volatility over a particular time period of the prices of such securities has been greater than the volatility over such time period of the future, or if otherwise deemed to be appropriate by the Adviser. Conversely, a Fund may buy or sell fewer futures contracts if the volatility over a particular time period of the prices of the securities being hedged is less than the volatility over such time period of the futures contract being used, or if otherwise deemed to be appropriate by the Adviser. It also is possible that, where a Fund has sold futures to hedge its portfolio against a decline in the market, the market may advance, and the value of securities held by the Fund may decline. If this occurred, the Fund would lose money on the future and also experience a decline in value in its portfolio securities. Where futures are purchased to hedge against a possible increase in the price of securities before a Fund is able to invest its cash (or cash equivalents) in securities (or options) in an orderly fashion, it is possible that the market may decline instead; if the Fund then concludes not to invest in securities or options at that time because of concern as to possible further market decline or for other reasons, the Fund will realize a loss on the futures contract that is not offset by a reduction in the price of securities purchased. In instances involving the purchase of futures contracts by a Fund, an amount of cash and cash equivalents, equal to the market value of the futures contracts, will be deposited in a segregated account with the Fund's Custodian and/or in a margin account with a broker to collateralize the position and thereby insure that the use of such futures is unleveraged. In addition to the possibility that there may be an imperfect correlation, or no correlation at all, between movements in the futures and the securities being hedged, the price of futures may not correlate perfectly with movement in the cash market due to certain market distortions. Rather than meeting additional margin deposit requirements, investors may close futures contracts through off-setting transactions which could distort the normal relationship between the cash and futures markets. Second, with respect to financial futures contracts, the liquidity of the futures market depends on participants entering into off-setting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced thus producing distortions. Third, from the point of view of speculators, the deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may also cause temporary price distortions. Due to the possibility of Price distortion in the futures market, and because of the imperfect correlation between the movements in the cash market and movements in the price of futures, a correct forecast of general market trends or interest rate movements by the Adviser still may not result in a successful hedging transaction over a short time frame. 26 Positions in futures may be closed out only on an exchange or board of trade which provides a secondary market for such futures. Although the Funds intend to purchase or sell futures only on exchanges or boards of trade where there appear to be active secondary markets, there is no assurance that a liquid secondary market on any exchange or board of trade will exist for any particular contract or at any particular time. In such event, it may not be possible to close a futures investment position, and in the event of adverse price movements, a Fund would continue to be required to make daily cash payments of variation margin. However, in the event futures contracts have been used to hedge portfolio securities, such securities will not be sold until the futures contract can be terminated. In such circumstances, an increase in the price of the securities, if any, may partially or completely offset losses on the futures contract. However, as described above, there is no guarantee that the price of the securities will in fact correlate with the price movements in the futures contract and thus provide an offset on a futures contract. Further, it should be noted that the liquidity of a secondary market in a futures contract may be adversely affected by "daily price fluctuation limits" established by commodity exchanges which limit the amount of fluctuation in a futures contract price during a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open futures positions. Successful use of futures by a Fund also is subject to the Adviser's ability to predict correctly movements in the direction of the market. For example, if a Fund has hedged against the possibility of a decline in the market adversely affecting securities held in its portfolio and securities prices increase instead, the Fund will lose part or all of the benefit to the increased value of its securities which it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Fund has insufficient cash, it may have to sell securities to meet daily variation margin requirements. Such sales of securities may be, but will not necessarily be, at increased prices which reflect the rising market. A Fund may have to sell securities at a time when it may be disadvantageous to do so. V. Options on Futures Contracts. The Funds may purchase options on the futures contracts described above. A futures option gives the holder, in return for the premium paid, the right to buy (call) from or sell (put) to the writer of the option a futures contract at a specified price at any time during the period of the option. Upon exercise, the writer of the option is obligated to pay the difference between the cash value of the futures contract and the exercise price. Like the buyer or seller of a futures contract, the holder, or writer, of an option has the right to terminate its position prior to the scheduled expiration of the option by selling, or purchasing, an option of the same series, at which time the person entering into the closing transaction will realize a gain or loss. Investments in futures options involve some of the same considerations that are involved in connection with investments in futures contracts (for example, the existence of a liquid secondary market). In addition, the purchase of an option also entails the risk that changes in the value of the underlying futures contract will not be fully reflected in the value of the option purchased. Depending on the pricing of the option compared to either the futures contract upon which it is based, or upon the price of the securities being hedged, an option may or may not be less risky than ownership of the futures contract or such securities. In general, the market prices of options can be expected to be more volatile than the market prices on the underlying futures contract. Compared to the purchase or sale of futures contracts, however, the purchase of call or put options on futures contracts may frequently involve less potential risk to a Fund because the maximum amount at risk is the premium paid for the options (plus transaction costs). Although permitted by their fundamental investment policies, the Funds do not currently intend to write future options, and will not do so in the future absent any necessary regulatory approvals. Accounting Treatment. Accounting for futures contracts and options will be in accordance with generally accepted accounting principles. 27 Guaranteed Investment Contracts Guaranteed investment contracts, investment contracts or funding agreements (each referred to as a "GIC") are investment instruments issued by highly rated insurance companies. Pursuant to such contracts, a Fund may make cash contributions to a deposit fund of the insurance company's general or separate accounts. The insurance company then credits to a Fund guaranteed interest. The insurance company may assess periodic charges against a GIC for expense and service costs allocable to it, and the charges will be deducted from the value of the deposit fund. The purchase price paid for a GIC generally becomes part of the general assets of the issuer, and the contract is paid from the general assets of the issuer. A Fund will only purchase GICs from issuers which, at the time of purchase, meet quality and credit standards established by the Adviser. Generally, GICs are not assignable or transferable without the permission of the issuing insurance companies, and an active secondary market in GICs does not currently exist. Also, a Fund may not receive the principal amount of a GIC from the insurance company on seven days' notice or less, at which point the GIC may be considered to be an illiquid investment. Illiquid and Restricted Securities Certain Funds may invest in restricted and illiquid securities. Illiquid securities are securities that may not be sold or disposed of in the ordinary course of business within seven business days at approximately the value at which they are being carried on the Fund's books. The Funds may invest in restricted, privately placed securities that may be sold only to qualified institutional buyers in accordance with Rule 144A under the 1933 Act, or which were issued under section 4(2) of the 1933 Act. In the case of Rule 144A restricted securities, because these securities can be resold only to qualified institutional buyers or after they have been held for a number of years, they may be considered illiquid securities--meaning that they could be difficult for a Fund to convert to cash if needed. If a substantial market develops for a restricted security held by a Fund, it will be treated as a liquid security, in accordance with procedures and guidelines approved by such Fund's Board. While the Adviser determines the liquidity of restricted securities on a daily basis, the Board oversees and retains ultimate responsibility for the Adviser's decisions. Several factors that the Board considers in monitoring these decisions include the valuation of a security, the availability of qualified institutional buyers, and the availability of information about the security's issuer. Insured Municipal Securities Certain of the Municipal Securities held by the Funds may be insured at the time of issuance as to the timely payment of principal and interest. The insurance policies will usually be obtained by the issuer of the Municipal Securities at the time of its original issuance. In the event that the issuer defaults with respect to interest or principal payments, the insurer will be notified and will be required to make payment to the bondholders. There is, however, no guarantee that the insurer will meet its obligations. In addition, such insurance will not protect against market fluctuations caused by changes in interest rates and other factors. Interest Rate Transactions Among the strategic transactions into which certain Funds may enter are interest rate swaps and the purchase or sale of related caps and floors. The Funds expect to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its portfolio, to protect against currency fluctuations, as a duration management technique or to protect against any increase in the price of securities the Fund anticipates purchasing at a later date. A Fund intends to use these transactions as hedges and not as speculative investments and will not sell interest rate caps or floors where it does not own securities or other instruments providing the income stream the Fund may be obligated to pay. Interest rate swaps involve the exchange by a Fund with another party of their respective commitments to pay or receive interest, e.g. an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. A currency swap is an agreement to exchange cash flows on a notional amount of two or more currencies based on the relative value differential among them and an index swap is an agreement to swap cash flows on a notional amount based on changes in the values of the reference indices. The purchase of a cap entitles the purchaser to receive payments on a notional principal amount from the party selling such floor to the extent that a specified index falls below a predetermined interest rate or amount. A Fund will usually enter into swaps on a net basis, i.e., the two payment streams are netted out in a cash settlement on the payment date or dates specified in the instrument, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. In as much as these swaps, caps and floors are entered into for good faith hedging purposes, the Adviser and the Fund believe such obligations do not constitute senior securities under the 1940 Act and, accordingly, will not treat them as being subject to its borrowing restrictions. A Fund will not enter into any swap, cap and floor transaction unless, at the time of entering into such transaction, the unsecured long-term debt of the counterparty, combined with any credit enhancements, is rated at least "A" by Standard & Poor's Corporation or Moody's Investors Service, Inc. or has an equivalent rating from an NRSRO or is determined to be of equivalent credit quality by the Adviser. If there is a default by the counterparty, the Fund may have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid. Caps and floors are more recent innovations for which standardized documentation has not yet been fully developed and, accordingly, they are less liquid than swaps. 28 With respect to swaps, a Fund will accrue the net amount of the excess, if any, of its obligations over its entitlements with respect to each swap on a daily basis and will segregate an amount of cash or liquid high grade securities having a value equal to the accrued excess. Caps and floors require segregation of assets with a value equal to the Fund's net obligation, if any. Lower Rated Debt Securities The yields on lower rated debt and comparable unrated fixed-income securities generally are higher than the yields available on higher-rated securities. However, investments in lower rated debt and comparable unrated securities generally involve greater volatility of price and risk of loss of income and principal, including the probability of default by or bankruptcy of the issuers of such securities. Lower rated debt and comparable unrated securities (a) will likely have some quality and protective characteristics that, in the judgment of the rating organization, are outweighed by large uncertainties or major risk exposures to adverse conditions and (b) are predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligation. Accordingly, it is possible that these types of factors could, in certain instances, reduce the value of securities held in a Fund's portfolio, with a commensurate effect on the value of the Fund's shares. Therefore, an investment in the Fund should not be considered as a complete investment program and may not be appropriate for all investors. The market prices of lower rated securities may fluctuate more than higher rated securities and may decline significantly in periods of general economic difficulty which may follow periods of rising interest rates. During an economic downturn or a prolonged period of rising interest rates, the ability of issuers of lower quality debt to service their payment obligations, meet projected goals, or obtain additional financing may be impaired. Since the risk of default is higher for lower rated securities, the Adviser will try to minimize the risks inherent in investing in lower rated debt securities by engaging in credit analysis, diversification, and attention to current developments and trends affecting interest rates and economic conditions. The Adviser will attempt to identify those issuers of high-yielding securities whose financial condition is adequate to meet future obligations, have improved, or are expected to improve in the future. Unrated securities are not necessarily of lower quality than rated securities, but they may not be attractive to as many buyers. Each Fund's policies regarding lower rated debt securities are not fundamental and may be changed at any time without shareholder approval. While the market values of lower rated debt and comparable unrated securities tend to react less to fluctuations in interest rate levels than the market values of higher-rated securities, the market values of certain lower rated debt and comparable unrated securities also tend to be more sensitive to individual corporate developments and changes in economic conditions than higher-rated securities. In addition, lower rated debt securities and comparable unrated securities generally present a higher degree of credit risk. Issuers of lower rated debt and comparable unrated securities often are highly leveraged and may not have more traditional methods of financing available to them so that their ability to service their debt obligations during an economic downturn or during sustained periods of rising interest rates may be impaired. The risk of loss due to default by such issuers is significantly greater because lower rated debt and comparable unrated securities generally are unsecured and frequently are subordinated to the prior payment of senior indebtedness. A Fund may incur additional expenses to the extent that it is required to seek recovery upon a default in the payment of principal or interest on its portfolio holdings. The existence of limited markets for lower rated debt and comparable unrated securities may diminish a Fund's ability to (a) obtain accurate market quotations for purposes of valuing such securities and calculating its net asset value and (b) sell the securities at fair value either to meet redemption requests or to respond to changes in the economy or in financial markets. 29 Fixed-income securities, including lower rated debt securities and comparable unrated securities, frequently have call or buy-back features that permit their issuers to call or repurchase the securities from their holders, such as a Fund. If an issuer exercises these rights during periods of declining interest rates, a Fund may have to replace the security with a lower yielding security, thus resulting in a decreased return to a Fund. The market for certain lower rated debt and comparable unrated securities is relatively new and has not weathered a major economic recession. The effect that such a recession might have on such securities is not known. Any such recession, however, could disrupt severely the market for such securities and adversely affect the value of such securities. Any such economic downturn also could adversely affect the ability of the issuers of such securities to repay principal and pay interest thereon. Options on Currencies Certain Funds may purchase and sell options on currencies to hedge the value of securities the Fund holds or intends to buy. Options on foreign currencies may be traded on U.S. and foreign exchanges or over-the-counter. Other Investment Companies In seeking to attain their investment objectives, certain Funds may invest in securities issued by other investment companies within the limits prescribed by the 1940 Act, its rules and regulations and any exemptive relief obtained by the Funds. Other than the Feeder Funds, which invest all of their assets in corresponding Master Portfolios, each Fund currently intends to limit its investments so that, as determined immediately after a securities purchase is made: (a) not more than 5% of the value of its total assets will be invested in the securities of any one investment company; (b) not more than 10% of the value of its total assets will be invested in the aggregate in securities of investment companies as a group; and (c) not more than 3% of the outstanding voting stock of any one investment company will be owned by the Fund or by the Company as a whole. As a shareholder of another investment company, a Fund would bear, along with other shareholders, its pro rata portion of the other investment company's expenses, including Advisory fees. These expenses would be in addition to the Advisory and other expenses that a Fund bears in connection with its own operations. The Adviser has agreed to remit to the respective investing Fund fees payable to it under its respective Investment Advisory Agreement with an affiliated money market Fund to the extent such fees are based upon the investing Fund's assets invested in shares of the affiliated money market fund. Each Fund is seeking or has obtained permission from the SEC to invest in other Funds in the Nations Funds family. Real Estate Investment Trusts A real estate investment trust ("REIT") is a managed portfolio of real estate investments which may include office buildings, apartment complexes, hotels and shopping malls. An equity REIT holds equity positions in real estate, and it seeks to provide its shareholders with income from the leasing of its properties, and with capital gains from any sales of properties. A mortgage REIT specializes in lending money to developers of properties, and passes any interest income it may earn to its shareholders. REITs may be affected by changes in the value of the underlying property owned or financed by the REIT, while Mortgage REITs also may be affected by the quality of credit extended. Both equity and mortgage REITs are dependent upon management skill and may not be diversified. REITs also may be subject to heavy cash flow dependency, defaults by borrowers, self-liquidation, and the possibility of failing to qualify for tax-free pass-through of income under the Internal Revenue Code of 1986, as amended. The real estate industry is particularly sensitive to economic downturns. The value of securities of issuers in the real estate industry is sensitive to changes in real estate values and rental income, property taxes, interest rates, tax and regulatory requirements, overbuilding, extended vacancies of properties, and the issuer's management skill. In addition, the value of a REIT can depend on the structure of and cash flow generated by the REIT. REITs and mortgage-backed securities are subject to the risk that mortgagors may not meet their payment obligations. Each investment also has its unique interest rate and payment priority characteristics. In addition, REITs are subject to unique tax requirements which, if not met, could adversely affect dividend payments. Also, in the event of a default of an underlying borrower or lessee, a REIT could experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments. 30 Repurchase Agreements The repurchase price under any repurchase agreements described in the Prospectuses generally equals the price paid by a Fund plus interest negotiated on the basis of current short-term rates (which may be more or less than the rate on the securities underlying the repurchase agreement). Securities subject to repurchase agreements will be held by the Company's custodian in a segregated account or in the Federal Reserve/Treasury book-entry system. Repurchase agreements are considered to be loans by such Company under the 1940 Act. Reverse Repurchase Agreements At the time a Fund enters into a reverse repurchase agreement, it may establish a segregated account with its custodian bank in which it will maintain cash, U.S. Government securities or other liquid high grade debt obligations equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Funds are obligated to repurchase under the agreement may decline below the repurchase price. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Funds' use of proceeds of the agreement may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the Funds' obligation to repurchase the securities. Reverse repurchase agreements are speculative techniques involving leverage, and are subject to asset coverage requirements if the Funds do not establish and maintain a segregated account (as described above). In addition, some or all of the proceeds received by a Fund from the sale of a portfolio instrument may be applied to the purchase of a repurchase agreement. To the extent the proceeds are used in this fashion and a common broker/dealer is the counterparty on both the reverse repurchase agreement and the repurchase agreement, the arrangement might be recharacterized as a swap transaction. Under the requirements of the 1940 Act, the Funds are required to maintain an asset coverage (including the proceeds of the borrowings) of at least 300% of all borrowings. Depending on market conditions, the Funds' asset coverage and other factors at the time of a reverse repurchase, the Funds may not establish a segregated account when the Adviser believes it is not in the best interests of the Funds to do so. In this case, such reverse repurchase agreements will be considered borrowings subject to the asset coverage described above. Securities Lending To increase return on portfolio securities, certain Funds may lend their portfolio securities to broker/dealers and other institutional investors pursuant to agreements requiring that the loans be continuously secured by collateral equal at all times in value to at least the market value of the securities loaned. Collateral for such loans may include cash, securities of the U.S. Government, its agencies or instrumentalities, an irrevocable letter of credit issued by (i) a U.S. bank that has total assets exceeding $1 billion and that is a member of the Federal Deposit Insurance Corporation, or (ii) a foreign bank that is one of the 75 largest foreign commercial banks in terms of total assets, or any combination thereof. Such loans will not be made if, as a result, the aggregate of all outstanding loans of the Fund involved exceeds 33% of the value of its total assets which may include cash collateral received for securities loaned. There may be risks of delay in receiving additional collateral or in recovering the securities loaned or even a loss of rights in the collateral should the borrower of the securities fail financially. However, loans are made only to borrowers deemed by the Adviser to be of good standing and when, in its judgment, the income to be earned from the loan justifies the attendant risks. Pursuant to the securities loan agreement a Fund is able to terminate the securities loan upon notice of not more than five business days and thereby secure the return to the Fund of securities identical to the transferred securities upon termination of the loan. Short Sales Certain Funds may from time to time enter into short sales transactions. A Fund will not make short sales of securities nor maintain a short position unless at all times when a short position is open, such Fund owns an equal amount of such securities or securities convertible into or exchangeable, without payment of any further consideration, for securities of the same issue as, and equal in amount to, the securities sold short. This is a technique known as selling short "against the box." Such short sales will be used by a Fund for the purpose of deferring recognition of gain or loss for federal income tax purposes. 31 Special Situations Certain Funds may invest in "special situations." A special situation arises when, in the opinion of the Adviser, the securities of a particular company will, within a reasonably estimable period of time, be accorded market recognition at an appreciated value solely by reason of a development applicable to that company, and regardless of general business conditions or movements of the market as a whole. Developments creating special situations might include, among others: liquidations, reorganizations, recapitalizations, mergers, material litigation, technical breakthroughs and new management or management policies. Although large and well known companies may be involved, special situations more often involve comparatively small or unseasoned companies. Investments in unseasoned companies and special situations often involve much greater risk than is inherent in ordinary investment securities. Standard & Poor's Depositary Receipts ("SPDRs") Certain Funds may purchase Standard & Poor's Depositary Receipts, or SPDRs, which are interests in a unit investment trust holding a portfolio of securities linked to the S&P 500 Index. Because a unit investment trust is an investment company under the 1940 Act, a Fund's investments in SPDRs are subject to the limitations set forth in Section 12(d)(1)(A) of the 1940 Act. SPDRs closely track the underlying portfolio of securities, trade like a share of common stock and pay periodic dividends proportionate to those paid by the portfolio of stocks that comprise the S&P 500 Index. As a holder of interests in a unit investment trust, a Fund would indirectly bear its ratable share of that unit investment trust's expenses. At the same time the Fund would continue to pay its own management and advisory fees and other expenses, as a result of which the Fund and its shareholders in effect will be absorbing duplicate levels of fees with respect to investments in such unit investment trusts. SPDRs are subject to the risks of an investment in a broadly based portfolio of large-capitalization common stocks, including the risk that the general level of stock prices may decline, thereby adversely affecting the value of such investment. In addition, because individual investments in SPDRs are not redeemable, except upon termination of the unit investment trust, the liquidity of small holdings of SPDRs will depend upon the existence of a secondary market. Large holdings of SPDRs are called "creation unit size" and are redeemable in kind only and are not redeemable for cash from the unit investment trust. The price of SPDRs is derived and based upon the securities held by the unit investment trust. Accordingly, the level of risk involved in the purchase or sale of a SPDR is similar to the risk involved in the purchase or sale of traditional common stock, with the exception that the pricing mechanism for SPDRs is based on a basket of stocks. Disruptions in the markets for the securities underlying SPDRs purchased or sold by a Fund could result in losses on SPDRs. Stand-By Commitments Certain Funds may acquire "stand-by commitments" with respect to Municipal Securities held in their portfolios. Under a "stand-by commitment," a dealer agrees to purchase from a Fund, at a Fund's option, specified Municipal Securities at a specified price. Stand-by commitments are exercisable by a Fund at any time before the maturity of the underlying Municipal Securities, and may be sold, transferred, or assigned by a Fund only with the underlying instruments. 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. A Fund's right to exercise stand-by commitments will be unconditional and unqualified. A stand-by commitment will not be transferable by a Fund, although the Fund could sell the underlying Municipal Securities to a third party at any time. Until a Fund exercises its stand-by commitment, it owns the securities in its portfolio which are subject to the stand-by commitment. The Funds expect that stand-by commitments will generally be available without the payment of any direct or indirect consideration. However, if necessary or advisable, a Fund may pay for a stand-by commitment either separately in cash or by paying a higher price for the security being acquired which will be subject to the commitment (thus reducing the yield to maturity otherwise available for the same security). When a Fund pays any consideration directly or indirectly for a stand-by commitment, its cost will be reflected as unrealized depreciation for the period during which the commitment is held by that Fund. The Tax-Free Bond Funds will not acquire a stand-by commitment unless immediately after the acquisition not more than 5% of the Funds' total assets will be subject to a demand feature, or in stand-by commitments, with the same institution. 32 Each Fund intends to enter into stand-by commitments only with banks and broker/dealers which, in the Adviser's opinion, present minimal credit risks. In evaluating the credit worthiness of the issuer of a stand-by commitment, the Adviser will review periodically the issuer's assets, liabilities, contingent claims, and other relevant financial information. The Funds would acquire stand-by commitments solely to facilitate portfolio liquidity and do not intend to exercise their rights thereunder for trading purposes. Stand-by commitments acquired by a Fund will be valued at zero in determining net asset value. A Fund's reliance upon the credit of these dealers, banks, and broker/dealers will be secured by the value of the underlying Municipal Securities that are subject to the commitment. Thus, the risk of loss to the Fund in connection with a "stand-by commitment" will not be qualitatively different from the risk of loss faced by a person that is holding securities pending settlement after having agreed to sell the securities in the ordinary course of business. Stripped Securities Certain Funds may purchase stripped securities issued or guaranteed by the U.S. Government, where the principal and interest components are traded independently under the Separate Trading of Registered Interest and Principal of Securities program ("STRIPS"). Under STRIPS, the principal and interest components are individually numbered and separately issued by the U.S. Treasury at the request of depository financial institutions, which then trade the component parts independently. In addition, the Funds may purchase stripped mortgage-backed securities ("SMBS") issued by the U.S. Government (or a U.S. Government agency or instrumentality) or by private issuers such as banks and other institutions. If the underlying obligations experience greater than anticipated prepayments of principal, the Fund may fail to fully recover its initial investment. The market value of the class consisting entirely of principal payments can be extremely volatile in response to changes in interest rates. The yields on a class of SMBS that receives all or most of the interest are generally higher than prevailing market yields on other mortgage-backed obligations because their cash flow patterns are also volatile and there is a greater risk that the initial investment will not be full recovered. SMBS issued by the U.S. Government (or a U.S. Government agency or instrumentality) may be considered liquid under guidelines established by the Company's Board of Trustees if they can be disposed of promptly in the ordinary course of business at a value reasonably close to that used in the calculation of the Fund's per share net asset value. Although stripped securities may not pay interest to holders prior to maturity, Federal income tax regulations require a Fund to recognize as interest income a portion of the bond's discount each year. This income must then be distributed to shareholders along with other income earned by the Fund. To the extent that any shareholders in the Fund elect to receive their dividends in cash rather than reinvest such dividends in additional Fund shares, cash to make these distributions will have to be provided from the assets of the Fund or other sources such as proceeds of sales of Fund shares and/or sales of portfolio securities. In such cases, the Fund will not be able to purchase additional income producing securities with cash used to make such distributions and its current income may ultimately be reduced as a result. U.S. and Foreign Bank Obligations These obligations include negotiable certificates of deposit, banker's acceptances and fixed time deposits. Each Fund limits its investments in domestic bank obligations to banks having total assets in excess of $1 billion and subject to regulation by the U.S. Government. Each Fund may also invest in certificates of deposit issued by members of the Federal Deposit Insurance Corporation ("FDIC") having total assets of less than $1 billion, provided that the Fund will at no time own more than $100,000 principal amount of certificates of deposit (or any higher principal amount which in the future may be fully covered by FDIC insurance) of any one of those issuers. Fixed time deposits are obligations which are payable at a stated maturity date and bear a fixed rate of interest. Generally, fixed time deposits may be withdrawn on demand by a Fund, but they may be subject to early withdrawal penalties which vary depending upon market conditions and the remaining maturity of the obligation. Although fixed time deposits do not have a market, there are no contractual restrictions on a Fund's right to transfer a beneficial interest in the deposit to a third party. 33 Each Fund limits its investments in foreign bank obligations (i.e., obligations of foreign branches and foreign subsidiaries of domestic banks, and domestic and foreign branches and agencies of foreign banks) to obligations of banks which at the time of investment are branches or subsidiaries of domestic banks which meet the criteria in the preceding paragraphs or are branches or agencies of foreign banks which (i) have more than $10 billion, or the equivalent in other currencies, in total assets; (ii) in terms of assets are among the 75 largest foreign banks in the world; (iii) have branches or agencies in the United States; and (iv) in the opinion of the Adviser, pursuant to the established by the Board of Trustees of the Company, are of an investment quality comparable to obligations of domestic banks which may be purchased by a Fund. These obligations may be general obligations of the parent bank in addition to the issuing branch or subsidiary, but the parent bank's obligations may be limited by the terms of the specific obligation or by governmental regulation. Each Fund also limits its investments in foreign bank obligations to banks, branches and subsidiaries located in Western Europe (United Kingdom, France, Germany, Belgium, The Netherlands, Italy and Switzerland), Scandinavia (Denmark and Sweden), Australia, Japan, the Cayman Islands, the Bahamas and Canada. Each Fund will limit its investment in securities of foreign banks to not more than 25% of total assets at the time of investment. Each Fund may also make interest-bearing savings deposits in commercial and savings banks in amounts not in excess of 5% of the total assets of the Fund. U.S. Government Obligations Each Fund may invest in U.S. Government obligations. Examples of the types of U.S. Government obligations that may be held by the Funds include, in addition to U.S. Treasury bonds, notes and bills, the obligations of the Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, Government National Mortgage Association, Federal National Mortgage Association, General Services Administration, Student Loan Marketing Association, Central Bank for Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate Credit Banks, Tennessee Valley Authority, Resolution Funding Corporation and Maritime Administration. Obligations guaranteed as to principal or interest by the U.S. Government, its agencies, authorities or instrumentalities are deemed to include: (a) securities for which the payment of principal and interest is backed by an irrevocable letter of credit issued by the U.S. Government, its agencies, authorities or instrumentalities and (b) participations in loans made to foreign governments or their agencies that are so guaranteed. The secondary market for certain of these participations is limited. If such participations are illiquid they will not be purchased. U.S. Government obligations include principal and interest components of securities issued or guaranteed by the U.S. Treasury if the components are traded independently under the Separate Trading of Registered Interest and Principal of Securities program. Obligations issued or guaranteed as to principal or interest by the U.S. Government, its agencies, authorities or instrumentalities may also be acquired in the form of custodial receipts. These receipts evidence ownership of future interest payments, principal payments or both on certain notes or bonds issued by the U.S. Government, its agencies, authorities or instrumentalities. Use of Segregated and Other Special Accounts Options, futures and forward foreign currency contracts that obligate a Fund to provide cash, securities or currencies to complete such transactions will entail that Fund to either segregate assets in an account with, or on the books of, the Company's custodian, or otherwise "covering" the transaction as described below. For example, a call option written by a Fund will require the Fund to hold the securities subject to the call (or securities convertible into the needed securities without additional consideration) or liquid assets sufficient to meet the obligation by purchasing and delivering the securities if the call is exercised. A call option written on an index will require that Fund to have portfolio securities that correlate with the index. A put option written by a Fund also will require that Fund to have available assets sufficient to purchase the securities the Fund would be obligated to buy if the put is exercised. A forward foreign currency contract that obligates a Fund to provide currencies will require the Fund to hold currencies or liquid securities denominated in a foreign currency which will equal the Fund's obligations. Such a contract requiring the purchase of currencies also requires segregation. 34 Unless a segregated account consists of the securities, cash or currencies that are the subject of the obligation, a Fund will hold cash, U.S. Government securities and other high grade liquid debt obligations in a segregated account. These assets cannot be transferred while the obligation is outstanding unless replaced with other suitable assets. In the case of an index-based transaction, a Fund could own securities substantially replicating the movement of the particular index. In the case of a futures contract, a Fund must deposit initial margin and variation margin, as often as daily, if the position moves adversely, sufficient to meet its obligation to purchase or provide securities or currencies, or to pay the amount owed at the expiration of an index-based futures contract. Similarly, options on futures contracts require a Fund to deposit margin to the extent necessary to meet the Fund's commitments. In lieu of such assets, such transactions may be covered by other means consistent with applicable regulatory policies. A Fund may enter into off-setting transactions so that its combined position, coupled with any segregated assets, equals its net outstanding obligation in related options and hedging transactions. For example, a Fund could purchase a put option if the strike price of that option is the same or higher than the strike price of a put option sold by that Fund. Moreover, instead of segregating assets if a Fund held a futures or forward contract, it could purchase a put option on the same futures or forward contract with a strike price as high or higher than the price of the contract held. Of course, the off-setting transaction must terminate at the time of or after the primary transaction. Variable- and Floating-Rate Instruments Certain Funds may purchase variable-rate and floating rate obligations. If such instrument is not rated, the Adviser will consider the earning power, cash flows, and other liquidity ratios of the issuers and guarantors of such obligations and, if the obligation is subject to a demand feature, will monitor their financial status to meet payment on demand. In determining average weighted portfolio maturity, a variable-rate demand instrument issued or guaranteed by the U.S. Government or an agency or instrumentality thereof will be deemed to have a maturity equal to the period remaining until the obligations next interest rate adjustment. Other variable-rate obligations will be deemed to have a maturity equal to the shorter of the period remaining to the next interest rate adjustment or the time a Fund can recover payment of principal as specified in the instrument. The variable- and-floating rate demand instruments that the Funds may purchase include participations in Municipal Securities purchased from and owned by financial institutions, primarily banks. Participation interests provide a Fund with a specified undivided interest (up to 100%) in the underlying obligation and the right to demand payment of the unpaid principal balance plus accrued interest on the participation interest from the institution upon a specified number of days' notice, not to exceed 30 days. Each participation interest is backed by an irrevocable letter of credit or guarantee of a bank that the Adviser has determined meets the prescribed quality standards for the Funds. The bank typically retains fees out of the interest paid on the obligation for servicing the obligation, providing the letter of credit, and issuing the repurchase commitment. Warrants Certain Funds are permitted to invest in warrants. Warrants are privileges issued by corporations enabling the owner to subscribe to and purchase a specified number of shares of the corporation at a specified price during a specified period of time. The prices of warrants do not necessarily correlate with the prices of the underlying securities. The purchase of warrants involves the risk that the purchaser could lose the purchase value of the warrant if the right to subscribe to additional shares is not exercised prior to the warrant's expiration. Also, the purchase of warrants involves the risk that the effective price paid for the warrant added to the subscription price of the related security may exceed the value of the subscribed security's market price such as when there is no movement in the level of the underlying security. When-Issued Purchases and Forward Commitments A Fund may agree to purchase securities on a when-issued basis or enter into a forward commitment to purchase securities. When a Fund engages in these transactions, its custodian will segregate cash, U.S. Government securities or other high quality debt obligations equal to the amount of the commitment. Normally, the custodian will segregate portfolio securities to satisfy a purchase commitment, and in such a case a Fund may be required subsequently to segregate additional assets in order to ensure that the value of the segregated assets remains equal to the amount of the Fund's commitment. Because a Fund will segregate cash or liquid assets to satisfy its purchase commitments in the manner described, the Fund's liquidity and ability to manage its portfolio might be adversely affected in the event its commitments to purchase when-issued securities ever exceeded 25% of the value of its assets. In the case of a forward commitment to sell portfolio securities, the Fund's custodian will hold the portfolio securities themselves in a segregated account while the commitment is outstanding. 35 A Fund will make commitments to purchase securities on a when-issued basis or to purchase or sell securities on a forward commitment basis only with the intention of completing the transaction and actually purchasing or selling the securities. If deemed advisable as a matter of investment strategy, however, a Fund may dispose of or renegotiate a commitment after it is entered into, and may sell securities it has committed to purchase before those securities are delivered to the Fund on the settlement date. In these cases the Fund may realize a capital gain or loss. When a Fund engages in when-issued and forward commitment transactions, it relies on the other party to consummate the trade. Failure of such party to do so may result in the Fund's incurring a loss or missing an opportunity to obtain a price considered to be advantageous. The value of the securities underlying a when-issued purchase or a forward commitment to purchase securities, and any subsequent fluctuations in their value, is taken into account when determining the net asset value of a Fund starting on the date the Fund agrees to purchase the securities. The Fund does not earn dividends on the securities it has committed to purchase until they are paid for and delivered on the settlement date. When the Fund makes a forward commitment to sell securities it owns, the proceeds to be received upon settlement are included in the Fund's assets. Fluctuations in the value of the underlying securities are not reflected in the Fund's net asset value as long as the commitment remains in effect. Portfolio Turnover Generally, the Domestic Stock Funds will purchase portfolio securities for capital appreciation or investment income, or both, and not for short-term trading profits. If a Fund's annual portfolio turnover rate exceeds 100%, it may result in higher brokerage costs and possible tax consequences for the Portfolio and its shareholders. For the Funds' portfolio turnover rates, see the "Financial Highlights" in the Prospectus. Investment Risks and Considerations In addition to the investment risks and considerations identified in certain of the securities descriptions above, there are additional investment risks and considerations associated with an investment in certain of the Funds. Investments by a Fund in common stocks and other equity securities are subject to stock market risks. The value of the stocks that the Fund holds, like the broader stock market, may decline over short or even extended periods. The U.S. stock market tends to be cyclical, with periods when stock prices generally rise and periods when prices generally decline. As of the date of this SAI, the stock market, as measured by the S&P 500 Index and other commonly used indexes, was trading at or close to record levels. There can be no guarantee that these levels will continue. The Marsico Focused Equities Fund is a non-diversified fund, which means that it typically invests in fewer issuers than diversified funds. Therefore, appreciation or depreciation of an investment in a single issuer could have a greater impact on its net asset value. Marsico Focused Equities Fund reserves the right to become a diversified fund by limiting the investments in which more than 5% of its total assets are invested. The value of a Fund's investments in debt securities, including U.S. Government Obligations, will tend to decrease when interest rates rise and increase when interest rates fall. In general, longer-term debt instruments tend to fluctuate in value more than shorter-term debt instruments in response to interest rate movements. In addition, debt securities that are not backed by the United States Government are subject to credit risk, which is the risk that the issuer may not be able to pay principal and/or interest when due. In addition, obligations with the lowest investment grade rating (e.g., "BBB" S&P or "Baa" by Moody's) have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case with higher grade debt obligations. Subsequent to its purchase by the Fund, an issue of securities may cease to be rated or its rating may be reduced below the minimum rating required for purchase by the Fund. The Adviser will consider such an event in determining whether the Fund should continue to hold the obligation. Unrated obligations may be acquired by the Fund if they are determined by the Adviser to be of comparable quality at the time of purchase to rated obligations that may be acquired. 36 Certain of the Funds' investments constitute derivative securities, which are securities whose value is derived, at least in part, from an underlying index or reference rate. There are certain types of derivative securities that can, under certain circumstances, significantly increase a purchaser's exposure to market or other risks. The Adviser, however, only purchases derivative securities in circumstances where it believes such purchases are consistent with such Fund's investment objective and do not unduly increase the Fund's exposure to market or other risks. For additional risk information regarding the Funds' investments in particular instruments, see "Appendix A -- Fund Securities." Certain of the Funds may invest in securities of smaller and newer issuers. Investments in such companies may present greater opportunities for capital appreciation because of high potential earnings growth, but also present greater risks than investments in more established companies with longer operating histories and greater financial capacity. Master Feeder Structure. The Feeder Funds are open-end mutual funds that seek to achieve their investment objectives by investing all of its investable assets in corresponding Master Portfolios which have the same investment objectives. The Feeder Funds may withdraw their investment in the Master Portfolios at any time if the Board of Trustees of the Company determines that it is in the best interest of such Feeder Fund to do so. Upon such withdrawal, the Board of Trustees would consider what action might be taken, including the investment of all of the assets of the Fund in another pooled investment entity having the same investment objective as the Feeder Fund or the hiring of an investment adviser to manage the Feeder Fund's assets in accordance with its investment policies. The Master Portfolios are separate series of NMIT, which is organized as a business trust under the laws of Delaware. The Feeder Fund and other entities that may investment in the Master Portfolios from time to time (e.g., other investment companies and commingled trust funds) will each be liable for all obligations of the Master Portfolios. However, the risk of the Feeder Fund's incurring financial loss on account of such liability is limited to circumstances in which both inadequate insurance exists and a Portfolio itself is unable to meet its obligations. Accordingly, the Company's Boards of Trustees believe that neither a Feeder Fund nor its shareholders will be adversely affected by reason of a Feeder Fund's investing in a Master Portfolio. As with any mutual fund, other investors in the Master Portfolios could control the results of voting at the Master Portfolio level in certain instances (e.g., a change in fundamental policies by the Master Portfolio which was not approved by the Fund's shareholders). This could result in a Feeder Fund's withdrawal of its investment in the Master Portfolio. Further, the withdrawal of other entities that may from time to time invest in the Master Portfolios could have an adverse effect on the performance of such Master Portfolios and the corresponding Feeder Fund, such as decreased economies of scale, and increased per share operating expenses. In addition, the total withdrawal by another investment company as an investor in a Master Portfolio will cause the such Master Portfolio to terminate automatically in 120 days unless a Feeder Fund and any other investors in the Master Portfolio unanimously agree to continue the business of the Master Portfolio. If unanimous agreement is not reached to continue the Master Portfolio, the Board of Trustees of the Company would need to consider alternative arrangements for the Feeder Fund, such as those described above. When the Fund is required to vote as an interestholder of the Master Portfolio, current regulations provide that in those circumstances the Feeder Fund may either seek instructions from its security holders with regard to voting such proxies and vote such proxies in accordance with such instructions or the Feeder Fund may vote its shares in the Master Portfolio in the same proportion of all other security holders in the Master Portfolio. There may also be other investment companies through which you can invest in the Master Portfolio which may have higher or lower fees and expense than those of its corresponding Fund and which may therefore have different performance results than the Feeder Fund. MANAGEMENT OF THE COMPANY The business and affairs of the Company is managed under the direction of the Board of Trustees. This SAI contains the names of and general background information concerning each Trustee of the Company. The Company and the Adviser have adopted codes of ethics which contain policies on personal securities transactions by "access persons," including portfolio managers and investment analysts. These policies substantially comply in all material respects with the recommendations set forth in the May 9, 1994 Report of the Advisory Group on Personal Investing of the Investment Company Institute. The Trustees and executive officers of the Company and their principal occupations during the last five years are set forth below. The address of each, unless otherwise indicated, is 111 Center Street, Little Rock, Arkansas 72201. Those trustees who are "interested persons" of the Company (as defined in the 1940 Act) are indicated by an asterisk(*). 37
Principal Occupations During Past 5 Years Position with and Current Name, Address, and Age the Company Directorships ---------------------- ----------- ------------- Edmund L. Benson, III, 63 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 Suite 216 Nations Fund Trust; Director, Nations Fund, Inc., and Nations Richmond, VA 23230 LifeGoal Funds, Inc.; Director, Nations Fund Portfolios, Inc. through August, 1999. William P. Carmichael, 56 Trustee Trustee - 231 Funds (investment company) from 1993 to 1995, Time Succession Fund Horizon Fund (investment company) from 1995 to 1999, Pacific The Wrigley Building Innovations Trust (investment company) from 1997 to 1999, Nations 400 North Michigan Avenue Annuity Trust (investment company) since December 1999, Nations Suite 1016 Master Investment Trust (investment company) since December 1999, Chicago, IL 60611 and Nations Funds Trust (investment company) since December 1999; Director- The Hain Food Group, Inc. (specialty food products distributor) until December 1998, Cobra Electronics Corporation (electronic equipment manufacturer), Opta Food Ingredients, Inc. (food ingredients manufacturer), Golden Rule Insurance Company, Nations LifeGoal Funds, Inc. (investment company) since December 1999. James Ermer, 57 Trustee Retired Executive Vice President, Corporate Development and 11511 Compass Point Drive Planning - Land America (title insurance); Senior Vice President, Ft. Meyers, FL 33908 Finance - CSX Corporation (transportation and natural resources); Director - National Mine Service (mining supplies), Lawyers Title Corporation (title insurance); Trustee, Nations Reserves, Nations Fund Trust, Nations Annuity Trust and Nations Master Investment Trust; Director, Nations Fund, Inc. and Nations LifeGoal Funds, Inc.; Director, Nations Fund Portfolios, Inc. through August, 1999. William H. Grigg, 67 Trustee Chairman Emeritus since July 1997, 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.
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Principal Occupations During Past 5 Years Position with and Current Name, Address, and Age the Company Directorships ---------------------- ----------- ------------- Thomas F. Keller, 68 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. Carl E. Mundy, Jr., 65 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, 71* 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*, 61 Trustee President - NationsBank Trust from NationsBank Corporation from 237 Cherokee Road January 1992 to May 1997; Chairman - January 1992 to September Charlotte, NC 28207 1996; Central Piedmont Community College Foundation; Board of Executive Vice President - 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.
39
Principal Occupations During Past 5 Years Position with and Current Name, Address, and Age the Company Directorships ---------------------- ----------- ------------- A. Max Walker*, 78 President, Trustee and Independent Financial Consultant; Director and Chairman of the 4580 Windsor Gate Court Chairman of the Board Board - Hatteras Income Securities, Inc., Nations Government Income Atlanta, GA 30342 Term Trust 2003, Inc., Nations Government Income Term Trust 2004, Inc., Nations Balanced Target Maturity Fund, Inc.; President, Director and Chairman of the Board - Nations Fund, Inc. and Nations LifeGoal Funds, Inc.; President, Trustee and Chairman of the Board - Nations Reserves, Nations Fund Trust, Nations Annuity Trust and Nations Master Investment Trust; Director, Nations Fund Portfolios, Inc. through August, 1999. Charles B. Walker, 61 Trustee 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.*, 62 Trustee Partner - McGuire, Woods, Battle & Boothe LLP (law firm); Director McGuire, Woods, Battle & Boothe LLP - Vaughan-Bassett Furniture Companies, Inc. (furniture), Nations One James Center Fund, Inc. and Nations LifeGoal Funds, Inc.; Trustee, Nations 8th Floor Reserves, Nations Fund Trust, Nations Annuity Trust and Nations Richmond, VA 23219 Master 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 111 Center Street Inc.; Secretary since September 1993 and Treasurer since November Little Rock, AR 72201 1998 - Nations Fund, Inc., Nations LifeGoal Funds, Inc., Nations Reserves, Nations Fund Trust, Nations Annuity Trust and Nations Master Investment Trust.; Secretary and Treasurer, Nations Fund Portfolios, Inc. through August, 1999. Michael W. Nolte, 39 Assistant Secretary Assistant Secretary - Nations Fund 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. Carolyn Wyse, 37 Assistant Secretary and Assistant Secretary and Assistant Treasurer since August 1999- Stephens Inc. Assistant Treasurer Nations Fund Trust, Nations Fund, Inc., Nations Reserves, Nations LifeGoal Funds, Inc., Nations Annuity Trust, Nations Master Investment Trust and Nations Funds Trust.
Each Trustee is a board member of NFST, Nations Fund Trust, Nations Fund, Inc., Nations Reserves, Nations Annuity Trust and Nations Master Investment Trust, each a registered investment company that is part of the Nations Funds Family, except William P. Carmichael, who is only a board member of NFST, Nations Annuity Trust and Nations Master Investment Trust. Richard H. Blank, Jr., Michael W. Nolte, and Carolyn Wyse also are officers of NFST, Nations Fund Trust, Nations Fund, Inc., Nations Reserves, Nations Annuity Trust and Nations Master Investment Trust. 40 The Company, each Adviser, and Stephens have adopted a code of ethics which, contain policies on personal securities transactions by "access persons," including portfolio managers and investment analysts. These policies substantially comply in all material respects with the amendments to Rule 17j-1 under the 1940 Act as set forth in the August 20, 1999 Release. Each code of ethics, among other things, prohibits each access person of the Company from purchasing or selling securities when such person knows or should have known that, at the time of the transaction, the security (i) was being considered for purchase or sale by a Fund, or (ii) was being purchased or sold by a Fund. For purposes of the code of ethics, an access person means (i) a trustee or officer of the Company, (ii) any employee of the Company (or any company in a control relationship with the Company) who, in the course of his/her regular duties, obtains information about, or makes recommendations with respect to, the purchase or sale of securities by the Company, and (iii) any natural person in a control relationship with the Company who obtains information concerning recommendations made to the Company regarding the purchase or sale of securities. Portfolio managers and other persons who assist in the investment process are subject to additional restrictions, including a requirement that they disgorge to the Company any profits realized on short-term trading (i.e., the purchase/sale or sale/purchase of securities within any 60-day period). The above restrictions do not apply to purchases or sales of certain types of securities, including mutual fund shares, money market instruments and certain U.S. Government securities. To facilitate enforcement, the code of ethics generally requires that the Company's access persons, other than its "disinterested" trustees, submit reports to the Company's designated compliance person regarding transactions involving securities which are eligible for purchase by a Fund. The codes of ethics for the Company, Advisers, and Stephens are on public file with, and are available from, the SEC. Nations Funds Retirement Plan Under the terms of the Nations Funds Retirement Plan for Eligible Trustees (the "Retirement Plan"), each Trustee may be entitled to certain benefits upon retirement from the Board of Trustees. Pursuant to the Retirement Plan, the normal retirement date is the date on which the eligible Trustee has attained age 65 and has completed at least five years of continuous service with one or more of the open-end investment companies advised by the Adviser. If a Trustee retires before reaching age 65, no benefits are payable. Each eligible Trustee is entitled to receive an annual benefit from the Funds commencing on the first day of the calendar quarter coincident with or next following his date of retirement equal to 5% of the aggregate Trustee's fees payable by the Funds during the calendar year in which the Trustee's retirement occurs multiplied by the number of years of service (not in excess of ten years of service) completed with respect to any of the Funds. Such benefit is payable to each eligible Trustee in quarterly installments for a period of no more than five years. If an eligible Trustee dies after attaining age 65, the Trustee's surviving spouse (if any) will be entitled to receive 50% of the benefits that would have been paid (or would have continued to have been paid) to the Trustee if he had not died. The Retirement Plan is unfunded. The benefits owed to each Trustee are unsecured and subject to the general creditors of the Funds. Nations Funds Deferred Compensation Plan Under the terms of the Nations Funds Deferred Compensation Plan for Eligible Trustees (the "Deferred Compensation Plan"), each Trustee may elect, on an annual basis, to defer all or any portion of the annual board fees (including the annual retainer and all attendance fees) payable to the Trustee for that calendar year. An application was submitted to and approved by the SEC to permit deferring trustees to elect to tie the rate of return on fees deferred pursuant to the Deferred Compensation Plan, to one or more of certain investment portfolios of certain Funds. Distributions from the deferring Trustees' deferral accounts will be paid in cash, in generally equal quarterly installments over a period of five years beginning on the date the deferring Trustees' retirement benefits commence under the Retirement Plan. The Board of Trustees, in its sole discretion, may accelerate or extend such payments after a Trustee's termination of service. If a deferring Trustee dies prior to the commencement of the distribution of amounts in his deferral account, the balance of the deferral account will be distributed to his designated beneficiary in a lump sum as soon as practicable after the Trustee's death. If a deferring Trustee dies after the commencement of such distribution, but prior to the complete distribution of his deferral account, the balance of the amounts credited to his deferral account will be distributed to his designated beneficiary over the remaining period during which such amounts were distributable to the Trustee. Amounts payable under the Deferred Compensation Plan are not funded or secured in any way and deferring Trustees have the status of unsecured creditors of the Funds from which they are deferring compensation. 41 Trustee Compensation Trustees of the Company are compensated for their services to the Nations Funds Family on a flat rate basis, and not on a per registered investment company or per fund basis as outlined in the following chart. Board Member Compensation Arrangement ----------------------------- -------------------------------------------------- Board Member Annual Retainer: $65,000 Board Chairman: Additional 20% of the base annual retainer. Payable in quarterly installments. Payable pro rata for partial calendar year of service. Allocated across multiple registrants. Meeting Fees: $5,000 per meeting for in-person meetings (up to six meetings per calendar year) and $1,000 for telephone meetings. Allocated across multiple registrants convened at meetings. ----------------------------- -------------------------------------------------- Audit Committee Members Chairman: Additional 10% of the base annual retainer as Board Member. Meeting Fees: $1,000 per meeting if not held within one calendar day before or after regularly scheduled Board meetings. Allocated across multiple registrants convened at meetings. ----------------------------- -------------------------------------------------- Nominating Committee Members Meeting Fees: $1,000 per meeting if not held within one calendar day before or after regularly scheduled Board meetings. Allocated across multiple registrants convened at meetings. ----------------------------- -------------------------------------------------- The following Compensation Table provides the compensation paid by the Nations Funds Family to the Trustees for the year ended March 31, 2000. From April 1, 1999 to June 30, 1999 each Trustee received (i) an annual retainer of $1,000 ($3,000 for the Chairman of the Board) plus $500 for each Series of each Company, plus (ii) a fee of $1,000 for attendance at each "in-person" meeting of each respective Board (or Committee thereof) and $500 for attendance at each other meeting of each respective Board (or Committee thereof). Beginning July 1, 1999 the Trustees were compensated according to the Compensation Arrangement as outlined above. COMPENSATION TABLE
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) ------------ -------------- -------- --------------- -------------------- Edmund L. Benson, III $76,708 $8,850 $48,000 $88,696 Trustee James Ermer 73,241 8,850 48,000 76,391 Trustee William H. Grigg 67,559 8,850 48,000 101,391 Trustee Thomas F. Keller 71,453 8,850 51,000 106,331 Trustee
42
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) ------------ -------------- -------- --------------- -------------------- A. Max Walker 98,230 8,850 54,000 125,000 Chairman of the Board Charles B. Walker 84,856 8,850 48,000 92,000 Trustee Thomas S. Word 67,009 8,850 48,000 84,391 Trustee James P. Sommers 89,856 8,850 48,000 93,000 Trustee Carl E. Mundy, Jr. 85,856 8,850 48,000 92,000 Trustee Dr. Cornelius Pings 83,606 8,850 48,000 92,000 Trustee William Carmichael -- -- 2,377 4,753 Trustee
(1) All trustees receive reimbursements for expenses related to their attendance at meetings of the Board of Trustees. Officers of the Company receive no direct remuneration in such capacity from the Company. As of the date of this SAI, the trustees and officers of the Company as a group owned less than 1% of the outstanding shares of each of the Funds. (2) For the twelve-month period ending March 31, 1999, each Trustee receives (i) an annual retainer of $1,000 ($3,000 for the Chairman of the Board) plus $500 for each Fund of the Company, plus (ii) a fee of $1,000 for attendance at each "in-person" meeting of the Board of Trustees (or committee thereof) and $500 for attendance at each other meeting of the Board of Trustees (or Committee thereof). (3) Messrs. Grigg, Keller and A.M. Walker receive compensation from eleven investment companies that are deemed to be part of the Nations Funds "fund complex," as that term is defined under Rule 14a-101 of the Securities Exchange Act of 1934, as amended. Messrs. Benson, Ermer, C. Walker, Sommers, Mundy and Word receive compensation from seven investment companies deemed to be part of the Nations Funds complex. (4) Total compensation amounts include deferred compensation payable to or accrued for the following Trustees: Edmund L. Benson, III $40,456; James Ermer $4,803; William H. Grigg $80,912; Thomas F. Keller $85,588; and Thomas S. Word $79,954. Shareholder and Trustee Liability NFST's Declaration of Trust provides that shareholders shall not be subject to any personal liability for the acts or obligations of the Trust, and also provides for indemnification out of the trust property of any shareholder held personally liable solely by reason of his being or having been a shareholder and not because of his acts or omissions or some other reason. NFST's Declarations of Trust states further that no Trustee, officer, or agent of NFST shall be personally liable for or on account of any contract, debt, tort, claim, damage, judgment, or decree arising out of or connected with the administration or preservation of the trust estate or the conduct of any business of NFST nor shall any Trustee be personally liable to any person for any action or failure to act except by reason of his own bad faith, willful misfeasance, gross negligence, or reckless disregard of his duties as Trustee. NFST's Declaration of Trust also provides that all persons having any claim against the Trustees or NFST shall look solely to the trust property for payment. With the exceptions stated, NFST's Declaration of Trust provides that a Trustee is entitled to be indemnified against all liabilities and expenses reasonably incurred by him in connection with the defense or disposition of any proceeding in which he may be involved or with which he may be threatened by reason of his being or having been a Trustee, and that the Trustees have the power, but not the duty, to indemnify officers and employees of NFST unless any such person would not be entitled to indemnification had he or she been a Trustee. 43 INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY, TRANSFER AGENCY, OTHER SERVICE PROVIDERS, SHAREHOLDER SERVICING AND DISTRIBUTION AGREEMENTS Investment Adviser and Sub-Advisers Bank of America and its Investment Adviser and Sub-Adviser Affiliates BAAI is the investment adviser to the Funds, except the Feeder Funds. BAAI is also the investment adviser to the Master Portfolios. Chicago Equity is co-investment sub-adviser with BACAP to the Asset Allocation Fund. Marsico Capital is investment sub-adviser to the Marsico Focused Equities Master Portfolio and Marsico Growth & Income Master Portfolio. BACAP is the investment sub-adviser to the Government Securities Fund. BAAI also serves as the investment adviser to the portfolios of Nations Fund Trust, Nations Fund, Inc., Nations Reserves and Nations Annuity Trust, each a registered investment company that is part of the Nations Funds Family. In addition, BAAI serves as the investment adviser to Hatteras Income Securities, Inc., Nations Government Income Term Trust 2003, Inc., Nations Government Income Term Trust 2004, Inc. and Nations Balanced Target Maturity Fund, Inc., each a closed-end diversified management investment company traded on the New York Stock Exchange. BACAP also serves as the sub-investment adviser to Hatteras Income Securities, Inc., Nations Government Income Term Trust 2003, Inc., Nations Government Income Term Trust 2004, Inc., and Nations Balanced Target Maturity Fund, Inc. BAAI and BACAP are each wholly owned subsidiaries of Bank of America, which in turn is a wholly owned banking subsidiary of Bank of America Corporation, a bank holding company organized as a Delaware corporation. The respective principal offices of BAAI and BACAP are located at One Bank of America Plaza, Charlotte, N.C. 28255. Marsico Capital is located at 1200 17th Street, Suite 1300, Denver, CO 80202. Thomas F. Marsico is Chairman and Chief Executive Officer of Marsico Capital. Prior to forming Marsico Capital in September 1997, Mr. Marsico had 18 years of experience as a securities analyst/portfolio manager. Bank of America owns 50% of Marsico Capital. Since 1874, Bank of America and its predecessors have been managing money for foundations, universities, corporations, institutions and individuals. Today, Bank of America affiliates collectively manage in excess of $100 billion, including the more than $90 billion in mutual fund assets. It is a company dedicated to a goal of providing responsible investment management and superior service. Bank of America is recognized for its sound investment approaches, which place it among the nation's foremost financial institutions. Bank of America and its affiliates organization makes available a wide range of financial services to its over 6 million customers through over 1700 banking and investment centers. Sub-Advisers Unaffiliated with BAAI Chicago Equity Partners Corporation was established in 1998 as a wholly owned subsidiary of Bank of America and was the successor to the Bank of America Institutional Equity Group. On April 30, 2000, Chicago Equity Partners Corporation merged into Chicago Equity Partners LLC, a limited liability company formed in the state of Delaware. Chicago Equity is an investment adviser registered under the Investment Advisers Act of 1940, as amended. It serves as the investment sub-adviser for the equity portion of the Asset Allocation Fund. The principal source of Chicago Equity's income is professional fees received from the management of client portfolios. Chicago Equity manages the assets of fiduciary and other institutional accounts. Chicago Equity is located at 231 South LaSalle Street, Chicago, Illinois 60697. 44 Investment Advisory and Sub-Advisory Agreements Pursuant to the terms of the Company's Investment Advisory Agreement and Sub-Advisory Agreements (at times, the "Advisory Agreements") with BAAI, BACAP, Chicago Equity, and/or Marsico Capital, and subject at all times to the control of the Company's Board of Trustees and conformity with the stated policies of the Company, BAAI, BACAP, Chicago Equity, and/or Marsico Capital each selects and manages the investments of the Funds. Each such advisory entity obtains and evaluates economic, statistical and financial information to formulate and implement investment policies for the Funds that they advise. The Advisory Agreements each provide that in the absence of willful misfeasance, bad faith, negligence or reckless disregard of obligations or duties thereunder on the part of an Adviser, respectively, or any of its respective officers, trustees, employees or agents, such Adviser shall not be subject to liability to the Company or to any shareholder of the Company for any act or omission in the course of, or connected with, rendering services under thereunder or for any losses that may be sustained in the purchase, holding or sale of any security. Each Advisory Agreement became effective with respect to a Fund after approved by the Board of the Company, and continues from year to year, provided that such continuation of the Agreement is specifically approved at least annually by (a) (i) the Company's Board of Trustees or (ii) the vote of "a majority of the outstanding voting securities" of a Fund (as defined in Section 2(a)(42) of the 1940 Act), and (b) the affirmative vote of a majority of the Company's Trustees who are not parties to such Agreement or "interested persons" (as defined in the 1940 Act) of a party to such Agreement (other than as Trustees of 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 a Fund at any time without penalty by the Company (by vote of the Board of Trustees or by vote of a majority of the outstanding voting securities of the Fund) or by BAAI on 60 days' written notice. The Funds, in any advertisement or sales literature, may advertise the names, experience and/or qualifications of the portfolio manager(s) of any Fund, or if a Fund is managed by team or committee, such Fund may advertise the names, experience and/or qualifications of any such team or committee member. The Adviser may waive a portion of its fees; however, any such waiver may be discontinued at any time. As discussed below," an Adviser will be required to reduce its fees charged to the Funds, in direct proportion to the fees payable by such Funds to an Adviser and the Administrator, if the expenses of the Funds exceed the applicable expense limitation of any state in which the Funds' shares are registered or qualified for sale. BAAI also may pay amounts from its own assets to Stephens or to selling or servicing agents for services they provide. The investment advisory agreements and the investment sub-advisory agreements for the Master Portfolios are generally similar to the Advisory Agreements. Subject to reduction in accordance with the expense limitation provisions which may be imposed by states in which the Funds' shares are qualified for sale, BAAI received fees from the Funds 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, 2000. Because all of the Funds of NFST are new series, they have not yet completed a single fiscal year. Accordingly, advisory fees and sub-advisory fees paid to their adviser and sub-advisers, respectively, are not included below. ADVISORY FEES Net Amount Reimbursed Amount Paid Waived by Adviser ----------- ------ ---------- Government Securities Fund 824,307 225,795 - Asset Allocation Fund* 1,920,669 246,996 - Marsico Focused Equities Fund 3,616,135 - - Marsico Growth & Income Fund 1,027,192 - - * The amounts shown for this Fund represent fees for the fiscal period from May 16, 1999 to March 31, 2000 BAAI received fees from the Funds 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. 45
Net Amount Paid Amount Waived Reimbursed by Adviser --------------- ------------- --------------------- Government Securities Fund 837,334 180,666 0.00 Marsico Growth & Income Fund 687,321 0.00 0.00 Marsico Focused Equities Fund 1,951,845 0.00 0.00
BAAI received fees from the Funds 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.
Net Amount Paid Amount Waived Reimbursed by Adviser --------------- ------------- --------------------- Government Securities Fund 606,485 160,648 0.00 Marsico Growth & Income Fund 0.00 10,919 0.00 Marsico Focused Equities Fund 27,032 0.00 0.00
The table below states the net sub-advisory fees paid to Marsico for the fiscal year indicated. No fees were waived or reimbursed by the Adviser during those periods.
Period Ending Period Ending Period Ending 3/31/00 3/31/999 3/31/98 ------- -------- ------- Marsico Focused Equities Fund $2,023,082 $1,033,332 $14,311 Marsico Growth & Income Fund 574,549 363,877 5,780
Co-Administrators and Sub-Administrator Stephens Inc. and BAAI (the "Co-Administrators") serve as co-administrators of the Company. The Co-Administrators serve under co-administration agreements ("Co-Administration Agreements"), which were approved by the Boards of Trustees on December 9, 1999. The Co-Administrators receive, as compensation for their services rendered under the Co-Administration Agreements, administration fees, computed daily and paid monthly, at the annual rate of: 0.23% of the Domestic Stock Funds and 0.22% of the Government & Corporate Bond Fund of the average daily net assets of each such Fund. BAAI also may pay amounts from its own assets to Stephens or to selling or servicing agents for services they provide. Pursuant to the Co-Administration Agreement, Stephens has agreed to, among other things, (i) maintain office facilities for the Funds, (ii) furnish statistical and research data, data processing, clerical, and internal executive and administrative services to the Company, (iii) furnish corporate secretarial services to the Company, including coordinating the preparation and distribution of materials for Board of Trustees meetings, (iv) coordinate the provision of legal advice to the Company with respect to regulatory matters, (v) coordinate the preparation of reports to the Company's shareholders and the SEC, including annual and semi-annual reports, (vi) coordinating the provision of services to the Company by the Transfer Agent, Sub-Transfer Agent and the Custodian, and (vii) generally assist in all aspects of the Company's operations. Stephens bears all expenses incurred in connection with the performance of its services. Also, pursuant to the Co-Administration Agreement, BAAI has agreed to, among other things, (i) provide accounting and bookkeeping services for the Funds, (ii) compute each Fund's net asset value and net income, (iii) accumulate information required for the Company's reports to shareholders and the SEC, (iv) prepare and file the Company's federal and state tax returns, (v) perform monthly compliance testing for the Company, and (vi) prepare and furnish the Company monthly broker security transaction summaries and transaction listings and performance information. BAAI bears all expenses incurred in connection with the performance of its services. 46 The Co-Administration Agreement may be terminated by a vote of a majority of the respective Board of Trustees, by Stephens or by BAAI, respectively, on 60 days' written notice without penalty. The Co-Administration Agreements are not assignable without the written consent of the other party. Furthermore, the Co-Administration Agreements provide that Stephens and BAAI shall not be liable to the Funds or to their shareholders except in the case of Stephens' or BAAI's, willful misfeasance, bad faith, gross negligence or reckless disregard of duty. BNY serves as sub-administrator for the Funds pursuant to sub-administration agreements. Pursuant to their terms, BNY assists Stephens and BAAI in supervising, coordinating and monitoring various aspects of the Funds' administrative operations. For providing such services, BNY is entitled to receive a monthly fee from Stephens and BAAI based on an annual rate of the Funds' average daily net assets. Because all of the Funds of NFST are new series, they have not yet completed a single fiscal year. Accordingly, co-administration fees and sub-administration fees paid are not included below. The table set forth below states the net Co-Administration fees paid to BAAI and waived for the fiscal period ended March 31, 2000. Co-Administration Fees
Fees Paid to BAAI Waiver per expense ratio analysis ----------------- --------------------------------- - Govt Securities Fund 205,715 - Asset Allocation Fund* 360,382 - Marsico Growth & Income Fund 181,239 - Marsico Focused Equities Fund 647,723 - ------------------------ *The amounts shown for this Fund represent fees for the Fiscal period from May 16, 1999 to March 31, 2000.
Co-Administration Fees
Fees Paid to Stephens Waiver per expense ratio analysis --------------------- --------------------------------- Govt Securities Fund 124,194 - Asset Allocation Fund* 196,260 - Marsico Growth & Income Fund 212,496 - Marsico Focused Equities Fund 849,604 -
The table set forth below states the net Sub-Administration fees paid to BNY and waived for the fiscal year ended March 31, 2000. Sub-Administration Fees
Fees Paid to BONY Waiver per expense ratio analysis ----------------- --------------------------------- Govt Securities Fund 103,347 - Asset Allocation Fund* 196,572 - Marsico Growth & Income Fund 212,943 - Marsico Focused Equities Fund 672,587 - --------------------------------- *The amounts shown for this Fund represent fees for the Fiscal period from May 16, 1999 to March 31, 2000.
Bank of New York Co-Administration Fee Structure Government and Corporate Bond Fund Breakpoints Rate ---------------------------------- ------------------- < than or equal to $500 million 0.0500% > $500 million to $1 billion 0.0500% > $1 billion to $1.5 billion 0.0300% > $1.5 billion to $2 billion 0.0150% In excess of $2 billion 0.0050% 47 Domestic Stock Funds Breakpoints Rate ---------------------------------- ------------------- < or equal to $500 million 0.0600% > $500 million to $1 billion 0.0600% > $1 billion to $1.5 billion 0.0400% $1.5 billion to $2 billion 0.0200% In excess of $2 billion 0.0100% 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 --------- ----------- Government Securities Fund 5,693 0 Marsico Growth & Income Fund 4,686 0 Marsico Focused Equities Fund 13,634 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 --------- ----------- Government Securities Fund 31,535 --- Marsico Growth & Income Fund 28,322 --- Marsico Focused Equities Fund 82,370 --- 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. Sub-Administration Fees Fees Paid Fees Waived --------- ----------- Government Securities Fund 13,627 --- Marsico Growth & Income Fund 22,432 --- Marsico Focused Equities Fund 66,100 --- 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 December 1, 1998 through March 31, 1999, under the previous co-administration arrangements. The amounts paid and waived are for the time period to the end of the conversion to The Bank of New York. The conversion dates are as follows: January 4, 1999 for Marsico Focused Equities Fund and Marsico Growth and Income Fund and February 3, 1999 for Government Securities. Co-Administration Fees Fees Paid Total ----- Government Securities Fund 11,769 Marsico Growth & Income Fund 2,795 Marsico Focused Equities Fund 7,708 The table set forth below states the net Co-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. 48 Co-Administration Fees Fees Paid Fees Waived --------- ----------- Government Securities Fund 59,181 -- Marsico Growth & Income Fund 21,106 -- Marsico Focused Equities Fund 58,002 -- 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 --------- ----------- Government Securities Fund 42,490 -- Marsico Growth & Income Fund 9,838 -- Marsico Focused Equities Fund 27,007 -- 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 --------- ----------- Government Securities Fund 8,778 -- Marsico Growth & Income Fund 3,058 -- Marsico Focused Equities Fund 8,279 -- 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 ------------- ----------- Government Securities Fund 71,126 0.00 Marsico Growth & Income Fund 898 0.00 Marsico Focused Equities Fund 2,227 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 ------------- ----------- Government Securities Fund 50,171 0.00 Marsico Growth & Income Fund 387 0.00 Marsico Focused Equities Fund 953 0.00 49 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. Sub-Administration Fees Net Fees Paid Fees Waived ------------- ----------- Government Securities Fund 12,130 -- Marsico Growth & Income Fund 128 -- Marsico Focused Equities Fund 318 -- Distribution Plans and Shareholder Servicing Arrangements Investor A Shares The Company has adopted a Shareholder Servicing and Distribution Plan (the "Investor A Plan") pursuant to Rule 12b-1 under the 1940 Act with respect to each Fund's Investor A Shares. The Investor A Plan provides that each Fund may pay the Distributor or banks, broker/dealers or other financial institutions that offer shares of the Fund and that have entered into a Sales Support Agreement with the Distributor ("Selling Agents") or a Shareholder Servicing Agreement with the Company, ("Servicing Agents"), up to 0.10% (on an annualized basis) of the average daily net asset value of Investor A Shares. Payments under the Investor A Plan may be made to the Distributor for providing the distribution-related services described in (i) above or to Servicing Agents that have entered into a Shareholder Servicing Agreement with the Company for providing shareholder support services to their Customers which hold of record or beneficially Investor A Shares. Such shareholder support services provided by Servicing Agents to holders of Investor A Shares may include (i) aggregating and processing purchase and redemption requests for Investor A Shares from their Customers and transmitting promptly net purchase and redemption orders to our distributor or transfer agent; (ii) providing their Customers with a service that invests the assets of their accounts in Investor A Shares pursuant to specific or pre-authorized instructions; (iii) processing dividend and distribution payments from the Company on behalf of their Customers; (iv) providing information periodically to their Customers showing their positions in Investor A Shares; (v) arranging for bank wires; (vi) responding to their Customers' inquiries concerning their investment in Investor A Shares; (vii) providing sub-accounting with respect to Investor A Shares beneficially owned by their Customers or the information necessary to us for sub-accounting; (viii) if required by law, forwarding shareholder communications from the Company (such as proxies, shareholder reports, annual and semi-annual financial statements and dividend, distribution and tax notices) to their Customers (ix) forwarding to their Customers proxy statements and proxies containing any proposals regarding the Shareholder Servicing Agreement; (x) providing general shareholder liaison services; and (xi) providing such other similar services as the Company may reasonably request to the extent the Selling Agent is permitted to do so under applicable statutes, rules or regulations. Because the Funds of NFST have not yet completed a fiscal year, fees paid are not included here. 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. There were no unreimbursed expenses incurred under the Investor A Plans in the previous year to be carried over to the current year from August 1, 2000 to August 1, 2001. The Funds in the Nations Funds Family participate in joint distribution activities with other Funds in the Nations Funds Family. The fees paid under each Investor A Plan adopted by a Fund may be used to finance the distribution of the shares of other Funds in the Nations Funds Family. Such distribution costs are allocated based on the relative net asset size of the respective Funds. Expenses incurred by the Distributor pursuant to the Investor A Plan in any given year may exceed the sum of the fees received under the Investor A Plan. Any such excess may be recovered by the Distributor in future years so long as the Investor A Plan is in effect. If the Investor A Plan were terminated or not continued, a Fund would not be contractually obligated to pay the Distributor for any expenses not previously reimbursed by the Fund. 50 Investor C Shares of the Funds. The Trustees of the Company have approved a Distribution Plan in accordance with Rule 12b-1 under the 1940 Act for the Investor C Shares of the Funds (the "Investor C Plan"). Pursuant to the Investor C Plan, each Fund may pay the Distributor for certain expenses that are incurred in connection with the distribution of shares. Payments under the Investor C Plan will be calculated daily and paid monthly at a rate set from time to time by the Board of Trustees provided that the annual rate may not exceed 0.75% of the average daily net asset value of Investor C Shares of a Fund. Payments to the Distributor pursuant to the Investor C Plan will be used (i) to compensate banks, other financial institutions or a securities broker/dealer that have entered into a Sales Support Agreement with the Distributor ("Selling Agents") for providing sales support assistance relating to Investor C Shares, for promotional activities intended to result in the sale of Investor C Shares such as to pay for the preparation, printing and distribution of prospectuses to other than current shareholders, and (ii) to compensate Selling Agents for providing sales support services with respect to their Customers who are, from time to time, beneficial and record holders of Investor C Shares. Currently, substantially all fees paid pursuant to the Investor C Plan are paid to compensate Selling Agents for providing the services described in (i) and (ii) above, with any remaining amounts being used by the Distributor to partially defray other expenses incurred by the Distributor in distributing Investor C Shares. Fees received by the Distributor pursuant to the Investor C Plan will not be used to pay any interest expenses, carrying charges or other financing costs (except to the extent permitted by the SEC) and will not be used to pay any general and administrative expenses of the Distributor. Pursuant to the Investor C Plan, the Distributor may enter into Sales Support Agreements with Selling Agents for providing sales support services to their Customers who are the record or beneficial owners of Investor C Shares of the Funds. Such Selling Agents will be compensated at the annual rate of up to 0.75% of the average daily net asset value of the Investor C Shares held of record or beneficially by such Customers. The sales support services provided by Setting Agents may include providing distribution assistance and promotional activities intended to result in the sales of shares such as paying for the preparation, printing and distribution of prospectuses to other than current shareholders. Fees paid pursuant to the Investor C Plan are accrued daily and paid monthly, and are charged as expenses of the relevant shares of a Fund as accrued. Expenses incurred by the Distributor pursuant to the Investor C Plan in any given year may exceed the sum of the fees received under the Investor C Plan and payments received pursuant to contingent deferred sales charges. Any such excess may be recovered by the Distributor in future years so long as the Investor C Plan is in effect. If the Investor C Plan were terminated or not continued, a Fund would not be contractually obligated to pay the Distributor for any expenses not previously reimbursed by the Fund or recovered through contingent deferred sales charges. There were no unreimbursed expenses incurred under the Investor C plans in the previous year to be carried over to the current year from August 1, 2000 to August 1, 2001. The Funds in the Nations Funds Family participate in joint distribution activities with other Funds in the Nations Funds Family. The fees paid under each Investor C Plan adopted by a Fund may be used to finance the distribution of the shares of other Funds in the Nations Funds Family. Such distribution costs are allocated based on the relative net asset size of the respective Funds. In addition, the Trustees have approved a Shareholder Servicing Plan ("Servicing Plan") with respect to the Investor C Shares of the Funds (the "Investor C Servicing Plan"). Pursuant to the Investor C Servicing Plan, each Fund may pay banks, broker/dealers or other financial institutions that have entered into a Shareholder Servicing Agreement with Nations Funds ("Servicing Agents") for certain expenses that are incurred by the Servicing Agents in connection with shareholder support services that are provided by the Servicing Agents. Payments under the Investor C Servicing Plan will be calculated daily and paid monthly at a rate set from time to time by the Board of Trustees, provided that the annual rate may not exceed 0.25% of the average daily net asset value of the Investor C Shares. The shareholder services provided by the Servicing Agents may include (i) aggregating and processing purchase and redemption requests for such Investor C Shares from Customers and transmitting promptly net purchase and redemption orders to our distributor or transfer agent; (ii) providing Customers with a service that invests the assets of their accounts in such Investor C Shares pursuant to specific or pre-authorized instructions; (iii) dividend and distribution payments from the Company on behalf of Customers; (iv) providing information periodically to Customers showing their positions in such Investor C Shares; (v) arranging for bank wires; (vi) responding to Customers' inquiries concerning their investment in such Investor C Shares; (vii) providing sub-accounting with respect to such Investor C Shares beneficially owned by Customers or providing the information to us necessary for sub-accounting; (viii) if required by law, forwarding shareholder communications from the Company (such as proxies, shareholder reports, annual and semi-annual financial statements and dividend, distribution and tax notices) to Customers; (ix) forwarding to Customers proxy statements and proxies containing any proposals regarding the Shareholder Servicing Agreement; (x) providing general shareholder liaison services; and (xi) providing such other similar services as the Company may reasonably request to the extent the Servicing Agent is permitted to do so under applicable statutes, rules or regulations. 51 Investor B Shares of the Funds. The Trustees of the Company have approved a Distribution Plan (the "Investor B Distribution Plan") with respect to Investor B Shares of the Funds. Pursuant to the Investor B Distribution Plan, a Fund may compensate or reimburse the Distributor for any activities or expenses primarily intended to result in the sale of the Fund's Investor B Shares, including for sales related services provided by banks, broker/dealers or other financial institutions that have entered into a Sales Support Agreement relating to the Investor B Shares with the Distributor ("Selling Agents"). Payments under a Fund's Investor B Distribution Plan will be calculated daily and paid monthly at a rate or rates set from time to time by the Board of Trustees provided that the annual rate may not exceed 0.75% of the average daily net asset value of each Fund's Investor B Shares. The fees payable under the Investor B Distribution Plan are used primarily to compensate or reimburse the Distributor for distribution services provided by it, and related expenses incurred, including payments by the Distributor to compensate or reimburse Selling Agents, for sales support services provided, and related expenses incurred, by such Selling Agents. Payments under the Investor B Distribution Plan may be made with respect to preparation, printing and distribution of prospectuses, sales literature and advertising materials by the Distributor or, as applicable, Selling Agents, attributable to distribution or sales support activities, respectively, commissions, incentive compensation or other compensation to, and expenses of, account executives or other employees of the Distributor or Selling Agents, attributable to distribution or sales support activities, respectively; overhead and other office expenses of the Distributor relating to the foregoing (which may be calculated as a carrying charge in the Distributor's or Selling Agents' unreimbursed expenses), incurred in connection with distribution or sales support activities. The overhead and other office expenses referenced above may include, without limitation, (i) the expenses of operating the Distributor's or Selling Agents' offices in connection with the sale of Fund shares, including lease costs, the salaries and employee benefit costs of administrative, operations and support personnel, utility costs, communication costs and the costs of stationery and supplies, (ii) the costs of client sales seminars and travel related to distribution and sales support activities, and (iii) other expenses relating to distribution and sales support activities. In addition, the Trustees have approved a Shareholder Servicing Plan with respect to Investor B Shares of the Funds ("Investor B Servicing Plan"). Pursuant to the Investor B Servicing Plan, a Fund may compensate or reimburse banks, broker/dealers or other financial institutions that have entered into a Shareholder Servicing Agreement with the Company ("Servicing Agents") for certain activities or expenses of the Servicing Agents in connection with shareholder services that are provided by the Servicing Agents. Payments under the Investor B Servicing Plan will be calculated daily and paid monthly at a rate or rates set from time to time by the Board of Trustees, provided that the annual rate may not exceed 0.25% of the average daily net asset value of the Investor B Shares of the Funds. The fees payable under the Investor B Servicing Plan are used primarily to compensate or reimburse Servicing Agents for shareholder services provided, and related expenses incurred, by such Servicing Agents. The shareholder services provided by Servicing Agents may include: (i) aggregating and processing purchase and redemption requests for such Investor B Shares from Customers and transmitting promptly net purchase and redemption orders to the Distributor or Transfer Agent; (ii) providing Customers with a service that invests the assets of their accounts in such Investor B Shares pursuant to specific or pre-authorized instructions; (iii) processing dividend and distribution payments from the Company on behalf of Customers; (iv) providing information periodically to Customers showing their positions in such Investor B Shares; (v) arranging for bank wires; (vi) responding to Customers' inquiries concerning their investment in such Investor B Shares; (vii) providing sub-accounting with respect to such Investor B Shares beneficially owned by Customers or providing the information to us necessary for sub-accounting; (viii) if required by law, forwarding shareholder communications from the Company (such as proxies, shareholder reports, annual and semi-annual financial statements and dividend, distribution and tax notices) to Customers; (ix) providing general shareholder liaison Services; and (x) providing such other similar services as the Company may reasonably request to the extent such Servicing Agent is permitted to do so under applicable statutes, rules or regulations. 52 The fees payable under the Investor B Distribution Plan and Investor B Servicing Plan (together, the "Investor B Plans") are treated by the Funds as an expense in the year they are accrued. At any given time, a Selling Agent and/or Servicing Agent may incur expenses in connection with services provided pursuant to its agreements with the Distributor under the Investor B Plans which exceed the total of (i) the payments made to the Selling Agents and Servicing Agents by the Distributor or the Company and reimbursed by the Fund pursuant to the Investor B Plans. Any such excess expenses may be recovered in future years, so long as the Investor B Plans are in effect. Because there is no requirement under the Investor B Plans that the Distributor be paid or the Selling Agents and Servicing Agents be compensated or reimbursed for all their expenses or any requirement that the Investor B Plans be continued from year to year, such excess amount, if any, does not constitute a liability to a Fund or the Distributor. Although there is no legal obligation for the Fund to pay expenses incurred by the Distributor, a Selling Agent or a Servicing Agent in excess of payments previously made to the Distributor under the Investor B Plans or in connection with contingent deferred sales charges, if for any reason the Investor B Plans are terminated, the Trustees will consider at that time the manner in which to treat such expenses. There were no unreimbursed expenses incurred under the Investor B Distribution Plans in the previous year to be carried over to the current year from August 1, 2000 to August 1, 2001. The Funds in the Nations Funds Family participate in joint distribution activities with other Funds in the Nations Funds Family. The fees paid under each Investor B Distribution Plan adopted by a Fund may be used to finance the distribution of the shares of other Funds in the Nations Funds Family. Such distribution costs are allocated based on the relative net asset size of the respective Funds. Daily Shares Fees Paid Pursuant to Shareholder Servicing/Distribution Plans Net Fees Paid* Investor A Shares 12B-1 Shareholder Svc TOTAL Waiver ----------------------------------------------- Govt Securities Fund 150,050 - 150,050 - Asset Allocation Fund* 167,959 - 167,959 - Marsico Focused Equities Fund 999,651 - 999,651 - Marsico Growth & Income Fund 209,938 - 209,938 - *The amounts shown for this Fund represent fees for the fiscal period from May 16, 1999 to March 31, 2000. Fees Paid Pursuant to Distribution Plans Investor C Shares
Net Fees Paid ------------- Shareholder Shareholder 12B-1 Services Admin TOTAL Waiver -------------- ----------------- ------------------ ---------------- ------------------ Govt Securities Fund 3,069 1,023 - 4,092 - Asset Allocation Fund* 13,749 4,583 - 18,332 - Marsico Focused Equities Fund 690,902 230,301 - 921,203 - Marsico Growth & - Income Fund 109,117 36,372 - 145,490
*The amounts shown for this Fund represent fees for the fiscal period from May 16, 1999 to March 31, 2000. 53 Investor B Shares
Net Fees Paid ------------- Shareholder Shareholder 12B-1 Services Admin TOTAL Waiver --------------- --------------------- -------------- ---------------- --------------- Asset Allocation Fund* 546,863 182,288 - 729,151 - Marsico Focused Equities Fund 4,425,219 1,475,073 - 5,900,292 - Marsico Growth & Income Fund 1,343,397 447,799 - 1,791,195 - --------------- ----------------- ------------------ ---------------- ---------------
*The amounts shown for this Fund represent fees for the fiscal period from May 16, 1999 to March 31, 2000. Expenses The Administrator furnishes, without additional cost to the Company, the services of the Treasurer and Secretary of the Company and such other personnel (other than the personnel of the Adviser) as are required for the proper conduct of the Company's affairs. The Distributor bears the incremental expenses of printing and distributing prospectuses used by the Distributor or furnished by the Distributor to investors in connection with the public offering of the Company's shares and the costs of any other promotional or sales literature, except that to the extent permitted under the Plans relating to the Investor A, Investor B or Investor C Shares of each Fund, sales-related expenses incurred by the Distributor may be reimbursed by the Company. The Company pays or causes to be paid all other expenses of the Company, including, without limitation: the fees of the Adviser, the Administrator and Co-Administrator; the charges and expenses of any registrar, any custodian or depository appointed by the Company for the safekeeping of its cash, fund securities and other property, and any stock transfer, dividend or accounting agent or agents appointed by the Company; brokerage commissions chargeable to the Company in connection with fund securities transactions to which the Company is a party; all taxes, including securities issuance and transfer taxes; corporate fees payable by the Company to federal, state or other governmental agencies; all costs and expenses in connection with the registration and maintenance of registration of the Company and its shares with the SEC and various states and other jurisdictions (including filing fees, legal fees and disbursements of counsel); the costs and expenses of typesetting prospectuses and statements of additional information of the Company (including supplements thereto) and periodic reports and of printing and distributing such prospectuses and statements of additional information (including supplements thereto) to the Company's shareholders; all expenses of shareholders' and trustees' meetings and of preparing, printing and mailing proxy statements and reports to shareholders; fees and travel expenses of trustees or trustee members of any advisory board or committee; all expenses incident to the payment of any dividend or distribution, whether in shares or cash; charges and expenses of any outside service used for pricing of the Company's shares; fees and expenses of legal counsel and of independent auditors in connection with any matter relating to the Company; membership dues of industry associations; interest payable on Company borrowings; postage and long-distance telephone charges; insurance premiums on property or personnel (including officers and trustees) of the Company which inure to its benefit; extraordinary expenses (including, but not limited to, legal claims and liabilities and litigation costs and any indemnification related thereto); and all other charges and costs of the Company's operation unless otherwise explicitly assumed by the Adviser), the Administrator or Co-Administrator. Expenses of the Company which are not directly attributable to the operations of any class of shares or Fund are pro-rated among all classes of shares or Fund of the Company based upon the relative net assets of each class or Fund. Expenses of the Company which are not directly attributable to a specific class of shares but are directly attributable to a specific Fund are prorated among all the classes of shares of such Fund based upon the relative net assets of each such class of shares. Expenses of the Company which are directly attributable to a class of shares are charged against the income available for distribution as dividends to such class of shares. The Advisory Agreement, the Sub-Advisory Agreements, and the Administration Agreement require the Advisers and the Administrator to reduce their fees to the extent required to satisfy any expense limitations which may be imposed by the securities laws or regulations thereunder of any state in which a Fund's shares are registered or qualified for sale, as such limitations may be raised or lowered from time to time, and the aggregate of all such investment advisory, sub-advisory, and administration fees shall be reduced by the amount of such excess. The amount of any such reduction to be borne by the Advisers or the Administrator shall be deducted from the monthly investment advisory and administration fees otherwise payable to the Advisers and the Administrator during such fiscal year. If required pursuant to such state securities regulations, the Advisers and the Administrator will reimburse the Company no later than the last day of the first month of the next succeeding fiscal year, for any such annual operating expenses (after reduction of all investment advisory and administration fees in excess of such limitation). 54 Transfer Agents and Custodians PFPC Inc. is located at 400 Bellevue Parkway, Wilmington, Delaware 19809, and acts as transfer agent for each Fund's Shares. Under the transfer agency agreements, the transfer agent maintains shareholder account records for the Company, handles certain communications between shareholders and the Company, and distributes dividends and distributions payable by the Company to shareholders, and produces statements with respect to account activity for the Company and its shareholders for these services. The transfer agent receives a monthly fee computed on the basis of the number of shareholder accounts that it maintains for the Company during the month and is reimbursed for out-of-pocket expenses. Bank of America serves as sub-transfer agent for each Fund's Primary A and Primary B Shares. BNY 100 Church Street, New York, N.Y. 10286 serves as custodian for the Funds' assets. As custodian, BNY maintains the Funds' securities cash and other property, delivers securities against payment upon sale and pays for securities against delivery upon purchase, makes payments on behalf of such Funds for payments of dividends, distributions and redemptions, endorses and collects on behalf of such Funds all checks, and receives all dividends and other distributions made on securities owned by such Funds. The SEC has amended Rule 17f-5 under the 1940 Act to permit boards to delegate certain foreign custody matters to foreign custody managers and to modify the criteria applied in the selection process. Accordingly, BNY serves as Foreign Custody Manager, pursuant to a Foreign Custody Manager Agreement, under which the Boards of Trustees retain the responsibility for selecting foreign compulsory depositories, although BNY agrees to make certain findings with respect to such depositories and to monitor such depositories. Distributor Stephens Inc. (the "Distributor") serves as the principal underwriter and distributor of the shares of the Funds. Pursuant to a distribution agreement (the "Distribution Agreement"), the Distributor, as agent, sells shares of the Funds on a continuous basis and transmits purchase and redemption orders that its receives to the Company or the Transfer Agent. Additionally, the Distributor has agreed to use appropriate efforts to solicit orders for the sale of shares and to undertake such advertising and promotion as it believes appropriate in connection with such solicitation. Pursuant to the Distribution Agreement, the Distributor, at its own expense, finances those activities which are primarily intended to result in the sale of shares of the Funds, including, but not limited to, advertising, compensation of underwriters, dealers and sales personnel, the printing of prospectuses to other than existing shareholders, and the printing and mailing of sales literature. The Distributor, however, may be reimbursed for all or a portion of such expenses to the extent permitted by a distribution plan adopted by the Company pursuant to Rule 12b-1 under the 1940 Act. The Distribution Agreement will continue year to year as long as such continuance is approved at least annually by (i) the Board of Trustees or a vote of the majority (as defined in the 1940 Act) of the outstanding voting securities of the Fund and (ii) a majority of the trustees who are not parties to the Distribution Agreement or "interested persons" of any such party by a vote cast in person at a meeting called for such purpose. The Distribution Agreement is not assignable and is terminable with respect to a Fund, without penalty, on 60 days' notice by the Board of Trustees, the vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the Fund, or by the Distributor. Independent Accountants and Reports The Company issues unaudited financial information semi-annually and audited financial statements annually. The Company furnishes proxy statements and other shareholder reports to shareholders of record. The annual financial statements will be audited by the Company's independent accountant. The Board of Trustees has selected PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York 10036, as the Company's independent accountant to audit the Company's books and review the Company's tax returns for the Funds' fiscal year ended March 31, 2000. PricewaterhouseCoopers LLP was the independent public accountants for the Funds for the period ended March 31, 1999. 55 The Financial Statements and Financial Highlights for the fiscal period ended March 31, 2000 are hereby incorporated herein by reference in this SAI. The Annual Reports for the fiscal period ended March 31, 1999 are hereby incorporated herein by reference in this SAI. These Annual Reports 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. Their address is 2000 Pennsylvania Avenue, N.W., Washington, D.C. 20006. FUND TRANSACTIONS AND BROKERAGE General Brokerage Policy Subject to policies established by the Board of Trustees of the Company, the Adviser is responsible for decisions to buy and sell securities for each Fund, for the selection of broker/dealers, for the execution of such Fund's securities transactions, and for the allocation of brokerage fees in connection with such transactions. The Adviser's primary consideration in effecting a security transaction is to obtain the best net price and the most favorable execution of the order. Purchases and sales of securities on a securities exchange are effected through brokers who charge a negotiated commission for their services. Orders may be directed to any broker to the extent and in the manner permitted by applicable law. In the over-the-counter market, securities are generally traded on a "net" basis with dealers acting as principal for their own accounts without stated commissions, although the price of a security usually includes a profit to the dealer. In underwritten offerings, securities are purchased at a fixed price that includes an amount of compensation to the underwriter, generally referred to as the underwriter's concession or discount. On occasion, certain money market instruments may be purchased directly from an issuer, in which case no commissions or discounts are paid. In placing orders for portfolio securities of a Fund, the Adviser is required to give primary consideration to obtaining the most favorable price and efficient execution. This means that the Adviser will seek to execute each transaction at a price and commission, if any, which provide the most favorable total cost or proceeds reasonably attainable in the circumstances. In seeking such execution, the Adviser will use its best judgment in evaluating the terms of a transaction, and will give consideration to various relevant factors, including, without limitation, the size and type of the transaction, the nature and character of the market for the security, the confidentiality, speed and certainty of effective execution required for the transaction, the general execution and operational capabilities of the broker-dealer, the reputation, reliability, experience and financial condition of the firm, the value and quality of the services rendered by the firm in this and other transactions and the reasonableness of the spread or commission, if any. In addition, the Adviser will consider research and investment services provided by brokers or dealers who effect or are parties to portfolio transactions of a Fund, the Adviser or its other clients. Such research and investment services are those which brokerage houses customarily provide to institutional investors and include statistical and economic data and research reports on particular companies and industries. Such services are used by the Adviser in connection with all of its investment activities, and some of such services obtained in connection with the execution of transactions for a Fund may be used in managing other investment accounts. Conversely, brokers furnishing such services may be selected for the execution of transactions of such other accounts, whose aggregate assets are far larger than those of a Fund. Services furnished by such brokers may be used by the Adviser in providing investment advisory and investment management services for the Company. Commission rates are established pursuant to negotiations with the broker based on the quality and quantity of execution services provided by the broker in the light of generally prevailing rates. The allocation of orders among brokers and the commission rates paid are reviewed periodically by the Trustees of the Company. On exchanges on which commissions are negotiated, the cost of transactions may vary among different brokers. Transactions on foreign stock exchanges involve payment of brokerage commissions which are generally fixed. Transactions in both foreign and domestic over-the-counter markets are generally principal transactions with dealers, and the costs of such transactions involve dealer spreads rather than brokerage commissions. With respect to over-the-counter transactions, the Adviser, where possible, will deal directly with dealers who make a market in the securities involved except in those circumstances in which better prices and execution are available elsewhere. 56 In certain instances there may be securities which are suitable for more than one Fund as well as for one or more of the other clients of the Adviser. Investment decisions for each Fund and for the Adviser's other clients are made with the goal of achieving their respective investment objectives. It may happen that a particular security is bought or sold for only one client even though it may be held by, or bought or sold for, other clients. Likewise, a particular security may be bought for one or more clients when one or more other clients are selling that same security. Some simultaneous transactions are inevitable when several clients receive investment advice from the same investment adviser, particularly when the same security is suitable for the investment objectives of more than one client. When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed to be equitable to each. It is recognized that in some cases this system could have a detrimental effect on the price or volume of the security in a particular transaction as far as a Fund is concerned. The Company believes that over time its ability to participate in volume transactions will produce superior executions for the Funds. The portfolio turnover rate for each Fund is calculated by dividing the lesser of purchases or sales of portfolio securities for the reporting period by the monthly average value of the portfolio securities owned during the reporting period. The calculation excludes all securities, including options, whose maturities or expiration dates at the time of acquisition are one year or less. Portfolio turnover may vary greatly from year to year as well as within a particular year, and may be affected by cash requirements for redemption of shares and by requirements which enable the Funds to receive favorable tax treatment. The Funds may participate, if and when practicable, in bidding for the purchase of portfolio securities directly from an issuer in order to take advantage of the lower purchase price available to members of a bidding group. A Fund will engage in this practice, however, only when the Adviser, in its sole discretion, believes such practice to be otherwise in the Fund's interests. The Company will not execute portfolio transactions through, or purchase or sell portfolio securities from or to the distributor, the Adviser, the administrator, the co-administrator or their affiliates, acting as principal (including repurchase and reverse repurchase agreements), except to the extent permitted by applicable law. In addition, the Company will not give preference to correspondents of Bank of America or its affiliates, with respect to such transactions or securities. (However, the Adviser is authorized to allocate purchase and sale orders for portfolio securities to certain financial institutions, including, in the case of agency transactions, financial institutions which are affiliated with Bank of America or its affiliates, and to take into account the sale of Fund shares if the Adviser believes that the quality of the transaction and the commission are comparable to what they would be with other qualified brokerage firms.) In addition, a Fund will not purchase securities during the existence of any underwriting or selling group relating thereto of which the distributor, the Adviser, the administrator, or the co-administrator, or any of their affiliates, is a member, except to the extent permitted by the SEC. Under certain circumstances, the Funds may be at a disadvantage because of these limitations in comparison with other investment companies which have similar investment objectives but are not subject to such limitations. Under the 1940 Act, persons affiliated with the Company are prohibited from dealing with the Company as a principal in the purchase and sale of securities unless an exemptive order allowing such transactions is obtained from the SEC. Each of the Funds may purchase securities from underwriting syndicates of which Bank of America or any of its affiliates is a member under certain conditions, in accordance with the provisions of a rule adopted under the 1940 Act and any restrictions imposed by the Board of Governors of the Federal Reserve System. Investment decisions for each Fund are made independently from those for the Company's other investment portfolios, other investment companies, and accounts advised or managed by the Adviser. Such other investment portfolios, investment companies, and accounts may also invest in the same securities as the Funds. When a purchase or sale of the same security is made at substantially the same time on behalf of one or more of the Funds and another investment portfolio, investment company, or account, the transaction will be averaged as to price and available investments allocated as to amount, in a manner which the Adviser believes to be equitable to each Fund and such other investment portfolio, investment company or account. In some instances, this investment procedure may adversely affect the price paid or received by a Fund or the size of the position obtained or sold by the Fund. To the extent permitted by law, the Adviser may aggregate the securities to be sold or purchased for the Funds with those to be sold or purchased for other investment portfolios, investment companies, or accounts in executing transactions. 57 Brokerage Commissions
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended March Fund March 31, 2000 March 31, 1999 31, 1998 ---- -------------- -------------- -------- Marsico Focused Equities 2,288,935 830,511 25,934 Marsico Growth & Income 501,608 265,230 9,903 Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended March 31, 2000 February 28, 1999 February 28, 1998 -------------- ----------------- ----------------- Asset Allocation Fund+ 358,923 $213,085 $125,211
Brokerage Commissions Paid to Affiliates During the fiscal periods ended March 31, 2000 NFST, did not pay brokerage commissions to Banc of America Investments, Inc. (or its predecessors), Banc of America Capital Markets, Inc. (a broker/dealer subsidiary of Bank of America) (or its predecessors), or Stephens. Securities of Regular Broker/Dealers As of March 31, 2000, each Fund owned securities of its "regular brokers or dealers" or their parents, as defined in the 1940 Act, as follows:
Dollar Amount of Fund Broker/Dealer Securities Held ---- ------------- --------------- Marsico Focused Equities Fund Morgan Stanley & Company, Inc. $ 76,741,422 Marsico Growth & Income Fund Morgan Stanley & Company, Inc. $ 18,084,364 Asset Allocation Fund Donaldson, Lufkin & Jenrette $ 1,599,046 J.P. Morgan Securities Inc. $ 1,238,450 Lehman Brothers Inc. $ 2,765,980 Salomon Brothers Inc. $ 1,259,102
Directed Brokerage During the fiscal year ended March 31, 2000, the Funds directed brokerage transactions to brokers because of research services provided. The amount of such transactions and related commissions were as follows: Fund Amount of Transaction(s) Related Commissions ---- ------------------------ ------------------- Marsico Focused Equities $ 197,689,417 $ 150,219 Marsico Growth & Income $ 41,503,355 $ 31,678 Asset Allocation $ 75,965,682 $ 47,981 Monies Paid to Broker/Dealers from the Adviser's Profit There were no fees paid to any broker/dealers from the profits of the Advisor for the last fiscal year (i.e., April 1, 1999 through March 31, 2000) of the Funds. This information is provided in order to satisfy certain requirements of Rule 10b-10 under the 1934 Act, which provides that broker/dealers must provide information to customers regarding any remuneration that a broker receives in connection with a sales transaction. -------- + Until June 23, 1997, Pacific Horizon Asset Allocation Fund (the predecessor to Nations Asset Allocation Fund) invested all of its assets in the Asset Allocation Master Portfolio. Information contained in the chart above includes brokerage commissions paid by the Asset Allocation Master Portfolio. 58 Section 28(e) Standards Under Section 28(e) of the Securities Exchange Act of 1934, the Adviser shall not be "deemed to have acted unlawfully or to have breached its fiduciary duty" solely because under certain circumstances it has caused the account to pay a higher commission than the lowest available. To obtain the benefit of Section 28(e), the Adviser must make a good faith determination that the commissions paid are "reasonable in relation to the value of the brokerage and research services provided ...viewed in terms of either that particular transaction or its overall responsibilities with respect to the accounts as to which it exercises investment discretion and that the services provided by a broker provide an adviser with lawful and appropriate assistance in the performance of its investment decision making responsibilities." Accordingly, the price to a Fund in any transaction may be less favorable than that available from another broker/dealer if the difference is reasonably justified by other aspects of the portfolio execution services offered. Broker/dealers utilized by the Adviser may furnish statistical, research and other information or services which are deemed by the Adviser to be beneficial to the Funds' investment programs. Research services received from brokers supplement the Adviser's own research and may include the following types of information: statistical and background information on industry groups and individual companies; forecasts and interpretations with respect to U.S. and foreign economies, securities, markets, specific industry groups and individual companies; information on political developments; fund management strategies; performance information on securities and information concerning prices of securities; and information supplied by specialized services to the Adviser and to the Company's Trustees with respect to the performance, investment activities and fees and expenses of other mutual funds. Such information may be communicated electronically, orally or in written form. Research services may also include the providing of equipment used to communicate research information, the arranging of meetings with management of companies and the providing of access to consultants who supply research information. The outside research assistance is useful to the Adviser since the brokers utilized by the Adviser as a group tend to follow a broader universe of securities and other matters than the Adviser's staff can follow. In addition, this research provides the Adviser with a diverse perspective on financial markets. Research services which are provided to the Adviser by brokers are available for the benefit of all accounts managed or advised by the Adviser. In some cases, the research services are available only from the broker providing such services. In other cases, the research services may be obtainable from alternative sources in return for cash payments. The Adviser is of the opinion that because the broker research supplements rather than replaces its research, the receipt of such research does not tend to decrease its expenses, but tends to improve the quality of its investment advice. However, to the extent that the Adviser would have purchased any such research services had such services not been provided by brokers, the expenses of such services to the Adviser could be considered to have been reduced accordingly. Certain research services furnished by broker/dealers may be useful to the Adviser with clients other than the Funds. Similarly, any research services received by the Adviser through the placement of fund transactions of other clients may be of value to the Adviser in fulfilling its obligations to the Funds. The Adviser is of the opinion that this material is beneficial in supplementing its research and analysis; and, therefore, it may benefit the Company by improving the quality of the Adviser's investment advice. The advisory fees paid by the Company are not reduced because the Adviser receives such services. Some broker/dealers may indicate that the provision of research services is dependent upon the generation of certain specified levels of commissions and underwriting concessions by the Adviser's clients, including the Funds. DESCRIPTION OF SHARES Description of Shares of the Company The Company's Board of Trustees have authorized the issuance of the classes of shares of the Funds indicated above and may, in the future, authorize the creation of additional investment portfolios or classes of shares. The Board may classify or reclassify any unissued shares of the Company into shares of any class, classes or Fund in addition to those already authorized by setting or changing in any one or more respects, from time to time, prior to the issuance of such shares, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or terms or conditions of redemption, of such shares and, pursuant to such classification or reclassification to increase or decrease the number of authorized shares of any Fund or class. Any such classification or reclassification will comply with the provisions of the 1940 Act. Fractional shares shall have the same rights as full shares to the extent of their proportionate interest. 59 All shares of a Fund have equal voting rights and will be voted in the aggregate, and not by series, except where voting by a series is required by law or where the matter involved only affects one series. For example, a change in a Fund's fundamental investment policy would be voted upon only by shareholders of the Fund involved. Additionally, approval of an advisory contract is a matter to be determined separately by Fund. Approval by the shareholders of one Fund is effective as to that Fund whether or not sufficient votes are received from the shareholders of the other Funds to approve the proposal as to those Portfolios. As used in the Prospectus and in this SAI, the term "majority," when referring to approvals to be obtained from shareholders of a Fund, means the vote of the lesser of (i) 67% of the shares of the Fund represented at a meeting if the shareholders of more than 50% of the outstanding interests of the Fund are present in person or by proxy, or (ii) more than 50% of the outstanding shares of the Fund. The term "majority," when referring to the approvals to be obtained from shareholders of the Company as a whole, means the vote of the lesser of (i) 67% of the Company's shares represented at a meeting if the shareholders of more than 50% of the Company's outstanding shares are present in person or by proxy, or (ii) more than 50% of the Company's outstanding shares. Shareholders are entitled to one vote for each full share held and fractional votes for fractional shares held. The Company may dispense with an annual meeting of shareholders in any year in which it is not required to elect Trustees under the 1940 Act. Each share of a Fund represents an equal proportional interest in the Fund with each other share and is entitled to such dividends and distributions out of the income earned on the assets belonging to the Fund, as are declared in the discretion of the Board members. In the event of the liquidation or dissolution of the Company, shareholders of the Company's Funds are entitled to receive the assets attributable to the Fund that are available for distribution, and a distribution of any general assets not attributable to a particular Fund that are available for distribution in such manner and on such basis as the Board members in their sole discretion may determine. Shareholders are not entitled to any preemptive rights. All shares, when issued, will be fully paid and non-assessable by the Company. Net investment income for the Funds for dividend purposes consists of (i) interest accrued and original issue discount earned on a Fund's assets, (ii) plus the amortization of market discount and minus the amortization of market premium on such assets, (iii) less accrued expenses directly attributable to the Fund and the general expenses of the Company prorated to a Fund on the basis of its relative net assets, plus dividend or distribution income on a Fund's assets. Prior to purchasing shares in one of the Funds, the impact of dividends or distributions which are expected to be or have been declared, but not paid, should be carefully considered. Any dividend or distribution declared shortly after a purchase of such shares prior to the record date will have the effect of reducing the per share net asset value by the per share amount of the dividend or distribution. All or a portion of such dividend or distribution, although in effect a return of capital, may be subject to tax. Shareholders receiving a distribution in the form of additional shares will be treated as receiving an amount equal to the fair market value of the shares received, determined as of the reinvestment date. Shares in the Funds may be purchased pursuant to the policies outlined in the Funds' prospectuses. In addition to the policies in such prospectuses the following purchasing or buying policy shall also apply. The Funds will waive any contingent deferred sales charge on the exchange or transfer of a shareholder's investment in a Fund to any of the offshore funds in the Nations Funds family. The Funds use the so-called "equalization accounting method" to allocate a portion of earnings and profits to redemption proceeds. This method permits a fund to achieve more balanced distributions for both continuing and departing shareholders. Continuing shareholders should realize tax savings or deferrals through this method, and departing shareholders will not have their tax obligations change. Although using this method will not affect a Fund's total returns, it may reduce the amount that otherwise would be distributable to continuing shareholders by reducing the effect of redemptions on dividend and distribution amounts. 60 Net Asset Value Determination With respect to the Funds, a security listed or traded on an exchange is valued at its last sale price on the exchange where the security is principally traded or, lacking any sales on a particular day, the security is valued at the mean between the closing bid and asked prices on that day. Each security traded in the over-the-counter market (but not including securities reported on the NASDAQ National Market System) is valued at the mean between the last bid and asked prices based upon quotes furnished by market makers for such securities. Each security reported on the NASDAQ National Market System is valued at the last sale price on the valuation date. With respect to the Government and Corporate Bond Fund, securities may be valued on the basis of prices provided by an independent pricing service. Prices provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as yield, type of issue, coupon rate maturity and seasoning differential. Securities for which prices are not provided by the pricing service are valued at the mean between the last bid and asked prices based upon quotes furnished by market makers for such securities. Securities for which market quotations are not readily available are valued under procedures adopted by the Board of Trustees of the Company. Short-Term obligations having 60 days or less to maturity are valued at amortized cost, which approximates current market value. Generally, trading in foreign securities, as well as U.S. Government securities, money market instruments and repurchase agreements, is substantially completed each day at various times prior to the close of the New York Stock Exchange. The values of such securities used in computing the net asset value of the shares of the Fund are determined as of such times. Foreign currency exchange rates are also generally determined prior to the close of the New York Stock Exchange. Occasionally, events affecting the value of such securities and such exchange rates may occur between the times at which they are determined and the close of the New York Stock Exchange, which will not be reflected in the computation of net asset value. If during such periods events occur which materially affect the value of such securities, the securities will be valued at their fair value under procedures adopted by the Boards. The Company may redeem shares involuntarily to reimburse the Funds for any loss sustained by reason of the failure of a shareholder to make full payment for Investor Shares purchased by the shareholder or to collect any charge relating to a transaction effected for the benefit of a shareholder which is applicable to Investor Shares as provided in the related Prospectuses from time to time. The Company also may make payment for redemptions in readily marketable securities or other property if it is appropriate to do so in light of the Company's responsibilities under the 1940 Act. Under the 1940 Act, the Funds may suspend the right of redemption or postpone the date of payment for Shares during any period when (a) trading on the Exchange is restricted by applicable rules and regulations of the SEC; (b) the Exchange is closed for other than customary weekend and holiday closings; (c) the SEC has by order permitted such suspension; (d) an emergency exists as determined by the SEC. (The Funds may also suspend or postpone the recordation of the transfer of their shares upon the occurrence of any of the foregoing conditions.) ADDITIONAL INFORMATION CONCERNING TAXES The following information supplements and should be read in conjunction with the Prospectuses. The Prospectuses of the Funds describe generally the tax treatment of distributions by the Funds. This section of the SAI includes additional information concerning Federal income taxes. General The Company intends to qualify each Fund as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), as long as such qualification is in the best interest of the Fund's shareholders. Each Fund will be treated as a separate entity for tax purposes and, thus, the provisions of the Code applicable to regulated investment companies generally will be applied to each Fund, rather than to the Company as a whole. In addition, net capital gain, net investment income, and operating expenses will be determined separately for each Fund. As a regulated investment company, each Fund will not be taxed on its net investment income and capital gains distributed to shareholders. 61 Qualification as a regulated investment company under the Code requires, among other things, that (a) each Fund derive at least 90% of its annual gross income from dividends, interest, certain payments with respect to securities loans, gains from the sale or other disposition of stock or securities or foreign currencies (to the extent such currency gains are directly related to the regulated investment company's principal business of investing in stock or securities) and other income (including but not limited to gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies; and (b) the Fund diversify its holdings so that, at the end of each quarter of the taxable year, (i) at least 50% of the market value of the Fund's assets is represented by cash, government securities and other securities limited in respect of any one issuer to an amount not greater than 5% of the Fund's assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its assets is invested in the securities of any one issuer (other than U.S. Government obligations and the securities of other regulated investment companies), or in two or more issuers which the Fund controls and which are determined to be engaged in the same or similar trades or businesses. Each Fund also must distribute or be deemed to distribute to its shareholders at least 90% of its net investment income which, for this purpose, includes net short-term capital gains and certain other items earned in each taxable year. In general, these distributions must actually or be deemed to be made in the taxable year. However, in certain circumstances, such distributions may be made in the 12 months following the taxable year. Furthermore, distributions declared in October, November or December of one taxable year and paid by January 31 of the following taxable year will be treated as paid by December 31 the first taxable year. The Funds intend to pay out substantially all of their net investment income and net capital gain (if any) for each year. Excise Tax A 4% nondeductible excise tax will be imposed on each Fund (other than to the extent of its tax-exempt interest income) to the extent it does not meet certain minimum distribution requirements of its by the end of each calendar year. Each Fund intends to actually or be deemed to distribute substantially all of its income and gains by the end of each calendar year and, thus, expects not to be subject to the excise tax. Private Letter Ruling In order for a Fund to maintain regulated investment company status under the Code, its dividends, including--for this purpose--capital gain distributions, must not constitute "preferential dividends," within the meaning of Section 562(c) of the Code. The Company has received a private letter ruling from the Internal Revenue Service ("IRS") generally to the effect that the following will not give rise to preferential dividends: differing fees imposed on the different classes of shares with respect to servicing, distribution and administrative support services, and transfer agency arrangements; differing sales charges on purchases and redemptions of such shares; and conversion features resulting in the Company paying different dividends or distributions on the different classes of shares. Investment through Master Portfolios Management of the Master Portfolios corresponding to each of the Feeder Funds intends for each Master Portfolio to be treated as a partnership (or, in the event that a Feeder Fund is the sole investor in a Master Portfolio, as disregarded from the Feeder Fund) for Federal income tax purposes rather than as a regulated investment company or a corporation under the Code. Under the rules applicable to a partnership (or a disregarded entity), a proportionate share of any interest, dividends, gains and losses of a Master Portfolio will be deemed to have been realized (i.e., "passed-through") to its investors, regardless of whether any amounts are actually distributed by the Master Portfolio. Each investor in a Master Portfolio will be taxed on its shares (as determined in accordance with the governing instruments of the particular Master Portfolio) of the Master Portfolio's income and gains in determining its Federal income tax liability. The determination of such share will be made in accordance with the Code and regulations promulgated thereunder. It is intended that each Master Portfolio's assets, income and distributions will be managed in such a way that an investor in a Master Portfolio will be able to qualify as a regulated investment company by investing substantially all of its assets through the Master Portfolio. 62 Taxation of Fund/Master Portfolio Investments Except as provided herein, gains and losses on the sale of portfolio securities by a Fund or Master Portfolio ("Fund/Master Portfolio") 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/Master Portfolio for more than one year at the time of disposition of the securities. Gains recognized on the disposition of a debt obligation (including a tax-exempt obligation) purchased by a Fund/Master Portfolio 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/Master Portfolio held the debt obligation. If an option granted by a Fund/Master Portfolio lapses or is terminated through a closing transaction, such as a repurchase by the Fund/Master Portfolio of the option from its holder, the Fund/Master Portfolio will realize a short-term capital gain or loss, depending on whether the premium income is greater or less than the amount paid by the Fund in the closing transaction. Some realized capital losses may be deferred if they result from a position which is part of a "straddle," discussed below. If securities are sold by a Fund/Master Portfolio pursuant to the exercise of a call option written by it, the Fund/Master Portfolio will add the premium received to the sale price of the securities delivered in determining the amount of gain or loss on the sale. If securities are purchased by a Fund/Master Portfolio pursuant to the exercise of a put option written by it, such Fund/Master Portfolio will subtract the premium received from its cost basis in the securities purchased. The amount of any gain or loss realized by a Fund/Master Portfolio on closing out a regulated futures contract will generally result in a realized capital gain or loss for Federal income tax purposes. Regulated futures contracts held at the end of each fiscal year will be required to be "marked to market" for Federal income tax purposes pursuant to Section 1256 of the Code. In this regard, they will be deemed to have been sold at market value. Sixty percent (60%) of any net gain or loss recognized on these deemed sales and sixty percent (60%) of any net realized gain or loss from any actual sales, will generally be treated as long-term capital gain or loss, and the remainder will be treated as short-term capital gain or loss. Transactions that qualify as designated hedges are excepted from the "mark-to-market" rule and the "60%/40%" rule. Under Section 988 of the Code, a Fund/Master Portfolio will generally recognize ordinary income or loss to the extent gain or loss realized on the disposition of portfolio securities is attributable to changes in foreign currency exchange rates. In addition, gain or loss realized on the disposition of a foreign currency forward contract, futures contract, option or similar financial instrument, or of foreign currency itself, will generally be treated as ordinary income or loss. Each Fund/Master Portfolio will attempt to monitor Section 988 transactions, where applicable, to avoid adverse tax impact. Offsetting positions held by a Fund/Master Portfolio involving certain financial forward, futures or options contracts may be considered, for tax purposes, to constitute "straddles." "Straddles" are defined to include "offsetting positions" in actively traded personal property. The tax treatment of "straddles" is governed by Section 1092 of the Code which, in certain circumstances, overrides or modifies the provisions of Section 1256. If a Fund/Master Portfolio were treated as entering into "straddles" by engaging in certain financial forward, futures or option contracts, such straddles could be characterized as "mixed straddles" if the futures, forwards, or options comprising a part of such straddles were governed by Section 1256 of the Code. A Fund/Master Portfolio 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/Master Portfolio may differ. Generally, to the extent the straddle rules apply to positions established by the Fund/Master Portfolio, losses realized by the Fund/Master Portfolio may be deferred to the extent of unrealized gain in any offsetting positions. Moreover, as a result of the straddle and the conversion transaction rules, short-term capital loss on straddle positions may be recharacterized as long-term capital loss, and long-term capital gain may be characterized as short-term capital gain or ordinary income. If a Fund/Master Portfolio enters into a "constructive sale" of any appreciated position in stock, a partnership interest, or certain debt instruments, the Fund/Master Portfolio must recognize gain (but not loss) with respect to that position. For this purpose, a constructive sale occurs when the Fund/Master Portfolio 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. 63 If a Fund/Master Portfolio purchases shares in a "passive foreign investment company" ("PFIC"), the Fund/Master Portfolio may be subject to Federal income tax and an interest charge imposed by the IRS upon certain distributions from the PFIC or the Fund/Master Portfolio's disposition of its PFIC shares. If the Fund/Master Portfolio invests in a PFIC, the Fund/Master Portfolio intends to make an available election to mark-to-market its interest in PFIC shares. Under the election, the Fund/Master Portfolio 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/Master Portfolio 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/Master Portfolio as ordinary income (or loss) notwithstanding any distributions by the PFIC, the Fund/Master Portfolio will not be subject to Federal income tax or the interest charge with respect to its interest in the PFIC under the election. Foreign Taxes Income and dividends received by a Fund/Master Portfolio from sources within foreign countries may be subject to withholding and other taxes imposed by such countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. If more than 50% of the value of a Fund's total assets at the close of its taxable year consists of securities of non-U.S. corporations, the Fund will be eligible to file an election with the IRS pursuant to which the regulated investment company may pass-through to its shareholders foreign taxes paid by the regulated investment company, which may be claimed either as a credit or deduction by the shareholders. However, even if a Fund qualifies for the election, foreign taxes will only pass-through to a Fund shareholder if (i) the shareholder holds the Fund shares for at least 16 days during the 30 day period beginning 15 days prior to the date upon which the shareholder becomes entitled to receive Fund distributions corresponding with the pass-through of the foreign taxes paid by the Fund, and (ii) with respect to foreign source dividends received by the Fund on shares giving rise to foreign tax, the Fund holds the shares for at least 16 days during the 30 day period beginning 15 days prior to the date upon which the Fund becomes entitled to the dividend. An individual with $300 or less of creditable foreign taxes generally is exempt from foreign source income and certain other limitations imposed by the Code on claiming a credit for such taxes. The $300 amount is increased to $600 for joint filers. Capital Gain Distributions Distributions which are designated by a Fund as capital gain distributions will be taxed to shareholders as long-term term capital gain (to the extent such distributions equal or exceed the Fund's actual net capital gains for the taxable year), regardless of how long a shareholder has held Fund shares. Such distributions will be designated as capital gain distributions in a written notice mailed by the Fund to its shareholders not later than 60 days after the close of the Fund's taxable year. Other Distributions For Federal income tax purposes, a Fund's earnings and profits will be determined at the end of each taxable year and will be allocated pro rata over the entire year. For Federal income tax purposes, only amounts paid out of earnings and profits will qualify as dividends. Thus, if during a taxable year the Fund's declared dividends exceed the Fund's net income (as determined at the end of the year), only that portion of the year's distributions which equals the year's earnings and profits (generally the Fund's net investment income and capital gain) will be deemed to have constituted a dividend. Distributions in excess of earnings and profits will first be treated as a return of capital up to the amount of a shareholder's basis in its Fund shares and then capital gain. It is expected that the Fund's net income, on an annual basis, will equal the dividends declared during the year. Disposition of Fund Shares A disposition of Fund shares pursuant to a redemption (including a redemption in-kind) or an exchange will ordinarily result in a taxable capital gain or loss, depending on the amount received for the shares (or are deemed to be received in the case of an exchange) and the cost of the shares. 64 If a shareholder exchanges or otherwise disposes of Fund shares within 90 days of having acquired such shares and if, as a result of having acquired those shares, the shareholder subsequently pays a reduced sales charge on a new purchase of shares of the Fund or a different regulated investment company, the sales charge previously incurred in acquiring the Fund's shares shall not be taken into account (to the extent such previous sales charges do not exceed the reduction in sales charges on the new purchase) for the purpose of determining the amount of gain or loss on the disposition, but will be treated as having been incurred in the acquisition of such other shares. Also, any loss realized on a redemption or exchange of shares of the Fund will be disallowed to the extent that substantially identical shares are acquired within the 61-day period beginning 30 days before and ending 30 days after the shares are disposed of. If a shareholder receives a capital gain distribution with respect to any Fund share and such Fund share is held for six months or less, then (unless otherwise disallowed) any loss on the sale or exchange of that Fund share will be treated as a long-term capital loss to the extent of the capital gain distribution. In addition, if a shareholder holds Fund shares for six months or less, any loss on the sale or exchange of those shares will be disallowed to the extent of the amount of exempt-interest dividends (defined below) received with respect to the shares. The Treasury Department is authorized to issue regulations reducing the six months holding requirement to a period of not less than the greater of 31 days or the period between regular distributions where a Fund regularly distributes at least 90% of its net tax-exempt interest, if any. No such regulations have been issued as of the date of this SAI. The loss disallowance rules described in this paragraph do not apply to losses realized under a periodic redemption plan. Federal Income Tax Rates As of the printing of this SAI, the maximum individual tax rate applicable to ordinary income is 39.6% (marginal tax rates may be higher for some individuals to reduce or eliminate the benefit of exemptions and deductions); the maximum individual marginal tax rate applicable to net capital gain is 20%; and the maximum corporate tax rate applicable to ordinary income and net capital gain is 35% (marginal tax rates may be higher for some corporations to reduce or eliminate the benefit of lower marginal income tax rates). Naturally, the amount of tax payable by an individual or corporation will be affected by a combination of tax laws covering, for example, deductions, credits, deferrals, exemptions, sources of income and other matters. Corporate Shareholders Corporate shareholders of the Funds may be eligible for the dividends-received deduction on distributions attributable to dividends received from domestic corporations, which, if received directly by the corporate shareholder, would qualify for such deduction. A distribution by a Fund attributable to dividends of a domestic corporation will only qualify for the dividends-received deduction if (i) the corporate shareholder generally holds the Fund shares upon which the distribution is made for at least 46 days during the 90 day period beginning 45 days prior to the date upon which the shareholder becomes entitled to the distribution; and (ii) the Fund generally holds the shares of the domestic corporation producing the dividend income for at least 46 days during the 90 day period beginning 45 days prior to the date upon which the Fund becomes entitled to such dividend income. Foreign Shareholders Under the Code, distributions attributable to income on taxable investments, net short-term capital gain and certain other items realized by a Fund and paid to a nonresident alien individual, foreign trust (i.e., a trust other than a trust which a U.S. court is able to exercise primary supervision over administration of that trust and one or more U.S. persons have authority to control substantial decisions of that trust), foreign estate (i.e., the income of which is not subject to U.S. tax regardless of source), foreign corporation, or foreign partnership (each, a "foreign shareholder") will be subject to U.S. withholding tax (at a rate of 30% or a lower treaty rate, if applicable). Withholding will not apply if a distribution paid by the Fund to a foreign shareholder is "effectively connected" with a U.S. trade or business (or, if an income tax treaty applies, is attributable to a U.S. permanent establishment of the foreign shareholder), in which case the reporting and withholding requirements applicable to U.S. persons will apply. Capital gain distributions generally are not subject to tax withholding. 65 Backup Withholding The Company may be required to withhold, subject to certain exemptions, at a rate of 31% ("backup withholding") on all distributions and redemption proceeds (including proceeds from exchanges and redemptions in-kind) paid or credited to an individual Fund shareholder, unless the shareholder certifies that the "taxpayer identification number" ("TIN") provided is correct and that the shareholder is not subject to backup withholding, or the IRS notifies the Company that the shareholder's TIN is incorrect or that the shareholder is subject to backup withholding. Such tax withheld does not constitute any additional tax imposed on the shareholder, and may be claimed as a tax payment on the shareholder's Federal income tax return. An investor must provide a valid TIN upon opening or reopening an account. Failure to furnish a valid TIN to the Company also could subject the investor to penalties imposed by the IRS. New Regulations On October 6, 1997, the Treasury Department issued new regulations (the "New Regulations") which make certain modifications to the backup withholding, U.S. income tax withholding and information reporting rules applicable to foreign shareholders. The New Regulations will generally be effective for payments made after December 31, 2000, subject to certain transition rules. Among other things, the New Regulations will permit the Funds to estimate the portion of their distributions qualifying as capital gain distributions for purposes of determining the portion of such distributions paid to foreign shareholders that will be subject to federal income tax withholding. Prospective investors are urged to consult their own tax advisors regarding the New Regulations. Tax-Deferred Plans The Funds are available for a variety of tax-deferred retirement and other plans, including Individual Retirement Accounts ("IRA"), Simplified Employee Pension Plans ("SEP-IRA"), Savings Incentive Match Plans for Employees ("SIMPLE plans"), Roth IRAs, and Education IRAs, which permit investors to defer some of their income from taxes. Other Matters Investors should be aware that the investments to be made by the Funds may involve sophisticated tax rules that may result in income or gain recognition by a Fund without corresponding current cash receipts. Although the Funds will seek to avoid significant noncash income, such noncash income could be recognized by a Fund, in which case the Fund may distribute cash derived from other sources in order to meet the minimum distribution requirements described above. The foregoing discussion and the discussions in the Prospectus applicable to each shareholder address only some of the Federal and state tax considerations generally affecting investments in the Funds. 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 each Fund may be obtained by calling (800) 321-7854 or 1.800.765.2668 for the Government and Corporate Bond Fund. From time to time, the yield and total return of a Fund's Shares may be quoted in advertisements, shareholder reports, and other communications to shareholders. Quotations of yield and total return reflect only the performance of a hypothetical investment in a Fund or class of shares during the particular time period shown. Yield and total return vary based on changes in the market conditions and the level of a Fund's expenses, and no reported performance figure should be considered an indication of performance which may be expected in the future. Standardized performance for the Funds, i.e., that required in both form and content by Form N-1A, is shown below and may be advertised by the Funds. The main purpose of standardized performance is to allow an investor to review the performance of a Fund's class of shares and compare such performance with that of investment alternatives, including other mutual funds. 66 Non-standardized performance also may be advertised by the Funds. One purpose of providing non-standardized performance to an investor is to provide that investor with a different snapshot of a Fund's performance that may not be captured by standardized performance. The non-standardized performance of a Fund's class of shares, however, may not be directly comparable to the performance of investment alternatives because of differences in certain variables (such as the length of time over which performance is shown and the exclusion of certain charges or expenses) and methods used to value portfolio securities, compute expenses and calculate performance. Non-standardized performance may include, but is not limited to, performance for non-standardized periods, including year-to-date and other periods less than a year, performance not reflecting the deduction of certain charges, fees and/or expenses, and performance reflecting the deduction of applicable state or federal taxes. After-tax returns are generally calculated using the same methodology as that used in calculating total return, except that such after-tax returns reflect the deduction of taxes according to applicable federal income and capital gain tax rates attributable to dividends, distributions and an investor's redemptions. Of course, after-tax returns for individual investors will vary as the tax rates applicable to such investors vary. In addition, the Funds may also advertise their tax efficiency ratios and compare those ratios with other mutual funds. A tax efficiency ratio is intended to let an investor know how tax efficient a fund has been over a period of time, and is typically related to its portfolio turnover rate. That is, an investor could expect that the higher a Fund's portfolio turnover rate, the greater the percentage of its gains that would have been realized and consequently, the less tax efficient it was over a given period of time. In general, comparisons to other mutual funds or investment alternatives may be useful to investors who wish to compare past performance of the Funds or a class with that of competitors. Of course, past performance cannot be a guarantee of future results. Each Fund may quote information obtained from the Investment Company Institute, national financial publications, trade journals and other industry sources in its advertising and sales literature. In addition, the Funds also may compare the performance and yield of a class or series of shares to those of other mutual funds with similar investment objectives and to other relevant indices or to rankings prepared by independent services or other financial or industry publications that monitor the performance of mutual funds. For example, the performance and yield of a class of shares in a Fund may be compared to data prepared by Lipper Analytical Services, Inc. Performance and yield data as reported in national financial publications such as Money Magazine, Forbes, Barron's, The Wall Street Journal, and The New York Times, or in publications of a local or regional nature, also may be used in comparing the performance of a class of shares in a Fund. The Funds also may use the following information in advertisements and other types of literature, only to the extent the information is appropriate for the Fund: (i) the Consumer Price Index may be used to assess the real rate of return from an investment in a Fund; (ii) other government statistics, including, but not limited to, The Survey of Current Business, may be used to illustrate investment attributes of a Fund or the general economic, business, investment, or financial environment in which a Fund operates; (iii) the effect of tax-deferred compounding on the investment returns of a Fund, or on returns in general, may be illustrated by graphs, charts, etc., where such graphs or charts would compare, at various points in time, the return from an investment in a Fund (or returns in general) on a tax-deferred basis (assuming reinvestment of capital gains and dividends and assuming one or more tax rates) with the return on a taxable basis; and (iv) the sectors or industries in which a Fund invests may be compared to relevant indices of stocks or surveys (e.g., S&P Industry Surveys) to evaluate a Fund's historical performance or current or potential value with respect to the particular industry or sector. In addition, the performance of a Fund's class of shares may be compared to the Standard & Poor's 500 Stock Index, an unmanaged index of a group of common stocks, the Consumer Price Index, the Dow Jones Industrial Average, a recognized unmanaged index of common stocks of 30 industrial companies listed on the New York Stock Exchange, the Europe, Far East and Australia Index, a recognized unmanaged index of international stocks, or any similar recognized index. The performance of a Fund's class of shares also may be compared to a composite index prepared by the Adviser, an affiliate of the Adviser, or an unaffiliated party to the Adviser. In addition, the Funds also may use, in advertisements and other types of literature, information and statements: (1) showing that bank savings accounts offer a guaranteed return of principal and a fixed rate of interest, but no opportunity for capital growth; and (2) describing Bank of America, and its affiliates and predecessors, as one of the first investment managers to advise investment accounts using asset allocation and index strategies. The Funds also may include in advertising and other types of literature information and other data from reports and studies prepared by the Tax Foundation, including information regarding federal and state tax levels and the related "Tax Freedom Day." 67 The Funds also may discuss in advertising and other types of literature that a Fund has been assigned a rating by an NRSRO, such as Standard & Poor's Corporation. Such rating would assess the creditworthiness of the investments held by the Fund. The assigned rating would not be a recommendation to purchase, sell or hold the Fund's shares since the rating would not comment on the market price of the Fund's shares or the suitability of the Fund for a particular investor. In addition, the assigned rating would be subject to change, suspension or withdrawal as a result of changes in, or unavailability of, information relating to the Fund or its investments. The Funds may compare a Fund's performance with other investments which are assigned ratings by NRSROs. Any such comparisons may be useful to investors who wish to compare the Fund's past performance with other rated investments. The Funds also may disclose in sales literature the distribution rate on the shares of a Fund. Distribution rate, which may be annualized, is the amount determined by dividing the dollar amount per share of the most recent dividend by the most recent NAV or maximum offering price per share as of a date specified in the sales literature. Distribution rate will be accompanied by the standard 30-day yield as required by the SEC. In addition, certain potential benefits of investing in world securities markets may be discussed in promotional materials. Such benefits include, but are not limited to: a) the expanded opportunities for investment in securities markets outside the U.S.; b) the growth of securities markets outside the U.S. vis-a-vis U.S. markets; c) the relative return associated with foreign securities markets vis-a-vis U.S. markets; and d) a reduced risk of portfolio volatility resulting from a diversified securities portfolio consisting of both U.S. and foreign securities. Ibbotson Data. Ibbotson Associates of Chicago, Illinois, ("Ibbotson") provides historical returns of the capital markets in the United States. The Funds may compare the performance of their share classes or series to the long-term performance of the U.S. capital markets in order to demonstrate general long-term risk versus reward investment scenarios. Performance comparisons could also include the value of a hypothetical investment in common stocks, long-term bonds or treasuries. The capital markets tracked by Ibbotson are common stocks, small capitalization stocks, long-term corporate bonds, intermediate-term government bonds, long-term government bonds, Treasury Bills, and the U.S. rate of inflation. These capital markets are based on the returns of several different indices. For common stocks, the S&P is used. For small capitalization stocks, return is based on the return achieved by Dimensional Fund Advisors (DFA) Small Company Fund. This fund is a market-value-weighted index of the ninth and tenth deciles of the Exchange, plus stocks listed on the American Stock Exchange (AMEX) and over-the-counter (OTC) with the same or less capitalization as the upperbound of the Exchange ninth docile. At year-end 199, the DFA Small Company Fund contained approximately 2,663 stocks, with a weighted average market capitalization of $16.7 million. The unweighted average market capitalization was $82.97 million, while the median was $6.0 million. Unlike an investment in a common stock mutual fund, an investment in bonds that are held to maturity provides a fixed and stated rate of return. Bonds have a senior priority in liquidation or bankruptcy to common stocks, and interest on bonds is generally paid from assets of the corporation before any distributions to common shareholders. Bonds rated in the two highest rating categories are considered high quality and to present minimal risks of default. See Schedule A for a more complete explanation of these ratings of corporate bonds. An advantage of investing in government bonds is that, in many cases, they are backed by the credit and taxing power of the United States government, and therefore, such securities may present little or no risk of default. Although government securities fluctuate in price, they are highly liquid and may be purchased and sold with relatively small transaction costs (direct purchase of Treasury securities can be made with no transaction costs). Long-term corporate bond returns are based on the performance of the Salomon Brothers Long-Term-High-Grade Corporate Bond Index and include nearly all "Aaa-" and "Aa-" rated bonds. Returns on intermediate-term government bonds are based on a one-bond portfolio constructed each year, containing a bond which is the shortest noncallable bond available with a maturity not less than 5 years. This bond is held for the calendar year and returns are recorded. Returns on long-term government bonds are based on a one-bond portfolio constructed each year, containing a bond that meets several criteria, including having a term of approximately 20 years. The bond is held for the calendar year and returns are recorded. Returns on U.S. Treasury Bills are based on a one-bill portfolio constructed each month, containing the shortest-term bill having not less than one month to maturity. The total return on the bill is the month end price divided by the previous month-end price, minus one. Data up to 1976 is from the U.S. Government Bond file at the University of Chicago's Center for Research in Security Prices; the Wall Street Journal is the source thereafter. Inflation rates are based on the CPI. Ibbotson calculates total returns in the same method as the Funds. 68 Yield Calculations Income calculated for the purposes of calculating a Fund's yield differs from income as determined for other accounting purposes. Because of the different accounting methods used, and because of the compounding assumed in yield calculations, the yield quoted for a Fund may differ from the rate of distributions a Fund paid over the same period or the rate of income reported in the Funds' financial statements. Yield is calculated separately for the Investor A, Investor C, Investor B and Primary A Shares of a Fund by dividing the net investment income per share for a particular class or series of shares (as described below) earned during a 30-day period by the maximum offering price per share on the last day of the period (for Primary A Shares, maximum offering price per share is the same as the net asset value per share) and annualizing the result on a semi-annual basis by adding one to the quotient, raising the sum to the power of six, subtracting one from the result and then doubling the difference. For a class or series of shares in a Fund, net investment income per share earned during the period is based on the average daily number of shares outstanding during the period entitled to receive dividends and includes dividends and interest earned during the period minus expenses accrued for the period, net of reimbursements. This calculation can be expressed as follows: Yield = 2 [(a-b+ 1)6 - 1] --- cd Where: a = dividends and interest earned during the period. b = expenses accrued for the period (net of reimbursements). c = the average daily number of shares outstanding during the period that were entitled to receive dividends. d = maximum offering price per share on the last day of the period (again, for Primary A and Primary B Shares, this is equivalent to net asset value per share). For the purpose of determining net investment income earned during the period (variable- "a" in the formula), dividend income on equity securities held by a Fund is recognized by accruing 1/360 of the stated dividend rate of the security each day that the security is in the portfolio. Each Fund calculates interest earned on any debt obligations held in its portfolio by computing the yield to maturity of each obligation held by it based on the market value of the obligation (including actual accrued interest) at the close of business on the last business day of each month, or, with respect to obligations purchased during the month, the purchase price (plus actual accrued interest) and dividing the result by 360 and multiplying the quotient by the market value of the obligation (including actual accrued interest) in order to determine the interest income on the obligation for each day of the subsequent month that the obligation is in the portfolio. For purposes of this calculation, it is assumed that each month contains 30 days. The maturity of an obligation with a call provision is the next call date on which the obligation reasonably may be expected to be called or, if none, the maturity date. With respect to debt obligations purchased at a discount or premium, the formula generally calls for amortization of the discount or premium. The amortization schedule will be adjusted monthly to reflect changes in the market values of such debt obligations. In the case of tax-exempt obligations that are issued with original issue discount, where the discount based on the current market value exceeds the then-remaining portion of original issue discount, the yield to maturity is the imputed rate based on the original issue discount calculation. Conversely, where the discount based on the current market value is less than the remaining portion of the original issue discount, the yield to maturity is based on the market value. 69 Expenses accrued for the period (variable "b" in the formula) include recurring fees charged by Nations Funds to shareholder accounts in proportion to the length of the base period. Undeclared earned income will be subtracted from the maximum offering price per share (which for Primary A Shares is net asset value per share) (variable "d" in the formula). Undeclared earned income is the net investment income which, at the end of the base period, has not been declared as a dividend, but is reasonably expected to be and is declared as a dividend shortly thereafter. A Fund's maximum offering price per share for purposes of the formula includes the maximum sales charge, if any, imposed by the Fund, as reflected in the Fund's prospectus. The Funds may provide additional yield calculations in communications (other than advertisements) to the holders of Investor A, Investor C or Investor B Shares. These may be calculated based on the Investor A, Investor C or Investor B Shares' net asset values per share (rather than their maximum offering prices) on the last day of the period covered by the yield computations. That is, some communications provided to the holders of Investor A, Investor C or Investor B Shares may also include additional yield calculations prepared for the holders of Primary A Shares. Such additional quotations, therefore, will not reflect the effect of the sales charges mentioned above. Thirty Day Yield For The Period Ended March 31, 2000 Tax Yield Tax Equivalent Without Equivalent Yield Without Yield Fee Waivers Yield Fee Waivers ----- ----------- ----- ----------- California Municipal Bond Fund Primary A Shares 5.03% 4.84% 9.18% 8.83% Investor A Shares 4.83% 4.59% 8.82% 8.38% Investor B Shares 4.18% 3.84% 7.63% 7.01% Investor C Shares 4.05% 3.86% 7.40% 7.05% Intermediate Bond Fund Primary A Shares 7.20% 6.95% n/a n/a Investor A Shares 7.05% 6.81% n/a n/a Investor B Shares 6.26% 6.02% n/a n/a Investor C Shares 6.14% 5.90% n/a n/a The "tax-equivalent" yield is computed by: (a) dividing the portion of the yield (calculated as above) that is exempt from Federal income tax by (b) one, minus (i) a stated Federal income tax rate and, for the Nations California Municipal Bond Fund, (ii) a state income tax rate multiplied by one minus the Stated Federal; income tax rate. The Federal income tax rate used in calculating the "tax-equivalent" yield 39.6%. Hypothetical examples showing the level of taxable yield needed to produce an after-tax equivalent to an assumed tax-free yield may be provided to shareholders. Provided is such an illustration: For Nations California Municipal Bond Fund: Single Return $25,351-$61,400 $61,401-$128,100 $128,101-$278,450 Joint Return $42,351-$102,300 $102,301-$155,950 $155,951-$278,450 To match a tax-free yield of: A taxable investment would have to pay you: 4% 6.13% 6.39% 6.89% 5% 7.66% 7.99% 8.61% 6% 9.19% 9.59% 10.34% 7% 10.72% 11.19% 12.06% 8% 12.28% 12.78% 13.78% 70 The tax-free yields used here are hypothetical and no assurance can be made that the Funds will obtain any particular yield. A fund's yield fluctuates as market conditions change. The tax brackets and the related yield calculations are based on the 1999 Federal (28%, 31%, 36%) and California (9.3%) tax rates and assume a Federal tax benefit for the state and local taxes. Note the highest 1999 marginal Federal tax rate may be higher than 36% due to the phase-out of allowable itemized deductions and personal exemptions for certain taxpayers. This schedule does not take into account the 39.6% Federal tax rate applied to taxable income in excess of $283,150. There can be no assurance that all of a yield quoted by one of these Funds will be tax-free since these Funds 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. There can be no assurance that all of a yield quoted by one of these Funds will be tax-free since these Funds 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. Thirty Day Yield ---------------- Yield Without Fee Government Securities Fund Yield Waivers -------------------------- ----- ------- Primary A Shares 6.24% 6.12% Primary B Shares n/a n/a Investor A Shares 6.00% 5.88% Investor B Shares 5.25% 5.07% Investor C Shares 5.27% 5.15% During the period for which certain yield quotations are given above, Bank of America and the Administrator voluntarily waived fees or reimbursed certain expenses of such shares, thereby increasing yield figures. Such waivers or expense reimbursements may be discontinued at any time. Total Return Calculations Total return measures both the net investment income generated by, and the effect of any realized or unrealized appreciation or depreciation of the underlying investments in a Fund. The Funds' average annual and cumulative total return figures are computed in accordance with the standardized methods prescribed by the SEC. Average annual total return figures are computed by determining the average annual compounded rates of return over the periods indicated in the advertisement, sales literature or shareholders' report that would equate the initial amount invested to the ending redeemable value, according to the following formula: P(1 + T)n = ERV Where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value at the end of the period of a hypothetical $1,000 payment made at the beginning of such period. This calculation (i) assumes all dividends and distributions are reinvested at net asset value on the appropriate reinvestment dates, and (ii) deducts (a) the maximum sales charge from the hypothetical initial $1,000 investment, and (b) all recurring fees, such as advisory and administrative fees, charged as expenses to all shareholder accounts. All performance calculations for the period ended March 31, 1999, reflect the deduction of sales charges, if any, that would have been deducted from a sale of shares. 71 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. All performance calculations for the period ended March 31, 2000, reflect the deduction of sales charges, if any, that would have been deducted from a sale of shares. Inception Through Inception Through 3/31/00 Without 3/31/00 Including Average Annual Total Returns Sales Charges Sales Charges ---------------------------- ------------- ------------- Asset Allocation Fund Primary A 15.57 15.57 Investor A 15.32 14.22 Investor B 15.09 15.09 Investor C 16.05 16.05 5 Year Period Ended One Year 3/31/00 or Inception Period Ended 3/31/00 through 3/31/00 -------------------- --------------- Government Securities Fund Primary A 1.12 5.71 Primary B -4.34 2.70 Investor A 0.80 5.44 Investor B 0.22 4.91 Investor C -0.22 4.85 72
One 10 Year Period Year Ended 3/31/00 Period 5-Year or Inception Ended Period Ending through 3/31/00 3/31/00 3/31/00 ------- ------- ------- Nations Asset Allocation Fund Investor A 10.65 17.92 15.32 Nations Asset Allocation Fund Investor B* 9.77 17.64 15.09 Nations Asset Allocation Fund Investor C 9.75 - 16.05 Nations Asset Allocation Fund Primary A** 12.18 18.24 15.57
* Performance prior to November 11, 1996 is represented by performance of the A Shares (the predecessor to Investor A Shares) of the Asset Allocation Fund. On the foregoing dates, K Shares (the predecessor to Investor C Shares) of the Fund commenced operations. K shares, unlike A shares, were sold without a front-end sales load but had a .75% distribution or administrative service fee which would have reduced performance if reflected. Aggregate or Cumulative Annual Total Return
10 Year Period 10 Year Period Ended 3/31/00 Ended 3/31/00 or Inception or Inception FYE FYE Year Period Year Period through through 3/31/00 3/31/00 Ended 3/31/00 Ended 3/31/00 3/31/00 3/31/00 Without Including Without Including Without Including Sales Sales Sales Sales Sales Sales Charges Charges Charges Charges Charges Charges ------- ------- ------- ------- ------- ------- Nations Government Securities Primary A 1.12 1.12 32.02 32.02 66.80 66.80 Nations Government Securities Primary B -4.34 -4.34 - - 10.54 10.54 Nations Government Securities Investor A 0.80 -3.97 30.31 24.10 63.18 55.42 Nations Government Securities Investor B 0.22 -3.59 27.08 26.11 29.19 29.19 Nations Government Securities Investor C -0.22 -1.17 26.72 26.72 36.18 36.18
* Primary A Shares of the Company do not carry a sales charge. Aggregate Annual Total Return
5-Year period 5-Year period Inception Inception FYE FYE ending ending through through 3/31/00 3/31/00 3/31/00 3/31/00 3/31/00 3/31/00 Without Including Without Including Without Including Sales Sales Sales Sales Sales Sales Charges Charges Charges Charges Charges Charges ------- ------- ------- ------- ------- ------- Nations Asset Allocation Fund Investor A 10.65 4.27 127.99 114.92 141.87 128.01 Nations Asset Allocation Fund Investor B* 9.77 4.77 125.27 123.27 138.98 138.98 Nations Asset Allocation Fund Investor C 9.75 8.75 - - 65.46 65.46 Nations Asset Allocation Fund Primary A** 12.18 12.18 131.16 131.16 145.22 145.22
* Performance prior to July 15, 1998 is represented by performance of the Asset Allocation Funds Investor B Shares. **Performance prior to May 21, 1999 is represented by performance of the Asset Allocation Funds Primary A Shares.
10 Year Period 10 Year Period Ended 3/31/00 Ended 3/31/00 or Inception or Inception FYE FYE 5 Year Period 5 Year Period through through 3/31/00 3/31/00 Ended 3/31/00 Ended 3/31/00 3/31/00 3/31/00 Without Including Without Including Without Including Sales Sales Sales Sales Sales Sales Charges Charges Charges Charges Charges Charges ------- ------- ------- ------- ------- ------- Nations Asset Allocation Fund Investor A 10.65 4.27 127.99 114.92 141.87 128.01 Nations Asset Allocation Fund Investor B* 9.77 4.77 125.27 123.27 138.98 138.98 Nations Asset Allocation Fund Investor C 9.75 8.75 - - 65.46 65.46 Nations Asset Allocation Fund Primary A** 12.18 12.18 131.16 131.16 145.22 145.22
73 ** Performance Prior to May 21, 1999 is represented by performance of the Asset Allocation Funds Primary A Shares. * Primary A Shares of the Trust do not carry a sales charge. MISCELLANEOUS Certain Record and Beneficial Holders The name, address and percentage of ownership of each person who is known by the Registrant to have owned of record or beneficially five percent or more of any of the Funds as of July 7, 2000 is:
Class; Amount of Shares Percentage Percentage Fund Name and Address Owned; Type of Ownership of Class of Fund ---- ---------------- ------------------------ -------- ------- Government NFSC FEBO # W79-735922 PAUL E ADAMS Investor C; 10,460.251; B 35.82 0.04 Securities Fund 2261 MEDINA AVE SIMI VALLEY CA 93063 NFSC FEBO # W78-027251 Investor C; 4,289.573; B 14.69 0.01 DAVID HAHN 2060 W 171ST ST TORRANCE CA 90504 NFSC FEBO # W80-005711 SOCIEDAD Investor C; 3,255.903; B 11.15 0.01 NACIONAL MEXICANA IGNACIO ZARAGOZA-SUPREMA ATT IGNACIO C ORNELAS 1024 HARLAN CIR SAN DIEGO CA 92114 NFSC FEBO # W75-019801 Investor C; 2,213.868; B 7.58 0.00 MEILING A WONG-BOND CUST KATHLEEN LEW UTMA CA 454 CHESAPEAKE AVE FOSTER CITY CA 94404 MERRILL LYNCH, PIERCE, FENNER Investor C; 1,577.398; B 5.40 0.00 & SMITH INC FOR THE SOLE BENEFIT OF ITS CUSTOMERS ATTENTION SERVICE TEAM 4800 DEER LAKE DRIVE EAST 3RD FLOOR JACKSONVILLE FL 32246 BANK OF AMERICA NA Primary A; 15,837,495.196; R 99.70 65.41 ATTN TONY FARRER 1401 ELM STREET, 11TH FLOOR DALLAS TX 75202-2911
74
Class; Amount of Shares Percentage Percentage Fund Name and Address Owned; Type of Ownership of Class of Fund ---- ---------------- ------------------------ -------- ------- Marsico Focused MERRILL LYNCH, PIERCE, FENNER Investor A; 34.18 10.67 Equities Fund & SMITH INC FOR THE SOLE BENEFIT 11,781,185.138; B OF ITS CUSTOMERS ATTENTION SERVICE TEAM 4800 DEER LAKE DRIVE EAST 3RD FLOOR JACKSONVILLE FL 32246 CHARLES SCHWAB & CO INC Investor A; 3,974,254.032; 11.53 3.63 SPECIAL CUSTODY ACCOUNT B FOR BENEFIT OF CUSTOMERS ATTN MUTUAL FUNDS 101 MONTGOMERY STREET SAN FRANCISCO CA 94104 MERRILL LYNCH, PIERCE, FENNER Investor B; 6,883,332.183; 14.19 6.17 & SMITH INC FOR THE SOLE BENEFIT B OF ITS CUSTOMERS ATTENTION SERVICE TEAM 4800 DEER LAKE DRIVE EAST 3RD FLOOR JACKSONVILLE FL 32246 MERRILL LYNCH, PIERCE, FENNER Investor C; 7,247,832.251; 56.85 6.53 & SMITH INC FOR THE SOLE BENEFIT B OF ITS CUSTOMERS ATTENTION SERVICE TEAM 4800 DEER LAKE DRIVE EAST 3RD FLOOR JACKSONVILLE FL 32246 BANK OF AMERICA NA Primary A; 9,623,111.578; R 50.37 8.80 ATTN TONY FARRER 1401 ELM STREET, 11TH FLOOR DALLAS TX 75202-2911 CHARLES SCHWAB & CO INC Primary A; 3,822,929.598; B 20.01 3.51 SPECIAL CUSTODY ACCOUNT FOR BENEFIT OF CUSTOMERS ATTN MUTUAL FUNDS 101 MONTGOMERY STREET SAN FRANCISCO CA 94104 BANK OF AMERICA NA TTEE Primary A; 2,866,805.953; R 15.01 1.78 NB 401K PLAN U/A DTD 01/01/1983 P O BOX 2518/TX4-213-06-14 HOUSTON TX 77252-2518 Asset Allocation SEAFIRST BANK Investor A; 8,462,555.134; 71.17 59.59 Fund FBO RETIREMENT SVCS B PO BOX 84248 SEATTLE WA 98124-5548 STATE STREET BANK & TRUST CO TTEE Investor C; 83,594.490; R 74.11 0.59 FBO COASTGEAR & COMPANY ATTN: KEVIN SMITH 105 ROSEMONT AVE WESTWOOD MA 02090 MICHAEL R MILLER P O BOX 1295 Investor C; 6,548.479; R 5.81 0.00 POMPANO BEACH FL 33061-1295 BANK OF AMERICA NA Primary A; 883,357.702; R 99.99 8.96 ATTN TONY FARRER 1401 ELM STREET, 11TH FLOOR DALLAS TX 75202-2911
75 As of August 2000, Bank of America 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. 76 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 B - Bond that are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Moody's applies numerical modifiers (1, 2 and 3) with respect to corporate bonds rated Aa through B. The modifier 1 indicates that the bond being rated ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the bond ranks in the lower end of its generic rating category. With regard to municipal bonds, those bonds in the Aa, A and Baa groups which Moody's believes possess the strongest investment attributes are designated by the symbols Aal, A1 or Baal, respectively. The following summarizes the highest four ratings used by Duff & Phelps Credit Rating Co. ("D&P") for bonds, each of which denotes that the securities are investment grade. AAA - Bonds that are rated AAA are of the highest credit quality. The risk factors are considered to be negligible, being only slightly more than for risk-free U.S. Treasury debt. AA - Bonds that are rated AA are of high credit quality. Protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. A - Bonds that are rated A have protection factors which are average but adequate. However risk factors are more variable and greater in periods of economic stress. BBB - Bonds that are rated BBB have below average protection factors but still are considered sufficient for prudent investment. Considerable variability in risk exists during economic cycles. To provide more detailed indications of credit quality, the AA, A and BBB ratings may modified by the addition of a plus or minus sign to show relative standing within these major categories. The following summarizes the highest four ratings used by Fitch Investors Service, Inc. ("Fitch") for bonds, each of which denotes that the securities are investment grade: AAA - Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA - Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated F-1+. A - Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB - Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. To provide more detailed indications of credit quality, the AA, A and BBB ratings may be modified by the addition of a plus or minus sign to show relative standing within these major rating categories. The following summarizes the two highest ratings used by Moody's for short-term municipal notes and variable-rate demand obligations: MIG-1/VMIG-1 -- Obligations bearing these designations are of the best quality, enjoying strong protection from established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing. MIG-2/VMIG-2 -- Obligations bearing these designations are of high quality, with ample margins of protection although not so large as in the preceding group. The following summarizes the two highest ratings used by S&P for short-term municipal notes: A-2 SP-1 - Indicates very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics are given a "plus" (+) designation. SP-2 - Indicates satisfactory capacity to pay principal and interest. The three highest rating categories of D&P for short-term debt, each of which denotes that the securities are investment grade, are D-1, D-2, and D-3. D&P employs three designations, D-1+, D-1 and D-1-, within the highest rating category. D-1+ indicates highest certainty of timely payment. Short-term liquidity, including internal operating factors and/or access to alternative sources of funds, is judged to be "outstanding, and safety is just below risk-free U.S. Treasury short-term obligations." D-1 indicates very high certainty of timely payment. Liquidity factors are excellent and supported by good fundamental protection factors. Risk factors are considered to be minor. D-1 indicates high certainty of timely payment. Liquidity factors are strong and supported by good fundamental protection factors. Risk factors are very small. D-2 indicates good certainty of timely payment. Liquidity factors and company fundamentals are sound. Although ongoing funding needs may enlarge total financing requirements, access to capital markets is good. Risk factors are small. D-3 indicates satisfactory liquidity and other protection factors which qualify the issue as investment grade. Risk factors are larger and subject to more variation. Nevertheless, timely payment is expected. The following summarizes the two highest rating categories used by Fitch for short-term obligations each of which denotes that the securities are investment grade: F-1+ securities possess exceptionally strong credit quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment. F-1 securities possess very strong credit quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated F-1+. F-2 securities possess good credit quality. Issues carrying this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned the F-1+ and F-1 ratings. Commercial paper rated A-1 by S&P indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted A-1+. Capacity for timely payment on commercial paper rated A-2 is satisfactory, but the relative degree of safety is not as high as for issues designated A-1. The rating Prime-1 is the highest commercial paper rating assigned by Moody's. Issuers rated Prime-1 (or related supporting institutions) are considered to have a superior capacity for repayment of senior short-term promissory obligations. Issuers rated Prime-2 (or related supporting institutions) are considered to have a strong capacity for repayment of senior short-term promissory obligations. This will normally be evidenced by many of the characteristics of issuers rated Prime-1, but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. For commercial paper, D&P uses the short-term debt ratings described above. For commercial paper, Fitch uses the short-term debt ratings described above. Thomson BankWatch, Inc. ("BankWatch") ratings are based upon a qualitative and quantitative analysis of all segments of the organization including, where applicable, holding company and operating subsidiaries. BankWatch ratings do not constitute a recommendation to buy or sell securities of any of these companies. Further, BankWatch does not suggest specific investment criteria for individual clients. BankWatch long-term ratings apply to specific issues of long-term debt and preferred stock. The long-term ratings specifically assess the likelihood of untimely payment of principal or interest over the term to maturity of the rated instrument. The following are the four investment grade ratings used by BankWatch for long-term debt: AAA - The highest category; indicates ability to repay principal and interest on a timely basis is extremely high. AA - The second highest category; indicates a very strong ability to repay principal and interest on a timely basis with limited incremental risk versus issues rated in the highest category. A-3 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 NATIONS FUNDS TRUST ONE BANK OF AMERICA PLAZA 33rd Floor Charlotte, NC 28255 1-800-626-2275 FORM N-1A PART C OTHER INFORMATION ITEM 23. Exhibits All references to the "Registration Statement" in the following list of Exhibits refer to the Registrant's Registration Statement on Form N-1A (File Nos. 333-89661; 811-09645)
---------------------- ------------------------------------------------------------------------------------- Exhibit Letter Description ---------------------- ------------------------------------------------------------------------------------- (a) Articles of Incorporation: (a)(1) Certificate of Trust dated October 22, 1999, incorporated by reference to Post-Effective Amendment No. 1, filed February 10, 2000. (a)(2) Declaration of Trust dated February 7, 2000, incorporated by reference to Post-Effective Amendment No. 1, filed February 10, 2000. ---------------------- ------------------------------------------------------------------------------------- (b) Bylaws: Not Applicable ---------------------- ------------------------------------------------------------------------------------- (c) Instruments Defining Rights of Securities Holders: Not Applicable ---------------------- ------------------------------------------------------------------------------------- (d) Investment Advisory Contracts: (d)(1) Investment Advisory Agreement between Banc of America Advisors, Inc. ("BAAI") and Nations Funds Trust ("Registrant") dated March 30, 2000, Schedule I amended July 14, 2000, filed herewith. ---------------------- -------------------------------------------------------------------------------------
C-1
---------------------- ------------------------------------------------------------------------------------- Exhibit Letter Description ---------------------- ------------------------------------------------------------------------------------- (d)(2) Investment Sub-Advisory Agreement among BAAI, Banc of America Capital Management, Inc. ("BACAP") and the Registrant dated March 30, 2000, Schedule I amended July 14, 2000, filed herewith. ---------------------- ------------------------------------------------------------------------------------- (e) Underwriting Contract: (e)(1) Distribution Agreement between the Registrant and Stephens Inc. ("Stephens") dated February 14, 2000, Schedule I dated August 1, 2000, filed herewith. ---------------------- ------------------------------------------------------------------------------------- (f) Bonus or Profit Sharing Contracts: (f)(1) Deferred Compensation Plan, incorporated by reference to Post-Effective Amendment No. 1, filed February 10, 2000. ---------------------- ------------------------------------------------------------------------------------- (g) Custodian Agreement: (g)(1) Custody Agreement between the Registrant and The Bank of New York ("BNY") dated February 14, 2000, Schedule I dated August 1, 2000, filed herewith. ---------------------- ------------------------------------------------------------------------------------- (h) Other Material Contracts: (h)(1) Co-Administration Agreement among the Registrant, Stephens and BAAI dated February 14, 2000, Schedule I dated August 1, 2000, filed herewith. (h)(2) Sub-Administration Agreement among the Registrant, BNY and BAAI dated February 14, 2000, Schedule I dated August 1, 2000, filed herewith. (h)(3) Shareholder Servicing Plan relating to Investor B Shares, Exhibit I amended August 1, 2000, filed herewith. (h)(4) Shareholder Servicing Plan relating to Investor C Shares, Exhibit I amended August 1, 2000, filed herewith. (h)(5) Transfer Agency and Services Agreement between PFPC Inc. (formerly First Data Investor Services Group, Inc.) ("PFPC") and the Nations Funds family dated June 1, 1995, Schedule G dated September 8, 2000, filed herewith. ---------------------- -------------------------------------------------------------------------------------
C-2
---------------------- ------------------------------------------------------------------------------------- Exhibit Letter Description ---------------------- ------------------------------------------------------------------------------------- (h)(6) Adoption Agreement and Amendment to Transfer Agency and Services Agreement dated February 14, 2000, incorporated by reference to Post-Effective Amendment No. 1, filed February 10, 2000. (h)(7) Amendment to Transfer Agency and Services Agreement dated January 1, 1999, incorporated by reference to Post-Effective Amendment No. 1, filed February 10, 2000. (h)(8) Sub-Transfer Agency Agreement between PFPC and Bank of America, N.A. ("Bank of America") dated September 11, 1995, Schedule A dated September 8, 2000, filed herewith. (h)(9) Cross Indemnification Agreement among Nations Fund Trust, Nations Fund, Inc., Nations Reserves, Nations Master Investment Trust and the Registrant dated February 14, 2000, incorporated by reference to Post-Effective Amendment No. 1, filed February 10, 2000. ---------------------- ------------------------------------------------------------------------------------- (i) Legal Opinion (i)(1) Opinion and Consent of Counsel, to be filed by amendment. ---------------------- ------------------------------------------------------------------------------------- (j) Other Opinions (j)(1) Consent of Independent Accountants -- PricewaterhouseCoopers LLP, to be filed by amendment. ---------------------- ------------------------------------------------------------------------------------- (k) Omitted Financial Statements Not Applicable ---------------------- ------------------------------------------------------------------------------------- (l) Initial Capital Agreements: (l)(1) Investment Letter, incorporated by reference to Post-Effective Amendment No. 1, filed February 10, 2000. ---------------------- ------------------------------------------------------------------------------------- (m) Rule 12b-1 Plans: (m)(1) Shareholder Servicing and Distribution Plan relating to Investor A Shares, Exhibit A amended August 1, 2000, filed herewith. (m)(2) Distribution Plan relating to Investor B Shares, Exhibit A amended August 1, 2000, filed herewith. ---------------------- -------------------------------------------------------------------------------------
C-3
---------------------- ------------------------------------------------------------------------------------- Exhibit Letter Description ---------------------- ------------------------------------------------------------------------------------- (m)(3) Distribution Plan relating to Investor C Shares, Exhibit A amended August 1, 2000, filed herewith. ---------------------- ------------------------------------------------------------------------------------- (n) Financial Data Schedule: Not Applicable ---------------------- ------------------------------------------------------------------------------------- (o) Rule 18f-3 Plan: (o)(1) Rule 18f-3 Multi-Class Plan, amended August 1, 2000, filed herewith. ---------------------- ------------------------------------------------------------------------------------- (p) Codes of Ethics: (p)(1) Nations Funds Family Code of Ethics, filed herewith. (p)(2) BAAI Code of Ethics, filed herewith. (p)(3) BACAP Code of Ethics, filed herewith. (p)(4) Stephens Code of Ethics, filed herewith. ---------------------- ------------------------------------------------------------------------------------- (q) Powers of Attorney for Edmund L. Benson, Charles B. Walker, A. Max Walker, Thomas S. Word, Jr., William H. Grigg, James Ermer, Thomas F. Keller, Carl E. Mundy, Jr., James B. Sommers, Cornelius J. Pings and William P. Carmichael, incorporated by reference to Post-Effective Amendment No. 2, filed May 5, 2000. ---------------------- -------------------------------------------------------------------------------------
ITEM 24. Persons Controlled by of Under Common Control with the Fund No person is controlled by or under common control with the Registrant. ITEM 25. Indemnification Article VII of the Declaration of Trust provides for the indemnification of the Registrant's trustees, officers, employees and other agents. Indemnification of the Registrant's administrators, distributor, custodian and transfer agents is provided for, respectively, in the Registrant's: 1. Co-Administration Agreement with Stephens and BAAI; 2. Sub-Administration Agreement with BNY and BAAI; 3. Distribution Agreement with Stephens; 4. Custody Agreement with BNY; C-4 5. Transfer Agency and Services Agreement with PFPC; and 6. Sub-Transfer Agency and Services Agreement with PFPC and Bank of America. The Registrant has entered into a Cross Indemnification Agreement with Nations Fund Trust (the "Trust") Nations Fund, Inc. (the "Company"), Nations Reserves ("Reserves") and Nations Master Investment Trust ("Master Trust") dated February 14, 2000. The Trust, the Company, Reserves and/or Master Trust will indemnify and hold harmless the Registrant against any losses, claims, damages or liabilities, to which the Registrant may become subject, under the Securities Act of 1933, as amended (the "1933 Act") and the Investment Company Act of 1940, as amended (the "1940 Act") or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any prospectuses, any preliminary prospectuses, the registration statements, any other prospectuses relating to the securities, or any amendments or supplements to the foregoing (hereinafter referred to collectively as the "Offering Documents"), or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Offering Documents in reliance upon and in conformity with written information furnished to the Registrant by the Trust, the Company, Reserves and/or Master Trust expressly for use therein; and will reimburse the Registrant for any legal or other expenses reasonably incurred by the Registrant in connection with investigating or defending any such action or claim; provided, however, that the Trust, the Company, Reserves and/or Master Trust shall not be liable in any such case to the extent that any such loss, claim, damage, or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Offering Documents in reliance upon and in conformity with written information furnished to the Trust, the Company, Reserves and/or Master Trust by the Registrant expressly for use in the Offering Documents. Promptly after receipt by an indemnified party above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission to so notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, to assume the defense thereof, with counsel satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. C-5 The Registrant has obtained from a major insurance carrier a trustees' and officers' liability policy covering certain types of errors and omissions. In no event will the Registrant indemnify any of its trustees, officers, employees, or agents against any liability to which such person would otherwise be subject by reason of his/her willful misfeasance, bad faith, gross negligence in the performance of his/her duties, or by reason of his/her reckless disregard of the duties involved in the conduct of his/her office or arising under his agreement with the Registrant. The Registrant will comply with Rule 484 under the 1933 Act and Release No. 11330 under the 1940 Act, in connection with any indemnification. Insofar as indemnification for liabilities arising under the 1933 Act may be permitted to trustees, officers and controlling persons of the Registrant by the Registrant pursuant to the Declaration of Trust or otherwise, the Registrant is aware that in the opinion of the Securities and Exchange Commission ("SEC") such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer or controlling person of the Registrant in the successful defense of any act, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issues. ITEM 26. Business and Other Connections of the Investment Adviser To the knowledge of the Registrant, none of the directors or officers of BAAI, the adviser to the Registrant's portfolios, or BACAP, the investment sub-adviser, except those set forth below, are or have been, at any time during the past two calendar years, engaged in any other business, profession, vocation or employment of a substantial nature, except that certain directors and officers also hold various positions with, and engage in business for, the company that owns all the outstanding stock (other than directors' qualifying shares) of BAAI or BACAP, respectively, or other subsidiaries of Bank of America Corporation. (a) BAAI performs investment advisory services for the Registrant and certain other customers. BAAI is a wholly-owned subsidiary of Bank of America, which in turn is a wholly-owned banking subsidiary of Bank of America Corporation. Information with respect to each director and officer of the investment adviser is incorporated by reference to Form ADV filed by BAAI with the SEC pursuant to the Investment Advisers Act of 1940, as amended (the "Advisers Act") (file no. 801-49874). (b) BACAP performs investment sub-advisory services for the Registrant and certain other customers. BACAP is a wholly-owned subsidiary of Bank of America Corporation. Information with respect to each director and officer of the investment sub-adviser is incorporated by reference to Form ADV filed by BACAP (formerly C-6 TradeStreet Investment Associates, Inc.) with the SEC pursuant to the Advisers Act (file no. 801-50372). ITEM 27. Principal Underwriters (a) Stephens, distributor for the Registrant, does not presently act as investment adviser for any other registered investment companies, but does act as distributor for Nations Fund Trust, Nations Fund, Inc., Nations Reserves, Nations LifeGoal Funds, Inc., Nations Annuity Trust, Wells Fargo Funds Trust, Wells Fargo Variable Trust, Barclays Global Investors Funds, Inc., and is the exclusive placement agent for Wells Fargo Core Trust, Nations Master Investment Trust and Master Investment Portfolio, all of which are registered open-end management investment companies, and has acted as principal underwriter for the Liberty Term Trust, Inc., Nations Government Income Term Trust 2003, Inc., Nations Government Income Term Trust 2004, Inc., Nations Balanced Target Maturity Fund, Inc., and Hatteras Income Securities, Inc., closed-end management investment companies. (b) Information with respect to each director and officer of the principal underwriter is incorporated by reference to Form ADV filed by Stephens with the SEC pursuant to the 1940 Act (file No. 501-15510). (c) Not applicable. ITEM 28. Location of Accounts and Records (1) BAAI, One Bank of America Plaza, Charlotte, NC 28255 (records relating to its function as investment adviser and co-administrator). (2) BACAP, One Bank of America Plaza, Charlotte, NC 28255 (records relating to its function as investment sub-advisor). (3) Stephens, 111 Center Street, Little Rock, AR 72201 (records relating to its function as distributor and co-administrator). (4) PFPC, 400 Bellevue Parkway, Wilmington, DE 19809 (records relating to its function as transfer agent). (5) BNY, 100 Church Street, New York, NY 10286 (records relating to its function as custodian and sub-administrator). (6) Bank of America, One Bank of America Plaza, Charlotte, NC 28255 (records relating to its function as sub-transfer agent). ITEM 29. Management Services Not Applicable C-7 ITEM 30. Undertakings Not Applicable C-8 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 13th day of October, 2000. NATIONS FUNDS TRUST By: * -------------------------------------------- A. Max Walker President and Chairman of the Board of Trustees By: /s/ Richard H. Blank, Jr. -------------------------------------------- Richard H. Blank, Jr. *Attorney-in-Fact Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment to the Registration Statement has been signed below by the following persons in the capacities and on the date indicated:
SIGNATURES TITLE DATE ---------- ----- ---- * President and Chairman October 13, 2000 --------------------------------------- of the Board of Trustees (A. Max Walker) (Principal Executive Officer) /s/ Richard H. Blank, Jr. Treasurer and Secretary October 13, 2000 ---------------------------------------- (Principal Financial and (Richard H. Blank, Jr.) Accounting Officer) * Trustee October 13, 2000 ---------------------------------------- (Edmund L. Benson, III) * Trustee October 13, 2000 ---------------------------------------- (William P. Carmichael) * Trustee October 13, 2000 ---------------------------------------- (James Ermer) * Trustee October 13, 2000 ---------------------------------------- (William H. Grigg) * Trustee October 13, 2000 ---------------------------------------- (Thomas F. Keller) * Trustee October 13, 2000 ---------------------------------------- (Carl E. Mundy, Jr.) * Trustee October 13, 2000 ---------------------------------------- (Cornelius J. Pings)
SIGNATURES TITLE DATE ---------- ----- ---- * Trustee October 13, 2000 ---------------------------------------- (Charles B. Walker) * Trustee October 13, 2000 ---------------------------------------- (Thomas S. Word) * Trustee October 13, 2000 ---------------------------------------- (James B. Sommers) /s/ Richard H. Blank, Jr. ------------------------- Richard H. Blank, Jr. *Attorney-in-Fact
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 13th day of October, 2000. NATIONS MASTER INVESTMENT TRUST By: * ----------------------------------------- A. Max Walker President and Chairman of the Board of Trustees By: /s/ Richard H. Blank, Jr. ----------------------------------------- Richard H. Blank, Jr. *Attorney-in-Fact Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment to the Registration Statement has been signed below by the following persons in the capacities and on the date indicated:
SIGNATURES TITLE DATE ---------- ----- ---- * President and Chairman October 13, 2000 ---------------------------------- of the Board of Trustees (A. Max Walker) (Principal Executive Officer) /s/ Richard H. Blank, Jr. Treasurer and Secretary October 13, 2000 ---------------------------------- (Principal Financial and (Richard H. Blank, Jr.) Accounting Officer) * Trustee October 13, 2000 ---------------------------------- (Edmund L. Benson, III) * Trustee October 13, 2000 ---------------------------------- (William P. Carmichael) * Trustee October 13, 2000 ---------------------------------- (James Ermer) * Trustee October 13, 2000 ---------------------------------- (William H. Grigg) * Trustee October 13, 2000 ---------------------------------- (Thomas F. Keller) * Trustee October 13, 2000 ---------------------------------- (Carl E. Mundy, Jr.) * Trustee October 13, 2000 ---------------------------------- (Cornelius J. Pings) * Trustee October 13, 2000 ---------------------------------- (Charles B. Walker) * Trustee October 13, 2000 ---------------------------------- (Thomas S. Word) * Trustee October 13, 2000 ---------------------------------- James B. Sommers /s/ Richard H. Blank, Jr. ------------------------- Richard H. Blank, Jr. *Attorney-in-Fact
Nations Funds Trust Exhibit Index Exhibit No. Description ----------- ----------- EX-99.23d(1) Investment Advisory Agreement with BAAI EX-99.23d(2) Sub-Advisory Agreement with BAAI and BACAP EX-99.23g(1) Custody Agreement with The Bank of New York EX-99.23h(1) Co-Administration Agreement with Stephens and BAAI EX-99.23h(2) Sub-Administration Agreement with BNY and BAAI EX-99.23h(3) Shareholder Servicing Plan relating to Investor B Shares EX-99.23h(4) Shareholder Servicing Plan relating to Investor C Shares EX-99.23h(5) Transfer Agency and Services Agreement between PFPC Inc. and the Nations Fund Family EX-99.23h(8) Sub-Transfer Agency Agreement between PFPC and Bank of America EX-99.23m(1) Shareholder Servicing and Distribution Plan relating to Investor A Shares EX-99.23m(2) Distribution Plan relating to Investor B Shares EX-99.23m(3) Distribution Plan relating to Investor C Shares EX-99.23o(1) Rule 18f-3 Multi-Class Plan EX-99.23p(1) Nations Funds Family Code of Ethics EX-99.23p(2) BAAI Code of Ethics EX-99.23p(3) BACAP Code of Ethics EX-99.23p(4) Stephens Code of Ethics