-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MAgXi/IlPkMnrIs4ivz+5YDQPNeqemmanm9l2tVYthidY46XycWyBOslCAFTE5Pe B/ZYqpkOsqG5xK34BbV9aw== 0000950168-99-002673.txt : 19991026 0000950168-99-002673.hdr.sgml : 19991026 ACCESSION NUMBER: 0000950168-99-002673 CONFORMED SUBMISSION TYPE: N-1A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19991025 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONS FUNDS TRUST CENTRAL INDEX KEY: 0001097519 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: N-1A SEC ACT: SEC FILE NUMBER: 333-89661 FILM NUMBER: 99733316 FILING VALUES: FORM TYPE: N-1A SEC ACT: SEC FILE NUMBER: 811-09645 FILM NUMBER: 99733317 BUSINESS ADDRESS: STREET 1: ONE BANK OF AMERICA PLAZA CITY: CHARLOTTE STATE: NC ZIP: 28255 BUSINESS PHONE: 8003217854 MAIL ADDRESS: STREET 1: ONE BANKOF AMERICA PLAZA CITY: CHARLOTTE STATE: NC ZIP: 28255 N-1A 1 N-1A REGISTRATION STATEMENT As filed with the Securities and Exchange Commission on October 25, 1999 Registration No. 333- ; 811-09645 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] Post-Effective Amendment No. [ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] Amendment No. [ ] (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 expected that the securities will be sold to the public as soon as possible after the registration statement is effective. The Registrant hereby elects to register an indefinite number of shares of its Common Stock, $0.001 par value, under the Securities Act of 1933, pursuant to Rule 24F-2(a)(1) under the Investment Company Act of 1940, as amended. The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. [GRAPHIC HERE] Index, Fixed Income and State Municipal Bond Funds Prospectus -- Primary A Shares January , 2000 Index Fund Nations MidCap Index Fund Fixed Income Fund Nations High Yield Fund State Municipal Bond Fund Nations Kansas Intermediate Municipal Bond Fund The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE [NATIONS FUNDS LOGO APPEARS HERE] An overview of the Funds - -------------------------------------------------------------------------------- [GRAPHIC] Terms used in this prospectus In this prospectus, we, us and our refer to the Nations Funds Family (Nations Funds). Some other important terms we've used may be new to you. These are printed in italics where they first appear in a section and are described in Terms used in this prospectus. [GRAPHIC] You'll find Terms used in this prospectus on page 167. Your investment in these Funds is not a bank deposit and is not insured or guaranteed by Bank of America, N. A. (Bank of America), the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Your investment may lose money. Affiliates of Bank of America are paid for the services they provide to the Funds. This booklet, which is called a prospectus, tells you about three groups of Nations Funds -- our Index, Fixed Income and State Municipal Bond Funds. Please read it carefully, because it contains information that's designed to help you make informed investment decisions. About the Funds Each group of Funds has a different investment focus: o Index Funds are intended to match the industry and risk characteristics of a specific stock market index, like the S&P 500, by investing primarily in equity securities that are included in the index o Fixed Income Funds focus on the potential to earn income by investing primarily in fixed income securities o State Municipal Bond Funds focus on the potential to earn income that is free from federal and state income tax by investing primarily in municipal securities. The Funds also have different risk/return characteristics because they invest in different kinds of securities. Fixed income securities and municipal securities have the potential to increase in value because when interest rates fall, the value of these securities tends to rise. When interest rates rise, however, the value of these securities tends to fall. Other things can also affect the value of fixed income securities. Because State Municipal Bond Funds invest primarily in securities issued by one state, the Fund is considered to be non-diversified. This means the value of a Fund and the amount of interest it pays could also be affected by the financial conditions of the state, its public authorities and local governments. In every case, there's a risk that you'll lose money or you may not earn as much as you expect. Choosing the right Funds for you Not every Fund is right for every investor. When you're choosing a Fund to invest in, you should consider things like your investment goals, how much risk you can accept and how long you're planning to hold your investment. The Index Fund focuses on long-term growth. It may be suitable for you if: o you have longer-term investment goals o 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 It may not be suitable for you if: o you're not prepared to accept or are unable to bear the risks associated with equity securities, including foreign securities o you have short-term investment goals o you're looking for a regular stream of income The Fixed Income Fund focuses on the potential to earn income. It may be suitable for you if: o you're looking for income o you have longer-term investment goals It may not be suitable for you if: o you're not prepared to accept or are unable to bear the risks associated with fixed income securities The State Municipal Bond Fund may be suitable for you if: o you're looking for income o you want to reduce taxes on your investment o you have longer-term investment goals It may not be suitable for you if: o you're not prepared to accept or are unable to bear the risks associated with fixed income securities You'll find a discussion of each Fund's principal investments, strategies and risks in the Fund descriptions that start on page 7. 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 . [GRAPHIC] About the Funds Index Fund Nations MidCap Index Fund 5 Sub-adviser: TradeStreet Investment Associates, Inc. - ---------------------------------------------------------------------- Fixed Income Fund Nations High Yield Fund 8 Sub-adviser: - ---------------------------------------------------------------------- State Municipal Bond Fund Nations Kansas Intermediate Municipal Bond Fund 11 Sub-adviser: TradeStreet Investment Associates, Inc. - ---------------------------------------------------------------------- Other important information 14 - ---------------------------------------------------------------------- How the Funds are managed 16 [GRAPHIC] About your investment Information for investors Buying, selling and exchanging shares 18 Distributions and taxes 21 - ---------------------------------------------------------------------- Terms used in this prospectus 23 - ---------------------------------------------------------------------- Where to find more information back cover
4 About the Index Fund - -------------------------------------------------------------------------------- [GRAPHIC] About the sub-adviser TradeStreet is this Fund's sub-adviser. TradeStreet's Structured Products Management Team makes the day-to-day investment decisions for the Fund. [GRAPHIC] You'll find more about TradeStreet on page 24. [GRAPHIC] What is an index fund? Index funds use a "passive" or "indexing" investment approach, which attempts to duplicate the performance of a specific market index. Correlation measures how closely a fund's returns match those of an index. A perfect correlation of 1.0 means that the net asset value of the fund increases or decreases in exact proportion to changes in the index. Nations MidCap Index Fund [GRAPHIC] Investment objective This Fund seeks investment results that (before fees and expenses) correspond to the total return of the Standard & Poor's MidCap 400 Stock Price Index (S&P 400). [GRAPHIC] Principal investment strategies The Fund normally invests at least 80% of its assets in common stocks that are included in the S&P 400. The S&P 400 is an unmanaged index of 400 domestic common stocks chosen for their market size, liquidity and industry representation. The index is weighted by market value, and is not available for investment. The Fund may buy stock index futures and other financial futures as substitutes for the underlying securities in the S&P 400. The Fund may also invest in securities that aren't part of its principal investment strategies, but it won't hold more than 10% of its assets in any one type of these securities. These securities are described in the SAI. Different common stocks have different weightings in the S&P 400, depending on the amount of stock outstanding and the stock's current price. In trying to match the performance of the S&P 400, the management team will try to allocate the Fund's portfolio among common stocks in approximately the same weightings as the S&P 400, beginning with the most heavily weighted stocks that make up a larger portion of the value of the S&P 400. The team generally will try to match the composition of the S&P 400 as closely as possible. The team starts with the stocks that make up a larger portion of the value of the S&P 400. It may not always invest in stocks that make up the smaller percentages because it may be more difficult and costly to make relatively small transactions. The team may remove a stock from the Fund's holdings or not invest in a stock if it believes that the stock is not liquid enough, or for other reasons. The team can substitute stocks that are not included in the S&P 400, if it believes these stocks have similar characteristics. The Fund tries to achieve a correlation of at least 0.95 with the return of the S&P 400 on an annual basis (before fees and expenses). The Fund's ability to track the S&P 400 is affected by transaction costs and other expenses, changes in the composition of the S&P 400, changes in the number of shares issued by the companies represented in the S&P 400, and by the timing and amount of shareholder purchases and redemptions, among other things. 5 [GRAPHIC] You'll find more about other risks of investing in this Fund starting on page 22 and in the SAI. Equity mutual funds, like other investors in equity securities, incur transaction costs, such as brokerage costs, when they buy and sell securities. The management team tries to minimize these costs for the Fund by using program trades and crossing networks. The team may sell a stock when its percentage weighting in the index is reduced, when the stock is removed from the index, or for other reasons. [GRAPHIC] Risks and other things to consider Nations MidCap Index Fund has the following risks: o Investment strategy risk - This Fund tries to match (before fees and expenses) the returns of the S&P 400, and is not actively managed. There is no assurance that the returns of the Fund will match the returns of the S&P 400. The value of the Fund will rise and fall with the performance of the S&P 400. o Stock market risk - The value of the stocks the Fund holds can be affected by changes in U.S. or foreign economies and financial markets, and the companies that issue the stocks, among other things. Stock prices can rise or fall over short as well as long periods. In general, stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. As of the date of this prospectus, the stock markets, as measured by the S&P 500 and other commonly used indices, were trading at or close to record levels. There can be no guarantee that these levels will continue. o Futures risk - This Fund may use futures contracts as a substitute for the securities included in the index. There is a risk that this could result in losses, reduce returns, increase transaction costs or increase the Fund's volatility. [GRAPHIC] There are two kinds of fees -- sales charges you pay directly, and annual fund operating expenses that are deducted from a fund's assets. Total net expenses are actual expenses paid by the Fund after waivers and/or reimbursements. [GRAPHIC] WHAT IT COSTS TO INVEST IN THE FUND This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
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 Fund operating expenses (Expenses that are deducted from the Fund's assets) Management fees 0.40% Other expenses 0.33% ------ Total annual Fund operating expenses 0.73% Fee waivers and/or reimbursements (0.38)% ------ Total net expenses(1) 0.35% ======
(1)The Fund's investment adviser and/or some of its other service providers have agreed to waive fees and/or reimburse expenses until July 31, 2000. The figure shown here is after waivers and/or reimbursements. There is no guarantee that these waivers and/or reimbursements will continue after this date. 6 [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, 2000] and are not reflected in the 3, 5 and 10 year examples Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 year 3 years 5 years 10 years Primary A Shares $36 $195 $368 $871
7 About the Fixed Income Fund - -------------------------------------------------------------------------------- [GRAPHIC] About the sub-adviser [Insert sub-adviser's name] is this Fund's sub-adviser. [Insert portfolio management team name] makes the day-to-day investment decisions for the Fund. [GRAPHIC] You'll find more about [name of sub-adviser] and [name of portfolio management team] on page [insert number]. [GRAPHIC] High yield debt securities This Fund invests primarily in high yield debt securities. High yield debt securities offer the potential for higher income than other kinds of debt securities with similar maturities, but they also have higher credit risk. Nations High Yield Fund [GRAPHIC] Investment Objective This Fund seeks maximum income by investing in a diversified portfolio of high-yield debt securities. [GRAPHIC] Principal Investment Strategies The Fund normally invests at least 65% of its assets in domestic and foreign corporate high-yield debt securities. The Fund invests primarily in: o Domestic corporate debt securities o U.S. dollar-denominated foreign corporate debt securities o Zero-coupon bonds o U.S. government obligations o Equity securities (up to 25% of its assets) The Fund also may invest in securities that aren't part of its principal investment strategies, but it won't hold more than 10% of its assets in any one type of these securities. These securities are described in the SAI. When selecting individual investments, the portfolio management team: o Uses a "bottom-up," total return approach with respect to an issuer o Emphasizes current income while attempting to minimize risk to principal o Seeks to identify a catalyst for capital appreciation o Selects securities using fundamental credit analysis o tries to manage risk by diversifying the Fund's investments across securities of many different issuers o is attentive to current developments and trends in both the economy and financial markets The portfolio management team may sell a security when its market price rises above the target price the team has set, when it believes there has been a deterioration in an issuer's fundamentals or an issue's credit quality, or for diversification or other reasons. 8 [GRAPHIC] Risks and other things to consider Nations High Yield Fund has the following risks: o Investment strategy risk - There is a risk that the value of the investments that the portfolio management team chooses will not rise as high as the team expects, or will fall. o Credit risk - The types of securities in which the Fund typically invests are generally considered speculative because they present a greater risk of loss, including default, than higher quality debt securities. These securities typically pay a premium -- a high interest rate or yield -- because of the increased risk of loss. These securities also can be subject to greater price volatility. o Interest rate risk - The prices of fixed income securities will tend to fall when interest rates rise. In general, fixed income securities with longer terms tend to fall more in value when interest rates rise than fixed income securities with shorter terms. o Derivatives risk - This Fund may invest in derivatives. There is a risk that these investments could result in losses, reduce returns, increase transaction costs or increase the Fund's volatility. [GRAPHIC] There are two kinds of fees -- sales charges you pay directly, and annual fund operating expenses that are deducted from a fund's assets. Total net expenses are actual expenses paid by the Fund after waivers and/or reimbursements. [GRAPHIC] What it costs to invest in the fund This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
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 (Expenses that are deducted from the Fund's assets) Management fees 0.65% Other expenses 0.38% ------ Total annual Fund operating expenses 1.03% Fee waivers and/or reimbursements 0.00% ------ Total net expenses(2) 1.03% ======
(2)The Fund's investment adviser and/or some of its other service providers have agreed to limit total annual operating expenses to 0.72% for Primary A Shares until May 2000. The figure shown here is after waivers and/or reimbursements. There is no guarantee that these waivers and/or reimbursements will continue after this date. 9 [GRAPHIC] This is an example only. Your actual costs could be higher or lower, depending on the amount you invest, and on the Fund's actual expenses and performance. Example This example is intended to help you compare the cost of investing in this Fund with the cost of investing in other mutual funds. This example assumes: o you invest $10,000 in Primary A Shares of the Fund for the time periods indicated and then sell all of your shares at the end of those periods o you reinvest all dividends and distributions in the Fund o your investment has a 5% return each year o the Fund's operating expenses remain the same as shown in the table above o the waivers and/or reimbursements included in above expire May 2000 and are not reflected in the 3, 5 and 10 year examples Although your actual costs may be higher or lower, based on these assumptions, your costs would be:
1 year 3 years 5 years 10 years Primary A Shares $107 $328 $569 $1,259
10 About the State Municipal Bond Fund - -------------------------------------------------------------------------------- [GRAPHIC] About the sub-adviser TradeStreet is this Fund's sub-adviser. TradeStreet's Municipal Fixed Income Management Team makes the day-to-day investment decisions for the Fund. [GRAPHIC] You'll find more about TradeStreet on page 60. [GRAPHIC] This Fund at a glance o Who should consider investing: Residents of Kansas o Duration: 3 to 8 years o Income potential: Moderate o Risk potential: Moderate [GRAPHIC] Duration Duration is a measure used to estimate how much a Fund's portfolio will fluctuate in response to a change in interest rates. Nations Kansas Intermediate Municipal Bond Fund [GRAPHIC] Investment objective This Fund seeks high current income exempt from federal and Kansas state income taxes consistent with moderate fluctuation of principal. [GRAPHIC] Principal investment strategies This Fund normally invests at least 80% of its assets in investment grade intermediate-term municipal securities that pay interest that is free from federal income tax and Kansas state income tax. The Fund may invest up to 20% of its assets in debt securities that are taxable, including securities that are subject to the federal alternative minimum tax. The Fund may also invest in securities that aren't part of its principal investment strategies, but it won't hold more than 10% of its assets in any one type of these securities. These securities are described in the SAI. Normally, the Fund's average dollar-weighted maturity will be between three and 10 years, and its duration will be between three and 8 years. When selecting individual investments, the portfolio management team: o looks at a security's potential to generate both income and price appreciation o allocates assets among revenue bonds, general obligation bonds, insured bonds and pre-refunded bonds (bonds that are repaid before their maturity date), based on how they have performed in the past, and on how they are expected to perform under current market conditions. The team may change the allocations when market conditions change o selects securities using credit and structure analysis. Credit analysis evaluates the creditworthiness of individual issuers. The team may invest in securities with lower credit ratings if it believes that the potential for a higher yield is substantial compared with the risk involved, and that the credit quality is stable or improving. Structure analysis evaluates the characteristics of a security, including its call features, coupons, and expected timing of cash flows The team also considers other factors. It reviews public policy issues that may affect the municipal bond market. Securities with different coupon rates may also represent good investment opportunities based on supply and demand conditions for bonds o tries to maintain a duration that is similar to the duration of the Fund's benchmark. This can help manage interest rate risk The team may sell a security when it believes the security is overvalued, there is a deterioration in the security's credit rating or in the issuer's financial situation, when other investments are more attractive, or for other reasons. 11 [GRAPHIC] You'll find more about other risks of investing in this Fund starting on page 57 and in the SAI. [GRAPHIC] Risks and other things to consider Nations Kansas Intermediate Municipal Bond Fund has the following risks: o Investment strategy risk - This Fund is considered to be non-diversified because it invests most of its assets in securities that pay interest that is free from income tax in one state. The value of the Fund and the amount of interest it pays could also be affected by the financial conditions of the state, its public authorities and local governments. Although the Fund tries to maintain a share price of $1.00, an investment in the Fund could lose money. An investment in this Fund is not a bank deposit and is not insured or guaranteed by Bank of America, the FDIC or any other government agency. o Interest rate risk - The prices of fixed income securities will tend to fall when interest rates rise. In general, fixed income securities with longer terms tend to fall more in value when interest rates rise than fixed income securities with shorter terms. o Credit risk - The Fund could lose money if the issuer of a fixed income security is unable to pay interest or repay principal when it's due. Credit risk usually applies to most fixed income securities, but is generally not a factor for U.S. government obligations. o Changing distribution levels - The level of monthly income distributions paid by the Fund depends on the amount of income paid by the securities the Fund holds. It is not guaranteed and will change. Changes in the value of the securities, however, generally should not affect the amount of income they pay. o Holding cash - The Fund may hold cash while it's waiting to make an investment, as a temporary defensive strategy, or if the portfolio management team believes that attractive tax-exempt investments are not available. Any uninvested cash the Fund holds does not earn income. o Tax considerations - Most of the distributions paid by the Fund come from interest on municipal securities, and are generally free from federal income tax and Kansas state income tax, but may be subject to the federal alternative minimum tax, and other state and local taxes. Any portion of a distribution that comes from income paid by other kinds of securities or from realized capital gains is generally subject to federal, state and local taxes. 12 [GRAPHIC] There are two kinds of fees -- sales charges you pay directly, and annual fund operating expenses that are deducted from a fund's assets. Total net expenses are actual expenses paid by the Fund after waivers and/or reimbursements. [GRAPHIC] What it costs to invest in the fund This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
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 (Expenses that are deducted from the Fund's assets) Management fees 0.40% Other expenses 0.22% ------ Total annual Fund operating expenses 0.78% Fee waivers and/or reimbursements (0.28)% ------ Total net expenses(1) 0.50% ======
(1)The Fund's investment adviser and/or some of its other service providers have agreed to waive fees and/or reimburse expenses until July 31, 2000. The figure shown here is after waivers and/or reimbursements. There is no guarantee that these waivers and/or reimbursements will continue after this date. [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, 2000 and are not reflected in the 3, 5 and 10 year examples Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 year 3 years 5 years 10 years Primary A Shares $51 $217 $397 $918
13 [GRAPHIC] Other important information You'll find specific information about each Fund's principal investments, strategies and risks in the descriptions starting on page 7. The following are some other risks and information you should consider before you invest: o Changing investment objectives and policies - The investment objective and certain investment policies of any Fund can be changed without shareholder approval. Other investment policies may be changed only with shareholder approval. o Changing to a feeder fund - Unlike traditional mutual funds, which invest in individual securities, a "feeder fund" invests all of its assets in another fund, called a "master portfolio." Other feeder funds generally also invest in a master portfolio. The master portfolio invests in individual securities and has the same investment objective, investment strategies and principal risks as the feeder funds. This structure can help reduce a feeder fund's expenses because its assets are combined with those of other feeder funds. If a master portfolio doesn't attract other feeder funds, however, a feeder fund's expenses could be higher than those of a traditional mutual fund. A Fund may become a feeder fund if the Board of Trustees decides this would be in the best interests of shareholders. We don't require shareholder approval to make the change, but we'll notify you if it happens. o Holding other kinds of investments - The Funds may hold investments that aren't part of their principal investment strategies. Please refer to the SAI for more information. The portfolio managers or management team can also choose not to invest in specific securities described in this prospectus and in the SAI. o Foreign investment risk - Funds that invest in foreign securities may be affected by changes in currency exchange rates and the costs of converting currencies; the implementation of the Euro; foreign government controls on foreign investment, repatriation of capital, and currency and exchange; foreign taxes; inadequate supervision and regulation of some foreign markets; difficulty selling some investments which may increase volatility; different settlement practices or delayed settlements in some markets; difficulty getting complete or accurate information about foreign companies; less strict accounting, auditing and financial reporting standards than those in the U.S.; political, economic or social instability; and difficulty enforcing legal rights outside the U.S. o Emerging markets risk - Securities issued by companies in developing or emerging market countries, like those in Eastern Europe, the Middle East, Asia or Africa, may be more sensitive to the risks of foreign investing. In particular, these countries may experience instability resulting from rapid social, political and economic development. Many of these countries are dependent on international trade, which makes them sensitive to world commodity prices and economic downturns in other countries. Some emerging countries have a higher risk of currency devaluation, and some countries may experience long periods of high inflation or rapid changes in inflation rates. 14 o Investing defensively - A Fund may temporarily hold investments that are not part of its investment objective or its principal investment strategies to try to protect it during a market or economic downturn or because of political or other conditions. A Fund may not achieve its investment objective while it is investing defensively. o Portfolio turnover - A Fund that replaces -- or turns over -- more than 100% of its investments in a year is considered to trade frequently. Frequent trading can result in larger distributions of short-term capital gains to shareholders. These gains are taxable at higher rates than long-term capital gains. Frequent trading can also mean higher brokerage and other transaction costs, which could reduce the Fund's returns. The Funds generally buy securities for capital appreciation, investment income, or both, and don't engage in short-term trading. The annual portfolio turnover rate for Nations Strategic Equity Fund and the Managed Index Funds is expected to be no more than 25%. You'll find the portfolio turnover rate for each Fund in Financial highlights. 15 [GRAPHIC] How the Funds are managed [GRAPHIC] Banc of America Advisors, Inc. One Bank of America Plaza Charlotte, North Carolina 28255 Investment adviser BAAI is the investment adviser to over 60 mutual fund portfolios in the Nations Funds family, including the Funds described in this prospectus. BAAI is a registered investment adviser. It's a wholly-owned subsidiary of Bank of America, which is owned by Bank of America Corporation. Nations Funds pay BAAI an annual fee for its investment advisory services. The fee is calculated daily based on the average net assets of each Fund and is paid monthly. BAAI uses part of this money to pay investment sub-advisers for the services they provide to each Fund. BAAI has agreed to waive fees and/or reimburse expenses for certain Funds until May 2000 or July 31, 2000. You'll find a discussion of any waiver and/or reimbursement in the Fund descriptions. There is no assurance that BAAI will continue to waive and/or reimburse any fees and/or expenses after these dates. The following chart shows the maximum advisory fees BAAI can receive, 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 advisory fee(1) Nations MidCap Index Fund 0.40% Nations High Yield Fund 0.65% Nations Kansas Intermediate Bond Fund 0.40%
(1)These fees are the current contract levels, which in most cases have been reduced from the contract levels that were in effect during the last fiscal year. 16 Investment sub-advisers Nations Funds and BAAI have engaged investment sub-advisers to provide day-to-day portfolio management for the Funds. These sub-advisers function under the supervision of BAAI and the Boards of Directors/Trustees of Nations Funds. [GRAPHIC] TradeStreet Investment Associates, Inc. One Bank of America Plaza Charlotte, North Carolina 28255 TradeStreet Investment Associates, Inc. TradeStreet is a registered investment adviser and a wholly-owned subsidiary of Bank of America. Its management expertise covers all major domestic asset classes, including equity and fixed income securities, and money market instruments. Currently managing more than $90 billion, TradeStreet has over 200 institutional clients and is sub-adviser to more than 50 mutual funds in the Nations Funds family. TradeStreet takes a team approach to investment management. Each team has access to the latest technology and analytical resources. TradeStreet is the investment sub-adviser to the Funds shown in the table below. The table also tells you which internal TradeStreet asset management team is responsible for making the day-to-day investment decisions for each Fund.
Fund TradeStreet Team Nations MidCap Index Fund Structured Products Management Team Nations Kansas Intermediate Municipal Fixed Income Management Municipal Bond Fund Team
[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 Equity Funds 0.23% Fixed Income Funds 0.22% State Municipal Bond Funds 0.22%
[GRAPHIC] First Data Investor Services Group, Inc. 101 Federal Street Boston, Massachusetts 02110 First Data Investor Services Group, Inc. (First Data) is the transfer agent for the Funds' shares. Its responsibilities include processing purchases, sales and exchanges, calculating and paying distributions, keeping shareholder records, preparing account statements and providing customer service. 17 About your investment - -------------------------------------------------------------------------------- [GRAPHIC] When you sell shares of a mutual fund, the fund is effectively "buying" them back from you. This is called a redemption. [GRAPHIC] A business day is any day that the New York Stock Exchange (NYSE) is open. A business day ends at the close of regular trading on the NYSE, usually at 4:00 p.m. Eastern time. If the NYSE closes early, the business day ends as of the time the NYSE closes. The NYSE is closed on weekends and on the following national holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. [GRAPHIC] Buying, selling and exchanging shares This prospectus offers Primary A Shares of the Funds. Here are some general rules about this class of shares: o Primary A Shares are available to certain financial institutions and intermediaries for their own accounts, and for certain client accounts for which they act as a fiduciary, agent or custodian. These include: o Bank of America and certain of its affiliates o certain other financial institutions and intermediaries, including financial planners and investment advisers o institutional investors o charitable foundations o endowments o other Funds in Nations Funds Family o The minimum initial investment is $250,000. Financial institutions or intermediaries can total the investments they make on behalf of their clients to meet the minimum initial investment amount. o There is no minimum amount for additional investments. o There are no sales charges for buying, selling or exchanging these shares. You'll find more information about buying, selling and exchanging Primary A Shares on the pages that follow. You should also ask your financial institution or intermediary about its limits, fees and policies for buying, selling and exchanging shares, which may be different from those described here, and about its related programs or services. The Funds also offer other classes of shares, with different features and expense levels, which you may be eligible to buy. Please contact your investment professional, or call us at 1.800.765.2668 if you have any questions or you need help placing an order. How shares are priced All transactions are based on the price of a Fund's shares -- or its net asset value per share. We calculate net asset value per share for each class of each Fund at the end of each business day. First, we calculate the net asset value for each class of a Fund by determining the value of the Fund's assets in the class and then subtracting its liabilities. Next, we divide this amount by the number of shares that investors are holding in the class. 18 Valuing securities in a Fund The value of a Fund's assets is based on the total market value of all of the securities it holds. The prices reported on stock exchanges and securities markets around the world are usually used to value securities in a Fund. If prices aren't readily available, we'll base the price of a security on its fair market value. We use the amortized cost method, which approximates market value, to value short-term investments maturing in 60 days or less. International markets may be open on days when U.S. markets are closed. The value of foreign securities owned by a Fund could change on days when Fund shares may not be bought or sold. How orders are processed Orders to buy, sell or exchange shares are processed on business days. Orders received by Stephens, First Data or their agents before the end of a business day (usually 4:00 p.m. Eastern time, unless the NYSE closes early) will receive that day's net asset value per share. Orders received after the end of a business day will receive the next business day's net asset value per share. The business day that applies to your order is also called the trade date. We may refuse any order to buy or exchange shares. If this happens, we'll return any money we've received. [GRAPHIC] Buying shares Here are some general rules for buying shares: o Investors buy Primary A Shares at net asset value per share. o If we don't receive payment within three business days of receiving an order, we'll refuse the order. We'll return any payment received for orders that we refuse. o Financial institutions and intermediaries are responsible for sending us orders for their clients and for ensuring that we receive payment on time. o Shares purchased are recorded on the books of the Fund. We don't issue certificates. o Financial institutions and intermediaries are responsible for recording the beneficial ownership of the shares of their clients, and for reporting this ownership on account statements they send to their clients. [GRAPHIC] Selling shares Here are some general rules for selling shares: o We normally send the sale proceeds by federal funds wire within three business days after Stephens, First Data or their agents receive the order. o If shares were paid for with a check that wasn't certified, we'll hold the sale proceeds when those shares are sold for at least 15 days after the trade date of the purchase, or until the check has cleared. o Financial institutions and intermediaries are responsible for sending us orders for their clients and for depositing the sale proceeds to their accounts on time. 19 o Under certain circumstances allowed under the Investment Company Act of 1940 (1940 Act), we can pay investors in securities or other property when they sell shares, or delay payment of the sale proceeds for up to seven days. o Other restrictions may apply to retirement plan accounts. For more information about these restrictions, please contact your retirement plan administrator. We may sell shares: o if the value of an investor's account falls below $500. We'll provide 60 days notice in writing if we're going to do this o if a financial institution or intermediary tells us to sell the shares for a client under arrangements it has made with its clients o under certain other circumstances allowed under the 1940 Act [GRAPHIC] You should make sure you understand the investment objectives and policies of the Fund you're exchanging into. Please read its prospectus carefully. [GRAPHIC] Exchanging shares Investors can sell shares of a Fund to buy shares of another Nations Fund. This is called an exchange, and may be appropriate if investment goals or tolerance for risk change. Here's how exchanges work: o Investors can exchange Primary A Shares of a Fund for Primary A Shares of any other Nations Fund. In some cases, the only Money Market Fund option is Trust Class Shares of Nations Reserves Money Market Funds. o The rules for buying shares of a Fund, including any minimum investment requirements, apply to exchanges into that Fund. o Exchanges can only be made into a Fund that is legally sold in the investor's state of residence. o Exchanges can generally only be made into a Fund that is accepting investments. o We may limit the number of exchanges that can be made within a specified period of time. o We may change or cancel the right to make an exchange by giving the amount of notice required by regulatory authorities (generally 60 days for a material change or cancellation). 20 [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 MidCap Index Fund quarterly Nations High Yield Fund monthly Nations Kansas Intermediate Municipal Bond Fund monthly
A distribution is paid based on the number of shares you hold on the record date, which is usually the day before the distribution is declared. Shares of the Index Fund are eligible to receive distributions from the trade date of the purchase, as long as it's at least one day before a distribution is declared, up to the day before the shares are sold. Shares of the Fixed Income Fund are eligible to receive distributions from the trade date of the purchase up to and including the day before the shares are sold. Different share classes of a Fund usually pay different distribution amounts, because each class has different expenses. Each time a distribution is made, the net asset value per share of the share class is reduced by the amount of the distribution. We'll automatically reinvest distributions in additional shares of the same Fund unless you tell us you want to receive your distributions in cash. You can do this by writing to us at the address on the back cover, or by calling us at 1.800.765.2668. We generally pay cash distributions within five business days after the end of the month, quarter or year in which the distribution was made. If you sell all of your shares, we'll pay any distribution that applies to those shares in cash within five business days after the sale was made. 21 If you buy shares of a Fund shortly before it makes a distribution, you will, in effect, receive part of your purchase back in the distribution, which is subject to tax. Similarly, if you buy shares of a Fund that holds securities with unrealized capital gain, you will, in effect, receive part of your purchase back if and when the Fund sells those securities and realizes and distributes the gain. This distribution is also subject to tax. Some Funds have built up, or have the potential to build up, high levels of unrealized capital gain. [GRAPHIC] This information is a summary of how federal income taxes may affect your investment in the Funds. It is not intended as a substitute for careful tax planning. You should consult with your own tax advisor about your situation, including any foreign, state and local taxes that may apply. [GRAPHIC] For more information about taxes, please see the SAI. How taxes affect your investment Distributions that come from net investment income, net foreign currency gain and any excess of net short-term capital gain over net long-term capital loss, generally are taxable to you as ordinary income. Distributions that come from net capital gain (generally the excess of net long-term capital gain over net short-term capital loss) generally are taxable to you as net capital gain. In general, all distributions are taxable to you when paid, whether they are paid in cash or automatically reinvested in additional shares of the Fund. However, any distributions declared in October, November or December of one year and distributed in January of the following year will be taxable as if they had been paid to you on December 31 of the first year. We'll send you a notice every year that tells you how much you've received in distributions during the year and their federal tax status. Foreign, state and local taxes may also apply to these distributions. Withholding tax We're required by federal law to withhold tax of 31% on any distributions and redemption proceeds paid to you (including amounts deemed to be paid for "in kind" redemptions and exchanges) if: o you haven't given us a correct Taxpayer Identification Number (TIN) and haven't certified that the TIN is correct and withholding doesn't apply o the Internal Revenue Service (IRS) has notified us that the TIN listed on your account is incorrect according to its records o the IRS informs us that you are otherwise subject to backup withholding The IRS may also impose penalties against you if you don't give us a correct TIN. Amounts we withhold are applied to your federal income tax liability. You may receive a refund from the IRS if the withholding tax results in an overpayment of taxes. We're also normally required by federal law to withhold tax on distributions paid to foreign shareholders. Taxation of redemptions and exchanges Your redemptions (including redemptions "in kind") and exchanges of Fund shares will usually result in a taxable capital gain or loss to you, depending on the amount you receive for your shares (or are deemed to receive in the case of exchanges) and the amount you paid (or are deemed to have paid) for them. 22 [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. 23 Corporate obligation - a money market instrument issued by a corporation or commercial bank. Crossing networks - an electronic system where anonymous parties can match buy and sell transactions. These transactions don't affect the market, and transaction costs are extremely low. Debt security - when you invest in a debt security, you are typically lending your money to a governmental body or company (the issuer) to help fund their operations or major projects. The issuer pays interest at a specified rate on a specified date or dates, and repays the principal when the security matures. Short-term debt securities include money market instruments such as treasury bills. Long-term debt securities include fixed income securities such as government and corporate bonds, and mortgage-backed and asset-backed securities. Depositary receipts - evidence of the deposit of a security with a custodian bank. American Depositary Receipts (ADRs), for example, are certificates traded in U.S. markets representing an interest of a foreign company. They were created to make it possible for foreign issuers to meet U.S. security registration requirements. Other examples include ADSs, GDRs and EDRs. Dividend yield - rate of return of dividends paid on a common or preferred stock. It equals the amount of the annual dividend on a stock expressed as a percentage of the stock's current market value. Dollar roll transaction - the sale by a Fund of mortgage-backed or other asset-backed securities, together with a commitment to buy similar, but not identical, securities at a future date. Duration - a security's or portfolio's sensitivity to changes in interest rates. For example, if interest rates rise by one percentage point, the share price of a fund with a duration of five years would decline by about 5%. If interest rates fall by one percentage point, the fund's share price would rise by about 5%. Equity security - an investment that gives you an equity ownership right in a company. Equity securities (or "equities") include common and preferred stock, rights and warrants. First Boston Convertible Index - a widely-used unmanaged index that measures the performance of convertible securities. The index is not available for investment. First-tier security - under Rule 2a-7 under the 1940 Act, a debt security that is an eligible investment for money market funds and has the highest short-term rating from a nationally recognized statistical rating organization (NRSRO), or if unrated, is determined by the fund's portfolio management team to be of comparable quality, or is a money market fund issued by a registered investment company, or is a government security. 24 Fixed income security - an intermediate to long-term debt security that matures in more than one year. Foreign security - a debt or equity security issued by a foreign company or government. Fundamental analysis - a method of securities analysis that tries to evaluate the intrinsic, or "true," value of a particular stock. It includes a study of the overall economy, industry conditions and the financial condition and management of a company. Futures contract - a contract to buy or sell an asset or an index of securities at a specified price on a specified future date. The price is set through a futures exchange. Guaranteed investment contract - an investment instrument issued by a rated insurance company in return for a payment by an investor. High quality - in the case of municipal securities, a long-term rating of A or higher from Duff & Phelps Credit Rating Co. (D&P), Fitch, S&P, Thomson BankWatch, Inc. (BankWatch), or Moody's in the case of certain bonds that are lacking a short-term rating from the required number of NRSROs; rated D-1 or higher by D&P, F-1 or higher by Fitch, SP-1 by S&P, or MIG-1 by Moody's in the case of notes; rated D-1 or higher by D&P, F-1 or higher by Fitch, or VMIG-1 by Moody's in the case of variable rate demand notes; or rated D-1 or higher by D&P, F-1 or higher by Fitch, A-1 or higher by S&P or Prime-1 by Moody's in the case of tax-exempt commercial paper. The portfolio management team may consider an unrated municipal security to be investment grade if the team believes it to be of comparable quality, based on guidelines provided by the Fund's Board of Directors. Please see the SAI for more information about credit ratings. High-yield debt security - debt securities that, at the time of investment by the sub-adviser, are rated "BB" or below by S&P or "Ba" or below by Moody's, or that are unrated and determined to be of comparable quality. IFC Investables Index - an unmanaged index that tracks more than 1,400 stocks in 25 emerging markets in Asia, Latin America, Eastern Europe, Africa and the Middle East. The index is weighted by market capitalization. Investment grade - a debt security that has been given a medium to high credit rating (Baa or higher by Moody's, BBB or higher by S&P or a comparable rating by other NRSROs) based on the issuer's ability to pay interest and repay principal on time. The portfolio management team may consider an unrated debt security to be investment grade if the team believes it is of comparable quality. Please see the SAI for more information about credit ratings. Lehman 3-Year Municipal Bond Index - a broad-based, unmanaged index of investment grade bonds with maturities of two to four years. All dividends are reinvested. Lehman 7-Year Municipal Bond Index - a broad-based, unmanaged index of investment grade bonds with maturities of seven to eight years. All dividends are reinvested. 25 Lehman Aggregate Bond Index - an index made up of the Lehman Government/Corporate Index, the Asset-Backed Securities Index and the Mortgage-Backed Securities Index. These indexes include U.S. government agency and U.S. Treasury securities, corporate bonds and mortgage-backed securities. All dividends are reinvested. Lehman Government Bond Index - an index of government bonds with an average maturity of approximately nine years. All dividends are reinvested. Lehman Government/Corporate Bond Index - an index of U.S. government, U.S. Treasury and agency securities, and corporate and Yankee bonds. All dividends are reinvested. Lehman Intermediate Government Bond Index - an index of U.S. government agency and U.S. Treasury securities. All dividends are reinvested. Lehman Intermediate Treasury Index - an index of U.S. Treasury securities with maturities of three to 10 years. All dividends are reinvested. Lehman Municipal Bond Index - a broad-based, unmanaged index of 8,000 investment grade bonds with long-term maturities. All dividends are reinvested. Liquidity - a measurement of how easily a security can be bought or sold at a price that is close to its market value. Merrill Lynch 1-3 Year Treasury Index - an index of U.S. Treasury bonds with maturities of 1 to 3 years. All dividends are reinvested. Money market instrument - a short-term debt security that is considered to mature in 13 months or less. Money market instruments include U.S. Treasury obligations, U.S. government obligations, certificates of deposit, bankers' acceptances, commercial paper, repurchase agreements and certain municipal securities. Mortgage-backed security or Mortgage-related security - a debt security that gives you an interest in, and is backed by, a pool of residential mortgages issued by the U.S. government or by financial institutions. The underlying mortgages may be guaranteed by the U.S. government or one of its agencies, authorities or instrumentalities. Mortgage-backed securities typically make monthly payments, which are a combination of interest and a portion of the principal of the underlying mortgages. MSCI EAFE Index - Morgan Stanley Capital International Europe, Australasia and Far East Index, an index of over 1,100 stocks from 21 developed markets in Europe, Australia, New Zealand and Asia. The index reflects the relative size of each market. 26 Municipal security (obligation) - a debt security issued by state or local governments or governmental authorities to pay for public projects and services. "General obligations" are typically backed by the issuer's full taxing and revenue-raising powers. "Revenue securities" depend on the income earned by a specific project or authority, like road or bridge tolls, user fees for water or revenues from a utility. Interest income from these securities is exempt from federal income taxes and is generally exempt from state taxes if you live in the state that issued the security. If you live in the municipality that issued the security, interest income may also be exempt from local taxes. Non-diversified - a fund that holds securities of fewer issuers or kinds of issuers than other kinds of funds. Non-diversified funds tend to have greater price swings than more diversified funds because events affecting one or more of its securities may have a disproportionately large effect on the fund. Over-the-counter market - a market where dealers trade securities through a telephone or computer network rather than through a public stock exchange. Participation - a pass-through certificate representing a share in a pool of debt obligations or other instruments. Pass-through certificate - securitized mortgages or other debt securities with interest and principal paid by a servicing intermediary shortly after interest payments are received from borrowers. Preferred stock - a type of equity security that gives you a limited ownership right in a company, with certain preferences or priority over common stock. Preferred stock generally pays a fixed annual dividend. If the company goes bankrupt, preferred shareholders generally receive their share of the company's remaining assets before common shareholders and after bondholders and other creditors. Pre-refunded bond - a bond that is repaid before its maturity date. The repayment is generally financed by a new issue. Issuers generally pre-refund bonds during periods of lower interest rates to reduce their interest costs. Price-to-earnings ratio (P/E ratio) - the current price of a share divided by its actual or estimated earnings per share. The P/E ratio is one measure of the value of a company. Private activity bond - a municipal security that is used to finance private projects or other projects that aren't qualified for tax purposes. Private activity bonds are generally taxable, unless their use is specifically exempted, or may be treated as tax preference items. Quantitative analysis - an analysis of financial information about a company or security to identify securities that have the potential for growth or are otherwise suitable for a fund to buy. 27 Real Estate Investment Trust (REIT) - a portfolio of real estate investments which may include office buildings, apartment complexes, hotels and shopping malls, and real-estate-related loans or interests. Repurchase agreement - a short-term (often overnight) investment arrangement. The investor agrees to buy certain securities from the borrower and the borrower promises to buy them back at a specified date and price. The difference between the purchase price paid by the investor and the repurchase price paid by the borrower represents the investor's return. Repurchase agreements are popular because they provide very low-risk return and can virtually eliminate credit difficulties. Reverse repurchase agreement - a repurchase agreement in which an investor sells a security to another party, like a bank or dealer, in return for cash, and agrees to buy the security back at a specified date and price. Right - a temporary privilege allowing investors who already own a common stock to buy additional shares directly from the company at a specified price or formula. Russell 2000 - an unmanaged index of 2,000 of the smallest stocks representing approximately 11% of the U.S. equity market. The index is weighted by market capitalization, and is not available for investment. S&P 400(1)- Standard & Poor's 400 Composite Stock Price Index, an unmanaged index of 400 widely held common stocks. It is not available for investment. S&P MidCap 400(1)- an unmanaged index of 400 domestic stocks chosen for market size, liquidity and industry representation. The index is weighted by market value, and is not available for investment. S&P SmallCap 600(1)- Standard & Poor's SmallCap 600 Index, an unmanaged index of 600 common stocks, weighted by market capitalization. It is not available for investment. S&P/BARRA SmallCap Value Index(1)- an unmanaged index of a group of stocks from the S&P SmallCap 600 that have low price-to-book ratios relative to the S&P SmallCap 600 as a whole. It is weighted by market capitalization, and is not available for investment. S&P/BARRA Value Index(1) - an unmanaged index of a group of stocks from the S&P 500 that have low price-to-book ratios relative to the S&P 500 as a whole. It is weighted by market capitalization, and is not available for investment. Salomon Brothers Mortgage Index - an index of 30-year and 15-year GNMA, FNMA and FHLMC securities, and FNMA and FHLMC balloon mortgages. Second-tier security - under Rule 2a-7 under the 1940 Act, a debt security that is an eligible investment for money market funds, but is not a first-tier security. 28 Senior security - a debt security that allows holders to receive their share of a company's remaining assets in a bankruptcy before other bondholders, creditors, and common and preferred shareholders. Special purpose issuer - an entity organized solely to issue asset-backed securities on a pool of assets it owns. Trade date - the effective date of a purchase, sale or exchange transaction, or other instructions sent to us. The trade date is determined by the day and time we receive the order or instructions in a form that's acceptable to us. U.S. government obligations - a wide range of debt securities issued or guaranteed by the U.S. government or its agencies, authorities or instrumentalities. U.S. Treasury obligation - a debt security issued by the U.S. Treasury. Warrant - a certificate that gives you the right to buy common shares at a specified price within a specified period of time. Wilshire 5000 Equity Index - an index that measures the performance of the equity securities of all companies headquartered in the U.S. that have readily available price data -- over 7, 000 companies. The index is weighted by market capitalization and is not available for investment. Zero-coupon bond - a bond that makes no periodic interest payments. Zero coupon bonds are sold at a deep discount to their face value and mature at face value. The difference between the face value at maturity and the purchase price represents the return. (1)S&P and BARRA have not reviewed any stock included in the S&P 400, S&P 600, BARRA Index or BARRA SmallCap Index for its investment merit. S&P and BARRA determine and calculate their indexes independently of the Funds and are not a sponsor or affiliate of the Funds. S&P and BARRA give no information and make no statements about the suitability of investing in the Funds or the ability of their indexes to track stock market performance. S&P and BARRA make no guarantees about the indexes, any data included in them and the suitability of the indexes or their data for any purpose. "Standard and Poor's," "S&P 400" and "S&P 600" are trademarks of the McGraw-Hill Companies, Inc. 29 (THIS PAGE INTENTIONALLY LEFT BLANK) (THIS PAGE INTENTIONALLY LEFT BLANK) [GRAPHIC] Where to find more information You'll find more information about the Equity, International, Index, Balanced, Fixed Income and Municipal Bond Funds in the following documents: [GRAPHIC] Annual and semi-annual reports The annual and semi-annual reports contain information about Fund investments and performance, the financial statements and the auditor's reports. The annual report also includes a discussion about the market conditions and investment strategies that had a significant effect on each Fund's performance during the period covered. [GRAPHIC] Statement of Additional Information The SAI contains additional information about the Funds and their policies. The SAI is legally part of this prospectus (it's incorporated by reference). A copy has been filed with the SEC. You can obtain a free copy of these documents, request other information about the Funds and make shareholder inquiries by contacting Nations Funds: By telephone: 1.800.765.2668 By mail: Nations Funds c/o Stephens Inc. One Bank of America Plaza 33rd Floor Charlotte, NC 28255 On the Internet: www.nationsbank.com/nationsfunds If you prefer, you can write the SEC's Public Reference Room and ask them to mail you copies of these documents. They'll charge you a fee for this service. You can also download them from the SEC's website or visit the Public Reference Section and copy the documents while you're there. Please call the SEC for more information. Public Reference Section of the SEC Washington, DC 20549-6009 1.800.SEC.0330 www.sec.gov SEC file number: Nations Funds Trust, [NATIONS FUNDS LOGO APPEARS HERE] NF-COMPROPA-8/99 [GRAPHIC] INDEX FUND PROSPECTUS -- INVESTOR A SHARES JANUARY , 2000 Index Fund Nations MidCap Index Fund The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. NOT FDIC INSURED - ------------------- May Lose Value - ------------------- No Bank Guarantee - ------------------- NATIONS FUNDS LOGO AN OVERVIEW OF THE FUND - -------------------------------------------------------------------------------- [GRAPHIC] TERMS USED IN THIS PROSPECTUS IN THIS PROSPECTUS, WE, US AND OUR REFER TO THE NATIONS FUNDS FAMILY (NATIONS FUNDS). SOME OTHER IMPORTANT TERMS WE'VE USED MAY BE NEW TO YOU. THESE ARE PRINTED IN ITALICS WHERE THEY FIRST APPEAR IN A SECTION AND ARE DESCRIBED IN TERMS USED IN THIS PROSPECTUS. [GRAPHIC] YOU'LL FIND TERMS USED IN THIS PROSPECTUS ON PAGE 38. YOUR INVESTMENT IN THIS FUND IS NOT A BANK DEPOSIT AND IS NOT INSURED OR GUARANTEED BY BANK OF AMERICA, N.A. (BANK OF AMERICA), THE FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) OR ANY OTHER GOVERNMENT AGENCY. YOUR INVESTMENT MAY LOSE MONEY. AFFILIATES OF BANK OF AMERICA ARE PAID FOR THE SERVICES THEY PROVIDE TO THE FUNDS. This booklet, which is called a prospectus, tells you about one of Nations Funds Index Funds. Please read it carefully because it contains information that's designed to help you make informed investment decisions. ABOUT THE FUND The Index Fund focuses on long-term growth. It is intended to match the industry and risk characteristics of a specific stock market index, like the S&P 500, by investing primarily in the equity securities that are included in the index. Equity securities have the potential to provide you with higher returns than many other kinds of investments, but they also tend to have the highest risk. There's always the risk that you'll lose money, or you may not earn as much as you expect. IS THIS FUND RIGHT FOR YOU? Not every Fund is right for every investor. When you're choosing a Fund to invest in, you should consider things like your investment goals, how much risk you can accept and how long you're planning to hold your investment. The Index Fund may be suitable for you if: o you have longer-term investment goals o 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 It may not be suitable for you if: o you're not prepared to accept or are unable to bear the risks associated with equity securities o you have short-term investment goals o you're looking for a regular stream of income You'll find a discussion of the Fund's principal investments, strategies and risks in the Fund descriptions that start on page 4. FOR MORE INFORMATION If you have any questions about the Fund, please call us at 1.800.321.7854 or contact your investment professional. You'll find more information about the Fund in the Statement of Additional Information (SAI). The SAI includes more detailed information about the Fund's investments, policies, performance and management, among other things. Please turn to the back cover to find out how you can get a copy. 2 WHAT'S INSIDE - -------------------------------------------------------------------------------- [GRAPHIC] BANC OF AMERICA ADVISORS, INC. BANC OF AMERICA ADVISORS, INC. (BAAI) IS THE INVESTMENT ADVISER TO THE FUND. BAAI IS RESPONSIBLE FOR THE OVERALL MANAGEMENT AND SUPERVISION OF THE INVESTMENT MANAGEMENT OF THE FUND. BAAI AND NATIONS FUNDS HAVE ENGAGED A SUB-ADVISER -- TRADESTREET INVESTMENT ASSOCIATES, INC. (TRADESTREET), WHICH IS RESPONSIBLE FOR THE DAY-TO-DAY INVESTMENT DECISIONS FOR THE FUND. [GRAPHIC] YOU'LL FIND MORE ABOUT BAAI AND TRADESTREET STARTING ON PAGE 23. [GRAPHIC] ABOUT THE INDEX FUND NATIONS MIDCAP INDEX FUND 4 Sub-adviser: TradeStreet - ------------------------------------------------------------ OTHER IMPORTANT INFORMATION 7 - ------------------------------------------------------------ HOW THE FUND IS MANAGED 8 [GRAPHIC] About your investment INFORMATION FOR INVESTORS Buying, selling and exchanging shares 10 How selling and servicing agents are paid 16 Distributions and taxes 17 - ------------------------------------------------------------ TERMS USED IN THIS PROSPECTUS 20 - ------------------------------------------------------------ WHERE TO FIND MORE INFORMATION BACK COVER
3 About the Index Fund - -------------------------------------------------------------------------------- [GRAPHIC] ABOUT THE SUB-ADVISER TRADESTREET IS THIS FUND'S SUB-ADVISER. TRADESTREET'S STRUCTURED PRODUCTS MANAGEMENT TEAM MAKES THE DAY-TO-DAY INVESTMENT DECISIONS FOR THE FUND. [GRAPHIC] YOU'LL FIND MORE ABOUT TRADESTREET ON PAGE 24. [GRAPHIC] WHAT IS AN INDEX FUND? INDEX FUNDS USE A "PASSIVE" OR "INDEXING" INVESTMENT APPROACH, WHICH ATTEMPTS TO DUPLICATE THE PERFORMANCE OF A SPECIFIC MARKET INDEX. CORRELATION MEASURES HOW CLOSELY A FUND'S RETURNS MATCH THOSE OF AN INDEX. A PERFECT CORRELATION OF 1.0 MEANS THAT THE NET ASSET VALUE OF THE FUND INCREASES OR DECREASES IN EXACT PROPORTION TO CHANGES IN THE INDEX. NATIONS MIDCAP INDEX FUND [GRAPHIC] INVESTMENT OBJECTIVE This Fund seeks investment results that (before fees and expenses) correspond to the total return of the Standard & Poor's MidCap 400 Stock Price Index (S&P 400). [GRAPHIC] PRINCIPAL INVESTMENT STRATEGIES The Fund normally invests at least 80% of its assets in common stocks that are included in the S&P 400. The S&P 400 is an unmanaged index of 400 domestic common stocks chosen for their market size, liquidity and industry representation. The index is weighted by market value, and is not available for investment. The Fund may buy stock index futures and other financial futures as substitutes for the underlying securities in the S&P 400. The Fund may also invest in securities that aren't part of its principal investment strategies, but it won't hold more than 10% of its assets in any one type of these securities. These securities are described in the SAI. Different common stocks have different weightings in the S&P 400, depending on the amount of stock outstanding and the stock's current price. In trying to match the performance of the S&P 400, the management team will try to allocate the Fund's portfolio among common stocks in approximately the same weightings as the S&P 400, beginning with the most heavily weighted stocks that make up a larger portion of the value of the S&P 400. The team generally will try to match the composition of the S&P 400 as closely as possible. The team starts with the stocks that make up a larger portion of the value of the S&P 400. It may not always invest in stocks that make up the smaller percentages because it may be more difficult and costly to make relatively small transactions. The team may remove a stock from the Fund's holdings or not invest in a stock if it believes that the stock is not liquid enough, or for other reasons. The team can substitute stocks that are not included in the S&P 400, if it believes these stocks have similar characteristics. The Fund tries to achieve a correlation of at least 0.95 with the return of the S&P 400 on an annual basis (before fees and expenses). The Fund's ability to track the S&P 400 is affected by transaction costs and other expenses, changes in the composition of the S&P 400, changes in the number of shares issued by the companies represented in the S&P 400, and by the timing and amount of shareholder purchases and redemptions, among other things. 4 [GRAPHIC] YOU'LL FIND MORE ABOUT OTHER RISKS OF INVESTING IN THIS FUND STARTING ON PAGE 22 AND IN THE SAI. Equity mutual funds, like other investors in equity securities, incur transaction costs, such as brokerage costs, when they buy and sell securities. The management team tries to minimize these costs for the Fund by using program trades and crossing networks. The team may sell a stock when its percentage weighting in the index is reduced, when the stock is removed from the index, or for other reasons. [GRAPHIC] RISKS AND OTHER THINGS TO CONSIDER Nations MidCap Index Fund has the following risks: o INVESTMENT STRATEGY RISK - This Fund tries to match (before fees and expenses) the returns of the S&P 400, and is not actively managed. There is no assurance that the returns of the Fund will match the returns of the S&P 400. The value of the Fund will rise and fall with the performance of the S&P 400. o STOCK MARKET RISK - The value of the stocks the Fund holds can be affected by changes in U.S. or foreign economies and financial markets, and the companies that issue the stocks, among other things. Stock prices can rise or fall over short as well as long periods. In general, stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. As of the date of this prospectus, the stock markets, as measured by the S&P 500 and other commonly used indices, were trading at or close to record levels. There can be no guarantee that these levels will continue. o FUTURES RISK - This Fund may use futures contracts as a substitute for the securities included in the index. There is a risk that this could result in losses, reduce returns, increase transaction costs or increase the Fund's volatility. 5 [GRAPHIC] THERE ARE TWO KINDS OF FEES -- SALES CHARGES YOU PAY DIRECTLY, AND ANNUAL FUND OPERATING EXPENSES THAT ARE DEDUCTED FROM A FUND'S ASSETS. TOTAL NET EXPENSES ARE ACTUAL EXPENSES PAID BY THE FUND AFTER WAIVERS AND/OR REIMBURSEMENTS. [GRAPHIC] 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. [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 (Fees paid directly from your investment) Investor A Shares Maximum sales charge (load) imposed on purchases none Maximum deferred sales charge (load) none Annual Fund operating expenses (Expenses that are deducted from the Fund's assets) Management fees 0.40% Distribution (12b-1) and shareholder servicing fees 0.25% Other expenses 0.33% ------ Total annual Fund operating expenses 0.98% Fee waivers and/or reimbursements (0.38)% ------ Total net expenses(1) 0.60% ======
(1)The Fund's investment adviser and/or some of its other service providers have agreed to waive fees and/or reimburse expenses until July 31, 2000. The figure shown here is after waivers and/or reimbursements. There is no guarantee that these waivers and/or reimbursements will continue after this date. EXAMPLE This example is intended to help you compare the cost of investing in this Fund with the cost of investing in other mutual funds. This example assumes: o you invest $10,000 in Investor A Shares of the Fund for the time periods indicated and then sell all of your shares at the end of those periods o you reinvest all dividends and distributions in the Fund o your investment has a 5% return each year o the Fund's operating expenses remain the same as shown in the table above o the waivers and/or reimbursements shown above expire July 31, 2000 and are not reflected in the 3, 5 and 10 year examples Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 year 3 years 5 years 10 years Investor A Shares $61 $274 $505 $1,167
6 [GRAPHIC] OTHER IMPORTANT INFORMATION You'll find specific information about the Fund's principal investments, strategies and risks in the descriptions starting on page 4. The following are some other risks and information you should consider before you invest: O CHANGING INVESTMENT OBJECTIVES AND POLICIES - The investment objective and certain investment policies of the Fund can be changed without shareholder approval. Other investment policies may be changed only with shareholder approval. O CHANGING TO A FEEDER FUND - Unlike traditional mutual funds, which invest in individual securities, a "feeder fund" invests all of its assets in another fund, called a "master portfolio." Other feeder funds generally also invest in a master portfolio. The master portfolio invests in individual securities and has the same investment objective, investment strategies and principal risks as the feeder funds. This structure can help reduce a feeder fund's expenses because its assets are combined with those of other feeder funds. If a master portfolio doesn't attract other feeder funds, however, a feeder fund's expenses could be higher than those of a traditional mutual fund. The Fund may become a feeder fund if the Board of Trustees decides this would be in the best interests of shareholders. We don't require shareholder approval to make the change, but we'll notify you if it happens. O HOLDING OTHER KINDS OF INVESTMENTS - The Fund may hold investments that aren't part of its principal investment strategies. Please refer to the SAI for more information. The portfolio managers or management team can also choose not to invest in specific securities described in this prospectus and in the SAI. O INVESTING DEFENSIVELY - The Fund may temporarily hold investments that are not part of its investment objective or its principal investment strategies to try to protect it during a market or economic downturn or because of political or other conditions. The Fund may not achieve its investment objective while it is investing defensively. O PORTFOLIO TURNOVER - The Fund that replaces -- or turns over -- more than 100% of its investments in a year is considered to trade frequently. Frequent trading can result in larger distributions of short-term capital gains to shareholders. These gains are taxable at higher rates than long-term capital gains. Frequent trading can also mean higher brokerage and other transaction costs, which could reduce the Fund's returns. The Fund generally buys securities for capital appreciation, investment income, or both, and don't engage in short-term trading. You'll find the portfolio turnover rate for the Fund in FINANCIAL HIGHLIGHTS. 7 [GRAPHIC] BANC OF AMERICA ADVISORS, INC. ONE BANK OF AMERICA PLAZA CHARLOTTE, NORTH CAROLINA 28255 [GRAPHIC] HOW THE FUND IS MANAGED INVESTMENT ADVISER BAAI is the investment adviser to over 60 mutual fund portfolios in the Nations Funds family, including the Index Fund described in this prospectus. BAAI is a registered investment adviser. It's a wholly-owned subsidiary of Bank of America, which is owned by Bank of America Corporation. Nations Funds pays BAAI an annual fee for its investment advisory services. The fee is calculated daily based on the average net assets of each Fund and is paid monthly. BAAI uses part of this money to pay investment sub-advisers for the services they provide to the Fund. BAAI has agreed to waive fees and/or reimburse expenses for certain Funds until July 31, 2000. You'll find a discussion of any waiver and/or reimbursement in the Fund descriptions. There is no assurance that BAAI will continue to waive and/or reimburse any fees and/or expenses after this date. The following chart shows the maximum advisory fees BAAI can receive, along with the actual advisory fees it received during the Fund's last fiscal year, after waivers and/or reimbursements: ANNUAL INVESTMENT ADVISORY FEE, AS A % OF AVERAGE DAILY NET ASSETS
Maximum advisory fee(1) Nations MidCap Index Fund 0.40%
(1)These fees are the current contract levels, which have been reduced from the contract levels in effect during the last fiscal year. 8 [GRAPHIC] TRADESTREET INVESTMENT ASSOCIATES, INC. ONE BANK OF AMERICA PLAZA CHARLOTTE, NORTH CAROLINA 28255 [GRAPHIC] STEPHENS INC. 111 CENTER STREET LITTLE ROCK, ARKANSAS 72201 [GRAPHIC] FIRST DATA INVESTOR SERVICES GROUP, INC. 101 FEDERAL STREET BOSTON, MASSACHUSETTS 02110 INVESTMENT SUB-ADVISER Nations Funds and BAAI have engaged an investment sub-adviser, TradeStreet Investment Associates, Inc., to provide day-to-day portfolio management for the Fund. TradeStreet functions under the supervision of BAAI and the Board of Trustees of Nations Funds. TRADESTREET INVESTMENT ASSOCIATES, INC. TradeStreet is a registered investment adviser and a wholly-owned subsidiary of Bank of America. Its management expertise covers all major domestic asset classes, including equity and fixed income securities and money market instruments. Currently managing more than $90 billion, TradeStreet has over 200 institutional clients and is sub-adviser to more than 50 mutual funds in the Nations Funds family. TradeStreet takes a team approach to investment management. Each team has access to the latest technology and analytical resources. TradeStreet's Structured Products Management Team is responsible for making the day-to-day investment decisions for the Fund. OTHER SERVICE PROVIDERS The Fund is distributed and co-administered by Stephens Inc., a registered broker/dealer. Stephens may pay distribution (12b-1) and shareholder servicing fees, and/or other compensation to companies for selling shares and providing services to investors. BAAI is also co-administrator of the Fund, and assists in overseeing the administrative operations of the Fund. The Fund pays BAAI and Stephens a combined fee of 0.23% for their services, plus certain out-of-pocket-expenses. The fee is calculated as an annual percentage of the average daily net assets of the Fund, and is paid monthly. First Data Investor Services Group, Inc. (First Data) is the transfer agent for the Fund's shares. Its responsibilities include processing purchases, sales and exchanges, calculating and paying distributions, keeping shareholder records, preparing account statements and providing customer service. 9 ABOUT YOUR INVESTMENT - -------------------------------------------------------------------------------- [GRAPHIC] WE'VE USED THE TERM, INVESTMENT PROFESSIONAL, TO REFER TO THE PERSON WHO HAS ASSISTED YOU WITH BUYING NATIONS FUNDS. SELLING AGENT OR SERVICING AGENT (SOMETIMES REFERRED TO AS A SELLING AGENT) MEANS THE COMPANY THAT EMPLOYS YOUR INVESTMENT PROFESSIONAL. SELLING AGENTS INCLUDE BANKS, BROKERAGE FIRMS, MUTUAL FUND DEALERS AND OTHER FINANCIAL INSTITUTIONS, INCLUDING AFFILIATES OF BANK OF AMERICA. WHEN YOU SELL SHARES OF A MUTUAL FUND, THE FUND IS EFFECTIVELY "BUYING" THEM BACK FROM YOU. THIS IS CALLED A REDEMPTION. [GRAPHIC] BUYING, SELLING AND EXCHANGING SHARES You can invest in the Fund through your selling agent or directly from Nations Funds. You don't pay any sales charges when you buy, sell or exchange Investor A Shares of the Index Fund. We encourage you to consult with an investment professional who can open an account for you with a selling agent and help you with your investment decisions. Once you have an account, you can buy, sell and exchange shares by contacting your investment professional or selling agent. They will look after any paperwork that's needed to complete a transaction and send your order to us. You should also ask your selling agent about its limits, fees and policies for buying, selling and exchanging shares, which may be different from those described here, and about its related programs or services. The table on the next page summarizes some key information about buying, selling and exchanging shares. Please contact your investment professional, or call us at 1.800.321.7854 if you have any questions, or you need help placing an order. 10
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 o $1,000 for regular accounts in Investor A Shares. o $500 for traditional and Roth IRA accounts o $250 for certain fee-based accounts o no minimum for certain retirement plan accounts like 401(k) plans and SEP accounts, but other restrictions apply minimum additional investment: o $100 for all accounts 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 send you or your selling agent the sale shares by telephone, otherwise there proceeds, usually within three business days of are no limits to the amount you can receiving your order. sell 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. - ------------------ --------------------------------------------------------------------------------------------- Exchanging shares o minimum $1,000 per exchange You can exchange Investor A Shares of an Index Fund for Investor A Shares of any other Index Fund. o minimum $25 per exchange You must already have an investment in the Funds you want to exchange. You can make exchanges monthly or quarterly.
11 [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 THE FUND The value of the Fund's assets is based on the total market value of all of the securities it holds. The prices reported on stock exchanges and securities markets around the world are usually used to value securities in the Fund. If prices aren't readily available, we'll base the price of a security on its fair market value. We use the amortized cost method, which approximates market value, to value short-term investments maturing in 60 days or less. HOW ORDERS ARE PROCESSED Orders to buy, sell or exchange shares are processed on business days. Orders received by Stephens, First Data or their agents before the end of a business day (usually 4:00 p.m. Eastern time, unless the NYSE closes early) will receive that day's net asset value per share. Orders received after the end of a business day will receive the next business day's net asset value per share. The business day that applies to your order is also called the trade date. We may refuse any order to buy or exchange shares. If this happens, we'll return any money we've received to your selling agent. TELEPHONE ORDERS You can place orders to buy, sell or exchange by telephone if you complete the telephone authorization section of our account application and send it to us. Here's how telephone orders work: o If you sign up for telephone orders after you open your account, you must have your signature guaranteed. o Telephone orders may not be as secure as written orders. You may be responsible for any loss resulting from a telephone order. o We'll take reasonable steps to confirm that telephone instructions are genuine. For example, we require proof of your identification before we will act on instructions received by telephone and may record telephone conversations. If we and our service providers don't take these steps, we may be liable for any losses from unauthorized or fraudulent instructions. o Telephone orders may be difficult to complete during periods of significant economic or market change. 12 [GRAPHIC] BUYING SHARES Here are some general rules for buying shares: o You buy Investor A Shares at net asset value per share. o If we don't receive your money within three business days of receiving your order, we'll refuse the order. o Selling agents are responsible for sending orders to us and ensuring we receive your money on time. o Shares you buy are recorded on the books of the Fund. We don't issue certificates unless you ask for them in writing, and we don't issue certificates for fractions of shares. MINIMUM INITIAL INVESTMENT The minimum initial amount you can buy is usually $1,000. If you're buying shares through one of the following accounts or plans, the minimum initial amount you can buy is: o $500 for traditional and Roth individual retirement accounts (IRAs) o $250 for accounts set up with some fee-based investment advisers or financial planners, including wrap fee accounts and other managed accounts o $100 using our Systematic Investment Plan o There is no minimum for 401(k) plans, simplified employee pension plans (SEPs), salary reduction-simplified employee pension plans (SAR-SEPs), Savings Incentives Match Plans for Employees (SIMPLE IRAs), salary reduction-IRAs (SAR-IRAs) or other similar kinds of accounts. However, if the value of your account falls below $1,000 for 401(k) plans or $500 for the other plans within one year after you open your account, we may sell your shares. We'll give you 60 days notice in writing if we're going to do this MINIMUM ADDITIONAL INVESTMENT You can make additional purchases of $100, or $50 if you use our Systematic Investment Plan. SYSTEMATIC INVESTMENT PLAN You can make regular purchases of $50 or more using automatic transfers from your bank account to the Funds you choose. You can contact your investment professional or us to set up the plan. Here's how the plan works: o You can buy shares twice a month, monthly or quarterly. o You can choose to have us transfer your money on or about the 15th or the last day of the month. o Some exceptions may apply to employees of Bank of America and its affiliates, and to plans set up before August 1, 1997. For details, please contact your investment professional. 13 [GRAPHIC] FOR MORE INFORMATION ABOUT TELEPHONE ORDERS, SEE PAGE 27. [GRAPHIC] SELLING SHARES Here are some general rules for selling shares: o If you're selling your shares through a selling agent, we'll normally send the sale proceeds by federal funds wire within three business days after Stephens, First Data or their agents receive your order. Your selling agent is responsible for depositing the sale proceeds to your account on time. o If you're selling your shares directly through us, we'll normally send the sale proceeds by mail or wire them to your bank account within three business days after the Fund receives your order. o You can sell up to $50,000 of shares by telephone if you qualify for telephone orders. o If you paid for your shares with a check that wasn't certified, we'll hold the sale proceeds when you sell those shares for at least 15 days after the trade date of the purchase, or until the check has cleared. o If you hold any shares in certificate form, you must sign the certificates (or send a signed stock power with them) and send them to First Data. Your signature must be guaranteed unless you've made other arrangements with us. We may ask for any other information we need to prove that the order is properly authorized. o Under certain circumstances allowed under the Investment Company Act of 1940 (1940 Act), we can pay you in securities or other property when you sell your shares, or delay payment of the sale proceeds for up to seven days. o Other restrictions may apply to retirement plan accounts. For more information about these restrictions, please contact your retirement plan administrator. We may sell your shares: o if the value of your account falls below $500. We'll give you 60 days notice in writing if we're going to do this o if your selling agent tells us to sell your shares under arrangements made between the selling agent and its customers o under certain other circumstances allowed under the 1940 Act AUTOMATIC WITHDRAWAL PLAN The Automatic Withdrawal Plan lets you withdraw $25 or more every month, every quarter or every year. You can contact your investment professional or us to set up the plan. Here's how the plan works: o Your account balance must be at least $10,000 to set up the plan. o If you set up the plan after you've opened your account, your signature must be guaranteed. o You can choose to have us transfer your money on or about the 15th or the 25th of the month. o We'll send you a check or deposit the money directly to your bank account. o You can cancel the plan by giving your selling agent or us 30 days notice in writing. It's important to remember that if you withdraw more than your investment in the Fund is earning, you'll eventually use up your original investment. 14 [GRAPHIC] YOU SHOULD MAKE SURE YOU UNDERSTAND THE INVESTMENT OBJECTIVES AND POLICIES OF THE FUND YOU'RE EXCHANGING INTO. PLEASE READ ITS PROSPECTUS CAREFULLY. [GRAPHIC] EXCHANGING SHARES You can sell shares of the Fund to buy shares of another Nations Fund. This is called an exchange. You might want to do this if your investment goals or tolerance for risk changes. Here's how exchanges work: o You can exchange Investor A Shares of an Index Fund for Investor A Shares of any other Index Fund. o If you received Investor A Shares of a Managed Index Fund through a conversion of Investor C Shares originally bought through a 401(k) plan, you can also exchange your shares for: o Investor C Shares of any other Nations Fund, except Nations Funds Money Market Funds o Daily Shares of Nations Funds Money Market Funds (before October 1, 1999) o Investor C Shares of Nations Reserves Money Market Funds (on or after October 1, 1999) o You must exchange at least $1,000, or $25 if you use our Automatic Exchange Feature. o The rules for buying shares of a Fund, including any minimum investment requirements, apply to exchanges into that Fund. o You may only make an exchange into a Fund that is legally sold in your state of residence. o You generally may only make an exchange into a Fund that is accepting investments. o We may limit the number of exchanges you can make within a specified period of time. o We may change or cancel your right to make an exchange by giving the amount of notice required by regulatory authorities (generally 60 days for a material change or cancellation). o You cannot exchange any shares you own in certificate form until First Data has received the certificate and deposited the shares to your account. AUTOMATIC EXCHANGE FEATURE The Automatic Exchange Feature lets you exchange $25 or more of Investor A Shares every month or every quarter. You can contact your investment professional or us to set up the plan. Here's how automatic exchanges work: o Send your request to First Data in writing or call 1.800.321.7854. o You must already have an investment in the Funds you want to exchange. o You can choose to have us transfer your money on or about the 15th or the last day of the month. o The rules for making exchanges apply to automatic exchanges. 15 [GRAPHIC] THE FINANCIAL INSTITUTION OR INTERMEDIARY THAT BUYS SHARES FOR YOU IS ALSO SOMETIMES REFERRED TO AS A SELLING AGENT. THE DISTRIBUTION FEE IS OFTEN REFERRED TO AS A "12B-1" FEE BECAUSE IT'S PAID THROUGH A PLAN APPROVED UNDER RULE 12B-1 UNDER THE 1940 ACT. YOUR SELLING AGENT MAY CHARGE OTHER FEES RELATED TO SERVICES PROVIDED TO YOUR ACCOUNT. [GRAPHIC] HOW SELLING AND SERVICING AGENTS ARE PAID Selling and servicing agents usually receive compensation based on your investment in the Fund. The kind and amount of the compensation depends on the share class you invest in. Selling agents typically pay a portion of the compensation they receive to their investment professionals. DISTRIBUTION (12B-1) AND SHAREHOLDER SERVICING FEES Stephens and selling and servicing agents are compensated for selling shares and providing services to investors under a combined distribution and shareholder servicing plan. Stephens and selling and servicing agents may receive a maximum combined annual distribution (12b-1) and shareholder servicing fee of 0.25% for selling shares and providing services to investors. Fees are calculated daily and deducted monthly. Because these fees are paid out of the Fund's assets on an ongoing basis, over time they will increase the cost of your investment, and may cost you more than any sale's charges you may pay. The Fund pays these fees to Stephens and to eligible selling and servicing agents for as long as the plans continue. We may reduce or discontinue payments at any time. OTHER COMPENSATION Selling and servicing agents may also receive: o a bonus, incentive or other compensation relating to the sale, promotion and marketing of the Fund o an amount of up to 1.00% of the net asset value per share on all sales of Investor A Shares o non-cash compensation like trips to sales seminars or vacation destinations, tickets to sporting events, theater or other entertainment, opportunities to participate in golf or other outings and gift certificates for meals or merchandise This compensation, which is not paid by the Fund, is discretionary and may be available only to selected selling and servicing agents. For example, Stephens sometimes sponsors promotions involving Banc of America Investment, Inc., an affiliate of BAAI, and certain other selling or servicing agents. Selected selling and servicing agents also may receive compensation for opening a minimum number of accounts. BAAI also may pay amounts from its own assets to Stephens or to selling or servicing agents for services they provide. 16 [GRAPHIC] THE POWER OF COMPOUNDING REINVESTING YOUR DISTRIBUTIONS BUYS YOU MORE SHARES OF A FUND -- WHICH LETS YOU TAKE ADVANTAGE OF THE POTENTIAL FOR COMPOUND GROWTH. PUTTING THE MONEY YOU EARN BACK INTO YOUR INVESTMENT MEANS IT, IN TURN, MAY EARN EVEN MORE MONEY. OVER TIME, THE POWER OF COMPOUNDING HAS THE POTENTIAL TO SIGNIFICANTLY INCREASE THE VALUE OF YOUR INVESTMENT. THERE IS NO ASSURANCE, HOWEVER, THAT YOU'LL EARN MORE MONEY IF YOU REINVEST YOUR DISTRIBUTIONS. [GRAPHIC] DISTRIBUTIONS AND TAXES ABOUT DISTRIBUTIONS A mutual fund can make money two ways: o It can earn income. Examples are interest paid on bonds and dividends paid on common stocks. o A fund can also have capital gain if the value of its investments increases. If a fund sells an investment at a gain, the gain is realized. If a fund continues to hold the investment, any gain is unrealized. A mutual fund is not subject to income tax as long as it distributes its net investment income and realized capital gain to its shareholders. The Fund intends to pay out a sufficient amount of their income and capital gain to their shareholders so the Fund won't have to pay any income tax. When a Fund makes this kind of a payment, it's split equally among all shares, and is called a distribution. The Fund distributes any net realized capital gain at least once a year. The frequency of distributions of net investment income varies by Fund:
Frequency of Fund income distributions Nations MidCap Index Fund quarterly
A distribution is paid based on the number of shares you hold on the record date, which is usually the day the distribution is declared (daily dividend Funds) or the day before the distribution is declared (all other Funds). Shares are eligible to receive distributions from the settlement date (daily dividend Funds) or the trade date (all other Funds) of the purchase up to and including the day before the shares are sold. Different share classes of a Fund usually pay different distribution amounts, because each class has different expenses. Each time a distribution is made, the net asset value per share of the share class is reduced by the amount of the distribution. We'll automatically reinvest distributions in additional shares of the same Fund unless you tell us you want to receive your distributions in cash. You can do this by writing to us at the address on the back cover or by calling us at 1.800.321.7854. We generally pay cash distributions within five business days after the end of the month, quarter or year in which the distribution was made. If you sell all of your shares, we'll pay any distribution that applies to those shares in cash within five business days after the sale was made. 17 [GRAPHIC] THIS INFORMATION IS A SUMMARY OF HOW FEDERAL INCOME TAXES MAY AFFECT YOUR INVESTMENT IN THE FUND. IT IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING. YOU SHOULD CONSULT WITH YOUR OWN TAX ADVISOR ABOUT YOUR SITUATION, INCLUDING ANY FOREIGN, STATE AND LOCAL TAXES THAT MAY APPLY. [GRAPHIC] FOR MORE INFORMATION ABOUT TAXES, PLEASE SEE THE SAI. If you buy shares of a Fund shortly before it makes a distribution, you will, in effect, receive part of your purchase back in the distribution, which is subject to tax. Similarly, if you buy shares of a Fund that holds securities with unrealized capital gain, you will, in effect, receive part of your purchase back if and when the Fund sells those securities and distributes the gain. This distribution is also subject to tax. Some Funds have built up, or have the potential to build up, high levels of unrealized capital gain. HOW TAXES AFFECT YOUR INVESTMENT Distributions that come from net investment income and any excess of net short-term capital gain over net long-term capital loss generally are taxable to you as ordinary income. Distributions that come from net capital gain (generally the excess of net long-term capital gain over net short-term capital loss) generally are taxable to you as net capital gain. In general, all distributions are taxable to you when paid, whether they are paid in cash or automatically reinvested in additional shares of the Fund. However, any distributions declared in October, November or December of one year and distributed in January of the following year will be taxable as if they had been paid to you on December 31 of the first year. We'll send you a notice every year that tells you how much you've received in distributions during the year and their federal tax status. Foreign, state and local taxes may also apply to these distributions. WITHHOLDING TAX We're required by federal law to withhold tax of 31% on any distributions and redemption proceeds paid to you (including amounts deemed to be paid for "in kind" redemptions and exchanges) if: o you haven't given us a correct Taxpayer Identification Number (TIN) and haven't certified that the TIN is correct and withholding doesn't apply o the Internal Revenue Service (IRS) has notified us that the TIN listed on your account is incorrect according to its records o the IRS informs us that you're otherwise subject to backup withholding The IRS may also impose penalties against you if you don't give us a correct TIN. Amounts we withhold are applied to your federal income tax liability. You may receive a refund from the IRS if the withholding tax results in an overpayment of taxes. We're also normally required by federal law to withhold tax on distributions paid to foreign shareholders. 18 TAXATION OF REDEMPTIONS AND EXCHANGES Your redemptions (including redemptions "in kind") and exchanges of Fund shares will usually result in a taxable capital gain or loss, depending on the amount you receive for your shares (or are deemed to receive in the case of exchanges) and the amount you paid (or are deemed to have paid) for them. 19 [GRAPHIC] TERMS USED IN THIS PROSPECTUS ASSET-BACKED SECURITY - a debt security that gives you an interest in a pool of assets that is collateralized or "backed" by one or more kinds of assets, including real property, receivables or mortgages, generally issued by banks, credit card companies or other lenders. Some securities may be issued or guaranteed by the U.S. government or its agencies, authorities or instrumentalities. Asset-backed securities typically make periodic payments, which may be interest or a combination of interest and a portion of the principal of the underlying assets. CAPITAL GAIN OR LOSS - the difference between the purchase price of a security and its selling price. You realize a capital gain when you sell a security for more than you paid for it. You realize a capital loss when you sell a security for less than you paid for it. CASH EQUIVALENTS - short-term, interest-bearing instruments, including obligations issued or guaranteed by the U.S. government, its agencies and instrumentalities, bank obligations, asset-backed securities, foreign government securities and commercial paper issued by U.S. and foreign issuers which, at the time of investment, is rated at least Prime-2 by Moody's Investor Services, Inc. (Moody's), A-2 by S&P, or F-1 by Fitch IBCA (Fitch). COMMON STOCK - a security that represents part equity ownership in a company. Common stock typically allows you to vote at shareholder meetings and to share in the company's profits by receiving dividends. CONVERTIBLE DEBT - a debt security that can be exchanged for common stock (or another type of security) on a specified basis and date. CONVERTIBLE SECURITY - a security that can be exchanged for common stock (or another type of security) at a specified rate. Convertible securities include convertible debt, rights and warrants. CROSSING NETWORKS - an electronic system where anonymous parties can match buy and sell transactions. These transactions don't affect the market, and transaction costs are extremely low. DEBT SECURITY - when you invest in a debt security, you are typically lending your money to a governmental body or company (the issuer) to help fund their operations or major projects. The issuer pays interest at a specified rate on a specified date or dates, and repays the principal when the security matures. Short-term debt securities include money market instruments such as treasury bills. Long-term debt securities include fixed income securities such as government and corporate bonds, and mortgage-backed and asset-backed securities. DEPOSITARY RECEIPTS - evidence of the deposit of a security with a custodian bank. American Depositary Receipts (ADRs), for example, are certificates traded in U.S. markets representing an interest of a foreign company. They were created to make it possible for foreign issuers to meet U.S. security registration requirements. Other examples include ADSs, GDRs and EDRs. 20 DIVIDEND YIELD - rate of return of dividends paid on a common or preferred stock. It equals the amount of the annual dividend on a stock expressed as a percentage of the stock's current market value. EQUITY SECURITY - an investment that gives you an equity ownership right in a company. Equity securities (or "equities") include common and preferred stock, rights and warrants. FIRST BOSTON CONVERTIBLE INDEX - a widely-used unmanaged index that measures the performance of convertible securities. The index is not available for investment. FIXED INCOME SECURITY - an intermediate to long-term debt security that matures in more than one year. FOREIGN SECURITY - a debt or equity security issued by a foreign company or government. FUNDAMENTAL ANALYSIS - a method of securities analysis that tries to evaluate the intrinsic, or "true," value of a particular stock. It includes a study of the overall economy, industry conditions and the financial condition and management of a company. FUTURES CONTRACT - a contract to buy or sell an asset or an index of securities at a specified price on a specified future date. The price is set through a futures exchange. IFC INVESTABLES INDEX - an unmanaged index that tracks more than 1,400 stocks in 25 emerging markets in Asia, Latin America, Eastern Europe, Africa and Middle East. The index is weighted by market capitalization. INVESTMENT GRADE - a debt security that has been given a medium to high credit rating (Baa or higher by Moody's, BBB or higher by S&P or a comparable rating by other nationally recognized statistical rating organization NRSROs) based on the issuer's ability to pay interest and repay principal on time. The portfolio management team may consider an unrated debt security to be investment grade if the team believes it is of comparable quality. Please see the SAI for more information about credit ratings. LIQUIDITY - a measurement of how easily a security can be bought or sold at a price that is close to its market value. MONEY MARKET INSTRUMENT - a short-term debt security that matures in 13 months or less. Money market instruments include U.S. Treasury obligations, U.S. government obligations, certificates of deposit, bankers' acceptances, commercial paper, repurchase agreements and certain municipal securities. MORTGAGE-BACKED SECURITY OR MORTGAGE-RELATED SECURITY - a debt security that gives you an interest in, and is backed by, a pool of residential mortgages issued by the U.S. government or by financial institutions. The underlying mortgages may be guaranteed by the U.S. government or one of its agencies, authorities or instrumentalities. 21 Mortgage-backed securities typically make monthly payments, which are a combination of interest and a portion of the principal of the underlying mortgages. MSCI EAFE INDEX - Morgan Stanley Capital International Europe, Australasia and Far East Index, an index of over 1,100 stocks from 21 developed markets in Europe, Australia, New Zealand and Asia. The index reflects the relative size of each market. MUNICIPAL SECURITY (OBLIGATION) - a debt security issued by state or local governments or governmental authorities to pay for public projects and services. "General obligations" are typically backed by the issuer's full taxing and revenue-raising powers. "Revenue securities" depend on the income earned by a specific project or authority, like road or bridge tolls, user fees for water or revenues from a utility. Interest income from these securities is exempt from federal income taxes and is generally exempt from state taxes if you live in the state that issued the security. If you live in the municipality that issued the security, interest income may also be exempt from local taxes. NON-DIVERSIFIED - a fund that holds securities of fewer issuers or kinds of issuers than other kinds of funds. Non-diversified funds tend to have greater price swings than more diversified funds because events affecting one or more of its securities may have a disproportionately large effect on the fund. OVER-THE-COUNTER MARKET - a market where dealers trade securities through a telephone or computer network rather than through a public stock exchange. PREFERRED STOCK - a type of equity security that gives you a limited ownership right in a company, with certain preferences or priority over common stock. Preferred stock generally pays a fixed annual dividend. If the company goes bankrupt, preferred shareholders generally receive their share of the company's remaining assets before common shareholders and after bondholders and other creditors. PRICE-TO-EARNINGS RATIO (P/E RATIO) - the current price of a share divided by its actual or estimated earnings per share. The P/E ratio is one measure of the value of a company. QUANTITATIVE ANALYSIS - an analysis of financial information about a company or security to identify securities that have the potential for growth or are otherwise suitable for a fund to buy. REAL ESTATE INVESTMENT TRUST (REIT) - a portfolio of real estate investments which may include office buildings, apartment complexes, hotels and shopping malls, and real-estate-related loans or interests. RIGHT - a temporary privilege allowing investors who already own a common stock to buy additional shares directly from the company at a specified price or formula. 22 RUSSELL 2000 - an unmanaged index of 2,000 of the smallest stocks representing approximately 11% of the U.S. equity market. The index is weighted by market capitalization, and is not available for investment. S&P 400(1) - Standard & Poor's 400 Composite Stock Price Index, an unmanaged index of 400 widely held common stocks. It is not available for investment. S&P MIDCAP 400(1) - an unmanaged index of 400 domestic stocks chosen for market size, liquidity and industry representation. The index is weighted by market value, and is not available for investment. S&P SMALLCAP 600(1) - Standard & Poor's SmallCap 600 Index, an unmanaged index of 600 common stocks, weighted by market capitalization. It is not available for investment. S&P/BARRA SMALLCAP VALUE INDEX(1) - an unmanaged index of a group of stocks from the S&P SmallCap 600 that have low price-to-book ratios relative to the S&P SmallCap 600 as a whole. It is weighted by market capitalization, and is not available for investment. S&P/BARRA VALUE INDEX(1) - an unmanaged index of a group of stocks from the S&P 500 that have low price-to-book ratios relative to the S&P 500 as a whole. It is weighted by market capitalization, and is not available for investment. SENIOR SECURITY - a debt security that allows holders to receive their share of a company's remaining assets in a bankruptcy before other bondholders, creditors, and common and preferred shareholders. SETTLEMENT DATE - the date on which an order is settled either by payment or delivery of securities. TRADE DATE - the effective date of a purchase, sale or exchange transaction, or other instructions sent to us. The trade date is determined by the day and time we receive the order or instructions in a form that's acceptable to us. U.S. GOVERNMENT OBLIGATIONS - a wide range of debt securities issued or guaranteed by the U.S. government or its agencies, authorities or instrumentalities. WARRANT - a certificate that gives you the right to buy common shares at a specified price within a specified period of time. WILSHIRE 5000 EQUITY INDEX - an index that measures the performance of the equity securities of all companies headquartered in the U.S. that have readily available price data -- over 7,000 companies. The index is weighted by market capitalization and is not available for investment. (1)S&P and BARRA have not reviewed any stock included in the S&P 400, S&P 600, BARRA Index or BARRA SmallCap Index for its investment merit. S&P and BARRA determine and calculate their indexes independently of the Funds and are not a sponsor or affiliate of the Funds. S&P and BARRA give no information and make no statements about the suitability of investing in the Funds or the ability of their indexes to track stock market performance. S&P and BARRA make no guarantees about the indexes, any data included in them and the suitability of the indexes or their data for any purpose. "Standard and Poor's," "S&P 400" and "S&P 600" are trademarks of the McGraw-Hill Companies, Inc. 23 (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 Index Funds in the following documents: [GRAPHIC] ANNUAL AND SEMI-ANNUAL REPORTS The annual and semi-annual reports contain information about Fund investments and performance, the financial statements and the auditor's reports. The annual report also includes a discussion about the market conditions and investment strategies that had a significant effect on each Fund's performance during the period covered. [GRAPHIC] STATEMENT OF ADDITIONAL INFORMATION The SAI contains additional information about the Funds and their policies. The SAI is legally part of this prospectus (it's incorporated by reference). A copy has been filed with the SEC. You can obtain a free copy of these documents, request other information about the Funds and make shareholder inquiries by contacting Nations Funds: By telephone: 1.800.321.7854 By mail: NATIONS FUNDS C/O STEPHENS INC. ONE BANK OF AMERICA PLAZA 33RD FLOOR CHARLOTTE, NC 28255 On the Internet: WWW.NATIONSBANK.COM/NATIONSFUNDS If you prefer, you can write the SEC's Public Reference Room and ask them to mail you copies of these documents. They'll charge you a fee for this service. You can also download them from the SEC's website or visit the Public Reference Section and copy the documents while you're there. Please call the SEC for more information. PUBLIC REFERENCE SECTION OF THE SEC WASHINGTON, DC 20549-6009 1.800.SEC.0330 WWW.SEC.GOV SEC file number: Nations Funds Trust, [GRAPHIC] NATIONS FUNDS FIXED INCOME FUND AND STATE MUNICIPAL BOND FUNDS PROSPECTUS -- INVESTOR A, B AND C SHARES JANUARY , 2000 Fixed Income Fund NATIONS HIGH YIELD FUND State Municipal Bond Fund NATIONS KANSAS INTERMEDIATE MUNICIPAL BOND FUND THE SECURITIES AND EXCHANGE COMMISSION (SEC) HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. NOT FDIC INSURED - ------------------- May Lose Value - ------------------- No Bank Guarantee - ------------------- NATIONS FUNDS AN OVERVIEW OF THE FUNDS - -------------------------------------------------------------------------------- [GRAPHIC] TERMS USED IN THIS PROSPECTUS IN THIS PROSPECTUS, WE, US AND OUR REFER TO THE NATIONS FUNDS FAMILY (NATIONS FUNDS). SOME OTHER IMPORTANT TERMS WE'VE USED MAY BE NEW TO YOU. THESE ARE PRINTED IN ITALICS WHERE THEY FIRST APPEAR IN A SECTION AND ARE DESCRIBED IN TERMS USED IN THIS PROSPECTUS. [GRAPHIC] YOU'LL FIND TERMS USED IN THIS PROSPECTUS ON PAGE 72. YOUR INVESTMENT IN THESE FUNDS IS NOT A BANK DEPOSIT AND IS NOT INSURED OR GUARANTEED BY BANK OF AMERICA, N. A. (BANK OF AMERICA), THE FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) OR ANY OTHER GOVERNMENT AGENCY. YOUR INVESTMENT MAY LOSE MONEY. AFFILIATES OF BANK OF AMERICA ARE PAID FOR THE SERVICES THEY PROVIDE TO THE FUNDS. This booklet, which is called a prospectus, tells you about one of the Nations Funds Fixed Income Funds and one of the Nations Funds State Municipal Bond Funds. Please read it carefully, because it contains information that's designed to help you make informed investment decisions. ABOUT THE FUNDS The Fixed Income Fund focuses on the potential to earn income by investing primarily in 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. There's always a risk that you'll lose money or you may not earn as much as you expect. State Municipal Bond Funds invest most of their assets in securities issued by one state and are generally intended for residents of that state. The Fund focuses on the potential to earn income that is free from federal and state income tax by investing primarily in MUNICIPAL SECURITIES. Municipal securities also have the potential to increase in value because when interest rates fall, the value of these securities tends to rise. When interest rates rise, however, the value of these securities tends to fall. Other things can also affect the value of municipal securities. There's always a risk that you'll lose money, or you may not earn as much as you expect. Because they invest primarily in securities issued by one state, the Fund is considered to be NON-DIVERSIFIED. This means the value of a Fund and the amount of interest it pays could also be affected by the financial conditions of the state, its public authorities and local governments. ARE THESE FUNDS RIGHT FOR YOU? Not every Fund is right for every investor. When you're choosing a Fund to invest in, you should consider things like your investment goals, how much risk you can accept and how long you're planning to hold your investment. The Fixed Income Fund may be suitable for you if: o you're looking for income o you have longer-term investment goals 2 It may not be suitable for you if: o you're not prepared to accept or are unable to bear the risks associated with fixed income securities The State Municipal Fund may be suitable for you if: o you're looking for income o you want to reduce taxes on your investment o you have longer-term investment goals It may not be suitable for you if: o you're not prepared to accept or are unable to bear the risks associated with FIXED INCOME SECURITIES You'll find a discussion of each Fund's principal investments, strategies and risks in the Fund descriptions that start on page 4. FOR MORE INFORMATION If you have any questions about the Funds, please call us at 1.800.321.7854 or contact your investment professional. You'll find more information about the Funds in the Statement of Additional Information (SAI). The SAI includes more detailed information about each Fund's investments, policies, performance and management, among other things. Please turn to the back cover to find out how you can get a copy. 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 34. [GRAPHIC] ABOUT THE FUNDS FIXED INCOME FUND NATIONS HIGH YIELD FUND 5 Sub-adviser: - --------------------------------------------------------------------- STATE MUNICIPAL BOND FUND NATIONS KANSAS INTERMEDIATE MUNICIPAL BOND FUND 8 Sub-adviser: TradeStreet Investment Associates, Inc. - --------------------------------------------------------------------- OTHER IMPORTANT INFORMATION 12 - --------------------------------------------------------------------- HOW THE FUNDS ARE MANAGED 13 [GRAPHIC] ABOUT YOUR INVESTMENT INFORMATION FOR INVESTORS Choosing a share class 15 Buying, selling and exchanging shares 26 How selling and servicing agents are paid 35 Distributions and taxes 37 - -------------------------------------------------------------------- TERMS USED IN THIS PROSPECTUS 40 - -------------------------------------------------------------------- WHERE TO FIND MORE INFORMATION BACK COVER
4 ABOUT THE FIXED INCOME FUND - -------------------------------------------------------------------------------- [GRAPHIC] ABOUT THE SUB-ADVISER [INSERT SUB-ADVISER'S NAME] IS THIS FUND'S SUB-ADVISER. [Insert portfolio management team name] MAKES THE DAY-TO-DAY INVESTMENT DECISIONS FOR THE FUND. [GRAPHIC] YOU'LL FIND MORE ABOUT [NAME OF SUB-ADVISER] AND [name of portfolio management team] ON PAGE[insert number]. [GRAPHIC] HIGH YIELD DEBT SECURITIES THIS FUND INVESTS PRIMARILY IN HIGH YIELD DEBT SECURITIES. HIGH YIELD DEBT SECURITIES OFFER THE POTENTIAL FOR HIGHER INCOME THAN OTHER KINDS OF DEBT SECURITIES WITH SIMILAR MATURITIES, BUT THEY ALSO HAVE HIGHER CREDIT RISK. NATIONS HIGH YIELD FUND [GRAPHIC] INVESTMENT OBJECTIVE This Fund seeks maximum income by investing in a diversified portfolio of high-yield debt securities. [GRAPHIC] PRINCIPAL INVESTMENT STRATEGIES The Fund normally invests at least 65% of its assets in domestic and foreign corporate HIGH-YIELD DEBT SECURITIES. The Fund invests primarily in: o Domestic corporate debt securities o U.S. dollar-denominated foreign corporate DEBT SECURITIES o ZERO-COUPON BONDS o U.S. GOVERNMENT OBLIGATIONS o EQUITY SECURITIES (up to 25% of its assets) The Fund also may invest in securities that aren't part of its principal investment strategies, but it won't hold more than 10% of its assets in any one type of these securities. These securities are described in the SAI. When selecting individual investments, the portfolio management team: o Uses a "bottom-up," total return approach with respect to an issuer o Emphasizes current income while attempting to minimize risk to principal o Seeks to identify a catalyst for capital appreciation o Selects securities using fundamental credit analysis o tries to manage risk by diversifying the Fund's investments across securities of many different issuers o is attentive to current developments and trends in both the economy and financial markets The portfolio management team may sell a security when its market price rises above the target price the team has set, when it believes there has been a deterioration in an issuer's fundamentals or an issue's credit quality, or for diversification or other reasons. 5 [GRAPHIC] THERE ARE TWO KINDS OF FEES -- SALES CHARGES YOU PAY DIRECTLY, AND ANNUAL FUND OPERATING EXPENSES THAT ARE DEDUCTED FROM A FUND'S ASSETS. TOTAL NET EXPENSES ARE ACTUAL EXPENSES PAID BY THE FUND AFTER WAIVERS AND/OR REIMBURSEMENTS. [GRAPHIC] RISKS AND OTHER THINGS TO CONSIDER Nations High Yield Fund has the following risks: o INVESTMENT STRATEGY RISK - There is a risk that the value of the investments that the portfolio management team chooses will not rise as high as the team expects, or will fall. o CREDIT RISK - The types of securities in which the Fund typically invests are generally considered speculative because they present a greater risk of loss, including default, than higher quality debt securities. These securities typically pay a premium -- a high interest rate or yield -- because of the increased risk of loss. These securities also can be subject to greater price volatility. o INTEREST RATE RISK - The prices of fixed income securities will tend to fall when interest rates rise. In general, fixed income securities with longer terms tend to fall more in value when interest rates rise than fixed income securities with shorter terms. o DERIVATIVES RISK - This Fund may invest in derivatives. There is a risk that these investments could result in losses, reduce returns, increase transaction costs or increase the Fund's volatility. [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 4.75% none none Maximum deferred sales charge as a % of net asset value none(1) 5.00%(2) 1.00%(3) Redemption fee, as a % of the amount sold none none none ANNUAL FUND OPERATING EXPENSES (Expenses that are deducted from the Fund's assets) Management fees 0.65% 0.65% 0.65% Distribution (12b-1) and shareholder servicing fees 0.23% 1.00% 1.00% Other expenses 0.38% 0.38% 0.38% ------ -------- -------- Total annual Fund operating expenses 1.28% 2.03% 2.03% Fee waivers and/or reimbursements 0.00% 0.00% 0.00% ------ -------- -------- Total net expenses(4) 1.28% 2.03% 2.03% ====== ======== ========
(1)A 1.00% maximum deferred sales charge applies to investors who buy $1 million or more of Investor A Shares and sell them within eighteen months of buying them. (2)This charge decreases over time. Please see page 42 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 44 for details. 6 [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. (4)Nations High Yield Fund's investment adviser and/or some of its other service providers have agreed to limit total annual operating expenses to 0.97% for Investor A Shares, 1.72% for Investor B Shares, and 1.72% for Investor C Shares until May 2000. The figures shown here are after waivers and/or reimbursements. There is no guarantee that these waivers and/or reimbursements will continue after this date. EXAMPLE This example is intended to help you compare the cost of investing in this Fund with the cost of investing in other mutual funds. This example assumes: o you invest $10,000 in Investor A, Investor B or Investor C Shares of the Fund for the time periods indicated and then sell all of your shares at the end of those periods o you reinvest all dividends and distributions in the Fund o your investment has a 5% return each year o the Fund's operating expenses remain the same as shown in the table above o the waivers and/or reimbursements shown above expire May 2000 and are not reflected in the 3, 5 and 10 year examples Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 year 3 years 5 years 10 years Investor A Shares $700 $960 $1,240 $2,030 Investor B Shares $706 $937 $1,293 $2,166 Investor C Shares $306 $637 $1,093 $2,358
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 $206 $637 $1,093 $2,166 Investor C Shares $206 $637 $1,093 $2,358
7 ABOUT THE STATE MUNICIPAL BOND FUND - -------------------------------------------------------------------------------- [GRAPHIC] ABOUT THE SUB-ADVISER TRADESTREET IS THIS FUND'S SUB-ADVISER. TRADESTREET'S MUNICIPAL FIXED INCOME MANAGEMENT TEAM MAKES THE DAY-TO-DAY INVESTMENT DECISIONS FOR THE FUND. [GRAPHIC] YOU'LL FIND MORE ABOUT TRADESTREET ON PAGE 93. [GRAPHIC] THIS FUND AT A GLANCE o WHO SHOULD CONSIDER INVESTING: RESIDENTS OF KANSAS o DURATION: 3 TO 8 YEARS o INCOME POTENTIAL: MODERATE o RISK POTENTIAL: MODERATE [GRAPHIC] DURATION DURATION IS A MEASURE USED TO ESTIMATE HOW MUCH A FUND'S PORTFOLIO WILL FLUCTUATE IN RESPONSE TO A CHANGE IN INTEREST RATES. NATIONS KANSAS INTERMEDIATE MUNICIPAL BOND FUND [GRAPHIC] INVESTMENT OBJECTIVE This Fund seeks high current income exempt from federal and Kansas state income taxes consistent with moderate fluctuation of principal. [GRAPHIC] PRINCIPAL INVESTMENT STRATEGIES This Fund normally invests at least 80% of its assets in INVESTMENT GRADE intermediate-term MUNICIPAL SECURITIES that pay interest that is free from federal income tax and Kansas state income tax. The Fund may invest up to 20% of its assets in DEBT SECURITIES that are taxable, including securities that are subject to the federal alternative minimum tax. The Fund may also invest in securities that aren't part of its principal investment strategies, but it won't hold more than 10% of its assets in any one type of these securities. These securities are described in the SAI. Normally, the Fund's AVERAGE DOLLAR-WEIGHTED MATURITY will be between three and 10 years, and its DURATION will be between three and 8 years. When selecting individual investments, the portfolio management team: o looks at a security's potential to generate both income and price appreciation o allocates assets among revenue bonds, general obligation bonds, insured bonds and PRE-REFUNDED BONDS (bonds that are repaid before their maturity date), based on how they have performed in the past, and on how they are expected to perform under current market conditions. The team may change the allocations when market conditions change o selects securities using credit and structure analysis. Credit analysis evaluates the creditworthiness of individual issuers. The team may invest in securities with lower credit ratings if it believes that the potential for a higher yield is substantial compared with the risk involved, and that the credit quality is stable or improving. Structure analysis evaluates the characteristics of a security, including its call features, coupons, and expected timing of cash flows The team also considers other factors. It reviews public policy issues that may affect the municipal bond market. Securities with different coupon rates may also represent good investment opportunities based on supply and demand conditions for bonds o tries to maintain a duration that is similar to the duration of the Fund's benchmark. This can help manage interest rate risk The team may sell a security when it believes the security is overvalued, there is a deterioration in the security's credit rating or in the issuer's financial situation, when other investments are more attractive, or for other reasons. 8 [GRAPHIC] YOU'LL FIND MORE ABOUT OTHER RISKS OF INVESTING IN THIS FUND STARTING ON PAGE 91 AND IN THE SAI. [GRAPHIC] RISKS AND OTHER THINGS TO CONSIDER Nations Kansas Intermediate Municipal Bond Fund has the following risks: o INVESTMENT STRATEGY RISK - This Fund is considered to be NON-DIVERSIFIED because it invests most of its assets in securities that pay interest that is free from income tax in one state. The value of the Fund and the amount of interest it pays could also be affected by the financial conditions of the state, its public authorities and local governments. Although the Fund tries to maintain a share price of $1.00, an investment in the Fund could lose money. AN INVESTMENT IN THIS FUND IS NOT A BANK DEPOSIT AND IS NOT INSURED OR GUARANTEED BY BANK OF AMERICA, THE FDIC OR ANY OTHER GOVERNMENT AGENCY. o INTEREST RATE RISK - The prices of FIXED INCOME SECURITIES will tend to fall when interest rates rise. In general, fixed income securities with longer terms tend to fall more in value when interest rates rise than fixed income securities with shorter terms. o CREDIT RISK - The Fund could lose money if the issuer of a fixed income security is unable to pay interest or repay principal when it's due. Credit risk usually applies to most fixed income securities, but is generally not a factor for U.S. GOVERNMENT OBLIGATIONS. o CHANGING DISTRIBUTION LEVELS - The level of monthly income distributions paid by the Fund depends on the amount of income paid by the securities the Fund holds. It is not guaranteed and will change. Changes in the value of the securities, however, generally should not affect the amount of income they pay. o HOLDING CASH - The Fund may hold cash while it's waiting to make an investment, as a temporary defensive strategy, or if the portfolio management team believes that attractive tax-exempt investments are not available. Any uninvested cash the Fund holds does not earn income. o TAX CONSIDERATIONS - Most of the distributions paid by the Fund come from interest on municipal securities, and are generally free from federal income tax and Kansas state income tax, but may be subject to the federal alternative minimum tax, and other state and local taxes. Any portion of a distribution that comes from income paid by other kinds of securities or from realized capital gains is generally subject to federal, state and local taxes. 9 [GRAPHIC] THERE ARE TWO KINDS OF FEES -- SALES CHARGES YOU PAY DIRECTLY, AND ANNUAL FUND OPERATING EXPENSES THAT ARE DEDUCTED FROM A FUND'S ASSETS. TOTAL NET EXPENSES ARE ACTUAL EXPENSES PAID BY THE FUND AFTER WAIVERS AND/OR REIMBURSEMENTS. [GRAPHIC] WHAT IT COSTS TO INVEST IN THE FUND This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
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 3.25% none none Maximum deferred sales charge (load) as a % of net asset value none(1) 3.00%(2) 1.00%(3) Redemption fee, as a % of the amount sold none none none ANNUAL FUND OPERATING EXPENSES(5) (Expenses that are deducted from the Fund's assets) Management fees 0.40% 0.40% 0.40% Distribution (12b-1) and shareholder servicing fees 0.25% 1.00% 1.00% Other expenses 0.38% 0.38% 0.38% ------ -------- -------- Total annual Fund operating expenses 1.03% 1.78% 1.78% Fee waivers and/or reimbursements (0.28)% (0.28)% (0.28)% ------ -------- -------- Total net expenses(4) 0.75% 1.50% 1.50% ====== ======== ========
(1)A 1.00% maximum deferred sales charge applies to investors who buy $1 million or more of Investor A Shares and sell them within eighteen months of buying them. Please see page for details. (2)This charge decreases over time. Please see page 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 for details. (4)The Fund's investment adviser and/or some of its other service providers have agreed to waive fees and/or reimburse expenses until July 31, 2000. The figures shown here are after waivers and/or reimbursements. There is no guarantee that these waivers and/or reimbursements will continue after this date. 10 [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, 2000 and are not reflected in the 3, 5 and 10 year examples Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 year 3 years 5 years 10 years Investor A Shares $399 $611 $840 $1,500 Investor B Shares $453 $729 $930 $1,853 Investor C Shares $253 $529 $930 $2,052
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 $153 $529 $930 $1,853 Investor C Shares $153 $529 $930 $2,052
11 [GRAPHIC] OTHER IMPORTANT INFORMATION You'll find specific information about each Fund's principal investments, strategies and risks in the descriptions starting on page 4. The following are some other risks and information you should consider before you invest: o CHANGING INVESTMENT OBJECTIVES AND POLICIES - The investment objective and certain investment policies of any Fund can be changed without shareholder approval. Other investment policies may be changed only with shareholder approval. o CHANGING TO A FEEDER FUND - Unlike traditional mutual funds, which invest in individual securities, a "feeder fund" invests all of its assets in another fund, called a "master portfolio." Other feeder funds generally also invest in a master portfolio. The master portfolio invests in individual securities and has the same investment objective, investment strategies and principal risks as the feeder funds. This structure can help reduce a feeder fund's expenses because its assets are combined with those of other feeder funds. If a master portfolio doesn't attract other feeder funds, however, a feeder fund's expenses could be higher than those of a traditional mutual fund. A Fund may become a feeder fund if the Board of Trustees decides this would be in the best interests of shareholders. o HOLDING OTHER KINDS OF INVESTMENTS - The Funds may hold investments that aren't part of their principal investment strategies. Please refer to the SAI for more information. The portfolio managers or management team can also choose not to invest in specific securities described in this prospectus and in the SAI. o INVESTING DEFENSIVELY - A Fund may temporarily hold investments that are not part of its investment objective or its principal investment strategies to try to protect it during a market or economic downturn or because of political or other conditions. A Fund may not achieve its investment objective while it is investing defensively. o PORTFOLIO TURNOVER - A Fund that replaces -- or turns over -- more than 100% of its investments in a year is considered to trade frequently. Frequent trading can result in larger distributions of short-term CAPITAL GAINS to shareholders. These gains are taxable at higher rates than long-term capital gains. Frequent trading can also mean higher brokerage and other transaction costs, which could reduce the Fund's returns. The Funds generally buy securities for capital appreciation, investment income, or both, and don't engage in short-term trading. You'll find the portfolio turnover rate for each Fund in FINANCIAL HIGHLIGHTS. 12 [GRAPHIC] BANC OF AMERICA ADVISORS, INC. ONE BANK OF AMERICA PLAZA CHARLOTTE, NORTH CAROLINA 28255 [GRAPHIC] HOW THE FUNDS ARE MANAGED INVESTMENT ADVISER BAAI is the investment adviser to over 60 mutual fund portfolios in the Nations Funds family, including the Fixed Income and State Municipal Bond Fund described in this prospectus. BAAI is a registered investment adviser. It's a wholly-owned subsidiary of Bank of America, which is owned by Bank of America Corporation. Nations Funds pays BAAI an annual fee for its investment advisory services. The fee is calculated daily based on the average net assets of each Fund and is paid monthly. BAAI uses part of this money to pay investment sub-advisers for the services they provide to each Fund. BAAI has agreed to waive fees and/or reimburse expenses for certain Funds until July 31, 2000. You'll find a discussion of any waiver and/or reimbursement in the Fund descriptions. There is no assurance that BAAI will continue to waive and/or reimburse any fees and/or expenses after this date. The following chart shows the maximum advisory fees BAAI can receive, 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 advisory fee(1) Nations High Yield Fund 0.65% Nations Kansas Intermediate Municipal Bond Fund 0.40%
(1)These fees are the current contract levels, which in most cases have been reduced from the contract levels that were in effect during the last fiscal year. 13 [GRAPHIC] TRADESTREET INVESTMENT ASSOCIATES, INC. ONE BANK OF AMERICA PLAZA CHARLOTTE, NORTH CAROLINA 28255 [GRAPHIC] STEPHENS INC. 111 CENTER STREET LITTLE ROCK, ARKANSAS 72201 [GRAPHIC] FIRST DATA INVESTOR SERVICES GROUP, INC. 101 FEDERAL STREET BOSTON, MASSACHUSETTS 02110 INVESTMENT SUB-ADVISERS Nations Funds and BAAI have engaged investment sub-advisers to provide day-to-day portfolio management for the Funds. These sub-advisers function under the supervision of BAAI and the Boards of Directors/Trustees of Nations Funds. TRADESTREET INVESTMENT ASSOCIATES, INC. TradeStreet is a registered investment adviser and a wholly-owned subsidiary of Bank of America. Its management expertise covers all major domestic asset classes, including EQUITY and FIXED INCOME SECURITIES, and MONEY MARKET INSTRUMENTS. Currently managing more than $90 billion, TradeStreet has over 200 institutional clients and is sub-adviser to more than 50 mutual funds in the Nations Funds family. TradeStreet takes a team approach to investment management. Each team has access to the latest technology and analytical resources. TradeStreet is the investment sub-adviser to the Funds shown in the table below. The table also tells you which internal TradeStreet asset management team is responsible for making the day-to-day investment decisions for each Fund.
Fund TradeStreet Team Nations Kansas Intermediate Municipal Bond Fund Municipal Fixed Income Management Team
OTHER SERVICE PROVIDERS The Funds are distributed and co-administered by Stephens Inc., a registered broker/dealer. Stephens may pay commissions, distribution (12b-1) and shareholder servicing fees, and/or other compensation to companies for selling shares and providing services to investors. BAAI is also co-administrator of the Funds, and assists in overseeing the administrative operations of the Funds. The Funds pay BAAI and Stephens a combined fee of 0.22% for their services, plus certain out-of-pocket expenses. The fee is calculated as an annual percentage of the average daily net assets of the Funds, and is paid monthly. First Data Investor Services Group, Inc. (First Data) 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. 14 ABOUT YOUR INVESTMENT - -------------------------------------------------------------------------------- [GRAPHIC] WE'VE USED THE TERM, INVESTMENT PROFESSIONAL, TO REFER TO THE PERSON WHO HAS ASSISTED YOU WITH BUYING NATIONS FUNDS. SELLING AGENT OR SERVICING AGENT (SOMETIMES REFERRED TO AS A SELLING AGENT) MEANS THE COMPANY THAT EMPLOYS YOUR INVESTMENT PROFESSIONAL. SELLING AND SERVICING AGENTS INCLUDE BANKS, BROKERAGE FIRMS, MUTUAL FUND DEALERS AND OTHER FINANCIAL INSTITUTIONS, INCLUDING AFFILIATES OF BANK OF AMERICA. [GRAPHIC] FOR MORE INFORMATION ABOUT HOW TO CHOOSE A SHARE CLASS, CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL US AT 1.800.321.7854. [GRAPHIC] BEFORE YOU INVEST, PLEASE NOTE THAT OVER TIME, DISTRIBUTION (12B-1) AND SHAREHOLDER SERVICING FEES WILL INCREASE THE COST OF YOUR INVESTMENT, AND MAY COST YOU MORE THAN ANY SALES CHARGES YOU MAY PAY. FOR MORE INFORMATION, SEE HOW SELLING AND SERVICING AGENTS ARE PAID. [GRAPHIC] Choosing a share class Before you can invest in the Funds, you'll need to choose a share class. There are three classes of shares for each Fund offered by this prospectus except Nations Short-Term Income Fund, which doesn't offer Investor B Shares. Each class has its own sales charges and fees. The table below compares the charges and fees of the share classes.
Nations High Yield Fund, Nations Kansas Intermediate Municipal Investor A Shares Bond Fund Maximum amount you can buy no limit Maximum front-end sales charge 3.25% Maximum deferred sales charge(1) none Redemption fee(2) none Maximum annual distribution and shareholder servicing fees 0.25% distribution (12b-1)/ service fee Conversion feature none
(1)A 1.00% maximum deferred sales charge applies to investors who buy $1 million or more of Investor A Shares and sell them within eighteen months of buying them. Different charges may apply to purchases made prior to August 1, 1999. Please see page 41 for details. (2)A 1.00% redemption fee applies to investors who bought $1 million or more of Investor A Shares between July 31, 1997 and November 15, 1998 and sell them within 18 months of buying them. The fee is paid to the Fund. Please see page 41 for details. 15
Nations High Yield Fund, Nations Kansas Intermediate Municipal Investor B Shares Bond Fund Maximum amount you can buy $250,000 Maximum front-end sales charge none Maximum deferred sales charge 3.00%(1) Redemption fee none Maximum annual distribution and shareholder servicing fees 0.75% distribution (12b-1) fee 0.25% service fee Conversion feature yes
(1)This charge decreases over time. Please see page 42 for details. Different charges apply to Investor B Shares of certain funds bought before January 1, 1996 and after July 31, 1997. Please see page 41 for details.
Nations High Yield Fund, Nations Kansas Intermediate Municipal Investor C Shares Bond Fund Maximum amount you can buy no limit Maximum front-end sales charge none Maximum deferred sales charge1 1.00% Redemption fee none Maximum annual distribution and shareholder servicing fees 0.75% distribution (12b-1) fee 0.25% service fee Conversion feature none
(1)This charge applies to investors who buy Investor C Shares and sell them within one year of buying them. Please see page 44 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. 16 [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. The total cost of your investment over the time you expect to hold your shares will be affected by the distribution (12b-1) and shareholder servicing fees, as well as by the amount of any front-end sales charge or contingent deferred sales charge (CDSC) that applies, and when you're required to pay the charge. You should think about these things carefully before you invest. Investor A Shares have a front-end sales charge, which is deducted when you buy your shares. This means that a smaller amount is invested in the Funds, unless you qualify for a waiver or reduction of the sales charge. However, Investor A Shares have lower ongoing distribution (12b-1) and/or shareholder servicing fees than Investor B and Investor C Shares. This means that Investor A Shares can be expected to pay relatively higher dividends per share. Investor B Shares have limits on how much you can invest. When you buy Investor B or Investor C Shares, the full amount is invested in the Funds. However, you may pay a CDSC when you sell your shares. Over time, Investor B and Investor C Shares can incur distribution (12b-1) and shareholder servicing fees that are equal to or more than the front-end sales charge, and the distribution (12b-1) and shareholder servicing fees you would pay for Investor A Shares. Although the full amount of your purchase is invested in the Funds, any positive investment return on this money may be partially or fully offset by the expected higher annual expenses of Investor B and Investor C Shares. You should also consider the conversion feature for Investor B Shares, which is described in ABOUT INVESTOR B SHARES. [GRAPHIC] ABOUT INVESTOR A SHARES There is no limit to the amount you can invest in Investor A Shares. You generally will pay a front-end sales charge when you buy your shares, or in some cases, a CDSC when you sell your shares. FRONT-END SALES CHARGE You'll pay a front-end sales charge when you buy Investor A Shares, unless: o you qualify for a waiver of the sales charge. You can find out if you qualify for a waiver in the section, WHEN YOU MIGHT NOT HAVE TO PAY A SALES CHARGE o you're reinvesting distributions The sales charge you'll pay depends on the Fund you're buying, and the amount you're investing -- the larger the investment, the smaller the sales charge. 17
Nations High Yield Fund Nations Kansas Intermediate Municipal Bond Fund Amount retained by selling Sales charge Sales charge agents as a % of the as a % of the as a % of the offering price net asset value offering price Amount you bought per share per share per share $0-$99,999 3.25% 3.36% 3.00% $100,000- $249,999 2.50% 2.56% 2.25% $250,000- $499,999 2.00% 2.04% 1.75% $500,000- $999,999 1.50% 1.53% 1.25% $1,000,000 or more 0.00% 0.00% 1.00%(1)
(1)1.00% on the first $3,000,000, 0.50% on the next $47,000,000, 0.25% on amounts over $50,000,000. Stephens pays the amount retained by selling agents on investments of $1,000,000 or more, but may be reimbursed when a CDSC is deducted if the shares are sold within eighteen months from the time they were bought. Please see HOW SELLING AND SERVICING AGENTS ARE PAID for more information. 18 CONTINGENT DEFERRED SALES CHARGE If you own or buy $1,000,000 or more of Investor A Shares, there are two situations when you'll pay a CDSC: o If you bought your shares before August 1, 1999, and you sell them: o during the first year you own them, you'll pay a CDSC of 1.00% o during the second year you own them, you'll pay a CDSC of 0.50% o If you buy your shares on or after August 1, 1999 and sell them within 18 months of buying them, you'll pay a CDSC of 1.00%. The CDSC is calculated from the day your purchase is accepted (the TRADE DATE). We deduct the CDSC from the market value or purchase price of the shares, whichever is lower. You won't pay a CDSC on any increase in net asset value since you bought your shares, or on any shares you receive from reinvested distributions. We'll sell any shares that aren't subject to the CDSC first. We'll then sell shares that result in the lowest CDSC. REDEMPTION FEE There are two situations when we'll charge a 1% redemption fee on the sale of Investor A Shares: o if you bought $1,000,000 or more Investor A Shares between July 31, 1997 and November 15, 1998 and sell them within 18 months of buying them o if an employee benefit plan made its initial investment in Investor A Shares between July 31, 1997 and November 15, 1998 and sold those shares within 18 months of buying them because the plan sold all of its Nations Funds holdings The fee is deducted from the amount sold and is paid to the Fund. The Fund can reduce or cancel the fee at any time. [GRAPHIC] ABOUT INVESTOR B SHARES You can buy up to $250,000 of Investor B Shares at a time. You don't pay a sales charge when you buy Investor B Shares, but you may have to pay a CDSC when you sell them. CONTINGENT DEFERRED SALES CHARGE You'll pay a CDSC when you sell your Investor B Shares, unless: o you bought the shares on or after January 1, 1996 and before August 1, 1997 o you received the shares from reinvested distributions o you qualify for a waiver of the CDSC. You can find out how to qualify for a waiver on page 46 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. 19
Nations High Yield Fund Nations Kansas Intermediate Municipal Bond Fund If you sell your shares during the following year: You'll pay a CDSC of: - --------------------------------- --------------------------------------------------------------------- Shares you bought Shares Shares on or after you you bought Shares you bought between 1/1/1996 bought after 8/1/1997 and 11/15/1998 and before before 11/15/1998 in the following amounts: 8/1/1997 1/1/1996 ------------ -------------------------- ------------- --------- $500,000- $0-$499,999 $999,999 the first year you own them 3.0% 3.0% 2.0% none 4.0% the second year you own them 3.0% 2.0% 1.0% none 3.0% the third year you own them 2.0% 1.0% none none 3.0% the fourth year you own them 1.0% none none none 2.0% the fifth year you own them none none none none 2.0% the sixth year you own them none none none none 1.0% after six years of owning them none none none none none
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. 20 ABOUT THE CONVERSION FEATURE Investor B Shares generally convert automatically to Investor A Shares according to the following schedule:
Nations High Yield Fund Nations Kansas Intermediate Municipal Bond 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 six years $250,000-$499,999 six years $500,000-$999,999 five years before August 1, 1997 six 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 Funds Money Market Fund. o Conversions are free from federal tax. 21 [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. [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 46 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. 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. 22 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 through a trust account established with certain trustees and invested in the Funds within 90 days o Nations Funds' Trustees, Directors and employees of its investment sub-advisers o registered broker/dealers that have entered into a Nations Funds dealer agreement with Stephens may buy Investor A Shares without paying a front-end sales charge for their investment account only o registered personnel and employees of these broker/dealers may buy Investor A Shares without paying a front-end sales charge according to the internal policies and procedures of their employer as long as these purchases are made for their own investment purposes o employees or partners of any service provider to the Funds o investors who buy through accounts established with certain fee-based investment advisers or financial planners, including Nations Funds Personal Investment Planner accounts, wrap fee accounts and other managed agency/asset allocation accounts o shareholders of certain Funds that reorganized into the Nations Funds who were entitled to buy shares at net asset value 23 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. First Data, Stephens or their agents must receive your written request within 120 days after you sell your shares. Stephens may pay selling agents up to 1.00% of the net asset value of Investor A Shares bought without a sales charge. Stephens may be reimbursed through any CDSC that applies. CONTINGENT DEFERRED SALES CHARGES (Investor A, Investor B and Investor C Shares) You won't pay a CDSC on the following transactions: o shares sold following the death or disability (as defined in the tax code) of a shareholder, including a registered joint owner 24 o the following retirement plan distributions: o lump-sum or other distributions from a qualified corporate or self-employed retirement plan following the retirement (or following attainment of age 59 1/2 in the case of a "key employee" of a "top heavy" plan) o distributions from an IRA or Custodial Account under Section 403(b)(7) of the tax code, following attainment of age 59 1/2 o a tax-free return of an excess contribution to an IRA o distributions from a qualified retirement plan that aren't subject to the 10% additional federal withdrawal tax under Section 72(t)(2) of the tax code o payments made to pay medical expenses which exceed 7.5% of income, and distributions made to pay for insurance by an individual who has separated from employment and who has received unemployment compensation under a federal or state program for at least 12 weeks o shares sold under our right to liquidate a shareholder's account, including instances where the aggregate net asset value of Investor A, Investor B or Investor C Shares held in the account is less than the minimum account size o withdrawals made under the Automatic Withdrawal Plan described in BUYING, SELLING AND EXCHANGING SHARES, if the total withdrawals of Investor A, Investor B or Investor C Shares made in a year are less than 12% of the total value of those shares in your account. A CDSC may only apply to Investor A Shares if you bought more than $1,000,000 We'll also waive the CDSC on the sale of Investor A or Investor C Shares bought before September 30, 1994 by current or retired employees of Bank of America and its affiliates, or by current or former trustees or directors of the Nations Funds or other management companies managed by Bank of America. You won't pay a CDSC on the sale of Investor B or Investor C Shares if you reinvest any of the proceeds in the same Fund within 120 days of the sale. This is called the reinstatement privilege. You can invest up to the amount of the sale proceeds. We'll credit your account with any CDSC paid when you sold the shares. The reinstatement privilege does not apply to any shares you bought through a previous reinstatement. First Data, Stephens or their agents must receive your written request within 120 days after you sell your shares. 25 [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 Funds through your selling agent or directly from Nations Funds. We encourage you to consult with an investment professional who can open an account for you with a selling agent and help you with your investment decisions. Once you have an account, you can buy, sell and exchange shares by contacting your investment professional or selling agent. They will look after any paperwork that's needed to complete a transaction and send your order to us. You should also ask your selling agent about its limits, fees and policies for buying, selling and exchanging shares, which may be different from those described here, and about its related programs or services. The table on the next page summarizes some key information about buying, selling and exchanging shares. You'll find sales charges and other fees that apply to these transactions in CHOOSING A SHARE CLASS. The Funds also offer other classes of shares, with different features and expense levels, which you may be eligible to buy. Please contact your investment professional, or call us at 1.800.321.7854 if you have any questions or you need help placing an order. 26
Ways to buy, sell or How much you can buy, exchange sell or exchange Other things to know ---------------- ---------------------------------------- ----------------------------------------------------- Buying shares In a lump sum minimum initial investment: There is no limit to the amount you can invest 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 Investor B Shares are not available for Nations Short-Term Income Fund. o no minimum for certain retirement plan accounts like 401(k) plans and SEP accounts, but other restrictions apply minimum additional investment: o $100 for all accounts Using our minimum initial investment: You can buy shares monthly, twice a month or Systematic o $100 quarterly, using automatic transfers from your Investment Plan minimum additional investment: bank account. o $50 - -------------------------------------------------------------------------------------------------------------------- Selling shares In a lump sum o you can sell up to $50,000 of your We'll deduct any CDSC from the amount you're shares by telephone, otherwise there selling and send you or your selling agent the are no lim its to the amount you can balance, usually within three business days of sell receiving your order. o other restrictions may apply to If you paid for your shares with a check that withdrawals from retirement plan wasn't certified, we'll hold the sale proceeds accounts when you sell those shares for at least 15 days after the trade date of the purchase, or until the check has cleared. Using our o minimum $25 per withdrawal Your account balance must be at least $10,000 Automatic to set up the plan. You can make withdrawals Withdrawal Plan monthly, twice a month or quarterly. We'll send your money by check or deposit it directly to your bank account. No CDSC is deducted if you withdraw 12% or less of the value of your shares in a class. - ----------------------------------------------------------------------------------------------------------------- Exchanging shares In a lump sum o minimum $1,000 per exchange You can exchange your Investor A Shares for Investor A Shares of any other Nations Fund, except Index Funds. You won't pay a front-end sales charge, CDSC or redemption fee on the shares you're exchanging. You can exchange your Investor B Shares for: o Investor B Shares of any other Nations Fund, except Nations Funds Money Market Funds o Investor C Shares of Nations Funds Money Market Funds (before October 1, 1999) o Investor B Shares of Nations Reserves Money Market Funds (on or after October 1, 1999) You won't pay a CDSC on the shares you're exchanging. You can exchange your Investor C Shares for: o Investor C Shares of any other Nations Fund, except Nations Funds Money Market Funds o Daily Shares of Nations Funds Money Market Funds (before October 1, 1999) o Investor C Shares of Nations Reserves Money Market Funds (on or after October 1, 1999) If you received Investor C Shares of a Fund from an exchange of Investor A Shares of a Managed Index Fund, you can also exchange these shares for Investor A Shares of an Index Fund. You won't pay a CDSC on the shares you're exchanging. Using our o minimum $25 per exchange This feature is not available for Investor B Automatic Shares. You must already have an investment in Exchange Feature the Funds you want to exchange. You can make exchanges monthly or quarterly.
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, we'll base the price of a security on its fair market value. We use the amortized cost method, which approximates market value, to value short-term investments maturing in 60 days or less. HOW ORDERS ARE PROCESSED Orders to buy, sell or exchange shares are processed on business days. Orders received by Stephens, First Data or their agents before the end of a business day (usually 4:00 p.m. Eastern time, unless the NYSE closes early) will receive that day's net asset value per share. Orders received after the end of a business day will receive the next business day's net asset value per share. The business day that applies to your order is also called the TRADE DATE. We may refuse any order to buy or exchange shares. If this happens, we'll return any money we've received to your selling agent. TELEPHONE ORDERS You can place orders to buy, sell or exchange by telephone if you complete the telephone authorization section of our account application and send it to us. Here's how telephone orders work: o If you sign up for telephone orders after you open your account, you must have your signature guaranteed. o Telephone orders may not be as secure as written orders. You may be responsible for any loss resulting from a telephone order. o We'll take reasonable steps to confirm that telephone instructions are genuine. For example, we require proof of your identification before we will act on instructions received by telephone and may record telephone conversations. If we and our service providers don't take these steps, we may be liable for any losses from unauthorized or fraudulent instructions. o Telephone orders may be difficult to complete during periods of significant economic or market change. 28 [GRAPHIC] THE OFFERING PRICE PER SHARE IS THE NET ASSET VALUE PER SHARE PLUS ANY SALES CHARGE THAT APPLIES. THE NET ASSET VALUE PER SHARE IS THE PRICE OF A SHARE CALCULATED BY A FUND EVERY BUSINESS DAY. [GRAPHIC] BUYING SHARES Here are some general rules for buying shares: o You buy Investor A Shares at the offering price per share. You buy Investor B and Investor C Shares at net asset value per share. o If we don't receive your money within three business days of receiving your order, we'll refuse the order. o Selling agents are responsible for sending orders to us and ensuring we receive your money on time. o Shares you buy are recorded on the books of the Fund. We don't issue certificates unless you ask for them in writing, and we don't issue certificates for fractions of shares. MINIMUM INITIAL INVESTMENT The minimum initial amount you can buy is usually $1,000. If you're buying shares through one of the following accounts or plans, the minimum initial amount you can buy is: o $500 for traditional and Roth individual retirement accounts (IRAs) o $250 for accounts set up with some fee-based investment advisers or financial planners, including wrap fee accounts and other managed accounts o $100 using our Systematic Investment Plan o There is no minimum for 401(k) plans, simplified employee pension plans (SEPs), salary reduction-simplified employee pension plans (SAR-SEPs), Savings Incentives Match Plans for Employees (SIMPLE IRAs), salary reduction IRAs (SAR-IRAs) or other similar kinds of accounts. However, if the value of your account falls below $1,000 for 401(k) plans or $500 for the other plans within one year after you open your account, we may sell your shares. We'll give you 60 days notice in writing if we're going to do this MINIMUM ADDITIONAL INVESTMENT You can make additional purchases of $100, or $50 if you use our Systematic Investment Plan. 29 [GRAPHIC] FOR MORE INFORMATION ABOUT TELEPHONE ORDERS, SEE PAGE 50. SYSTEMATIC INVESTMENT PLAN You can make regular purchases of $50 or more using automatic transfers from your bank account to the Funds you choose. You can contact your investment professional or us to set up the plan. Here's how the plan works: o You can buy shares twice a month, monthly or quarterly. o You can choose to have us transfer your money on or about the 15th or the last day of the month. o Some exceptions may apply to employees of Bank of America and its affiliates, and to plans set up before August 1, 1997. For details, please contact your investment professional. [GRAPHIC] SELLING SHARES Here are some general rules for selling shares: o We'll deduct any CDSC from the amount you're selling and send you the balance. o If you're selling your shares through a selling agent, we'll normally send the sale proceeds by federal funds wire within three business days after Stephens, First Data or their agents receive your order. Your selling agent is responsible for depositing the sale proceeds to your account on time. o If you're selling your shares directly through us, we'll normally send the sale proceeds by mail or wire them to your bank account within three business days after the Fund receives your order. o You can sell up to $50,000 of shares by telephone if you qualify for telephone orders. o If you paid for your shares with a check that wasn't certified, we'll hold the sale proceeds when you sell those shares for at least 15 days after the trade date of the purchase, or until the check has cleared. o If you hold any shares in certificate form, you must sign the certificates (or send a signed stock power with them) and send them to First Data. Your signature must be guaranteed unless you've made other arrangements with us. We may ask for any other information we need to prove that the order is properly authorized. o Under certain circumstances allowed under the Investment Company Act of 1940 (1940 Act), we can pay you in securities or other property when you sell your shares, or 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. 30 [GRAPHIC] YOU SHOULD MAKE SURE YOU UNDERSTAND THE INVESTMENT OBJECTIVES AND POLICIES OF THE FUND YOU'RE EXCHANGING INTO. PLEASE READ ITS PROSPECTUS CAREFULLY. We may sell your shares: o if the value of your account falls below $500. We'll give you 60 days notice in writing if we're going to do this o if your selling agent tells us to sell your shares under arrangements made between the selling agent and its customers o under certain other circumstances allowed under the 1940 Act AUTOMATIC WITHDRAWAL PLAN The Automatic Withdrawal Plan lets you withdraw $25 or more every month, every quarter or every year. You can contact your investment professional or us to set up the plan. Here's how the plan works: o Your account balance must be at least $10,000 to set up the plan. o If you set up the plan after you've opened your account, your signature must be guaranteed. o You can choose to have us transfer your money on or about the 15th or the 25th of the month. o You won't pay a CDSC on Investor A, Investor B or Investor C Shares if you withdraw 12% or less of the value of those shares in a year. Otherwise, we'll deduct any CDSC from the withdrawals. o We'll send you a check or deposit the money directly to your bank account. o You can cancel the plan by giving your selling agent or us 30 days notice in writing. It's important to remember that if you withdraw more than your investment in the Fund is earning, you'll eventually use up your original investment. [GRAPHIC] EXCHANGING SHARES You can sell shares of one Fund to buy shares of another Nations Fund. This is called an exchange. You might want to do this if your investment goals or tolerance for risk changes. Here's how exchanges work: o You must exchange at least $1,000, or $25 if you use our Automatic Exchange Feature. o The rules for buying shares of a Fund, including any minimum investment requirements, apply to exchanges into that Fund. o You may only make an exchange into a Fund that is legally sold in your state of residence. 31 o You generally may only make an exchange into a Fund that is accepting investments. o We may limit the number of exchanges you can make within a specified period of time. o We may change or cancel your right to make an exchange by giving the amount of notice required by regulatory authorities (generally 60 days for a material change or cancellation). o You cannot exchange any shares you own in certificate form until First Data has received the certificate and deposited the shares to your account. EXCHANGING INVESTOR A SHARES You can exchange Investor A Shares of a Fund for Investor A Shares of any other Nations Fund, except Index Funds. Here are some rules for exchanging Investor A Shares: o You won't pay a front-end sales charge on the shares of the Fund you're exchanging. o You won't pay a CDSC on the shares you're exchanging. Any CDSC will be deducted later on when you sell the shares you received from the exchange. The CDSC at that time will be based on the period from when you bought the original shares until when you sold the shares you received from the exchange. o You won't pay a redemption fee on the shares you're exchanging. Any redemption fee will be deducted later on when you sell the shares you received from the exchange. Any redemption fee will be paid to the original Fund. o If you received Investor A Shares of Nations Short-Term Income Fund directly or indirectly from an exchange of Investor B Shares of another Fund, you can exchange these shares for: o Investor B Shares of any other Nations Fund, except Nations Funds Money Market Funds, or o Investor C Shares of Nations Funds Money Market Funds (before October 1, 1999) o Investor B Shares of Nations Reserves Money Market Funds (on or after October 1, 1999) 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. 32 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 C Shares of Nations Funds Money Market Funds (before October 1, 1999) o Investor B Shares of Nations Reserves Money Market Funds (on or after October 1, 1999) You won't pay a CDSC on the shares you're exchanging. Any CDSC will be deducted later on when you sell the shares you received from the exchange. The CDSC will be based on the period from when you bought the original shares until you sold the shares you received from the exchange. If you received Investor C Shares of a Nations Funds Money Market Fund from an exchange of Investor B Shares of a Fund before October 1, 1999, a CDSC may apply when you sell your Investor C Shares. The CDSC will be based on the period from when you bought the original shares until you exchanged them. EXCHANGING INVESTOR C SHARES You can exchange Investor C Shares of a Fund for: o Investor C Shares of any other Nations Fund, except Nations Funds Money Market Funds o Daily Shares of Nations Funds Money Market Funds (before October 1, 1999) o Investor C Shares of Nations Reserves Money Market Funds (on or after October 1, 1999) If you received Investor C Shares of a Fund from an exchange of Investor A Shares of a Managed Index Fund, you can also exchange these shares for Investor A Shares of an Index Fund. You won't pay a CDSC on the shares you're exchanging. Any CDSC will be deducted later on when you sell the shares you received from the exchange. The CDSC will be based on the period from when you bought the original shares until you sold the shares you received from the exchange. If you received Daily Shares of a Nations Funds Money Market Fund through an exchange of Investor C Shares of a Fund before October 1, 1999, a CDSC may apply when you sell your Daily Shares. The CDSC will be based on the period from when you bought the original shares until you exchanged them. 33 AUTOMATIC EXCHANGE FEATURE The Automatic Exchange Feature lets you exchange $25 or more of Investor A or Investor C Shares every month or every quarter. You can contact your investment professional or us to set up the plan. Here's how automatic exchanges work: o Send your request to First Data in writing or call 1.800.321.7854. o You must already have an investment in the Funds you want to exchange. o You can choose to have us transfer your money on or about the 15th or the last day of the month. o The rules for making exchanges apply to automatic exchanges. 34 [GRAPHIC] THE FINANCIAL INSTITUTION OR INTERMEDIARY THAT BUYS SHARES FOR YOU IS ALSO SOMETIMES REFERRED TO AS A SELLING AGENT. THE DISTRIBUTION FEE IS OFTEN REFERRED TO AS A "12B-1" FEE BECAUSE IT'S PAID THROUGH A PLAN APPROVED UNDER RULE 12B-1 UNDER THE 1940 ACT. YOUR SELLING AGENT MAY CHARGE OTHER FEES FOR SERVICES PROVIDED TO YOUR ACCOUNT. [GRAPHIC] HOW SELLING AND SERVICING AGENTS ARE PAID Selling and servicing agents usually receive compensation based on your investment in the Funds. The kind and amount of the compensation depends on the share class you invest in. Selling agents typically pay a portion of the compensation they receive to their investment professionals. COMMISSIONS Your selling agent may receive an up-front commission (reallowance) when you buy shares of a Fund. The amount of this commission depends on which share class you choose: o up to 4.25% of the offering price per share of Investor A Shares. The commission is paid from the sales charge we deduct when you buy your shares o up to 4.00% of the net asset value per share of Investor B Shares. The commission is not deducted from your purchase -- we pay your selling agent directly o up to 1.00% of the net asset value per share of Investor C Shares. The commission is not deducted from your purchase -- we pay your selling agent directly If you buy Investor B or Investor C Shares you will be subject to higher distribution (12b-1) and shareholder servicing fees and may be subject to a CDSC when you sell your shares. 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. 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. 35 OTHER COMPENSATION Selling and servicing agents may also receive: o a bonus, incentive or other compensation relating to the sale, promotion and marketing of the Funds o additional amounts on all sales of shares: o up to 1.00% of the offering price per share of Investor A Shares o up to 1.00% of the net asset value per share of Investor B Shares o up to 1.00% of the net asset value per share of Investor C Shares o non-cash compensation like trips to sales seminars or vacation destinations, tickets to sporting events, theater or other entertainment, opportunities to participate in golf or other outings and gift certificates for meals or merchandise This compensation, which is not paid by the Funds, is discretionary and may be available only to selected selling and servicing agents. For example, Stephens sometimes sponsors promotions involving Banc of America Investments, Inc., an affiliate of BAAI, and certain other selling or servicing agents. Selected selling and servicing agents also may receive compensation for opening a minimum number of accounts. BAAI also may pay amounts from its own assets to Stephens or to selling or servicing agents for related services they provide. 36 [GRAPHIC] THE POWER OF COMPOUNDING REINVESTING YOUR DISTRIBUTIONS BUYS YOU MORE SHARES OF A FUND -- WHICH LETS YOU TAKE ADVANTAGE OF THE POTENTIAL FOR COMPOUND GROWTH. PUTTING THE MONEY YOU EARN BACK INTO YOUR INVESTMENT MEANS IT, IN TURN, MAY EARN EVEN MORE MONEY. OVER TIME, THE POWER OF COMPOUNDING HAS THE POTENTIAL TO SIGNIFICANTLY INCREASE THE VALUE OF YOUR INVESTMENT. THERE IS NO ASSURANCE, HOWEVER, THAT YOU'LL EARN MORE MONEY IF YOU REINVEST YOUR DISTRIBUTIONS. [GRAPHIC] Distributions and taxes ABOUT DISTRIBUTIONS A mutual fund can make money two ways: o It can earn income. Examples are interest paid on bonds and dividends paid on COMMON STOCKS. o A fund can also have CAPITAL GAIN if the value of its investments increases. If a fund sells an investment at a gain, the gain is realized. If a fund continues to hold the investment, any gain is unrealized. A mutual fund is not subject to income tax as long as it distributes its net investment income and realized capital gain to its shareholders. The Funds intend to pay out a sufficient amount of their income and capital gain to their shareholders so the Funds won't have to pay any income tax. When a Fund makes this kind of a payment, it's split equally among all shares, and is called a distribution. All of the Funds distribute any net realized capital gain at least once a year. All of the Funds declare distributions of net investment income daily and pay them monthly. A distribution is paid based on the number of shares you hold on the record date, which is usually the day the distribution is declared (daily dividend Funds) or the day before the distribution is declared (all other Funds). Shares are eligible to receive distributions from the SETTLEMENT DATE (daily dividend Funds) or the TRADE DATE (all other Funds) of the purchase up to and including the day before the shares are sold. Different share classes of a Fund usually pay different distribution amounts, because each class has different expenses. Each time a distribution is made, the net asset value per share of the share class is reduced by the amount of the distribution. We'll automatically reinvest distributions in additional shares of the same Fund unless you tell us you want to receive your distributions in cash. You can do this by writing to us at the address on the back cover, or by calling us at 1.800.321.7854. We generally pay cash distributions within five business days after the end of the month, quarter or year in which the distribution was made. If you sell all of your shares, we'll pay any distribution that applies to those shares in cash within five business days after the sale was made. If you buy shares of a Fund shortly before it makes a distribution, you will, in effect, receive part of your purchase back in the distribution, which is subject to tax. Similarly, if you buy shares of a Fund that holds securities with unrealized capital gain, you will, in effect, receive part of your purchase back if and when the Fund sells those securities and distributes the gain. This distribution is also subject to tax. Some Funds have built up, or have the potential to build up, high levels of unrealized capital gain. 37 [GRAPHIC] THIS INFORMATION IS A SUMMARY OF HOW FEDERAL INCOME TAXES MAY AFFECT YOUR INVESTMENT IN THE FUNDS. IT IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING. YOU SHOULD CONSULT WITH YOUR OWN TAX ADVISOR ABOUT YOUR SITUATION, INCLUDING ANY FOREIGN, STATE AND LOCAL TAXES THAT MAY APPLY. [GRAPHIC] FOR MORE INFORMATION ABOUT TAXES, PLEASE SEE THE SAI. HOW TAXES AFFECT YOUR INVESTMENT Distributions that come from a Fund's net investment income, net foreign currency gain and any excess of net short-term capital gain over net long-term capital loss generally are taxable to you as ordinary income. Distributions that come from a Fund's net capital gain (generally the excess of net long-term capital gain over net short-term capital loss), generally are taxable to you as net capital gain. Corporate shareholders won't be able to deduct any distributions from a Fund when determining their taxable income. In general, all distributions are taxable to you when paid, whether they are paid in cash or automatically reinvested in additional shares of the Fund. However, any distributions declared in October, November or December of one year and distributed in January of the following year will be taxable as if they had been paid to you on December 31 of the first year. We'll send you a notice every year that tells you how much you've received in distributions during the year and their federal tax status. Foreign, state and local taxes may also apply to these distributions. WITHHOLDING TAX We're required by federal law to withhold tax of 31% on any distributions and redemption proceeds paid to you (including amounts deemed to be paid for "in kind" redemptions and exchanges) if: o you haven't given us a correct Taxpayer Identification Number (TIN) and haven't certified that the TIN is correct and withholding doesn't apply o the Internal Revenue Service (IRS) has notified us that the TIN listed on your account is incorrect according to its records o the IRS informs us that you're otherwise subject to backup withholding The IRS may also impose penalties against you if you don't give us a correct TIN. Amounts we withhold are applied to your federal income tax liability. You may receive a refund from the IRS if the withholding tax results in an overpayment of taxes. We're also normally required by federal law to withhold tax on distributions paid to foreign shareholders. 38 TAXATION OF REDEMPTIONS AND EXCHANGES Your redemptions (including redemptions "in kind") and exchanges of Fund shares will usually result in a taxable capital gain or loss, depending on the amount you receive for your shares (or are deemed to receive in the case of exchanges) and the amount you paid (or are deemed to have paid) for them. 39 [GRAPHIC] TERMS USED IN THIS PROSPECTUS ASSET-BACKED SECURITY - a debt security that gives you an interest in a pool of assets that is collateralized or "backed" by one or more kinds of assets, including real property, receivables or mortgages, generally issued by banks, credit card companies or other lenders. Some securities may be issued or guaranteed by the U.S. government or its agencies, authorities or instrumentalities. Asset-backed securities typically make periodic payments, which may be interest or a combination of interest and a portion of the principal of the underlying assets. AVERAGE DOLLAR-WEIGHTED MATURITY - the average length of time until the debt securities held by a Fund reach maturity. In general, the longer the average dollar-weighted maturity, the more a Fund's share price will fluctuate in response to changes in interest rates. BANK OBLIGATION - a money market instrument issued by a bank, including certificates of deposit, time deposits and bankers' acceptances. CAPITAL GAIN OR LOSS - the difference between the purchase price of a security and its selling price. You realize a capital gain when you sell a security for more than you paid for it. You realize a capital loss when you sell a security for less than you paid for it. CASH EQUIVALENTS - short-term, interest-bearing instruments, including obligations issued or guaranteed by the U.S. government, its agencies and instrumentalities, bank obligations, asset-backed securities, foreign government securities and commercial paper issued by U.S. and foreign issuers which, at the time of investment, is rated at least Prime-2 by Moody's Investor Services, Inc. (Moody's), A-2 by S&P, or F-1 by Fitch IBCA (Fitch). COLLATERALIZED MORTGAGE OBLIGATION (CMO) - a debt security that is backed by real estate mortgages. CMO payment obligations are covered by interest and/or principal payments from a pool of mortgages. In addition, the underlying assets of a CMO are typically separated into classes, called tranches, based on maturity. Each tranche pays a different rate of interest. CMOs are not generally issued by the U.S. government, its agencies or instrumentalities. COMMERCIAL PAPER - a money market instrument issued by a large company. COMMON STOCK - a security that represents part equity ownership in a company. Common stock typically allows you to vote at shareholder meetings and to share in the company's profits by receiving dividends. CONVERTIBLE SECURITY - a security that can be exchanged for common stock (or another type of security) at a specified rate. Convertible securities include convertible debt, rights and warrants. CORPORATE OBLIGATION - a money market instrument issued by a corporation or commercial bank. 40 DEBT SECURITY - when you invest in a debt security, you are typically lending your money to a governmental body or company (the issuer) to help fund their operations or major projects. The issuer pays interest at a specified rate on a specified date or dates, and repays the principal when the security matures. Short-term debt securities include money market instruments such as treasury bills. Long-term debt securities include fixed income securities such as government and corporate bonds, and mortgage-backed and asset-backed securities. DEPOSITARY RECEIPTS - evidence of the deposit of a security with a custodian bank. American Depositary Receipts (ADRs), for example, are certificates traded in U.S. markets representing an interest of a foreign company. They were created to make it possible for foreign issuers to meet U.S. security registration requirements. Other examples include ADSs, GDRs and EDRs. DOLLAR ROLL TRANSACTION - the sale by a Fund of mortgage-backed or other asset-backed securities, together with a commitment to buy similar, but not identical, securities at a future date. DURATION - a measure used to estimate a security's or portfolio's sensitivity to changes in interest rates. For example, if interest rates rise by one percentage point, the share price of a fund with a duration of five years would decline by about 5%. If interest rates fall by one percentage point, the fund's share price would rise by about 5%. EQUITY SECURITY - an investment that gives you an equity ownership right in a company. Equity securities (or "equities") include common and preferred stock, rights and warrants. FIRST-TIER SECURITY - under Rule 2a-7 under the 1940 Act, a debt security that is an eligible investment for money market funds and has the highest short-term rating from a nationally recognized statistical rating organization (NRSRO), or if unrated, is determined by the fund's portfolio management team to be of comparable quality, or is a money market fund issued by a registered investment company, or is a government security. FIXED INCOME SECURITY - an intermediate to long-term debt security that matures in more than one year. FOREIGN SECURITY - a debt or equity security issued by a foreign company or government. FUTURES CONTRACT - a contract to buy or sell an asset or an index of securities at a specified price on a specified future date. The price is set through a futures exchange. GUARANTEED INVESTMENT CONTRACT - an investment instrument issued by a rated insurance company in return for a payment by an investor. 41 HIGH QUALITY - in the case of municipal securities, a long-term rating of A or higher from Duff & Phelps Credit Rating Co. (D&P), Fitch, S&P, Thomson BankWatch, Inc. (BankWatch), or Moody's in the case of certain bonds that are lacking a short-term rating from the required number of NRSROS; rated D-1 or higher by D&P, F-1 or higher by Fitch, SP-1 by S&P, or MIG-1 by Moody's in the case of notes; rated D-1 or higher by D&P, F-1 or higher by Fitch, or VMIG-1 by Moody's in the case of variable rate demand notes; or rated D-1 or higher by D&P, F-1 or higher by Fitch, A-1 or higher by S&P or PRIME-1 by Moody's in the case of tax-exempt commercial paper. The portfolio management team may consider an unrated municipal security to be investment grade if the team believes it to be of comparable quality, based on guidelines provided by the Fund's Board of Directors. Please see the SAI for more information about credit ratings. HIGH-YIELD DEBT SECURITY - debt securities that, at the time of investment by the sub-adviser, are rated "BB" or below by S&P or "Ba" or below by Moody's, or that are unrated and determined to be of comparable quality. INVESTMENT GRADE - a debt security that has been given a medium to high credit rating (Baa or higher by Moody's, BBB or higher by S&P or a comparable rating by other NRSROs) based on the issuer's ability to pay interest and repay principal on time. The portfolio management team may consider an unrated debt security to be investment grade if the team believes it is of comparable quality. Please see the SAI for more information about credit ratings. LEHMAN 3-YEAR MUNICIPAL BOND INDEX - a broad-based, unmanaged index of investment grade bonds with maturities of two to four years. All dividends are reinvested. LEHMAN 7-YEAR MUNICIPAL BOND INDEX - a broad-based, unmanaged index of investment grade bonds with maturities of seven to eight years. All dividends are reinvested. LEHMAN AGGREGATE BOND INDEX - an index made up of the Lehman Government/Corporate Index, the Asset-Backed Securities Index and the Mortgage-Backed Securities Index. These indexes include U.S. government agency and U.S. Treasury securities, corporate bonds and mortgage-backed securities. All dividends are reinvested. LEHMAN GOVERNMENT BOND INDEX - an index of government bonds with an average maturity of approximately nine years. All dividends are reinvested. LEHMAN GOVERNMENT/CORPORATE BOND INDEX - an index of U.S. government, U.S. Treasury and agency securities, and corporate and Yankee bonds. All dividends are reinvested. LEHMAN INTERMEDIATE GOVERNMENT BOND INDEX - an index of U.S. government agency and U.S. Treasury securities. All dividends are reinvested. LEHMAN INTERMEDIATE TREASURY INDEX - an index of U.S. Treasury securities with maturities of three to 10 years. All dividends are reinvested. LEHMAN MUNICIPAL BOND INDEX - a broad-based, unmanaged index of 8,000 investment grade bonds with long-term maturities. All dividends are reinvested. 42 LIQUIDITY - a measurement of how easily a security can be bought or sold at a price that is close to its market value. MERRILL LYNCH 1-3 YEAR TREASURY INDEX - an index of U.S. Treasury bonds with maturities of 1 to 3 years. All dividends are reinvested. MONEY MARKET INSTRUMENT - a short-term debt security that matures in 13 months or less. Money market instruments include U.S. Treasury obligations, U.S. government obligations, certificates of deposit, bankers' acceptances, commercial paper, repurchase agreements and certain municipal securities. MORTGAGE-BACKED SECURITY OR MORTGAGE-RELATED SECURITY - a debt security that gives you an interest in, and is backed by, a pool of residential mortgages issued by the U.S. government or by financial institutions. The underlying mortgages may be guaranteed by the U.S. government or one of its agencies, authorities or instrumentalities. Mortgage-backed securities typically make monthly payments, which are a combination of interest and a portion of the principal of the underlying mortgages. MUNICIPAL SECURITY (OBLIGATION) - a debt security issued by state or local governments or governmental authorities to pay for public projects and services. "General obligations" are typically backed by the issuer's full taxing and revenue-raising powers. "Revenue securities" depend on the income earned by a specific project or authority, like road or bridge tolls, user fees for water or revenues from a utility. Interest income from these securities is exempt from federal income taxes and is generally exempt from state taxes if you live in the state that issued the security. If you live in the municipality that issued the security, interest income may also be exempt from local taxes. NON-DIVERSIFIED - a fund that holds securities of fewer issuers or kinds of issuers than other kinds of funds. Non-diversified funds tend to have greater price swings than more diversified funds because events affecting one or more of its securities may have a disproportionately large effect on the fund. PARTICIPATION - a pass-through certificate representing a share in a pool of debt obligations or other instruments. PASS-THROUGH CERTIFICATE - securitized mortgages or other debt securities with interest and principal paid by a servicing intermediary shortly after interest payments are received from borrowers. PRE-REFUNDED BOND - a bond that is repaid before its maturity date. The repayment is generally financed by a new issue. Issuers generally pre-refund bonds during periods of lower interest rates to reduce their interest costs. 43 PRIVATE ACTIVITY BOND - a municipal security that is used to finance private projects or other projects that aren't qualified for tax purposes. Private activity bonds are generally taxable, unless their use is specifically exempted, or may be treated as tax preference items. REAL ESTATE INVESTMENT TRUST (REIT) - a portfolio of real estate investments which may include office buildings, apartment complexes, hotels and shopping malls, and real-estate-related loans or interests. REPURCHASE AGREEMENT - a short-term (often overnight) investment arrangement. The investor agrees to buy certain securities from the borrower and the borrower promises to buy them back at a specified date and price. The difference between the purchase price paid by the investor and the repurchase price paid by the borrower represents the investor's return. Repurchase agreements are popular because they provide very low-risk return and can virtually eliminate credit difficulties. REVERSE REPURCHASE AGREEMENT - a repurchase agreement in which an investor sells a security to another party, like a bank or dealer, in return for cash, and agrees to buy the security back at a specified date and price. SALOMON BROTHERS MORTGAGE INDEX - an index of 30-year and 15-year GNMA, FNMA and FHLMC securities, and FNMA and FHLMC balloon mortgages. SECOND-TIER SECURITY - under Rule 2a-7 under the 1940 Act, a debt security that is an eligible investment for money market funds, but is not a first-tier security. SETTLEMENT DATE - the date on which an order is settled either by payment or delivery of securities. SPECIAL PURPOSE ISSUER - an entity organized solely to issue asset-backed securities on a pool of assets it owns. TRADE DATE - the effective date of a purchase, sale or exchange transaction, or other instructions sent to us. The trade date is determined by the day and time we receive the order or instructions in a form that's acceptable to us. U.S. GOVERNMENT OBLIGATIONS - a wide range of debt securities issued or guaranteed by the U.S. government or its agencies, authorities or instrumentalities. U.S. TREASURY OBLIGATION - a debt security issued by the U.S. Treasury. ZERO-COUPON BOND - a bond that makes no periodic interest payments. Zero coupon bonds are sold at a deep discount to their face value and mature at face value. The difference between the face value at maturity and the purchase price represents the return. 44 (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 Fixed Income Funds in the following documents: [GRAPHIC] ANNUAL AND SEMI-ANNUAL REPORTS The annual and semi-annual reports contain information about Fund investments and performance, the financial statements and the auditor's reports. The annual report also includes a discussion about the market conditions and investment strategies that had a significant effect on each Fund's performance during the period covered. [GRAPHIC] STATEMENT OF ADDITIONAL INFORMATION The SAI contains additional information about the Funds and their policies. The SAI is legally part of this prospectus (it's incorporated by reference). A copy has been filed with the SEC. You can obtain a free copy of these documents, request other information about the Funds and make shareholder inquiries by contacting Nations Funds: By telephone: 1.800.321.7854 By mail: NATIONS FUNDS C/O STEPHENS INC. ONE BANK OF AMERICA PLAZA 33RD FLOOR CHARLOTTE, NC 28255 On the Internet: WWW.NATIONSBANK.COM/NATIONSFUNDS If you prefer, you can write the SEC's Public Reference Room and ask them to mail you copies of these documents. They'll charge you a fee for this service. You can also download them from the SEC's website or visit the Public Reference Section and copy the documents while you're there. Please call the SEC for more information. PUBLIC REFERENCE SECTION OF THE SEC WASHINGTON, DC 20549-6009 1.800.SEC.0330 WWW.SEC.GOV SEC file number: Nations Funds Trust, NF-BONDPROLX-8/99 [GRAPHIC] NATIONS FUNDS NATIONS FUNDS TRUST STATEMENT OF ADDITIONAL INFORMATION Nations High Yield Fund Nations Kansas Municipal Bond Fund Nations MidCap Index Fund PRIMARY A, INVESTOR A, INVESTOR B AND INVESTOR C SHARES January __, 2000 This Statement of Additional Information ("SAI") provides supplementary information pertaining to the classes of shares representing interests in the above listed series of Nations Funds Trust (individually, a "Fund" and collectively, the "Funds"). This SAI is not a prospectus, and should be read only in conjunction with the current prospectuses for the aforementioned Funds related to the class or series of shares in which one is interested, dated January __, 2000, as supplemented (each a "Prospectus"). All terms used in this SAI that are defined in the Prospectuses will have the same meanings assigned in the Prospectuses. Copies of the Prospectuses may be obtained without charge by writing Nations Funds Trust, c/o Stephens Inc., One Bank of America Plaza, 33rd Floor, Charlotte, North Carolina 28255, or by calling Nations Funds Trust at (800) 321-7854. TABLE OF CONTENTS Page HISTORY OF NATIONS FUNDS TRUST............................................... 1 DESCRIPTION OF THE TRUST AND THE INVESTMENTS AND RISKS OF ITS FUNDS ................................................................ 1 General............................................................... 1 Investment Limitations ............................................... 2 The Funds' Fundamental Policy Restrictions............................ 2 The Funds' Non-Fundamental Policy Restrictions........................ 3 Permissible Fund Investments.......................................... 3 Asset-Backed Securities............................................... 5 Borrowings............................................................ 9 Commercial Instruments................................................ 9 Combined Transactions.................................................10 Convertible Securities................................................10 Corporate Debt Securities.............................................11 Custodial Receipts....................................................11 Currency Swaps........................................................11 Delayed Delivery Transactions.........................................11 Dollar Roll Transactions .............................................12 Equity Swap Contracts ................................................12 Foreign Currency Transactions ........................................13 Futures, Options and Other Derivative Instruments.....................14 Guaranteed Investment Contracts.......................................28 Insured Municipal Securities .........................................28 Interest Rate Transactions ...........................................28 Lower Rated (or High Yield) Debt Securities...........................29 Municipal Securities .................................................30 Options on Currencies.................................................33 Other Investment Companies............................................33 Participation Interests and Company Receipts..........................33 Real Estate Investment Trusts.........................................34 Repurchase Agreements ................................................34 Reverse Repurchase Agreements ........................................34 Securities Lending....................................................35 Short Sales...........................................................35 Special Situations....................................................35 Standard & Poor's Depositary Receipts.................................35 Stand-by Commitments .................................................36 Stripped Securities...................................................36 U.S. and Foreign Bank Obligations.....................................37 U.S. Government Obligations...........................................37 Use of Segregated and Other Special Accounts..........................38 Variable and Floating Rate Instruments ...............................38 Warrants..............................................................39 When-Issued Purchases and Forward Commitments .......................39 Portfolio Turnover....................................................40 Investment Risks and Considerations...................................40 MANAGEMENT OF THE TRUST......................................................41 Nations Funds Retirement Plan.........................................44 Nations Funds Deferred Compensation Plan..............................44 Shareholder and Trustee Liability.....................................45 i INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY, TRANSFER AGENCY, OTHER SERVICE PROVIDERS, SHAREHOLDER SERVICING AND DISTRIBUTION AGREEMENTS .....................................................45 Investment Adviser and Sub-Advisers...................................45 Co-Administrators and Sub-Administrator...............................46 Distribution Plans and Shareholder Servicing Arrangements for Primary A Shares..................................................47 Investor A Shares ................................................47 Investor B Shares.................................................48 Investor C Shares.................................................48 Expenses..........................................................50 Transfer Agents and Custodians........................................50 Distributor...........................................................51 Independent Accountants and Reports...................................51 Counsel...............................................................52 FUND TRANSACTIONS AND BROKERAGE..............................................52 General Brokerage Policy..............................................52 Section 28(e) Standards...............................................54 DESCRIPTION OF SHARES........................................................55 Description of Shares of the Trust....................................55 Net Asset Value Determination.........................................56 ADDITIONAL INFORMATION CONCERNING TAXES......................................56 General...............................................................57 Excise Tax ...........................................................57 Private Letter Ruling.................................................57 Taxation of Fund Investments..........................................57 Foreign Taxes ........................................................58 Capital Gain Distributions............................................59 Disposition of Fund Shares............................................59 Federal Income Tax Rates..............................................59 Corporate Shareholders................................................60 Foreign Shareholders..................................................60 Backup Withholding....................................................60 Special Tax Considerations Pertaining to the Kansas Fund .............60 Other Matters.........................................................61 ADDITIONAL INFORMATION ON PERFORMANCE........................................61 Yield Calculations....................................................64 Total Return Calculations.............................................65 MISCELLANEOUS ...............................................................66 Certain Record Holders................................................66 SCHEDULE A - Description of Ratings..........................................A-1 ii HISTORY OF NATIONS FUNDS TRUST Nations Funds Trust (the "Trust") is an open-end registered investment company in the Nations Funds family of mutual funds (the "Nations Funds Family"), which in addition to the Trust, consists of the Nations Fund Trust, Nations Fund, Inc., Nations Reserves, Nations LifeGoal Funds, Inc., Nations Annuity Trust and Nations Master Investment Trust. The Nations Funds Family currently has more than 70 distinct investment portfolios and total assets in excess of $70 billion. The Trust was organized as a Delaware business trust on October 22, 1999. It has a fiscal year end of March 31st. DESCRIPTION OF THE TRUST AND THE INVESTMENTS AND RISKS OF ITS FUNDS GENERAL. The Trust currently consists of three different investment portfolios. This SAI pertains to the: o Primary A Shares of the Nations High Yield Fund (the "High Yield Fund"), Nations Kansas Municipal Bond Fund (the "Kansas Fund") and the Nations MidCap Index Fund (the "MidCap Index Fund"); o Investor A Shares of the High Yield Fund, the Kansas Fund and the MidCap Index Fund; and o Investor B Shares and Investor C Shares of the High Yield Fund and the Kansas Fund. All of the Funds of the Trust are diversified, with the exception of the Kansas Fund. Each share of the Trust is without par value, represents an equal proportionate interest in the related fund with other shares of the same class, and is entitled to such dividends and distributions out of the income earned on the assets belonging to such fund as are declared in the discretion of the Trust's Board of Trustees. The Trust's Declaration of Trust authorizes the Board of Trustees to classify or reclassify any class of shares into one or more series of shares. Shareholders are entitled to one vote for each full share held and a proportionate fractional vote for each fractional share held. Shareholders of each Fund of the Trust will vote in the aggregate and not by fund, and shareholders of each fund will vote in the aggregate and not by class except as otherwise expressly required by law or when the Board of Trustees determines that the matter to be voted on affects only the interests of shareholders of a particular fund or class. See the discussion on Investment Limitations and Description of Shares for examples of when the Investment Company Act of 1940 (the "1940 Act") requires voting by fund. As of the date of the SAI set forth on the cover page, Bank of America, N.A. ("Bank of America") and its affiliates possessed or shared power to dispose or vote with respect to more than 25% of the outstanding shares of the Trust and therefore could be considered to be a controlling person of the Trust for purposes of the 1940 Act. For more detailed information concerning the percentage of each class or series of shares over which Bank of America and its affiliates possessed or shared power to dispose or vote as of a certain date, see the discussion on Certain Record Holders. The Trust does not presently intend to hold annual meetings except as required by the 1940 Act. Banc of America Advisors, Inc. ("BAAI") is the investment adviser to the Funds. TradeStreet Investment Associates, Inc. ("TradeStreet") is the investment sub-adviser to the MidCap Index Fund and the Kansas Fund. [INSERT HIGH YIELD'S SUB-ADVISER NAME] is the investment sub-adviser to the High Yield Fund. As used herein the term "Adviser" shall mean BAAI, TradeStreet and/or [INSERT HIGH YIELD'S SUB-ADVISER NAME] as the context may require. This SAI is intended to furnish prospective investors with additional information concerning the Trust and the Funds. Some of the information required to be in this SAI is also included in the Funds' current Prospectuses. Additionally, the Prospectuses and this SAI omit certain information contained in the registration statement filed with the SEC. Copies of the registration statement, including items omitted from the Prospectuses and this SAI, may be obtained from the SEC on its website (www.sec.gov) or by visiting the public reading room of the SEC as is discussed in the Prospectuses. No investment in the Funds' Shares should be made without first reading the related Prospectuses. 1 INVESTMENT LIMITATIONS Information concerning each Fund's investment objective is set forth in each of the Prospectuses. 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 most significant fundamental and non-fundamental investment restrictions applicable to the Funds' investment programs are set forth below. The investment limitations that are matters of fundamental policy may not be changed without the affirmative vote of a Fund's shareholders. The investment limitations that are matters of non-fundamental policy may be changed without the affirmative vote of a Fund's shareholders. In addition to the policies outlined below, each Fund is seeking or has obtained permission from the SEC to borrow money from or lend money to other funds of the companies, and to other investment companies that permit such transactions, and for which BAAI serves as investment adviser. The Funds' Fundamental Policy Restrictions Each Fund may not: 1. Underwrite any issue of securities within the meaning of the 1933 Act except when it might technically be deemed to be an underwriter either (a) in connection with the disposition of a portfolio security, or (b) in connection with the purchase of securities directly from the issuer thereof in accordance with its investment objective. This restriction shall not limit the Fund's ability to invest in securities issued by other registered investment companies. 2. Purchase or sell real estate, except a Fund may purchase securities of issuers which deal or invest in real estate and may purchase securities which are secured by real estate or interests in real estate. 3. Purchase or sell commodities, except that a Fund may to the extent consistent with its investment objective, invest in securities of companies that purchase or sell commodities or which invest in such programs, and purchase and sell options, forward contracts, futures contracts, and options on futures contracts. This limitation does not apply to foreign currency transactions including without limitation forward currency contracts. 4. Purchase any securities which would cause 25% or more of the value of its total assets at the time of purchase to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that: (a) there is no limitation with respect to obligations issued or guaranteed by the U.S. Government, any state or territory of the United States, or any of their agencies, instrumentalities or political subdivisions, and (b) notwithstanding this limitation or any other fundamental investment limitation, assets may be invested in the securities of one or more management investment companies to the extent permitted by the 1940 Act, the rules and regulations thereunder and any exemptive relief obtained by the Funds. 5. Make loans, except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any exemptive relief obtained by the Funds. 6. Borrow money or issue senior securities except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any exemptive relief obtained by the Funds. 7. Except for the Kansas Fund, purchase securities (except securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities) of any one issuer if, as a result, more than 5% of its total assets will be invested in the securities of such issuer or it would own more than 10% of the voting securities of such issuer, except that (a) up to 25% of its total assets may be invested without regard to these limitations and (b) a Fund's assets may be invested in the securities of one or more management investment companies to the extent permitted by the 1940 Act. 2 The Funds' Non-Fundamental Policy Restrictions Each Fund may: 1. Invest in shares of other open-end management investment companies, subject to the limitations of the 1940 Act, the rules thereunder, and any orders obtained thereunder now or in the future. Funds in a master/feeder structure generally invest in the securities of one or more open-end management investment companies pursuant to various provisions of the 1940 Act. 2. Not invest or hold more than 15% (10% in the case of a money market fund) of the Fund's net assets in illiquid securities. For this purpose, illiquid securities include, among others, (a) securities that are illiquid by virtue of the absence of a readily available market or legal or contractual restrictions on resale, (b) fixed time deposits that are subject to withdrawal penalties and that have maturities of more than seven days, and (c) repurchase agreements not terminable within seven days. 3. Invest in futures or options contracts regulated by the CFTC for (i) bona fide hedging purposes within the meaning of the rules of the CFTC and (ii) for other purposes if, as a result, no more than 5% of a Fund's net assets would be invested in initial margin and premiums (excluding amounts "in-the-money") required to establish the contracts. A Fund (i) will not hedge more than 50% of its total assets by selling futures contracts, buying put options, and writing call options (so called "short positions"), (ii) will not buy futures contracts or write put options whose underlying value exceeds 25% of the Fund's total assets, and (iii) will not buy call options with a value exceeding 5% of the Fund's total assets. 4. Lend securities from its portfolio to brokers, dealers and financial institutions, in amounts not to exceed (in the aggregate) one-third of the Fund's total assets. Any such loans of portfolio securities will be fully collateralized based on values that are marked to market daily. 5. Not make investments for the purpose of exercising control of management. (Investments by the Fund in entities created under the laws of foreign countries solely to facilitate investment in securities in that country will not be deemed the making of investments for the purpose of exercising control.) 6. Not sell securities short, unless it owns or has the right to obtain securities equivalent in kind and amount to the securities sold short (short sales "against the box"), and provided that transactions in futures contracts and options are not deemed to constitute selling securities short. 7. The Kansas Fund may not purchase securities of any one issuer (other than U.S. Government Obligations) if, immediately after such purchase, more than 25% of the value of a Fund's total assets would be invested in the securities of one issuer, and with respect to 50% of such Fund's total assets, more than 5% of its assets would be invested in the securities of one issuer. For purposes of the foregoing limitations, any limitation that involves a maximum percentage shall not be considered violated unless an excess over the percentage occurs immediately after, and is caused by, an acquisition or encumbrance of securities or assets of, or borrowings on behalf of, a Fund. PERMISSIBLE FUND INVESTMENTS In addition to the principal investment strategies for each Fund, which are outlined in the Funds' prospectuses, each Fund also may invest in other types of securities in percentages of less than 10% of its total assets (unless otherwise indicated, E.G., most Funds may invest in money market instruments without limit during temporary defensive periods). These types of securities are listed below for each portfolio and then are described in more detail after this sub-section. High Yield Fund: In addition to the types of securities described in its Prospectuses, the Fund may invest in: debt securities, which include all types of debt obligations of both domestic and foreign issuers, such as bonds, debentures, notes, equipment lease certificates, equipment trust certificates, conditional sales contracts, 3 commercial paper and U.S. government securities (including obligations, such as repurchase agreements, secured by such instruments). The Fund may invest in participation interests in loans. Such participation interests, which may take the form of interests in, or assignments of, loans, are acquired from banks which have made loans or are members of lending syndicates. The Fund's investments in loan participation interests will be subject to its limitation on investments in illiquid securities and, to the extent applicable, its limitation on investments in securities rated below investment grade. Kansas Fund: In addition to the types of securities described in its Prospectuses, the Fund may invest in: certain specified derivative securities, including interest rate swaps, caps and floors for hedging purposes; exchange-traded options; over-the-counter options executed with primary dealers, including long term calls and puts and covered calls; and U.S. and foreign exchange-traded financial futures and options thereon approved by the CFTC for market exposure risk management. The Fund also may lend its portfolio securities to qualified institutional investors and may invest in repurchase agreements, restricted, private placement and other illiquid securities. Additionally, the Fund may purchase securities issued by other investment companies, consistent with the its investment objective, investment strategies and policies. The Fund also may invest in instruments issued by trusts or certain partnerships including pass-through certificates representing participations in, or debt instruments backed by, the securities and other assets owned by such issuers. MidCap Index Fund: In addition to the types of securities described in its Prospectuses, the Fund may invest in: high-quality short-term debt securities and money market instruments to meet redemption requests. If the Adviser believes that market conditions warrant a temporary defensive posture, the Fund may invest without limitation in high-quality short-term debt securities and money market instruments, domestic and foreign commercial paper, certificates of deposit, bankers' acceptances and time deposits, U.S. Government Obligations and repurchase agreements. The Fund also may invest in certain specified derivative securities including: exchange-traded options; over-the-counter options executed with primary dealers, including long calls and puts and covered calls to enhance return; and U.S. exchange-traded financial futures approved by the CFTC and options thereon for market exposure risk management. The Fund may lend its securities to qualified institutional investors and may invest in repurchase agreements, restricted, private placement and other illiquid securities. The Fund also may invest in Standard & Poor's Depositary Receipts ("SPDRs"). In addition, the Funds may invest in other securities issued by other investment companies, consistent with the Fund's investment objective and policies. In addition, when consistent with the Fund's investment objective, the Adviser will employ various techniques to manage capital gain distributions. These techniques include utilizing a share identification methodology whereby the Fund will specifically identify each lot of shares of Fund securities that it holds, which will allow the Fund to sell first those specific shares with the highest tax basis in order to reduce the amount of recognized capital gains as compared with a sale of identical Fund securities, if any, with a lower tax basis. The Fund will sell first those shares with the highest tax basis only when it is in the best interest of the Fund to do so, and reserves the right to sell other shares when appropriate. In addition, the Fund may, at times, sell Fund securities in order to realize capital losses. Such capital losses would be used to offset realized capital gains thereby reducing capital gain distributions. Additionally, the Adviser will, consistent with the Fund construction process discussed above, employ a low Fund turnover strategy designed to defer the realization of capital gains. The Fund incurs transaction (brokerage) costs in connection with the purchase and sale of Fund securities. For some funds, these costs can have a material negative impact on performance. With respect thereto, the Adviser will attempt to minimize these transaction costs by utilizing program trades and computerized exchanges called "crossing networks" which allow institutions to execute trades at the midpoint of the bid/ask spread and at a reduced commission rate. Kansas Fund: In addition to the types of securities described in its Prospectuses, the Fund may invest in: certain specified derivative securities, including interest rate swaps, caps and floors for hedging purposes; exchange-traded options; over-the-counter options executed with primary dealers, including long term calls and puts and covered calls; and U.S. and foreign exchange-traded financial futures and options thereon approved by the CFTC for market exposure risk management. The Fund also may lend its portfolio securities to qualified institutional investors and may invest in repurchase agreements, restricted, private placement and other illiquid securities. Additionally, the Fund may purchase securities issued by other investment companies, consistent with the its investment objective, investment strategies and policies. The Fund also may invest in instruments issued by trusts or certain partnerships including pass-through certificates representing participations in, or debt instruments backed by, the securities and other assets owned by such issuers. 4 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. 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 5 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. 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. 6 FNMA is a Government sponsored corporation owned entirely by private stockholders. It is subject to general regulation by the Secretary of Housing and Urban Development. FNMA purchases residential mortgages from a list of approved sellers/servicers which include state and federally-chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA. The principal Government guarantor of mortgage-backed securities is the GNMA. GNMA is a wholly-owned U.S. Government corporation within the Department of Housing and Urban Development. GNMA is authorized to guarantee, with the full faith and credit of the U.S. Government, the timely payment of principal and interest on securities issued by approved institutions and backed by pools of FHA-insured or VA-guaranteed mortgages. Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional residential mortgage loans. Pools created by such non-governmental issuers generally offer a higher rate of interest than Government and Government-related pools because there are no direct or indirect Government guarantees of payments in the former pools. However, timely payment of interest and principal of these pools is supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance purchased by the issuer. The insurance and guarantees are issued by Governmental entities, private insurers, and the mortgage poolers. There can be no assurance that the private insurers or mortgage poolers can meet their obligations under the policies. The Fund expects that Governmental or private entities may create mortgage loan pools offering pass-through investments in addition to those described above. The mortgages underlying these securities may be alternative mortgage instruments, that is, mortgage instruments whose principal or interest payment may vary or whose terms to maturity may be shorter than previously customary. As new types of mortgage-backed securities are developed and offered to investors, certain Funds will, consistent with their investment objective and policies, consider making investments in such new types of securities. Underlying Mortgages Pools consist of whole mortgage loans or participations in loans. The majority of these loans are made to purchasers of 1-4 family homes. The terms and characteristics of the mortgage instruments are generally uniform within a pool but may vary among pools. For example, in addition to fixed-rate, fixed-term mortgages, a Fund may purchase pools of variable-rate mortgages (VRM), growing equity mortgages (GEM), graduated payment mortgages (GPM) and other types where the principal and interest payment procedures vary. VRM's are mortgages which reset the mortgage's interest rate periodically with changes in open market interest rates. To the extent that the Fund is actually invested in VRM's, the Fund's interest income will vary with changes in the applicable interest rate on pools of VRM's. GPM and GEM pools maintain constant interest rates, with varying levels of principal repayment over the life of the mortgage. These different interest and principal payment procedures should not impact the Fund's net asset value since the prices at which these securities are valued will reflect the payment procedures. All poolers apply standards for qualification to local lending institutions which originate mortgages for the pools. Poolers also establish credit standards and underwriting criteria for individual mortgages included in the pools. In addition, some mortgages included in pools are insured through private mortgage insurance companies. Average Life The average life of pass-through pools varies with the maturities of the underlying mortgage instruments. In addition, a pool's term may be shortened by unscheduled or early payments of principal and interest on the underlying mortgages. The occurrence of mortgage prepayments is affected by factors including the level of interest rates, general economic conditions, the location and age of the mortgage, and other social and demographic conditions. As prepayment rates of individual pools vary widely, it is not possible to accurately predict the average life of a particular pool. For pools of fixed-rated 30-year mortgages, common industry practice is to assume that prepayments will result in a 12-year average life. Pools of mortgages with other maturities or different characteristics will have varying assumptions for average life. Returns on Mortgage-Backed Securities 7 Yields on mortgage-backed pass-through securities are typically quoted based on the maturity of the underlying instruments and the associated average life assumption. Actual prepayment experience may cause the yield to differ from the assumed average life yield. Reinvestment of prepayments may occur at higher or lower interest rates than the original investment, thus affecting the yields of the Fund. The compounding effect from reinvestments of monthly payments received by the Fund will increase its yield to shareholders, compared to bonds that pay interest semi-annually. NON-MORTGAGE ASSET-BACKED SECURITIES. Non-mortgage asset-backed securities include interests in pools of receivables, such as motor vehicle installment purchase obligations and credit card receivables. Such securities are generally issued as pass-through certificates, which represent undivided fractional ownership interests in the underlying pools of assets. Such securities also may be debt instruments, which are also known as collateralized obligations and are generally issued as the debt of a special purpose entity organized solely for the purpose of owning such assets and issuing such debt. Such securities also may include instruments issued by certain trusts, partnerships or other special purpose issuers, including pass-through certificates representing participations in, or debt instruments backed by, the securities and other assets owned by such issuers. Non-mortgage-backed securities are not issued or guaranteed by the U.S. Government or its agencies or instrumentalities; however, the payment of principal and interest on such obligations may be guaranteed up to certain amounts and for a certain time period by a letter of credit issued by a financial institution (such as a bank or insurance company) unaffiliated with the issuers of such securities. The purchase of non-mortgage-backed securities raises considerations peculiar to the financing of the instruments underlying such securities. For example, most organizations that issue asset-backed securities relating to motor vehicle installment purchase obligations perfect their interests in their respective obligations only by filing a financing statement and by having the servicer of the obligations, which is usually the originator, take custody thereof. In such circumstances, if the servicer were to sell the same obligations to another party, in violation of its duty not to do so, there is a risk that such party could acquire an interest in the obligations superior to that of the holders of the asset-backed securities. Also, although most such obligations grant a security interest in the motor vehicle being financed, in most states the security interest in a motor vehicle must be noted on the certificate of title to perfect such security interest against competing claims of other parties. Due to the larger number of vehicles involved, however, the certificate of title to each vehicle financed, pursuant to the obligations underlying the asset-backed securities, usually is not amended to reflect the assignment of the seller's security interest for the benefit of the holders of the asset-backed securities. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on those securities. In addition, various state and Federal laws give the motor vehicle owner the right to assert against the holder of the owner's obligation certain defenses such owner would have against the seller of the motor vehicle. The assertion of such defenses could reduce payments on the related asset-backed securities. Insofar as credit card receivables are concerned, credit card holders are entitled to the protection of a number of state and Federal consumer credit laws, many of which give such holders the right to set off certain amounts against balances owed on the credit card, thereby reducing the amounts paid on such receivables. In addition, unlike most other asset-backed securities, credit card receivables are unsecured obligations of the card holder. While the market for asset-backed securities is becoming increasingly liquid, the market for mortgage-backed securities issued by certain private organizations and non-mortgage-backed securities is not as well developed. As stated above, the Adviser intends to limit its purchases of mortgage-backed securities issued by certain private organizations and non-mortgage-backed securities to securities that are readily marketable at the time of purchase. BORROWINGS The registered investment companies in the Nations Funds family participate in an uncommitted line of credit provided by The Bank of New York under a line of credit agreement (the "Agreement"). Advances under the Agreement are taken primarily for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. Interest on borrowings is payable at the federal funds rate plus .50% on an annualized basis. The Agreement requires, among other things, that each participating Fund maintain a ratio of no less than 4 to 1 net assets (not including funds borrowed pursuant to the Agreement) to the aggregate amount of indebtedness pursuant to the Agreement. Specific borrowings by a Fund under the Agreement over the last fiscal year, if any, can by found in the Funds' Annual Reports for the year ended March 31, 1999. 8 COMMERCIAL INSTRUMENTS Commercial Instruments consist of short-term U.S. dollar-denominated obligations issued by domestic corporations or issued in the U.S. by foreign corporations and foreign commercial banks. The Prime Fund will limit purchases of commercial instruments to instruments which: (a) if rated by at least two NRSROs are rated in the highest rating category for short-term debt obligations given by such organizations, or if only rated by one such organization, are rated in the highest rating category for short-term debt obligations given by such organization; or (b) if not rated, are (i) comparable in priority and security to a class of short-term instruments of the same issuer that has such rating(s), or (ii) of comparable quality to such instruments as determined by the Board on the advice of the Adviser. Investments by a Fund in commercial paper will consist of issues rated in a manner consistent with such Fund's investment policies and objectives. In addition, the Funds may acquire unrated commercial paper and corporate bonds that are determined by the Adviser at the time of purchase to be of comparable quality to rated instruments that may be acquired by such Funds as previously described. Variable-rate master demand notes are unsecured instruments that permit the indebtedness thereunder to vary and provide for periodic adjustments in the interest rate. While some of these notes are not rated by credit rating agencies, issuers of variable rate master demand notes must satisfy the Adviser that similar criteria to that set forth above with respect to the issuers of commercial paper purchasable by the Prime Fund are met. Variable-rate instruments acquired by a Fund will be rated at a level consistent with such Fund's investment objective and policies of high quality as determined by a major rating agency or, if not rated, will be of comparable quality as determined by the Adviser. See also the discussion of variable- and floating-rate instruments in this SAI. Variable- and floating-rate instruments are unsecured instruments that permit the indebtedness thereunder to vary. While there may be no active secondary market with respect to a particular variable or floating rate instrument purchased by a Fund, a Fund may, from time to time as specified in the instrument, demand payment of the principal or may resell the instrument to a third party. The absence of an active secondary market, however, could make it difficult for a Fund to dispose of an instrument if the issuer defaulted on its payment obligation or during periods when a Fund is not entitled to exercise its demand rights, and a Fund could, for these or other reasons, suffer a loss. A Fund may invest in variable and floating rate instruments only when the Adviser deems the investment to involve minimal credit risk. If such instruments are not rated, the Adviser will consider the earning power, cash flows, and other liquidity ratios of the issuers of such instruments and will continuously monitor their financial status to meet payment on demand. In determining average weighted portfolio maturity, an instrument will be deemed to have a maturity equal to the longer of the period remaining to the next interest rate adjustment or the demand notice period specified in the instrument. Certain Funds also may purchase short-term participation interests in loans extended by banks to companies, provided that both such banks and such companies meet the quality standards set forth above. In purchasing a loan participation or assignment, the Fund acquires some or all of the interest of a bank or other lending institution in a loan to a corporate borrower. Many such loans are secured and most impose restrictive covenants which must be met by the borrower and which are generally more stringent than the covenants available in publicly traded debt securities. However, interests in some loans may not be secured, and the Fund will be exposed to a risk of loss if the borrower defaults. Loan participations also may be purchased by the Fund when the borrowing company is already in default. In purchasing a loan participation, the Fund may have less protection under the federal securities laws than it has in purchasing traditional types of securities. The Fund's ability to assert its rights against the borrower will also depend on the particular terms of the loan agreement among the parties. COMBINED TRANSACTIONS Certain Funds may enter into multiple transactions, including multiple options transactions, multiple futures transactions, multiple forward foreign currency exchange contracts and any combination of futures, options and forward foreign currency exchange contracts ("component" transactions), instead of a single transaction, as part of a single hedging strategy when, in the opinion of the Adviser, it is in the best interest of a Fund to do so and where underlying hedging strategies are permitted by a Fund's investment policies. A combined transaction, while part of a single hedging strategy, may contain elements of risk that are present in each of its component transactions. 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 9 rated in the top two categories by an NRSRO or, if unrated, determined by the Adviser to be of comparable quality. Investments in convertible securities can provide income through interest and dividend payments, as well as, an opportunity for capital appreciation by virtue of their conversion or exchange features. The convertible securities in which a Fund may invest include fixed-income and zero coupon debt securities, and preferred stock that may be converted or exchanged at a stated or determinable exchange ratio into underlying shares of common stock. The exchange ratio for any particular convertible security may be adjusted from time to time due to stock splits, dividends, spin-offs, other corporate distributions or scheduled changes in the exchange ratio. Convertible debt securities and convertible preferred stocks, until converted, have general characteristics similar to both debt and equity securities. Although to a lesser extent than with debt securities, generally, the market value of convertible securities tends to decline as interest rates increase and, conversely, tends to increase as interest rates decline. In addition, because of the conversion exchange feature, the market value of convertible securities typically changes as the market value of the underlying common stock changes, and, therefore, also tends to follow movements in the general market for equity securities. A unique feature of convertible securities is that as the market price of the underlying common stock declines, convertible securities tend to trade increasingly on a yield basis, and so may not experience market value declines to the same extent as the underlying common stock. When the market price of the underlying common stock increases, the price of a convertible security tends to rise as a reflection of the value of the underlying common stock, although typically not as much as the price of the underlying common stock. While no securities investments are without risk, investments in convertible securities generally entail less risk than investments in common stock of the same issuer. As debt securities, convertible securities are investments which provide for a stream of income or, in the case of zero coupon securities, accretion of income with generally higher yields than common stocks. Of course, like all debt securities, there can be no assurance of income or principal payments because the issuers of the convertible securities may default on their obligations. Convertible securities generally offer lower yields than non-convertible securities of similar quality because of their conversion exchange features. Convertible securities generally are subordinated to other similar debt securities but not to non-convertible securities of the same issuer. Convertible bonds, as corporate debt obligations, are senior in right of payment to all equity securities, and convertible preferred stock is senior to common stock, of the same issuer. However, convertible bonds and convertible preferred stock typically have lower coupon rates than similar non-convertible securities. Convertible securities may be issued as fixed income obligations that pay current income or as zero coupon notes and bonds, including Liquid Yield Option Notes ("LYONs"). Zero coupon securities pay no cash income and are sold at substantial discounts from their value at maturity. When held to maturity, their entire income, which consists of accretion of discount, comes from the difference between the issue price and their value at maturity. Zero coupon convertible securities offer the opportunity for capital appreciation because increases (or decreases) in the market value of such securities closely follow the movements in the market value of the underlying common stock. Zero coupon convertible securities generally are expected to be less volatile than the underlying common stocks because they usually are issued with short maturities (15 years or less) and are issued with options and/or redemption features exercisable by the holder of the obligation entitling the holder to redeem the obligation and receive a defined cash payment. CORPORATE DEBT SECURITIES Certain Funds may invest in corporate debt securities of domestic issuers of all types and maturities, such as bonds, debentures, notes and commercial paper. Corporate debt securities may involve equity features, such as conversion or exchange rights or warrants for the acquisition of stock of the same or a different issuer, participation based on revenue, sales or profit, or the purchase of common stock or warrants in a unit transaction (where corporate debt obligations and common stock are offered as a unit). Each Fund may also invest in corporate debt securities of foreign issuers. The corporate debt securities in which the 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 Trust. If the rating of any corporate debt security held by a Fund falls below such ratings or if the Adviser determines that an unrated corporate debt security is no longer of comparable quality, then such security shall be disposed of in an orderly manner as quickly as possible. A description of these ratings is attached as Schedule A to this Statement of Additional Information. 10 CUSTODIAL RECEIPTS Certain Funds may also acquire custodial receipts that evidence ownership of future interest payments, principal payments or both on certain U.S. Government notes or bonds. Such notes and bonds are held in custody by a bank on behalf of the owners. These custodial receipts are known by various names, including "Treasury Receipts," "Treasury Investors Growth Receipts" and "Certificates of Accrual on Treasury Securities." Although custodial receipts are not considered U.S. Government securities, they are indirectly issued or guaranteed as to principal and interest by the U.S. Government, its agencies, authorities or instrumentalities. Custodial receipts will be treated as illiquid securities. CURRENCY SWAPS Certain Funds also may enter into currency swaps for hedging purposes and to seek to increase total return. In as much as swaps are entered into for good faith hedging purposes or are offset by a segregated account as described below, the Fund and the Adviser believe that swaps do not constitute senior securities as defined in the 1940 Act and, accordingly, will not treat them as being subject to the Fund's borrowing restrictions. The net amount of the excess, if any, of the Fund's obligations over its entitlement with respect to each currency swap will be accrued on a daily basis and an amount of cash or liquid high grade debt securities (I.E., securities rated in one of the top three ratings categories by an NRSRO, or, if unrated, deemed by the Adviser to be of comparable credit quality) having an aggregate net asset value at least equal to such accrued excess will be maintained in a segregated account by the Fund's custodian. The Fund will not enter into any currency swap unless the credit quality of the unsecured senior debt or the claims-paying ability of the other party thereto is considered to be investment grade by the Adviser. DELAYED DELIVERY TRANSACTIONS In a delayed delivery transaction, the Fund relies on the other party to complete the transaction. If the transaction is not completed, the Fund may miss a price or yield considered to be advantageous. In delayed delivery transactions, delivery of the securities occurs beyond normal settlement periods, but a Fund would not pay for such securities or start earning interest on them until they are delivered. However, when a Fund purchases securities on such a delayed delivery basis, it immediately assumes the risk of ownership, including the risk of price fluctuation. Failure by a counterparty to deliver a security purchased on a delayed delivery basis may result in a loss or missed opportunity to make an alternative investment. Depending upon market conditions, a Fund's delayed delivery purchase commitments could cause its net asset value to be more volatile, because such securities may increase the amount by which the Fund's total assets, including the value of when-issued and delayed delivery securities held by the Fund, exceed its net assets. DOLLAR ROLL TRANSACTIONS Certain Funds may enter into "dollar roll" transactions, which consist of the sale by a Fund to a bank or broker/dealer (the "counterparty") of GNMA certificates or other mortgage-backed securities together with a commitment to purchase from the counterparty similar, but not identical, securities at a future date, at the same price. The counterparty receives all principal and interest payments, including prepayments, made on the security while it is the holder. A Fund receives a fee from the counterparty as consideration for entering into the commitment to purchase. Dollar rolls may be renewed over a period of several months with a different repurchase price and a cash settlement made at each renewal without physical delivery of securities. Moreover, the transaction may be preceded by a firm commitment agreement pursuant to which the Fund agrees to buy a security on a future date. If the broker/dealer to whom a Fund sells the security becomes insolvent, the Fund's right to purchase or repurchase the security may be restricted; the value of the security may change adversely over the term of the dollar roll; the security that the Fund is required to repurchase may be worth less than the security that the Fund originally held, and the return earned by the Fund with the proceeds of a dollar roll may not exceed transaction costs. 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 11 required to buy under the dollar roll may be worth less than an identical security. Finally, there can be no assurance that the Fund's use of the cash that it receives from a dollar roll will provide a return that exceeds borrowing costs. EQUITY SWAP CONTRACTS Certain Funds may from time to time enter into equity swap contracts. The counterparty to an equity swap contract will typically be a bank, investment banking firm or broker/dealer. For example, the counterparty will generally agree to pay a Fund the amount, if any, by which the notional amount of the Equity Swap Contract would have increased in value had it been invested in the stocks comprising the S&P 500 Index in proportion to the composition of the Index, plus the dividends that would have been received on those stocks. A Fund will agree to pay to the counterparty a floating rate of interest (typically the London Inter Bank Offered Rate) on the notional amount of the Equity Swap Contract plus the amount, if any, by which that notional amount would have decreased in value had it been invested in such stocks. Therefore, the return to a Fund on any Equity Swap Contract should be the gain or loss on the notional amount plus dividends on the stocks comprising the S&P 500 Index less the interest paid by the Fund on the notional amount. A Fund will only enter into Equity Swap Contracts on a net basis, I.E., the two parties' obligations are netted out, with the Fund paying or receiving, as the case may be, only the net amount of any payments. Payments under the Equity Swap Contracts may be made at the conclusion of the contract or periodically during its term. If there is a default by the counterparty to an Equity Swap Contract, a Fund will be limited to contractual remedies pursuant to the agreements related to the transaction. There is no assurance that Equity Swap Contract counterparties will be able to meet their obligations pursuant to Equity Swap Contracts or that, in the event of default, a Fund will succeed in pursuing contractual remedies. A Fund thus assumes the risk that it may be delayed in or prevented from obtaining payments owed to it pursuant to Equity Swap Contracts. A Fund will closely monitor the credit of Equity Swap Contract counterparties in order to minimize this risk. Certain Funds may from time to time enter into the opposite side of Equity Swap Contracts (I.E., where a Fund is obligated to pay the increase (net of interest) or receive the decrease (plus interest) on the contract to reduce the amount of the Fund's equity market exposure consistent with the Fund's objective. These positions are sometimes referred to as Reverse Equity Swap Contracts. Equity Swap Contracts will not be used to leverage a Fund. A Fund will not enter into any Equity Swap Contract or Reverse Equity Swap Contract unless, at the time of entering into such transaction, the unsecured senior debt of the counterparty is rated at least A by Moody's or S&P. Since the SEC considers Equity Swap Contracts and Reverse Equity Swap Contracts to be illiquid securities, a Fund will not invest in Equity Swap Contracts or Reverse Equity Swap Contracts if the total value of such investments together with that of all other illiquid securities which a Fund owns would exceed any limitation imposed by the SEC Staff. The Adviser does not believe that a Fund's obligations under Equity Swap Contracts or Reverse Equity Swap Contracts are senior securities and, accordingly, the Fund will not treat them as being subject to its borrowing restrictions. However, the net amount of the excess, if any, of a Fund's obligations over its respective entitlements with respect to each Equity Swap Contract and each Reverse Equity Swap Contract will be accrued on a daily basis and an amount of cash, U.S. Government securities or other liquid high quality debt securities having an aggregate market value at least equal to the accrued excess will be maintained in a segregated account by the Fund's custodian. FOREIGN CURRENCY TRANSACTIONS Certain Funds may invest in foreign currency transactions. Foreign securities involve currency risks. The U.S. dollar value of a foreign security tends to decrease when the value of the U.S. dollar rises against the foreign currency in which the security is denominated, and tends to increase when the value of the U.S. dollar falls against such currency. A Fund may purchase or sell forward foreign currency exchange contracts ("forward contracts") to attempt to minimize the risk to the Fund from adverse changes in the relationship between the U.S. dollar and foreign currencies. A Fund may also purchase and sell foreign currency futures contracts and related options (see "Purchase and Sale of Currency Futures Contracts and Related Options"). A forward contract is an obligation to purchase or sell a specific currency for an agreed price at a future date that is individually negotiated and privately traded by currency traders and their customers. Forward foreign currency exchange contracts establish an exchange rate at a future date. These contracts are transferable in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward foreign currency exchange contract generally has no deposit requirement, 12 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). 13 FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS FUTURES CONTRACTS IN GENERAL. A futures contract is an agreement between two parties for the future delivery of fixed income securities or equity securities or for the payment or acceptance of a cash settlement in the case of futures contracts on an index of fixed income or equity securities. A "sale" of a futures contract means the contractual obligation to deliver the securities at a specified price on a specified date, or to make the cash settlement called for by the contract. Futures contracts have been designed by exchanges which have been designated "contract markets" by the CFTC and must be executed through a brokerage firm, known as a futures commission merchant, which is a member of the relevant contract market. Futures contracts trade on these markets, and the exchanges, through their clearing organizations, guarantee that the contracts will be performed as between the clearing members of the exchange. Presently, futures contracts are based on such debt securities as long-term U.S. Treasury Bonds, Treasury Notes, GNMA modified pass-through mortgage-backed securities, three-month U.S. Treasury Bills, bank certificates of deposit, and on indices of municipal, corporate and government bonds. While futures contracts based on securities do provide for the delivery and acceptance of securities, such deliveries and acceptances are seldom made. Generally, a futures contract is terminated by entering into an offsetting transaction. A Fund will incur brokerage fees when it purchases and sells futures contracts. At the time such a purchase or sale is made, a Fund must provide cash or money market securities as a deposit known as "margin." The initial deposit required will vary, but may be as low as 2% or less of a contract's face value. Daily thereafter, the futures contract is valued through a process known as "marking to market," and a Fund that engages in futures transactions may receive or be required to pay "variation margin" as the futures contract becomes more or less valuable. At the time of delivery of securities pursuant to a futures contract based on securities, adjustments are made to recognize differences in value arising from the delivery of securities with a different interest rate than the specific security that provides the standard for the contract. In some (but not many) cases, securities called for by a futures contract may not have been issued when the contract was written. Futures contracts on indices of securities are settled through the making and acceptance of cash settlements based on changes in value of the underlying rate or index between the time the contract is entered into and the time it is liquidated. FUTURES CONTRACTS ON FIXED INCOME SECURITIES AND RELATED INDICES. As noted in their respective Prospectuses, certain Funds may enter into transactions in futures contracts for the purpose of hedging a relevant portion of their portfolios. A Fund may enter into transactions in futures contracts that are based on U.S. Government obligations, including any index of government obligations that may be available for trading. Such transactions will be entered into where movements in the value of the securities or index underlying a futures contract can be expected to correlate closely with movements in the value of securities held in a Fund. For example, a Fund may sell futures contracts in anticipation of a general rise in the level of interest rates, which would result in a decline in the value of its fixed income securities. If the expected rise in interest rates occurs, the Fund may realize gains on its futures position, which should offset all or part of the decline in value of fixed income fund securities. A Fund could protect against such decline by selling fixed income securities, but such a strategy would involve higher transaction costs than the sale of futures contracts and, if interest rates again declined, the Fund would be unable to take advantage of the resulting market advance without purchases of additional securities. The purpose of the purchase or sale of a futures contract on government securities and indices of government securities, in the case of the above-referenced Funds, which hold or intend to acquire long-term debt securities, is to protect a Fund from fluctuations in interest rates without actually buying or selling long-term debt securities. For example, if long-term bonds are held by a Fund, and interest rates were expected to increase, the Fund might enter into futures contracts for the sale of debt securities. Such a sale would have much the same effect as selling an equivalent value of the long-term bonds held by the Fund. If interest rates did increase, the value of the debt securities in the Fund would decline, but the value of the futures contracts to the Fund would increase at approximately the same rate thereby keeping the net asset value of the Fund from declining as much as it otherwise would have. When a Fund is not fully invested and a decline in interest rates is anticipated, which would increase the cost of fixed income securities that the Fund intends to acquire, it may purchase futures contracts. In the event that the projected decline in interest rates occurs, the increased cost of the securities acquired by the Fund should be offset, in whole or part, by gains on the futures contracts by entering into offsetting transactions on the contract market on which the initial purchase was effected. In a substantial majority of transactions involving futures contracts on fixed income securities, a Fund will purchase the securities upon termination of the long futures positions, but under unusual market conditions, a long futures position may be terminated without a corresponding purchase of securities. 14 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. 15 Further, while a Fund generally would not write options on individual portfolio securities, it may do so under limited circumstances known as "targeted sales" and "targeted buys," which involve the writing of call or put options in an attempt to purchase or sell portfolio securities at specific desired prices. A Fund would receive a fee, or a "premium," for the writing of the option. For example, where the Fund seeks to sell portfolio securities at a "targeted" price, it may write a call option at that price. In the event that the market rises above the exercise price, it would receive its "targeted" price, upon the exercise of the option, as well as the premium income. Also, where it seeks to buy portfolio securities at a "targeted" price, it may write a put option at that price for which it will receive the premium income. In the event that the market declines below the exercise price, a Fund would pay its "targeted" price upon the exercise of the option. In the event that the market does not move in the direction or to the extent anticipated, however, the targeted sale or buy might not be successful and a Fund could sustain a loss on the transaction that may not be offset by the premium received. In addition, a Fund may be required to forego the benefit of an intervening increase or decline in value of the underlying security. OPTIONS AND FUTURES STRATEGIES. The Adviser may seek to increase the current return of certain Funds by writing covered call or put options. In addition, through the writing and purchase of options and the purchase and sale of U.S. and certain foreign stock index futures contracts, interest rate futures contracts, foreign currency futures contracts and related options on such futures contracts, the Adviser may at times seek to hedge against a decline in the value of securities included in the Fund or an increase in the price of securities that it plans to purchase for the Fund. Expenses and losses incurred as a result of such hedging strategies will reduce the Fund's current return. A Fund's investment in foreign stock index futures contracts and foreign interest rate futures contracts, and related options on such futures contracts, are limited to only those contracts and related options that have been approved by the CFTC for investment by U.S. investors. Additionally, with respect to a Fund's investment in foreign options, unless such options are specifically authorized for investment by order of the CFTC or meet the definition of trade options as set forth in CFTC Rule 32.4, a Fund will not make these investments. The ability of a Fund to engage in the options and futures strategies described below will depend on the availability of liquid markets in such instruments. Markets in options and futures with respect to stock indices, foreign government securities and foreign currencies are relatively new and still developing. It is impossible to predict the amount of trading interest that may exist in various types of options or futures. Therefore, no assurance can be given that a Fund will be able to utilize these instruments effectively for the purposes stated below. Furthermore, a Fund's ability to engage in options and futures transactions may be limited by tax considerations. Although a Fund will only engage in options and futures transactions for limited purposes, these activities will involve certain risks which are described below under "Risk Factors Associated with Futures and Options Transactions." A Fund will not engage in options and futures transactions for leveraging purposes. WRITING COVERED OPTIONS ON SECURITIES. Certain Funds may write covered call options and covered put options on securities in which it is permitted to invest from time to time as the Adviser determines is appropriate in seeking to attain its objective. Call options written by a Fund give the holder the right to buy the underlying securities from a Fund at a stated exercise price; put options give the holder the right to sell the underlying security to the Fund at a stated price. A Fund may write only covered options, which means that, so long as the Fund is obligated as the writer of a call option, it will own the underlying securities subject to the option (or comparable securities satisfying the cover requirements of securities exchanges). In the case of put options, a Fund will maintain in a separate account cash or short-term U.S. Government securities with a value equal to or greater than the exercise price of the underlying securities. A Fund may also write combinations of covered puts and calls on the same underlying security. 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. 16 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. 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. 17 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. 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. 18 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. The use of options and futures involves the risk of imperfect correlation between movements in options and futures prices and movements in the price of securities which are the subject of the hedge. Such correlation, particularly with respect to options on stock indices and stock index futures, is imperfect, and such risk increases as the composition of a Fund diverges from the composition of the relevant index. The successful use of these strategies also depends on the ability of the Adviser to correctly forecast interest rate movements, currency rate movements and general stock market price movements. In addition to certain risk factors described above, the following sets forth certain information regarding the potential risks associated with the Funds' futures and options transactions. RISK OF IMPERFECT CORRELATION. A Fund's ability effectively to hedge all or a portion of its portfolio through transactions in futures, options on futures or options on stock indices depends on the degree to which movements in the value of the securities or index underlying such hedging instrument correlate with movements in the value of the relevant portion of the Fund's securities. If the values of the securities being hedged do not move in the same amount or direction as the underlying security or index, the hedging strategy for a Fund might not be successful and the Fund could sustain losses on its hedging transactions which would not be offset by gains on its portfolio. It is also possible that there may be a negative correlation between the security or index underlying a futures or option contract and the portfolio securities being hedged, which could result in losses both on the hedging transaction and the fund securities. In such instances, a Fund's overall return could be less than if the hedging transactions had not been undertaken. Stock index futures or options based on a narrower index of securities may present greater risk than options or futures based on a broad market index, as a narrower index is more susceptible to rapid and extreme fluctuations resulting from changes in the value of a small number of securities. A Fund would, however, effect transactions in such futures or options only for hedging purposes. 19 The trading of futures and options on indices involves the additional risk of imperfect correlation between movements in the futures or option price and the value of the underlying index. The anticipated spread between the prices may be distorted due to differences in the nature of the markets, such as differences in margin requirements, the liquidity of such markets and the participation of speculators in the futures and options market. The purchase of an option on a futures contract also involves the risk that changes in the value of underlying futures contract will not be fully reflected in the value of the option purchased. The risk of imperfect correlation, however, generally tends to diminish as the maturity date of the futures contract or termination date of the option approaches. The risk incurred in purchasing an option on a futures contract is limited to the amount of the premium plus related transaction costs, although it may be necessary under certain circumstances to exercise the option and enter into the underlying futures contract in order to realize a profit. Under certain extreme market conditions, it is possible that a Fund will not be able to establish hedging positions, or that any hedging strategy adopted will be insufficient to completely protect the Fund. A Fund will purchase or sell futures contracts or options only if, in the Adviser's judgment, there is expected to be a sufficient degree of correlation between movements in the value of such instruments and changes in the value of the relevant portion of the Fund's portfolio for the hedge to be effective. There can be no assurance that the Adviser's judgment will be accurate. POTENTIAL LACK OF A LIQUID SECONDARY MARKET. The ordinary spreads between prices in the cash and futures markets, due to differences in the natures of those markets, are subject to distortions. First, all participants in the futures market are subject to initial deposit and variation margin requirements. This could require a Fund to post additional cash or cash equivalents as the value of the position fluctuates. Further, rather than meeting additional variation margin requirements, investors may close futures contracts through offsetting transactions which could distort the normal relationship between the cash and futures markets. Second, the liquidity of the futures or options market may be lacking. Prior to exercise or expiration, a futures or option position may be terminated only by entering into a closing purchase or sale transaction, which requires a secondary market on the exchange on which the position was originally established. While a Fund will establish a futures or option position only if there appears to be a liquid secondary market therefor, there can be no assurance that such a market will exist for any particular futures or option contract at any specific time. In such event, it may not be possible to close out a position held by a Fund, which could require the Fund to purchase or sell the instrument underlying the position, make or receive a cash settlement, or meet ongoing variation margin requirements. The inability to close out futures or option positions also could have an adverse impact on a Fund's ability effectively to hedge its securities, or the relevant portion thereof. The liquidity of a secondary market in a futures contract or an option on a futures contract may be adversely affected by "daily price fluctuation limits" established by the exchanges, which limit the amount of fluctuation in the price of a contract during a single trading day and prohibit trading beyond such limits once they have been reached. The trading of futures and options contracts also is subject to the risk of trading halts, suspensions, exchange or clearing house equipment failures, government intervention, insolvency of the brokerage firm or clearing house or other disruptions of normal trading activity, which could at times make it difficult or impossible to liquidate existing positions or to recover excess variation margin payments. 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. 20 TRADING AND POSITION LIMITS. Each contract market on which futures and option contracts are traded has established a number of limitations governing the maximum number of positions which may be held by a trader, whether acting alone or in concert with others. The Adviser does not believe that these trading and position limits will have an adverse impact on the hedging strategies regarding the Funds' investments. REGULATIONS ON THE USE OF FUTURES AND OPTIONS CONTRACTS. Regulations of the CFTC require that the Funds enter into transactions in futures contracts and options thereon for hedging purposes only, in order to assure that they are not deemed to be a "commodity pool" under such regulations. In particular, CFTC regulations require that all short futures positions be entered into for the purpose of hedging the value of investment securities held by a Fund, and that all long futures positions either constitute bona fide hedging transactions, as defined in such regulations, or have a total value not in excess of an amount determined by reference to certain cash and securities positions maintained for the Fund, and accrued profits on such positions. In addition, a Fund may not purchase or sell such instruments if, immediately thereafter, the sum of the amount of initial margin deposits on its existing futures positions and premiums paid for options on futures contracts would exceed 5% of the market value of the Fund's total assets. When a Fund purchases a futures contract, an amount of cash or cash equivalents or high quality debt securities will be segregated with the Fund's custodian so that the amount so segregated, plus the initial deposit and variation margin held in the account of its broker, will at all times equal the value of the futures contract, thereby insuring that the use of such futures is unleveraged. The Funds' ability to engage in the hedging transactions described herein may be limited by the current federal income tax requirement that a Fund derive less than 30% of its gross income from the sale or other disposition of stock or securities held for less than three months. The Funds may also further limit their ability to engage in such transactions in response to the policies and concerns of various Federal and state regulatory agencies. Such policies may be changed by vote of the Board of Trustees. Additional Information on Futures and Options As stated in the Prospectus, each Non-Money Market Fund, may enter into futures contracts and options for hedging purposes. Such transactions are described in this Schedule. During the current fiscal year, each of these Funds intends to limit its transactions in futures contracts and options so that not more than 5% of the Fund's net assets are at risk. Furthermore, in no event would any Fund purchase or sell futures contracts, or related options thereon, for hedging purposes if, immediately thereafter, the aggregate initial margin that is required to be posted by the Fund under the rules of the exchange on which the futures contract (or futures option) is traded, plus any premiums paid by the Fund on its open futures options positions, exceeds 5% of the Fund's total assets, after taking into account any unrealized profits and unrealized losses on the Fund's open contracts and excluding the amount that a futures option is "in-the-money" at the time of purchase. (An option to buy a futures contract is "in-the-money" if the value of the contract that is subject to the option exceeds the exercise price; an option to sell a futures contract is "in-the-money" if the exercise Price exceeds the value of the contract that is subject of the option.) 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. 21 Description of Interest Rates Futures Contracts. An interest rate futures contract sale would create an obligation by a Fund, as seller, to deliver the specific type of financial instrument called for in the contract at a specific future time for a specified price. A futures contract purchase would create an obligation by the Fund, as purchaser, to take delivery of the specific type of financial instrument at a specific future time at a specific price. The specific securities delivered or taken, respectively, at settlement date, would not be determined until at or near that date. The determination would be in accordance with the rules of the exchange on which the futures contract sale or purchase was made. Although interest rate futures contracts by their terms call for actual delivery or acceptance of securities, in most cases the contracts are closed out before the settlement date without the making or taking of delivery of securities. Closing out a futures contract sale is effected by the Fund's entering into a futures contract purchase for the same aggregate amount of the specific type of financial instrument and the same delivery date. If the price in the sale exceeds the price in the offsetting purchase, the Fund is paid the difference and thus realizes a gain. If the offsetting purchase price exceeds the sale price, the Fund pays the difference and realizes a loss. Similarly, the closing out of a futures contract purchase is effected by the Fund's entering into a futures contract sale. If the offsetting sale price exceeds the purchase price, the Fund realizes a gain, and if the purchase price exceeds the offsetting sale price, the Fund realizes a loss. Interest rate futures contracts are traded in an auction environment on the floors of several exchanges - principally, the Chicago Board of Trade, the Chicago Mercantile Exchange and the New York Futures Exchange. A Fund would deal only in standardized contracts on recognized changes. Each exchange guarantees performance under contract provisions through a clearing corporation, a nonprofit organization managed by the exchange membership. A public market now exists in futures contracts covering various financial instruments including long-term United States Treasury Bonds and Notes; GNMA modified pass-through mortgage-backed securities; three-month United States Treasury Bills; and ninety-day commercial paper. The Funds may trade in any futures contract for which there exists a public market, including, without limitation, the foregoing instruments. Examples of Futures Contract Sale. A Fund would engage in an interest rate futures contract sale to maintain the income advantage from continued holding of a long-term bond while endeavoring to avoid part or all of the loss in market value that would otherwise accompany a decline in long-term securities prices. Assume that the market value of a certain security in a Fund tends to move in concert with the futures market prices of long-term United States Treasury bonds ("Treasury Bonds"). The Adviser wishes to fix the current market value of this portfolio security until some point in the future. Assume the portfolio security has a market value of 100, and the Adviser believes that, because of an anticipated rise in interest rates, the value will decline to 95. The Fund might enter into futures contract sales of Treasury bonds for an equivalent of 98. If the market value of the portfolio securities does indeed decline from 100 to 95, the equivalent futures market price for the Treasury bonds might also decline from 98 to 93. In that case, the five-point loss in the market value of the portfolio security would be offset by the five-point gain realized by closing out the futures contract sale. Of course, the futures market price of Treasury bonds might well decline to more than 93 or to less than 93 because of the imperfect correlation between cash and futures prices mentioned below. 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. 22 For example, assume that the market price of a long-term bond that the Fund may purchase, currently yielding 10%, tends to move in concert with futures market prices of Treasury bonds. The Adviser wishes to fix the current market price (and thus 10% yield) of the long-term bond until the time (four months away in this example) when it may purchase the bond. Assume the long-term bond has a market price of 100, and the Adviser believes that, because of an anticipated fall in interest rates, the price will have risen to 105 (and the yield will have dropped to about 9-1/2%) in four months. The Fund might enter into futures contracts purchases of Treasury bonds for an equivalent price of 98. At the same time, the Fund would assign a pool of investments in short-term securities that are either maturing in four months or earmarked for sale in four months, for purchase of the long-term bond at an assumed market price of 100. Assume these short-term securities are yielding 15%. If the market price of the long-term bond does indeed rise from 100 to 105, the equivalent futures market price for Treasury bonds might also rise from 98 to 103. In that case, the 5-point increase in the price that the Fund pays for the long-term bond would be offset by the 5-point gain realized by closing out the futures contract Purchase. The Adviser could be wrong in its forecast of interest rates; long-term interest rates might rise to above 10%; and the equivalent futures market price could fall below 98. If short-term rates at the same time fall to 10% or below, it is possible that the Fund would continue with its purchase program for long-term bonds. The market price of available long-term bonds would have decreased. The benefit of this price decrease, and thus yield increase, will be reduced by the loss realized on closing out the futures contract purchase. If, however, short-term rates remained above available long-term rates, it is possible that the Fund would discontinue its purchase program for long-term bonds. The yield on short-term securities in the portfolio, including those originally in the pool assigned to the particular long-term bond, would remain higher than yields on long-term bonds. The benefit of this continued incremental income will be reduced by the loss realized on closing out the futures contract purchase. In each transaction, expenses also would be incurred. II. Index Futures Contracts. A stock or bond index assigns relative values to the stocks or bonds included in the index, and the index fluctuates with changes in the market values of the stocks or bonds included. Some stock index futures contracts are based on broad market indices, such as the Standard & Poor's 500 or the New York Stock Exchange Composite Index. In contract, certain exchanges offer futures contracts on narrower market indices, such as the Standard & Poor's 100, the Bond Buyer Municipal Bond Index, an index composed of 40 term revenue and general obligation bonds, or indices based on an industry or market segment, such as oil and gas stocks. Futures contracts are traded on organized exchanges regulated by the Commodity Futures Trading Commission. Transactions on such exchanges are cleared through a clearing corporation, which guarantees the performance of the parties to each contract. 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). 23 ANTICIPATORY PURCHASE HEDGE: Buy the Future Hedge Objective: Protect Against Increasing Price Portfolio Futures -Day Hedge is Placed Anticipate Buying $62,500 Buying 1 Index Futures at 125 Equity Portfolio Value of Futures = $62,500/Contract -Day Hedge is Lifted- Buy Equity Portfolio with Sell 1 Index Futures at 130 Actual Cost = $65,000 Value of Futures = $65,000/Contract Increase in Purchase Gain on Futures = $2,500 Price = $2,500 HEDGING A STOCK PORTFOLIO: Sell the Future Hedge Objective: Protect Against Declining (Value of the Portfolio) Factors Value of Stock Portfolio = $1,000,000 Value of Futures Contract = 125 x $500 = $62,500 Portfolio Beta Relative to the Index - 1.0 Portfolio Futures -Day Hedge is Placed Anticipate Selling $1,000,000 Sell 16 Index Futures at 125 Equity Portfolio Value of Futures = $1,000,000 -Day Hedge is Lifted- Equity Portfolio-Own Buy 16 Index Futures at 120 Stock with Value = $960,000 Value of Futures = $960,000 Loss in Portfolio Gain on Futures = $40,000 Value = $40 000 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 24 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. 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. 25 In instances involving the purchase of futures contracts by a Fund, an amount of cash and cash equivalents, equal to the market value of the futures contracts, will be deposited in a segregated account with the Fund's Custodian and/or in a margin account with a broker to collateralize the position and thereby insure that the use of such futures is unleveraged. In addition to the possibility that there may be an imperfect correlation, or no correlation at all, between movements in the futures and the securities being hedged, the price of futures may not correlate perfectly with movement in the cash market due to certain market distortions. Rather than meeting additional margin deposit requirements, investors may close futures contracts through off-setting transactions which could distort the normal relationship between the cash and futures markets. Second, with respect to financial futures contracts, the liquidity of the futures market depends on participants entering into off-setting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced thus producing distortions. Third, from the point of view of speculators, the deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may also cause temporary price distortions. Due to the possibility of Price distortion in the futures market, and because of the imperfect correlation between the movements in the cash market and movements in the price of futures, a correct forecast of general market trends or interest rate movements by the Adviser still may not result in a successful hedging transaction over a short time frame. Positions in futures may be closed out only on an exchange or board of trade which provides a secondary market for such futures. Although the Funds intend to purchase or sell futures only on exchanges or boards of trade where there appear to be active secondary markets, there is no assurance that a liquid secondary market on any exchange or board of trade will exist for any particular contract or at any particular time. In such event, it may not be possible to close a futures investment position, and in the event of adverse price movements, a Fund would continue to be required to make daily cash payments of variation margin. However, in the event futures contracts have been used to hedge portfolio securities, such securities will not be sold until the futures contract can be terminated. In such circumstances, an increase in the price of the securities, if any, may partially or completely offset losses on the futures contract. However, as described above, there is no guarantee that the price of the securities will in fact correlate with the price movements in the futures contract and thus provide an offset on a futures contract. 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. 26 Investments in futures options involve some of the same considerations that are involved in connection with investments in futures contracts (for example, the existence of a liquid secondary market). In addition, the purchase of an option also entails the risk that changes in the value of the underlying futures contract will not be fully reflected in the value of the option purchased. Depending on the pricing of the option compared to either the futures contract upon which it is based, or upon the price of the securities being hedged, an option may or may not be less risky than ownership of the futures contract or such securities. In general, the market prices of options can be expected to be more volatile than the market prices on the underlying futures contract. Compared to the purchase or sale of futures contracts, however, the purchase of call or put options on futures contracts may frequently involve less potential risk to a Fund because the maximum amount at risk is the premium paid for the options (plus transaction costs). Although permitted by their fundamental investment policies, the Funds do not currently intend to write future options, and will not do so in the future absent any necessary regulatory approvals. Accounting Treatment. Accounting for futures contracts and options will be in accordance with generally accepted accounting principles. GUARANTEED INVESTMENT CONTRACTS Guaranteed investment contracts, investment contracts or funding agreements (each referred to as a "GIC") are investment instruments issued by highly rated insurance companies. Pursuant to such contracts, a Fund may make cash contributions to a deposit fund of the insurance company's general or separate accounts. The insurance company then credits to a Fund guaranteed interest. The insurance company may assess periodic charges against a GIC for expense and service costs allocable to it, and the charges will be deducted from the value of the deposit fund. The purchase price paid for a GIC generally becomes part of the general assets of the issuer, and the contract is paid from the general assets of the issuer. A Fund will only purchase GICs from issuers which, at the time of purchase, meet quality and credit standards established by the Adviser. Generally, GICs are not assignable or transferable without the permission of the issuing insurance companies, and an active secondary market in GICs does not currently exist. Also, a Fund may not receive the principal amount of a GIC from the insurance company on seven days' notice or less, at which point the GIC may be considered to be an illiquid investment. INSURED MUNICIPAL SECURITIES Certain of the Municipal Securities held by the Funds may be insured at the time of issuance as to the timely payment of principal and interest. The insurance policies will usually be obtained by the issuer of the Municipal Securities at the time of its original issuance. In the event that the issuer defaults with respect to interest or principal payments, the insurer will be notified and will be required to make payment to the bondholders. There is, however, no guarantee that the insurer will meet its obligations. In addition, such insurance will not protect against market fluctuations caused by changes in interest rates and other factors. INTEREST RATE TRANSACTIONS Among the strategic transactions into which certain Funds may enter are interest rate swaps and the purchase or sale of related caps and floors. The Funds expect to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its portfolio, to protect against currency fluctuations, as a duration management technique or to protect against any increase in the price of securities the Fund anticipates purchasing at a later date. A Fund intends to use these transactions as hedges and not as speculative investments and will not sell interest rate caps or floors where it does not own securities or other instruments providing the income stream the Fund may be obligated to pay. Interest rate swaps involve the exchange by a Fund with another party of their respective commitments to pay or receive interest, E.G. an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. A currency swap is an agreement to exchange cash flows on a notional amount of two or more currencies based on the relative value differential among them and an index swap is an agreement to swap cash flows on a notional amount based on changes in the values of the reference indices. The purchase of a cap entitles the purchaser to receive payments on a notional principal amount from the party selling such floor to the extent that a specified index falls below a predetermined interest rate or amount. 27 A Fund will usually enter into swaps on a net basis, I.E., the two payment streams are netted out in a cash settlement on the payment date or dates specified in the instrument, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. In as much as these swaps, caps and floors are entered into for good faith hedging purposes, the Adviser and the Fund believe such obligations do not constitute senior securities under the 1940 Act and, accordingly, will not treat them as being subject to its borrowing restrictions. A Fund will not enter into any swap, cap and floor transaction unless, at the time of entering into such transaction, the unsecured long-term debt of the counterparty, combined with any credit enhancements, is rated at least "A" by Standard & Poor's Corporation or Moody's Investors Service, Inc. or has an equivalent rating from an NRSRO or is determined to be of equivalent credit quality by the Adviser. If there is a default by the counterparty, the Fund may have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid. Caps and floors are more recent innovations for which standardized documentation has not yet been fully developed and, accordingly, they are less liquid than swaps. With respect to swaps, a Fund will accrue the net amount of the excess, if any, of its obligations over its entitlements with respect to each swap on a daily basis and will segregate an amount of cash or liquid high grade securities having a value equal to the accrued excess. Caps and floors require segregation of assets with a value equal to the Fund's net obligation, if any. LOWER RATED (OR HIGH YIELD) DEBT SECURITIES The yields on lower rated debt and comparable unrated fixed-income securities generally are higher than the yields available on higher-rated securities. However, investments in lower rated debt and comparable unrated securities generally involve greater volatility of price and risk of loss of income and principal, including the probability of default by or bankruptcy of the issuers of such securities. Lower rated debt and comparable unrated securities (a) will likely have some quality and protective characteristics that, in the judgment of the rating organization, are outweighed by large uncertainties or major risk exposures to adverse conditions and (b) are predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligation. Accordingly, it is possible that these types of factors could, in certain instances, reduce the value of securities held in a Fund's portfolio, with a commensurate effect on the value of the Fund's shares. Therefore, an investment in the Fund should not be considered as a complete investment program and may not be appropriate for all investors. The market prices of lower rated securities may fluctuate more than higher rated securities and may decline significantly in periods of general economic difficulty which may follow periods of rising interest rates. During an economic downturn or a prolonged period of rising interest rates, the ability of issuers of lower quality debt to service their payment obligations, meet projected goals, or obtain additional financing may be impaired. Since the risk of default is higher for lower rated securities, the Adviser will try to minimize the risks inherent in investing in lower rated debt securities by engaging in credit analysis, diversification, and attention to current developments and trends affecting interest rates and economic conditions. The Adviser will attempt to identify those issuers of high-yielding securities whose financial condition is adequate to meet future obligations, have improved, or are expected to improve in the future. Unrated securities are not necessarily of lower quality than rated securities, but they may not be attractive to as many buyers. Each Fund's policies regarding lower rated debt securities are not fundamental and may be changed at any time without shareholder approval. While the market values of lower rated debt and comparable unrated securities tend to react less to fluctuations in interest rate levels than the market values of higher-rated securities, the market values of certain lower rated debt and comparable unrated securities also tend to be more sensitive to individual corporate developments and changes in economic conditions than higher-rated securities. In addition, lower rated debt securities and comparable unrated securities generally present a higher degree of credit risk. Issuers of lower rated debt and comparable unrated securities often are highly leveraged and may not have more traditional methods of financing available to them so that their ability to service their debt obligations during an economic downturn or during sustained periods of rising interest rates may be impaired. The risk of loss due to default by such issuers is significantly greater because lower rated debt and comparable unrated securities generally are unsecured and frequently are subordinated to the prior payment of senior indebtedness. A Fund may incur additional expenses to the extent that it is required to seek recovery upon a default in the payment of principal or interest on its portfolio holdings. The existence of limited markets for lower rated debt and comparable unrated securities may diminish a Fund's ability to (a) obtain accurate market quotations for purposes of valuing such securities and calculating its net asset value and (b) sell the securities at fair value either to meet redemption requests or to respond to changes in the economy or in financial markets. 28 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. 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. 29 The Funds will not invest more than 5% of their total investment assets in lease obligations that contain "non-appropriation" clauses where (1) the nature of the leased equipment or property is such that its ownership or use is essential to a governmental function of the municipality, (2) the lease payments will commence amortization of principal at an early date resulting in an average life of seven years or less for the lease obligation, (3) appropriate covenants will be obtained from the municipal obligor prohibiting the substitution or purchase of similar equipment if lease payments are not appropriated, (4) the lease obligor has maintained good market acceptability in the past, (5) the investment is of a size that will be attractive to institutional investors, and (6) the underlying leased equipment has elements of probability and/or use that enhance its marketability in the event foreclosure on the underlying equipment were ever required. The Funds have not imposed any percentage limitations with respect to their investment in lease obligations not subject to the "non-appropriation" risk. To the extent municipal leases are illiquid, they will be subject to each Fund's limitation on investments in illiquid securities. Recovery of an investment in any such loan that is illiquid and payable on demand may depend on the ability of the municipal borrower to meet an obligation for full repayment of principal and payment of accrued interest within the demand period, normally seven days or less (unless a Fund determines that a particular loan issue, unlike most such loans, has a readily available market). As it deems appropriate, the Adviser will establish procedures to monitor the credit standing of each such municipal borrower, including its ability to meet contractual payment obligations. In evaluating the credit quality of a municipal lease obligation and determining whether such lease obligation will be considered "liquid," the Adviser for each Fund will consider: (1) whether the lease can be canceled; (2) what assurance there is that the assets represented by the lease can be sold; (3) the strength of the lessee's general credit (E.G., its debt, administrative, economic, and financial characteristics); (4) the likelihood that the municipality will discontinue appropriating funding for the leased property because the property is no longer deemed essential to the operations of the municipality (E.G., the potential for an "event of non-appropriation"); and (5) the legal recourse in the event of failure to appropriate. Municipal securities may include units of participation in trusts holding pools of tax-exempt leases. Municipal participation interests may be purchased from financial institutions, and give the purchaser an undivided interest in one or more underlying municipal security. To the extent that municipal participation interests are considered to be "illiquid securities," such instruments are subject to each Fund's limitation on the purchase of illiquid securities. Municipal leases and participating interests therein, which may take the form of a lease or an installment sales contract, are issued by state and local governments and authorities to acquire a wide variety of equipment and facilities. Interest payments on qualifying leases are exempt from Federal income taxes. In addition, certain of the Funds may acquire "stand-by commitments" from banks or broker/dealers with respect to municipal securities held in their portfolios. Under a stand-by commitment, a dealer would agree to purchase at a Fund's option specified Municipal Securities at a specified price. The Funds will acquire stand-by commitments solely to facilitate portfolio liquidity and do not intend to exercise their rights thereunder for trading purposes. Although the Funds do not presently intend to do so on a regular basis, each may invest more than 25% of its total assets in municipal securities the interest on which is paid solely from revenues of similar projects if such investment is deemed necessary or appropriate by the Adviser. To the extent that more than 25% of a Fund's total assets are invested in Municipal Securities that are payable from the revenues of similar projects, a Fund will be subject to the peculiar risks presented by such projects to a greater extent than it would be if its assets were not so concentrated. There are, of course, variations in the quality of Municipal Securities, both within a particular classification and between classifications, and the yields on Municipal Securities depend upon a variety of factors, including general money market conditions, the financial condition of the issuer, general conditions of the municipal bond market, the size of a particular offering, the maturity of the obligation, and the rating of the issue. The ratings of NRSROs represent their opinions as to the quality of Municipal Securities. It should be emphasized, however, that these ratings are general and are not absolute standards of quality, and Municipal Securities with the same maturity, interest rate, and rating may have different yields while Municipal Securities of the same maturity and interest rate with different ratings may have the same yield. Subsequent to its purchase by a Fund, an issue of Municipal Securities may cease to be rated, or its rating may be reduced below the minimum rating required for purchase by that Fund. The Adviser will consider such an event in determining whether a Fund should continue to hold the obligation. 30 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. The following information relating to the Fund supplements information relevant to the Fund in the related Prospectuses. From time to time, proposals have been introduced before Congress for the purpose of restricting or eliminating the Federal income tax exemption for interest on Municipal Securities. Moreover, with respect to Municipal Securities issued by Kansas, the Trust cannot predict which legislation, if any, may be proposed in the state legislature or which proposals, if any, might be enacted. Such proposals, while pending or if enacted, might materially and adversely affect the availability of Municipal Securities generally, or Kansas Municipal Securities specifically, for investment by the Fund and the liquidity and value of such portfolios. In such an event, a Fund impacted would re-evaluate its investment objective and policies and consider possible changes in its structure or possible dissolution. Although the Kansas Fund invests primarily in Municipal Securities with intermediate and long-term maturities, it may also purchase short-term General Obligation Notes, Tax Anticipation Notes, Bond Anticipation Notes, Revenue Anticipation Notes, Tax-Exempt Commercial Paper, Construction Loan Notes, and other forms of short-term loans. Such instruments are issued with a short-term maturity in anticipation of the receipt of tax funds, the proceeds of bond placements, or other revenues. The Fund may also invest in long-term tax-exempt instruments. The following information as to certain Kansas State considerations is given to investors in view of the Fund's policy of concentrating its investments in Kansas issuers. Such information supplements the information in the Prospectuses. It is derived from sources that are generally available to investors and is believed to be accurate. Such information constitutes only a brief summary, does not purport to be a complete description and is based on information from official statements relating to securities offerings of Kansas State issuers. Neither the Trust nor the Kansas Fund has independently verified this information. 31 Traditionally a farm-based economy, recent growth in the trade, services and manufacturing sectors has decreased Kansas' strong dependence on agriculture. At present, the Kansas economy has four major economic sectors (wholesale and retail trade, manufacturing, services, and government) which employ from 16 to 24 percent of the labor force. Agriculture employed an estimated 4.6 percent of the work force in 1996. Primary sources of state revenue are a 4.9% sales tax, a corporate income tax between 4% and 7.35% and an individual income tax between 3.5% and 7.75%. In 1994, the sales tax constituted 31% of taxes collected. The largest percentage of expenditures from all state funds are in the areas of education and research (public schools, state universities, state board of education) and human resources (assistance programs). General property taxes generate a large portion of local tax revenue. Local sales and use taxes have provided an increased amount of revenue, from $30 million in 1980 to $343.9 million in 1995. The State's 1995 General Fund showed total revenues of $3.2 billion against total expenditures of $2.5 billion. In 1990, the Kansas legislature approved House Bill 2867 which established ending balances as a mechanism to hold state expenditure growth to the level of revenue growth. House Bill 2867 requires that in each fiscal year certain funds be transferred from the state General Fund to the newly created cash operating reserve fund. The reserve fund is designed to be available in the event that revenues in the General Fund are insufficient to meet budgeted expenditures. House Bill 2867 also provides that state General Fund balances in addition to the cash operating reserve fund must be one percent of expenditures in fiscal year 1993, two percent of expenditures in fiscal year 1994 and 2.5 percent in 1995 and each fiscal year thereafter. BAAI believes that the information summarized above describes some of the more significant matters relating to the Kansas Fund. The sources of the information are the official statements of issuers located in the state, other publicly available documents, and oral statements from various state agencies. BAAI has not independently verified any of the information contained in the official statements, other publicly available documents, or oral statements from various state agencies. OPTIONS ON CURRENCIES Certain Funds may purchase and sell options on currencies to hedge the value of securities the Fund holds or intends to buy. Options on foreign currencies may be traded on U.S. and foreign exchanges or over-the-counter. OTHER INVESTMENT COMPANIES In seeking to attain their investment objectives, certain Funds may invest in securities issued by other investment companies within the limits prescribed by the 1940 Act, its rules and regulations and any exemptive relief obtained by the Funds. Each Fund currently intends to limit its investments so that, as determined immediately after a securities purchase is made: (a) not more than 5% of the value of its total assets will be invested in the securities of any one investment company; (b) not more than 10% of the value of its total assets will be invested in the aggregate in securities of investment companies as a group; and (c) not more than 3% of the outstanding voting stock of any one investment company will be owned by the Fund or by the Trust as a whole. As a shareholder of another investment company, a Fund would bear, along with other shareholders, its pro rata portion of the other investment company's expenses, including Advisory fees. These expenses would be in addition to the Advisory and other expenses that a Fund bears in connection with its own operations. The Adviser has agreed to remit to the respective investing Fund fees payable to it under its respective Investment Advisory Agreement with an affiliated money market Fund to the extent such fees are based upon the investing Fund's assets invested in shares of the affiliated money market fund. PARTICIPATION INTERESTS AND COMPANY RECEIPTS Certain Funds may purchase from domestic financial institutions and trusts created by such institutions participation interests and trust receipts in high quality debt securities. A participation interest or receipt gives the Fund an undivided interest in the security in the proportion that the Fund's participation interest or receipt bears to the total principal amount of the security. As to certain instruments for which the Fund will be able to demand payment, the Fund intends to exercise its right to do so only upon a default under the terms of the security, as needed to provide liquidity or to maintain or improve the quality of its investment portfolio. It is possible that a participation interest or trust receipt may be deemed to be an extension of credit by the Fund to the issuing financial institution rather than to the obligor of the underlying security and may not be directly entitled to the protection of any collateral security provided by the obligor. In such event, the ability of the Fund to obtain repayment could depend on the issuing financial institution. 32 Participation interests and trust receipts may have fixed, floating or variable rates of interest, and will have remaining maturities of thirteen months or less (as defined by the SEC). If a participation interest or trust receipt is unrated, the Adviser will have determined that the interest or receipt is of comparable quality to those instruments in which the Fund may invest pursuant to guidelines approved by the Board of Trustees. For certain participation interests or trust receipts the Fund will have the right to demand payment, on not more than 30 days' notice, for all or any part of the Fund's participation interest or trust receipt in the securities involved, plus accrued interest. REAL ESTATE INVESTMENT TRUSTS A real estate investment trust ("REIT") is a managed portfolio of real estate investments which may include office buildings, apartment complexes, hotels and shopping malls. An equity REIT holds equity positions in real estate, and it seeks to provide its shareholders with income from the leasing of its properties, and with capital gains from any sales of properties. A mortgage REIT specializes in lending money to developers of properties, and passes any interest income it may earn to its shareholders. REITs may be affected by changes in the value of the underlying property owned or financed by the REIT, while Mortgage REITs also may be affected by the quality of credit extended. Both equity and mortgage REITs are dependent upon management skill and may not be diversified. REITs also may be subject to heavy cash flow dependency, defaults by borrowers, self-liquidation, and the possibility of failing to qualify for tax-free pass-through of income under the Internal Revenue Code of 1986, as amended. REPURCHASE AGREEMENTS The repurchase price under any repurchase agreements described in the Prospectuses generally equals the price paid by a Fund plus interest negotiated on the basis of current short-term rates (which may be more or less than the rate on the securities underlying the repurchase agreement). Securities subject to repurchase agreements will be held by the Trust's custodian in a segregated account or in the Federal Reserve/Treasury book-entry system. Repurchase agreements are considered to be loans by the Trust under the 1940 Act. 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. 33 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. 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. 34 The amount payable to a tax-free bond fund, such as the Kansas Fund, upon its exercise of a stand-by commitment will normally be (i) the Fund's acquisition cost of the Municipal Securities (excluding any accrued interest which a the Fund paid on their acquisition), less any amortized market premium or plus any amortized market or original issue discount during the period a Fund owned the securities, plus (ii) all interest accrued on the securities since the last interest payment date during that period. Under normal market conditions, in determining net asset value a Fund values the underlying Municipal Securities on an amortized cost basis. Accordingly, the amount payable by a dealer upon exercise of a stand-by commitment will normally be substantially the same as the portfolio value of the underlying Municipal Securities. A Fund's right to exercise stand-by commitments will be unconditional and unqualified. A stand-by commitment will not be transferable by a Fund, although the Fund could sell the underlying Municipal Securities to a third party at any time. Until a Fund exercises its stand-by commitment, it owns the securities in its portfolio which are subject to the stand-by commitment. The Funds expect that stand-by commitments will generally be available without the payment of any direct or indirect consideration. However, if necessary or advisable, a Fund may pay for a stand-by commitment either separately in cash or by paying a higher price for the security being acquired which will be subject to the commitment (thus reducing the yield to maturity otherwise available for the same security). When a Fund pays any consideration directly or indirectly for a stand-by commitment, its cost will be reflected as unrealized depreciation for the period during which the commitment is held by that Fund. Each Fund intends to enter into stand-by commitments only with banks and broker/dealers which, in the Adviser's opinion, present minimal credit risks. In evaluating the credit worthiness of the issuer of a stand-by commitment, the Adviser will review periodically the issuer's assets, liabilities, contingent claims, and other relevant financial information. The Funds would acquire stand-by commitments solely to facilitate portfolio liquidity and do not intend to exercise their rights thereunder for trading purposes. Stand-by commitments acquired by a Fund will be valued at zero in determining net asset value. A Fund's reliance upon the credit of these dealers, banks, and broker/dealers will be secured by the value of the underlying Municipal Securities that are subject to the commitment. Thus, the risk of loss to the Fund in connection with a "stand-by commitment" will not be qualitatively different from the risk of loss faced by a person that is holding securities pending settlement after having agreed to sell the securities in the ordinary course of business. STRIPPED SECURITIES Certain Funds may purchase stripped securities issued or guaranteed by the U.S. Government, where the principal and interest components are traded independently under the Separate Trading of Registered Interest and Principal of Securities program ("STRIPS"). Under STRIPS, the principal and interest components are individually numbered and separately issued by the U.S. Treasury at the request of depository financial institutions, which then trade the component parts independently. In addition, the Fund may purchase stripped mortgage-backed securities ("SMBS") issued by the U.S. Government (or a U.S. Government agency or instrumentality) or by private issuers such as banks and other institutions. If the underlying obligations experience greater than anticipated prepayments of principal, the Fund may fail to fully recover its initial investment. The market value of the class consisting entirely of principal payments can be extremely volatile in response to changes in interest rates. The yields on a class of SMBS that receives all or most of the interest are generally higher than prevailing market yields on other mortgage-backed obligations because their cash flow patterns are also volatile and there is a greater risk that the initial investment will not be full recovered. SMBS issued by the U.S. Government (or a U.S. Government agency or instrumentality) may be considered liquid under guidelines established by the Trust's Board of Trustees if they can be disposed of promptly in the ordinary course of business at a value reasonably close to that used in the calculation of the Fund's per share net asset value. Although stripped securities may not pay interest to holders prior to maturity, Federal income tax regulations require a Fund to recognize as interest income a portion of the bond's discount each year. This income must then be distributed to shareholders along with other income earned by the Fund. To the extent that any shareholders in the Fund elect to receive their dividends in cash rather than reinvest such dividends in additional Fund shares, cash to make these distributions will have to be provided from the assets of the Fund or other sources such as proceeds of sales of Fund shares and/or sales of portfolio securities. In such cases, the Fund will not be able to purchase additional income producing securities with cash used to make such distributions and its current income may ultimately be reduced as a result. 35 U.S. AND FOREIGN BANK OBLIGATIONS These obligations include negotiable certificates of deposit, banker's acceptances and fixed time deposits. Each Fund limits its investments in domestic bank obligations to banks having total assets in excess of $1 billion and subject to regulation by the U.S. Government. Each Fund may also invest in certificates of deposit issued by members of the Federal Deposit Insurance Corporation ("FDIC") having total assets of less than $1 billion, provided that the Fund will at no time own more than $100,000 principal amount of certificates of deposit (or any higher principal amount which in the future may be fully covered by FDIC insurance) of any one of those issuers. Fixed time deposits are obligations which are payable at a stated maturity date and bear a fixed rate of interest. Generally, fixed time deposits may be withdrawn on demand by a Fund, but they may be subject to early withdrawal penalties which vary depending upon market conditions and the remaining maturity of the obligation. Although fixed time deposits do not have a market, there are no contractual restrictions on a Fund's right to transfer a beneficial interest in the deposit to a third party. Each Fund limits any investments in foreign bank obligations (I.E., obligations of foreign branches and subsidiaries of domestic banks, and domestic and foreign branches and agencies of foreign banks) to obligations of banks which at the time of investment are branches or subsidiaries of domestic banks which meet the criteria in the preceding paragraphs or are branches or agencies of foreign banks which (i) have more than $10 billion, or the equivalent in other currencies, in total assets; (ii) in terms of assets are among the 75 largest foreign banks in the world; (iii) have branches or agencies in the United States; and (iv) in the opinion of the Adviser, pursuant to the established by the Board of Trustees of the Trust, are of an investment quality comparable to obligations of domestic banks which may be purchased by a Fund. These obligations may be general obligations of the parent bank in addition to the issuing branch or subsidiary, but the parent bank's obligations may be limited by the terms of the specific obligation or by governmental regulation. Each Fund also limits its investments in foreign bank obligations to banks, branches and subsidiaries located in Western Europe (United Kingdom, France, Germany, Belgium, The Netherlands, Italy and Switzerland), Scandinavia (Denmark and Sweden), Australia, Japan, the Cayman Islands, the Bahamas and Canada. Each Fund will limit its investment in securities of foreign banks to not more than 20% of total assets at the time of investment. Each Fund may also make interest-bearing savings deposits in commercial and savings banks in amounts not in excess of 5% of the total assets of the Fund. U.S. GOVERNMENT OBLIGATIONS Each Fund may invest in U.S. Government obligations. Examples of the types of U.S. Government obligations that may be held by the Funds include, in addition to U.S. Treasury bonds, notes and bills, the obligations of the Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, Government National Mortgage Association, Federal National Mortgage Association, General Services Administration, Student Loan Marketing Association, Central Bank for Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate Credit Banks, Tennessee Valley Authority, Resolution Funding Corporation and Maritime Administration. Obligations guaranteed as to principal or interest by the U.S. Government, its agencies, authorities or instrumentalities are deemed to include: (a) securities for which the payment of principal and interest is backed by an irrevocable letter of credit issued by the U.S. Government, its agencies, authorities or instrumentalities and (b) participations in loans made to foreign governments or their agencies that are so guaranteed. The secondary market for certain of these participations is limited. If such participations are illiquid they will not be purchased. U.S. Government obligations include principal and interest components of securities issued or guaranteed by the U.S. Treasury if the components are traded independently under the Separate Trading of Registered Interest and Principal of Securities program. Obligations issued or guaranteed as to principal or interest by the U.S. Government, its agencies, authorities or instrumentalities may also be acquired in the form of custodial receipts. These receipts evidence ownership of future interest payments, principal payments or both on certain notes or bonds issued by the U.S. Government, its agencies, authorities or instrumentalities. USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS Options, futures and forward foreign currency contracts that obligate a Fund to provide cash, securities or currencies to complete such transactions will entail that Fund to either segregate assets in an account with, or on the books of, the Trust's custodian, or otherwise "covering" the transaction as described below. For example, a call option written by a Fund will require the Fund to hold the securities subject to the call (or securities convertible into the needed securities without additional consideration) or liquid assets sufficient to meet the obligation by purchasing and delivering the securities if the call is exercised. A call option written on an index will require that Fund to have portfolio securities that correlate with the index. A put option written by a Fund also will require that Fund to have available assets sufficient to purchase the securities the Fund would be obligated to buy if the put is exercised. 36 A forward foreign currency contract that obligates a Fund to provide currencies will require the Fund to hold currencies or liquid securities denominated in a foreign currency which will equal the Fund's obligations. Such a contract requiring the purchase of currencies also requires segregation. Unless a segregated account consists of the securities, cash or currencies that are the subject of the obligation, a Fund will hold cash, U.S. Government securities and other high grade liquid debt obligations in a segregated account. These assets cannot be transferred while the obligation is outstanding unless replaced with other suitable assets. In the case of an index-based transaction, a Fund could own securities substantially replicating the movement of the particular index. In the case of a futures contract, a Fund must deposit initial margin and variation margin, as often as daily, if the position moves adversely, sufficient to meet its obligation to purchase or provide securities or currencies, or to pay the amount owed at the expiration of an index-based futures contract. Similarly, options on futures contracts require a Fund to deposit margin to the extent necessary to meet the Fund's commitments. In lieu of such assets, such transactions may be covered by other means consistent with applicable regulatory policies. A Fund may enter into off-setting transactions so that its combined position, coupled with any segregated assets, equals its net outstanding obligation in related options and hedging transactions. For example, a Fund could purchase a put option if the strike price of that option is the same or higher than the strike price of a put option sold by that Fund. Moreover, instead of segregating assets if a Fund held a futures or forward contract, it could purchase a put option on the same futures or forward contract with a strike price as high or higher than the price of the contract held. Of course, the off-setting transaction must terminate at the time of or after the primary transaction. VARIABLE- AND FLOATING-RATE INSTRUMENTS Certain Funds may purchase variable-rate and floating rate obligations. If such instrument is not rated, the Adviser will consider the earning power, cash flows, and other liquidity ratios of the issuers and guarantors of such obligations and, if the obligation is subject to a demand feature, will monitor their financial status to meet payment on demand. In determining average weighted portfolio maturity, a variable-rate demand instrument issued or guaranteed by the U.S. Government or an agency or instrumentality thereof will be deemed to have a maturity equal to the period remaining until the obligations next interest rate adjustment. Other variable-rate obligations will be deemed to have a maturity equal to the 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. 37 WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS A Fund may agree to purchase securities on a when-issued basis or enter into a forward commitment to purchase securities. When a Fund engages in these transactions, its custodian will segregate cash, U.S. Government securities or other high quality debt obligations equal to the amount of the commitment. Normally, the custodian will segregate portfolio securities to satisfy a purchase commitment, and in such a case a Fund may be required subsequently to segregate additional assets in order to ensure that the value of the segregated assets remains equal to the amount of the Fund's commitment. Because a Fund will segregate cash or liquid assets to satisfy its purchase commitments in the manner described, the Fund's liquidity and ability to manage its portfolio might be adversely affected in the event its commitments to purchase when-issued securities ever exceeded 25% of the value of its assets. In the case of a forward commitment to sell portfolio securities, the Fund's custodian will hold the portfolio securities themselves in a segregated account while the commitment is outstanding. A Fund will make commitments to purchase securities on a when-issued basis or to purchase or sell securities on a forward commitment basis only with the intention of completing the transaction and actually purchasing or selling the securities. If deemed advisable as a matter of investment strategy, however, a Fund may dispose of or renegotiate a commitment after it is entered into, and may sell securities it has committed to purchase before those securities are delivered to the Fund on the settlement date. In these cases the Fund may realize a capital gain or loss. When a Fund engages in when-issued and forward commitment transactions, it relies on the other party to consummate the trade. Failure of such party to do so may result in the Fund's incurring a loss or missing an opportunity to obtain a price considered to be advantageous. The value of the securities underlying a when-issued purchase or a forward commitment to purchase securities, and any subsequent fluctuations in their value, is taken into account when determining the net asset value of a Fund starting on the date the Fund agrees to purchase the securities. The Fund does not earn dividends on the securities it has committed to purchase until they are paid for and delivered on the settlement date. When the Fund makes a forward commitment to sell securities it owns, the proceeds to be received upon settlement are included in the Fund's assets. Fluctuations in the value of the underlying securities are not reflected in the Fund's net asset value as long as the commitment remains in effect. PORTFOLIO TURNOVER Generally, the Equity Funds will purchase portfolio securities for capital appreciation or investment income, or both, and not for short-term trading profits. If a Fund's annual portfolio turnover rate exceeds 100%, it may result in higher brokerage costs and possible tax consequences for the Portfolio and its shareholders. For the Funds' portfolio turnover rates, see the "Financial Highlights" in the Prospectus. INVESTMENT RISKS AND CONSIDERATIONS In addition to the investment risks and considerations identified in certain of the securities descriptions above, there are additional investment risks and considerations associated with an investment in certain of the Funds. Investments by a Fund in common stocks and other equity securities are subject to stock market risks. The value of the stocks that the Fund holds, like the broader stock market, may decline over short or even extended periods. The U.S. stock market tends to be cyclical, with periods when stock prices generally rise and periods when prices generally decline. As of the date of this SAI, the stock market, as measured by the S&P 500 Index and other commonly used indexes, was trading at or close to record levels. There can be no guarantee that these levels will continue. The Kansas Fund is a non-diversified fund, which means that it typically invest in fewer issuers than diversified funds. Therefore, appreciation or depreciation of an investment in a single issuer could have a greater impact on the Fund's net asset value. 38 The value of a Fund's investments in debt securities, including U.S. Government Obligations, will tend to decrease when interest rates rise and increase when interest rates fall. In general, longer-term debt instruments tend to fluctuate in value more than shorter-term debt instruments in response to interest rate movements. In addition, debt securities that are not backed by the United States Government are subject to credit risk, which is the risk that the issuer may not be able to pay principal and/or interest when due. In addition, obligations with the lowest investment grade rating (E.G., "BBB" by Standard & Poor's Corporation ("S&P") or "Baa" by Moody's Investors Service, Inc. ("Moody's")) have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case with higher grade debt obligations. Subsequent to its purchase by the Fund, an issue of securities may cease to be rated or its rating may be reduced below the minimum rating required for purchase by the Fund. The Adviser will consider such an event in determining whether the Fund should continue to hold the obligation. Unrated obligations may be acquired by the Fund if they are determined by the Adviser to be of comparable quality at the time of purchase to rated obligations that may be acquired. Certain of the Funds' investments constitute derivative securities, which are securities whose value is derived, at least in part, from an underlying index or reference rate. There are certain types of derivative securities that can, under certain circumstances, significantly increase a purchaser's exposure to market or other risks. The Adviser, however, only purchases derivative securities in circumstances where it believes such purchases are consistent with such Fund's investment objective and do not unduly increase the Fund's exposure to market or other risks. For additional risk information regarding the Funds' investments in particular instruments, see "Appendix A -- Fund Securities." SPECIAL RISK RELATING TO THE HIGH YIELD FUND -- High yield bonds may be more susceptible to real or perceived adverse economic and competitive industry conditions than higher grade bonds. The prices of high yield bonds have been found to be less sensitive to interest-rate changes than more highly rated investments, but more sensitive to adverse economic downturns or individual corporate developments. A projection of an economic downturn or of a period of rising interest rates, for example, could cause a decline in high yield bond prices because the advent of a recession could lessen the ability of a highly leveraged company to make principal and interest payments on its debt securities. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of high yield bonds, especially in a thinly traded market. Legislation designed to limit the use of high yield bonds in corporate transactions may have a material adverse effect on a Fund's net asset value and investment practices. In addition, there may be special tax considerations associated with investing in high yield bonds structured as zero coupon or payment-in-kind securities. A Fund records the interest on these securities annually as income even though it receives no cash interest until the security's maturity or payment date. Also, distributions on account of such interest generally will be taxable to shareholders even if the Fund does not distribute cash to them. Therefore, in order to pay taxes on this interest, shareholders may have to redeem some of their shares to pay the tax or the Fund may have to sell some of its assets to reduce the Fund's assets and may thereby increase its expense ratio and decrease its rate of return. The Sub-Adviser seeks to reduce risk through diversification, credit analysis and attention to current developments and trends in both the economy and financial markets. In addition, investments in foreign securities may serve to provide further diversification. MANAGEMENT OF THE TRUST The business and affairs of the Trust is managed under the direction of its Board of Trustees. This SAI contains the names of and general background information concerning each Trustee. The Trustees and executive officers of the Trust and their principal occupations during the last five years are set forth below. The address of each, unless otherwise indicated, is 111 Center Street, Little Rock, Arkansas 72201. Those trustees who are "interested persons" of the Trust (as defined in the 1940 Act) are indicated by an asterisk(*). 39
PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS POSITION WITH AND CURRENT NAME, ADDRESS, AND AGE THE COMPANIES DIRECTORSHIPS - ---------------------- ------------- ------------- C> Edmund L. Benson, III, 62 Trustee Director, President and Treasurer, Saunders & Benson, Inc. Saunders & Benson, Inc. (Insurance), 1510 Willow Lawn Drive Insurance Managers, Inc. Suite 216 (insurance); Trustee, Nations Richmond, VA 23230 Reserves, Master Investment Trust, Nations Annuity Trust and Nations Fund Trust; Director, Nations Fund, Inc., and Nations LifeGoal Funds, Inc.; Director, Nations Fund Portfolios, Inc. through August, 1999. James Ermer, 56 Trustee Retired Executive Vice President, 11511 Compass Point Drive Corporate Development and Planning - Ft. Meyers, FL 33908 Land America (title insurance); Senior Vice President, Finance - CSX Corporation (transportation and natural resources); Director National Mine Service (mining supplies), Lawyers Title Corporation (title insurance); Trustee, Nations Reserves, Nations Fund Trust, Nations Annuity Trust and Nations Master Investment Trust; Director, Nations Fund, Inc. and Nations LifeGoal Funds, Inc.; Director, Nations Fund Portfolios, Inc. through August, 1999. William H. Grigg, 66 Trustee Chairman Emeritus since July 1997, Duke Power Co. Chairman and Chief Executive Officer 16092A Reap Road from April 1994 to July 1997 - Duke Albermarle, NC 28001 Power Co.; Director - The Shaw Group, Inc.; Director and Vice Chairman, Aegis Insurance Services, Ltd. (a mutual insurance company in Bermuda); Trustee, Nations Reserves, Nations Fund Trust, Nations Annuity Trust and Nations Master Investment Trust; Director, Hatteras Income Securities, Inc., Nations Government Income Term Trust 2003, Inc., Nations Government Income Term Trust 2004, Inc., Nations Balanced Target Maturity Fund, Inc., Nations Fund, Inc. and Nations LifeGoal Funds, Inc.; Director, Nations Fund Portfolios, Inc. through August, 1999. Thomas F. Keller, 67 Trustee R.J. Reynolds Industries Professor Fuqua School of Business of Business Administration and P.O. Box 90120 Former Dean - Fuqua School of Duke University Business, Duke University; Director Durham, NC 27708 - LADD Furniture, Inc. (furniture), Wendy's International, Inc. (restaurant operating and franchising), American Business Products, Inc. (printing services), Dimon, Inc. (tobacco), Biogen, Inc. (pharmaceutical biotechnology); Trustee, The Mentor Funds, Mentor Institutional Trust, Cash Reserve Trust, Nations Reserves, Nations Fund Trust, Nations Annuity Trust and Nations Master Investment Trust; Director, Hatteras Income Securities, Inc., Nations Government Income Term Trust 2003, Inc., Nations Government Income Term Trust 2004, Inc., Nations Balanced Target Maturity Fund, Inc. and Nations LifeGoal Funds, Inc.; Director, Nations Fund Portfolios, Inc. through August, 1999. Carl E. Mundy, Jr., 64 Trustee President and CEO - USO from May USO World Headquarters 1996 to present; Commandant - United Washington Navy Yard States Marine Corps from July 1991 Building 198 to July 1995; Director - 901 M Street, S.E. Shering-Plough (pharmaceuticals and Washington, D.C. 20374-5096 health care products); General Dynamics Corporation (defense systems); Trustee, Nations Reserves, Nations Fund Trust, Nations Annuity Trust and Nations Master Investment Trust; Director, Nations Fund, Inc. and Nations LifeGoal Funds, Inc.; Director, Nations Fund Portfolios, Inc. through August, 1999. 40 PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS POSITION WITH AND CURRENT NAME, ADDRESS, AND AGE THE COMPANIES DIRECTORSHIPS - ---------------------- ------------- ------------- Dr. Cornelius J. Pings, 70* Trustee President - Association of American 480 S. Orange Grove Blvd. Universities from February 1993 to Pasadena, CA 91105 June 1998; Director - Farmers Group, Inc. (insurance company), Nations Fund, Inc. and Nations LifeGoal Funds, Inc.; Trustee, Master Investment Trust, Series I from 1995 to 1999, Master Investment Trust, Series II from 1995 to 1997, Nations Reserves, Nations Fund Trust, Nations Annuity Trust and Nations Master Investment Trust.; Director/Trustee and Chairman - Pacific Horizon Funds, Inc. and Master Investment Trust, Series I, from inception to May 1999; Director - Time Horizon Funds and Pacific Innovations Trust; Director, Nations Fund Portfolios, Inc. through August, 1999. James B. Sommers*, 60 Trustee President - NationsBank Trust from 237 Cherokee Road January 1992 to September 1996; Charlotte, NC 28207 Executive Vice President - NationsBank Corporation from January 1992 to May 1997; Chairman - Central Piedmont Community College Foundation; Board of Commissioners, Charlotte/ Mecklenberg Hospital Authority; Director - Nations Fund, Inc. and Nations LifeGoal Funds, Inc.; Trustee, Central Piedmont Community College; Mint Museum of Art, Nations Reserves, Nations Fund Trust, Nations Annuity Trust and Nations Master Investment Trust; Director, Nations Fund Portfolios, Inc. through August, 1999. A. Max Walker*, 77 President, Trustee and Independent Financial Consultant; 4580 Windsor Gate Court Chairman of the Board Director and Chairman of the Board - Atlanta, GA 30342 Hatteras Income Securities, Inc., Nations Government Income Term Trust 2003, Inc., Nations Government Income Term Trust 2004, Inc., Nations Balanced Target Maturity Fund, Inc.; President, Director and Chairman of the Board - Nations Fund, Inc. and Nations LifeGoal Funds, Inc.; President, Trustee and Chairman of the Board - Nations Reserves, Nations Fund Trust, Nations Annuity Trust and Nations Master Investment Trust; Director, Nations Fund Portfolios, Inc. through August, 1999. Charles B. Walker, 60 Trustee Director-Ethyl Corporation (chemical Albermarle Corporation manufacturing); Vice Chairman and Vice Chairman and CFO Chief Financial Officer - Albemarle 330 South Fourth Street Corporation (chemical Richmond, VA 23219 manufacturing); Director, Nations Fund, Inc. and Nations LifeGoal Funds, Inc.; Trustee, Nations Reserves, Nations Fund Trust, Nations Annuity Trust and Nations Master Investment Trust; Director, Nations Fund Portfolios, Inc. through August, 1999. Thomas S. Word, Jr.*, 61 Trustee Partner - McGuire, Woods, Battle & McGuire, Woods, Battle & Boothe LLP Boothe LLP (law firm); Director - One James Center Vaughan-Bassett Furniture Companies, 8th Floor Inc. (furniture), Nations Fund, Inc. Richmond, VA 23219 and Nations LifeGoal Funds, Inc.; Trustee, Nations Reserves, Nations Fund Trust, Nations Annuity Trust and Nations Master Investment Trust; Director, Nations Fund Portfolios, Inc. through August, 1999. 41 PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS POSITION WITH AND CURRENT NAME, ADDRESS, AND AGE THE COMPANIES DIRECTORSHIPS - ---------------------- ------------- ------------- Richard H. Blank, Jr., 42 Secretary and Treasurer Senior Vice President since 1998, Stephens Inc. Vice President from 1994 to 1998 and 111 Center Street Manager from 1990 to 1994 - Mutual Little Rock, AR 72201 Fund Services, Stephens Inc.; Secretary since September 1993 and Treasurer since November 1998 Nations Fund, Inc., Nations LifeGoal Funds, Inc., Nations Reserves, Nations Fund Trust, Nations Annuity Trust and Nations Master Investment Trust.; Secretary and Treasurer, Nations Fund Portfolios, Inc. through August, 1999. Michael W. Nolte, 38 Assistant Secretary Assistant Secretary - Nations Fund Stephens Inc. Trust, Nations Fund, Inc., Nations Reserves, Nations LifeGoal Funds, Inc., Nations Annuity Trust and Nations Master Investment Trust; Assistant Secretary, Nations Fund Portfolios, Inc. through August, 1999. James E. Banks, 43 Assistant Secretary Assistant Secretary - Nations Fund Stephens Inc. Trust, Nations Fund, Inc., Nations Reserves, Nations LifeGoal Funds, Inc., Nations Annuity Trust and Nations Master Investment Trust; ; Director, Nations Fund Portfolios, Inc. through August, 1999.
Each Trustee is a board member of the Trust, Nations Fund Trust, Nations Fund, Inc., Nations Reserves, Nations Annuity Trust, Nations Master Investment Trust and Nations LifeGoal Funds, Inc., each a registered investment company that is part of the Nations Funds family. Richard H. Blank, Jr., Michael W. Nolte, and James E. Banks. Jr. also are officers of Trust, Nations Fund Trust, Nations Fund, Inc., Nations Reserves, Nations Annuity Trust, Nations Master Investment Trust and Nations LifeGoal Funds, Inc. The Trust and the Adviser have adopted codes of ethics which contain policies on personal securities transactions by "access persons," including portfolio managers and investment analysts. These policies substantially comply in all material respects with the recommendations set forth in the May 9, 1994 Report of the Advisory Group on Personal Investing of the Investment Company Institute. The Trust's Code of Ethics, among other things, prohibits each access person of the Trust from purchasing or selling securities when such person knows or should have known that, at the time of the transaction, the security (i) was being considered for purchase or sale by a Fund, or (ii) was being purchased or sold by a Fund. For purposes of the Code of Ethics, an access person means (i) a trustee or officer of the Trust, (ii) any employee of the Trust (or any company in a control relationship with the Trust) who, in the course of his/her regular duties, obtains information about, or makes recommendations with respect to, the purchase or sale of securities by the Trust, and (iii) any natural person in a control relationship with the Trust who obtains information concerning recommendations made to the Trust regarding the purchase or sale of securities. Portfolio managers and other persons who assist in the investment process are subject to additional restrictions, including a requirement that they disgorge to the Trust any profits realized on short-term trading (I.E., the purchase/sale or sale/purchase of securities within any 60-day period). The above restrictions do not apply to purchases or sales of certain types of securities, including mutual fund shares, money market instruments and certain U.S. Government securities. To facilitate enforcement, the Code of Ethics generally requires that the Trust's access persons, other than its "disinterested" directors or trustees, submit reports to the Trust's designated compliance person regarding transactions involving securities which are eligible for purchase by a Fund. 42 NATIONS FUNDS RETIREMENT PLAN Under the terms of the Nations Funds Retirement Plan for Eligible Directors/Trustees (the "Retirement Plan"), each Director/Trustee may be entitled to certain benefits upon retirement from the Board of Directors/Trustees. Pursuant to the Retirement Plan, the normal retirement date is the date on which the eligible director/trustee has attained age 65 and has completed at least five years of continuous service with one or more of the open-end investment companies advised by the Adviser. If a director/trustee retires before reaching age 65, no benefits are payable. Each eligible director/trustee is entitled to receive an annual benefit from the Funds commencing on the first day of the calendar quarter coincident with or next following his date of retirement equal to 5% of the aggregate director's/trustee's fees payable by the Funds during the calendar year in which the director's/trustee's retirement occurs multiplied by the number of years of service (not in excess of ten years of service) completed with respect to any of the Funds. Such benefit is payable to each eligible director/trustee in quarterly installments for a period of no more than five years. If an eligible director/trustee's dies after attaining age 65, the director's/trustees surviving spouse (if any) will be entitled to receive 50% of the benefits that would have been paid (or would have continued to have been paid) to the director/trustee if he had not died. The Retirement Plan is unfunded. The benefits owed to each director/trustee are unsecured and subject to the general creditors of the Funds. NATIONS FUNDS DEFERRED COMPENSATION PLAN Under the terms of the Nations Funds Deferred Compensation Plan for Eligible Directors/Trustees (the "Deferred Compensation Plan"), each director/trustee may elect, on an annual basis, to defer all or any portion of the annual board fees (including the annual retainer and all attendance fees) payable to the director/trustee for that calendar year. An application was submitted to and approved by the SEC to permit deferring directors/trustees to elect to tie the rate of return on fees deferred pursuant to the Deferred Compensation Plan to one or more of certain investment portfolios of certain Funds. Distributions from the deferring directors'/trustees deferral accounts will be paid in cash, in generally equal quarterly installments over a period of five years beginning on the date the deferring director's/trustees' retirement benefits commence under the Retirement Plan. The Board of Directors/Trustees, in its sole discretion, may accelerate or extend such payments after a director's/trustee's termination of service. If a deferring director/trustee dies prior to the commencement of the distribution of amounts in his deferral account, the balance of the deferral account will be distributed to his designated beneficiary in a lump sum as soon as practicable after the director's/trustee's death. If a deferring director/trustee dies after the commencement of such distribution, but prior to the complete distribution of his deferral account, the balance of the amounts credited to his deferral account will be distributed to his designated beneficiary over the remaining period during which such amounts were distributable to the director/trustee. Amounts payable under the Deferred Compensation Plan are not funded or secured in any way and deferring directors/trustees have the status of unsecured creditors of the Funds from which they are deferring compensation. Trustee Compensation Board members of the Trust are compensated for their services to the Nations Funds family on a flat rate basis, and not on a per registered investment company or per fund basis. The Nations Funds family currently consists of the Trust, Nations Fund Trust, Nations Fund, Inc., Nations Reserves, Nations Annuity Trust, Nations LifeGoal Funds, Inc. and Nations Master Investment Trust. Under the structure, each Board member would receive a base retainer fee in the amount of $65,000 per year, in addition to $5,000 for each in-person meeting attended; in addition to $1,000 for each telephonic meeting attended. Each Board member would be compensated only for a maximum of six in-person meetings per calendar year. In addition, the Chairman of the Board, currently A. Max Walker, would receive an additional fee of 20% of the base retainer fee; the Chairman of the Audit Committees would receive an additional fee of 10% of the base retainer fee. The members of the Nominating Committees will receive additional compensation at the rate of $1,000 per meeting attended. SHAREHOLDER AND TRUSTEE LIABILITY The Trust's Declaration of Trust provides that shareholders shall not be subject to any personal liability for the acts or obligations of the Trust, and also provides for indemnification out of the trust property of any shareholder held personally liable solely by reason of his being or having been a shareholder and not because of his acts or omissions or some other reason. 43 The Declaration of Trust states further that no Trustee, officer, or agent of the Trust shall be personally liable for or on account of any contract, debt, tort, claim, damage, judgment, or decree arising out of or connected with the administration or preservation of the trust estate or the conduct of any business of the Trust; nor shall any Trustee be personally liable to any person for any action or failure to act except by reason of his own bad faith, willful misfeasance, gross negligence, or reckless disregard of his duties as Trustee. The Declaration of Trust also provides that all persons having any claim against the Trustees shall look solely to the trust property for payment. With the exceptions stated, the Declaration of Trust provides that a Trustee is entitled to be indemnified against all liabilities and expenses reasonably incurred by him in connection with the defense or disposition of any proceeding in which he may be involved or with which he may be threatened by reason of his being or having been a Trustee, and that the Trustees have the power, but not the duty, to indemnify officers and employees of the Trust unless any such person would not be entitled to indemnification had he or she been a Trustee. INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY, TRANSFER AGENCY, OTHER SERVICE PROVIDERS, SHAREHOLDER SERVICING AND DISTRIBUTION AGREEMENTS INVESTMENT ADVISER AND SUB-ADVISERS Bank of America and its Investment Adviser and Sub-Adviser Affiliates BAAI is the investment adviser to the Funds. TradeStreet is the investment sub-adviser to the MidCap Index Fund and the Kansas Fund. [insert name] is the investment sub-adviser to the High Yield Fund. The respective principal offices of BAAI and TradeStreet are located at One Bank of America Plaza, Charlotte, N.C. 28255. [insert name] is located at [insert address]. Since 1874, Bank of America and its predecessors have been managing money for foundations, universities, corporations, institutions and individuals. Today, Bank of America affiliates collectively manage in excess of $100 billion, including the more than $40 billion in mutual fund assets. It is a company dedicated to a goal of providing responsible investment management and superior service. Bank of America is recognized for its sound investment approaches, which place it among the nation's foremost financial institutions. Bank of America and its affiliates organization makes available a wide range of financial services to its over 6 million customers through over 1700 banking and investment centers. Investment Advisory and Sub-Advisory Agreements Pursuant to the terms of the Trust's Investment Advisory Agreement and Sub-Advisory Agreements (at times, the "Advisory Agreements") with BAAI, TradeStreet and/or [insert name], and subject at all times to the control of the Board of Trustees and, in conformity with the stated policies of the Trust, TradeStreet and [insert name] each select and manages the investments of their respective Funds. Each such advisory entity obtains and evaluates economic, statistical and financial information to formulate and implement investment policies for the Funds that they advise. The Advisory Agreements each provide that in the absence of willful misfeasance, bad faith, negligence or reckless disregard of obligations or duties thereunder on the part of an Adviser, respectively, or any of its respective officers, trustees, employees or agents, such Adviser shall not be subject to liability to the Trust or to any shareholder of the Trust for any act or omission in the course of, or connected with, rendering services under thereunder or for any losses that may be sustained in the purchase, holding or sale of any security. Each Advisory Agreement became effective with respect to a Fund after approved by the Board of the Trust, and continues from year to year, provided that such continuation of the Agreement is specifically approved at least annually by (a) (i) the Trust's Board or (ii) the vote of "a majority of the outstanding voting securities" of a Fund (as defined in Section 2(a)(42) of the 1940 Act), and (b) the affirmative vote of a majority of the Trust's Board of Trustees who are not parties to such Agreement or "interested persons" (as defined in the 1940 Act) of a party to such Agreement (other than as Trustees of the Trust), by votes cast in person at a meeting specifically called for such purpose. The respective Advisory Agreement terminates automatically in the event of its assignment, and is terminable with respect to a Fund at any time without penalty by the Trust (by vote of the Board of Trustees or by vote of a majority of the outstanding voting securities of the Fund) or by BAAI on 60 days' written notice. 44 The Funds, in any advertisement or sales literature, may advertise the names, experience and/or qualifications of the portfolio manager(s) of any Fund, or if a Fund is managed by team or committee, such Fund may advertise the names, experience and/or qualifications of any such team or committee member. The Adviser may waive a portion of its fees; however, any such waiver may be discontinued at any time. As discussed below," an Adviser will be required to reduce its fees charged to the Funds, in direct proportion to the fees payable by such Funds to an Adviser and the Administrator, if the expenses of the Funds exceed the applicable expense limitation of any state in which the Funds' shares are registered or qualified for sale. Because the Funds are new series they have not yet paid any advisory or sub-advisory fees. CO-ADMINISTRATORS AND SUB-ADMINISTRATOR Stephens Inc. and BAAI (the "Co-Administrators") serve as co-administrators of the Trust pursuant to co-administration agreements ("Co-Administration Agreements"). Under the Co-Administration Agreements, the co-administrators receive, as compensation for their services rendered, co-administration fees, computed daily and paid monthly, at the annual rate of: 0.12% of the High Yield Fund and the Kansas Fund; and 0.13% of the MidCap Index Fund, of the average daily net assets of each such Fund. Pursuant to the Co-Administration Agreement, Stephens has agreed to, among other things, (i) maintain office facilities for the Funds, (ii) furnish statistical and research data, data processing, clerical, and internal executive and administrative services to the Trust, (iii) furnish corporate secretarial services to the Trust, including coordinating the preparation and distribution of materials for Board meetings, (iv) coordinate the provision of legal advice to the Trust with respect to regulatory matters, (v) coordinate the preparation of reports to the Trust's shareholders and the SEC, including annual and semi-annual reports, (vi) coordinating the provision of services to the Trust by the Transfer Agent, Sub-Transfer Agent and the Custodian, and (vii) generally assist in all aspects of the Trust's operations. Stephens bears all expenses incurred in connection with the performance of its services. Also, pursuant to the Co-Administration Agreement, BAAI has agreed to, among other things, (i) provide accounting and bookkeeping services for the Funds, (ii) compute each Fund's net asset value and net income, (iii) accumulate information required for the Trust's reports to shareholders and the SEC, (iv) prepare and file the Trust's federal and state tax returns, (v) perform monthly compliance testing for the Trust, and (vi) prepare and furnish the Trust monthly broker security transaction summaries and transaction listings and performance information. BAAI bears all expenses incurred in connection with the performance of its services. The Co-Administration Agreement may be terminated by a vote of a majority of the Trustees, by Stephens or by BAAI, respectively, on 60 days' written notice without penalty. The Co-Administration Agreements are not assignable without the written consent of the other party. Furthermore, the Co-Administration Agreements provide that Stephens and BAAI shall not be liable to the Funds or to their shareholders except in the case of Stephens's or BAAI's, willful misfeasance, bad faith, gross negligence or reckless disregard of duty. BNY serves as sub-administrator for the Funds pursuant to sub-administration agreements. Pursuant to their terms, BNY assists Stephens and BAAI in supervising, coordinating and monitoring various aspects of the Funds' administrative operations. For providing such services, BNY is entitled to receive a monthly fee from Stephens and BAAI based on an annual rate of 0.01% of the Funds' average daily net assets. DISTRIBUTION PLANS AND SHAREHOLDER SERVICING ARRANGEMENTS PRIMARY A SHARES The Trust has not adopted an shareholder servicing or distribution plan for the Primary A Shares. 45 INVESTOR A SHARES The Trust has adopted a Shareholder Servicing and Distribution Plan (the "Investor A Plan") pursuant to Rule 12b-1 under the 1940 Act with respect to each Fund's Investor A Shares. The Investor A Plan provides that each Fund may pay, up to [ ]% (on an annualized basis) of the average daily net asset value of the Funds: (i) the Distributor for reimbursements of distribution-related expenses actually incurred by the Distributor, including, but not limited to, expenses of organizing and conducting sales seminars, printing of prospectuses and statements of additional information (and supplements thereto) and reports for other than existing shareholders, preparation and distribution of advertising material and sales literature and costs of administering the Investor A Plan; or (ii) certain broker/dealers and other financial institutions ("Agents") who offer shares to their customers and who have entered into Shareholder Servicing Agreements, and Sales Support Agreements with respect to the Funds, for providing the services contemplated thereunder. The shareholder servicing activities for which compensation may be received under the Investor A Plan may include, among other things: (i) aggregating and processing purchase and redemption requests and transmitting promptly net purchase and redemption orders to the Distributor or transfer agent; (ii) providing customers with a service that invests the assets of their accounts in Shares pursuant to specific or pre-authorized instructions; (iii) processing dividend and distribution payments; (iv) providing information periodically to customers showing their positions in Shares; (v) arranging for bank wires; (vi) responding to customers' inquiries concerning their investment in Shares; (vii) providing subaccounting with respect to Shares beneficially owned by customers or the information to the Trust necessary for subaccounting; (viii) if required by law, forwarding shareholder communications (such as proxies, shareholder reports, annual and semi-annual financial statements and dividend, distribution and tax notices) to customers; (ix) forwarding to customers proxy statements and proxies containing any proposals regarding the Shareholder Servicing Agreement; (x) general shareholder liaison services; and (xi) providing such other similar services as the Trust may reasonably request to the extent such firms are permitted to do so under applicable statutes, rules or regulations. The Investor A Plan may be terminated at any time by a vote of a majority of the non-interested Trustees or with respect to a particular Fund, by vote of a majority of the outstanding securities of the Investor A Shares of such Fund. Because the Funds are new series, they have not yet paid any fees pursuant to the Investor A Plan. INVESTOR B SHARES The Trust has adopted a Distribution Plan (the "Investor B Distribution Plan") pursuant to Rule 12b-1 under the 1940 Act with respect to each Fund's Investor B Shares. The Trust also has adopted a Shareholder Servicing Plan (the "Investor B Servicing Plan") for each Fund's Investor B Shares. Under the Investor B Distribution Plan, the Trust may compensate or reimburse its Distributor for any activities or expenses primarily intended to result in the sale of Investor B Shares of the Trust's Funds. Payments by the Trust may not exceed, on an annual basis, 0.75% of the average daily net asset value of a Fund's Investor B Shares. The fees payable under the Investor B Distribution Plan are used primarily to compensate or reimburse the Distributor for distribution services provided by it, and related expenses incurred, including payments by the Distributor to compensate or reimburse banks, broker/dealers or other financial institutions that have entered into Sales Support Agreements with the Distributor ("Selling Agents"), for sales support services provided, and related expenses incurred, by such Selling Agents. These services may include: preparation, printing and distribution of prospectuses, sales literature and advertising materials by the Distributor or, as applicable, Selling Agents, attributable to distribution or sales support activities, respectively; commissions, incentive compensation or other compensation to, and expenses of, account executives or other employees of the Distributor or Selling Agents, attributable to distribution or sales support activities, respectively; overhead and other office expenses of the Distributor or Selling Agents, attributable to distribution or sales support activities, respectively; opportunity costs relating to the foregoing (which may be calculated as a carrying charge on the Distributor's or Selling Agents' unreimbursed expenses incurred in connection with distribution or sales support activities, respectively); and any other costs and expenses relating to distribution or sales support activities. Notwithstanding anything herein to the contrary, no Fund shall be obligated to make any payments under this Plan that exceed the maximum amounts payable under Rule 2830, of the National Association of Securities Dealers, Inc. Conduct Rules. 46 Under the Investor B Servicing Plan, the Trust may execute agreements with broker/dealers, banks and other financial institutions that are dealers of record or holders of record or which have a servicing relationship ("Servicing Agents") with the beneficial owners of Investor B Shares of the Trust, pursuant to which, Servicing Agents shall provide shareholder support services to their clients who beneficially own Investor B Shares of the Funds in consideration of a fee, at an annual rate of up to 0.25% of the average daily net asset value of the Investor B Shares beneficially owned by or attributable to such clients. Affiliates of the Trust's distributor, administrator, co-administrator and adviser are eligible to become Servicing Agents and to receive fees under this Plan. The Investor B Servicing Plan further provides that all expenses incurred by a Fund in connection with the Agreements and the implementation of such Plan is be borne either by the holders of the Investor B Shares of the particular Fund involved. If more than one Fund is involved and these expenses are not directly attributable to the Investor B Shares of a particular Fund, then the expenses may be allocated between or among the Shares of the Funds in a fair and equitable manner. The Investor B Servicing Plan may be terminated only by a majority of the Board of Trustees, including a majority of the Trustees who are not "interested persons," as defined in the Investment Company Act of 1940, of the Trust. INVESTOR C SHARES The Trust has adopted a Distribution Plan (the "Investor C Distribution Plan") pursuant to Rule 12b-1 under the 1940 Act with respect to each Fund's Investor C Shares. The Trust also has adopted a Shareholder Servicing Plan (the "Investor C Servicing Plan") for each Fund's Investor C Shares. Under the Investor C Distribution Plan, the Trust may compensate or reimburse its Distributor for any activities or expenses primarily intended to result in the sale of Investor C Shares of the Trust's Funds. Payments by the Trust may not exceed, on an annual basis, 0.75% of the average daily net asset value of a Fund's Investor C Shares. The fees payable under the Investor C Distribution Plan are used primarily to compensate or reimburse the Distributor for distribution services provided by it, and related expenses incurred, including payments by the Distributor to compensate or reimburse banks, broker/dealers or other financial institutions that have entered into Sales Support Agreements with the Distributor ("Selling Agents"), for sales support services provided, and related expenses incurred, by such Selling Agents. These services may include: preparation, printing and distribution of prospectuses, sales literature and advertising materials by the Distributor or, as applicable, Selling Agents, attributable to distribution or sales support activities, respectively; commissions, incentive compensation or other compensation to, and expenses of, account executives or other employees of the Distributor or Selling Agents, attributable to distribution or sales support activities, respectively; overhead and other office expenses of the Distributor or Selling Agents, attributable to distribution or sales support activities, respectively; opportunity costs relating to the foregoing (which may be calculated as a carrying charge on the Distributor's or Selling Agents' unreimbursed expenses incurred in connection with distribution or sales support activities, respectively); and any other costs and expenses relating to distribution or sales support activities. Notwithstanding anything herein to the contrary, no Fund shall be obligated to make any payments under this Plan that exceed the maximum amounts payable under Rule 2830, of the National Association of Securities Dealers, Inc. Conduct Rules. Under the Investor C Servicing Plan, the Trust may execute agreements with broker/dealers, banks and other financial institutions that are dealers of record or holders of record or which have a servicing relationship ("Servicing Agents") with the beneficial owners of Investor C Shares of the Trust, pursuant to which, Servicing Agents shall provide shareholder support services to their clients who beneficially own Investor C Shares of the Funds in consideration of a fee, at an annual rate of up to 0.25% of the average daily net asset value of the Investor C Shares beneficially owned by or attributable to such clients. Affiliates of the Trust's distributor, administrator, co-administrator and adviser are eligible to become Servicing Agents and to receive fees under this Plan. The Investor C Servicing Plan further provides that all expenses incurred by a Fund in connection with the Agreements and the implementation of such Plan is be borne either by the holders of the Investor C Shares of the particular Fund involved. If more than one Fund is involved and these expenses are not directly attributable to the Investor C Shares of a particular Fund, then the expenses may be allocated between or among the Shares of the Funds in a fair and equitable manner. The Investor C Servicing Plan may be terminated only by a majority of the Board of Trustees, including a majority of the Trustees who are not "interested persons," as defined in the Investment Company Act of 1940, of the Trust. 47 INFORMATION APPLICABLE TO INVESTOR A, INVESTOR B, INVESTOR C PLANS The Investor A Plan, the Investor B Plans and the Investor C Plans (each a "Plan" and collectively the "Plans") may only be used for the purposes specified above and as stated in each such Plan. Compensation payable to Selling Agents or Servicing Agents for shareholder support services under the Plans subject to, among other things, the National Association of Securities Dealers, Inc. ("NASD") Conduct Rules, which govern receipt by NASD members of Plan fees from registered investment companies. Each Plan requires the officers of the Trust or the Distributor to provide the Board of Trustees at least quarterly with a written report of the amounts expended pursuant to the Plan and the purposes for which such expenditures were made. The Board of Trustees reviews these reports in connection with its decisions with respect to the Plans. As required by Rule 12b-1 under the 1940 Act, the Investor A Plan, Investor B Distribution Plan and Investor C Distribution Plan were approved by the Board of Trustees, including a majority of the trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust and who have no direct or indirect financial interest in the operation of any Plan or in any agreements related to such Plan. In approving the Investor A Plan, Investor B Distribution Plan and Investor C Distribution Plan in accordance with the requirements of Rule 12b-1, the Trustees considered various factors and determined that there was a reasonable likelihood that each such Plan will benefit the respective Investor A, Investor B or Investor C Shares and the holders of such shares. The Investor A Plan, Investor B Distribution Plan and Investor C Distribution Plan were approved by the initial shareholders of the Funds' Investor A, B and C Shares, resepctvely, on [INSERT DATE]. EXPENSES The Administrator furnishes, without additional cost to the Trust, the services of the Treasurer and Secretary of the Trust and such other personnel (other than the personnel of the Adviser) as are required for the proper conduct of the Trust's affairs. The Distributor bears the incremental expenses of printing and distributing prospectuses used by the Distributor or furnished by the Distributor to investors in connection with the public offering of the Trust's shares and the costs of any other promotional or sales literature, except that to the extent permitted under the Plans relating to the Investor A, Investor B or Investor C Shares of each Fund, sales-related expenses incurred by the Distributor may be reimbursed by the Trust. The Trust pays or causes to be paid all other expenses of the Trust, including, without limitation: the fees of the Adviser, the Administrator and Co-Administrator; the charges and expenses of any registrar, any custodian or depository appointed by the Trust for the safekeeping of its cash, fund securities and other property, and any stock transfer, dividend or accounting agent or agents appointed by the Trust; brokerage commissions chargeable to the Trust in connection with fund securities transactions to which the Trust is a party; all taxes, including securities issuance and transfer taxes; corporate fees payable by the Trust to federal, state or other governmental agencies; all costs and expenses in connection with the registration and maintenance of registration of the Trust and its shares with the SEC and various states and other jurisdictions (including filing fees, legal fees and disbursements of counsel); the costs and expenses of typesetting prospectuses and statements of additional information of the Trust (including supplements thereto) and periodic reports and of printing and distributing such prospectuses and statements of additional information (including supplements thereto) to the Trust's shareholders; all expenses of shareholders' and trustees' meetings and of preparing, printing and mailing proxy statements and reports to shareholders; fees and travel expenses of trustees or trustee members of any advisory board or committee; all expenses incident to the payment of any dividend or distribution, whether in shares or cash; charges and expenses of any outside service used for pricing of the Trust's shares; fees and expenses of legal counsel and of independent auditors in connection with any matter relating to the Trust; membership dues of industry associations; interest payable on Trust borrowings; postage and long-distance telephone charges; insurance premiums on property or personnel (including officers and trustees) of the Trust which inure to its benefit; extraordinary expenses (including, but not limited to, legal claims and liabilities and litigation costs and any indemnification related thereto); and all other charges and costs of the Trust's operation unless otherwise explicitly assumed by the Adviser), the Administrator or Co-Administrator. 48 Expenses of the Trust which are not directly attributable to the operations of any class of shares or Fund are pro-rated among all classes of shares or Fund of the Trust based upon the relative net assets of each class or Fund. Expenses of the Trust which are not directly attributable to a specific class of shares but are directly attributable to a specific Fund are prorated among all the classes of shares of such Fund based upon the relative net assets of each such class of shares. Expenses of the Trust which are directly attributable to a class of shares are charged against the income available for distribution as dividends to such class of shares. The Advisory Agreement, the Sub-Advisory Agreements, and the Administration Agreement require BAAI, TradeStreet, [INSERT NAME], and the Administrator to reduce their fees to the extent required to satisfy any expense limitations which may be imposed by the securities laws or regulations thereunder of any state in which a Fund's shares are registered or qualified for sale, as such limitations may be raised or lowered from time to time, and the aggregate of all such investment advisory, sub-advisory, and administration fees shall be reduced by the amount of such excess. The amount of any such reduction to be borne by BAAI, TradeStreet, [INSERT NAME] or the Administrator shall be deducted from the monthly investment advisory and administration fees otherwise payable to BAAI, TradeStreet, [INSERT NAME] and the Administrator during such fiscal year. If required pursuant to such state securities regulations, BAAI, TradeStreet, [INSERT NAME] and the Administrator will reimburse the Trust no later than the last day of the first month of the next succeeding fiscal year, for any such annual operating expenses (after reduction of all investment advisory and administration fees in excess of such limitation). TRANSFER AGENTS AND CUSTODIANS First Data is located at One Exchange Place, 53 State Street, Boston, Massachusetts 02109, and acts as transfer agent for each Fund's Shares. Under the transfer agency agreements, the transfer agent maintains shareholder account records for the Trust, handles certain communications between shareholders and the Trust, and distributes dividends and distributions payable by the Trust to shareholders, and produces statements with respect to account activity for the Trust and its shareholders for these services. The transfer agent receives a monthly fee computed on the basis of the number of shareholder accounts that it maintains for the Trust during the month and is reimbursed for out-of-pocket expenses. Bank of America serves as sub-transfer agent for each Fund's Primary A Shares. The Bank of New York ("BONY") 90 Washington Street, New York, N.Y. 10286 serves as custodian for the Funds' assets. As custodian, BONY maintains the Funds' securities cash and other property, delivers securities against payment upon sale and pays for securities against delivery upon purchase, makes payments on behalf of such Funds for payments of dividends, distributions and redemptions, endorses and collects on behalf of such Funds all checks, and receives all dividends and other distributions made on securities owned by such Funds. The Bank of New York ("BONY"), Avenue des Arts, 35 1040 Brussels, Belgium serves as custodian for the assets of the international 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, BONY serves as Foreign Custody Manager, pursuant to a Foreign Custody Manager Agreement, under which the Board of Directors/Trustees retain the responsibility for selecting foreign compulsory depositories, although BONY agrees to make certain findings with respect to such depositories and to monitor such depositories. DISTRIBUTOR Stephens Inc. (the "Distributor") serves as the principal underwriter and distributor of the shares of the Funds. Pursuant to a distribution agreement (the "Distribution Agreement"), the Distributor, as agent, sells shares of the Funds on a continuous basis and transmits purchase and redemption orders that its receives to the Companies 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 Companies pursuant to Rule 12b-1 under the 1940 Act. 49 The Distribution Agreement will continue year to year as long as such continuance is approved at least annually by (i) the Board of Directors/Trustees or a vote of the majority (as defined in the 1940 Act) of the outstanding voting securities of the Fund and (ii) a majority of the trustees who are not parties to the Distribution Agreement or "interested persons" of any such party by a vote cast in person at a meeting called for such purpose. The Distribution Agreement is not assignable and is terminable with respect to a Fund, without penalty, on 60 days' notice by the Board of Directors/Trustees, the vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the Fund, or by the Distributor. INDEPENDENT ACCOUNTANTS AND REPORTS The Companies issue unaudited financial information semi-annually and audited financial statements annually. The Companies furnish proxy statements and other shareholder reports to shareholders of record. The annual financial statements will be audited by the Trust's independent accountant. The Board of Trustees has selected PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York 10036, as the Trust's independent accountant to audit the Trust's books and review the Trust's tax returns for the Funds' fiscal year ended March 31, 2000. Because the Trust is a newly registered investment company, it has not yet issued any annual or semi-annual shareholder reports. COUNSEL Morrison & Foerster LLP serves as legal counsel to the Companies. Their address is 2000 Pennsylvania Avenue, N.W., Washington, D.C. 20006. Morrison & Foerster LLP, counsel to the Companies and special counsel to Bank of America has advised the Companies and Bank of America that Bank of America and its affiliates may perform the services contemplated by the Investment Advisory Agreement and this Prospectus without violation of the Glass-Steagall Act. Such counsel has pointed out, however, that there are no controlling judicial or administrative interpretations or decisions and that future judicial or administrative interpretations of, or decisions relating to, present federal or state statutes, including the Glass-Steagall Act, and regulations relating to the permissible activities of banks and their subsidiaries or affiliates, as well as future changes in such federal or state statutes, regulations and judicial or administrative decisions or interpretations, could prevent such entities from continuing to perform, in whole or in part, such services. If any such entity were prohibited from performing any of such services, it is expected that new agreements would be proposed or entered into with another entity or entities qualified to perform such services. FUND TRANSACTIONS AND BROKERAGE GENERAL BROKERAGE POLICY Subject to policies established by the Board of Trustees of the Trust, the Adviser is responsible for decisions to buy and sell securities for each Fund, for the selection of broker/dealers, for the execution of such Fund's securities transactions, and for the allocation of brokerage fees in connection with such transactions. The Adviser's primary consideration in effecting a security transaction is to obtain the best net price and the most 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. 50 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 Companies. Commission rates are established pursuant to negotiations with the broker based on the quality and quantity of execution services provided by the broker in the light of generally prevailing rates. The allocation of orders among brokers and the commission rates paid are reviewed periodically by the Trustees of the Trust. On exchanges on which commissions are negotiated, the cost of transactions may vary among different brokers. Transactions on foreign stock exchanges involve payment of brokerage commissions which are generally fixed. Transactions in both foreign and domestic over-the-counter markets are generally principal transactions with dealers, and the costs of such transactions involve dealer spreads rather than brokerage commissions. With respect to over-the-counter transactions, the Adviser, where possible, will deal directly with dealers who make a market in the securities involved except in those circumstances in which better prices and execution are available elsewhere. In certain instances there may be securities which are suitable for more than one Fund as well as for one or more of the other clients of the Adviser. Investment decisions for each Fund and for the Adviser's other clients are made with the goal of achieving their respective investment objectives. It may happen that a particular security is bought or sold for only one client even though it may be held by, or bought or sold for, other clients. Likewise, a particular security may be bought for one or more clients when one or more other clients are selling that same security. Some simultaneous transactions are inevitable when several clients receive investment advice from the same investment adviser, particularly when the same security is suitable for the investment objectives of more than one client. When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed to be equitable to each. It is recognized that in some cases this system could have a detrimental effect on the price or volume of the security in a particular transaction as far as a Fund is concerned. The Companies believe that over time their ability to participate in volume transactions will produce superior executions for the Funds. The portfolio turnover rate for each Fund is calculated by dividing the lesser of purchases or sales of portfolio securities for the reporting period by the monthly average value of the portfolio securities owned during the reporting period. The calculation excludes all securities, including options, whose maturities or expiration dates at the time of acquisition are one year or less. Portfolio turnover may vary greatly from year to year as well as within a 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 Companies 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 Companies 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. 51 Certain affiliates of Bank of America Corporation and its subsidiary banks may have deposit, loan or commercial banking relationships with the corporate users of facilities financed by industrial development revenue bonds or private activity bonds purchased by the High Yield Bond Fund or the Kansas Fund. Bank of America or certain of its affiliates may serve as trustee, tender agent, guarantor, placement agent, underwriter, or in some other capacity, with respect to certain issues of municipal securities. Under the 1940 Act, persons affiliated with the Trust are prohibited from dealing with the Trust as a principal in the purchase and sale of securities unless an exemptive order allowing such transactions is obtained from the SEC. Each of the Funds may purchase securities from underwriting syndicates of which Bank of America or any of its affiliates is a member under certain conditions, in accordance with the provisions of a rule adopted under the 1940 Act and any restrictions imposed by the Board of Governors of the Federal Reserve System. Investment decisions for each Fund are made independently from those for the Trust's other investment portfolios, other investment companies, and accounts advised or managed by the Adviser. Such other investment portfolios, investment companies, and accounts may also invest in the same securities as the Funds. When a purchase or sale of the same security is made at substantially the same time on behalf of one or more of the Funds and another investment portfolio, investment company, or account, the transaction will be averaged as to price and available investments allocated as to amount, in a manner which the Adviser believes to be equitable to each Fund and such other investment portfolio, investment company or account. In some instances, this investment procedure may adversely affect the price paid or received by a Fund or the size of the position obtained or sold by the Fund. To the extent permitted by law, the Adviser may aggregate the securities to be sold or purchased for the Funds with those to be sold or purchased for other investment portfolios, investment companies, or accounts in executing transactions. Because the Trust is a new registered investment company, it has not yet paid any brokerage commissions. SECTION 28(E) STANDARDS Under Section 28(e) of the Securities Exchange Act of 1934, the Adviser shall not be "deemed to have acted unlawfully or to have breached its fiduciary duty" solely because under certain circumstances it has caused the account to pay a higher commission than the lowest available. To obtain the benefit of Section 28(e), the Adviser must make a good faith determination that the commissions paid are "reasonable in relation to the value of the brokerage and research services provided ...viewed in terms of either that particular transaction or its overall responsibilities with respect to the accounts as to which it exercises investment discretion and that the services provided by a broker provide an adviser with lawful and appropriate assistance in the performance of its investment decision making responsibilities." Accordingly, the price to a Fund in any transaction may be less favorable than that available from another broker/dealer if the difference is reasonably justified by other aspects of the portfolio execution services offered. Broker/dealers utilized by the Adviser may furnish statistical, research and other information or services which are deemed by the Adviser to be beneficial to the Funds' investment programs. Research services received from brokers supplement the Adviser's own research and may include the following types of information: statistical and background information on industry groups and individual companies; forecasts and interpretations with respect to U.S and foreign economies, securities, markets, specific industry groups and individual companies; information on political developments; fund management strategies; performance information on securities and information concerning prices of securities; and information supplied by specialized services to the Adviser and to the Trust's Directors/Trustees with respect to the performance, investment activities and fees and expenses of other mutual funds. Such information may be communicated electronically, orally or in written form. Research services may also include the providing of equipment used to communicate research information, the arranging of meetings with management of companies and the providing of access to consultants who supply research information. 52 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 Companies by improving the quality of the Adviser's investment advice. The advisory fees paid by the Companies are not reduced because the Adviser receives such services. Some broker/dealers may indicate that the provision of research services is dependent upon the generation of certain specified levels of commissions and underwriting concessions by the Adviser's clients, including the Funds. DESCRIPTION OF SHARES DESCRIPTION OF SHARES OF THE TRUST The Trust's Board of Trustees has authorized the issuance of the classes of shares of the Funds indicated above and may, in the future, authorize the creation of additional investment portfolios or classes of shares. The Board may classify or reclassify any unissued shares of the Trust into shares of any class, classes or Fund in addition to those already authorized by setting or changing in any one or more respects, from time to time, prior to the issuance of such shares, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or terms or conditions of redemption, of such shares and, pursuant to such classification or reclassification to increase or decrease the number of authorized shares of any Fund or class. Any such classification or reclassification will comply with the provisions of the 1940 Act. Fractional shares shall have the same rights as full shares to the extent of their proportionate interest. All shares of a Fund have equal voting rights and will be voted in the aggregate, and not by series, except where voting by a series is required by law or where the matter involved only affects one series. For example, a change in a Fund's fundamental investment policy would be voted upon only by shareholders of the Fund involved. Shareholders are entitled to one votE for each full share held and fractional votes for fractional shares held. The Trust may dispense with an annual meeting of shareholders in any year in which it is not required to elect Trustees under the 1940 Act. The Trust will hold a special meeting of its shareholders for the purpose of voting on the question of removal of a Board member, only to the extent required by the 1940 Act. Each share of a Fund represents an equal proportional interest in the Fund with each other share and is entitled to such dividends and distributions out of the income earned on the assets belonging to the Fund, as are declared in the discretion of the Board members. In the event of the liquidation or dissolution of the Trust, shareholders of the Trust's Funds are entitled to receive the assets attributable to the Fund that are available for distribution, and a distribution of any general assets not attributable to a particular Fund that are available for distribution in such manner and on such basis as the Board members in their sole discretion may determine. Shareholders are not entitled to any preemptive rights. All shares, when issued, will be fully paid and non-assessable by the Trust. Net investment income for the Funds for dividend purposes consists of (i) interest accrued and original issue discount earned on a Fund's assets, (ii) plus the amortization of market discount and minus the amortization of market premium on such assets, (iii) less accrued expenses directly attributable to the Fund and the general expenses of the Trust prorated to a Fund on the basis of its relative net assets, plus dividend or distribution income on a Fund's assets. Prior to purchasing shares in one of the Funds, the impact of dividends or distributions which are expected to be or have been declared, but not paid, should be carefully considered. Any dividend or distribution declared shortly after a purchase of such shares prior to the record date will have the effect of reducing the per share net asset value by the per share amount of the dividend or distribution. All or a portion of such dividend or distribution, although in effect a return of capital, may be subject to tax. Shareholders receiving a distribution in the form of additional shares will be treated as receiving an amount equal to the fair market value of the shares received, determined as of the reinvestment date. 53 The Funds use the so-called "equalization accounting method" to allocate a portion of earnings and profits to redemption proceeds. This method permits a fund to achieve more balanced distributions for both continuing and departing shareholders. Continuing shareholders should realize tax savings or deferrals through this method, and departing shareholders will not have their tax obligations change. Although using this method will not affect a Fund's total returns, it may reduce the amount that otherwise would be distributable to continuing shareholders by reducing the effect of redemptions on dividend and distribution amounts. NET ASSET VALUE DETERMINATION With respect to the Funds, a security listed or traded on an exchange is valued at its last sales price on the exchange where the security is principally traded or, lacking any sales on a particular day, the security is valued at the mean between the closing bid and asked prices on that day. Each security traded in the over-the-counter market (but not including securities reported on the NASDAQ National Market System) is valued at the mean between the last bid and asked prices based upon quotes furnished by market makers for such securities. Each security reported on the NASDAQ National Market System is valued at the last sales price on the valuation date. With respect to the Bond Funds, securities may be valued on the basis of prices provided by an independent pricing service. Prices provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as yield, type of issue, coupon rate maturity and seasoning differential. Securities for which prices are not provided by the pricing service are valued at the mean between the last bid and asked prices based upon quotes furnished by market makers for such securities. Securities for which market quotations are not readily available are valued at fair value as determined in good faith by or under the supervision of the Trust's officers in a manner specifically authorized by the Board of Trustees of the Trust. Short-Term obligations having 60 days or less to maturity are valued at amortized cost, which approximates market value. Generally, trading in foreign securities, as well as U.S. Government securities, money market instruments and repurchase agreements, is substantially completed each day at various times prior to the close of the New York Stock Exchange. The values of such securities used in computing the net asset value of the shares of the Fund are determined as of such times. Foreign currency exchange rates are also generally determined prior to the close of the New York Stock Exchange. Occasionally, events affecting the value of such securities and such exchange rates may occur between the times at which they are determined and the close of the New York Stock Exchange, which will not be reflected in the computation of net asset value. If during such periods events occur which materially affect the value of such securities, the securities will be valued at their fair market value as determined in good faith by the Trustees. For purposes of determining the net asset value per share of the International Funds, all assets and liabilities of the International Funds initially expressed in foreign currencies will be converted into U.S. dollars at the mean between the bid and offer prices of such currencies against U.S. dollars quoted by a major bank that is a regular participant in the foreign exchange market or on the basis of a pricing service that takes into account the quotes provided by a number of such major banks. The Trust may redeem shares involuntarily to reimburse the Funds for any loss sustained by reason of the failure of a shareholder to make full payment for Investor Shares purchased by the shareholder or to collect any charge relating to a transaction effected for the benefit of a shareholder which is applicable to Investor Shares as provided in the related Prospectuses from time to time. The Trust also may make payment for redemptions in readily marketable securities or other property if it is appropriate to do so in light of the Trust's responsibilities under the 1940 Act. Under the 1940 Act, the Funds may suspend the right of redemption or postpone the date of payment for Shares during any period when (a) trading on the Exchange is restricted by applicable rules and regulations of the SEC; (b) the Exchange is closed for other than customary weekend and holiday closings; (c) the SEC has by order permitted such suspension; or (d) an emergency exists as determined by the SEC. (The Funds may also suspend or postpone the recordation of the transfer of their shares upon the occurrence of any of the foregoing conditions.) ADDITIONAL INFORMATION CONCERNING TAXES The following information supplements and should be read in conjunction with the Prospectuses. The Prospectuses of the Funds describe generally the tax treatment of distributions by the Funds. This section of the SAI includes additional information concerning Federal income taxes. 54 GENERAL The Trust intends to qualify each Fund as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), as long as such qualification is in the best interest of the Fund's shareholders. Each Fund will be treated as a separate entity for tax purposes and, thus, the provisions of the Code applicable to regulated investment companies generally will be applied to each Fund, rather than to the Trust as a whole. In addition, net capital gain, net investment income, and operating expenses will be determined separately for each Fund. As a regulated investment company, each Fund will not be taxed on its net investment income and capital gains distributed to shareholders. Qualification as a regulated investment company under the Code requires, among other things, that (a) each Fund derive at least 90% of its annual gross income from dividends, interest, certain payments with respect to securities loans, gains from the sale or other disposition of stock or securities or foreign currencies (to the extent such currency gains are directly related to the regulated investment company's principal business of investing in stock or securities) and other income (including but not limited to gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies; and (b) the Fund diversify its holdings so that, at the end of each quarter of the taxable year, (i) at least 50% of the market value of the Fund's assets is represented by cash, government securities and other securities limited in respect of any one issuer to an amount not greater than 5% of the Fund's assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its assets is invested in the securities of any one issuer (other than U.S. Government obligations and the securities of other regulated investment companies), or in two or more issuers which the Fund controls and which are determined to be engaged in the same or similar trades or businesses. Each Fund also must distribute or be deemed to distribute to its shareholders at least 90% of its net investment income which, for this purpose, includes net short-term capital gains and certain other items earned in each taxable year. In general, these distributions must actually or be deemed to be made in the taxable year. However, in certain circumstances, such distributions may be made in the 12 months following the taxable year. Furthermore, distributions declared in October, November or December of one taxable year and paid by January 31 of the following taxable year will be treated as paid by December 31 the first taxable year. The Funds intend to pay out substantially all of their net investment income and net capital gain (if any) for each year. EXCISE TAX A 4% nondeductible excise tax will be imposed on each Fund (other than to the extent of its tax-exempt interest income) to the extent it does not meet certain minimum distribution requirements by the end of each calendar year. Each Fund intends to actually or be deemed to distribute substantially all of its net investment income and net capital gain 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 Trust 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 Trust paying different dividends or distributions on the different classes of shares. TAXATION OF FUND INVESTMENTS Except as provided herein, gains and losses on the sale of portfolio securities by a Fund will generally be capital gains and losses. Such gains and losses will ordinarily be long-term capital gains and losses if the securities have been held by the Fund for more than one year at the time of disposition of the securities. Gains recognized on the disposition of a debt obligation purchased by a Fund at a market discount (generally at a price less than its principal amount) will be treated as ordinary income to the extent of the portion of market discount which accrued, but was not previously recognized pursuant to an available election, during the term the Fund held the debt obligation. 55 If an option granted by a Fund lapses or is terminated through a closing transaction, such as a repurchase by the Fund of the option from its holder, the Fund will realize a short-term capital gain or loss, depending on whether the premium income is greater or less than the amount paid by the Fund in the closing transaction. Some realized capital losses may be deferred if they result from a position which is part of a "straddle," discussed below. If securities are sold by a Fund pursuant to the exercise of a call option written by it, the Fund will add the premium received to the sale price of the securities delivered in determining the amount of gain or loss on the sale. If securities are purchased by a Fund pursuant to the exercise of a put option written by it, such Fund will subtract the premium received from its cost basis in the securities purchased. The amount of any gain or loss realized by a Fund on closing out a regulated futures contract will generally result in a realized capital gain or loss for Federal income tax purposes. Regulated futures contracts held at the end of each fiscal year will be required to be "marked to market" for Federal income tax purposes pursuant to Section 1256 of the Code. In this regard, they will be deemed to have been sold at market value. Sixty percent (60%) of any net gain or loss recognized on these deemed sales and sixty percent (60%) of any net realized gain or loss from any actual sales, will generally be treated as long-term capital gain or loss, and the remainder will be treated as short-term capital gain or loss. Transactions that qualify as designated hedges are excepted from the "mark-to-market" rule and the "60%/40%" rule. Under Section 988 of the Code, a Fund will generally recognize ordinary income or loss to the extent gain or loss realized on the disposition of portfolio securities is attributable to changes in foreign currency exchange rates. In addition, gain or loss realized on the disposition of a foreign currency forward contract, futures contract, option or similar financial instrument, or of foreign currency itself, will generally be treated as ordinary income or loss. The Funds will attempt to monitor Section 988 transactions, where applicable, to avoid adverse tax impact. Offsetting positions held by a Fund involving certain financial forward, futures or options contracts may be considered, for tax purposes, to constitute "straddles." "Straddles" are defined to include "offsetting positions" in actively traded personal property. The tax treatment of "straddles" is governed by Section 1092 of the Code which, in certain circumstances, overrides or modifies the provisions of Section 1256. If a Fund were treated as entering into "straddles" by engaging in certain financial forward, futures or option contracts, such straddles could be characterized as "mixed straddles" if the futures, forwards, or options comprising a part of such straddles were governed by Section 1256 of the Code. The Fund may make one or more elections with respect to "mixed straddles." Depending upon which election is made, if any, the results with respect to the Fund may differ. Generally, to the extent the straddle rules apply to positions established by the Fund, losses realized by the Fund may be deferred to the extent of unrealized gain in any offsetting positions. Moreover, as a result of the straddle and the conversion transaction rules, short-term capital loss on straddle positions may be recharacterized as long-term capital loss, and long-term capital gain may be characterized as short-term capital gain or ordinary income. If a Fund enters into a "constructive sale" of any appreciated position in stock, a partnership interest, or certain debt instruments, the Fund must recognize gain (but not loss) with respect to that position. For this purpose, a constructive sale occurs when the Fund enters into one of the following transactions with respect to the same or substantially identical property: (i) a short sale; (ii) an offsetting notional principal contract; or (iii) a futures or forward contract. If a Fund purchases shares in a "passive foreign investment company" ("PFIC"), the Fund may be subject to Federal income tax and an interest charge imposed by the IRS upon certain distributions from the PFIC or the Fund's disposition of its PFIC shares. If the Fund invests in a PFIC, the Fund intends to make an available election to mark-to-market its interest in PFIC shares. Under the election, the Fund will be treated as recognizing at the end of each taxable year the difference, if any, between the fair market value of its interest in the PFIC shares and its basis in such shares. In some circumstances, the recognition of loss may be suspended. The Fund will adjust its basis in the PFIC shares by the amount of income (or loss) recognized. Although such income (or loss) will be taxable to the Fund as ordinary income (or loss) notwithstanding any distributions by the PFIC, the Fund will not be subject to Federal income tax or the interest charge with respect to its interest in the PFIC under the election. 56 FOREIGN TAXES Income and dividends received by a Fund from sources within foreign countries may be subject to withholding and other taxes imposed by such countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. If more than 50% of the value of a Fund's total assets at the close of its taxable year consists of securities of non-U.S. corporations, the Fund will be eligible to file an election with the IRS pursuant to which the regulated investment company may pass-through to its shareholders foreign taxes paid by the regulated investment company, which may be claimed either as a credit or deduction by the shareholders. Only the International Funds expect to qualify for the election. However, even if a Fund qualifies for the election, foreign taxes will only pass-through to a Fund shareholder if (i) the shareholder holds the Fund shares for at least 16 days during the 30 day period beginning 15 days prior to the date upon which the shareholder becomes entitled to receive Fund distributions corresponding with the pass-through of the foreign taxes paid by the Fund, and (ii) with respect to foreign source dividends received by the Fund on shares giving rise to foreign tax, the Fund holds the shares for at least 16 days during the 30 day period beginning 15 days prior to the date upon which the Fund becomes entitled to the dividend. An individual with $300 or less of creditable foreign taxes generally is exempt from foreign source income and certain other limitations imposed by the Code on claiming a credit for such taxes. The $300 amount is increased to $600 for joint filers. CAPITAL GAIN DISTRIBUTIONS Distributions which are designated by a Fund as capital gain distributions will be taxed to shareholders as long-term term capital gain (to the extent such distributions equal or exceed the Fund's actual net capital gains for the taxable year), regardless of how long a shareholder has held Fund shares. Such distributions will be designated as capital gain distributions in a written notice mailed by the Fund to its shareholders not later than 60 days after the close of the Fund's taxable year. DISPOSITION OF FUND SHARES A disposition of Fund shares pursuant to a redemption (including a redemption in-kind) or an exchange will ordinarily result in a taxable capital gain or loss, depending on the amount received for the shares (or are deemed to be received in the case of an exchange) and the cost of the shares. If a shareholder exchanges or otherwise disposes of Fund shares within 90 days of having acquired such shares and if, as a result of having acquired those shares, the shareholder subsequently pays a reduced sales charge on a new purchase of shares of the Fund or a different regulated investment company, the sales charge previously incurred in acquiring the Fund's shares shall not be taken into account (to the extent such previous sales charges do not exceed the reduction in sales charges on the new purchase) for the purpose of determining the amount of gain or loss on the disposition, but will be treated as having been incurred in the acquisition of such other shares. Also, any loss realized on a redemption or exchange of shares of the Fund will be disallowed to the extent that substantially identical shares are acquired within the 61-day period beginning 30 days before and ending 30 days after the shares are disposed of. If a shareholder receives a capital gain distribution with respect to any Fund share and such Fund share is held for six months or less, then (unless otherwise disallowed) any loss on the sale or exchange of that Fund share will be treated as a long-term capital loss to the extent of the capital gain distribution. In addition, if a shareholder holds Fund shares for six months or less, any loss on the sale or exchange of those shares will be disallowed to the extent of the amount of exempt-interest dividends received with respect to the shares. The Treasury Department is authorized to issue regulations reducing the six months holding requirement to a period of not less than the greater of 31 days or the period between regular distributions where a Fund regularly distributes at least 90% of its net tax-exempt interest, if any. No such regulations have been issued as of the date of this SAI. The loss disallowance rules described in this paragraph do not apply to losses realized under a periodic redemption plan. FEDERAL INCOME TAX RATES As of the printing of this SAI, the maximum individual tax rate applicable to ordinary income is 39.6% (marginal tax rates may be higher for some individuals to reduce or eliminate the benefit of exemptions and deductions); the maximum individual marginal tax rate applicable to net capital gain is 20%; and the maximum corporate tax rate applicable to ordinary income and net capital gain is 35% (marginal tax rates may be higher for some corporations to reduce or eliminate the benefit of lower marginal income tax rates). Naturally, the amount of tax payable by an individual or corporation will be affected by a combination of tax laws covering, for example, deductions, credits, deferrals, exemptions, sources of income and other matters. 57 CORPORATE SHAREHOLDERS Corporate shareholders of the Funds may be eligible for the dividends-received deduction on distributions attributable to dividends received from domestic corporations, which, if received directly by the corporate shareholder, would qualify for such deduction. A distribution by a Fund attributable to dividends of a domestic corporation will only qualify for the dividends-received deduction if (i) the corporate shareholder generally holds the Fund shares upon which the distribution is made for at least 46 days during the 90 day period beginning 45 days prior to the date upon which the shareholder becomes entitled to the distribution; and (ii) the Fund generally holds the shares of the domestic corporation producing the dividend income for at least 46 days during the 90 day period beginning 45 days prior to the date upon which the Fund becomes entitled to such dividend income. FOREIGN SHAREHOLDERS Under the Code, distributions of net investment income by a Fund to a nonresident alien individual, foreign trust (I.E., trust which a U.S. court is able to exercise primary supervision over administration of that trust and one or more U.S. persons have authority to control substantial decisions of that trust), foreign estate (I.E., the income of which is not subject to U.S. tax regardless of source), foreign corporation, or foreign partnership (each a "foreign shareholder") will be subject to U.S. withholding tax (at a rate of 30% or a lower treaty rate if applicable). Withholding will not apply if a distribution paid by a Fund to a foreign shareholder is "effectively connected" with a U.S. trade or business (or, if an income tax treaty applies, is attributable to a U.S. permanent establishment of the foreign shareholder), in which case the reporting and withholding requirements applicable to U.S. persons will apply. Distributions of net long-term capital gains are generally not subject to tax withholding. BACKUP WITHHOLDING The Trust may be required to withhold, subject to certain exemptions, at a rate of 31% ("backup withholding") on dividends, capital gain distributions, and redemption proceeds (including proceeds from exchanges and redemptions in-kind) paid or credited to an individual Fund shareholder, if the shareholder fails to certify that the Taxpayer Identification Number ("TIN") provided is correct and that the shareholder is not subject to backup withholding, or the IRS notifies the Trust that the shareholder's TIN is incorrect or that the shareholder is subject to backup withholding. Such tax withheld does not constitute any additional tax imposed on the shareholder, and may be claimed as a tax payment on the shareholder's Federal income tax return. An investor must provide a valid TIN upon opening or reopening an account. Failure to furnish a valid TIN to the Trust could subject the investor to penalties imposed by the IRS. SPECIAL TAX CONSIDERATIONS PERTAINING TO THE KANSAS FUND In each year that the Kansas Fund qualifies as a regulated investment company for Federal income tax purposes, dividends distributed to the Fund's shareholders who are Kansas resident individuals, or estates or trusts resident in Kansas, will be excluded from the computation of Kansas adjusted gross income to the extent that such dividends (a) qualify as exempt-interest dividends for Federal income tax purposes and (b) are attributable to interest on obligations (i) issued after December 31, 1987 by the State of Kansas or its political subdivisions or on certain specific obligations issued before January 1, 1988 by such entities, or (ii) of any authority, commission or instrumentality of the United States or its possessions, to the extent exempted from state income taxes under Federal law. The Fund intends to primarily invest only in obligations which will permit distributions attributable to interest to be excludable from Kansas adjusted gross income on resident individuals, estates and trusts. Resident individuals, estates and trusts will generally be subject to Kansas income tax on other types of distributions received from the Fund, including distributions attributable to interest on certain obligations issued before January 1, 1988, by the State of Kansas or its political subdivisions, to interest on obligations of other issuers and to all long-term and short-term capital gains, if any, to the extent such capital gains distributions are included in Federal taxable income. Corporations within Kansas' tax jurisdiction are subject to the same rules as Kansas individuals in computing such corporation's net income before apportionment. The foregoing discussion of Kansas law does not apply to shareholders which are banks or to certain other individuals or entities who are in the banking business. Banks and others in the banking business are subject to the Kansas privilege tax on net income for which distributions from the Kansas Fund are not exempt. Except as noted above with respect to Kansas income taxation, distributions from the Kansas Fund may be taxable to investors under other state and local laws imposing taxes on or measured by net income, even though all or a portion of such distributions are derived from tax-exempt obligations which, if realized directly by the investor, would be nontaxable. The Fund will notify its shareholders within 60 days after the close of each year as to the amount of exempt interest dividends from Kansas obligations which is exempt from Kansas individual income taxation. Earnings derived from the Kansas Fund will not be subject to the local intangibles tax imposed by various counties, cities and townships in Kansas. 58 OTHER MATTERS Investors should be aware that the investments to be made by the Funds may involve sophisticated tax rules that may result in income or gain recognition by a Fund without corresponding current cash receipts. Although the Funds will seek to avoid significant noncash income, such noncash income could be recognized by a Fund, in which case the Fund may distribute cash derived from other sources in order to meet the minimum distribution requirements described above. The foregoing discussion and the discussions in the Prospectus applicable to each shareholder address only some of the Federal tax considerations generally affecting investments in the Fund. Each investor is urged to consult his or her tax advisor regarding specific questions as to Federal, state, local or foreign taxes. ADDITIONAL INFORMATION ON PERFORMANCE Yield information and other performance information for the Trust's Funds may be obtained by calling (800) 321-7854. From time to time, the yield and total return of a Fund's Shares may be quoted in advertisements, shareholder reports, and other communications to shareholders. Quotations of yield and total return reflect only the performance of a hypothetical investment in a Fund or class of shares during the particular time period shown. Yield and total return vary based on changes in the market conditions and the level of a Fund's expenses, and no reported performance figure should be considered an indication of performance which may be expected in the future. Standardized performance for the Funds, I.E., that required in both form and content by Form N-1A, is shown below and may be advertised by the Funds. The main purpose of standardized performance is to allow an investor to review the performance of a Fund's class of shares and compare such performance with that of investment alternatives, including other mutual funds. Non-standardized performance also may be advertised by the Funds. One purpose of providing non-standardized performance to an investor is to provide that investor with a different snapshot of a Fund's performance that may not be captured by standardized performance. The non-standardized performance of a Fund's class of shares, however, may not be directly comparable to the performance of investment alternatives because of differences in certain variables (such as the length of time over which performance is shown and the exclusion of certain charges or expenses) and methods used to value portfolio securities, compute expenses and calculate performance. Non-standardized performance may include, but is not limited to, performance for non-standardized periods, including year-to-date and other periods less than a year, performance not reflecting the deduction of certain charges, fees and/or expenses, and performance reflecting the deduction of applicable state or federal taxes. After-tax returns are generally calculated using the same methodology as that used in calculating total return, except that 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. 59 Each Fund may quote information obtained from the Investment Company Institute, national financial publications, trade journals and other industry sources in its advertising and sales literature. In addition, the Funds also may compare the performance and yield of a class or series of shares to those of other mutual funds with similar investment objectives and to other relevant indices or to rankings prepared by independent services or other financial or industry publications that monitor the performance of mutual funds. For example, the performance and yield of a class of shares in a Fund may be compared to data prepared by Lipper Analytical Services, Inc. Performance and yield data as reported in national financial publications such as MONEY MAGAZINE, FORBES, BARRON'S, THE WALL STREET JOURNAL, and THE NEW YORK TIMES, OR in publications of a local or regional nature, also may be used in comparing the performance of a class of shares in a Fund. The "yield" and "effective yield" of each class of shares of a Money Market Fund may be compared to the respective averages compiled by DONOGHUE'S MONEY FUND REPORT, a widely recognized independent publication that monitors the performance of money market funds, or to the average yields reported by the BANK RATE MONITOR for money market deposit accounts offered by leading banks and thrift institutions in the top five metropolitan statistical areas. The Funds also may use the following information in advertisements and other types of literature, only to the extent the information is appropriate for the Fund: (i) the Consumer Price Index may be used to assess the real rate of return from an investment in a Fund; (ii) other government statistics, including, but not limited to, The Survey of Current Business, may be used to illustrate investment attributes of a Fund or the general economic, business, investment, or financial environment in which a Fund operates; (iii) the effect of tax-deferred compounding on the investment returns of a Fund, or on returns in general, may be illustrated by graphs, charts, etc., where such graphs or charts would compare, at various points in time, the return from an investment in a Fund (or returns in general) on a tax-deferred basis (assuming reinvestment of capital gains and dividends and assuming one or more tax rates) with the return on a taxable basis; and (iv) the sectors or industries in which a Fund invests may be compared to relevant indices of stocks or surveys (E.G., S&P Industry Surveys) to evaluate a Fund's historical performance or current or potential value with respect to the particular industry or sector. In addition, the performance of a Fund's class of shares may be compared to the Standard & Poor's 500 Stock Index, an unmanaged index of a group of common stocks, the Consumer Price Index, the Dow Jones Industrial Average, a recognized unmanaged index of common stocks of 30 industrial companies listed on the New York Stock Exchange, the Europe, Far East and Australia Index, a recognized unmanaged index of international stocks, or any similar recognized index. The performance of a Fund's class of shares also may be compared to a composite index prepared by the Adviser, an affiliate of the Adviser, or an unaffiliated party to the Adviser. In addition, the Funds also may use, in advertisements and other types of literature, information and statements: (1) showing that bank savings accounts offer a guaranteed return of principal and a fixed rate of interest, but no opportunity for capital growth; and (2) describing Bank of America, and its affiliates and predecessors, as one of the first investment managers to advise investment accounts using asset allocation and index strategies. The Funds also may include in advertising and other types of literature information and other data from reports and studies prepared by the Tax Foundation, including information regarding federal and state tax levels and the related "Tax Freedom Day." The Funds also may discuss in advertising and other types of literature that a Fund has been assigned a rating by an NRSRO, such as Standard & Poor's Corporation. Such rating would assess the creditworthiness of the investments held by the Fund. The assigned rating would not be a recommendation to purchase, sell or hold the Fund's shares since the rating would not comment on the market price of the Fund's shares or the suitability of the 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. 60 In addition, certain potential benefits of investing in world securities markets may be discussed in promotional materials. Such benefits include, but are not limited to: a) the expanded opportunities for investment in securities markets outside the U.S.; b) the growth of securities markets outside the U.S. vis-a-vis U.S. markets; c) the relative return associated with foreign securities markets vis-a-vis U.S. markets; and d) a reduced risk of portfolio volatility resulting from a diversified securities portfolio consisting of both U.S. and foreign securities. IBBOTSON DATA. Ibbotson Associates of Chicago, Illinois, ("Ibbotson") provides historical returns of the capital markets in the United States. The Funds may compare the performance of their share classes or series to the long-term performance of the U.S. capital markets in order to demonstrate general long-term risk versus reward investment scenarios. Performance comparisons could also include the value of a hypothetical investment in common stocks, long-term bonds or treasuries. The capital markets tracked by Ibbotson are common stocks, small capitalization stocks, long-term corporate bonds, intermediate-term government bonds, long-term government bonds, Treasury Bills, and the U.S. rate of inflation. These capital markets are based on the returns of several different indices. For common stocks, the S&P is used. For small capitalization stocks, return is based on the return achieved by Dimensional Fund Advisors (DFA) Small Company Fund. This fund is a market-value-weighted index of the ninth and tenth deciles of the Exchange, plus stocks listed on the American Stock Exchange (AMEX) and over-the-counter (OTC) with the same or less capitalization as the upperbound of the Exchange ninth docile. At year-end 199, the DFA Small Company Fund contained approximately 2,663 stocks, with a weighted average market capitalization of $16.7 million. The unweighted average market capitalization was $82.97 million, while the median was $6.0 million. Unlike an investment in a common stock mutual fund, an investment in bonds that are held to maturity provides a fixed and stated rate of return. Bonds have a senior priority in liquidation or bankruptcy to common stocks, and interest on bonds is generally paid from assets of the corporation before any distributions to common shareholders. Bonds rated in the two highest rating categories are considered high quality and to present minimal risks of default. See Schedule A for a more complete explanation of these ratings of corporate bonds. An advantage of investing in government bonds is that, in many cases, they are backed by the credit and taxing power of the United States government, and therefore, such securities may present little or no risk of default. Although government securities fluctuate in price, they are highly liquid and may be purchased and sold with relatively small transaction costs (direct purchase of Treasury securities can be made with no transaction costs). Long-term corporate bond returns are based on the performance of the Salomon Brothers Long-Term-High-Grade Corporate Bond Index and include nearly all "Aaa-" and "Aa-" rated bonds. Returns on intermediate-term government bonds are based on a one-bond portfolio constructed each year, containing a bond which is the shortest noncallable bond available with a maturity not less than 5 years. This bond is held for the calendar year and returns are recorded. Returns on long-term government bonds are based on a one-bond portfolio constructed each year, containing a bond that meets several criteria, including having a term of approximately 20 years. The bond is held for the calendar year and returns are recorded. Returns on U.S. Treasury Bills are based on a one-bill portfolio constructed each month, containing the shortest-term bill having not less than one month to maturity. The total return on the bill is the month end price divided by the previous month-end price, minus one. Data up to 1976 is from the U.S. Government Bond file at the University of Chicago's Center for Research in Security Prices; the Wall Street Journal is the source thereafter. Inflation rates are based on the CPI. Ibbotson calculates total returns in the same method as the Funds. YIELD CALCULATIONS 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. 61 Yield is calculated separately for the Primary A, Investor A, Investor B and Investor C Shares of a Fund by dividing the net investment income per share for a particular class or series of shares (as described below) earned during a 30-day period by the maximum offering price per share on the last day of the period (for Primary A, maximum offering price per share is the same as the net asset value per share) and annualizing the result on a semi-annual basis by adding one to the quotient, raising the sum to the power of six, subtracting one from the result and then doubling the difference. For a class or series of shares in a Fund, net investment income per share earned during the period is based on the average daily number of shares outstanding during the period entitled to receive dividends and includes dividends and interest earned during the period minus expenses accrued for the period, net of reimbursements. This calculation can be expressed as follows: Yield = 2 [(a-b+ 1)(6) - 1] --- cd Where: a = dividends and interest earned during the period. b = expenses accrued for the period (net of reimbursements). c = the average daily number of shares outstanding during the period that were entitled to receive dividends. d = maximum offering price per share on the last day of the period (again, for Primary A Shares, this is equivalent to net asset value per share). For the purpose of determining net investment income earned during the period (variable- "a" in the formula), dividend income on equity securities held by a Fund is recognized by accruing 1/360 of the stated dividend rate of the security each day that the security is in the portfolio. Each Fund calculates interest earned on any debt obligations held in its portfolio by computing the yield to maturity of each obligation held by it based on the market value of the obligation (including actual accrued interest) at the close of business on the last business day of each month, or, with respect to obligations purchased during the month, the purchase price (plus actual accrued interest) and dividing the result by 360 and multiplying the quotient by the market value of the obligation (including actual accrued interest) in order to determine the interest income on the obligation for each day of the subsequent month that the obligation is in the portfolio. For purposes of this calculation, it is assumed that each month contains 30 days. The maturity of an obligation with a call provision is the next call date on which the obligation reasonably may be expected to be called or, if none, the maturity date. With respect to debt obligations purchased at a discount or premium, the formula generally calls for amortization of the discount or premium. The amortization schedule will be adjusted monthly to reflect changes in the market values of such debt obligations. The California Municipal Bond Fund, Municipal Income Fund, Short-Term Municipal Income Fund, Intermediate Municipal Bond Fund, the State Intermediate Municipal Bond Funds and the State Municipal Bond Funds calculate interest gained on tax-exempt obligations issued without original issue discount and having a current market discount by using the coupon rate of interest instead of the yield to maturity. In the case of tax-exempt obligations that are issued with original issue discount, where the discount based on the current market value exceeds the then-remaining portion of original issue discount, the yield to maturity is the imputed rate based on the original issue discount calculation. Conversely, where the discount based on the current market value is less than the remaining portion of the original issue discount, the yield to maturity is based on the market value. Expenses accrued for the period (variable "b" in the formula) include recurring fees charged by Nations Funds to shareholder accounts in proportion to the length of the base period. Undeclared earned income will be subtracted from the maximum offering price per share (which for Primary A and Primary B Shares is net asset value per share) (variable "d" in the formula). Undeclared earned income is the net investment income which, at the end of the base period, has not been declared as a dividend, but is reasonably expected to be and is declared as a dividend shortly thereafter. A Fund's maximum offering price per share for purposes of the formula includes the maximum sales charge, if any, imposed by the Fund, as reflected in the Fund's prospectus. The Funds may provide additional yield calculations in communications (other than advertisements) to the holders of Primary A, Investor A, Investor B or Investor C Shares. These may be calculated based on the Primary A, Investor A, Investor B or Investor C Shares' net asset values per share (rather than their maximum offering prices) on the last day of the period covered by the yield computations. That is, some communications provided to the holders of Primary A, Investor A, Investor B or Investor C Shares may also include additional yield calculations prepared for the holders of Primary A Shares. Such additional quotations, therefore, will not reflect the effect of the sales charges mentioned above. 62 Because the Funds are new series they do not yet have any historical yield performance. TOTAL RETURN CALCULATIONS Total return measures both the net investment income generated by, and the effect of any realized or unrealized appreciation or depreciation of the underlying investments in a Fund. The Funds' average annual and cumulative total return figures are computed in accordance with the standardized methods prescribed by the SEC. Average annual total return figures are computed by determining the average annual compounded rates of return over the periods indicated in the advertisement, sales literature or shareholders' report that would equate the initial amount invested to the ending redeemable value, according to the following formula: P(1 + T)(n) = ERV Where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value at the end of the period of a hypothetical $1,000 payment made at the beginning of such period. This calculation (i) assumes all dividends and distributions are reinvested at net asset value on the appropriate reinvestment dates, and (ii) deducts (a) the maximum sales charge from the hypothetical initial $1,000 investment, and (b) all recurring fees, such as advisory and administrative fees, charged as expenses to all shareholder accounts. All performance calculations for the period ended March 31, 1999, reflect the deduction of sales charges, if any, that would have been deducted from a sale of shares. Cumulative total return is based on the overall percentage change in value of a hypothetical investment in the Fund, assuming all Fund dividends and capital gain distributions are reinvested, without reflecting the effect of any sales charge that would be paid by an investor, and is not annualized. Cumulative total return is computed by finding the cumulative compounded rate of return over the period indicated in the advertisement that would equate the initial amount invested to the ending redeemable value, according to the following formula: CTR = (ERV-P) 100 ----- P Where: CTR = Cumulative total return ERV = ending redeemable value at the end of the period of a hypothetical $1,000 payment made at the beginning of such period P = initial payment of $1,000. This calculation (i) assumes all dividends and distributions are reinvested at net asset value on the appropriate reinvestment dates, and (ii) deducts (a) the maximum sales charge from the hypothetical initial $1,000 investment, and (b) all recurring fees, such as advisory and administrative fees, charged as expenses to all shareholder accounts. Because the Funds are new series they do not yet have any historical return performance. MISCELLANEOUS 63 CERTAIN RECORD HOLDERS The name, address and percentage of ownership of each person who is known by the Registrant to have owned of record or beneficially five percent or more of any of the Funds as of January __, 2000 is: Class; Amount of Shares Owned; Type of Percentage Percentage Fund Name and Address Ownership of Class of Fund ---- ---------------- --------- -------- ------- 64 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. __-_____; ___-____)]
- ---------------------- ------------------------------------------------------------------------------------- EXHIBIT LETTER DESCRIPTION - ---------------------- ------------------------------------------------------------------------------------- (a) ARTICLES OF INCORPORATION: (a)(1) Certificate of Trust, to be filed by amendment. (a)(2) Declaration of Trust, to be filed by amendment. - ---------------------- ------------------------------------------------------------------------------------- (b) BY-LAWS: By-Laws, to be filed by amendment. - ---------------------- ------------------------------------------------------------------------------------- (c) INSTRUMENTS DEFINING RIGHTS OF SECURITIES HOLDERS: Not Applicable - ---------------------- ------------------------------------------------------------------------------------- (d) INVESTMENT ADVISORY CONTRACTS: (d)(1) Form of Investment Advisory Agreement between Nations Funds Trust and Banc of America Advisors, Inc. ("BAAI"), filed herewith. (d)(2) Form of Sub-Advisory Agreement among Nations Funds Trust, BAAI and Sub-Adviser on behalf of the Funds of Nations Funds Trust, filed herewith. - ---------------------- ------------------------------------------------------------------------------------- (e) UNDERWRITING CONTRACT: Form of Distribution Agreement between Nations Funds Trust and Stephens Inc., filed herewith. - ---------------------- ------------------------------------------------------------------------------------- C-1 - ---------------------- ------------------------------------------------------------------------------------- EXHIBIT LETTER DESCRIPTION (f) BONUS OR PROFIT SHARING CONTRACTS: Nations Funds Trust Deferred Compensation Plan, to be filed by amendment. - ---------------------- ------------------------------------------------------------------------------------- (g) CUSTODIAN AGREEMENT: Form of Custody Agreement between Nations Funds Trust and The Bank of New York, filed herewith. - ---------------------- ------------------------------------------------------------------------------------- (h) OTHER MATERIAL CONTRACTS: (h)(1) Form of Co-Administration Agreement among Nations Funds Trust, Stephens Inc. and BAAI, filed herewith. (h)(2) Form of Sub-Administration Agreement among Nations Funds Trust, The Bank of New York and BAAI, filed herewith. (h)(3) Transfer Agency between First Data Investor Services Group, Inc. ("First Data") and Nations Funds Trust, to be filed by amendment. (h)(4) Sub-Transfer Agency Agreement among First Data, Bank of America, N.A. ("Bank of America") and Nations Funds Trust, to be filed by amendment. (h)(5) Cross Indemnification Agreement among Nations Fund Trust, Nations Fund, Inc., Nations Reserves, Nations Master Investment Trust and Nations Funds Trust, to be filed by amendment. (h)(6) Form of Shareholder Servicing Plan relating to Investor B Shares, filed herewith. (h)(7) Form of Shareholder Servicing Plan relating to Investor C Shares, filed herewith. - ---------------------- ------------------------------------------------------------------------------------- (i) LEGAL OPINION Not Applicable. - ---------------------- ------------------------------------------------------------------------------------- (j) OTHER OPINIONS Not Applicable. - ---------------------- ------------------------------------------------------------------------------------- C-2 - ---------------------- ------------------------------------------------------------------------------------- EXHIBIT LETTER DESCRIPTION (k) OMITTED FINANCIAL STATEMENTS Not Applicable - ---------------------- ------------------------------------------------------------------------------------- (l) INITIAL CAPITAL AGREEMENTS: Investment Letter, to be filed by amendment. - ---------------------- ------------------------------------------------------------------------------------- (m) RULE 12B-1 PLANS: (m)(1) Form of Shareholder Servicing and Distribution Plan relating to Investor A Shares, filed herewith. (m)(2) Form of Distribution Plan relating to Investor B Shares, filed herewith. (m)(3) Form of Distribution Plan relating to Investor C Shares, filed herewith. - ---------------------- ------------------------------------------------------------------------------------- (n) FINANCIAL DATA SCHEDULE: Not Applicable - ---------------------- ------------------------------------------------------------------------------------- (o) RULE 18F-3 PLAN: Form of Rule 18f-3 Multi-Class Plan, filed herewith. - ---------------------- -------------------------------------------------------------------------------------
ITEM 24. PERSONS CONTROLLED BY OF UNDER COMMON CONTROL WITH THE FUND No person is controlled by or under common control with the Registrant. ITEM 25. INDEMNIFICATION Article V, Section 2 of the Declaration of Trust provides for the indemnification of Registrant's trustees and employees Indemnification of Registrant's administrators, principal underwriter, custodian and transfer agent is provided for, respectively, in the: 1. Co-Administration Agreement with Stephens Inc. and BAAI; 2. Sub--Administration Agreement with The Bank of New York; 3. Distribution Agreement with Stephens Inc.; 4. Custody Agreement with The Bank of New York; and 5. Transfer Agency Agreement with First Data. C-3 Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the Registrant by the Registrant pursuant to the Declaration of Trust or otherwise, the Registrant is aware that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and, therefore, is unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by trustees, directors, officers or controlling persons of the Registrant in connection with the successful defense of any act, suit or proceeding) is asserted by such trustees, officers or controlling persons in connection with the shares being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issues. ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER To the knowledge of the Registrant, none of the directors or officers of BAAI, the adviser to the Registrant's portfolios, or the investment sub-advisers, except those set forth below, are or have been, at any time during the past two calendar years, engaged in any other business, profession, vocation or employment of a substantial nature, except that certain directors and officers also hold various positions with, and engage in business for, the company that owns all the outstanding stock (other than directors' qualifying shares) of BAAI or TradeStreet, respectively, or other subsidiaries of Bank of America Corporation. (a) BAAI performs investment advisory services for the Registrant and certain other customers. BAAI is a wholly owned subsidiary of Bank of America, which in turn is a wholly owned banking subsidiary of Bank of America Corporation. Information with respect to each director and officer of the investment adviser is incorporated by reference to Form ADV filed by BAAI with the SEC pursuant to the Investment Advisers Act of 1940, as amended (the "Advisers Act") (file no. 801-49874). (b) TradeStreet performs investment sub-advisory services for the Registrant and certain other customers. TradeStreet is a wholly owned subsidiary of Bank of America, which in turn is a wholly owned banking subsidiary of Bank of America Corporation. Information with respect to each director and officer of the investment sub-adviser is incorporated by reference to Form ADV filed by TradeStreet with the SEC pursuant to the Advisers Act (file no. 801-50372). ITEM 27. PRINCIPAL UNDERWRITERS (a) Stephens, distributor for the Registrant, does not presently act as investment adviser for any other registered investment companies, but does act as principal underwriter for Nations Fund Trust, Nations Fund, Inc., Nations LifeGoal Fund, Inc., Nations Annuity Trust, the Overland Express Funds, Inc., Stagecoach Inc., Stagecoach Funds, Inc. and Stagecoach Trust, and is the exclusive placement agent for Master Investment Trust, Managed Series Investment Trust, Life & Annuity Trust and C-4 Master Investment Portfolio, all of which are registered open-end management investment companies, and has acted as principal underwriter for the Liberty Term Trust, Inc., Nations Government Income Term Trust 2003, Inc., Nations Government Income Term Trust 2004, Inc. and the Managed Balanced Target Maturity Fund, Inc., closed-end management investment companies. (b) Information with respect to each director and officer of the principal underwriter is incorporated by reference to Form ADV filed by Stephens Inc. with the SEC pursuant to the Investment Company Act of 1940, as amended (the "1940 Act") (file No. 501-15510). (c) Not applicable. ITEM 28. LOCATION OF ACCOUNTS AND RECORDS (1) BAAI, One Bank of America Plaza, Charlotte, NC 28255 (records relating to its function as Investment Adviser and Co-Administrator). (2) TradeStreet, One Bank of America Plaza, Charlotte, NC 28255 (records relating to its function as Sub-Adviser). (3) Stephens, 111 Center Street, Little Rock, AR 72201 (records relating to its function as Distributor and Co-Administrator). (4) First Data, 101 Federal Street, Boston, MA 02110 (records relating to its function as Transfer Agent). (5) Bank of New York, 90 Washington Street, New York, NY 10286 (records relating to its function as Custodian and Sub-Administrator) ITEM 29. MANAGEMENT SERVICES Not Applicable ITEM 30. UNDERTAKINGS Not Applicable C-5 Signatures ---------- Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this 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 25th day of October, 1999. NATIONS FUNDS TRUST By: /s/ Richard H. Blank, Jr. ------------------------------------- Richard H. Blank, Jr. Secretary and Treasurer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated:
SIGNATURES TITLE DATE * Trustee October 25, 1999 - ------------------------------ (Marco E. Adelfio) * Trustee October 25, 1999 - ------------------------------ (Steven G. Cravath) * Trustee October 25, 1999 - ------------------------------ (Barry I. Pershkow) /s/ Richard H. Blank, Jr. Secretary and Treasurer October 25, 1999 - ------------------------------------- (Richard H. Blank, Jr.) By/s/ Richard H. Blank, Jr. (Richard H. Blank, Jr.) *Attorney-in-Fact October 25, 1999
dc-179700 Nations Funds Trust Exhibit Index Exhibit No. Description - ----------- ----------- EX-99.D1 Form of Investment Advisory Agreement EX-99.D2 Form of Sub-Advisory Agreement EX-99.E Form of Distribution Agreement EX-99.G Form of Custody Agreement EX-99.H1 Form of Co-Administration Agreement EX-99.H2 Form of Sub-Administration Agreement EX-99.H6 Form of Shareholder Servicing Plan EX-99.H7 Form of Shareholder Servicing Plan EX-99.M1 Form of Shareholder Servicing and Distribution Plan EX-99.M2 Form of Distribution Plan--Investor B Shares EX-99.M3 Form of Distribution Plan--Investor C Shares EX-99.O Form of Rule 18f-3 Multi-Class Plan EX-99.P Powers of Attorney dc-175080 EX-99.D1 2 EXHIBIT 99.D1 Exhibit 99.D1 FORM OF INVESTMENT ADVISORY AGREEMENT NATIONS FUNDS TRUST THIS AGREEMENT is made as of [DATE], by and between NATIONS FUNDS TRUST, a Delaware business trust (the "Trust"), and BANC OF AMERICA ADVISORS, INC., a North Carolina corporation (the "Adviser"), on behalf of those series of the Trust now or hereafter identified on Schedule I (each, a "Fund" and collectively, the "Funds"). WHEREAS, the Trust is registered with the Securities and Exchange Commission (the "Commission") as an open-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"); WHEREAS, the Adviser is registered with the Commission as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act"); WHEREAS, the Trust desires that the Adviser manage the investment operations of the Funds and the Adviser desires to manage said operations; and WHEREAS, the Board of Trustees of the Trust (the "Board"), including a majority of the Trustees who are not "interested persons" (as defined herein) of any party to this Agreement, have approved this arrangement; NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is agreed between the parties hereto as follows: 1. APPOINTMENT OF ADVISER. The Trust hereby appoints the Adviser and the Adviser hereby agrees to manage the investment operations of each Fund subject to the terms of this Agreement and subject to the supervision of the Board. The Trust and the Adviser contemplate that certain duties of the Adviser under this Agreement may be delegated to one or more investment sub-adviser(s) (the "Sub-Adviser(s)") pursuant to separate investment sub-advisory agreement(s) (the "Sub-Advisory Agreement(s)"). The Adviser may, in its discretion, provide services under this Agreement through its own employees or through one or more affiliated companies that are qualified to act as investment advisers under applicable law and are under common control of Bank of America Corporation. 2. SERVICES OF ADVISER. The Adviser shall perform, or arrange for the performance of, the management services necessary for the investment operations of each Fund, including but not limited to: (a) Managing the investment and reinvestment of all assets, now or hereafter acquired by each Fund, including determining what securities and other investments are to be purchased or sold for each Fund and executing transactions accordingly; (b) Transmitting trades to each Fund's custodian for settlement in accordance with each Fund's procedures and as may be directed by the Trust; -1- (c) Assisting in the preparation of all shareholder communications, including shareholder reports, and participating in shareholder relations; (d) Making recommendations as to the manner in which voting rights, rights to consent to Fund action and any other rights pertaining to each Fund's portfolio securities shall be exercised; (e) Making recommendations to the Board with respect to Fund investment policies, and carrying out such investment policies as are adopted by the Board; (f) Supplying reports, evaluations, analyses, statistical data and information to the Board or to the Funds' officers and other service providers as the Board may reasonably request from time to time or as may be necessary or appropriate for the operation of the Trust as an open-end investment company or as necessary to comply with Section 3(a) of this Agreement; (g) Maintaining all required books and records with respect to the investment decisions and securities transactions for each Fund; (h) Furnishing any and all other services, subject to review by the Board, that the Adviser from time to time determines to be necessary or useful to perform its obligations under this Agreement or as the Board may reasonably request from time to time. 3. RESPONSIBILITIES OF ADVISER. In carrying out its obligations under this Agreement, the Adviser agrees that it will: (a) Comply with all applicable law, including but not limited to the 1940 Act and the Advisers Act, the rules and regulations of the Commission thereunder, and the conditions of any order affecting the Trust or a Fund issued thereunder; (b) Use the same skill and care in providing such services as it uses in providing services to other fiduciary accounts for which it has investment responsibilities; (c) Not make loans to any person for the purpose of purchasing or carrying Fund shares; (d) Place, or arrange for the placement of, all orders pursuant to its investment determinations for the Funds either directly with the issuer or with any broker or dealer (including any affiliated broker or dealer). In executing portfolio transactions and selecting brokers or dealers, the Adviser will use its best efforts to seek on behalf of each Fund the best overall terms available. In assessing the best overall terms available for any transaction, the Adviser shall consider all factors that it deems relevant, including the -2- breadth of the market in the security, the price of the security, the financial condition and execution capability of the broker or dealer, and the reasonableness of the commission, if any, both for the specific transaction and on a continuing basis. In evaluating the best overall terms available, and in selecting the broker or dealer to execute a particular transaction, the Adviser may also consider whether such broker or dealer furnishes research and other information or services to the Adviser; (e) Adhere to the investment objective, strategies and policies and procedures of the Trust adopted on behalf of each Fund; and (f) Maintain a policy and practice of conducting its investment advisory services hereunder independently of the commercial banking operations of its affiliates. In making investment recommendations for a Fund, the Adviser's investment advisory personnel will not inquire or take into consideration whether the issuers (or related supporting institutions) of securities proposed for purchase or sale for the Fund's account are customers of the commercial departments of its affiliates. In dealing with commercial customers, such commercial departments will not inquire or take into consideration whether securities of those customers are held by the Fund. 4. CONFIDENTIALITY OF INFORMATION. Each party agrees that it will treat confidentially all information provided by the other party regarding such other party's business and operations, including without limitation the investment activities or holdings of a Fund. All confidential information provided by a party hereto shall not be disclosed to any unaffiliated third party without the prior consent of the providing party. The foregoing shall not apply to any information that is public when provided or thereafter becomes public or which is required to be disclosed by any regulatory authority in the lawful and appropriate exercise of its jurisdiction over a party, by any auditor of the parties hereto, by judicial or administrative process or otherwise by applicable law or regulation. 5. DELEGATION OF DUTIES. Subject to the approval of the Board and, if required, the shareholders of the Funds, the Adviser may delegate to one or more Sub-Adviser(s) any or all of its duties hereunder, provided that the Adviser shall continue to supervise and monitor the performance of the duties delegated to the Sub-Adviser(s) and any such delegation shall not relieve the Adviser of its duties and obligations under this Agreement. The Adviser shall be solely responsible for compensating the Sub-Adviser(s) for performing any of the duties delegated to them. The Adviser may request that the Trust pay directly to the Sub-Adviser(s) the portion of the Adviser's compensation that the Adviser is obligated to pay to the Sub-Adviser(s). If the Trust agrees to such request, it will pay such portion to the Sub-Adviser(s) on behalf of the Adviser, thereby reducing the compensation paid to the Adviser by the amount paid directly to the Sub-Adviser(s). However, such an arrangement will not relieve the Adviser of its responsibility for compensating the Sub-Adviser(s). In the event that any Sub-Adviser appointed hereunder is terminated, the Adviser may provide investment advisory services pursuant to this Agreement through its own employees or through one or more affiliated companies that are -3- qualified to act as investment advisers under applicable law and are under common control of Bank of America Corporation or through other Sub-Adviser(s) as approved by the Trust in accordance with applicable law. 6. SERVICES NOT EXCLUSIVE. The services furnished by the Adviser hereunder are deemed not to be exclusive, and the Adviser shall be free to furnish similar services to others so long as its provision of services under this Agreement is not impaired thereby. To the extent that the purchase or sale of securities or other investments of the same issuer may be deemed by the Adviser to be suitable for two or more accounts managed by the Adviser, the available securities or investments may be allocated in a manner believed by the Adviser to be equitable to each account. It is recognized that in some cases this procedure may adversely affect the price paid or received by a Fund or the size of the position obtainable for or disposed of by a Fund. Nothing in this Agreement shall limit or restrict the right of any of the Adviser's partners, officers or employees to engage in any other business or to devote his or her time and attention in part to the management or other aspects of any business, whether of a similar or dissimilar nature, nor limit or restrict the Adviser's right to engage in any other business or to render services of any kind to any other corporation, firm, individual or association. 7. DELIVERY OF DOCUMENTS. The Trust has furnished the Adviser with copies, properly certified or authenticated, of each of the following: (a) the Trust's Certificate of Trust, as filed with the Secretary of State of Delaware, and Declaration of Trust (such Declaration of Trust, as presently in effect and as from time to time amended, is herein called the "Declaration of Trust"); (b) the Trust's Bylaws, if any; (c) the most recent prospectus(es) and statement(s) of additional information relating to each Fund (such prospectus(es) together with the related statement(s) of additional information, as presently in effect and all amendments and supplements thereto, are herein called the "Prospectus"); and (d) any and all applicable policies and procedures approved by the Board. The Trust will promptly furnish the Adviser with copies of any and all amendments of or additions or supplements to the foregoing. 8. BOOKS AND RECORDS. In compliance with the requirements of Rule 31a-3 under the 1940 Act, the Adviser hereby agrees that all records that it maintains for each Fund under this Agreement are the property of the Trust and further agrees to surrender promptly to the Trust any of such records upon request. The Adviser further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records required to be maintained by Rule 31a-1 under the 1940 Act. -4- 9. EXPENSES OF THE FUNDS. Except to the extent expressly assumed by the Adviser and except to any extent required by law to be paid or reimbursed by the Adviser, the Adviser shall have no duty to pay any ordinary operating expenses incurred in the organization and operation of the Funds. Ordinary operating expenses include, but are not limited to, brokerage commissions and other transaction charges, taxes, legal, auditing, printing, or governmental fees, other service providers' fees and expenses, expenses of issue, sale, redemption and repurchase of shares, expenses of registering and qualifying shares for sale, expenses relating to Board and shareholder meetings, the cost of preparing and distributing reports and notices to shareholders and interest payments and other fees or charges associated with any credit facilities established by or on behalf of the Funds. 10. COMPENSATION. For the services provided to each Fund and the expenses assumed pursuant to this Agreement, the Trust will pay the Adviser and the Adviser will accept as full compensation therefor a fee determined in accordance with Schedule I attached hereto; provided, however, that the compensation paid to the Adviser shall be reduced by any amount paid by the Trust directly to the Sub-Advisor(s) pursuant to Section 5 of this Agreement. In addition, BAAI or its affiliated persons may receive compensation or reimbursement of recordkeeping, bookkeeping, accounting, administrative and transactional fees or charges incurred in connection with any credit facilities established by or on behalf of the Funds. The fees or charges attributable to each Fund shall be a separate charge to such Fund and shall be the several (and not joint or joint and several) obligation of each such Fund. The Trust and the Adviser may, from time to time, agree to reduce, limit or waive the amounts payable hereunder with respect to one or more Funds for such period or periods they deem advisable. 11. LIABILITY OF ADVISER. The Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the performance of this Agreement, except a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services or a loss resulting from willful misfeasance, bad faith or negligence on the part of the Adviser or any of its officers, directors, employees or agents, in the performance of its duties, or from reckless disregard by it of any of its obligations and duties under this Agreement. 12. TERM AND APPROVAL. This Agreement will become effective as of the date set forth herein above, and shall continue in effect until the second anniversary of its effective date. This Agreement will become effective with respect to each additional Fund as of the date set forth on Schedule I when each such Fund is added thereto. The Agreement shall continue in effect for a Fund after the second anniversary of the effective date for successive annual periods ending on each anniversary of such date, provided that the continuation of the Agreement is specifically approved for the Fund at least annually: (a)(i) by the Board or (ii) by the vote of "a majority of the outstanding voting securities" of the Fund (as defined in Section 2(a)(42) of the 1940 Act); and (b) by the affirmative vote of a majority of the Trustees of the Trust who are not parties to this Agreement or "interested persons" (as defined in the -5- 1940 Act) of a party to this Agreement (other than as Trustees of the Trust), by votes cast in person at a meeting specifically called for such purpose. 13. TERMINATION. This Agreement may be terminated without payment of any penalty at any time by: (a) the Trust with respect to a Fund, by vote of the Board or by vote of a majority of a Fund's outstanding voting securities, upon sixty (60) days' written notice to the Adviser; or (b) the Adviser with respect to a Fund, upon sixty (60) days' written notice to the Trust. Any party entitled to notice may waive the notice provided for herein. This Agreement shall automatically terminate in the event of its assignment, unless an order is issued by the Commission conditionally or unconditionally exempting such assignment from the provisions of Section 15(a) of the 1940 Act, in which event this Agreement shall remain in full force and effect subject to the terms of such order. For the purposes of this paragraph, the definitions contained in Section 2(a) of the 1940 Act and the applicable rules under the 1940 Act shall apply. 14. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be changed, waived, discharged or terminated orally, except by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. 15. NOTICES. Any notices under this Agreement shall be in writing, addressed and delivered or mailed postage paid to such address as may be designated for the receipt of such notice. Until further notice, it is agreed that the address of the Trust shall be c/o Stephens Inc., 111 Center Street, Little Rock, Arkansas 72201, Attention: Secretary, and that of the Adviser shall be One Bank of America Plaza, 33rd Floor, 101 South Tryon Street, Charlotte, North Carolina 28255, Attention: President. 16. RELEASE. The names "Nations Funds Trust" and "Trustees of Nations Funds Trust" refer respectively to the Trust created by the Declaration of Trust and the Trustees as Trustees but not individually or personally. All parties hereto acknowledge and agree that any and all liabilities of the Trust arising, directly or indirectly, under this Agreement will be satisfied solely out of the assets of the Trust and that no Trustee, officer or shareholder shall be personally liable for any such liabilities. All persons dealing with any Fund of the Trust must look solely to the property belonging to such Fund for the enforcement of any claims against the Trust. 17. MISCELLANEOUS. This Agreement contains the entire understanding of the parties hereto. Each provision of this Agreement is intended to be severable. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. -6- 18. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, Delaware law and the federal securities laws, including the 1940 Act and the Advisers Act. 19. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original. 20. USE OF THE NAME "NATIONS FUNDS". The name "Nations Funds" is the property of Bank of America Corporation and/or its affiliates and its use by the Trust is governed by a separate License Agreement. -7- IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their officers designated below as of the day and year first above written. NATIONS FUNDS TRUST on behalf of the Funds By:_________________________________ A. Max Walker President and Chairman of the Board of Trustees BANC OF AMERICA ADVISORS, INC. By:_________________________________ Robert H. Gordon President -8- SCHEDULE I The Trust shall pay the Adviser as, full compensation for services provided and expenses assumed hereunder, an advisory fee for each Fund, computed daily and payable monthly at the annual rates listed below as a percentage of the average daily net assets of the Fund: RATE OF FUND COMPENSATION EFFECTIVE DATE ---- ------------ -------------- Fund Name -.--% Approved: -9- EX-99.D2 3 EXHIBIT 99.D2 Exhibit 99.D2 FORM OF INVESTMENT SUB-ADVISORY AGREEMENT NATIONS FUNDS TRUST THIS AGREEMENT is made as of [DATE], by and between BANC OF AMERICA ADVISORS, INC., a North Carolina corporation (the "Adviser"), [SUB-ADVISER], a [STATE] corporation (the "Sub-Adviser"), and NATIONS FUNDS TRUST, a Delaware business trust (the "Trust"), on behalf of those series of the Trust now or hereafter identified on Schedule I (each a "Fund" and collectively, the "Funds"). WHEREAS, the Trust is registered with the Securities and Exchange Commission (the "Commission") as an open-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"); WHEREAS, the Adviser is registered with the Commission as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act"); WHEREAS, the Sub-Adviser is also registered with the Commission as an investment adviser under the Advisers Act; WHEREAS, the Adviser and the Trust have entered into an investment advisory agreement (the "Investment Advisory Agreement"), pursuant to which the Adviser manages the investment operations of each Fund and may delegate certain duties of the Adviser to one or more investment sub-adviser(s); and WHEREAS, the Adviser, with the approval of the Board of Trustees of the Trust (the "Board"), including a majority of the Trustees who are not "interested persons" (defined herein) of any party to this Agreement, desires to delegate to the Sub-Adviser the duty to manage the portfolio investments of the Funds; NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is agreed between the parties hereto as follows: 1. APPOINTMENT OF SUB-ADVISER. The Adviser hereby appoints the Sub-Adviser and the Sub-Adviser hereby agrees to manage the portfolio investments of each Fund subject to the terms of this Agreement and subject to the supervision of the Adviser and the Board. 2. SERVICES OF SUB-ADVISER. The Sub-Adviser shall perform all services necessary for the management of the portfolio investments of each Fund, including but not limited to: (a) Managing the investment and reinvestment of all assets, now or hereafter acquired by each Fund, including determining what securities and other investments are to be purchased or sold for each Fund and executing transactions accordingly; -1- (b) Transmitting trades to each Fund's custodian for settlement in accordance with each Fund's procedures and as may be directed by the Trust; (c) Assisting in the preparation of all shareholder communications, including shareholder reports, and participating in shareholder relations; (d) Making recommendations as to the manner in which voting rights, rights to consent to Fund action and any other rights pertaining to each Fund's portfolio securities shall be exercised; (e) Making recommendations to the Adviser and the Board with respect to Fund investment policies and procedures, and carrying out such investment policies and procedures as are approved by the Board or by the Adviser under authority delegated by the Board to the Adviser; (f) Supplying reports, evaluations, analyses, statistical data and information to the Adviser, the Board or to the Funds' officers and other service providers as the Adviser or the Board may reasonably request from time to time or as may be necessary or appropriate for the operation of the Trust as an open-end investment company or as necessary to comply with Section 3(a) of this Agreement; (g) Maintaining all required books and records with respect to the investment decisions and securities transactions for each Fund; (h) Furnishing any and all other services, subject to review by the Board, that the Adviser from time to time determines to be necessary or useful to perform its obligations under the Investment Advisory Agreement or as the Board may reasonably request from time to time. 3. RESPONSIBILITIES OF SUB-ADVISER. In carrying out its obligations under this Agreement, the Sub-Adviser agrees that it will: (a) Comply with all applicable law, including but not limited to the 1940 Act and the Advisers Act, the rules and regulations of the Commission thereunder, and the conditions of any order affecting the Trust or a Fund issued thereunder; (b) Use the same skill and care in providing such services as it uses in providing services to other fiduciary accounts for which it has investment responsibilities; (c) Not make loans to any person for the purpose of purchasing or carrying Fund shares; (d) Place, or arrange for the placement of, all orders pursuant to its investment determinations for the Funds either directly with the issuer or with any -2- broker or dealer (including any affiliated broker or dealer). In executing portfolio transactions and selecting brokers or dealers, the Sub-Adviser will use its best efforts to seek on behalf of each Fund the best overall terms available. In assessing the best overall terms available for any transaction, the Sub-Adviser shall consider all factors that it deems relevant, including the breadth of the market in the security, the price of the security, the financial condition and execution capability of the broker or dealer, and the reasonableness of the commission, if any, both for the specific transaction and on a continuing basis. In evaluating the best overall terms available, and in selecting the broker or dealer to execute a particular transaction, the Sub-Adviser may also consider whether such broker or dealer furnishes research and other information or services to the Sub-Adviser; and (e) Adhere to the investment objective, strategies and policies and procedures of the Trust adopted on behalf of each Fund. 4. CONFIDENTIALITY OF INFORMATION. Each party agrees that it will treat confidentially all information provided by another party regarding such other party's business and operations, including without limitation the investment activities or holdings of a Fund. All confidential information provided by a party hereto shall not be disclosed to any unaffiliated third party without the prior consent of the providing party. The foregoing shall not apply to any information that is public when provided or thereafter becomes public or which is required to be disclosed by any regulatory authority in the lawful and appropriate exercise of its jurisdiction over a party, by any auditor of the parties hereto, by judicial or administrative process or otherwise by applicable law or regulation. 5. SERVICES NOT EXCLUSIVE. The services furnished by the Sub-Adviser hereunder are deemed not to be exclusive, and the Sub-Adviser shall be free to furnish similar services to others so long as its provision of services under this Agreement is not impaired thereby. To the extent that the purchase or sale of securities or other investments of the same issuer may be deemed by the Sub-Adviser to be suitable for two or more accounts managed by the Sub-Adviser, the available securities or investments may be allocated in a manner believed by the Sub-Adviser to be equitable to each account. It is recognized that in some cases this procedure may adversely affect the price paid or received by a Fund or the size of the position obtainable for or disposed of by a Fund. 6. DELIVERY OF DOCUMENTS. The Trust will provide the Sub-Adviser with copies, properly certified or authenticated, of each of the following: (a) the Trust's Certificate of Trust, as filed with the Secretary of State of Delaware, and Declaration of Trust (such Declaration of Trust, as presently in effect and as from time to time amended, is herein called the "Declaration of Trust"); (b) the Trust's Bylaws, if any; -3- (c) the most recent prospectus(es) and statement(s) of additional information relating to each Fund (such prospectus(es) together with the related statement(s) of additional information, as presently in effect and all amendments and supplements thereto, are herein called the "Prospectus"); and (d) any and all applicable policies and procedures approved by the Board. The Trust will promptly furnish the Sub-Adviser with copies of any and all amendments of or additions or supplements to the foregoing. 7. BOOKS AND RECORDS. In compliance with the requirements of Rule 31a-3 under the 1940 Act, the Sub-Adviser hereby agrees that all records that it maintains for each Fund under this Agreement are the property of the Trust and further agrees to surrender promptly to the Trust or the Adviser any of such records upon request. The Sub-Adviser further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records required to be maintained by Rule 31a-1 under the 1940 Act. 8. EXPENSES OF THE FUNDS. Except to the extent expressly assumed by the Sub-Adviser and except to any extent required by law to be paid or reimbursed by the Sub-Adviser, the Sub-Adviser shall have no duty to pay any ordinary operating expenses incurred in the organization and operation of the Funds. Ordinary operating expenses include, but are not limited to, brokerage commissions and other transaction charges, taxes, legal, auditing, printing, or governmental fees, other Fund service providers' fees and expenses, expenses of issue, sale, redemption and repurchase of shares, expenses of registering and qualifying shares for sale, expenses relating to Board and shareholder meetings, and the cost of preparing and distributing reports and notices to shareholders. The Sub-Adviser shall pay all other expenses incurred by it in connection with its services under this Agreement. 9. COMPENSATION. Except as otherwise provided herein, for the services provided to each Fund and the expenses assumed pursuant to this Agreement, the Adviser will pay the Sub-Adviser and the Sub-Adviser will accept as full compensation therefor a fee determined in accordance with Schedule I attached hereto. It is understood that the Adviser shall be solely responsible for compensating the Sub-Adviser for performing any of the duties delegated to the Sub-Adviser and the Sub-Adviser agrees that it shall have no claim against the Trust or any Fund with respect to compensation under this Agreement. To the extent that the advisory fee that the Trust would be obligated to pay to the Adviser with respect to a Fund pursuant to the Investment Advisory Agreement is reduced or reimbursed, the fee that the Sub-Adviser would otherwise receive pursuant to this Agreement shall be reduced or reimbursed proportionately. 10. LIABILITY OF SUB-ADVISER. The Sub-Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Adviser or the Trust in connection with the performance of its duties under this Agreement, except a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services, from willful misfeasance, bad faith or negligence on the part of the Sub-Adviser or any of its officers, directors, employees or agents, in connection with the performance of their duties under this Agreement, from reckless -4- disregard by it or its officers, directors, employees or agents of any of their obligations and duties under this Agreement, or from any violations of securities laws, rules, regulations, statutes and codes, whether federal or state, by the Sub-Adviser or any of its officers, directors, employees or agents. 11. INDEMNIFICATION. The Sub-Adviser shall indemnify and hold harmless the Funds and the Adviser from and against any and all direct or indirect claims, losses, liabilities or damages (including reasonable attorney's fees and other related expenses) resulting from a breach of fiduciary duty with respect to the receipt of compensation for services, from willful misfeasance, bad faith or negligence on the part of the Sub-Adviser or any of its officers, directors, employees or agents, in connection with the performance of their duties under this Agreement, from reckless disregard by it or its officers, directors, employees or agents of any of their obligations and duties under this Agreement, or resulting from any violations of securities laws, rules, regulations, statutes and codes, whether federal or state, by the Sub-Adviser or any of its officers, directors, employees or agents; provided, however, that the Sub-Adviser shall not be required to indemnify or otherwise hold the Funds or the Adviser harmless under this Section 11 where the claim against, or the loss, liability or damage experienced by the Funds or the Adviser, is caused by or is otherwise directly related to the Funds' or the Adviser's own willful misfeasance, bad faith or negligence, or to the reckless disregard by the Funds or the Adviser of their duties under this Agreement. 12. TERM AND APPROVAL. This Agreement will become effective as of the date set forth herein above, and shall continue in effect until the second anniversary of its effective date. This Agreement will become effective with respect to each additional Fund as of the date set forth on Schedule I when each such Fund is added thereto. The Agreement shall continue in effect for a Fund after the second anniversary of the effective date for successive annual periods ending on each anniversary of such date, provided that the continuation of the Agreement is specifically approved for the Fund at least annually: (a)(i) by the Board or (ii) by the vote of "a majority of the outstanding voting securities" of the Fund (as defined in Section 2(a)(42) of the 1940 Act); and (b) by the affirmative vote of a majority of the Trustees of the Trust who are not parties to this Agreement or "interested persons" (as defined in the 1940 Act) of a party to this Agreement (other than as Trustees of the Trust), by votes cast in person at a meeting specifically called for such purpose. 13. TERMINATION. This Agreement may be terminated without payment of any penalty at any time by: (a) the Trust with respect to a Fund, by vote of the Board or by vote of a majority of a Fund's outstanding voting securities, upon sixty (60) days' written notice to the other parties to this Agreement; or -5- (b) the Adviser or the Sub-Adviser with respect to a Fund, upon sixty (60) days' written notice to the other parties to this Agreement. Any party entitled to notice may waive the notice provided for herein. This Agreement shall automatically terminate in the event of its assignment, unless an order is issued by the Commission conditionally or unconditionally exempting such assignment from the provisions of Section 15(a) of the 1940 Act, in which event this Agreement shall remain in full force and effect subject to the terms of such order. For the purposes of this paragraph, the definitions contained in Section 2(a) of the 1940 Act and the applicable rules under the 1940 Act shall apply. 14. CODE OF ETHICS. The Sub-Adviser represents that it has adopted a written code of ethics complying with the requirements of Rule 17j-1 under the 1940 Act and will provide the Adviser or the Trust with a copy of such code, any amendments or supplements thereto and its policies and/or procedures implemented to ensure compliance therewith. 15. INSURANCE. The Sub-Adviser shall maintain for the term of this Agreement and provide evidence thereof to the Trust or the Adviser a blanket bond and professional liability (error and omissions) insurance in an amount reasonably acceptable to Adviser. 16. REPRESENTATIONS AND WARRANTIES. Each party to this Agreement represents and warrants that the execution, delivery and performance of its obligations under this Agreement are within its powers, have been duly authorized by all necessary actions and that this Agreement constitutes a legal, valid and binding obligation enforceable against it in accordance with its terms. The Sub-Adviser further represents and warrants that it is duly registered as an investment adviser under the Advisers Act. 17. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be changed, waived, discharged or terminated orally, except by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. 18. NOTICES. Any notices under this Agreement shall be in writing, addressed and delivered or mailed postage paid to such address as may be designated for the receipt of such notice. Until further notice, it is agreed that the address of the Trust shall be c/o Stephens Inc., 111 Center Street, Little Rock, Arkansas 72201, Attention: Secretary, that of the Adviser shall be One Bank of America Plaza, 33rd Floor, 101 South Tryon Street, Charlotte, North Carolina 28255, Attention: President and that of the Sub-Adviser shall be _________________________. The Sub-Adviser agrees to promptly notify the Adviser and the Trust in writing of the occurrence of any event which could have a material impact on the performance of its duties under this Agreement, including but not limited to (i) the occurrence of any event which could disqualify the Sub-Adviser from serving as an investment adviser pursuant to Section 9 of the 1940 Act; (ii) any material change in the Sub-Adviser's business activities; (iii) any event that would constitute a change in control of the Sub-Adviser; (iv) any change in the portfolio manager or portfolio management team of a Fund; (v) the existence of any pending or threatened audit, investigation, examination, complaint or other inquiry (other than routine audits or regulatory examinations or inspections) relating to any Fund; and (vi) any material violation of the Sub-Adviser's code of ethics. -6- 19. RELEASE. The names "Nations Funds Trust" and "Trustees of Nations Funds Trust" refer respectively to the Trust created by the Declaration of Trust and the Trustees as Trustees but not individually or personally. All parties hereto acknowledge and agree that any and all liabilities of the Trust arising, directly or indirectly, under this Agreement will be satisfied solely out of the assets of the Trust and that no Trustee, officer or shareholder shall be personally liable for any such liabilities. All persons dealing with any Fund of the Trust must look solely to the property belonging to such Fund for the enforcement of any claims against the Trust. 20. MISCELLANEOUS. This Agreement contains the entire understanding of the parties hereto. Each provision of this Agreement is intended to be severable. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. 21. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, Delaware law and the federal securities laws, including the 1940 Act and the Advisers Act. 22. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original. 23. USE OF THE NAME "NATIONS FUNDS". The Sub-Adviser acknowledges and agrees that the name "Nations Funds" is the property of Bank of America Corporation and/or its affiliates and that the Sub-Adviser will not use such name or the name of the Adviser, the Trust or any Fund except in accordance with such policies and procedures as may be mutually agreed to in writing. -7- IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their officers designated below as of the day and year first above written. NATIONS FUNDS TRUST on behalf of the Funds By:_________________________________ A. Max Walker President and Chairman of the Board of Trustees BANC OF AMERICA ADVISORS, INC. By:_________________________________ Robert H. Gordon President [SUB-ADVISER NAME] By:_________________________________ [NAME] [TITLE] -8- SCHEDULE I The Adviser shall pay the Sub-Adviser as, full compensation for services provided and expenses assumed hereunder, a sub-advisory fee for each Fund, computed daily and payable monthly at the annual rates listed below as a percentage of the average daily net assets of the Fund: RATE OF FUND COMPENSATION EFFECTIVE DATE ---- ------------ -------------- Fund Name -.--% Approved: -9- EX-99.E 4 EXHIBIT 99.E Exhibit 99.E FORM OF DISTRIBUTION AGREEMENT NATIONS FUNDS TRUST Stephens Inc. 111 Center Street Little Rock, Arkansas 72201 Gentlemen: This is to confirm that, in consideration of the agreements hereinafter contained, the undersigned, Nations Funds Trust (the "Trust"), a Delaware business trust, has agreed that Stephens Inc. (the "Distributor") shall be, for the period of this Agreement, the exclusive distributor of the units of beneficial interest in all classes of shares ("Shares") of the investment portfolios of the Trust listed on Schedule I (individually, a "Fund" and collectively the "Funds"). Absent written notification to the contrary by either the Trust or the Distributor, each new investment portfolio established in the future shall automatically become a "Fund" for all purposes hereunder and shares of each new class established in the future shall automatically become "Shares" for all purposes hereunder as if set forth on Schedule I. 1. Services as Distributor. 1.1. The Distributor will act as agent for the distribution of Shares in accordance with the instructions of the Trust's Board of Trustees and the Trust's registration statement and prospectus then in effect under the Securities Act of 1933, as amended, and will transmit promptly any orders received by it for the purchase or redemption of Shares to the Trust or its transfer agent. 1.2. The Distributor agrees to use appropriate efforts to solicit orders for the sale of Shares and will undertake such advertising and promotion as it believes appropriate in connection with such solicitation. The Trust understands that the Distributor is and may in the future be the distributor of shares of other investment Company portfolios ("Portfolios") including Portfolios having investment objectives similar to those of the Funds. The Trust further understands that existing and future investors in the Funds may invest in shares of such other Portfolios. The Trust agrees that the Distributor's duties to such Portfolios shall not be deemed in conflict with its duties to the Trust under this paragraph 1.2. 1.3. The Distributor shall, at its own expense, finance such activities as it deems reasonable and which are primarily intended to result in the sale of Shares, including, but not limited to, advertising, compensation of underwriters, dealers and sales personnel, the printing and mailing of prospectuses to other than current shareholders, and the printing and mailing of sales literature. The Distributor shall be responsible for reviewing and providing advice and counsel on all sales literature (e.g., advertisements, brochures and shareholder communications) with respect to each of the Funds. In addition, the Distributor will provide one or more persons, during normal business hours, to respond to telephone questions with respect to the Funds. 1.4. All activities by the Distributor and its agents and employees as distributor of Shares shall comply with all applicable laws, rules and regulations, including, without limitation, all rules and regulations made or adopted pursuant to the Investment Company Act of 1940 ("1940 Act") by the Securities and Exchange Commission (the "SEC") or any securities association registered under the Securities Exchange Act of 1934. 1.5. Whenever in their judgment such action is warranted by unusual market, economic or political conditions, or by other circumstances of any kind, the Trust's officers may decline to accept any orders for, or make any sales of Shares until such time as those officers deem it advisable to accept such orders and to make such sales. 1.6. The Trust agrees at its own expense to execute any and all documents and to furnish any and all information and otherwise to take all actions that may be reasonably necessary in connection with the registration or qualification of Shares for sale in such states as the Distributor may designate to the Trust and the Trust may 2 approve, and the Trust shall pay all fees and other expenses incurred in connection with such registration or qualification. 1.7. The Trust shall furnish from time to time, for use in connection with the sale of Shares, such information with respect to the Funds and Shares as the Distributor may reasonably request; and the Trust warrants that the statements contained in any such information shall fairly show or represent what they purport to show or represent. The Trust shall also furnish the Distributor upon request with: (a) audited annual and unaudited semi-annual statements of the Trust's books and accounts with respect to each Fund, and, (b) from time to time such additional information regarding the Funds' financial condition as the Distribution may reasonably request. 1.8. The Distributor may be reimbursed for all or a portion of the expenses described above to the extent permitted by a distribution plan adopted by the Trust on behalf of a Fund pursuant to Rule 12b-1 under the 1940 Act. No provision of this Agreement shall be deemed to prohibit any payments by a Fund to the Distributor or by a Fund or the Distributor to investment dealers, banks or other financial institutions through whom shares of the Fund are sold where such payments are made under a distribution plan adopted by the Trust on behalf of such Fund pursuant to Rule 12b-1 under the 1940 Act. In addition, the Trust shall pay to the Distributor the proceeds from any contingent deferred sales charge imposed on the redemption of the shares as specified in the Fund's Registration Statement. 1.9. The Distributor will execute and deliver agreements with broker/dealers, financial institutions and other industry professionals based on the forms attached hereto or based on the additional forms of agreement approved from time to time by the Trust's Board of Trustees with respect to the various classes of shares of the Funds, including but not limited to forms of sales support agreements and shareholder servicing agreements approved in connection with a distribution and/or servicing plan approved in accordance with Rule 12b-1 under the 1940 Act. 3 2. Representations; Indemnification. --------------------------------- 2.1. The Trust represents to the Distributor that all registration statements and prospectuses filed by the Trust with the SEC under the Securities Act of 1933, as amended ("Act"), with respect to Shares have been prepared in conformity with the requirements of the said Act and rules and regulations of the SEC thereunder. As used in this Agreement, the terms "registration statement" and "prospectus" shall mean any registration statement and then current prospectus (together with any related then current statement of additional information) filed with the SEC with respect to Shares, and any amendments and supplements thereto which at any time shall have been filed therewith. The Trust represents and warrants to the Distributor that any registration statement and prospectus, when such registration statement becomes effective, will contain all statements required to be stated therein in conformity with the said Act and the rules and regulations of the SEC; that all statements of fact contained in any such registration statement and prospectus will be true and correct when such registration statement and prospectus become effective; and that neither any registration statement nor any prospectus when any registration statement becomes effective will include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading to a purchaser of Shares. The Trust may, but shall not be obligated to, propose from time to time such amendment or amendments to any registration statement and such supplement or supplements to any prospectus which in light of future developments, may, in the opinion of the Trust's counsel, be necessary or advisable. The Trust shall promptly notify the Distributor of any advice given to it by the Trust's counsel regarding the necessity or advisability so to amend or supplement such registration statement or prospectus. If the Trust shall not propose such amendment or amendments and/or supplement or supplements within fifteen days after receipt by the Trust of a written request from the Distributor to do so, the Distributor may, at its option, terminate this Agreement. The Trust shall not file any amendment to any registration statement or supplement to any prospectus without giving the Distributor reasonable notice thereof in advance; provided, however, that nothing contained in this Agreement shall in any way limit the Trust's right to file at any time such amendments to any registration statement and/or supplements to 4 any prospectus, of whatever character, as the Trust may deem advisable, such right being in all respects absolute and unconditional. 2.2. The Trust authorizes the Distributor and dealers to use any prospectus in the form furnished from time to time in connection with the sale of Shares and represented by the Trust as being the then current form of prospectus. The Trust agrees to indemnify, defend and hold the Distributor, its several officers and directors, and any person who controls the Distributor within the meaning of Section 15 of the Act free and harmless from and against any and all claims, demands, liabilities and expenses (including the cost of investigating or defending such claims, demands or liabilities and any counsel fees incurred in connection therewith) which the Distributor, its officers and directors, or any such controlling person, may incur under the Act or under common law or otherwise, arising out of or based upon any untrue statement, or alleged untrue statement, of a material fact contained in any registration statement or any prospectus or arising out of or based upon any omission, or alleged omission, to state a material fact required to be stated in any registration statement or prospectus or necessary to make any statement in such documents not misleading; provided, however, that the Trust's agreement to indemnify the Distributor, its officers or directors, and any such controlling person shall not be deemed to cover any claims, demands, liabilities or expenses arising out of any untrue statement or alleged untrue statement or omission or alleged omission made in any registration statement or prospectus or in any financial or other statements in reliance upon and in conformity with any information furnished to the Trust by the Distributor or any affiliate thereof and used in the preparation thereof; and further provided that the Trust's agreement to indemnify the Distributor and the Trust's representations and warranties herein set forth shall not be deemed to cover any liability to the Trust or its shareholders to which the Distributor would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties, or by reason of the Distributor's reckless disregard of its obligations and duties under this Agreement. The Trust's agreement to indemnify the Distributor, its officers and directors, and any such controlling person, as aforesaid, is expressly conditioned upon the Trust's being notified of any action brought against the Distributor, its officers or directors, or any such controlling person, such notification to be given by letter or by 5 telegram addressed to the Trust at its principal office and sent to the Trust by the person against whom such action is brought, within a reasonable period of time after the summons or other first legal process shall have been served. The failure to so notify the Trust of any such action shall not relieve the Trust from any liability which the Trust may have to the person against whom such action is brought by reason of any such untrue, or allegedly untrue, statement or omission, or alleged omission, otherwise than on account of the Trust's indemnity agreement contained in this paragraph 2.2. The Trust will be entitled to assume the defense of any suit brought to enforce any such claim, demand or liability, but, in such case, such defense shall be conducted by counsel of good standing chosen by the Trust and approved by the Distributor, which approval shall not unreasonably be withheld. In the event the Trust elects to assume the defense of any such suit and retain counsel of good standing approved by the Distributor, the defendant or defendants in such suit shall bear the fees and expenses of any additional counsel retained by any of them; but in case the Trust does not elect to assume the defense of any such suit, or in case the Distributor reasonably does not approve of counsel chosen by the Trust, the Trust will reimburse the Distributor, its officers and directors, or the controlling person or persons named as defendant or defendants in such suit, for the fees and expenses of any counsel retained by the Distributor or them. The Trust's indemnification agreement contained in this paragraph 2.2 and the Trust's representations and warranties in this Agreement shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Distributor, its officers and directors, or any controlling person, and shall survive the delivery of any Shares. This agreement of indemnity will inure exclusively to the Distributor's benefit, to the benefit of its several officers and directors, and their respective estates, and to the benefit of the controlling persons and their successors. The Trust agrees promptly to notify the Distributor of the commencement of any litigation or proceedings against the Trust or any of its officers or directors in connection with the issue and sale of any Shares. 2.3. The Distributor agrees to indemnify, defend and hold the Trust, its several officers and trustees, and any person who controls the Trust within the meaning of Section 15 of the Act free and harmless from and against any and all claims, 6 demands, liabilities and expenses (including the costs of investigation or defending such claims, demands or liabilities and any counsel fees incurred in connection therewith) which the Trust, its officers or trustees or any such controlling person, may incur under the Act or under common law or otherwise, but only to the extent that such liability or expense incurred by the Trust, its officers or trustees, or such controlling person resulting from such claims or demands, shall arise out of or be based upon any untrue, or alleged untrue, statement of a material fact contained in information furnished by the Distributor or any affiliate thereof to the Trust or its counsel and used in the Trust's registration statement or corresponding statements made in the prospectus, or shall arise out of or be based upon any omission, or alleged omission, to state a material fact in connection with such information furnished by the Distributor or any affiliate thereof to the Trust or its counsel required to be stated in such answers or necessary to make such information not misleading. The Distributor's agreement to indemnify the Trust, its officers and directors, and any such controlling person, as aforesaid, is expressly conditioned upon the Distributor's being notified of any action brought against the Trust, its officers or directors, or any such controlling person, such notification to be given by letter or telegram addressed to the Distributor at its principal office in Little Rock, Arkansas and sent to the Distributor by the person against whom such action is brought, within a reasonable period of time after the summons or other first legal process shall have been served. The Distributor shall have the right to control the defense of such action, with counsel of its own choosing, satisfactory to the Trust, if such action is based solely upon such alleged misstatement or omission on the Distributor's part or any affiliate thereof, and in any other event the Trust, its officers or directors or such controlling person shall each have the right to participate in the defense or preparation of the defense of any such action. The failure so to notify the Distributor of any such action shall not relieve the Distributor or any affiliate thereof from any liability which the Distributor or any affiliate thereof may have to the Trust, its officers or directors, or to such controlling person by reason of any such untrue or alleged untrue statement, or omission or alleged omission, otherwise than on account of the Distributor's indemnity agreement contained in this paragraph 2.3. 2.4. No Shares shall be offered by either the Distributor or the Trust under any of the provisions of this Agreement and no orders for the purchase or sale of 7 Shares hereunder shall be accepted by the Trust if and so long as the effectiveness of the registration statement then in effect or any necessary amendments thereto shall be suspended under any of the provisions of the Act, or if and so long as a current prospectus, as required by Section 10(b) of said Act, as amended, is not on file with the SEC; provided, however, that nothing contained in this paragraph 2.4 shall in any way restrict or have any application to or bearing upon the Trust's obligation to repurchase Shares from any shareholder in accordance with the provisions of the Trust's prospectus or Articles of Incorporation. 2.5. The Trust agrees to advise the Distributor as soon as reasonably practical: (a) of any request by the SEC for amendments to the registration statement or prospectus then in effect; (b) of the issuance by the SEC of any stop order suspending the effectiveness of the registration statement or prospectus then in effect or of the initiation of any proceeding for that purpose; (c) of the happening of any event that makes untrue any statement of a material fact made in the registration statement or prospectus then in effect or which requires the making of a change in such registration statement or prospectus in order to make the statements therein not misleading; (d) of all actions of the SEC with respect to any amendment to any registration statement or prospectus which may from time to time be filed with the SEC; and (e) if a current prospectus is not on file with the SEC. For purposes of this section, informal requests by or acts of the Staff of the SEC shall not be deemed actions of or requests by the SEC. 8 3. Confidentiality. ---------------- The Distributor agrees on behalf of itself and its employees to treat confidentially and as proprietary information of the Trust all records and other information relative to the Funds and/or the Trust and its prior, present or potential shareholders, and not to use such records and information for any purpose other than performance of its responsibilities and duties hereunder, except after prior notification to and approval in writing by the Trust, which approval shall not be unreasonably withheld and may not be withheld where the Distributor may be exposed to civil or criminal contempt proceedings for failure to comply, when requested to divulge such information by duly constituted authorities, or when so requested by the Trust. 4. Limitations of Liability. ------------------------- 4.1. Except as provided in paragraph 2.3, the Distributor shall not be liable for any error of judgment or mistake or law or for any loss suffered by the Trust or any Fund in connection with matters to which this agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations and duties under this agreement. 4.2. The names "Nations Fund Trust" and "Trustees of Nations Fund Trust" refer respectively to the Trust created and the Trustees, as trustees but not individually or personally, acting from time to time under a Declaration of Trust dated May 6, 1985, which is hereby referred to and a copy of which is on file at the office of the state Secretary of the Commonwealth of Massachusetts and at the principal office of the Trust. The obligations of "Nations Fund Trust" entered into the name or on behalf thereof by any of the Trustees, representatives or agents are made not individually, but in such capacities, and are not binding upon any of the Trustees, Shareholders, or representatives of the Trust personally, but bind only the Trust Property, and all persons dealing with any class of Shares of the Trust must look solely to the Trust Property belonging to such class for the enforcement of any claims against the Trust. 9 5. Term. ----- This agreement shall become effective on the date of its execution and, unless sooner terminated as provided herein, shall continue thereafter with respect to each Fund for successive annual periods, provided such continuance is specifically approved at least annually by (i) the Trust's Board of Trustees or (ii) by a vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the Fund, provided that in either event the continuance is also approved by the majority of the Trust's Trustees who are not parties to this agreement or interested persons (as defined in the 1940 Act) of any such party, by vote cast in person at a meeting called for the purpose of voting on such approval. This agreement is not assignable and is terminable with respect to a Fund, without penalty, on not less than sixty days' notice, by the Trust's Board of Trustees, by vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of such Fund, or by the Distributor. This agreement will also terminate automatically in the event of its assignment (as defined in the 1940 Act). 6. Miscellaneous. -------------- 6.1. No provision of this Agreement may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which an enforcement of the change, waiver, discharge or termination is sought. 6.2. This agreement shall be governed by the laws of the State of Arkansas. 10 Please confirm that the foregoing is in accordance with your understanding by indicating your acceptance hereof at the place indicated below, whereupon it shall become a binding agreement between us. Yours very truly, NATIONS FUNDS TRUST By:_________________________________ Name: Richard H. Blank, Jr. Title: Secretary Accepted: STEPHENS INC. By:___________________________ Name: Title: Dated: 11 SCHEDULE I NATIONS FUNDS TRUST: 1. Nations High Yield Fund 2. Nations MidCap Index 3. Nations Kansas Intermediate Municipal Bond Fund EX-99.G 5 EXHIBIT 99.G Exhibit 99.G FORM OF CUSTODY AGREEMENT THIS AGREEMENT is made as of the __ day of ___, 2000 by and between The Bank of New York, a New York corporation authorized to do a banking business ("Custodian"), and Nations Funds Trust, a Delaware business trust (the "Trust"). W I T N E S S E T H -------------------- WHEREAS, the Trust is a registered open-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Trust desires to retain Custodian to serve as custodian for the Trust, on behalf of its portfolios listed on Schedule I (individually a "Fund" and collectively the "Funds") and to provide the services described herein, and Custodian is willing to serve and to provide such services; and NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the Trust and Custodian hereby agree as follows: 1. APPOINTMENT. The Trust hereby appoints Custodian to act as custodian of its portfolio securities, cash and other property on the terms set forth in this Agreement. Custodian accepts such appointment and agrees to furnish the services herein set forth in return for the compensation as provided in Paragraph 23 hereof. Custodian agrees to comply with all relevant provisions of the 1940 Act and applicable rules and regulations thereunder. The Trust may from time to time issue separate series or classes, and classify and reclassify shares of any such series or class. The Trust shall promptly specify to Custodian in writing such series or classes, or any reclassification and thereafter Custodian shall identify to each such series or class Property, as hereinafter defined, belonging to such series or class, and such reports, confirmations and notices to the Trust as are called for under this Agreement shall identify the series or class to which such report, confirmation or notice pertains. 2. DELIVERY OF DOCUMENTS. The Trust has furnished Custodian with copies properly certified or authenticated of each of the following: (a) votes of the Trust's Board of Trustees authorizing the appointment of Custodian as custodian of portfolio securities, cash and other property of the Trust, respectively, and approving and consenting to this Agreement; (b) schedules identifying and containing the signatures of all of the Trust's officers and any other persons authorized to issue Oral Instructions and to sign Written Instructions, as hereinafter defined, on behalf of the Funds of the Trust; 1 (c) the Trust's current Registration Statement on Form N-1A under the 1940 Act, as filed with the Securities and Exchange Commission (the "SEC"), relating to shares of beneficial interest of the Trust, without par value (the "Shares"); (d) the current prospectus(es) and statement of additional information of each of the Funds, including all amendments and supplements thereto (collectively the "Prospectuses"); and (e) a copy of the opinion of counsel for the Trust, filed with the SEC as part of the Trust's current registration statement. The Trust will furnish Custodian from time to time with copies, properly certified or authenticated, of all amendments of or supplements to any of the foregoing, if any. 3. DEFINITIONS. (a) "Authorized Person". As used in this Agreement, the term "Authorized Person" means any of the Trust's officers, and any other person, whether or not any such person is an officer or employee of the Trust, duly authorized by the Board of Trustees of the Trust to give Oral and Written Instructions to Custodian on behalf of the Trust and listed on a schedule provided to Custodian pursuant to Section 2 of this Agreement. Authorized Persons duly authorized by the Board of Trustees of the Trust to buy and sell foreign currency on a spot and forward basis and options to buy and sell foreign currency are denoted by an asterisk thereon. (b) "Book-Entry System". As used in this Agreement, the term "Book-Entry System" means the Federal Reserve/Treasury book-entry system for United States and federal agency securities, its successor or successors and its nominee or nominees and any book-entry system maintained by a clearing agency registered with the SEC under Section 17A of the Securities Exchange Act of 1934 (the "1934 Act"). (c) "Composite Currency Unit". Shall mean the European Currency Unit or any other composite unit consisting of the aggregate of specified amounts of specified Currencies as such unit may be constituted from time to time. (d) "Currency". Shall mean money denominated in a lawful currency of any country or the European Currency Unit. (e) "FX Transaction". Shall mean any transaction for the purchase by one party of an agreed amount in one Currency against the sale by it to the other party of an agreed amount in another Currency. (f) "Instructions". Shall mean instruction communications transmitted by appropriately safeguarded (whether by password protection or other means) electronic or telecommunications media including but not limited to S.W.I.F.T., LASER, computer-to-computer interface, dedicated transmission line and tested telex. 2 (g) "Oral Instructions". As used in this Agreement, the term "Oral Instructions" means oral instructions actually received by Custodian from an Authorized Person or from a person reasonably believed by Custodian to be an Authorized Person. (h) "Officer's Certificate". The term "Officer's Certificate" as used in this Agreement means instructions delivered by hand, mail, tested telegram, cable, telex, or facsimile sending device, and actually received by Custodian signed or reasonably believed by Custodian to be signed by two officers of the Trust listed on a schedule provided to Custodian pursuant to Section 2 of this Agreement. (i) "Property". The term "Property", as used in this Agreement, means: (i) any and all securities and other property of the Trust which the Trust may from time to time deliver to Custodian, as applicable, or which Custodian may from time to time hold for the Trust; (ii) all income in respect of any securities or other property described in immediately preceding clause (i); (iii) all proceeds of sales of any of such securities or other property described in preceding clause (i) actually received by Custodian; and (iv) proceeds of the sale of Shares received by Custodian from time to time from or on behalf of the Trust. (j) "Securities Depository". As used in this Agreement, the term "Securities Depository" shall mean The Depository Trust Company, a clearing agency registered with the SEC or its successor or successors and its nominee or nominees; and shall also mean any other registered clearing agency, its successor or successors specifically identified in a certified copy of a resolution of the Trust's Board of Trustees approving deposits by Custodian therein. (k) "Written Instructions". As used in this Agreement, "Written Instructions" means instructions delivered by hand, mail, tested telegram, cable, telex, or facsimile sending device, and actually received by Custodian, signed or reasonably believed by Custodian to be signed by an appropriate number of Authorized Person(s), and the term Written Instructions shall also include Instructions, except that Instructions need not be signed or reasonably believed to be signed by any Authorized Person(s) where such Instructions are transmitted by Software pursuant to Paragraph 26A. A fax receipt or comparable confirmation of transmission of any Written Instructions shall be deemed evidence of actual receipt by Custodian. 4. DELIVERY AND REGISTRATION OF THE PROPERTY. The Trust shall deliver or cause to be delivered to Custodian all securities and all monies owned by the Funds, including cash received for the issuance of Shares, at any time during the period of this Agreement, except for securities and monies to be delivered to any sub-custodian appointed, with approval of the Trust, by Custodian pursuant to Paragraphs 7, 27, or 28(g) hereof. Custodian will not be responsible for such securities and such monies until actually received by it. All securities delivered to Custodian or any such sub-custodian (other than in bearer form) shall be registered in the name of the Fund or in the name of a nominee of a Fund or in the name of Custodian or any nominee 3 of Custodian (with or without indication of fiduciary status) or in the name of any sub-custodian or any nominee of such sub-custodian appointed, with approval of the Trust, pursuant to Paragraphs 7, 27, or 28(g) hereof or shall be properly endorsed and in form for transfer satisfactory to Custodian. 5. VOTING AND OTHER RIGHTS. With respect to all securities, however registered, it is understood that the voting and other rights and powers shall be exercised by the Trust. Custodian's only duty with respect to such rights shall be to mail to the Trust within two (2) business days following receipt by Custodian any documents received by Custodian as custodian, including notices of corporate action, proxies, proxy soliciting materials and offering circulars, with any elections or proxies for securities registered in a nominee name executed by such nominee. In addition, Custodian shall provide notice of Custodian's receipt of such documents by electronic means (e.g., posting notice on LASER), as agreed between the parties. Where warrants, options, tenders or other securities have fixed expiration dates, the Trust understands that in order for Custodian to act, Custodian must receive the Trust's instructions at its offices in New York, addressed as Custodian may from time to time request, by no later than noon (New York City time) at least one (1) business day prior to the last scheduled date to act with respect thereto (or such earlier date or time as Custodian may reasonably notify the Trust). Absent Custodian's timely receipt of such instructions, such instructions will expire without liability to Custodian. Custodian shall have no duty to forward to the Trust any annual, quarterly or special reports issued by companies whose securities are held by Custodian hereunder. 6. RECEIPT AND DISBURSEMENT OF MONEY. (a) Custodian shall open and maintain a custody account for each Fund of the Trust, subject only to draft or order by Custodian acting pursuant to the terms of this Agreement, and, subject to Paragraphs 7, 27, or 28(g) hereof, shall hold in such account, subject to the provisions hereof, all cash received by it from or for the Funds. Custodian shall make payments of cash to, or for the account of, each Fund from such cash only: (i) for the purchase of securities for the Funds as provided in Paragraph 14 hereof; (ii) upon receipt of an Officer's Certificate for the payment of dividends or other distributions on or with respect to Shares, or for the payment of interest, taxes, administration, distribution or advisory fees or expenses which are to be borne by the Funds under the terms of this Agreement and, with respect to each Fund, and under the terms of any investment advisory agreements, administration agreements or distribution agreements; (iii) upon receipt of Written Instructions for payments in connection with the conversion, exchange or surrender of securities owned or subscribed to by the Funds and held by or to be delivered to Custodian; (iv) to a sub-custodian pursuant to Paragraphs 7, 27, or 28(g) hereof; (v) for the redemption of Shares; or (vi) upon receipt of an Officer's Certificate for other corporate purposes. (b) Custodian is hereby authorized to endorse and collect all checks, drafts or other orders for the payment of money received as Custodian for the Funds. 7. RECEIPT OF SECURITIES. (a) Except as provided by Paragraphs 7(c), 8, 27, or 28(g) hereof, and except as otherwise directed by Oral or Written Instructions described in Paragraph 11 hereof, Custodian 4 shall hold and physically segregate in a separate account with respect to each Fund, identifiable from those of any other person, all securities and non-cash property received by it for the Funds. All such securities and non-cash property are to be held or disposed of by Custodian for each Fund pursuant to the terms of this Agreement. In the absence of Written Instructions accompanied by a certified resolution authorizing the specific transaction by the Trust's Board of Trustees, and subject to Paragraph 25 hereof, Custodian shall have no power or authority to withdraw, deliver, assign, hypothecate, pledge or otherwise dispose of any such securities and investments, except in accordance with the express terms provided for in this Agreement. In no case may any trustee, officer, employee or agent of the Trust withdraw any securities. In connection with its duties under this Paragraph 7(a), Custodian may enter into sub-custodian agreements with other banks or trust companies for the receipt of certain securities and cash to be held by Custodian for the account of a Fund pursuant to this Agreement, provided Custodian obtains the prior written approval of the Trust to any such sub-custody arrangement. Custodian will provide the Trust with a copy of each sub-custodian agreement it executes pursuant to this Paragraph 7(a). Custodian shall be liable for acts or omissions of any such sub-custodian selected by it pursuant to this Paragraph 7(a), under the standards of care provided for herein, except for any such sub-custodian engaged at the specific direction of the Funds. Notwithstanding anything herein to the contrary, this Paragraph 7(a) shall not apply to Custodian's engagement of foreign sub-custodians, which shall instead be governed by Paragraph 27 hereof. (b) Promptly after the close of business on each day, Custodian shall furnish the Trust with confirmations and a summary of all transfers to or from the account of each Fund during said day. Where securities are transferred to the account of any Fund established at a Securities Depository or the Book Entry System pursuant to Paragraph 8 herein, Custodian shall also, by book-entry or otherwise, identify as belonging to such Fund the quantity of securities in a fungible bulk of securities registered in the name of Custodian (or its nominee) or shown in Custodian's account on the books of a Securities Depository or the Book-Entry System. At least monthly and from time to time, Custodian shall furnish the Trust with a detailed statement of the Property held for each Fund under this Agreement. (c) Notwithstanding any provision elsewhere contained herein, Custodian shall not be required to obtain possession of any instrument or certificate representing any futures contract, any option, or any futures contract option until after it shall have determined, or shall have received an Officer's Certificate from the Trust stating that any such instruments or certificates are available. The Trust shall deliver to Custodian such an Officer's Certificate no later than the business day preceding the availability of any such instrument or certificate. Prior to such availability, Custodian shall comply with the 1940 Act in connection with the purchase, sale, settlement, closing out or writing of futures contracts, options, or futures contract options by making payments or deliveries specified in such Officer's Certificates or Written Instructions received by Custodian in connection with any such purchase, sale, writing, settlement or closing out upon its receipt from a broker, dealer, or futures commission merchant of a statement or confirmation reasonably believed by Custodian to be in the form customarily used by brokers, dealers, or future commission merchants with respect to such futures contracts, options, or futures contract options, as the case may be, confirming that the same is held by such broker, dealer or futures commission merchant, in book-entry form or otherwise, in the name of Custodian (or any nominee of Custodian) as Custodian for the Fund, provided, however, that 5 notwithstanding the foregoing, and subject to Paragraph 13(b) hereof, payments to or deliveries from any margin account, and payments with respect to future contracts, options, or future contract options to which a margin account relates, shall be made in accordance with the terms and conditions of the Trust's relevant margin account agreement. Whenever any such instruments or certificates are available, Custodian shall, notwithstanding any provision in this Agreement to the contrary, make payment for any futures contract, option, or futures contract option for which such instruments or such certificates are available against the delivery to Custodian of such instrument or such certificate, and deliver any futures contract, option or futures contract option for which such instruments or such certificates are available only against receipt by Custodian of payment therefor. Any such instrument or certificate delivered to Custodian shall be held by Custodian hereunder in accordance with, and subject to, the provisions of this Agreement. 8. USE OF SECURITIES DEPOSITORY OR THE BOOK-ENTRY SYSTEM. The Trust shall deliver to Custodian a certified vote of the Board of Trustees of the Trust approving, authorizing and instructing Custodian on a continuous and ongoing basis until instructed to the contrary by Written Instructions: (i) to deposit in a Securities Depository or the Book-Entry System all securities of the Funds held hereunder eligible for deposit therein, and (ii) to utilize a Securities Depository or the Book-Entry System to the extent possible in connection with the performance of its duties hereunder, including without limitation, settlements of purchases and sales of securities by the Funds, and deliveries and returns of securities loaned, subject to repurchase agreements or used as collateral in connection with borrowings. Without limiting the generality of such use, the following provisions shall apply thereto: (a) Securities and any cash of the Funds deposited by Custodian in a Securities Depository or the Book-Entry System will at all times be segregated from any assets and cash controlled by Custodian in other than a fiduciary or custodian capacity. Subject to Paragraph 28(m) hereof, Custodian and its sub-custodians, if any, will pay out money only upon receipt of securities and will deliver securities only upon receipt of money, absent Written Instructions to the contrary. (b) All books and records maintained by Custodian that relate to the Funds' participation in a Securities Depository or the Book-Entry System will at all times during Custodian's regular business hours be open to inspection by the Trust's duly authorized employees or agents and the Trust's independent auditors in accordance with applicable regulations, it being understood, however, that such records may be kept in an off-site Custodian storage location and the Trust will be furnished with all information in respect of the services rendered to it as it may require. (c) Custodian will provide the Trust with copies of any report obtained by Custodian on the system of internal accounting control of the Securities Depository or Book-Entry System promptly after receipt of such a report by Custodian. Custodian will also provide the Trust with such reports on its own system of internal control as the Trust may reasonably request from time to time. 9. INSTRUCTIONS CONSISTENT WITH THE CHARTER, ETC. Unless otherwise provided in this Agreement, Custodian shall act only upon Officer's Certificates, Oral Instructions and/or 6 Written Instructions. Custodian may assume that any Officer's Certificate, Oral Instructions or Written Instructions received hereunder are not in any way inconsistent with any provision of the Declaration of Trust or By-Laws or any vote of the Trust's Board of Trustees, or any committee thereof. Custodian shall be entitled to rely upon any Oral Instructions or Written Instructions actually received by Custodian pursuant to this Agreement, and upon any certificate, oral instructions, or written instructions reasonably believed by Custodian to be an Officer's Certificate, Oral Instructions or Written Instructions. The Trust agrees to forward to Custodian, Written Instructions confirming Oral Instructions in such manner that the Written Instructions are received by Custodian at the close of business of the same day that such Oral Instructions are given to Custodian. The Trust agrees that the fact that such confirming Written Instructions are not received by Custodian shall in no way affect the validity of any of the transactions authorized by the Trust by giving Oral Instructions, and that Custodian's records with respect to the content of Oral Instructions shall be controlling. 10. TRANSACTIONS NOT REQUIRING INSTRUCTIONS. Custodian is authorized to take the following action without Oral Instructions, Written Instructions, or an Officer's Certificate: (a) Collection of Income and Other Payments. Custodian shall subject to Paragraph 28(f) hereof: (i) Collect and receive for the account of any Fund, all income and other payments and distributions, including (without limitation) stock dividends, rights, warrants and similar items, included or to be included in the Property of any Fund, and promptly advise the Trust of such receipt and shall credit such income, as collected, to such Fund of the Trust. From time to time, Custodian may elect, but shall not be so obligated, to credit the account with interest, dividends or principal payments on the payable or contractual settlement date, in anticipation of receiving same from a payor, central depository, Securities Depository, broker or other agent employed by the Trust or Custodian. Any such crediting and posting shall be at the Trust's sole risk, and Custodian shall be authorized to reverse (A) any such advance posting in the event it does not receive good funds from any such payor, central depository, Securities Depository, broker or agent, and (B) any other payment or crediting, including, without limitation, payments made by check or draft, in the event it does not receive good funds or final payment; (ii) With respect to securities of foreign issue, and subject to Paragraph 27 hereof, effect collection of dividends, interest and other income, and to promptly transmit to the Trust all reports, written information or notices actually received by Custodian as Custodian, including notices of any call for redemption, offer of exchange, right of subscription, reorganization, or other proceedings affecting such securities, or any default in payments due thereon. It is understood, however, that Custodian shall be under no responsibility for any failure or delay in effecting such collections or giving such notice with respect to securities of foreign issue, regardless of whether or not the relevant information is published in any financial service available to it unless such failure or delay is due to Custodian's own negligence. Collections of income in foreign currency are, to the extent possible, to be converted into United States dollars unless otherwise instructed in writing, and in effecting such conversion Custodian may use such methods or agencies as it may see fit, including the facilities of its own foreign division at customary rates. All risk and expenses incident to such collection and conversion are for the 7 account of the Funds and Custodian shall have no responsibility for fluctuations in exchange rates affecting any such conversions; (iii) Endorse and deposit for collection in the name of the Trust and each of its Funds, checks, drafts, or other orders for the payment of money on the same day as received; (iv) Receive and hold for the account of each of the Fund's securities received by the Funds as a result of a stock dividend, share split-up or reorganization, recapitalization, readjustment or other rearrangement or distribution of rights or similar securities issued with respect to any portfolio securities of the Funds held by Custodian hereunder; (v) Present for payment and collect the amount payable upon all securities which may mature or be called, redeemed or retired, or otherwise become payable on the date such securities become payable, but, with respect to calls, early redemptions, or early retirements, only if Custodian either: (i) receives a written notice of the same, or (ii) notice of the same appears in one or more of the publications then listed in Appendix A hereto, which Appendix may be amended to add other publications at any time by Custodian without prior notice to or consent from the Trust and which may be amended to delete a publication with the prior notice and consent from the Trust; (vi) Subject to Paragraphs 28(e) and (f) hereof, take any action which may be necessary and proper in connection with the collection and receipt of such income and other payments and the endorsement for collection of checks, drafts and other negotiable instructions; and (vii) With respect to domestic securities, to exchange securities in temporary form for securities in definitive form, to effect an exchange of the shares where the par value of stock is changed, and to surrender securities at maturity or when advised by the Trust or the investment adviser to the Trust of an earlier call for redemption, against payment therefor in accordance with accepted industry practice. When fractional shares of stock of a declaring corporation are received as a stock distribution, Custodian is authorized to sell the fraction received and credit the Trust's account. Unless specifically instructed to the contrary in writing, Custodian is authorized to exchange securities in bearer form for securities in registered form. If any Property registered in the name of a nominee of Custodian is called for partial redemption by the issuer of such Property, Custodian is authorized to allot the called portion to the respective beneficial holders of the Property in such manner deemed to be fair and equitable by Custodian in its reasonable discretion. (b) Miscellaneous Transactions. Custodian is authorized to deliver or cause to be delivered Property against payment or other consideration or written receipt therefor in the following cases: (i) for examination by a broker selling for the account of the Trust in accordance with street delivery custom; (ii) for the exchange for interim receipts or temporary securities for definitive securities; 8 (iii) for transfer of securities into the name of the Funds or Custodian or a nominee of either, or for exchange of securities for a different number of bonds, certificates, or other evidence, representing the same aggregate face amount or number of units bearing the same interest rate, maturity date and call provisions, if any; provided that, in any such case, the new securities are to be delivered to Custodian. 11. TRANSACTIONS REQUIRING INSTRUCTIONS. Upon receipt of Oral or Written Instructions, and not otherwise, Custodian, directly or through the use of a Securities Depository or the Book-Entry System, shall: (a) execute and deliver to such persons as may be designated in such Oral or Written Instructions, proxies, consents, authorizations, and any other instruments whereby the authority of the Funds as owners of any securities may be exercised; (b) deliver any securities held for any Fund against receipt of other securities or cash issued or paid in connection with the liquidation, reorganization, refinancing, merger, consolidation or recapitalization of any corporation, or the exercise of any conversion privilege; (c) deliver any securities held for any Fund to any protective committee, reorganization committee or other person in connection with the reorganization, refinancing, merger, consolidation, recapitalization or sale of assets of any corporation, against receipt of such certificates or deposit, interim receipts or other instruments or documents as may be issued to it to evidence such delivery; (d) make such transfers or exchanges of the assets of any Fund and take such other steps as shall be stated in said instructions to be for the purposes of effectuating any duly authorized plan of liquidation, reorganization, merger, consolidation or recapitalization of the Funds; (e) subject to Paragraph 25(b) hereof, release securities belonging to any Fund to any bank or trust company for the purpose of pledge or hypothecation to secure any loan incurred by such Fund; provided, however, that securities shall be released only upon payment to Custodian of the monies borrowed, except that in cases where additional collateral is required to secure a borrowing already made, subject to proper prior authorization, further securities may be released for that purpose; and pay such loan upon redelivery to it of the securities pledged or hypothecated therefor and upon surrender of the note or notes evidencing the loan; (f) deliver any securities held for any Fund upon the exercise of a covered call option written by such Fund on such securities; (g) release and deliver securities owned by a Fund in connection with any repurchase agreement entered into on behalf of such Fund, but subject to Paragraph 28(m) hereof, only on receipt of payment therefor; and pay out monies of such Fund in connection with such repurchase agreements, but only upon the delivery of the securities; (h) otherwise transfer, exchange or deliver securities in accordance with Oral or Written Instructions specifying the purpose of such transfer, including without limitation, 9 loans of securities, short sales, or reverse repurchase agreements, and subject to Paragraph 7(a) hereof. 12. SEGREGATED ACCOUNTS. Custodian shall upon receipt of Written or Oral Instructions establish and maintain a segregated account or accounts on its records for and on behalf of any Fund, into which account or accounts shall be credited, but only pursuant to an Officer's Certificate or Written Instructions specifying the particular securities and/or amount of cash, cash and/or securities, including securities in the Book-Entry System: (i) for the purposes of compliance by the Funds and the Trust with the procedures required by a securities or option exchange, (ii) for the purpose of compliance by the Funds and the Trust with the 1940 Act and Release No. 10666 or any subsequent release or releases of the SEC relating to the maintenance of segregated accounts by registered investment companies, and (iii) for other proper corporate purposes. 13. DIVIDENDS AND DISTRIBUTIONS. (a) The Trust shall furnish Custodian with appropriate evidence of action by the Trust's Board of Trustees declaring and authorizing the payment of any dividends and distributions. Upon receipt by Custodian of an Officer's Certificate with respect to dividends and distributions declared by the Trust's Board of Trustees and payable to interestholders of any Fund who are entitled to receive cash for fractional shares and those who have elected in the proper manner to receive their distributions on dividends in cash, and in conformance with procedures mutually agreed upon by Custodian and the Trust, and the Trust's administrator or transfer agent, Custodian shall pay to the Fund's transfer agent, as agent for the interestholders, an amount equal to the amount indicated in said Officer's Certificate as payable by the Fund to such interestholders for distribution in cash by the transfer agent to such interestholders. (b) Custodian may enter into separate custodial agreements with various futures commission merchants ("FCMs") that the Trust uses (each an "FCM Agreement"), pursuant to which the Funds' margin deposits in any transactions involving futures contracts and options on futures contracts will be held by Custodian in accounts (each an "FCM Account") subject to the disposition by the FCM involved in such contracts in accordance with the customer contract between the FCM and the Trust ("FCM Contract"), SEC rules governing such segregated accounts, Commodity Futures Trading Commission ("CFTC") rules and the rules of the applicable commodities exchange. Such FCM Agreements shall only be entered into by Custodian upon receipt by Custodian of Written Instructions from the Trust which state that: (i) an FCM Contract has been entered into; (ii) the Trust is in compliance with all the rules and regulations of the CFTC; and (iii) the FCM Agreement is acceptable to the Trust. Transfers of initial margin shall be made into an FCM Account only upon Written Instructions; transfers of premium and variation margin may be made into an FCM Account pursuant to Oral Instructions. Transfers of funds from an FCM Account to the FCM for which Custodian holds such an account may only occur in accordance with the terms of the FCM Agreement. 14. PURCHASE OF SECURITIES. Promptly after each purchase of securities by the Trust on behalf of any Fund, the Trust shall deliver to Custodian Oral or Written Instructions specifying with respect to each such purchase: (a) the name of the issuer and the title of the securities; (b) the number of shares of the principal amount purchased and accrued interest, if 10 any; (c) the dates of purchase and settlement; (d) the purchase price per unit; (e) the total amount payable upon such purchase; (f) the name of the person from whom or the broker through whom the purchase was made; and (g) the Fund for which the purchase was made. Custodian shall upon receipt of securities purchased by or for the Trust pay out of the monies held for the account of the Trust the total amount payable to the person from whom or the broker through whom the purchase was made, provided that the same conforms to the total amount payable as set forth in such Oral or Written Instructions. 15. SALES OF SECURITIES. Promptly after each sale of securities by the Funds or the Trust shall deliver to Custodian Oral or Written Instructions, specifying with respect to each such sale: (a) the name of the issuer and the title of the security; (b) the number of shares or principal amount sold, and accrued interest, if any; (c) the dates of sale; (d) the sale price per unit; (e) the total amount payable to the Trust upon such sale; (f) the name of the broker through whom or the person to whom the sale was made; and (g) the Fund for which the sale was made. Custodian shall, subject to Paragraph 28(m) hereof, deliver the securities against payment of the total amount payable to the Trust upon such sale, provided that the same conforms to the total amount payable as set forth in such Oral and Written Instructions. 16. RECORDS. The books and records pertaining to the Funds and the Trust which are in the possession of Custodian shall be the property of the Trust. Such books and records shall be prepared and maintained as required by the 1940 Act and other applicable securities laws, rules and regulations. The SEC, the Trust, or the Trust's authorized representatives, shall have access to such books and records at all times during Custodian's normal business hours. Upon the reasonable request of the Trust, copies of any such books and records shall be provided by Custodian to the Trust or the Trust's authorized representative, and the Trust shall reimburse Custodian reasonable expenses for providing such copies. Upon reasonable request of the Trust, Custodian shall provide in hard copy, tape or on micro-film, or such other medium as agreed to among the Trust and Custodian, and any books and records maintained by Custodian. 17. REPORTS. (a) Custodian shall furnish the Trust the following reports: (i) such periodic and special reports as the Trust may reasonably request from time to time; (ii) a monthly statement summarizing all transactions and entries for the account of each Fund; (iii) a monthly report of portfolio securities belonging to each Fund showing the adjusted average cost of each issue and market value at the end of such month; (iv) a monthly report of the cash account of each Fund showing disbursements; (v) the reports to be furnished to the Trust pursuant to Rule 17f-4 under the 1940 Act; and 11 (vi) such other information as may be agreed upon from time to time between the Trust and Custodian. (b) Subject to Paragraphs 5 and 27(g) hereof, Custodian shall transmit promptly to the Trust any proxy statement, proxy materials, notice of a call or conversion or similar communications actually received by Custodian as custodian of the Property. (c) Custodian shall report as the market value at the end of each month the last closing bid, offer or sale price to the extent, and as the same, is furnished to Custodian by a pricing or similar service utilized or subscribed to by Custodian. Custodian shall not be responsible for, have any liability with respect to, or be under any duty to inquire into, nor deemed to make any assurances with respect to, the accuracy or completeness of such information, even if The Bank of New York in performing services for others, including services similar to those performed hereunder, receives different valuations of the same or different securities of the same issuer. 18. COOPERATION WITH ACCOUNTANTS. Custodian shall cooperate with the Trust's independent certified public accountants and shall take all reasonable action in the performance of its obligations under this Agreement, to assure that the necessary information is made available to such accountants. 19. CONFIDENTIALITY. Custodian agrees on behalf of itself and its employees to treat all record and other information relative to the Trust, its prior, present or potential interestholders, its service providers and its prior, present or potential customers, as confidential information, and to protect and safeguard the same to the extent required by applicable law, provided, however, that Custodian may make such disclosure as required by applicable law, regulation, court order, decrees or legal process and upon receipt of any of the foregoing requiring such disclosure, Custodian's only obligation shall be to notify the Trust thereof. Custodian further agrees not to otherwise use such records and information for any purpose other than performance of its responsibilities and duties hereunder, except after prior notification to and approval in writing by the Trust. 20. EQUIPMENT FAILURES. In the event of equipment failures beyond Custodian's control, Custodian shall take reasonable steps to minimize service interruptions but shall not have any further liability with respect thereto. Notwithstanding the foregoing, Custodian shall maintain sufficient back up electronic data processing equipment to enable Custodian to fulfill its obligations under this Agreement consistent with standard industry practices. 21. RIGHT TO RECEIVE ADVICE. (a) Advice of Fund. If Custodian shall be in doubt as to any action to be taken or omitted by it, either may request, and shall receive, from the Trust clarification or advice, including Oral or Written Instructions. (b) Advice of Counsel. If Custodian shall be in doubt as to any question of law involved in any action to be taken or omitted by Custodian, it may request at its option advice from its own counsel, at its own expense, or advice from the Trust's counsel. 12 (c) Conflicting Advice. In case of conflict between directions, advice or Oral or Written Instructions received by Custodian pursuant to subparagraph (a) of this paragraph and advice received by Custodian pursuant to subparagraph (b) of this paragraph, Custodian shall be entitled to rely on and follow the advice received pursuant to subparagraph (b) alone. (d) Protection of Custodian. Custodian shall be protected in any action or inaction which it takes or omits to take in reliance on any directions, advice or Oral or Written Instructions received pursuant to subparagraphs (a) or (b) of this section which it, after receipt of any such directions, advice or Oral or Written Instructions, in good faith reasonably believes to be consistent with such directions, advice or Oral or Written Instructions, as the case may be. Nothing in this Paragraph 21 shall be construed as imposing upon Custodian any obligation: (i) to seek such directions, advice or Oral or Written Instructions, or (ii) to act in accordance with such directions, advice or Oral or Written Instructions when received, unless, under the terms or another provision of this Agreement, the same is a condition to Custodian's properly taking or omitting to take such action. Nothing in this Paragraph 21(d) shall excuse Custodian when an action or omission on the part of Custodian constitutes willful misfeasance or bad faith, or negligence or reckless disregard by Custodian of its duties under this Agreement. 22. COMPLIANCE WITH GOVERNMENTAL RULES AND REGULATIONS. Custodian undertakes to comply with the laws, rules and regulations of governmental authorities having jurisdiction over Custodian and its express duties hereunder. 23. COMPENSATION. As compensation for the services rendered by Custodian during the term of this Agreement, the Trust shall pay to Custodian, in addition to reimbursement of its out-of-pocket expenses, such compensation as may be agreed upon from time to time in writing by the Trust and Custodian as set forth in Schedule III. 24. INDEMNIFICATION. The Trust agrees to indemnify Custodian against, and hold harmless from all taxes, charges, expenses (including reasonable fees and expenses of counsel), assessments, claims, losses, demands and liabilities whatsoever (including, without limitation, liabilities arising under the 1933 Act, the 1934 Act and the 1940 Act, and any state and foreign securities laws, all as currently in effect or as may be amended from time to time) and expenses, including without limitation, reasonable attorney's fees and disbursements, howsoever arising or incurred because of or in connection with this Agreement, except for such liability, claim, loss, demand, charge, expense, tax or assessment arising out of Custodian's, or such nominees', willful misconduct or negligence or reckless disregard of its duties under this Agreement. For the purposes of this Agreement, including, without limitation, for purposes of Paragraphs 24 and 28, neither Custodian's acceptance of Instructions in accordance with Paragraph 26A nor Custodian's use of Foreign Sub-Custodians pursuant to agreements that do not permit actual examination by independent public accountants, nor the denial of examination by any Foreign Sub-Custodian, as defined in Paragraph 27, shall, in and of itself, constitute, or be deemed to constitute, a breach by Custodian of this Agreement or negligence, willful misconduct, or reckless disregard of its duties by Custodian, provided the relevant agreement between Custodian and a Foreign Sub-Custodian satisfies the requirements of Rule 17f-5. 13 25. OVERDRAFTS OR INDEBTEDNESS. (a) Custodian shall advance funds under this Agreement with respect to any Fund which results in an overdraft because the moneys held by Custodian in the separate account for such Fund shall be insufficient to pay the total amount payable upon a purchase of securities by such Fund, as set forth in an Officer's Certificate or Oral or Written Instructions, or which results in an overdraft in the separate account of such Fund for some other reason, or if the Trust is for any other reason indebted to Custodian, including any indebtedness to The Bank of New York under the Trust's Cash Management and Related Services Agreement, (except a borrowing for investment or for temporary or emergency purposes using securities as collateral pursuant to a separate agreement and subject to the provisions of Paragraph 25(b) hereof), such overdraft or indebtedness shall be deemed to be a loan made by Custodian to the Trust for such Fund payable on demand and shall bear interest from the date incurred at a rate per annum (based on a 360-day year for the actual number of days involved) equal to the overdraft rate specified in Schedule III to this Agreement. In addition, the Trust hereby agrees that to the extent of such overdraft or indebtedness, Custodian shall have a continuing lien, security entitlement and security interest in and to any property at any time held by it for the benefit of such Fund or in which the Fund may have an interest which is then in Custodian's possession or control or in possession or control of any third party acting on Custodian's behalf. The Trust authorizes Custodian, in its sole discretion, at any time to charge any such overdraft or indebtedness together with interest due thereon against any balance of account standing to such Fund's credit on Custodian's books. In addition, the Trust hereby covenants that on each Business Day on which either it intends to enter a Reverse Repurchase Agreement and/or otherwise borrow from a third party, or which next succeeds a Business Day on which at the close of business the Trust had outstanding a Reverse Repurchase Agreement or such a borrowing, it shall prior to 1:00 p.m., New York City time, advise Custodian, in writing, of each such borrowing, shall specify the Fund to which the same relates, and shall not incur any indebtedness not so specified other than from Custodian. (b) The Trust will cause to be delivered to Custodian by any bank (including, if the borrowing is pursuant to a separate agreement, Custodian) from which it borrows money for investment or for temporary or emergency purposes using securities held by Custodian hereunder as collateral for such borrowings, a notice or undertaking in the form currently employed by such bank setting forth the amount which such bank will loan to the Trust against delivery of a stated amount of collateral. The Trust shall promptly deliver to Custodian Written Instructions specifying with respect to each such borrowing: (a) the Fund to which such borrowing relates; (b) the name of the bank; (c) the amount and terms of the borrowing, which may be set forth by incorporating by reference an attached promissory note, duly endorsed by the Fund, or other loan agreement; (d) the time and date, if known, on which the loan is to be entered into; (e) the date on which the loan becomes due and payable; (f) the total amount payable to the Fund on the borrowing date; (g) the market value of securities to be delivered as collateral for such loan, including the name of the issuer, the title and the number of shares or the principal amount of any particular securities and (h) a statement specifying whether such loan is for investment purposes or for temporary or emergency purposes and that such loan is in conformance with the 1940 Act and the Fund's prospectus. Custodian shall deliver on the borrowing date specified in Written 14 Instructions the specified collateral and the executed promissory note, if any, against delivery by the lending bank of the total amount of the loan payable, provided that the same conforms to the total amount payable as set forth in such Written Instructions. Custodian may, at the option of the lending bank, keep such collateral in its possession, but such collateral shall be subject to all rights therein given the lending bank by virtue of any promissory note or loan agreement. Custodian shall deliver such securities as additional collateral as may be specified in Written Instructions to collateralize further any transaction described in this Paragraph 25(b). The Trust shall cause all securities released from collateral status to be returned directly to Custodian, and Custodian shall receive from time to time such return of collateral as may be tendered to it. In the event that the Trust fails to specify in Written Instructions the Fund, the name of the issuer, the title and number of shares or the principal amount of any particular securities to be delivered as collateral by Custodian, Custodian shall not be under any obligation to deliver any securities. 26A. INSTRUCTIONS. (a) It is understood and agreed that Custodian may, from time to time, provide software to the Trust for purposes of enabling a Fund to transmit Instructions to Custodian (the "Software"). Such Software has been designed to include password protection or other features to restrict the use of the Software to Authorized Persons; provided, however, that the Custodian makes no warranty or representations of any kind with respect to such protections or features, express or implied, including, but not limited to, any implied warranties of merchantability or fitness for a particular purpose. The Trust and the Custodian shall use commercially reasonable efforts to develop other mechanisms (i) to enable the Trust to restrict the use of the Software to Authorized Persons, (ii) to identify transmissions from a terminal other than an authorized terminal, and (iii) for the prompt and accurate transmission of Instructions by Authorized Persons to Custodian. It is further understood and agreed that Custodian may provide specialized hardware or other equipment to enable the Trust and the Funds to utilize the Software. With respect to any such Software, Custodian grants to the Trust and its service providers a personal, nontransferable and nonexclusive license to use the Software solely for the purpose of transmitting Instructions to, and receiving communications from, Custodian in connection with its account(s). The Trust and its service providers agree not to sell, reproduce, lease or otherwise provide, directly or indirectly, the Software or any portion thereof to any third party without the prior written consent of Custodian. At no time shall the Trust be obligated to use the Software to transmit Instructions to Custodian. (b) The Trust shall obtain and maintain at its own cost and expense all equipment and services, including but not limited to communications services, necessary for it to utilize the Software and transmit Instructions to Custodian; provided, however, that the parties acknowledge and agree that if any specialized equipment is necessary to enable the Trust to utilize the Software, Custodian shall, at its own expense, provide and maintain such equipment. (c) The Trust acknowledges that the Software, all databases made available to the Trust by utilizing the Software (other than databases relating solely to the assets of the Funds and transactions with respect thereto), and any proprietary data, processes, information and documentation (other than those which are or become part of the public domain or are legally required to be made available to the public) (collectively, the "Information"), are the exclusive and confidential property of Custodian. The Trust shall keep the Information confidential by using the same care and discretion that the Trust uses with respect to its own confidential property and trade secrets and shall neither make nor permit any disclosure without the prior 15 written consent of Custodian. Upon termination of this Agreement or the Software license granted hereunder for any reason, the Trust shall return to Custodian all copies of the Information which are in its possession or under its control or which the Trust distributed to third parties. (d) Custodian reserves the right to modify the Software from time to time upon reasonable prior notice and the Trust shall, if it desires in its sole discretion to continue to use the Software, install new releases of the Software as Custodian may direct. The Trust agrees not to modify or attempt to modify the Software without Custodian's prior written consent. The Trust acknowledges that any modifications to the Software, whether by the Trust or Custodian and whether with or without Custodian's consent, shall become the property of Custodian. (e) Where the method for transmitting Instructions by the Trust involves an automatic systems acknowledgment to the Trust by Custodian of its receipt of such Instructions, including any transmission of Instructions using the Software, then (i) if an acknowledgment is not actually received by the Trust, Custodian shall not be deemed to have received any such Instructions, and (ii) if an acknowledgment is actually received by the Trust, the Custodian shall be deemed to have received such Instructions and shall be responsible for any error, omission, interruption or delay in connection with the transmission of such Instructions; provided, however, that the Trust shall promptly review all acknowledgments actually received and notify the Custodian in the event of any apparent discrepancy. (f) (i) The Trust agrees that where it delivers to Custodian Instructions hereunder using the Software, it shall be the Trust's sole responsibility to ensure that only persons duly authorized by the Trust and the correct number of such persons transmit such Instructions to Custodian and the Trust will cause all such persons to treat applicable use and authorization codes, passwords and authentication keys with extreme care, and authorizes Custodian to act in accordance with and rely upon Instructions received by it pursuant hereto using the Software. (ii) The Trust hereby represents, acknowledges and agrees that it is fully informed of the protections and risks associated with the various methods of transmitting Instructions to Custodian and that there may be more secure methods of transmitting Instructions to Custodian than the method(s) selected by the Trust. (iii) With respect to all Oral Instructions and all Written Instructions other than Instructions delivered to Custodian using the Software provided by Custodian, Custodian shall exercise all commercially reasonable efforts to form a reasonable belief that each such instruction has been given by an Authorized Person and, where required, signed by an appropriate number of Authorized Person(s). (g) The Trust shall notify Custodian of any errors, omissions or interruptions in, or delay or unavailability of, its ability to send Instructions using the Software provided by Custodian as promptly as practicable, and in any event within 24 hours after the earliest of (i) discovery thereof, (ii) the business day on which discovery should have occurred through the exercise of reasonable care and (iii) in the case of any error, the date of actual receipt of the earliest notice which reflects such error, it being agreed that discovery and receipt of notice may only occur on a business day. Custodian shall, as promptly as practicable, and in any event within 24 hours after the earliest of (i) discovery thereof, (ii) the business day on which discovery should have occurred through the exercise of reasonable care and (iii) in the case of any error, the date of actual receipt of the earliest notice which reflects such error, it being agreed that discovery and receipt of notice may only occur on a business day, advise the Trust whenever 16 Custodian learns or reasonably should have learned, of any errors, omissions or interruption in, or delay or unavailability of, the Trust's ability to send Instructions using the Software provided by Custodian. 26B. FX TRANSACTIONS. (a) Whenever a Fund shall enter into an FX Transaction, the Fund shall promptly deliver to Custodian a Certificate or Oral Instructions specifying with respect to such FX Transaction: (i) the Series to which such FX Transaction is specifically allocated; (ii) the type and amount of Currency to be purchased by the Fund; (iii) the type and amount of Currency to be sold by the Fund; (iv) the date on which the Currency to be purchased is to be delivered; (v) the date on which the Currency to be sold is to be delivered; and (vi) the name of the person from whom or through whom such Currencies are to be purchased and sold. Unless otherwise instructed by a Certificate or Oral Instructions, Custodian shall deliver, or shall instruct a Foreign Sub-Custodian to deliver, the Currency to be sold on the date on which such delivery is to be made, as set forth in the Certificate, and shall receive, or instruct a Foreign Sub-Custodian to receive, the Currency to be purchased on the date as set forth in the Certificate. (b) Where the Currency to be sold is to be delivered on the same day as the Currency to be purchased, as specified in the Certificate or Oral Instructions, Custodian or a Foreign Sub-Custodian may arrange for such deliveries and receipts to be made in accordance with the customs prevailing from time to time among brokers or dealers in Currencies, and such receipt and delivery may not be completed simultaneously. The Fund assumes all responsibility and liability for all credit risks involved in connection with such receipts and deliveries, which responsibility and liability shall continue until the Currency to be received by the Fund has been received in full. (c) Any foreign exchange transaction effected by Custodian in connection with this Agreement may be entered with Custodian, any office, branch or subsidiary of The Bank of New York, or any Foreign Sub-Custodian (as defined below) acting as principal or otherwise through customary banking channels. The Fund may issue a standing Certificate with respect to foreign exchange transactions but Custodian may establish rules or limitations concerning any foreign exchange facility made available to the Fund. The Fund shall bear all risks of investing in securities or holding Currency. Without limiting the foregoing, the Fund shall bear the risks that rules or procedures imposed by a Foreign Sub-Custodian or foreign depositories, exchange controls, asset freezes or other laws, rules, regulations or orders shall prohibit or impose burdens or costs on the transfer to, by or for the account of the Fund of securities or any cash held outside the Fund's jurisdiction or denominated in Currency other than its home jurisdiction or the conversion of cash from one Currency into another Currency. Custodian shall not be obligated to substitute another Currency for a Currency (including a Currency that is a component of a Composite Currency Unit) whose transferability, convertibility or availability has been affected by such law, regulation, rule or procedure. Neither Custodian nor any Foreign Sub-Custodian shall be liable to the Fund for any loss resulting from any of the foregoing events. 17 27. DUTIES OF CUSTODIAN WITH RESPECT TO PROPERTY OF ANY FUND HELD OUTSIDE OF THE UNITED STATES. (a) Custodian is authorized and instructed to employ, as sub-custodian for each Fund's foreign securities and other assets, the foreign banking institutions and foreign securities depositories and clearing agencies selected from time to time by Custodian as the Foreign Custody Manager appointed by the Trust's Board of Trustees ("Foreign Sub-Custodians") to carry out their respective responsibilities in accordance with the terms of the sub-custodian agreement between each such Foreign Sub-Custodian and Custodian (each such agreement, a "Foreign Sub-Custodian Agreement"). Upon receipt of an Officer's Certificate, the Trust may designate any additional foreign sub-custodian with which Custodian has an agreement for such entity to act as Custodian's agent, as its sub-custodian and any such additional foreign sub-custodian shall be deemed a Foreign Sub-Custodian hereunder. Upon receipt of an Officer's Certificate, Custodian shall cease using any one or more Foreign Sub-Custodians for the Fund's assets. (b) Each Foreign Sub-Custodian Agreement shall be substantially in the form delivered to the Trust herewith and will not be amended in a way that materially or adversely affects the Trust without the Trust's prior written consent. (c) Custodian shall identify on its books as belonging to each Fund the Foreign Securities of such Fund held by each Foreign Sub-Custodian. At the election of the Trust, it shall be entitled to be subrogated to any claims by the Trust or any Fund against a Foreign Sub-Custodian as a consequence of any loss, damage, cost, expense, liability or claim sustained or incurred by the Trust or any Fund if and to the extent that the Trust or such Fund has been made whole by Custodian for any such loss, damage, cost, expense, liability or claim. (d) Upon request of the Trust, Custodian will, consistent with the terms of the applicable Foreign Sub-Custodian Agreement, use reasonable efforts to arrange for the independent accountants of the Trust to be afforded access to the books and records of any Foreign Sub-Custodian insofar as such books and records relate to the performance of such Foreign Sub-Custodian under its agreement with Custodian on behalf of the Trust. (e) Custodian will supply to the Trust from time to time, as mutually agreed upon, statements in respect of the securities and other assets of each Fund held by Foreign Sub-Custodians, including but not limited to, an identification of entities having possession of each Fund's Foreign Securities and other assets, and advises or notifications of any transfers of Foreign Securities to or from each custodial account maintained by a Foreign Sub-Custodian for Custodian on behalf of the Fund. (f) Custodian agrees that it will use reasonable care in monitoring compliance by each Foreign Sub-Custodian with the terms of the relevant Foreign Sub-Custodian Agreement and that if it learns of any breach of such Foreign Sub-Custodian Agreement believed by Custodian to have a material adverse effect on the Trust or any Fund it will promptly notify the Trust in writing of such breach. Custodian also agrees to use reasonable and diligent efforts to enforce its rights under the relevant Foreign Sub-Custodian Agreement. 18 (g) Custodian shall transmit promptly to the Trust all notices, reports or other written information received pertaining to the Funds' Foreign Securities, including without limitation, notices of corporate action, proxies and proxy solicitation materials. (h) Notwithstanding any provision of this Agreement to the contrary, settlement and payment for securities received for the account of the Trust or any Fund and delivery of securities maintained for the account of the Trust or any Fund may be effected in accordance with the customary or established securities trading or securities processing practices and procedures in the jurisdiction or market in which the transaction occurs, including, without limitation, delivery of securities to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) against a receipt with the expectation of receiving later payment for such securities from such purchaser or dealer. (i) With respect to any losses or damages arising out of or relating to any actions or omissions of any Foreign Sub-Custodian, the sole responsibility and liability of Custodian shall be to take all appropriate and reasonable action at the Trust's expense to recover such loss or damage from the Foreign Sub-Custodian. It is expressly understood and agreed that Custodian's sole responsibility and liability shall be limited to amounts so recovered from the Foreign Sub-Custodian. 28. CONCERNING CUSTODIAN. (a) (i) Custodian shall exercise care and diligence and act in good faith and use all commercially reasonable efforts in the performance of its duties hereunder. Custodian shall be responsible to the Trust for its own failure or the failure of any sub-custodian that it shall appoint (other than a foreign sub-custodian referred to in Paragraph 27 or a sub-custodian appointed by Custodian at the specific direction of the Trust) or that of its employees or agents, to perform its duties, obligations or responsibilities in accordance with this Agreement, but only to the extent that such failure results from acts or omissions that constitute willful misfeasance, bad faith or negligence on the part of Custodian, or on the part of its employees or agents, or reckless disregard of such duties, obligations and responsibilities. (ii) Without limiting the generality of the foregoing or any other provision of this Agreement, in no event shall Custodian be liable to the Fund or any third party nor, except as otherwise provided in this subparagraph for special, indirect or consequential damages or lost profits or loss of business, arising under or in connection with this Agreement, even if previously informed of the possibility of such damages and regardless of the form of action. Custodian may, with respect to questions of law arising under any FCM Agreement, apply for and obtain the advice and opinion of counsel to the Trust at the expense of the Trust, or of its own counsel at its own expense, and shall be fully protected with respect to anything done or omitted by it in good faith in conformity with such advice or opinion. Custodian shall be liable to the Trust for any loss or damage resulting from the use of the Book-Entry System or any Securities Depository arising by reason of any negligence or willful misconduct on the part of Custodian or any of its employees or agents. (iii) Custodian's liability pursuant to the last sentence of subparagraph (a)(i) shall include, but not be limited to, reimbursing the Trust for court-ordered 19 damage awards, fines, penalties, and judicially-approved settlements (and attorney's fees and disbursements relating thereto) arising out of or in connection with the conduct giving rise to such liability. (iv) If the Trust receives notice of the commencement of any action, suit, or proceeding (an "Action"), or notice that any Action may be commenced, for which Custodian may be liable to the Trust pursuant to this Paragraph 28, the Trust shall give notice to Custodian of the commencement of the Action or of the possibility that an Action will be commenced. Any omission to notify Custodian will not relieve Custodian from any liability which it may have under this Paragraph, except to the extent the failure to notify Custodian prejudices the rights of Custodian. Custodian will be entitled at its sole expense and liability, to exercise full control of the defense, compromise or settlement of any such Action, provided that Custodian: (1) notifies the Trust in writing of Custodian's intention to assume such defense; and (2) retains legal counsel reasonably satisfactory to the Trust to conduct the defense of such Action. If Custodian advises the Trust that it does not wish to exercise full control of any defense, compromise or settlement of any Action, Custodian shall be responsible for the fees and expenses of counsel selected by the Trust, in addition to any other amounts for which Custodian may be liable pursuant to this Paragraph 28. The other person will cooperate with the person assuming the defense, compromise or settlement of any Action in accordance with this Paragraph in any manner that such person reasonably may request. If Custodian so assumes the defense of any such Action, the Trust will have the right to employ a separate counsel and to participate in (but not control) the defense, compromise or settlement of the Action, but the fees and expenses of such counsel will be at the expense of the Trust unless: (a) Custodian has agreed to pay such fees and expenses, (b) any relief other than the payment of money damages is sought against the Trust, or (c) the Trust has been advised by its counsel that there may be one or more defenses available to it which are different from or additional to those available to Custodian and that a conflict of interest therefore exists, and in any such case that portion of the fees and expenses of such separate counsel that are reasonably related to matters for which Custodian is liable pursuant to this Paragraph will be paid by Custodian. The Trust will not settle or compromise any such Action for which Custodian is liable pursuant to this Paragraph without the prior written consent of Custodian, unless Custodian has failed, after reasonable notice, to undertake control of such Action in the manner provided in this Paragraph. Custodian will not settle or compromise any such Action in which any relief other than the payment of money damages is sought against the Trust without the consent of the Trust, such consent not to be unreasonably withheld. In the event that Custodian intends to settle or compromise any Action in which solely money damages are sought, Custodian shall give the Trust fifteen (15) business days prior written notice. (b) Without limiting the generality of the foregoing, Custodian shall be under no obligation to inquire into, and shall not be liable for: (i) the validity of the issue of any securities purchased, sold, or written by or for the Trust or any Fund, the legality of the purchase, sale or writing thereof, or the propriety of the amount paid or received therefor; (ii) the legality of the sale or redemption of any Shares, or the propriety of the amount to be received or paid therefor; 20 (iii) the legality of the declaration or payment of any dividend by the Trust; (iv) the legality of any borrowing by the Trust using securities as collateral; (v) the legality of any loan of portfolio securities, or under any duty or obligation to see to it that any cash collateral delivered to it by a broker, dealer, or financial institution or held by it at any time as a result of such loan of portfolio securities is adequate collateral for or against any loss Custodian, the Trust or any Fund might sustain as a result of such loan. Custodian specifically, but not by way of limitation, shall not be under any duty or obligation periodically to check or notify the Trust or any Fund that the amount of such cash collateral held by Custodian for the Trust is sufficient collateral for the Trust, but such duty or obligation shall be the sole responsibility of the Trust. In addition, Custodian shall be under no duty or obligation to see that any broker, dealer or financial institution to which portfolio securities are lent makes payment to it of any dividends or interest which are payable to or for the account of the Trust during the period of such loan or at the termination of such loan, provided, however, that Custodian shall promptly notify the Trust in the event that such dividends or interest are not paid and received when due; or (vi) the sufficiency or value of any amounts of money and/or securities held in any segregated account described in Paragraph 12(a) hereof in connection with transactions by the Funds, or whether such segregated account provides the compliance intended to be achieved. In addition, Custodian shall not be under any duty or obligation to see that any broker, dealer, FCM or Clearing Member makes payment to the Fund of any variation margin payment or similar payment which the Fund may be entitled to receive from such broker, dealer, FCM or Clearing Member, to see that any payment received by Custodian from any broker, dealer, FCM or Clearing Member is the amount the Trust is entitled to receive, or to notify the Trust or a Fund of Custodian's receipt or non-receipt of any such payment. (c) Custodian shall not be liable for, or considered to be sub-custodian or custodian of, any money, whether or not represented by any check, draft, or other instrument for the payment of money, received by Custodian on behalf of the Trust until Custodian actually receives and collects such money directly or by the final crediting of the account representing the Fund's interest at the Book-Entry System or a Securities Depository. (d) Custodian shall not have any responsibility or be liable for ascertaining or acting upon any calls, conversions, exchange offers, tenders, interest rate changes or similar matters relating to securities held in a Securities Depository, unless Custodian shall have actually received timely notice from such Securities Depository. In no event shall Custodian have any responsibility or liability for the failure of any Securities Depository to collect, or for the late collection or late crediting by a Securities Depository of any amount payable upon securities deposited in a Securities Depository which may mature or be redeemed, retired, called or otherwise become payable. Upon receipt of Written Instructions from the Trust of an overdue amount on securities held in a Securities Depository, Custodian shall make a claim against a Securities Depository on behalf of the Trust, except that Custodian shall not be under any obligation to appear in, prosecute or defend any action suit or proceeding in respect to any securi- 21 ties held by a Securities Depository which in its opinion may involve it in expense or liability, unless indemnity satisfactory to it against all expense and liability be furnished as often as may be required. (e) Custodian shall not be under any duty or obligation to take action to effect collection of any amount due to the Trust from a transfer agent of the Trust nor to take any action to effect payment or distribution by the transfer agent of the Trust of any amount paid by Custodian to the transfer agent of the Trust in accordance with this Agreement. (f) Custodian shall not be under any duty or obligation to take action to effect collection of any amount, if the securities upon which such amount is payable are in default, or if payment is refused after due demand or presentation, unless and until: (i) it shall be directed to take such action by Written Instructions, and (ii) it shall be assured to its reasonable satisfaction of reimbursement of its costs and expenses in connection with any such action. (g) Custodian may in addition to the employment of Foreign Sub-Custodians pursuant to Paragraphs 7 and 27, hereof appoint one or more banking institutions as Depository or Depositories, as a sub-custodian or as sub-custodians, or as a co-custodian or as co-custodians, including, but not limited to, banking institutions located in foreign countries, of securities and moneys at any time owned by the Funds, upon such terms and conditions as may be approved in an Officer's Certificate or contained in an agreement executed by Custodian and the Trust and the appointed institution. (h) Custodian shall not be under any duty or obligation: (i) to ascertain whether any securities at any time delivered to, or held by it or by any Foreign Sub-Custodian, for the account of the Trust and specifically allocated to a Fund are such as properly may be held by the Trust or such Fund under the provisions of its Prospectus, or (ii) to ascertain whether any transactions by the Fund, whether or not involving Custodian, are such transactions as may properly be engaged in by the Fund. (i) Custodian shall charge its compensation and any expenses with respect to the Funds of the Trust incurred by Custodian in the performance of its duties under this Agreement only against the money of the Fund or Funds of the Trust from which such compensation or expenses is actually due and payable, and under no circumstances shall any compensation or expenses due to Custodian be considered to be a joint, or joint and several, obligation of the Funds of the Trust. To the extent that Custodian is entitled to recover from the Trust any loss, damage, liability or expense (including counsel fees) under this Agreement, Custodian shall charge the amount due in respect of such loss, damage, liability or expense (including counsel fees) only against the money held by it for the Fund or Funds of the Trust that is/are identified by the Trust in an Officer's Certificate, unless and until the Trust instructs Custodian by an Officer's Certificate to charge against money held by it for the account of a Fund such Fund's pro rata share (based on such Fund's net asset value at the time of the charge in proportion to the aggregate net asset value of all Funds at that time) of the amount of such loss, damage, liability or expense (including counsel fees). (j) Custodian shall be entitled to rely upon any Officer's Certificate, Written Instructions, notice or other instrument in writing received by Custodian and reasonably believed 22 by Custodian, to be an Officer's Certificate or Written Instructions. Custodian shall be entitled to rely upon any Oral Instructions actually received by Custodian. The Trust agrees to forward to Custodian Written Instructions confirming such Oral Instructions in such manner so that such Written Instructions are received by Custodian, whether by hand delivery, telecopier or other similar device, or otherwise, by the close of business of the same day that such Oral Instructions are received by Custodian. The Trust agrees that the fact that such confirming instructions are not received, or that contrary instructions are received, by Custodian shall in no way affect the validity of the transactions or enforceability of the transactions hereby authorized by the Trust. The Trust agrees that Custodian shall not incur any liability to the Trust in acting upon Oral Instructions given to Custodian hereunder concerning such transactions provided such instructions reasonably appear to have been received from an Authorized Person. (k) Custodian shall be entitled to rely upon any instrument, instruction or notice received by it and reasonably believed by it to be given in accordance with the terms and conditions of any FCM Agreement. Without limiting the generality of the foregoing, Custodian shall not be under any duty to inquire into, and Custodian shall not be liable for, the accuracy of any statements or representations contained in any such instrument or other notice including, without limitation, any specification of any amount to be paid to a broker, dealer, futures commission merchant or clearing member. (l) Custodian shall provide the Trust with any report obtained by Custodian on the system of internal accounting control of the Book-Entry System, any Securities Depository utilized hereunder the Depository or the Options Clearing Corporation, and with such reports on its own systems of internal accounting control as the Trust may reasonably request from time to time. (m) Subject to the foregoing provisions of this Agreement, including, without limitation, those contained in Paragraph 27 hereof, Custodian may deliver and receive securities, and receipts with respect to such securities, and arrange for payments to be made and received by Custodian in accordance with the customs prevailing from time to time among brokers or dealers in such securities. When Custodian is instructed to deliver securities against payment, delivery of such securities and receipt of payment therefor may not be completed simultaneously. The Fund assumes all responsibility and liability for all credit risks involved in connection with Custodian's delivery of securities pursuant to proper instructions of the Fund, which responsibility and liability shall continue until final payment in full has been received by Custodian. (n) Custodian shall not have any duties or responsibilities whatsoever except such duties and responsibilities as are specifically set forth in this Agreement, and no covenant or obligation shall be implied in this Agreement against Custodian. 29. TERMINATION. Any of the parties hereto may terminate this Agreement by giving to the other parties a notice in writing specifying the date of such termination, which shall be not less than ninety (90) days after the date of giving of such notice. Upon the date set forth in such notice this Agreement shall terminate, and Custodian shall on that date deliver directly to the Trust or a successor custodian designated by the Trust all securities and moneys then owned by the Trust and held by Custodian, after deducting all fees, expenses and other amounts for the 23 payment or reimbursement of which it shall then be entitled; provided, however, that transaction fees and expenses payable by the Trust in connection with a deconversion to a successor custodian shall be limited to Custodian's actual direct cost. 30. NOTICES. All notices and other communications (collectively referred to as "Notice" or "Notices" in this paragraph) hereunder shall be in writing or by confirm in telegram, cable, telex, or facsimile sending device. Notices shall be addressed: (a) if to Custodian, at Custodian's address, 90 Washington Street, 22nd Floor, New York, New York 10286, Attention: Frank Ajosa; (b) if to the Trust, at the address of the Trust, 111 Center Street, Little Rock, Arkansas 72201, Attention: Richard H. Blank, Jr., Secretary; or (c) if to none of the foregoing, at such other address as shall have been notified to the sender of any such Notice or other communication. Notice shall be deemed to have been given when actually received by the other party. All postage, cable, telegram, telex and facsimile sending device charges arising from the sending of a Notice hereunder shall be paid by the sender. 31. FURTHER ACTIONS. Each party agrees to perform such further acts and execute such further documents as it deems necessary to effectuate the purposes hereof. 32. AMENDMENTS. This Agreement or any part hereof may be changed or waived only by an instrument in writing signed by the party against which enforcement of such change or waiver is sought. 33. MISCELLANEOUS. (a) The Trust agrees that Custodian may be a counterparty in any purchase or sale of foreign currency by or for the Trust on a spot or forward basis, and on any option to buy or sell foreign currency. (b) This Agreement embodies the entire Agreement and understanding between the parties hereto, and supersedes all prior agreements and understandings relating to the subject matter hereof. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. This Agreement shall be deemed to be a contract made in New York and governed by New York law. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors. 34. RELEASE. The names "Nations Master Investment Trust" and "Trustees of Nations Master Investment Trust" refer respectively to the Trust created and the Trustees, as trustees but not individually or personally, acting from time to time under a Declaration of Trust and Certificate of Trust dated January 14, 1999, which is hereby referred to and a copy of which is on file at the principal office of the Trust. The obligations of "Nations Master Investment Trust" entered into in the name or on behalf thereof by any of the Trustees, representatives or agents are made not individually, but in such capacities, and are not binding upon any of the Trustees, Interestholders, or representatives of the Trust personally, but bind only the Trust Property (as defined in the Declaration of Trust), and all persons dealing with any class of Shares of the Trust 24 Property, and all persons dealing with any class of Shares of the Trust must look solely to the Trust Property belonging to such class for the enforcement of any claims against the Trust. 35. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original. 25 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below as of the day and year first above written. NATIONS FUNDS TRUST By: ______________________ James E. Banks, Jr. Assistant Secretary THE BANK OF NEW YORK By: ______________________ Stephen E. Grunston Vice President 26 SCHEDULE I ---------- The Custody Agreement between Nations Funds Trust, and Sub-Custodian applies to the following Funds of the Trust: Nations High Yield Fund Nations Kansas Intermediate Municipal Bond Fund Nations MidCap Index Fund Approved: [__________________] 27 SCHEDULE II ----------- I, Ira Rosner, a Vice President with THE BANK OF NEW YORK do hereby designate the following publications: The Bond Buyer Depository Trust Company Services Financial Daily Card Service JJ Kenney Municipal Bond Service London Financial Times Standard & Poor's Called Bond Record Wall Street Journal 28 SCHEDULE III ------------ DOMESTIC CUSTODIAN FEE SCHEDULE FOR NATIONS MASTER INVESTMENT TRUST SAFEKEEPING/INCOME COLLECTION/REPORTING DTC-ID AFFIRMATION ALL SYSTEMS DEVELOPMENT AND USAGE CHARGES - ----------------------------------------- 3/4ths of one basis point per annum on the aggregate net assets of all Nations' Non-Money Market Funds up to $10 billion. 1/2 of a basis point on the excess. SECURITY TRANSACTION CHARGES/PAYDOWNS - ------------------------------------- $ 5 Paydowns $ 7 DTC/FRB/PTC $15 Physicals, options and futures $40 Euro C/D's OTHER CHARGES - ------------- $ 5 Bank official checks $ 2 Money transfers in/out of the Fund's custodian account not related to securities transactions. EARNINGS CREDITS ON BALANCES/INTEREST ON OVERDRAFTS - ---------------------------------------------------- Earnings credits are provided to each Fund on 80% of the daily balance in the domestic custodian account computed at the 90-day T-bill rate on the day of the balance. Overdrafts, excluding bank errors, will cause a reduction of earnings credits daily, computed at 1% above the average Federal Funds rate on the day of the overdraft. Credits and debits will be accumulated daily and offset monthly against the Bank's domestic custodian fees. To the extent a net debit is accumulated, each Fund will be billed for the expense. To the extent a net earnings credit is generated, such excess earnings credit can be carried forward to the next succeeding month. However, no earnings credit will be carried forward after year-end. 29 OUT-OF-POCKET EXPENSES - ---------------------- None. BILLING CYCLE - ------------- The above fees are billed monthly. 30 SCHEDULE IV ----------- OVERDRAFT RATE 31 EX-99.H1 6 EXHIBIT 99.H1 Exhibit 99.H1 FORM OF CO-ADMINISTRATION AGREEMENT This CO-ADMINISTRATION AGREEMENT (the "Agreement") is made as of [_______________ ] by and among STEPHENS INC. ("Stephens"), BANC OF AMERICA ("BAAI") and NATIONS FUNDS TRUST (the "Trust"). WHEREAS, the Trust is registered as an open-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Trust desires to retain Stephens and BAAI to render certain administrative services for the investment portfolios of the Trust listed on Schedule I (individually, a "Fund" and collectively, the "Funds"), and Stephens and BAAI are willing to render such services. NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is agreed among the parties hereto as follows: 1. Appointment. (a) The Trust hereby appoints Stephens to act as Co-Administrator of the Funds and Stephens hereby accepts such appointment and agrees to render such services and duties set forth in Paragraph 3, for the compensation and on the terms herein provided. Absent written notification to the contrary by the Trust, BAAI or Stephens, each new investment portfolio established in the future by the Trust shall automatically become a "Fund" for all purposes hereunder as if listed on Schedule I. (b) The Trust also hereby appoints BAAI to act as Co-Administrator of the Funds, and BAAI hereby accepts such appointment and agrees to render such services and duties set forth in Paragraph 4, for the compensation and on the terms herein provided. Absent written notification to the contrary by either the Trust or BAAI, each new investment portfolio established in the future by the Trust shall automatically become a "Fund" for all purposes hereunder as if listed on Schedule I. 2. Delivery of Documents. The Trust has furnished Stephens and BAAI with copies properly certified or authenticated of each of the following: (a) The Trust's Registration Statement on Form N-1A (the "Registration Statement") under the Securities Act of 1933, as amended, and under the 1940 Act [(FILE NOS. __________ AND __________)], as filed with the Securities and Exchange Commission (the "SEC") relating to the Funds' shares (the "Shares"); (b) The Funds' most recent Prospectus(es); and (c) The Funds' most recent Statement(s) of Additional Information. 1 The Trust will furnish Stephens and BAAI from time to time with copies, properly certified or authenticated, of all amendments of or supplements to the foregoing. Furthermore, the Trust will provide Stephens and BAAI with any other documents that Stephens and BAAI may reasonably request and will notify Stephens and BAAI as soon as possible of any matter materially affecting either Stephens' or BAAI's performance of its services under this Agreement. 3. Duties as Co-Administrator. Subject to the supervision and direction of the Board of Trustees of the Trust, Stephens, as Co-Administrator, will assist in supervising various aspects of the Trust's administrative operations and undertakes to perform the following specific services from and after the effective date of this Agreement: (a) Maintaining office facilities for the Trust (which may be in the offices of Stephens or a corporate affiliate); (b) Furnishing clerical services, internal executive and administrative services and stationery and office supplies in connection with the foregoing; (c) Assist in furnishing statistical and research data and data processing services in connection with the foregoing; (d) Furnishing corporate secretarial services, including assisting in the coordination of the preparation and distribution of materials for Board of Trustees meetings; (e) Providing the services of certain persons who may be appointed as officers of the Trust by the Trust's Board of Trustees; (f) Assist in coordinating the provision of legal advice and counsel to the Trust with respect to regulatory matters, including monitoring regulatory and legislative developments which may affect the Trust and assisting in the strategic response to such developments, counseling and assisting the Trust in routine regulatory examinations or investigations of the Trust, and working closely with outside counsel to the Trust in connection with any litigation in which the Trust is involved; (g) Assist in coordinating the preparation of reports to the Trust's shareholders of record and the SEC including, but not necessarily limited to, Annual Reports and Semi-Annual Reports to Shareholders and on Form N-SAR and Notices pursuant to Rule 24f-2 under the 1940 Act; (h) Coordinating with the Trust regarding the jurisdictions in which the Shares shall be registered or qualified for sale and, in connection therewith, being responsible for the registration or qualification and the maintenance of such registration or qualification of Shares for sale under the securities laws of any state. Payment of share registration fees and any fees for qualifying or continuing the qualification of the Trust or any Fund as a dealer or broker shall be made or reimbursed by the Trust or that Fund, respectively; 2 (i) Assisting in the preparation and filing on a timely basis of various reports, registration statements and post-effective amendments thereto, and other documents required by federal, state and other applicable laws and regulations, other than those filed or required to be filed by BAAI or the Funds' Sub-Advisers, Transfer Agent, Sub-Transfer Agent or Custodian; (j) Performing certain compliance procedures for the Trust which will include, among other matters, monitoring compliance with personal trading guidelines by the Trust's Board of Trustees; and (k) Generally assisting in all aspects of the Trust's operations. In performing all services under this Agreement, Stephens shall (i) act in conformity with: the Trust's Declaration of Trust and Bylaws, the 1940 Act and the rules thereunder, and other applicable laws and regulations, as the same may be amended from time to time, and the Trust's Registration Statement, as such Registration Statement may be amended from time to time; (ii) consult and coordinate with the Trust, as necessary and appropriate; and (iii) advise and report to the Trust, as necessary or appropriate, with respect to any compliance matters that come to its attention. Stephens represents and warrants to the Trust that it will use reasonable efforts to perform its duties and obligations under this Agreement without: (a) any failure of its computer systems, or those used by it in the performance of its duties hereunder, to properly record, store, process, calculate or present calendar dates falling on and after, and time spans including, January 1, 2000 as a result of the occurrence of, or use of data containing, such date; (b) any failure of its computer systems, or those used by it in the performance of its duties hereunder, to calculate any information dependent on or relating to dates on or after January 1, 2000; or (c) any loss of functionality or performance with respect to the maintenance of records or processing of data containing dates falling on or after January 1, 2000 ((a), (b), and (c) above shall be referred to as "Y2K Failures"). Notwithstanding the above, Stephens shall not be liable for any Y2K Failures caused by Y2K Failures in a third party system with which Stephens interfaces or from which Stephens receives data in connection with the performance of its duties hereunder. In performing its services under this Agreement, Stephens shall cooperate and coordinate with BAAI as necessary and appropriate and shall provide such information as is reasonably necessary or appropriate for BAAI to perform its responsibilities to the Trust. 4. Duties as Co-Administrator. Subject to the supervision and direction of the Board of Trustees of the Trust, BAAI, as Co-Administrator, will assist in supervising various aspects of the Trust's administrative operations and undertakes to perform the following specific services, from and after the effective date of this Agreement: (a) providing accounting and bookkeeping services (including the maintenance for the periods prescribed by Rule 31a-2 under the 1940 3 Act of such accounts, books and records of the Trust as may be required by Section 31(a) of the 1940 Act and the rules thereunder). BAAI further agrees that all such records which it maintains for the Trust are the property of the Trust and further agrees to surrender promptly to the Trust any of such records upon the Trust's request; (b) valuing each Fund's assets and calculating the net asset value and the net income of the shares of each Fund in accordance with the Trust's current Prospectus(es), applicable pricing procedures and resolutions of the Trust's Board of Trustees, provided, that in performing such services, BAAI shall obtain security market quotes from independent pricing services, or if such quotes are unavailable, obtain such prices from the Funds' Sub-Advisers; (c) accumulating information for reports to the Trust's shareholders of record and the SEC including, but not necessarily limited to, Annual Reports and Semi-Annual Reports to Shareholders and on Form N-SAR and Notices pursuant to Rule 24f-2 under the 1940 Act; (d) preparing and filing on a timely basis the Trust's tax returns and other tax filings; (e) monitoring the development and implementation of certain compliance procedures for the Trust including, but not limited to, monitoring (i) each Fund's status as a regulated investment company under Sub-Chapter M of the Internal Revenue Code of 1986, as amended, including performing, on a monthly basis and based upon information provided by the Fund's Sub-Advisers, the 90% gross income and asset diversification tests derived from such Sub-Chapter; and (ii) compliance by each Fund with its investment objective, policies and restrictions, and applicable laws and regulations; (f) preparing and furnishing to the Trust monthly broker security transaction summaries and monthly security transaction listings and (at the Trust's request) performance information (including yield and total return information) calculated in accordance with applicable U.S. securities laws and reporting to external databases such information as may reasonably be requested; (g) assisting the Trust and its agents in their accumulation and preparation of materials for the Board of Trustees' meetings and for regulatory examinations and inspections of the Trust, to the extent such materials relate to the services being performed for the Trust by BAAI; and (h) coordinate the provisions of services to the Trust by other service providers to the Trust, including the transfer agent, sub-transfer agent and custodian. In performing all services under this Agreement, BAAI shall (i) act in conformity with the Trust's Declaration of Trust and Bylaws; the 1940 Act and the rules thereunder, and other applicable laws and regulations, as the same may be amended from time to time; and the Trust's Registration Statement, as such Registration Statement may be amended from time to time, (ii) consult and coordinate with the Trust, as necessary and 4 appropriate, and (iii) advise and report to the Trust, as necessary or appropriate, with respect to any compliance matters that come to its attention. BAAI represents and warrants to the Trust that it will use reasonable efforts to perform its duties and obligations under this Agreement without: (a) any failure of its computer systems to properly record, store, process, calculate or present calendar dates falling on and after, and time spans including, January 1, 2000 as a result of the occurrence of, or use of data containing, such date; (b) any failure of its computer systems to calculate any information dependent on or relating to dates on or after January 1, 2000; or (c) any loss of functionality or performance with respect to the maintenance of records or processing of data containing dates falling on or after January 1, 2000 ((a), (b), and (c) above shall be referred to as "Y2K Failures"). Notwithstanding the above, BAAI shall not be liable for any Y2K Failures caused by Y2K Failures in a third party system with which BAAI interfaces or from which BAAI receives data in connection with the performance of its duties hereunder including, without limitation, the system of any sub-administrator engaged pursuant to Paragraph 4. In connection with its duties under this Paragraph 4, it is understood and agreed that BAAI may, at its own expense, enter into sub-administration agreements with other service providers and the Fund(s), provided that each such service provider agrees with BAAI and the Fund(s) to comply with all relevant provisions of the 1940 Act and applicable rules and regulations thereunder. In addition, upon notice to the Board of Trustees of the Trust, the parties agree that BAAI may from time to time assume some or all of Stephens' duties set forth in Paragraph 3 above. In performing its responsibilities under this Agreement, BAAI shall cooperate and coordinate with Stephens as necessary and appropriate and shall provide such information within its possession or control as is reasonably necessary or appropriate to Stephens to enable it to perform its responsibilities to the Trust. 5. Compensation. (a) Stephens shall bear all expenses in connection with the performance of its services under this Agreement, except those enumerated in Paragraph 5(a)(2) below. (1) Stephens will from time to time employ or associate with such person or persons as Stephens may believe to be particularly suited to assist it in performing services under this Agreement. Such person or persons may be officers and employees of both Stephens and the Trust. The compensation of such person or persons shall be paid by Stephens and no obligation shall be incurred on behalf of the Trust or BAAI in such respect. (2) Stephens shall not be required to pay any of the following expenses incurred by the Trust: investment advisory expenses; costs of printing and mailing stock certificates, prospectuses, reports and notices; interest on borrowed money; brokerage fees and commissions; taxes and fees payable to federal, state and other 5 governmental agencies; fees of Trustees of the Trust who are not affiliated with Stephens; outside auditing expenses; outside legal expenses; fees of any other service provider to the Trust; or other expenses not specified in this Section 5(a) which may be properly payable by the Trust and which are approved by the Trust's President or Treasurer. (3) The Trust will compensate Stephens for its services rendered pursuant to this Agreement in accordance with Schedule A. In addition, the Trust shall reimburse Stephens for certain reasonable out-of-pocket distributions made in connection with fulfilling its obligations under the Agreement. The items eligible for reimbursement are set forth on Schedule A. (b) BAAI shall bear all expenses in connection with the performance of its services under this Agreement, except those enumerated in 5(b)(2) below. (1) BAAI will from time to time employ or associate with such person or persons as BAAI may believe to be particularly suited to assist it in performing services under this Agreement. Such person or persons may be officers and employees of both BAAI and the Trust. The compensation of such person or persons shall be paid by BAAI and no obligation shall be incurred on behalf of the Trust or Stephens in such respect. (2) BAAI shall not be required to pay any of the following expenses incurred by the Trust: investment advisory expenses; costs of printing and mailing stock certificates, prospectuses, reports and notices; interest on borrowed money; brokerage fees and commissions; taxes and fees payable to federal, state and other governmental agencies; fees of Trustees of the Trust who are not affiliated with BAAI; outside auditing expenses; outside legal expenses; fees of independent pricing services utilized by BAAI to value each Fund's assets; fees of any other service provider to the Trust (other than a sub-administrator engaged pursuant to Paragraph 4); or other expenses not specified in this Section 5(b) which may be properly payable by the Trust and which are approved by the Trust's President or Treasurer. (3) The Trust will compensate BAAI for its services rendered pursuant to this Agreement in accordance with Schedule A. In addition, the Trust shall reimburse BAAI for certain reasonable out-of pocket distributions made in connection with fulfilling its obligations under the Agreement. The items eligible for reimbursement are set forth on Schedule A. 6. Limitation of Liability; Indemnification. (a) Stephens shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the performance of its obligations and duties under this Agreement, except a loss resulting from Stephens' willful misfeasance, bad faith or gross negligence in the performance of such obligations and duties, or by reason of its reckless disregard thereof. (b) BAAI shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the performance of its 6 obligations and duties under this Agreement, except a loss resulting from BAAI's willful misfeasance, bad faith or gross negligence in the performance of such obligations and duties, or by reason of its reckless disregard thereof. (c) The Trust, on behalf of each Fund, will indemnify Stephens and/or BAAI against and hold each harmless from any and all losses, claims, damages, liabilities or expenses (including reasonable counsel fees and expenses) resulting from any claim, demand, action or suit relating to the particular Fund and not resulting from the willful misfeasance, bad faith or gross negligence of Stephens and/or BAAI in the performance of such obligations and duties or by reason of their reckless disregard thereof. Stephens and/or BAAI will not confess any claim or settle or make any compromise in any instance in which the Trust will be asked to provide indemnification, except with the Trust's prior written consent. Any amounts payable by the Trust under this Section 6(c) shall be satisfied only against the assets of the Fund involved in the claim, demand, action or suit and not against the assets of any other investment portfolio of the Trust. 7. Effective Date; Termination of Agreement. (a) This Agreement shall become effective, on a Fund by Fund basis, upon the completion of the transfer of a Fund's accounting function to The Bank of New York, notice of which shall be provided by the Trust to Stephens and BAAI for each Fund. This Agreement shall remain in full force and effect with respect to such Fund(s) unless terminated pursuant to the provisions of Section 7(c). (b) The parties agree that the administration arrangements between Stephens and the Trust [dated ___________], and the sub-administration arrangements between Stephens and BAAI, dated November 18, 1997, with respect to the Funds shall be terminated on a Fund by Fund basis upon the effectiveness of this Agreement. (c) This Agreement may be terminated at any time without payment of any penalty, upon 60 days' written notice, by vote of the Board of Trustees of the Trust, by Stephens or by BAAI. Stephens and BAAI will each cooperate with and assist the Trust, its agents and any successor administrator or administrators in the substitution/conversion process. (d) Sections 6 and 9 shall survive this Agreement's termination. 8. Amendments. No provision of this Agreement may be changed, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, discharge or termination is sought. 9. Confidentiality. All books, records, information and data pertaining to the business of the Trust, its prior, present or potential shareholders and BAAI's customers that are exchanged or received pursuant to the performance of Stephens' and/or BAAI's duties under this Agreement shall remain confidential and shall not be disclosed to any other person, except as specifically authorized by the Trust or as may be required by law, and shall not be used for any purpose other than performance of BAAI's and Stephens' responsibilities and duties hereunder. 7 10. Service to Other Companies or Accounts. The Trust acknowledges that both Stephens and BAAI now act, will continue to act and may act in the future as investment adviser to fiduciary and other managed accounts, and as investment adviser, investment sub-adviser and/or administrator to other investment companies or series of investment companies, and the Trust has no objection to either Stephens or BAAI so acting. The Trust further acknowledges that the persons employed by both Stephens and BAAI to assist in the performance of their duties under this Agreement may not devote their full time to such service and nothing contained in this Agreement shall be deemed to limit or restrict the right of Stephens or BAAI or any affiliate of either to engage in and devote time and attention to other businesses or to render services of whatever kind or nature. 11. Miscellaneous. (a) Any notice or other instrument authorized or required by this Agreement to be given in writing to the Trust, Stephens or BAAI shall be sufficiently given if addressed to that party and received by it at its office set forth below or at such other place as it may from time to time designate in writing. To the Trust: Nations Funds Trust 111 Center Street, Suite 3000 Little Rock, Arkansas 72201 Attention: Secretary To Stephens: Stephens Inc. 111 Center Street, Suite 3000 Little Rock, Arkansas 72201 Attention: Richard H. Blank, Jr. To BAAI: Banc of America Advisors, Inc. One Bank of America Plaza 33rd Floor Charlotte, NC 28255 Attention: Edward D. Bedard (b) This Agreement shall extend to and shall be binding upon the parties hereto and their respective successors and assigns; provided, however, that this Agreement shall not be assignable without the written consent of the other parties. (c) This Agreement shall be construed in accordance with the laws of the State of Delaware. (d) This Agreement may be executed in any number of counterparts each of which shall be deemed to be an original and which collectively shall be deemed to constitute only one instrument. 8 (e) The captions of this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. (f) This Agreement constitutes the entire agreement between the parties hereto with respect to the matters described herein. 9 IN WITNESS WHEREOF, the parties hereto have caused this instrument to be duly executed and delivered by their duly authorized officers as of the date first written above. STEPHENS INC. By: _________________________________ Name: Richard H. Blank, Jr. Title: Senior Vice President BANC OF AMERICA ADVISORS, INC. By: __________________________________ Name: Edward D. Bedard Title: Senior Vice President and Chief Operating Officer NATIONS FUNDS TRUST By: __________________________________ Name: James E. Banks, Jr. Title: Assistant Secretary 10 SCHEDULE I 1. Nations High Yield Fund 2. Nations Kansas Intermediate Municipal Bond Fund 3. Nations MidCap Index Fund Amended: [_______________] I-1 SCHEDULE A For services rendered pursuant to this Agreement, the Trust will pay Stephens and BAAI, in the aggregate, an administration fee, computed daily and payable monthly, based on annual rate of each Fund's daily net assets as follows: 1. Money Market Funds: [0.10%] 2. Fixed Income Funds: [0.22%] 3. International Funds: [0.22%] 4. Domestic Equity Funds: [0.23%] It is understood and agreed among the parties that the aggregate administration fee payable hereunder shall be divided by and between Stephens and BAAI, as they may agree from time to time. In addition to the asset-based fee set forth above, the Trust shall reimburse Stephens, BAAI and any sub-administrator engaged pursuant to Paragraph 4 for certain reasonable out-of-pocket expenses incurred by them in connection with the performance of their respective duties hereunder. Reimbursable out-of-pocket expenses shall include the following: reasonable costs associated with postage (including overnight services), telephone, telecommunications (including facsimiles), duplicating, pricing services, and forms and supplies. A-1 EX-99.H2 7 EXHIBIT 99.H2 Exhibit 99.H2 FORM OF SUB-ADMINISTRATION AGREEMENT This SUB-ADMINISTRATION AGREEMENT (the "Agreement") is made as of [_________________] by and among THE BANK OF NEW YORK ("BNY"), BANC OF AMERICA ADVISORS, INC. ("BAAI") and NATIONS FUNDS TRUST (the "Trust"). WHEREAS, the Trust is registered as an open-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"); WHEREAS, BAAI serves as the Co-Administrator for the investment portfolios of the Trust pursuant to a separate Co-Administration Agreement; and WHEREAS, BAAI desires to retain BNY to render certain sub-administrative services to the Trust and to BAAI, as Co-Administrator of the Trust, and BNY is willing to render such services. NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is agreed among the parties hereto as follows: 1. Appointment and Duties as Sub-Administrator. (a) BAAI hereby appoints BNY to act as Sub-Administrator of the Trust and to render sub-administrative services for each portfolio of the Trust listed on Schedule I (individually, a "Fund" and collectively, the "Funds") and BNY hereby accepts such appointment and agrees to render the services and duties set forth in Schedule II as it may be amended from time to time, for the compensation and on the terms herein provided. Each new investment portfolio established in the future by the Trust or BAAI will become a "Fund" for all purposes hereunder when BNY receives a revised Schedule I from BAAI or the Trust that includes such new portfolio. (b) Subject to the other provisions of this Section 1, in performing all services under this Agreement, BNY shall (i) act in conformity with the Trust's Agreement and Declaration of Trust and Bylaws (the "Bylaws"), the 1940 Act and the rules thereunder, including but not limited to Rules 31a-1 to 31a-3, and other applicable laws and regulations, as the same may be amended from time to time, and the Trust's Registration Statement, as such Registration Statement may be amended from time to time; (ii) consult and coordinate with BAAI and the Trust, as necessary and appropriate; and (iii) advise and report to BAAI and the Trust, as necessary or appropriate, with respect to any compliance matters that come to its attention. In performing all services under this Agreement BNY shall meet the minimum quality of service standards set forth on Schedule III. (c) The Trust has furnished BNY and BAAI with copies properly certified or authenticated of each of the following: (i) the Trust's Agreement and Declaration of Trust or 1 other organizational document and all amendments thereto (the "Declaration"); (ii) the Trust's Bylaws; (iii) resolutions of the Trust's Board of Trustees or other governing body (the "Board") authorizing the execution, delivery and performance of this Agreement by the Trust; (iv) the Trust's Registration Statement on Form N-1A (the "Registration Statement") under the Securities Act of 1933, as amended, and under the 1940 Act [(FILE NOS. __________ AND ________)], as filed with the Securities and Exchange Commission (the "SEC") relating to the Funds' shares (the "Shares"); (iv) the Funds' current Prospectus(es); (v) the Funds' current Statement(s) of Additional Information; and (vi) the pricing procedures applicable to the calculation of the Funds' net asset values as approved by the Trust's Board (the "Pricing Procedures"). It is solely the Trust's responsibility to furnish BNY from time to time with copies, properly certified or authenticated, of all amendments of or supplements to the foregoing, and BNY will not be held to have knowledge of any such amendments or supplements until the same are actually received by BNY. Furthermore, the Trust will provide BNY with any other documents that BNY and BAAI may reasonably request and will notify BNY and BAAI as soon as possible of any matter materially affecting either BNY's or BAAI's performance of its services under this Agreement. (d)(i) BNY undertakes to report on a regular basis to BAAI and the Trust regarding: (A) the readiness of its computer systems, or those used by it in the performance of its duties hereunder, properly to record, store, process, calculate or present calendar dates falling on and after, and time spans including, January 1, 2000 or February 29, 2000 (the "Subject Dates") as a result of the occurrence, or use of data containing any such Subject Dates; (B) the readiness of its computer systems or those used by it in the performance of its duties hereunder, to calculate any information dependent on or relating to dates on or after the Subject Dates; and (C) its ability to perform the administration and fund accounting services set forth in Schedule II (the "Services") in accordance with any applicable performance standards set forth in Schedule III (the "Standards") with respect to the maintenance of records or processing of data containing dates falling on or after the Subject Dates, provided that, with respect to computers used but not owned by BNY and third-party computer systems other than InvestOne, BNY's responsibility shall be limited to seeking similar reports from such owners or third parties and promptly forwarding such reports to BAAI. Without limiting the foregoing, BNY undertakes to notify BAAI and the Trust, in writing, of any concerns believed by BNY to be material regarding the events described in this paragraph, provided that, with respect to computers owned by others and third-party computer systems other than InvestOne, BNY's responsibility shall be limited to seeking similar notice from such owners or third parties and promptly forwarding such notifications to BAAI. (ii) BAAI or the Trust shall have the right to terminate this Agreement if there is a "material failure" by BNY to perform any of the Services in accordance with the Standards due to a failure by computers owned or used by BNY in performing its duties hereunder to properly process the occurrence of the Subject Dates or data containing the Subject Dates. As used in this Section 1(d), the term "material failure" shall be limited to a failure to provide any of the Services in accordance with the Standards, provided that no such failure shall be deemed a "material failure" if such failure occurs at or about the time other major financial institutions similar to BNY providing similar services in a similar volume to investment companies similar to the Trust are experiencing similar failures, and, provided further, that no failure by BNY shall be or be deemed a "material failure" if BNY substantially provides the Services under a 2 contingency plan, it being agreed that, to the extent that the parties mutually agree, the time frames and deadlines set forth in Schedule III of this Agreement and elsewhere shall not be considered in determining whether BNY is substantially providing the Services in accordance with the Standards. BAAI and the Trust agree to act reasonably and in good faith in considering any request by BNY to extend time frames and deadlines. (iii) In the event there is a "material failure" by BNY to provide the Services and such "material failure" is not cured by BNY within 10 days after such material failure arises, BAAI or the Trust shall have the right to terminate this Agreement upon the giving of 60 days written notice to BNY. BNY shall, notwithstanding any other provision contained in this Agreement, have no liability to the Trust or BAAI under this Agreement if such "material failure" initially arose out of or was caused by a failure of a computer used but not owned by BNY or owned by a third party (other than InvestOne) to properly process the Subject Dates or data containing the Subject Dates, and BNY shall be entitled to any compensation and reimbursement for out-of-pocket expense as may then be due and payable, as well as agreed-upon out-of-pocket expenses incurred in connection with such a termination. If such a termination is the result of a "material failure" initially arising out of, or caused by a failure of computers owned by BNY or a failure by InvestOne, then, first, BNY's liability hereunder for such failure shall, notwithstanding any other provision contained in this Agreement to the contrary, be limited to the lesser of (x) the fees paid to a successor service provider during the six months next succeeding the date of termination to the extent such fees exceed the fees that would have been paid to BNY hereunder, and (y) $1,000,000; and second, BNY shall not be entitled to out-of-pocket expenses incurred in connection with such a termination. (iv) In the event of conflict between this Section 1(d) and any other provision contained in this Agreement, this Section 1(d) shall control. (v) BAAI and the Trust each agree to hold all of the provisions of this Section 1(d) in strict confidence and not to disclose, nor permit disclosure of, such provisions. (e) Subject to the direction and approval of the Trust's Board and appropriate officers and the provisions of this Agreement, BNY shall provide to each Fund the administrative services set forth on Schedule II attached hereto. In performing such services hereunder, BNY shall provide, at its expense, office space, facilities, equipment and personnel. BNY shall not provide any services relating to the management, investment advisory or sub-advisory functions of any Fund, distribution of shares of any Fund, maintenance of any Fund's financial records (except as otherwise agreed by the parties) or any services normally performed by the Funds' counsel or independent accountants. Upon receipt of the Trust's prior written consent, BNY may delegate any of its duties and obligations hereunder to any delegee or agent whenever and on such terms and conditions as it deems necessary or appropriate. Unless expressly agreed in writing, BNY shall not be relieved of liability or responsibility for the performance of any duties or obligations delegated to a delegee or agent, provided that BNY shall have no liability for duties or obligations that are delegated to a delegee or agent at the instruction of the Trust or BAAI. The Trust and BAAI shall cause their respective officers, and shall use reasonable efforts to cause the Trust's or BAAI's legal counsel, independent accountants, and transfer agent to cooperate with BNY and to provide BNY, upon BNY's reasonable written request, such 3 information, documents and advice relating to such Fund as is within the possession or knowledge of such persons, in order to enable BNY to perform its duties hereunder. Such cooperation or provision of information, documents or advice shall be at no cost to BNY, provided BNY's request is reasonable and BAAI shall have been notified of the request. In connection with its duties hereunder, BNY shall be entitled to reasonably rely upon any documents relating to a Fund provided to BNY by any of the aforementioned persons. BNY may apply to the Trust or BAAI for written instructions with respect to any matter arising in connection with BNY's performance hereunder. If, after a reasonable period of time, BNY receives no response to any such application, BNY may then notify the Trust or BAAI of reasonable action that BNY shall take if written instructions are not received within a stated period of time after such notice, and then BNY shall not be liable for taking such reasonable action as if written instructions had been provided. BNY is entitled to reasonably rely and act in accordance with written instructions believed to have been given by authorized persons and shall incur no costs for such reasonable reliance. BNY shall have no duties or responsibilities whatsoever except such duties and responsibilities as are specifically set forth in this Agreement and Schedule II hereto, and no covenant or obligation shall be implied against BNY in connection with this Agreement. (f) The Trust and BAAI, for itself and not for the others, hereby represents and warrants to BNY, which representations and warranties shall be deemed to be continuing, that: (i) it is duly organized and existing under the laws of the jurisdiction of its organization, with full power to carry on its business as now conducted, to enter into this Agreement and to perform its obligations hereunder; (ii) this Agreement has been duly authorized, executed and delivered by it in accordance with all requisite action and constitutes a valid and legally binding obligation, enforceable in accordance with its terms; (iii) it is conducting its business substantially in compliance with all applicable laws and regulations, both state and federal, and has obtained all regulatory licenses, approvals and consents necessary to carry on its business as now conducted; (iv) there is no statute, regulation, rule, order or judgment binding on it and no provision of its Declaration or Bylaws, nor of any mortgage, indenture, credit agreement or other contract binding on it or affecting its property which would prohibit its execution or performance of this Agreement; and (v) the Trust and BAAI will use reasonable efforts to promptly notify BNY of any errors or omissions contained in any reports, calculations, valuations and other items of information, provided that any failure by the Trust or BAAI to detect any such errors or omissions shall not relieve BNY of any resulting liability therefrom. To the extent that BAAI has actual knowledge of any such error or omission and fails to use reasonable efforts to promptly notify BNY, BNY shall be relieved of any liability that BNY may have mitigated had BAAI provided notice of such error or omission to BNY. (g) BNY hereby represents and warrants to the Trust and BAAI, which representations and warranties shall be deemed to be continuing, that: (i) it is duly organized and existing under the laws of the jurisdiction of its organization, with full power to carry on its business as now conducted, to enter into this Agreement and to perform its obligations hereunder; (ii) this Agreement has been duly authorized, executed and delivered by it in accordance with all requisite action and constitutes a valid and legally binding obligation, enforceable in accordance with its terms; and (iii) it is conducting its business substantially in compliance with all applicable laws and regulations, both state and federal, and has obtained all 4 regulatory licenses, approvals and consents necessary to carry on its business as now conducted; there is no statute, regulation, rule, order or judgment binding on it and no provision of its Declaration or Bylaws, nor of any mortgage, indenture, credit agreement or other contract binding on it or affecting its property which would prohibit its execution or performance of this Agreement. 2. Compensation. For the services to be rendered, the facilities to be furnished and the compensation and other expenses to be borne by BNY, as provided for in this Agreement, BNY shall be entitled to receive a monthly fee from BAAI and reimbursement for out-of-pocket expenses as set forth in Schedule IV to this Agreement. It is understood that BAAI shall be responsible for BNY's monthly fee for its services hereunder, and BNY agrees that it shall have no claim against the Trust or the Funds with respect to compensation under this Agreement. 3. Recordkeeping. BNY shall, as agent for the Trust, and subject to the direction and approval of the Trust's Board and the provisions of this Agreement, maintain and keep current the books, accounts and other documents, if any, pursuant to the services and duties provided by BNY as set forth in Schedule II of this Agreement, and preserve any such books, accounts and other documents in accordance with the applicable provisions of Rule 31a-2 of the 1940 Act. Such books, accounts and other documents shall be made available upon reasonable request for inspection by officers, employees and auditors of the Trust and BAAI during BNY's normal business hours. All records maintained and preserved by BNY pursuant to this Agreement which the Trust is required to maintain and preserve in accordance with Rule 31a-2 of the 1940 Act shall be and remain the property of the Trust and shall be surrendered to the Trust promptly upon request in the form in which such records have been maintained and preserved. Upon reasonable request of the Trust, BNY shall provide in data files or hard copy, whichever the Trust shall reasonably elect, any records included in any such delivery which are maintained by BNY on a computer disc, or are similarly maintained, and the Trust shall reimburse BNY for its expenses of providing such hard copy. 4. Standard of Care; Indemnification. (a) BNY shall at all times act in good faith and agrees to use its best efforts to fulfill its obligations under this Agreement, but assumes no responsibility for loss or damage to the Trust unless such loss or damages is caused by BNY's own negligence, bad faith or willful misconduct or that of its directors, officers or employees. BNY shall be responsible hereunder for all direct damages resulting from its own negligence, bad faith or willful misconduct, provided however that it shall not be responsible for lost profits or lost business arising under or in connection with this Agreement. It is understood and agreed that for purposes of this Section 4(a), "direct damages" shall include, but shall not be limited to, all legal costs, penalties, reimbursement for excess distribution and redemption payments, repurchasing costs for servicing agents and reimbursement to the Funds for net asset value breaks (as calculated under the Pricing Procedures). (b) The Trust, on behalf of each Fund, will indemnify BNY against and hold it harmless from any and all losses, claims, damages, liabilities or expenses (including reasonable counsel fees and expenses of a defense against any claim, demand, action or suit), relating to the 5 particular Fund and arising from any one or more of the following: (i) errors in records or instructions, explanations, information, specifications or documentation of any kind, as the case may be, supplied to BNY by any person described in Section 1 hereof or by any third party described in Section 5; (ii) action or inaction taken or omitted to be taken by BNY pursuant to written or oral instructions described in this Agreement (or otherwise without bad faith, negligence or willful misconduct); (iii) any action taken or omitted to be taken by BNY in good faith in accordance with the advice or opinion of counsel for a Fund, the Trust, BAAI (obtained in accordance with the procedures set forth in this Agreement) or its own counsel; (iv) any improper use by the Fund, the Trust, BAAI or their respective agents, of any valuations or computations supplied by BNY pursuant to this Agreement; (v) the method of valuation of the securities and the method of computing a Fund's net asset value or any other amount computed by BNY hereunder, provided BNY has followed the Pricing Procedures; and (vi) any valuation of securities, net asset value or other amount provided by a Fund or BAAI. BNY will not confess any claim or settle or make any compromise in any instance in which the Trust will be asked to provide indemnification, except with the Trust's prior written consent. Any amounts payable by the Trust under this Section 4(b) shall be satisfied only against the assets of the Fund involved in the claim, demand, action or suit and not against the assets of any other investment portfolio of the Trust. 5. Fund Accounting Services. (a) BNY, in performing the services required of it under the terms of this Agreement, shall be entitled to rely fully on the accuracy and validity of any and all instructions, explanations, information, specifications and documentation furnished to it by a Fund and shall have no duty or obligation to review the accuracy, validity or propriety of such instructions, explanations, information, specifications or documentation, including, without limitation, evaluations of securities; the amounts or formula for calculating the amounts and times of accrual of Fund's liabilities and expenses; the amounts receivable and the amounts payable on the sale or purchase of securities; and amounts receivable or amounts payable for the sale or redemption of Fund shares effected by or on behalf of the Fund. In the event BNY's computations hereunder rely, in whole or in part, upon information, including, without limitation, bid, offer or market values of securities or other assets, or accruals of interest or earnings thereon, from a pricing or similar service utilized, or subscribed to, by BNY which BNY in its judgment deems reliable, or any other third party pricing source designated by the Trust, BNY shall not be responsible for, under any duty to inquire into, or deemed to make any assurances with respect to, the accuracy or completeness of such information. BNY shall not be required to inquire into any valuation of securities or other assets by the Fund or any third party described in this Section, even though BNY in performing services similar to the services provided pursuant to this Agreement for others may receive different valuations of the same or different securities of the same issuers. (b) Subject to the provisions of this Agreement and the direction and approval of the Trust's Board, BNY shall perform the computations described in Schedule II at such times and dates and in the manner specified or described in the then-current Prospectus(es) of a Fund. To the extent valuation of securities or a computation specified or described in a Fund's Pricing Procedures or then-current effective Prospectus is at any time inconsistent with any applicable laws or regulations, the Trust or BAAI shall immediately so notify BNY in writing and thereafter 6 shall furnish BNY at all appropriate times with the values of such securities and such Fund's net asset value or other amounts otherwise to be calculated by BNY, or, subject to the prior approval of BNY, instruct BNY in writing to value securities and make such computations in a manner which the Trust or BAAI then represents in writing to be consistent with all applicable laws and regulations. The Trust or BAAI may also from time to time, subject to the prior approval of BNY, instruct BNY in writing to make computations other than as specified in this Section of this Agreement. By giving such instruction, the Trust or BAAI shall be deemed to have represented that such instruction is consistent with all applicable laws and regulations and the then-current effective Prospectus of the particular Fund. The Trust or BAAI shall have sole responsibility for determining the method of valuation of securities and the method of computations, and all computations, valuation of securities and the method of computing each Fund's net asset value shall be subject to approval by the Trust and BAAI. BNY shall not be liable for relying on any price provided by any pricing service believed by BNY to be reliable, and the Trust or BAAI shall furnish values when the same are not available from a pricing service utilized by BNY, with such furnishing to constitute an instruction to BNY to rely on the provided values. (c) BNY shall be responsible for determining and properly reflecting in the computations made by it made by it under this Agreement: (i) the taxable nature of any distribution or amount received or deemed received by, or payable to, a Fund; (ii) the taxable nature or effect on a Fund or its shareholders of any corporate actions, class actions, tax reclaims, tax refunds, or similar events; (iii) the taxable nature or taxable amount of any distribution or dividend paid, payable or deemed paid, by a Fund to its shareholders; (iv) the effect under any federal, state, or foreign income tax laws of a Fund making or not making any distribution or dividend payment, or any election with respect thereto; or (v) any tax accounting; provided, however, that if BNY is not certain of the taxable nature, amount or effect of any such item, it may seek instructions regarding the proper treatment of such item from the Trust or BAAI in accordance with the procedures set forth in Section 1(e), above, and shall have no liability for acting in reliance on such instructions. 6. Termination of Agreement. (a) This Agreement shall become effective as of the date first set forth above and shall remain in full force and effect unless terminated pursuant to the provisions of Section 6(b). (b) This Agreement may be terminated at any time without payment of any penalty, upon 60 days' written notice to BNY by BAAI or by vote of the Board of the Trust; or upon 180 days' written notice to BAAI and the Trust by BNY. Upon any such termination, BNY will cooperate with and assist the Trust, BAAI, their agents and any successor administrator(s) or sub-administrator(s) in the substitution/conversion process. In connection with any termination of this Agreement, unless BNY is in breach of this Agreement, the Funds and BAAI agree to pay BNY any compensation and reimbursement for out-of-pocket expenses as may then be due and payable, as well as agreed-upon out-of-pocket expenses incurred in connection with a termination. If BNY is in breach of this Agreement, the Funds and BAAI may offset any compensation or reimbursement amounts owed to BNY by the amount of damages, costs and expenses incurred as a result of BNY's breach, including costs, expenses and reasonable 7 incremental fees for a period not to exceed one year incurred in connection with a conversion by the Trust and BAAI to a successor service provider. In the event of a dispute as to the amount of such damages, the Funds and BAAI agree to escrow the set-off amount. (c) Sections 4 and 8 shall survive this Agreement's termination. 7. Amendments. Except as expressly provided in the first paragraph of Section 1, no provision of this Agreement may be amended or modified orally, but only by an instrument in writing signed by the party against which enforcement of the amendment or modification is sought. 8. Confidentiality. All books, records, information and data pertaining to the business of the Trust, or its prior, present or potential shareholders that are exchanged or received in connection with the performance of BNY's duties under this Agreement shall remain confidential and shall not be disclosed to any other person, except as specifically authorized by the Trust or as may be required by law, and shall not be used for any purpose other than performance of its responsibilities and duties hereunder, and except that BNY retains the right to disclose matters subject to confidentiality to its examiners, regulators, internal or external auditors, its accountants, its internal and external counsel, and to any other entity whenever it is advised by its internal or external counsel that it is reasonably likely that BNY would be liable for a failure to do so. BNY will endeavor to provide written notice to the Trust and BAAI at least five business days prior to any disclosures pursuant to this Section 8, but, provided it shall have provided as much notice as is reasonably practicable under the circumstances, BNY shall have no liability for any failure to do so. 9. Service to Other Companies. The Trust and BAAI acknowledge that BNY now provides, will continue to provide and may in the future provide administrative or other services to other investment companies or series of investment companies, and the Trust and BAAI have no objection to BNY so doing. The Trust and BAAI further acknowledge that the persons employed by BNY to assist in the performance of BNY's duties under this Agreement may not devote their full time to such service and nothing contained in this Agreement shall be deemed to limit or restrict the right of BNY or any affiliate of BNY to engage in and devote time and attention to other businesses or to render services of whatever kind or nature. 10. Conversion Schedule. If the Trust and BAAI, in the exercise of their reasonable judgment, cannot meet the conversion schedule set forth in Schedule VI as a result of BNY's inability to provide, or to confirm that it is capable of providing, the services described in Schedule II or to meet the quality of service standards set forth in Schedule III with respect to one or more Funds in accordance with the conversion schedule attached as Schedule VI, then BNY shall be obligated to pay any resulting incremental costs incurred by the Trust or BAAI, including any incremental fees payable to First Data Investors Services Group by the Trust or BAAI. 11. Miscellaneous. (a) This Agreement shall be construed in accordance with the laws of the State of New York, without regard to conflict of laws principles thereof. Each Fund, the Trust and BAAI 8 hereby consent to the jurisdiction of a state or federal court situated in New York City, New York in connection with any dispute arising hereunder. To the extent that in any such jurisdiction any of the aforementioned persons may now or hereafter be entitled to claim, for itself or its assets, immunity from suit, execution, attachment (before or after judgment) or other legal process, each irrevocably agrees not to claim, and it hereby waives, such immunity. (b) In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations shall not in any way be affected or impaired thereby, and if any provision is inapplicable to any person or circumstances, it shall nevertheless remain applicable to all other persons and circumstances. (c) Each and every right granted to BNY, the Trust or BAAI hereunder or under any other document delivered hereunder or in connection herewith, or allowed it by law or equity, shall be cumulative and may be exercised from time to time. No failure on the part of BNY, the Trust or BAAI to exercise, and no delay in exercising, any right will operate as a waiver thereof, nor will any single or partial exercise by BNY, the Trust or BAAI of any right preclude any other or future exercise thereof or the exercise of any other right. (d) BNY shall not be responsible for delays or errors that occur by reason of circumstances beyond its reasonable control in the performance of its duties under this Agreement, provided that reasonable back-up and disaster recovery systems are in place, including, without limitation, labor difficulties, mechanical breakdowns, computer breakdowns or malfunctions (hardware or software), flood or catastrophe, acts of God, failures of transportation, communication or power supply, or other similar circumstances. Nor shall BNY be responsible for delays or failures to supply the information or services specified in this Agreement where such delays or failures are caused by the failure of any person(s) other than BNY to supply any instructions, explanations, information, specifications or documentation deemed necessary by BNY in the performance of its duties under this Agreement. (e) Any notice or other instrument authorized or required by this Agreement to be given in writing to the Trust, BNY and/or BAAI shall be sufficiently given if addressed to that party and received by it at its office set forth below or at such other place as it may from time to time designate in writing. To the Trust: Nations Funds Trust 111 Center Street Little Rock, Arkansas 72201 Attention: Richard H. Blank, Jr. To BAAI: Banc of America Advisors, Inc. One Bank of America Plaza 9 101 South Tryon Street, NC1-002-33-31 Charlotte, NC 28255-0001 Attention: Edward D. Bedard To BNY: The Bank of New York 90 Washington Street 22nd Floor New York, NY 10286 Attention: Stephen E. Grunston (f) This Agreement shall extend to and shall be binding upon the parties hereto and their respective successors and assigns; provided, however, that this Agreement may not be assigned by BNY, nor may BNY delegate responsibility for the performance of any of its duties hereunder, without the written consent of the other parties hereto. (g) This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and which collectively shall be deemed to constitute only one instrument. (h) The captions of this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. (i) This Agreement constitutes the entire agreement between the parties hereto with respect to the provision by BNY of sub-administrative services and the receipt of fees therefor, and supersedes all prior arrangements or understandings, written or oral, with respect to the provision by BNY of such services and the receipt of fees therefor. 10 IN WITNESS WHEREOF, the parties hereto have caused this instrument to be duly executed and delivered by their duly authorized officers as of the date first written above. THE BANK OF NEW YORK By: _________________________________ Name: Stephen E. Grunston Title: Vice President BANC OF AMERICA ADVISORS, INC. By: _________________________________ Name: Edward D. Bedard Title: Senior Vice President and Chief Operating Officer NATIONS FUNDS TRUST By: _________________________________ Name: James E. Banks, Jr. Title: Assistant Secretary 11 SCHEDULE I 1. Nations High Yield Fund 2. Nations Kansas Intermediate Municipal Bond Fund 3. Nations MidCap Index Fund Approved: [______________] II-1 SCHEDULE II FUND ADMINISTRATION SERVICES BNY shall perform the following sub-administrative services, in addition to any other services agreed to from time to time: o Monitor and document compliance by the Funds with their policies and restrictions as delineated in their Prospectuses and Statements of Additional Information, including any supplements or amendments thereto, and with the rules and regulations under the 1940 Act utilizing Charles River Development's compliance monitoring system or by such other means as the parties may agree. BAAI shall be responsible for communicating such policies and restrictions, including any changes thereto, to BNY by such means as the parties agree. o Provide income attribution summary schedules necessary for year-end tax reporting, including the attached examples. Provide a gross up for foreign taxes on a per share basis and the redesignation of income and capital gains on a per share basis. o Prepare federal, state, excise and local income tax returns for the Funds and file such returns upon the approval of the Funds' independent accountants; monitor, report on and prepare periodic worksheet and tax provision packages with respect to Sub-Chapter M qualifications; prepare and file all Form 1099s with respect to the Funds' Trustees; monitor compliance with Section 4982 of the Internal Revenue Code; calculate and maintain records pertaining to original issue discount and premium amortization as required; identify wash sales and all other book/tax differences, and report results to the Funds' independent accountants and Funds management; and such other duties relating to federal and/or state tax compliance as the parties may agree. BNY shall be responsible for providing all pertinent tax information to the Funds' independent accountants. o Prepare Return of Capital Statement of Position 93-2 adjustments. o Support BAAI in its preparation of the schedules and provide BAAI unaudited quarterly and semi-annual and audited annual financial statements and schedules of Fund investments by providing, without limitation, each Funds' schedule of investments and general ledger in electronic format and/or hard copy, as required, and such other information as may be necessary to complete such financial reports. o Prepare statistical reports for outside information services (referenced in Schedule V), and such other information services as the parties may agree, including the ICI expense survey. o Prepare calculations for capital gains pursuant to IRS rules in conjunction with BAAI and the Funds' independent accountants. o Attend Fund shareholder and Board of Trustees meetings as requested by BAAI, including making such presentations as are appropriate, and, with respect to the Fund administration II-2 services described herein, provide such periodic and special reports to the Trust and BAAI as the Trust and BAAI shall reasonably request. FUND ACCOUNTING SERVICES BNY shall provide all accounting and recordkeeping services necessary and appropriate for the business of the Funds, including but not limited to those set forth below. Required Records; Ledgers and Journals -------------------------------------- BNY shall keep current the following accounts and records relating to the business of the Funds, in such form as is required by the 1940 Act and the rules thereunder, and generally accepted accounting principles, to support all filings under applicable federal and state tax laws and regulations and as may be mutually agreed to among the Trust, BAAI and BNY, and shall make available to BAAI and/or the Trust upon request: 1. Cash Receipts Journal 2. Cash Disbursements Journal 3. Dividends Paid and Payable Schedule (book vs. tax basis) 4. Purchase and Sales Journals - Portfolio Securities 5. Realized/Unrealized Gain (Loss) Reports 6. Subscription and Redemption Journals 7. Security Ledgers - Transaction Report and Tax Lot Holdings Report 8. Broker Ledger - Commission Report 9. Daily Expense Accruals 10. Daily Interest Accruals 11. Daily Trial Balance 12. Portfolio Interest Receivable and Income Journal 13. Portfolio Dividend Receivable and Income Register 14. Listing of Portfolio Holdings - showing cost, market value and percentage of portfolio comprised of each security 15. Aged Receivables (dividends, interest, tax reclaiming) 16. Portfolio Turnover Rate 17. Cash reconciliations 18. Position reconciliations BNY will be responsible for maintaining, in accordance with Section 31 and the rules thereunder of the 1940 Act, all books and records so required and generated in the course of performing their duties under this agreement. Further, at a minimum, BNY shall maintain on-site the above referenced reports as of each month end for the most recent fiscal year-ended and the current fiscal year. II-3 Daily Accounting Services BNY shall perform the following services on each Business Day: 1. Calculate Net Asset Value (NAV), and Public Offering Price (POP) Per Share Pursuant to SEC formulas: o Update the valuation of security positions held by each Fund's portfolio in accordance with the Fund's Pricing Procedures and any other appropriate procedures established by the Board and BAAI as BAAI shall provide BNY in writing o When instructed by BAAI, enter manual prices supplied by broker and link to pricing procedures o Calculate each Fund's NAV/POP in accordance with the applicable Pricing Procedures approved by the Trust's Board of Trustees and prepare NAV proof sheet. Review components of change in NAV for reasonableness based on the tolerance levels as BAAI shall direct BNY in writing o Review variance reporting for price changes in individual securities using variance levels established by Fund and report to Fund portfolio managers and to BAAI o Review for ex-dividend items indicated by pricing sources; trace to general ledger for agreement o Communicate required pricing and yield information (NAV/POP), as appropriate, to BAAI, the Funds' Transfer Agent and Sub-Transfer Agent and, electronically, to NASDAQ and to such other third parties as designated by the Funds with respect to its various distribution channels. In addition, provide Fund share activity to BAAI. 2. Dividend Rates/Yields/Dollar Weighted Average Maturity: o Calculate, subject to the approval of BAAI, net investment income available for distribution daily as appropriate o Calculate daily dividend rate, and 1, 7, 30-day yields/SEC yields o Calculate dollar weighted average maturity 3. Determine and Report Cash Availability: o Receive daily cash and transaction statements from the Funds' Custodian o Complete daily bank cash reconciliations (including documentation of any reconciling items) and notify the Funds' Custodian o Report investable cash to BAAI and Fund sub-advisers 4. Daily Expense Accruals: o Accrue individual expenses on a daily basis based on Instructions provided by BAAI, except for those instances where such an adjustment would cause a full penny break in NAV, in which case such adjustment will be included in the calculation of NAV on the day received o If applicable, accrue daily amortization of organization expense as instructed by BAAI II-4 o If applicable, accrue daily Rule 12b-1 Plan expenses o Adjust expense accruals as instructed by BAAI and provide reports as requested by BAAI 5. Verify and Record All Daily Income Accruals for Debt Issues: o Track income and provide year end tax schedules o Review and verify all interest and amortization reports o Periodic tie-out of receivables o Ensure security masters denote proper interest and amortization methods as per the fund set up sheets as instructed by BAAI 6. Monitor Securities: o Review each funds portfolio holding and current days security trades for dividend activity o Interface with Funds' Custodian for timely collection and postings of corporate actions, dividends and interest pre-payments 7. Enter All Security Trades: o Review verification of trade and interest calculations o Verify settlement through custodian statements o Maintain security ledger transaction reporting o Maintain tax lot holdings o Determine realized gains or losses on security trades o Provide broker commission information 8. Enter All Fund Share Transactions: o Periodically reconcile dividend payable amounts with the Funds' Transfer Agent o Process activity identified on transfer agent reports o Verify settlement through custodian statements o Reconcile to transfer agency report balances o Process and track capital stock gain/loss activity 9. Prepare Daily Trial Balance: o Post manual entries to general ledger o Post custodian bank activity o Require automated settled transactions between custody and activity records (prepare, clear and post) o Post shareholder and security transactions o Post and verify income and expense accruals and resolve differences o Prepare general ledger o Post corporate action activity II-5 10. Review and Reconcile Custodian Statements: o Verify all posted interest, dividends, expenses, and shareholder and security payments/receipts, etc. when requested o Post all cash settlement activity to trial balance o Reconcile to ending cash balance accounts o Report to BAAI the status of past due items and failed trades with the custodian o Reconcile cash exception Income items, tax reclaims and past due income items with custody area 11. Preparation of Accounting Reports: o Price Variance Report o Trial Balance o Portfolio Valuation o NAV Calculation Report o Cash Availability o Change in NAV o Non-standard entries o Stale Price Report o Other such reports as may be reasonably be requested by BAAI Monthly/Quarterly Services -------------------------- BNY shall provide the following services on a monthly or quarterly basis, within such timeframe as may be mutually agreed upon by BNY, the Trust and BAAI: 1. Submission of Monthly Accounting Reports as mutually agreed upon 2. Reconcile Asset Listing to Custodian Asset Listing 3. Provide Monthly Analysis and Reconciliation of Trial Balance Accounts 4. Prepare Documentation Supporting the Preparation of: o SEC yield reporting o Income by state reporting o Standard Industry Code Valuation Report (please provide BAAI's industry code classifications/is there a standard for all funds) o Alternative Minimum Tax Income segregation schedule II-6 5. Provide Upon Request Broker Commission and Net Trade Reports Annual (and Semi-Annual) Accounting Services -------------------------------------------- BNY shall provide the following services on an annual and semi-annual basis: 1. Supply auditors InvestOne reports supporting securities and shareholder transactions, income and expense accruals, etc. during the year in accordance with standard audit assistance requirements 2. Provide BAAI with information to assist BAAI in the preparation of NSAR filings Other Core Services ------------------- BNY shall provide the following services: o Accrete discounts and amortize premiums to put and call events as directed by BAAI and in a manner acceptable under generally accepted accounting principles o Process principal repayments on mortgage backed securities o Update variable securities with current rates o Process corporate action events through a primary vender feed, and monitor results via Reuters, Bloomberg, or other available sources as the parties may agree o Perform automated portfolio pricing with a second vendor as requested by BAAI o Produce documents and respond to inquiries during account and SEC examinations Money Market Funds: Prepare daily mark to market reports and analysis in compliance with Rule 2a-7 including: o Calculating the daily portfolio weighted average maturity o Report portfolio diversification based on trade/security information provided by BAAI by: Country, State, Tier, Liquidity, Asset Backed Securities, Industry, Letter of Credit o Listing percentage of portfolio maturing in specified intervals (I.E., number of days) o Providing issuer and guarantor diversification exception reporting International Funds: BNY shall provide the following services: o Report in base and local currency II-7 o Processing of tax liability on foreign income subject to approval of BAAI o Daily variance analysis performed on FX rates for security position held o Produce automated bifurcation reporting in compliance with IRC Section 988 o Mark to market security receivables and payables on a daily basis o Determine portfolio exposure by country and currency In addition to the above, BNY will provide additional support as agreed upon from time to time (i.e., financial statement production). II-8 SCHEDULE III SERVICE LEVEL PERFORMANCE STANDARDS
- ------------------------------------------------------------ --------------------------------------------------------------- SERVICE STANDARD - ------------------------------------------------------------ --------------------------------------------------------------- 1. Daily Cash Availability |_| 100% accuracy and delivery by 9:00 a.m. EST for Money Market Funds and 9:30 a.m. EST for all others - ------------------------------------------------------------ --------------------------------------------------------------- 2. Calculation of daily NAVs |_| 100% accuracy by 5:00 p.m. EST including pricing, expense accruals, cash activity, manual entries, S/H activity. Delivery by 5:45 p.m. EST - ------------------------------------------------------------ --------------------------------------------------------------- 3. Review of daily NAVs |_| 100% review by 5:30 p.m. EST |_| Review of NAV components for reasonableness including analysis of the change in the NAV and the change in mill rates. |_| Review of price variance report |_| Review of manual proof - ------------------------------------------------------------ --------------------------------------------------------------- 4. NASDAQ Reporting |_| 100% accuracy and communication by 5:45 p.m. EST - ------------------------------------------------------------ --------------------------------------------------------------- 5. Daily Pricing and Rate Report (DPRR) |_| 100% accuracy in nightly transmission of DPRRs |_| Money Market Funds-5:30 p.m. EST |_| All other funds- 6:00 p.m. EST - ------------------------------------------------------------ --------------------------------------------------------------- 6. FundStation Report (SubM) |_| 100% accuracy and nightly transmission by 7:00 p.m. EST - ------------------------------------------------------------ --------------------------------------------------------------- 7. Processing of trade tickets |_| 100% accuracy and processed by T+1 if received by the following cut-off times: |_| All Funds (except International) - 10:00 am (T+1) |_| International - 12:00 p.m. (T+1) |_| Same day settlements - 1:30 p.m. - ------------------------------------------------------------ --------------------------------------------------------------- 8. Problem Resolution (general) |_| NAV impact analysis within 1 day |_| Clear and timely communication of 100% - ------------------------------------------------------------ ---------------------------------------------------------------
III-1
- ------------------------------------------------------------ --------------------------------------------------------------- SERVICE STANDARD - ------------------------------------------------------------ --------------------------------------------------------------- of issues |_| Ongoing Tracking - ------------------------------------------------------------ --------------------------------------------------------------- 9. Cash reconciliations |_| Performed daily and sent daily to BAAI (Money Market Funds) and sent weekly to BAAI(all other funds) |_| Issues communicated to BAAI same day |_| Outstanding items addressed within 1 business day - ------------------------------------------------------------ --------------------------------------------------------------- 10. Position Reconciliations |_| Performed daily and sent weekly to BAAI |_| Issues communicated to BAAI same day |_| Open issues addressed within 2 business days - ------------------------------------------------------------ --------------------------------------------------------------- 11. Tax reporting |_| Federal, state, tax returns |_| Tax provision package prepared within time parameters as set by BAAI/Independent tax |_| Tax provision packages including personnel (PWC) Sub-M and excise tax amounts/ distributions |_| Estimates of tax requirements prepared as required |_| Identification of all book/tax by BAAI for proper tax planning differences |_| Capital gain estimate preparations - ------------------------------------------------------------ --------------------------------------------------------------- 12. Statistical Reports |_| Filed within the time parameters as set forth by each statistical service - ------------------------------------------------------------ --------------------------------------------------------------- 13. Expense accruals/payments |_| Payments made on the business day written instructions from an authorized signator received |_| Expense accruals made with 100% accuracy based upon written instructions from BAAI - ------------------------------------------------------------ --------------------------------------------------------------- 14. Management Reports |_| Provided to BAAI within 10 business days of month end - ------------------------------------------------------------ --------------------------------------------------------------- 15. Year end tax reports |_| Provided to BAAI within the time frame agreed to - ------------------------------------------------------------ ---------------------------------------------------------------
III-2
- ------------------------------------------------------------ --------------------------------------------------------------- SERVICE STANDARD - ------------------------------------------------------------ --------------------------------------------------------------- 16. Annual/Semi-Annual Reports |_| Provide Trial Balance within 5 business days after annual/semi-annual period |_| Provide additional financial statement support as agreed to - ------------------------------------------------------------ --------------------------------------------------------------- 17. Daily Reports |_| To be provided on the following day |_| Provide detailed portfolio valuation |_| Trial Balance - ------------------------------------------------------------ --------------------------------------------------------------- 18. Daily Cash Sweep |_| 100% accuracy and communication by 2:00 p.m. EST |_| AIM |_| Nuveen - ------------------------------------------------------------ --------------------------------------------------------------- 19. Post Dividends / Corporate Actions |_| 100% accuracy and posted on effective date - ------------------------------------------------------------ --------------------------------------------------------------- 20. Monthly Reconciliations |_| Complete reconciliations within 10 business days - ------------------------------------------------------------ --------------------------------------------------------------- 21. Reporting to Sub-Advisors |_| Provide nightly and other periodic reporting to Nations Funds Sub-Advisors - ------------------------------------------------------------ --------------------------------------------------------------- 22. Compliance |_| Provide compliance reports as requested by BAAI - ------------------------------------------------------------ ---------------------------------------------------------------
III-3 SCHEDULE IV (ATTACHED) IV-1 SCHEDULE V All Database Companies Quarterly List ---------------------- -------------- AMG Data Services Lipper Barron's Morningstar Bloomberg CDA Wiesenberger CDA Wiesenberger Investment Company Institute Commerce Clearing House (CCH) S&P Micropal Forbes Institute for Economic Research Institute for Economic Research Value Line Interactive Data Services Media General Financial Services Investment Company Institute LCG Associates LCG Associates Closed End Fund Digest (Closed Lipper End Only) Media General Lipper - International (Closed Moody's Investors Service End Only) Morningstar S&P Micropal Strategic Insights Value Line V-1 SCHEDULE VI Conversion Schedule - ---------------------------- ------------------- ---------------- Fund Type Number of Funds No Later Than - ---------------------------- ------------------- ---------------- Money Market Funds - ---------------------------- ------------------- ---------------- Variable Annuity Funds - ---------------------------- ------------------- ---------------- International Funds: - ---------------------------- ------------------- ---------------- All Remaining Funds - ---------------------------- ------------------- ---------------- VI-1 EX-99.H6 8 EXHIBIT 99.H6 Exhibit 99.H6 FORM OF NATIONS FUNDS TRUST SHAREHOLDER SERVICING PLAN ("PLAN") INVESTOR B SHARES Section 1. Each of the proper officers of Nations Funds Trust (the "Trust") is authorized to execute and deliver, in the name and on behalf of the Trust, written agreements based substantially on the form attached hereto as Appendix A or any other form duly approved by the Trust's Board of Trustees ("Agreements") with broker/dealers, banks and other financial institutions that are dealers of record or holders of record or which have a servicing relationship ("Servicing Agents") with the beneficial owners of Investor B Shares of the Trust (collectively, "Shares") provided that any material modifications of services listed in the Agreement shall be presented for approval or ratification by the Trustees at the next regularly scheduled Board Meeting. Pursuant to such Agreements, Servicing Agents shall provide shareholder support services as set forth therein to their clients who beneficially own Shares of the portfolios listed on Exhibit I (the "Funds") in consideration of a fee, computed monthly in the manner set forth in the applicable Fund's then current prospectus, at an annual rate of up to [___%] of the average daily net asset value of the Shares beneficially owned by or attributable to such clients. Affiliates of the Trust's distributor, administrator, co-administrator and adviser are eligible to become Servicing Agents and to receive fees under this Plan. All expenses incurred by a Fund in connection with the Agreements and the implementation of this Plan shall be borne either by the holders of the Shares of the particular Fund involved. If more than one Fund is involved and these expenses are not directly attributable to Shares of a particular Fund, then the expenses may be allocated between or among the Shares of the Funds in a fair and equitable manner. Section 2. The Trust's administrator and/or co-administrator shall monitor the arrangements pertaining to the Trust's Agreements with Servicing Agents. The Trust's administrator and co-administrator shall not, however, be obligated by this Plan to recommend, and the Trust shall not be obligated to execute, any Agreement with any qualifying Servicing Agents. Section 3. So long as this Plan is in effect, the Trust's distributor shall provide to the Trust's Board of Trustees, and the Trustees shall review, at least quarterly, a written report of the amounts expended pursuant to this Plan and the purposes for which such expenditures were made. Section 4. Unless sooner terminated, this Plan shall continue in effect for a period of one year from its date of execution and shall continue thereafter for successive annual periods, provided that such continuance is specifically approved by a majority of the Board of Trustees, including a majority of the Trustees who are not "interested persons," as defined in the Investment Company Act of 1940, of the Trust and have no direct or indirect financial interest in the operation of this Plan or in any Agreement related to this Plan (the "Disinterested Trustees") cast in person at a meeting called for the purpose of voting on this Plan. Section 5. This Plan may be amended at any time with respect to any Fund by the Trust's Board of Trustees, provided that any material amendment of the terms of this Plan (including a material increase of the fee payable hereunder) shall become effective only upon the approvals set forth in Section 4. Section 6. This Plan is terminable at any time with respect to any Fund by vote of a majority of the Disinterested Trustees. Section 7. While this Plan is in effect, the selection and nomination of the Disinterested Trustees shall be committed to the discretion of such Disinterested Trustees. Section 8. The Trust will preserve copies of this Plan, Agreements, and any written reports regarding this Plan presented to the Board of Trustees for a period of not less than six years. 2 EXHIBIT I Nations High Yield Fund Nations Kansas Intermediate Municipal Bond Fund Nations MidCap Index Fund Dated: [________________] Last Amended: [________________] 3 EX-99.H7 9 EXHIBIT 99.H7 Exhibit 99.H7 FORM OF NATIONS FUNDS TRUST SHAREHOLDER SERVICING PLAN ("PLAN") INVESTOR C SHARES Section 1. Each of the proper officers of Nations Funds Trust (the "Trust") is authorized to execute and deliver, in the name and on behalf of the Trust, written agreements based substantially on the form attached hereto as Appendix A or any other form duly approved by the Trust's Board of Trustees ("Agreements") with broker/dealers, banks and other financial institutions that are dealers of record or holders of record or which have a servicing relationship ("Servicing Agents") with the beneficial owners of Investor C Shares of the Trust (as listed on Schedule 1) (collectively, the "Shares") in any of the Trust's portfolios listed on Schedule 1 (the "Funds") provided that any material modifications of services listed in the Agreement shall be presented for approval or ratification by the Trustees at the next regularly scheduled Board Meeting. Pursuant to such Agreements, Servicing Agents shall provide shareholder support services as set forth therein to their clients who beneficially own Shares of the Funds in consideration of a fee, computed monthly in the manner set forth in the applicable Fund's then current prospectus, at an annual rate of up to [___%] of the average daily net asset value of the Shares beneficially owned by or attributable to such clients. Affiliates of the Trust's distributor, administrator, co-administrator and adviser are eligible to become Servicing Agents and to receive fees under this Plan. All expenses incurred by a Fund in connection with the Agreements and the implementation of this Plan shall be borne entirely by the holders of the Shares of the particular Fund involved. If more than one Fund is involved and these expenses are not directly attributable to Shares of a particular Fund, then the expenses may be allocated between or among the Shares of the Funds in a fair and equitable manner. Section 2. The Trust's administrator and/or co-administrator shall monitor the arrangements pertaining to the Trust's Agreements with Servicing Agents. The Trust's administrator and co-administrator shall not, however, be obligated by this Plan to recommend, and the Trust shall not be obligated to execute, any Agreement with any qualifying Servicing Agents. Section 3. So long as this Plan is in effect, the Trust's distributor shall provide to the Trust's Board of Trustees, and the Trustees shall review, at least quarterly, a written report of the amounts expended pursuant to this Plan and the purposes for which such expenditures were made. Section 4. Unless sooner terminated, this Plan shall continue in effect for a period of one year from its date of execution and shall continue thereafter for successive annual periods, provided that such continuance is specifically approved by a majority of the Board of Trustees, including a majority of the Trustees who are not "interested persons," as defined in the Investment Company Act of 1940, of the Trust and have no direct or indirect financial interest in 1 the operation of this Plan or in any Agreement related to this Plan (the "Disinterested Trustees") cast in person at a meeting called for the purpose of voting on this Plan. Section 5. This Plan may be amended at any time with respect to any Fund by the Trust's Board of Trustees, provided that any material amendment of the terms of this Plan (including a material increase of the fee payable hereunder) shall become effective only upon the approvals set forth in Section 4. Section 6. This Plan is terminable at any time with respect to any Fund by vote of a majority of the Disinterested Trustees. Section 7. While this Plan is in effect, the selection and nomination of the Disinterested Trustees shall be committed to the discretion of such Disinterested Trustees. Section 8. The Trust will preserve copies of this Plan, Agreements, and any written reports regarding this Plan presented to the Board of Trustees for a period of not less than six years. 2 SCHEDULE I Nations High Yield Fund Nations Kansas Intermediate Municipal Bond Fund Nations MidCap Index Fund Dated: [________________] Last Amended: [________________] 3 EX-99.M1 10 EXHIBIT 99.M1 Exhibit 99.M1 FORM OF NATIONS FUNDS TRUST SHAREHOLDER SERVICING AND DISTRIBUTION PLAN INVESTOR A SHARES This amended and restated Investor A Shareholder Servicing and Distribution Plan (the "Plan") has been adopted by the Board of Trustees of Nations Funds Trust (the "Trust") in conformance with Rule 12b-1 under the Investment Company Act of 1940 (the "1940 Act"). Section 1. Payments for Services. Under the terms of this Plan, the Trust may act as a distributor of the Shares of which a Fund is the issuer, pursuant to Rule 12b-1 under the 1940 Act. The Trust may incur as a distributor of the Investor A Shares of each Fund ("Shares") expenses of up to [________________________] per annum of the average daily net assets of the Trust attributable to the Shares of the Funds (as defined on Exhibit A). Section 2. Expenses Covered by the Plan. Amounts set forth in Section 1 may be expended when and if authorized in advance by the Trust's Board of Trustees. Such amounts may be used to finance any activity which is primarily intended to result in the sale of the Shares, 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, supplemental payments to the Trust's distributor (the "Distributor") and the cost of administering this Plan, as well as, with respect to payments made under Section 1, above, the shareholder servicing activities described below. All amounts expended pursuant to this Plan shall be paid: (i) 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 this Plan, or (ii) to certain broker/dealers and other financial institutions ("Agents") who offer shares to their customers and who have entered into Shareholder Servicing Agreements substantially in the form of Exhibit C, and Sales Support Agreements substantially in the form of Exhibit B with respect to the Funds, for providing the services contemplated thereunder. The shareholder servicing activities for which compensation may be received under this Plan may include, among other things: (i) aggregating and processing purchase and redemption requests and transmitting promptly net purchase and redemption orders to the Distributor or transfer agent; (ii) providing customers with a service that invests the assets of their accounts in Shares pursuant to specific or pre-authorized instructions; (iii) processing dividend and distribution payments; (iv) providing information periodically to customers 1 showing their positions in Shares; (v) arranging for bank wires; (vi) responding to customers' inquiries concerning their investment in Shares; (vii) providing subaccounting with respect to Shares beneficially owned by customers or the information to the Trust necessary for subaccounting; (viii) if required by law, forwarding shareholder communications (such as proxies, shareholder reports, annual and semi-annual financial statements and dividend, distribution and tax notices) to customers; (ix) forwarding to customers proxy statements and proxies containing any proposals regarding the Shareholder Servicing Agreement; (x) general shareholder liaison services; and (xi) providing such other similar services as the Trust may reasonably request to the extent such firms are permitted to do so under applicable statutes, rules or regulations. Section 3. Limitations on Payments. No additional payments are to be made by the Trust on behalf of the Funds with respect to the Shares under this Plan, provided that the Funds shall not be precluded from making the payments such Fund is otherwise obligated to make (i) to Bank of America, N.A. ("Bank of America"), pursuant to the Investment Advisory Agreement, (ii) to The Bank of New York ("BNY"), pursuant to the Custody Agreement, (iii) to "First Data Investor Services Group, Inc. ("First Data"), pursuant to the Transfer Agency and Registrar Agreement, (iv) to Stephens Inc. ("Stephens"), pursuant to the Co-Administration Agreement, (v) to Banc of America Advisors, Inc. ("BAAI"), pursuant to the Co-Administration Agreement, (vi) to Servicing Agents, pursuant to Shareholder Servicing Agreements and (vii) for the expenses otherwise incurred by a Fund and the Trust on behalf of the Shares in the normal conduct of such Fund's business pursuant to the Investment Advisory Agreement, the Custody Agreement, the Transfer Agency and Registrar Agreement, the Co-Administration Agreement and the Shareholder Servicing Agreements. However, to the extent any payments by the Trust on behalf of a Fund to Bank of America, BNY, First Data, Stephens, BAAI or Servicing Agents; by Bank of America, BNY, First Data, Stephens, BAAI or Servicing Agents or any affiliate thereof, to any party, pursuant to any agreement; or, generally, by the Trust on behalf of a Fund to any party, are deemed to be payments for the financing of any activity primarily intended to result in the sale of the Shares within the context of Rule 12b-1 under the 1940 Act, then such payments shall be deemed to be approved pursuant to this Plan as set forth herein. Section 4. Reports of Distributor. The officers of the Trust shall report quarterly in writing to the Board of Trustees on the amounts and purpose of payments for any of the activities in Section 2 and shall furnish the Board of Trustees with such other information as the Board may reasonably request in connection with such payments in order to enable the Board to make an informed determination on the nature and value of such expenditures. Section 5. Approval of Plan. This Plan shall continue in effect for a period of more than one year from the date written below only so long as such continuance is specifically approved at least annually by the Trust's Board of Trustees, including the Trustees who are not interested persons of the Trust and have no direct or indirect financial interest in the operation of this Plan or in any Agreements related to this Plan ("Disinterested Trustees"), by vote cast in person at a meeting called for the purpose of voting on this Plan. 2 Section 6. Termination. This Plan may be terminated at any time by vote of a majority of the Disinterested Trustees or with respect to a particular Fund by vote of a majority of the outstanding voting securities of the Shares of such Fund, on not more than sixty (60) days' written notice to any other party to the Plan, and shall terminate automatically in the event of any act that constitutes an assignment of the Distribution Agreement or the Investment Advisory Agreement. Section 7. Amendments. This Plan may be amended at any time by the Board of Trustees provided that (a) any amendment to increase materially the costs which a Fund's Investor A Shares may bear for distribution pursuant to this Plan shall be effective only upon approval by a vote of a majority of the outstanding Investor A Shares of such Fund, and (b) any material amendments of the terms of this Plan shall become effective only upon approval as provided in Section 6 thereof. Section 8. Selection/Nomination of Trustees. So long as this Plan is in effect, the selection and nomination of the Trust's Disinterested Trustees shall be committed to the discretion of such Disinterested Trustees. Section 9. Governing Law. This Plan shall be subject to the laws of The State of Delaware and shall be interpreted and construed to further promote the operation of the Trust as an open-end management investment company. As used herein the terms "open-end management investment company," "assignment," "principal underwriter," "interested person," and "majority of the outstanding voting securities" shall have the meanings set forth in the Securities Act of 1933, as amended or the 1940 Act, and the rules and regulations thereunder. Section 10. Scope of Liability. Nothing herein shall be deemed to protect the parties to any Agreement entered into pursuant to this Plan against any liability to the Trust or its shareholders to which they would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of their duties hereunder, or by reason of their reckless disregard of their obligations and duties hereunder. Section 11. Records. The Trust will preserve copies of this Plan, Agreements and any written reports regarding this Plan presented to the Board of Trustees for a period of not less than six years. Section 12. Limitation of Liability. The names "Nations Funds Trust" and "Trustees of Nations Funds Trust" refer respectively to the trust created and the Trustees, as trustees but not individually or personally, acting from time to time under a Declaration of Trust dated [_______], which is hereby referred to and a copy of which is on file at the office of the State Secretary of Delaware and at the principal office of the Trust. The obligations of "Nations Funds Trust" entered into in the name or on behalf thereof by any of the Trustees, officers, representatives or agents are made not individually, but in such capacities, and are not binding upon any of the Trustees, Shareholders, officers, representatives or agents of the Trust personally, but bind only the Trust Property (as defined in the Declaration of Trust), and all persons dealing 3 with any class of shares of the Trust must look solely to the Trust Property belonging to such class for the enforcement of any claims against the Trust. 4 EXHIBIT A Nations High Yield Fund Nations Kansas Intermediate Municipal Bond Fund Nations MidCap Index Fund Dated: [_________________] Last Amended: [_________________] 5 EX-99.M2 11 EXHIBIT 99.M2 Exhibit 99.M2 FORM OF NATIONS FUNDS TRUST INVESTOR B DISTRIBUTION PLAN This Investor B Distribution Plan (the "Plan") has been adopted by the Board of Trustees of Nations Funds Trust (the "Trust") in conformance with Rule 12b-1 under the Investment Company Act of 1940 (the "1940 Act"). Section 1. Payments for Distribution-Related Services. The Trust may compensate or reimburse its Distributor for any activities or expenses primarily intended to result in the sale of Investor B Shares of the Trust's Funds, as listed on Exhibit A (collectively, the "Funds" or, individually, a "Fund"). Payments by the Trust under this Section of this Plan will be calculated daily and paid monthly at a rate or rates set from time to time by the Trust's Board of Trustees, provided that no rate set by the Board for any Fund may exceed, on an annual basis, [___%] of the average daily net asset value of a Fund's Investor B Shares. Section 2. Expenses Covered by Plan. The fees payable under Section 1 of this Plan shall be used primarily to compensate or reimburse the Distributor for distribution services provided by it, and related expenses incurred, including payments by the Distributor to compensate or reimburse banks, broker/dealers or other financial institutions that have entered into Sales Support Agreements with the Distributor ("Selling Agents"), for sales support services provided, and related expenses incurred, by such Selling Agents. Payments under Section 1 of this 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 or Selling Agents, attributable to distribution or sales support activities, respectively; opportunity costs relating to the foregoing (which may be calculated as a carrying charge on the Distributor's or Selling Agents' unreimbursed expenses incurred in connection with distribution or sales support activities, respectively); and any other costs and expenses relating to distribution or sales support activities. The overhead and other office expenses referenced in this Section 2 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. Section 3. Distribution and Sales Support Agreements. Any officer of the Trust is authorized to execute and deliver, in the name and on behalf of the Trust, a written agreement with the Distributor in a form duly approved from time to time by the Trust's Board of Trustees. 1 Such agreement shall authorize the Distributor to enter into written Sales Support Agreements, in substantially the form attached hereto as Exhibit B ("Agreements"), with Selling Agents. Section 4. Limitations on Payments. Payment made by a particular Fund under Section 1 must be for distribution or sales support services rendered for or on behalf of such Fund. However, joint distribution or sales support financing with respect to the Funds (which financing may also involve other investment portfolios or companies that are affiliated persons of such a person, or affiliated persons of the Distributor) shall be permitted in accordance with applicable regulations of the Securities and Exchange Commission as in effect from time to time. Except for the payments specified in Section 1, no additional payments are to be made by the Trust under this Plan, provided that nothing herein shall be deemed to preclude the payments such Funds are otherwise obligated to make (i) to Bank of America, N.A. ("Bank of America") pursuant to the Investment Advisory Agreement, (ii) to The Bank of New York ("BNY"), pursuant to the Custody Agreement, (iii) to First Data Investor Services Group, Inc. ("First Data"), pursuant to the Transfer Agency and Registrar Agreement, (iv) to Stephens Inc. ("Stephens"), pursuant to the Administration Agreement, (v) to Banc of America Advisors, Inc. ("BAAI"), pursuant to the Co-Administration Agreement, (vi) to Servicing Agents pursuant to Shareholder Servicing Agreements and (vii) for the expenses otherwise incurred by a Fund and the Trust on behalf of the Investor B Shares in the normal conduct of such Fund's business pursuant to the Investment Advisory Agreement, the Custody Agreement, the Transfer Agency and Registrar Agreement, the Co-Administration Agreement and the Shareholder Servicing Agreements. To the extent any such payments by the Trust on behalf of a Fund to Bank of America, BNY, First Data, BAAI, Stephens or Servicing Agents; by BNY, First Data, BAAI, Stephens or Servicing Agents, or any affiliate thereof, to any party pursuant to any agreement; or, generally, by the Trust on behalf of a Fund to any party, are deemed to be payments for the financing of any activity primarily intended to result in the sale of the Investor B Shares within the context of Rule 12b-1 under the 1940 Act, then such payments shall be deemed to have been approved pursuant to this Plan without regard to Section 1. With respect to Investor B Shares, actual distribution expenses incurred by the Distributor (or sales support expenses incurred by Selling Agents) in a given year may exceed the sum of the fees received by the Distributor pursuant to this Plan and payments received by the Distributor pursuant to contingent deferred sales charges. Any such excess may be recovered by the Distributor, and retained by it or paid over to Selling Agents, as applicable, in future years as long as this Plan is in effect. If this Plan is terminated or not continued, the Trust shall not be obligated to pay the Distributor (or Selling Agents) for any expenses not previously reimbursed by the Trust or recovered through contingent deferred sales charges. Notwithstanding anything herein to the contrary, no Fund shall be obligated to make any payments under this Plan that exceed the maximum amounts payable under Rule 2830, of the National Association of Securities Dealers, Inc. Conduct Rules. Section 5. Reports of Distributor. So long as this Plan is in effect, the Distributor shall provide to the Trust's Officers and Board of Trustees, and the Trustees shall review at least 2 quarterly, a written report of the amounts expended by it pursuant to the Distribution Agreement, or by Selling Agents pursuant to Sales Support Agreements, and the purposes for which such expenditures were made. Section 6. Approval of Plan. This Plan will become effective immediately, as to any Fund's Investor B Shares, upon its approval by (a) a majority of the outstanding Investor B Shares of such Fund, and (b) a majority of the Board of Trustees, including a majority of the Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust and who have no direct or indirect financial interest in the operation of this Plan or in any agreements entered into in connection with this Plan, pursuant to a vote cast in person at a meeting called for the purpose of voting on the approval of this Plan. Section 7. Continuance of Plan. This Plan shall continue in effect for so long as its continuance is specifically approved at least annually by the Trust's Board of Trustees in the manner described in Section 6. Section 8. Amendments. This Plan may be amended at any time by the Board of Trustees provided that (a) any amendment to increase materially the costs which a Fund's Investor B Shares may bear for distribution pursuant to this Plan shall be effective only upon approval by a vote of a majority of the outstanding Investor B Shares of such Fund, and (b) any material amendments of the terms of this Plan shall become effective only upon approval as provided in Section 6 hereof. Section 9. Termination. This Plan is terminable, as to a Fund's Investor B Shares, without penalty at any time by (a) a vote of a majority of the Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust and who have no direct or indirect financial interest in the operation of this Plan or in any agreements entered into in connection with this Plan, or (b) a vote of a majority of the outstanding Investor B Shares of such Fund. Section 10. Selection/Nomination of Trustees. While this Plan is in effect, the selection and nomination of those Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust shall be committed to the discretion of such non-interested Trustees. Section 11. Limitation of Liability. The names "Nations Funds Trust" and "Trustees of Nations Funds Trust" refer respectively to the trust created and the Trustees, as Trustees but not individually or personally, acting from time to time under a Declaration of Trust dated [________________], which is hereby referred to and a copy of which is on file at the office of the State Secretary of Delaware and at the principal office of the Trust. The obligations of "Nations Funds Trust" entered into in the name or on behalf thereof by any of the Trustees, officers, representatives or agents are made not individually, but in such capacities, and are not binding upon any of the Trustees, Shareholders, officers, representatives or agents of the Trust personally, but bind only the Trust Property (as defined in the Declaration of Trust), and all persons dealing with a Fund's Investor B Shares of the Trust must look solely to the Trust property belonging to such Fund's Investor B Shares for the enforcement of any claims against the Trust. 3 Section 12. Records. The Trust will preserve copies of this Plan, and any Agreements and written reports regarding this Plan presented to the Board of Trustees for a period of not less than six years. Section 13. Miscellaneous. The captions in this Plan are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. 4 EXHIBIT A Nations High Yield Fund Nations Kansas Intermediate Municipal Bond Fund Nations MidCap Index Fund Dated: [________________] Last Amended: [________________] 5 EX-99.M3 12 EXHIBIT 99.M3 Exhibit 99.M3 FORM OF NATIONS FUNDS TRUST DISTRIBUTION PLAN INVESTOR C SHARES This Distribution Plan (this "Plan") has been adopted by the Board of Trustees of Nations Funds Trust (the "Trust") in conformance with Rule 12b-1 under the Investment Company Act of 1940 (the "1940 Act"). Section 1. Payments for Distribution-Related Services. The Trust may pay its Distributor for certain expenses that are incurred in connection with the support and distribution of Investor C Shares (the "Shares") of the Trust's Funds (collectively the "Funds"). Payments by the Trust under the Plan will be calculated daily and paid monthly at a rate or rates set from time to time by the Trust's Board of Trustees, provided that no rate set by the Board for any Fund may exceed the annual rate of 0.75% of the average daily net asset value of the Investor C Shares of the Funds. For purposes of determining the payments payable under this Plan, the net asset value of the outstanding Shares of the respective Funds shall be computed in the manner specified in the Trust's then current prospectuses and statement of additional information as amended or supplemented from time to time for such Shares. Section 2. Expenses Covered by Plan. Payments to the Distributor under Section 1 of this Plan will be used by the Distributor (i) to compensate banks, broker/dealers or other financial institutions that have entered into Sales Support Agreements with the Distributor ("Selling Agents") for providing distribution assistance relating to Shares, (ii) for promotional activities intended to result in the sale of Shares such as by paying for the preparation, printing and distribution of prospectuses for other than current Shareholders, and (iii) to compensate Selling Agents for providing distribution services with regard to their Customers who are, from time to time, beneficial, and record owners of Shares. Section 3. Distribution and Sales Support Agreements. Any officer of the Trust is authorized to execute and deliver, in the name and on behalf of the Trust, a written agreement with the Distributor in a form duly approved from time to time by the Trust's Board of Trustees. Such agreement shall authorize the Distributor to enter into written Sales Support Agreements, in substantially the form attached hereto as Exhibit B ("Agreements"), with Selling Agents. As used herein, promotional activities include, but are not limited to, advertising via radio, television, newspapers, magazines and otherwise; preparing, printing and mailing sales materials, brochures and prospectuses (except for prospectuses used for regulatory purposes or for distribution to existing shareholders). Section 4. Limitations on Payments. Payment made by a particular Fund under Section 1 must be for distribution or sales support services rendered for or on behalf of such Fund. However, joint distribution or sales support financing with respect to the Funds (which financing may also involve other investment portfolios or companies that are affiliated persons of such a person, or affiliated persons of the Distributor) shall be permitted in accordance with applicable regulations of the Securities and Exchange Commission ("SEC") as in effect from time to time. Upon proper authorization by the Trust's Trustees in accordance with Rule 12b-1 under the Act, expenses covered by this Plan may also include other expenses the Distributor (or any other person) may incur in connection with the distribution of the Trust's Shares including, without limitation, expenditures for telephone facilities and in-house telemarketing, or in connection with shareholder servicing. Distribution service fees will not be used to pay any interest expenses, carrying charges or other financing costs (except to the extent permitted by the SEC). Distribution service fees will not be used to pay any general or administrative expenses of the Distributor. Except for the payments specified in Section 1, no additional payments are to be made by the Trust under this Plan, provided that nothing herein shall be deemed to preclude the payments such Funds are otherwise obligated to make to (i) Bank of America, N.A. ("Bank of America"), pursuant to the Investment Advisory Agreement (ii) The Bank of New York ("BNY"), pursuant to the Custody Agreement, (iii) First Data Investor Services Group, Inc. ("First Data"), pursuant to the Transfer Agency and Registrar Agreement, (iv) Stephens Inc. ("Stephens"), pursuant to the Co-Administration Agreement, (v) Banc of America Advisors, Inc. ("BAAI"), pursuant to the Co-Administration Agreement, (vi) Servicing Agents, pursuant to Shareholder Servicing Agreements and (vii) for the expenses otherwise incurred by a Fund and the Trust on behalf of the Shares in the normal conduct of such Fund's business pursuant to the Investment Advisory Agreement, the Custody Agreement, the Transfer Agency and Registrar Agreement, the Co-Administration Agreement and the Shareholder Servicing Agreements. To the extent any such payments by the Trust on behalf of a Fund to Bank of America, BNY, First Data, BAAI, Stephens or Servicing Agents; by Bank of America, Bank of America Texas, TSSG, Stephens or Servicing Agents, or any affiliate thereof, to any party pursuant to any agreement; or, generally, by the Trust on behalf of a Fund to any party, are deemed to be payments for the financing of any activity primarily intended to result in the sale of the Shares within the context of Rule 12b-1 under the 1940 Act, then such payments shall be deemed to have been approved pursuant to this Plan without regard to Section 1. With respect to Shares, actual distribution expenses incurred by the Distributor (or sales support expenses incurred by the Selling Agents) in a given year may exceed the sum of the fees received by the Distributor pursuant to this Plan and payments received by the Distributor pursuant to contingent deferred sales charges. Any such excess may be recovered by the Distributor, and retained by it or paid over to the Selling Agents, as applicable, in future years as long as this Plan is in effect. If this Plan is terminated or not continued, the Trust shall not be obligated to pay the Distributor (or Selling Agents) for any expenses not previously reimbursed by the Trust or recovered through contingent deferred sales charges. Notwithstanding anything herein to the contrary, no Fund shall be obligated to make any payments under this Plan that exceed the maximum amounts payable under Rule 2830 of the National Association of Securities Dealers, Inc. Conduct Rules. 2 Section 5. Reports of Distributor. So long as this Plan is in effect, the Distributor shall provide to the Trust's Officers and Board of Trustees, and the Trustees shall review, at least quarterly, a written report of the amounts expended by it pursuant to the Distribution Agreement, or by Selling Agents pursuant to Sales Support Agreements, and the purposes for which such expenditures were made. Section 6. Approval of Plan. The Plan will become effective immediately, as to any Fund's Shares, upon its approval by (a) a majority of the outstanding Shares of such Fund, and (b) a majority of the Board of Trustees, including a majority of the Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust and who have no direct or indirect financial interest in the operation of this Plan or in any agreements entered into in connection with this Plan, pursuant to a vote cast in person at a meeting called for the purpose of voting on the approval of this Plan. Section 7. Continuance of Plan. The Plan shall continue in effect for so long as its continuance is specifically approved at least annually by the Trust's Board of Trustees in the manner described in Section 6. Section 8. Amendments. The Plan may be amended at any time by the Board of Trustees provided that (a) any amendment to increase materially the costs which a Fund's Shares may bear for distribution pursuant to this Plan shall be effective only upon approval by a vote of a majority of the outstanding Shares of such Fund, and (b) any material amendments of the terms of this Plan shall become effective only upon approval as provided in Section 6 hereof. Section 9. Termination. The Plan is terminable, as to a Fund's Shares, without penalty at any time by (a) a vote of a majority of the Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust and who have no direct or indirect financial interest in the operation of this Plan or in any agreements entered into in connection with this Plan, or (b) a vote of a majority of the outstanding Shares of such Fund. Section 10. Selection/Nomination of Trustees. While this Plan is in effect, the selection and nomination of those Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust shall be committed to the discretion of such non-interested Trustees. Section 11. Limitation of Liability. The names "Nations Funds Trust" and "Trustees of Nations Funds Trust" refer respectively to the trust created and the Trustees, as Trustees but not individually or personally, acting from time to time under a Declaration of Trust dated [_________], which is hereby referred to and a copy of which is on file at the office of the State Secretary of Delaware and at the principal office of the Trust. The obligations of "Nations Funds Trust" entered into in the name or on behalf thereof by any of the Trustees, officers, representatives or agents are made not individually, but in such capacities, and are not binding upon any of the Trustees, Shareholders, officers, representatives or agents of the Trust personally, but bind only the Trust Property (as defined in the Declaration of Trust), and all persons dealing with a Fund's Shares of the Trust must look solely to the Trust property belonging to such Fund's Shares for the enforcement of any claims against the Trust. 3 Section 12. Records. The Trust will preserve copies of this Plan, Agreements, and any written reports regarding this Plan presented to the Board of Trustees for a period of not less than six years. Section 13. Miscellaneous. The captions in this Plan are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. 4 EXHIBIT A Nations High Yield Fund Nations Kansas Intermediate Municipal Bond Fund Nations MidCap Index Fund Dated: [________________] Last Amended: [________________] 5 EX-99.O 13 EXHIBIT 99.O Exhibit 99.O FORM OF NATIONS FUNDS TRUST RULE 18F-3 MULTI-CLASS PLAN I. INTRODUCTION. Pursuant to Rule 18f-3 under the Investment Company Act of 1940, as amended (the "1940 Act"), the following sets forth the method for allocating fees and expenses among each class of shares in the investment portfolios of Nations Funds Trust (the "Trust"). In addition, this Rule 18f-3 Multi-Class Plan (the "Plan") sets forth the maximum initial sales loads, contingent deferred sales charges, Rule 12b-1 distribution fees, shareholder servicing fees, conversion features, exchange privileges and other shareholder services, if any, applicable to a particular class of shares of the portfolios. The Plan also identifies expenses that may be allocated to a particular class of shares to the extent that they are actually incurred in a different amount by the class or relate to a different kind or degree of services provided to the class. The Trust is an open-end series investment company registered under the 1940 Act, the shares of which are registered on Form N-1A under the Securities Act of 1933 [(REGISTRATION NOS. ____________ AND ____________)]. The Trust elects to offer multiple classes of shares in its investment portfolios pursuant to the provisions of Rule 18f-3 and this Plan. The Trust currently consists of the following three separate investment portfolios: Nations High Yield Fund, Nations Kansas Intermediate Municipal Bond Fund and Nations MidCap Index Fund. The above-listed investment portfolios of the Trust (the "Funds") are authorized to issue the following classes of shares representing interests in the Funds: Primary A Shares, Investor A Shares, Investor B Shares and Investor C Shares. II. ALLOCATION OF EXPENSES. A. Pursuant to Rule 18f-3 under the 1940 Act, the Trust shall allocate to each class of shares in a Fund (i) any fees and expenses incurred by the Trust in connection with the distribution of such class of shares under a distribution plan adopted for such class of shares pursuant to Rule 12b-1, and (ii) any fees and expenses incurred by the Trust under a shareholder servicing plan in connection with the provision of shareholder services to the holders of such class of shares. B. In addition, pursuant to Rule 18f-3, the Trust may allocate the following fees and expenses, if any, to a particular class of shares in a single Fund: 1 (i) transfer agent fees identified by the transfer agent as being attributable to such class of shares; (ii) printing and postage expenses related to preparing and distributing materials such as shareholder reports, prospectuses, reports, and proxies to current shareholders of such class of shares or to regulatory agencies with respect to such class of shares; (iii) blue sky registration or qualification fees incurred by such class of shares; (iv) Securities and Exchange Commission registration fees incurred by such class of shares; (v) the expense of administrative personnel and services (including, but not limited to, those of a portfolio accountant, custodian or dividend paying agent charged with calculating net asset values or determining or paying dividends) as required to support the shareholders of such class of shares; (vi) litigation or other legal expenses relating solely to such class of shares; (vii) fees of the Trustees of the Trust incurred as result of issues relating to such class of shares; (viii) independent accountants' fees relating solely to such class of shares; and (ix) any other fees and expenses, not including advisory or custodial fees or other expenses related to the management of the Fund's assets, relating to (as defined below) such class of shares. C. For all purposes under this Plan, fees and expenses "relating to" a class of shares are those fees and expenses that are actually incurred in a different amount by the class or that relate to a different kind or degree of services provided to the class. The proper officers of the Trust shall have the authority to determine whether any or all of the fees and expenses described in Section B of this Part II should be allocated to a particular class of shares. The Board of Trustees will monitor such allocation to ensure that they comply with the requirements of the Plan. D. Income, realized and unrealized capital gains and losses, and any expenses of a Fund shall be allocated to each class of the Fund on the basis of the relative net assets (settled shares), as defined in Rule 18f-3, of that class in relation to the net assets of the Fund. E. In certain cases, Banc of America Advisors, Inc., TradeStreet Investment Associates, Inc., [_______________________], Bank of America, N.A., Stephens Inc., First Data Investor Services Group, Inc., or another service provider for a Fund may waive or reimburse all or a portion of the expenses of a specific class of shares of the Fund. The Board of Trustees will monitor any such waivers or reimbursements to ensure that they do not provide a means for cross-subsidization between classes. 2 III. CLASS ARRANGEMENTS. The following summarizes the maximum front-end sales charges, contingent deferred sales charges, Rule 12b-1 distribution fees, shareholder servicing fees, conversion features, exchange privileges and other shareholder services, if any, applicable to each class of shares of the Trust. Additional details regarding such fees and services are set forth in the relevant Funds' current Prospectus(es) and Statement of Additional Information. A. PRIMARY A SHARES. 1. Maximum Initial Sales Load: None 2. Contingent Deferred Sales Charge: None 3. Maximum Rule 12b-1 Distribution Fees: None 4. Maximum Shareholder Servicing Fees: None 5. Conversion Features: None 6. Exchange Privileges: (a) Primary A Shares of a Fund may be exchanged for Primary A Shares of any other Nations Fund. (b) From time to time, the Board of Trustees of the Trust may modify, or ratify modifications to, the exchange privileges of Primary A Shares of a Fund without amending this Plan, provided that such exchange privileges, as modified, are described in the then-current prospectus for such shares of such Fund. 7. Other Shareholder Services: None B. INVESTOR A SHARES. 1. Maximum Initial Sales Load: (a) Nations High Yield Fund, Nations Kansas Intermediate Municipal Bond Fund and Nations MidCap Index Fund: maximum of [____%]. 2. Contingent Deferred Sales Charge (as a percentage of the lower of the original purchase price or redemption proceeds): (a) 1.00% of purchases made before August 1, 1999 in amounts over $1 million if redeemed within one year of purchase, declining to 0.50% in the second year after purchase and eliminated thereafter. (b) 1.00% of purchases made on or after August 1, 1999 in amounts over $1 million if redeemed within 18 months of purchase and eliminated thereafter. 3 3. Redemption Fee: (a) 1.00% of the current net asset value of shares purchased in amounts of $1 million or more between July 31, 1997 and November 15, 1998, and redeemed within 18 months of purchase. (b) 1.00% of the current net asset value of shares purchased by an employee benefit plan that initially invested in Investor A Shares between July 31, 1997 and November 15, 1998, and redeemed within 18 months of purchase in connection with redemption of all Nations Funds holdings of the employee benefit plan. 4. Maximum Rule 12b-1 Distribution/Shareholder Servicing Fees: Pursuant to a Shareholder Servicing and Distribution Plan adopted under Rule 12b-1, Investor A Shares may pay a combined distribution and shareholder servicing fee of up to [___%] of the average daily net assets of such shares. 5. Conversion Features: Investor A Shares of a Fund shall have such conversion features, if any, as are determined by or ratified by the Board of Trustees of the Trust and described in the then-current prospectus for such shares of such Fund. 6. Exchange Privileges: (a) Investor A Shares of a Fund may be exchanged for Investor A Shares of any other Nations Fund, except Index Funds. (b) From time to time, the Board of Trustees of the Trust may modify, or ratify modifications to, the exchange privileges of Investor A Shares of a Fund without amending this Plan, provided that such exchange privileges, as modified, are described in the then-current prospectus for such shares of such Fund. 7. Other Shareholder Services. The Trust offers a Systematic Investment Plan, an Automatic Withdrawal Plan and an Automatic Exchange Feature to holders of Investor A Shares of the Funds. 4 C. INVESTOR B SHARES. 1. Maximum Initial Sales Load: None 2. Contingent Deferred Sales Charge (as a percentage of the lower of the original purchase price or redemption proceeds): (a) Nations High Yield Fund, Nations Kansas Intermediate Municipal Bond Fund and Nations MidCap Index Fund: [___%] if redeemed within one year of purchase, declining to [___%] in the sixth year after purchase and eliminated thereafter. 3. Maximum Rule 12b-1 Distribution Fees: Pursuant to a Distribution Plan adopted under Rule 12b-1, Investor B Shares of each Fund may pay distribution fees of up to [___%] of the average daily net assets of such shares. 4. Maximum Shareholder Servicing Fees: Pursuant to a Shareholder Servicing Plan, Investor B Shares of each Fund may pay shareholder servicing fees of up to [___%] of the average daily net assets of such shares. 5. Conversion Features: Investor B Shares of a Fund shall have such conversion features, if any, as are determined by or ratified by the Board of Trustees of the Trust and described in the then-current prospectus for such shares of such Fund. 6. Exchange Privileges: (a) Investor B Shares of a Fund may be exchanged for Investor B Shares of any other Nations Fund, except Money Market Funds. (b) From time to time, the Board of Trustees of the Trust may modify, or ratify modifications to, the exchange privileges of Investor B Shares of a Fund without amending this Plan, provided that such exchange privileges, as modified, are described in the then-current prospectus for such shares of such Fund. 7. Other Shareholder Services: the Trust offers a Systematic Investment Plan, an Automatic Withdrawal Plan and an Automatic Exchange Feature to holders of Investor B Shares of the Funds. 5 D. INVESTOR C SHARES. 1. Maximum Initial Sales Load: None 2. Contingent Deferred Sales Charge (as a percentage of the lower of the original purchase price or redemption proceeds): [___%] if redeemed within one year of purchase and eliminated thereafter. 3. Maximum Rule 12b-1 Distribution Fees: Pursuant to a Distribution Plan adopted under Rule 12b-1, Investor C Shares of each Fund may pay distribution fees of up to [___%] of the average daily net assets of such shares. 4. Maximum Shareholder Servicing Fees: Pursuant to a Shareholder Servicing Plan, Investor C Shares of each Fund may pay shareholder servicing fees of up to [___%] of the average daily net assets of such shares. 5. Conversion Features: Investor C Shares of a Fund shall have such conversion features, if any, as are determined by or ratified by the Board of Trustees of the Trust and described in the then-current prospectus for such shares of such Fund. 6. Exchange Privileges: (a) Investor C Shares of a Fund may be exchanged for Investor C Shares of any other Nations Fund, except Money Market Funds. (b) Investor C Shares of a Fund that were originally obtained in an exchange of Investor A Shares of a Managed Index Fund for Investor C Shares of a Non-Money Market Fund may be exchanged for Investor A Shares of an Index Fund. (c) From time to time, the Board of Trustees of the Trust may modify, or ratify modifications to, the exchange privileges of Investor C Shares of a Fund without amending this Plan, provided that such exchange privileges, as modified, are described in the then-current prospectus for such shares of such Fund. 7. Other Shareholder Services. The Trust offers a Systematic Investment Plan, an Automatic Withdrawal Plan and an Automatic Exchange Feature to holders of Investor C Shares of the Funds. IV. BOARD REVIEW. The Board of Trustees of the Trust shall review this Plan as frequently as it deems necessary. Prior to any material amendment(s) to this Plan, the Board of Trustees of the Trust, 6 including a majority of the Trustees who are not interested persons of the Trust, shall find that the Plan, as proposed to be amended (including any proposed amendments to the method of allocating class and/or fund expenses), is in the best interests of each class of shares of the Fund individually, and the Fund as a whole. In considering whether to approve any proposed amendment(s) to the Plan, the Trustees of the Trust shall request and evaluate such information as they consider reasonably necessary to evaluate the proposed amendment(s) to the Plan. Adopted: [________________] Amended: [________________] 7 EX-99.P 14 EXHIBIT 99.P EX-99.P POWER OF ATTORNEY Marco E. Adelfio, whose signature appears below, does hereby constitute and appoint Richard H. Blank, Jr., his true and lawful agent, with power of substitution or resubstitution, to do any and all acts and things and to execute any and all instruments which said agent, may deem necessary or advisable or which may be required to enable Nations Funds Trust (the "Trust"), to comply with the Investment Company Act of 1940, as amended, and the Securities Act of 1933 (the "1933 Act"), and any other applicable federal securities laws, or rules, regulations or requirements of the Securities and Exchange Commission in respect thereof, in connection with the filing and effectiveness of the Trust's Registration Statement on Form N-14 pursuant to the 1933 Act, and any and all amendments thereto, and to determine the states in which appropriate filings should be made and to take any and all necessary and appropriate actions to make any and all such filings, and any and all amendments thereto, including specifically, but without limiting the generality of the foregoing, the power and authority to sign in the name and on behalf of the undersigned as a Trustee of the Trust, such Registration Statement and filings, any and all exemptive applications under the 1933 Act, and any and all amendments and any other instruments or documents related thereto, and the undersigned does hereby ratify and confirm all that said agent shall do or cause to be done by virtue hereof. Dated: October 25, 1999 /s/ Marco E. Adelfio --------------------- Marco E. Adelfio EX-99.P POWER OF ATTORNEY Steven G. Cravath, whose signature appears below, does hereby constitute and appoint Richard H. Blank, Jr., his true and lawful agent, with power of substitution or resubstitution, to do any and all acts and things and to execute any and all instruments which said agent, may deem necessary or advisable or which may be required to enable Nations Funds Trust (the "Trust"), to comply with the Investment Company Act of 1940, as amended, and the Securities Act of 1933 (the "1933 Act"), and any other applicable federal securities laws, or rules, regulations or requirements of the Securities and Exchange Commission in respect thereof, in connection with the filing and effectiveness of the Trust's Registration Statement on Form N-14 pursuant to the 1933 Act, and any and all amendments thereto, and to determine the states in which appropriate filings should be made and to take any and all necessary and appropriate actions to make any and all such filings, and any and all amendments thereto, including specifically, but without limiting the generality of the foregoing, the power and authority to sign in the name and on behalf of the undersigned as a Trustee of the Trust, such Registration Statement and filings, any and all exemptive applications under the 1933 Act, and any and all amendments and any other instruments or documents related thereto, and the undersigned does hereby ratify and confirm all that said agent shall do or cause to be done by virtue hereof. Dated: October 25, 1999 /s/ Steven G. Cravath --------------------- Steven G. Cravath EX-99.P POWER OF ATTORNEY Barry I. Pershkow, whose signature appears below, does hereby constitute and appoint Richard H. Blank, Jr., his true and lawful agent, with power of substitution or resubstitution, to do any and all acts and things and to execute any and all instruments which said agent, may deem necessary or advisable or which may be required to enable Nations Funds Trust (the "Trust"), to comply with the Investment Company Act of 1940, as amended, and the Securities Act of 1933 (the "1933 Act"), and any other applicable federal securities laws, or rules, regulations or requirements of the Securities and Exchange Commission in respect thereof, in connection with the filing and effectiveness of the Trust's Registration Statement on Form N-14 pursuant to the 1933 Act, and any and all amendments thereto, and to determine the states in which appropriate filings should be made and to take any and all necessary and appropriate actions to make any and all such filings, and any and all amendments thereto, including specifically, but without limiting the generality of the foregoing, the power and authority to sign in the name and on behalf of the undersigned as a Trustee of the Trust, such Registration Statement and filings, any and all exemptive applications under the 1933 Act, and any and all amendments and any other instruments or documents related thereto, and the undersigned does hereby ratify and confirm all that said agent shall do or cause to be done by virtue hereof. Dated: October 25, 1999 /s/ Barry I. Pershkow --------------------- Barry I. Pershkow -----END PRIVACY-ENHANCED MESSAGE-----