NATIONS FUND TRUST
Statement of Additional Information
Nations Government Money Market Fund
Nations Tax Exempt Fund
Nations Value Fund
Nations Capital Growth Fund
Nations Emerging Growth Fund
Nations Equity Index Fund
Nations Managed Index Fund
Nations Managed SmallCap Index Fund
Nations Disciplined Equity Fund
Nations Balanced Assets Fund
Nations Short-Intermediate Government Fund
Nations Short-Term Income Fund
Nations Diversified Income Fund
Nations Strategic Fixed Income Fund
Nations Municipal Income Fund
Nations Short-Term Municipal Income Fund
Nations Intermediate Municipal Bond Fund
Nations Florida Intermediate Municipal Bond Fund
Nations Florida Municipal Bond Fund
Nations Georgia Intermediate Municipal Bond Fund
Nations Georgia Municipal Bond Fund
Nations Maryland Intermediate Municipal Bond Fund
Nations Maryland Municipal Bond Fund
Nations North Carolina Intermediate Municipal Bond Fund
Nations North Carolina Municipal Bond Fund
Nations South Carolina Intermediate Municipal Bond Fund
Nations South Carolina Municipal Bond Fund
Nations Tennessee Intermediate Municipal Bond Fund
Nations Tennessee Municipal Bond Fund
Nations Texas Intermediate Municipal Bond Fund
Nations Texas Municipal Bond Fund
Nations Virginia Intermediate Municipal Bond Fund
Nations Virginia Municipal Bond Fund
Investor Shares and Primary Shares
July 31, 1996
Supplemented on November 7, 1996
This Statement of Additional Information ("SAI") provides supplementary
information pertaining to the classes of shares representing interests in the
above listed thirty-one investment portfolios of Nations Fund 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 July 31, 1996 (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 these Prospectuses may be obtained by
writing Nations Fund, c/o Stephens Inc., One NationsBank Plaza, 33rd Floor,
Charlotte, North Carolina 28255, or by calling Nations Funds at 1-800-321-7854.
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TABLE OF CONTENTS
Page
INTRODUCTION.............................................................. 1
FUND TRANSACTIONS AND BROKERAGE .......................................... 2
ADDITIONAL INFORMATION ON FUND INVESTMENTS................................ 6
Asset Backed Securities.......................................... 6
Commercial Instruments........................................... 10
Repurchase Agreements............................................ 11
Reverse Repurchase Agreements.................................... 11
Lending Securities............................................... 11
American Depositary Receipts..................................... 12
Futures, Options and Other Derivative
Instruments................................................ 12
When-Issued Purchases and Forward
Commitments................................................ 17
Municipal Securities............................................. 17
Insured Municipal Securities..................................... 45
Real Estate Investment Trusts.................................... 45
Guaranteed Investment Contracts.................................. 46
Variable- and Floating- Rate
Instruments................................................ 46
Stand-by Commitments............................................. 47
Variable- and Floating-Rate Government
Securities................................................. 48
Lower Rated Debt Securities...................................... 48
Dollar Roll Transactions......................................... 50
Foreign Currency Transactions.................................... 50
Interest Rate Transactions....................................... 51
Illiquid Securities.............................................. 52
Other Securities................................................. 52
Additional Investment Limitations................................ 53
NET ASSET VALUE .......................................................... 55
Money Market Funds............................................... 55
Non-Money Market Funds........................................... 56
Exchange Privilege............................................... 57
DESCRIPTION OF SHARES .................................................... 58
Dividends and Distributions...................................... 59
ADDITIONAL INFORMATION CONCERNING TAXES .................................. 60
Federal Taxes - In General....................................... 60
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Excise Tax on Regulated Investment
Companies.................................................. 63
Sale or Redemption of Shares..................................... 64
Investment Strategy.............................................. 65
Tax Rates........................................................ 65
Foreign Shareholders............................................. 65
Special Tax Considerations Pertaining to the Value,
Capital Growth, Emerging Growth, Equity Index, Disciplined
Equity, Managed Index, Balanced Assets, Short-Intermediate
Government, Short-Term Income, Diversified Income and
Strategic Fixed Income Funds .............................. 66
Special Tax Considerations Pertaining to the Municipal
Income, Short-Term Municipal Income, Intermediate
Municipal Bond, State Intermediate Municipal Bond
and the State Municipal Bond Funds......................... 67
TRUSTEES AND OFFICERS .................................................... 71
Nations Funds Retirement Plan.................................... 75
Nations Funds Deferred Compensation Plan......................... 75
Compensation Table............................................... 76
Shareholder and Trustee Liability................................ 77
INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY,
TRANSFER AGENCY, SHAREHOLDER SERVICING, SHAREHOLDER ADMINISTRATION AND
DISTRIBUTION AGREEMENTS ................................................ 77
Investment Adviser............................................... 77
Investment Styles................................................ 85
Administrator and Co-Administrator............................... 89
Custodian and Transfer Agent..................................... 92
Shareholder Servicing Agreements
(Primary B Shares Only).................................... 93
Shareholder Administration Plan
(Primary B Shares Only).................................... 94
Distribution Plans and Shareholder
Servicing Arrangements for Investor Shares.................. 95
DISTRIBUTOR .............................................................. 109
INDEPENDENT ACCOUNTANT AND REPORTS........................................ 110
COUNSEL................................................................... 110
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ADDITIONAL INFORMATION ON PERFORMANCE .................................... 110
Yield Calculations............................................... 110
Total Return Calculations........................................ 123
MISCELLANEOUS ............................................................ 134
Certain Record Holders........................................... 134
SCHEDULE A................................................................ A-1
SCHEDULE B................................................................ B-1
SCHEDULE C................................................................ C-1
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INTRODUCTION
Nations Fund Trust ("Trust") was organized on May 6, 1985 under the
name "MarketMaster Trust," and in March 1992 changed its name to "Nations Fund,"
and in September 1992 changed its name to "Nations Fund Trust." The Trust's
fiscal year end is March 31; prior to 1996, the Trust's fiscal year end was
November 30. NationsBanc Advisors, Inc. ("NBAI") is the investment adviser to
the Funds. TradeStreet Investment Associates, Inc. ("TradeStreet") is a
sub-investment adviser. As used herein the "Adviser" shall mean NBAI and/or
TradeStreet as the context may require.
Nations Fund Trust currently consists of thirty-two different
investment portfolios. This SAI pertains to the Primary A (formerly called Trust
A), Primary B (formerly called Trust B), Investor A, Investor B, Investor C and
Daily (formerly called Investor D) Shares of the following investment portfolios
of Nations Fund Trust: Nations Government Money Market Fund ("Government Money
Market Fund") and Nations Tax Exempt Fund ("Tax Exempt Fund") (collectively, the
"Money Market Funds") and the Primary A, Primary B, Investor A, Investor C and
Investor N Shares of Nations Value Fund ("Value Fund"), Nations Capital Growth
Fund ("Capital Growth Fund"), Nations Emerging Growth Fund ("Emerging Growth
Fund"), Nations Equity Index Fund ("Equity Index Fund"), Nations Managed Index
Fund ("Managed Index Fund"), Nations Managed SmallCap Index Fund ("Managed
SmallCap Index Fund"), Nations Disciplined Equity Fund ("Disciplined Equity
Fund"), Nations Balanced Assets Fund ("Balanced Assets Fund"), Nations
Short-Intermediate Government Fund ("Short-Intermediate Government Fund"),
Nations Municipal Income Fund ("Municipal Income Fund"), Nations Short-Term
Municipal Income Fund ("Short-Term Municipal Income Fund"), Nations Intermediate
Municipal Bond Fund ("Intermediate Municipal Bond Fund"), Nations Short-Term
Income Fund ("Short-Term Income Fund"), Nations Diversified Income Fund
("Diversified Income Fund"), Nations Strategic Fixed Income Fund ("Strategic
Fixed Income Fund"), Nations Florida Intermediate Municipal Bond Fund ("Florida
Intermediate Municipal Bond Fund"), Nations Georgia Intermediate Municipal Bond
Fund ("Georgia Intermediate Municipal Bond Fund"), Nations Maryland Intermediate
Municipal Bond Fund ("Maryland Intermediate Municipal Bond Fund"), Nations North
Carolina Intermediate Municipal Bond Fund ("North Carolina Intermediate
Municipal Bond Fund"), Nations South Carolina Intermediate Municipal Bond Fund
("South Carolina Intermediate Municipal Bond Fund"), Nations Tennessee
Intermediate Municipal Bond Fund ("Tennessee Intermediate Municipal Bond Fund"),
Nations Texas Intermediate Municipal Bond Fund ("Texas Intermediate Municipal
Bond Fund"), Nations Virginia Intermediate Municipal Bond Fund ("Virginia
Intermediate Municipal Bond Fund"), Nations Florida Municipal Bond Fund
("Florida Municipal Bond Fund"), Nations Georgia Municipal Bond Fund ("Georgia
Municipal Bond Fund"), Nations Maryland Municipal Bond Fund ("Maryland Municipal
Bond Fund"), Nations North Carolina Municipal Bond Fund ("North Carolina
Municipal Bond Fund"), Nations South Carolina Municipal Bond Fund ("South
Carolina Municipal Bond Fund"), Nations Tennessee Municipal Bond Fund
("Tennessee Municipal Bond Fund"), Nations Texas Municipal Bond Fund ("Texas
Municipal Bond Fund"), and Nations Virginia Municipal Bond Fund ("Virginia
Municipal Bond Fund") (collectively, "Non-Money Market Funds," and with the
Money Market Funds, the "Funds"). The Florida Intermediate Municipal Bond Fund,
Georgia Intermediate Municipal Bond Fund, Maryland Intermediate Municipal Bond
Fund, North Carolina Intermediate Municipal Bond Fund, South Carolina
Intermediate Municipal Bond Fund, Tennessee Intermediate Municipal Bond Fund,
Texas Intermediate Municipal Bond Fund and Virginia Intermediate Municipal Bond
Fund are sometimes collectively referred to herein as the ("State Intermediate
Municipal Bond Funds"). The Florida Municipal Bond Fund, Georgia Municipal Bond
Fund, Maryland Municipal Bond Fund, North Carolina Municipal Bond Fund, South
Carolina Municipal Bond Fund,
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Tennessee Municipal Bond Fund, Texas Municipal Bond Fund and Virginia Municipal
Bond Fund are sometimes collectively referred to herein as the ("State Municipal
Bond Funds"). The Disciplined Equity Fund was formerly called "Nations Special
Equity Fund." The Primary A Shares and Primary B Shares of the Funds are
sometimes collectively referred to as "Primary Shares." The Investor A, Investor
B, Investor C, Daily and Investor N Shares of the Funds are sometimes
collectively referred to as "Investor Shares."
As of the date of this SAI, no shares of the Managed Index Fund have
been sold. As a result, certain financial information and performance data is
not available and thus not included in this SAI.
Much of the information contained in this SAI expands upon subjects
discussed in the Prospectuses. No investment in Primary Shares or Investor
Shares should be made without first reading the related Prospectuses.
FUND TRANSACTIONS AND BROKERAGE
Subject to the general supervision of the Board of Trustees, the
Adviser is responsible for, makes decisions with respect to, and places orders
for all purchases and sales of portfolio securities for the Funds.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. 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 Trust, 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.
Securities purchased and sold by the Non-Money Market Funds are
generally traded in the over-the-counter market on a net basis (i.e., without
commission) through dealers, or otherwise involve transactions directly with the
issuer of an instrument. The cost of securities purchased from underwriters
includes an underwriting commission or concession, and the prices at which
securities are purchased from and sold to dealers include a dealer's mark-up or
mark-down.
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
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when the Adviser, in its sole discretion, believes such practice to be otherwise
in the Fund's interests.
In executing portfolio transactions and selecting brokers or dealers,
the Adviser will seek to obtain the best overall terms available for each Fund.
In assessing the best overall terms available for any transaction, the Adviser
shall consider factors deemed 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. The Adviser
may cause a Fund to pay a broker/dealer which furnishes brokerage and research
services a higher commission than that which might be charged by another
broker/dealer for effecting the same transaction, provided that the Adviser
determines in good faith that such commission is reasonable in relation to the
value of the brokerage and research services provided by such broker/dealer,
viewed in terms of either the particular transaction or the overall
responsibilities of the Adviser. Such brokerage and research services might
consist of reports and statistics relating to specific companies or industries,
general summaries of groups of stocks or bonds and their comparative earnings
and yields, or broad overviews of the stock, bond, and government securities
markets and the economy.
Supplementary research information so received is in addition to, and
not in lieu of, services required to be performed by the Adviser and does not
reduce the advisory fees payable by the Funds. The Board of Trustees will
periodically review the commissions paid by the Funds to consider whether the
commissions paid over representative periods of time appear to be reasonable in
relation to the benefits inuring to the Funds. It is possible that certain of
the supplementary research or other services received will primarily benefit one
or more other investment companies or other accounts for which investment
discretion is exercised. Conversely, a Fund may be the primary beneficiary of
the research or services received as a result of portfolio transactions effected
for such other account or investment company.
Under Section 28(e) of the Securities Exchange Act of 1934, an 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), an 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
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foreign economies, securities, markets, specific industry groups and individual
companies; information on political developments; portfolio 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 Trustees with respect to the performance, investment
activities and fees and expenses of other mutual funds. Such information may be
communicated electronically, orally or in written form. Research services may
also include the providing of equipment used to communicate research
information, the arranging of meetings with management of companies and the
providing of access to consultants who supply research information.
The outside research assistance is useful to the Adviser since the
brokers utilized by the Adviser as a group tend to follow a broader universe of
securities and other matters than the staff of the Adviser 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. It is the opinion of the
Adviser that because the broker research supplements rather than replaces their
research, the receipt of such research does not tend to decrease their expenses,
but tends to improve the quality of their 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 portfolio transactions of other clients may be of value
to the Adviser in fulfilling its obligations to the Funds. It is the opinion of
the Adviser that this material is beneficial in supplementing their research and
analysis; and, therefore, it may benefit the Trust by improving the quality of
the Adviser's investment advice. The advisory fees paid by the Trust 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.
The Trust will not execute portfolio transactions through, or purchase
or sell portfolio securities from or to the distributor, the Adviser, the
administrator, or the co-administrator, or their affiliates acting as principal
(including repurchase and reverse repurchase agreements), except to the extent
permitted by the Securities and Exchange Commission (the "SEC"). In addition,
the Trust will not give preference to correspondents of NationsBank N.A.
("NationsBank") 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 NationsBank 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
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distributor, the Adviser, 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.
Certain affiliates of NationsBank 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 Tax Exempt Fund, the Municipal Income Fund, the
Short-Term Municipal Income Fund, the Intermediate Municipal Bond Fund, the
State Intermediate Municipal Bond Funds and the State Municipal Bond Funds (the
"Tax-Free Bond Funds"). NationsBank 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 certain
circumstances, the Tax-Free Bond Funds may purchase municipal securities from a
member of an underwriting syndicate in which an affiliate of NationsBank is a
member. The Trust has adopted procedures pursuant to Rule 10f-3 under The
Investment Company Act of 1940 (the "1940 Act"), and intends to comply with the
requirements of Rule 10f-3, in connection with any purchases of municipal
securities that may be subject to such Rule.
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 NationsBank 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.
NationsBank has agreed to maintain its policy and practice of
conducting its trust department independently of its commercial department. In
making investment recommendations for the Funds, trust department personnel will
not inquire or take into consideration whether the issuer of securities proposed
for purchase or sale for those Funds' accounts are customers of the commercial
department. In dealing with commercial customers, the commercial department will
not inquire or take into consideration whether securities of those customers are
held by the Trust.
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.
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During the fiscal period ended March 31, 1996, the Company did not pay
brokerage commissions to NationsBanc Securities, Inc., NationsBanc Capital
Markets, Inc., Nations Securities or Stephens.
As of the fiscal period ended March 31,1996, the following Funds held
the indicated amounts of securities issued by the Trust's indicated regular
broker or dealer: Balanced Assets Fund -- $1,591,550 of Dean Witter, Discover &
Company; Value Fund -- $5,544,000 of Paine Webber Group, Inc.; Equity Index --
$363, 881, $403,866, and $308,534 of Dean Witter, Discover & Company, Merrill
Lynch and Co., Inc. and Morgan Stanley Group, Inc., respectively. As of the
fiscal period ended March 31, 1996, all other Funds did not hold any securities
of the Company's regular brokers or dealers.
The indicated Fund paid aggregate brokerage commissions for the fiscal
years ended November 30, 1994 and 1995 and for the fiscal period ended March 31,
1996: Balanced Assets Fund - $425,294, $439,292 and $203,960, respectively;
Capital Growth Fund - $1,819,367, $1,108,838 and $448,561, respectively;
Disciplined Equity Fund - $282,046, $37,406 and $140,621, respectively; Emerging
Growth Fund - $179,737, $597,940 and $191,371, respectively; Equity Index Fund -
$24,399, $53,646 and $8,151 respectively; Value Fund - $2,099,352, $2,847,170
and $396,611, respectively.
The portfolio turnover rates described in the Prospectuses are
calculated by dividing the lesser of purchases or sales of portfolio securities
for the year by the monthly average value of the portfolio securities. The
calculation excludes all securities whose maturities at the time of acquisition
were one year or less. Fund turnover may vary greatly from year to year as well
as within a particular year, and may also be affected by the cash requirements
for redemptions of shares and by requirements which enable a Fund to receive
certain favorable tax treatment. Fund turnover will not be a limiting factor in
making portfolio decisions.
ADDITIONAL INFORMATION ON FUND INVESTMENTS
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 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
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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 ("GNMA"), by Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC"). Such Certificates are
mortgage-backed securities which represent a partial ownership interest in a
pool of mortgage loans issued by lenders such as mortgage bankers, commercial
banks and savings and loan associations. Such mortgage loans may have fixed or
adjustable rates of interest.
The average life of a mortgage-backed security is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities. Prepayments of principal by mortgagors and mortgage foreclosures
will usually result in the return of the greater part of principal invested far
in advance of the maturity of the mortgages in the pool.
The yield which will be earned on mortgage-backed securities may vary
from their coupon rates for the following reasons: (i) Certificates may be
issued at a premium or discount, rather than at par; (ii) Certificates may trade
in the secondary market at a premium or discount after issuance; (iii) interest
is earned and compounded monthly which has the effect of raising the effective
yield earned on the Certificates; and (iv) the actual yield of each Certificate
is affected by the prepayment of mortgages included in the mortgage pool
underlying the Certificates and the rate at which principal so prepaid is
reinvested. In addition, prepayment of mortgages included in the mortgage pool
underlying a GNMA Certificate purchased at a premium may result in a loss to the
Fund.
Mortgage-backed securities issued by private issuers, whether or not
such obligations are subject to guarantees by the private issuer, may entail
greater risk than obligations directly or indirectly guaranteed by the U.S.
Government.
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Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities (collateral
collectively hereinafter referred to as "Mortgage Assets"). Multi-class
pass-through securities are interests in a trust composed of Mortgage Assets and
all references herein to CMOs will include multi-class pass-through securities.
Payments of principal of and interest on the Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distribution on the multi-class pass-through securities.
Moreover, principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates, resulting in a loss of all or part of the premium if any has
been paid. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semiannual basis.
The principal and interest payments on the Mortgage Assets may be
allocated among the various classes of CMOs in several ways. Typically, payments
of principal, including any prepayments, on the underlying mortgages are applied
to the classes in the order of their respective stated maturities or final
distribution dates, so that no payment of principal is made on CMOs of a class
until all CMOs of other classes having earlier stated maturities or final
distribution dates have been paid in full.
Stripped mortgage-backed securities ("SMBS") are derivative multi-class
mortgage securities. A Fund will only invest in SMBS that are obligations backed
by the full faith and credit of the U.S. Government. SMBS are usually structured
with two classes that receive different proportions of the interest and
principal distributions from a pool of mortgage assets. A Fund will only invest
in SMBS whose mortgage assets are U.S. Government obligations.
A common type of SMBS will be structured so that one class receives
some of the interest and most of the principal from the mortgage assets, while
the other class receives most of the interest and the remainder of the
principal. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, a Fund may fail to fully recoup its initial investment
in these securities. The market value of any class which consists primarily or
entirely of principal payments generally is unusually volatile in response to
changes in interest rates.
The average life of mortgage-backed securities varies with the
maturities of the underlying mortgage instruments. The average life is likely to
be substantially less than the original maturity of the mortgage pools
underlying the securities as the result of mortgage prepayments, mortgage
refinancings, or foreclosures. The rate of mortgage prepayments, and hence the
average life of the certificates, will be a function of the level of interest
rates, general economic conditions, the location and age of the mortgage and
other social and demographic conditions. Such prepayments are passed through to
the registered holder with the regular monthly payments of principal and
interest and have the effect of reducing future payments. Estimated average life
will be determined by the Adviser and used for the purpose of determining the
average weighted maturity and duration of the Funds.
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
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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.
The development of non-mortgage backed securities is at an early stage
compared to mortgage-backed securities. 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, as adviser to
each Fund, 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.
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Commercial Instruments
Commercial Instruments consist of short-term U.S. dollar-denominated
obligations issued by domestic corporations or by foreign corporations and
foreign commercial banks.
Investments by a Fund in commercial paper will consist of issues rated
in a manner consistent with such Fund's investment policies and objectives. In
addition, the Funds may acquire unrated commercial paper and corporate bonds
that are determined by the Adviser at the time of purchase to be of comparable
quality to rated instruments that may be acquired by these 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 criteria similar to the following are met; (a) if rated by at least two
Nationally Recognized Statistical Rating Organizations ("NRSROs"), the
instruments are rated in the highest rating category for short-term 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 of Trustees on the advice of the Adviser. 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.
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.
Repurchase Agreements
The repurchase price under the 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, or
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a sub-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.
Lending Securities
To increase return on portfolio securities, certain of the Funds may
lend their portfolio securities to broker/dealers and other institutional
investors pursuant to agreements requiring that the loans be continuously
secured by collateral equal at all times in value to at least the market value
of the securities loaned. 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 30%
of the value of its total assets. 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.
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American Depositary Receipts
The Non-Money Market Funds (consistent with their investment policies
and objectives) may invest in American Depositary Receipts ("ADRs"), which are
receipts issued by an American bank or trust company evidencing ownership of
underlying securities issued by a foreign issuer. ADRs may be listed on a
national securities exchange or may trade in the over-the-counter market. The
prices of ADRs are denominated in U.S. dollars; the underlying security may be
denominated in a foreign currency. The underlying security may be subject to
foreign government taxes which would reduce the yield on such securities.
Investments in such securities also involve certain inherent risks, including
those set forth in the Prospectuses for the Funds under "Appendix A -- Foreign
Securities."
Futures, Options and Other Derivative Instruments
Certain of the Funds may purchase put and call options which are traded
on a national securities exchange in an amount not exceeding 5% of its net
assets. Such options may relate to particular securities or to various stock or
bond indices. Purchasing options is a specialized investment technique which
entails a substantial risk of a complete loss of the amount paid as premiums to
the writer of the option.
Futures Contracts and Related Options. In addition, the Adviser may
determine that it would be in the interest of a Fund to purchase or sell futures
contracts, or options thereon, as a hedge against changes resulting from market
conditions in the value of the securities held by one of the Funds, or of
securities which one of them intends to purchase. For example, a Fund may enter
into transactions involving a stock or bond index futures contract, which is a
bilateral agreement pursuant to which two parties agree to take or make delivery
of an amount of cash equal to a specified dollar amount times the difference
between the index value (which assigns relative values to the common stocks or
bonds included in the index) at the close of the last trading day of the
contract and the price at which the futures contract is originally struck. No
physical delivery of the underlying stocks or bonds in the index is made. During
the coming fiscal year, each of these Funds intends to limit its transactions in
futures contracts and options thereon so that: (i) no more than 5% of a Fund's
total assets would be committed to initial margin deposits or premiums on such
contracts and (ii) immediately after entering into such contracts, no more than
30% of a Fund's total assets would be represented by such contracts.
Options Trading. Call options written by a Fund give the holder the
right to buy the underlying securities from the Fund at a fixed exercise price
up to a stated expiration date or, in the case of certain options, on such date.
Put options give the holder the right to sell the underlying securities to the
Fund during the term of the option at a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date. Call options
are "covered" by a Fund, for example, when it owns the underlying securities and
put options are "covered" by the Fund, for example, when it has established a
segregated account of cash, cash equivalents or securities which can be
liquidated promptly to satisfy any obligation of a Fund to purchase the
underlying securities. A Fund also may write combinations of puts and calls on
the same underlying security.
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A Fund will receive a premium from writing a put or call option, which
increases the gross income of a Fund 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 exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand and interest rates. 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, a 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 unless the security subsequently appreciates in value.
A Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which the Fund
purchases an option having the same terms as the option written. It is possible,
however, that illiquidity in the options markets may make it difficult from time
to time for a Fund to close out its written option positions.
A Fund also may purchase put or call options in anticipation of changes
in interest rates which may adversely affect the value of its portfolio or the
prices of securities that the Fund wants to purchase at a later date. The
premium paid for a put or call option plus any transaction costs will reduce the
benefit, if any, realized by a Fund upon exercise of the option and, unless the
price of the underlying security changes sufficiently, the option may expire
without value.
A Fund may write and purchase options on securities both for hedging
purposes and in an effort to increase current income. Options on securities that
are written or purchased by a Fund will be traded on U.S. and foreign exchanges
and over-the-counter.
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 applicable limitations on the amount of a Fund's assets that may
be invested in illiquid securities. 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 the applicable SEC test regarding illiquid
securities.
As stated in the related Prospectuses, each Fund may purchase put and
call options listed on a national securities exchange. This is a highly
specialized activity which entails greater than ordinary investment risks.
Regardless of how much the market price of the underlying security
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increases or decreases, the option buyer's risk is limited to the amount of the
original investment for the purchase of the option. However, options may be more
volatile than the underlying securities, and therefore, on a percentage basis,
an investment in options may be subject to greater fluctuation than an
investment in the underlying securities. A listed call option gives the
purchaser of the option the right to buy from a clearing corporation, and a
writer has the obligation to sell to the clearing corporation, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is in consideration for undertaking the obligations under the option
contract. A listed put option gives the purchaser the right to sell to a
clearing corporation the underlying security at the stated exercise price at any
time prior to the expiration date of the option, regardless of the market price
of the security. Put and call options purchased by a Fund will be valued at the
last sale price or, in the absence of such a price, at the mean between bid and
asked prices.
A Fund's obligation to sell a security subject to a covered call option
written by it, or to purchase a security subject to a secured put option written
by it, may be terminated prior to the expiration date of the option by the Fund
executing a closing purchase transaction, which is effected by purchasing on an
exchange an option of the same series (i.e., same underlying security, exercise
price, and expiration date) as the option previously written. Such a purchase
does not result in the ownership of an option. A closing purchase transaction
will ordinarily be effected to realize a profit on an outstanding option, to
prevent an underlying security from being called, to permit the sale of the
underlying security, or to permit the writing of a new option containing
different terms on such underlying security. The cost of such a liquidation
purchase plus transaction costs may be greater than the premium received upon
the original option, in which event the Fund will have incurred a loss in the
transaction. An option position may be closed out only on an exchange which
provides a secondary market for an option of the same series. There is no
assurance that a liquid secondary market on an exchange will exist for any
particular option. A covered call option writer, unable to effect a closing
purchase transaction, will not be able to sell the underlying security until the
option expires or the underlying security is delivered upon exercise with the
result that the writer in such circumstances will be subject to the risk of
market decline in the underlying security during such period. A Fund will write
an option on a particular security only if the Adviser believes that a liquid
secondary market will exist on an exchange for options of the same series which
will permit the Fund to make a closing purchase transaction in order to close
out its position.
When a Fund writes a covered call option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of the deferred credit will be subsequently
marked-to-market to reflect the current value of the option written. The current
value of the traded option is the last sale price or, in the absence of a sale,
the average of the closing bid and asked prices. If an option expires on the
stipulated expiration date or if the Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold), and the
deferred credit related to such option will be eliminated. Any gain on a covered
call option may be offset by a decline in the market price of the underlying
security during the option period. If a covered call option is exercised, the
Fund may deliver the underlying security held by it or purchase the underlying
security in the open market. In either event, the proceeds of the sale will
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be increased by the net premium originally received, and the Fund will realize a
gain or loss. If a secured put option is exercised, the amount paid by the Fund
involved for the underlying security will be partially offset by the amount of
the premium previously paid to the Fund. Premiums from expired options written
by a Fund and net gains from closing purchase transactions are treated as
short-term capital gains for Federal income tax purposes, and losses on closing
purchase transactions are short-term capital losses.
Futures Contracts. A futures contract is a bilateral agreement
providing for the purchase and sale of a specified type and amount of a
financial instrument, or, in the case of futures contracts on indices of
securities, for the making and acceptance of a cash settlement, at a stated time
in the future for a fixed price. By its terms, a futures contract provides for a
specified settlement date on which, in the case of the majority of interest rate
futures contracts, the fixed income securities underlying a contract are
delivered by the seller and paid for by the purchaser, or on which, in the case
of a stock index futures contract, an amount equal to a dollar amount multiplied
by the difference between the value of a stock index at the close of the last
trading day of the contract and the value of such index at the time the futures
contract was originally entered into is settled between the purchaser and seller
in cash. The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no purchase price is paid or received at the time the
contract is entered into. Instead, an amount of cash or cash equivalents, the
value of which may vary but is generally equal to 2% or less of the value of the
contract, must be deposited with the broker as initial deposit or "margin."
Subsequent payments to and from the broker, referred to as "variation margin,"
are made on a daily basis as the value of the index underlying the futures
contract fluctuates, making positions in the futures contract more or less
valuable, a process known as "marking to the market."
At any time prior to the expiration of a futures contract, a trader may
elect to close out a Fund's position by taking an opposite position, subject to
the availability of a secondary market, which will operate to terminate the
initial position. At that time, a final determination of variation margin is
made and any loss experienced by a party is required to be paid to the exchange
clearing corporation, while any profit due to a party must be delivered to it.
Futures contracts differ from options in that they are bilateral
agreements, with both the purchaser and the seller equally obligated to complete
the transaction. Futures contracts call for settlement only on the expiration
date, and cannot be "exercised" at any other time during their term.
Options on Futures Contracts. An option on a futures contract gives the
purchaser (the "holder") the right, but not the obligation, to enter into a
"long" 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,
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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.
An option, whether based on a futures contract, a stock index or an
equity security, becomes worthless to the holder when it expires. A position in
an option may be terminated by the purchaser or seller prior to expiration by
effecting a closing purchase or sale transaction subject to the availability of
a secondary market, which is the purchase or sale of an option of the same
series (i.e., the same exercise price and expiration date) as the option
previously purchased or sold. The difference between the premiums paid and
received represents the party's profit or loss on the transaction.
The use of futures contracts and options does involve certain
transaction costs and risks. 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 holdings. 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. While a Fund will establish a future 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 such Fund to purchase
or sell the instrument underlying the position, make or receive a cash
settlement, or meet ongoing variation margin requirements. 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. Income earned from transactions in
futures contracts and options thereon would be treated in part as a short-term,
and in part as a long-term, capital gain and, if not offset by net realized
capital losses, generally would be subject to Federal income taxes.
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.
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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.
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
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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.
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
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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 cancelled; (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 nationally recognized
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statistical rating organizations represent their opinions as to the quality of
Municipal Securities. It should be emphasized, however, that these ratings are
general and are not absolute standards of quality, and Municipal Securities with
the same maturity, interest rate, and rating may have different yields while
Municipal Securities of the same maturity and interest rate with different
ratings may have the same yield. Subsequent to its purchase by a Fund, an issue
of Municipal Securities may cease to be rated, or its rating may be reduced
below the minimum rating required for purchase by that Fund. The Adviser will
consider such an event in determining whether a Fund should continue to hold the
obligation.
Opinions relating to the validity of Municipal Securities and to the
exemption of interest thereon from regular Federal income tax or state income
tax are rendered by counsel to the issuer or bond counsel at the time of
issuance. Neither the Funds nor the Adviser will review the proceedings relating
to the issuance of Municipal Securities or the bases for opinions relating to
the validity of such issuance.
The payment of principal and interest on most securities purchased by a
Fund will depend upon the ability of the issuers to meet their obligations. Each
state, each of their political subdivisions, municipalities, and public
authorities, as well as the District of Columbia, Puerto Rico, Guam, and the
Virgin Islands are a separate "issuer" as that term is used in the Prospectuses
and this SAI. The non-governmental user of facilities financed by private
activity bonds is also considered to be an "issuer." An issuer's obligations
under its Municipal Securities are subject to the provisions of bankruptcy,
insolvency, and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Code, and laws, if any, which may be enacted by
Federal or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes. The power or
ability of an issuer to meet its obligations for the payment of interest on and
principal of its Municipal Securities may be materially adversely affected by
litigation or other conditions.
Although the Municipal Income Fund and the State Municipal Bond Funds
invest primarily in Municipal Securities with long-term maturities, the
Intermediate Municipal Bond Fund and the State Intermediate Municipal Bond Funds
invest primarily in Municipal Securities with intermediate-term maturities, they
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 State
Intermediate Municipal Bond Funds may also invest in long-term tax-exempt
instruments.
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
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communities. The principal and interest on these obligations may be payable from
the general revenues of the users of such facilities.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the Federal income tax exemption for
interest on Municipal Securities. Moreover, with respect to Municipal Securities
issued by Florida, Georgia, Maryland, North Carolina, South Carolina, Tennessee,
Texas, or Virginia issuers, the Trust cannot predict which legislation, if any,
may be proposed in the state legislatures or which proposals, if any, might be
enacted. Such proposals, while pending or if enacted, might materially and
adversely affect the availability of Municipal Securities generally, or Florida,
Georgia, Maryland, North Carolina, South Carolina, Tennessee, Texas, or Virginia
Municipal Securities specifically, for investment by one of these Funds and the
liquidity and value of such portfolios. In such an event, a Fund impacted would
re-evaluate its investment objective and policies and consider possible changes
in its structure or possible dissolution.
The following information relating to the State Intermediate Municipal
Bond Funds and the State Municipal Bond Funds supplements information relevant
to each of those Funds in the related Prospectuses.
Florida. Florida is now the fourth most populous state with an
estimated 1995 population of 14,141,047. By the year 2000 population will likely
exceed 15 million. Population growth has historically been driven by retirement
migration with local economies weighted heavily in tourism and agriculture. Over
the past twenty years, retirement, agriculture and tourism have been
complemented by high technology jobs, service sector jobs and international
trade. In the meantime, the three traditional industries have taken on a global
character. Trade and tourism have become international and this has fueled
foreign retirement migration. The character and dynamism of Florida has changed
considerably in recent decades and the state is considered a bellwether
indicator for the health of national economic trends.
The health of the national economy plays an important role in Florida's
fiscal soundness and economic development. During the period of strong national
expansion in the mid to late 1980's, Florida's population growth reached a peak
of 400,000 per year. Today, as this country enters its fifth year of economic
expansion, population growth in Florida exceeds 250,000 per year.
The emergence of Florida as one of the most populous states in the
United States has placed significant pressure on state and local government to
provide infrastructure and municipal and urban services. During the 1980's
growth was so rapid that a significant backlog of need emerged which, today, is
still being filled. Across the state, construction of new highway systems,
airport expansions, local school and university systems, hospitals and jails are
being put in place. Much of this growth is being funded by bonded revenues
secured by the expanding real property tax base. During the ten year period
ending in 1994, Florida real property values increased 70 percent from $376
billion to $641 billion. Residential property values account for nearly two
thirds of all value accounting for over $400 billion in value. Despite the rapid
population growth and resulting increases in improved residential properties,
commercial and industrial valuations have also grown consistently. Today these
values still account for 17 percent
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of Florida property values as they did a decade ago. There is now over $100
billion in real property value in commercial and industrial properties in
Florida.
One reason commercial and industrial values have increased is the
strategic nature of the industries that have located and grown in the state. The
Florida industrial base is concentrated in high technology industries such as
electronics, medical equipment, laser optics, computer simulation and space
travel. As a result, while defense contract spending has declined nationally by
over 20 percent from 1985-1994, Florida's value of defense contracts has
increased 12 percent to nearly $6 billion over the same period.
With increasing demands for services and comparatively low taxes,
Florida has experienced a rapid growth in the volume of bond debt. Because of
rapid population growth however, per capita State debt remains well below the
national average. In 1992, the outstanding state debt, among all states, was
$1,461 per capita compared with $912 in Florida.
Part of the focus on needs and services at the state level comes from
the philosophy behind Florida's growth management legislation, passed in 1985.
This legislation recognized the need to preserve Florida's unique quality of
life in the face of rapid growth and development and expanding demands for
physical infrastructure and social services. One of the key components of this
legislation is a rule requiring infrastructure be in place concurrent with new
development. In addition, the growth management legislation gave rise to the
designation of developable urban areas through an update of all locally land use
plans, a policy to discourage urban sprawl and a program to purchase
environmentally sensitive lands.
The Growth Management Act of 1985 and the concurrency rule has affected
Florida's economic growth and development in some regions of the state and could
continue to impact the economy in the future. In addition, the location of new
development will be more carefully scrutinized with respect to environmental
sensitivity and natural resource limitations. Growth management legislation will
affect all areas of the state with varying degrees of impact depending on the
specific local conditions such as, existing infrastructure capacity, local
environmental constraints, and limitations on natural resources such as potable
water and habitat preservation. Having now experienced ten years subject to
growth management rules, it appears that The Growth Management Act of 1985 has,
on balance, been beneficial. Growth management has helped improve quality of
life, ease infrastructure shortfalls and focused the State agenda on preserving
quality of life through growth management regulation and other state funded
environmental land preservation programs.
At the regional level, local economies within Florida perform
differently according to their urban or rural qualities and level of economic
diversification. The spectrum of local economies spans dense urban centers such
as Miami and Tampa to rural agricultural regions of citrus, cattle ranching and
sugar cane production.
Southeast Florida includes Miami, Fort Lauderdale, West Palm Beach and
the Florida Keys. This area is highly urban and economically diverse. Tourism,
retirement, high technology computer manufacturing, medical industries,
international trade, winter vegetable crops and sugar cane production are the
prominent features of this regional economy. The area accounts for just
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under one-third of the state's population. Hurricane Andrew struck south Dade
County in fall, 1992. Some 80,000 homes were destroyed along with local
businesses. During the four years since the hurricane, approximately 80 to 90
percent of the homes have been restored. The restoration and rebuilding process
is now essentially complete. Over the long term, the effects of the hurricane
may speed the suburbanization of South Florida. Other factors helping to
diminish agriculture locally include environmental preservation efforts in
sugarcane lands, and the effect of foreign competition due to NAFTA on local
winter fruit and vegetable growers.
In Broward and Palm Beach Counties, in particular, growth management's
concurrency requirements have played a significant role in limiting economic
expansion as compared with other regions of the state because of the lack of
infrastructure capacity. Community consensus based long range planning efforts
recently have been undertaken in northern Palm Beach County. These efforts are a
recognition of the pause in growth that has occurred and over time will help the
area accommodate new development. More recently improved infrastructure and
access in Southwest Broward has fueled development there.
Southwest Florida has emerged as a strong growth market. Traditionally
very retirement oriented, the region's economy has begun to diversify through
increased employment opportunities and migration southward of citrus production.
Increased employment opportunity has occurred due to the overall size of the
market and improvements in infrastructure capacity, notably the completion of
Interstate 75 in Collier County and the Southwest Regional Airport located in
Fort Myers. The improvement in transportation access also has helped tourism and
as a result indirectly buoyed population growth rates by providing exposure and
increased awareness of the region as a retirement destination among visitors.
The State of Florida has committed to building its tenth public university in
Lee County, near the Fort Myers airport. The university will accommodate 10,000
students within a decade and provide opportunities for synergy between industry
and education. Finally, recent updates to the Lee County comprehensive plan have
been beneficial with respect to growth management and policy revisions that are
more accommodating of future growth and development.
Central Florida is a premier world-class resort/vacation destination.
The presence of Disney World, studio theme parks and other tourist oriented
recreational parks drives the Central Florida economy. While the total size of
the market has grown rapidly, the economy is dependent on tourism and population
growth. Locally, the tourism industry has been more stable and seen better
growth over the past three decades than either the manufacturing or services
section. Two additional local industry concentrations, the laser/optical
research node and motion picture industries are helping to diversify the local
economy. Universal Studios has announced an expansion of its motion picture and
theme park facilities. Expansion began in 1995 and will employ an additional
14,000 workers when completed. Disney World has also financed and begun
construction of its fourth theme park covering 500 acres and adjacent
residential and commercial developments. Strong growth in tourism and large land
areas available for expansion suggest this region will lead the state in
population growth through the mid to late 1990s. International tourism has
fueled the growth of an international retirement and second home market
throughout Florida. Today, in the tourist areas of the market, one fifth of new
homes built are sold to foreign retirees or vacation home owners. Places of
origin include England, Germany, South America, and Puerto Rico. International
retirement markets are also growing in Southwest
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and Southeast Florida.
North Florida is rural in many areas. Jacksonville is the major city in
North Florida. The local economy is dominated by the logging and paper
industries, defense and retirement. The insurance industry also has a strong
presence in Jacksonville. Growth in North Florida peaked in the mid-1980s,
coinciding with the military defense buildup, prior to the full implementation
of growth management legislation. As urbanization and living costs increase in
the south and central parts of the state, population growth from national
retirement migration sources are increasing.
The Florida Panhandle is quite rural with reliance on tourism, defense
and state government for employment opportunities. This areas of the state has
the lowest per capita incomes and the smallest volume of population growth. With
the uncertainty of state budget funding in recent years and continuing defense
cutbacks, strong growth in this region of the state is not expected. Coastal
counties, however, remain attractive to continued economic development and
retirement migration because of the pristine beaches along the Gulf of Mexico.
In general, pursuant to the Florida Constitution and certain statutory
provisions, there are two basic types of obligations that may be issued in the
State of Florida: general obligation bonds and revenue bonds.
General obligation bonds are also known as full faith and credit bonds
because their repayment is based on the general credit and taxing power of the
borrowing government. The ad valorem tax is the most common source of revenue
pledged for the repayment of general obligation bonds. Being tax-supported,
general obligation bonds are typically used to finance the capital portion of
tax supported general purpose governmental projects, with public buildings,
roads, criminal justice facilities, and schools being the most common. Only
units of local government with taxing power can levy and collect ad valorem
taxes. The State of Florida has no ad valorem taxing power. General obligation
bonds payable from ad valorem taxes and maturing more than twelve months (other
than certain refunding bonds) after issuance may be issued to finance capital
projects authorized by law and only if the issuance of such bonds is approved by
the qualified electors.
Revenue bonds are obligations of a unit of government payable solely
from the revenues of a particular enterprise, such as a water and sewer system,
or from the revenues derived from a particular facility or user, or from non-ad
valorem revenues, such as the sales tax, or from other special funds authorized
to be pledged as additional security. Revenue bonds may also be payable from
non-specific revenues budgeted each year by the issuer. Unlike general
obligation bonds, revenue bonds do not constitute a debt of the issuing unit or
a pledge of its faith and credit, and they are not backed by the issuer's taxing
power.
A test was developed by the Florida Supreme Court for analyzing the
constitutional ability of an issuer to issue revenue bonds where a significant
portion of the proceeds would be used for private or non-governmental benefit.
Generally, these types of securities are referred to as industrial revenue bonds
or private activity bonds. Unless a particular use for the proceeds of a private
activity bond has been constitutionally or legislatively sanctioned (such as
multifamily and single family housing revenue bonds) or tested in the courts, a
determination must be made that
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the project to be financed with the proceeds of the private activity bond will
serve a paramount public purpose. The paramount public purpose doctrine is
designed to protect public funds from being exploited in assisting or promoting
private ventures when the public would be, at the most, only incidentally
benefited.
Generally, an issuer may pledge something less than all of its
available non-ad valorem revenues without voter approval, subject to the
parameters established by the Florida Supreme Court. The Florida Supreme Court,
in Volusia v. State, 417 So.2d 968 (Fla. 1982), refused to validate capital
improvement bonds which were to be used for the construction of a new jail and
which were secured by a pledge of all legally available, unencumbered revenues
of the county other than its ad valorem taxes, and by a further pledge to
maintain the programs and projects from which the unencumbered revenues were
derived. The Court held that the practical effect of such a pledge was to
require increased ad valorem taxes. The Court reasoned that a general pledge of
all available non-ad valorem revenues and the covenant by the issuer to maintain
the source of such non-ad valorem revenues was thought to have more than a mere
incidental affect on the ad valorem taxing power of an issuer, and therefore a
bond referendum would be required. The Florida Supreme Court, in State v.
Brevard County, 539 So.2d 461 (Fla. 1989), however, confirmed a lower court bond
validation where a county's obligations to make payments under a lease-purchase
arrangement were to be secured solely by non-ad valorem revenues budgeted for
such purpose during any fiscal year. The arrangement did not violate the State
Constitutional provision requiring voter approval in issuing the certificates of
indebtedness since the County did not also covenant to maintain the programs and
projects from which the non-ad valorem revenues were to be derived.
The Florida courts have validated debt obligations commonly referred to
as certificates of participation or "COPS." In a typical COPS transaction, the
issuer leases either real or personal property from a special purpose
corporation. The special purpose corporation assigns its rights to the lease
payments to a corporate trustee who in turn issues certificates evidencing an
undivided proportionate interest of the owners of such certificates to receive
the lease payments. The lease payments made by the issuer may be derived from
both ad valorem and non-ad valorem revenues of the issuer. Although ad valorem
taxes can be used to make the lease payments, the Florida Supreme Court has held
that a referendum is not required because the obligation to make lease payments
is an annual obligation subject to renewal each year. If the issuing body elects
not to renew its lease for the next succeeding year and therefore fails to
appropriate the necessary moneys to make lease payments, the holders of the COPS
would be limited to the remedies available under the lease. At least one Florida
court has upheld the right of a governmental unit to not exercise the annual
renewal option of its lease.
When a mortgage, with a right of foreclosure, on real or personal
property (owned by a unit of government) is given to secure a bond, the Florida
courts have held that a pledge of such mortgage requires voter approval. In
effect, ad valorem taxes are indirectly pledged because, as the Florida Supreme
Court reasoned, the legislative body affected by such foreclosure might feel
"morally compelled" to levy taxes to prevent the loss of assets through
foreclosure. As a result, the majority of revenue bonds issued in the State of
Florida are not additionally secured by a mortgage on the governmental property
being financed. This prohibition is applicable even if the issuer has no taxing
power.
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In Florida, the Division of Bond Finance has authority over the
issuance of State bonds pledging the full faith and credit of the State and the
issuance of revenue bonds payable solely from funds derived from sources other
than State tax revenues or rents or fees paid from State tax revenues.
Pursuant to the Florida Constitution, moneys sufficient to pay debt
service on State bonds must be appropriated as the same become due. Furthermore,
to the extent necessary, all State tax revenues, other than trust funds, must be
available for such appropriation purposes.
At the November 1994 general election, voters in the State approved an
amendment to the Florida Constitution limiting the amount of taxes, fees,
licenses and charges imposed by the State and collected during any fiscal year
to the amount of revenues allowed for the prior fiscal year, plus an adjustment
for growth. Growth is defined as the amount equal to the average annual rate of
growth in Florida personal income over the most recent twenty quarters times the
State revenues allowed for the prior fiscal year. The revenues allowed for any
fiscal year can be increased by a two-thirds vote of the State Legislature. The
limit is effective starting with fiscal year 1995-1996. Any excess revenues
generated will be deposited in the budget stabilization fund until it is fully
funded and then refunded to taxpayers. Included among the categories of revenues
which are exempt from the proposed revenue limitation, however, are revenues
pledged to state bonds and charges for services imposed by local, regional or
school district governing bodies.
The total outstanding principal of State bonds pledging the full faith
and credit of the State may not exceed fifty percent of the total tax revenues
of the State for the two preceding fiscal years, excluding any tax revenues held
in trust.
State bonds pledging the full faith and credit of the State, except
certain refunding bonds, generally may be issued only to finance or refinance
the cost of State fixed capital outlay projects subject to approval by a vote of
the electors. However, State bonds pledging the full faith and credit of the
State may be issued without a referendum to finance the construction of air and
water pollution control and abatement and solid waste disposal facilities to be
operated by a political subdivision of the State or by an agency of the State.
All forms of taxation other than ad valorem taxes are preempted to the
State, except as provided by general law. The State is prohibited from
collecting ad valorem taxes, which are taxes that are levied on real estate or
tangible personal property.
Revenue bonds may be issued by the State of Florida or its agencies
without voter approval only to finance or refinance the cost of state capital
projects payable solely from funds derived from sources other than state tax
revenues or rents or fees paid from state tax revenues.
Bonds issued pursuant to the State Bond Act must be validated in
accordance with Florida Statutes. Once an issuer decides to finance a project
with bonds issued pursuant to the State Bond Act, a bond validation proceeding
is held in circuit court to determine whether the proposed bond issuance
complies with Florida law. The court makes findings on the questions of whether
the issuing body had the power to incur bonded debt and whether it exercised
that power in accordance with the law. The court may not weigh the fiscal
feasibility of the proposed bonds in
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the validation determination. The circuit court judgment is final on all
matters, other than constitutional issues, raised at the validation hearing
after time for appeal to the Supreme Court of Florida has elapsed. Refunding
bonds and bonds issued to finance or refinance capital outlay projects for the
system of public education are not required to be validated.
The legislature has the power to confer on political subdivisions the
power to issue bonds, notes and other forms of indebtedness, except as otherwise
restricted by State and federal constitutional provisions, and such power is
conferred on municipal corporations, cities, counties and a variety of other
specially created districts and authorities. The bond validation process
described above is also available to such units of local government. In most
cases, bond validations are not statutorily mandated and many general obligation
and revenue bond issues have not been validated.
Generally, the Florida Constitution and Florida Statutes require that
the budget of the State and that of the units of local government in the State
be kept in balance from currently available revenues during each fiscal year. If
revenues collected during a fiscal year are less than anticipated, expenditures
must be reduced in order to comply with the balanced budget requirement.
Florida Statutes provide for a statewide maximum bond interest rate
which is flexible with the bond market and from which are exempted bonds rated
in one of the three highest ratings by nationally recognized rating services.
Nevertheless, upon request of a governmental unit, the State Board of
Administration may authorize a rate of interest in excess of the maximum rate,
provided relevant financial data and information relating to the sale of the
bonds is submitted to the State Board.
The Florida Sunshine Law, among other things, precludes public
officials from meeting with respect to the issuance of bonds other than at duly
noticed public meetings of the governmental entity. These provisions apply to
all meetings of any board or commission of any State agency or authority, or of
any county, municipal corporation, or political subdivision. No resolution,
rule, or formal action is considered binding except as taken at such duly
noticed public meetings.
Georgia. The state government of Georgia has one of the lowest debt
levels, per capita, of all states in the United States, which is reflective of
the very conservative fiscal approach taken by elected state officials, even
through the state has enjoyed a strong economy over the past few years.
Typically, general obligation bonds of the state are issued pursuant to the
powers granted under Article VII, Section IV of the Constitution of the State of
Georgia (the "Georgia Constitution"), which provides that the bonds are the
direct and general obligations of the state. The key language is provided under
Article VII, Section IV, Paragraph VI of the Georgia Constitution which provides
as follows:
"The full faith, credit and taxing power of the state are hereby pledged
to the payment of all public debt incurred under this article and all
such debt and the interest on the debt shall be exempt from taxation
(emphasis added). Such debt may be validated by judicial
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proceedings in the manner provided by law. Such validation shall be
incontestable and conclusive."
The Georgia Constitution further mandates that the General Assembly "shall raise
by taxation and appropriate each fiscal year . . . such amounts as are necessary
to pay debt service requirements in such fiscal year on all general obligation
debt." The Georgia Constitution further provides for the establishment of a
special trust fund which is designated the "State of Georgia General Obligation
Debt Sinking Fund" which is used for the payment of annual debt service
requirements on all general obligation debt.
There are debt limitations provided under Article VII, Section IV,
Paragraph II(b)-(e) of the Georgia Constitution which essentially provide that
the cumulative annual debt service for both general obligation debt and
guaranteed revenue debt shall not exceed 10% of the total revenue receipts, less
refunds paid to the state treasury in the fiscal year immediately preceding the
proposed issuance of any new debt. The Georgia Constitution prohibits state
departments and agencies from circumventing the debt limitation provisions by
not allowing such agencies to execute contracts which may be deemed to
constitute a security for bonds or other public obligations. (See Article VII,
Section IV, Paragraph IV of the Georgia Constitution.)
The State of Georgia may incur: "Public debt to supply a temporary
deficit in the state treasury in any fiscal year created by a delay in
collecting the taxes of that year. Such debt shall not exceed, in the aggregate,
5% of the total revenue receipts, less refunds, of the state treasury in the
fiscal year immediately preceding the year in which such debt is incurred." (See
Georgia Constitution, Article VII, Section IV, Paragraph I(b).) Since this
provision of the Constitution was enacted, there has been no temporary debt
incurred by the state.
Virtually all debt obligations represented by bonds issued by the State
of Georgia, counties or municipalities or other public subdivisions, and public
authorities require validation by a judicial proceeding prior to the issuance of
such obligation. The judicial validation makes these obligations incontestable
and conclusive, as provided under the Georgia Constitution.
The State of Georgia operates on a fiscal year beginning on July 1 and
ending on June 30. Each year the State Economist, the Governor and the State
Revenue Commissioner jointly prepare a revenue forecast upon which is based the
state budget which is considered, amended and approved by the Georgia General
Assembly. On June 30, 1994 the state had a revenue shortfall reserve fund of
$267,195,474. Total net revenue collections for the fiscal year ending on June
30, 1995 were $9,115,243,249, which represented a 7.9% increase over fiscal year
1994 collections of $8,444,864,060. Additionally, Georgia received in fiscal
year 1995, $502,286,000 in revenue from the Georgia Lottery Corporation; all
lottery revenues being earmarked for educational expenditures.
Georgia has a very bright economic future highlighted by a $2 billion
stimulus to the economy which is expected from Atlanta's hosting of the 1996
Summer Olympic Games. Manufacturing activity, particularly in the textile,
apparel and carpet sectors, has increased dramatically as a result of increased
home building. The real estate/construction industry appears to be emerging from
a recession that had been caused by over-building of commercial office space
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and industrial parks in the late 1980s. In recent years, Georgia has enjoyed the
economic stimulus caused by a number of major corporate relocations led by
United Parcel Service of America, Inc., which moved its World Headquarters from
Greenwich, Connecticut, to Atlanta. This move was followed shortly by Holiday
Inn Worldwide, which moved its headquarters to Atlanta from Memphis.
On December 6, 1994, the United States Supreme Court reversed the
Georgia Supreme Court's decision in Reich v. Collins, 263 Ga. 602 (1993) and
held that Georgia resident federal retirees were entitled to refunds of pre-1989
taxes on federal retirement pension benefits. In response, the Governor signed
H.B. 90 on February 1, 1995, permitting federal retirees who file timely claims
to receive refunds for such taxes for tax years 1985-1988. Total potential
liability is approximately $110,000,000 which is now being paid in four equal
annual installments, the first of which occurred on October 15, 1995. The Reich
case has now been dismissed.
The United States Supreme Court in the decision of Bacchus Imports,
Ltd. v. Dias, 468 U.S. 263 (1994), held that a Georgia statute assessing lower
alcoholic beverage taxes against domestic producers than out-of-state producers
was unconstitutional. In the wake of Bacchus, James B. Beam Distilling Company
v. State, 501 U.S. 529 (decided June 20, 1991) held that out-of-state producers
had a right to assert claims for refunds for the unlawful alcohol beverage taxes
levied against them, but that the enforceability of such claims would be subject
to state statutes of limitations and other procedural bars. On remand, the
Fulton County Superior Court held that statutes of limitations and other
procedural bars would preclude Beam's recovery for refunds, where applicable.
After having its writ of certiorari denied by the United States Supreme Court,
Beam has filed a petition for rehearing, which has been denied. Currently,
Georgia's statute of limitations (O.C.G.A. ss. 48-2-85) has run on all
applicable pre-Bacchus claims for refund except for five claims currently
pending, which seek tax refunds in the amount of $31,700,000, plus interest.
Age International, Inc. v. State, Fulton County Superior Court, Civil
Case Number E-3793, and Age International, Inc. v. Miller, Fulton County
Superior Court, Civil Case Number E-25073 were filed by out-of-state producers
of alcoholic beverages seeking (i) refunds totaling $119,000,000.00 for alcohol
import taxes imposed under Georgia's post-Bacchus statute (O.C.G.A. ss. 3-4-60)
and (ii) declaratory and injunctive relief. These claims account for an
estimated 99% of all such taxes paid pursuant to the statute and which would not
be barred by the statute of limitations. The refund cases are still pending in
the trial court. The declaratory/injunctive relief case was dismissed by the
District Court, such dismissal being affirmed by the Eleventh Circuit Court of
Appeals; a petition for rehearing was denied therefore giving the state a
favorable verdict on this issue.
Local school boards have filed suit against Georgia in Board of Public
Education for Savannah/Chatham County v. State of Georgia, United States
District Court, Civil Case Number CV-490-101 and DeKalb County v. State of
Georgia, State of Georgia Court of Appeals, Civil Case Number 95-9149. The local
school boards have contested the manner in which desegregation policies were
implemented. In Savannah/Chatham County, the Savannah Board originally sued for
$30,000,000, challenging the application of state desegregation funding
formulae, but the District Court approved a formula requiring a State payment of
approximately
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$8,900,000 through and including June 30, 1994. The local school boards appealed
the decision to the Eleventh Circuit Court of Appeals. A preliminary settlement
has been reached, in which the state has paid $8,925,000 and discussions
continue on a proposed formula for allocating student transportation costs and
additional payments may have to be made depending on the final agreement on
costs accruing during the settlement negotiations. In DeKalb County, the
plaintiffs filed suit for $67,500,000 on a related issue; the District Court
held the funding formula was contrary to state law. The Court reduced a
potential state funding obligation of $34,000,000 to approximately $28,000,000.
Notices of appeal, however, have been filed with the Eleventh Circuit Court of
Appeals. Approximately five school districts may file similar claims.
Leslie K. Johnsen v. Collins, filed in Chatham County, involved
constitutional challenges to Georgia's transfer ("impact") fee (O.C.G.A. ss.
40-3-31.1) was challenged under the commerce clause. This case has been
voluntarily dismissed and the plaintiff has joined in a similar lawsuit which
was filed in the Superior Court of Fulton County (Mueller v. Collins). The
aggregate potential liability of the state is estimated to be $20,600,835 for
the period from May, 1992 to February 15, 1995. Since June 7, 1995, all amounts
have been paid into an escrow account and collections continue at the rate of
$500,000 to $600,000 per month.
On February 9, 1996 the Georgia General Assembly repealed the import
fee statute and this has effectively eliminated the legal obligation to collect
the fees. The escrow account as of February 12, 1996 contained a total of
$3,813,574 which could be used to partially fund refund claims depending on the
ultimate outcome of the Mueller case.
In Daniel W. Tedder v. Marcus E. Collins, Sr., a class action was filed
in the Cobb County Superior Court challenging a revenue regulation authorizing
the collections on sales tax on sales of used transportation equipment where
neither the buyer nor the seller was engaged in the "regular business" of buying
or selling such tangible property. The trial court declared the regulation
invalid. Accordingly, $21,900,000 in refunds have been paid, with a possible
aggregate exposure of $30,000,000, plus interest. The revenue regulation has
been rescinded.
On September 1, 1994, the case of Buskirk and Estill v. State of
Georgia, et al., was filed in the Superior Court of Fulton County Georgia, Case
No. E-31547, purportedly to be filed on behalf of all "Classified employees of
the State of Georgia or its agencies and departments during all or part of
fiscal years 1992 through 1995, who are eligible to receive within grade pay
increases and who would have received same were it not for a freeze of within
grade pay increases." The case is pending and discovery completed. The Attorney
General's Office believes that the State has an adequate defense to all claims,
but in the event the plaintiffs are successful, the potential liability to the
State for these retroactive pay raises could be as much as $295 million.
On August 2, 1995, a petition was filed in Dekalb County Superior court
(Civil Action File No. 95-10114-4) by the Lombard Corporation against Marcus
Collins, Commissioner of the Georgia Department of Revenue, and Tom Scott, Tax
Commissioner for Dekalb County. This petition attacks the constitutionality of
the Georgia intangibles tax. In the event the intangibles tax is found to be
unconstitutional, the financial impact on the State will be marginal, but city
and
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county governments, as well as local Boards of Education, will collectively
lose approximately $40 million per year in intangibles tax revenues.
On February 21, 1996, the United States Supreme Court ruled a similar
North Carolina intangibles tax facially discriminatory and unconstitutional in
the case of Fulton Corporation v. Janice H. Faulkner, Secretary of Revenue of
North Carolina, Case No. 94-1239. It is expected that the judicial ruling in the
Lombard case will follow this United States Supreme Court decision, and the
Georgia intangibles tax will be found to be unconstitutional. There is a chance
that the Court in the Lombard case will sever the intrastate exemption for stock
owned in Georgia corporations, and uphold the balance of the intangibles tax
stature.
The above-referenced information is based on available public documents
and oral representations made by officials at the State Attorney General's
Office, the Georgia Department of Revenue and contained in the Significant
Contingent Liability representation made in a recent Preliminary Official
Statement accompanying a September 1995 State of Georgia General Obligation Bond
issue.
Maryland. The public indebtedness of the State of Maryland and its
instrumentalities is divided into three basic categories. The State issues
general obligation bonds, to the payment of which the State ad valorem property
tax is exclusively pledged, for capital improvements and for various
State-sponsored projects. The Maryland Department of Transportation issues
limited, special obligation bonds for transportation purposes payable primarily
from specific, fixed-rate excise taxes and other revenues related mainly to
highway use. Certain authorities issue obligations payable solely from specific
non-tax, enterprise fund revenues, and for which the State has no liability and
has given no moral obligation assurance. The State and certain of its agencies
also have entered into a variety of lease purchase agreements to finance the
acquisition of capital assets. These lease agreements specify that payments
thereunder are subject to annual appropriation by the General Assembly.
At least since the end of the Civil War, the State has paid the
principal of and interest on its general obligation bonds when due. Neither the
Maryland Constitution nor the public general laws of Maryland impose any general
debt limit. Although the State has the authority to make short-term borrowings
in anticipation of taxes and other receipts up to a maximum of $100 million, the
State in the past has not issued short-term tax anticipation notes or made any
other similar short-term borrowings for cash flow purposes. The State has not
issued bond anticipation notes except in connection with a State program to
ameliorate the impact of the failure of certain State-chartered savings and loan
associations in 1985; all such notes were redeemed without the issuance of debt.
The State Constitution prohibits the contracting of State debt unless
authorized by a law providing for the collection of an annual tax or taxes
sufficient to pay the interest when due and to discharge the principal within 15
years of the date of debt issuance. The Constitution also provides that the
taxes levied for this purpose may not be repealed or applied to any other
purpose until the debt is fully discharged. As a matter of practice, general
obligation bonds, other than small denomination bonds and refunding bonds, are
issued to mature in serial installments
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designed to provide payment of interest only during the first two years and an
approximately level annual amortization of principal and interest over the
remaining years.
The State has financed and expects to continue to finance the
construction and acquisition of various facilities and equipment through
conditional purchase, sale-leaseback, and similar transactions. All of the lease
payments under these arrangements are subject to annual appropriation by the
General Assembly. In the event that appropriations are not made, the State may
not be held contractually liable for the payments. These transactions are
subject to approval by the Board of Public Works.
1994 Budget -- On April 5, 1993 the General Assembly approved the
Budget for fiscal year 1994. The 1994 Budget Program of $12.5 billion is 3.4%
above the spending level for 1993. The 1994 Budget does not include any funds
for employee cost-of-living increases or selective salary adjustments, but does
include funds for employee in-grade salary increments. The Budget does not
include any proposed expenditures dependent upon additional revenue from new or
broad-based taxes; the only additional revenues are to be derived from fees in
the health care and insurance regulation areas.
The operating budget for fiscal year 1994 is to be funded with $6,499
million in general funds, $3,221 million in special and higher education funds,
and $2,752 million in federal funds. The 1994 Budget, according to the
Department of Fiscal Services, is within the spending level recommended by the
Spending Affordability Committee.
1995 Budget -- On April 5, 1994, the General Assembly approved the
budget for fiscal year 1995. The Budget includes, among other things: (i)
sufficient funds to meet all specific statutory funding requirements; (ii)
sufficient funds to meet the actuarily recommended contributions for the seven
retirement systems, determined on a basis consistent with prior years' practice;
(iii) sufficient general funds for the Annuity Bond Fund to maintain the State
property tax rate at 21(cent) per $100 of assessed valuation; (iv) $2.6 billion
in aid to local governments (reflecting a $102.4 million increase over 1994 that
provides for substantial increases in education, health, and police aid); (v) a
$20 million general fund appropriation to the Dedicated Purpose Account of the
State Reserve Fund to reduce the liabilities for the State Employee Health
Insurance program; and (vi) $104.8 million in general fund deficiency
appropriations for fiscal year 1994, of which $60.5 million is an appropriation
to the Revenue Stabilization Account of the State Reserve Fund as previously
mandated by the General Assembly. The Budget includes $59.6 million in general
funds for a 3% employee cost-of-living adjustment with a minimum increase of
$800 per employee.
The operating budget is to be funded with $6,886 million in general
funds, $2,396 million in special funds, $1,154 in higher education funds, and
$2,935 million in federal funds.
The State's fiscal year 1995 capital program is to be funded with $380
million in general obligation bonds, $54.6 million in general funds appropriated
in the operating budget, $943.9 million in special and federal funds (of which
$774.6 million is appropriated to the Department of Transportation), $201.7
million in revenue bonds, and $23.5 million in reappropriated prior years'
capital appropriations. The general obligation bond financed program
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includes $170 million for State facilities, $82 million for the construction and
renovation of local elementary and secondary schools, and $128 million for
various other grants and loan projects.
When the 1995 budget was enacted, it was estimated that the general
fund surplus on a budgetary basis at June 30, 1995, would be approximately $9.7
million; the current estimate is $49.5 million, which reflects the actual
general fund surplus on a budgetary basis at June 30, 1994, of $60.0 million. In
addition, it is currently estimated that the balance in the Revenue
Stabilization Account of the State Reserve fund at June 30, 1995, will be $223.6
million. Current statute requires the Governor to include as part of the budget
submitted at the 1995 Session of the General Assembly an appropriation in an
amount equivalent to the general fund surplus at June 30, 1994. The estimates of
the general fund surplus and balance in the Revenue Stabilization Account at
June 30, 1995, assume that the required appropriation will be effective July 1,
1995.
1996 Budget--On April 1, 1995, the General Assembly approved the Budget
for fiscal year 1996. The Budget includes, among other things: (i) sufficient
funds to meet all specific statutory funding requirements; (ii) sufficient funds
to meet the actuarily recommended contributions for the seven retirement
systems, determined on a basis consistent with prior years' practice; (iii)
sufficient general funds for the Annuity Bond Fund to maintain the State
property tax rate at $0.21 per $100 of assessed valuation; (iv) $2.8 billion in
aid to local governments (reflecting a $161 million increase over fiscal year
1995 that provides for substantial increases in education, health, and police
aid); (v) a $270 million general fund appropriation to the State Reserve Fund,
$200 million of which is appropriated to the Revenue Stabilization Account; and
(vi) $134.1 million in general fund deficiency appropriations for fiscal year
1995, of which $60 million is an appropriation to the Revenue Stabilization
Account of the State Reserve Fund as previously mandated by the General
Assembly. The Budget also includes $39 million in general funds for a 2%
employee cost-of-living adjustment.
The operating budget for fiscal year 1996 is to be funded with $7,394
million in general funds, $3,918 million in special and higher education funds,
and $3,299 million in federal funds.
The State's fiscal year 1996 capital program is proposed to be funded
with $390 million in general obligation bonds, $93.5 million in general funds
appropriated in the operating budget, $1,244.6 in special and federal funds (of
which $1,055.2 is appropriated to the Department of Transportation), $131.9
million in revenue bonds, and $21.0 million in reappropriated prior years'
capital appropriations. The proposed general obligation bond financed program
includes $152 million for State facilities, $83 million for the construction and
renovation of local elementary and secondary schools, and $155 million for
various other grants and loan projects.
When the 1996 Budget was enacted, it was estimated that the general
fund surplus on a budgetary basis at June 30, 1996, would be approximately $7.8
million; it is currently estimated to be $1.0 million. At its December 12, 1995,
meeting, the Board of Revenue Estimates lowered the estimate of fiscal year 1996
general fund revenues by $92 million. The Governor has proposed a plan to
address this change that principally includes: (1) additional reversions for
Medicaid and Nonpublic Special Education Placements of $22 million; (2)
reduction of current general fund appropriations of $26 million; (3) transfer
from the Revenue Stabilization Account of $18 million; and (4) use of
unanticipated fiscal year 1995 surplus of $26 million. It is anticipated that
the
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balance of the Revenue Stabilization Account after the transfer at June 30,
1996, will be $500 million.
The Adviser believes that the information summarized above describes
some of the more significant matters relating to the Maryland Intermediate
Municipal Bond Fund and Maryland Municipal Bond Fund. The sources of the
information are the official statements of issuers located in Maryland, other
publicly available documents, and oral statements from various state agencies.
The Adviser has not independently verified any of the information contained in
the official statements, other publicly available documents, or oral statements
from various state agencies.
North Carolina. The North Carolina Constitution requires that the total
expenditures of the State for the fiscal period covered by the budget not exceed
the total receipts during the fiscal period plus any surplus remaining in the
State Treasury at the beginning of the period. The State operates on a fiscal
year ending June 30th.
Economic growth in North Carolina continued in 1995, although at a
somewhat slower pace than in recent years. The total real (inflation-adjusted)
output of goods and services in North Carolina is estimated to have increased
3.6% in 1995, which is lower than in 1994 and 1993. Despite the slower growth
rate, however, the State's overall economic performance in 1995 exceeded that of
the nation. In addition, it is forecasted that North Carolina will have added
approximately 70,000 jobs during 1995. This number is smaller than in recent
years and again reflects a slowing of the pace of economic growth. The State's
inflation rate remained moderate in 1995. North Carolina is expected to continue
the pattern of slower economic growth in 1996, with the real output of goods and
services in North Carolina increasing between 2.5% and 3% in 1996.
The fund balance of the State's General Fund grew by $124 million in
1995. The growth in tax and other revenues exceeded expectations in 1995, which
directly contributed to the strong condition of the General Fund at fiscal year
end. Nevertheless, upward actuarial revisions in net projected Medicaid
liabilities of approximately $31 million, and cuts of approximately $73 million
to individual income tax revenues, were reflected in the balance sheet of June
30, 1995. At that date, the fund balance of the General Fund was $1,024.6
million, as compared to a $900.6 million balance at June 30, 1994. The budgets
for the 1995-96 and 1996-97 fiscal years project an ending balance for the
General Fund of $630.3 million and $824.4 million, respectively.
The following are cases pending in which the State faces the risk of
either a loss of revenue or an unanticipated expenditure. In the Opinion of the
Department of State Treasurer, however, any such loss of revenue or expenditure
would not materially adversely affect the State's ability to meet its financial
obligations.
Leandro, et al. v. State of North Carolina and State Board of
Education. On May 25, 1994, students and boards of education in five counties
filed suit requesting a declaration that the public education system of North
Carolina violates the State constitution by failing to provide adequate or
substantially equal education opportunities, and by denying due process of law.
The
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defendants' motion to dismiss was denied and the ruling was appealed. The North
Carolina Court of Appeals heard oral argument in late January 1996, and a ruling
is expected later this year.
Francisco case. On August 10, 1994, a class action lawsuit was filed
against the Superintendent of Public Instruction and the State Board of
Education on behalf of a class of parents and their children who are
characterized as limited English proficient. The complaint alleges that the
State has failed to provide funding for the education of these students and has
failed to supervise local school systems in administering programs for them. The
complaint asks the Court to order the defendants to fund a comprehensive program
to ensure equal educational opportunities for limited English proficient
children. Discovery is underway but no trial date has been set.
Swanson case. In Davis v. Michigan (1989), the U.S. Supreme Court ruled
that a Michigan income tax statute which taxed federal retirement benefits while
exempting those paid by state and local governments violated the constitutional
doctrine of intergovernmental tax immunity. At the time of the Davis decision,
North Carolina law contained similar exemptions in favor of state and local
retirees. Those exemptions were repealed prospectively beginning with the 1989
tax year. Following Davis, federal retirees filed a class action suit in federal
court in 1989 seeking damages equal to the North Carolina income tax paid on
federal retirement income by the class members. A companion suit was filed in
state court in 1990. The North Carolina Department of Revenue's estimate of
refunds and interest liability is $280.89 million as of June 30, 1994. In 1991
the North Carolina Supreme Court ruled in favor of the State in the state court
action. In 1993 the U.S. Supreme Court vacated that decision and remanded the
case to the North Carolina Supreme Court. The North Carolina Supreme Court then
ruled in favor of the State on the grounds that the federal retirees had failed
to comply with state procedures for challenging unconstitutional taxes.
Plaintiffs petitioned the U.S. Supreme Court for review of that decision, but
the U.S. Supreme Court denied their petition. The U.S. District Court has ruled
in favor of the defendants in the federal case, and a petition for
reconsideration was denied. Plaintiffs appealed to the U.S. Court of Appeals,
which upheld the lower federal court's ruling.
An additional lawsuit was filed in mid-1995 in state court by federal
pensioners seeking to recover state income taxes paid on federal retirement
benefits. This case grew out of the claims made by the federal pensioners in the
original Swanson federal case. In the new lawsuit, the plaintiffs allege that,
when the state granted an increase in retirement benefits to state retirees in
the same legislation that equalized tax treatment between state and federal
retirees, the increased benefits to state retirees constituted an indirect
violation of Davis. The suit seeks a refund of taxes paid by federal retirees on
federal retirement benefits received in the years 1989-93 and refunds or
monetary relief sufficient to equalize the alleged on-going discriminatory
treatment for those years. This case has been stayed pending the outcome in
Bailey (see below).
Bailey case. State and local government retirees filed a class action
suit in 1990 as a result of the repeal of the income tax exemptions for state
and local government retirement benefits. The original suit was dismissed after
the North Carolina Supreme Court ruled in 1991 that the plaintiffs had failed to
comply with state law requirements for challenging unconstitutional taxes and
the U.S. Supreme Court denied review. In the 1992 many of the same plaintiffs
filed a new lawsuit alleging essentially the same claims. The case went to trial
in March of 1995.
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On May 31, 1995, the court issued an order ruling in favor of the
plaintiffs. The court found that the repeal of the tax exemption on state and
local government retirement benefits was null, void and unenforceable and that
retirement benefits vested before 1989 are exempt from taxation. The North
Carolina Attorney General has appealed the order, and it estimates that the
amount in controversy is approximately $40-45 million annually for the tax years
1989-91. In addition, it is anticipated that the decision reached in this case
will govern the resolution of tax refund for claims made by retired state and
local government employees for taxes paid on retirement benefit income for tax
years after 1991. Furthermore, if the order of the trial court is upheld, its
provisions would apply prospectively to prevent future taxation of state and
local government retirement funds that were vested before August 1989.
Faulkenbury v. Teachers' and State Employees' Retirement System, Peele
v. Teachers' and State Employees' Retirement System, and Woodard v. Local
Governmental Employees' Retirement System. Plaintiffs are disability retirees
who brought class actions in state court challenging changes in the formula for
payment of disability retirement benefits and claiming impairment of contract
rights, breach of fiduciary duty, violation of other federal constitutional
rights and violation of state constitutional and statutory rights. The State
estimates that the cost in damages and higher prospective benefit payments to
plaintiffs and class members may amount to $50 million or more in Faulkenbury,
$50 million in Peele and $15 million or more in Woodard. Upon review in
Faulkenbury, the North Carolina Court of Appeals and the North Carolina Supreme
Court have held that the claims made in Faulkenbury, which are substantially
similar to those in Peele and Woodard, for breach of fiduciary duty and
violation of federal constitutional rights brought under the Federal Civil
Rights Act, either do not state a cause of action or are otherwise barred by the
statute of limitations. In 1994 plaintiffs took voluntary dismissals of their
claims for impairment of contract rights in violation of the U.S. Constitution
and filed new actions in federal court asserting the same claims along with
claims for violation of constitutional rights in the taxation of retirement
benefits. The remaining State court claims in all of the cases were scheduled to
be heard in May, 1995, and the trial court ruled against the defendants. The
defendants have given notice of appeal. The federal actions have been stayed
pending resolution of the State claims.
Fulton Case. The State's intangible personal property tax levied on
certain shares of stock has been challenged by the plaintiff on the grounds that
it violates the U.S. Constitution's commerce clause by discriminating against
stock issued by corporations that do all or part of their business outside the
State. The plaintiff in the action is a North Carolina corporation that paid the
tax on stock it owned in companies that did all or part of their business
outside the State. Plaintiff seeks to invalidate the tax in its entirety and to
recover tax paid on the value of its shares in such corporations. The North
Carolina Court of Appeals invalidated the taxable percentage deduction and
excised it from the statute beginning with the 1994 tax year; however, the North
Carolina Supreme Court reversed the Court of Appeals and reinstated the trial
court's ruling, which had upheld the tax as constitutional, including the
taxable percentage deduction. The plaintiffs' petition for certiorari to the
U.S. Supreme Court was granted, and on February 21, 1996, the U.S. Supreme Court
declared the State's intangibles tax to be unconstitutional under the commerce
clause and remanded the case to the North Carolina Supreme Court for its
determination of the appropriate remedy for taxes improperly collected in years
prior to the repeal of the tax.
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The Adviser believes that the information summarized above describes
some of the more significant matters relating to the North Carolina Intermediate
Municipal Bond Fund and North Carolina Municipal Bond Fund. The sources of the
information are the official statements of the Department of State Treasurer of
North Carolina, other publicly available documents and oral statements from
various State agencies. The Adviser has not independently verified any of the
information contained in the official statements, other publicly available
documents, or oral statements from various State agencies.
South Carolina. The South Carolina Constitution mandates a balanced
budget. If a deficit occurs, the General Assembly must account for it in the
succeeding fiscal year. In addition, if a deficit appears likely, the State
Budget and Control Board may reduce appropriations during the current fiscal
year as necessary to prevent the deficit. The State Constitution limits annual
increases in State appropriations to the average growth rate of the economy of
the State and annual increases in the number of State employees to the average
growth of the population of the State; provided, however, that these two
limitations are subject to suspension for any one fiscal year by a special vote
in each House of the General Assembly.
The State Constitution requires a General Reserve fund that equals
three percent of General Fund Revenue for the latest completed fiscal year. When
deficits have occurred, the State has funded them out of the General Reserve
Fund. The State Constitution also requires a Capital Reserve Fund equal to two
percent of General Fund Reserve for the latest completed fiscal year. The State
Constitution requires that the General Assembly provide that, if revenue
forecasts before March 1 project that revenues for the current fiscal year will
be less than expenditures authorized by appropriation for the current fiscal
year, the current fiscal year's appropriation to the Capital Reserve Fund shall
first be reduced to the extent necessary before any reduction is made in
operating appropriations. If it is determined that a fiscal year had ended with
an operating deficit, the State Constitution requires that monies appropriated
from the Capital Reserve Fund must be reduced to the extent necessary and
applied to the year end operating deficit before withdrawing monies from the
General Reserve Fund for such purpose.
After March 1, monies from the Capital Reserve Fund may be appropriated
by a special vote of the General Assembly to finance previously authorized
capital improvement bond projects, to retire principal or interest on bonds
previously issued, and to pay for capital improvements or other nonrecurring
purposes. Monies in the Capital Reserve Fund not appropriated or any
appropriation for a particular project or item that has been reduced due to
application of the monies to a year-end deficit must go back to the General
Fund.
The State operates on a fiscal year beginning July 1 and ending June
30. For the fiscal year ended June 30, 1995, the State had a budgetary surplus
of $393,000,000, and the Capital Reserve Fund and General Reserve Fund were
fully funded at the combined 5% level. The South Carolina General Assembly
recently passed the Fiscal Year 1995-96 Appropriations Act that enacted a
balanced budget where most of the new revenue was allocated to property tax
relief and education.
A class action lawsuit, Bass v. State of South Carolina, questioning
the State's tax treatment of federal retirement benefits for the tax years 1985,
1986, 1987 and 1988, has been
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settled by agreement of the parties and approved by the Circuit Court of the
State. The time for appeal has expired. In addition, the General Assembly
authorized the payment of up to $85,000,000 to the members of the class and
approximately $77,000,000 has been paid. The General Assembly, during the 1994
Session, enacted legislation which extended the time for filing claims until
August 8, 1994. The State, in October 1995, paid approximately $11,700,000, and
in October 1996, will pay approximately $11,500,000, for claims filed during the
extended period, which will conclude the State's obligation.
The Adviser believes that the information summarized above described
some of the more significant matters relating to the South Carolina Intermediate
Municipal Bond Fund and South Carolina Municipal Bond Fund. The sources of the
information are the official statements of issuers located in South Carolina,
other publicly available documents, or oral statements from various State
agencies. The Adviser has not independently verified any of the information
contained in the official statements, other publicly available documents, or
oral statements from various State agencies.
Tennessee. The Constitution of the State of Tennessee forbids the
expenditure of the proceeds of any debt obligation for a purpose other than the
purpose for which it was authorized by statute. The Constitution also forbids
the authorization of any debt obligation, except as shall be repaid within the
fiscal year of issuance, for current operation of any state service or program.
Under Tennessee law, the term of the State's bonds cannot exceed the life of the
projects being financed. Furthermore, the amount of debt obligations of the
State of Tennessee cannot exceed the amount authorized by the Tennessee General
Assembly. The procedure for funding State of Tennessee debt is provided by
Chapter 9 of Title 9, Tennessee Code Annotated. The Funding Board of the State
of Tennessee is the entity authorized to issue general obligation indebtedness
of the State of Tennessee. Pursuant to Section 9-9-106, Tennessee Code
Annotated, the Funding Board of the State of Tennessee has a lien on the taxes,
fees and revenues from certain designated revenue sources for the full amount
required to service the State's general obligation indebtedness. Certain other
agencies and authorities in Tennessee issue obligations, payable solely from
specific non-tax enterprise fund revenues and which are not debts or liabilities
of the State of Tennessee nor is the full faith and credit pledged to the
payment thereof.
Under current state statutes, the State of Tennessee's general
obligation bonded debt issuances are subject to an annual legal debt service
limitation based on a pledged portion of certain current year revenues. As of
June 30, 1995, the State of Tennessee's annual legal debt service limit of $374
million was well above the debt service required of $112 million, with a legal
debt service margin of $262 million. Debt per capita equaled $128, and the ratio
of net general long-term bonded debt to assessed property valuation was 1.25
percent.
The Constitution of the State of Tennessee requires a balanced budget.
As required by law, the legislature enacted a balanced budget for fiscal year
1994-95. Beginning January 1, 1994 the State of Tennessee received a waiver from
the federal government to replace Medicaid with the new program, TennCare.
TennCare was implemented to help control the sky-rocketing cost of health care
and to provide insurance coverage not only to previous Medicaid eligible
individuals but also to uninsured Tennesseans.
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Despite the budgetary concerns caused by the costs associated with
implementing TennCare, the economic outlook for Tennessee remains favorable. The
State's economic diversity has improved substantially over the last twelve
years. Investments announced in new and expanding business exceeded one billion
dollars in each of those years and exceeded two billion in the last two years.
The $2.5 billion in announced capital investments in 1994 was the third largest
year and exceeded only by the $2.78 billion in 1985 when Saturn Corporation
chose Tennessee for its plant site and 1989 when $3.2 billion in capital
investments were announced. This growth created 26,317 new jobs in Tennessee for
the year ended June 1995. As of June 1995, the State's unemployment rate was
4.8%, well below the national average of 6.1%. The decision by Columbia/HCA
Corporation to relocate its headquarters in Tennessee is also expected to have a
significant positive impact on future growth in Tennessee. Based on current
projections, the State's overall growth is expected to exceed the national
average into the next century according to the Comprehensive Annual Financial
Report for the State of Tennessee for the year ended June 1995.
Texas. The State has long been identified with the oil and gas
industry, but the Texas economy has diversified. Oil and gas related industries
accounted for 27% of the State's total output of goods and services in 1981, but
currently account for only 12% of the State's economy. Service-producing sectors
(which include transportation and public utilities; finance and insurance and
real estate; trade; services; and government) are the major sources of job
growth in Texas. Texas' location and transportation and accessibility have made
it a distribution center for the southwestern United States as well as an
international center for finance and distribution. The high-technology sector,
growth of exports and manufacturing job growth are expected to be significant to
Texas' future growth. The State Comptroller of Public Accounts has predicted
that the overall Texas economy will slightly out pace national economic growth
in the long term.
The State generally can be divided into six geo-economic regions. The
east region is a largely non-metropolitan region, in which the economy is
dependent on agricultural activities and the production and processing of coal,
petroleum and wood. The Dallas-Ft. Worth metroplex region is almost totally
metropolitan, with diversified manufacturing, defense, financial and commercial
sectors. The panhandle, Permian basin and Concho Valley regions are the largest
and most sparsely populated areas of the State, with an economy based on
petroleum production and agriculture. The border region stretching from El Paso
to Brownsville is characterized by its dependence on trade with Mexico, tourism
and agriculture. The gulf coast region is the most populous region in the State
and has an economy centered on energy services, petro-chemical industries and
commercial activities resulting from agriculture and seaport trade. The economy
of the central corridor is based upon the public and private service sector,
recreation/tourism and manufacturing. Because the economic base is different
from region to region, economic developments, such as the strength of the U.S.
economy, shifting export markets or changes in oil prices or defense spending,
can be expected to affect the economy of each region differently.
Employment in the State increased steadily through the 70's and early
80's. However, in 1986, the Texas economy was battered by a recession induced by
declining oil prices and a collapse in its real estate industry. The
unemployment rate in Texas peaked at 8.9% in 1986. By the summer of 1988, the
State had replaced jobs lost during this recession, although many were in
lower-paying occupations. Although the Texas economy was slowed by the nation's
1990-91
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recession, it did not fall into recession itself. The unemployment rate in Texas
fell more than two percentage points from 1992 to 1995. Since reaching nearly 8
percent in 1992, the unemployment rate improved to a rate below 6 percent in
1995. During the twelve months ending in September, 1995, the Texas Employment
Commission reported total nonfarm employment growth of 3%.
Most new jobs created in the past year have been in the service sector
with most of the growth in the health, business and miscellaneous services
sectors. Employment during the past year also increased in the wholesale and
retail trade, government, transportation, communications, public utilities,
manufacturing and construction industries. Oil and gas mining experienced a job
decline during the past year. The State's per capita personal income compared to
the national average peaked in 1981 at approximately 102% of the national
average but steadily fell to a low of 88% of the national average in 1988-87 and
has since increased to approximately 91% as of 1995.
The State's general revenue fund provides an indication of the State's
financial condition. Effective as of the beginning of fiscal 1994, numerous
state funds were merged into the general revenue fund providing for a one-time
gain of approximately $1.2 billion for the fund. In the fiscal year 1995, the
general revenue fund accounted for most of the state's total revenue. Due to the
state's expansion in Medicaid spending and other Health and Human Services
programs requiring federal matching revenues, federal receipts were the state's
number one source of income in fiscal 1995. Sales tax, which had been the main
source of revenue for the previous 12 years prior to fiscal 1993, dropped to
second. Licenses, fees, fines and penalties are now the third largest source of
revenue to the state, with motor fuels taxes and motor vehicle sales/rental
taxes following as fourth largest and fifth largest, respectively. The remainder
of the state's revenues are derived primarily from interest and investment
income, lottery proceeds, cigarette and tobacco, franchise, oil and gas
severance and other taxes. The state has no personal or corporate income tax,
although the state does impose a corporate franchise tax based on the amount of
a corporation's capital and "earned surplus," which includes corporate net
income and officers' and directors' compensation. For each of the fiscal years
ended 1991, 1992, 1993, 1994 and 1995 the general revenue fund contained a cash
surplus of approximately $1.005 billion, $609 million, $1.623 billion, $2.239
billion, and $2.110 billion, respectively.
Virginia. The Constitution of Virginia, in Section 9 of Article X
provides for the issuance of debt by or on behalf of the Commonwealth. Sections
9(a), (b) and (c) provide for the issuance of debt to which the Commonwealth's
full faith and credit is pledged and Section 9(d) provides for the issuance of
debt not secured by the full faith and credit of the Commonwealth, but which may
be supported by and paid from Commonwealth tax collections. The Commonwealth may
also enter into leases and contracts that are classified on its financial
statements as long-term indebtedness. Debt may also be issued by certain
authorities and institutions of the Commonwealth.
Section 9(a) of Article X authorizes general obligation debt to meet
certain types of emergencies, to meet casual deficits in the revenue or in
anticipation of the collection of revenues of the Commonwealth (subject to
limits on the amount and duration of the debt), and to redeem a previous debt
obligation of the Commonwealth. Total indebtedness issued to meet casual
deficits
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may not exceed thirty percent of an amount equal to 1.15 times the annual tax
revenues "derived from taxes on income and retail sales, as certified by the
Auditor of Public Accounts, for the preceding fiscal year."
Section 9(b) of Article X authorizes general obligation debt for
capital projects. The outstanding amount of Section 9(b) debt is limited in the
aggregate to an amount equal to 1.15 times the average annual tax revenues
"derived from taxes on income and retail sales, as certified by the Auditor of
Public Accounts," for the three immediately preceding fiscal years less the
total amounts of bonds outstanding. The amount of Section 9(b) debt that the
General Assembly may authorize for the current fiscal year is further limited to
25% of the aggregate Section 9(b) debt limit less Section 9(b) debt authorized
in the current and prior three fiscal years. Also, the debt must be authorized
by a vote of a majority of the members of each house of the General Assembly and
approved in a state-wide election.
Section 9(c) of Article X authorizes general obligation debt for
revenue-producing capital projects. The outstanding amount of Section 9(c) debt
is limited in the aggregate to an amount equal to 1.15 times the average annual
tax revenues "derived from taxes on income and retail sales, as certified by the
Auditor of Public Accounts," for the three immediately preceding fiscal years.
This debt must be approved by a vote of two-thirds of the members of each house
of the General Assembly and approved by the Governor. The Governor must certify
before the enactment of the bond legislation and again before the issuance of
the bonds that the net revenues pledged are expected to be sufficient to pay
principal and interest on the bonds issued to finance the projects.
The phase "taxes on income and retail sales" is not defined in the
Constitution or by statute. The record made in the process of adopting the
Constitution, however, suggests an intention to include only income taxes
payable by individuals, fiduciaries and corporations and the state sales and use
tax.
Section 9(d) of Article X provides that the restrictions of Section 9
are not applicable to any obligation increased by the Commonwealth or any of its
institutions, agencies or authorities if the full faith and credit of the
Commonwealth is not pledged or committed to the payment of such obligation.
Various types of Section 9(d) revenue bonds are issued for which the
Commonwealth's full faith and credit is not pledged. Certain of these bonds,
however, are paid in whole or in part from revenues received as appropriations
by the General Assembly from general tax revenues, while others are paid solely
from the revenues derived from enterprises related to the operation of financed
capital projects.
The Commonwealth is involved in numerous agreements to lease buildings
and equipment. These lease agreements are for various terms, and each lease
contains a nonappropriation clause indicting that continuation of the lease is
subject to funding by the General Assembly. The principal balance of all capital
leases outstanding was $25.8 million as of June 30, 1995.
The Commonwealth also finances the acquisition of certain personal
property and equipment through installment purchase agreements. The length of
the agreements and the interest rates charged vary. In most cases, the
agreements are collateralized by the personal
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property and equipment acquired. Installment purchase agreements contain
nonappropriation clauses indicating that continuation of the installment
purchase is subject to funding by the General Assembly. The principal balance of
installment purchase obligations outstanding was $42.2 million as of June 30,
1995.
Virginia operates on a two-year budget.
On December 20, 1993, Governor Wilder presented the Budget Bill for the
1994-96 Biennium. A new governor, George Allen, was elected on November 7, 1993
and took office on January 15, 1994. On January 21, 1994, Governor Allen
submitted amendments to the budget with a financial impact totaling $89 million.
Major amendments proposed by Governor Allen included provisions for a $30
million reserve fund for the anticipated settlement of the Harper v. Virginia
Department of Taxation court case involving a dispute over taxation of federal
retirees.
The General Assembly amended the proposed budget and passed the
resulting Budget Bill on March 12, 1994. The adopted Budget Bill did not include
the Governor's proposed reserve fund to settle the Harper case.
On April 11, 1994, Governor Allen submitted 38 amendments to the
adopted Budget Bill for consideration by the General Assembly. Among other
things, the amendments proposed to set aside a $40 million reserve fund for the
Harper case. At the Veto Session held on April 20, 1994, the General Assembly
approved most of the amendments submitted by the Governor, but did not agree to
the reserve fund for the Harper settlement. However, at a Special Session
commended on July 6, 1994, the General Assembly took action to enact a
settlement package and set aside a $60 million reserve fund to settle the Harper
case.
The Budget Bill became effective as Chapter 966 of the 1994 Acts of
Assembly (the 1994-96 Appropriations Act) on July 1, 1994.
At a Special Session concluded September 30, 1994, the General Assembly
passed, and sent to the Governor, legislation that would in effect lengthen the
period certain convicted felons would be incarcerated and would incidentally
increase the capital and operating costs to the Commonwealth of its prison
system. At its 1995 Regular Session, the General Assembly authorized $118.7
million in new prison-related capital projects to be funded with bonds issued by
the Virginia Public Building Authority.
On December 19, 1994, the Governor presented to the General Assembly
the 1995 Budget Bill, a bill proposing amendments to the current Appropriation
Act, which appropriated funds for the 1994-96 biennium. The 1995 General
Assembly Session ended on February 25, 1995. The 1995 Budget Bill, as amended by
the General Assembly, was submitted to the Governor for approval. The Governor
then returned the 1995 Budget Bill with his amendments to the General Assembly
for consideration at its two-day reconvened session held on April 7-8, 1995. The
General Assembly made final revisions to the Budget Bill and re-submitted it to
the Governor for his final approval. The Governor signed the 1995 Budget Bill,
as amended by the General Assembly, on May 5, 1995.
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The 1996-98 Budget Bill focuses on three key areas: education, public
safety, and economic development. The Budget Bill provides about $1,411.9
million in spending increases above the level necessary to continue FY1996
workloads and costs. Of these increases, $108.9 million would result from the
deposits to the Revenue Stabilization Fund. The remainder would provide the
state share of Standards of Quality for public schools, proposed increases in
higher education, increased spending for adult and juvenile corrections,
proposed expansion of economic development activities in several areas, and
mandated increases in several entitlement programs in health and human
resources, primarily for Medicaid.
The proposed budget includes more than $200 million to cover
installment payments on the settlement and the recent ruling by the Virginia
Supreme Court in favor of retirees who did not settle in the Harper v. Virginia
Department of Taxation.
The Virginia Intermediate Municipal Bond Fund and Virginia Municipal
Bond Fund also invest in debt obligations issued by local governments. Local
government in the Commonwealth is comprised of approximately 95 counties, 41
incorporated cities, and 190 incorporated towns. The Commonwealth is unique in
that cities and counties are independent and their land areas do not overlap.
Cities and counties each levy and collect their own taxes and provide their own
services. Towns, which are units of local government and which continue to be
part of the counties in which they are located, levy and collect taxes for town
purposes but their residents are also subject to county taxes. Generally, the
largest expenditure by local governments in the Commonwealth is for public
education. Each county and city in the Commonwealth, with few exceptions,
constitutes a separate school district. Counties, cities and towns typically
also provide such services such as water and sewer services, police and fire
protection, and recreational facilities.
In Davis v. Michigan (decided March 28, 1989), the United States
Supreme Court ruled unconstitutional states' exempting from state income tax the
retirement benefits paid by the state or local governments without exempting
retirement benefits paid by the federal government. At that time, Virginia
exempted state and local retirement benefits but not federal retirement
benefits. At a Special Session held in April 1989, the General Assembly repealed
the exemption of state and local retirement benefits. Following Davis, at least
five suits, some with multiple plaintiffs, for refunds of Virginia income taxes,
were filed by federal retirees. These suits were consolidated under the name of
Harper v. Virginia Department of Taxation.
In a Special Session, the Virginia General Assembly on July 9, 1994
passed emergency legislation to provide payments to federal retirees in
settlement of the retirees' claims as a result of Davis. The settlement payments
are to be made over a five-year period, commencing March 31, 1995. The total
amount of authorized appropriations for the settlement is $340 million (payment
to participating retirees in installments of $60 million on March 31, 1995, and
$70 million on each succeeding March 31 through March 31, 1999, subject to
appropriation by the General Assembly).
On September 15, 1995 the Supreme Court of Virginia rendered its
decision in Harper. The Court reversed the judgment of the trial court and
entered final judgment in favor of the taxpayers, directing that the amounts
unlawfully collected be refunded with statutory interest.
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The Commonwealth will not seek an appeal or rehearing of this decision. The
Commonwealth issued refund checks on November 9, 1995, and interest stopped
accruing as of November 3, 1995. The cost of refunding all Virginia income taxes
paid on federal government pensions for taxable years 1985, 1986, 1987 and 1988
to federal government pensioners who opted out of the settlement was
approximately $78.4 million, including interest earnings. The total cost of
refunding all Virginia income taxes paid on federal government pensions was
$418.4 million, $340 million for the settlement and $78.4 million as a result of
the judgment. Of this total amount, $60 million was paid in March 1995 and $78.4
million was paid in November 1995 leaving a balance to be paid of $280 million.
NationsBank believes that the information summarized above describes
some of the more significant matters relating to the Virginia Intermediate
Municipal Bond Fund and Virginia Municipal Bond Fund. The sources of the
information are the official statements of issuers located in the Commonwealth,
other publicly available documents, and oral statements from various state
agencies. NationsBank has not independently verified any of the information
contained in the official statements, other publicly available documents, or
oral statements from various state agencies.
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.
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.
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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.
A Money Market Fund will acquire GICs so that they, together with other
instruments in such Fund's portfolio which are not readily marketable, will not
exceed applicable limitations on such Fund's investments in illiquid securities.
A Money Market Fund will restrict its investments in GICs to those having a term
of 397 days or less. In determining average weighted portfolio maturity, a GIC
will be deemed to have a maturity equal to the period of time remaining under
the next readjustment of the guaranteed interest rate.
Variable- and Floating-Rate Instruments
The Funds may purchase variable-rate and floating rate obligations as
described in the Prospectuses. 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,
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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.
Stand-By Commitments
The Funds may acquire "stand-by commitments" with respect to Municipal
Securities held in their portfolios. Under a "stand-by commitment," a dealer
agrees to purchase from a Fund, at a Fund's option, specified Municipal
Securities at a specified price. Stand-by commitments are exercisable by a Fund
at any time before the maturity of the underlying Municipal Securities, and may
be sold, transferred, or assigned by a Fund only with the underlying
instruments.
The amount payable to a Tax-Free Bond Fund upon its exercise of a
stand-by commitment will normally be (i) the Fund's acquisition cost of the
Municipal Securities (excluding any accrued interest which a Tax-Free Bond Fund
paid on their acquisition), less any amortized market premium or plus any
amortized market or original issue discount during the period a Tax-Free Bond
Fund owned the securities, plus (ii) all interest accrued on the securities
since the last interest payment date during that period. Under normal market
conditions, in determining net asset value a Tax-Free Bond Fund values the
underlying Municipal Securities on an amortized cost basis. Accordingly, the
amount payable by a dealer upon exercise of a stand-by commitment will normally
be substantially the same as the portfolio value of the underlying Municipal
Securities.
A Fund's right to exercise stand-by commitments will be unconditional
and unqualified. A stand-by commitment will not be transferable by a Fund,
although the Fund could sell the underlying Municipal Securities to a third
party at any time. Until a Fund exercises its stand-by commitment, it owns the
securities in its portfolio which are subject to the stand-by commitment.
The Funds expect that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for the security being acquired
which will be subject to the commitment (thus reducing the yield to maturity
otherwise available for the same security). When a Fund pays any consideration
directly or indirectly for a stand-by commitment, its cost will be reflected as
unrealized depreciation for the period during which the commitment is held by
that Fund. The Tax-Free Bond Funds will not acquire a stand-by commitment unless
immediately after the acquisition not more than 5% of the Funds' total assets
will be subject to a demand feature, or in stand-by commitments, with the same
institution.
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
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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.
Variable- and Floating-Rate Government Securities
Government securities that have variable- or floating interest rates or
demand or put features may be deemed to have remaining maturities shorter than
their nominal maturities for purposes of determining a Fund's average weighted
maturity. The remaining maturities of such obligations will be determined as
follows: (i) a government security with a variable- or floating rate of interest
will be deemed to have a maturity equal to the period remaining until the next
readjustment of the interest rate; (ii) a government security with a demand or
put feature that entitles the holder to receive the principal amount of the
underlying security at the time of or sometime after the holder gives notice of
demand or exercise of the put will be deemed to have a maturity equal to the
period remaining until the principal amount can be recovered through demand or
exercise of the put; and (iii) a government security with both a variable- or
floating rate of interest as described in clause (i) and a demand or put feature
as described in clause (ii) will be deemed to have a maturity equal to the
shorter of the period remaining until the next readjustment of the interest rate
or the period remaining until the principal amount can be recovered through
demand.
Lower Rated Debt Securities
The yields on lower rated debt and comparable unrated fixed-income
securities generally are higher than the yields available on higher-rated
securities. However, investments in lower rated debt and comparable unrated
securities generally involve greater volatility of price and risk of loss of
income and principal, including the probability of default by or bankruptcy of
the issuers of such securities. Lower rated debt and comparable unrated
securities (a) will likely have some quality and protective characteristics
that, in the judgment of the rating organization, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (b) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. Accordingly,
it is possible that these types of factors could, in certain instances, reduce
the value of securities held in a Fund's portfolio, with a commensurate effect
on the value of the Fund's shares. Therefore, an investment in the Fund should
not be considered as a complete investment program and may not be appropriate
for all investors.
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The market prices of lower rated securities may fluctuate more than
higher rated securities and may decline significantly in periods of general
economic difficulty which may follow periods of rising interest rates. During an
economic downturn or a prolonged period of rising interest rates, the ability of
issuers of lower quality debt to service their payment obligations, meet
projected goals, or obtain additional financing may be impaired.
Since the risk of default is higher for lower rated securities, the
Adviser will try to minimize the risks inherent in investing in lower rated debt
securities by engaging in credit analysis, diversification, and attention to
current developments and trends affecting interest rates and economic
conditions. The Adviser will attempt to identify those issuers of high-yielding
securities whose financial condition is adequate to meet future obligations,
have improved, or are expected to improve in the future.
Unrated securities are not necessarily of lower quality than rated
securities, but they may not be attractive to as may buyers. Each Fund's
policies regarding lower rated debt securities is not fundamental and may be
changed at any time without shareholder approval.
While the market values of lower rated debt and comparable unrated
securities tend to react less to fluctuations in interest rate levels than the
market values of higher-rated securities, the market values of certain lower
rated debt and comparable unrated securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
higher-rated securities. In addition, lower rated debt securities and comparable
unrated securities generally present a higher degree of credit risk. Issuers of
lower rated debt and comparable unrated securities often are highly leveraged
and may not have more traditional methods of financing available to them so that
their ability to service their debt obligations during an economic downturn or
during sustained periods of rising interest rates may be impaired. The risk of
loss due to default by such issuers is significantly greater because lower rated
debt and comparable unrated securities generally are unsecured and frequently
are subordinated to the prior payment of senior indebtedness. A Fund may incur
additional expenses to the extent that it is required to seek recovery upon a
default in the payment of principal or interest on its portfolio holdings. The
existence of limited markets for lower rated debt and comparable unrated
securities may diminish a Fund's ability to (a) obtain accurate market
quotations for purposes of valuing such securities and calculating its net asset
value and (b) sell the securities at fair value either to meet redemption
requests or to respond to changes in the economy or in financial markets.
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
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downturn also could adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon.
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.
Dollar roll transactions consist of the sale by a fund of
mortgage-backed or other asset-backed securities, together with a commitment to
purchase similar, but not identical, securities at a future date, at the same
price. In addition, a Fund is paid a fee as consideration for entering into the
commitment to purchase. If the broker/dealer to whom a Fund sells the security
becomes insolvent, the Fund's right to purchase or repurchase the security may
be restricted; the value of the security may change adversely over the term of
the dollar roll; the security that the Fund is required to repurchase may be
worth less than the security that the Fund originally held, and the return
earned by the Fund with the proceeds of a dollar roll may not exceed transaction
costs.
The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Fund's right to purchase
from the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Fund is able to purchase them.
Similarly, the Fund may be required to purchase securities in connection with a
dollar roll at a higher price than may otherwise be available on the open
market. Since, as noted above, the counterparty is required to deliver a
similar, but not identical security to the Fund, the security that the Fund is
required to buy under the dollar roll may be worth less than an identical
security. Finally, there can be no assurance that the Fund's use of the cash
that it receives from a dollar roll will provide a return that exceeds borrowing
costs.
Foreign Currency Transactions
Certain of the Funds may enter into foreign currency exchange
transactions to convert foreign currencies to and from the United States Dollar.
A Fund either enters into these transactions on a spot (i.e., cash) basis at the
spot rate prevailing in the foreign currency exchange market, or uses forward
contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by a Fund
to purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract. Forward foreign currency exchange
contracts establish an exchange rate at a future
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date. These contracts are transferable in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward foreign currency exchange contract generally has no deposit
requirement, and is traded at a net price without commission. A Fund will direct
its custodian to segregate high grade liquid assets in an amount at least equal
to its obligations under each forward foreign currency exchange contract.
Neither spot transactions nor forward foreign currency exchange contracts
eliminate fluctuations in the prices of a Fund's portfolio securities or in
foreign exchange rates, or prevent loss if the prices of these securities should
decline.
Certain of the Funds also may purchase and write options on such
futures contracts. These investments will be used only to hedge against
anticipated future changes in interest rates which otherwise might either
adversely affect the value of the portfolio securities of a Fund or adversely
affect the prices of securities which a Fund intends to purchase at a later
date. Should interest rates move in an unexpected manner, a Fund may not achieve
the anticipated benefits of futures contracts or options on futures contracts or
may realize a loss.
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.
Interest Rate Transactions
Among the strategic transactions into which the Non-Money Market Funds
may enter are interest rate swaps and the purchase or sale of related caps and
floors. Each Fund expects to enter into these transactions primarily to preserve
a return or spread on a particular investment or portion of its portfolio, to
protect against currency fluctuations, as a duration management technique or to
protect against any increase in the price of securities the Funds anticipate
purchasing at a later date. Each Fund intends to use these transactions as
hedges and not as speculative investments and will not sell interest rate caps
or floors where it does not own securities or other instruments providing the
income stream the Fund may be obligated to pay. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay
or receive interest, e.g., an exchange of floating rate payments for fixed-rate
payments with respect to a notional amount of principal. A currency swap is an
agreement to exchange cash flows on a notional amount of two or more currencies
based on the relative value differential among them and an index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such
floor to the extent that a specified index falls below a predetermined interest
rate or amount.
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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. Inasmuch as these swaps, caps, and
floors are entered into for good faith hedging purposes, the Adviser and the
Funds believe such obligations do not constitute senior securities under the
1940 Act and, accordingly, will not treat them as being subject to its borrowing
restrictions. The Funds will not enter into any swap, cap, or 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 S&P or Moody's 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 a Fund's net obligation, if any.
Illiquid Securities
Certain of the Non-Money Market Funds may invest up to 15% of their net
assets, and certain of the Money Market Funds may invest up to 10% of their net
assets, in securities that are considered illiquid because of the absence of a
readily available market or due to legal or contractual restrictions. Certain
restricted securities that are not registered for sale to the general public but
that can be resold to institutional investors may not be considered illiquid,
provided that a dealer or institutional trading market exists.
Other Securities
For additional information regarding options and futures, see "Schedule
B." For additional information regarding mortgage-backed securities, see
"Schedule C."
Additional Investment Limitations
In addition to the investment limitations disclosed in the related
Prospectuses, the Funds are subject to the investment limitations enumerated in
this subsection which may be changed with respect to one of these Funds only by
a vote of the holders of a majority of such Fund's outstanding shares (as
defined in this SAI).
None of these Funds may:
1. Borrow money or issue senior securities as defined in the 1940 Act
except that (a) a Fund may borrow money from banks for temporary
purposes in amounts up to one-
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third of the value of such Fund's total assets at the time of
borrowing, provided that borrowings in excess of 5% of the value
of such Fund's total assets will be repaid prior to the purchase
of portfolio securities by such Fund, (b) a Fund may enter into
commitments to purchase securities in accordance with the Fund's
investment program, including delayed delivery and when-issued
securities, which commitments may be considered the issuance of
senior securities, and (c) a Fund may issue multiple classes of
shares in accordance with SEC regulations or exemptions under the
1940 Act. The purchase or sale of futures contracts and related
options shall not be considered to involve the borrowing of money
or issuance of senior securities.
2. Purchase any securities on margin (except for such short-term
credits as are necessary for the clearance of purchases and sales
of portfolio securities) or sell any securities short (except
against the box). (For purposes of this restriction, the deposit
or payment by the Fund of initial or maintenance margin in
connection with futures contracts and related options and options
on securities is not considered to be the purchase of a security
on margin.)
3. Underwrite securities issued by any other person, except to the
extent that the purchase of securities and the later disposition
of such securities in accordance with the Fund's investment
program may be deemed an underwriting. This restriction shall not
limit a Fund's ability to invest in securities issued by other
registered investment companies.
4. Invest in real estate or real estate limited partnership interests
(the Fund may, however, purchase and sell securities secured by
real estate or interests therein or issued by issuers which invest
in real estate or interests therein). This restriction does not
apply to real estate limited partnerships listed on a national
stock exchange (e.g. the New York Stock Exchange).
5. Purchase or sell commodity contracts except that each Fund may, to
the extent appropriate under its investment policies, purchase
publicly traded securities of companies engaging in whole or in
part in such activities, may enter into futures contracts and
related options, may engage in transactions on a when issued or
forward commitment basis, and may enter into forward currency
contracts in accordance with its investment policies.
In addition, certain non-fundamental investment restrictions are
applicable to various investment portfolios, including the following:
1. The Trust will not purchase or retain the securities of any issuer
if the officers, directors or Trustees of the Trust, its advisers,
or managers owning beneficially more than one half of one percent
of the securities of each issuer together own beneficially more
than five percent of such securities.
2. No Fund of the Trust will purchase securities of unseasoned
issuers, including their predecessors, that have been in operation
for less than three years, if by reason thereof
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the value of such Fund's investment in such classes of securities
would exceed 5% of such Fund's total assets. For purposes of the
above-described investment limitation, issuers include
predecessors, sponsors, controlling persons, general partners,
guarantors and originators of underlying assets which have less
than three years of continuous operations of relevant business
experience.
3. No Fund will purchase puts, calls, straddles, spreads and any
combination thereof if by reason thereof the value of its
aggregate investment in such classes of securities will exceed 5%
of its total assets except that: (a) this restriction shall not
apply to standby commitments, (b) this restriction shall not apply
to a Fund's transactions in futures contracts and related options,
and (c) a Fund may obtain short-term credit as may be necessary
for the clearance of purchases and sales of portfolio securities.
4. No Fund will invest in warrants, valued at the lower of cost or
market, in excess of 5% of the value of such Fund's assets, and no
more than 2% of the value of the Fund's net assets may be invested
in warrants that are not listed on the New York or American Stock
Exchange (for purposes of this undertaking, warrants acquired by a
Fund in units or attached to securities will be deemed to have no
value).
5. Each of the Government Money Market Fund and the Nations Tax
Exempt Fund may not purchase securities of any one issuer (other
than obligations issued or guaranteed by the U.S. government, its
agencies, authorities or instrumentalities and repurchase
agreements fully collateralized by such obligations) if,
immediately after such purchase, more than 5% of the value of the
Fund's assets would be invested in the securities of such issuer.
Notwithstanding the foregoing, up to 25% of each Fund's total
assets may be invested for a period of three business days in the
first tier securities of a single issuer without regard to such 5%
limitation.
6. No Fund of the Trust will purchase securities of companies for the
purpose of exercising control.
7. No Money Market Fund of the Trust will invest more than 10% of the
value of its net assets in illiquid securities, including
repurchase agreements, time deposits and GICs with maturities in
excess of seven days, illiquid restricted securities, and other
securities which are not readily marketable. For purposes of this
restriction, illiquid securities shall not include securities
which may be resold under Rule 144A and Section 4(2) of the
Securities Act of 1933 that the Board of Trustees, or its
delegate, determines to be liquid, based upon the trading markets
for the specific security.
8. No Non-Money Market Fund of the Trust will invest more than 15% of
the value of its net assets in illiquid securities, including
repurchase agreements, time deposits and GICs with maturities in
excess of seven days, illiquid restricted securities, and other
securities which are not readily marketable. For purposes of this
restriction, illiquid securities shall not include securities
which may be resold under Rule 144A and Section 4(2) under the
Securities Act of 1933 that the Board of Trustees, or its
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delegate, determines to be liquid, based upon the trading markets
for the specific security.
9. No Fund of the Trust will mortgage, pledge or hypothecate any
assets except to secure permitted borrowings and then only in an
amount up to one-third of the value of the Fund's total assets at
the time of borrowing. For purposes of this limitation, collateral
arrangements with respect to the writing of options, futures
contracts, options on futures contracts, and collateral
arrangements with respect to initial and variation margin are not
considered to be a mortgage, pledge or hypothecation of assets.
10. No Fund of the Trust will invest in securities of other investment
companies, except as they may be acquired as part of a merger,
consolidation or acquisition of assets and except to the extent
otherwise permitted by the 1940 Act.
11. No Fund of the Trust will purchase oil, gas or mineral leases or
other interests (a Fund may, however, purchase and sell the
securities of companies engaged in exploration, development,
production, refining, transporting and marketing of oil, gas or
minerals).
In order to permit the sale of shares of the Trust in certain states,
the Trust may make commitments more restrictive than the investment policies and
limitations described above and in the Prospectuses. Should the Trust determine
that any such commitment is no longer in its best interest, it will revoke the
commitment by terminating sales of its shares to investors residing in the state
involved.
NET ASSET VALUE
Money Market Funds
The Money Market Funds use the amortized cost method of valuation to
value shares in such Funds. Pursuant to this method, a security is valued at its
cost initially and thereafter a constant amortization to maturity of any
discount or premium is assumed, regardless of the impact of fluctuating interest
rates on the market value of the security. Where it is not appropriate to value
a security by the amortized cost method, the security will be valued either by
market quotations or by fair value as determined by the Board of Trustees. This
method may result in periods during which value, as determined by amortized
cost, is higher or lower than the price the Trust would receive if it sold the
security.
Each of the Money Market Funds invest only in high quality instruments
and maintain a dollar-weighted average portfolio maturity appropriate to its
objective of maintaining a stable net asset value per share, provided that a
Fund will neither purchase any security deemed to have a remaining maturity of
more than 397 days within the meaning of the 1940 Act nor maintain a
dollar-weighted average portfolio maturity which exceeds 90 days. The Trust's
Board of Trustees has established procedures reasonably designed, taking into
account current market conditions and each Money Market Fund's investment
objective, to stabilize the net asset value per share of each Money Market Fund
for purposes of sales and redemptions at $1.00. These procedures include review
by the Board of Trustees, at such intervals as it deems appropriate, to
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determine the extent, if any, to which the net asset value per share of each
Money Market Fund calculated by using available market quotations deviates from
$1.00 per share. In the event such deviation exceeds one-half of one percent,
the Board of Trustees will promptly consider what action, if any, should be
initiated. If the Board of Trustees believes that the extent of any deviation
from a Fund's $1.00 amortized cost price per share may result in material
dilution or other unfair results to new or existing investors, it has agreed to
take such steps as it considers appropriate to eliminate or reduce, to the
extent reasonably practicable, any such dilution or unfair results. These steps
may include selling portfolio instruments prior to maturity; shortening the
average portfolio maturity; withholding or reducing dividends; redeeming shares
in kind; reducing the number of a Fund's outstanding shares without monetary
consideration; or utilizing a net asset value per share determined by using
available market quotations.
Non-Money Market Funds
With respect to the Equity Funds and Balanced Fund, a security listed
or traded on an exchange is valued at its last sales price on the exchange where
the security is principally traded or, lacking any sales on a particular day,
the security is valued at the mean between the closing bid and asked prices on
that day. Each security traded in the over-the-counter market (but not including
securities reported on the NASDAQ National Market System) is valued at the mean
between the last bid and asked prices based upon quotes furnished by market
makers for such securities. Each security reported on the NASDAQ National Market
System is valued at the last sales price on the valuation date. With respect to
the Bond Funds, securities will 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.
With respect to each Non-Money Market Fund, securities for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the supervision of the Trust's officers in a manner
specifically authorized by the Board of Trustees. 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 "Exchange"). The values of such securities used in computing the
net asset value of the shares of the Funds are determined as of such times.
Foreign currency exchange rates are also generally determined prior to the close
of the 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 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.
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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 Nations Fund 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 Investor Shares or Primary 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.)
Exchange Privilege
By use of the exchange privilege, the holder of Investor Shares and/or
Primary Shares authorizes the transfer agent or the shareholder's financial
institution to rely on telephonic instructions from any person representing
himself to be the investor and reasonably believed to be genuine. The transfer
agent's or a financial institution's records of such instructions are binding.
Exchanges are taxable transactions for Federal income tax purposes; therefore, a
shareholder will realize a capital gain or loss depending on whether the
Investor Shares and/or Primary Shares being exchanged have a value which is more
or less than their adjusted cost basis.
The Funds and each of the other funds of Nations Fund may limit the
number of times the exchange privilege may be exercised by a shareholder within
a specified period of time. Also, the exchange privilege may be terminated or
revised at any time by the Trust upon such notice as may be required by
applicable regulatory agencies (presently sixty days for termination or material
revision), provided that the exchange privilege may be terminated or materially
revised without notice under certain unusual circumstances.
The current prospectuses for the Investor Shares and Primary Shares of
each Fund describes the exchange privileges available to investors in such
Investor Shares and Primary Shares, respectively.
Primary Shares of the Funds are offered and sold on a continuous basis
by the Distributor acting as agent. As stated in the Prospectuses for the
Primary Shares, Primary Shares are sold to bank trust departments and other
financial institutions (primarily to NationsBank and its affiliated and
correspondent banks) (collectively, "Institutions") acting on behalf of
customers maintaining a qualified trust account or relationship at the
Institution.
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DESCRIPTION OF SHARES
Nations Fund Trust is a Massachusetts business trust. The Trust's
Declaration of Trust authorizes the Board of Trustees to issue an unlimited
number of units of beneficial interest ("shares") and to classify or reclassify
any unissued shares of the Trust into one or more additional classes or series
by setting or changing in any one or more respects their respective preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption. Pursuant to
such authority, the Board of Trustees has authorized the issuance of thirty-two
series of shares, of which thirty-one series are described in this Statement of
Additional Information (each a "Fund"). Each Money Market Fund is divided into
six classes of shares: Investor A Shares, Investor B Shares, Investor C Shares,
Daily Shares, Primary A Shares and Primary B Shares. Each Non-Money Market Fund
generally is divided into five classes of shares: Investor A Shares, Investor C
(formerly Investor B) Shares, Investor N (formerly Investor C) Shares, Primary A
Shares and Primary B Shares. However, the Equity Index Fund only issue Primary A
Shares, Primary B Shares and Investor A Shares.
Shares have no preemptive rights and only such conversion or exchange
rights as the Board of Trustees may grant in its discretion. When issued for
payment as described in the Prospectuses, the Trust's shares will be fully paid
and non-assessable. In the event of a liquidation or dissolution of the Trust or
an individual Fund, shareholders of a Fund are entitled to receive the assets
available for distribution belonging to the particular Fund, and a proportionate
distribution, based upon the relative asset values of the Trust's respective
investment portfolios, of any general assets of the Trust not belonging to any
particular investment portfolio which are available for distribution.
Shareholders of a Fund are entitled to participate, in proportion to the net
asset value of the class or series of shares held, in the net distributable
assets of a particular Fund involved in liquidation, based on the number of
shares of the Fund that are held by such shareholders.
As stated in the Prospectuses, shareholders of each of the Funds will
vote in the aggregate and not by class or series, except as otherwise expressly
required by law or when the Board of Trustees determines that the matter to be
voted upon affects only the interests of the holders of a particular class or
series of shares. In addition, shareholders of each investment portfolio of the
Trust will vote in the aggregate and not by portfolio, except as otherwise
expressly required by law or when the Board of Trustees determines that the
matter to be voted upon affects only the interests of shareholders of a
particular portfolio. Rule 18f-2 (the "Rule") under the 1940 Act provides that
any matter required to be submitted to the holders of the outstanding voting
securities of an investment company such as the Trust shall not be deemed to
have been effectively acted upon unless approved by the holders of a majority of
the outstanding shares of each investment portfolio affected by the matter. An
investment portfolio is affected by a matter unless it is clear that the
interests of each investment portfolio in the matter are substantially identical
or that the matter does not affect any interest of the investment portfolio.
Under the Rule, the approval of an investment advisory agreement or any change
in a fundamental investment policy would be effectively acted upon with respect
to an investment portfolio only if approved by a majority of the outstanding
shares of such investment portfolio. However, the Rule also provides that the
ratification of the appointment of independent public accountants, the approval
of principal underwriting contracts, and the election of Trustees may be
effectively acted
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upon by shareholders of the Trust voting together in the aggregate without
regard to a particular investment portfolio. Under the Trust's Declaration of
Trust, when the Board of Trustees determines that a matter to be voted upon
affects only the interests of the shareholders of one or more but not all the
Funds, only the shareholders of the Fund or Funds so affected will be entitled
to vote on the matter.
The Trust's Declaration of Trust authorizes the Board of Trustees,
without shareholder approval (unless otherwise required by applicable law), to
(a) sell and convey the assets of a Fund to another management investment
company for consideration which may include securities issued by the purchaser
and, in connection therewith, to cause all outstanding shares of the Fund
involved to be redeemed at a price which is equal to their net asset value and
which may be paid in cash or by distribution of the securities or other
consideration received from the sale and conveyance; (b) sell and convert a
Fund's assets into money and, in connection therewith, to cause all outstanding
shares of the Fund involved to be redeemed at their net asset value; or (c)
combine the assets belonging to a Fund with the assets belonging to another
investment portfolio of the Trust, if the Board of Trustees reasonably
determines that such combination will not have a material adverse effect on
shareholders of any investment portfolio participating in such combination, and,
in connection therewith, to cause all outstanding shares of any such Fund to be
redeemed at their net asset value or converted into shares of another class or
series of the Trust's shares at net asset value. In the event that shares are
redeemed in cash at their net asset value, a shareholder may receive in payment
for such shares an amount that is more or less than his original investment due
to changes in the market prices of the Fund's portfolio securities. The exercise
of such authority by the Board of Trustees will be subject to the provisions of
the 1940 Act.
Dividends and Distributions
Money Market Funds. Net income for dividend purposes consists of (i)
interest accrued and original issue discount earned on the Fund's assets, (ii)
plus the amortization of market discount (including, in the case of the Tax
Exempt Fund, market discount on tax-exempt obligations purchased after April 30,
1993) and minus the amortization of market premium on such assets, (iii) less
accrued expenses directly attributable to the Fund and the general expenses of
Nations Fund prorated to a Fund on the basis of its relative net assets. Shares
of the Money Market Funds begin earning dividends on the day the purchase order
is executed and continue earning dividends through and including the day before
the redemption order is executed (e.g., the settlement date).
Non-Money Market Funds. With respect to the Non-Money Market Funds, net
investment income for dividend purposes consist of items (i), (ii) and (iii)
discussed above with respect to the Money Market Funds and dividend or
distribution income on such assets.
Shares of the Bond Funds are eligible to begin earning dividends that
are declared on the day the purchase order is executed and continue to be
eligible for dividends through and including the day before the redemption order
is executed. Shares of the Equity Funds and the Balanced Fund are eligible to
receive dividends when declared, provided however, that the purchase order for
such shares is received at least one day prior to the dividend declaration and
such shares
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continue to be eligible for dividends through and including the day before the
redemption order is executed.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations
generally affecting the Funds and their shareholders that are not described in
the Prospectuses. No attempt is made to present a detailed explanation of the
tax treatment of the Trust or its shareholders or possible changes to the law,
and the discussion here and in the Prospectuses is not intended as a substitute
for careful tax planning. Potential investors should consult their tax advisors
with specific reference to their own tax situation.
The Trust has received a private letter ruling from the Internal
Revenue Service to the effect that: (i) the differing fees imposed on Primary A,
Primary B, Investor A, Investor B, Investor C (formerly Investor B) and Investor
N (formerly Investor C Shares) Shares with respect to servicing, distribution
and administrative support services, and transfer agency arrangements; the
differing sales charges on purchases and redemptions of such shares; and the
conversion feature of Investor C Shares of the Non-Money Market Funds does not
result in the Trust's dividends or distributions constituting "preferential
dividends" under the Internal Revenue Code of 1986, as amended (the "Code").
Federal Taxes - In General
Each Fund of the Trust will be treated as a separate corporate entity
under the Code and intends to qualify as a regulated investment company. As a
regulated investment company, each Fund is not subject to federal income tax on
the portion of its net investment income (i.e., taxable interest, dividends and
other taxable ordinary income, net of expenses) and capital gain net income
(i.e., the excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of its net
short-term capital gains over net long-term capital losses) and at least 90% of
its tax-exempt income (net of expenses allocable thereto) for the taxable year
(the "Distribution Requirement"), and satisfies certain other requirements of
the Code some of which are described below. Distributions by a Fund made during
the taxable year or, under specified circumstances, within twelve months after
the close of the taxable year, will be considered distributions of income and
gains of the taxable year and can therefore satisfy the Distribution
Requirement.
In addition to satisfying the Distribution Requirement; a regulated
investment company must (i) derive at least 90% of its 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 (the "Income Requirement"); and (ii) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale
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or other disposition of stock, securities or foreign currencies (or options,
futures or forward contracts thereon) held for less than three months
("Short-Short Gains"). However, foreign currency gains, including those derived
from options, futures and forwards, will not be characterized as Short-Short
Gain if they are directly related to the regulated investment company's
principal business of investing in stock or securities (or options or futures
thereon). Because of the limitations on Short-Short Gains, a Fund may have to
limit the sale of appreciated securities that it has held for less than three
months. However, these limitations will not prevent a Fund from disposing of
specific investments at a loss, since the recognition of a loss before the
expiration of the three-month holding period is disregarded for purposes of
Short-Short Gains. Interest (including original issue discount) received by a
Fund at maturity or upon the disposition of a security held for less than three
months will not be treated as gross income derived from the sale or other
disposition of such security for purposes of Short-Short Gains. However, income
that is attributable to realized market appreciation will be treated as gross
income from the sale or other disposition of securities for this purpose.
In general, gain or loss recognized by a Fund on the disposition of an
asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation (including tax-exempt obligations purchased
after April 30, 1993) 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 the market discount which accrued during the period of
time the Fund held the debt obligation. In addition, under the rules of Section
988 of the Code, gain or loss recognized on the disposition of a debt obligation
denominated in a foreign currency or an option with respect thereto (but only to
the extent attributable to changes in foreign currency exchange rates), and gain
or loss recognized 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.
In general, for purposes of determining whether capital gain or loss
recognized by a Fund on the disposition of an asset is long-term or short-term,
the holding period of the asset may be affected if (i) the asset is used to
close a "short sale" (which includes for certain purposes the acquisition of a
put option) or is substantially identical to another asset so used, (ii) the
asset is otherwise held by the Fund as part of a "straddle" (which term
generally excludes a situation where the asset is stock and the Fund grants a
qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto) or (iii) the asset is stock and the
Fund grants an in-the-money qualified covered call option with respect thereto.
However, for purposes of Short-Short Gains, the holding period of the asset
disposed of may be reduced only in the case of clause (i) above. In addition, a
Fund may be required to defer the recognition of loss on the disposition of an
asset held as part of a straddle may be deferred to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by a Fund on the lapse of, or any gain or loss
recognized by a Fund from a closing transaction with respect to, an option
written by the Fund will be treated as a short-term capital gain or loss. For
purposes of the Short-Short Gains, the holding period of an option written by a
Fund will commence on the date it is written and end on the date it lapses or
the date a closing transaction is entered into. Accordingly, a Fund may be
limited in its ability to
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write options which expire within three months and to enter into closing
transactions at a gain within three months of the writing of options.
In addition to satisfying the requirement described above, each Fund
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of each Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of the Fund's total assets in securities
of such issuer and as to which the Fund does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses or related trades or
businesses.
If for any taxable year a Fund does not qualify for Federal tax
treatment as a regulated investment company, all of its taxable income
(including its net capital gain) will be subject to Federal income tax at
regular corporate rates without any deduction for distributions to its
shareholders. In such event, dividend distributions (including amounts derived
from interest on Municipal Securities in the case of the Municipal Income Fund,
Short-Term Municipal Income Fund, Intermediate Municipal Bond Fund, the State
Intermediate Municipal Bond Funds and the State Municipal Bond Funds) would be
taxable as ordinary income to the Fund's shareholders to the extent of the
Fund's current and accumulated earnings and profits.
The Funds also are available for a variety of retirement plans,
including IRAs, that allow investors to shelter some of their income from taxes.
A Tax Free Bond Fund, however, is generally not a suitable investment for
retirement plans because such retirement plans would not gain any benefit from
the tax-exempt nature of the Tax Free Bond Fund's dividends because such
dividends would be ultimately taxable to the beneficiaries when distributed to
them. Investors should contact their Selling Agents for details concerning
retirement plans.
The Funds also are available for a variety of retirement plans,
including IRAs, that allow investors to shelter some of their income from taxes.
A Tax Free Bond, however, is generally not a suitable investment for retirement
plans because such retirement plans would not gain any benefit from the
tax-exempt nature of the Tax Free Fund's dividends because such dividends would
be ultimately taxable to the beneficiaries when distributed to them. Investors
should contact their Selling Agents for details concerning retirement plans.
Depending upon the extent of a Fund's activities in states and
localities in which its offices are maintained, in which its agents or
independent contractors are located, or in which it is otherwise deemed to be
conducting business, such Fund may be subject to the tax laws of such states or
localities. In addition, in those states and localities which have income tax
laws, the treatment of a Fund and its shareholders under such laws may differ
from their treatment under Federal income tax laws.
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Excise Tax on Regulated Investment Companies
A nondeductible 4% excise tax will be imposed on each Fund (other than
to the extent of the Fund's tax-exempt income) to the extent it does not meet
certain minimum distribution requirements by the end of each calendar year. Each
Fund will either actually or be deemed to distribute substantially all of its
net investment income and net capital gains by the end of each calendar year
and, thus, expects not to be subject to the excise tax.
For purposes of the corporate alternative minimum tax (the "AMT") and
the "environmental tax", the corporate dividends received deduction is not
itself an item of tax preference that must be added back to taxable income or is
otherwise disallowed in determining a corporation's alternative minimum taxable
income ("AMTI"). However, corporate shareholders will generally be required to
take the full amount of any dividend received from the Equity Income Fund into
account (without a dividends-received deduction) in determining its adjusted
current earnings.
Distributions by a Fund that do not constitute ordinary income
dividends, exempt-interest dividends or capital gain dividends will be treated
as a return of capital to the extent of (and in reduction of) the shareholder's
tax basis in his/her shares; any excess will be treated as gain from the sale of
his/her shares, as discussed below.
Prior to purchasing shares in one of the Non-Money Market 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.
Distributions by a Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund (or of another Fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of a Fund reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the Fund, distributions of such
amounts will be taxable to the shareholder in the manner described above, even
though such distributions economically constitute a return of capital to the
shareholder.
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of a Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the Fund (or substantially identical shares) within 30
days before or after the sale or redemption. In general, any gain or loss
arising from (or treated as arising from) the sale or redemption of shares of a
Fund will be considered capital in
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nature and will be long-term capital gain or loss if the shares were held for
longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be disallowed to the
extent of the amount of exempt-interest dividends received on such shares and
(to the extent not disallowed) will be treated as a long-term capital loss to
the extent of the amount of capital gain dividends received on such shares.
Capital losses in any year are deductible only to the extent capital gains plus,
in the case of a taxpayer filing an individual tax return, $3,000 of ordinary
income. None of the Money Market Funds expect to realize long-term capital
gains, and therefore, do not foresee payment of any capital gain.
If a shareholder (i) incurs a sales load in acquiring shares of a Fund,
(ii) disposes of such shares less than 91 days after they are acquired and (iii)
subsequently acquires shares of the Fund or another fund at a reduced sales load
pursuant to a right to reinvest at such reduced sales load acquired in
connection with the acquisition of the shares disposed of, then the sales load
on the shares disposed of (to the extent of the reduction in the sales load on
the shares subsequently acquired) shall not be taken into account in determining
gain or loss on the shares disposed of, but shall be treated as incurred on the
acquisition of the shares subsequently acquired.
Investment Strategy
Investing the same dollar amount at regular intervals is an investment
strategy known as Dollar Cost Averaging. Using this strategy, investors purchase
a greater number of shares when the fund's price is low and fewer shares when
the price is high. As a result, the average purchase price for shares will be
less than their average cost. Dollar Cost Averaging does not provide assurance
of making a profit or any guarantee against loss in continually declining
markets. Investors should evaluate whether they are able to make regular
investments through periods of declining price levels before deciding to use
this investment technique.
Tax Rates
As of the printing of this SAI, the maximum individual tax rate
applicable to ordinary income is 39.6% (marginal rates may be higher for some
individuals due to phase out of exemptions and elimination of deductions); the
maximum individual tax rate applicable to net capital gains is 28%; and the
maximum corporate tax rate applicable to ordinary income and net capital gains
is 35% (however, to eliminate the benefit of lower marginal corporate income tax
rates, corporations which have taxable income in excess of $100,000 for a
taxable year will be required to pay an additional amount of income tax of up to
$11,750 and corporations which have taxable income in excess of $15,000,000 for
a taxable year will be required to pay an additional amount of tax of up to
$100,000).
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
a Fund is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
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If the income from a Fund is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
will be subject to U.S. withholding tax at the rate of 30% (or lower applicable
treaty rate) upon the gross amount of the dividend. Furthermore, such a foreign
shareholder may be subject to U.S. withholding tax at the rate of 30% (or lower
applicable treaty rate) on the gross income resulting from the Fund's election
to treat any foreign taxes paid by its shareholders, but may not be allowed a
deduction against this gross income or a credit against this U.S. withholding
tax for the foreign shareholder's pro rata share of such foreign taxes which it
is treated as having paid. Such a foreign shareholder would generally be exempt
from U.S. federal income tax on gains realized on the sale of shares of a Fund,
capital gain dividends and exempt-interest dividends and amounts retained by a
Fund that are designated as undistributed capital gains.
If the income from a Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens, U.S. residents or domestic corporations.
In the case of foreign noncorporate shareholders, a Fund may be
required to withhold U.S. federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the Fund with proper notification of
their foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisors with
respect to the particular tax consequences to them of an investment in a Fund,
including the applicability of foreign taxes.
Special Tax Considerations Pertaining to the Value Fund, Capital Growth Fund,
Emerging Growth Fund, Equity Index Fund, Disciplined Equity Fund, Managed Index
Fund, Balanced Assets Fund, Short-Intermediate Government Fund, Short-Term
Income Fund, Diversified Income Fund and Strategic Fixed Income Fund
With respect to the Value Fund, Capital Growth Fund, Emerging Growth
Fund, Equity Index Fund, Disciplined Equity Fund, Managed Index Fund, Managed
Small Cap Index Fund Balanced Assets Fund, Short-Intermediate Government Fund,
Short-Term Income Fund, Diversified Income Fund and Strategic Fixed Income Fund
some investments may be subject to special rules which govern the Federal
income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value
of one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (1) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to
the extent provided in Treasury regulations, preferred stock); (2) the accruing
of certain trade receivables and payables; and (3) the entering into or
acquisition of any forward contract, futures contract, option, and similar
financial instrument. The disposition of a currency other than the U.S.
dollar by a U.S. taxpayer is also treated as a transaction subject to the
special currency rules. With respect to transactions covered by the special
rules, foreign currency gain or loss is calculated separately from any gain or
loss on the underlying transaction and is normally taxable as ordinary gain or
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loss. The amount of any realized gain or loss on closing out a forward contract
will generally result in a realized capital gain or loss for tax purposes.
Transactions that may be engaged in by the Funds (such as futures
contracts and options on stock indices and futures contracts) will be subject to
a special tax treatment as "Section 1256 contracts." Section 1256 contracts are
treated as if they are sold for their fair market value on the last business day
of the taxable year, regardless of whether a taxpayer's obligations (or rights)
under such contracts have terminated (by delivery, exercise, entering into a
closing transaction or otherwise) as of such date. Any gain or loss arising from
the actual or deemed disposition of a Section 1256 contract is treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. The
Internal Revenue Service has held in several private rulings that gains arising
from Section 1256 contracts will not be treated as Short-Short Gains if the
gains arise from a deemed disposition. A Fund may elect not to have this special
tax treatment apply to Section 1256 contracts that are part of "mixed straddles"
with other investments of the Fund that are not Section 1256 contracts.
In the case of an overlap between Sections 1256 and 988, special
provisions determine the character and timing of any income, gain or loss. The
Funds will attempt to monitor Section 988 transactions to avoid an adverse tax
impact.
Investment returns received by the Fund may give rise to withholding
and other taxes imposed by foreign countries, generally at rates from 10% to
40%. Tax conventions between certain countries and the U.S. may reduce or
eliminate such taxes. Foreign countries generally do not impose taxes on capital
gains with respect to investments by nonresident investors. To the extent a Fund
does pay foreign withholding or other foreign taxes on certain of its
investments, investors will be unable to take a deduction or receive a tax
credit with respect to such foreign taxes in computing their U.S. tax liability,
since investment by the Funds in foreign investments is limited.
Special Tax Considerations Pertaining to the Municipal Income Fund, Short-Term
Municipal Income Fund, Intermediate Municipal Bond Fund, the State Intermediate
Municipal Bond Funds and the State Municipal Bond Funds
As described above and in the Prospectuses, the Tax-Free Bond Funds are
designed to provide investors with current tax-exempt interest income. Each Fund
is not intended to constitute a balanced investment program and is not designed
for investors seeking capital appreciation or maximum tax-exempt income
irrespective of fluctuations in principal. Shares of a Fund would not be
suitable for tax-exempt institutions and may not be suitable for retirement
plans qualified under Section 401 of the Code, H.R. 10 plans, and individual
retirement accounts since such plans and accounts are generally tax-exempt and,
therefore, would not gain any additional benefit from the Fund's dividends being
tax-exempt.
The Municipal Income Fund, Short-Term Municipal Income Fund,
Intermediate Municipal Bond Fund, the State Intermediate Municipal Bond Funds
and the State Municipal Bond Funds are designed to provide investors with a high
level of income exempt from Federal and, with respect to the Florida
Intermediate Municipal Bond Fund and Florida Municipal Bond Fund,
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Georgia Intermediate Municipal Bond Fund and Georgia Municipal Bond Fund,
Maryland Intermediate Municipal Bond Fund and Maryland Municipal Bond Fund,
North Carolina Intermediate Municipal Bond Fund and North Carolina Municipal
Bond Fund, South Carolina Intermediate Municipal Bond Fund and South Carolina
Municipal Bond Fund, Tennessee Intermediate Municipal Bond Fund and Tennessee
Municipal Bond Fund, and Virginia Intermediate Municipal Bond Fund and Virginia
Municipal Bond Fund, Florida state intangibles tax, and the Georgia, Maryland,
North Carolina, South Carolina, or Virginia state income tax, and the Tennessee
Hall Income Tax on unearned income, respectively. Florida and Texas do not
presently impose any income tax but Florida currently imposes a state
intangibles tax on intangible personal property. Exempt-interest dividends may
be treated by the shareholders as items of interest excludable from their gross
income under Section 103(a) of the Code. An exempt-interest dividend is any
dividend or part thereof paid by a Fund and designated as an exempt-interest
dividend in a written notice mailed to shareholders not later than sixty days
after the close of the Funds' taxable year. However, the aggregate amount of
dividends so designated by a Fund cannot exceed the excess of the amount of
interest exempt from tax under Section 103 of the Code received by a Fund during
the taxable year over any amounts disallowed as deductions under Sections 265
and 171(a)(2) of the Code. The percentage of the total dividends paid for any
taxable year which qualifies as exempt-interest dividends will be the same for
all shareholders receiving dividends from the same Fund with respect to such
year, regardless of the period for which the shares were held. In order for a
Fund to pay exempt-interest dividends for any taxable year, at the close of each
quarter of its taxable year at least 50% of the aggregate value of the Fund's
assets must consist of exempt-interest obligations.
Shareholders are advised to consult their tax advisers with respect to
whether exempt-interest dividends would retain the exclusion under Section
103(a) if the shareholder would be treated as a "substantial user" or a "related
person" to such user with respect to facilities financed through any of the
tax-exempt obligations held by a Fund. A "substantial user" is defined under
U.S. Treasury Regulations to include a non-exempt person who regularly uses a
part of such facilities in his trade or business and whose gross revenues
derived with respect to the facilities financed by the issuance of bonds are
more than 5% of the total revenues derived by all users of such facilities, or
who occupies more than 5% of the usable area of such facilities or for whom such
facilities or a part thereof were specifically constructed, reconstructed, or
acquired. A "related person" includes certain related natural persons,
affiliated corporations, partners and partnerships, and S corporations and their
shareholders.
The Code treats interest on private activity bonds, as defined therein,
as an item of tax preference subject to the federal alternative minimum tax (the
"AMT") on individuals and corporations at the applicable tax rates. As of the
printing of this SAI, individuals are subject to AMT at a maximum marginal rate
of 28% and corporations at a rate of 20%. Shareholders are advised to consult
their tax advisers with respect to other "tax preference items" and
"adjustments" which must be considered when calculating the shareholders' AMT.
Corporate shareholders will generally be required to include all interest on
municipal bonds and other tax-exempt obligations (including exempt-interest
dividends paid by a Fund) in adjusted current earnings in calculating federal
alternative minimum taxable income. The receipt of tax-exempt amounts may also
affect corporate federal environmental tax liability.
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Interest on indebtedness incurred by a shareholder to purchase or carry
Fund shares is not deductible for Federal income tax purposes if that Fund
distributes exempt-interest dividends during the shareholder's taxable year. 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. Such
disallowance does not apply to losses realized under a periodic redemption plan.
Further, 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 dividend distributions where the investment
company regularly distributes at least 90% of its net tax-exempt interest. No
such regulations had been issued as of the date of this SAI.
Although each Fund expects to qualify as a "regulated investment
company" and to be relieved of substantially all Federal and, in the case of the
Florida Intermediate Municipal Bond Fund and Florida Municipal Bond Fund,
Georgia Intermediate Municipal Bond Fund and Georgia Municipal Bond Fund,
Maryland Intermediate Municipal Bond Fund and Maryland Municipal Bond Fund,
North Carolina Intermediate Municipal Bond Fund and North Carolina Municipal
Bond Fund, South Carolina Intermediate Municipal Bond Fund and South Carolina
Municipal Bond Fund, Tennessee Intermediate Municipal Bond Fund and Tennessee
Municipal Bond Fund, and Virginia Intermediate Municipal Bond Fund and Virginia
Municipal Bond Fund, Florida State intangible tax, and the Georgia, Maryland,
North Carolina, South Carolina, or Virginia state income taxes, and the
Tennessee Hall Income Tax on unearned income, respectively, depending upon the
extent of its activities in states and localities in which its offices are
maintained, in which its agents or independent contractors are located, or in
which it is otherwise deemed to be conducting business, the Funds may be subject
to the tax laws of such states or localities.
Distributions other than exempt-interest dividends, including
distributions of interest in Municipal Securities issued by other issuers and
all long-term and short-term capital gains will be subject to state income tax
(other than Florida and Texas) unless specifically exempted by statute
including, in the case of Virginia, statutory provisions creating the agency or
political subdivision.
Florida does not impose a personal income tax, but does impose an
annual intangible personal property tax on intangible personal property
(including but not limited to stocks or shares of business trusts or mutual
funds) held by persons domiciled in the State of Florida, regardless of where
such property is kept. Florida counsel has, however, advised the Fund that
shares in the Nations Florida Intermediate Municipal Bond Fund and the Nations
Florida Municipal Bond Fund shall not be subject to Florida's intangible
personal property tax if on January 1 of each tax year the portfolio of such
Fund consists exclusively of obligations of the government of the United States
of America, its agencies, instrumentalities, the Commonwealth of Puerto Rico,
the government of Guam, the government of American Samoa, the government of the
Northern Mariana Islands, the State of Florida, its political subdivisions,
municipalities or other taxing districts. Nations Fund has received a Technical
Assistance Advisement from the Florida Department of Revenue confirming the
foregoing.
Although the Nations Florida Intermediate Municipal Bond Fund and
Nations Florida Municipal Bond Fund anticipate that the portfolio will
exclusively contain assets that are exempt from Florida's intangible personal
property tax on January 1 of each tax year, it may be possible
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that the portfolio will have a small portion of its assets invested temporarily
in assets on such date which are not exempt from Florida's annual intangible
personal property tax. In this situation, only the portion of the net asset
value of the portfolio which is made up of direct obligations of the United
States of America, its agencies, territories and possessions (as described
above) may be removed from the net asset value for purposes of computing the
intangible personal property tax. The remaining net asset value of the portfolio
and hence a portion of the net asset value of the shares in the Nations Florida
Intermediate Municipal Bond Fund and Nations Florida Municipal Bond Fund would
be subject to the intangible personal property tax. Notice as to the tax status
of your shares will be mailed to you annually. Owners of shares in the Nations
Florida Intermediate Municipal Bond Fund or Nations Florida Municipal Bond Fund
should consult their tax advisers with specific reference to their own tax
situation if advised that a portion of the portfolio of such Funds consisted on
January 1 of any year of assets which are not exempt from Florida's annual
intangible personal property tax. Such annual intangible personal property tax,
if any, is due and payable on June 30 of such year in which the tax liability
arises.
The Georgia state intangibles tax was under attack in a case pending in
Dekalb County Superior Court (Lombard Corporation v. Colline et al.) and a
constitutional amendment authorizing the repeal of the intangibles tax was
approved during the 1996 session of the Georgia General Assembly (H.R. 734).
Nations Maryland Intermediate Municipal Bond Fund's and Nations
Maryland Municipal Bond Fund's shareholders who are residents of Maryland must
add to their federal adjusted gross income 50% of their federal tax preference
items (which include interest amounts from private activity bonds) the sum total
of which is in excess of $10,000 for an individual return (or $20,000 for a
joint return) when determining their Maryland adjusted gross income.
Shareholders who are nonresidents of Maryland are required to include only those
tax preference items that are based on income taxable in Maryland.
For tax years beginning after 1994, the deduction for South Carolina
taxable income purposes for the net capital gains recognized from the sale or
exchange of an asset which has been held for a period of two or more years has
been increased from 29% to 44%.
The Tennessee Hall Income Tax imposes a tax on income received by way
of dividends from stock or interest on bonds. Dividends from a qualified
regulated investment company are exempt from the Hall Income Tax, but only to
the extent attributable to interest on bonds or securities of the U.S.
Government or any agency or instrumentality thereof or on bonds of the State of
Tennessee or any county or any municipality or political subdivision thereof,
including any agency, board, authority or commission of any of the above.
According to the Tax Foundation in Washington, D.C., it is estimated
that "tax freedom day" usually falls around May 3rd across the country. On
average, the money earned by an individual prior to that date goes to the
payment of taxes. In addition, The Tax Foundation estimates that the average
taxpayer needs to work 2 hours and 41 minutes during an eight-hour day to cover
federal, state and local taxes. In contrast, it takes only 57 minutes to cover
the average cost of housing and household expenses. In recent years, tax-free
bonds have been in high demand due to high tax rates and fewer available tax
deductions. Insured certificates of
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deposit and money market funds have traditionally offered a solid way to
preserve capital and enjoy competitive yields. But yields on these investments
have declined considerably. Because of that, more and more investors have found
it beneficial to look for conservative higher-yielding alternatives, especially
those that also offer tax relief.
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and the regulations issued thereunder as in
effect on the date of this SAI. Future legislative or administrative changes or
court decisions may significantly change the conclusions expressed herein, and
any such changes or decisions may have a retroactive effect with respect to the
transactions contemplated herein.
Rules of state and local taxation for ordinary income dividends,
exempt-interest dividends and capital gain dividends from regulated investment
companies often differ from the rules for U.S. federal income taxation described
above. Distributions of net investment income may be taxable to shareholders as
dividend income under state or local law even though a substantial portion of
such distributions may be derived from interest on U.S. Government obligations,
which, if realized directly, would be exempt from such taxes. Shareholders are
urged to consult their tax advisers as to the consequences of these and other
state and local tax rules affecting investment in the Funds.
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Trust, their addresses,
principal occupations during the past five years, and other affiliations are as
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 (*).
<TABLE>
<CAPTION>
Position With Principal Occupation During
Name, Address and Age the Trust Past 5 Years and Current Directorships
- --------------------- -------------- --------------------------------------
<S> <C> <C>
Edmund L. Benson, III, 59 Trustee Director, President and Treasurer, Saunders &
Saunders & Benson, Inc. Benson, Inc. (insurance); Trustee, Nations
728 East Main Street Institutional Reserves, Director, Nations Fund,
Suite 400 Inc. and Nations Fund Portfolios, Inc.
Richmond, VA 23219
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Position With Principal Occupation During
Name, Address and Age the Trust Past 5 Years and Current Directorships
- --------------------- -------------- --------------------------------------
<S> <C> <C>
James Ermer, 54 Trustee Senior Vice President -- Finance, CSX Corporation
13705 Hickory Nut Point (transportation and natural resources); Director,
Midlothian, VA 23112 National Mine Service; Director, Lawyers Title
Corporation; Trustee, Nations Institutional
Reserves; Director, Nations Fund, Inc. and Nations
Fund Portfolios, Inc.
William H. Grigg, 63 Trustee Since April 1994, Chairman and Chief Executive
Duke Power Co. Officer; November 1991 to April 1994, Vice
422 South Church Street Chairman, Duke Power Co.; from April 1988 to
PB04G November 1991, Executive Vice President --
Charlotte, NC 28242-0001 Customer Group, Duke Power Co., 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 Fund Portfolios, Inc.; Trustee, Nations
Institutional Reserves
Thomas F. Keller, 65 Trustee R.J. Reynolds Industries Professor of Business
Fuqua School of Business Administration and Dean, Fuqua School of Business,
P.O. Box 90120 Duke University; Director LADD Furniture, Inc.,
Duke University Director, Wendy's International Mentor Growth Fund
Durham, NC 27706 and Cambridge 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 Fund
Portfolios, Inc.; Trustee, Nations Institutional
Reserves
Carl E. Mundy, Jr., 61 Trustee Commandant, United States Marine Corps, from July
9308 Ludgate Drive 1991 to July 1995, Commanding General, Marine
Alexandria, VA 22309 Forces Atlantic, from June 1990 to June 1991;
Director, Nations Fund, Inc. and Nations Fund
Portfolios, Inc.; Trustee, Nations Institutional
Reserves
A. Max Walker*, 74 President, Trustee Financial consultant, formerly President, A. Max
4580 Windsor Gate Court and Chairman of the Walker, Inc.; Director and Chairman of the Board,
Atlanta, GA 30342 Board Hatteras Income Securities, Inc., Nations
Government Income Term Trust 2003, Inc., Nations
Government Income Term Trust 2004,
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
Position With Principal Occupation During
Name, Address and Age the Trust Past 5 Years and Current Directorships
- --------------------- -------------- --------------------------------------
<S> <C> <C>
Inc., Nations Balanced Target Maturity Fund,
Inc.; Nations Fund, Inc. and Nations Fund
Portfolios, Inc.; President and Chairman of the
Board of Trustees, Nations Institutional Reserves
Charles B. Walker, 57 Trustee Since 1989, Director, Executive Vice President,
Ethyl Corporation Chief Financial Officer and Treasurer, Ethyl
330 South Fourth Street Corporation (chemicals, plastics and aluminum
Richmond, VA 23219 manufacturing); since 1994, Vice Chairman, Ethyl
Corporation and Vice Chairman, Chief Financial
Officer and Treasurer, Albemarle Corporation;
Director, Nations Fund, Inc. and Nations Fund
Portfolios, Inc.; Trustee, Nations Institutional
Reserves
Thomas S. Word, Jr.*, 58 Trustee Partner, McGuire Woods Battle & Boothe (law);
McGuire, Woods, Battle & Boothe Director, Vaughan Bassett Furniture Company,
One James Center, 8th Floor Director V-B/Williams Furniture Company, Inc.;
Richmond, VA 23219 Director, Nations Fund, Inc. and Nations Fund
Portfolios, Inc.; Trustee, Nations Institutional
Reserves
Richard H. Blank, Jr., 40 Secretary Since 1994, Vice President of Mutual Funds
Stephens Inc. Services, Stephens Inc. 1990 to 1994, Manager
Mutual Fund Services, Stephens Inc. 1983 to 1990,
Associate in Corporate Finance Department,
Stephens Inc.
Michael W. Nolte, 35 Assistant Secretary Associate, Financial Services Group of Stephens
Stephens Inc. Inc.
Louise P. Newcomb, 44 Assistant Secretary Corporation Syndicate Associate, Stephens Inc.
Stephens Inc.
James E. Banks, 40 Assistant Secretary Since 1993 Attorney, Stephens Inc.; Associate
Stephens Inc. Corporate Counsel, Federated Investors; from 1991
to 1993, Staff Attorney, Securities and Exchange
Commission from 1988 to 1991.
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
Position With Principal Occupation During
Name, Address and Age the Trust Past 5 Years and Current Directorships
- --------------------- -------------- --------------------------------------
<S> <C> <C>
Richard H. Rose, 41 Treasurer Since 1994, Vice President, Division Manager,
First Data Investor Services Group, Inc. First Data Investor Services Group, Inc., since
One Exchange Place 1988, Senior Vice President, The Boston Company
Boston, MA 02109 Advisors, Inc.; Treasurer, Nations Institutional
Reserves, Nations Fund, Inc. and Nations
Portfolios, Inc.
Joseph C. Viselli, 32 Assistant Treasurer Since 1994, Director, First Data Investor Services
First Data Services Group, Inc. Group, Inc., since 1992, Assistant Vice President,
One Exchange Place The Boston Company Advisors, Inc., since 1989,
Boston, MA 02109 Senior Accountant, Price Waterhouse LLP
Susan Manter, 42 Assistant Treasurer Since 1996, Vice President, First Data Investor
First Data Investor Services Group, Inc. Services Group, Inc., since 1994, Vice President,
One Exchange Place Scudder Stevens and Clark, Inc., previously Senior
Boston, MA 02109 Manager, Coopers & Lybrand LLP
</TABLE>
Mr. Rose serves as Treasurer to certain other investment companies for
which First Data (the "Co-Administrator") or its affiliates serve as sponsor,
distributor, administrator and/or investment adviser.
Each Trustee of the Trust is also a Director of Nations Fund, Inc. and
Nations Fund Portfolios, Inc. and a trustee of Nations Institutional Reserves,
each, a registered investment company that is part of the Nations Fund family of
funds. Richard H. Blank, Jr., Richard H. Rose, Joseph C. Viselli, Susan Manter,
Michael W. Nolte, Louise P. Newcomb and James E. Banks, Jr. also are officers of
Nations Fund, Inc., Nations Fund Portfolios, Inc. and Nations Institutional
Reserves.
Each Trustee receives (i) an annual retainer of $1,000 ($3,000 for the
Chairman of the Board) plus $500 for each Fund of the Trust, plus (ii) a fee of
$1,000 for attendance at each "in-person" meeting of the Board of Trustees (or
committee thereof) and $500 for attendance at each other meeting of the Board of
Trustees (or committee thereof). All Trustees receive reimbursements for
expenses related to their attendance at meetings of the Board of Trustees.
Officers receive no direct remuneration in such capacity from the Trust. No
person who is an officer, director, or employee of NationsBank or its affiliates
serves as an officer, Trustee, or employee of the Trust. The Trustees and
officers of Nations Fund own less than 1% of the shares of the Trust.
The Trust has adopted a Code of Ethics which, 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
72
<PAGE>
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 funds 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" Trustees, submit
reports to the Trust's designated compliance person regarding transactions
involving securities which are eligible for purchase by a Fund.
Nations Funds Retirement Plan
Under the terms of the Nations Funds Retirement Plan for Eligible
Trustees (the "Retirement Plan"), each trustee may be entitled to certain
benefits upon retirement from the Board of Trustees. Pursuant to the Retirement
Plan, the normal retirement date is the date on which the eligible trustee has
attained age 65 and has completed at least five years of continuous service with
one or more of the open-end investment companies ("Funds") advised by the
Adviser. If a trustee retires before reaching age 65, no benefits are payable.
Each eligible trustee is entitled to receive an annual benefit from the Funds
commencing on the first day of the calendar quarter coincident with or next
following his date of retirement equal to 5% of the aggregate trustee's fees
payable by the Funds during the calendar year in which the trustee's retirement
occurs multiplied by the number of years of service (not in excess of ten years
of service) completed with respect to any of the Funds. Such benefit is payable
to each eligible trustee in quarterly installments for a period of no more than
five years. If an eligible trustee dies after attaining age 65, the trustee's
surviving spouse (if any) will be entitled to receive 50% of the benefits that
would have been paid (or would have continued to have been paid) to the trustee
if he had not died. The Retirement Plan is unfunded. The benefits owed to each
trustee are unsecured and subject to the general creditors of the Funds.
Nations Funds Deferred Compensation Plan
Under the terms of the Nations Funds Deferred Compensation Plan for
Eligible Trustees (the "Deferred Compensation Plan"), each trustee may elect, on
an annual basis, to defer all or any portion of the annual board fees (including
the annual retainer and all attendance fees) payable to the trustee for that
calendar year. An application was submitted to and approved by the SEC to permit
deferring trustees to elect to tie
73
<PAGE>
the rate of return on fees deferred pursuant to the Deferred Compensation Plan
to one or more of certain investment portfolios of certain Funds. Distributions
from the deferring trustees' deferral accounts will be paid in cash, in
generally equal quarterly installments over a period of five years beginning on
the date the deferring trustee's retirement benefits commence under the
Retirement Plan. The Board of Trustees, in its sole discretion, may accelerate
or extend such payments after a trustee's termination of service. If a deferring
trustee dies prior to the commencement of the distribution of amounts in his
deferral account, the balance of the deferral account will be distributed to his
designated beneficiary in a lump sum as soon as practicable after the trustee's
death. If a deferring trustee dies after the commencement of such distribution,
but prior to the complete distribution of his deferral account, the balance of
the amounts credited to his deferral account will be distributed to his
designated beneficiary over the remaining period during which such amounts were
distributable to the trustee. Amounts payable under the Deferred Compensation
Plan are not funded or secured in any way and deferring trustees have the status
of unsecured creditors of the Funds from which they are deferring compensation.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Estimated Annual
Compensation Pension or Retirement Benefits Upon Total Compensation from
Name of Person from Benefits Accrued as Retirement Registrant and Fund
Position (1) Registrant (2) Part of Fund Expenses Complex (3)(4)
------------- -------------- --------------------- ---------------- ------------------------
<S> <C> <C> <C> <C>
Edmund L. Benson, III, $24,381 $19,488 $21,000 $49,119
Trustee
James Ermer 22,875 19,488 21,000 44,250
Trustee
William H. Grigg 25,349 19,488 21,000 66,397
Trustee
Thomas F. Keller 25,434 19,488 21,000 68,597
Trustee
A. Max Walker 25,375 19,488 25,000 75,250
Chairman of the Board
Charles B. Walker 22,375 19,488 21,000 43,750
Trustee
Thomas S. Word 25,426 19,488 21,000 51,579
Trustee
Carl E. Mundy, Jr. 11,375 0 21,000 25,875
Trustee
</TABLE>
74
<PAGE>
(1)The Compensation Table provides data concerning the compensation paid to
Trustees of the Trust during the twelve-month period ended March 31, 1996. All
trustees receive reimbursements for expenses related to their attendance at
meetings of the Board of Trustees. Officers of the Trust receive no direct
remuneration in such capacity from the Trust.
(2)For the fiscal period from December 1, 1995 to March 31, 1996. Each Trustee
receives (i) an annual retainer of $1,000 ($3,000 for the Chairman of the Board)
plus $500 for each Fund of the Trust, plus (ii) a fee of $1,000 for attendance
at each "in-person" meeting of the Board of Trustees (or committee thereof) and
$500 for attendance at each other meeting of the Board of Trustees (or Committee
thereof).
(3)Messrs. Grigg, Keller and A.M. Walker receive compensation from eight
investment companies, including the Trust, that are deemed to be part of the
Nations Fund "fund complex," as that term is defined under Rule 14a-101 of the
Securities Exchange Act of 1934, as amended. Messrs. Benson, Ermer, C. Walker,
Mundy and Word receive compensation from four investment companies, including
the Trust, deemed to be part of the Nations Fund complex.
(4)Total compensation amounts include deferred compensation (including interest)
payable to or accrued for the following Trustees: Edmund L. Benson, III
($25,744); William H. Grigg ($47,897); Thomas F. Keller ($51,596); and Thomas S.
Word ($54,579).
Shareholder and Trustee Liability
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. However, 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 that every note, bond, contract, order, or other
undertaking made by the Trust shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Declaration of Trust
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. The Declaration of
Trust also provides that the Trust shall, upon request, assume the defense of
any claim made against any shareholder for any act or obligation of the Trust
and shall satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations.
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 or the Trust 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
75
<PAGE>
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, SHAREHOLDER SERVICING, SHAREHOLDER
ADMINISTRATION AND DISTRIBUTION AGREEMENTS
Investment Adviser
Effective January 1, 1996, NBAI began serving as investment adviser to
the Funds of the Trust, pursuant to an Investment Advisory Agreement dated
January 1, 1996. Effective January 1, 1996, TradeStreet began serving as
sub-investment adviser to the Funds of the Trust, pursuant to a Sub-Advisory
Agreement dated January 1, 1996.
NBAI also serves as the investment adviser to Nations Fund, Inc.,
Nations Institutional Reserves and Nations Fund Portfolios, Inc., each a
registered investment company that is part of the Nations Fund Family. In
addition, NBAI serves as the investment advisor to Hatteras Income Securities,
Inc., Nations Government Income Term Trust 2003, Inc., Nations Government Income
Term Trust 2004, Inc. and Managed Balanced Target Maturity Fund, Inc., each a
closed-end diversified management investment company traded on the New York
Stock Exchange. TradeStreet also serves as the sub-investment adviser to all of
the funds of Nations Fund, Inc., except the International Equity Fund, and to
Nations Institutional Reserves, Hatteras Income Securities, Inc., Nations
Government Income Term Trust 2003, Inc., Nations Government Income Term Trust
2004, Inc. and Managed Balanced Target Maturity Fund, Inc.
NBAI and TradeStreet are each wholly owned banking subsidiaries of
NationsBank, which in turn is a wholly owned banking subsidiary of NationsBank
Corporation, a bank holding company organized as a North Carolina corporation.
Prior to January 1, 1996, NationsBank, through its investment
management division, served as investment adviser to the Funds. NationsBank is
successor to NationsBank of North Carolina, N.A. which was merged with and into
NationsBank of South Carolina, N.A., effective January 3, 1995. The resulting
entity was renamed NationsBank, N.A. (Carolinas). NationsBank is a wholly owned
subsidiary of NationsBank Corporation, a bank holding company. Prior to June 30,
1992, NationsBank of Georgia, N.A. served as the Investment Adviser to the
Trust. On December 31, 1991 an Agreement and Plan of Consolidation between NCNB
Corporation ("NCNB") and C&S Sovran Corporation ("C&S/Sovran") was consummated
whereby C&S/Sovran was merged into and became a wholly owned
76
<PAGE>
subsidiary of NCNB and NCNB changed its name to NationsBank Corporation. In
anticipation of this transaction, the prior investment adviser for the Trust was
changed from Sovran Bank, N.A., to C&S/Sovran Trust Company (Georgia), N.A.
After the merger of C&S/Sovran and NCNB was completed, C&S Sovran Trust Company
(Georgia), N.A., changed its name to NationsBank Trust Company (Georgia), N.A.,
and subsequently merged into NationsBank of Georgia, N.A. which continued to
serve as the investment adviser to Nations Fund Trust until June 30, 1992. Prior
to the merger of NCNB and C&S/Sovran, NationsBank (formerly NCNB National Bank
of North Carolina) served and continues to serve as investment adviser to all of
the Funds of the Trust pursuant to an amendment to its investment advisory
agreements. NationsBank and NationsBank of Georgia, N.A. are wholly owned
subsidiaries of NationsBank Corporation.
Since 1874, NationsBank and its predecessors have been managing money
for foundations, universities, corporations, institutions and individuals.
Today, NationsBank affiliates collectively manage in excess of $60 billion,
including the more than $18 billion in mutual fund assets. It is a company
dedicated to a goal of providing responsible investment management and superior
service. NationsBank is recognized for its sound investment approaches, which
place it among the nation's foremost financial institutions. NationsBank 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.
Approximately 12 of NationsBank personnel are involved in stock and bond
research.
NationsBank restructured its investment management division as of
January 1, 1996 by reorganizing the division into two separate, wholly owned
advisory subsidiaries, NBAI and TradeStreet. The restructuring resulted in the
transfer of the division's investment management and advisory functions to NBAI,
and its day to day investment company portfolio management functions to
TradeStreet. The investment professionals who performed investment company
management functions and who managed the companies portfolios as employees of
NationsBank continue to perform such services as employees of NBAI and
TradeStreet, respectively. The restructuring did not change the scope and nature
of investment advisory services provided to the relevant Funds. The
restructuring, and related Investment Advisory Agreement and Sub-Advisory
Agreement, were approved by the Board of Trustees of the Trust at the October
12-13, 1995 Board Meeting.
The Investment Advisory Agreement for NBAI and Sub-Advisory Agreement for
TradeStreet each provides that in the absence of willful misfeasance, bad faith,
negligence or reckless disregard of obligations or duties thereunder on the part
of NBAI or Trade Street, respectively, or any of their respective officers,
directors, employees or agents, NBAI or TradeStreet 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 thereunder or
for any losses that may be sustained in the purchase, holding or sale of any
security.
77
<PAGE>
The Investment Advisory Agreement shall become effective with respect to a
Fund if and when approved by the Trustees of the Trust, and if so approved,
shall thereafter continue from year to year, provided that such continuation of
the Agreement is specifically approved at least annually by (a) (i) the Trust's
Board of Trustees or (ii) the vote of "a majority of the outstanding voting
securities" of a Fund (as defined in Section 2(a)(42) of the 1940 Act), and (b)
the affirmative vote of a majority of the Trust's Trustees who are not parties
to such Agreement or "interested persons" (as defined in the 1940 Act) of a
party to such Agreement (other than as Trustees of the Trust), by votes cast in
person at a meeting specifically called for such purpose.
The Investment Advisory Agreement will terminate automatically in the
event of its assignment, and is terminable with respect to a 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 NBAI on 60
days' written notice.
The Sub-Advisory Agreement shall become effective with respect to each
Fund as of its execution date and, unless sooner terminated, shall continue in
full force and effect for one year, and may be continued with respect to each
Fund thereafter, provided that the continuation of the Agreement is specifically
approved at least annually by (a) (i) the Trust's Board of Trustees or (ii) the
vote of "a majority of the outstanding voting securities" of a Fund (as defined
in Section 2(a)(42) of the 1940 Act), and (b) the affirmative vote of a majority
of the Trust's Trustees who are not parties to such Agreement or "interested
persons" (as defined in the 1940 Act) of a party to such Agreement (other than
as Trustees of the Trust), by votes cast in person at a meeting specifically
called for such purpose.
The Sub-Advisory Agreement will terminate 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 NBAI, or by TradeStreet
on 60 days' written notice.
The table below states the net advisory fees paid to NationsBank and/or
its wholly-owned affiliate NBAI, the advisory fees waived and expense
reimbursements where applicable for the fiscal period from December 1, 1995 to
March 31, 1996.
78
<PAGE>
ADVISORY FEES
<TABLE>
<CAPTION>
Net Amt. Amount Reimbsd.
Paid Waived by Advsr.
<S> <C> <C> <C>
Nations
Government $ 195,815.00 $442,122.00 $ 0.00
Money
Market Fund
Nations Tax
Exempt
Fund 600,930.00 1,248,939.00 0.00
Nations 2,808,328.00 0.00 0.00
Value Fund
Nations
Capital
Growth Fund 2,253,497.00 0.00 0.00
Nations
Disciplined
Equity Fund 339,082.00 0.00 0.00
Nations
Equity
Index Fund 64,733.00 0.00 0.00
Nations
Emerging
Growth Fund 777,193.00 0.00 0.00
Nations
Balanced
Assets Fund 590,332.00 00.0 0.00
Nations
Short-Inter-
mediate 619,149.00 384,574.00 0.00
Gov't Fund
Nations
Short-Term
Income Fund 173,410.00 216,740.00 0.00
Nations
Diversified
Income Fund 286,700.00 57,340.00 0.00
Nations
Strategic
Fixed 1,388,673.00 294,244.00 0.00
Income Fund
Nations
Municipal
Income Fund 114,363.00 117,368.00 0.00
Nations
Short-Term
Municipal
Income
Fund 12,972.00 99,745.00 0.00
Nations
Intermediate
Municipal 45,524.00 89,165.00 0.00
Bond Fund
Nations
Florida
Intermediate
Municipal
Bond Fund 25,169.00 62,242.00 0.00
Nations
Georgia
Intermediate
Municipal
Bond Fund 33,891.00 64,182.00 0.00
Nations
Maryland
Intermediate
Municipal 59,770.00 93,011.00 0.00
Bond Fund
Nations
North
Carolina 17,326.00 47,071.00 0.00
Intermediate
Municipal
Bond Fund
Nations
South Carolina
Intermediate 42,310.00 75,330.00 0.00
Municipal
Bond Fund
Nations
Tennessee
0.00 31,491.00 1,332.00
Intermediate
Municipal
Bond Fund
Nations Texas
Intermediate
Municipal 11,045.00 41,063.00 0.00
Bond Fund
Nations
Virginia
Intermediate 196,295.00 215,292.00 0.00
Municipal
Bond Fund
Nations
Florida 34,641.00 44,125.00 0.00
Municipal
Bond Fund
Nations
Georgia 4,774.00 25,162.00 0.00
Municipal
Bond Fund
Nations
Maryland 108.00 27,352.00 0.00
Municipal
Bond Fund
Nations North
Carolina
Municipal $ 24,232.00 $ 38,851.00 $ 0.00
Bond Fund
Nations South
Carolina
Municipal
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
Net Amt. Amount Reimbsd.
Paid Waived by Advsr.
<S> <C> <C> <C>
5,358.00 27,497.00 0
Bond Funds
Nations
Tennessee 0 15,588.00 5,817.00
Municipal
Bond Fund
Nations Texas
Municipal 6,913.00 28,200.00 0.00
Bond Fund
Nations
Virginia 11,162.00 29,711.00 0.00
Municipal
Bond Fund
</TABLE>
The table below states the net sub-advisory fees paid to Tradestreet,
the sub-advisory fees waived and expense reimbursements where applicable for the
fiscal period from January 1, 1996 to March 31, 1996.
ADVISORY FEES
<TABLE>
<CAPTION>
Net Amt. Amount Reimbsd.
Paid Waived by Advsr.
<S> <C> <C> <C>
Nations
Government $65,559.22 $ 0.00 $ 0.00
Money
Market Fund
Nations Tax
Exempt
Fund 195,836.30 0.00 0.00
Nations 702,508.52 0.00 0.00
Value Fund
Nations
Capital
Growth Fund 558,981.57 0.00 0.00
Nations
Disciplined
Equity Fund 85,311.87 0.00 0.00
Nations
Equity
Index Fund 41,386.62 0.00 0.00
Nations
Emerging
Growth Fund 194,888.10 0.00 0.00
Nations
Balanced
Assets Fund 146,994.87 0.00 0.00
Nations
Short-Inter-
mediate 185,611.41 0.00 0.00
Gov't Fund
Nations
Short-Term
Income Fund 73,671.51 0.00 0.00
Nations
Diversified
Income Fund 63,997.63 0.00 0.00
Nations
Strategic
Fixed 313,681.03 0.00 0.00
Income Fund
Nations
Municipal
Income Fund 20,092.35 0.00 0.00
Nations
Short-Term
Municipal
Income
Fund 11,904.57 0.00 0.00
Nations
Intermediate
Municipal 14,212.28 0.00 0.00
Bond Fund
Nations
Florida
Intermediate
Municipal
Bond Fund 9,158.98 0.00 0.00
Nations
Georgia
Intermediate
Municipal
Bond Fund $10,161.88 $ 0.00 $ 0.00
Nations
Maryland
Intermediate
Municipal 15,999.36 0.00 0.00
Bond Fund
Nations
North
Carolina 6,729.45 0.00 0.00
Intermediate
Municipal
Bond Fund
Nations
South Carolina
Intermediate
Municipal
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
Net Amt. Amount Reimbsd.
Paid Waived by Advsr.
<S> <C> <C> <C>
Bond Fund 12,199.38 0.00 0.00
Nations
Tennessee
3,812.00 0.00 0.00
Intermediate
Municipal
Bond Fund
Nations Texas
Intermediate
Municipal 5,474.20 0.00 0.00
Bond Fund
Nations
Virginia
Intermediate 42,887.69 0.00 0.00
Municipal
Bond Fund
Nations
Florida 6,891.65 0.00 0.00
Municipal
Bond Fund
Nations
Georgia 2,562.42 0.00 0.00
Municipal
Bond Fund
Nations
Maryland 2,390.88 0.00 0.00
Municipal
Bond Fund
Nations North
Carolina
Municipal 5,475.32 0.00 0.00
Bond Fund
Nations South
Carolina
Municipal 2,870.87 0.00 0.00
Bond Fund
Nations
Tennessee 1,366.28 0.00
Municipal 0.00
Bond Fund
Nations Texas
Municipal 3,051.30 0.00 0.00
Bond Fund
Nations
Virginia 3,538.33 0.00 0.00
Municipal
Bond Fund
</TABLE>
As discussed above, NationsBank was the investment adviser to the Funds
prior to January 1, 1996. Prior to April 1, 1995, ASB Management, Inc. was
sub-investment adviser to Nations Disciplined Equity Fund. A&B Management, Inc.
received $28,916 as sub-investment advisory fees in 1995. The table below states
the net advisory fees paid to NationsBank, the advisory fees waived and expense
reimbursements where applicable for the fiscal years ended November 30, 1995 and
1994 where applicable.
ADVISORY FEES
<TABLE>
<CAPTION>
FY 1995 FY 1994
------- -------
Net Amt. Amount Reimbsd. Net Amt. Amount
Paid Waived by Advsr. Paid Waived Reimbsd.by Advsr.
<S> <C> <C> <C> <C> <C> <C>
Nations Government
Money Market Fund $ 815,364 $1,249,536 $0 $724,416 $1,235,880 $0
Nations Tax Exempt
Fund 1,920,171 2,694,691 0 874,309 2,912,954 0
Nations Value Fund 7,206,029 25,350 0 6,534,662 53,149 0
Nations Capital
Growth Fund 6,269,137 0 0 5,381,628 0 0
Nations Disciplined
Equity Fund 370,769 610 0 8,160 0 0
Nations Equity
Index Fund 122,169 523,117 0 102,464 433,345 0
Nations Emerging
Growth Fund 1,855,452 3,328 0 1,288,934 0 0
Nations Balanced
Assets Fund 1,624,854 0 0 1,805,446 0 0
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
FY 1995 FY 1994
------- -------
Net Amt. Amount Reimbsd. Net Amt. Amount
Paid Waived by Advsr. Paid Waived Reimbsd.by Advsr.
<S> <C> <C> <C> <C> <C> <C>
Nations Short-Inter-
mediate Gov't Fund 2,044,261 1,022,131 0 2,556,715 1,278,358 0
Nations Short-Term
Income Fund 564,197 564,197 0 696,393 730,564 34,171
Nations Diversified
Income Fund 573,462 114,692 0 329,285 170,640 0
Nations Strategic
Fixed Income Fund 3,156,062 631,213 0 2,902,823 427,781 0
Nations Municipal
Income Fund 383,148 269,813 0 398,300 279,021 66,736
Nations Short-Term
Municipal Income
Fund 40,165 255,162 0 42,559 167,405 362
Nations Intermediate
Municipal Bond Fund
99,722 241,595 0 (8,684) 151,227 40,762
Nations Florida
Intermediate Municipal
Bond Fund 137,002 113,704 0 154,249 102,832 0
Nations Georgia
Intermediate Municipal
Bond Fund 158,113 126,861 0 166,565 111,043 0
Nations Maryland
Intermediate
Municipal Bond Fund
245,189 191,375 0 287,326 191,550 0
Nations North Carolina
Intermediate Municipal
Bond Fund 94,414 86,937 0 73,680 61,099 17,968
Nations South Carolina
Intermediate Municipal Bond
Fund 229,204 143,374 0 271,482 180,988 0
Nations Tennessee
Intermediate
Municipal Bond Fund 29,713 54,285 0 27,480 35,606 25,930
Nations Texas
Intermediate
Municipal Bond Fund 76,262 67,309 0 99,658 70,684 6,366
Nations Virginia
Intermediate
Municipal Bond Fund 831,878 439,488 0 1,138,587 346,587 0
Nations Florida
Municipal Bond Fund 31,520 168,010 0 (3,925) 127,352 6,635
Nations Georgia
Municipal Bond Fund 0 73,427 2,470 (57,827) 111,043 0
Nations Maryland
Municipal Bond Fund 0 56,020 15,327 (12,208) 23,155 12,701
Nations North
Carolina Municipal
Bond Fund 19,600 157,625 0 (6,440) 126,235 9,504
Nations South
Carolina Municipal
Bond Funds 0 75,568 1,498 (14,381) 44,830 15,335
Nations Tennessee
Municipal Bond Fund 0 40,270 12,792 (10,922) 26,558 13,336
Nations Texas
Municipal Bond Fund 1,425 91,303 0 (13,243) 70,358 14,740
Nations Virginia
Municipal Bond Fund 3,726 101,277 0 (9,176) 71,728 10,702
</TABLE>
82
<PAGE>
Investment Styles
When you invest in any Fund in the Nations Fund Family, you can be
assured your money is managed according to a disciplined investment style; one
that remains constant regardless of particular styles coming in and out of
favor. The Advisor believes this structured approach to managing portfolio
securities may provide you with consistent performance over time. The Adviser
uses various investment strategies during the process of constructing and
managing the Nations Fund Trust portfolios. These strategies have been
categorized into investment styles which consist of (i) the NationsBank Fixed
Income Style, (ii) the NationsBank Growth Equity Style, (iii) the NationsBank
Value Equity Style and (iv) the NationsBank Balanced Assets Style. Investment
Styles described below relate to the Diversified Income, Government Securities,
Short-Intermediate Government, Short-Term Income, Strategic Fixed Income,
Intermediate Municipal Bond, Municipal Income, Short-Term Municipal Income,
Capital Growth, Emerging Growth, Value and Balanced Assets Funds and the State
Intermediate Municipal Bond Funds and the State Municipal Bond Funds.
NationsBank Fixed Income Style. The Nations Diversified Income,
Government Securities, Short-Intermediate Government, Short-Term Income,
Strategic Fixed Income, Intermediate Municipal Bond, Municipal Income, Florida
Intermediate Municipal Bond, Georgia Intermediate Municipal Bond, Maryland
Intermediate Municipal Bond, North Carolina Intermediate Municipal Bond, South
Carolina Intermediate Municipal Bond, Tennessee Intermediate Municipal Bond,
Texas Intermediate Municipal Bond, Virginia Intermediate Municipal Bond Fund,
Short-Term Municipal Income Fund and the State Municipal Bond Funds are managed
by the Adviser using the NationsBank Fixed Income Style. The NationsBank Fixed
Income Style investment philosophy is premised on the belief that a well
diversified portfolio of fixed income securities that emphasizes a combination
of investments strategies will capture relative value in the bond market.
In order to pursue this goal, the Fixed Income Style includes certain
biases. The Adviser reduces the risk by investing in many different issuers.
This is done by setting a maximum percentage permitted of any single issuer in
any portfolio. Focus on high credit quality is the second bias. Holdings are
concentrated in the upper end of the quality spectrum. Securities of less than
the highest quality are used only when the team of credit analysts support the
conclusion that the quality will remain stable or improve, and that it offers
attractive potential in expected return. The third bias is to de-emphasize
interest rate forecasts. The performance of a portfolio therefore is not held
hostage to the accuracy of a rate forecast.
This philosophy attempts to achieve consistent results while minimizing
risk. Five strategies are also utilized by the Fixed Income Style Group
Portfolio Managers to meet this objective.
Sector Spread Anomalies: When sectors of the bond market are over or
under valued, the allocation in the portfolios is adjusted accordingly. Such
decisions are made based on a sound analysis of historical bond values as well
as a review of current market conditions and its impact on future values.
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<PAGE>
Yield Curve Anomalies: Unusual shapes in the yield curve or the degree
of steepness in the yield curve provide opportunities to outperform fixed income
indices. Such opportunities are reviewed by our specialists for return
enhancement under a variety of possible interest rate shifts before they are
implemented.
Coupon/Quality Opportunities: High or low coupon securities may
represent investment value based on supply and demand conditions for bonds.
There are also times when upgrading or downgrading of the credit quality of a
bond can enhance a portfolio's return. Funds hold lower quality bonds only when
the expected reward is substantial compared to the potential risks, and credit
analysis supports the conclusion that the credit quality is stable or improving.
Security Analysis: A full staff of credit analysts is dedicated to
supporting fixed income credit decisions. This staff gains additional support
from a substantial equity research team when analyzing bonds from corporate
issuers.
Duration Management: The duration (price volatility of a bond in
relation to interest rate movements) of the portfolios may be altered by 10%
shorter or longer than the portfolios normal benchmark. Changes in duration are
made infrequently and only when they are supported by economic expectations and
an assessment of value.
A final portfolio consists of securities that have been selected by the
Fixed Income Style Group Portfolio Managers, in-house industry specialists and
expert Wall Street sources all working together.
NationsBank Growth Equity Style. The Capital Growth and Emerging Growth
Funds are managed by the Adviser using the NationsBank Growth Equity style. The
NationsBank Growth Equity Style investment philosophy seeks companies with
superior growth prospects selling at reasonable prices that, over time, should
outperform the market.
Emphasis is placed on a "value adjusted for growth" stock selection
process. Essential to this style is the Adviser's belief that absolute valuation
does not capture the powerful effects of inflation. Therefore, relative
price/earnings ranges of stocks going back 5 years are examined rather than
static absolute price/earnings ratio.
Inflation causes the market price/earnings ratio of a stock to expand
or contract. Investors are willing to pay a higher price for stock in a company
in periods of low inflation. The inverse is also true. The premium paid for
growth will increase as inflation declines and decreases as inflation rises.
The stock selection process begins with a universe of financially
strong companies. The selection process selects companies with a market
capitalization greater than $500 million (large, established companies) and a
strong price momentum (growth in share price over the last 18 months).
This results in a universe of approximately 750 companies.
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<PAGE>
These 750 companies are the universe from which the Adviser's industry
specialists make their final decision for inclusion in an investment portfolio.
In accordance with the Growth Equity Style, portfolio managers focus on those
stocks among the universe with the lowest price/earnings ratio and are in
industries with above average earnings growth potential. The final portfolio of
stocks is then constructed by our Growth Equity Group Senior Portfolio Managers
who work closely with the in-house industry specialists, as well as expert Wall
Street sources.
In summary, the Growth Equity Style seeks to produce a diverse
portfolio of large capitalization growth stocks, that over time, should
outperform the market.
NationsBank Value Equity Style. The Value Fund is managed by the
Adviser using the NationsBank Value Equity Style. The Value Equity Style
investment philosophy is premised on the belief that a well diversified
portfolio of undervalued companies exhibiting low price/earnings ratios will
over time outperform the market while incurring lower than market risk.
This style utilizes a "bottom-up" approach to stock selection, focusing
on well proven factors of fundamental valuation. A low price/earnings ratio and
above market dividend yield are two of the biases which reduce market risk. A
catalyst for earnings improvement is also one of this Style's requirements as it
assists with the "timing" of the purchase of a particular company.
Stock selection process begins with a team of 10 in-house research
specialists aided by a computerized screening model. Starting with approximately
a 2,000 company universe, stocks must first pass a rigorous screening process
that selects only those companies that possess strong financial quality and a
market capitalization greater than $500 million. This results in a universe of
approximately 900 companies, representing all of the 54 major U.S. industries
and approximately 10 economic sectors.
A more sophisticated screening process is then applied to the 900
company universe. The companies are then ranked based on the following factor
weightings:
The top one-third, or approximately 300 companies, result in the final
universe from which the industry specialists make initial selections for a Fund.
To insure adherence to the discipline, price objectives (buy and sell prices)
are set for each company purchased, based on sound fundamental analysis. A final
diversified portfolio of approximately 65 issues is constructed by the Value
Equity Style Group Senior Portfolio Managers working closely with in-house
industry specialists, as well as expert Wall Street sources.
In summary, the low price/earnings ratio, value discipline seeks to
produce a well diversified portfolio of high quality companies, that over time,
should outperform the market, thereby adding value while incurring below-market
risk.
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<PAGE>
NationsBank Balanced Asset Style. The Nations Balanced Assets Fund is
managed by the Adviser using the NationsBank Balanced Assets Style. The
NationsBank Balanced Asset Style investment philosophy is premised on the belief
that a diversified portfolio of stocks, fixed income, and money market
securities will provide total investment return through a combination of growth
of capital and current income consistent with preservation of capital.
In order to pursue this goal, the Balanced Asset Style utilizes an
asset allocation approach. Asset allocation is a process of allocating a
portfolio's market value among major asset classes (equities, fixed income, and
cash equivalents). Different asset classes have unique return and risk
characteristics. The principle behind asset allocations is that a diversified
portfolio of equities, fixed income, and cash equivalents with different
return/risk characteristics will reduce overall portfolio risk in both up and
down markets.
The asset allocation process begins by making projections for stock,
bond and cash returns and risk profiles. A computer data analysis identifies the
highest expected return and measures it against the minimum return requirements
for the balanced strategy. Recommendations are made to an Investment Policy
Committee who reviews and approves asset class allocations.
The stock, bond and asset allocation recommendations are then passed
onto the Balanced Asset Group Senior Portfolio Managers who make the final
investment decisions. The Portfolio Managers have the ability to change the
portfolio's holdings to take advantage of changing market conditions, while
seeking an optimal balance of income, stability, and growth. Most stock
investments will be made in companies with above average earnings and dividend
prospects and overall financial market stability. All bond purchases will be
investment grade or above. Cash instruments will provide liquidity.
In summary, the Balanced Asset Style should provide total investment
return through a combination of growth of capital and current income consistent
with preservation of capital.
NationsBank Disciplined Equity Style. The Nations Disciplined Equity
Fund is managed by the Adviser using the NationsBank Disciplined Equity Style.
The NationsBank Disciplined Equity Style investment philosophy seeks to identify
companies which offer future near-term earnings momentum.
The Adviser pursues this investment philosophy through the use of a
proprietary computerized tracking system (the "Alpha Model") which monitors the
earnings per share estimates of approximately 3,000 Wall Street analysts, and
through conventional security analysis. In utilizing the computerized tracking
system, the Adviser identifies companies with respect to which there has been a
change in the consensus analyst estimate of earnings per share. The Adviser
believes that such a change often signifies the beginning of a trend for the
company, rather than an isolated
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<PAGE>
occurrence, and that such trend ultimately will be reflected in the share price
of the company. The Adviser then buys or sells stocks for the Fund based on the
results of this analysis.
In selecting stocks pursuant to the NationsBank Disciplined Equity
Style, the Adviser also uses conventional security analysis techniques. Starting
with a universe of approximately 2,000 companies with large market
capitalizations, the Adviser eliminates stocks that have relatively low trading
activity, as well as stocks of companies of poor credit quality and those which,
in the opinion of the Adviser, are overpriced. From the available pool of stocks
that meet all of the criteria, approximately 40 to 50 are selected for inclusion
in the Fund's portfolio.
The Adviser strives to keep the assets of the Fund fully invested at
all times, except as required to meet expected liquidity needs.
Administrator and Co-Administrator
Stephens Inc. (the "Administrator") as administrator of the Trust and
First Data Investor Services, Inc. serves as the co-administrator of the Trust
(the "Co-Administrator").
The Administrator and Co-Administrator serve under an administration
agreement ("Administration Agreement") and co-administration agreement
("Co-Administration Agreement"), respectively, each of which was approved by the
Board of Trustees on August 4, 1993. The Administrator receives, as compensation
for its services rendered under the Administration Agreement and as agent for
the Co-Administrator for the services it provides under the Co-Administration
Agreement, an administrative fee, computed daily and paid monthly, at the annual
rate of 0.10% of the average daily net assets of each Fund.
Pursuant to the Administration Agreement, the Administrator 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 of Trustees 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) coordinate the provision of
services to the Trust by the Co-Administrator, the Transfer Agents and the
Custodian, and (vii) generally assist in all aspects of the Trust's operations.
Additionally, the Administrator is authorized to receive, as agent for the
Co-Administrator, the fees payable to the Co-Administrator by the Trust for its
services rendered under the Co-Administration Agreement. The Administrator bears
all expenses incurred in connection with the performance of its services.
87
<PAGE>
Pursuant to the Co-Administration Agreement, the Co-Administrator 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. The Co-Administrator bears all expenses incurred in
connection with the performance of its services.
The Administration Agreement and the Co-Administration Agreement may be
terminated by a vote of a majority of the Board of Trustees, or by the
Administrator or Co-Administrator, respectively, on 60 days' written notice
without penalty. The Administration Agreement and Co-Administration Agreement
are not assignable without the written consent of the other party. Furthermore,
the Administration Agreement and the Co-Administration Agreement provide that
the Administrator and Co-Administrator, respectively, shall not be liable to the
Funds or to their shareholders except in the case of the Administrator's or
Co-Administrator's, respectively, willful misfeasance, bad faith, gross
negligence or reckless disregard of duty.
The table set forth on the following page states the net administration
fees paid and the administration fees waived for the fiscal period ended March
31, 1996 and for the fiscal years ended November 30, 1995 and 1994 (where
applicable).
Administration Fees
<TABLE>
<CAPTION>
FY 1996 FY 1995 FY 1994
---------------------- ---------------------- --------------------
Net Fees Fees Net Fees Fees Net Fees Fees
Paid Waived Paid Waived Paid Waived
<S> <C> <C> <C> <C> <C> <C>
Nations Government Money $139,341.00 $19,949.00 $368,833 $139,379 $119,102 $70,972
Market Fund
Nations Tax Exempt Fund 409,267.00 $52,641.00 791,074 347,743 864,933 81,883
Nations Value Fund 374,444.00 0.00 951,938 0 866,305 12,070
Nations Capital Growth 300,466.00 0.00 825,136 0 664,272 53,278
Fund
Nations Emerging Growth 103,626.00 0.00 244,941 0 159,098 12,760
Fund
Nations Disciplined 45,211.00 0.00 53,136 0 5,026 414
Equity Fund
Nations Equity Index Fund 53,838.00 0.00 127,288 0 94,857 12,305
Nations Balanced Assets 78,711.00 0.00 213,630 0 222,852 17,874
Fund
Nations Short-Intermediate
Government Fund 167,287.00 0.00 503,568 0 591,720 47,459
Nations Short-Term Income 65,025.00 0.00 185,278 0 225,440 18,081
Fund
Nations Diversified 57,340.00 0.00 80,883 0 77,134 6,187
Income Fund
Nations Strategic Fixed 280,486.00 0.00 623,321 0 513,885 411,216
Income
</TABLE>
88
<TABLE>
<CAPTION>
FY 1996 FY 1995 FY 1994
---------------------- ---------------------- --------------------
Net Fees Fees Net Fees Fees Net Fees Fees
Paid Waived Paid Waived Paid Waived
<S> <C> <C> <C> <C> <C> <C>
Fund
Nations Municipal Income 38,622.00 0.00 79,205 28,128 114,802 9,208
Fund
Nations Short-Term
Municipal
Income Fund 22,543.00 0.00 41,135 17,261 26,208 15,857
Nations Intermediate
Municipal
Bond Fund 26,938.00 0.00 48,857 18,605 14,603 22,058
Nations Florida
Intermediate
Municipal Bond Fund 17,482.00 0.00 36,717 12,708 47,598 3,818
Nations Georgia
Intermediate
Municipal Bond Fund 19,615.00 0.00 41,646 14,573 51,400 4,122
Nations Maryland
Intermediate
Municipal Bond Fund 30,556.00 0.00 63,726 22,366 88,663 7,112
Nations North Carolina
Intermediate Municipal
Bond
Fund 12,879.00 0.00 26,465 9,257 28,281 2,268
Nations South Carolina
Intermediate Municipal 23,528.00 0.00 70,495 2,931 83,775 6,719
Bond Fund
Nations Tennessee
Intermediate
Municipal Bond Fund 6,298.00 0.00 12,193 4,383 16,481 1,322
Nations Texas Intermediate
Municipal Bond Fund $10,422.00 $0.00 $20,979 $7,337 $32,717 $2,624
Nations Virginia
Intermediate
Municipal Bond Fund 82,317.00 0.00 240,312 10,264 275,016 22,058
Nations Florida Municipal
Bond Fund 13,127.00 0.00 23,746 9,126 14,712 9,995
Nations Georgia Municipal
Bond Fund 4,989.00 0.00 8,688 3,408 4,780 4,089
Nations Maryland Municipal
Bond Fund 4,576.00 0.00 6,434 2,815 2,124 1,817
Nations North Carolina
Municipal
Bond Fund 10,514.00 0.00 21,537 7,614 13,262 8,288
Nations South Carolina
Municipal
Bond Fund 5,476.00 0.00 8,881 3,573 4,113 3,518
Nations Tennessee
Municipal
Bond Fund 2,598 0.00 4,816 1,812 3,001 1,828
Nations Texas Municipal
Bond
Fund 5,852 0.00 11,093 4,168 6,454 5,522
Nations Virginia Municipal
Bond Fund 6,812 0.00 12,592 4,700 6,580 5,629
</TABLE>
89
<PAGE>
As discussed under the caption "Expenses," the Administrator will be
required to reduce its fee from the Trust, in direct proportion to the fees
payable to the Adviser and the Administrator by the Trust, if the expenses of
the Trust exceed the applicable expense limitation of any state in which the
Funds' shares are registered or qualified for sale.
Custodian and Transfer Agent
NationsBank of Texas, N.A., serves as custodian for the fund securities
and cash of each Fund. As custodian, NationsBank of Texas, N.A., maintains
custody of such 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. For such services, NationsBank of Texas, N.A., is entitled
to receive, in addition to out-of-pocket expenses, fees, payable monthly (i) at
the rate of 1.25% of 1% of the amortized cost value of the Money Market Funds'
investments and the average daily net assets of each Non-Money Market Fund, (ii)
$10.00 per repurchase collateral transaction by each Fund, and (iii) $15.00 per
purchase, sale and maturity transaction involving each Fund. NationsBank of
Texas, N.A. is a wholly owned subsidiary of NationsBank Corp.
First Data Investor Services Group, Inc. ("First Data"), a wholly owned
subsidiary of First Data Corporation, which is located at One Exchange Place,
Boston, Massachusetts 02109, acts as transfer agent for the Trust's Shares.
Under the transfer agency agreements, the transfer agent maintains the
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. NationsBank of Texas, N.A., 901 Main
Street, Dallas, Texas 75201, serves as sub-transfer agent for each Fund's
Primary A and Primary B Shares.
Shareholder Servicing Agreements (Primary B Shares Only)
As stated in the Prospectuses for the Primary Shares, the Trust has a
Shareholder Servicing Plan with respect to the Primary B Shares for each of the
Funds except the Value Fund, Capital Growth Fund, Emerging Growth Fund,
Disciplined Equity Fund, Equity Index Fund, Balanced Assets Fund,
Short-Intermediate Government Fund, Short-Term Income Fund, Diversified Income
Fund and Strategic Fixed Income Fund. Pursuant to the Shareholder Servicing
Plan, the Trust has entered into agreements with certain banks pertaining to the
provision of administrative services to their customers who may from time to
time own of record or beneficially Primary B Shares ("Customers") in
consideration for the payment of up to 0.25% (on
90
<PAGE>
an annualized basis) of the average daily net asset value of such shares. Such
services may include: (i) aggregating and processing purchase, exchange and
redemption requests for shares from Customers and transmitting promptly net
purchase and redemption orders with the Distributor or the transfer agents; (ii)
providing Customers with a service that invests the assets of their accounts in
shares pursuant to specific or pre-authorized instructions; (iii) processing
dividend and distribution payments from the Funds on behalf of Customers; (iv)
providing information periodically to Customers including information showing
their position in shares; (v) responding to Customer inquiries concerning their
investment in shares; (vi) providing sub-accounting with respect to shares
beneficially owned by Customers or the information necessary for sub-accounting;
(vii) 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; (viii) forwarding to
Customers proxy statements and proxies containing any proposals regarding the
Shareholder Servicing Agreements or Shareholder Services Plan; (ix) arranging
for bank wires; (x) providing general shareholder liaison services; and (xi)
providing such other similar services as may reasonably be requested to the
extent permitted under applicable statutes, rules or regulations.
Shareholder Administration Plan (Primary B Shares Only)
As stated in the Prospectus describing the Primary B Shares of the Value
Fund, Capital Growth Fund, Emerging Growth Fund, Disciplined Equity Fund, Equity
Index Fund, Balanced Assets Fund, Short-Intermediate Government Fund, Short-Term
Income Fund, Diversified Income Fund and Strategic Fixed Income Fund, the Trust
has a separate Shareholder Administration Plan (the "Administration Plan") with
respect to such shares. Pursuant to the Administration Plan, the Trust may enter
into agreements ("Administration Agreements") with broker/dealers, banks and
other financial institutions that are dealers of record or holders of record or
which have a servicing relationship with the beneficial owners of Non-Money
Market Fund Primary B Shares ("Servicing Agents"). The Administration Plan
provides that pursuant to the Administration Agreements, Servicing Agents shall
provide the shareholder support services as set forth therein to their customers
who may from time to time own of record or beneficially Primary B Shares in
consideration for the payment of up to 0.60% (on an annualized basis) of the net
asset value of such shares. Such services may include: (i) aggregating and
processing purchase, exchange and redemption requests for Primary B Shares from
Customers and transmitting promptly net purchase and redemption orders with the
Distributor or the transfer agents; (ii) providing Customers with a service that
invests the assets of their accounts in Primary B Shares pursuant to specific or
pre-authorized instructions; (iii) processing dividend and distribution payments
from the Trust on behalf of Customers; (iv) providing information periodically
to Customers showing their positions in Primary B Shares; (v) arranging for bank
wires; (vi) responding to Customer inquiries concerning their investment in
Primary B Shares; (vii) providing sub-accounting with respect to Primary B
Shares beneficially owned by Customers or the information necessary for
sub-accounting; (viii) if required by law, forwarding shareholder communications
(such as
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<PAGE>
proxies, shareholder reports annual and semi-annual financial statements and
dividend, distribution and tax notices) to Customers; (ix) forwarding to
Customers proxy statements and proxies containing any proposals regarding an
Administration Agreement; (x) employee benefit plan recordkeeping,
administration, custody and trustee services; (xi) general shareholder liaison
services and (xii) providing such other similar services as may reasonably be
requested to the extent permitted under applicable statutes, rules, or
regulations.
The Administration Plan also provides that in no event may the portion of
the shareholder administration fee that constitutes a "service fee," as the term
is defined in NASD Service Plan Rule, exceed 0.25% of the average daily net
asset value of the Primary B Shares of the relevant Funds. In addition, to the
extent any portion of the fees payable under the Plan is deemed to be for
services primarily intended to result in the sale of Fund shares, such fees are
deemed approved and may be paid under the Administration Plan. Accordingly, the
Administration Plan has been approved and will be operated pursuant to Rule
12b-1 under the 1940 Act. Such plan shall continue in effect as long as the
Board of Trustees, including a majority of the Qualified Trustees, specifically
approves the plan at least annually.
Distribution Plans and Shareholder Servicing Arrangements for Investor Shares
Investor A Shares. The Trust has adopted an Amended and Restated
Shareholder Servicing and Distribution Plan (the "Investor A Plan") pursuant to
Rule 12b-1 under the 1940 Act with respect to the Investor A Shares of the
Funds. The Investor A Plan provides that each Fund may pay the Distributor or
banks, broker/dealers or other financial institutions that offer shares of the
Fund and that have entered into a Sales Support Agreement with the Distributor
("Selling Agents") or a Shareholder Servicing Agreement with Nations Fund Trust
("Servicing Agents"), up to 0.10% (on an annualized basis) of the average daily
net asset value of Investor A Shares of the Money Market Funds and up to 0.25%
(on an annualized basis) of the average daily net asset value of the Non-Money
Market Funds.
Such payments may be made to (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) Selling Agents that have
entered into a Sales Support Agreement with the Distributor for providing sales
support assistance in connection with the sale of Investor A Shares. The sales
support assistance provided by a Selling Agent under a Sales Support Agreement
may include forwarding sales literature and advertising provided by Nations Fund
Trust or the Distributor to their customers and providing such other sales
support assistance as may be requested by the Distributor from time to time.
Currently, substantially all fees paid by the Money Market Funds pursuant to the
Investor A Plan are paid to compensate Selling Agents for providing sales
support
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<PAGE>
services, with any remaining amounts being used by the Distributor to partially
defray other expenses incurred by the Distributor in distributing Investor A
Shares.
Payments under the Investor A Plan by each Non-Money Market Fund
(except the Short-Term Income Fund and the Short-Term Municipal Income Fund)
also may be made to Servicing Agents that have entered into a Shareholder
Servicing Agreement with Nations Fund Trust for providing shareholder support
services to their Customers which hold of record or beneficially Investor A
Shares of a Non-Money Market Fund. Such shareholder support services provided by
Servicing Agents to holders of Investor A Shares of such Funds may include (i)
aggregating and processing purchase and redemption requests for Investor A
Shares from their Customers and transmitting promptly net purchase and
redemption orders to our distributor or transfer agent; (ii) providing their
Customers with a service that invests the assets of their accounts in Investor A
Shares pursuant to specific or pre-authorized instructions; (iii) processing
dividend and distribution payments from Nations Fund Trust on behalf of their
Customers; (iv) providing information periodically to their Customers showing
their positions in Investor A Shares; (v) arranging for bank wires; (vi)
responding to their Customers' inquiries concerning their investment in Investor
A Shares; (vii) providing subaccounting with respect to Investor A Shares
beneficially owned by their Customers or the information to us necessary for
subaccounting; (viii) if required by law, forwarding shareholder communications
from Nations Fund Trust (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
their Customers; (ix) forwarding to their Customers proxy statements and proxies
containing any proposals regarding the Shareholder Servicing Agreement; (x)
providing general shareholder liaison services; and (xi) providing such other
similar services as Nations Fund Trust may reasonably request to the extent the
Selling Agent is permitted to do so under applicable statutes, rules or
regulations. The Money Market Funds, the Short-Term Income Fund and the
Short-Term Municipal Income Fund may not pay for personal services and/or the
maintenance of shareholder accounts, as such terms are interpreted by the NASD,
under the Investor A Plan.
Expenses incurred by the Distributor pursuant to the Investor A Plan in
any given year may exceed the sum of the fees received under the Investor A
Plan. Any such excess may be recovered by the Distributor in future years so
long as the Investor A Plan is in effect. If the Investor A Plan were terminated
or not continued, a Fund would not be contractually obligated to pay the
Distributor for any expenses not previously reimbursed by the Fund. Fees
received by the Distributor pursuant to the Investor A Plan will not be used to
pay any interest expenses, carrying charges or other financing costs (except to
the extent permitted by the SEC) and will not be used to pay any general and
administrative expenses of the Distributor.
In addition, the Trust has adopted an Amended and Restated Shareholder
Servicing Plan for the Investor A Shares of the Money Market Funds, the
Short-Term Income Fund and the Short-Term Municipal Income Fund (the "Investor A
Servicing Plan"). Pursuant to the Investor A Servicing Plan, each such Fund may
pay banks,
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broker/dealers or other financial institutions that have entered into a
Shareholder Servicing Agreement with the Trust ("Servicing Agents") up to 0.25%
(on an annualized basis) of the average daily net asset value of the Investor A
Shares of each Fund for providing shareholder support services. Such shareholder
support services provided by Servicing Agents may include those shareholder
support services discussed above with respect to the Investor A Plan. Fees paid
pursuant to the Investor A Servicing Plan are calculated daily and paid monthly.
During the fiscal period ended March 31, 1996, the Distributor received
the following amounts from Rule 12b-1 fees, front end sales load fees and CDSC
fees in connection with Investor A Shares: $265,899, $12,473 and $0,
respectively. Of these amounts, the Distributor retained $0, $0 and $0,
respectively, and paid the balance to selling dealers.
Investor C Shares of the Non-Money Market Funds and Investor B Shares
of the Money Market Funds. As stated in the Prospectuses, the Trustees of the
Trust have approved an Amended and Restated Distribution Plan (the "Investor C/B
Plan") in accordance with Rule 12b-1 under the 1940 Act for the Investor C
Shares of the Non-Money Market Funds and Investor B Shares of Money Market
Funds. Pursuant to the Investor C/B Plan, a Fund may pay the Distributor for
certain expenses that are incurred in connection with sales support services.
Payments under the Investor C/B Plan will be calculated daily and paid monthly
at a rate set from time to time by the Board of Trustees provided that the
annual rate may not exceed 0.75% of the average daily net asset value of
Investor C Shares of a Non-Money Market Fund and 0.10% of the average daily net
asset value of Investor B Shares of a Money Market Fund. Payments to the
Distributor pursuant to the Investor C/B Plan will be used (i) to compensate
banks, other financial institutions or a securities broker/dealer that have
entered into a Sales Support Agreement with the Distributor ("Selling Agents")
for providing sales support assistance relating to Investor Shares covered by
the Plan, (ii) for promotional activities intended to result in the sale of
Investor Shares covered by the Plan such as to pay for the preparation, printing
and distribution of prospectuses to other than current shareholders, and (iii)
to compensate Selling Agents for providing sales support services with respect
to their Customers who are, from time to time, beneficial and record holders of
Investor Shares covered by the Plan. Currently, substantially all fees paid
pursuant to the Investor C/B Plan are paid to compensate Selling Agents for
providing the services described in (i) and (iii) above, with any remaining
amounts being used by the Distributor to partially defray other expenses
incurred by the Distributor in distributing Investor C Shares of a Non-Money
Market Fund and Investor B Shares of a Money Market Fund. Fees received by the
Distributor pursuant to the Investor C/B Plan will not be used to pay any
interest expenses, carrying charges or other financing costs (except to the
extent permitted by the SEC) and will not be used to pay any general and
administrative expenses of the Distributor.
Pursuant to the Investor C/B Plan, the Distributor may enter into Sales
Support Agreements with Selling Agents for providing sales support services to
their Customers who are the record or beneficial owners of Investor C/B Shares
of a Non-Money
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Market Fund and Investor B Shares of a Money Market Fund. Such Selling Agents
will be compensated at the annual rate of up to 0.75% of the average daily net
asset value of the Investor C Shares of the Non-Money Market Funds, and up to
0.10% of the average daily net asset value of the Investor B Shares of the Money
Market Funds held of record or beneficially by such Customers. The sales support
services provided by Selling Agents may include providing distribution
assistance and promotional activities intended to result in the sales of shares
such as paying for the preparation, printing and distribution of prospectuses to
other than current shareholders. Fees paid pursuant to the Investor C/B Plan are
accrued daily and paid monthly, and are charged as expenses of Shares of a Fund
as accrued. Expenses incurred by the Distributor pursuant to the Investor C/B
Plan in any given year may exceed the sum of the fees received under the
Investor C/B Plan and payments received pursuant to contingent deferred sales
charges. Any such excess may be recovered by the Distributor in future years so
long as the Investor C/B Plan is in effect. If the Investor C/B Plan were
terminated or not continued, a Fund would not be contractually obligated to pay
the Distributor for any expenses not previously reimbursed by the Fund or
recovered through contingent deferred sales charges.
In addition, the Trustees have approved an Amended and Restated
Shareholder Servicing Plan with respect to Investor C Shares of the Non-Money
Market Funds and Investor B Shares of the Money Market Funds (the "Investor C/B
Servicing Plan"). Pursuant to its Investor C/B Servicing Plan, each Fund may pay
banks, broker/dealers or other financial institutions that have entered into a
Shareholder Servicing Agreement with the Trust ("Servicing Agents") for certain
expenses that are incurred by the Servicing Agents in connection with
shareholder support services that are provided by the Servicing Agents. Payments
under a Fund's Investor C/B Servicing Plan will be calculated daily and paid
monthly at a rate set from time to time by the Board of Trustees, provided that
the annual rate may not exceed 0.25% of the average daily net asset value of
each Fund's Investor C or Investor B Shares, as appropriate. The shareholder
services provided by the Servicing Agents may include (i) aggregating and
processing purchase and redemption requests for Investor Shares covered by the
Plan from Customers and transmitting promptly net purchase and redemption orders
to our distributor or transfer agent; (ii) providing Customers with a service
that invests the assets of their accounts in Investor Shares covered by the Plan
pursuant to specific or pre-authorized instructions; (iii) processing dividend
and distribution payments from the Trust on behalf of Customers; (iv) providing
information periodically to Customers showing their positions in Investor Shares
covered by the Plan; (v) arranging for bank wires; (vi) responding to Customers'
inquiries concerning their investment in Investor Shares covered by the Plan;
(vii) providing subaccounting with respect to Investor Shares covered by the
Plan beneficially owned by Customers or providing the information to us
necessary for subaccounting; (viii) if required by law, forwarding shareholder
communications from the Trust (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
Customers; (ix) forwarding to Customers proxy statements and proxies containing
any proposals regarding the Shareholder Servicing Agreement; (x) providing
general
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shareholder liaison services; and (xi) providing such other similar services as
the Trust may reasonably request to the extent the Servicing Agent is permitted
to do so under applicable statutes, rules or regulations.
During the fiscal period ended March 31, 1996, the Distributor received
the following amounts from Rule 12b-1 fees, front end sales load fees and CDSC
fees in connection with Investor C Shares of the Non-Money Market Funds:
$226,162.84, $0 and $5,086, respectively. Of these amounts, the Distributor
retained $15,749.93, $0 and $1,394.24, respectively, and paid the balance to
selling dealers.
Daily Shares of the Money Market Funds. The Trustees have approved a
Distribution Plan (the "Daily Distribution Plan") with respect to Daily Shares
of the Money Market Funds. Pursuant to the Daily Distribution Plan, a Money
Market Fund may compensate or reimburse the Distributor for any activities or
expenses primarily intended to result in the sale of a Fund's Daily Shares,
including for sales related services provided by banks, broker/dealers or other
financial institutions that have entered into a Sales Support Agreement relating
to the Daily Shares with the Distributor ("Selling Agents"). Payments under a
Fund's Daily Distribution Plan will be calculated daily and paid monthly at a
rate or rates set from time to time by the Board of Trustees provided that the
annual rate may not exceed 0.45% of the average daily net asset value of each
Money Market Fund's Daily Shares.
The fees payable under the Daily Distribution Plan are used primarily
to compensate or reimburse the Distributor for distribution services provided by
it, and related expenses incurred, including payments by the Distributor to
compensate or reimburse Selling Agents, for sales support services provided, and
related expenses incurred, by such Selling Agents. Payments under the Daily
Distribution Plan may be made with respect to preparation, printing and
distribution of prospectuses, sales literature and advertising materials by the
Distributor or, as applicable, Selling Agents, attributable to distribution or
sales support activities, respectively, commissions, incentive compensation or
other compensation to, and expenses of, account executives or other employees of
the Distributor or Selling Agents, attributable to distribution or sales support
activities, respectively; overhead and other office expenses of the Distributor
relating to the foregoing (which may be calculated as a carrying charge in the
Distributor's or Selling Agents' unreimbursed expenses), incurred in connection
with distribution or sales support activities. The overhead and other office
expenses referenced above may include, without limitation, (i) the expenses of
operating the Distributor's or Selling Agents' offices in connection with the
sale of Fund shares, including lease costs, the salaries and employee benefit
costs of administrative, operations and support personnel, utility costs,
communication costs and the costs of stationery and supplies, (ii) the costs of
client sales seminars and travel related to distribution and sales support
activities, and (iii) other expenses relating to distribution and sales support
activities.
In addition, the Trustees have approved a Shareholder Servicing Plan
with respect to Daily Shares of the Money Market Funds (the "Daily Servicing
Plan").
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<PAGE>
Pursuant to the Daily Servicing Plan, a Fund may compensate or reimburse banks,
broker/dealers or other financial institutions that have entered into a
Shareholder Servicing Agreement with the Trust ("Servicing Agents") for certain
activities or expenses of the Servicing Agents in connection with shareholder
services that are provided by the Servicing Agents. Payments under the Daily
Servicing Plan will be calculated daily and paid monthly at a rate or rates set
from time to time by the Board of Trustees, provided that the annual rate may
not exceed 0.25% of the average daily net asset value of the Daily Shares of the
Money Market Funds.
The fees payable under the Daily Servicing Plan are used primarily to
compensate or reimburse Servicing Agents for shareholder services provided, and
related expenses incurred, by such Servicing Agents. The shareholder services
provided by Servicing Agents may include: (i) aggregating and processing
purchase and redemption requests for such Daily Shares from Customers and
transmitting promptly net purchase and redemption orders to the Distributor or
Transfer Agent; (ii) providing Customers with a service that invests the assets
of their accounts in such Daily Shares pursuant to specific or pre-authorized
instructions; (iii) processing dividend and distribution payments from the Trust
on behalf of Customers; (iv) providing information periodically to Customers
showing their positions in such Daily Shares; (v) arranging for bank wires; (vi)
responding to Customers' inquiries concerning their investment in such Daily
Shares; (vii) providing sub-accounting with respect to such Daily Shares
beneficially owned by Customers or providing the information to us necessary for
sub-accounting; (viii) if required by law, forwarding shareholder communications
from the Trust (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 Daily Servicing Plan or related agreements; (x)
providing general shareholder liaison services; and (xi) providing such other
similar services as the Trust may reasonably request to the extent such
Servicing Agent is permitted to do so under applicable statutes, rules or
regulations.
The fees payable under the Daily Distribution Plan and Daily Servicing
Plan (together, the "Daily Plans") are treated by the Funds as an expense in the
year they are accrued. At any given time, a Selling Agent and/or Servicing Agent
may incur expenses in connection with services provided pursuant to its
agreements with the Distributor under the Daily Plans which exceed the total of
(i) the payments made to the Selling Agents and Servicing Agents by the
Distributor or Nations Fund and reimbursed by the Fund pursuant to the Daily
Plans, and (ii) the proceeds of contingent deferred sales charges paid to the
Distributor and reallowed to the Selling Agent, upon the redemption of their
Customers' Daily Shares. Any such excess expenses may be recovered in future
years, so long as the Daily Plans are in effect. Because there is no requirement
under the Daily Plans that the Distributor be paid or the Selling Agents and
Servicing Agents be compensated or reimbursed for all their expenses or any
requirement that the Daily Plans be continued from year to year, such excess
amount, if any, does not constitute a liability to a Fund or the Distributor.
Although there is no legal obligation for the Fund to pay expenses incurred by
the Distributor, a Selling
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<PAGE>
Agent or a Servicing Agent in excess of payments previously made to the
Distributor under the Daily Plans or in connection with contingent deferred
sales charges, if for any reason the Daily Plans are terminated, the Trustees
will consider at that time the manner in which to treat such expenses.
During the fiscal period ended March 31, 1996, the Distributor received
the following amount from Rule 12b-1 fees in connection with Daily Shares of the
Money Market Funds: $2, all of which was paid to selling dealers.
Investor N Shares of the Non-Money Market Funds. As stated in the
Prospectuses for the Investor N Shares of the Non-Money Market Funds, the
Trustees have approved a Distribution Plan (the "Investor N Distribution Plan")
with respect to Investor N Shares of the Non-Money Market Funds. Pursuant to the
Investor N Distribution Plan, a Fund may compensate or reimburse the Distributor
for any activities or expenses primarily intended to result in the sale of the
Fund's Investor N Shares, including for sales related services provided by
banks, broker/dealers or other financial institutions that have entered into a
Sales Support Agreement relating to the Investor N Shares with the Distributor
("Selling Agents"). Payments under a Fund's Investor N Distribution Plan will be
calculated daily and paid monthly at a rate or rates set from time to time by
the Board of Trustees provided that the annual rate may not exceed 0.75% of the
average daily net asset value of each Non-Money Market Fund's Investor N Shares.
The fees payable under the Investor N Distribution Plan are used
primarily to compensate or reimburse the Distributor for distribution services
provided by it, and related expenses incurred, including payments by the
Distributor to compensate or reimburse Selling Agents, for sales support
services provided, and related expenses incurred, by such Selling Agents.
Payments under the Investor N Distribution Plan may be made with respect to
preparation, printing and distribution of prospectuses, sales literature and
advertising materials by the Distributor or, as applicable, Selling Agents,
attributable to distribution or sales support activities, respectively,
commissions, incentive compensation or other compensation to, and expenses of,
account executives or other employees of the Distributor or Selling Agents,
attributable to distribution or sales support activities, respectively; overhead
and other office expenses of the Distributor relating to the foregoing (which
may be calculated as a carrying charge in the Distributor's or Selling Agents'
unreimbursed expenses), incurred in connection with distribution or sales
support activities. The overhead and other office expenses referenced above may
include, without limitation, (i) the expenses of operating the Distributor's or
Selling Agents' offices in connection with the sale of Fund shares, including
lease costs, the salaries and employee benefit costs of administrative,
operations and support personnel, utility costs, communication costs and the
costs of stationery and supplies, (ii) the costs of client sales seminars and
travel related to distribution and sales support activities, and (iii) other
expenses relating to distribution and sales support activities.
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In addition, the Trustees have approved a Shareholder Servicing Plan
with respect to Investor N Shares of the Non-Money Market Funds and Investor C
Shares of the Money Market Funds) the "Investor N/C Servicing Plan"). Pursuant
to its Investor N/C Servicing Plan, a Fund may compensate or reimburse banks,
broker/dealers or other financial institutions that have entered into a
Shareholder Servicing Agreement with the Trust ("Servicing Agents") for certain
activities or expenses of the Servicing Agents in connection with shareholder
services that are provided by the Servicing Agents. Payments under a Fund's
Investor N/C Servicing Plan will be calculated daily and paid monthly at a rate
or rates set from time to time by the Board of Trustees, provided that the
annual rate may not exceed 0.25% of the average daily net asset value of the
Fund's Investor N or C Shares, as appropriate.
The fees payable under the Investor N/C Servicing Plan are used
primarily to compensate or reimburse Servicing Agents for shareholder services
provided, and related expenses incurred, by such Servicing Agents. The
shareholder services provided by Servicing Agents may include: (i) aggregating
and processing purchase and redemption requests for Investor N and C Shares from
Customers and transmitting promptly net purchase and redemption orders to the
Distributor or Transfer Agent; (ii) providing Customers with a service that
invests the assets of their accounts in Investor N or C Shares pursuant to
specific or pre-authorized instructions; (iii) processing dividend and
distribution payments from the Trust on behalf of Customers; (iv) providing
information periodically to Customers showing their positions in Investor N or C
Shares; (v) arranging for bank wires; (vi) responding to Customers' inquiries
concerning their investment in Investor N or C Shares; (vii) providing
sub-accounting with respect to Investor C Shares beneficially owned by Customers
or providing the information to us necessary for sub-accounting; (viii) if
required by law, forwarding shareholder communications from the Trust (such as
proxies, shareholder reports, annual and semi-annual financial statements and
dividend, distribution and tax notices) to Customers; (ix) forwarding to
Customers proxy statements and proxies containing any proposals regarding the
Investor N or C Servicing Plan or related agreements; (x) providing general
shareholder liaison services; and (xi) providing such other similar services as
the Trust may reasonably request to the extent such Servicing Agent is permitted
to do so under applicable statutes, rules or regulations.
The fees payable under the Investor C Distribution Plan and Investor
N/C Servicing Plan (together, the "Investor N/C Plans") are treated by the Funds
as an expense in the year they are accrued. At any given time, a Selling Agent
and/or Servicing Agent may incur expenses in connection with services provided
pursuant to its agreements with the Distributor under the Investor N/C Plans
which exceed the total of (i) the payments made to the Selling Agents and
Servicing Agents by the Distributor or Nations Fund and reimbursed by the Fund
pursuant to the Investor N/C Plans, and (ii) the proceeds of contingent deferred
sales charges paid to the Distributor and reallowed to the Selling Agent, upon
the redemption of their Customers' Investor N Shares. Any such excess expenses
may be recovered in future years, so long as the Investor N/C Plans are in
effect.
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Because there is no requirement under the Investor N/C Plans that the
Distributor be paid or the Selling Agents and Servicing Agents be compensated or
reimbursed for all their expenses or any requirement that the Investor N/C Plans
be continued from year to year, such excess amount, if any, does not constitute
a liability to a Fund or the Distributor. Although there is no legal obligation
for the Fund to pay expenses incurred by the Distributor, a Selling Agent or a
Servicing Agent in excess of payments previously made to the Distributor under
the Investor N/C Plans or in connection with contingent deferred sales charges,
if for any reason the Investor N/C Plans are terminated, the Trustees will
consider at that time and manner in which to treat such expenses.
During the fiscal period ended March 31, 1996, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor N Shares of the Non-Money Market Funds: $939,081 and $558,076,
respectively. Of these amounts, the Distributor retained $ 0 and $0,
respectively, and paid the balance to selling dealers.
Information Applicable to Investor A, Investor B, Investor C Shares,
Daily and Investor N Shares. The Investor A Plan, the Investor A Servicing Plan,
the Investor C/B Plan, the Investor C/B Servicing Plan, the Investor C Plan and
the Investor N/C Servicing Plan (each a "Plan" and collectively the "Plans") may
only be used for the purposes specified above and as stated in each such Plan.
Compensation payable to Selling Agents or Servicing Agents for shareholder
support services under the Investor A Plan, the Investor A Servicing Plan, the
Investor C/B Servicing Plan and the Investor N/C Servicing Plan is subject to,
among other things, the National Association of Securities Dealers, Inc.
("NASD") Rules of Fair Practice governing receipt by NASD members of servicing
fees from registered investment companies (the "NASD Service Fee Rule"), which
became effective on July 7, 1993. Such compensation shall only be paid for
services determined to be permissible under the NASD Service Fee Rule.
Each Plan requires the officers of the Trust to provide the Board of
Trustees at least quarterly with a written report of the amounts expended
pursuant to the Plan and the purposes for which such expenditures were made. The
Board of Trustees reviews these reports in connection with their decisions with
respect to the Plans.
As required by Rule 12b-1 under the 1940 Act, each Plan was approved by
the Board of Trustees, including a majority of the 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 the Plan or in any
agreements related to the Plan ("Qualified Trustees") on June 24, 1992, with
respect to the Investor A Shares of each Fund except the Intermediate Municipal
Bond Fund and the Tennessee Intermediate Municipal Bond Fund; on March 19, 1992
with respect to the Investor C Shares (formerly Investor B Shares) of the Value
Fund, Short-Intermediate Government Fund, Municipal Income Fund, Georgia
Intermediate Municipal Bond Fund, Maryland Intermediate Municipal Bond Fund,
South Carolina Intermediate Municipal Bond Fund
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and Virginia Intermediate Municipal Bond Fund; on June 24, 1992 with respect to
the Investor C Shares (formerly Investor B Shares) of the Capital Growth Fund,
Emerging Growth Fund, Balanced Assets Fund, Short-Term Income Fund, Diversified
Income Fund, Strategic Fixed Income Fund, Florida Intermediate Municipal Bond
Fund, and North Carolina Intermediate Municipal Bond Fund and Texas Intermediate
Municipal Bond Fund; on February 3, 1993, with respect to the Investor A and
Investor C Shares (formerly Investor B Shares) of the Intermediate Municipal
Bond Fund and the Tennessee Intermediate Municipal Bond Fund; on February 3,
1993, with respect to the Investor B Shares of the Government Money Market Fund
and the Tax Exempt Fund; and on February 3, 1993, with respect to the Investor N
Shares (formerly Investor C Shares) of each Non-Money Market Fund. On August 4,
1993, the Board of Trustees approved the Investor N/C Servicing Plan with
respect to the Money Market Funds. On February 2, 1994, the Board of Trustees
approved the Primary B Servicing Plan, Investor A Plan, Investor C/B Plan,
Investor C/B Servicing Plan, Investor C Plan and Investor N/C Servicing Plan
with respect to the Disciplined Equity Fund.
In approving the Plans in accordance with the requirements of Rule
12b-1, the Trustees considered various factors and determined that there is a
reasonable likelihood that each Plan will benefit the respective Investor A,
Investor B, Investor C Shares or Investor N Shares and the holders of such
shares. The Plans were approved by the Investor A Shares of the Government Money
Market Fund, Tax Exempt Fund, Value Fund, Short-Intermediate Government Fund,
Municipal Income Fund, Georgia Intermediate Municipal Bond Fund, South Carolina
Intermediate Municipal Bond Fund and Virginia Intermediate Municipal Bond Fund
on September 22, 1992. The Plans applicable to Investor A and Investor C Shares
(formerly Investor B Shares) of the Capital Growth Fund, Emerging Growth Fund,
Balanced Assets Fund, Short-Term Income Fund, Diversified Income Fund, Strategic
Fixed Income Fund, North Carolina Intermediate Municipal Bond Fund, and Florida
Intermediate Municipal Bond Fund were approved by the initial shareholders of
each such Fund's Investor A Shares and Investor C Shares and will be submitted
to each Fund's relevant shareholders for approval at a later date. The Plans
applicable to the Investor C Shares (formerly Investor B Shares) of the Value
Fund, Short-Intermediate Government Fund, Municipal Income Fund, Georgia
Intermediate Municipal Bond Fund, Maryland Intermediate Municipal Bond Fund,
South Carolina Intermediate Municipal Bond Fund and Virginia Intermediate
Municipal Bond Fund were approved by each such Fund's initial shareholder of
Investor C Shares and by each Fund's shareholders on September 22, 1992. The
Plans applicable to the Investor A Shares of the Intermediate Municipal Bond
Fund, the Texas Intermediate Municipal Bond Fund and the Tennessee Intermediate
Municipal Bond Fund were approved by such Funds' initial shareholder of Investor
A Shares. The Plans applicable to the Investor N Shares (formerly Investor C
Shares) of each Non-Money Market Fund were approved by each Fund's initial
shareholder of Investor N Shares.
All Plans shall continue in effect as long as such continuance is
specifically approved at least annually by the Board of Trustees, including a
majority of qualified Trustees. On November 6, 1993, the Board of Trustees
considered the Plans for all
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Funds (except the Special Equity Fund) and voted to continue such Plans for an
additional one-year period.
The Investor A Plan, the Investor C/B Plan and the Investor C Plan may
be terminated with respect to Investor A, Investor C/B or Investor C Shares by
vote of a majority of the Qualified Trustees, or by vote of a majority of the
holders of a Fund's outstanding voting securities of the Investor A, Investor
C/B or Investor C Shares. Any change in such a Plan that would increase
materially the distribution expenses paid by the Investor A, Investor B,
Investor C Shares or Investor N Shares, as appropriate, requires shareholder
approval; otherwise, each Plan may be amended by the trustees, including a
majority of the Qualified Trustees, by vote cast in person at a meeting called
for the purpose of voting upon such amendment. The Investor A Servicing Plan,
the Investor C/B Servicing Plan and the Investor N/C Servicing Plan may be
terminated by a vote of a majority of the Qualified Trustees. As long as a Plan
is in effect, the selection or nomination of the Qualified Trustees is committed
to the discretion of the Qualified Trustees.
Conflict of interest restrictions may apply to the receipt by Selling
and/or Servicing Agents of compensation from Nations Fund in connection with the
investment of fiduciary assets in Investor Shares. Selling and/or Servicing
Agents, including banks regulated by the Comptroller of the Currency, the
Federal Reserve Board, or the Federal Deposit Insurance Corporation, and
investment advisers and other money managers subject to the jurisdiction of the
SEC, the Department of Labor, or state securities commissions, are urged to
consult their legal advisers before investing such assets in Investor Shares.
Fees Paid Pursuant to Shareholder Servicing/Distribution Plans
Investor A Shares
<TABLE>
<CAPTION>
FUND
Net Net
Fees Paid (12b-1 Fees Paid (Shareholder Net
Component) Servicing Component) Fees Paid
Period ended 3/31/96 Period ended 3/31/96 FYE 11/30/95
<S> <C> <C> <C>
Government Money Market Fund $16,455.40 $41,138.51 $66,320
Tax Exempt Fund 10,736.30 96,941.24 325,609
Value Fund 42,080.39 0 100,864
Capital Growth Fund 14,002.47 0 33,996
Emerging Growth Fund 5,258.18 0 10,934
Disciplined Equity Fund 1,260.99 0 926
Equity Index Fund 0.00 0 3
Balanced Assets Fund 4,779.67 0 12,281
</TABLE>
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<TABLE>
<CAPTION>
FUND
Net Net
Fees Paid (12b-1 Fees Paid (Shareholder Net
Component) Servicing Component) Fees Paid
Period ended 3/31/96 Period ended 3/31/96 FYE 11/30/95
<S> <C> <C> <C>
Short-Intermediate Government Fund 40,480.00 0 134,526
Short-Term Income Fund 1,478.04 507.60 5,271
Diversified Income Fund 11,251.60 0 29,942
Strategic Fixed Income Fund 4,469.96 0 4,577
Municipal Income Fund 18,008.35 0 51,257
Short-Term Municipal Income Fund 1,946.00 626.41 4,237
Intermediate Municipal Bond Fund 920.48 0 1,714
Florida Intermediate Municipal Bond Fund 1,498.39 0 4,198
Georgia Intermediate Municipal Bond Fund 5,919.11 0 20,573
Maryland Intermediate Municipal Bond Fund 13,895.07 0 42,880
North Carolina Intermediate Municipal Bond Fund 5,267.95 0 17,214
South Carolina Intermediate Municipal Bond Fund 9,734.75 0 31,815
Tennessee Intermediate Municipal Bond Fund 4,998.34 0 15,683
Texas Intermediate Municipal Bond Fund 534.24 0 1,638
Virginia Intermediate Municipal Bond Fund 47,116.23 0 151,365
Florida Municipal Bond Fund 1,248.67 0 3,021
Georgia Municipal Bond Fund 4.44 0 13
Maryland Municipal Bond Fund 672.03 0 1,205
North Carolina Municipal Bond Fund 258.37 0 1,530
South Carolina Municipal Bond Fund 822.50 0 850
Tennessee Municipal Bond Fund 140.74 0 216
Texas Municipal Bond Fund 223.17 0 311
Virginia Municipal Bond Fund 437.02 0 810
</TABLE>
103
<PAGE>
Fees Paid Pursuant to Distribution Plans
Investor C Shares - Non-Money Market Funds
Investor B Shares - Money Market Funds
<TABLE>
<CAPTION>
FUND
Net
Net Fees Paid
Fees Paid (12b-1 Component) (Shareholder Net
Period ended Servicing Component) Fees Paid
3/31/96 Period ended 3/31/96 FYE 11/30/95
<S> <C> <C> <C>
Government Money Market Fund $ 0 $ 44,849.32 $53,417
Tax Exempt Fund 0 90,151.60 107,280
Value Fund 5,473.54 3,691.06 35,944
Capital Growth Fund 4,271.18 2,880.17 29,156
Emerging Growth Fund 1,034.88 696.27 6,801
Disciplined Equity Fund 375.04 249.30 1,185
Equity Index Fund 0 0 N/A
Balanced Assets Fund 1,321.25 898.11 8,359
Short-Intermediate Government Fund 13,283.36 7,730.30 70,814
Short-Term Income Fund 3,402.21 3,905.80 24,650
Diversified Income Fund 4,406.98 2,159.11 22,769
Strategic Fixed Income Fund 316.71 189.92 349
Municipal Income Fund 2,823.76 1,386.55 19,872
Short-Term Municipal Income Fund 865.61 1,146.43 2,660
Intermediate Municipal Bond Fund 586.62 434.35 662
Florida Intermediate Municipal Bond Fund 290.06 172.80 1,436
Georgia Intermediate Municipal Bond Fund 2,613.10 1,529.53 12,823
Maryland Intermediate Municipal Bond 2,972.66 1,782.66 13,177
Fund
North Carolina Intermediate Municipal 1,435.87 856.47 7,248
Bond Fund
South Carolina Intermediate Municipal Bond 5,767.95 3,425.64 28,757
Fund
Tennessee Intermediate Municipal 2.41 1.44 11
Bond Fund
Texas Intermediate Municipal Bond Fund 598.51 356.82 2,216
Virginia Intermediate Municipal Bond Fund 7,394.28 4,374.82 38,399
Florida Municipal Bond Fund 56.22 31.74 182
Georgia Municipal Bond Fund 87.35 43.25 270
Maryland Municipal Bond Fund 3.03 1.50 17
North Carolina Municipal Bond Fund 4.10 2.55 103
South Carolina Municipal Bond Fund 562.09 257.26 27
Tennessee Municipal Bond Fund 72.07 31.45 364
Texas Municipal Bond Fund 88.67 43.88 29
Virginia Municipal Bond Fund 54.24 27.16 61
</TABLE>
104
<PAGE>
NOTE: All fees paid under the Investor A and Investor C/B Shares Distribution
Plans were accrued as payments to broker/dealers and financial
institutions offering such shares to their customers.
Daily Shares - Money Market Funds
<TABLE>
<CAPTION>
Net Net Fees Paid
Fees Paid (12b-1 (Shareholder
Component) Servicing Component) FYE
Period ended 3/31/96 Period ended 3/31/96 11/30/95
FUND
<S> <C> <C> <C>
Government Money Market Fund $ 1.23 $ 1.67 $ 4
Tax Exempt Fund 1.20 1.46 2
</TABLE>
Investor C Shares - Money Market Funds
Investor N Shares - Non-Money Market Funds
<TABLE>
<CAPTION>
Net Fees Paid
Fees Paid (12b-1 (Shareholder Net
Component) Servicing Component) Fees Paid
Period ended 3/31/96 Period ended 3/31/96 FYE 11/30/95
FUND
<S> <C> <C> <C>
Government Money Market Fund $ 0.00 $ 1,895.46 $ 2,573
Tax Exempt Fund 0.00 27,500.83 43,328
Value Fund 145,275.27 72,637.63 449,537
Capital Growth Fund 101,564.48 33,854.83 314,386
Emerging Growth Fund 82,069.51 27,356.50 232,800
Disciplined Equity Fund 43,585.75 14,528.58 39,592
Nations Equity Index Fund 0.00 0.00 --
Balanced Assets Fund 110,015.94 55,007.97 421,921
Short-Intermediate Government Fund 16,952.38 12,108.84 70,600
Short-Term Income Fund 2,738.41 6,846.02 38,981
Diversified Income Fund 149,179.97 74,589.98 538,683
Strategic Fixed Income Fund 3,421.99 2,138.74 14,648
Municipal Income Fund 29,356.11 14,678.05 136,830
Short-Term Municipal Income Fund 3,998.28 9,995.69 37,488
Intermediate Municipal Bond Fund 1,239.10 1,239.10 5,868
Florida Intermediate Municipal Bond Fund 3,717.78 3,717.78 23,484
Georgia Intermediate Municipal Bond Fund 6,838.88 6,838.88 38,810
Maryland Intermediate Municipal Bond Fund 3,761.25 3,761.25 22,102
North Carolina Intermediate Municipal Bond 6,740.61 6,740.61 34,834
Fund
South Carolina Intermediate Municipal Bond 5,660.88 5,660.88 30,676
Fund
</TABLE>
105
<PAGE>
<TABLE>
<CAPTION>
Net Fees Paid
Fees Paid (12b-1 (Shareholder Net
Component) Servicing Component) Fees Paid
Period ended 3/31/96 Period ended 3/31/96 FYE 11/30/95
FUND
<S> <C> <C> <C>
Tennessee Intermediate Municipal Bond Fund $ 2,950.00 $ 2,950.00 $ 17,478
Texas Intermediate Municipal Bond Fund 2,467.32 2,467.32 15,692
Virginia Intermediate Municipal Bond Fund 10,073.97 10,073.97 55,284
Florida Municipal Bond Fund 41,713.29 20,856.65 174,654
Georgia Municipal Bond Fund 21,200.11 10,600.06 84,678
Maryland Municipal Bond Fund 16,622.75 8,311.38 52,328
North Carolina Municipal Bond Fund 49,477.85 24,738.91 207,955
South Carolina Municipal Bond Fund 21,418.47 10,709.23 80,631
Tennessee Municipal Bond Fund 11,115.33 5,557.67 46,226
Texas Municipal Bond Fund 20,606.45 10,303.22 89,464
Virginia Municipal Bond Fund 27,318.78 13,659.39 111,655
</TABLE>
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 Trust 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 Trust pursuant to Rule 12b-1 under the 1940
Act.
The Distribution Agreement will continue year to year as long as such
continuance is approved at least annually by (i) the Board of Trustees or a vote
of the majority (as defined in the 1940 Act) of the outstanding voting
securities of a Fund and (ii) a majority of the trustees who are not parties to
the Distribution Agreement or "interested persons" of any such party by a vote
cast in person at a meeting called for such purpose. The Distribution Agreement
is not assignable and is terminable with respect to a Fund, without penalty, on
60 days' notice by the Board of Trustees, the vote of a majority (as defined in
the 1940 Act) of the outstanding voting securities of a Fund, or by the
Distributor.
106
<PAGE>
INDEPENDENT ACCOUNTANT AND REPORTS
On November 28, 1992, the Board of Trustees selected Price Waterhouse
LLP, with offices at 160 Federal Street, Boston, MA 02110, to serve as
independent accountant to Nations Fund Trust for the fiscal years beginning
December 1, 1992. Certain financial information which appears in the
Prospectuses and the financial statements has been audited by the accountants.
The audited financial statements and portfolio of investments contained
in the Annual Report for the fiscal period ended March 31, 1996, are hereby
incorporated by reference in this SAI. The Annual Reports will be sent free of
charge with this SAI to any shareholder who requests this SAI.
COUNSEL
Morrison & Foerster LLP, 2000 Pennsylvania Avenue, N.W., Suite 5500,
Washington, D.C. 20006-1812, is counsel to the Trust.
ADDITIONAL INFORMATION ON PERFORMANCE
From time to time, the yield and total return of a Fund's Investor
Shares and Primary Shares may be quoted in advertisements, shareholder reports,
and other communications to shareholders. Performance information is available
by calling 1-800-321-7854 with respect to Investor Shares and 1-800-621-2192
with respect to Primary Shares.
Yield Calculations
Money Market Funds. The "yield" and "effective yield" of Primary A,
Primary B, Investor A, Investor B, Investor C and Daily Shares of each Money
Market Fund are computed separately as described in the Prospectuses according
to formulas prescribed by the SEC. The standardized seven-day yield is computed
by determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account in the particular Fund involved having a
balance of one share of the class or series involved at the beginning of the
period, dividing the net change in account value by the value of the account at
the beginning of the base period to obtain the base period return, and
multiplying the base period return by (365/7). The net change in the value of an
account in each Fund includes the value of additional shares purchased with
dividends from the original share, and dividends declared on both the original
share and any such additional shares; and all fees, other than nonrecurring
account or sales charges, that are charged to shareholder accounts in proportion
to the length of the
107
<PAGE>
base period and the Fund's average account size. The capital changes to be
excluded from the calculation of the net change in account value are realized
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The effective annualized yield for a class or series of shares in
a Fund is computed by compounding the unannualized base period return
(calculated as above) by adding 1 to the base period return, raising the sum to
a power equal to 365 divided by 7, and subtracting 1 from the result.
In addition, the "tax-equivalent yield" of the Primary A, Primary B,
Investor A, Investor B, Investor C and Daily Shares of the Tax Exempt Fund is
computed by: (a) dividing the portion of the yield that is exempt from Federal
income tax by one minus a stated Federal income tax rate; and (b) adding the
figure resulting from (a) above to that portion, if any, of the yield that is
not exempt from Federal income tax.
The current yield for each class or series of shares may be obtained by
calling the Trust at the telephone number provided on the cover page.
Seven Day Yield For the Period Ended 3/31/96
<TABLE>
<CAPTION>
Effective Tax
Yield Yield Tax Equivalent
Nations Government Without Effective Without Equivalent Yield Without
Money Market Fund Yield Fee Waivers Yield Fee Waivers Yield Fee Waivers
----- ------------ --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Primary A Shares 4.97% 4.68% 5.09% 4.80% N/A N/A
Primary B Shares 4.72% 4.43% 4.83% 4.54% N/A N/A
Investor A Shares 4.62% 4.33% 4.72% 4.43% N/A N/A
Investor B Shares 4.72% 4.43% 4.83% 4.54% N/A N/A
Investor C Shares 4.72% 4.43% 4.83% 4.54% N/A N/A
Daily Shares 4.39% 4.10% 4.48% 4.19% N/A N/A
Nations Tax Exempt
Fund
Primary A Shares 3.40% 3.13% 3.45% 3.18% 4.93% 4.54%
Primary B Shares 3.15% 2.88% 3.19% 2.92% 4.57% 4.17%
Investor A Shares 3.15% 2.88% 3.19% 2.92% 4.57% 4.17%
Investor B Shares 3.20% 2.93% 3.25% 2.98% 4.64% 4.25%
Investor C Shares 3.25% 2.98% 3.30% 3.03% 4.71% 4.32%
Daily Shares 2.74% 2.47% 2.77% 2.50% 3.97% 3.58%
</TABLE>
Non-Money Market Funds. Yield is calculated separately for the Investor
A, Investor C, Investor N, Primary A and Primary B Shares of a Non-Money Market
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
and Primary B Shares, maximum offering price per share is the same as the net
asset value per share) and annualizing the result on a semi-annual basis by
adding one to the quotient, raising the sum to the power of six, subtracting one
from the result and then doubling the
108
<PAGE>
difference. For a class or series of shares in a Fund, net investment income per
share earned during the period is based on the average daily number of shares
outstanding during the period entitled to receive dividends and includes
dividends and interest earned during the period minus expenses accrued for the
period, net of reimbursements. This calculation can be expressed as follows:
Yield = 2 [(a-b+ 1)6 - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = maximum offering price per share on the last day
of the period (again, for Primary A and Primary B
Shares, this is equivalent to net asset value per
share).
For the purpose of determining net investment income earned during the
period (variable- "a" in the formula), dividend income on equity securities held
by a Fund is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is in the portfolio. Each Fund calculates
interest earned on any debt obligations held in its portfolio by computing the
yield to maturity of each obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest) and dividing
the result by 360 and multiplying the quotient by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. For purposes of this calculation, it is assumed
that each month contains 30 days. The maturity of an obligation with a call
provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. With respect to debt
obligations purchased at a discount or premium, the formula generally calls for
amortization of the discount or premium. The amortization schedule will be
adjusted monthly to reflect changes in the market values of such debt
obligations. The 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.
109
<PAGE>
Expenses accrued for the period (variable "b" in the formula) include
recurring fees charged by Nations Fund 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 Investor A, Investor C or Investor
N Shares. These may be calculated based on the Investor A, Investor C or
Investor N Shares' net asset values per share (rather than their maximum
offering prices) on the last day of the period covered by the yield
computations. That is, some communications provided to the holders of Investor
A, Investor C or Investor N Shares may also include additional yield
calculations prepared for the holders of Primary A or Primary B Shares. Such
additional quotations, therefore, will not reflect the effect of the sales
charges mentioned above.
Investor A Shares Only. Based on the foregoing calculations, the yield,
taking into account fee waivers and/or expense reimbursements, and the yield
without fee waivers and/or expense reimbursements for the 30-day period ended
March 31, 1996 were as follows:
Thirty Day Yield For The Period Ended 3/31/96
<TABLE>
<CAPTION>
Tax
Yield Tax Equivalent
Without Equivalent Yield Without
Yield Fee Waivers Yield Fee Waivers
<S> <C> <C> <C> <C>
Short-Intermediate
Government Fund
Primary A Shares 5.36% 5.15% N/A N/A
Investor A Shares 5.16% 4.92% N/A N/A
Investor C Shares 4.86% 4.17% N/A N/A
Investor N Shares 4.76% 4.17% N/A N/A
Short-Term Income Fund
Primary A Shares 5.60% 5.35% N/A N/A
Investor A Shares 5.40% 4.83% N/A N/A
Investor C Shares 5.25% 4.33% N/A N/A
Investor N Shares 5.25% 4.33% N/A N/A
Diversified Income Fund
Primary A Shares 7.00% 6.96% N/A N/A
Investor A Shares 6.75% 6.65% N/A N/A
110
<PAGE>
Investor C Shares 6.49% 6.14% N/A N/A
Investor N Shares 6.24% 5.89% N/A N/A
Strategic Fixed Income Fund
Primary A Shares 5.56% 5.50% N/A N/A
Investor A Shares 5.35% 5.27% N/A N/A
Investor C Shares 5.05% 4.52% N/A N/A
Investor N Shares 4.90% 4.52% N/A N/A
Nations Municipal Income Fund
Primary A Shares 5.21% 4.96% 7.55% 7.19%
Investor A Shares 5.01% 4.71% 7.26% 6.83%
Investor C Shares 4.70% 4.20% 6.81% 6.09%
Investor N Shares 4.45% 3.95% 6.45% 5.72%
Nations Short-Term Municipal
Income Fund
- ------------
Primary A Shares 3.80% 3.54% 5.51% 5.13%
Investor A Shares 3.60% 3.05% 5.22% 4.42%
Investor C Shares 3.45% 2.45% 5.00% 3.55%
Investor N Shares 3.45% 2.55% 5.00% 3.70%
Nations Intermediate
Municipal Bond Fund
- -------------------
Primary A Shares 4.56% 4.30% 6.61% 6.23%
Investor A Shares 4.35% 4.05% 6.30% 5.87%
Investor C Shares 4.05% 3.30% 5.87% 4.78%
Investor N Shares 4.05% 3.30% 5.87% 4.78%
Nations Florida Intermediate
Municipal Bond Fund
- -------------------
Primary A Shares 4.38% 4.19% 6.35% 6.07%
Investor A Shares 4.18% 3.95% 6.06% 5.72%
Investor C Shares 3.88% 3.20% 5.62% 4.64%
Investor N Shares 3.88% 3.20% 5.62% 4.64%
Nations Georgia Intermediate
Municipal Bond Fund
- -------------------
Primary A Shares 4.36% 4.17% 6.92% 6.62%
Investor A Shares 4.16% 3.93% 6.60% 6.24%
Investor C Shares 3.85% 3.17% 6.11% 5.03%
Investor N Shares 3.85% 3.17% 6.11% 5.03%
111
<PAGE>
Nations Maryland Intermediate
Municipal Bond Fund
- -------------------
Primary A Shares 4.15% 3.96% 6.48% 6.19%
Investor A Shares 3.95% 3.72% 6.17% 5.81%
Investor C Shares 3.65% 2.97% 5.70% 4.64%
Investor N Shares 3.65% 2.97% 5.70% 4.64%
Nations North Carolina
Intermediate Municipal Bond Fund
- --------------------------------
Primary A Shares 4.32% 4.16% 6.97% 6.71%
Investor A Shares 4.12% 3.87% 6.65% 6.24%
Investor C Shares 3.81% 3.11% 6.15% 5.02%
Investor N Shares 3.81% 3.11% 6.15% 5.02%
Nations South Carolina
Intermediate Municipal Bond Fund
- --------------------------------
Primary A Shares 4.56% 4.36% 7.35% 7.03%
Investor A Shares 4.36% 4.12% 7.03% 6.65%
Investor C Shares 4.06% 3.37% 6.55% 5.44%
Investor N Shares 4.06% 3.37% 6.55% 5.44%
Nations Tennessee Intermediate
Municipal Bond Fund
- -------------------
Primary A Shares 4.35% 4.19% 6.90% 6.65%
Investor A Shares 4.15% 3.90% 6.59% 6.19%
Investor C Shares 3.89% 3.19% 6.17% 5.06%
Investor N Shares 3.85% 3.15% 6.11% 5.00%
Nations Texas Intermediate
Municipal Bond Fund
- -------------------
Primary A Shares 4.37% 4.21% 6.33% 6.10%
Investor A Shares 4.17% 3.92% 6.04% 5.68%
Investor C Shares 3.87% 3.17% 5.61% 4.59%
Investor N Shares 3.87% 3.17% 5.61% 4.59%
Nations Virginia Intermediate
Municipal Bond Fund
- -------------------
Primary A Shares 4.14% 3.89% 6.55% 6.15%
Investor A Shares 3.94% 3.65% 6.23% 5.77%
Investor C Shares 3.64% 2.90% 5.75% 4.58%
Investor N Shares 3.64% 2.90% 5.75% 4.58%
112
<PAGE>
Nations Florida Municipal
Bond Fund
Primary A Shares 5.04% 4.58% 7.30% 6.64%
Investor A Shares 4.83% 4.33% 7.00% 6.28%
Investor C Shares 4.53% 3.83% 6.57% 5.55%
Investor N Shares 4.28% 3.58% 6.20% 5.19%
Nations Georgia Municipal
Bond Fund
Primary A Shares 5.05% 4.59% 8.02% 7.29%
Investor A Shares 4.83% 4.33% 7.67% 6.87%
Investor C Shares 4.55% 3.85% 7.22% 6.11%
Investor N Shares 4.30% 3.60% 6.83% 5.71%
Nations Maryland Municipal
Bond Fund
- ---------
Primary A Shares 4.80% 4.34% 7.50% 6.78%
Investor A Shares 4.60% 4.10% 7.19% 6.41%
Investor C Shares 4.32% 3.62% 6.75% 5.66%
Investor N Shares 4.04% 3.34% 6.31% 5.22%
Nations North Carolina
Municipal Bond Fund
- -------------------
Primary A Shares 4.91% 4.45% 8.02% 7.27%
Investor A Shares 4.71% 4.21% 7.69% 6.87%
Investor C Shares 4.42% 3.72% 7.22% 6.07%
Investor N Shares 4.16% 3.46% 6.79% 5.65%
Nations South Carolina
Municipal Bond Fund
- -------------------
Primary A Shares 5.00% 4.54% 8.06% 7.32%
Investor A Shares 4.80% 4.30% 7.74% 6.94%
Investor C Shares 4.50% 3.80% 7.26% 6.13%
Investor N Shares 4.25% 3.55% 6.85% 5.73%
Nations Tennessee
Municipal Bond Fund
- -------------------
Primary A Shares 4.85% 4.39% 7.70% 6.97%
Investor A Shares 4.65% 4.15% 7.38% 6.59%
Investor C Shares 4.34% 3.64% 6.89% 5.78%
Investor N Shares 4.10% 3.40% 6.51% 5.40%
113
<PAGE>
Nations Texas
Municipal Bond Fund
- -------------------
Primary A Shares 4.87% 4.41% 7.06% 6.39%
Investor A Shares 4.67% 4.17% 6.77% 6.04%
Investor C Shares 4.37% 3.67% 6.33% 5.32%
Investor N Shares 4.12% 3.42% 5.97% 4.96%
Nations Virginia
Municipal Bond Fund
- -------------------
Primary A Shares 5.14% 4.68% 8.13% 7.40%
Investor A Shares 4.94% 4.44% 7.81% 7.02%
Investor C Shares 4.63% 3.93% 7.32% 6.21%
Investor N Shares 4.38% 3.68% 6.92% 5.82%
</TABLE>
The "tax-equivalent" yield is computed by: (a) dividing the portion of the yield
(calculated as above) that is exempt from Federal income tax by (b) one minus
(i) a stated Federal income tax rate, and, for the State Intermediate Municipal
Bond Funds, (ii) a state income tax rate. The Federal income tax rate used in
calculating the "tax-equivalent" yield was 31%. The state income tax rate used
in calculating the "tax-equivalent" yield of the State Intermediate Municipal
Bond Funds was as follows: Florida --0%;; Georgia --6%; Maryland --5%; North
Carolina --7.75%; South Carolina --7%; Tennessee 6%; Texas --0%; and Virginia
- --5.75%.
Hypothetical examples showing the level of taxable yield needed to produce
on after-tax equivalent to an assumed tax-free yield may be provided to
shareholders. Provided below are such illustrations:
For the Georgia Intermediate Municipal Bond fund and Georgia Municipal
Bond Fund:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Single Return $24,000-$58,150 $58,150-$121,300 $121,300-$263,750
Joint Return $40,100-$96,900 $96,900-$147,700 $147,700-$263,750
</TABLE>
To match a
tax-free
yield of: A taxable investment would have to pay you:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
4% 6.06% 6.35% 6.90%
5% 7.58% 7.94% 8.62%
6% 9.09% 9.52% 10.34%
7% 10.60% 11.11% 12.07%
8% 12.12% 12.70% 13.79%
</TABLE>
The tax-free yields used here are hypothetical and no assurance can be made that
the Funds will obtain any particular yield. A fund's yield fluctuates as market
conditions change. The tax
114
<PAGE>
brackets and the related yield calculations are based on the 1996 Federal (28%,
31%, 36%) and Georgia (6%) tax rates and assume a Federal tax benefit for the
state and local taxes. Note the highest 1996 effective Federal tax rate may be
higher than 36% due to the phase-out of allowable itemized deductions and
personal exemptions for certain taxpayers. This schedule does not take into
account the 39.6% Federal surtax imposed on certain high-income taxpayers.
For the Maryland Intermediate Municipal Bond Fund and Maryland Municipal Bond
Fund:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Single Return $24,000-$58,150 $58,150-$121,300 $121,300-$263,750
Joint Return $40,100-$96,900 $96,900-$147,700 $147,700-$263,750
</TABLE>
To match a
tax-free
yield of: A taxable investment would have to pay you:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
4% 6.20% 6.50% 7.08%
5% 7.75% 8.13% 8.85%
6% 9.30% 9.76% 10.62%
7% 10.85% 11.38% 12.39%
8% 12.40% 13.01% 14.16%
</TABLE>
The tax-free yields used here are hypothetical and no assurance can be made that
the Funds will obtain any particular yield. A fund's yield fluctuates as market
conditions change. The tax brackets and the related yield calculations are based
on the 1996 Federal (28%, 31%, 36%), Maryland (5%) and local county (2.5%) tax
rates and assume a Federal tax benefit for the state and local taxes. Note the
highest 1996 effective Federal tax rate may be higher than 36% due to the
phase-out of allowable itemized deductions and personal exemptions for certain
taxpayers. This schedule does not take into account the 39.6% Federal surtax
imposed on certain high-income taxpayers.
For the North Carolina Intermediate Municipal Bond Fund and North Carolina
Municipal Bond Fund:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Single Return $24,000-$58,150 $58,150-$60,000 $60,000-$121,300 $121,300-$263,750
(28%, 7%) (31%, 7%) (31%, 7.75%) (36%, 7.75%)
Joint Return $40,100-$96,900 $96,900-$100,000 $100,000-$147,700 $147,700-$263,750
(28%, 7%) (31%,7%) (31%, 7.75%) (36%, 7.75%)
</TABLE>
115
<PAGE>
To match a
tax-free
yield of: A taxable investment would have to pay you:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
4% 6.15% 6.45% 6.53% 7.11%
5% 7.69% 8.06% 8.16% 8.99%
6% 9.23% 9.68% 9.80% 10.67%
7% 10.77% 11.29% 11.43% 12.44%
8% 12.31% 12.90% 13.06% 14.22%
</TABLE>
The tax-free yields used here are hypothetical and no assurance can be made that
the Funds will obtain any particular yield. A fund's yield fluctuates as market
conditions change. The tax brackets and the related yield calculations are based
on the 1995 Federal (28%, 31% 36%) and North Carolina (7%, 7.75%) tax rates and
assume a Federal tax benefit for the state and local taxes. Note that the
highest 1995 effective Federal tax rate may be higher than 36% due to the
phase-out of allowable itemized deductions and personal exemptions for certain
taxpayers. This schedule does not take into account the 39.6% Federal surtax
imposed on certain high-income taxpayers.
For the South Carolina Intermediate Municipal Bond Fund and South Carolina
Municipal Bond Fund:
Single Return $24,000-$58,150 $58,150-$121,300 $121,300-$263,750
(28%, 7%) (31%, 7%) (36%, 7%)
Joint Return $40,100-$96,900 $ 96,900-$147,700 $147,700-$263,750
(28%, 7%) (31%, 7%) (36%, 7%)
To match a
tax-free
yield of: A taxable investment would have to pay you:
116
<PAGE>
4% 6.15% 6.45% 7.02%
5% 7.69% 8.06% 8.77%
6% 9.23% 9.68% 10.53%
7% 10.77% 11.29% 12.28%
8% 12.31% 12.90% 14.04%
The tax-free yields used here are hypothetical and no assurance can be made that
the Funds will obtain any particular yield. A fund's yield fluctuates as market
conditions change. The tax brackets and the related yield calculations are based
on the 1995 Federal (28%, 31%, 36%) and South Carolina (7%) tax rates and assume
a Federal tax benefit for the state and local taxes. Note that the highest 1995
effective Federal tax rate may be higher than 36% due to the phase-out of
allowable itemized deductions and personal exemptions for certain taxpayers.
This schedule does not take into account the 39.6% Federal surtax imposed on
certain high-income taxpayers.
For the Tennessee Intermediate Municipal Bond Fund and Tennessee Municipal Bond
Fund:
Single Return $24,000-$58,150 $58,150-$121,300 $121,300-$263,750
(28%, 6%) (31%, 6%) (36%, 6%)
Joint Return $40,100-$96,900 $96,900-$147,700 $147,700-$263,750
(28%, 6%) (31%, 6%) (36%, 6%)
117
<PAGE>
To match a
tax-free
yield of: A taxable investment would have to pay you:
4% 6.06% 6.35% 6.90%
5% 7.58% 7.94% 8.62%
6% 9.09% 9.52% 10.34%
7% 10.61% 11.11% 12.07%
8% 12.12% 12.70% 13.79%
The tax-free yields used here are hypothetical and no assurance can be made that
the Funds will obtain any particular yield. A fund's yield fluctuates as market
conditions change. The tax brackets and the related yield calculations are based
on the 1995 Federal (28%, 31%, 36%) and Tennessee (6%) tax rates and assume a
Federal tax benefit for the state and local taxes. Note that the highest 1995
effective Federal tax rate may be higher than 36% due to the phase-out of
allowable itemized deductions and personal exemptions for certain taxpayers.
This schedule does not take into account the 39.6% Federal surtax imposed on
certain high-income taxpayers.
For the Virginia Intermediate Municipal Bond Fund and Virginia Municipal Bond
Fund:
Single Return $24,000-$58,150 $58,150-$121,300 $121,300-$263,750
(28%, 5.75%) (31%, 5.75%) (36%, 5.75%)
Joint Return $40,100-$96,900 $96,900-$147,700 $147,700-$263,750
(28%, 5.75%) (31%, 5.75%) (36%, 5.75%)
To match a
tax-free
yield of: A taxable investment would have to pay you:
4% 6.04% 6.32% 6.87%
5% 7.55% 7.91% 8.58%
6% 9.06% 9.49% 10.30%
118
<PAGE>
7% 10.57% 11.07% 12.02%
8% 12.08% 12.65% 13.73%
The tax-free yields used here are hypothetical and no assurance can be made that
the Funds will obtain any particular yield. A fund's yield fluctuates as market
conditions change. The tax brackets and the related yield calculations are based
on the 1995 Federal (28%, 31%, 36%) and Virginia (5.75%) tax rates and assume a
Federal tax benefit for the state and local taxes. Note that the highest 1995
effective Federal tax rate may be higher than 36% due to the phase-out of
allowable itemized deductions and personal exemptions for certain taxpayers.
This schedule does not take into account the 39.6% Federal surtax imposed on
certain high-income taxpayers.
For the Municipal Income Fund, Short-Term Municipal Income Fund, the
Intermediate Municipal Bond Fund, the Florida Intermediate Municipal Bond Fund,
Florida Municipal Bond Fund, the Texas Intermediate Municipal Bond Fund and
Texas Municipal Bond Fund:
Single Return $24,000-$58,150 $58,150-$121,300 $121,300-$263,750
(28%) (31%) (36%)
Joint Return $40,100-$96,900 $ 96,900-$147,700 $147,700-$263,750
(28%) (31%) (36%)
To match a
tax-free
yield of: A taxable investment would have to pay you:
4% 5.56% 5.80% 6.25%
5% 6.94% 7.25% 7.81%
6% 8.33% 8.70% 9.38%
7% 9.72% 10.14% 10.94%
8% 11.11% 11.59% 12.50%
The tax-free yields used here are hypothetical and no assurance can be made that
the Funds will obtain any particular yield. A fund's yield fluctuates as market
conditions change. The tax brackets and the related yield calculations are based
on the 1995 Federal (28%, 31%, 36%) tax rates. This analysis does not take into
account any state or local taxes imposed, although, with
119
respect to the Florida Intermediate Municipal Bond Fund, the Florida Municipal
Bond Fund, the Texas Intermediate Municipal Bond Fund and the Texas Municipal
Bond Fund, neither Florida nor Texas impose a personal income tax. Note that
the highest 1995 effective Federal tax rate may be higher than 36% due to
the phase-out of allowable itemized deductions and personal exemptions for
certain taxpayers. This schedule does not take into account the 39.6% Federal
surtax imposed on certain high-income taxpayers.
There can be no assurance that all of a yield quoted by one of these Funds
will be tax-free since these Funds may invest in short-term taxable obligations
for temporary defensive periods as described in the Prospectuses. Also, the
above hypothetical examples are for illustration only. Tax laws and regulations
may be changed at any time by legislative or administrative actions and such
changes may make the information contained in such examples obsolete.
Total Return Calculations
Each Non-Money Market Fund computes its average annual total return for
Investor A, Investor C, Investor N, Primary A and Primary B Shares separately by
determining the average annual compounded rates of return during specified
periods that equate the initial amount invested to the ending redeemable value
of such investment. This is done by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
T = [(ERV)1/n - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the
end of the period covered by
the computation of a
hypothetical $1,000 payment
made at the beginning of the
period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed
in terms of years.
The Funds compute their aggregate total returns for Investor A, Investor
C, Investor N, Primary A and Primary B Shares separately by determining the
aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
T = [(ERV) - 1]
P
The calculations of average annual total return and aggregate total return
assume the reinvestment of all dividends and capital gain distributions on the
reinvestment dates during the period. The ending redeemable value (variable
"ERV" in each formula) is determined by assuming complete redemption of the
hypothetical investment and the deduction of all
120
<PAGE>
nonrecurring charges at the end of the period covered by the computations. The
Funds' average annual total return and aggregate total return quotations for
Primary A, Investor A, Investor C and Investor N Shares reflect the deduction
of the maximum sales charge charged (if applicable) with respect to the
applicable class of shares in connection with the purchase of these shares.
The Funds may also provide, in conjunction with such quotations for Primary
A, Investor A, Investor C and Investor N Shares, additional quotations that
do not reflect the maximum sales charge when the quotations are being provided
to investors who are subject to waiver of or reduction in the sales charges
described in the Investor Shares Prospectuses.
Based on the foregoing calculations, the Fund's average annual total
return for all classes of shares were as follows for the periods indicated:
<TABLE>
<CAPTION>
Average Annual Total Return
5-year Inception
FYE period ending through 3/31/96
3/31/96 3/31/96
<S> <C> <C> <C>
Nations Value Fund
Primary A Shares 30.81% 13.95% 13.39%
Investor A Shares 30.41% 13.77% 13.66%
Investor C Shares 29.15% N/A 14.94%
Investor N Shares 29.82% N/A 15.44%
Nations Capital Growth Fund
Primary A Shares 26.51% N/A 13.23%
Investor A Shares 26.25% N/A 12.97%
Investor C Shares 24.87% N/A 12.12%
Investor N Shares 25.36% N/A 13.15%
Nations Emerging Growth Fund
Primary A Shares 34.67% N/A 16.28%
Investor A Shares 34.35% N/A 16.52%
Investor C Shares 33.01% N/A 15.77%
Investor N Shares 33.36% N/A 18.81%
Nations Disciplined Equity Fund
Primary A Shares 30.95% N/A 24.52%
Invest A Shares 30.73% N/A 14.28%
Investor C Shares N/A N/A N/A
Investor N Shares 29.66% N/A 17.59%
Nations Equity Index Fund
Primary A Shares 31.62% N/A 18.21%
Investor A Shares N/A N/A N/A
Nations Balanced Assets Fund
Primary A Shares 23.43% N/A 11.08%
Investor A Shares 23.28% N/A 10.84%
Investor C Shares 22.02% N/A 10.03%
Investor N Shares 22.60% N/A 10.16%
</TABLE>
121
<PAGE>
<TABLE>
<CAPTION>
5-year Inception
FYE period ending through 3/31/96
3/31/96 3/31/96
<S> <C> <C> <C>
Nations Short-Intermediate Government Fund
Primary A Shares 7.36% N/A 6.78%
Investor A Shares 7.15% N/A 6.64%
Investor C Shares 6.33% N/A 4.63%
Investor N Shares 6.71% N/A 3.65%
Nations Short-Term Income Fund
Primary A Shares 8.11% N/A 5.09%
Investor A Shares 7.92% N/A 4.82%
Investor C Shares 7.21% N/A 4.61%
Investor N Shares 7.74% N/A 4.78%
Nations Diversified Income Fund
Primary A Shares 11.21% N/A 9.17%
Investor A Shares 10.94% N/A 8.91%
Investor C Shares 9.95% N/A 8.57%
Investor N Shares 10.38% N/A 6.35%
Nations Strategic Fixed Income Fund
Primary A Shares 9.38% N/A 6.58%
Investor A Shares 9.16% N/A 6.38%
Investor C Shares 8.32% N/A 6.01%
Investor N Shares 8.67% N/A 4.58%
Nations Municipal Income Fund
Primary A Shares 8.91% 8.04% 7.94%
Investor A Shares 8.70% 7.89% 7.80%
Investor C Shares 7.67% N/A 6.41%
Investor N Shares 8.10% N/A 4.60%
Nations Short-Term Municipal Income Fund
Primary A Shares 5.72% N/A 4.09%
Investor A Shares 5.51% N/A 4.02%
Investor C Shares 4.93% N/A 4.91%
Investor N Shares 5.35% N/A 3.73%
Nations Intermediate Municipal Bond Fund
Primary A Shares 7.62% N/A 4.91%
Investor A Shares 7.42% N/A 4.34%
Investor C Shares 6.51% N/A 9.77%
Investor N Shares 7.08% N/A 3.89%
Nations Florida Intermediate Municipal Bond Fund
Primary A Shares 7.21% N/A 6.06%
Investor A Shares 6.99% N/A 5.91%
Investor C Shares 6.17% N/A 5.48%
Investor N Shares 6.67% N/A 4.60%
</TABLE>
122
<PAGE>
<TABLE>
<CAPTION>
5-year Inception
FYE period ending through 3/31/96
3/31/96 3/31/96
<S> <C> <C> <C>
Nations Georgia Intermediate Municipal Bond Fund
Primary A Shares 7.21% N/A 6.62%
Investor A Shares 7.00% N/A 6.54%
Investor C Shares 6.18% N/A 5.73%
Investor N Shares 6.68% N/A 4.37%
Nations Maryland Intermediate Municipal Bond Fund
Primary A Shares 7.24% 6.58% 7.06%
Investor A Shares 7.03% 6.43% 6.93%
Investor C Shares 6.20% N/A 5.24%.
Investor N Shares 6.70% N/A 4.30%
Nations North Carolina Intermediate Municipal
Bond Fund
Primary A Shares 6.99% N/A 5.79%
Investor A Shares 6.78% N/A 5.58%
Investor C Shares 5.96% N/A 5.19%
Investor N Shares 6.46% N/A 4.34%
Nations South Carolina Intermediate Municipal
Bond Fund
Primary A Shares 7.18% N/A 6.31%
Investor A Shares 6.97% N/A 6.29%
Investor C Shares 6.15% N/A 5.62%
Investor N Shares 6.65% N/A 4.58%
Nations Tennessee Intermediate Municipal Bond Fund
Primary A Shares 7.19% N/A 4.83%
Investor A Shares 6.97% N/A 4.82%
Investor C Shares 6.15% N/A 9.74%
Investor N Shares 6.65% N/A 4.39%
Nations Texas Intermediate Municipal Bond Fund
Primary A Shares 6.84% N/A 5.39%
Investor A Shares 6.63% N/A 4.70%
Investor C Shares 5.81% N/A 9.22%
Investor N Shares 6.31% N/A 4.00%
Nations Virginia Intermediate Municipal Bond Fund
Primary A Shares 7.21% 6.45% 6.68%
Investor A Shares 6.99% 6.31% 6.55%
Investor C Shares 6.17% N/A 5.22%
Investor N Shares 6.67% N/A 4.18%
</TABLE>
123
<PAGE>
<TABLE>
<CAPTION>
5-year Inception
FYE period ending through 3/31/96
3/31/96 3/31/96
<S> <C> <C> <C>
Nations Florida Municipal Bond Fund
Primary A Shares 8.08% N/A 3.46%
Investor A Shares 7.87% N/A 2.99%
Investor C Shares 6.84% N/A 13.44%
Investor N Shares 7.28% N/A 2.44%
Nations Georgia Municipal Bond Fund
Primary A Shares 8.64% N/A 3.01%
Investor A Shares 8.24% N/A 2.95%
Investor C Shares 7.41% N/A 13.69%
Investor N Shares 7.84% N/A 2.52%
Nations Maryland Municipal Bond Fund
Primary A Shares 7.94% N/A 9.09%
Investor A Shares 7.72% N/A 3.39%
Investor C Shares 6.67% N/A 12.74%
Investor N Shares 7.13% N/A 1.94%
Nations North Carolina Municipal Bond Fund
Primary A Shares 8.24% N/A 2.83%
Investor A Shares 8.02% N/A 3.22%
Investor C Shares 7.00% N/A 13.73%
Investor N Shares 7.44% N/A 2.50%
Nations South Carolina Municipal Bond Fund
Primary A Shares 8.58% N/A 4.40%
Investor A Shares 8.36% N/A 4.92%
Investor C Shares 7.28% N/A 13.46%
Investor N Shares 7.77% N/A 3.75%
Nations Tennessee Municipal Bond Fund
Primary A Shares 8.71% N/A 6.09%
Investor A Shares 8.49% N/A 4.50%
Investor C Shares 7.47% N/A 13.79%
Investor N Shares 7.90% N/A 3.38%
Nations Texas Municipal Bond Fund
Primary A Shares 8.97% N/A 3.01%
Investor A Shares 8.75% N/A 3.34%
Investor C Shares 7.69% N/A 13.65%
Investor N Shares 8.16% N/A 2.51%
Nations Virginia Municipal Bond Fund
Primary A Shares 8.55% N/A 2.64%
Investor A Shares 8.32% N/A 3.33%
Investor C Shares 7.29% N/A 13.59%
Investor N Shares 7.73% N/A 2.08%
</TABLE>
124
<PAGE>
Based on the foregoing calculations, the Funds' aggregate total returns
for all classes of shares were as follows for the periods indicated:
<TABLE>
<CAPTION>
Aggregate Annual Total Return
-----------------------------------------------------------------------------------------------
5-Year period 5-Year period Inception Inception
FYE FYE ending ending through through
3/31/96 3/31/96 3/31/96 3/31/96 3/31/96 3/31/96
Without Including Without Including Without Including
Sales Sales Sales Sales Sales Sales
Charges Charges Charges Charges Charges Charges
<S> <C> <C> <C> <C> <C> <C>
Nations Value Fund
Primary A Shares 30.81% N/A 92.13$ ?% 127.24% N/A
Investor A Shares 30.41% N/A 90.58% ?% 124.50% N/A
Investor C Share 29.65% 29.15% N/A N/A 69.44% N/A
Investor N Shares 29.82% N/A N/A N/A 49.79% N/A
Nations Capital Growth Fund
Primary A Shares 26.51% N/A N/A N/A 54.49% N/A
Investor A Shares 26.25% N/A N/A N/A 53.12% 40.09%
Investor C Shares 25.37% 24.87% N/A N/A 49.17% 45.02%
Investor N Shares 25.36% N/A N/A N/A 41.57% 34.76%
Nations Emerging Growth Fund
Primary A Shares 34.67% N/A N/A N/A 65.08% N/A
Investor A Shares 34.35% NA/ N/A N/A 65.81% N/A
Investor C Shares 33.51% 33.01% N/A N/A 61.76% N/A
Investor N Shares 33.36% N/A N/A N/A 62.41% N/A
Nations Disciplined Equity Fund
Primary A Shares 30.95% N/A N/A N/A 115.29% N/A
Investor A Shares 30.73% N/A N/A N/A 43.00% N/A
Investor C Shares N/A N/A N/A N/A 23.43% 22.93%
Investor N Shares 29.66% N/A N/A N/A 35.24% N/A
Nations Equity Index Fund
Primary A Shares 31.62% N/A N/A N/A 46.77% N/A
Investor A Shares N/A N/A N/A N/A 12.67% N/A
Nations Balanced Assets Funds
Primary A Shares 23.43% N/A N/A N/A 44.43% N/A
Investor A Shares 23.28% N/A N/A N/A 43.27% N/A
Investor C Shares 22.52% 22.02% N/A N/A 39.67% N/A
Investor N Shares 22.60% N/A N/A N/A 31.29% N/A
Nations Short-Intermediate
Government Fund
Primary A Shares 7.36% N/A N/A N/A 35.80% N/A
Investor A Shares 7.15% N/A N/A N/A 34.85% N/A
Investor C Shares 6.83% 6.33% N/A N/A 18.70% N/A
Investor N Shares 6.71% N/A N/A N/A 10.61% N/A
Nations Short-Term Income Fund
Primary A Shares 8.11% N/A N/A N/A 18.99% N/A
Investor A Shares 7.92% N/A N/A N/A 17.90% N/A
Investor C. Shares 7.71% 7.21% N/A N/A 17.07% N/A
Investor N Shares 7.74% N/A N/A N/A 14.05% N/A
Nations Diversified Income Fund
Primary A Shares 11.21% N/A N/A N/A 34.97% N/A
Investor A Shares 10.94% N/A N/A N/A 33.05% N/A
Investor C Shares 10.45% 9.95% N/A N/A 32.17% N/A
Investor N Shares 10.38% N/A N/A N/A 18.91% N/A
</TABLE>
125
<PAGE>
<TABLE>
<CAPTION>
Aggregate Annual Total Return
------------------------------------------------------------------------------------------------
5-Year period 5-Year period Inception Inception
FYE FYE ended ended through through
11/30/95 11/30/95 11/30/95 11/30/95 11/30/95 11/30/95
Without Including Without Including Without Including
Sales Sales Sales Sales Sales Sales
Charges Charges Charges Charges Charges Charges
<S> <C> <C> <C> <C> <C> <C>
Nations Strategic Fixed Income
Fund
Primary A Shares 9.38% N/A N/A N/A 24.36% N/A
Investor A Shares 9.16% N/A N/A N/A 23.13% N/A
Investor C Shares 8.82% 8.32% N/A N/A 21.74% N/A
Investor N Shares 8.67% N/A N/A N/A 13.42% N/A
Nations Municipal Income Fund
Primary A Shares 8.91% N/A 47.20% ?% 48.39% N/A
Investor A Shares 8.70% N/A 46.20% ?% 47.38% N/A
Investor C Shares 8.17% 7.67% N/A N/A 26.51% N/A
Investor N Shares 8.10% N/A N/A N/A 13.48% N/A
Nations Short-Term Municipal
Income Fund
Primary A Shares 5.72% N/A N/A N/A 10.45% N/A
Investor A Shares 5.51% N/A N/A N/A 9.97% N/A
Investor C Shares 5.43% 4.93% N/A N/A 9.36% N/A
Investor N Shares 5.35% N/A N/A N/A 9.47% N/A
Nations Intermediate Municipal
Bond Fund
Primary A Shares 7.62% N/A N/A N/A 13.64% N/A
Investor A Shares 7.42% N/A N/A N/A 11.78% N/A
Investor C Shares 7.01% 6.51% N/A N/A 14.03% N/A
Investor N Shares 7.08% N/A N/A N/A 9.30% N/A
Nations Florida Intermediate
Municipal Bond Fund
Primary A Shares 7.21% N/A N/A N/A 21.45% N/A
Investor A Shares 6.99% N/A N/A N/A 20.84% N/A
Investor C Shares 6.67% 6.17% N/A N/A 19.19% N/A
Investor N Shares 6.67% N/A N/A N/A 13.50% N/A
Nations Georgia Intermediate
Municipal Bond Fund
Primary A Shares 7.21% N/A N/A N/A 28.89% N/A
Investor A Shares 7.00% N/A N/A N/A 28.09% N/A
Investor C Shares 6.68% 6.18% N/A N/A 23.48% N/A
Investor N Shares 6.68% N/A N/A N/A 12.78% N/A
Nations Maryland Intermediate
Municipal Bond Fund
Primary A Shares 7.24% N/A 37.52% ?% 46.36% N/A
Investor A Shares 7.03% N/A 36.59$ ?% 45.38% N/A
Investor C Shares 6.70% 6.20% N/A N/A 21.32 N/A
Investor N Shares 6.70% N/A N/A N/A 12.55% N/A
Nations North Carolina
Intermediate Municipal Bond Fund
Primary A Shares 6.99% N/A N/A N/A 20.44% N/A
Investor A Shares 6.78% N/A N/A N/A 19.60% N/A
Investor C Shares 6.46 5.96% N/A N/A 18.11 N/A
Investor N Shares 6.46% N/A N/A N/A 12.71% N/A
Nations South Carolina
Intermediate Municipal Bond Fund
Primary A Shares 7.18% N/A N/A N/A 29.55% N/A
Investor A Shares 6.97% N/A N/A N/A 26.87% N/A
Investor C Shares 6.65% 6.15% N/A N/A 22.99% N/A
Investor N Shares 6.65% N/A N/A N/A 13.42% N/A
</TABLE>
126
<PAGE>
<TABLE>
<CAPTION>
Aggregate Annual Total Return
------------------------------------------------------------------------------------------------
5-Year period 5-Year period Inception Inception
FYE FYE ended ended through through
11/30/95 11/30/95 11/30/95 11/30/95 11/30/95 11/30/95
Without Including Without Including Without Including
Sales Sales Sales Sales Sales Sales
Charges Charges Charges Charges Charges Charges
<S> <C> <C> <C> <C> <C> <C>
Nations Tennessee Intermediate
Municipal Bond Fund
Primary A Shares 7.19% N/A N/A N/A 14.99% N/A
Investor A Shares 6.97% N/A N/A N/A 15.14% N/A
Investor C Shares 6.65% 6.15% N/A N/A 13.99$% N/A
Investor N Shares 6.65% N/A N/A N/A 12.82% N/A
Nations Texas Intermediate
Municipal Bond Fund
Primary A Shares 6.84% N/A N/A N/A 18.40% N/A
Investor A Shares 6.63% N/A N/A N/A 15.60% N/A
Investor C Shares 6.31% 5.81% N/A N/A 13.23% N/A
Investor N Shares 6.31% N/A N/A N/A 11.48% N/A
Nations Virginia Intermediate
Municipal Bond Fund
Primary A Shares 7.21% N/A 36.69% ?% 52.55% N/A
Investor A Shares 6.99% N/A 35.78% ?% 49.35% N/A
Investor C Shares 6.67% 6.17% N/A N/A 21.24% N/A
Investor N Shares 6.67% N/A N/A N/A 12.22% N/A
Nations Florida Municipal Bond
Fund 8.08% N/A N/A N/A 8.11% N/A
Primary A Shares
Investor A Shares 7.87% N/A N/A N/A 7.03% N/A
Investor C Shares 7.34% 6.84% N/A N/A 19.43% N/A
Investor N Shares 7.28% N/A N/A N/A 6.07% N/A
Nations Georgia Municipal Bond
Fund 8.64% N/A N/A N/A 6.79% N/A
Primary A Shares
Investor A Shares 8.24% N/A N/A N/A 6.78% N/A
Investor C Shares 7.91% 7.41% N/A N/A 19.81% N/A
Investor N Shares 7.84% N/A N/A N/A 6.28% N/A
Nations Maryland Municipal Bond
Fund 7.94% N/A N/A N/A 14.21% N/A
Primary A Shares
Investor A Shares 7.72% N/A N/A N/A 8.34% N/A
Investor C Shares 7.17% 6.67% N/A N/A 18.40% N/A
Investor N Shares 7.13% N/A N/A N/A 4.81% N/A
Nations North Carolina Municipal
Bond Fund
Primary A Shares 8.24% N/A N/A N/A 6.39% N/A
Investor A Shares 8.02% N/A N/A N/A 7.95% N/A
Investor C Shares 7.50% 7.00% N/A N/A 19.86% N/A
Investor N Shares 7.44% N/A N/A N/A 6.23% N/A
Nations South Carolina Municipal
Bond Fund
Primary A Shares 8.58% N/A N/A N/A 10.23% N/A
Investor A Shares 8.36% N/A N/A N/A 12.20% N/A
Investor C Shares 7.78% 7.28% N/A N/A 19.47% N/A
Investor N Shares 7.77% N/A N/A N/A 9.42% N/A
Nations Tennessee Municipal Bond
Fund
Primary A Shares 8.71% N/A N/A N/A 13.08% N/A
Investor A Shares 8.49% N/A N/A N/A 11.19% N/A
Investor C Shares 7.97% 7.47% N/A N/A 19.95% N/A
Investor N Shares 7.90% N/A N/A N/A 8.47% N/A
</TABLE>
127
<PAGE>
<TABLE>
<CAPTION>
Aggregate Annual Total Return
------------------------------------------------------------------------------------------------
5-Year period 5-Year period Inception Inception
FYE FYE ended ended through through
11/30/95 11/30/95 11/30/95 11/30/95 11/30/95 11/30/95
Without Including Without Including Without Including
Sales Sales Sales Sales Sales Sales
Charges Charges Charges Charges Charges Charges
<S> <C> <C> <C> <C> <C> <C>
Nations Texas Municipal Bond Fund
Primary A Shares 8.97% N/A N/A N/A 6.60% N/A
Investor A Shares 8.75% N/A N/A N/A 7.80% N/A
Investor C Shares 8.19% 7.69% N/A N/A 19.74% N/A
Investor N Shares 8.16% N/A% N/A N/A 6.25% N/A
Nations Virginia Municipal Bond
Fund 8.55% N/A N/A N/A 5.96% N/A
Primary A Shares
Investor A Shares 8.32% N/A N/A N/A 8.16% N/A
Investor C Shares 7.79% 7.29% N/A N/A 19.66% N/A
Investor N Shares 7.73% N/A N/A N/A 5.16% N/A
</TABLE>
Fee waivers and/or expense reimbursements were in effect for the periods
presented. Primary B Shares were not offered during the period described above.
128
<PAGE>
From time to time, the yields 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 the 50 leading banks
and thrift institutions in the top five metropolitan statistical areas.
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 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. The performance and yield of a
class of shares in the Value Fund, Capital Growth Fund, Balanced Assets Fund,
Equity Index Fund and Emerging Growth Fund may be compared to the Standard &
Poor's 500 Stock Index, an unmanaged index of a group of common stocks, the
Consumer Price Index, or the Dow Jones Industrial Average, a recognized
unmanaged index of common stocks of 30 industrial companies listed on the
Exchange. The performance and yield of a class of shares in the
Short-Intermediate Government Fund may be compared to the Shearson Lehman
Intermediate Government Bond Index, an unmanaged index of intermediate
government securities. 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 Short-Intermediate Government Fund seeks to provide higher current
yields than money market funds and short-term treasury obligations. The
Short-Intermediate Government Fund also seeks to maintain greater price
stability than higher yielding long-term bond funds. Therefore, in its
advertisements and sales materials, the Short-Intermediate Government Fund may
compare performance of the Short-Intermediate Government Fund to money market
indices, such as those compiled by IBC/Donoghue, Inc. and Bank Rate Monitor. In
such advertising and sales materials, the Short-Intermediate Government Fund may
also compare the price stability of the Short-Intermediate Government Fund, or
indices of funds with similar investment objectives, to indices of long term
government bond funds such as those compiled by Salomon Brothers and Shearson
Lehman Brothers Inc. The Short-Intermediate Government Fund is not meant to be a
substitute for a money market fund which seeks to maintain a fixed net asset
value of $1.00 per share.
Each Fund may quote information obtained from the Investment Company
Institute in its advertising materials and sales literature.
Ibbotson Data. Ibbotson Associates of Chicago, Illinois, ("Ibbotson")
provides historical returns of the capital markets in the United States. The
Funds may compare the
129
<PAGE>
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 decile. At year-end 1995, the DFA Small Company
Fund contained approximately 2,663 stocks, with a weighted average market
capitalization of $165.75 million. The unweighted average market capitalization
was $82.97 million, while the median was $56.0 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.
130
<PAGE>
MISCELLANEOUS
Certain Record Holders
The following indicates those persons who owned 5% or more of the
indicated class of shares. Information provided is as of July 2, 1996.
J. Steven Summer 5.80%
103 Saura Lane
Winston-Salem, NC 27107
Richard G. Summer 5.01%
8227 Stafford Mill Road
Oak Ridge, NC 27310
Nations Government Money Market Fund
Investor A Shares
USCI Inc Warrant Account 50.09%
P.O. Box 1645
Norcross, GA 30091
Ramon A. Alvarez 9.95%
2116 Great Falls Street
Falls Church, VA 22043
Norwest Bank Minnesota 5.68%
Trustee for Rockdale County/
C&D Charter
Attn: Polly Berquist-Corp. Trust
6th Street and Marquette Avenue
Minneapolis, MN 55479-0069
Investor B Shares
Norbert Dickman & 20.64%
Robert Dickman Trustees
Barbara Fasken 1995 Trust
303 West Wall Avenue, Ste. 1900
Midland, TX 79701
Hare & Co., Bank of New York 19.50%
Attn: Stif/Master Note
One Wall Street, 5th Floor
New York, NY 10286
131
<PAGE>
Fasken Oil and Ranch Ltd. 18.35%
303 W. Wall Avenue, Ste. 1900
Midland, TX 79701
Peggy Ebright Dickson Trust 7.59%
303 West Wall, Ste. 1900
Midland, TX 79701
Liberty Investment Management Inc. 5.29%
2502 Rockey Point Drive, Suite 500
Tampa, FL 33607
Eli S. Jacobs 5.67%
4450 South Park Avenue, #1507
Chevy Chase, MD 20815
Investor C Shares
George Charles Zutes & 34.35%
Lucinda Zutes JTTEN
975 Bayshore Drive
Tarpon Springs, FL 34689-2403
George Charles Zutes 19.14%
975 Bayshore Drive
Tarpon Springs, FL 34689-2403
Charles H. Meyer & Elna R. Meyer 9.24%
Co-Trustees Charles R. Meyer Trust
Dated 10-27-95
1607 Frontier Dr.
Melbourne, FL 32940
Beulah W. Kelsey Trustee 6.88%
Dated December 10, 1992
Beulah W. Kelsey Revocable Trust
5 Whistling Swan
Hilton Head, SC 29928-5732
Sara Kraus 6.05%
8617 Camille Dr.
Potomac, MD 20854
Daily Shares
Diane Stunbo & Thomas Petrarca & 99.62%
Thomas Jackson TTEES
Bond Cote Corporation
401(k) Retirement Plan
P.O. Box 729 Burgis Avenue
Polaski, VA 24301
132
<PAGE>
Percentage of
Shares held of
Name and Address Record Only
Nations Value Fund
Investor C Shares
George H. Lumsden and 7.83%
Erika J. Lumsden JTTEN
16 Full Sweep Drive
Savannah, GA 31419-9330
Nations Capital Growth Fund
Investor C Shares
Dean Witter Reynolds Cust. for 7.73%
Herbert Halperin
IRA Standard 6/14/93
6905 Nevis Road
Bethesda, MD 20817-4642
Dean Witter Reynolds Cust. for 5.88%
Dale Morris
IRA Standard 6/14/93
818 19th Avenue South
Nashville, TN 37203-3202
Patricia L. DeLorenzo 5.72%
7 Durban Place
Hilton Head, SC 29926
Janet Howard & 5.13%
Dr. Mark Clark TTEE
For The Tidewater Heart Specialists
Profit Sharing Plan DTD 1-1-94
2112-B Hartford Road
Hampton, VA 23666
Nations Emerging Growth Fund
Investor A Shares
Ron Underwood & 5.04%
David Brown Trustees
Dallas Heart Group
401K Plan
8440 Walnut Hill Lane
Suite 700
Dallas, TX 75231
133
<PAGE>
Percentage of
Shares held of
Name and Address Record Only
Investor C Shares
Janet C. Howard & 15.37%
Dr. Mark Clark, TTEE
For The Tidewater Heart Specialists
Profit Sharing Plan
2112-B Hartford Road
Hampton, VA 23666
Dean Witter Reynolds Cust for 6.53%
William O. Kirker MD
IRA Standard 6/14/93
6130 Moss Spring Road
Columbia, SC 29209
Dean Witter Reynolds Cust. for 5.45%
Bernard D. Bouvier
IRA Rollover 6/14/93
633 Dolphin Road
Fripp Island
St. Helena Island, SC 29920-9517
Marian Brodsky 5.18%
7104 Millwood Drive
Bethesda, MD 20817-6145
Dean Witter Reynolds Cust. For 5.02%
William B. McGuire, Jr.
IRA Standard Dated 06/14/93
212 South Tryon Street, Suite 800
Charlotte, NC 28281-8174
Nations Disciplined Equity Fund
Primary A Shares
PT NationsBank 11.86%
101 South Tryon Street
Charlotte, NC 28255
TR U/A Memorial Mission Hospital 7.84%
600 Peachtree Street, N.E.
7th Fl. - Performance Measurement
Atlanta, GA 30308-000
TR U/A Educational Foundation School Endowment 6.60%
P.O. Box 2446
Chapel Hill, NC 27514-0000
Flagstar Pension Plan 6.35%
203 East Main Street
Spartanburg, SC 29319-9979 5.36%
134
<PAGE>
Percentage of
Shares held of
Name and Address Record Only
Investor A Shares
Jack B. Chadsey 11.10%
9050 Hammock Lake Drive
Miami, FL 33156
Ron Underwood & David Brown TTEES 10.88%
Dallas Heart Group
401K Plan
8440 Walnut Hill Lane, Suite 700
Dallas, TX 75231
Zachary Taylor TTEE FBO 6.13%
Kleen Tex Industries Inc.
PSP & 401K Savings Plan and Trust
P.O. Box KTI
La Grange, GA 30241
Investor C Shares
Richard A. Royds TTEE 22.43%
Miller Family Trust
2900 South Tower Pennzoil Place
Houston, TX 77002
Frank L. Scofield, Trustee 11.77%
Dated January 4, 1976
FLSAB Trust
1411 West Avenue, Suite 200
Austin, TX 78701
Dean Witter Reynolds Cust. For 10.20%
Sidney W. Boone
IRA Rollover Dated 05/04/95
1411 E. 51st Street
Savannah, GA 31404-4037
Dean Witter Reynolds Cust. For 7.19%
Jean M. De Ru
IRA Standard DTD 06/14/93
2664 Sharondale Drive
Atlanta, GA 30305-3858
Mila K. Kennedy Cust. 5.49%
FBO Haydn Kennedy Collard UTMA TX
15751 Mapleview Circle
Dallas, TX 75230
John A. Hardin 5.26%
P.O. Box 751
Rock Hill, SC 29731-6751
135
<PAGE>
Percentage of
Shares held of
Name and Address Record Only
BSDC Cust. Rollover IRA FBO 5.07%
Rosemary L. Waring
4601 Anson Ct.
Plano, TX 75024
Nations Balanced Assets Fund
Investor C Shares
Carmine L. Dorio & Carmen Dorio JTTEN 17.75%
2580 Blythe Lane
Snellville, GA 30278
Haeson Mills TTE FBO 5.81%
Q Systems Inc.
401K Plan
5201 Leesburg Pike, Suite 700
Falls Church, VA 22041
Patricia Earle Lipscomb 5.64%
Estate of Patricia N. Earle
622 McDaniel Avenue
Greenville, SC 29605
Nations Intermediate Municipal Bond Fund
Investor A Shares
Mitchel Wong & 36.96%
Rose T. Wong JTWROS
1700 Stoneridge Terrace
Austin, TX 78746
Laverne A. Nebel 14.44%
Laverne A. Nebel Trust
DTD 11/04/92
2248 Kingfisher Lane
Clearwater, FL 34622-3322
Lonnie K. Ledbetter & 8.95%
Saundra Ledbetter JTWROS
P.O. Box 5687
Arlington, TX 76005
Helen Goh & 5.04%
Jeffrey M. Kadet JTWROS
c/o Arthur Anderson & Co. MOSCOW
69 W. Washington Street
Chicago, IL 60602
136
<PAGE>
Percentage of
Shares held of
Name and Address Record Only
Investor C Shares
Neal S. Platzer and 51.37%
Jack W. Crosby JTTEN
Special Account
1410 Lost Ridge Circle
Seabrook, TX 77586-4514
Paul J. Rangel and 20.28%
Kimberly K. Rangel JTTEN%
915 Kipp Avenue
Kemah, TX 77565
Charles W. Doolin 14.37%
3508 Harvard Avenue
Dallas, TX 75205
D. Keith Cobb 5.20%
2521 Del Lago Drive
Del Lago Isle
Ft. Lauderdale, FL 33316
Yun-Wu Chan and 5.13%
Jinn-Tyi Tung JTTEN
834 Fern Springs Court
Houston, TX 77062
Investor N Shares
WIN Communication Corp. 15.04%
ATTN: Bob Poole
6755 Jimmy Carter Boulevard
Norcross, GA 30071
Ellen Aston Paull 9.45%
1407 N. Weston Lane
Austin, TX 78733
Joanne B. Stegall 8.79%
517 Cameo Terrace
Chesapeake, VA 23320
Eleanor B. Calkins and 5.91%
W. D. Calkins JTTEN
9602 Baseline
Dallas, TX 75243
Mary Louise Foster 5.83%
700 Mease Plaza
Apt 232
Dunedin, FL 34698-6619
137
<PAGE>
Percentage of
Shares held of
Name and Address Record Only
Jerry Ann Bell 5.75%
213 Lucille Lane
Toccoa, GA 30577
Nations Municipal Income Fund
Investor A Shares
Lloyd E. Raport 22.07%
5600 Wisconsin Ave., Apt. - 17E
Chevy Chase, MD 20815
Irwin Grossman 5.72%
540 Preston Commons
8117 Preston Road
Dallas, TX 75225
Investor C Shares
Sunrise OK Tires 6.67%
c/o Vernon Hunter
1013 W. Sunrise Boulevard
Fort Lauderdale, FL 33311
Vernon E. Potter & 5.53%
Maxine Potter JT TEN
P.O. Box 820069
Dallas, TX 75382
Silvio Capoluongo & 5.47%
Diana McNaughton JT TEN
3031 Newark Street, N.W.
Washington, D.C. 20006-3342
Jake Schulhofer & 5.13%
William Schulhofer
Daniel Scott Schulfoer &
WD Schulfoer JT WROS
P.O. Box 314
Waynesville, NC 28786
Lynn Fain Friedman Trust 5.02%
DTD 7/5/94
Lynn Fain Friedman Trustee
5817 Midhill Street
Bethesda, MD 20817
138
<PAGE>
Percentage of
Shares held of
Name and Address Record Only
Nations Short-Term Income Fund
Investor A Shares
Graward General 23.09%
Attn: Kellye Norcross-Controller
P.O. Box 290909
Nashville, TN 37229-0909
Roger W. Sant 9.98%
1001 N 19th Street Suite 2000
Arlington, VA 22209
Dean Witter Reynolds Cust For 6.95%
Charles T. Bell
IRA Rollover Dated 6/14/93
503 Geiger Circle
Key Largo, FL 33037
Gerald S. Gordon 5.84%
2307 Bluebonnet
Houston, TX 77030-3601
Investor C Shares
Virginia United Methodist Homes Inc. 20.65%
Attn: Cheryl H. Duff
7113 Three Chopt Road, Ste. 300
Richmond, VA 23226
Dr. George B. Richardson 14.06%
516 Azalea Lane
Florence, SC 29501
Roger W. Sant 12.48%
1001 N. 19th Street, St. 2000
Arlington, VA 22209
Industrial Marine Service, Inc. 10.11%
Attn: Bob Lewis
1301 Marsh Street
P.O. Box 1779
Norfolk, VA 23501
Wanda M. Shearer 6.17%
1065 Pine Top Road
Belton, SC 29627
The Lincolnshire Trust 5.32%
5208 Lincolnshire
Dallas, TX 75287
139
<PAGE>
Percentage of
Shares held of
Name and Address Record Only
Nations Diversified Income Fund
Investor A Shares
Dean Witter Reynolds Cust. for 6.39%
James T. Pearce IRA SEP 6/14/93
P.O. Box 1986
Greenville, SC 29602-1986
Howard M. Arnold 6.33%
9825 Conestoga Way
Potomac, MD 20854-4713
Investor C Shares
None
Nations Strategic Fixed Income Fund
Investor A Shares
Sheryl Isaacs TTREE 11.34%
Good Buy Sportswear
401K Saving Plan
2400 31st St. S.
St. Petersburg, FL 33712
Rental Uniform of Florence 6.64%
P.O. Box 12410
Florence, SC 29504-0410
Investor C Shares
Patricia Earle Lipscomb Per Rep. 28.36%
Estate of Patricia N. Earle
622 McDaniel Ave.
Greenville, SC 29605
BSDT Cust. IRA FBO 26.26%
James A. Blanchard
9 Las Brisas
Austin, TX 78746
Alton J. Turley & 14.09%
Christine Turley JTTEN
55 Swan Lake Road
Stockbridge, GA 30281
140
<PAGE>
Percentage of
Shares held of
Name and Address Record Only
John M. Lewis & 8.09%
Robert V. Dipauli &
John H. Vaughan TTEES FBO
St. Joe Communications Inc.
Employees Salary Deferral Plan
502 Fifth Street
Port St. Joe, FL 32456
Mary Jane Bakery Salesman Assoc. 6.85%
ATTN: Frank Rollins
1948 Country Manor Lane
Virginia Beach, VA 23456
NationsBank of Florida NA Succ. TTEE 6.42%
FBO William E. Clark
TUA DTD 8-8-95
ATTN SAS/06050230066100
PO Box 831575
Dallas, TX 75283-1575
Investor N Shares
Dean Witter Reynolds Cust for 8.38%
Robert A. Pierce
IRA Rollover 6/14/93
10 Lavington Ct.
Columbia, SC 29209-1944
Nations Florida Intermediate Municipal Bond Fund
Investor A Shares
Charlotte G. Bowen 10.23%
1371 South Ocean Blvd.
Apt. 915
Pompano Beach, FL 33062
P. McNeil 9.69%
2310 Del Mar Island
Fort Lauderdale, FL 33301
Lillian J. Clayman and 8.21%
Charles E. Clayman JTWROS
6161 NW 2nd Ave #625
Boca Raton, FL 33487
Janice Quale Revocable Trust 6.12%
U/A DTD 2/23/87
c/o NorWest Investment Management & Trust
Attn: C. Kaehler
6th & Marquette Ave.
Minneapolis, MN 55479-0039
141
<PAGE>
Percentage of
Shares held of
Name and Address Record Only
Investor C Shares
Bertram C. Ellison and 6.15%
Joline M. Ellison JTTEN
651 NW Hiatus Road
Plantation, FL 33325-2010
Louise D. Lee 5.69%
408 SE 9 Court
Fort Lauderdale, FL 33316
Investor N Shares
None
Nations Florida Municipal Bond Fund
Investor A Shares
Jacqueline Bailes, Charles E. Bailes, Jr., 58.87%
Charles E. Bailes III and J.D. Bailes
Bailes Investment Account
6212 Dartmoor Ct.
Orlando, FL 32819
Robert P. Cornelssen, Trustee 25.25%
Robert P. Cornelssen Trust
U/A DTD 4/18/91
1868 Shore Drive South
Apartment 401
St. Petersburg, FL 33707
Harold A. Dargel and 6.08%
Phyllis A. Dargel Co-TTEES
Harold A. Dargel REV TR DTD 10-20-89
5721 SW 16th Court
Plantation, FL 33317-5901
Arthur W. Ihle, Trustee 5.44%
Arthur W. Ihle REVOC LIV Trust
DTD 11-21-94
910 Dogwood Dr., Apt. 447
Delray Beach, FL 33483
Investor C Shares
None
Nations Georgia Intermediate Municipal Bond Fund
Investor A Shares
Lyles W. Sanders & 16.05%
Mary C. Sanders, JTTEN
2305 Welton Place
Dunwoody, GA 30338
142
<PAGE>
Percentage of
Shares held of
Name and Address Record Only
Investor C Shares
Letty C. Cagle and 20.16%
Douglas Cagle, JTTEN
8592 Roswell Road, Apt. 318
Atlanta, GA 30350
Ruth D. Lautz TTEE 8.47%
Ruth D. Lautz Revocable Trust
3046 Shinnecock Hills
Duluth, GA 30136
Arthur R. Lautz TTEE 6.61%
Arthur R. Lautz Revocable Trust
3046 Shinnecock Hills
Duluth, GA 30136
Charles D. Davidson and 6.15%
Judith L. Davidson JTTEN
370 Rosalie Ct.
Alpharetta, GA 30202
Investor N Shares
Edward J. Derst, Jr. Trustee 33.32%
U/A of Edward J. Derst, Jr.
Trust Agreement DTD 11/15/88
258 Varn Drive
Savannah, GA 31403
Nations Georgia Municipal Bond Fund
Primary A Shares
None
Investor A Shares
Lowell A. Young and 60.20%
MaryAnn E. Young JT-TEN
4031 Oakridge Bend
Valdosta, GA 31602
Enzor Leroy Bechman 22.72%
2314 Golfcourse Dr.
Albany, GA 31707
Monte L. Poole and 16.90%
Venetia C. Poole JTWROS
1344 Hidden Hills Parkway
Stone Mountain, GA 30088
Investor C Shares
F. Wayne Weaver and 96.49%
Edith T. McWaters JTTEN
1576 Bethsaida Road
Riverdale, GA 30296
143
<PAGE>
Percentage of
Shares held of
Name and Address Record Only
Nations Maryland Intermediate Municipal Bond Fund
Investor A Shares
Robert Gladstone & 16.50%
Leslie Gladstone JTTEN
2468 Belmont Road, N.W.
Washington, D.C. 20008-1610
Investor C Shares
Margot H. Hahn 9.00%
815 Connecticut Avenue, N.W., Suite 601
Washington, D.C. 20006-4004
Douglas D. Van Riper & 5.36%
Mary E. Van Riper JTTEN
10513 Patuxent Ridge Way
Laurel, MD 20723
William Bobrow 5.17%
Miriam Bobrow JTTEN
1008 East Boxhill Drive
Kensington, MD 20895
Investor N Shares
Laurel R.G. Moreno, Trustee 5.44%
U/Deed DTD 10/14/91
FBO Miro Gudelsky
10808 Riverwood Drive
Potomac, MD 20854-1334
Nations Maryland Municipal Bond Fund
Primary A Shares
None
Investor A Shares
Carol C. House & 37.60%
Peter W. House JTWROS
4210 Leeward Place
Bethesda, MD 20816
Thomas A. Beach & 23.22%
Joan A. Beach JTWROS
P.O. Box 1294
Rockville, MD 20849-1294
Raymond A. Turetsky and 14.84%
Bess H. Turetsky JTTEN
11220 Woodson Avenue
Kensington, MD 20895-1427
144
<PAGE>
Percentage of
Shares held of
Name and Address Record Only
Charles E. Chlan 13.85%
Sole Proprietorship
7200 Bel Air Road
Baltimore, MD 21206
Dona L. Lechliter and 7.31%
Stephen C. Lechliter JTTEN
2921 N. Leisure World Blvd., Apt. 427
Silver Spring, MD 20906
Investor C Shares
None
Nations North Carolina Intermediate Municipal Bond Fund
Investor A Shares
Jerry Wordsworth 21.23%
P.O. Box 800
Rocky Mount, NC 27802
W. Frank Dowd, Jr. 7.82%
P.O. Box 35430
Charlotte, NC 28235-5430
Wayne Joyce and 7.60%
Julia Y. Joyce JTTEN
2694 Merry Oaks Trail
Winston-Salem, NC 27103
Elizabeth H. Miller 7.34%
P.O. Box 68
Tuxedo, NC 28784
Investor C Shares
Barbara B. Coyner 18.36%
513 Lake Boone Trail
Raleigh, NC 27608-1027
J. Robert Stout & 13.19%
Maggie Smith Stout JTTEN
P.O. Box 35343
Greensboro, NC 27425-5343
W. Joseph Selvia and 8.50%
Jay P. Selvia JTTEN
5730 Phillips Bridge Road
Winston-Salem, NC 27104-3323
145
<PAGE>
Percentage of
Shares held of
Name and Address Record Only
Anna B. Steele 8.19%
2041 Georgia Avenue
Winston-Salem, NC 27104
William F. Cox 8.17%
3225 Bermuda Village
Advance, NC 27006-9478
Jean Parker Moore 6.07%
2721 Spring Garden Road
Winston-Salem, NC 27106
Roger W. Simmons and 5.01%
Mary R. Simmons JTTEN
150 River Hill Drive
Advance, NC 27006
Investor N Shares
James E. Smith and 5.49%
Bettie T. Smith JTTEN
18227 Capstan Greens Road
Cornelius, NC 28031
Nations North Carolina Municipal Bond Fund
Primary A Shares
None
Investor A Shares
Barbara Bartow Church 22.66%
1535 Providence Road
Charlotte, NC 28207-2627
Harlan O. Greene and 18.47%
Raydell S. Greene JTTEN
384 Hayes Wellborn Road
Deep Gap, NC 28618-9738
Andrew M. Silton and 13.37%
Margaret Kanze Silton JTWROS
5314 Germaine Terrace
Charlotte, NC 28226
Byron E. Gross & 7.11%
Pauline S. Gross JTWROS
3768 Osceola Road
Elon College, NC 27244-9784
Susan E. Bales and 6.89%
Audrey D. Bales JTTEN
Box 712
Wingate, NC 28174
146
<PAGE>
Percentage of
Shares held of
Name and Address Record Only
L. Elwood Wight 6.47%
Margaret C. Wright JTWROS
1113 Devonshire Dr.
New Bern, NC 28562
Investor C Shares
Eugene G. Agres 86.20%
611 Oyster Bay Dr.
Sunset Beach, NC 28468
Nations South Carolina Intermediate Municipal Bond Fund
Investor A Shares
James T. Pearce 16.05%
P.O. Box 1986
Greenville, SC 29602-1986
Joseph F. Rice 8.05%
777 Bradburn Drive
Mt. Pleasant, S.C. 29464-5114
James Bloor Trustee 6.07%
Revocable Trust NA 8/19/92
James Bloor Trust
51 Bird Song Way
Hilton Head, S.C. 29926-1364
Investor C Shares
Anne M. Inman 8.87%
1829 Senate St. Apt. 11-A
Columbia, SC 29201
Helena B. Clark 5.42%
324 Broad River Drive
Santee, SC 29142-9301
Investor N Shares
None
Nations South Carolina Municipal Bond Fund
Investor A Shares
Donna R. Cart 41.58%
1140 Partridge Road
Spartanburg, SC 29302-3328
James C. Cuppia & 30.64%
Doris W. Cuppia TTEES
Jerome C. Cuppia Jr. Trust DTD 10/28/87
8 Outerbridge Circle
Hilton Head Island, SC 29926-2916
147
<PAGE>
Percentage of
Shares held of
Name and Address Record Only
Doris White Cuppia TTEE FBO 9.84%
Doris White Cuppia TR DTD
10-28-87 by Doris White Cuppia
8 Outerbridge Circle
Hilton Head Island, SC 29926
Adina Allen 5.74%
1283 Dogwood Dr. NE
Orangeburg, SC 29115
Investor C Shares
None
Nations Tennessee Intermediate Municipal Bond Fund
Investor A Shares
Bob G. Long 15.99%
P.O. Box 266
Hermitage, TN 37076
Marshall T. Polk, III 14.23%
P.O. Box 90148
Nashville, TN 37209
Joseph L. DiLorenzo 7.28%
4400 Belmont Park Ter. #249
Nashville, TN 37215
Inman Construction Corp. 5.88%
Attn: Frank Inman Jr.
5100 Poplar Ave., Suite 1210
Memphis, TN 38137
Investor C Shares
None
Investor N Shares
John O. Colton 15.54%
6211 Jocelyn Hollow Road
Nashville, TN 37205-3213
Robert R. Hayes and 10.41%
Vira E. Hayes JTTEN
400 Bryants Lane
Woodbury, TN 37190-1641
Nations Tennessee Municipal Bond Fund
Primary A Shares
Jerry L. Benefield & 9.15%
Evelyn S. Benefield
4036 Barfield Road
Murfreesboro, TN 37129-5719
148
<PAGE>
Percentage of
Shares held of
Name and Address Record Only
Miriam F. Hildebrand 7.08%
884 Edmondson Pike
Brentwood, TN 37027
Investor A Shares
None
Investor C Shares
Frank W. Condurelis and 93.42%
Jane E. Condurelis JTTEN
806 Brentview Drive
Nashville, TN 37220
Investor N Shares
Miriam F. Hildebrand 9.80%
884 Edmondson Pike
Brentwood, TN 37027
Nations Texas Intermediate Municipal Bond Fund
Investor A Shares
MOTCO 20.83%
P.O. Box 17001-Trust
San Antonio, TX 78217
Harriet G. Wolf 19.49%
2520 Old Gate Road
San Antonio, TX 78230
James Bradley Curlee Trustee 17.82%
For the Homer Hill Shaw Trust
6428 Tulip Lane
Dallas, TX 75230
Steven F. Beard Jr. 11.64%
P.O. Box 428
Spicewood, TX 78669
Mary Bradfield Briggs 5.44%
4410 Three Oaks Drive
Arlington, TX 76016-2351
Investor C Shares
Orsinger Investments Ltd. 99.60%
2206 Camelback Drive
San Antonio, TX 78209-4262
Investor N Shares
Montine T. Wisdom 9.31%
6335 W. Northwest Hwy. #1318
Dallas, TX 75225-3533
149
<PAGE>
Percentage of
Shares held of
Name and Address Record Only
James Robert Mallory and 8.77%
Faith K. Mallory JTTEN
2400 Winton Terrace East
Ft. Worth, TX 76109
Oliver Roofing Systems 6.36%
906-B Justin Lane
P.O. Box 180191
Austin, TX 78718
Nations Texas Municipal Bond Fund
Primary A Shares
None
Investor A Shares
MOTCO 61.15%
P.O. Box 17001-Trust
San Antonio, TX 78217
Liberto Investments Ltd. 14.46%
Partnership
621 S. Flores St.
San Antonio, TX 78204-1220
Jeanette Dorman and 7.63%
Taylor Dorman JTWROS
Route 13, Box 6089
Lufkin, TX 75901
Carolyn A. Lee and 6.96%
Philip A. Lee JTTEN
P.O. Box 7917
Horseshoe Bay, TX 78657
Shirley A. Wagner 5.97%
3002 San Paula
Dallas, TX 75228
Investor C Shares
None
150
<PAGE>
Percentage of
Shares held of
Name and Address Record Only
Nations Virginia Intermediate Municipal Bond Fund
Investor A Shares
None
Nations Virginia Municipal Bond Fund
Investor A Shares
William P. Moore & 32.07%
Vera W. Moore JTTEN
P.O. Box 1270
Hopewell, VA 23860
Rodney M. Carlson and 9.64%
Joyce L. Carlson JTTEN
3608 South Creek Ct.
Chesapeake, VA 23325
Rebecca C. Bell 9.05%
1092 Oaklawn Drive
Culpepper, VA 22701
Jessie E. Spells
14927 Boydell Dr. 7.00%
Centreville, VA 22020-1534
Lester W. Morris
c/o C. Hunter Jones 6.93%
308 Hunter Street
Ashland, VA 23005-1910
Creola N. Shearin
2205 Parkside Ave. 6.77%
Richmond, VA 23228
Investor C Shares
Russell E. Herring
P.O. Box 568 6.20%
Crozet, VA 22932
Nations Short-Term Municipal Income Fund
Investor A Shares
Carl W. Cheek 25.57%
120 North Charles Street
Red Lion, PA 17356
Ralph Jerry Parker, Jr. 14.69%
500 Forest Avenue
Richmond, VA 23229-6808
151
<PAGE>
Percentage of
Shares held of
Name and Address Record Only
Richard H. Kristinik 14.20%
10 W Terrace
Houston, TX 77007
Mitchel Wong &
Rose T. Wong JTWROS 11.96%
1700 Stoneridge Terrace
Austin, TX 78746
Jerome Dobson 11.35%
Bridget Dobson JTTEN
3490 Piedmont Road
Suite 1206
Atlanta, GA 30305
Investor C Shares
Carl W. Cheek 34.69%
120 North Charles Street
Red Lion, PA 17356
Steven L. Feder & 25.33%
Thomas H. Lindsey JTWROS
3001 NE 19th St.
Fort Lauderdale, FL 33305
Louis J. Scott & 10.45%
Leslie G. Scott JTWROS
9337B Katy Fwy, Ste. 329
Houston, TX 77024
Jay L. Willmann and 6.88%
Catherine B. Willmann JTTEN
2918 Kassarine Pass
Austin, TX 78704-4655
Ilah Coffee Merriman 5.70%
#8 Rue Du Lac
Dallas, TX 75230-0000
Investor N Shares
William L. Spadoni and 7.28%
Julia S. Spadoni JTTEN
P.O. Box 1019
Myrtle Beach, SC 29578-1019
James H. Sparks and 6.60%
Karen M. Sparks JTTEN
4121 Roenker Lane
Virginia Beach, VA 23455
152
<PAGE>
Percentage of
Shares held of
Name and Address Record Only
James D. Yopp, Jr. & 5.44%
Johanna F. Yopp JTTEN
1095 Fieldwood Lane
Winston Salem, NC 27106-5863
Nations Short-Intermediate Government Fund
Investor A Shares
Burgess Pigment Co.
P.O. Box 349 Deck Blvd. 5.82%
Sandersville, GA 31082
As of July 2, 1996, NationsBank Corporation and its affiliates owned of
record more than 25% of the outstanding shares of the Trust acting as agent,
fiduciary, or custodian for its customers and may be deemed a controlling person
of the Trust under the 1940 Act.
153
<PAGE>
SCHEDULE A
DESCRIPTION OF RATINGS
The following summarizes the highest six ratings used by Standard &
Poor's Corporation ("S&P") for corporate and municipal bonds. The first four
ratings denote investment grade securities.
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay interest and repay
principal.
AA - Debt rated AA is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in a small
degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for those in
higher-rated categories.
BB, B - Bonds rated BB and B are regarded, on balance as predominantly
speculative with respect to capacity to pay interest and repay principal
in accordance with the terms of the obligation. Debt rated BB has less
near-term vulnerability to default than other speculative issues.
However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. Debt
rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal.
To provide more detailed indications of credit quality, the AA, A and
BBB, BB and B ratings may be modified by the addition of a plus or minus sign to
show relative standing within these major rating categories.
The following summarizes the highest six ratings used by Moody's
Investors Service, Inc. ("Moody's") for corporate and municipal bonds. The first
four denote investment grade securities.
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
A-1
<PAGE>
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 as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not as well
safeguarded during both good times and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B - Bonds 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 Aa1, A1 or Baa1,
respectively.
The following summarizes the highest four ratings used by Duff & Phelps
Credit Rating Co. ("D&P") for bonds, each of which denotes that the securities
are investment grade.
AAA - Bonds that are rated AAA are of the highest credit quality. The
risk factors are considered to be negligible, being only slightly more
than for risk-free U.S. Treasury debt.
AA - Bonds that are rated AA are of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to
time because of economic conditions.
A - Bonds that are rated A have protection factors which are average but
adequate. However, risk factors are more variable and greater in periods
of economic stress.
A-2
<PAGE>
BBB - Bonds that are rated BBB have below average protection factors but
still are considered sufficient for prudent investment. Considerable
variability in risk 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 S&P for
short-term municipal notes:
SP-1 -- Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics are given
a "plus" (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest.
The following summarizes the two highest ratings used by Moody's for
short-term municipal notes and variable-rate demand obligations:
A-3
<PAGE>
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 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,
A-4
<PAGE>
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 ratings described above.
For commercial paper, Fitch uses the short-term 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 is the four investment grade ratings used by BankWatch
for long-term debt:
AAA - The highest category; indicates ability to repay principal and
interest on a timely basis is extremely high.
AA - The second highest category; indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk
versus issues rated in the highest category.
A - The third highest category; indicates the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with
higher ratings.
BBB - The lowest investment grade category; indicates an acceptable
capacity to repay principal and interest. Issues rated "BBB" are, however,
more vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
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.
A-5
<PAGE>
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 posses 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-6
<PAGE>
SCHEDULE B
ADDITIONAL INFORMATION CONCERNING
OPTIONS & FUTURES
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 the Funds
intends to limit its transactions in futures contracts and options so that not
more than 5% of the Fund's net assets are at risk. Furthermore, in no event
would any Fund purchase or sell futures contracts, or related options thereon,
for hedging purposes if, immediately thereafter, the aggregate initial margin
that is required to be posted by the Fund under the rules of the exchange on
which the futures contract (or futures option) is traded, plus any premiums paid
by the Fund on its open futures options positions, exceeds 5% of the Fund's
total assets, after taking into account any unrealized profits and unrealized
losses on the Fund's open contracts and excluding the amount that a futures
option is "in-the-money" at the time of purchase. (An option to buy a futures
contract is "in-the-money" if the value of the contract that is subject to the
option exceeds the exercise price; an option to sell a futures contract is
"in-the-money" if the exercise price exceeds the value of the contract that is
subject of the option.)
I. Interest Rate Futures Contracts.
Use of Interest Rate Futures Contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures market have tended to move generally in the aggregate
in concert with the cash market prices and have maintained fairly predictable
relationships. Accordingly, a Fund may use interest rate futures as a defense,
or hedge, against anticipated interest rate changes and not for speculation. As
described below, this would include the use of futures contract sales to protect
against expected increases in interest rates and futures contract purchases to
offset the impact of interest rate declines.
A Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Fund, through using futures contracts.
Description of Interest Rates Futures Contracts. An interest rate
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract
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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; Government National Mortgage Association (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 investment adviser ("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
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futures market price of Treasury bonds might well decline to more than 93 or
to less than 93 because of the imperfect correlation between cash and futures
prices mentioned below.
The Adviser could be wrong in its forecast of interest rates and the
equivalent futures market price could rise above 98. In this case, the market
value of the portfolio securities, including the portfolio security being
protected, would increase. The benefit of this increase would be reduced by the
loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example
might incur a loss of 2 points (which might be reduced by an offsetting
transaction prior to the settlement date). In each transaction, transaction
expenses would also be incurred.
Examples of Future Contract Purchase. A Fund would engage in an
interest rate futures contract purchase when it is not fully invested in
long-term bonds but wishes to defer for a time the purchase of long-term bonds
in light of the availability of advantageous interim investments, e.g.,
shorter-term securities whose yields are greater than those available on
long-term bonds. The Fund's basic motivation would be to maintain for a time the
income advantage from investing in the short-term securities; the Fund would be
endeavoring at the same time to eliminate the effect of all or part of an
expected increase in market price of the long-term bonds that the Fund may
purchase.
For example, assume that the market price of a long-term bond that the
Fund may purchase, currently yielding 10%, tends to move in concert with futures
market prices of Treasury bonds. The Adviser wishes to fix the current market
price (and thus 10% yield) of the long-term bond until the time (four months
away in this example) when it may purchase the bond. Assume the long-term bond
has a market price of 100, and the Adviser believes that, because of an
anticipated fall in interest rates, the price will have risen to 105 (and the
yield will have dropped to about 9-1/2%) in four months. The Fund might enter
into futures contracts purchases of Treasury bonds for an equivalent price of
98. At the same time, the Fund would assign a pool of investments in short-term
securities that are either maturing in four months or earmarked for sale in four
months, for purchase of the long-term bond at an assumed market price of 100.
Assume these short-term securities are yielding 15%. If the market price of the
long-term bond does indeed rise from 100 to 105, the equivalent futures market
price for Treasury bonds might also rise from 98 to 103. In that case, the
5-point increase in the price that the Fund pays for the long-term bond would be
offset by the 5-point gain realized by closing out the futures contract
purchase.
The Adviser could be wrong in its forecast of interest rates; long-term
interest rates might rise to above 10%; and the equivalent futures market price
could fall below 98. If short-term rates at the same time fall to 10% or below,
it is possible that the Fund would continue with its purchase program for
long-term bonds. The market price of available long-term bonds would have
decreased. The benefit of this price decrease, and thus yield increase, will be
reduced by the loss realized on closing out the futures contract purchase.
If, however, short-term rates remained above available long-term rates,
it is possible that the Fund would discontinue its purchase program for
long-term bonds. The yield on short-term
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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 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).
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ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objection: 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 Price =$2,500 Gain on Futures = $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
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Loss in Portfolio Value = $40,000 Gain on Futures = $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 Price = $2,500 Loss on Futures = $2,500/Contract
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
Portfolio Futures
-Day Hedge is Placed --
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
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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
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, and 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 the
securities being hedged has moved in an unfavorable direction, the Fund would be
in a better position than if it had not hedged at all. If the price of the
securities being hedged has moved in a favorable direction, this
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advance will be partially offset by the loss on the future. If the price of
the future moves more than the price of the hedged securities, the Fund
involved will experience either a loss or gain on the future which will
not be completely offset by movements in the price of the securities
which are the subject of the hedge.
To compensate for the imperfect correlation of movements in the price
of securities being hedged and movements in the price of futures contracts, a
Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the volatility over a particular
time period of the prices of such securities has been greater than the
volatility over such time period of the future, or if otherwise deemed to be
appropriate by the Adviser. Conversely, a Fund may buy or sell fewer futures
contracts if the volatility over a particular time period of the prices of the
securities being hedged is less than the volatility over such time period of the
futures contract being used, or if otherwise deemed to be appropriate by the
Adviser. It also is possible that, where a Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance, and the value
of securities held by the Fund may decline. If this occurred, the Fund would
lose money on the future and also experience a decline in value in its portfolio
securities.
Where futures are purchased to hedge against a possible increase in the
price of securities before a Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the Fund then concludes not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, the Fund will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In instances involving the purchase of futures contracts by a Fund, an
amount of cash and cash equivalents, equal to the market value of the futures
contracts, will be deposited in a segregated account with the Fund's Custodian
and/or in a margin account with a broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the Adviser still may not
result in a successful hedging transaction over a short time frame.
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Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, a Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in
a futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions.
Successful use of futures by a Fund also is subject to the Adviser's
ability to predict correctly movements in the direction of the market. For
example, if a Fund has hedged against the possibility of a decline in the market
adversely affecting securities held in its portfolio and securities prices
increase instead, the Fund will lose part or all of the benefit to the increased
value of its securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the Fund
has insufficient cash, it may have to sell securities to meet daily variation
margin requirements. Such sales of securities may be, but will not necessarily
be, at increased prices which reflect the rising market. A Fund may have to sell
securities at a time when it may be disadvantageous to do so.
V. Options on Futures Contracts.
The Funds may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer or
seller of a futures contract, the holder, or writer, of an option has the right
to terminate its position prior to the scheduled expiration of the option by
selling, or purchasing, an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
of an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased. Depending on the pricing of the option compared to either the futures
contract upon which it is based, or upon the price of the securities being
hedged, an option may or may not be
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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.
VI. Accounting and Tax Treatment.
Accounting for futures contracts and options will be in accordance with
generally accepted accounting principles.
Generally, futures contracts and options on futures contracts held by a
Fund at the close of the Fund's taxable year will be treated for Federal income
tax purposes as sold for their fair market value on the last business day of
such year, a process known as "marking-to-market." Forty percent (40%) of any
gains or loss resulting from such constructive sale will be treated as
short-term capital gain or loss and sixty percent (60%) of such gain or loss
will be treated as long-term capital gain or loss without regard to the length
of time the Fund holds the futures contract or option (the "40%-60% rule"). The
amount of any capital gain or loss actually realized by a Fund in a subsequent
sale or other disposition of those futures contracts will be adjusted to reflect
any capital gain or loss taken into account by the Fund in a prior year as a
result of the constructive sale of the contracts and options. With respect to
futures contracts to sell or options which will be regarded as parts of a "mixed
straddle" because their values fluctuate inversely to the values of specific
securities held by the Fund, losses as to such contracts to sell or options will
be subject to certain loss deferral rules which limit the amount of loss
currently deductible on either part of the straddle to the amount thereof which
exceeds the unrecognized gain (if any) with respect to the other part of the
straddle, and to certain wash sales regulations. Under short sales rules, which
also will be applicable, the holding period of the securities forming part of
the straddle will (if they have not been held for the long-term holding period)
be deemed not to begin prior to termination of the straddle. With respect to
certain futures contracts and options, deductions for interest and carrying
charges will not be allowed. Notwithstanding the rules described above, with
respect to futures contracts to sell which are properly identified as such and
certain options, a Fund may make an election which will except (in whole or in
part) those identified futures contracts or options from being treated for
Federal income tax purposes as sold on the last business day of the Fund's
taxable year, but gains and losses will be subject to such short sales, wash
sales, loss deferral rules and the requirement to capitalize interest and
carrying charges. Under temporary regulations, a Fund would be allowed (in lieu
of the foregoing) to elect to either (1) offset gains or losses from portions
which are part of a mixed straddle by separately identifying each mixed straddle
to which such treatment applies, or (2) establish a mixed straddle account for
which gains and losses would be recognized and offset on a periodic basis during
the taxable year. Under either election, the 40%-60% rule will apply to the net
gain or loss attributable to the futures contracts, but in the case of a mixed
straddle account election, not more than 50% of any net gain may be treated as
long-term and not more than 40% of any net loss may be treated as short-term.
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Certain foreign currency contracts entered into by a Fund may be
subject to the "marking-to-market" process and the 40%-60% rule in a manner
similar to that described in the preceding paragraph for futures contracts and
options on futures contracts. To receive such Federal income tax treatment, a
foreign currency contract must meet the following conditions: (1) the contract
must require delivery of a foreign currency of a type in which regulated futures
contracts are traded or upon which the settlement value of the contract depends;
(2) the contract must be entered into at arm's length at a price determined by
reference to the price in the interbank market; and (3) the contract must be
traded in the interbank market. The Treasury Department has broad authority to
issue regulations under the provisions respecting foreign currency contracts.
Other foreign currency contracts entered into by a Fund may result in the
creation of one or more straddles for Federal income tax purposes, in which case
certain loss deferral, short sales, and wash sales rules and the requirement to
capitalize interest and carrying charges may apply.
As described more full in the section of the SAI entitled "Additional
Information Concerning Taxes," in order to qualify as a regulated investment
company under the Code a Fund must derive less than 30% of its gross income from
investments held for less than three months. With respect to futures contracts
and other financial instruments subject to the marking-to-market rules, the
Internal Revenue Service has ruled in private letter rulings that a gain
realized from such a futures contract or financial instrument will be treated as
being derived from a security held for three months or more (regardless of the
actual period for which the contract or instrument is held) if the gain arises
as a result of a constructive sale under the marking-to-market rules, and will
be treated as being derived from a security held for less than three months only
if the contract or instrument is terminated (or transferred) during the taxable
year (other than by reason of marking-to-market) and less than three months have
elapsed between the date the contract or instrument is acquired and the
termination date. In determining whether the 30% test is met for a taxable year,
increases and decreases in the value of each Fund's futures contracts and other
investments that qualify as part of a "designated hedge," as defined in the
Code, may be netted.
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SCHEDULE C
ADDITIONAL INFORMATION CONCERNING
MORTGAGE-BACKED SECURITIES
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 Federal Home Loan Mortgage
Corporation (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.
The Federal National Mortgage Association (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
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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
Government National Mortgage Association (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.
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All poolers apply standards for qualification to local lending
institutions which originate mortgages for the pools. Poolers also establish
credit standards and underwriting criteria for individual mortgages included in
the pools. In addition, some mortgages included in pools are insured through
private mortgage insurance companies.
Average Life
The average life of pass-through pools varies with the maturities of
the underlying mortgage instruments. In addition, a pool's term may be shortened
by unscheduled or early payments of principal and interest on the underlying
mortgages. The occurrence of mortgage prepayments is affected by factors
including the level of interest rates, general economic conditions, the location
and age of the mortgage, and other social and demographic conditions.
As prepayment rates of individual pools vary widely, it is not possible
to accurately predict the average life of a particular pool. For pools of
fixed-rated 30-year mortgages, common industry practice is to assume that
prepayments will result in a 12-year average life. Pools of mortgages with other
maturities or different characteristics will have varying assumptions for
average life.
Returns on Mortgage-Backed Securities
Yields on mortgage-backed pass-through securities are typically quoted
based on the maturity of the underlying instruments and the associated average
life assumption. Actual prepayment experience may cause the yield to differ from
the assumed average life yield.
Reinvestment of prepayments may occur at higher or lower interest rates
than the original investment, thus affecting the yields of the Fund. The
compounding effect from reinvestments of monthly payments received by the Fund
will increase its yield to shareholders, compared to bonds that pay interest
semi-annually.
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