STATEMENT OF ADDITIONAL INFORMATION
NATIONS FUND PORTFOLIOS, INC.
Nations Emerging Markets Fund
Nations Pacific Growth Fund
Nations Global Government Income Fund
NATIONS FUND, INC.
Nations Prime Fund
Nations Treasury Fund
Nations Equity Income Fund
Nations Government Securities Fund
Nations International Equity Fund
Nations International Growth Fund
Nations International Value Fund
Nations Small Company Growth Fund
Nations U.S. Government Bond Fund
NATIONS FUND TRUST
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 Managed Value Index Fund
Nations Managed SmallCap Value Index Fund
Nations Marsico Growth & Income Fund
Nations Marsico Focused Equities 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, PRIMARY SHARES AND DAILY SHARES
August 1, 1998
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This Statement of Additional Information ("SAI") provides supplementary
information pertaining to the classes of shares representing interests in the
above listed forty nine investment portfolios of Nations Fund Portfolios, Inc.,
Nations Fund, Inc., and 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
August 1, 1998 (each a "Prospectus"). All terms used in this SAI that are
defined in the Prospectuses will have the same meanings assigned in the
Prospectuses. Copies of the Prospectuses may be obtained without charge by
writing Nations Funds c/o Stephens Inc., One NationsBank Plaza, 33rd Floor,
Charlotte, North Carolina 28255, or by calling Nations Funds at (800) 321-7854.
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TABLE OF CONTENTS
Page
INTRODUCTION ............................................................... 1
ADDITIONAL INFORMATION ON FUND INVESTMENTS ................................. 2
General ............................................................... 2
Additional Investment Limitations ..................................... 2
Asset-Backed Securities ............................................... 7
Borrowings ............................................................ 9
Commercial Instruments ................................................ 10
Combined Transactions ................................................. 10
Convertible Securities ................................................ 11
Corporate Debt Securities ............................................. 11
Custodial Receipts .................................................... 12
Currency Swaps ........................................................ 12
Delayed Delivery Transactions ......................................... 12
Dollar Roll Transactions .............................................. 13
Equity Swap Contracts ................................................. 13
Foreign Currency Transactions ......................................... 14
Futures, Options and Other Derivative
Instruments ....................................................... 15
Risk Factors Associated with Futures and Options Transactions ......... 21
Guaranteed Investment Contracts ....................................... 23
Insured Municipal Securities .......................................... 24
Interest Rate Transactions ............................................ 24
Lower Rated Debt Securities ........................................... 24
Municipal Securities .................................................. 25
Options on Currencies ................................................. 43
Other Investment Companies ............................................ 43
Participation Interests and Company Receipts .......................... 43
Real Estate Investment Trusts ......................................... 43
Repurchase Agreements ................................................. 44
Reverse Repurchase Agreements ......................................... 44
Securities Lending .................................................... 44
Short Sales ........................................................... 45
Special Situations .................................................... 45
Stand-by Commitments .................................................. 45
Stripped Securities ................................................... 46
U.S. and Foreign Bank Obligations ..................................... 46
U.S. Government Obligations ........................................... 47
Use of Segregated and Other Special Accounts .......................... 47
Variable and Floating Rate Instruments ................................ 48
Warrants .............................................................. 48
When-Issued Purchases and Forward Commitments ......................... 49
NET ASSET VALUE ............................................................ 49
Purchases and Redemptions ............................................. 49
Investment Strategy ................................................... 50
Money Market Funds .................................................... 50
Non-Money Market Funds ................................................ 50
Exchanges ............................................................. 51
DESCRIPTION OF SHARES ...................................................... 52
Dividends and Distributions of NFI .................................... 52
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Dividends and Distributions of NFP .................................... 53
Dividends and Distributions of NFT .................................... 53
ADDITIONAL INFORMATION CONCERNING TAXES .................................... 54
General ............................................................... 54
Excise Tax ............................................................ 55
Private Letter Ruling ................................................. 55
Taxation of Fund Investments .......................................... 55
Foreign Taxes ......................................................... 56
Capital Gain Distribution ............................................. 57
Other Distributions ................................................... 57
Disposition of Fund Shares ............................................ 57
Federal Income Tax Rates .............................................. 57
Corporate Shareholders ................................................ 58
Foreign Shareholders .................................................. 58
Backup Withholding .................................................... 58
Tax Deferred Plans .................................................... 58
Special Tax Consideration ............................................. 59
Other Matters ......................................................... 61
FUND TRANSACTIONS AND BROKERAGE ............................................ 61
General Brokerage Policy .............................................. 61
BROKERAGE COMMISSIONS ...................................................... 63
Section 28(e) Standards ............................................... 64
DIRECTORS AND OFFICERS ..................................................... 65
Nations Funds Retirement Plan ......................................... 68
Nations Funds Deferred Compensation Plan .............................. 68
Compensation Table .................................................... 69
Shareholder and Trustee Liability ..................................... 70
INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY,
TRANSFER AGENCY, SHAREHOLDER SERVICING AND
DISTRIBUTION AGREEMENTS .................................................... 70
The Companies and Their Common Stock .................................. 70
Investment Adviser .................................................... 72
Advisory Fees ......................................................... 75
Sub-Advisory Fees ..................................................... 79
Investment Styles ..................................................... 81
Administrator, Co-Administrator and Sub-Administrator ................. 87
Distribution Plans and Shareholder Servicing
Arrangements for Investor Shares .................................. 93
Fees Paid Pursuant to Shareholder Servicing/
Distribution Plans - Investor A Shares ............................ 102
Fees Paid Pursuant to Distribution Plan
Investor B Shares - Money Market Funds ............................ 103
Investor-C Shares - Money Market Funds
Investor B Shares - Non-Money Market Funds ........................ 105
Shareholder Servicing Agreements-Money Market Funds
(Primary B Shares) ................................................ 108
Shareholder Administration Plan-Non-Money Market Funds
(Primary B Shares) ................................................ 108
Expenses .............................................................. 109
Transfer Agents and Custodians ........................................ 110
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DISTRIBUTOR ................................................................ 110
INDEPENDENT ACCOUNTANTS AND REPORTS ........................................ 111
COUNSEL .................................................................... 111
ADDITIONAL INFORMATION ON PERFORMANCE ...................................... 111
Yield Calculations .................................................... 111
Total Return Calculations ............................................. 121
MISCELLANEOUS .............................................................. 135
Certain Record Holders ................................................ 135
SUITABILITY OF NATIONS TREASURY FUND FOR
INVESTMENT BY MUNICIPAL INVESTORS .......................................... 165
SCHEDULE A - Description of Ratings ........................................ A-1
SCHEDULE B - Additional Information Concerning Options &
Futures .................................................................... B-1
SCHEDULE C - Additional Information Concerning Mortgage
Backed Securities .......................................................... C-1
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INTRODUCTION
Nations Fund Portfolios, Inc. ("NFP"), Nations Fund, Inc. ("NFI") and
Nations Fund Trust ("NFT") (individually a "Company", and collectively, the
"Companies") are mutual funds. The rules and regulations of the United States
Securities and Exchange Commission (the "SEC") require all mutual funds to
furnish prospective investors with certain information concerning the activities
of the mutual fund being considered for investment. This information about each
Company is included in various Prospectuses.
NFP currently consists of three different investment portfolios. This SAI
pertains to the Primary A, Primary B, Investor A, Investor B and Investor C
Shares of Nations Emerging Markets Fund (the "Emerging Markets Fund"), Nations
Pacific Growth Fund (the "Pacific Growth Fund") and Nations Global Government
Income Fund (the "Global Government Income Fund") (each, a "Fund" and
collectively, the "NFP Funds").
NFI currently consists of nine different investment portfolios. This SAI
pertains to the Primary A, Primary B, Investor A, Investor B, Investor C and
Daily Shares of Nations Prime Fund (the "Prime Fund") and Nations Treasury Fund
(the "Treasury Fund") (collectively referred to as the "NFI Money Market
Funds"), and the Primary A, Primary B, Investor A, Investor B and Investor C
Shares of Nations Equity Income Fund (the "Equity Income Fund"), Nations
Government Securities Fund (the "Government Securities Fund"), Nations Small
Company Growth Fund (the "Small Company Growth Fund"), Nations U.S. Government
Bond Fund (the "U.S. Government Bond Fund"), Nations International Equity Fund
(the "International Equity Fund"), Nations International Growth Fund (the
"International Growth Fund") and Nations International Value Fund (the
"International Value Fund").
NFT currently consists of thirty-seven different investment portfolios.
This SAI pertains to the Primary A, Primary B, Investor A, Investor B, Investor
C and Daily Shares of Nations Government Money Market Fund ("Government Money
Market Fund") and Nations Tax Exempt Fund ("Tax Exempt Fund") (collectively,
also referred to as the "NFT Money Market Funds") and the Primary A, Primary B,
Investor A, Investor B and Investor C 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 Managed Value Index
Fund ("Managed Value Index Fund"), Nations Managed SmallCap Value Index Fund
("Managed SmallCap Value Index Fund"), Nations Marsico Growth & Income Fund (the
"Marsico Growth & Income Fund"), Nations Marsico Focused Equities Fund (the
"Marsico Focused Equities 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 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 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 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"). 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
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Florida Municipal Bond Fund, Georgia Municipal Bond Fund, Maryland Municipal
Bond Fund, North Carolina Municipal Bond Fund, South Carolina Municipal Bond
Fund, 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 NFI Money Market Funds and the NFT Money Market Funds are collectively
referred to herein as the "Money Market Funds". All other Funds of NFP, NFI and
NFT are referred to as "Non-Money Market Funds". The Primary A and Primary B
Shares are collectively referred to herein as "Primary Shares" and the Investor
A, Investor B, Investor C, and Daily Shares are referred to as "Investor
Shares."
NationsBanc Advisors, Inc. ("NBAI") is the investment adviser to the
Funds. Gartmore Global Partners ("Gartmore") is the investment sub-adviser
to the International Equity Fund, Nations Emerging Markets Fund, Nations
Pacific Growth Fund and Nations International Growth Fund. Boatmen's Capital
Management, Inc. ("Boatmen's") is the investment sub-adviser to the U.S.
Government Bond Fund. Brandes Investment Partners, L.P. ("Brandes") is the
investment sub-adviser to the International Value Fund. Marsico Capital
Management, LLC ("Marsico Capital") is investment sub-adviser to the Marsico
Focused Equities Fund and Marsico Growth & Income Fund. TradeStreet
Investment Associates, Inc. ("TradeStreet") is the investment sub-adviser to
all other Funds. As used herein the term "Adviser" shall mean NBAI,
TradeStreet, Gartmore, Boatmen's, Brandes and/or Marsico Capital as the
context may require.
This SAI is intended to furnish prospective investors with additional
information concerning the Companies and the Funds. Some of the information
required to be in this SAI is also included in the Funds' current Prospectuses,
and, in order to avoid repetition, reference will be made to sections of the
Prospectuses. Additionally, the Prospectuses and this SAI omit certain
information contained in the registration statement filed with the SEC. Copies
of the registration statement, including items omitted from the Prospectuses and
this SAI, may be obtained from the SEC by paying the charges prescribed under
its rules and regulations. No investment in Primary Shares or Investor Shares
should be made without first reading the related Prospectuses.
ADDITIONAL INFORMATION ON FUND INVESTMENTS
GENERAL
Information concerning each Fund's investment objective is set forth in
each of the Prospectuses under the headings "About the Funds--Objectives." There
can be no assurance that the Funds will achieve their objectives. The principal
features of the Funds' investment programs and the primary risks associated with
those investment programs are discussed in the Prospectuses under the heading
"About the Funds--How Objectives Are Pursued" and "Appendix A--Portfolio
Securities." The securities in which the Money Market Funds invest may not yield
as high a level of current income as longer term or lower grade securities,
which generally have less liquidity and greater fluctuation in value. The values
of the securities in which the Funds invest fluctuate based upon interest rates,
foreign currency rates, the financial stability of the issuer and market
factors.
ADDITIONAL INVESTMENT LIMITATIONS
Significant investment restrictions applicable to the Funds' investment
programs are set forth in the Prospectuses under the heading "How Objectives Are
Pursued - Investment Limitations." Additionally, as a matter of fundamental
policy which may not be changed without a majority vote of a Fund's shareholders
(as that term is defined under the heading "Investment Advisory, Administration,
Custody, Transfer Agency, Shareholder Servicing and Distribution Agreements --
"The Company and Its Common Stock" in this SAI), each Fund (except with respect
to certain Funds whose restrictions are enumerated separately) will not:
1. Borrow money or issue senior securities as defined in the Investment
Company Act of 1940, as amended (the "1940 Act") except that (a) a Fund
may borrow money from banks for temporary purposes in amounts up to
one-third of the value of such Fund's total assets at the time of
borrowing, provided that borrowings in
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excess of 5% of the value of such Fund's total assets will be repaid prior
to the purchase of additional 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. Each Fund may enter into reverse repurchase agreements or
dollar roll transactions. The purchase or sale of futures contracts and
related options shall not be considered to involve the borrowing of money
or issuance of senior securities.
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 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. (A
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, as a matter of fundamental policy, the Small Company Growth
Fund and the Government Bond Fund may not:
1. Purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalists or
certificates of deposit for any such securities) if, immediately after
such purchase, more than 5% of the value of the Fund's total assets
would be invested in the securities of such issuer, or more than 10% of
the issuer's outstanding voting securities would be owned by the Fund
or the Company; except that up to 25% of the value of a Fund's total
assets may be invested without regard to the foregoing limitations.
For purposes of this limitation, (a) a security is considered to be
issued by the entity (or entities) whose assets and revenues back the
security and (b) a guarantee of a security shall not be deemed to be a
security issued by the guarantor when the value of securities issued
and guaranteed by the guarantor, and owned by the Fund, does not exceed
10% of the value of the Fund's total assets. Each Fund will maintain
asset coverage of 300% or maintain a segregated account with its
custodian bank in which it will maintain cash, U.S. Government
Securities or other liquid high grade debt obligations equal in value
to its borrowing.
2. Purchase any securities which would cause 25% or more of the value of
the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that: (a) there is no
limitation with respect to (i) instruments issued or guaranteed by the
United States, any state, territory or possession of the United States,
the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions and (ii) repurchase
agreements secured by the instruments described in clause (i); (b)
wholly-owned finance companies will be
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considered to be in the industries of their parents if their activities
are primarily related to financing the activities of the parents; and (c)
utilities will be divided according to their services, for example, gas,
gas transmission, electric and gas, electric and telephone will each be
considered a separate industry or (iii) with respect to the Small Company
Growth Fund, instruments issued by domestic branches of U.S. Banks.
Purchase or sell real estate, except that the Fund may purchase securities
of issuers which deal in real estate and may purchase securities which are
secured by interest in real estate.
In addition, as a matter of fundamental policy, the International Value
Fund may not:
1. In general, purchase or sell real estate, except that the Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interest in real estate.
2. Acquire any other investment company or investment company security except
in connection with a merger, consolidation, reorganization or acquisition
of assets or where otherwise permitted by the 1940 Act.
3. In general, act as an underwriter of securities within the meaning of the
Securities Act of 1933, as amended, except to the extent that the purchase
of obligations directly from the issuer thereof in accordance with the
Fund's investment objective, policies and limitations may be deemed to be
underwriting.
4. Borrow money or issue senior securities, except that the Fund may
borrow from banks and enter into reverse repurchase agreements for
temporary purposes in amounts up to one-third of the value of the total
assets at the time of such borrowing; or mortgage, pledge or
hypothecate any assets, except in connection with any such borrowing
and then in amounts not in excess of one-third of the value of the
Fund's total assets at the time of such borrowing. The Fund will not
purchase securities while its borrowings (including reverse repurchase
agreements) in excess of 5% of its total assets are outstanding.
Securities held in escrow or separate accounts in connection with the
Fund's investment practices described in this SAI or in the
Prospectuses are not deemed to be pledged for purposes of this
limitation.
5. Make loans, except that the Fund may purchase and hold debt instruments
and enter into repurchase agreements in accordance with its investment
objective and policies and may lend portfolio securities.
6. Purchase securities of companies for the purpose of exercising control.
7. Purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or
certificates of deposit for any such securities) if, immediately after
such purchase, (a) with respect to the Fund, more than 5% of the value
of the Fund's total assets would be invested in the securities of such
issuer, or (b) more than 10% of the issuer's outstanding voting
securities would be owned by the Fund; except that up to 25% of the
value of the Fund's total assets may be invested without regard to the
foregoing limitations. For purposes of this limitation, with respect
to the Fund, a security is considered to be issued by the entity (or
entities) whose assets and revenues back the security. A guarantee of
a security shall not be deemed to be a security issued by the guarantor
when the value of all securities issued and guaranteed by the
guarantor, and owned by the Fund, does not exceed 10% of the value of
the Fund's total assets.
8. Purchase any securities which would cause 25% or more of the value of
the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no
limitation with respect to (i) instruments issued or guaranteed by the
United States, any state, territory or possession of the United States,
the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions and (ii) repurchase
agreements secured by the instruments described in clause (i);
(b) wholly-owned finance companies will be considered to be in the
industries of their parents if their activities are primarily related
to financing the activities of the parents; and (c) utilities will be
divided according to their services, for example, gas, gas
transmission, electric and gas, electric and telephone will each be
considered a separate industry.
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9. Write or sell put options, call options, straddles, spreads or any
combination thereof, except for transactions in options on securities,
securities indices, futures contracts, options on futures contracts,
financial instruments, currencies, forward currency exchange contracts and
swaps, floors and caps.
10. Purchase securities on margin, make short sales of securities or maintain
a short position, except that (a) this investment limitation shall not
apply to the Fund's transactions in futures contracts, currencies and
related options, and (b) the Fund may obtain short-term credit as may be
necessary for the clearance of purchases and sales of portfolio
securities.
11. In general, purchase or sell commodity contracts, or invest in oil,
gas or mineral exploration or development programs, except that the
Fund may, to the extent appropriate to its investment objective,
purchase publicly traded securities of companies engaging in whole or
in part in such activities and may enter into futures contracts and
related options; and the Fund may enter into foreign currency contracts
and related options to the extent permitted by its investment objective
and polices.
In addition, certain non-fundamental investment restrictions are also
applicable to various investment portfolios, including the following:
1. No Fund will purchase or retain the securities of any issuer if the
officers, or directors of the Company, its advisers, or managers owning
beneficially more than one half of one percent of the securities of each
issuer together own beneficially more than five percent of such
securities.
2. No Fund will purchase securities of unseasoned issuers, including
their predecessors, that have been in operation for less than three
years, if by reason thereof the value of such Fund's investment in such
classes of securities would exceed 5% of such Fund's total assets. For
purposes of this limitation, issuers include predecessors, sponsors,
controlling persons, general partners, guarantors and originators of
underlying assets which have less than three years of continuous
operation or relevant business experience.
3. 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. No Money Market Fund may 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 will purchase securities of companies for the purpose of
exercising control.
7. No Money Market Fund 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
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Securities Act of 1933 that the Board of Directors, or its delegate,
determines to be liquid, based upon the trading markets for the specific
security.
8. No Non-Money Market Fund 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) of the Securities Act of 1933 that the Board
of Directors, or its delegate, determines to be liquid, based upon the
trading markets for the specific security.
9. No Fund 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 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 will purchase oil, gas or mineral leases or other interests (a
Fund may, however, purchase and sell the securities of companies engaged
in the exploration, development, production, refining, transporting and
marketing of oil, gas or minerals).
As a matter of non-fundamental policy, the Small Company Growth Fund and
Government Bond Fund may not:
1. Lend its securities if collateral values are not continuously maintained
at no less than 100% by market to market daily.
In addition, as a matter of non-fundamental policy, the Government Bond Fund may
not:
1. Purchase equity securities of issuers that are not readily marketable if
the value of a Fund's aggregate investment in such securities will exceed
5% of its total assets.
2. Purchase securities of issuers restricted as to disposition if the value
of its aggregate investment in such classes of securities will exceed 10%
of its total assets.
For purposes of the foregoing limitations, any limitation that involves a
maximum percentage shall not be considered violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition or
encumbrance of securities or assets of, or borrowings on behalf of, a Fund.
For purposes of the foregoing fundamental and non-fundamental limitations,
any limitation that involves a maximum percentage shall not be considered
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition or encumbrance of securities or assets of, or
borrowings on behalf of, the Funds.
Pursuant to a fundamental investment restriction (see "How Objectives are
Pursued" "Investment Limitations" in the Companies' Prospectuses), the Companies
do not have authority to purchase any securities which would cause more than 25%
of the value of any Fund's total assets at the time of such purchase to be
invested in the securities of one or more issuers conducting their principal
business activities in the same industry, provided that, there is no limitation
with respect to investments in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities and further provided that with
respect to the Money Market Funds only, there is no limitation with respect to
investments in obligations by banks. The position of the staff of the SEC is
that the exclusion with respect to banks may only be applied to domestic banks.
For this purpose, the staff also takes the position that United States branches
of foreign banks and foreign branches of domestic banks may, if certain
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conditions are met, be treated as "domestic banks." The Companies currently
intend to consider only obligations of "domestic banks" to be within the
exclusion with respect to banks. For this purpose, "domestic banks" will be
construed by the Companies to include: (a) United States branches of foreign
banks, to the extent they are subject to the same regulation as United States
banks; and (b) foreign branches of domestic banks with respect to which the
domestic bank would be unconditionally liable in the event that the foreign
branch failed to pay on its instruments for any reason.
For purposes of the foregoing limitations, any limitation that involves a
maximum percentage shall not be considered violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition or
encumbrance of securities or assets of, or borrowings on behalf of, a Fund.
Additional information on the particular types of securities in which
certain Funds may invest is set forth below.
ASSET-BACKED SECURITIES
IN GENERAL. Asset-backed securities arise through the grouping by
governmental, government-related, and private organizations of loans,
receivables, or other assets originated by various lenders. Asset-backed
securities consist of both mortgage- and non-mortgage-backed securities.
Interests in pools of these assets may differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal paid at maturity or specified call dates. Conversely,
asset-backed securities provide periodic payments which may consist of both
interest and principal payments.
The life of an asset-backed security varies depending upon rate of the
prepayment of the underlying debt instruments. The rate of such prepayments will
be a function of current market interest rates, and other economic and
demographic factors. For example, falling interest rates generally result in an
increase in the rate of prepayments of mortgage loans while rising interest
rates generally decrease the rate of prepayments. An acceleration in prepayments
in response to sharply falling interest rates will shorten the security's
average maturity and limit the potential appreciation in the security's value
relative to a conventional debt security. Consequently, asset-backed securities
may not be as effective in locking in high, long-term yields. Conversely, in
periods of sharply rising rates, prepayments are generally slow, increasing the
security's average life and its potential for price depreciation.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent an
ownership interest in a pool of mortgage loans.
Mortgage pass-through securities may represent participation interests in
pools of residential mortgage loans originated by U.S. governmental or private
lenders and guaranteed, to the extent provided in such securities, by the U.S.
Government or one of its agencies, authorities or instrumentalities. Such
securities, which are ownership interests in the underlying mortgage loans,
differ from conventional debt securities, which provide for periodic payment of
interest in fixed amounts (usually semi-annually) and principal payments at
maturity or on specified call dates. Mortgage pass-through securities provide
for monthly payments that are a "pass-through" of the monthly interest and
principal payments (including any prepayments) made by the individual borrowers
on the pooled mortgage loans, net of any fees paid to the guarantor of such
securities and the servicer of the underlying mortgage loans.
The guaranteed mortgage pass-through securities in which a Fund may invest
may include those issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac.
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
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usually result in the return of the greater part of principal invested far in
advance of the maturity of the mortgages in the pool.
The yield which will be earned on mortgage-backed securities may vary from
their coupon rates for the following reasons: (i) Certificates may be issued at
a premium or discount, rather than at par; (ii) Certificates may trade in the
secondary market at a premium or discount after issuance; (iii) interest is
earned and compounded monthly, which has the effect of raising the effective
yield earned on the Certificates; and (iv) the actual yield of each Certificate
is affected by the prepayment of mortgages included in the mortgage pool
underlying the Certificates and the rate at which principal so prepaid is
reinvested. In addition, prepayment of mortgages included in the mortgage pool
underlying a GNMA Certificate purchased at a premium may result in a loss to the
Fund.
Mortgage-backed securities issued by private issuers, whether or not such
obligations are subject to guarantees by the private issuer, may entail greater
risk than obligations directly or indirectly guaranteed by the U.S.
Government.
Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities (collateral
collectively hereinafter referred to as "Mortgage Assets"). Multi-class
pass-through securities are interests in a trust composed of Mortgage Assets and
all references herein to CMOs will include multi-class pass-through securities.
Payments of principal of and interest on the Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distribution on the multi-class pass-through securities.
Moreover, principal prepayments on the Mortgage Assets may cause the CMOs
to be retired substantially earlier than their stated maturities or final
distribution dates, resulting in a loss of all or part of the premium if any has
been paid. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semiannual basis.
The principal and interest payments on the Mortgage Assets may be
allocated among the various classes of CMOs in several ways. Typically, payments
of principal, including any prepayments, on the underlying mortgages are applied
to the classes in the order of their respective stated maturities or final
distribution dates, so that no payment of principal is made on CMOs of a class
until all CMOs of other classes having earlier stated maturities or final
distribution dates have been paid in full.
Stripped mortgage-backed securities ("SMBS") are derivative multi-class
mortgage securities. A Fund will only invest in SMBS that are obligations backed
by the full faith and credit of the U.S. Government. SMBS are usually structured
with two classes that receive different proportions of the interest and
principal distributions from a pool of mortgage assets. A Fund will only invest
in SMBS whose mortgage assets are U.S. Government obligations.
A common type of SMBS will be structured so that one class receives some
of the interest and most of the principal from the mortgage assets, while the
other class receives most of the interest and the remainder of the principal. If
the underlying mortgage assets experience greater than anticipated prepayments
of principal, a Fund may fail to fully recoup its initial investment in these
securities. The market value of any class which consists primarily or entirely
of principal payments generally is unusually volatile in response to changes in
interest rates.
The average life of mortgage-backed securities varies with the maturities
of the underlying mortgage instruments. The average life is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities as the result of mortgage prepayments, mortgage refinancings, or
foreclosures. The rate of mortgage prepayments, and hence the average life of
the certificates, will be a function of the level of interest rates, general
economic conditions, the location and age of the mortgage and other social and
demographic conditions. Such prepayments are passed through to the registered
holder with the regular monthly payments of principal and interest and have the
effect of reducing future payments. Estimated average life will be determined by
the Adviser and used for the purpose of determining the average weighted
maturity and duration of the Funds.
NON-MORTGAGE ASSET-BACKED SECURITIES. Non-mortgage asset-backed securities
include interests in pools of receivables, such as motor vehicle installment
purchase obligations and credit card receivables. Such securities are
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generally issued as pass-through certificates, which represent undivided
fractional ownership interests in the underlying pools of assets. Such
securities also may be debt instruments, which are also known as collateralized
obligations and are generally issued as the debt of a special purpose entity
organized solely for the purpose of owning such assets and issuing such debt.
Such securities also may include instruments issued by certain trusts,
partnerships or other special purpose issuers, including pass-through
certificates representing participations in, or debt instruments backed by, the
securities and other assets owned by such issuers.
Non-mortgage-backed securities are not issued or guaranteed by the U.S.
Government or its agencies or instrumentalities; however, the payment of
principal and interest on such obligations may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution (such as a bank or insurance company) unaffiliated with
the issuers of such securities.
The purchase of non-mortgage-backed securities raises considerations
peculiar to the financing of the instruments underlying such securities. For
example, most organizations that issue asset-backed securities relating to motor
vehicle installment purchase obligations perfect their interests in their
respective obligations only by filing a financing statement and by having the
servicer of the obligations, which is usually the originator, take custody
thereof. In such circumstances, if the servicer were to sell the same
obligations to another party, in violation of its duty not to do so, there is a
risk that such party could acquire an interest in the obligations superior to
that of the holders of the Asset-backed Securities. Also, although most such
obligations grant a security interest in the motor vehicle being financed, in
most states the security interest in a motor vehicle must be noted on the
certificate of title to perfect such security interest against competing claims
of other parties. Due to the larger number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the obligations
underlying the Asset-backed Securities, usually is not amended to reflect the
assignment of the seller's security interest for the benefit of the holders of
the Asset-backed Securities. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on those securities. In addition, various state and Federal laws give
the motor vehicle owner the right to assert against the holder of the owner's
obligation certain defenses such owner would have against the seller of the
motor vehicle. The assertion of such defenses could reduce payments on the
related Asset-backed Securities. Insofar as credit card receivables are
concerned, credit card holders are entitled to the protection of a number of
state and Federal consumer credit laws, many of which give such holders the
right to set off certain amounts against balances owed on the credit card,
thereby reducing the amounts paid on such receivables. In addition, unlike most
other Asset-backed Securities, credit card receivables are unsecured obligations
of the card holder.
While the market for Asset-backed Securities is becoming increasingly
liquid, the market for mortgage-backed securities issued by certain private
organizations and non-mortgage-backed securities is not as well developed. As
stated above, the Adviser intends to limit its purchases of mortgage-backed
securities issued by certain private organizations and non-mortgage-backed
securities to securities that are readily marketable at the time of purchase.
BORROWINGS
NFT, NFI and NFP participate in an uncommitted line of credit provided by
The Bank of New York under a line of credit agreement (the "Agreement").
Advances under the Agreement are taken primarily for temporary or emergency
purposes, including the meeting of redemption requests that otherwise might
require the untimely disposition of securities. Interest on borrowings is
payable at the federal funds rate plus .50% on an annualized basis. The
Agreement requires, among other things, that each participating Fund maintain a
ratio of no less than 4 to 1 net assets (not including funds borrowed pursuant
to the Agreement) to the aggregate amount of indebtedness pursuant to the
Agreement. Specific borrowings by a Fund under the Agreement over the last
fiscal year, if any, can by found in the Funds' Annual Reports for the year
ended March 31, 1998.
COMMERCIAL INSTRUMENTS
Commercial Instruments consist of short-term U.S. dollar-denominated
obligations issued by domestic corporations or issued in the U.S. by foreign
corporations and foreign commercial banks. The Nations Prime Fund will limit
purchases of commercial instruments to instruments which: (a) if rated by at
least two Nationally Rated
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Statistical Rating Organizations ("NRSROs"), are rated in the highest rating
category for short-term debt obligations given by such organizations, or if only
rated by one such organization, are rated in the highest rating category for
short-term debt obligations given by such organization; or (b) if not rated, are
(i) comparable in priority and security to a class of short-term instruments of
the same issuer that has such rating(s), or (ii) of comparable quality to such
instruments as determined by NFI's Board of Directors on the advice of the
Adviser.
Investments by a Fund in commercial paper will consist of issues rated in
a manner consistent with such Fund's investment policies and objectives. In
addition, the Funds may acquire unrated commercial paper and corporate bonds
that are determined by the Adviser at the time of purchase to be of comparable
quality to rated instruments that may be acquired by such Funds as previously
described.
Variable-rate master demand notes are unsecured instruments that permit
the indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate. While some of these notes are not rated by credit rating
agencies, issuers of variable rate master demand notes must satisfy the Adviser
that similar criteria to that set forth above with respect to the issuers of
commercial paper purchasable by the Nations Prime Fund are met. Variable-rate
instruments acquired by a Fund will be rated at a level consistent with such
Fund's investment objective and policies of high quality as determined by a
major rating agency or, if not rated, will be of comparable quality as
determined by the Adviser. See also the discussion of variable- and
floating-rate instruments in this SAI.
Variable- and floating-rate instruments are unsecured instruments that
permit the indebtedness thereunder to vary. While there may be no active
secondary market with respect to a particular variable or floating rate
instrument purchased by a Fund, a Fund may, from time to time as specified in
the instrument, demand payment of the principal or may resell the instrument to
a third party. The absence of an active secondary market, however, could make it
difficult for a Fund to dispose of an instrument if the issuer defaulted on its
payment obligation or during periods when a Fund is not entitled to exercise its
demand rights, and a Fund could, for these or other reasons, suffer a loss. A
Fund may invest in variable and floating rate instruments only when the Adviser
deems the investment to involve minimal credit risk. If such instruments are not
rated, the Adviser will consider the earning power, cash flows, and other
liquidity ratios of the issuers of such instruments and will continuously
monitor their financial status to meet payment on demand. In determining average
weighted portfolio maturity, an instrument will be deemed to have a maturity
equal to the longer of the period remaining to the next interest rate adjustment
or the demand notice period specified in the instrument.
Certain Funds also may purchase short-term participation interests in
loans extended by banks to companies, provided that both such banks and such
companies meet the quality standards set forth above. In purchasing a loan
participation or assignment, the Fund acquires some or all of the interest of a
bank or other lending institution in a loan to a corporate borrower. Many such
loans are secured and most impose restrictive covenants which must be met by the
borrower and which are generally more stringent than the covenants available in
publicly traded debt securities. However, interests in some loans may not be
secured, and the Fund will be exposed to a risk of loss if the borrower
defaults. Loan participations also may be purchased by the Fund when the
borrowing company is already in default. In purchasing a loan participation, the
Fund may have less protection under the federal securities laws than it has in
purchasing traditional types of securities. The Fund's ability to assert its
rights against the borrower will also depend on the particular terms of the loan
agreement among the parties.
COMBINED TRANSACTIONS
Certain Funds may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple forward foreign
currency exchange contracts and any combination of futures, options and forward
foreign currency exchange contracts ("component" transactions), instead of a
single transaction, as part of a single hedging strategy when, in the opinion of
the Adviser, it is in the best interest of a Fund to do so and where underlying
hedging strategies are permitted by a Fund's investment policies. A combined
transaction, while part of a single hedging strategy, may contain elements of
risk that are present in each of its component transactions. (See above for the
risk characteristics of certain transactions.)
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CONVERTIBLE SECURITIES
Certain Funds may invest in convertible securities, such as bonds, notes,
debentures, preferred stocks and other securities that may be converted into
common stock. All convertible securities purchased by the Fund will be rated in
the top two categories by an Nationally Recognized Statistical Rating
Organization ("NRSRO") or, if unrated, determined by the Adviser to be of
comparable quality. Investments in convertible securities can provide income
through interest and dividend payments, as well as, an opportunity for capital
appreciation by virtue of their conversion or exchange features.
The convertible securities in which a Fund may invest include fixed-income
and zero coupon debt securities, and preferred stock that may be converted or
exchanged at a stated or determinable exchange ratio into underlying shares of
common stock. The exchange ratio for any particular convertible security may be
adjusted from time to time due to stock splits, dividends, spin-offs, other
corporate distributions or scheduled changes in the exchange ratio. Convertible
debt securities and convertible preferred stocks, until converted, have general
characteristics similar to both debt and equity securities. Although to a lesser
extent than with debt securities, generally, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of the conversion
exchange feature, the market value of convertible securities typically changes
as the market value of the underlying common stock changes, and, therefore, also
tends to follow movements in the general market for equity securities. A unique
feature of convertible securities is that as the market price of the underlying
common stock declines, convertible securities tend to trade increasingly on a
yield basis, and so may not experience market value declines to the same extent
as the underlying common stock. When the market price of the underlying common
stock increases, the price of a convertible security tends to rise as a
reflection of the value of the underlying common stock, although typically not
as much as the price of the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
As debt securities, convertible securities are investments which provide
for a stream of income or, in the case of zero coupon securities, accretion of
income with generally higher yields than common stocks. Of course, like all debt
securities, there can be no assurance of income or principal payments because
the issuers of the convertible securities may default on their obligations.
Convertible securities generally offer lower yields than non-convertible
securities of similar quality because of their conversion exchange features.
Convertible securities generally are subordinated to other similar debt
securities but not to non-convertible securities of the same issuer. Convertible
bonds, as corporate debt obligations, are senior in right of payment to all
equity securities, and convertible preferred stock is senior to common stock, of
the same issuer. However, convertible bonds and convertible preferred stock
typically have lower coupon rates than similar non-convertible securities.
Convertible securities may be issued as fixed income obligations that pay
current income or as zero coupon notes and bonds, including Liquid Yield Option
Notes ("LYONs"). Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation because
increases (or decreases) in the market value of such securities closely follow
the movements in the market value of the underlying common stock. Zero coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks because they usually are issued with short maturities
(15 years or less) and are issued with options and/or redemption features
exercisable by the holder of the obligation entitling the holder to redeem the
obligation and receive a defined cash payment.
CORPORATE DEBT SECURITIES
Certain Funds may invest in corporate debt securities of domestic issuers
of all types and maturities, such as bonds, debentures, notes and commercial
paper. Corporate debt securities may involve equity features, such as conversion
or exchange rights or warrants for the acquisition of stock of the same or a
different issuer, participation based on revenue, sales or profit, or the
purchase of common stock or warrants in a unit transaction (where corporate debt
obligations and common stock are offered as a unit). Each Fund may also invest
in corporate debt securities of foreign issuers.
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The corporate debt securities in which the Funds will invest will be rated
investment grade by at least one NRSRO (E.G., BBB or above by Standard & Poor's
Corporation ("S&P") or Baa or above by Moody's Investors Services, Inc.
("Moody's")). Commercial paper purchased by the Funds will be rated in the top
two categories by a NRSRO. Corporate debt securities that are not rated may be
purchased by such Funds if they are determined by the Adviser to be of
comparable quality under the direction of the Board of Directors of the Company.
If the rating of any corporate debt security held by a Fund falls below such
ratings or if the Adviser determines that an unrated corporate debt security is
no longer of comparable quality, then such security shall be disposed of in an
orderly manner as quickly as possible. A description of these ratings is
attached as Schedule A to this Statement of Additional Information.
CUSTODIAL RECEIPTS
Certain Funds may also acquire custodial receipts that evidence ownership
of future interest payments, principal payments or both on certain U.S.
Government notes or bonds. Such notes and bonds are held in custody by a bank on
behalf of the owners. These custodial receipts are known by various names,
including "Treasury Receipts," "Treasury Investors Growth Receipts" and
"Certificates of Accrual on Treasury Securities." Although custodial receipts
are not considered U.S. Government securities, they are indirectly issued or
guaranteed as to principal and interest by the U.S. Government, its agencies,
authorities or instrumentalities. Custodial receipts will be treated as illiquid
securities.
CURRENCY SWAPS
Certain Funds also may enter into currency swaps for hedging purposes and
to seek to increase total return. In as much as swaps are entered into for good
faith hedging purposes or are offset by a segregated account as described below,
the Fund and the Adviser believe that swaps do not constitute senior securities
as defined in the 1940 Act and, accordingly, will not treat them as being
subject to the Fund's borrowing restrictions. The net amount of the excess, if
any, of the Fund's obligations over its entitlement with respect to each
currency swap will be accrued on a daily basis and an amount of cash or liquid
high grade debt securities (i.e., securities rated in one of the top three
ratings categories by an NRSRO, or, if unrated, deemed by the Adviser to be of
comparable credit quality) having an aggregate net asset value at least equal to
such accrued excess will be maintained in a segregated account by the Fund's
custodian. The Fund will not enter into any currency swap unless the credit
quality of the unsecured senior debt or the claims-paying ability of the other
party thereto is considered to be investment grade by the Adviser.
DELAYED DELIVERY TRANSACTIONS
In a delayed delivery transaction, the Fund relies on the other party to
complete the transaction. If the transaction is not completed, the Fund may miss
a price or yield considered to be advantageous. In delayed delivery
transactions, delivery of the securities occurs beyond normal settlement
periods, but a Fund would not pay for such securities or start earning interest
on them until they are delivered. However, when a Fund purchases securities on
such a delayed delivery basis, it immediately assumes the risk of ownership,
including the risk of price fluctuation. Failure by a counterparty to deliver a
security purchased on a delayed delivery basis may result in a loss or missed
opportunity to make an alternative investment. Depending upon market conditions,
a Fund's delayed delivery purchase commitments could cause its net asset value
to be more volatile, because such securities may increase the amount by which
the Fund's total assets, including the value of when-issued and delayed delivery
securities held by the Fund, exceed its net assets.
DOLLAR ROLL TRANSACTIONS
Certain Funds may enter into "dollar roll" transactions, which consist of
the sale by a Fund to a bank or broker/dealer (the "counterparty") of GNMA
certificates or other mortgage-backed securities together with a commitment to
purchase from the counterparty similar, but not identical, securities at a
future date, at the same price. The counterparty receives all principal and
interest payments, including prepayments, made on the security while it is the
holder. A Fund receives a fee from the counterparty as consideration for
entering into the commitment to
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purchase. Dollar rolls may be renewed over a period of several months with a
different repurchase price and a cash settlement made at each renewal without
physical delivery of securities. Moreover, the transaction may be preceded by a
firm commitment agreement pursuant to which the Fund agrees to buy a security on
a future date. If the broker/dealer to whom a Fund sells the security becomes
insolvent, the Fund's right to purchase or repurchase the security may be
restricted; the value of the security may change adversely over the term of the
dollar roll; the security that the Fund is required to repurchase may be worth
less than the security that the Fund originally held, and the return earned by
the Fund with the proceeds of a dollar roll may not exceed transaction costs.
The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Fund's right to purchase
from the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Fund is able to purchase them.
Similarly, the Fund may be required to purchase securities in connection with a
dollar roll at a higher price than may otherwise be available on the open
market. Since, as noted above, the counterparty is required to deliver a
similar, but not identical security to the Fund, the security that the Fund is
required to buy under the dollar roll may be worth less than an identical
security. Finally, there can be no assurance that the Fund's use of the cash
that it receives from a dollar roll will provide a return that exceeds borrowing
costs.
EQUITY SWAP CONTRACTS
Certain Funds may from time to time enter into equity swap contracts. The
counterparty to an equity swap contract will typically be a bank, investment
banking firm or broker/dealer. For example, the counterparty will generally
agree to pay a Fund the amount, if any, by which the notional amount of the
Equity Swap Contract would have increased in value had it been invested in the
stocks comprising the S&P 500 Index in proportion to the composition of the
Index, plus the dividends that would have been received on those stocks. A Fund
will agree to pay to the counterparty a floating rate of interest (typically the
London Inter Bank Offered Rate) on the notional amount of the Equity Swap
Contract plus the amount, if any, by which that notional amount would have
decreased in value had it been invested in such stocks. Therefore, the return to
a Fund on any Equity Swap Contract should be the gain or loss on the notional
amount plus dividends on the stocks comprising the S&P 500 Index less the
interest paid by the Fund on the notional amount. A Fund will only enter into
Equity Swap Contracts on a net basis, i.e., the two parties' obligations are
netted out, with the Fund paying or receiving, as the case may be, only the net
amount of any payments. Payments under the Equity Swap Contracts may be made at
the conclusion of the contract or periodically during its term.
If there is a default by the counterparty to an Equity Swap Contract, a
Fund will be limited to contractual remedies pursuant to the agreements related
to the transaction. There is no assurance that Equity Swap Contract
counterparties will be able to meet their obligations pursuant to Equity Swap
Contracts or that, in the event of default, a Fund will succeed in pursuing
contractual remedies. A Fund thus assumes the risk that it may be delayed in or
prevented from obtaining payments owed to it pursuant to Equity Swap Contracts.
A Fund will closely monitor the credit of Equity Swap Contract counterparties in
order to minimize this risk.
Certain Funds may from time to time enter into the opposite side of Equity
Swap Contracts (i.e., where a Fund is obligated to pay the increase (net of
interest) or receive the decrease (plus interest) on the contract to reduce the
amount of the Fund's equity market exposure consistent with the Fund's
objective. These positions are sometimes referred to as Reverse Equity Swap
Contracts.
Equity Swap Contracts will not be used to leverage a Fund. A Fund will not
enter into any Equity Swap Contract or Reverse Equity Swap Contract unless, at
the time of entering into such transaction, the unsecured senior debt of the
counterparty is rated at least A by Moody's or S&P. Since the SEC considers
Equity Swap Contracts and Reverse Equity Swap Contracts to be illiquid
securities, a Fund will not invest in Equity Swap Contracts or Reverse Equity
Swap Contracts if the total value of such investments together with that of all
other illiquid securities which a Fund owns would exceed 15% of the Fund's total
assets.
The Adviser does not believe that a Fund's obligations under Equity Swap
Contracts or Reverse Equity Swap Contracts are senior securities and,
accordingly, the Fund will not treat them as being subject to its borrowing
restrictions. However, the net amount of the excess, if any, of a Fund's
obligations over its respective entitlements
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with respect to each Equity Swap Contract and each Reverse Equity Swap Contract
will be accrued on a daily basis and an amount of cash, U.S. Government
securities or other liquid high quality debt securities having an aggregate
market value at least equal to the accrued excess will be maintained in a
segregated account by the Fund's custodian.
FOREIGN CURRENCY TRANSACTIONS
As described in the Prospectuses, certain Funds may invest in foreign
currency transactions. Foreign securities involve currency risks. The U.S.
dollar value of a foreign security tends to decrease when the value of the U.S.
dollar rises against the foreign currency in which the security is denominated,
and tends to increase when the value of the U.S. dollar falls against such
currency. A Fund may purchase or sell forward foreign currency exchange
contracts ("forward contracts") to attempt to minimize the risk to the Fund from
adverse changes in the relationship between the U.S. dollar and foreign
currencies. A Fund may also purchase and sell foreign currency futures contracts
and related options (see "Purchase and Sale of Currency Futures Contracts and
Related Options"). A forward contract is an obligation to purchase or sell a
specific currency for an agreed price at a future date that is individually
negotiated and privately traded by currency traders and their customers.
Forward foreign currency exchange contracts establish an exchange rate at
a future date. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward foreign currency exchange contract generally has no
deposit requirement, and is traded at a net price without commission. A Fund
will direct its custodian to segregate high grade liquid assets in an amount at
least equal to its obligations under each forward foreign currency exchange
contract. Neither spot transactions nor forward foreign currency exchange
contracts eliminate fluctuations in the prices of a Fund's portfolio securities
or in foreign exchange rates, or prevent loss if the prices of these securities
should decline.
A Fund may enter into a forward contract, for example, when it enters into
a contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of the security (a
"transaction hedge"). In addition, when the Adviser believes that a foreign
currency may suffer a substantial decline against the U.S. dollar, it may enter
into a forward sale contract to sell an amount of that foreign currency
approximating the value of some or all of the Fund's securities denominated in
such foreign currency, or when the Adviser believes that the U.S. dollar may
suffer a substantial decline against the foreign currency, it may enter into a
forward purchase contract to buy that foreign currency for a fixed dollar amount
(a "position hedge").
A Fund may, however, enter into a forward contract to sell a different
foreign currency for a fixed U.S. dollar amount where the Adviser believes that
the U.S. dollar value of the currency to be sold pursuant to the forward
contract will fall whenever there is a decline in the U.S. dollar value of the
currency in which the fund securities are denominated (a "cross-hedge").
Foreign currency hedging transactions are an attempt to protect a Fund
against changes in foreign currency exchange rates between the trade and
settlement dates of specific securities transactions or changes in foreign
currency exchange rates that would adversely affect a portfolio position or an
anticipated portfolio position. Although these transactions tend to minimize the
risk of loss due to a decline in the value of the hedged currency, at the same
time they tend to limit any potential gain that might be realized should the
value of the hedged currency increase. The precise matching of the forward
contract amount and the value of the securities involved will not generally be
possible because the future value of these securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and date it matures.
The Fund's custodian will segregate cash, U.S. Government securities or
other high-quality debt securities having a value equal to the aggregate amount
of the Fund's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the segregated securities
declines, additional cash or securities will be segregated on a daily basis so
that the value of the segregated securities will equal the amount of the Fund's
commitments with respect to such contracts. As an alternative to segregating all
or part of such securities, the Fund may purchase a call option permitting the
Fund to purchase the amount of foreign currency being hedged by a forward sale
contract at a price no higher than the forward contract price or the Fund may
purchase a put option
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permitting the Fund to sell the amount of foreign currency subject to a forward
purchase contract at a price as high or higher than the forward contract price.
The Funds are dollar-denominated mutual funds and therefore consideration
is given to hedging part or all of the portfolio back to U.S. dollars from
international currencies. All decisions to hedge are based upon an analysis of
the relative value of the U.S. dollar on an international purchasing power
parity basis (purchasing power parity is a method for determining the relative
purchasing power of different currencies by comparing the amount of each
currency required to purchase a typical bundle of goods and services to domestic
markets) and an estimation of short-term interest rate differentials (which
affect both the direction of currency movements and also the cost of hedging).
FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS
FUTURES CONTRACTS IN GENERAL. A futures contract is an agreement between
two parties for the future delivery of fixed income securities or equity
securities or for the payment or acceptance of a cash settlement in the case of
futures contracts on an index of fixed income or equity securities. A "sale" of
a futures contract means the contractual obligation to deliver the securities at
a specified price on a specified date, or to make the cash settlement called for
by the contract. Futures contracts have been designed by exchanges which have
been designated "contract markets" by the Commodity Futures Trading Commission
("CFTC") and must be executed through a brokerage firm, known as a futures
commission merchant, which is a member of the relevant contract market. Futures
contracts trade on these markets, and the exchanges, through their clearing
organizations, guarantee that the contracts will be performed as between the
clearing members of the exchange. Presently, futures contracts are based on such
debt securities as long-term U.S. Treasury Bonds, Treasury Notes, GNMA modified
pass-through mortgage-backed securities, three-month U.S. Treasury Bills, bank
certificates of deposit, and on indices of municipal, corporate and government
bonds.
While futures contracts based on securities do provide for the delivery
and acceptance of securities, such deliveries and acceptances are seldom made.
Generally, a futures contract is terminated by entering into an offsetting
transaction. A Fund will incur brokerage fees when it purchases and sells
futures contracts. At the time such a purchase or sale is made, a Fund must
provide cash or money market securities as a deposit known as "margin." The
initial deposit required will vary, but may be as low as 2% or less of a
contract's face value. Daily thereafter, the futures contract is valued through
a process known as "marking to market," and a Fund that engages in futures
transactions may receive or be required to pay "variation margin" as the futures
contract becomes more or less valuable. At the time of delivery of securities
pursuant to a futures contract based on securities, adjustments are made to
recognize differences in value arising from the delivery of securities with a
different interest rate than the specific security that provides the standard
for the contract. In some (but not many) cases, securities called for by a
futures contract may not have been issued when the contract was written.
Futures contracts on indices of securities are settled through the making
and acceptance of cash settlements based on changes in value of the underlying
rate or index between the time the contract is entered into and the time it is
liquidated.
FUTURES CONTRACTS ON FIXED INCOME SECURITIES AND RELATED INDICES. As noted
in their respective Prospectuses, certain Funds may enter into transactions in
futures contracts for the purpose of hedging a relevant portion of their
portfolios. A Fund may enter into transactions in futures contracts that are
based on U.S. Government obligations, including any index of government
obligations that may be available for trading. Such transactions will be entered
into where movements in the value of the securities or index underlying a
futures contract can be expected to correlate closely with movements in the
value of securities held in a Fund. For example, a Fund may sell futures
contracts in anticipation of a general rise in the level of interest rates,
which would result in a decline in the value of its fixed income securities. If
the expected rise in interest rates occurs, the Fund may realize gains on its
futures position, which should offset all or part of the decline in value of
fixed income fund securities. A Fund could protect against such decline by
selling fixed income securities, but such a strategy would involve higher
transaction costs than the sale of futures contracts and, if interest rates
again declined, the Fund would be unable to take advantage of the resulting
market advance without purchases of additional securities.
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The purpose of the purchase or sale of a futures contract on government
securities and indices of government securities, in the case of the
above-referenced Funds, which hold or intend to acquire long-term debt
securities, is to protect a Fund from fluctuations in interest rates without
actually buying or selling long-term debt securities. For example, if long-term
bonds are held by a Fund, and interest rates were expected to increase, the Fund
might enter into futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling an equivalent value of the long-term
bonds held by the Fund. If interest rates did increase, the value of the debt
securities in the Fund would decline, but the value of the futures contracts to
the Fund would increase at approximately the same rate thereby keeping the net
asset value of the Fund from declining as much as it otherwise would have. When
a Fund is not fully invested and a decline in interest rates is anticipated,
which would increase the cost of fixed income securities that the Fund intends
to acquire, it may purchase futures contracts. In the event that the projected
decline in interest rates occurs, the increased cost of the securities acquired
by the Fund should be offset, in whole or part, by gains on the futures
contracts by entering into offsetting transactions on the contract market on
which the initial purchase was effected. In a substantial majority of
transactions involving futures contracts on fixed income securities, a Fund will
purchase the securities upon termination of the long futures positions, but
under unusual market conditions, a long futures position may be terminated
without a corresponding purchase of securities.
Similarly, when it is expected that interest rates may decline, futures
contracts on fixed income securities and indices of government securities may be
purchased for the purpose of hedging against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of such futures
contracts should be similar to that of long-term bonds, a Fund could take
advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Fund's cash reserves could then be used to
buy long-term bonds in the cash market. Similar results could be accomplished by
selling bonds with long maturities and investing in bonds with short maturities
when interest rates are expected to increase. However, since the futures market
is more liquid than the cash market, the use of these futures contracts as an
investment technique allows a Fund to act in anticipation of such an interest
rate decline without having to sell its portfolio securities. To the extent a
Fund enters into futures contracts for this purpose, the segregated assets
maintained by a Fund will consist of cash, cash equivalents or high quality debt
securities of the Fund in an amount equal to the difference between the
fluctuating market value of such futures contract and the aggregate value of the
initial deposit and variation margin payments made by the Fund with respect to
such futures contracts.
STOCK INDEX FUTURES CONTRACTS. As described in the Prospectuses, certain
Funds may sell stock index futures contracts in order to offset a decrease in
market value of its securities that might otherwise result from a market
decline. A Fund may do so either to hedge the value of its portfolio as a whole,
or to protect against declines, occurring prior to sales of securities, in the
value of securities to be sold. Conversely, a Fund may purchase stock index
futures contracts in order to protect against anticipated increases in the cost
of securities to be acquired.
In addition, a Fund may utilize stock index futures contracts in
anticipation of changes in the composition of its portfolio. For example, in the
event that a Fund expects to narrow the range of industry groups represented in
its portfolio, it may, prior to making purchases of the actual securities,
establish a long futures position based on a more restricted index, such as an
index comprised of securities of a particular industry group. As such securities
are acquired, a Fund's futures positions would be closed out. A Fund may also
sell futures contracts in connection with this strategy, in order to protect
against the possibility that the value of the securities to be sold as part of
the restructuring of its portfolio will decline prior to the time of sale.
OPTIONS ON FUTURES CONTRACTS. As described in the Prospectuses, an option
on a futures contract gives the purchaser (the "holder") the right, but not the
obligation, to purchase a position in the underlying futures contract (i.e., a
purchase of such futures contract) in the case of an option to purchase (a
"call" option), or a "short" position in the underlying futures contract (i.e.,
a sale of such futures contract) in the case of an option to sell (a "put"
option), at a fixed price (the "strike price") up to a stated expiration date.
The holder pays a non-refundable purchase price for the option, known as the
"premium." The maximum amount of risk the purchase of the option assumes is
equal to the premium plus related transaction costs, although this entire amount
may be lost. Upon exercise of the option by the holder, the exchange clearing
corporation establishes a corresponding long position in the case of a put
option. In the event that an option is exercised, the parties will be subject to
all the risks associated with the trading
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of futures contracts, such as payment of variation margin deposits. In addition,
the writer of an option on a futures contract, unlike the holder, is subject to
initial and variation margin requirements on the option position.
OPTIONS ON FUTURES CONTRACTS ON FIXED INCOME SECURITIES AND RELATED
INDICES. As described in the Prospectuses, certain Funds may purchase put
options on futures contracts in which such Funds are permitted to invest for the
purpose of hedging a relevant portion of their portfolios against an anticipated
decline in the values of portfolio securities resulting from increases in
interest rates, and may purchase call options on such futures contracts as a
hedge against an interest rate decline when they are not fully invested. A Fund
would write options on these futures contracts primarily for the purpose of
terminating existing positions.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS, OPTIONS ON STOCK INDICES AND
OPTIONS ON EQUITY SECURITIES. As described in the Prospectuses, certain Funds
may purchase put options on stock index futures contracts, stock indices or
equity securities for the purpose of hedging the relevant portion of their
portfolio securities against an anticipated market-wide decline or against
declines in the values of individual portfolio securities, and they may purchase
call options on such futures contracts as a hedge against a market advance when
they are not fully invested. A Fund would write options on such futures
contracts primarily for the purpose of terminating existing positions. In
general, options on stock indices will be employed in lieu of options on stock
index futures contracts only where they present an opportunity to hedge at lower
cost. With respect to options on equity securities, a Fund may, under certain
circumstances, purchase a combination of call options on such securities and
U.S. Treasury bills. The Adviser believes that such a combination may more
closely parallel movements in the value of the security underlying the call
option than would the option itself.
Further, while a Fund generally would not write options on individual
portfolio securities, it may do so under limited circumstances known as
"targeted sales" and "targeted buys," which involve the writing of call or put
options in an attempt to purchase or sell portfolio securities at specific
desired prices. A Fund would receive a fee, or a "premium," for the writing of
the option. For example, where the Fund seeks to sell portfolio securities at a
"targeted" price, it may write a call option at that price. In the event that
the market rises above the exercise price, it would receive its "targeted"
price, upon the exercise of the option, as well as the premium income. Also,
where it seeks to buy portfolio securities at a "targeted" price, it may write a
put option at that price for which it will receive the premium income. In the
event that the market declines below the exercise price, a Fund would pay its
"targeted" price upon the exercise of the option. In the event that the market
does not move in the direction or to the extent anticipated, however, the
targeted sale or buy might not be successful and a Fund could sustain a loss on
the transaction that may not be offset by the premium received. In addition, a
Fund may be required to forego the benefit of an intervening increase or decline
in value of the underlying security.
OPTIONS AND FUTURES STRATEGIES. As described in the Prospectuses, the
Adviser may seek to increase the current return of certain Funds by writing
covered call or put options. In addition, through the writing and purchase of
options and the purchase and sale of U.S. and certain foreign stock index
futures contracts, interest rate futures contracts, foreign currency futures
contracts and related options on such futures contracts, the Adviser may at
times seek to hedge against a decline in the value of securities included in the
Fund or an increase in the price of securities that it plans to purchase for the
Fund. Expenses and losses incurred as a result of such hedging strategies will
reduce the Fund's current return. A Fund's investment in foreign stock index
futures contracts and foreign interest rate futures contracts, and related
options on such futures contracts, are limited to only those contracts and
related options that have been approved by the CFTC for investment by U.S.
investors. Additionally, with respect to a Fund's investment in foreign options,
unless such options are specifically authorized for investment by order of the
CFTC or meet the definition of trade options as set forth in CFTC Rule 32.4, a
Fund will not make these investments.
The ability of a Fund to engage in the options and futures strategies
described below will depend on the availability of liquid markets in such
instruments. Markets in options and futures with respect to stock indices,
foreign government securities and foreign currencies are relatively new and
still developing. It is impossible to predict the amount of trading interest
that may exist in various types of options or futures. Therefore, no assurance
can be given that a Fund will be able to utilize these instruments effectively
for the purposes stated below. Furthermore, a Fund's ability to engage in
options and futures transactions may be limited by tax considerations. Although
a Fund will only engage in options and futures transactions for limited
purposes, these activities will
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involve certain risks which are described below under "Risk Factors Associated
with Futures and Options Transactions." A Fund will not engage in options and
futures transactions for leveraging purposes.
WRITING COVERED OPTIONS ON SECURITIES. Certain Funds may write covered
call options and covered put options on securities in which it is permitted to
invest from time to time as the Adviser determines is appropriate in seeking to
attain its objective. Call options written by a Fund give the holder the right
to buy the underlying securities from a Fund at a stated exercise price; put
options give the holder the right to sell the underlying security to the Fund at
a stated price.
A Fund may write only covered options, which means that, so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, a Fund will
maintain in a separate account cash or short-term U.S. Government securities
with a value equal to or greater than the exercise price of the underlying
securities. A Fund may also write combinations of covered puts and calls on the
same underlying security.
A Fund will receive a premium from writing a put or call option, which
increases the Fund's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price of the underlying security to the
exercise price of the option, the term of the option and the volatility of the
market price of the underlying security. By writing a call option, a Fund limits
its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, the Fund assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then current market
value, resulting in a potential capital loss if the purchase price exceeds the
market value plus the amount of the premium received, unless the security
subsequently appreciates in value.
A Fund may terminate an option that it has written prior to its expiration
by entering into a closing purchase transaction in which it purchases an option
having the same terms as the option written. A Fund will realize a profit or
loss from such transaction if the cost of such transaction is less or more than
the premium received from the writing of the option. In the case of a put
option, any loss so incurred may be partially or entirely offset by the premium
received from a simultaneous or subsequent sale of a different put option.
Because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the repurchase of a call option is likely to be offset in whole or in part
by unrealized appreciation of the underlying security owned by a Fund.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES. A Fund may purchase put
options to protect its portfolio holdings in an underlying security against a
decline in market value. Such hedge protection is provided during the life of
the put option since a Fund, as holder of the put option, is able to sell the
underlying security at the put exercise price regardless of any decline in the
underlying security's market price. In order for a put option to be profitable,
the market price of the underlying security must decline sufficiently below the
exercise price to cover the premium and transaction costs. By using put options
in this manner, a Fund will reduce any profit it might otherwise have realized
in its underlying security by the premium paid for the put option and by
transaction costs.
A Fund may also purchase call options to hedge against an increase in
prices of securities that it wants ultimately to buy. Such hedge protection is
provided during the life of the call option since the Fund, as holder of the
call option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, a Fund will reduce any
profit it might have realized had it bought the underlying security at the time
it purchased the call option by the premium paid for the call option and by
transaction costs.
PURCHASE AND SALE OF OPTIONS AND FUTURES ON STOCK INDICES. A Fund may
purchase and sell options on non-U.S. stock indices and stock index futures
as a hedge against movements in the equity markets.
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Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specific price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of that stock index is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option expressed in dollars multiplied by a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike options on specific securities, all settlements
of options on stock indices are in cash and gain or loss depends on general
movements in the stocks included in the index rather than price movements in
particular stocks. A stock index futures contract is an agreement in which one
party agrees to deliver to the other an amount of cash equal to a specific
amount multiplied by the difference between the value of a specific stock index
at the close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of securities is made.
If the Adviser expects general stock market prices to rise, a Fund might
purchase a call option on a stock index or a futures contract on that index as a
hedge against an increase in prices of particular equity securities it wants
ultimately to buy. If in fact the stock index does rise, the price of the
particular equity securities intended to be purchased may also increase, but
that increase would be offset in part by the increase in the value of a Fund's
index option or futures contract resulting from the increase in the index. If,
on the other hand, the Adviser expects general stock market prices to decline, a
Fund might purchase a put option or sell a futures contract on the index. If
that index does in fact decline, the value of some or all of the equity
securities in a Fund may also be expected to decline, but that decrease would be
offset in part by the increase in the value of the Fund's position in such put
option or futures contract.
PURCHASE AND SALE OF INTEREST RATE FUTURES. A Fund may purchase and sell
interest rate futures contracts on foreign government securities including, but
not limited to, debt securities of the governments and central banks of France,
Germany, Denmark and Japan for the purpose of hedging fixed income and interest
sensitive securities against the adverse effects of anticipated movements in
interest rates.
A Fund may sell interest rate futures contracts in anticipation of an
increase in the general level of interest rates. Generally, as interest rates
rise, the market value of the fixed income securities held by a Fund will fall,
thus reducing the net asset value of the Fund. This interest rate risk can be
reduced without employing futures as a hedge by selling long-term fixed income
securities and either reinvesting the proceeds in securities with shorter
maturities or by holding assets in cash. This strategy, however, entails
increased transaction costs to a Fund in the form of dealer spreads and
brokerage commissions.
The sale of interest rate futures contracts provides an alternative means
of hedging against rising interest rates. As rates increase, the value of a
Fund's short position in the futures contracts will also tend to increase, thus
offsetting all or a portion of the depreciation in the market value of a Fund's
investments that are being hedged. While a Fund will incur commission expenses
in selling and closing out futures positions (which is done by taking an
opposite position which operates to terminate the position in the futures
contract), commissions on futures transactions are lower than transaction costs
incurred in the purchase and sale of portfolio securities.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS AND INTEREST RATE FUTURES
CONTRACTS. A Fund may purchase and write call and put options on non-U.S. stock
index and interest rate futures contracts. A Fund may use such options on
futures contracts in connection with its hedging strategies in lieu of
purchasing and writing options directly on the underlying securities or stock
indices or purchasing and selling the underlying futures. For example, a Fund
may purchase put options or write call options on stock index futures, or
interest rate futures, rather than selling futures contracts, in anticipation of
a decline in general stock market prices or rise in interest rates,
respectively, or purchase call options or write put options on stock index or
interest rate futures, rather than purchasing such futures, to hedge against
possible increases in the price of equity securities or debt securities,
respectively, which the Fund intends to purchase.
PURCHASE AND SALE OF CURRENCY FUTURES CONTRACTS AND RELATED OPTIONS. In
order to hedge its portfolio and to protect it against possible variations in
foreign exchange rates pending the settlement of securities transactions, a
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Fund may buy or sell currency futures contracts and related options. If a fall
in exchange rates for a particular currency is anticipated, a Fund may sell a
currency futures contract or a call option thereon or purchase a put option on
such futures contract as a hedge. If it is anticipated that exchange rates will
rise, a Fund may purchase a currency futures contract or a call option thereon
or sell (write) a put option to protect against an increase in the price of
securities denominated in a particular currency a Fund intends to purchase.
These futures contracts and related options thereon will be used only as a hedge
against anticipated currency rate changes, and all options on currency futures
written by a Fund will be covered.
A currency futures contract sale creates an obligation by a Fund, as
seller, to deliver the amount of currency called for in the contract at a
specified future time for a special price. A currency futures contract purchase
creates an obligation by a Fund, as purchaser, to take delivery of an amount of
currency at a specified future time at a specified price. Although the terms of
currency futures contracts specify actual delivery or receipt, in most instances
the contracts are closed out before the settlement date without the making or
taking of delivery of the currency. Closing out of a currency futures contract
is effected by entering into an offsetting purchase or sale transaction. Unlike
a currency futures contract, which requires the parties to buy and sell currency
on a set date, an option on a currency futures contract entitles its holder to
decide on or before a future date whether to enter into such a contract. If the
holder decides not to enter into the contract, the premium paid for the option
is fixed at the point of sale.
The Fund will write (sell) only covered put and call options on currency
futures. This means that a Fund will provide for its obligations upon exercise
of the option by segregating sufficient cash or short-term obligations or by
holding an offsetting position in the option or underlying currency future, or a
combination of the foregoing. A Fund will, so long as it is obligated as the
writer of a call option on currency futures, own on a contract-for-contract
basis an equal long position in currency futures with the same delivery date or
a call option on stock index futures with the difference, if any, between the
market value of the call written and the market value of the call or long
currency futures purchased maintained by a Fund in cash, Treasury bills, or
other high grade short-term obligations in a segregated account with its
custodian. If at the close of business on any day the market value of the call
purchased by a Fund falls below 100% of the market value of the call written by
the Fund, a Fund will so segregate an amount of cash, Treasury bills or other
high grade short-term obligations equal in value to the difference.
Alternatively, a Fund may cover the call option through segregating with the
custodian an amount of the particular foreign currency equal to the amount of
foreign currency per futures contract option times the number of options written
by a Fund. In the case of put options on currency futures written by the Fund,
the Fund will hold the aggregate exercise price in cash, Treasury bills, or
other high grade short-term obligations in a segregated account with its
custodian, or own put options on currency futures or short currency futures,
with the difference, if any, between the market value of the put written and the
market value of the puts purchased or the currency futures sold maintained by a
Fund in cash, Treasury bills or other high grade short-term obligations in a
segregated account with its custodian. If at the close of business on any day
the market value of the put options purchased or the currency futures by a Fund
falls below 100% of the market value of the put options written by the Fund, a
Fund will so segregate an amount of cash, Treasury bills or other high grade
short-term obligations equal in value to the difference.
If other methods of providing appropriate cover are developed, a Fund
reserves the right to employ them to the extent consistent with applicable
regulatory and exchange requirements. In connection with transactions in stock
index options, stock index futures, interest rate futures, foreign currency
futures and related options on such futures, a Fund will be required to deposit
as "initial margin" an amount of cash or short-term government securities equal
to from 5% to 8% of the contract amount. Thereafter, subsequent payments
(referred to as "variation margin") are made to and from the broker to reflect
changes in the value of the futures contract.
LIMITATIONS ON PURCHASE OF OPTIONS. The staff of the SEC has taken the
position that purchased over-the-counter options and assets used to cover
written over-the-counter options are illiquid and, therefore, together with
other illiquid securities, cannot exceed 15% of a Fund's assets. The Adviser
intends to limit a Fund's writing of over-the-counter options in accordance with
the following procedure. Each Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts which a Fund has in place with
such primary dealers will provide that the Fund has the absolute right to
repurchase an option it writes at any time at a price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula
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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
15% test imposed by the SEC staff.
RISK FACTORS ASSOCIATED WITH FUTURES AND OPTIONS TRANSACTIONS
The effective use of options and futures strategies depends on, among
other things, a Fund's ability to terminate options and futures positions at
times when its the Adviser deems it desirable to do so. Although a Fund will not
enter into an option or futures position unless the Adviser believes that a
liquid secondary market exists for such option or future, there is no assurance
that a Fund will be able to effect closing transactions at any particular time
or at an acceptable price. A Fund generally expects that its options and futures
transactions will be conducted on recognized U.S. and foreign securities and
commodity exchanges. In certain instances, however, a Fund may purchase and sell
options in the over-the-counter market. A Fund's ability to terminate option
positions established in the over-the-counter market may be more limited than in
the case of exchange-traded options and may also involve the risk that
securities dealers participating in such transactions would fail to meet their
obligations to the Fund.
Options and futures markets can be highly volatile and transactions of
this type carry a high risk of loss. Moreover, a relatively small adverse market
movement with respect to these types of transactions may result not only in loss
of the original investment but also in unquantifiable further loss exceeding any
margin deposited.
The use of options and futures involves the risk of imperfect correlation
between movements in options and futures prices and movements in the price of
securities which are the subject of the hedge. Such correlation, particularly
with respect to options on stock indices and stock index futures, is imperfect,
and such risk increases as the composition of a Fund diverges from the
composition of the relevant index. The successful use of these strategies also
depends on the ability of the Adviser to correctly forecast interest rate
movements, currency rate movements and general stock market price movements.
In addition to certain risk factors described above, the following sets
forth certain information regarding the potential risks associated with the
Funds' futures and options transactions.
RISK OF IMPERFECT CORRELATION. A Fund's ability effectively to hedge all
or a portion of its portfolio through transactions in futures, options on
futures or options on stock indices depends on the degree to which movements in
the value of the securities or index underlying such hedging instrument
correlate with movements in the value of the relevant portion of the Fund's
securities. If the values of the securities being hedged do not move in the same
amount or direction as the underlying security or index, the hedging strategy
for a Fund might not be successful and the Fund could sustain losses on its
hedging transactions which would not be offset by gains on its portfolio. It is
also possible that there may be a negative correlation between the security or
index underlying a futures or option contract and the portfolio securities being
hedged, which could result in losses both on the hedging transaction and the
fund securities. In such instances, a Fund's overall return could be less than
if the hedging transactions had not been undertaken. Stock index futures or
options based on a narrower index of securities may present greater risk than
options or futures based on a broad market index, as a narrower index is more
susceptible to rapid and extreme fluctuations resulting from changes in the
value of a small number of securities. A Fund would, however, effect
transactions in such futures or options only for hedging purposes.
The trading of futures and options on indices involves the additional risk
of imperfect correlation between movements in the futures or option price and
the value of the underlying index. The anticipated spread between the prices may
be distorted due to differences in the nature of the markets, such as
differences in margin requirements, the liquidity of such markets and the
participation of speculators in the futures and options market. The purchase of
an option on a futures contract also involves the risk that changes in the value
of underlying futures contract will not be fully reflected in the value of the
option purchased. The risk of imperfect correlation, however, generally tends to
diminish as the maturity date of the futures contract or termination date of the
option approaches. The risk incurred
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in purchasing an option on a futures contract is limited to the amount of the
premium plus related transaction costs, although it may be necessary under
certain circumstances to exercise the option and enter into the underlying
futures contract in order to realize a profit. Under certain extreme market
conditions, it is possible that a Fund will not be able to establish hedging
positions, or that any hedging strategy adopted will be insufficient to
completely protect the Fund.
A Fund will purchase or sell futures contracts or options only if, in the
Adviser's judgment, there is expected to be a sufficient degree of correlation
between movements in the value of such instruments and changes in the value of
the relevant portion of the Fund's portfolio for the hedge to be effective.
There can be no assurance that the Adviser's judgment will be accurate.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET. The ordinary spreads between
prices in the cash and futures markets, due to differences in the natures of
those markets, are subject to distortions. First, all participants in the
futures market are subject to initial deposit and variation margin requirements.
This could require a Fund to post additional cash or cash equivalents as the
value of the position fluctuates. Further, rather than meeting additional
variation margin requirements, investors may close futures contracts through
offsetting transactions which could distort the normal relationship between the
cash and futures markets. Second, the liquidity of the futures or options market
may be lacking. Prior to exercise or expiration, a futures or option position
may be terminated only by entering into a closing purchase or sale transaction,
which requires a secondary market on the exchange on which the position was
originally established. While a Fund will establish a futures or option position
only if there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular futures or option
contract at any specific time. In such event, it may not be possible to close
out a position held by a Fund, which could require the Fund to purchase or sell
the instrument underlying the position, make or receive a cash settlement, or
meet ongoing variation margin requirements. The inability to close out futures
or option positions also could have an adverse impact on a Fund's ability
effectively to hedge its securities, or the relevant portion thereof.
The liquidity of a secondary market in a futures contract or an option on
a futures contract may be adversely affected by "daily price fluctuation limits"
established by the exchanges, which limit the amount of fluctuation in the price
of a contract during a single trading day and prohibit trading beyond such
limits once they have been reached. The trading of futures and options contracts
also is subject to the risk of trading halts, suspensions, exchange or clearing
house equipment failures, government intervention, insolvency of the brokerage
firm or clearing house or other disruptions of normal trading activity, which
could at times make it difficult or impossible to liquidate existing positions
or to recover excess variation margin payments.
RISK OF PREDICTING INTEREST RATE MOVEMENTS. Investments in futures
contracts on fixed income securities and related indices involve the risk that
if the Adviser's investment judgment concerning the general direction of
interest rates is incorrect, a Fund's overall performance may be poorer than if
it had not entered into any such contract. For example, if a Fund has been
hedged against the possibility of an increase in interest rates which would
adversely affect the price of bonds held in its portfolio and interest rates
decrease instead, the Fund will lose part or all of the benefit of the increased
value of its bonds which have been hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if a Fund has
insufficient cash, it may have to sell bonds from its portfolio to meet daily
variation margin requirements, possibly at a time when it may be disadvantageous
to do so. Such sale of bonds may be, but will not necessarily be, at increased
prices which reflect the rising market.
TRADING AND POSITION LIMITS. Each contract market on which futures and
option contracts are traded has established a number of limitations governing
the maximum number of positions which may be held by a trader, whether acting
alone or in concert with others. The Adviser does not believe that these trading
and position limits will have an adverse impact on the hedging strategies
regarding the Funds' investments.
REGULATIONS ON THE USE OF FUTURES AND OPTIONS CONTRACTS. Regulations of
the CFTC require that the Funds enter into transactions in futures contracts and
options thereon for hedging purposes only, in order to assure that they are not
deemed to be a "commodity pool" under such regulations. In particular, CFTC
regulations require that all short futures positions be entered into for the
purpose of hedging the value of investment securities held by a Fund, and that
all long futures positions either constitute bona fide hedging transactions, as
defined in such regulations, or
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have a total value not in excess of an amount determined by reference to certain
cash and securities positions maintained for the Fund, and accrued profits on
such positions. In addition, a Fund may not purchase or sell such instruments
if, immediately thereafter, the sum of the amount of initial margin deposits on
its existing futures positions and premiums paid for options on futures
contracts would exceed 5% of the market value of the Fund's total assets.
When a Fund purchases a futures contract, an amount of cash or cash
equivalents or high quality debt securities will be segregated with the Fund's
custodian so that the amount so segregated, plus the initial deposit and
variation margin held in the account of its broker, will at all times equal the
value of the futures contract, thereby insuring that the use of such futures is
unleveraged.
The Funds' ability to engage in the hedging transactions described herein
may be limited by the current federal income tax requirement that a Fund derive
less than 30% of its gross income from the sale or other disposition of stock or
securities held for less than three months. The Funds may also further limit
their ability to engage in such transactions in response to the policies and
concerns of various Federal and state regulatory agencies. Such policies may be
changed by vote of the Board of Directors/Trustees.
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 GlCs 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 GlCs to those having a term
of 397 days or less. In determining average weighted portfolio maturity, a GIC
will be deemed to have a maturity equal to the period of time remaining under
the next readjustment of the guaranteed interest rate.
INSURED MUNICIPAL SECURITIES
Certain of the Municipal Securities held by the Funds may be insured at
the time of issuance as to the timely payment of principal and interest. The
insurance policies will usually be obtained by the issuer of the Municipal
Securities at the time of its original issuance. In the event that the issuer
defaults with respect to interest or principal payments, the insurer will be
notified and will be required to make payment to the bondholders. There is,
however, no guarantee that the insurer will meet its obligations. In addition,
such insurance will not protect against market fluctuations caused by changes in
interest rates and other factors.
INTEREST RATE TRANSACTIONS
Among the strategic transactions into which certain Funds may enter are
interest rate swaps and the purchase or sale of related caps and floors. The
Funds expect to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio, to protect
against currency fluctuations, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a
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later date. A Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by a Fund
with another party of their respective commitments to pay or receive interest,
e.g. an exchange of floating rate payments for fixed rate payments with respect
to a notional amount of principal. A currency swap is an agreement to exchange
cash flows on a notional amount of two or more currencies based on the relative
value differential among them and an index swap is an agreement to swap cash
flows on a notional amount based on changes in the values of the reference
indices. The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount.
A Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. In as much as these swaps, caps and
floors are entered into for good faith hedging purposes, the Adviser and the
Fund believe such obligations do not constitute senior securities under the 1940
Act and, accordingly, will not treat them as being subject to its borrowing
restrictions. A Fund will not enter into any swap, cap and floor transaction
unless, at the time of entering into such transaction, the unsecured long-term
debt of the counterparty, combined with any credit enhancements, is rated at
least "A" by Standard & Poor's Corporation or Moody's Investors Service, Inc. or
has an equivalent rating from a Nationally Recognized Statistical Rating
Organization ("NRSRO") or is determined to be of equivalent credit quality by
the Adviser. If there is a default by the counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps and floors are more recent innovations for which
standardized documentation has not yet been fully developed and, accordingly,
they are less liquid than swaps.
With respect to swaps, a Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high grade securities
having a value equal to the accrued excess. Caps and floors require segregation
of assets with a value equal to the Fund's net obligation, if any.
LOWER RATED DEBT SECURITIES
The yields on lower rated debt and comparable unrated fixed-income
securities generally are higher than the yields available on higher-rated
securities. However, investments in lower rated debt and comparable unrated
securities generally involve greater volatility of price and risk of loss of
income and principal, including the probability of default by or bankruptcy of
the issuers of such securities. Lower rated debt and comparable unrated
securities (a) will likely have some quality and protective characteristics
that, in the judgment of the rating organization, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (b) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. Accordingly,
it is possible that these types of factors could, in certain instances, reduce
the value of securities held in a Fund's portfolio, with a commensurate effect
on the value of the Fund's shares. Therefore, an investment in the Fund should
not be considered as a complete investment program and may not be appropriate
for all investors.
The market prices of lower rated securities may fluctuate more than higher
rated securities and may decline significantly in periods of general economic
difficulty which may follow periods of rising interest rates. During an economic
downturn or a prolonged period of rising interest rates, the ability of issuers
of lower quality debt to service their payment obligations, meet projected
goals, or obtain additional financing may be impaired.
Since the risk of default is higher for lower rated securities, the
Adviser will try to minimize the risks inherent in investing in lower rated debt
securities by engaging in credit analysis, diversification, and attention to
current developments and trends affecting interest rates and economic
conditions. The Adviser will attempt to identify those issuers of high-yielding
securities whose financial condition is adequate to meet future obligations,
have improved, or are expected to improve in the future.
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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 downturn also
could adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon.
MUNICIPAL SECURITIES
GENERALLY. The two principal classifications of municipal securities are
"general obligation" securities and "revenue" securities. General obligation
securities are secured by the issuer's pledge of its full faith, credit, and
taxing power for the payment of principal and interest. Revenue securities are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as the user of the facility being financed. Private
activity bonds held by a Fund are in most cases revenue securities and are not
payable from the unrestricted revenues of the issuer. Consequently, the credit
quality of private activity bonds is usually directly related to the credit
standing of the corporate user of the facility involved.
Municipal securities may include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which created
the issuer.
Municipal securities may include variable- or floating- rate instruments
issued by industrial development authorities and other governmental entities.
While there may not be an active secondary market with respect to a particular
instrument purchased by a Fund, a Fund may demand payment of the principal and
accrued interest on the instrument or may resell it to a third party as
specified in the instruments. The absence of an active secondary market,
however, could make it difficult for a Fund to dispose of the instrument if the
issuer defaulted on its payment obligation or during periods the Fund is not
entitled to exercise its demand rights, and the Fund could, for these or other
reasons, suffer a loss.
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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 subject to each Fund's limitation on investments in illiquid securities.
Recovery of an investment in any such loan that is illiquid and payable on
demand may depend on the ability of the municipal borrower to meet an obligation
for full repayment of principal and payment of accrued interest within the
demand period, normally seven days or less (unless a Fund determines that a
particular loan issue, unlike most such loans, has a readily available market).
As it deems appropriate, the Adviser will establish procedures to monitor the
credit standing of each such municipal borrower, including its ability to meet
contractual payment obligations.
In evaluating the credit quality of a municipal lease obligation and
determining whether such lease obligation will be considered "liquid," the
Adviser for each Fund will consider: (1) whether the lease can be canceled; (2)
what assurance there is that the assets represented by the lease can be sold;
(3) the strength of the lessee's general credit (e.g., its debt, administrative,
economic, and financial characteristics); (4) the likelihood that the
municipality will discontinue appropriating funding for the leased property
because the property is no longer deemed essential to the operations of the
municipality (e.g., the potential for an "event of non-appropriation"); and (5)
the legal recourse in the event of failure to appropriate.
Municipal securities may include units of participation in trusts holding
pools of tax-exempt leases. Municipal participation interests may be purchased
from financial institutions, and give the purchaser an undivided interest in one
or more underlying municipal security. To the extent that municipal
participation interests are considered to be "illiquid securities," such
instruments are subject to each Fund's limitation on the purchase of
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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 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.
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Certain types of Municipal Securities (private activity bonds) have been
or are issued to obtain funds to provide, among other things, privately operated
housing facilities, pollution control facilities, convention or trade show
facilities, mass transit, airport, port or parking facilities, and certain local
facilities for water supply, gas, electricity, or sewage or solid waste
disposal. Private activity bonds are also issued for privately held or publicly
owned corporations in the financing of commercial or industrial facilities. Most
governments are authorized to issue private activity bonds for such purposes in
order to encourage corporations to locate within their communities. The
principal and interest on these obligations may be payable from the general
revenues of the users of such facilities.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the Federal income tax exemption for
interest on Municipal Securities. Moreover, with respect to Municipal Securities
issued by Florida, Georgia, Maryland, North Carolina, South Carolina, Tennessee,
Texas, or Virginia issuers, NFT 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 the fourth most populous state with an estimated 1997
population of 14,700,000. By the year 2000, population will likely exceed 15.5
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. Today, as this country enters its
eighth 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. As of 1997, real property values exceed
$724 billion. Residential property values account 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 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
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the national average. In 1996, the outstanding state debt, among all states, was
$1,690 per capita compared with $1,077 in Florida.
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 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.
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 1996,
Florida led the nation in housing starts. The demand for new single and
multi-family homes should remain robust. Across the State, new construction and
renovations to existing structures is fueling the construction industry. Naples,
in southwest Florida, led the nation in the highest per capita number of
building permits. Ongoing redevelopment in downtown Jacksonville and the new
construction of public schools in the Orlando area, for instance, are worthy
examples of infrastructure meeting the demands of increasing population.
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. 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
begun 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.
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
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industries are helping to diversify the local economy. Universal Studios has
began to expand its motion picture and theme park facilities. 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 end of the century. 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 and Southeast Florida. There
were over 37 million visitors to the Orlando market in 1977.
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 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.
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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.
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.
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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 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 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
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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, 1996 the state had a revenue shortfall reserve fund of
$313,385,534. Total net revenue collections for the fiscal year ended on June
30, 1996 were $11,166,835,592, which represented a 8.3890 increase over fiscal
year 1995 collections of $10,303,573,061. Additionally, Georgia received
$558,473,887 in revenue from the Georgia Lottery Corporation in fiscal year
1996; all lottery revenues are earmarked for educational expenditures.
Georgia has a very bright economic future highlighted by a $3 billion
stimulus to the economy which occurred by reason of 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 is thriving and has emerged
from a recession that had been caused by over-building of commercial office
space 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. and Holiday Inn Worldwide. In
1996, Paragon Trade Brands, Inc., moved its headquarters to Atlanta from
Seattle, Washington.
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.
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 attacked the constitutionality of
the Georgia intangibles tax and sought a refund for previously paid intangibles
taxes. During the 1996 Session of the Georgia General Assembly, the Georgia
intangibles tax was legislatively repealed. On November 5, 1996, a
constitutional amendment was approved by the voters of Georgia, which also
repealed the intangibles tax, retroactively effective to January 1, 1996.
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There have been two other cases filed seeking refunds of the
intangibles tax, Charles Pero v. T. Jerry Jackson, Civil Action No. E-47722,
and Jack W. Shemaria v. T. Jerry Jackson, Civil Action No. 96-11005-4.
Regardless of the outcome of these refund cases, the financial impact on the
State of Georgia will be marginal since the intangibles taxes were paid to
city and county governments and local boards of education, which historically
received approximately $40 million per year in intangibles tax revenues.
The above-referenced information is based on available public documents
and oral representations made by officials at the state Attorney General's
Office, Georgia Department of Revenue, and participants in the pending cases, as
well as representations made as "Significant Contingent Liabilities" provided in
the Official Statement dated April 1, 1997 for the issuance of $307,195,000
General Obligation Bonds (1997-A) by the State of Georgia.
MARYLAND. The public indebtedness of the State of Maryland and its
instrumentalities is divided into four 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. The Maryland Stadium Authority issues limited special obligation
bonds and votes for purposes of financing stadiums and conference centers
payable primarily from fixed rate financing of facility bonds using a
combination of variable rate refunding obligations and forward interest rate
exchange agreements. 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 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.
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 balance of the Revenue Stabilization Account after the transfer at June 30,
1996, will be $500 million.
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1997 Budget--On April 3, 1996, the General Assembly approved the budget
for fiscal year 1997. The Budget includes, among other things: (i) sufficient
funds to meet all specific statutory funding requirements; (ii) sufficient funds
to meet the actuarial 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 per $100 of assessed valuation; (iv) $2.9 billion in
aid to local governments (reflecting a $121.5 million increase over fiscal year
1996 that provides for increases in education, health and police aid); and (v)
$13.2 million in general fund deficiency appropriations.
Legislation enacted by the 1996 General Assembly reorganized the State's
personnel system and reformed the welfare and Medicaid programs; estimated
fiscal year 1997 savings of $29 million ($19.5 million general funds) are
incorporated into the fiscal year 1997 Budget. The legislation establishes a
decentralized personnel management system, replacing the classified and
unclassified services with skilled, professional, management, and executive
services; a pay for performance plan; and early retirement during fiscal year
1997 for certain groups of employees. The welfare reform legislation limits
welfare recipients to 60 months of cumulative cash assistance and requires
adults to be in a State-defined work activity in order to receive more than 24
months of benefits; federal permission must be obtained before the new welfare
program can be implemented. The Medicaid reform authorized the establishment of
a mandatory managed care program for Medicaid recipients (consistent with
federal law or federal waivers). The legislation requires managed care
organizations to meet certain performance, access, and quality standards; it is
anticipated the organizations will be paid prospectively.
The operating budget is to be funded with $7,412 million in general funds,
$4,112 million in special and higher education funds, and $3,117 million in
federal funds.
The State's fiscal year 1997 capital program is to be funded with $400
million in general obligation bonds (net of $12.1 million of prior year
authorizations to be deauthorized), $66.8 million general funds appropriated in
the operating budget, $1,297 million in special and federal funds (of which
$1,099 million is appropriated to the Department of Transportation, including
$71 million for infrastructure improvements related to the construction of
Redskins Stadium in Prince George's County) and $69.8 million in revenue bonds
other than those issued by the Department of Transportation. The general
obligation bond financed program includes $229 million for education, $23
million for the environment, $41 million for business and job creation, $41
million for public safety, and $63 million for various other projects.
Based on the 1997 Budget, it is estimated that the general fund surplus on
a budgetary basis at June 30, 1997, will be approximately $0.8 million. It is
also estimated that the balance in the Revenue Stabilization Account of the
State Reserve Fund at June 30, 1997, will be $465 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.
The State of North Carolina is the tenth most populous state. Its economy
is a combination of manufacturing, agriculture, services and tourism. The
State's seasonally adjusted unemployment rate in December 1997 was 3.6%. In
recent years, the State has moved from an agricultural economy to a service and
goods producing economy. The State leads the nation in the production of
textiles, tobacco products, furniture and fiberoptic cable and is among the
largest producers of pharmaceuticals, electronics and telecommunications
equipment. The principal agricultural products are poultry, pork and tobacco.
Charlotte is now the second largest financial center in the nation, based on the
assets of banks headquartered there.
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The ending fund balance for the State's General Fund at June 30, 1997 was
$1,307.5 million. The growth in tax and other revenues exceeded expectations
since that date which, with existing reserves, provides sufficient funds to pay
intangibles tax refunds required by the Fulton case described below and the
income tax refunds required by the Bailey case described below. The budget for
the fiscal year ending June 30, 1998 projects an ending General Fund balance of
$622.2 million.
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
defendants' motion to dismiss was denied. However, the North Carolina Supreme
Court upheld the present funding system and remanded the case for trial on the
claim for relief based on the conclusion that the constitution guarantees every
child the opportunity to obtain a sound basic education. Five other counties
intervened and now allege claims for relief on behalf of their students' rights
to a sound basic education on the basis of the high proportion of at-risk
students in their counties' systems.
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.
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.
Patton case. Federal retirees filed a class action suit in 1995 seeking
monetary relief for taxes paid since 1989 on federal government retirement
benefits.
On May 8, 1998, the North Carolina Supreme Court ruled that it was
unconstitutional for the State of North Carolina to collect taxes on the
pensions of retired federal, state and local government employees. The required
refunds were estimated to be $1.1 billion. However, a settlement has been
reached and a Consent Order signed in which the State will pay a total of $799
million with $400 million to be paid beginning as early as July 1998 and the
balance by July 1999.
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 North
Carolina Court of Appeals and Supreme Court dismissed the fiduciary claims and
certain of the constitutional claims. The primary claim for unconstitutional
impairment of contract was tried in Superior Court in May, 1995, and the court
issued an order in favor of the plaintiffs. In April of 1997, the North Carolina
Supreme Court upheld the trial court's ruling. A determination of the actual
amount of liability and the payment process is being made by the parties. The
plaintiffs have submitted documentation to the court asserting that the cost and
damages and higher prospective benefit payments to the plaintiffs and class
members would amount to $407 million. These amounts would be payable from the
funds of the State's retirement system. The plaintiffs also have filed actions
in federal court asserting the same claims, along with claims for violations of
constitutional rights in the taxation of disability benefits.
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Smith case. This class action is related to litigation in Fulton v.
Faulkner brought by a single taxpayer and decided by the United States Supreme
Court in 1996 which held that certain intangibles taxes previously collected by
the State of North Carolina on intangible personal property were
unconstitutional. In 1995, the Smith class action was commenced on behalf of all
taxpayers who had complied with the refund requirements of the North Carolina
statute who would be entitled to refunds if Fulton prevailed on its refund
claim. A second group of plaintiffs was added consisting of taxpayers who paid
the intangibles tax but failed to comply with the tax refund statute. Refunds
were ordered for those plaintiffs who had complied with the requirements of the
North Carolina tax refund statute and the court dismissed the claims of those
who had not complied. Refunds totaling approximately $120 million have been paid
with interest. The appeal of the plaintiffs who did not comply with the tax
refund statute is pending in the North Carolina Court of Appeals. A separate
class action was filed in January 1998 on behalf of the plaintiffs who did not
comply with the tax refund requirements.
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 sought 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 plaintiff's 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.
In February of 1997, the North Carolina Supreme Court ruled that the
unconstitutional portion of the statute is severable and referred the matter to
the North Carolina General Assembly for legislative action. This action may
include paying refunds to taxpayers who paid the tax, but took appropriate steps
to claim that a refund was due. The estimated cost of paying such refunds is
approximately $150 million.
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 appears likely, the State Budget and Control Board may
reduce appropriations during the current fiscal year as necessary to prevent the
deficit. If it is determined that a fiscal year has 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.
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. Funds may
be withdrawn from the General Reserve Fund only for the purpose of covering
operating deficits. The State Constitution also requires a Capital Reserve Fund
equal to two percent of General Fund Revenue for the latest completed fiscal
year.
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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.
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, 1997, the State had a budgetary surplus of
$297,700,000, 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 1997-98 Appropriations Act that enacted a balanced budget
where most of the new revenue was allocated to property tax relief, health and
human services and education.
A lawsuit, Glen E. Kennedy, et al vs. the South Carolina Retirement System
and South Carolina Budget and Control Board, has been filed against the South
Carolina Retirement Systems (Systems) by a group of retired participants in the
Systems which challenges the Systems' treatment of annual leave calculation of
participants' retirement payments. The Systems' liability in the event of an
unfavorable outcome would be approximately $340 million for current retirees,
and $800 million for current active members of the South Carolina Retirement
System and the Police Officers' Retirement System. The Circuit Court determined
that the State has been providing retirement benefits to its members in
accordance with the law. The Circuit Court decision has been appealed to the
State Supreme Court and the State continues to defend its position and believes
it is meritorious.
The Adviser believes that the information summarized above describes 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,
1997, the State of Tennessee's annual legal debt service limit of $463 million
was well above the debt service required of $110 million, with a legal debt
service margin of $353 million. Debt per capita equaled $163, and the ratio of
net general long-term bonded debt to assessed property valuation was 1.55
percent.
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The Constitution of the State of Tennessee requires a balanced budget. As
required by law, the legislature enacted a balanced budget for fiscal year
1996-97. During fiscal year 1997, Tennessee continued several programs that were
designed to position the State to remain competitive in attracting new jobs
while addressing several problem areas for the State. The State continued its
Basic Education Program which is designed to achieve salary equalization in
teachers' salaries and to provide funding for enrollment growth. The State also
extended coverage under Ten Care to all Tennessee children who do not otherwise
have access to health insurance, enhanced all services to children under the
newly established Department of Children's Services and continued enhancement of
industrial growth and strengthening services for the continued success of the
Families First Program of welfare reform.
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 three billion in the last two years. The $3.4 billion
in announced capital investments in 1996 was the largest year in Tennessee
history. This growth created 20,863 new jobs in Tennessee for the year ended
June 1997. As of June 1997, the State's unemployment rate was 4.8%, below the
national average of 5.6%. 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 1997.
TEXAS. Except as specifically authorized, the Texas Constitution generally
prohibits the creation of debt by or on behalf of the State, with only limited
exceptions. In addition, the Constitution prohibits the Legislature from lending
the credit of the State to any person, including municipalities, or pledging the
credit of the State in any manner for the payment of the liabilities of any
individual, association of individuals, corporation or municipality. The
limitations of the Constitution do not prohibit the issuance of revenue bonds,
since the Texas courts (like the courts of most states) have held that certain
obligations do not create a "debt" within the meaning of the Constitution. The
State and various State agencies have issued revenue bonds payable from the
revenues produced by various facilities or from lease payments appropriated by
the Legislature. Furthermore, obligations which are payable from funds expected
to be available during the current budget period, do not constitute "debt"
within the meaning of the constitutional prohibition.
Texas Revised Civil Statutes Article 717k-7(8) prohibits the Legislature
from authorizing additional state debt payable from general revenues, including
authorized but unissued bonds and lease purchase contracts in excess of $250,000
or for a term of greater than five years, if the resulting annual debt service
exceeds five percent of an amount equal to the average amount of general revenue
for the three immediately preceding years, excluding revenues constitutionally
dedicated for purposes other than payment of debt service. Self-supporting
general obligation bonds, although backed by the full faith and credit of the
State, are reasonably expected to be paid from other revenue sources and are not
expected to create a general revenue draw. On November 4, 1997, Texas voters
approved a constitutional amendment pursuant to Proposition 11 in order to add
the provisions of Article 717k-7(8) to the Constitution. The State has long been
identified with the oil and gas industry, but the Texas economy has diversified,
particularly with the growth of the computer and electronics industries. Oil and
gas related industries currently account for only 10% 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 although the rate of growth of
goods-producing jobs has been about the same as that of service-producing jobs
since 1995. Texas' location and transportation and accessibility have made it a
distribution center for the southwestern United States as well as a growing
international market for export trade. With leadership provided by a strong
high-technology sector and the growth of exports, manufacturing job growth is
expected to remain a significant part of Texas' economic future. The State
Comptroller of Public Accounts has predicted that the overall Texas economy will
slightly outpace 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 mostly metropolitan, with
diversified manufacturing, financial and commercial sectors. The panhandle,
Permian basin and Concho Valley regions are relatively populated areas of the
State, with an economy drawing heavily from petroleum production and
agriculture.
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The border region stretching from El Paso to Brownsville is characterized by its
economic ties to 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 high-technology
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.
In 1997, total nonfarm employment growth was 4.2%. 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 added jobs since the beginning of 1996, but
experienced a tapering off in hiring during the last few months of 1997. The
State's per capita personal income growth has exceeded the nation's each year
since 1989. Per capita personal income has since increased to approximately 91%
of U.S. per capita income as of 1997.
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 1997, the
general revenue fund accounted for most of the state's net 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 1997. Sales tax, which had been the main
source of revenue for the previous 12 years prior to fiscal 1993, was 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
August 31, 1993, 1994, 1995, 1996 and 1997, the general revenue fund contained a
cash surplus of approximately $1.633 billion, $2.239 billion, $2.110 billion,
$2.271 billion and $2.685 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 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
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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 phrase "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 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 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.
On December 18, 1995, the Governor presented to the General Assembly the
Budget Bill for the 1996-98 biennium. The 1996-98 Budget Bill focused on three
key areas: education, public safety, and economic development. The Budget Bill
provided about $1,4119.9 million in spending increases above the level necessary
to continue FY 1996 workloads and costs. Of these increases, $107.2 million
resulted from the deposits to the Revenue Stabilization Fund ($66.6 million is
scheduled for deposit on June 30, 1997 and an estimated $40.6 million is
scheduled for deposit on June 30, 1998). The remainder provided 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 included 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 1996 General Assembly Session ended on March 11, 1996. The 1996-98
Budget Bill, as amended by the General Assembly, was submitted to the Governor
for approval. The Governor then returned the 1996-98 Budget Bill to the General
Assembly for consideration at its one-day reconvened session held on April 17,
1996. The General Assembly re-submitted the 1996-98 Budget Bill, as amended, to
the Governor for his final approval. The 1996-98 Budget Bill, as amended, became
effective as Chapter 912 of the 1996 Acts of Assembly (the 1996-98 Appropriation
Act) on April 17, 1996.
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
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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. 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.
Nations Funds believe 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. Nations
Funds have not independently verified any of the information contained in the
official statements, other publicly available documents, or oral statements from
various state agencies.
OPTIONS ON CURRENCIES
Certain Funds may purchase and sell options on currencies to hedge the
value of securities the Fund holds or intends to buy. Options on foreign
currencies may be traded on U.S. and foreign exchanges or over-the-counter.
OTHER INVESTMENT COMPANIES
In seeking to attain their investment objectives, certain Funds may invest
in securities issued by other investment companies within the limits prescribed
by the 1940 Act. Each Fund currently intends to limit its investments so that,
as determined immediately after a securities purchase is made: (a) not more than
5% of the value of its total assets will be invested in the securities of any
one investment company; (b) not more than 10% of the value of its total assets
will be invested in the aggregate in securities of investment companies as a
group; and (c) not
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more than 3% of the outstanding voting stock of any one investment company will
be owned by the Fund or by the Company as a whole. As a shareholder of another
investment company, a Fund would bear, along with other shareholders, its pro
rata portion of the other investment company's expenses, including Advisory
fees. These expenses would be in addition to the Advisory and other expenses
that a Fund bears in connection with its own operations. The Adviser has agreed
to remit to the respective investing Fund fees payable to it under its
respective Investment Advisory Agreement with an affiliated money market Fund to
the extent such fees are based upon the investing Fund's assets invested in
shares of the affiliated money market fund.
PARTICIPATION INTERESTS AND COMPANY RECEIPTS
The Government Bond Fund also may purchase from domestic financial
institutions and trusts created by such institutions participation interests and
trust receipts in high quality debt securities. A participation interest or
receipt gives the Fund an undivided interest in the security in the proportion
that the Fund's participation interest or receipt bears to the total principal
amount of the security. As to certain instruments for which the Fund will be
able to demand payment, the Fund intends to exercise its right to do so only
upon a default under the terms of the security, as needed to provide liquidity
or to maintain or improve the quality of its investment portfolio. It is
possible that a participation interest or trust receipt may be deemed to be an
extension of credit by the Fund to the issuing financial institution rather than
to the obligor of the underlying security and may not be directly entitled to
the protection of any collateral security provided by the obligor. In such
event, the ability of the Fund to obtain repayment could depend on the issuing
financial institution.
Participation interests and trust receipts may have fixed, floating or
variable rates of interest, and will have remaining maturities of thirteen
months or less (as defined by the SEC). If a participation interest or trust
receipt is unrated, the Adviser will have determined that the interest or
receipt is of comparable quality to those instruments in which the Fund may
invest pursuant to guidelines approved by the Board of Directors. For certain
participation interests or trust receipts the Fund will have the right to demand
payment, on not more than 30 days' notice, for all or any part of the Fund's
participation interest or trust receipt in the securities involved, plus accrued
interest.
REAL ESTATE INVESTMENT TRUSTS
A real estate investment trust ("REIT") is a managed portfolio of real
estate investments which may include office buildings, apartment complexes,
hotels and shopping malls. An equity REIT holds equity positions in real estate,
and it seeks to provide its shareholders with income from the leasing of its
properties, and with capital gains from any sales of properties. A mortgage REIT
specializes in lending money to developers of properties, and passes any
interest income it may earn to its shareholders.
REITs may be affected by changes in the value of the underlying property
owned or financed by the REIT, while Mortgage REITs also may be affected by the
quality of credit extended. Both equity and mortgage REITs are dependent upon
management skill and may not be diversified. REITs also may be subject to heavy
cash flow dependency, defaults by borrowers, self-liquidation, and the
possibility of failing to qualify for tax-free pass-through of income under the
Internal Revenue Code of 1986, as amended.
REPURCHASE AGREEMENTS
The repurchase price under any repurchase agreements described in the
Prospectuses generally equals the price paid by a Fund plus interest negotiated
on the basis of current short-term rates (which may be more or less than the
rate on the securities underlying the repurchase agreement). Securities subject
to repurchase agreements will be held by a Company's custodian in a segregated
account or in the Federal Reserve/Treasury book-entry system. Repurchase
agreements are considered to be loans by such Company under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS
At the time a Fund enters into a reverse repurchase agreement, it may
establish a segregated account with its custodian bank in which it will maintain
cash, U.S. Government securities or other liquid high grade debt obligations
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equal in value to its obligations in respect of reverse repurchase agreements.
Reverse repurchase agreements involve the risk that the market value of the
securities the Funds are obligated to repurchase under the agreement may decline
below the repurchase price. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, the Funds' use
of proceeds of the agreement may be restricted pending a determination by the
other party, or its trustee or receiver, whether to enforce the Funds'
obligation to repurchase the securities. Reverse repurchase agreements are
speculative techniques involving leverage, and are subject to asset coverage
requirements if the Funds do not establish and maintain a segregated account (as
described above). In addition, some or all of the proceeds received by a Fund
from the sale of a portfolio instrument may be applied to the purchase of a
repurchase agreement. To the extent the proceeds are used in this fashion and a
common broker/dealer is the counterparty on both the reverse repurchase
agreement and the repurchase agreement, the arrangement might be recharacterized
as a swap transaction. Under the requirements of the 1940 Act, the Funds are
required to maintain an asset coverage (including the proceeds of the
borrowings) of at least 300% of all borrowings. Depending on market conditions,
the Funds' asset coverage and other factors at the time of a reverse repurchase,
the Funds may not establish a segregated account when the Adviser believes it is
not in the best interests of the Funds to do so. In this case, such reverse
repurchase agreements will be considered borrowings subject to the asset
coverage described above.
SECURITIES LENDING
To increase return on portfolio securities, certain Funds may lend their
portfolio securities to broker/dealers and other institutional investors
pursuant to agreements requiring that the loans be continuously secured by
collateral equal at all times in value to at least the market value of the
securities loaned. Collateral for such loans may include cash, securities of the
U.S. Government, its agencies or instrumentalities, an irrevocable letter of
credit issued by (i) a U.S. bank that has total assets exceeding $1 billion and
that is a member of the Federal Deposit Insurance Corporation, or (ii) a foreign
bank that is one of the 75 largest foreign commercial banks in terms of total
assets, or any combination thereof. Such loans will not be made if, as a result,
the aggregate of all outstanding loans of the Fund involved exceeds 33% of the
value of its total assets which may include cash collateral received for
securities loaned. There may be risks of delay in receiving additional
collateral or in recovering the securities loaned or even a loss of rights in
the collateral should the borrower of the securities fail financially. However,
loans are made only to borrowers deemed by the Adviser to be of good standing
and when, in its judgment, the income to be earned from the loan justifies the
attendant risks. Pursuant to the securities loan agreement a Fund is able to
terminate the securities loan upon notice of not more than five business days
and thereby secure the return to the Fund of securities identical to the
transferred securities upon termination of the loan.
SHORT SALES
As described in the Prospectuses, certain Funds may from time to time
enter into short sales transactions. A Fund will not make short sales of
securities nor maintain a short position unless at all times when a short
position is open, such Fund owns an equal amount of such securities or
securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issue as, and equal in amount to, the
securities sold short. This is a technique known as selling short "against the
box." Such short sales will be used by a Fund for the purpose of deferring
recognition of gain or loss for federal income tax purposes.
SPECIAL SITUATIONS
As described in the Prospectuses, certain Funds may invest in "special
situations." A special situation arises when, in the opinion of the Adviser, the
securities of a particular company will, within a reasonably estimable period of
time, be accorded market recognition at an appreciated value solely by reason of
a development applicable to that company, and regardless of general business
conditions or movements of the market as a whole. Developments creating special
situations might include, among others: liquidations, reorganizations,
recapitalizations, mergers, material litigation, technical breakthroughs and new
management or management policies. Although large and well known companies may
be involved, special situations more often involve comparatively small or
unseasoned companies. Investments in unseasoned companies and special situations
often involve much greater risk than is inherent in ordinary investment
securities.
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STAND-BY COMMITMENTS
Certain Funds may acquire "stand-by commitments" with respect to Municipal
Securities held in their portfolios. Under a "stand-by commitment," a dealer
agrees to purchase from a Fund, at a Fund's option, specified Municipal
Securities at a specified price. Stand-by commitments are exercisable by a Fund
at any time before the maturity of the underlying Municipal Securities, and may
be sold, transferred, or assigned by a Fund only with the underlying
instruments.
The amount payable to a Tax-Free Bond Fund upon its exercise of a stand-by
commitment will normally be (i) the Fund's acquisition cost of the Municipal
Securities (excluding any accrued interest which a Tax-Free Bond Fund paid on
their acquisition), less any amortized market premium or plus any amortized
market or original issue discount during the period a Tax-Free Bond Fund owned
the securities, plus (ii) all interest accrued on the securities since the last
interest payment date during that period. Under normal market conditions, in
determining net asset value a Tax-Free Bond Fund values the underlying Municipal
Securities on an amortized cost basis. Accordingly, the amount payable by a
dealer upon exercise of a stand-by commitment will normally be substantially the
same as the portfolio value of the underlying Municipal Securities.
A Fund's right to exercise stand-by commitments will be unconditional and
unqualified. A stand-by commitment will not be transferable by a Fund, although
the Fund could sell the underlying Municipal Securities to a third party at any
time. Until a Fund exercises its stand-by commitment, it owns the securities in
its portfolio which are subject to the stand-by commitment.
The Funds expect that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for the security being acquired
which will be subject to the commitment (thus reducing the yield to maturity
otherwise available for the same security). When a Fund pays any consideration
directly or indirectly for a stand-by commitment, its cost will be reflected as
unrealized depreciation for the period during which the commitment is held by
that Fund. The Tax-Free Bond Funds will not acquire a stand-by commitment unless
immediately after the acquisition not more than 5% of the Funds' total assets
will be subject to a demand feature, or in stand-by commitments, with the same
institution.
Each Fund intends to enter into stand-by commitments only with banks and
broker/dealers which, in the Adviser's opinion, present minimal credit risks. In
evaluating the credit worthiness of the issuer of a stand-by commitment, the
Adviser will review periodically the issuer's assets, liabilities, contingent
claims, and other relevant financial information.
The Funds would acquire stand-by commitments solely to facilitate
portfolio liquidity and do not intend to exercise their rights thereunder for
trading purposes. Stand-by commitments acquired by a Fund will be valued at zero
in determining net asset value. A Fund's reliance upon the credit of these
dealers, banks, and broker/dealers will be secured by the value of the
underlying Municipal Securities that are subject to the commitment. Thus, the
risk of loss to the Fund in connection with a "stand-by commitment" will not be
qualitatively different from the risk of loss faced by a person that is holding
securities pending settlement after having agreed to sell the securities in the
ordinary course of business.
STRIPPED SECURITIES
Certain Funds may purchase stripped securities issued or guaranteed by the
U.S. Government, where the principal and interest components are traded
independently under the Separate Trading of Registered Interest and Principal of
Securities program ("STRIPS"). Under STRIPS, the principal and interest
components are individually numbered and separately issued by the U.S. Treasury
at the request of depository financial institutions, which then trade the
component parts independently.
In addition, the Fund may purchase stripped mortgage-backed securities
("SMBS") issued by the U.S. Government (or a U.S. Government agency or
instrumentality) or by private issuers such as banks and other
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institutions. If the underlying obligations experience greater than anticipated
prepayments of principal, the Fund may fail to fully recover its initial
investment. The market value of the class consisting entirely of principal
payments can be extremely volatile in response to changes in interest rates. The
yields on a class of SMBS that receives all or most of the interest are
generally higher than prevailing market yields on other mortgage-backed
obligations because their cash flow patterns are also volatile and there is a
greater risk that the initial investment will not be full recovered. SMBS issued
by the U.S. Government (or a U.S. Government agency or instrumentality) may be
considered liquid under guidelines established by the Company's Board of
Directors if they can be disposed of promptly in the ordinary course of business
at a value reasonably close to that used in the calculation of the Fund's per
share net asset value.
Although stripped securities may not pay interest to holders prior to
maturity, Federal income tax regulations require a Fund to recognize as interest
income a portion of the bond's discount each year. This income must then be
distributed to shareholders along with other income earned by the Fund. To the
extent that any shareholders in the Fund elect to receive their dividends in
cash rather than reinvest such dividends in additional Fund shares, cash to make
these distributions will have to be provided from the assets of the Fund or
other sources such as proceeds of sales of Fund shares and/or sales of portfolio
securities. In such cases, the Fund will not be able to purchase additional
income producing securities with cash used to make such distributions and its
current income may ultimately be reduced as a result.
U.S. AND FOREIGN BANK OBLIGATIONS
These obligations include negotiable certificates of deposit, banker's
acceptances and fixed time deposits. Each Fund limits its investments in
domestic bank obligations to banks having total assets in excess of $1 billion
and subject to regulation by the U.S. Government. Each Fund may also invest in
certificates of deposit issued by members of the Federal Deposit Insurance
Corporation ("FDIC") having total assets of less than $1 billion, provided that
the Fund will at no time own more than $100,000 principal amount of certificates
of deposit (or any higher principal amount which in the future may be fully
covered by FDIC insurance) of any one of those issuers. Fixed time deposits are
obligations which are payable at a stated maturity date and bear a fixed rate of
interest. Generally, fixed time deposits may be withdrawn on demand by a Fund,
but they may be subject to early withdrawal penalties which vary depending upon
market conditions and the remaining maturity of the obligation. Although fixed
time deposits do not have a market, there are no contractual restrictions on a
Fund's right to transfer a beneficial interest in the deposit to a third party.
Each Fund limits its investments in foreign bank obligations (i.e.,
obligations of foreign branches and subsidiaries of domestic banks, and domestic
and foreign branches and agencies of foreign banks) to obligations of banks
which at the time of investment are branches or subsidiaries of domestic banks
which meet the criteria in the preceding paragraphs or are branches or agencies
of foreign banks which (i) have more than $10 billion, or the equivalent in
other currencies, in total assets; (ii) in terms of assets are among the 75
largest foreign banks in the world; (iii) have branches or agencies in the
United States; and (iv) in the opinion of the Adviser, pursuant to the
established by the Board of Directors of the Company, are of an investment
quality comparable to obligations of domestic banks which may be purchased by a
Fund. These obligations may be general obligations of the parent bank in
addition to the issuing branch or subsidiary, but the parent bank's obligations
may be limited by the terms of the specific obligation or by governmental
regulation. Each Fund also limits its investments in foreign bank obligations to
banks, branches and subsidiaries located in Western Europe (United Kingdom,
France, Germany, Belgium, The Netherlands, Italy and Switzerland), Scandinavia
(Denmark and Sweden), Australia, Japan, the Cayman Islands, the Bahamas and
Canada. Each Fund will limit its investment in securities of foreign banks to
not more than 20% of total assets at the time of investment.
Each Fund may also make interest-bearing savings deposits in commercial
and savings banks in amounts not in excess of 5% of the total assets of the
Fund.
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U.S. GOVERNMENT OBLIGATIONS
Each Fund may invest in U.S. Government obligations. Examples of the types
of U.S. Government obligations that may be held by the Funds include, in
addition to U.S. Treasury bonds, notes and bills, the obligations of the Federal
Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage Association,
Federal National Mortgage Association, General Services Administration, Student
Loan Marketing Association, Central Bank for Cooperatives, Federal Home Loan
Mortgage Corporation, Federal Intermediate Credit Banks, Tennessee Valley
Authority, Resolution Funding Corporation and Maritime Administration.
Obligations guaranteed as to principal or interest by the U.S. Government, its
agencies, authorities or instrumentalities are deemed to include: (a) securities
for which the payment of principal and interest is backed by an irrevocable
letter of credit issued by the U.S. Government, its agencies, authorities or
instrumentalities and (b) participations in loans made to foreign governments or
their agencies that are so guaranteed. The secondary market for certain of these
participations is limited. If such participations are illiquid they will not be
purchased.
U.S. Government obligations include principal and interest components of
securities issued or guaranteed by the U.S. Treasury if the components are
traded independently under the Separate Trading of Registered Interest and
Principal of Securities program. Obligations issued or guaranteed as to
principal or interest by the U.S. Government, its agencies, authorities or
instrumentalities may also be acquired in the form of custodial receipts. These
receipts evidence ownership of future interest payments, principal payments or
both on certain notes or bonds issued by the U.S. Government, its agencies,
authorities or instrumentalities.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Options, futures and forward foreign currency contracts that obligate a
Fund to provide cash, securities or currencies to complete such transactions
will entail that Fund to either segregate assets in an account with, or on the
books of, the Company's custodian, or otherwise "covering" the transaction as
described below. For example, a call option written by a Fund will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or liquid assets
sufficient to meet the obligation by purchasing and delivering the securities if
the call is exercised. A call option written on an index will require that Fund
to have portfolio securities that correlate with the index. A put option written
by a Fund also will require that Fund to have available assets sufficient to
purchase the securities the Fund would be obligated to buy if the put is
exercised.
A forward foreign currency contract that obligates a Fund to provide
currencies will require the Fund to hold currencies or liquid securities
denominated in a foreign currency which will equal the Fund's obligations. Such
a contract requiring the purchase of currencies also requires segregation.
Unless a segregated account consists of the securities, cash or currencies
that are the subject of the obligation, a Fund will hold cash, U.S. Government
securities and other high grade liquid debt obligations in a segregated account.
These assets cannot be transferred while the obligation is outstanding unless
replaced with other suitable assets. In the case of an index-based transaction,
a Fund could own securities substantially replicating the movement of the
particular index.
In the case of a futures contract, a Fund must deposit initial margin and
variation margin, as often as daily, if the position moves adversely, sufficient
to meet its obligation to purchase or provide securities or currencies, or to
pay the amount owed at the expiration of an index-based futures contract.
Similarly, options on futures contracts require a Fund to deposit margin to the
extent necessary to meet the Fund's commitments.
In lieu of such assets, such transactions may be covered by other means
consistent with applicable regulatory policies. A Fund may enter into
off-setting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
hedging transactions. For example, a Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
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option sold by that Fund. Moreover, instead of segregating assets if a Fund held
a futures or forward contract, it could purchase a put option on the same
futures or forward contract with a strike price as high or higher than the price
of the contract held. Of course, the off-setting transaction must terminate at
the time of or after the primary transaction.
VARIABLE- AND FLOATING-RATE INSTRUMENTS
Certain Funds may purchase variable-rate and floating rate obligations 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, primarily banks. Participation interests provide a
Fund with a specified undivided interest (up to 100%) in the underlying
obligation and the right to demand payment of the unpaid principal balance plus
accrued interest on the participation interest from the institution upon a
specified number of days' notice, not to exceed 30 days. Each participation
interest is backed by an irrevocable letter of credit or guarantee of a bank
that the Adviser has determined meets the prescribed quality standards for the
Funds. The bank typically retains fees out of the interest paid on the
obligation for servicing the obligation, providing the letter of credit, and
issuing the repurchase commitment.
WARRANTS
Certain Funds are permitted to invest in warrants. Warrants are privileges
issued by corporations enabling the owner to subscribe to and purchase a
specified number of shares of the corporation at a specified price during a
specified period of time. The prices of warrants do not necessarily correlate
with the prices of the underlying securities. The purchase of warrants involves
the risk that the purchaser could lose the purchase value of the warrant if the
right to subscribe to additional shares is not exercised prior to the warrant's
expiration. Also, the purchase of warrants involves the risk that the effective
price paid for the warrant added to the subscription price of the related
security may exceed the value of the subscribed security's market price such as
when there is no movement in the level of the underlying security.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS
A Fund may agree to purchase securities on a when-issued basis or enter
into a forward commitment to purchase securities. When a Fund engages in these
transactions, its custodian will segregate cash, U.S. government securities or
other high quality debt obligations equal to the amount of the commitment.
Normally, the custodian will segregate portfolio securities to satisfy a
purchase commitment, and in such a case a Fund may be required subsequently to
segregate additional assets in order to ensure that the value of the segregated
assets remains equal to the amount of the Fund's commitment. Because a Fund will
segregate cash or liquid assets to satisfy its purchase commitments in the
manner described, the Fund's liquidity and ability to manage its portfolio might
be adversely affected in the event its commitments to purchase when-issued
securities ever exceeded 25% of the value of its assets. In the case of a
forward commitment to sell portfolio securities, the Fund's custodian will hold
the portfolio securities themselves in a segregated account while the commitment
is outstanding.
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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.
NET ASSET VALUE
PURCHASES AND REDEMPTIONS
See "How To Buy Shares" and "How To Redeem Shares" in the Prospectuses for
a complete description of the manner in which shares of the various classes of
the Funds may be purchased and redeemed.
The Funds also are available for a variety of retirement plans, including
IRAs, that allow investors to shelter some of their income from taxes. Investors
should contact their Selling Agents for details concerning retirement plans.
The right of redemption may be suspended or the date of payment postponed
when (a) trading on the New York Stock Exchange is restricted, as determined by
applicable rules and regulations of the SEC, (b) the New York Stock Exchange is
closed for other than customary weekend and holiday closings, (c) the SEC has by
order permitted such suspension, or (d) an emergency as determined by the SEC
exists making disposal of portfolio securities or the valuation of the net
assets of a Fund of a Company not reasonably practicable. The Exchange is closed
for business on New Years Day, Martin Luther King, Jr. Day, President's Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Veterans Day,
Thanksgiving Day and Christmas Day. The Federal Reserve Bank observes the
following holidays: New Years Day, Martin Luther King Jr's Birthday, Presidents
Day, Memorial Day, Independence Day, Labor Day, Columbus Day, Veteran's Day,
Thanksgiving Day and Christmas Day.
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.
MONEY MARKET FUNDS
The Money Market Funds use the amortized cost method of valuation to value
their 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
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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 Fund 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. NFT's NFI's
Board of Directors and NFT's Board of Trustees each have 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 Directors/Trustees, at such
intervals as it deems appropriate, to 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 Directors/Trustees will
promptly consider what action, if any, should be initiated. If the Board of
Directors/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 Non-Money Market Funds, a security listed or traded on
an exchange is valued at its last sales price on the exchange where the security
is principally traded or, lacking any sales on a particular day, the security is
valued at the mean between the closing bid and asked prices on that day. Each
security traded in the over-the-counter market (but not including securities
reported on the NASDAQ National Market System) is valued at the mean between the
last bid and asked prices based upon quotes furnished by market makers for such
securities. Each security reported on the NASDAQ National Market System is
valued at the last sales price on the valuation date. With respect to the Bond
Funds, securities may be valued on the basis of prices provided by an
independent pricing service. Prices provided by the pricing service may be
determined without exclusive reliance on quoted prices, and may reflect
appropriate factors such as yield, type of issue, coupon rate maturity and
seasoning differential. Securities for which prices are not provided by the
pricing service are valued at the mean between the last bid and asked prices
based upon quotes furnished by market makers for such securities.
With respect to the Non-Money Market Funds, securities for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the supervision of the Company's officers in a manner
specifically authorized by the Board of Directors/Trustees of the Company.
Short-Term obligations having 60 days or less to maturity are valued at
amortized cost, which approximates market value.
Generally, trading in foreign securities, as well as U.S. Government
securities, money market instruments and repurchase agreements, is substantially
completed each day at various times prior to the close of the New York Stock
Exchange. The values of such securities used in computing the net asset value of
the shares of the Fund are determined as of such times. Foreign currency
exchange rates are also generally determined prior to the close of the New York
Stock Exchange. Occasionally, events affecting the value of such securities and
such exchange rates may occur between the times at which they are determined and
the close of the New York Stock Exchange, which will not be reflected in the
computation of net asset value. If during such periods events occur which
materially affect the value of such securities, the securities will be valued at
their fair market value as determined in good faith by the directors/trustees.
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For purposes of determining the net asset value per share of the
International Funds, all assets and liabilities of the International Funds
initially expressed in foreign currencies will be converted into U.S. dollars at
the mean between the bid and offer prices of such currencies against U.S.
dollars quoted by a major bank that is a regular participant in the foreign
exchange market or on the basis of a pricing service that takes into account the
quotes provided by a number of such major banks.
A Company may redeem shares involuntarily to reimburse the Funds for any
loss sustained by reason of the failure of a shareholder to make full payment
for Investor Shares purchased by the shareholder or to collect any charge
relating to a transaction effected for the benefit of a shareholder which is
applicable to Investor Shares as provided in the related Prospectuses from time
to time. A Company also may make payment for redemptions in readily marketable
securities or other property if it is appropriate to do so in light of such
Company's responsibilities under the 1940 Act.
Under the 1940 Act, the Funds may suspend the right of redemption or
postpone the date of payment for 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.)
EXCHANGES
By use of the exchange privilege, the holder of Investor Shares, Daily
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.
A Company may limit the number of times the exchange privilege may be
exercised by a shareholder within a specified period of time. Also, the exchange
privilege may be terminated or revised at any time by the Companies upon such
notice as may be required by applicable regulatory agencies (presently sixty
days for termination or material revision), provided that the exchange privilege
may be terminated or materially revised without notice under certain unusual
circumstances.
The Prospectuses for the Investor Shares and Primary Shares of each Fund
describe the exchange privileges available to holders of 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, N.A. ("NationsBank") and its affiliated
and correspondent banks) (collectively, "Institutions") acting on behalf of
customers maintaining a qualified trust account or relationship at the
Institution.
DESCRIPTION OF SHARES
Net investment income for the Funds for dividend purposes consists of (i)
interest accrued and original issue discount earned on a Fund's assets, (ii)
plus the amortization of market discount and minus the amortization of market
premium on such assets, (iii) less accrued expenses directly attributable to the
Fund and the general expenses of the Company prorated to a Fund on the basis of
its relative net assets, plus dividend or distribution income on a Fund's
assets.
Prior to purchasing shares in one of the Funds, the impact of dividends or
distributions which are expected to be or have been declared, but not paid,
should be carefully considered. Any dividend or distribution declared
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shortly after a purchase of such shares prior to the record date will have the
effect of reducing the per share net asset value by the per share amount of the
dividend or distribution. All or a portion of such dividend or distribution,
although in effect a return of capital, may be subject to tax.
Shareholders receiving a distribution in the form of additional shares
will be treated as receiving an amount equal to the fair market value of the
shares received, determined as of the reinvestment date.
The Funds use the so-called "equalization accounting method" to allocate a
portion of earnings and profits to redemption proceeds. This method permits a
fund to achieve more balanced distributions for both continuing and departing
shareholders. Continuing shareholders should realize tax savings or deferrals
through this method, and departing shareholders will not have their tax
obligations change. Although using this method will not affect a Fund's total
returns, it may reduce the amount that otherwise would be distributable to
continuing shareholders by reducing the effect of redemptions on dividend and
distribution amounts.
DIVIDENDS AND DISTRIBUTIONS OF NFI
NATIONS PRIME AND TREASURY FUNDS. All of the net investment income earned
by each of the Money Market Funds is declared daily as a dividend to the
shareholders of record of each class of shares of each Fund. The Investor A,
Investor B, Investor C, Daily and Primary B Shares of each such Fund shall
accrue an additional expense not borne by the Primary A Shares as a result of
the Rule 12b-1 Plans and/or the Shareholder Servicing Plans or Shareholder
Administration Plan and/or Shareholder Administration Agreements applicable to
each such class of shares. Consequently, a separate calculation shall be made to
arrive at the dividends of each class of shares. Dividends normally accrue on
the first day that a purchase order is effective but not on the date that a
redemption order is effective. Thus, if a purchase order is accepted prior to
12:00 noon Eastern Standard Time, the shareholder will receive dividends
beginning that day. All dividends declared during a month will be paid in cash
within five business days after the end of the month. If a shareholder of record
redeems all of the shares in its account at any time during the month, all
dividends declared through the date of redemption are paid to the shareholder
along with the proceeds of the redemption within five business days of the
redemption.
EQUITY INCOME FUND, INTERNATIONAL EQUITY FUND AND INTERNATIONAL GROWTH
FUND. Dividends and distributions from net investment income, if any, are
declared and paid quarterly, and capital gains distributions are declared and
paid annually. The Investor A, Investor B, Investor C and Primary B Shares of
the Funds shall accrue an additional expense not borne by the Primary A Shares
as a result of the applicable Rule 12b-1 Plan and/or Shareholder Servicing Plan
or Shareholder Administration Plan and/or Shareholder Administration Agreements.
Consequently, a separate calculation shall be made to arrive at the net asset
value per share and dividends of each class of shares of the Funds.
GOVERNMENT SECURITIES FUND AND GOVERNMENT BOND FUND. Dividends and
distributions from net investment income are declared daily and paid monthly,
and capital gains distributions are declared and paid annually. The Investor A,
Investor B, Investor C and Primary B Shares of the Fund shall accrue an
additional expense not borne by the Primary A Shares as a result of the 12b-1
Plans and the Shareholder Servicing Plan or Shareholder Administration Plan
and/or Shareholder Administration Agreements. Consequently, a separate
calculation shall be made to arrive at the net asset value per share and
dividends of each class of shares of the Funds.
SMALL COMPANY GROWTH FUND AND INTERNATIONAL VALUE FUND. Dividends and
distributions from net investment income, if any, are declared and paid
quarterly, and capital gains distributions are declared and paid annually. The
Investor A, Investor B and Investor C Shares of the Funds shall accrue an
additional expense not borne by the Primary A Shares or Primary B Shares as a
result of the applicable Rule 12b-1 Plan and/or Shareholder Servicing Plan or
Shareholder Administration Plan and/or Shareholder Administration Agreements.
Consequently, a separate calculation shall be made to arrive at the net asset
value per share and dividends of each class of shares of the Funds.
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DIVIDENDS AND DISTRIBUTIONS OF NFP
EMERGING MARKETS FUND AND PACIFIC GROWTH FUND. Dividends and distributions
from net investment income, if any, are declared and paid quarterly, and capital
gains distributions are declared and paid annually. The Investor A, Investor B,
Investor C and Primary B Shares of the Funds shall accrue an additional expense
not borne by the Primary A Shares as a result of the applicable Rule 12b-1 Plan,
Shareholder Servicing Plan and/or Shareholder Administration Plan. Consequently,
a separate calculation shall be made to arrive at the net asset value per share
and dividends of each class of shares of the Funds.
GLOBAL GOVERNMENT INCOME FUND. Dividends and distributions from net
investment income are declared daily and paid monthly, and capital gains
distributions are declared and paid annually. The Investor A, Investor B,
Investor C and Primary B Shares of the Fund shall accrue an additional expense
not borne by the Primary A Shares as a result of the 12b-1 Plans, Shareholder
Servicing Plan and Shareholder Administration Plan. Consequently, a separate
calculation shall be made to arrive at the net asset value per share and
dividends of each class of shares of the Fund.
DIVIDENDS AND DISTRIBUTIONS OF NFT
Dividends from net investment income are declared and paid monthly by the
Capital Growth Fund, the Disciplined Equity Fund, the Managed Index Fund and the
Value Fund. The Short-Intermediate Government Fund, the Short-Term Income Fund,
the Diversified Income Fund, the Strategic Fixed Income Fund, the NFT Money
Market Funds, and the Tax-Free Bond Funds declare dividends daily and pay them
monthly. All other NFT Non-Money Market Funds declare and pay dividends from net
investment income each calendar quarter.
MONEY MARKET FUNDS. All of the net investment income earned by each of the
Money Market Funds is declared daily as a dividend to the shareholders of record
of each class of shares of each Fund. The Investor A, Investor B, Investor C,
Daily and Primary B Shares of each such Fund shall accrue an additional expense
not borne by the Primary A Shares as a result of the Rule 12b-1 Plans and/or the
Shareholder Servicing Plans or Shareholder Administration Plan and/or
Shareholder Administration Agreements applicable to each such class of shares.
Consequently, a separate calculation shall be made to arrive at the dividends of
each class of shares. Dividends normally accrue on the first day that a purchase
order is effective but not on the date that a redemption order is effective.
Thus, if a purchase order is accepted prior to 12:00 noon Eastern Standard Time,
the shareholder will receive dividends beginning that day. All dividends
declared during a month will be paid in cash within five business days after the
end of the month. If a shareholder of record redeems all of the shares in its
account at any time during the month, all dividends declared through the date of
redemption are paid to the shareholder along with the proceeds of the redemption
within five business days of the redemption. 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 Funds 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 continue to be eligible for dividends through and including the day
before the redemption order is executed.
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ADDITIONAL INFORMATION CONCERNING TAXES
The following information supplements and should be read in conjunction
with the Prospectus section entitled "Tax Information." The Prospectuses of the
Funds describe generally the tax treatment of distributions by the Funds. This
section of the SAI includes additional information concerning Federal income
taxes.
GENERAL
The Companies intend to qualify each Fund as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), as long as such qualification is in the best interest of the Fund's
shareholders. Each Fund will be treated as a separate entity for tax purposes
and thus, the provisions of the Code applicable to regulated investment
companies generally will be applied to each Fund, rather than to a Company as a
whole. In addition, net capital gains, net investment income, and operating
expenses will be determined separately for each Fund. As a regulated investment
company, the Funds will not be taxed on net investment income and capital gains
distributed to shareholders.
Qualification as a regulated investment company under the Code requires,
among other things, that (a) each Fund derive at least 90% of its annual gross
income from dividends, interest, certain payments with respect to securities
loans, gains from the sale or other disposition of stock or securities or
foreign currencies (to the extent such currency gains are directly related to
the regulated investment company's principal business of investing in stock or
securities) and other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies; and (b) the Fund diversify its holdings
so that, at the end of each quarter of the taxable year, (i) at least 50% of the
market value of the Fund's assets is represented by cash, government securities
and other securities limited in respect of any one issuer to an amount not
greater than 5% of the Fund's assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than U.S. Government
obligations and the securities of other regulated investment companies), or in
two or more issuers which the Fund controls and which are determined to be
engaged in the same or similar trades or businesses.
Each Fund also must distribute or be deemed to distribute to its
shareholders at least 90% of its net investment income which for this purpose,
includes net short-term capital gains earned in each taxable year. In general,
these distributions must actually or be deemed to be made in the taxable year.
However, in certain circumstances, such distributions may be made in the 12
months following the taxable year. Furthermore, distributions declared in
October, November or December of one taxable year and paid by January 3 of the
following taxable year will be treated as paid by December 31 the first taxable
year. The Funds intend to pay out substantially all of their net investment
income and net realized capital gains (if any) for each year.
In addition, a regulated investment company must, in general, derive less
than 30% of its gross income from the sale or other disposition of securities or
options thereon held for less than three months. However, this restriction has
been repealed with respect to a regulated investment company's taxable years
beginning after August 5, 1997.
EXCISE TAX
A 4% nondeductible excise tax will be imposed on each Fund (other than to
the extent of its tax-exempt interest income) to the extent it does not meet
certain minimum distribution requirements by the end of each calendar year. Each
Fund intends to actually or be deemed to distribute substantially all of its net
investment income and net capital gains by the end of each calendar year and,
thus, expects not to be subject to the excise tax.
PRIVATE LETTER RULING
In order for a Fund to maintain regulated investment company status under
the Code, its dividends, including--for this purpose--capital gain
distributions, must not constitute "preferential dividends," within the meaning
of Section 562(c) of the Code. The Companies have received a private letter
ruling from the Internal Revenue Service ("IRS") generally to the effect that
the following will not give rise to preferential dividends:
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differing fees imposed on the different classes of shares with respect to
servicing, distribution and administrative support services, and transfer agency
arrangements; differing sales charges on purchases and redemptions of such
shares; and conversion features resulting in the Companies paying different
dividends or distributions on the different classes of shares.
TAXATION OF FUND INVESTMENTS
Except as provided herein, gains and losses on the sale of portfolio
securities by a Fund will generally be capital gains and losses. Such gains and
losses will ordinarily be long-term capital gains and losses if the securities
have been held by the Fund for more than one year at the time of disposition of
the securities.
Gains recognized on the disposition of a debt obligation (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 market discount which
accrued, but was not previously recognized pursuant to an available election,
during the term the Fund held the debt obligation.
If an option granted by a Fund lapses or is terminated through a closing
transaction, such as a repurchase by the Fund of the option from its holder, the
Fund will realize a short-term capital gain or loss, depending on whether the
premium income is greater or less than the amount paid by the Fund in the
closing transaction. Some realized capital losses may be deferred if they result
from a position which is part of a "straddle," discussed below. If securities
are sold by a Fund pursuant to the exercise of a call option written by it, the
Fund will add the premium received to the sale price of the securities delivered
in determining the amount of gain or loss on the sale. If securities are
purchased by a Fund pursuant to the exercise of a put option written by it, such
Fund will subtract the premium received from its cost basis in the securities
purchased.
The amount of any gain or loss realized by a Fund on closing out a
regulated futures contract will generally result in a realized capital gain or
loss for Federal income tax purposes. Regulated futures contracts held at the
end of each fiscal year will be required to be "marked to market" for Federal
income tax purposes pursuant to Section 1256 of the Code. In this regard, they
will be deemed to have been sold at market value. Sixty percent (60%) of any net
gain or loss recognized on these deemed sales and sixty percent (60%) of any net
realized gain or loss from any actual sales, will generally be treated as
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss. Transactions that qualify as designated hedges are
excepted from the "mark-to-market" rule and the "60%/40%" rule.
Under Section 988 of the Code, a Fund will generally recognize ordinary
income or loss to the extent gain or loss realized on the disposition of
portfolio securities is attributable to changes in foreign currency exchange
rates. In addition, gain or loss realized on the disposition of a foreign
currency forward contract, futures contract, option or similar financial
instrument, or of foreign currency itself, will generally be treated as ordinary
income or loss. The Funds will attempt to monitor Section 988 transactions,
where applicable, to avoid adverse tax impact.
Offsetting positions held by a Fund involving certain financial forward,
futures or options contracts may be considered, for tax purposes, to constitute
"straddles." "Straddles" are defined to include "offsetting positions" in
actively traded personal property. The tax treatment of "straddles" is governed
by Section 1092 of the Code which, in certain circumstances, overrides or
modifies the provisions of Section 1256. If a Fund were treated as entering into
"straddles" by engaging in certain financial forward, futures or option
contracts, such straddles could be characterized as "mixed straddles" if the
futures, forwards, or options comprising a part of such straddles were governed
by Section 1256 of the Code. The Fund may make one or more elections with
respect to "mixed straddles." Depending upon which election is made, if any, the
results with respect to the Fund may differ. Generally, to the extent the
straddle rules apply to positions established by the Fund, losses realized by
the Fund may be deferred to the extent of unrealized gain in any offsetting
positions. Moreover, as a result of the straddle and the conversion transaction
rules, short-term capital loss on straddle positions may be recharacterized as
long-term capital loss, and long-term capital gain may be characterized as
short-term capital gain or ordinary income.
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If a Fund enters into a "constructive sale" of any appreciated position in
stock, a partnership interest, or certain debt instruments, the Fund must
recognize gain (but not loss) with respect to that position. For this purpose, a
constructive sale occurs when the Fund enters into one of the following
transactions with respect to the same or substantially identical property: (i) a
short sale; (ii) an offsetting notional principal contract; or (iii) a futures
or forward contract.
If a Fund purchases shares in a "passive foreign investment company"
("PFIC"), the Fund may be subject to Federal income tax and an interest charge
imposed by the IRS upon certain distributions from the PFIC or the Fund's
disposition of its PFIC shares. If the Fund invests in a PFIC, the Fund intends
to make an available election to mark-to-market its interest in PFIC shares.
Under the election, the Fund will be treated as recognizing at the end of each
taxable year the difference, if any, between the fair market value of its
interest in the PFIC shares and its basis in such shares. In some circumstances,
the recognition of loss may be suspended. The Fund will adjust its basis in the
PFIC shares by the amount of income (or loss) recognized. Although such income
(or loss) will be taxable to the Fund as ordinary income (or loss)
notwithstanding any distributions by the PFIC, the Fund will not be subject to
Federal income tax or the interest charge with respect to its interest in the
PFIC under the election.
FOREIGN TAXES
Income and dividends received by a Fund from sources within foreign
countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. If more than 50% of the value of a Fund's total
assets at the close of its taxable year consists of securities of non-U.S.
corporations, the Fund will be eligible to file an election with the IRS
pursuant to which the regulated investment company may pass-through to its
shareholders foreign taxes paid by the regulated investment company, which may
be claimed either as a credit or deduction by the shareholders. Only the Nations
Emerging Markets Fund, Nations Pacific Growth Fund and Nations Global Government
Income Fund expect to qualify for the election. However, even if a Fund
qualifies for the election, foreign taxes will only pass-through to a Fund
shareholder if (i) the shareholder holds the Fund shares for at least 16 days
during the 30 day period beginning 15 days prior to the date upon which the
shareholder becomes entitled to receive Fund dividends corresponding with the
pass-through of the foreign taxes paid by the Fund, and (ii) with respect to
foreign source dividends received by the Fund on shares giving rise to foreign
tax, the Fund holds the shares for at least 16 days during the 30 day period
beginning 15 days prior to the date upon which the Fund becomes entitled to the
dividend.
For tax years beginning after December 31, 1997, an individual with $300
or less of creditable foreign taxes generally is exempt from foreign source
income and certain other limitations imposed by the Code on claiming a credit
for such taxes. The $300 amount is increased to $600 for joint filers.
CAPITAL GAIN DISTRIBUTIONS
Distributions which are designated by a Fund as capital gain distributions
will be taxed to shareholders as long-term term capital gain (to the extent such
dividends do exceed the Fund's actual net capital gains for the taxable year),
regardless of how long a shareholder has held Fund shares. Such distributions
will be designated as capital gain distributions in a written notice mailed by
the Fund to its shareholders not later than 60 days after the close of the
Fund's taxable year.
OTHER DISTRIBUTIONS
Although dividends will be declared daily based on each Money Market
Fund's and the Government Securities Fund's daily earnings, for Federal income
tax purposes, the Fund's earnings and profits will be determined at the end of
each taxable year and will be allocated pro rata over the entire year. For
Federal income tax purposes, only amounts paid out of earnings and profits will
qualify as dividends. Thus, if during a taxable year a Fund's declared dividends
(as declared daily throughout the year) exceed the Fund's net income (as
determined at the end of the year), only that portion of the year's
distributions which equals the year's earnings and profits will be deemed to
have constituted a dividend. It is expected that each Fund's net income, on an
annual basis, will equal the dividends declared during the year.
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DISPOSITION OF FUND SHARES
A disposition of Fund shares pursuant to a redemption (including a
redemption in-kind) or an exchange will ordinarily result in a taxable capital
gain or loss, depending on the amount received for the shares (or are deemed to
be received in the case of an exchange) and the cost of the shares.
If a shareholder exchanges or otherwise disposes of Fund shares within 90
days of having acquired such shares and if, as a result of having acquired those
shares, the shareholder subsequently pays a reduced sales charge on a new
purchase of shares of the Fund or a different regulated investment company, the
sales charge previously incurred in acquiring the Fund's shares shall not be
taken into account (to the extent such previous sales charges do not exceed the
reduction in sales charges on the new purchase) for the purpose of determining
the amount of gain or loss on the disposition, but will be treated as having
been incurred in the acquisition of such other shares. Also, any loss realized
on a redemption or exchange of shares of the Fund will be disallowed to the
extent that substantially identical shares are acquired within the 61-day period
beginning 30 days before and ending 30 days after the shares are disposed of.
If a shareholder receives a designated capital gain distribution (to be
treated by the shareholder as a long-term capital gain) with respect to any Fund
share and such Fund share is held for six months or less, then (unless otherwise
disallowed) any loss on the sale or exchange of that Fund share will be treated
as a long-term capital loss to the extent of the designated capital gain
distribution. In addition, if a shareholder holds Fund shares for six months or
less, any loss on the sale or exchange of those shares will be disallowed to the
extent of the amount of exempt-interest dividends received with respect to the
shares. The Treasury Department is authorized to issue regulations reducing the
six months holding requirement to a period of not less than the greater of 31
days or the period between regular dividend distributions where a Fund regularly
distributes at least 90% of its net tax-exempt interest, if any. No such
regulations have been issued as of the date of this SAI. The loss disallowance
rules described in this paragraph do not apply to losses realized under a
periodic redemption plan.
FEDERAL INCOME TAX RATES
As of the printing of this SAI, the maximum individual tax rate applicable
to ordinary income is 39.6% (marginal tax rates may be higher for some
individuals to reduce or eliminate the benefit of exemptions and deductions);
the maximum individual marginal tax rate applicable to net capital gain is 20%;
and the maximum corporate tax rate applicable to ordinary income and net capital
gain is 35% (marginal tax rates may be higher for some corporations to reduce or
eliminate the benefit of lower marginal income tax rates). Naturally, the amount
of tax payable by an individual or corporation will be affected by a combination
of tax laws covering, for example, deductions, credits, deferrals, exemptions,
sources of income and other matters.
CORPORATE SHAREHOLDERS
Corporate shareholders of the Funds may be eligible for the
dividends-received deduction on dividends distributed out of a Fund's net
investment income attributable to dividends received from domestic corporations,
which, if received directly by the corporate shareholder, would qualify for such
deduction. A distribution by a Fund attributable to dividends of a domestic
corporation will only qualify for the dividends-received deduction if (i) the
corporate shareholder generally holds the Fund shares upon which the
distribution is made for at least 46 days during the 90 day period beginning 45
days prior to the date upon which the shareholder becomes entitled to the
distribution; and (ii) the Fund generally holds the shares of the domestic
corporation producing the dividend income for at least 46 days during the 90 day
period beginning 45 days prior to the date upon which the Fund becomes entitled
to such dividend income.
FOREIGN SHAREHOLDERS
Under the Code, distributions of net investment income by a Fund to a
nonresident alien individual, foreign trust (i.e., trust which a U.S. court is
able to exercise primary supervision over administration of that trust and one
or more U.S. persons have authority to control substantial decisions of that
trust), foreign estate (i.e., the income of
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which is not subject to U.S. tax regardless of source), foreign corporation, or
foreign partnership (a "foreign shareholder") will be subject to U.S.
withholding tax (at a rate of 30% or a lower treaty rate if applicable).
Withholding will not apply if a dividend paid by a Fund to a foreign shareholder
is "effectively connected" with a U.S. trade or business (or, if an income tax
treaty applies, is attributable to a U.S. permanent establishment of the foreign
shareholder), in which case the reporting and withholding requirements
applicable to U.S. persons will apply. Distributions of net long-term capital
gains are generally not subject to tax withholding, and beginning in 2000, the
Funds will be permitted to estimate the portion of their distributions
qualifying as capital gain distributions.
BACKUP WITHHOLDING
The Companies may be required to withhold, subject to certain exemptions,
at a rate of 31% ("backup withholding") on dividends, capital gain
distributions, and redemption proceeds (including proceeds from exchanges and
redemptions in-kind) paid or credited to an individual Fund shareholder, if the
shareholder fails to certify that the Taxpayer Identification Number ("TIN")
provided is correct and that the shareholder is not subject to backup
withholding, or the IRS notifies NFT that the shareholder's TIN is incorrect or
that the shareholder is subject to backup withholding. Such tax withheld does
not constitute any additional tax imposed on the shareholder, and may be claimed
as a tax payment on the shareholder's Federal income tax return. An investor
must provide a valid TIN upon opening or reopening an account. Failure to
furnish a valid TIN to the Companies could subject the investor to penalties
imposed by the IRS.
TAX-DEFERRED PLANS
The Funds are available for a variety of tax-deferred retirement and other
plans, including Individual Retirement Accounts ("IRA"), Simplified Employee
Pension Plans ("SEP-IRA"), Savings Incentive Match Plans for Employees ("SIMPLE
plans"), Roth IRAs, and Education IRAs, which permit investors to defer some of
their income from taxes. A Tax Free Bond Fund, however, is generally not a
suitable investment for tax-deferred plans because such plans, which are
generally tax exempt, would not gain any benefit from the tax-exempt nature of
the Tax Free Bond Fund's dividends. Investors should contact their Selling
Agents for details concerning retirement plans.
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
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 (each, a "Tax-Free Bond Fund" and collectively the
"Tax-Free 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, 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.
Each Tax-Free Bond Fund intends that at least 50% of the value of its
total assets at the close of each quarter of its taxable years will consist of
obligations the interest on which is exempt from Federal income tax, so that
they will qualify under the Code to pay "exempt-interest dividends." The portion
of total dividends paid by the Fund with respect to any taxable year that
constitutes exempt-interest dividends will be the same for all shareholders
receiving dividends during such year. Long-term and/or short-term capital gain
distributions will not constitute exempt-interest dividends and will be taxed as
capital gain or ordinary income dividends, respectively. The exemption of
interest income derived from investments in tax-exempt obligations for Federal
income tax purposes may not result in a similar exemption under the laws of a
particular state or local taxing authority.
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Not later than 60 days after the close of its taxable year, each
Tax-Exempt Bond Fund will notify its shareholders of the portion of the
dividends paid with respect to such taxable year which constitutes
exempt-interest dividends. The aggregate amount of dividends so designated
cannot exceed the excess of the amount of interest excludable from gross income
under Section 103 of the Code received by the Fund during the taxable year over
any amounts disallowed as deductions under Sections 265 and 171(a)(2) of the
Code. Interest on indebtedness incurred to purchase or carry shares of a Fund
will not be deductible to the extent that the Fund's distributions are exempt
from Federal income tax.
In addition, the Federal alternative minimum tax ("AMT") rules ensure that
at least a minimum amount of tax is paid by taxpayers who obtain significant
benefit from certain tax deductions and exemptions. Some of these deductions and
exemptions have been designated "tax preference items" which must be added back
to taxable income for purposes of calculating AMT. Among the tax preference
items is tax-exempt interest from "private activity bonds" issued after August
7, 1986. To the extent that a Fund invests in private activity bonds, its
shareholders who pay AMT will be required to report that portion of Fund
dividends attributable to income from the bonds as a tax preference item in
determining their AMT. Shareholders will be notified of the tax status of
distributions made by the Fund. Persons who may be "substantial users" (or
"related persons" of substantial users) of facilities financed by private
activity bonds should consult their tax advisors before purchasing shares in the
Fund. Furthermore, shareholders will not be permitted to deduct any of their
share of the Fund's expenses in computing their AMT. With respect to a corporate
shareholder of such Funds, exempt-interest dividends paid by a Fund is included
in the corporate shareholder's "adjusted current earnings" as part of its AMT
calculation, and may also affect its Federal "environmental tax" liability. As
of the printing of this SAI, individuals are subject to an AMT at a maximum rate
of 28% and corporations at a maximum rate of 20%. Shareholders with questions or
concerns about AMT should consult their tax advisors.
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 Funds 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 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.
59
<PAGE>
The Georgia state intangibles tax was legislatively repealed by action of
the General Assembly during the 1996 Session and was also repealed by a
constitutional amendment approved by the voters of Georgia on November 5, 1996.
The repeal of the Georgia intangibles tax was made retroactively effective to
January 1, 1996.
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.
Although any net capital gain recognized with respect to the sale or
exchange of shares of a Fund may be subject to the South Carolina state income
tax, individuals, estates and trusts are entitled to a deduction for South
Carolina taxable income purposes equal to 44% of the net capital gain recognized
from the sale or exchange of an asset which has been held for a period of two or
more years. In the case of estates or trusts, the deduction is applicable only
to income taxed to the estate or trust or individual beneficiaries and not
income passed through to nonindividual beneficiaries.
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.
OTHER MATTERS
Investors should be aware that the investments to be made by the Funds may
involve sophisticated tax rules that may result in income or gain recognition by
a Fund without corresponding current cash receipts. Although the Funds will seek
to avoid significant noncash income, such noncash income could be recognized by
a Fund, in which case the Fund may distribute cash derived from other sources in
order to meet the minimum distribution requirements described above.
The foregoing discussion and the discussions in the Prospectus applicable
to each shareholder address only some of the Federal tax considerations
generally affecting investments in the Fund. Each investor is urged to consult
his or her tax advisor regarding specific questions as to Federal, state, local
or foreign taxes.
FUND TRANSACTIONS AND BROKERAGE
GENERAL BROKERAGE POLICY
Subject to policies established by the Board of Directors/Trustees of each
Company, the Adviser is responsible for decisions to buy and sell securities for
each Fund, for the selection of broker/dealers, for the execution of such Fund's
securities transactions, and for the allocation of brokerage fees in connection
with such transactions. The Adviser's primary consideration in effecting a
security transaction is to obtain the best net price and the most favorable
execution of the order. Purchases and sales of securities on a securities
exchange are effected through brokers who charge a negotiated commission for
their services. Orders may be directed to any broker to the extent and in the
manner permitted by applicable law.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without stated
commissions, although the price of a security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
that includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
60
<PAGE>
In placing orders for portfolio securities of a Fund, the Adviser is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Adviser will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable in the circumstances. In seeking
such execution, the Adviser will use its best judgment in evaluating the terms
of a transaction, and will give consideration to various relevant factors,
including, without limitation, the size and type of the transaction, the nature
and character of the market for the security, the confidentiality, speed and
certainty of effective execution required for the transaction, the general
execution and operational capabilities of the broker-dealer, the reputation,
reliability, experience and financial condition of the firm, the value and
quality of the services rendered by the firm in this and other transactions and
the reasonableness of the spread or commission, if any. In addition, the Adviser
will consider research and investment services provided by brokers or dealers
who effect or are parties to portfolio transactions of a Fund, the Adviser or
its other clients. Such research and investment services are those which
brokerage houses customarily provide to institutional investors and include
statistical and economic data and research reports on particular companies and
industries. Such services are used by the Adviser in connection with all of its
investment activities, and some of such services obtained in connection with the
execution of transactions for a Fund may be used in managing other investment
accounts. Conversely, brokers furnishing such services may be selected for the
execution of transactions of such other accounts, whose aggregate assets are far
larger than those of a Fund. Services furnished by such brokers may be used by
the Adviser in providing investment advisory and investment management services
for the Companies.
Commission rates are established pursuant to negotiations with the broker
based on the quality and quantity of execution services provided by the broker
in the light of generally prevailing rates. The allocation of orders among
brokers and the commission rates paid are reviewed periodically by the
Directors/Trustees of the respective Company. On exchanges on which commissions
are negotiated, the cost of transactions may vary among different brokers.
Transactions on foreign stock exchanges involve payment of brokerage commissions
which are generally fixed. Transactions in both foreign and domestic
over-the-counter markets are generally principal transactions with dealers, and
the costs of such transactions involve dealer spreads rather than brokerage
commissions. With respect to over-the-counter transactions, the Adviser, where
possible, will deal directly with dealers who make a market in the securities
involved except in those circumstances in which better prices and execution are
available elsewhere.
In certain instances there may be securities which are suitable for more
than one Fund as well as for one or more of the other clients of the Adviser.
Investment decisions for each Fund and for the Adviser's other clients are made
with the goal of achieving their respective investment objectives. It may happen
that a particular security is bought or sold for only one client even though it
may be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling that same security. Some simultaneous transactions are inevitable
when several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated among
clients in a manner believed to be equitable to each. It is recognized that in
some cases this system could have a detrimental effect on the price or volume of
the security in a particular transaction as far as a Fund is concerned. The
Companies believe that over time its ability to participate in volume
transactions will produce superior executions for the Funds.
The portfolio turnover rate for each Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the reporting period by
the monthly average value of the portfolio securities owned during the reporting
period. The calculation excludes all securities, including options, whose
maturities or expiration dates at the time of acquisition are one year or less.
Portfolio turnover may vary greatly from year to year as well as within a
particular year, and may be affected by cash requirements for redemption of
shares and by requirements which enable the Funds to receive favorable tax
treatment.
The Funds may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group. A
Fund will engage in this practice, however, only when the Adviser, in its sole
discretion, believes such practice to be otherwise in the Fund's interests.
61
<PAGE>
The Companies will not execute portfolio transactions through, or purchase
or sell portfolio securities from or to the distributor, the Adviser, the
administrator, the co-administrator or their affiliates, acting as principal
(including repurchase and reverse repurchase agreements), except to the extent
permitted by applicable law. In addition, the Companies will not give preference
to correspondents of 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 distributor, the Adviser, the administrator, or the
co-administrator, or any of their affiliates, is a member, except to the extent
permitted by the SEC. Under certain circumstances, the Funds may be at a
disadvantage because of these limitations in comparison with other investment
companies which have similar investment objectives but are not subject to such
limitations.
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. NFT has adopted procedures pursuant to Rule 10f-3 under 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 a Company are prohibited from
dealing with such Company as a principal in the purchase and sale of securities
unless an exemptive order allowing such transactions is obtained from the SEC.
Each of the Funds may purchase securities from underwriting syndicates of which
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.
Investment decisions for each Fund are made independently from those for
each Company's other investment portfolios, other investment companies, and
accounts advised or managed by the Adviser. Such other investment portfolios,
investment companies, and accounts may also invest in the same securities as the
Funds. When a purchase or sale of the same security is made at substantially the
same time on behalf of one or more of the Funds and another investment
portfolio, investment company, or account, the transaction will be averaged as
to price and available investments allocated as to amount, in a manner which the
Adviser believes to be equitable to each Fund and such other investment
portfolio, investment company or account. In some instances, this investment
procedure may adversely affect the price paid or received by a Fund or the size
of the position obtained or sold by the Fund. To the extent permitted by law,
the Adviser may aggregate the securities to be sold or purchased for the Funds
with those to be sold or purchased for other investment portfolios, investment
companies, or accounts in executing transactions.
BROKERAGE COMMISSIONS
- ------------------------------------------------------------------------------
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED MARCH ENDED MARCH ENDED MARCH
FUND 31,1998 31,1997 31,1996
- ------------------------------------------------------------------------------
Managed SmallCap Index 143,732 $ 54,486.18 --
- ------------------------------------------------------------------------------
Disciplined Equity 152,295 288,643.86 --
- ------------------------------------------------------------------------------
Equity Index 208,604 115,828.91 --
- ------------------------------------------------------------------------------
Emerging Growth 477,588 554,981.41 --
- ------------------------------------------------------------------------------
Capital Growth Fund 1,392,418 1,584,909.43 --
- ------------------------------------------------------------------------------
Managed Index 119,677 24,684.19 --
- ------------------------------------------------------------------------------
62
<PAGE>
- ------------------------------------------------------------------------------
Value 3,142,078 1,784,504.83 --
- ------------------------------------------------------------------------------
Balanced Assets 1,207,000 1,965,293.04 --
- ------------------------------------------------------------------------------
Nations Emerging Markets 284,328 207,518.87 192,107.00
- ------------------------------------------------------------------------------
Nations Pacific Growth 963,416 932,004.34 638,176.00
- ------------------------------------------------------------------------------
Equity Income 1,111,460 1,083,187.32 578,343.00
- ------------------------------------------------------------------------------
International Equity 2,421,975 1,738,165.19 1,251,696.00
- ------------------------------------------------------------------------------
International Growth 1,054,454 0 0
- ------------------------------------------------------------------------------
Managed Small Cap Value
Index 5,469 0 0
- ------------------------------------------------------------------------------
Marsico Focused Equities 25,934 0 0
- ------------------------------------------------------------------------------
Marsico Growth & Income 9,903 0 0
- ------------------------------------------------------------------------------
Small Company Growth 184,948 0 0
- ------------------------------------------------------------------------------
During the fiscal periods ended March 31, 1998, 1997 and 1996, NFT and its
Funds did not pay brokerage commissions to NationsBanc Investments, Inc. (or its
predecessors), NationsBanc Capital Markets, Inc., or Stephens. NFT did pay
$2,368.03 to Nations Montgomery Securities LLC during the fiscal year ended
March 31, 1998.
During the fiscal period ended March 31, 1998 1997 and 1996, NFP did not
pay brokerage commissions to Nations Montgomery Securities LLC, NationsBanc
Investments, Inc. (or its predecessors), NationsBanc Capital
Markets, Inc. or Stephens.
During the fiscal years ended March 31, 1998, 1997 and 1996, NFI did not
pay brokerage commissions to Nations Montgomery Securities LLC, NationsBanc
Investments, Inc. (or its predecessors), NationsBanc Capital
Markets, Inc. or Stephens.
No other Funds of NFP, NFI or NFT paid brokerage fees during the fiscal
years ended March 31, 1998, 1997 and 1996.
SECTION 28(E) STANDARDS
Under Section 28(e) of the Securities Exchange Act of 1934, the Adviser
shall not be "deemed to have acted unlawfully or to have breached its fiduciary
duty" solely because under certain circumstances it has caused the account to
pay a higher commission than the lowest available. To obtain the benefit of
Section 28(e), the Adviser must make a good faith determination that the
commissions paid are "reasonable in relation to the value of the brokerage and
research services provided ...viewed in terms of either that particular
transaction or its overall responsibilities with respect to the accounts as to
which it exercises investment discretion and that the services provided by a
broker provide an adviser with lawful and appropriate assistance in the
performance of its investment decision making responsibilities." Accordingly,
the price to a Fund in any transaction may be less favorable than that available
from another broker/dealer if the difference is reasonably justified by other
aspects of the portfolio execution services offered.
Broker/dealers utilized by the Adviser may furnish statistical, research
and other information or services which are deemed by the Adviser to be
beneficial to the Funds' investment programs. Research services received from
brokers supplement the Adviser's own research and may include the following
types of information: statistical and background information on industry groups
and individual companies; forecasts and interpretations with respect to U.S and
foreign economies, securities, markets, specific industry groups and individual
companies; information on political developments; fund management strategies;
performance information on securities and information concerning prices of
securities; and information supplied by specialized services to the Adviser and
to the Company's Directors/Trustees with respect to the performance, investment
activities and fees and expenses of other mutual funds. Such information may be
communicated electronically, orally or in written form. Research services may
also include the providing of equipment used to communicate research
information, the arranging of meetings with management of companies and the
providing of access to consultants who supply research information.
63
<PAGE>
The outside research assistance is useful to the Adviser since the brokers
utilized by the Adviser as a group tend to follow a broader universe of
securities and other matters than the Adviser's staff can follow. In addition,
this research provides the Adviser with a diverse perspective on financial
markets. Research services which are provided to the Adviser by brokers are
available for the benefit of all accounts managed or advised by the Adviser. In
some cases, the research services are available only from the broker providing
such services. In other cases, the research services may be obtainable from
alternative sources in return for cash payments. The Adviser is of the opinion
that because the broker research supplements rather than replaces its research,
the receipt of such research does not tend to decrease its expenses, but tends
to improve the quality of its investment advice. However, to the extent that the
Adviser would have purchased any such research services had such services not
been provided by brokers, the expenses of such services to the Adviser could be
considered to have been reduced accordingly. Certain research services furnished
by broker/dealers may be useful to the Adviser with clients other than the
Funds. Similarly, any research services received by the Adviser through the
placement of fund transactions of other clients may be of value to the Adviser
in fulfilling its obligations to the Funds. The Adviser is of the opinion that
this material is beneficial in supplementing its research and analysis; and,
therefore, it may benefit the Companies by improving the quality of the
Adviser's investment advice. The advisory fees paid by the Companies are not
reduced because the Adviser receives such services.
Some broker/dealers may indicate that the provision of research services
is dependent upon the generation of certain specified levels of commissions and
underwriting concessions by the Adviser's clients, including the Funds.
DIRECTORS/TRUSTEES AND OFFICERS
The directors/trustees and executive officers of each Company and their
principal occupations during the last five years are set forth below. The
address of each, unless otherwise indicated, is 111 Center Street, Little Rock,
Arkansas 72201. Those directors who are "interested persons" of a Company (as
defined in the 1940 Act) are indicated by an asterisk(*).
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS
POSITION WITH AND CURRENT
NAME ADDRESS AND AGE THE COMPANIES DIRECTORSHIPS
- -------------------- ------------- -------------
<S> <C> <C>
Edmund L. Benson, III, 61 Director/Trustee Director, President and Treasurer,
Saunders & Benson, Inc. Saunders & Benson, Inc. (Insurance);
728 East Main Street Trustee, Nations Institutional Reserves,
Suite 400 Nations Annuity Trust and NFT, Director,
Richmond, VA 23219 NFI, Nations LifeGoal Funds, Inc., and
NFP
James Ermer, 55 Director/Trustee Senior Vice President- Finance, CSX
13705 Hickory Nut Point Corporation (transportation and natural
Midlothian, VA 23112 resources); Director, National Mine
Service; Director, Lawyers
Title Corporation; Trustee,
Nations Institutional
Reserves, Nations Annuity
Trust and NFT; Director, NFI,
Nations LifeGoal Funds, Inc.,
and NFP.
William H. Grigg, 65 Director /Trustee Chairman Emeritus, Duke Power Co., since
Duke Power Co. July, 1997; April 1994 to July 1997,
422 South Church Street Chairman and Chief Executive Officer;
PB04G November 1991 to April 1994, Vice
Charlotte, NC 28242-0001 Chairman, from April 1988 to November
1991, Executive Vice President
--Customer Group, Director,
Coltec Industries, Hatteras
Income Securities, Inc.,
Nations Government Income Term
Trust 2003, Inc., Nations
Government Income Term Trust
2004, Inc., Nations
64
<PAGE>
PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS
POSITION WITH AND CURRENT
NAME ADDRESS AND AGE THE COMPANIES DIRECTORSHIPS
- -------------------- ------------- -------------
Balanced Target Maturity Fund,
Inc., NFI, Nations LifeGoal
Funds, Inc. and NFP; Trustee,
Nations Institutional
Reserves, Nations Annuity
Trust and NFT.
Thomas F. Keller, 66 Director/Trustee R.J. Reynolds Industries Professor of
Fuqua School of Business Business Administration and former Dean,
P.O. Box 90120 Fuqua School of Business, Duke
Duke University University; Director, LADD Furniture,
Durham, NC 27708 Inc.; Director, Wendy's International
Inc., American Business
Products, Dimon Inc., Biogen,
Inc., Hatteras Income
Securities, Inc., Nations
Government Income Term Trust
2003, Inc., Nations Government
Income Term Trust 2004, Inc.,
Nations Balanced Target
Maturity Fund, Inc., NFI,
Nations LifeGoal Funds, Inc.,
and NFP; Trustee, Nations
Institutional Reserves,
Nations Annuity Trust, NFT,
the Mentor Funds, Mentor
Institutional Trust, Cash
Resource Trust.
Carl E. Mundy, Jr., 63 Director/Trustee Commandant, United States Marine Corps,
9308 Ludgate Drive from July 1991 to July 1995; Commanding
Alexandria, VA 22309 General, Marine Forces Atlantic, from
June 1990 to June 1991;
Director, NFI, Nations
LifeGoal Funds, Inc., and NFP;
Trustee, Nations Institutional
Reserves, Nations Annuity
Trust and NFT.
James B. Sommers*, 59 Director/Trustee President, NationsBank Trust, from
237 Cherokee Road January 1992 to September 1996; Executive
Charlotte, NC 28207 Vice President, NationsBank Corporation,
from January 1992 to May 1997;
Principal, Bainbridge &
Associates; Partner, Villa
LLC; Chairman, Central
Piedmont Community College
Foundation; Trustee, Central
Piedmont Community College;
Board of Commissioners,
Charlotte/Mecklenberg Hospital
Authority; Director, NFI, NFP
and Nations LifeGoal Funds,
Inc.; Trustee, Nations
Institutional Reserves,
Nations Annuity Trust and NFT.
A. Max Walker*, 76 President, Financial consultant; Formerly,
4580 Windsor Gate Court Director/Trustee and President, A. Max Walker, Inc.; Director
Atlanta, GA 30342 Chairman of the and Chairman of the Board, Hatteras
Board Income Securities, Inc., Nations
Government Income Term Trust 2003, Inc.,
Nations Government Income Term Trust
2004, Inc., Nations Balanced Target
Maturity Fund, Inc., NFI, Nations
LifeGoal Funds, Inc., and Nations Fund
Portfolios. Inc.; President and Chairman
of the Board of Trustees, Nations
Institutional Reserves, Nations Annuity
Trust and NFT.
65
<PAGE>
PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS
POSITION WITH AND CURRENT
NAME ADDRESS AND AGE THE COMPANIES DIRECTORSHIPS
- -------------------- ------------- -------------
Charles B. Walker, 59 Director/Trustee Since 1989, Director, Executive Vice
Ethyl Corporation President, Chief Financial Officer and
330 South Fourth Street Treasurer, Ethyl Corporation (chemicals,
Richmond, VA 23219 plastics, and aluminum manufacturing);
since 1994, Vice Chairman,
Ethyl Corporation and Vice
Chairman, Chief Financial
Officer and Treasurer,
Albemarle Corporation,
Director, NFI, Nations
LifeGoal Funds, Inc, and NFP;
Trustee, Nations Institutional
Reserves, Nations Annuity
Trust and NFT.
Thomas S. Word, Jr.*, 60 Director/Trustee Partner, McGuire Woods Battle & Boothe
McGuire, Woods, Battle & (law); Director, Vaughan Bassett
Boothe Furniture Company, Director VB Williams
One James Center Furniture Company, Inc.; Director, NFI,
Richmond, VA 23219 Nations LifeGoal Funds, Inc., and NFP;
Trustee, Nations Institutional Reserves,
Nations Annuity Trust and NFT.
Richard H. Blank, Jr., 41 Secretary Since 1994, Vice President of Mutual Fund
Stephens Inc. Services, Stephens Inc. 1990 to 1994,
111 Center Street Manager Mutual Fund Services, Stephens
Suite 300 Inc. 1983 to 1990, Associate in Corporate
Little Rock, AR 72201 Finance Department, Stephens Inc.;
Secretary, Nations Institutional
Reserves, Nations Annuity Trust, NFT,
NFI, Nations LifeGoal Funds, Inc., and
NFP
Michael W. Nolte, 37 Assistant Secretary Associate, Financial Services Group of
Stephens Inc. Stephens Inc.
111 Center Street
Suite 300
Little Rock, AR 72201
Louise P. Newcomb, 45 Assistant Secretary Corporate Syndicate Associate, Stephens
Stephens Inc. Inc.
111 Center Street
Suite 300
Little Rock, AR 72201
James E. Banks, 42 Assistant Secretary Since 1993, Attorney, Stephens Inc.;
Stephens Inc. Associate Corporate Counsel, Federated
111 Center Street Investors; from 1991 to 1993, Staff
Suite 300 Attorney, Securities and Exchange
Little Rock, AR 72201 Commission from 1988 to 1991
Richard H. Rose, 43 Treasurer Since 1994, Vice President, Division
First Data Investor Manager, First Data Investor Services
Services Group, Inc. Group, Inc. since 1988, Senior Vice
One Exchange Place President, The Boston Company Advisors.
Boston, MA 02109 Inc.; Treasurer, Nations Institutional
Reserves, NFT, NFI, Nations LifeGoal
Funds, Inc., and NFP
Steven Levy, 33 Assistant Treasurer Since 1997, Vice President of Fund
First Data Investor Accounting, First Data Investor Services
Services Group, Inc. Group, Inc.; Prior to 1997, Investment
One Exchange Place Operations Manager, Franklin Templeton
Boston, MA 02109 Group and Assistant Vice President of
Fund Accounting, Scudder Stevens and
Clark, Inc.
</TABLE>
66
Mr. Rose serves as Treasurer to certain other investment companies for
which First Data Investors Services Group, Inc. (the "Co-Administrator") or
its affiliates serve as sponsor, distributor, administrator and/or investment
adviser. Each Director/Trustee is a board member of NFI, NFT, NFP, Nations
Annuity Trust, Nations Institutional Reserves and Nations LifeGoal Funds,
Inc., each a registered investment company that is part of the Nations Funds
Family. Richard H. Blank, Jr., Richard H. Rose, Steven Levy, Michael W.
Nolte, Louise P. Newcomb and James E. Banks. Jr. also are officers of NFI,
NFT, NFP, Nations Annuity Trust, Nations Institutional Reserves and Nations
LifeGoal Funds, Inc.
Each Director/Trustee receives (i) an annual retainer of $1,000 ($3,000
for the Chairman of the Board) plus $500 for each Fund of each Company, plus
(ii) a fee of $1,000 for attendance at each "in-person" meeting of the Board of
Directors/Trustees (or committee thereof). All Directors/Trustees receive
reimbursements for expenses related to their attendance at meetings of the Board
of Directors/Trustees. Officers receive no direct remuneration in such capacity
from the Companies. No person who is an officer, director, trustee, or employee
of NationsBank or its affiliates serves as an Officer, Director, Trustee or
employee of the company. As of the date of this SAI, the directors and officers
of each Company as a group owned less than 1% of the outstanding shares of each
of the Funds. Each Company has adopted a Code of Ethics which, among other
things, prohibits each access person of the Company from purchasing or selling
securities when such person knows or should have known that, at the time of the
transaction, the security (i) was being considered for purchase or sale by a
Fund, or (ii) was being purchased or sold by a Fund. For purposes of the Code of
Ethics, an access person means (i) a director or officer of a Company, (ii) any
employee of a Company (or any company in a control relationship with a Company)
who, in the course of his/her regular duties, obtains information about, or
makes recommendations with respect to, the purchase or sale of securities by a
Company, and (iii) any natural person in a control relationship with a Company
who obtains information concerning recommendations made to a Company regarding
the purchase or sale of securities. Portfolio managers and other persons who
assist in the investment process are subject to additional restrictions,
including a requirement that they disgorge to a Company any profits realized on
short-term trading (i.e., the purchase/sale or sale/purchase of securities
within any 60-day period). The above restrictions do not apply to purchases or
sales of certain types of securities, including mutual fund shares, money market
instruments and certain U.S. Government securities. To facilitate enforcement,
the Code of Ethics generally requires that a Company's access persons, other
than its "disinterested" directors, submit reports to a Company'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
Directors/Trustees (the "Retirement Plan"), each director/trustee may be
entitled to certain benefits upon retirement from the Board of
Directors/Trustees. Pursuant to the Retirement Plan, the normal retirement date
is the date on which the eligible director/trustee has attained age 65 and has
completed at least five years of continuous service with one or more of the
open-end investment companies advised by the Adviser. If a director/trustee
retires before reaching age 65, no benefits are payable. Each eligible
director/trustee is entitled to receive an annual benefit from the Funds
commencing on the first day of the calendar quarter coincident with or next
following his date of retirement equal to 5% of the aggregate
director's/trustee's fees payable by the Funds during the calendar year in which
the director's/trustee's retirement occurs multiplied by the number of years of
service (not in excess of ten years of service) completed with respect to any of
the Funds. Such benefit is payable to each eligible director/trustee in
quarterly installments for a period of no more than five years. If an eligible
director/trustee's dies after attaining age 65, the director's/trustees
surviving spouse (if any) will be entitled to receive 50% of the benefits that
would have been paid (or would have continued to have been paid) to the
director/trustee if he had not died. The Retirement Plan is unfunded. The
benefits owed to each director/trustee are unsecured and subject to the general
creditors of the Funds.
NATIONS FUNDS DEFERRED COMPENSATION PLAN
Under the terms of the Nations Funds Deferred Compensation Plan for
Eligible Directors (the "Deferred Compensation Plan"), each director/trustee may
elect, on an annual basis, to defer all or any portion of the annual board fees
(including the annual retainer and all attendance fees) payable to the
director/trustee for that calendar
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year. An application was submitted to and
approved by the SEC to permit deferring directors/trustees to elect to tie the
rate of return on fees deferred pursuant to the Deferred Compensation Plan to
one or more of certain investment portfolios of certain Funds. Distributions
from the deferring directors'/trustees deferral accounts will be paid in cash,
in generally equal quarterly installments over a period of five years beginning
on the date the deferring director's/trustees' retirement benefits commence
under the Retirement Plan. The Board of Directors/Trustees, in its sole
discretion, may accelerate or extend such payments after a director's/trustee's
termination of service. If a deferring director/trustee dies prior to the
commencement of the distribution of amounts in his deferral account, the balance
of the deferral account will be distributed to his designated beneficiary in a
lump sum as soon as practicable after the director's/trustee's death. If a
deferring director dies after the commencement of such distribution, but prior
to the complete distribution of his deferral account, the balance of the amounts
credited to his deferral account will be distributed to his designated
beneficiary over the remaining period during which such amounts were
distributable to the director. Amounts payable under the Deferred Compensation
Plan are not funded or secured in any way and deferring directors/trustees have
the status of unsecured creditors of the Funds from which they are deferring
compensation.
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COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR ESTIMATED TOTAL
AGGREGATE AGGREGATE RETIREMENT ANNUAL COMPENSATION
AGGREGATE COMPENSATION COMPENSATION BENEFITS ACCRUED BENEFITS FROM REGISTRANT
NAME OF PERSON COMPENSATION FROM FROM AS PART OF FUND UPON AND FUND
POSITION (1) FROM NFT (2) NFI (2) NFP (2) EXPENSES RETIREMENT COMPLEX (3)(4)
------------ ------------ ------- ------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Edmund L. Benson, III, $24,500.00 $11,000.00 $7,500.00 $4,431.53 $30,000.00 $86,201.07
Trustee
James Ermer $24,500.00 $11,000.00 $7,500.00 $4,431.53 $30,000.00 $59,000.00
Trustee
William H. Grigg $24,500.00 $11,000.00 $7,500.00 $4,431.53 $30,000.00 $117,533.68
Trustee
Thomas F. Keller $24,500.00 $11,000.00 $7,500.00 $4,431.53 $30,000.00 $116,115.17
Trustee
Carl E. Mundy, Jr. $23,500.00 $10,000.00 $6,500.00 $4,431.53 $30,000.00 $54,000.00
Trustee
James Sommers $18,625.00 $8,250.00 $5,375.00 $4,431.53 $30,000.00 $43,875.00
Trustee
A. Max Walker $26,500.00 $13,000.00 $9,500.00 $4,431.53 $35,000.00 $89,000.00
Chairman of the Board
Charles B. Walker $24,500.00 $11,000.00 $7,500.00 $4,431.53 $30,000.00 $59,000.00
Trustee
Thomas S. Word $24,500.00 $11,000.00 $7,500.00 $4,431.53 $30,000.00 $109,255.23
Trustee
</TABLE>
(1)All directors/trustees receive reimbursements for expenses related to
their attendance at meetings of the Board of Directors/Trustees. Officers of the
Companies receive no direct remuneration in such capacity from the Companies.
(2) For the twelve-month period ending March 31, 1998, each
Director/Trustee receives (i) an annual retainer of $1,000 ($3,000 for the
Chairman of the Board) plus $500 for each Fund of the Companies, plus (ii) a fee
of $1,000 for attendance at each "in-person" meeting of the Board of Trustees
(or committee thereof) and $500 for attendance at each other meeting of the
Board of Directors/Trustees (or Committee thereof).
(3) Messrs. Grigg, Keller and A.M. Walker receive compensation from nine
investment companies that are deemed to be part of the Nations Funds "fund
complex," as that term is defined under Rule 14a-101 of the Securities Exchange
Act of 1934, as amended. Messrs. Benson, Ermer, C. Walker, Sommers, Mundy and
Word receive compensation from five investment companies deemed to be part of
the Nations Funds complex.
(4) Total compensation amounts include deferred compensation (including
interest) payable to or accrued for the following Directors/Trustees: Edmund L.
Benson, III $53,201; William H. Grigg $94,534; Thomas F. Keller $93,115; and
Thomas S. Word $102,255.
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SHAREHOLDER AND TRUSTEE LIABILITY
NFT is a Massachusetts business trust. 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, NFT's
Declaration of Trust provides that shareholders shall not be subject to any
personal liability for the acts or obligations of NFT, and that every note,
bond, contract, order, or other undertaking made by NFT 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 NFT shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of NFT 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 NFT itself would be unable to meet its
obligations.
The Declaration of Trust states further that no Trustee, officer, or agent
of NFT 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 NFT; 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 NFT shall look solely to the trust property for payment.
With the exceptions stated, the Declaration of Trust provides that a
Trustee is entitled to be indemnified against all liabilities and expenses
reasonably incurred by him in connection with the defense or disposition of any
proceeding in which he may be involved or with which he may be threatened by
reason of his being or having been a Trustee, and that the Trustees have the
power, but not the duty, to indemnify officers and employees of NFT 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 AND DISTRIBUTION AGREEMENTS
THE COMPANIES AND THEIR COMMON STOCK
NFI is an open-end diversified management investment company organized as
a corporation under the laws of the State of Maryland on December 13, 1983. NFI
had no operations prior to December 15, 1986. Effective October 2, 1989, NFI
changed its name from Silver Star Fund, Inc. to Hatteras Funds, Inc., effective
May 1, 1992 NFI began doing business under the name NFP and effective September
24, 1992 NFI changed its name to Nations Fund, Inc. NFI's fiscal year end is
March 31; prior to 1996, the NFI's fiscal year end was May 31. NFI offers shares
of common stock which represent interests in one of nine separate Funds. Shares
of each Fund of the Company are redeemable at the net asset value (less any
applicable contingent deferred sales charge ("CDSC") thereof at the option of
the holders thereof or in certain circumstances at the option of the Company.
For information concerning the methods of redemption and the rights of share
ownership, consult the Prospectuses under the captions "How To Buy Shares," "How
To Redeem Shares" and "Organization And History."
NFT 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 "NFT." NFT's fiscal year end is March 31; prior to 1996, NFT's
fiscal year end was November 30. NFT'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 NFT 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-seven series of shares which are described in
this SAI. Each Money Market Fund of NFT 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
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classes of shares: Investor A Shares, Investor B Shares, Investor C Shares,
Primary A Shares and Primary B Shares. However, certain Funds issue fewer
classes of shares.
NFP is an open-end diversified management investment company organized as
a corporation under the laws of the State of Maryland on January 23, 1995. NFP
offers shares of common stock which represent interests in one of three separate
Funds. Shares of each Fund of NFP are redeemable at the net asset value (less
any applicable CDSC thereof at the option of the holders thereof or in certain
circumstances at the option of NFP. For information concerning the methods of
redemption and the rights of share ownership, consult the Prospectuses under the
captions "How To Buy Shares," "How To Redeem Shares" and "Organization And
History."
Shares have no preemptive rights and only such conversion or exchange
rights as the Boards may grant in their discretion. When issued for payment as
described in the Prospectuses, Fund shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of a Company 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 Company's respective
investment portfolios, of any general assets of the Company 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 Boards determine 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 a Company will
vote in the aggregate and not by portfolio, except as otherwise expressly
required by law or when the Board 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 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 Board members may be effectively acted upon by
shareholders of such Company voting together in the aggregate without regard to
a particular investment portfolio.
As used in this SAI and in the Prospectuses, the term "majority of the
outstanding shares" of a Company, a particular Fund or a particular class of
shares of a Fund means, respectively, the vote of the lesser of (i) 67% or more
of the shares of a Company, Fund or class (as appropriate) present at a meeting
of shareholders, if the holders of more than 50% of the outstanding shares
entitled to vote, are present or represented by proxy, or (ii) more than 50% of
the outstanding shares of a Company, Fund or class.
The Boards of Directors/Trustees may classify or reclassify any unissued
shares of a Company into shares of any class, classes or Fund in addition to
those already authorized by setting or changing in any one or more respects,
from time to time, prior to the issuance of such shares, the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or terms or conditions of redemption, of such shares
and, pursuant to such classification or reclassification to increase or decrease
the number of authorized shares of any Fund or class. Any such classification or
reclassification will comply with the provisions of the 1940 Act. Fractional
shares shall have the same rights as full shares to the extent of their
proportionate interest.
Because certain of the Prospectuses combine disclosure on two separate
open-end management investment companies, there is a possibility that one
investment company might become liable for a misstatement, inaccuracy or
incomplete disclosure in such Prospectuses concerning the other investment
company. NFT and NFI have entered
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into an indemnification agreement that creates a right of indemnification from
the investment company responsible for any such misstatement, inaccuracy or
incomplete disclosure that may appear in such Prospectuses.
INVESTMENT ADVISER
NBAI serves as investment adviser to all of the Funds of the Companies,
pursuant to Investment Advisory Agreements dated January 1, 1996, and amended
thereafter. Brandes serves as investment sub-adviser to the International Value
Fund, pursuant to an Investment Sub-Advisory Agreement dated as of April 8,
1998. Gartmore serves as investment sub-adviser to Funds of NFP and to the
International Equity Fund and International Growth Fund, pursuant to Investment
Sub-Advisory Agreements dated January 1, 1996, and amended thereafter. Boatmen's
serves as investment sub-adviser to the Government Bond Fund, pursuant to an
Investment Sub-Advisory Agreement dated July 31, 1997. Marsico Capital serves as
investment sub-adviser to the Marsico Focused Equities Fund and Marsico Growth &
Income Fund, pursuant to an Investment Sub-Advisory Agreement, dated December
31, 1997. TradeStreet serves as investment sub-adviser to all other Funds of the
NFI and NFT, pursuant to Investment Sub-Advisory Agreements, dated January 1,
1996, and amended thereafter.
NBAI also serves as the investment adviser to the portfolios of Nations
Institutional Reserves, Nations Annuity Trust, Nations LifeGoal Funds, Inc.,
each a registered investment company that is part of the Nations Funds 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 Nations 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 Nations Institutional Reserves, Nations Annuity Trust, Hatteras
Income Securities, Inc., Nations Government Income Term Trust 2003, Inc.,
Nations Government Income Term Trust 2004, Inc. and Nations Balanced Target
Maturity Fund, Inc.
NBAI and TradeStreet are each wholly owned subsidiaries of Nations Bank,
which in turn is a wholly owned banking subsidiary of NationsBank Corporation, a
bank holding company organized as a North Carolina corporation. Gartmore is a
joint venture structured as a Delaware general partnership between NB Partner
Corp., a wholly owned subsidiary of NationsBank and Gartmore U.S. Limited, an
indirect wholly owned subsidiary of Gartmore Investment Management plc
("Gartmore plc"), a publicly listed U.K. company. National Westminster Bank plc
and affiliated parties (collectively, "NatWest) own 100% of the equity of
Gartmore plc. Gartmore is a registered investment adviser in the United States
and a member of the Investment Management Regulatory Organization Limited, a
U.K. regulatory authority. The respective principal offices of NBAI, TradeStreet
and Gartmore are located at One NationsBank Plaza, Charlotte, N.C. 28255.
Boatmen's is an indirect wholly owned subsidiary of NationsBank Corporation, a
bank holding company organized as a North Carolina corporation. Boatmen's
principal office is located at 100 North Broadway, St. Louis, Missouri 63178.
Marsico Capital is located at 1200 17th Street, Suite 1300, Denver, CO 80202.
NationsBank has an option to purchase up to 50% of Marsico Capital.
Prior to April 10, 1996, the predecessor to Gartmore, Nations Gartmore
Investment Management ("Nations Gartmore"), provided sub-advisory services to
NBAI and Nations International Equity Fund and Nations International Growth
Fund. Nations Gartmore was a joint venture structured as a general partnership
between NB Partner Corp. and Gartmore U.S. Limited. On April 10, 1996, NatWest
purchased control of Gartmore plc from Compagnie de Suez, S.A. and affiliated
entities (collectively, "Compagnie de Suez") through a two-part transaction
involving (1) the direct purchase from Compagnie de Suez of its indirect
subsidiary Indosuez UK Asset Management Limited, which held 75% of the
outstanding voting shares of Gartmore plc; and (2) the acquisition of the
remaining portion of Gartmore plc's shares held by public shareholders through a
tender offer. This acquisition resulted in the change of control of Nations
Gartmore and the creation of a successor entity, Gartmore. On July 17, 1996, the
shareholders of Nations International Equity Fund and Nations International
Growth Fund approved the new sub-advisory arrangements with Gartmore. There were
no material changes to the personnel who provided service to NFP, the
International Equity Fund, or the Nations International Growth Fund, and the
change in ownership did not result in a change in the level of service provided
NFP, the International Equity Fund, or the Nations International Growth Fund or
the level of sub-advisory fees.
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Brandes Investment Partners, Inc. owns a controlling interest in Brandes
Investment Partners, L.P. and serves as its General Partner. Charles Brandes is
the controlling shareholder of Brandes Investment Partners, Inc. The principal
offices of Brandes are located at 12750 High Bluff Drive, San Diego, CA 92130.
Thomas F. Marsico is Chairman and Chief Executive Officer of Marsico
Capital and has voting control of the company. Prior to forming Marsico Capital
in September 1997, Mr. Marsico had 18 years of experience as a securities
analyst/portfolio manager.
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 NFT. 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 subsidiary of NCNB
and NCNB changed its name to NationsBank Corporation. In anticipation of this
transaction, the prior investment adviser for NFT 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
as investment adviser to all of the Funds of NFT pursuant to an amendment to its
investment advisory agreements.
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 $100 billion, including
the more than $40 billion in mutual fund assets. It is a company dedicated to a
goal of providing responsible investment management and superior service.
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.
Pursuant to the terms of the Investment Advisory Agreements and
Sub-Advisory Agreements (at times, the "Advisory Agreements") with NBAI,
TradeStreet, Gartmore, Boatman's, Brandes and Marsico Capital, subject at all
times to the control of the respective Companies' Boards of Directors/Trustees
and conformance with the stated policies of each Company, NBAI, TradeStreet,
Gartmore, Boatman's, Brandes and Marsico Capital each selects and manages the
investments of the Funds. Each such advisory entity obtains and evaluates
economic, statistical and financial information to formulate and implement
investment policies for the Funds.
The Advisory Agreements for NBAI, TradeStreet, Gartmore, Boatmen's Brandes
and Marsico Capital each provide 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 Company or to any shareholder of the Company for any
act or omission in the course of, or connected with, rendering services under
thereunder or for any losses that may be sustained in the purchase, holding or
sale of any security.
An Investment Advisory Agreement with NBAI shall become effective with
respect to a Fund if and when approved by the Boards of a Company, and if so
approved, shall thereafter continue from year to year, provided that such
continuation of the Agreement is specifically approved at least annually by (a)
(i) the Company's Board of Directors/Trustees or (ii) the vote of "a majority of
the outstanding voting securities" of a Fund (as defined in Section 2(a)(42) of
the 1940 Act), and (b) the affirmative vote of a majority of the Company's
Directors/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
Directors of the Company), by votes cast in person at a meeting specifically
called for such purpose. The respective Investment Advisory Agreement will
terminate automatically in the event of its assignment,
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and is terminable with respect to a Fund at any time without penalty by a
Company (by vote of the Board of Directors/Trustees or by vote of a majority of
the outstanding voting securities of the Fund) or by NBAI on 60 days' written
notice.
A Sub-Advisory Agreement with TradeStreet 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 Company's Board of
Directors (ii) the vote of "a majority of the outstanding voting securities" of
a Fund (as defined in Section 2(a)(42) of the 1940 Act), and (b) the affirmative
vote of a majority of the Company's Directors who are not parties to such
Agreement or "interested persons" (as defined in the 1940 Act) of a party to
such Agreement (other than as Directors of the Company), by votes cast in person
at a meeting specifically called for such purpose. The 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 Company (by vote of
the Board of Directors 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 Sub-Advisory Agreement with Gartmore was initially approved by NFP's
Board of Directors on January 26, 1995 and by the initial shareholder on June
30, 1995. The Sub-Advisory Agreement will continue in effect for an initial term
of two years from its effective date and continues in effect from year to year
thereafter only if such continuance is specifically approved at least annually
by the Company's Board of Directors and the affirmative vote of a majority of
the directors who are not parties to the Sub-Advisory Agreement or "interested
persons" of any such party by votes cast in person at a meeting called for such
purpose. The respective Funds, NBAI or Gartmore may terminate the Sub-Advisory
Agreement, on 60 days' written notice without penalty. The Advisory Agreement
terminates automatically in the event of its "assignment," as defined in the
1940 Act. The Sub-Advisory Agreement with Gartmore provides that Gartmore shall
not be liable to the Company or to its shareholders for any act or omission by
Gartmore or for any loss sustained by the Company or by its shareholders except
in the case of Gartmore's willful misfeasance, bad faith, gross negligence or
reckless disregard of duty on the part of Gartmore, as the case may be.
The Sub-Advisory Agreement with Boatmen's became effective on July 31,
1997 and it shall thereafter continue from year to year, provided that such
continuation of the Agreement is specifically approved at least annually by
(a)(i) the Company's Board of Directors or (ii) the vote of "a majority of the
outstanding voting securities" of a Fund (as defined in Section 2(a)(42) of the
1940 Act), and (b) the affirmative vote of a majority of the Company's Directors
who are not parties to such Agreement or "interested persons" (as defined in the
1940 Act) of a party to such Agreement (other than as Directors of the Company),
by votes cast in person at a meeting specifically called for such purpose. Each
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
Company (by vote of the Board of Directors or by vote of a majority of the
outstanding voting securities of the Fund) or by the Adviser on 60 days' written
notice. The Sub-Advisory Agreement provides that the Adviser shall not be liable
to the Company or to its shareholders for any act or omission by Boatmen's or
for any loss sustained by the Company or by its shareholders except in the case
of such Adviser's willful misfeasance, bad faith, gross negligence or reckless
disregard of duty on the part of such Adviser, as the case may be.
The Sub-Advisory Agreement with Brandes was initially approved by NFI's
Board of Directors on February 4, 1998. The Sub-Advisory Agreement will continue
in effect for an initial term of two years from its effective date and continues
in effect from year to year thereafter only if such continuance is specifically
approved at least annually by the Company's Board of Directors and the
affirmative vote of a majority of the directors who are not parties to the
Sub-Advisory Agreement or "interested persons" of any such party by votes cast
in person at a meeting called for such purpose. The Fund, NBAI or Brandes may
terminate the Sub-Advisory Agreement, on 60 days' written notice without
penalty. The Sub-Advisory Agreement terminates automatically in the event of its
"assignment," as defined in the 1940 Act. The Sub-Advisory Agreement with
Brandes provides that Brandes shall not be liable to the Company or to its
shareholders for any act or omission by Brandes or for any loss sustained by the
Company or by its shareholders except in the case of Brandes' willful
misfeasance, bad faith, gross negligence or reckless disregard of duty on the
part of Brandes, as the case may be.
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The Investment Sub-Advisory Agreement with Marsico Capital was initially
approved by NFT's Board of Trustees on December 7, 1997 and is effective for a
two year period and shall thereafter continue from year to year, provided that
such continuation of the Agreement is specifically approved at least annually by
(a)(i) NFT'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 NFT'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 NFT), by votes cast
in person at a meeting specifically called for such purpose. The Investment
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 NFT (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 for a two-year term
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) NFT's
Board of Trustees or (ii) the vote of "a majority of the outstanding voting
securities" of the Fund (as defined in Section 2(a)(42) of the 1940 Act), and
(b) the affirmative vote of a majority of NFT'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 NFT), by votes cast in person at a
meeting specifically called for such purpose.
The Funds, in any advertisement or sales literature, may advertise the
names, experience and/or qualifications of the portfolio manager(s) of any Fund,
or if a Fund is managed by team or committee, such Fund may advertise the names,
experience and/or qualifications of any such team or committee member.
The Adviser may waive a portion of its fees; however, any such waiver may
be discontinued at any time. As discussed under the caption "Expenses," NBAI,
TradeStreet and Gartmore will be required to reduce their fees from the Funds,
in direct proportion to the fees payable by the Funds to NBAI, TradeStreet,
Gartmore, Brandes, Boatmen's, Marsico Capital and the Administrator, if the
expenses of the Funds exceed the applicable expense limitation of any state in
which the Funds' shares are registered or qualified for sale.
Subject to reduction in accordance with the expense limitation provisions
which may be imposed by states in which the Funds' shares are qualified for
sale, NBAI received fees from the Funds for its services as outlined in the
following chart, which states the net advisory fees paid to NBAI, the advisory
fees waived and expense reimbursements where applicable for the fiscal year
ended March 31, 1998. The table below also states the advisory fees paid and
waived by Barnett Capital Advisers, Inc. with respect to the Emerald
International Equity Fund (predecessor to the International Value Fund) for the
fiscal period December 1, 1997 through May 15, 1998.
ADVISORY FEES
<TABLE>
<CAPTION>
Net Amount Reimbursed by
Paid Amount Waived Adviser
---- ------------- -------
<S> <C> <C> <C>
Prime Fund $ 9,639,804 $ 1,588,170 $ 0.00
Treasury Fund 5,843,938 843,672 0.00
Equity Income Fund 4,731,858 0.00 0.00
Government Securities Fund 606,485 160,648 0.00
International Equity Fund 9,260,334 0.00 0.00
International Growth Fund 4,491,759 145,205 0.00
International Value Fund 326,210 0.00 3,902.00
Small Company Growth Fund 959,096 419,890 0.00
U.S. Government Bond Fund 483,931 385,271 0.00
Government Money Market Fund 468,312 954,231 0.00
Tax Exempt Fund 3,482,525 5,239,935 0.00
Value Fund 15,618,802 49,168 0.00
Capital Growth Fund 5,717,424 0.00 0.00
Disciplined Equity Fund 1,236,280 0.00 0.00
Equity Index Fund 1,302,110 2,088,839 0.00
Emerging Growth Fund 2,836,719 0.00 0.00
Managed Index Fund 360,994 449,019 0.00
Managed SmallCap Index Fund 0.00 419,108 0.00
Managed Value Index Fund 670 11,025 0.00
Managed SmallCap Value Index Fund 193 5,901 0.00
75
<PAGE>
Marsico Growth & Income Fund 0.00 10,919 0.00
Marsico Focused Equities Fund 27,032 0.00 0.00
Balanced Assets Fund 1,493,286 0.00 0.00
Short-Intermediate Gov't Fund 2,708,669 1,354,334 0.00
Short-Term Income Fund 1,006,049 1,006,049 0.00
Diversified Income Fund 1,440,010 288,002 0.00
Strategic Fixed Income Fund 7,389,298 1,760,101 0.00
Municipal Income Fund 1,495,049 865,120 0.00
Short-Term Municipal Income Fund 143,891 357,577 0.00
Intermediate Municipal Bond Fund 1,814,264 1,420,175 0.00
Florida Intermediate Municipal Bond Fund 414,266 371,186 0.00
Georgia Intermediate Municipal Bond Fund 305,490 267,367 0.00
Maryland Intermediate Municipal Bond Fund 216,531 251,773 0.00
North Carolina Intermediate Municipal Bond Fund 350,910 325,600 0.00
South Carolina Intermediate Municipal Bond Fund 532,494 471,252 0.00
Tennessee Intermediate Municipal Bond Fund 67,179 121,971 0.00
Texas Intermediate Municipal Bond Fund 688,008 601,927 0.00
Virginia Intermediate Municipal Bond Fund 631,227 484,093 0.00
Florida Municipal Bond Fund 144,492 123,106 0.00
Georgia Municipal Bond Fund 33,480 66,122 0.00
Maryland Municipal Bond Fund 25,999 82,546 0.00
North Carolina Municipal Bond Fund 83,208 94,452 0.00
South Carolina Municipal Bond Funds 42,805 72,257 0.00
Tennessee Municipal Bond Fund 1,873 57,822 0.00
Texas Municipal Bond Fund 26,062 72,988 0.00
Virginia Municipal Bond Fund 56,750 81,176 0.00
Emerging Markets Fund 988,113 0.00 0.00
Pacific Growth Fund 894,307 0.00 0.00
Global Government Income Fund 288,379 0.00 0.00
</TABLE>
NBAI received fees from the Funds for its services as outlined in the following
chart, which states the net advisory fees paid to NBAI, the advisory fees waived
and expense reimbursements where applicable for the fiscal year ended March 31,
1997. The table below also states the advisory fees paid and waived by Barnett
Capital Advisers, Inc. with respect to the Emerald International Equity Fund
(predecessor to the International Value Fund) for the period ended December 1,
1996 through November 30, 1997.
ADVISORY FEES
<TABLE>
<CAPTION>
Net Amt. Amount Reimbsd.
Paid Waived by Advsr.
---- ------ ---------
<S> <C> <C> <C>
Government Money Market Fund $ 595,369.00 $ 1,087,306.00 $ 0.00
Tax Exempt Fund 2,307,746.00 3,589,593.00 0.00
Value Fund 9,794,835.00 0.00 0.00
Capital Growth Fund 5,714,094.00 0.00 0.00
Disciplined Equity Fund 1,064,026.00 0.00 0.00
Equity Index Fund 678,564.00 1,534,132.00 0.00
Emerging Growth Fund 2,666,535.00 0.00 0.00
Managed Index Fund 12,069.00 86,414.00 22,720.00
Managed SmallCap Index Fund 13.00 44,990.00 18,619.00
Balanced Assets Fund 1,798,693.00 00.0 0.00
Short-Intermediate Gov't Fund 1,886,178.00 943,089.00 0.00
Short-Term Income Fund 600,834.00 601,326.00 0.00
Diversified Income Fund 1,000,615.00 200,123.00 0.00
Strategic Fixed Income Fund 4,757,641.00 951,528.00 0.00
Municipal Income Fund 323,476.00 305,497.00 0.00
Short-Term Municipal Income Fund 60,734.00 294,153.00 0.00
Intermediate Municipal Bond Fund 189,645.00 277,372.00 0.00
Florida Intermediate Municipal Bond Fund 104,662.00 161,773.00 0.00
Georgia Intermediate Municipal Bond Fund 124,834.00 165,879.00 0.00
Maryland Intermediate Municipal Bond Fund 260,093.00 227,212.00 0.00
North Carolina Intermediate Municipal Bond Fund 76,726.00 121,064.00 0.00
South Carolina Intermediate Municipal Bond Fund 152,937.00 197,205.00 0.00
Tennessee Intermediate Municipal Bond Fund 14,485.00 79,715.00 0.00
Texas Intermediate Municipal Bond Fund 54,898.00 104,929.00 0.00
76
<PAGE>
Net Amt. Amount Reimbsd.
Paid Waived by Advsr.
---- ------ ---------
Virginia Intermediate Municipal Bond Fund 614,014.00 520,946.00 0.00
Florida Municipal Bond Fund 112,099.00 117,651.00 0.00
Georgia Municipal Bond Fund 26,675.00 61,249.00 0.00
Maryland Municipal Bond Fund 15,208.00 67,979.00 0.00
North Carolina Municipal Bond Fund 80,159.00 92,926.00 0.00
South Carolina Municipal Bond Funds 40,452.00 67,297.00 0.00
Tennessee Municipal Bond Fund 2,763.00 47,192.00 3,159.00
Texas Municipal Bond Fund 35,113.00 69,111.00 0.00
Virginia Municipal Bond Fund 49,575.00 71,879.00 0.00
Emerging Markets Fund 661,747.00 0.00 0.00
Pacific Growth Fund 1,035,724.00 0.00 0.00
Global Government Income Fund 298,997.00 0.00 0.00
Prime Fund 6,849,130.00 1,579,771.00 0.00
Treasury Fund 4,030,618.00 1,026,792.00 0.00
Equity Income Fund 2,632,510.00 0.00 0.00
International Equity Fund 8,870,691.00 0.00 0.00
International Value Fund 395,837.00 0.00 4,304.00
Government Securities Fund 568,081.00 156,808.00
</TABLE>
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. The table below also states the advisory fees paid to NBAI or
its predecessor under NFP's prior advisory agreement and the advisory fees
waived for the fiscal period from June 1, 1995 to March 31, 1996 for the
Emerging Markets Fund, Pacific Growth Fund and Global Government Income Fund.
The table also states the advisory fees paid and waived by Barnett Capital
Advisors, Inc. with respect to the Emerald International Equity Fund
(predecessor to the International Value Fund) from its commencement on Dec. 27,
1995 through the period ended November 30, 1996.
ADVISORY FEES
<TABLE>
<CAPTION>
Net Amt. Amount Reimbsd.
Paid Waived by Advsr.
---- ------ ---------
<S> <C> <C> <C>
Government Money Market Fund $ 195,815.00 $442,122.00 $ 0.00
Tax Exempt Fund 600,930.00 1,248,939.00 0.00
Value Fund 2,808,328.00 0.00 0.00
Capital Growth Fund 2,253,497.00 0.00 0.00
Disciplined Equity Fund 339,082.00 0.00 0.00
Equity Index Fund 64,733.00 0.00 0.00
Emerging Growth Fund 777,193.00 0.00 0.00
Balanced Assets Fund 590,332.00 0.00 0.00
Short-Intermediate Gov't Fund 619,149.00 384,574.00 0.00
Short-Term Income Fund 173,410.00 216,740.00 0.00
Diversified Income Fund 286,700.00 57,340.00 0.00
Strategic Fixed Income Fund 1,388,673.00 294,244.00 0.00
Municipal Income Fund 114,363.00 117,368.00 0.00
Short-Term Municipal Income Fund 12,972.00 99,745.00 0.00
Intermediate Municipal Bond Fund 45,524.00 89,165.00 0.00
Florida Intermediate Municipal Bond Fund 25,169.00 62,242.00 0.00
Georgia Intermediate Municipal Bond Fund 33,891.00 64,182.00 0.00
Maryland Intermediate Municipal Bond Fund 59,770.00 93,011.00 0.00
North Carolina Intermediate Municipal Bond Fund 17,326.00 47,071.00 0.00
South Carolina Intermediate Municipal Bond Fund 42,310.00 75,330.00 0.00
Tennessee Intermediate Municipal Bond Fund 0.00 31,491.00 1,332.00
Texas Intermediate Municipal Bond Fund 11,045.00 41,063.00 0.00
Virginia Intermediate Municipal Bond Fund 196,295.00 215,292.00 0.00
Florida Municipal Bond Fund 34,641.00 44,125.00 0.00
Georgia Municipal Bond Fund 4,774.00 25,162.00 0.00
Maryland Municipal Bond Fund 108.00 27,352.00 0.00
North Carolina Municipal Bond Fund 24,232.00 38,851.00 0.00
South Carolina Municipal Bond Funds 5,358.00 27,497.00 0.00
Tennessee Municipal Bond Fund 0.00 15,588.00 5,817.00
Texas Municipal Bond Fund 6,913.00 28,200.00 0.00
Virginia Municipal Bond Fund 11,162.00 29,711.00 0.00
77
<PAGE>
Net Amt. Amount Reimbsd.
Paid Waived by Advsr.
---- ------ ---------
Prime Fund 6,265,471.00 726,242.00 0.00
Treasury Fund 4,417,264.00 552,985.00 0.00
Equity Income Fund 2,329,896.00 0.00 0.00
International Equity Fund 5,291,343.00 84,472.00 0.00
International Value Fund 0.00 0.00 0.00
Government Securities Fund 468,579.00 147,897.00 0.00
Emerging Markets Fund 188,334.00 0.00 0.00
Pacific Growth Fund 307,806.00 0.00 0.00
Global Government Income Fund 1,132,152.00 0.00 0.00
</TABLE>
The Pilot U.S. Government Fund (predecessor to the U.S. Government Bond
Fund) and the Pilot Small Capitalization Equity Fund (predecessor to the Pilot
Small Company Growth Fund) paid and waived the following advisory and
sub-advisory fees under a prior advisory agreement with Boatmen's during the
periods indicated.
ADVISORY AND SUB-ADVISORY FEES PAID
SEPTEMBER 1, 1996 - MAY 16, 1997
Advisory
Fee
Pilot US Government Fund
Advisory Fee $552,504
Advisory Waiver (125,674)
426,830
Pilot Small Capitalization Fund
Advisory Fee $731,622
Advisory Waiver $(250,320)
$481,302
ADVISORY FEES PAID
SEPTEMBER 1, 1995 - SEPTEMBER 1, 1994 -
AUGUST 31, 1996 AUGUST 31, 1995
Pilot US Government Fund $555,098 $415,164
Pilot Small Capitalization Fund $178,877 $0*
* Fund inception 12/12/95
SUB-ADVISORY FEES PAID
SEPTEMBER 1, 1995 - AUGUST 31, 1994 -
AUGUST 31, 1996 AUGUST 31, 1995
Pilot US Government Fund N/A N/A
Pilot Small Capitalization Fund N/A N/A
The table below states the net sub-advisory fees paid to TradeStreet for
the fiscal periods indicated. No fees were waived or reimbursed by the Adviser
during this periods.
78
<PAGE>
SUB-ADVISORY FEES
Period Ending
3/31/98
Net Amount
Paid
Prime Fund $2,959,571
Treasury Fund 1,763,574
Equity Income Fund 1,478,586
Government Securities Fund 181,945
Small Company Growth Fund 338,212
Government Money Market Fund 186,411
Tax Exempt Fund 1,199,059
Value Fund 5,222,656
Capital Growth Fund 1,905,808
Disciplined Equity Fund 412,093
Equity Index Fund 678,190
Emerging Growth Fund 945,572
Managed Index Fund 162,002
Managed SmallCap Index Fund 83,822
Managed Value Index Fund 2,505
Managed SmallCap Value Index
Fund 1,410
Balanced Assets Fund 497,762
Short-Intermediate Gov't Fund 1,015,751
Short-Term Income Fund 503,025
Diversified Income Fund 432,003
Strategic Fixed Income Fund 2,287,350
Municipal Income Fund 275,353
Short-Term Municipal Income
Fund 70,205
Intermediate Municipal Bond
Fund 452,822
Florida Intermediate
Municipal Bond Fund 109,963
Georgia Intermediate
Municipal Bond Fund 80,200
Maryland Intermediate
Municipal Bond Fund 65,563
North Carolina Intermediate
Municipal Bond Fund 94,711
South Carolina Intermediate
Municipal Bond Fund 140,524
Tennessee Intermediate
Municipal Bond Fund 26,481
Texas Intermediate Municipal
Bond Fund 180,591
Virginia Intermediate
Municipal Bond Fund 156,145
Florida Municipal Bond Fund 31,220
Georgia Municipal Bond Fund 11,621
Maryland Municipal Bond Fund 12,663
North Carolina Municipal
Bond Fund 20,727
South Carolina Municipal Bond
Funds 13,424
Tennessee Municipal Bond Fund 6,964
Texas Municipal Bond Fund 11,556
Virginia Municipal Bond Fund 16,091
<TABLE>
<CAPTION>
Period
Period Ending Ending
3/31/97 3/31/96
Net Amt. Net Amt.
Paid Paid
---- ----
<S> <C> <C>
Government Money Market Fund $ 231,367.00 $ 65,559.22
Tax Exempt Fund 810,884.00 195,836.30
Value Fund 3,264,945.00 702,508.52
Capital Growth Fund 1,904,698.00 558,981.57
Disciplined Equity Fund 354,675.00 85,311.87
Equity Index Fund 442,539.00 41,386.62
Managed Index Fund 19,717.00 194,888.10
Managed SmallCap Index Fund 9,001.00 146,994.87
Emerging Growth Fund 888,845.00 185,611.41
Balanced Assets Fund 599,564.00 73,671.51
Short-Intermediate Gov't Fund 707,317.00 63,997.63
Short-Term Income Fund 300,416.00 313,681.03
Diversified Income Fund 300,184.00 20,092.35
Strategic Fixed Income Fund 1,427,292.00 11,904.57
79
<PAGE>
Period
Period Ending Ending
3/31/97 3/31/96
Net Amt. Net Amt.
Paid Paid
---- ----
Municipal Income Fund 73,380.00 14,212.28
Short-Term Municipal Income Fund 49,684.00 9,158.98
Intermediate Municipal Bond Fund 65,382.00 10,161.88
Florida Intermediate Municipal Bond Fund 37,301.00 15,999.36
Georgia Intermediate Municipal Bond Fund 40,700.00 6,729.45
Maryland Intermediate Municipal Bond Fund 59,822.00 12,199.38
North Carolina Intermediate Municipal Bond Fund 27,691.00 3,812.00
South Carolina Intermediate Municipal Bond Fund 49,020.00 5,474.20
Tennessee Intermediate Municipal Bond F 13,188.00 42,887.69
Texas Intermediate Municipal Bond Fund 22,376.00 6,891.65
Virginia Intermediate Municipal Bond Fund 158,894.00 2,562.42
Florida Municipal Bond Fund 26,804.00 2,390.88
Georgia Municipal Bond Fund 10,258.00 5,475.32
Maryland Municipal Bond Fund 9,705.00 2,870.87
North Carolina Municipal Bond Fund 20,193.00 1,366.28
South Carolina Municipal Bond Fund 12,571.00 3,051.30
Tennessee Municipal Bond Fund 5,828.00 3,538.33
Texas Municipal Bond Fund 12,160.00 563,821.51
Virginia Municipal Bond Fund 14,170.00 356,560.15
Emerging Markets Fund 511,350.00 212,221.62
Pacific Growth Fund 805,563.00 0.00
Prime Fund 2,296,435.00 239,405.20
Treasury Fund 1,377,806.00 145,531.05
Equity Income Fund 777,371.00 101,945.98
Government Securities Fund 170,424.00 n/a
</TABLE>
The table below states the net sub-advisory fees paid to Gartmore for the
fiscal period indicated. No fees were waived or reimbursed by the Adviser during
this periods.
SUB-ADVISORY FEES
Period Ending Period Ending Period Ending
3/31/98 3/31/97 3/31/97
International Equity Fund $9,260,333.98 $6,899,426.00 n/a
International Growth Fund 4,331,994.06 n/a n/a
Emerging Markets Fund 988,113.20 511,350.00 $212,221.62
Pacific Growth Fund 894,306.20 805,563.00 0.00
Global Government Income Fund 288,379.18 230,655.00 47,092.65
The table below states the net sub-advisory fees paid to Marsico for the
fiscal year ended March 31, 1998. No fees were waived or reimbursed by the
Adviser during this periods.
SUB-ADVISORY FEES
Net Amount Paid
---------------
Marsico Focused Equities Fund $14,311
Marsico Growth & Income Fund 5,780
The table below states the net sub-advisory fees paid to Brandes for the
fiscal period indicated. No fees were waived or reimbursed by the Adviser during
this periods.
Period Ending Period Ending Period Ending
5/15/98 11/30/97 11/30/96
International Value Fund $177,516.52 $212,631.72 $19,395.00
80
<PAGE>
INVESTMENT STYLES
When you invest in any Fund in the Nations Funds 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
Adviser 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 managing the Funds. These strategies
have been categorized into investment styles which include (i) the Small Company
Growth Style; (ii) the Equity Income Style; (iii) the International Equity
Style; (iv) The International Growth Style; (v) the Fixed Income Style; (vi) the
Growth Style, (vii) the Value Style and (viii) the Balanced Assets Style.
Investment Styles described below relate to the Small Company Growth,
Diversified Income, International Equity, International Growth, 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.
SMALL COMPANY GROWTH STYLE. The Small Company Growth Fund is managed by
the Adviser using the Small Company Growth Style. The Small Company Growth Style
investment philosophy is premised on the belief that a diversified portfolio of
stocks with an above average yield can provide long-term returns, higher than
that of the S&P 500 Index (the "S&P 500") and with less volatility.
This style utilizes a "low volatility" approach to stock selection,
focusing on tested factors of fundamental stock valuation. Volatility is reduced
through selecting stocks with Beta Coefficient ("Beta") of less than 1.0 (Beta
is a measurement of volatility relative to the stock market as a whole, which
has a Beta of 1.0). Small Company Growth Style seeks to maintain a yield on the
portfolio of at least 50% higher than the dividend yield for the S&P 500. The
Adviser reduces risk by investing in both common stocks and convertible
securities.
The Small Company Growth Style stock selection process begins with a team
of in-house research specialists aided by a computerized screening process.
Starting with a 5000 company universe, stocks must first pass a rigorous
screening process that selects companies with a yield one-third less than the
S&P 500 and market capitalization of less than $1 billion. Often stocks with
below average yields grow faster than those with average yields. Therefore, over
time, a portfolio may earn more income by purchasing stocks with below average
yields. Stocks are then ranked relative to other stocks within their industry.
A more sophisticated screening process is then applied to the universe.
Each company is ranked based on the following factor weightings: (i) market
style analyzes correlations between crucial stock characteristics (price/book
ratios, dividends yields, and return on assets) and price performance; (ii)
insider trading looks at filings with the SEC and evaluates them by title, date,
transaction size and historical performance; (iii) earnings expectations
evaluates changes in annual earnings estimates and quarterly earnings surprises,
and (iv) price momentum monitors relative price strength with short term under
performance. The final portfolio of approximately 75 to 130 issues is
constructed by the TradeStreet's Strategic Growth Management Team working
closely with in-house industry specialists, as well as expert Wall Street
sources.
EQUITY INCOME STYLE. The Equity Income Fund is managed by the Adviser using
the Equity Income Style. The Equity Income Style investment philosophy is
premised on the belief that a diversified portfolio of stocks with an above
average yield can provide long-term returns, higher than that of the S&P 500
Index (the "S&P 500") and with less volatility.
This style utilizes a "low volatility" approach to stock selection, focusing
on tested factors of fundamental stock valuation. Volatility is reduced through
selecting stocks with Beta Coefficient ("Beta") of less than 1.0 (Beta is a
measurement of volatility relative to the stock market as a whole, which has a
Beta of 1.0). The Equity Income Style seeks to maintain a yield on the portfolio
of at least 50% higher than the dividend yield for the S&P 500. The Adviser
reduces risk by investing in both common stocks and convertible securities.
81
<PAGE>
The Equity Income Style stock selection process begins with a team of
in-house research specialists aided by a computerized screening process.
Starting with a 2000 company universe, stocks must first pass a rigorous
screening process that selects companies with a yield only one-third less than
the S&P 500 and market capitalization greater than $500 million. Often stocks
with below average yields grow faster than those with average yields. Therefore,
over time, a portfolio may earn more income by purchasing stocks with below
average yields. Stocks are then ranked relative to other stocks within their
industry.
A more sophisticated screening process is then applied to the universe. Each
company is ranked based on the following factor weightings: (i) market style
analyzes correlation's between crucial stock characteristics (price/book ratios,
dividends yields, and return on assets) and price performance; (ii) Insider
Trading looks at filings with the SEC and evaluates them by title, date,
transaction size and historical performance; (iii) Earnings Expectations
evaluates changes in annual earnings estimates and quarterly earnings surprises,
and (iv) Price Momentum monitors relative price strength with short term under
performance. The final portfolio of approximately 70 issues is constructed by
the Adviser's Value Management Team working closely with in-house industry
specialists, as well as outside sources.
INTERNATIONAL EQUITY STYLE. The International Equity Fund is managed by the
Adviser using the International Equity Style. The International Equity Style
investment philosophy is premised on the belief that a diversified portfolio of
equity securities of established, non-United States issuers can provide
long-term growth of capital and income.
This style focuses on the country selection process by utilizing macro
economics forecasts to identify areas of the world which will exhibit relatively
strong growth within the context of a modest inflation and low interest rate
environment. The political factors and market liquidity constraints which can
affect stock market valuations are also taken into consideration by the Adviser
prior to making stock selections.
The stock selection process begins with the elimination of equity securities
with a market capitalization of less than $250 million. The next step in the
process is the ranking of each country and industry sector by relative
price/earnings ratio using an historical range of not less than ten years from
an universe of approximately 1000 stocks. In addition to the relative historical
price/earnings ratio the portfolio managers also employ a fundamental analysis
of growth opportunities, management and future direction of these stocks.
The International Equity Fund is a dollar-denominated mutual fund and
therefore, consideration is given to hedging part or all of the portfolio back
to U.S. dollars from international currencies. All decisions to hedge are based
upon an analysis of the relative value of the U.S. dollar on an international
purchasing power parity basis (purchasing power parity is a method for
determining the relative purchasing power of different currencies by comparing
the amount of each currency required to purchase a typical bundle of goods and
services to domestic markets) and an estimation of short-term interest rate
differentials (which affect both the direction of currency movements and also
the cost of hedging).
INTERNATIONAL GROWTH STYLE. The International Growth Fund is managed by the
Adviser using the International Growth Style. The International Growth Style
investment philosophy is premised on the belief that a diversified portfolio of
equity securities of established, non-United States issuers can provide
long-term growth of capital and income.
This style focuses on the country selection process by utilizing
macroeconomic forecasts to identify areas of the world which will exhibit
relatively strong growth within the context of a modest inflation and low
interest rate environment. The political factors and market liquidity
constraints which can affect stock market valuations are also taken into
consideration by the Adviser prior to making stock selections.
The International Growth Fund is a dollar-denominated mutual fund and
therefore, consideration is given to hedging part or all of the portfolio back
to U.S. dollars from international currencies. All decisions to hedge are based
upon an analysis of the relative value of the U.S. dollar on an international
purchasing power parity basis (purchasing power parity is a method for
determining the relative purchasing power of different currencies by
82
<PAGE>
comparing the amount of each currency required to purchase a typical bundle of
goods and services to domestic markets) and an estimation of short-term interest
rate differentials (which affect both the direction of currency movements and
also the cost of hedging).
FIXED INCOME STYLE. The 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 Fixed Income Style. The 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 Adviser 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.
Yield Curve Anomalies: Unusual shapes in the yield curve or the degree of
steeples 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
TradeStreet's Municipal Fixed Income Management Team and Fixed Income Management
Team, as the case may be, in-house industry specialists and outside sources all
working together.
GROWTH STYLE. The Capital Growth and Emerging Growth Funds are managed by
the Adviser using the Growth Style. The Growth Equity Style investment
philosophy seeks companies with superior growth prospects selling at reasonable
prices that, over time, should outperform the market.
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<PAGE>
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.
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 Style, the CoreGrowth Management Team (with
respect to Capital Growth Fund) and the Strategy Growth Management Team (with
respect to Growth Fund) 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 the Adviser, who
works 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.
VALUE STYLE. The Value Fund is managed by the Adviser using the Value
Style. The Value 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
Management Team working closely with in-house industry specialists, as well as
outside 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.
BALANCED ASSETS STYLE. The Balanced Assets Fund is managed by the Adviser
using the NationsBank Balanced Assets Style. The Balanced Assets Style
investment philosophy is premised on the belief that a diversified
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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 Assets 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.
Final stock, bond and asset allocation decisions are made by the Value
Management Team, which has 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 Assets Style should provide total investment
return through a combination of growth of capital and current income consistent
with preservation of capital.
DISCIPLINED EQUITY STYLE. The Disciplined Equity Fund is managed by the
Adviser using the Disciplined Equity Style. The 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 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 Disciplined Equity Style, the Adviser
also uses conventional security analysis techniques. Starting with a universe of
approximately 2,000 companies with large market capitalization's, 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.
Other strategies have been categorized into investment styles which
consist of the Emerging Markets and Pacific Growth Funds Style and the Global
Government Income Fund Style. These styles are described below.
EMERGING MARKETS AND PACIFIC GROWTH FUNDS STYLE. The Emerging Markets and
Pacific Growth Funds utilize an investment philosophy that is best characterized
as growth at a reasonable price. This philosophy is applied as appropriate for
each specific region or market in which the Funds invest, with input from the
asset allocation process. This implies a combination of bottom-up stock
selection with risk controlled allocation. For the Emerging Markets Fund the
integration of active stock selection with country allocation is necessary to
optimize the Fund's risk/return characteristics, as emerging markets are fast
changing. The ability to move freely between markets to take advantage of
improving or deteriorating economic fundamentals is important in the pursuit of
an active management style. Therefore emphasis is placed on the larger more
liquid securities available in the markets in which it invests.
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<PAGE>
The research for the Emerging Markets Fund focuses on over twenty-five
countries. While many of the countries within this universe share regional
characteristics that influence their capital markets, they each possess unique
political economic and developmental elements. The investable universe is
researched to assess factors such as: (1) political risk; (2) economic growth;
(3) trade balances and (4) stock market value. Country allocations are then made
within previously established risk control guidelines to prevent undue
concentration. The allocations are actively reviewed for market movement and/or
changes in fundamentals.
Stock selection is driven by fundamental research. As a first step, the
Adviser creates a screened universe of approximately 800 small-to
large-capitalization companies. The initial screen focuses on several criteria,
with earnings growth, financial resources and marketability being the most
critical. Companies producing consistently above average earnings growth rates
are featured, as are those with strong balance sheets or producing high levels
of free cash flow. Securities that exhibit very low levels of trading are
eliminated.
Approximately 500 companies evolve from the process as potential
candidates, and are subject to further fundamental analysis. Company visits are
made to verify the corporate and industry factors that have created a record of
growth, and to assess whether these factors are sustainable. Earnings models are
created, which are related to historic and projected levels of valuation in
order to generate expected returns across the universe of emerging market
securities. A preferred list of approximately 80 to 100 stocks in 15 or more
countries are then chosen for inclusion in the Fund. Fund holdings are actively
reviewed to assess whether expected return targets are being met and to confirm
that a company's fundamentals have not changed.
**For the Pacific Growth Fund, local contacts, fundamental research and
seasoned judgment are vital components in capturing attractive issues and
regional growth in the Pacific Basin and Far East. The Fund's investment process
is driven by fundamental research for both macroeconomic factors and stock
analysis with a focus on economic trends, market valuations, and performance
momentum. Overall, research is concentrated on a screened universe of
approximately 600 companies. Quantitative and qualitative screens, are essential
elements of the research process.
Approximately 250 companies will evolve from the process as potential
candidates and will be subject to more stringent analysis seeking to identify:
(1) above-average earnings growth over the medium term; (2) solid financials;
(3) positive cash flow and (4) strength and depth of management.
At this stage company visits are made. These visits are a critical part of
the selection process. Special effort is expended in visiting competitors,
suppliers and customers of the companies in which we are interested. Of
particular importance is a thorough understanding of the management's criteria
for measuring their success in achieving strategic objectives; their motivation,
stability, and succession plan; and critically, their recognition of the need to
create value for external shareholders. A preferred list of approximately 80
Pacific Basin stocks will result and will be chosen for investment in the Fund.
Fund holdings are actively reviewed to assess whether expected return targets
are being met and to confirm that a company's fundamentals have not changed.
The Fund utilizes a twelve month rolling earnings forecasts to generate
country return forecasts. The forecast is based on the assessment of
macro-economic, political and local market factors as well as the composite of
the individual company earnings forecasts. Country allocations are then made
within previously established risk control guidelines to prevent undue
concentration by country. The portfolio is rigorously analyzed in final
screening to monitor industry and sector exposures to prevent undue
concentration, and to consider market influence factors such as political
changes, market rotation or liquidity flows.
GLOBAL GOVERNMENT INCOME FUND STYLE. The Global Government Income Fund
utilizes an investment philosophy that is founded upon the belief that the
analysis of longer term economic trends is the key to successful fixed income
investment management rather than relying on short-term tactical models or
specific issue selection through credit analysis. Therefore, the investment
process is top-down, macroeconomic driven and strategic in nature, relying
primarily on investment in very high credit quality fixed income securities with
the objective of adding value through correct identification of interest rate
and currency trends across global markets.
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<PAGE>
The starting point for the fixed income process is a top-down view of key
economic variables across the regions in which it invest. Based on this
fundamental research, a rolling twelve month forecast of interest rates across
the yield curve from three months through thirty years is produced. Currency
rates are also forecast. These forecasts generate a matrix of potential returns
for fixed income securities of every maturity and from each currency base.
Duration management, not security selection, is key to the investment
process. As the forecasting process predicts returns across the yield curve, it
is possible to select the most advantageous maturity and duration of bonds in
which to invest. The screening process encompasses the entire maturity spectrum
of fixed income instruments, from three month deposits to ten year bonds, and up
to thirty year bonds where available. However, under normal market conditions
the dollar-weighted average maturity will not be greater than 15 years.
Investments are primarily made in U.S. and foreign government bonds and high
credit quality corporate bonds, banks and supranatural entities, as very high
emphasis is placed on credit quality and liquidity of investments.
ADMINISTRATOR, CO-ADMINISTRATOR AND SUB-ADMINISTRATOR
Stephens Inc. (the "Administrator") serves as administrator of each Company
and First Data Investors Services Group, Inc. (the "Co-Administrator") serves as
the co-administrator of the Companies.
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 Directors 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 each Company, (iii) furnish corporate secretarial
services to each Company, including coordinating the preparation and
distribution of materials for Board of Directors/Trustees meetings, (iv)
coordinate the provision of legal advice to each Company with respect to
regulatory matters, (v) coordinate the preparation of reports to each Company's
shareholders and the SEC, including annual and semi-annual reports, (vi)
coordinating the provision of services to each Company by the Co-Administrator,
the Transfer Agents and the Custodians, and (vii) generally assist in all
aspects of each Company's operations. Additionally, the Administrator is
authorized to receive, as agent for the Co-Administrator, the fees payable to
the Co-Administrator by each Company for its services rendered under the
Co-Administration Agreement. The Administrator bears all expenses incurred in
connection with the performance of its services.
Pursuant to the Co-Administration Agreement, the Co-Administrator has agreed
to, among other things, (i) provide accounting and bookkeeping services for the
Funds, (ii) compute each Fund's net asset value and net income, (iii) accumulate
information required for the Company's reports to shareholders and the SEC, (iv)
prepare and file each Company's federal and state tax returns, (v) perform
monthly compliance testing for the Company, and (vi) prepare and furnish the
Company monthly broker security transaction summaries and transaction listings
and performance information. 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 Directors/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.
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<PAGE>
NBAI serves as sub-administrator for the Funds pursuant to
sub-administration agreements. Pursuant to their terms, NBAI assists Stephens in
supervising, coordinating and monitoring various aspects of the Funds'
administrative operations. For providing such services, NBAI is entitled to
receive a monthly fee from Stephens based on an annual rate of 0.01% of the
Funds' average daily net assets.
The table set forth below states the net Administration fees paid to
Stephens and waived for the fiscal year ended March 31, 1998.
ADMINISTRATION FEES
<TABLE>
<CAPTION>
Net Fees Paid Fees Waived
------------- -----------
<S> <C> <C>
Prime Fund 4,056,997 1,110,297
Treasury Fund 2,423,641 664,082
Equity Income Fund 494,468 0.00
Government Securities Fund 71,126 0.00
International Equity Fund 405,314 0.00
International Growth Fund 230,311 0.00
International Value Fund n/a n/a
Small Company Growth Fund 96,976 0.00
U.S. Government Bond Fund 89,058 0.00
Government Money Market Fund 259,300 71,128
Tax Exempt Fund 1,591,584 436,123
Value Fund 1,408,801 0.00
Capital Growth Fund 503,034 0.00
Disciplined Equity Fund 101,504 0.00
Equity Index Fund 458,619 0.00
Emerging Growth Fund 246,308 0.00
Managed Index Fund 111,133 0.00
Managed SmallCap Index Fund 61,116 0.00
Managed Value Index Fund 1,630 0.00
Managed SmallCap Value Index Fund 848 0.00
Marsico Growth & Income Fund 898 0.00
Marsico Focused Equities Fund 2,227 0.00
Balanced Assets Fund 134,032 0.00
Short-Intermediate Gov't Fund 401,570 0.00
Short-Term Income Fund 203,225 0.00
Diversified Income Fund 173,538 0.00
Strategic Fixed Income Fund 903,615 0.00
Municipal Income Fund 153,482 78,672
Short-Term Municipal Income Fund 38,788 20,059
Intermediate Municipal Bond Fund 254,780 129,378
Florida Intermediate Municipal Bond Fund 61,898 31,419
Georgia Intermediate Municipal Bond Fund 44,811 22,914
Maryland Intermediate Municipal Bond Fund 36,010 26,201
North Carolina Intermediate Municipal Bond Fund 53,527 27,061
South Carolina Intermediate Municipal Bond Fund 79,235 40,150
Tennessee Intermediate Municipal Bond Fund 14,824 7,566
Texas Intermediate Municipal Bond Fund 102,899 51,598
Virginia Intermediate Municipal Bond Fund 85,542 44,703
Florida Municipal Bond Fund 17,169 8,920
Georgia Municipal Bond Fund 6,369 3,320
Maryland Municipal Bond Fund 6,978 3,619
North Carolina Municipal Bond Fund 11,379 5,922
South Carolina Municipal Bond Funds 7,376 3,836
Tennessee Municipal Bond Fund 3,826 1,990
Texas Municipal Bond Fund 6,334 3,301
Virginia Municipal Bond Fund 8,843 4,598
Emerging Markets Fund 21,266 0.00
Pacific Growth Fund 30,206 0.00
Global Government Income Fund 21,621 0.00
</TABLE>
The table below sets forth the total co-administration fees paid to First
Data Investor Services Group, Inc. ("First Data") and waived by First Data for
the fiscal year ended March 31, 1998.
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<PAGE>
<TABLE>
<CAPTION>
CO-ADMINISTRATION FEES
Net Fees Paid Fees Waived
------------- -----------
<S> <C> <C>
Prime Fund 384,193 0.00
Treasury Fund 232,691 0.00
Equity Income Fund 244,825 0.00
Government Securities Fund 50,171 0.00
International Equity Fund 623,612 0.00
International Growth Fund 306,814 0.00
International Value Fund n/a n/a
Small Company Growth Fund 43,762 0.00
U.S. Government Bond Fund 59,434 0.00
Government Money Market Fund 25,208 0.00
Tax Exempt Fund 152,908 0.00
Value Fund 680,262 0.00
Capital Growth Fund 259,289 0.00
Disciplined Equity Fund 63,108 0.00
Equity Index Fund 214,846 0.00
Emerging Growth Fund 131,921 0.00
Managed Index Fund 50,870 0.00
Managed SmallCap Index Fund 22,706 0.00
Managed Value Index Fund 709 0.00
Managed SmallCap Value Index Fund 371 0.00
Marsico Growth & Income Fund 387 0.00
Marsico Focused Equities Fund 953 0.00
Balanced Assets Fund 65,073 0.00
Short-Intermediate Gov't Fund 275,597 0.00
Short-Term Income Fund 132,125 0.00
Diversified Income Fund 114,464 0.00
Strategic Fixed Income Fund 621,285 0.00
Municipal Income Fund 161,207 0.00
Short-Term Municipal Income Fund 41,447 0.00
Intermediate Municipal Bond Fund 262,730 0.00
Florida Intermediate Municipal Bond Fund 63,773 0.00
Georgia Intermediate Municipal Bond Fund 46,846 0.00
Maryland Intermediate Municipal Bond Fund 31,450 0.00
North Carolina Intermediate Municipal Bond Fund 54,714 0.00
South Carolina Intermediate Municipal Bond Fund 81,364 0.00
Tennessee Intermediate Municipal Bond Fund 15,440 0.00
Texas Intermediate Municipal Bond Fund 103,490 0.00
Virginia Intermediate Municipal Bond Fund 92,909 0.00
Florida Municipal Bond Fund 18,511 0.00
Georgia Municipal Bond Fund 6,911 0.00
Maryland Municipal Bond Fund 7,494 0.00
North Carolina Municipal Bond Fund 12,309 0.00
South Carolina Municipal Bond Fund 7,965 0.00
Tennessee Municipal Bond Fund 4,133 0.00
Texas Municipal Bond Fund 6,873 0.00
Virginia Municipal Bond Fund 9,547 0.00
Emerging Markets Fund 67,559 0.00
Pacific Growth Fund 69,037 0.00
Global Government Income Fund 19,576 0.00
</TABLE>
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The table set forth below states the net Administration fees paid to
Stephens and waived for the fiscal year ended March 31, 1997.
ADMINISTRATION FEES
Net Fees Paid Fees Waived
------------- -----------
Government Money Market Fund $ 281,893.00 $ 39,867.00
Tax Exempt Fund 995,984.00 151,529.00
Value Fund 792,002.00 0.00
Capital Growth Fund 463,687.00 0.00
Disciplined Equity Fund 81,365.00 0.00
Equity Index Fund 270,994.00 0.00
Managed Index Fund 12,195.00 0.00
Managed SmallCap Index Fund 1,626.00 0.00
Emerging Growth Fund 211,748.00 0.00
Balanced Assets Fund 146,269.00 0.00
Short-Intermediate Government Fund 252,303.00 0.00
Short-Term Income Fund 104,245.00 0.00
Diversified Income Fund 103,988.00 0.00
Strategic Fixed Income Fund 510,826.00 0.00
Municipal Income Fund 46,849.00 10,434.00
Short-Term Municipal Income Fund 31,084.00 7,479.00
Intermediate Municipal Bond Fund 40,902.00 9,878.00
Florida Intermediate Municipal Bond Fund 23,525.00 5,513.00
Georgia Intermediate Municipal Bond Fund 25,682.00 5,977.00
Maryland Intermediate Municipal Bond Fund 38,122.00 2,519.00
North Carolina Intermediate Municipal Bond Fund 17,628.00 3,971.00
South Carolina Intermediate Municipal Bond Fund 31,091.00 7,071.00
Tennessee Intermediate Municipal Bond Fund 8,422.00 1,869.00
Texas Intermediate Municipal Bond Fund 14,310.00 3,130.00
Virginia Intermediate Municipal Bond Fund 101,774.00 22,264.00
Florida Municipal Bond Fund 17,082.00 3,824.00
Georgia Municipal Bond Fund 6,500.00 1,497.00
Maryland Municipal Bond Fund 6,151.00 1,408.00
North Carolina Municipal Bond Fund 12,881.00 2,857.00
South Carolina Municipal Bond Fund 7,923.00 1,846.00
Tennessee Municipal Bond Fund 3,695.00 847.00
Texas Municipal Bond Fund 7,747.00 1,724.00
Virginia Municipal Bond Fund 8,995.00 2,043.00
Prime Fund 3,775,833.00 419,503.00
Treasury Fund 2,254,616.00 250,485.00
Equity Income Fund 388,686.00 0.00
International Equity Fund 985,632.00 0.00
Government Securities Fund 113,616.00 0.00
Emerging Markets Fund 60,159.00 0.00
Pacific Growth Fund 115,080 0.00
Global Government Income Fund 42,714.00 0.00
The table below sets forth the total sub-administration fees paid to First
Data and waived by First Data for the fiscal year ended March 31, 1997.
CO-ADMINISTRATION FEES
Net Fees Paid Fees Waived
------------- -----------
Government Money Market Fund $ 98,906.00 $ 0.00
Tax Exempt Fund 326,822.00 0.00
Value Fund 513,976.00 0.00
Capital Growth Fund 298,193.00 0.00
Disciplined Equity Fund 60,505.00 0.00
Equity Index Fund 171,545.00 0.00
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Managed Index Fund 7,522.00 0.00
Managed SmallCap Index Fund 7,375.00 0.00
Emerging Growth Fund 143,790.00 0.00
Balanced Assets Fund 93,557.00 0.00
Short-Intermediate Government Fund 219,240.00 0.00
Short-Term Income Fund 96,033.00 0.00
Diversified Income Fund 96,135.00 0.00
Strategic Fixed Income Fund 440,702.00 0.00
Municipal Income Fund 47,546.00 0.00
Short-Term Municipal Income Fund 32,415.00 0.00
Intermediate Municipal Bond Fund 42,623.00 0.00
Florida Intermediate Municipal Bond Fund 24,249.00 0.00
Georgia Intermediate Municipal Bond Fund 26,483.00 0.00
Maryland Intermediate Municipal Bond Fund 38,819.00 0.00
North Carolina Intermediate Municipal Bond Fund 17,960.00 0.00
South Carolina Intermediate Municipal Bond Fund 31,867.00 0.00
Tennessee Intermediate Municipal Bond Fund 8,549.00 0.00
Texas Intermediate Municipal Bond Fund 14,526.00 0.00
Virginia Intermediate Municipal Bond Fund 102,954.00 0.00
Florida Municipal Bond Fund 17,385.00 0.00
Georgia Municipal Bond Fund 6,657.00 0.00
Maryland Municipal Bond Fund 6,306.00 0.00
North Carolina Municipal Bond Fund 13,109.00 0.00
South Carolina Municipal Bond Fund 8,189.00 0.00
Tennessee Municipal Bond Fund 3,784.00 0.00
Texas Municipal Bond Fund 7,900.00 0.00
Virginia Municipal Bond Fund 9,205.00 0.00
The table set forth on the following page states the total net
administration fees paid and the total administration fees waived for the fiscal
period ended March 31, 1996.
ADMINISTRATION FEES
<TABLE>
<CAPTION>
FY 1996
-------
Net Fees Fees
Paid Waived
---- ------
<S> <C> <C>
Government Money Market Fund $ 139,341.00 $ 19,949.00
Tax Exempt Fund 409,267.00 $ 52,641.00
Value Fund 374,444.00 0.00
Capital Growth Fund 300,466.00 0.00
Emerging Growth Fund 103,626.00 0.00
Disciplined Equity Fund 45,211.00 0.00
Equity Index Fund 53,838.00 0.00
Balanced Assets Fund 78,711.00 0.00
Short-Intermediate Government Fund 167,287.00 0.00
Short-Term Income Fund 65,025.00 0.00
Diversified Income Fund 57,340.00 0.00
Strategic Fixed Income Fund 280,486.00 0.00
Municipal Income Fund 38,622.00 0.00
Short-Term Municipal Income Fund 22,543.00 0.00
Intermediate Municipal Bond Funds 26,938.00 0.00
Florida Intermediate Municipal Bond Fund 17,482.00 0.00
Georgia Intermediate Municipal Bond Fund 19,615.00 0.00
Maryland Intermediate Municipal Bond Fund 30,556.00 0.00
North Carolina Intermediate Municipal Bond Fund 12,879.00 0.00
South Carolina Intermediate MunBond Fund 23,528.00 0.00
Tennessee Intermediate Municipal Bond Fund 6,298.00 0.00
Texas Intermediate Municipal Bond Fund 10,422.00 0.00
Virginia Intermediate Municipal Bond Fund 82,317.00 0.00
Florida Municipal Bond Fund 13,127.00 0.00
Georgia Municipal Bond Fund 4,989.00 0.00
Maryland Municipal Bond Fund 4,576.00 0.00
North Carolina Municipal Bond Fund 10,514.00 0.00
South Carolina Municipal Bond Fund 5,476.00 0.00
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<PAGE>
FY 1996
-------
Net Fees Fees
Paid Waived
---- ------
Tennessee Municipal Bond Fund 2,598.00 0.00
Texas Municipal Bond Fund 5,852.00 0.00
Virginia Municipal Bond Fund 6,812.00 0.00
Prime Fund 1,924,496.00 1,537,278.00
Treasury Fund 1,405,372.00 1,126,831.00
Equity Income Fund 346,633.00 0.00
International Equity Fund 597,450.00 0.00
Government Securities Fund 96,960.00 0.00
Emerging Markets Fund 17,121.00 0.00
Pacific Growth Fund 34,201.00 0.00
Global Government Income Fund 418,879.00 0.00
</TABLE>
The table set forth below states the net Sub-Administration fees paid and
waived to NationsBank, or its affiliate NBAI, for the fiscal year ended March
31, 1998. For the period March 31, 1997 through November 30, 1997, fees were
paid to NationsBank. For the period December 1, 1997 through March 31, 1998,
fees were paid to NBAI.
SUB-ADMINISTRATION FEES
Net Fees
Paid Fees Waived
---- -----------
Prime Fund $555,149 $ 0
Treasury Fund 332,041 --
Equity Income Fund 73,929 --
Government Securities Fund 12,130 --
International Equity Fund 102,893 --
International Growth Fund 55,097 --
International Value Fund 0 --
Small Company Growth Fund 14,378 --
U.S. Government Bond Fund 15,227 --
Government Money Market Fund 35,564 --
Tax Exempt Fund 218,062 --
Value Fund 208,906 --
Capital Growth Fund 76,232 --
Disciplined Equity Fund 16,484 --
Equity Index Fund 67,819 --
Emerging Growth Fund 37,823 --
Managed Index Fund 16,200 --
Managed SmallCap Index Fund 8,382 --
Managed Value Index Fund 250 --
Managed SmallCap Value Index Fund 141 --
Marsico Growth & Income Fund 128 --
Marsico Focused Equities Fund 318 --
Balanced Assets Fund 19,910 --
Short-Intermediate Gov't Fund 67,717 --
Short-Term Income Fund 33,535 --
Diversified Income Fund 28,800 --
Strategic Fixed Income Fund 152,490 --
Municipal Income Fund 39,336 --
Short-Term Municipal Income Fund 10,029 --
Intermediate Municipal Bond Fund 64,689 --
Florida Intermediate Municipal Bond Fund 15,709 --
Georgia Intermediate Municipal Bond Fund 11,457 --
Maryland Intermediate Municipal Bond Fund 9,366 --
North Carolina Intermediate Municipal Bond Fund 13,530 --
South Carolina Intermediate Municipal Bond Fund 20,075 --
Tennessee Intermediate Municipal Bond Fund 3,783 --
Texas Intermediate Municipal Bond Fund 25,799 --
Virginia Intermediate Municipal Bond Fund 22,306 --
Florida Municipal Bond Fund 4,460 --
Georgia Municipal Bond Fund 1,660 --
Maryland Municipal Bond Fund 1,809 --
North Carolina Municipal Bond Fund 2,961 --
South Carolina Municipal Bond Fund 1,918 --
Tennessee Municipal Bond Fund 995 --
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Texas Municipal Bond Fund 1,651 --
Virginia Municipal Bond Fund 2,299 --
Emerging Markets Fund 8,983 --
Pacific Growth Fund 9,937 --
Global Government Income Fund 4,120 --
As discussed under the caption "Expenses," the Administrator will be
required to reduce its fee from the Companies, in direct proportion to the fees
payable to the Adviser and the Administrator by the Companies, if the expenses
of the Companies exceed the applicable expense limitation of any state in which
the Funds' shares are registered or qualified for sale.
DISTRIBUTION PLANS AND SHAREHOLDER SERVICING ARRANGEMENTS FOR INVESTOR SHARES
INVESTOR A SHARES. Each Company 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 each Fund's Investor A Shares. The
Investor A Plan provides that each Fund may pay the Distributor or banks,
broker/dealers or other financial institutions that offer shares of the Fund and
that have entered into a Sales Support Agreement with the Distributor ("Selling
Agents") or a Shareholder Servicing Agreement with the respective Company,
("Servicing Agents"), up to 0.10% (on an annualized basis) of the average daily
net asset value of Investor A Shares of the Money Market Funds and up to 0.25%
(on an annualized basis) of the average daily net asset value of the Non-Money
Market Funds.
With respect to the 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 of the Money Market Funds. The sales support assistance
provided by a Selling Agent under a Sales Support Agreement may include
forwarding sales literature and advertising provided by the Companies 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 services,
with any remaining amounts being used by the Distributor to partially defray
other expenses incurred by the Distributor in distributing Investor A Shares.
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.
With respect to the Non-Money Market Funds, (except the Short-Term Income
Fund and the Short-Term Municipal Income Fund) payments under the Investor A
Plan may be made to the Distributor for providing the distribution-related
services described in (i) above or to Servicing Agents that have entered into a
Shareholder Servicing Agreement with each Company for providing shareholder
support services to their Customers which hold of record or beneficially
Investor A Shares of a Non-Money Market Fund. Such shareholder support services
provided by Servicing Agents to holders of Investor A Shares of the Non-Money
Market Funds may include (i) aggregating and processing purchase and redemption
requests for Investor A Shares from their Customers and transmitting promptly
net purchase and redemption orders to our distributor or transfer agent; (ii)
providing their Customers with a service that invests the assets of their
accounts in Investor A Shares pursuant to specific or pre-authorized
instructions; (iii) processing dividend and distribution payments from the
Company on behalf of their Customers; (iv) providing information periodically to
their Customers showing their positions in Investor A Shares; (v) arranging for
bank wires; (vi) responding to their Customers' inquiries concerning their
investment in Investor A Shares; (vii) providing sub-accounting with respect to
Investor A Shares beneficially owned by their Customers or the information
necessary to us for sub-accounting; (viii) if required by law, forwarding
shareholder communications from each Company (such as proxies, shareholder
reports, annual and semi-annual financial statements and dividend, distribution
and tax notices) to their Customers (ix) forwarding to their Customers proxy
statements and proxies
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containing any proposals regarding the Shareholder Servicing Agreement; (x)
providing general shareholder liaison services; and (xi) providing such other
similar services as each Company may reasonably request to the extent the
Selling Agent is permitted to do so under applicable statutes, rules or
regulations. The Money Market Funds, the Short-Term Income Fund and the
Short-Term Municipal Income Fund may not pay for personal services and/or
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.
In addition, NFI has adopted an Amended and Restated Shareholder Servicing
Plan for the Investor A Shares of the Money Market Funds (the "Money Market
Investor A Servicing Plan"). Pursuant to the Money Market Investor A Servicing
Plan, which became effective on March 28, 1993, each Money Market Fund may pay
banks, broker/dealers or other financial institutions that have entered into a
Shareholder Servicing Agreement with the Company ("Servicing Agents") up to
0.25% (on an annualized basis) of the average daily net asset value of the
Investor A Shares of each Money Market 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 Shares of the Non-Money Market Funds. Fees paid pursuant to the Money
Market Investor A Servicing Plan are calculated daily and paid monthly.
In addition, NFT has adopted an Amended and Restated Shareholder Servicing
Plan for the Investor A Shares of NFT's 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,
broker/dealers or other financial institutions that have entered into a
Shareholder Servicing Agreement with NFT ("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.
During the fiscal year ended March 31,1997, the Distributor received the
following amount from Rule 12b-1 fees in connection with Investor A Shares of
NFT's Money Market Funds: $0. Of this amount, the Distributor retained $0.
During the fiscal year ended March 31,1997, the Distributor received the
following amount from Rule 12b-1 fees in connection with Investor A Shares of
NFT's Non-Money Market Funds: $0. Of this amount, the Distributor retained $0.
During the fiscal year ended March 31,1998, the Distributor received the
following amount from Rule 12b-1 fees in connection with Investor A Shares of
NFT's Money Market Funds: $0. Of this amount, the Distributor retained $0.
During the fiscal year ended March 31,1998, the Distributor received the
following amount from Rule 12b-1 fees in connection with Investor A Shares of
NFT's Non-Money Market Funds: $0. Of this amount, the Distributor retained $0.
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 of the NFI Money Market Funds: $972,685 and
$35,670, respectively. Of these amounts, the prior Distributor retained $0 and
$6,728.76.
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<PAGE>
During the fiscal year ended March 31,1997, the Distributor received the
following amount from Rule 12b-1 fees in connection with Investor A Shares of
the NFI Non-Money Market Funds: $0. Of this amount, the Distributor retained $0.
During the fiscal year ended March 31,1997, the Distributor received the
following amount from Rule 12b-1 fees in connection with Investor A Shares of
the NFI Money Market Funds: $0. Of this amount, the Distributor retained $0.
During the fiscal year ended March 31,1998, the Distributor received the
following amount from Rule 12b-1 fees in connection with Investor A Shares of
the NFI Non-Money Market Funds: $0. Of this amount, the Distributor retained $0.
During the fiscal year ended March 31,1998, the Distributor received the
following amount from Rule 12b-1 fees in connection with Investor A Shares of
the NFI Money Market Funds: $0. Of this amount, the Distributor retained $0.
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.
During the fiscal period ended March 31, 1996 the Distributor received
$7,579 from 12b-1 fees and $1,533 from front end sales load fees in connection
with the NFP Investor A Shares. Of this amount, the Distributor retained $0 of
the 12b-1 fees and $224.17 of the front end sales load fees and paid the balance
to selling dealers.
During the fiscal year ended March 31,1997, the Distributor received the
following amounts from Rule 12b-1 fees and front end sales load fees in
connection with Investor A Shares of the NFP Funds: $0 and $0, respectively. Of
these amounts, the Distributor retained $0 and $0, respectively.
During the fiscal year ended March 31,1998, the Distributor received the
following amounts from Rule 12b-1 fees and front end sales load fees in
connection with Investor A Shares of the NFP Funds: $0 and $0, respectively. Of
these amounts, the Distributor retained $0 and $0, respectively.
INVESTOR B SHARES OF THE MONEY MARKET FUNDS AND INVESTOR C SHARES OF THE
NON-MONEY MARKET FUNDS. The Directors/Trustees of the Companies have approved an
Amended and Restated Distribution Plan in accordance with Rule 12b-1 under the
1940 Act for the Investor B Shares of Money Market Funds and Investor C Shares
of the Non-Money Market Funds (the "Investor B/C Plan"). Pursuant to the
Investor B/C Plan, each Fund may pay the Distributor for certain expenses that
are incurred in connection with the distribution of shares. Payments under the
Investor B/C Plan will be calculated daily and paid monthly at a rate set from
time to time by the Board of Directors provided that the annual rate may not
exceed 0.75% of the average daily net asset value of Investor C Shares of a
Non-Money Market Fund and 0.10% of the average daily net asset value of Investor
B Shares of a Money Market Fund. Payments to the Distributor pursuant to the
Investor B/C Plan will be used (i) to compensate banks, other financial
institutions or a securities broker/dealer that have entered into a Sales
Support Agreement with the Distributor ("Selling Agents") for providing sales
support assistance relating to Investor B or Investor C Shares, for promotional
activities intended to result in the sale of Investor B or Investor C Shares
such as to pay for the preparation, printing and distribution of prospectuses to
other than current shareholders, and (iii) to compensate Selling Agents for
providing sales support services with respect to their Customers who are, from
time to time, beneficial and record holders of Investor B or Investor C Shares.
Currently, substantially all fees paid pursuant to the Investor B/C Plan are
paid to compensate Selling Agents for providing the services described in (i)
and (iii) above, with any remaining amounts being used by the Distributor to
partially defray other expenses incurred by the Distributor in distributing
Investor B or Investor C Shares. Fees received by the Distributor pursuant to
the Investor B/C Plan will not be used to pay any interest expenses, carrying
charges or other financing costs (except to the extent permitted by the SEC) and
will not be used to pay any general and administrative expenses of the
Distributor.
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<PAGE>
Pursuant to the Investor B/C Plan, the Distributor may enter into Sales
Support Agreements with Selling Agents for providing sales support services to
their Customers who are the record or beneficial owners of Investor B Shares of
the Money Market Funds and Investor C Shares of the non-Money Market Funds. Such
Selling Agents will be compensated at the annual rate of up to 0.75% of the
average daily net asset value of the Investor C Shares of the Non-Money Market
Funds, and up to 0.10% of the average daily net asset value of the Investor B
Shares of the Money Market Funds held of record or beneficially by such
Customers. The sales support services provided by Setting Agents may include
providing distribution assistance and promotional activities intended to result
in the sales of shares such as paying for the preparation, printing and
distribution of prospectuses to other than current shareholders.
Fees paid pursuant to the Investor B/C Plan are accrued daily and paid
monthly, and are charged as expenses of the relevant shares of a Fund as
accrued. Expenses incurred by the Distributor pursuant to the Investor B/C Plan
in any given year may exceed the sum of the fees received under the Investor B/C
Plan and payments received pursuant to contingent deferred sales charges. Any
such excess may be recovered by the Distributor in future years so long as the
Investor B/C Plan is in effect. If the Investor B/C Plan were terminated or not
continued, a Fund would not be contractually obligated to pay the Distributor
for any expenses not previously reimbursed by the Fund or recovered through
contingent deferred sales charges.
In addition, the Directors have approved an Amended and Restated
Shareholder Servicing Plan ("Servicing Plan") with respect to the Investor B
Shares of the Money Market Funds and Investor C Shares of the Non-Money Market
Funds (the "Investor B/C Servicing Plan"). Pursuant to the Investor B/C
Servicing Plan, each Fund may pay banks, broker/dealers or other financial
institutions that have entered into a Shareholder Servicing Agreement with
Nations Funds ("Servicing Agents") for certain expenses that are incurred by the
Servicing Agents in connection with shareholder support services that are
provided by the Servicing Agents. Payments under the Investor B/C Servicing Plan
will be calculated daily and paid monthly at a rate set from time to time by the
Board of Directors, provided that the annual rate may not exceed 0.25% of the
average daily net asset value of the Money Market Funds' Investor B Shares and
the Non-Money Market Funds' Investor C Shares. The shareholder services provided
by the Servicing Agents may include (i) aggregating and processing purchase and
redemption requests for such Investor B or Investor C Shares from Customers and
transmitting promptly net purchase and redemption orders to our distributor or
transfer agent; (ii) providing Customers with a service that invests the assets
of their accounts in such Investor B or Investor C Shares pursuant to specific
or pre-authorized instructions; (iii) dividend and distribution payments from
the Company on behalf of Customers; (iv) providing information periodically to
Customers showing their positions in such Investor B or Investor C Shares; (v)
arranging for bank wires; (vi) responding to Customers' inquiries concerning
their investment in such Investor B or Investor C Shares; (vii) providing
sub-accounting with respect to such Investor B or Investor C Shares beneficially
owned by Customers or providing the information to us necessary for
sub-accounting; (viii) if required by law, forwarding shareholder communications
from the Company (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to Customers;
(ix) forwarding to Customers proxy statements and proxies containing any
proposals regarding the Shareholder Servicing Agreement; (x) providing general
shareholder liaison services; and (xi) providing such other similar services as
the Company may reasonably request to the extent the Servicing Agent is
permitted to do so under applicable statutes, rules or regulations.
During the fiscal period ended March 31,1996, the Distributor received the
following amounts from Rule 12b-1 fees and CDSC fees in connection with Investor
B Shares of the NFI Money Market Funds: $1,982,677.43 and $65,117 respectively.
Of these amounts, the prior distributor retained $13,780.21 and $456.62,
respectively.
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 C Shares of the NFI Non-Money Market Funds: $226,162.84 and $5,086,
respectively. Of these amounts, the Distributor retained $15,749.93 and
$1,394.24, respectively.
During the fiscal year ended March 31,1997, the Distributor received the
following amount from Rule 12b-1 fees in connection with Investor B Shares of
the NFI Money Market Funds: $4,403,155.44. Of this amount, the Distributor
retained $302.33.
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<PAGE>
During the fiscal year ended March 31,1997, the Distributor received the
following amounts from Rule 12b-1 fees and CDSC fees in connection with Investor
C Shares of the NFI Non-Money Market Funds: $38,342.90 and $587.17,
respectively. Of these amounts, the Distributor retained $4,441.52 and $587.17,
respectively.
During the fiscal year ended March 31,1997, the Distributor received the
following amount from Rule 12b-1 fees in connection with Investor B Shares of
the NFT Money Market Funds: $488,455.68. Of this amount, the Distributor
retained $369.80.
During the fiscal year ended March 31,1997, the Distributor received the
following amounts from Rule 12b-1 fees and CDSC fees in connection with Investor
C Shares of the NFT Non-Money Market Funds: $252,094.80 and $6,716.67,
respectively. Of these amounts, the Distributor retained $43,497.58 and
$6,716.67, respectively.
During the fiscal year ended March 31,1998, the Distributor received the
following amount from Rule 12b-1 fees in connection with Investor B Shares of
the NFI Money Market Funds: $3,466,866.65. Of this amount, the Distributor
retained $7,743.41.
During the fiscal year ended March 31,1998, the Distributor received the
following amounts from Rule 12b-1 fees and CDSC fees in connection with Investor
C Shares of the NFI Non-Money Market Funds: $98,350.80 and $18,143.54
respectively. Of these amounts, the Distributor retained $33,051.16 and
$18,143.54, respectively.
During the fiscal year ended March 31,1998, the Distributor received the
following amount from Rule 12b-1 fees in connection with Investor B Shares of
the NFT Money Market Funds: $562,681.69. Of this amount, the Distributor
retained $730.94.
During the fiscal year ended March 31,1998, the Distributor received the
following amounts from Rule 12b-1 fees and CDSC fees in connection with Investor
C Shares of the NFT Non-Money Market Funds: $369,785.35 and $18,619.52,
respectively. Of these amounts, the Distributor retained $148,710.43 and
$18,619.52, respectively.
During the fiscal year ended March 31,1998, the Distributor received the
following amounts from Rule 12b-1 fees and CDSC fees in connection with Investor
C Shares of the NFP Non-Money Market Funds: $2,682.36 and $14.74, respectively.
Of these amounts, the Distributor retained $1,646.52 and $14.74, respectively.
INVESTOR C SHARES OF THE MONEY MARKET FUNDS AND INVESTOR B SHARES OF THE
NON-MONEY MARKET FUNDS. The Directors/Trustees of each Company have approved a
Distribution Plan (the "Investor B Distribution Plan") with respect to Investor
B Shares of the Non-Money Market Funds. Pursuant to the Investor B Distribution
Plan, a Non-Money Market Fund may compensate or reimburse the Distributor for
any activities or expenses primarily intended to result in the sale of the
Fund's Investor B Shares, including for sales related services provided by
banks, broker/dealers or other financial institutions that have entered into a
Sales Support Agreement relating to the Investor B Shares with the Distributor
("Selling Agents"). Payments under a Fund's Investor B Distribution Plan will be
calculated daily and paid monthly at a rate or rates set from time to time by
the Board of Directors provided that the annual rate may not exceed 0.75% of the
average daily net asset value of each Non-Money Market Fund's Investor B Shares.
The fees payable under the Investor B Distribution Plan are used primarily
to compensate or reimburse the Distributor for distribution services provided by
it, and related expenses incurred, including payments by the Distributor to
compensate or reimburse Selling Agents, for sales support services provided, and
related expenses incurred, by such Selling Agents. Payments under the Investor B
Distribution Plan may be made with respect to preparation, printing and
distribution of prospectuses, sales literature and advertising materials by the
Distributor or, as applicable, Selling Agents, attributable to distribution or
sales support activities, respectively, commissions, incentive compensation or
other compensation to, and expenses of, account executives or other employees of
the Distributor or Selling Agents, attributable to distribution or sales support
activities, respectively; overhead and other office expenses of the Distributor
relating to the foregoing (which may be calculated as a carrying charge in the
Distributor's or Selling Agents' unreimbursed expenses), incurred in connection
with distribution or sales support activities. The overhead and other office
expenses referenced above may include, without limitation, (i) the
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<PAGE>
expenses of operating the Distributor's or Selling Agents' offices in connection
with the sale of Fund shares, including lease costs, the salaries and employee
benefit costs of administrative, operations and support personnel, utility
costs, communication costs and the costs of stationery and supplies, (ii) the
costs of client sales seminars and travel related to distribution and sales
support activities, and (iii) other expenses relating to distribution and sales
support activities.
In addition, the Directors/Trustees have approved a Shareholder Servicing
Plan with respect to Investor C Shares of the Money Market Funds and Investor B
Shares of the Non-Money Market Funds ( "Investor C/B Servicing Plan"). Pursuant
to the Investor C/B Servicing Plan, a Fund may compensate or reimburse banks,
broker/dealers or other financial institutions that have entered into a
Shareholder Servicing Agreement with the Company ("Servicing Agents") for
certain activities or expenses of the Servicing Agents in connection with
shareholder services that are provided by the Servicing Agents. Payments under
the Investor C/B Servicing Plan will be calculated daily and paid monthly at a
rate or rates set from time to time by the Board of Directors/Trustees, provided
that the annual rate may not exceed 0.25% of the average daily net asset value
of the Investor C Shares of the Money Market Funds and Investor B Shares of the
Non-Money Market Funds.
The fees payable under the Investor C/B Servicing Plan are used primarily
to compensate or reimburse Servicing Agents for shareholder services provided,
and related expenses incurred, by such Servicing Agents. The shareholder
services provided by Servicing Agents may include: (i) aggregating and
processing purchase and redemption requests for such Investor C or Investor B
Shares from Customers and transmitting promptly net purchase and redemption
orders to the Distributor or Transfer Agent; (ii) providing Customers with a
service that invests the assets of their accounts in such Investor C or Investor
B Shares pursuant to specific or pre-authorized instructions; (iii) processing
dividend and distribution payments from the Companies on behalf of Customers;
(iv) providing information periodically to Customers showing their positions in
such Investor C or Investor B Shares; (v) arranging for bank wires; (vi)
responding to Customers' inquiries concerning their investment in such Investor
C or Investor B Shares; (vii) providing sub-accounting with respect to such
Investor C or Investor B Shares beneficially owned by Customers or providing the
information to us necessary for sub-accounting; (viii) if required by law,
forwarding shareholder communications from the Companies (such as proxies,
shareholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to Customers; (ix) forwarding to Customers proxy
statements and proxies containing any proposals regarding the Investor C
Servicing Plan or related agreements; (x) providing general shareholder liaison
Services; and (xi) providing such other similar services as the Companies may
reasonably request to the extent such Servicing Agent is permitted to do so
under applicable statutes, rules or regulations.
The fees payable under the Investor B Distribution Plan and Investor C/B
Servicing Plan (together, the "Investor C/B Plans") are treated by the Funds as
an expense in the year they are accrued. At any given time, a Selling Agent
and/or Servicing Agent may incur expenses in connection with services provided
pursuant to its agreements with the Distributor under the Investor C/B Plans
which exceed the total of (i) the payments made to the Selling Agents and
Servicing Agents by the Distributor or the Company and reimbursed by the Fund
pursuant to the Investor C/B Plans, and (ii) the proceeds of contingent deferred
sales charges paid to the Distributor and reallowed to the Selling Agent, upon
the redemption of their Customers' Investor C Shares. Any such excess expenses
may be recovered in future years, so long as the Investor C/B Plans are in
effect. Because there is no requirement under the Investor C/B Plans that the
Distributor be paid or the Selling Agents and Servicing Agents be compensated or
reimbursed for all their expenses or any requirement that the Investor C/B Plans
be continued from year to year, such excess amount, if any, does not constitute
a liability to a Fund or the Distributor. Although there is no legal obligation
for the Fund to pay expenses incurred by the Distributor, a Selling Agent or a
Servicing Agent in excess of payments previously made to the Distributor under
the Investor C/B Plans or in connection with contingent deferred sales charges,
if for any reason the Investor C/B Plans are terminated, the Directors will
consider at that time the manner in which to treat such expenses.
During the fiscal period ended March 31, 1996, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor B Shares of the Non-Money Market Funds: $796,535 and $503,334
respectively. Of these amounts, the prior distributor retained $ 0 and $ 0,
respectively.
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<PAGE>
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 B Shares of the Non-Money Market Funds of NFT: $939,081 and $558,076,
respectively. Of these amounts, the Distributor retained $0 and $0,
respectively.
During the fiscal year ended March 31, 1997, the Distributor received the
following amounts from Rule 12b-1 fees and CDSC fees in connection with Investor
B Shares of the Non-Money Market Funds: $0 and $0, respectively. Of these
amounts, the Distributor retained $0 and $0, respectively.
During the fiscal year ended March 31,1997, the Distributor received the
following amounts from Rule 12b-1 fees and CDSC fees in connection with Investor
B Shares of the Non-Money Market Funds of NFT: $0 and $0, respectively. Of these
amounts, the Distributor retained $0 and $0, respectively.
During the fiscal year ended March 31, 1998, the Distributor received the
following amounts from Rule 12b-1 fees and CDSC fees in connection with Investor
B Shares of the Non-Money Market Funds: $0 and $0, respectively. Of these
amounts, the Distributor retained $0 and $0, respectively.
During the fiscal year ended March 31,1998, the Distributor received the
following amounts from Rule 12b-1 fees and CDSC fees in connection with Investor
B Shares of the Non-Money Market Funds of NFT: $0 and $0, respectively. Of these
amounts, the Distributor retained $0 and $0, respectively.
DAILY SHARES OF THE MONEY MARKET FUNDS. The Directors/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 the 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
Directors 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 Directors have approved a Shareholder Servicing Plan with
respect to Daily Shares of the Money Market Funds (the "Daily Servicing Plan").
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 Company ("Servicing Agents") for
certain activities or expenses of the Servicing Agents in connection with
shareholder services that are provided by the Servicing Agents. Payments under
the Daily Servicing Plan will be calculated daily and paid monthly at a rate or
rates set from time to time by the Board of Directors, provided that the annual
rate may not exceed 0.25% of the average daily net asset value of the Daily
Shares of the Money Market Funds.
99
<PAGE>
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
Company 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 Company (such as proxies, shareholder reports, annual
and semi-annual financial statements and dividend, distribution and tax notices)
to Customers; (ix) forwarding to Customers proxy statements and proxies
containing any proposals regarding the Daily Servicing Plan or related
agreements; (x) providing general shareholder liaison services; and (xi)
providing such other similar services as the Company may reasonably request to
the extent such Servicing Agent is permitted to do so under applicable statutes,
rules or regulations.
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 the Company 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 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 Directors 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 amounts from Rule 12b-1 fees in connection with Daily Shares of
the Money Market Funds: $48 and $0, respectively. Of these amounts, the prior
Distributor retained $0 and $0, respectively.
During the fiscal year ended March 31, 1997, the Distributor received $0
from Rule 12b-1 fees in connection with Daily Shares of the Money Market Funds.
Of this amount, the Distributor retained $0.
During the fiscal year ended March 31, 1998, the Distributor received $0
from Rule 12b-1 fees in connection with Daily Shares of the Money Market Funds.
Of this amount, the Distributor retained $0.
INFORMATION APPLICABLE TO INVESTOR A, INVESTOR B, INVESTOR C AND DAILY
SHARES. The Investor A Plan, the Money Market Investor A Servicing Plan, the
Investor B/C Plan, the Investor B/C Servicing Plan, the Investor C Plan, the
Daily Distribution Plan, the Daily Servicing Plan and the Investor C/B Servicing
Plan (each a "Plan" and collectively the "Plans") may only be used for the
purposes specified above and as stated in each such Plan. Compensation payable
to Selling Agents or Servicing Agents for shareholder support services under the
Investor A Plan, the Money Market Investor A Servicing Plan, the Investor B/C
Servicing Plan, Daily Servicing Plan and the Investor C/B Servicing Plan is
subject to, among other things, the National Association of Securities Dealers,
Inc. ("NASD") Rules of Conduct governing receipt by NASD members of shareholder
servicing plan fees from registered investment companies (the "NASD Servicing
Plan Rule"), which became effective on July 7, 1993. Such compensation shall
only be paid for services determined to be permissible under the NASD Servicing
Plan Rule.
100
<PAGE>
Each Plan requires the officers of the Company or the Distributor to
provide the Board of Directors at least quarterly with a written report of the
amounts expended pursuant to the Plan and the purposes for which such
expenditures were made. The Board of Directors reviews these reports in
connection with 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 Directors, including a majority of the directors who are not
"interested persons" (as defined in the 1940 Act) of the Company and who have no
direct or indirect financial interest in the operation of the Plan or in any
agreements related to the Plan ("Qualified Directors") on February 6, 1997, with
respect to the Investor C Shares of the Money Market Funds, on March 22, 1991,
with respect to the Investor A Shares of the Equity Income and Government
Securities Funds, on June 24, 1992 with respect to the Investor A Shares of the
International Equity Fund, and on March 19, 1992, with respect to the Investor C
Shares of the Non-Money Market Funds. Additionally, each Plan with respect to
the Investor B Shares of the Money Market Funds and with respect to the Investor
B Shares of all the Non-Money Market Funds was approved by the Board of
Directors, including a majority of the Qualified Directors, on February 3, 1993.
The Plan with respect to the Investor C Shares of the Money Market Funds was
initially approved on August 4, 1993. The Plan with respect to the Daily Shares
of the Money Market Funds was initially approved on August 4, 1993. The Plans
continue in effect as long as such continuance is specifically approved at least
annually by the Board of Directors, including a majority of the Qualified
Directors. On October 12, 1996, the Board of Directors (including a majority of
the Qualified Directors) voted to continue each Plan for an additional one year
period.
In approving the Plans in accordance with the requirements of Rule 12b-1,
the directors considered various factors and determined that there is a
reasonable likelihood that each Plan will benefit the respective Investor A,
Investor B, Investor C Shares or Investor B Shares and the holders of such
shares. The Investor A Plan was approved by the Shareholders of the Investor A
Shares of each of the Funds except the International Equity Fund on September 6,
1991, and the Investor B/C Plan applicable to Investor C Shares of the
International Equity and Equity Income Funds and the Investor A Plan applicable
to Investor A Shares of the International Equity Fund were approved on September
22, 1992 by the Investor C Shareholders of the respective International Equity
and Equity Income Funds with respect to the Investor B/C Plan and by the
Investor A Shareholders of the International Equity Fund with respect to the
Investor A Plan. The Plans applicable to the Investor B Shares of the Money
Market Funds and Investor B Shares of the Non-Money Market Funds were approved
by such Funds' initial shareholder of Investor B and Investor B Shares.
The Investor A Shares' Plans with respect to the Money Market Funds
originally became effective on December 4, 1989, and were amended February
12,1990, March 19, 1992 and February 3, 1993. The Investor A Shares' Plan with
respect to the Equity Income and Government Securities Funds became effective on
March 22, 1991, and was amended March 19, 1992. The Investor A Shares' Plan with
respect to the International Equity Fund became effective September 6, 1991 and
was amended March 19, 1992 and February 3, 1993.
The Investor A Plan, Investor B/C Plan and Investor C/B Plan may be
terminated with respect to their respective shares by vote of a majority of the
Qualified Directors, or by vote of a majority of the holders of the outstanding
voting securities of the Investor A, Investor B or Investor C, as appropriate.
Any change in such a Plan that would increase materially the distribution
expenses paid by the Investor A, Investor B or Investor C Shares requires
shareholder approval; otherwise, each Plan may be amended by the directors,
including a majority of the Qualified Directors, by vote cast in person at a
meeting called for the purpose of voting upon such amendment. The Money Market
Investor A Servicing Plan, the Investor B/C Servicing Plan and the Investor C/N
Servicing Plan may be terminated by a vote of a majority of the Qualified
Directors. As long as a Plan is in effect, the selection or nomination of the
Qualified Directors is committed to the discretion of the Qualified Directors.
Conflict of interest restrictions may apply to the receipt by Selling and/or
Servicing Agents of compensation from the Company in connection with the
investment of fiduciary assets in Investor Shares. Selling and/or Servicing
Agents, including banks regulated by the Comptroller of the Currency, the
Federal Reserve Board, or the Federal Deposit Insurance Corporation, and
investment advisers and other money managers subject to the jurisdiction of the
SEC, the Department of Labor, or state securities commissions, are urged to
consult their legal advisers before investing such assets in Investor Shares.
101
<PAGE>
FEES PAID PURSUANT TO SHAREHOLDER SERVICING/DISTRIBUTION PLANS
INVESTOR A SHARES
<TABLE>
<CAPTION>
NET
FEES PAID
NET (SHAREHOLDER
FEES PAID (12B-1 SERVICING NET
COMPONENT) COMPONENT) FEES
FUND YEAR ENDED 3/31/98 YEAR ENDED 3/31/98 PAID
---- ------------------ ------------------ ----
<S> <C> <C> <C>
Prime Fund $1,375,724.00 $3,439,309.00 $4,815,033.00
Treasury Fund 1,154,511 2,886,280 4,040,791
Equity Income Fund 148,897 --- 148,897
International Equity Fund 31,043 --- 31,043
Government Securities
Fund 25,326 --- 25,326
Small Company Growth Fund 11,220 --- 11,220
U.S. Government Bond Fund 2,909 --- 2,909
International Growth Fund 52,736 --- 52,736
International Value Fund N/A N/A N/A
Emerging Markets Fund 2,429 --- 2,429
Pacific Growth Fund 5,247 --- 5,247
Global Government Income
Fund 36,794 --- 36,794
Value Fund 273,466 --- 273,466
Capital Growth Fund 74,936 --- 74,936
Emerging Growth Fund 39,225 --- 39,225
Equity Index Fund 7,389 --- 7,389
Managed Index Fund 30,542 --- 30,542
Managed SmallCap Index Fund 19,228 --- 19,228
Managed Value Index Fund 1,760 --- 1,760
Managed SmallCap Value
Index Fund 1,291 --- 1,291
Disciplined Equity Fund 32,655 --- 32,655
Marsico Focused Equities
Fund 1,045 --- 1,045
Marsico Growth & Income
Fund 205 --- 205
Balanced Assets Fund 30,709 --- 30,709
Short-Intermediate
Government Fund 88,874 --- 88,874
Short-Term Income Fund 17,958 --- 17,958
Diversified Income Fund 28,987 --- 28,987
Strategic Fixed Income Fund 30,753 --- 30,753
Municipal Income Fund 34,073 --- 34,073
Short-Term Municipal
Income Fund 47,824 --- 47,824
Intermediate Municipal
Bond Fund 8,045 --- 8,045
FL Intermediate Municipal
Fund 11,973 --- 11,973
</TABLE>
102
<PAGE>
<TABLE>
<CAPTION>
NET FEES PAID
(SHAREHOLDER
NET FEES PAID SERVICING NET FEES
FUND (12B-1 COMPONENT) COMPONENT) PAID
---- ---------------- ---------- ----
<S> <C> <C>
FL Municipal Bond Fund 3,758 --- 3,758
GA Intermediate Municipal
Fund 18,809 --- 18,809
GA Municipal Bond Fund 763 --- 763
MD Intermediate Municipal
Fund 30,370 --- 30,370
MD Municipal Bond Fund 3,364 --- 3,364
NC Intermediate Municipal
Fund 13,654 --- 13,654
NC Municipal Bond Fund 1,271 --- 1,271
SC Intermediate Municipal
Fund 22,738 --- 22,738
SC Municipal Bond Fund 2,628 --- 2,628
TN Intermediate Municipal
Fund 14,351 --- 14,351
TN Municipal Bond Fund 2,631 --- 2,631
TX Intermediate Municipal
Fund 2,806 --- 2,806
TX Municipal Bond Fund 791 --- 791
VA Intermediate Municipal
Fund 108,231 --- 108,231
VA Municipal Bond Fund 1,928 --- 1,928
Government Money Market
Fund 24,664 61,660 86,324
Tax Exempt Fund 125,498 313,747 439,245
</TABLE>
FEES PAID PURSUANT TO DISTRIBUTION PLANS
INVESTOR B SHARES - MONEY MARKET FUNDS
INVESTOR C SHARES - NON-MONEY MARKET FUNDS
<TABLE>
<CAPTION>
NET
FEES PAID
NET (SHAREHOLDER
FEES PAID (12B-1 SERVICING NET
COMPONENT) COMPONENT) FEES
FUND YEAR ENDED 3/31/98 YEAR ENDED 3/31/98 PAID
---- ------------------ ------------------ ----
<S> <C> <C>
Prime Fund ---- $1,577,256.00 $1,577,256.00
Treasury Fund ---- 1,891,737 1,891,737
Equity Income Fund $870,896.00 290,298 1,161,194
International Equity Fund 265,759 88,586 354,345
Government Securities
Fund 193,008 80,420 273,428
Small Company Growth Fund 13,850 4,617 18,467
U.S. Government Bond Fund 3,840 1,601 5,441
International Growth Fund 2,704 900 3,604
International Value Fund N/A N/A N/A
Emerging Markets Fund 10,642 3,546 14,188
Pacific Growth Fund 12,870 4,290 17,160
Global Government Income
Fund 1,029 428 1,457
Value Fund 846,974 282,235 1,129,299
Capital Growth Fund 375,580 125,193 500,773
Emerging Growth Fund 299,754 99,919 399,673
103
<PAGE>
NET
FEES PAID
NET (SHAREHOLDER
FEES PAID (12B-1 SERVICING NET
COMPONENT) COMPONENT) FEES
FUND YEAR ENDED 3/31/98 YEAR ENDED 3/31/98 PAID
---- ------------------ ------------------ ----
Equity Index Fund ---- ---- ----
Managed Index Fund ---- ---- ----
Managed SmallCap Index Fund ---- ---- ----
Managed Value Index Fund ---- ---- ----
Managed SmallCap Value
Index Fund ---- ---- ----
Disciplined Equity Fund 202,394 67,465 269,859
Marsico Focused Equities
Fund 12,707 4,235 16,942
Marsico Growth & Income
Fund 4,894 1,631 6,525
Balanced Assets Fund 486,598 162,199 648,797
Short-Intermediate
Government Fund 51,218 23,281 74,499
Short-Term Income Fund 4,939 12,351 17,290
Diversified Income Fund 389,914 162,464 552,378
Strategic Fixed Income Fund 12,218 5,554 17,772
Municipal Income Fund 84,881 35,367 120,248
Short-Term Municipal
Income Fund 11,797 29,493 41,290
Intermediate Municipal
Bond Fund 8,693 3,951 12,644
FL Intermediate Municipal
Fund 16,492 7,496 23,988
FL Municipal Bond Fund 103,668 43,195 146,863
GA Intermediate Municipal
Fund 35,901 16,331 52,232
GA Municipal Bond Fund 57,039 23,767 80,806
MD Intermediate Municipal
Fund 21,223 9,648 30,871
MD Municipal Bond Fund 50,771 21,154 71,925
NC Intermediate Municipal
Fund 32,514 14,779 47,293
NC Municipal Bond Fund 140,970 58,737 199,707
SC Intermediate Municipal
Fund 30,401 13,816 44,219
SC Municipal Bond Fund 62,947 26,229 89,176
TN Intermediate Municipal
Fund 14,924 6,784 21,708
TN Municipal Bond Fund 28,813 12,006 40,819
TX Intermediate Municipal
Fund 10,414 4,734 15,148
TX Municipal Bond Fund 54,020 22,509 76,529
VA Intermediate Municipal
Fund 49,251 22,387 71,638
VA Municipal Bond Fund 80,656 33,606 114,262
Government Money Market
Fund ---- 105,609 105,609
Tax Exempt Fund ---- 453,492 453,492
</TABLE>
NOTE: All fees paid under the Investor A and Investor C/B Shares Distribution
Plans were accrued as payments to broker/dealers and financial
institutions offering such shares to their customers.
104
<PAGE>
INVESTOR C SHARES - MONEY MARKET FUNDS
INVESTOR B SHARES - NON-MONEY MARKET FUNDS
<TABLE>
<CAPTION>
NET
FEES PAID
NET (SHAREHOLDER
FEES PAID (12B-1 SERVICING NET
COMPONENT) COMPONENT) FEES
FUND YEAR ENDED 3/31/98 YEAR ENDED 3/31/98 PAID
---- ------------------ ------------------ ----
<S> <C> <C>
Prime Fund --- $219,261.00 $ 219,261.00
Treasury Fund --- 25,041 25,041
Equity Income Fund 51,110 17,036 68,146
International Equity Fund 6,518 2,173 8,691
Government Securities
Fund 7,171 2,988 10,159
Small Company Growth Fund 12,232 4,077 16,309
U.S. Government Bond Fund 4,428 1,846 6,274
International Growth Fund 1,894 631 2,525
International Value Fund N/A N/A N/A
Emerging Markets Fund 1,505 502 2,007
Pacific Growth Fund 488 163 651
Global Government Income
Fund 48 20 68
Value Fund 68,338 22,779 91,117
Capital Growth Fund 39,286 13,095 52,381
Emerging Growth Fund 13,099 4,366 17,465
Equity Index Fund ---- ---- ----
Managed Index Fund 4,939 4,940 9,879
Managed SmallCap Index Fund 550 550 1,100
Managed Value Index Fund 2 1 3
Managed SmallCap Value
Index Fund 12 11 23
Disciplined Equity Fund 5,891 1,963 7,854
Marsico Focused Equities
Fund 267 89 356
Marsico Growth & Income
Fund 143 47 190
Balanced Assets Fund 13,783 4,594 18,377
Short-Intermediate
Government Fund 26,501 12,047 38,548
Short-Term Income Fund 3,483 8,709 12,192
Diversified Income Fund 13,883 5,784 19,667
Strategic Fixed Income Fund 4,844 2,201 7,045
Municipal Income Fund 12,181 5,076 17,257
Short-Term Municipal
Income Fund 668 1,670 2,338
Intermediate Municipal
Bond Fund 4,830 2,195 7,025
FL Intermediate Municipal
Fund 1,183 537 1,720
105
<PAGE>
FL Municipal Bond Fund 125 52 177
GA Intermediate Municipal
Fund 8,039 3,654 11,693
GA Municipal Bond Fund 215 89 304
MD Intermediate Municipal
Fund 7,338 3,335 10,673
MD Municipal Bond Fund 14 6 20
NC Intermediate Municipal
Fund 6,348 2,886 9,234
NC Municipal Bond Fund 64 26 90
SC Intermediate Municipal
Fund 19,281 8,764 28,045
SC Municipal Bond Fund 272 114 386
TN Intermediate Municipal
Fund 12 5 17
TN Municipal Bond Fund 208 86 294
TX Intermediate Municipal
Fund 2,484 1,129 3,613
TX Municipal Bond Fund 398 166 564
VA Intermediate Municipal
Fund 23,904 10,866 34,770
VA Municipal Bond Fund 137 57 194
Government Money Market
Fund ---- 7,557 7,557
Tax Exempt Fund ---- 115,616 115,616
</TABLE>
DAILY SHARES - MONEY MARKET FUNDS
<TABLE>
<CAPTION>
NET FEES PAID
NET (SHAREHOLDER
FEES PAID (12B-1 SERVICING
COMPONENT) COMPONENT) NET
YEAR ENDED YEAR ENDED FEES
FUND 3/31/98 3/31/98 PAID
---- ------- ------- ----
<S> <C> <C> <C>
Prime Fund $178,213.00 $178,213.00 $ 356,426.00
Treasury Fund 378,507 378,507 757,014
Government Money Market Fund 17,523 17,523 35,046
Tax-Exempt Fund 34,060 34,060 68,120
</TABLE>
FEES PAID PURSUANT TO THE ADMINISTRATION PLAN
PRIMARY B SHARES
<TABLE>
<CAPTION>
NET ADMIN NET ADMIN
FEES PAID FEES WAIVED
--------- -----------
<S> <C> <C>
Prime Fund $145,320.00 ----
Treasury Fund 67,921.00 ----
Equity Income Fund 24,723.00 ----
International Equity Fund 16,264 ----
Government Securities Fund 2,961 ----
</TABLE>
106
<PAGE>
NET ADMIN NET ADMIN
FEES PAID FEES WAIVED
--------- -----------
Small Company Growth Fund ---- ----
U.S. Government Bond Fund ---- ----
International Growth Fund ---- ----
International Value Fund N/A N/A
Emerging Markets Fund 888 ----
Pacific Growth Fund 1,682 ----
Global Government Income
Fund 1 ----
Value Fund 94,267 ----
Capital Growth Fund 38,659 ----
Emerging Growth Fund 14,710 ----
Equity Index Fund 20,313 ----
Managed Index Fund 8 ----
Managed SmallCap Index Fund 1,026 ----
Managed Value Index Fund ---- ----
Managed SmallCap Value
Index Fund ---- ----
Disciplined Equity Fund 3,779 ----
Marsico Focused Equities
Fund ---- ----
Marsico Growth & Income
Fund ---- ----
Balanced Assets Fund 30,926 ----
Short-Intermediate
Government Fund 43,035 ----
Short-Term Income Fund 1,642 ----
Diversified Income Fund 767 ----
Strategic Fixed Income Fund 88,031 ----
Municipal Income Fund ---- ----
Short-Term Municipal
Income Fund ---- ----
Intermediate Municipal
Bond Fund ---- ----
FL Intermediate Municipal
Fund ---- ----
FL Municipal Bond Fund ---- ----
GA Intermediate Municipal
Fund ---- ----
GA Municipal Bond Fund ---- ----
Kansas Intermediate
Municipal Fund N/A N/A
MD Intermediate Municipal
Fund ---- ----
MD Municipal Bond Fund ---- ----
NC Intermediate Municipal
Fund ---- ----
NC Municipal Bond Fund ---- ----
SC Intermediate Municipal
Fund ---- ----
SC Municipal Bond Fund ---- ----
TN Intermediate Municipal
Fund ---- ----
TN Municipal Bond Fund ---- ----
TX Intermediate Municipal
Fund ---- ----
TX Municipal Bond Fund ---- ----
VA Intermediate Municipal
Fund ---- ----
VA Municipal Bond Fund ---- ----
Government Money Market
Fund 41,993 ----
Tax Exempt Fund 26,714 ----
107
<PAGE>
SHAREHOLDER SERVICING AGREEMENTS (PRIMARY B SHARES) - MONEY MARKET FUNDS
As stated in the Prospectuses for the Money Market Funds' Primary Shares of NFI
and the Prospectuses for the Primary B Shares of NFT, each of NFI and NFT has a
separate Shareholder Servicing Plan with respect to the Non-Money Market Funds'
Primary B Shares of NFI and the Primary B Shares of NFI and the Primary B Shares
of NFT except the Value Fund, Capital Growth Fund, Emerging Growth Fund,
Disciplined Equity Fund, Equity Index Fund, Managed Index Fund, Managed SmallCap
Index Fund, Managed Value Index Fund, Managed SmallCap Value 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 Plans, NFI and NFT each has entered into separate
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 an annualized basis) of the net asset value of such shares. Such
services may include: (i) aggregating and processing purchase, exchange and
redemption requests for Primary B Shares from Customers and transmitting
promptly net purchase and redemption orders with the Distributor or the transfer
agents; (ii) providing Customers with a service that invests the assets of their
accounts in Primary B Shares pursuant to specific or pre-authorized
instructions; (iii) processing dividend and distribution payments from the
Company on behalf of Customers; (iv) providing information periodically to
Customers showing their positions in Primary B Shares; (v) arranging for bank
wires; (vi) responding to Customer inquiries concerning their investment in
Primary B Shares; (vii) providing sub-accounting with respect to Primary B
Shares beneficially owned by Customers or the information necessary for
sub-accounting; (viii) if required by law, forwarding shareholder communications
(such as proxies, shareholder reports annual and semi-annual financial
statements and dividend, distribution and tax notices) to Customers; (ix)
forwarding to Customers proxy statements and proxies containing any proposals
regarding the Shareholder Servicing Agreements or Shareholder Serving Plan; and
(x) providing such other similar services as may reasonably be requested to the
extent permitted under applicable statutes, rules, or regulations.
Such plan shall continue in effect as long as the Board of
Directors/Trustees, including a majority of the Qualified Directors,
specifically approves the plan at least annually.
SHAREHOLDER ADMINISTRATION PLAN (PRIMARY B SHARES) - NON-MONEY MARKET FUNDS
As stated in the Prospectus for the Non-Money Market Funds' Primary B
Shares, each Company has a separate Shareholder Administration Plan (the
"Administration Plan") with respect to such shares. Pursuant to the
Administration Plan, each Company may enter into agreements ("Administration
Agreements") with broker/dealers, banks and other financial institutions that
are dealers of record or holders of record or which have a servicing
relationship with the beneficial owners of 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 ("Customers") in
consideration for the payment of up to 0.60% (on an annualized basis) of the net
asset value of such shares. Such services may include: (i) aggregating and
processing purchase, exchange and redemption requests for Primary B Shares from
Customers and transmitting promptly net purchase and redemption orders with the
Distributor or the transfer agents; (ii) providing Customers with a service that
invests the assets of their accounts in Primary B Shares pursuant to specific or
pre-authorized instructions; (iii) processing dividend and distribution payments
from the Company on behalf of Customers; (iv) providing information periodically
to Customers showing their positions in Primary B Shares; (v) arranging for bank
wires; (vi) responding to Customer inquiries concerning their investment in
Primary B Shares; (vii) providing sub-accounting with respect to Primary B
Shares beneficially owned by Customers or the information necessary for
sub-accounting; (viii) if required by law, forwarding shareholder communications
(such as proxies, shareholder reports annual and semi-annual financial
statements and dividend, distribution and tax notices) to Customers; (ix)
forwarding to Customers proxy statements and proxies containing any proposals
regarding an Administration Agreement; (x) employee benefit plan recordkeeping,
administration, custody and trustee services; (xi) general shareholder liaison
services and (xii) providing such other similar services as may reasonably be
requested to the extent permitted under applicable statutes, rules, or
regulations.
108
<PAGE>
EXPENSES
The Administrator furnishes, without additional cost to each Company, the
services of the Treasurer and Secretary of each Company and such other personnel
(other than the personnel of the Adviser) as are required for the proper conduct
of each Company's affairs. The Distributor bears the incremental expenses of
printing and distributing prospectuses used by the Distributor or furnished by
the Distributor to investors in connection with the public offering of each
Company's shares and the costs of any other promotional or sales literature,
except that to the extent permitted under the Plans relating to the Investor A,
Investor B or Investor C Shares of each Fund, sales-related expenses incurred by
the Distributor may be reimbursed by each Company.
Each Company pays or causes to be paid all other expenses of each Company,
including, without limitation: the fees of the Adviser, the Administrator and
Co-Administrator; the charges and expenses of any registrar, any custodian or
depository appointed by each Company for the safekeeping of its cash, fund
securities and other property, and any stock transfer, dividend or accounting
agent or agents appointed by each Company; brokerage commissions chargeable to
each Company in connection with fund securities transactions to which each
Company is a party; all taxes, including securities issuance and transfer taxes;
corporate fees payable by each Company to federal, state or other governmental
agencies; all costs and expenses in connection with the registration and
maintenance of registration of each Company and its shares with the SEC and
various states and other jurisdictions (including filing fees, legal fees and
disbursements of counsel); the costs and expenses of typesetting prospectuses
and statements of additional information of each Company (including supplements
thereto) and periodic reports and of printing and distributing such prospectuses
and statements of additional information (including supplements thereto) to each
Company's shareholders; all expenses of shareholders' and directors' meetings
and of preparing, printing and mailing proxy statements and reports to
shareholders; fees and travel expenses of directors or director members of any
advisory board or committee; all expenses incident to the payment of any
dividend or distribution, whether in shares or cash; charges and expenses of any
outside service used for pricing of each Company's shares; fees and expenses of
legal counsel and of independent auditors in connection with any matter relating
to each Company; membership dues of industry associations; interest payable on
Company borrowings; postage and long-distance telephone charges; insurance
premiums on property or personnel (including officers and directors) of each
Company which inure to its benefit; extraordinary expenses (including, but not
limited to, legal claims and liabilities and litigation costs and any
indemnification related thereto); and all other charges and costs of each
Company's operation unless otherwise explicitly assumed by the Adviser), the
Administrator or Co-Administrator.
Expenses of each Company which are not directly attributable to the
operations of any class of shares or Fund are pro-rated among all classes of
shares or Fund of each Company based upon the relative net assets of each class
or Fund. Expenses of each Company which are not directly attributable to a
specific class of shares but are directly attributable to a specific Fund are
prorated among all the classes of shares of such Fund based upon the relative
net assets of each such class of shares. Expenses of each Company which are
directly attributable to a class of shares are charged against the income
available for distribution as dividends to such class of shares.
The Advisory Agreement, the Sub-Advisory Agreements, and the
Administration Agreement require NBAI, TradeStreet, Gartmore, and the
Administrator to reduce their fees to the extent required to satisfy any expense
limitations which may be imposed by the securities laws or regulations
thereunder of any state in which a Fund's shares are registered or qualified for
sale, as such limitations may be raised or lowered from time to time, and the
aggregate of all such investment advisory, sub-advisory, and administration fees
shall be reduced by the amount of such excess. The amount of any such reduction
to be borne by NBAI, TradeStreet, Gartmore or the Administrator shall be
deducted from the monthly investment advisory and administration fees otherwise
payable to NBAI, TradeStreet, Gartmore and the Administrator during such fiscal
year. If required pursuant to such state securities regulations, NBAI,
TradeStreet, Gartmore and the Administrator will reimburse the Company no later
than the last day of the first month of the next succeeding fiscal year, for any
such annual operating expenses (after reduction of all investment advisory and
administration fees in excess of such limitation).
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<PAGE>
TRANSFER AGENTS AND CUSTODIANS
First Data is located at One Exchange Place, 53 State Street, Boston,
Massachusetts 02109, and acts as transfer agent for each Companies Primary
Shares and Investor Shares. Under the transfer agency agreements, the transfer
agent maintains shareholder account records for the Company, handles certain
communications between shareholders and the Companies, and distributes dividends
and distributions payable by the Companies to shareholders, and produces
statements with respect to account activity for the Companies 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 each Company during the month and is reimbursed for out-of-pocket expenses.
NationsBank serves as sub-transfer agent for each Fund's Primary Shares.
The Bank of New York ("BONY") 90 Washington Street, New York, N.Y. 10286
serves as custodian for the Funds' assets. As custodian, BONY maintains the
Funds' securities cash and other property, delivers securities against payment
upon sale and pays for securities against delivery upon purchase, makes payments
on behalf of such Funds for payments of dividends, distributions and
redemptions, endorses and collects on behalf of such Funds all checks, and
receives all dividends and other distributions made on securities owned by such
Funds.
The Bank of New York ("BONY"), Avenue des Arts, 35 1040 Brussels, Belgium
serves as custodian for the assets of the international Funds.
The SEC has amended Rule 17f-5 under the 1940 Act to permit boards to
delegate certain foreign custody matters to foreign custody managers and to
modify the criteria applied in the selection process. Accordingly, BONY serves
as Foreign Custody Manager, pursuant to a Foreign Custody Manager Agreement,
under which the Boards of Directors/Trustees retain the responsibility for
selecting foreign compulsory depositories, although BONY agrees to make certain
findings with respect to such depositories and to monitor such depositories.
DISTRIBUTOR
Stephens Inc. (the "Distributor") serves as the principal underwriter and
distributor of the shares of the Funds.
Pursuant to a distribution agreement (the "Distribution Agreement"), the
Distributor, as agent, sells shares of the Funds on a continuous basis and
transmits purchase and redemption orders that its receives to the Companies or
the Transfer Agent. Additionally, the Distributor has agreed to use appropriate
efforts to solicit orders for the sale of shares and to undertake such
advertising and promotion as it believes appropriate in connection with such
solicitation. Pursuant to the Distribution Agreement, the Distributor, at its
own expense, finances those activities which are primarily intended to result in
the sale of shares of the Funds, including, but not limited to, advertising,
compensation of underwriters, dealers and sales personnel, the printing of
prospectuses to other than existing shareholders, and the printing and mailing
of sales literature. The Distributor, however, may be reimbursed for all or a
portion of such expenses to the extent permitted by a distribution plan adopted
by the Companies pursuant to Rule 12b-1 under the 1940 Act.
The Distribution Agreement will continue year to year as long as such
continuance is approved at least annually by (i) the Board of Directors/Trustees
or a vote of the majority (as defined in the 1940 Act) of the outstanding voting
securities of the Fund and (ii) a majority of the directors who are not parties
to the Distribution Agreement or "interested persons" of any such party by a
vote cast in person at a meeting called for such purpose. The Distribution
Agreement is not assignable and is terminable with respect to a Fund, without
penalty, on 60 days' notice by the Board of Directors/Trustees, the vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the Fund, or by the Distributor.
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INDEPENDENT ACCOUNTANTS AND REPORTS
At least semi-annually, the Companies will furnish shareholders of the
Funds with a list of the investments held in the Funds and financial statements
for the Funds. The annual financial statements will be audited by each Company's
independent accountant. The Board of Directors/Trustees has selected
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts, 02110 as
each Company's independent accountant to audit each Company's books and review
each Company's tax returns for the Funds' fiscal year ended March 31, 1998. KPMG
Peat Marwick LLP, Two Nationwide Plaza, Columbus, Ohio 43215 were the
independent auditors for the Emerald International Equity Fund (predecessor to
the International Value Fund) for the fiscal period December 1, 1997 through May
15, 1998 and for the fiscal year ended November 30, 1997.
The Annual Reports for the fiscal period ended March 31, 1998 are hereby
incorporated herein by reference in this SAI. The Annual Reports for the Emerald
International Equity Fund (the predecessor to the International Value Fund) for
the fiscal period ended May 15, 1998 and for the fiscal year ended November 30,
1997 are also is incorporated herein by reference. These Annual Reports will be
sent free of charge with this SAI to any shareholder who requests this SAI.
COUNSEL
Morrison & Foerster LLP serves as legal counsel to the Companies. Their
address is 2000 Pennsylvania Avenue, N.W., Washington, D.C. 20006.
ADDITIONAL INFORMATION ON PERFORMANCE
Yield information and other performance information for each Company's
Funds may be obtained by calling the Company at (800) 321-7854.
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. Each Fund of the Company also may quote
information obtained from the Investment Company Institute in its advertising
materials and sales literature. In addition, certain potential benefits of
investing in world securities markets may be discussed in promotional materials.
Such benefits include, but are not limited to: a) the expanded opportunities for
investment in securities markets outside the U.S.; b) the growth of securities
markets outside the U.S. vis-a-vis U.S. markets; c) the relative return
associated with foreign securities markets vis-a-vis U.S. markets; and d) a
reduced risk of portfolio volatility resulting from a diversified securities
portfolio consisting of both U.S. and foreign securities. 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
The current yield quotations for the Primary A, Primary B, Investor A,
Investor B, Investor C and Daily Shares of the NFI Money Market Funds are
computed by determining the net change, exclusive of capital changes, over a
seven-day base period in the value of a hypothetical pre-existing account having
a balance of one share at the beginning of the period. The net change in account
value is divided by the value of the account at the beginning of the base period
to obtain the base period return. The base period return is then multiplied by
(5/7), with the resulting annualized yield figure carried to the nearest 1/100
of 1%. For purposes of calculating current yield, net change in account value
reflects: (i) the value of additional shares purchased with dividends from the
original shares and dividends declared on both the original shares and any such
additional shares, and (ii) all fees (other than non-recurring account charges)
that are charged to all shareholder accounts in proportion to the length of the
base period and the average account size of the Primary A, Primary B, Investor
A, Investor B, Investor C and Daily Shares of the Money Market Funds. The
capital changes excluded from the calculation of current yield are realized
gains and losses from the sale of securities and unrealized appreciation and
depreciation.
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<PAGE>
The effective yield quotations for the Primary Shares and Investor Shares
of the Money Market Funds are computed by compounding the unannualized seven-day
base period return as follows: 1 is added to the base period return and this sum
is then raised to a power equal to (5/7), and 1 is then subtracted from the
result. Based on the seven-day period ended March 31, 1998, (the "base period"),
the current and effective yields of the various shares of the Money Market Funds
were as follows:
The yield of the Primary Shares and Investor Shares of the NFP Funds is a
measure of the net investment income per share (as defined) earned over a 30-day
period expressed as a percentage of the maximum offering price of a share of
such classes at the end of the period. Yield figures are determined by dividing
the net investment income per share earned during the specified 30-day period by
the maximum offering price per share on the last day of the period, according to
the following formula:
Yield = 2[(a-b + 1)6 1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = average daily number of shares outstanding during the period
that were entitled to receive dividends
d = maximum offering price per share on the last day of the period
For purposes of yield quotation, income is calculated in accordance with
standardized methods applicable to all stock and bond mutual funds. In general,
interest income is reduced with respect to bonds trading at a premium over their
par value by subtracting a portion of the premium from income on a daily basis,
and is increased with respect to bonds trading at a discount by adding a portion
of the discount to daily income. Capital gains and losses are excluded from the
calculation.
Income calculated for the purposes of calculating a Fund's yield differs
from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed in
yield calculations, the yield quoted for a Fund may differ from the rate of
distributions a Fund paid over the same period or the rate of income reported in
the Funds' financial statements.
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 of NFT 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 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
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<PAGE>
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.
Seven Day Yield
Effective
Yield Yield Tax
Without Without Tax Equivalent
Fee Effective Fee Equivalent Yield w/o
Yield Waivers Yield Waivers Yield Waivers
----- ------- ----- ------- ----- -------
Prime Fund
Primary A Shares 5.47% 5.42% 5.62% 5.57% n/a n/a
Primary B Shares 5.22% 5.17% 5.36% 5.31% n/a n/a
Investor A Shares 5.12% 5.07% 5.25% 5.20% n/a n/a
Investor B Shares 5.22% 5.17% 5.36% 5.31% n/a n/a
Investor C Shares 5.22% 5.17% 5.36% 5.31% n/a n/a
Daily Shares 4.97% 4.92% 5.10% 5.05% n/a n/a
Treasury Fund
Primary A Shares 5.42% 5.37% 5.56% 5.51% n/a n/a
Primary B Shares 5.17% 5.12% 5.30% 5.25% n/a n/a
Investor A Shares 5.07% 5.02% 5.19% 5.14% n/a n/a
Investor B Shares 5.17% 5.12% 5.30% 5.25% n/a n/a
Investor C Shares 5.17% 5.12% 5.30% 5.25% n/a n/a
Daily Shares 4.92% 4.87% 5.04% 4.99% n/a n/a
SEVEN DAY YIELD FOR THE YEAR ENDED 3/31/98
Tax Equivalent Yields @ 39.6%
<TABLE>
<CAPTION>
Tax
Effective Equivalent
Yield Yield Yield
Without Without Tax Without
Fee Effective Fee Equivalent Fee
Yield Waivers Yield Waivers Yield Waivers
----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C>
Government Money
Market Fund
Primary A Shares 5.30% 5.01% 5.44% 5.15% n/a n/a
Primary B Shares 5.05% 4.76% 5.18% 4.89% n/a n/a
Investor A Shares 4.95% 4.66% 5.07% 4.78% n/a n/a
Investor B Shares 5.05% 4.76% 5.18% 4.89% n/a n/a
Investor C Shares 5.05% 4.76% 5.18% 4.89% n/a n/a
Daily Shares 4.80% 4.51% 4.92% 4.63% n/a n/a
Tax Exempt Fund
Primary A Shares 3.42% 3.16% 3.48% 3.22% 5.66% 5.23%
Primary B Shares 3.17% 2.91% 3.22% 2.96% 5.25% 4.82%
Investor A Shares 3.07% 2.81% 3.12% 2.86% 5.08% 4.65%
Investor B Shares 3.22% 2.96% 3.27% 3.01% 5.33% 4.90%
Investor C Shares 3.17% 2.91% 3.22% 2.96% 5.25% 4.82%
Daily Shares 2.92% 2.66% 2.96% 2.70% 4.83% 4.40%
</TABLE>
NON-MONEY MARKET FUNDS. Yield is calculated separately for the Investor A,
Investor C, Investor B, 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 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
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<PAGE>
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.
Expenses accrued for the period (variable "b" in the formula) include
recurring fees charged by Nations Funds to shareholder accounts in proportion to
the length of the base period. Undeclared earned income will be subtracted from
the maximum offering price per share (which for Primary A and Primary B Shares
is net asset value per share) (variable "d" in the formula). Undeclared earned
income is the net investment income which, at the end of the base period, has
not been declared as a dividend, but is reasonably expected to be and is
declared as a dividend shortly thereafter. A Fund's maximum offering price per
share for purposes of the formula includes the maximum sales charge, if any,
imposed by the Fund, as reflected in the Fund's prospectus.
The Funds may provide additional yield calculations in communications
(other than advertisements) to the holders of Investor A, Investor C or Investor
B Shares. These may be calculated based on the Investor A, Investor C or
Investor B Shares' net asset values per share (rather than their maximum
offering prices) on the last day of the period covered by the yield
computations. That is, some communications provided to the holders of Investor
A, Investor C or Investor B Shares may also include additional yield
calculations prepared for the holders of Primary A or Primary B Shares. Such
additional quotations, therefore, will not reflect the effect of the sales
charges mentioned above.
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<PAGE>
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, 1998 were as follows:
THIRTY DAY YIELD FOR THE PERIOD ENDED 3/31/98
Tax
Equivalent
Yield Yield
Without Tax Without
Fee Equivalent Fee
Yield Waivers Yield Waivers
----- ------- ----- -------
Short-Intermediate Government Fund
Primary A Shares 5.42% 5.22% n/a n/a
Primary B Shares n/a n/a n/a n/a
Investor A Shares 5.17% 4.97% n/a n/a
Investor B Shares 4.57% 4.37% n/a n/a
Investor C Shares 4.57% 4.37% n/a n/a
Short-Term Income Fund
Primary A Shares 5.09% 4.79% n/a n/a
Primary B Shares n/a n/a n/a n/a
Investor A Shares 4.83% 4.53% n/a n/a
Investor B Shares 4.23% 3.93% n/a n/a
Investor C Shares 4.43% 4.13% n/a n/a
Diversified Income Fund
Primary A Shares 6.43% 6.33% n/a n/a
Primary B Shares 4.86% 4.76% n/a n/a
Investor A Shares 6.15% 6.05% n/a n/a
Investor B Shares 5.56% 5.46% n/a n/a
Investor C Shares 5.56% 5.46% n/a n/a
Strategic Fixed Income Fund
Primary A Shares 5.93% 5.82% n/a n/a
Primary B Shares n/a n/a n/a n/a
Investor A Shares 5.73% 5.62% n/a n/a
Investor B Shares 5.12% 5.01% n/a n/a
Investor C Shares 5.22% 5.11% n/a n/a
Municipal Income Fund
Primary A Shares 4.80% 4.56% 7.95% 7.55%
Investor A Shares 4.60% 4.36% 7.62% 7.22%
Investor B Shares 3.95% 3.71% 6.54% 6.14%
Investor C Shares 4.05% 3.81% 6.71% 6.31%
Short-Term Municipal Income Fund
Primary A Shares 4.19% 3.82% 6.94% 6.32%
Investor A Shares 3.99% 3.62% 6.61% 5.99%
Investor B Shares 3.84% 3.47% 6.36% 5.75%
Investor C Shares 3.84% 3.47% 6.36% 5.75%
Intermediate Municipal Bond Fund
Primary A Shares 4.66% 4.42% 7.72% 7.32%
Investor A Shares 4.45% 4.21% 7.37% 6.97%
Investor B Shares 3.85% 3.61% 6.37% 5.98%
Investor C Shares 4.15% 3.91% 6.87% 6.47%
Florida Intermediate Municipal Bond Fund
Primary A Shares 4.75% 4.49% 7.86% 7.43%
Investor A Shares 4.55% 4.29% 7.53% 7.10%
Investor B Shares 3.95% 3.69% 6.54% 6.11%
Investor C Shares 3.95% 3.69% 6.54% 6.11%
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<PAGE>
Tax
Equivalent
Yield Yield
Without Tax Without
Fee Equivalent Fee
Yield Waivers Yield Waivers
----- ------- ----- -------
Georgia Intermediate Municipal Bond Fund
Primary A Shares 4.61% 4.36% 8.12% 7.68%
Investor A Shares 4.41% 4.16% 7.77% 7.33%
Investor B Shares 3.81% 3.56% 6.71% 6.27%
Investor C Shares 3.81% 3.56% 6.71% 6.27%
Maryland Intermediate
Municipal Bond Fund
Primary A Shares 4.54% 4.24% 7.90% 7.38%
Investor A Shares 4.34% 4.04% 7.55% 7.03%
Investor B Shares 3.74% 3.44% 6.51% 5.99%
Investor C Shares 3.74% 3.44% 6.51% 5.99%
North Carolina Intermediate
Municipal Bond Fund
Primary A Shares 4.68% 4.42% 8.40% 7.93%
Investor A Shares 4.48% 4.22% 8.04% 7.57%
Investor B Shares 3.88% 3.62% 6.96% 6.50%
Investor C Shares 3.88% 3.62% 6.96% 6.50%
South Carolina Intermediate
Municipal Bond Fund
Primary A Shares 4.91% 4.66% 8.74% 8.30%
Investor A Shares 4.71% 4.46% 8.38% 7.94%
Investor B Shares 4.10% 3.85% 7.30% 6.85%
Investor C Shares 4.11% 3.86% 7.32% 6.87%
Tennessee Intermediate
Municipal Bond Fund
Primary A Shares 4.58% 4.24% 8.07% 7.47%
Investor A Shares 4.38% 4.04% 7.71% 7.12%
Investor B Shares 3.78% 3.44% 6.66% 6.06%
Investor C Shares 3.74% 3.40% 6.59% 5.99%
Texas Intermediate Municipal
Bond Fund
Primary A Shares 4.77% 4.52% 7.90% 7.48%
Investor A Shares 4.57% 4.32% 7.57% 7.15%
Investor B Shares 3.97% 3.72% 6.57% 6.16%
Investor C Shares 3.97% 3.72% 6.57% 6.16%
Virginia Intermediate
Municipal Bond Fund
Primary A Shares 4.71% 4.47% 8.27% 7.85%
Investor A Shares 4.51% 4.27% 7.92% 7.50%
Investor B Shares 3.91% 3.67% 6.87% 6.45%
Investor C Shares 3.91% 3.67% 6.87% 6.45%
Florida Municipal Bond Fund
Primary A Shares 4.84% 4.54% 8.01% 7.52%
Investor A Shares 4.63% 4.33% 7.67% 7.17%
Investor B Shares 3.98% 3.68% 6.59% 6.09%
Investor C Shares 3.98% 3.68% 6.59% 6.09%
Georgia Municipal Bond Fund
Primary A Shares 4.71% 4.29% 8.30% 7.56%
Investor A Shares 4.52% 4.10% 7.96% 7.22%
Investor B Shares 3.87% 3.45% 6.82% 6.08%
Investor C Shares 3.88% 3.46% 6.83% 6.09%
Maryland Municipal Bond Fund
Primary A Shares 4.49% 4.02% 7.81% 7.00%
Investor A Shares 4.29% 3.82% 7.47% 6.65%
Investor B Shares 3.64% 3.17% 6.34% 5.52%
Investor C Shares 3.75% 3.28% 6.53% 5.71%
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<PAGE>
Tax
Equivalent
Yield Yield
Without Tax Without
Fee Equivalent Fee
Yield Waivers Yield Waivers
----- ------- ----- -------
North Carolina Municipal Bond Fund
Primary A Shares 4.68% 4.35% 8.40% 7.81%
Investor A Shares 4.48% 4.15% 8.04% 7.45%
Investor B Shares 3.83% 3.50% 6.87% 6.28%
Investor C Shares 3.84% 3.51% 6.89% 6.30%
South Carolina Municipal Bond Fund
Primary A Shares 4.71% 4.32% 8.38% 7.69%
Investor A Shares 4.51% 4.12% 8.03% 7.33%
Investor B Shares 3.86% 3.47% 6.87% 6.18%
Investor C Shares 3.86% 3.47% 6.87% 6.18%
Tennessee Municipal Bond Fund
Primary A Shares 4.65% 4.05% 8.19% 7.13%
Investor A Shares 4.45% 3.85% 7.84% 6.78%
Investor B Shares 3.80% 3.20% 6.69% 5.64%
Investor C Shares 3.79% 3.19% 6.68% 5.62%
Texas Municipal Bond Fund
Primary A Shares 4.75% 4.28% 7.86% 7.09%
Investor A Shares 4.55% 4.08% 7.53% 6.75%
Investor B Shares 3.90% 3.43% 6.46% 5.68%
Investor C Shares 3.89% 3.42% 6.44% 5.66%
Virginia Municipal Bond Fund
Primary A Shares 4.77% 4.40% 8.38% 7.73%
Investor A Shares 4.57% 4.20% 8.03% 7.38%
Investor B Shares 3.90% 3.53% 6.85% 6.20%
Investor C Shares 3.86% 3.49% 6.78% 6.13%
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 multiplied by one minus the stated
Federal income tax rate. The Federal income tax rate used in calculating the
"tax-equivalent" yield 39.6%. The state income tax rate used in calculating the
"tax-equivalent" yield of the State Intermediate Municipal Bond Funds is as
follows: Florida --0%;; Georgia --6%; Maryland --4.875%; 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:
- --------------------------------------------------------------------------------
Single Return $25,351-$61,400 $61,401-$128,100 $128,101-$278,450
- --------------------------------------------------------------------------------
Joint Return $42,351-$102,300 $102,301-$155,950 $155,951-$278,450
- --------------------------------------------------------------------------------
To match a
tax-free
yield of: A taxable investment would have to pay you:
- --------------------------------------------------------------------------------
4% 5.91% 6.17% 6.65%
- --------------------------------------------------------------------------------
5% 7.39% 7.71% 8.31%
- --------------------------------------------------------------------------------
6% 8.87% 9.25% 9.97%
- --------------------------------------------------------------------------------
7% 10.34% 10.79% 11.64%
- --------------------------------------------------------------------------------
8% 11.82% 12.33% 13.30%
- --------------------------------------------------------------------------------
117
<PAGE>
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 1998 Federal (28%, 31%, 36%) and Georgia (6%) tax rates and assume a
Federal tax benefit for the state and local taxes. Note the highest 1998
marginal Federal tax rate may be higher than 36% due to the phase-out of
allowable itemized deductions and personal exemptions for certain taxpayers.
This schedule does not take into account the 39.6% Federal tax rate applied to
taxable income in excess of $278,450.
For the Maryland Intermediate Municipal Bond Fund and Maryland Municipal
Bond Fund:
- --------------------------------------------------------------------------------
Single Return $25,351-$61,400 $61,401-$128,100 $128,101-$278,450
- --------------------------------------------------------------------------------
Joint Return $42,351-$102,300 $102,301-$155,950 $155,951-$278,450
- --------------------------------------------------------------------------------
To match a
tax-free
yield of: A taxable investment would have to pay you:
- --------------------------------------------------------------------------------
4% 6.00% 6.26% 6.75%
- --------------------------------------------------------------------------------
5% 7.50% 7.82% 8.43%
- --------------------------------------------------------------------------------
6% 9.00% 9.39% 10.12%
- --------------------------------------------------------------------------------
7% 10.50% 10.95% 11.81%
- --------------------------------------------------------------------------------
8% 12.00% 12.52% 13.50%
- --------------------------------------------------------------------------------
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 1998 Federal (28%, 31%, 36%), Maryland (4.875%) and local county (which,
for purposes of the above table is approximately 2.5%) tax rates and assume a
Federal tax benefit for the state and local taxes. Note the highest 1998
marginal Federal tax rate may be higher than 36% due to the phase-out of
allowable itemized deductions and personal exemptions for certain taxpayers.
This schedule does not take into account the 39.6% Federal tax rate applied to
taxable income in excess of $278,450.
For the North Carolina Intermediate Municipal Bond Fund and North Carolina
Municipal Bond Fund:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
Single Return $25,351-$60,000 $60,001-$61,400 $61,401-$128,100 $128,101-$278,450
(28%, 7%) (28%, 7.75%) (31%, 7.75%) (36%, 7.75%)
- -------------------------------------------------------------------------------------------
Joint Return $42,351-$100,000 $100,001-$102,300 $102,301-$155,950 $155,951-$278,450
(28%, 7%) (28%,7.75%) (31%, 7.75%) (36%, 7.75%)
- -------------------------------------------------------------------------------------------
</TABLE>
To match a
tax-free
yield of: A taxable investment would have to pay you:
- -------------------------------------------------------------------
4% 5.97% 60.22% 6.28% 6.78%
- -------------------------------------------------------------------
5% 7.47% 7.53% 7.86% 8.42%
- -------------------------------------------------------------------
6% 8.96% 9.03% 9.43% 10.16%
- -------------------------------------------------------------------
7% 10.45% 10.54% 11.00% 11.86%
- -------------------------------------------------------------------
8% 11.95% 12.04% 12.57% 13.55%
- -------------------------------------------------------------------
118
<PAGE>
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 1998 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 1998 marginal Federal tax rate may be higher than 36% due to the
phase-out of allowable itemized deductions and personal exemptions for certain
taxpayers. This schedule does not take into account the 39.6% Federal tax rate
imposed on taxable income in excess of $278,450.
For the South Carolina Intermediate Municipal Bond Fund and South Carolina
Municipal Bond Fund:
- --------------------------------------------------------------------------------
Single Return $25,351-$61,400 $61,401-$128,100 $128,101-$278,450
(28%, 7%) (31%, 7%) (36%, 7%)
- --------------------------------------------------------------------------------
Joint Return $42,351-$102,300 $102,301-$155,950 $155,951-$278,450
(28%, 7%) (31%, 7%) (36%, 7%)
- --------------------------------------------------------------------------------
To match a
tax-free
yield of: A taxable investment would have to pay you:
- ------------------------------------------------------
4% 5.97% 6.23% 6.72%
- ------------------------------------------------------
5% 7.43% 7.79% 8.40%
- ------------------------------------------------------
6% 8.96% 9.35% 10.08%
- ------------------------------------------------------
7% 10.45% 10.91% 11.76%
- ------------------------------------------------------
8% 11.95% 12.47% 13.44%
- ------------------------------------------------------
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 1998 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 1998
marginal Federal tax rate may be higher than 36% due to the phase-out of
allowable itemized deductions and personal exemptions for certain taxpayers.
This schedule does not take into account the 39.6% Federal tax rate imposed on
taxable income in excess of $278,450.
For the Tennessee Intermediate Municipal Bond Fund and Tennessee Municipal Bond
Fund:
- --------------------------------------------------------------------------------
Single Return $25,351-$61,400 $61,401-$128,100 $128,101-$278,450
Joint Return $42,351-$102,300 $102,301-$155,950 $155,951-$278,450
- --------------------------------------------------------------------------------
To match a
tax-free
yield of: A taxable investment would have to pay you:
- -------------------------------------------------------
4% 5.91% 6.17% 6.65%
- -------------------------------------------------------
5% 7.39% 7.71% 8.31%
- -------------------------------------------------------
119
<PAGE>
- -------------------------------------------------------
6% 8.87% 9.25% 9.97%
- -------------------------------------------------------
7% 10.34% 10.79% 11.64%
- -------------------------------------------------------
8% 11.82% 12.33% 13.30%
- -------------------------------------------------------
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 1998 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 1998
marginal Federal tax rate may be higher than 36% due to the phase-out of
allowable itemized deductions and personal exemptions for certain taxpayers.
This schedule does not take into account the 39.6% Federal tax rate imposed on
taxable income in excess of $278,450.
For the Virginia Intermediate Municipal Bond Fund and Virginia Municipal Bond
Fund:
- --------------------------------------------------------------------------------
Single Return $25,351-$61,400 $61,401-128,100 $128,101-$278,450
- --------------------------------------------------------------------------------
Joint Return $42,351-$102,300 $102,301-$155,950 $155,951-$278,450
- --------------------------------------------------------------------------------
To match a
tax-free
yield of: A taxable investment would have to pay you:
- ------------------------------------------------------
4% 5.89% 6.15% 6.63%
- ------------------------------------------------------
5% 7.37% 7.69% 8.29%
- ------------------------------------------------------
6% 8.84% 9.23% 9.95%
- ------------------------------------------------------
7% 10.32% 10.76% 11.60%
- ------------------------------------------------------
8% 11.79% 12.30% 13.26%
- ------------------------------------------------------
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 1998 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 1998
marginal Federal tax rate may be higher than 36% due to the phase-out of
allowable itemized deductions and personal exemptions for certain taxpayers.
This schedule does not take into account the 39.6% Federal tax rate imposed on
taxable income in excess of $271,050.
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 $25,351-$61,400 $61,401-$128,100 $128,101-$278,450
- --------------------------------------------------------------------------------
Joint Return $42,352-$102,300 $102,301-$155,950 $155,951-$278,450
- --------------------------------------------------------------------------------
120
<PAGE>
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 1998 Federal (28%, 31%, 36%) tax rates. This analysis does not take into
account any state or local taxes imposed, although, with 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 1998
marginal Federal tax rate may be higher than 36% due to the phase-out of
allowable itemized deductions and personal exemptions for certain taxpayers.
This schedule does not take into account the 39.6% Federal tax rate imposed on
taxable income in excess of $278,450.
There can be no assurance that all of a yield quoted by one of these Funds
will be tax-free since these Funds may invest in short-term taxable obligations
for temporary defensive periods as described in the Prospectuses. Also, the
above hypothetical examples are for illustration only. Tax laws and regulations
may be changed at any time by legislative or administrative actions and such
changes may make the information contained in such examples obsolete.
Thirty Day Yield
Yield Without
Government Securities Fund Yield Fee Waivers
----- -------
Primary A Shares 5.42% 5.28%
Primary B Shares n/a n/a
Investor A Shares 5.17% 5.03%
Investor B Shares 4.57% 4.43%
Investor C Shares 4.57% 4.43%
During the period for which certain yield quotations are given above,
NationsBank and the Administrator voluntarily waived fees or reimbursed certain
expenses of such shares, thereby increasing yield figures. Such waivers or
expense reimbursements may be discontinued at any time.
TOTAL RETURN CALCULATIONS
Total return measures both the net investment income generated by, and the
effect of any realized or unrealized appreciation or depreciation of the
underlying investments in a Non-Money Market Fund. The Non-Money Market Funds'
average annual and cumulative total return figures are computed in accordance
with the standardized methods prescribed by the SEC. Average annual total return
figures are computed by determining the average annual compounded rates of
return over the periods indicated in the advertisement, sales literature or
121
<PAGE>
shareholders' report that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period.
This calculation (i) assumes all dividends and distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectuses, and (ii) deducts (a) the maximum sales charge from the
hypothetical initial $1,000 investment, and (b) all recurring fees, such as
advisory and administrative fees, charged as expenses to all shareholder
accounts.
The following figures, for the period ended March 31, 1998, reflect the
deduction of sales charges, if any, that would have been deducted from a sale of
shares.
INCEPTION
INCEPTION THROUGH
THROUGH 3/31/98 3/31/98
WITHOUT SALES INCLUDING
AVERAGE ANNUAL TOTAL RETURNS CHARGES SALES CHARGES
---------------------------- ------- -------------
Emerging Markets Fund
Primary A. Shares -6.39% 2.97%
Primary B Shares -6.80% 0.02%
Investor A Shares -6.60% 2.74%
Investor B Shares -11.89% 0.91%
Investor C Shares -7.17% 2.19%
Pacific Growth Fund
Primary A Shares -28.35% -9.86%
Primary B Shares -28.77% -17.22%
Investor A Shares -28.59% -10.12%
Investor B Shares -32.57% -11.72%
Investor C Shares -28.91% -10.53%
Global Government Income Fund
Primary A Shares 3.38% 4.61%
Primary B Shares 3.20% 2.92%
Investor A Shares 3.12% 4.35%
Investor B Shares -2.50% 2.62%
Investor C Shares 2.63% 3.92%
The Primary Shares and Investor Shares of the Funds may also quote their
distribution rates, which express the historical amount of income dividends paid
to their shareholders during a one-month (in the case of the Global Government
Income Fund) or a three-month (in the case of the Emerging Markets Fund and
Pacific Growth Fund) period as a percentage of the maximum offering price per
share on the last day of such period.
122
<PAGE>
The performance figures of the Funds as described above will vary from
time to time depending upon market and economic conditions, the composition of
their portfolios and operating expenses. These factors should be considered when
comparing the performance figures of the Funds with those of other investment
companies and investment vehicles.
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. 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.
AVERAGE ANNUAL TOTAL RETURN
5 YEAR PERIOD
ENDED 3/31/98 OR
ONE YEAR INCEPTION
PERIOD ENDED 3/31/98 THROUGH 3/31/98
-------------------- ---------------
Equity Income Fund
Primary A Shares 37.21% 17.82%
Primary B 36.36% 26.74%
Investor A 36.92% 17.53%
Investor B 36.02% 17.66%
Investor C 36.28% 16.85%
International Equity Fund
Primary A 16.06% 10.68%
Primary B 15.09% 7.93%
Investor A 15.77% 10.41%
Investor B 14.93% 8.77%
Investor C 15.05% 9.69%
Government Securities Fund
Primary A 11.65% 5.22%
Primary B 11.23% 7.93%
Investor A 11.37% 5.00%
Investor B 10.78% 4.45%
Investor C 10.84% 4.50%
AVERAGE ANNUAL TOTAL RETURN
10 YEAR
PERIOD
ENDED
ONE 3/31/98
YEAR 5-YEAR OR
PERIOD PERIOD INCEPTION
ENDED ENDING THROUGH
3/31/98 3/31/98 3/31/98
------- ------- -------
Value Fund
Primary A Shares 38.53% 20.29% 16.64%
Primary B Shares 38.09% 28.98% n/a
Investor A Shares 38.22% 20.03% 16.86%
Investor B Shares 32.29% 19.85% n/a
Investor C Shares 37.55% 19.35% 19.02%
123
<PAGE>
10 YEAR
PERIOD
ENDED
ONE 3/31/98
YEAR 5-YEAR OR
PERIOD PERIOD INCEPTION
ENDED ENDING THROUGH
3/31/98 3/31/98 3/31/98
------- ------- -------
Capital Growth Fund
Primary A Shares 53.89% 19.35% 19.47%
Primary B Shares 52.99% 32.46% n/a
Investor A Shares 53.83% 19.11% 19.23%
Investor B Shares 47.52% 19.63% n/a
Investor C Shares 53.02% 18.41% 18.51%
Emerging Growth Fund
Primary A Shares 45.09% 19.30% 17.92%
Primary B Shares 44.33% 18.40% n/a
Investor A Shares 44.86% 19.04% 18.00%
Investor B Shares 38.64% 18.88% n/a
Investor C Shares 43.80% 18.31% 17.31%
Managed Index Fund
Primary A Shares 47.54% 41.04% n/a
Primary B Shares 46.88% 40.66% n/a
Investor A Shares 47.21% 40.78% n/a
Investor C Shares 46.71% 40.48% n/a
Managed SmallCap Index Fund
Primary A Shares 47.71% 29.41% n/a
Primary B Shares 47.04% 28.88% n/a
Investor A Shares 47.35% 29.06% n/a
Investor C Shares 47.10% 28.96% n/a
Managed Value Index Fund
Primary A Shares n/a 13.78% n/a
Primary B Shares n/a n/a n/a
Investor A Shares n/a 13.68% n/a
Investor C Shares n/a 13.69% n/a
Managed SmallCap Value Index Fund
Primary A Shares n/a 14.88% n/a
Primary B Shares n/a n/a n/a
Investor A Shares n/a 14.79% n/a
Investor C Shares n/a 14.71% n/a
Disciplined Equity Fund
Primary A Shares 48.65% 21.56% 27.15%
Primary B Shares 48.44% 33.67% n/a
Investor A Shares 48.28% 21.37% n/a
Investor B Shares 42.14% 23.88% n/a
Investor C Shares 47.38% 29.66% n/a
124
<PAGE>
10 YEAR
PERIOD
ENDED
ONE 3/31/98
YEAR 5-YEAR OR
PERIOD PERIOD INCEPTION
ENDED ENDING THROUGH
3/31/98 3/31/98 3/31/98
------- ------- -------
Equity Index Fund
Primary A Shares 47.38% 24.74% n/a
Primary B Shares 46.75% 34.01% n/a
Investor A Shares 46.58% 31.44% n/a
Balanced Assets Fund
Primary A Shares 30.35% 14.38% 14.62%
Primary B Shares 29.90% 21.95% n/a
Investor A Shares 30.13% 14.13% 14.37%
Investor B Shares 24.35% 13.96% n/a
Investor C Shares 29.43% 13.45% 13.67%
Short-Intermediate Government Fund
Primary A Shares 9.11% 5.08% 6.66%
Primary B Shares 8.74% 6.85% n/a
Investor A Shares 8.89% 4.87% 6.50%
Investor B Shares 4.35% 4.15% n/a
Investor C Shares 8.45% 4.48% 5.03%
Short-Term Income Fund
Primary A Shares 6.89% 5.45% 5.45%
Primary B Shares 6.58% 6.00% n/a
Investor A Shares 6.67% 5.26% 5.20%
Investor B Shares 6.51% 5.16% n/a
Investor C Shares 6.51% 5.04% 5.01%
Diversified Income Fund
Primary A Shares 11.07% 7.63% 8.73%
Primary B Shares 10.29% 8.26% n/a
Investor A Shares 10.80% 7.41% 8.46%
Investor B Shares 5.18% 6.35% n/a
Investor C Shares 10.27% 6.92% 8.10%
Strategic Fixed Income Fund
Primary A Shares 10.53% 6.07% 6.80%
Primary B Shares 10.12% 7.64% n/a
Investor A Shares 10.30% 5.87% 6.59%
Investor B Shares 5.73% 5.01% n/a
Investor C Shares 9.87% 5.46% 6.22%
Municipal Income Fund
Primary A Shares 11.12% 6.97% 8.11%
Investor A Shares 10.89% 6.74% 7.95%
Investor B Shares 5.23% 5.54% n/a
Investor C Shares 10.37% 6.23% 6.92%
125
<PAGE>
10 YEAR
PERIOD
ENDED
ONE 3/31/98
YEAR 5-YEAR OR
PERIOD PERIOD INCEPTION
ENDED ENDING THROUGH
3/31/98 3/31/98 3/31/98
------- ------- -------
Short-Term Municipal Income Fund
Primary A Shares 5.33% 4.38% n/a
Investor A Shares 5.12% 4.25% n/a
Investor B Shares 4.96% 4.02% n/a
Investor C Shares 4.99% 4.64% n/a
Intermediate Municipal Bond Fund
Primary A Shares 8.20% 5.55% n/a
Investor A Shares 7.99% 5.14% n/a
Investor B Shares 3.50% 4.37% n/a
Investor C Shares 7.62% 7.45% n/a
Florida Intermediate Municipal Bond Fund
Primary A Shares 8.55% 5.78% 6.18%
Investor A Shares 8.34% 5.58% 6.00%
Investor B Shares 3.80% 4.73% n/a
Investor C Shares 7.80% 5.16% 5.58%
Georgia Intermediate Municipal Bond Fund
Primary A Shares 8.45% 5.59% 6.54%
Investor A Shares 8.24% 5.39% 6.41%
Investor B Shares 3.70% 4.59% n/a
Investor C Shares 7.70% 5.00% 5.73%
Maryland Intermediate Municipal Bond Fund
Primary A Shares 7.83% 5.33% 6.73%
Investor A Shares 7.61% 5.11% 6.58%
Investor B Shares 3.07% 4.31% n/a
Investor C Shares 7.07% 4.69% 5.22%
North Carolina Intermediate
Municipal Bond Fund
Primary A Shares 8.39% 5.62% 6.02%
Investor A Shares 8.17% 5.42% 5.81%
Investor B Shares 3.64% 4.59% n/a
Investor C Shares 7.64% 4.98% 5.41%
South Carolina Intermediate
Municipal Bond Fund
Primary A Shares 7.88% 5.68% 6.30%
Investor A Shares 7.67% 5.48% 6.22%
Investor B Shares 3.13% 4.68% n/a
Investor C Shares 7.13% 5.06% 5.63%
Tennessee Intermediate
Municipal Bond Fund
Primary A Shares 7.99% 5.40% n/a
Investor A Shares 7.77% 5.30% n/a
Investor B Shares 3.24% 4.55% n/a
Investor C Shares 7.29% 7.34% n/a
126
<PAGE>
10 YEAR
PERIOD
ENDED
ONE 3/31/98
YEAR 5-YEAR OR
PERIOD PERIOD INCEPTION
ENDED ENDING THROUGH
3/31/98 3/31/98 3/31/98
------- ------- -------
Texas Intermediate Municipal
Bond Fund
Primary A Shares 8.09% 5.37% 5.71%
Investor A Shares 7.87% 5.16% 5.20%
Investor B Shares 3.34% 4.30% n/a
Investor C Shares 7.34% 7.07% n/a
Virginia Intermediate Municipal
Bond Fund
Primary A Shares 8.12% 5.38% 6.52%
Investor A Shares 7.91% 5.17% 6.37%
Investor B Shares 3.37% 4.32% n/a
Investor C Shares 7.37% 4.77% 5.27%
Florida Municipal Bond Fund
Primary A Shares 10.60% 5.50% n/a
Investor A Shares 10.38% 5.15% n/a
Investor B Shares 4.71% 4.12% n/a
Investor C Shares 9.83% 9.78% n/a
Georgia Municipal Bond Fund
Primary A Shares 10.43% 5.27% n/a
Investor A Shares 10.22% 5.12% n/a
Investor B Shares 4.54% 4.12% n/a
Investor C Shares 9.64% 9.82% n/a
Maryland Municipal Bond Fund
Primary A Shares 10.62% 8.40% n/a
Investor A Shares 10.40% 5.30% n/a
Investor B Shares 4.72% 3.81% n/a
Investor C Shares 9.88% 9.50% n/a
North Carolina Municipal Bond
Fund
Primary A Shares 10.86% 5.16% n/a
Investor A Shares 10.64% 5.18% n/a
Investor B Shares 4.96% 4.10% n/a
Investor C Shares 10.07% 9.82% n/a
South Carolina Municipal Bond
Fund
Primary A Shares 10.04% 5.92% n/a
Investor A Shares 9.82% 6.06% n/a
Investor B Shares 4.15% 4.74% n/a
Investor C Shares 9.29% 9.64% n/a
Tennessee Municipal Bond Fund
Primary A Shares 10.45% 6.93% n/a
Investor A Shares 10.23% 5.89% n/a
Investor B Shares 4.56% 4.60% n/a
Investor C Shares 9.65% 9.85% n/a
Texas Municipal Bond Fund
Primary A Shares 11.12% 5.39% n/a
Investor A Shares 10.90% 5.40% n/a
Investor B Shares 5.23% 4.20% n/a
Investor C Shares 10.31% 9.91% n/a
127
<PAGE>
10 YEAR
PERIOD
ENDED
ONE 3/31/98
YEAR 5-YEAR OR
PERIOD PERIOD INCEPTION
ENDED ENDING THROUGH
3/31/98 3/31/98 3/31/98
------- ------- -------
Virginia Municipal Bond Fund
Primary A Shares 11.11% 5.26% n/a
Investor A Shares 10.88% 5.44% n/a
Investor B Shares 5.21% 4.05% n/a
Investor C Shares 10.31% 10.02% n/a
AGGREGATE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
5-Year 5-Year
period period Inception Inception
FYE FYE ending ending through through
3/31/98 3/31/98 3/31/98 3/31/98 3/31/98 3/31/98
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>
Value Fund
Primary A Shares 38.53% n/a 151.82% n/a 271.65% n/a
Primary B Shares 38.09% n/a 56.33% n/a n/a n/a
Investor A Shares 38.22% n/a 149.14% n/a 265.53% n/a
Investor B Shares 37.29% 32.29% 141.05% 139.05% n/a n/a
Investor C Shares 37.55% n/a 142.16% n/a 173.87% n/a
Capital Growth Fund
Primary A Shares 53.89% n/a 142.20% n/a 165.98% n/a
Primary B Shares 52.99% n/a 63.81% n/a n/a n/a
Investor A Shares 53.83% n/a 139.73% n/a 162.83% n/a
Investor B Shares 52.52% 47.52% 138.98% 136.98% n/a n/a
Investor C Shares 53.02% n/a 132.79% n/a 154.26% n/a
Emerging Growth Fund
Primary A Shares 45.09% n/a 141.68% n/a 140.47% n/a
Primary B Shares 44.33% n/a 34.52% n/a n/a n/a
Investor A Shares 44.86% n/a 139.05% n/a 140.63% n/a
Investor B Shares 43.64% 38.64% 131.95% 129.95% n/a n/a
Investor C Shares 43.80% n/a 131.82% n/a 132.52% n/a
Managed Index Fund
Primary A Shares n/a n/a 47.54% n/a 77.38% n/a
Primary B Shares n/a n/a 46.88% n/a 76.58% n/a
Investor A Shares n/a n/a 47.21% n/a 76.84% n/a
Investor C Shares n/a n/a 46.71% n/a 76.21% n/a
Managed SmallCap Index Fund
Primary A Shares n/a n/a 47.71% n/a 45.69% n/a
Primary B Shares n/a n/a 47.04% n/a 44.82% n/a
Investor A Shares n/a n/a 47.35% n/a 45.12% n/a
Investor C Shares n/a n/a 47.10% n/a 44.96% n/a
128
<PAGE>
Managed Value Index Fund
Primary A Shares n/a n/a 13.78% n/a n/a n/a
Primary B Shares n/a n/a n/a n/a n/a n/a
Investor A Shares n/a n/a 13.68% n/a n/a n/a
Investor C Shares n/a n/a 13.78% n/a n/a n/a
Managed SmallCap Value Index Fund
Primary A Shares n/a n/a 14.88% n/a n/a n/a
Primary B Shares n/a n/a n/a n/a n/a n/a
Investor A Shares n/a n/a 14.79% n/a n/a n/a
Investor C Shares n/a n/a 14.71% n/a n/a n/a
Disciplined Equity Fund
Primary A Shares 48.65% n/a 165.46% n/a 274.43% n/a
Primary B Shares 48.44% n/a 66.45% n/a n/a n/a
Investor A Shares 48.28% n/a 147.57% n/a n/a n/a
Investor B Shares 47.14% 42.14% 130.69% 127.69% n/a n/a
Investor C Shares 47.38% n/a 111.83% n/a n/a n/a
Equity Index Fund
Primary A Shares n/a n/a 47.38% n/a 158.29% n/a
Primary B Shares n/a n/a 46.75% n/a 67.19% n/a
Investor A Shares n/a n/a 46.58% n/a 96.62% n/a
Balanced Assets Funds
Primary A Shares 30.35% n/a 95.79% n/a 111.80% n/a
Primary B Shares 29.90% n/a 41.67% n/a n/a n/a
Investor A Shares 30.13% n/a 93.66% n/a 109.15% n/a
Investor B Shares 29.35% 24.35% 89.55% 87.55% n/a n/a
Investor C Shares 29.43% n/a 87.94% n/a 102.19% n/a
Short-Intermediate
Government Fund
Primary A Shares 9.11% n/a 28.10% n/a 53.69% n/a
Primary B Shares 8.74% n/a 12.33% n/a n/a n/a
Investor A Shares 8.89% n/a 26.86% n/a 52.00% n/a
Investor B Shares 8.35% 4.35% 23.56% 23.56% n/a n/a
Investor C Shares 8.45% n/a 24.48% n/a 32.85% n/a
Short-Term Income Fund
Primary A Shares 6.89% n/a 33.86% n/a n/a n/a
Primary B Shares 6.58% n/a 9.33% n/a n/a n/a
Investor A Shares 6.67% n/a 32.10% n/a n/a n/a
Investor B Shares 6.51% n/a 27.41% n/a n/a n/a
Investor C. Shares 6.51% n/a 30.80% n/a n/a n/a
Diversified Income Fund
Primary A Shares 11.07% n/a 44.45% n/a 57.37% n/a
Primary B Shares 10.29% n/a 14.95% n/a n/a n/a
Investor A Shares 10.80% n/a 42.94% n/a 54.36% n/a
Investor B Shares 10.18% 5.18% 36.49% 35.50% n/a n/a
Investor C Shares 10.27% n/a 39.74% n/a 52.22% n/a
Strategic Fixed Income
Fund
Primary A Shares 10.53% n/a 34.27% n/a 42.81% n/a
Primary B Shares 10.12% n/a 12.64% n/a n/a n/a
Investor A Shares 10.30% n/a 32.99% n/a 40.84% n/a
Investor B Shares 9.73% 5.73% 28.47% 28.47% n/a n/a
Investor C Shares 9.87% n/a 30.47% n/a 38.27% n/a
Municipal Income Fund
Primary A Shares 11.12% n/a 40.04% n/a 74.82% n/a
Investor A Shares 10.89% n/a 38.59% n/a 72.94% n/a
Investor B Shares 10.23% 5.23% 31.65% 30.65% n/a n/a
Investor C Shares 10.37% n/a 35.28% n/a 47.31% n/a
129
<PAGE>
Short-Term Municipal Income Fund
Primary A Shares 5.33% n/a 21.16% n/a n/a n/a
Investor A Shares 5.12% n/a 20.17% n/a n/a n/a
Investor B Shares 4.96% n/a 19.25% n/a n/a n/a
Investor C Shares 4.99% n/a 19.16% n/a n/a n/a
Intermediate Municipal Bond Fund
Primary A Shares 8.20% n/a 28.66% n/a n/a n/a
Investor A Shares 7.99% n/a 26.04% n/a n/a n/a
Investor B Shares 7.50% 3.50% 22.34% 22.34% n/a n/a
Investor C Shares 7.62% n/a 27.77% n/a n/a n/a
Florida Intermediate Municipal Bond Fund
Primary A Shares 8.55% n/a 32.45% n/a 37.41% n/a
Investor A Shares 8.34% n/a 31.19% n/a 36.17% n/a
Investor B Shares 7.80% 3.80% 26.89% 26.89% n/a n/a
Investor C Shares 7.80% n/a 28.61% n/a 33.24% n/a
Georgia Intermediate Municipal Bond Fund
Primary A Shares 8.45% n/a 31.27% n/a 46.97% n/a
Investor A Shares 8.24% n/a 30.03% n/a 44.35% n/a
Investor B Shares 7.70% 3.70% 26.09% 26.09% n/a n/a
Investor C Shares 7.70% n/a 27.60% n/a 38.05% n/a
Maryland Intermediate
Municipal Bond Fund
Primary A Shares 7.83% n/a 29.62% n/a 63.86% n/a
Investor A Shares 7.61% n/a 28.29% n/a 62.11% n/a
Investor B Shares 7.07% 3.07% 24.49% 24.49% n/a n/a
Investor C Shares 7.07% n/a 25.73% n/a 34.20% n/a
North Carolina Intermediate Municipal Bond Fund
Primary A Shares 8.39% n/a 31.45% n/a 36.36% n/a
Investor A Shares 8.17% n/a 30.21% n/a 34.87% n/a
Investor B Shares 7.64% 3.64% 26.10% 26.10% n/a n/a
Investor C Shares 7.64% n/a 27.53% n/a 32.14% n/a
South Carolina Intermediate Municipal Bond Fund
Primary A Shares 7.88% n/a 31.79% n/a 46.34% n/a
Investor A Shares 7.67% n/a 30.57% n/a 42.76% n/a
Investor B Shares 7.13% 3.13% 26.60% 26.60% n/a n/a
Investor C Shares 7.13% n/a 27.99% n/a 37.31% n/a
Tennessee Intermediate Municipal Bond Fund
Primary A Shares 7.99% n/a 29.81% n/a n/a n/a
Investor A Shares 7.77% n/a 29.45% n/a n/a n/a
Investor B Shares 7.24% 3.24% 25.85% 25.85% n/a n/a
Investor C Shares 7.29% n/a 27.29% n/a n/a n/a
Texas Intermediate Municipal Bond Fund
Primary A Shares 8.09% n/a 29.87% n/a 33.58% n/a
Investor A Shares 7.87% n/a 28.63% n/a 29.89% n/a
Investor B Shares 7.34% 3.34% 24.28% 24.28% n/a n/a
Investor C Shares 7.34% n/a 26.23% n/a n/a n/a
130
<PAGE>
Virginia Intermediate Municipal Bond Fund
Primary A Shares 8.12% n/a 29.97% n/a 71.39% n/a
Investor A Shares 7.91% n/a 28.65% n/a 67.14% n/a
Investor B Shares 7.37% 3.37% 24.60% 24.60% n/a n/a
Investor C Shares 7.37% n/a 26.21% n/a 34.61% n/a
Florida Municipal Bond Fund
Primary A Shares 10.60% n/a 25.90% n/a n/a n/a
Investor A Shares 10.38% n/a 24.15% n/a n/a n/a
Investor B Shares 9.71% 4.71% 21.63% 20.63% n/a n/a
Investor C Shares 9.83% n/a 37.44% n/a n/a n/a
Georgia Municipal Bond Fund
Primary A Shares 10.43% n/a 24.17% n/a n/a n/a
Investor A Shares 10.22% n/a 23.64% n/a n/a n/a
Investor B Shares 9.54% 4.54% 21.67% 20.67% n/a n/a
Investor C Shares 9.64% n/a 37.62% n/a n/a n/a
Maryland Municipal Bond Fund
Primary A Shares 10.62% n/a 32.90% n/a n/a n/a
Investor A Shares 10.40% n/a 25.57% n/a n/a n/a
Investor B Shares 9.72% 4.72% 20.08% 19.08% n/a n/a
Investor C Shares 9.88% n/a 36.24% n/a n/a n/a
North Carolina Municipal Bond Fund
Primary A Shares 10.86% n/a 23.65% n/a n/a n/a
Investor A Shares 10.64% n/a 24.96% n/a n/a n/a
Investor B Shares 9.96% 4.96% 21.55% 20.55% n/a n/a
Investor C Shares 10.07% n/a 37.62% n/a n/a n/a
South Carolina Municipal Bond Fund
Primary A Shares 10.04% n/a 27.75% n/a n/a n/a
Investor A Shares 9.82% n/a 29.51% n/a n/a n/a
Investor B Shares 9.15% 4.15% 24.85% 23.85% n/a n/a
Investor C Shares 9.29% n/a 36.83% n/a n/a n/a
Tennessee Municipal Bond Fund
Primary A Shares 10.45% n/a 31.44% n/a n/a n/a
Investor A Shares 10.23% n/a 28.73% n/a n/a n/a
Investor B Shares 9.56% 4.56% 24.12% 23.12% n/a n/a
Investor C Shares 9.65% n/a 37.72% n/a n/a n/a
Texas Municipal Bond Fund
Primary A Shares 11.12% n/a 24.37% n/a n/a n/a
Investor A Shares 10.90% n/a 25.27% n/a n/a n/a
Investor B Shares 10.23% 5.23% 22.04% 21.04% n/a n/a
Investor C Shares 10.31% n/a 37.99% n/a n/a n/a
Virginia Municipal Bond Fund
Primary A Shares 11.11% n/a 24.13% n/a n/a n/a
Investor A Shares 10.88% n/a 26.21% n/a n/a n/a
Investor B Shares 10.21% 5.21% 21.28% 20.29% n/a n/a
Investor C Shares 10.31% n/a 38.48% n/a n/a 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.
131
<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 performance of their share classes or series to the
long-term performance of the U.S. capital markets in order to demonstrate
general long-term risk versus reward investment scenarios. Performance
comparisons could also include the value of a hypothetical investment in common
stocks, long-term bonds or treasuries.
The capital markets tracked by Ibbotson are common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, Treasury Bills, and the U.S. rate of
inflation. These capital markets are based on the returns of several different
indices. For common stocks, the S&P is used. For small capitalization stocks,
return is based on the return achieved by Dimensional Fund Advisors (DFA) Small
Company Fund. This fund is a market-value-weighted index of the ninth and tenth
deciles of the Exchange, plus stocks listed on the American Stock Exchange
(AMEX) and over-the-counter (OTC) with the same or less capitalization as the
upperbound of the Exchange ninth docile. At year-end 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
132
<PAGE>
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.
Cumulative total return is computed by finding the cumulative compounded
rate of return over the period indicated in the advertisement that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
CTR = (ERV-P) 100
P
Where: CTR = Cumulative total return
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period
P = initial payment of $1,000.
This calculation (i) assumes all dividends and distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectuses, and (ii) deducts (a) the maximum sales charge from the
hypothetical initial $1,000 investment, and (b) all recurring fees, such as
advisory and administrative fees, charged as expenses to all shareholder
accounts.
Cumulative Total Return
<TABLE>
<CAPTION>
10 Year 10 Year
Period Period
Ended Ended
3/31/98 3/31/98
5 Year 5 Year or or
Period Period Inception Inception
FYE FYE Ended Ended through through
3/31/98 3/31/98 3/31/98 3/31/98 3/31/98 3/31/98
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>
Equity Income Fund
Primary A
Shares 37.21% n/a 127.08% n/a 201.84% n/a
Primary B
Shares 36.36% n/a 51.59% n/a n/a n/a
Investor A
Shares 36.92% n/a 124.28% n/a 195.03% n/a
Investor B
Shares 36.02% 31.02% 118.74% 116.74% n/a n/a
Investor C
Shares 36.28% n/a 117.83% n/a 149.92% n/a
133
<PAGE>
International Equity Fund
Primary A
Shares 16.06% n/a 66.09% n/a 67.27% n/a
Primary B
Shares 15.09% n/a 14.33% n/a n/a n/a
Investor A
Shares 15.77% n/a 64.07% n/a 57.84% n/a
Investor B
Shares 14.93% 9.93% 49.87% 47.87% n/a n/a
Investor C
Shares 15.05% n/a 58.83% n/a 56.09% n/a
Government Securities Fund
Primary A
Shares 11.65% n/a 28.95% n/a 56.49% n/a
Primary B
Shares 11.23% n/a 13.19% n/a n/a n/a
Investor A
Shares 11.37% n/a 27.61% n/a 53.94% n/a
Investor B
Shares 10.78% 5.78% 23.32% 22.38% n/a n/a
Investor C
Shares 10.84% n/a 24.63% n/a 30.58% n/a
</TABLE>
<TABLE>
<CAPTION>
10 Year 10 Year
Period Period
Ended Ended
3/31/98 3/31/98
5 Year 5 Year or or
Period Period Inception Inception
FYE FYE Ended Ended through through
3/31/98 3/31/98 3/31/98 3/31/98 3/31/98 3/31/98
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>
International Growth Fund
Primary A Shares 14.81% n/a 69.06% n/a n/a n/a
Investor A Shares 14.58% n/a 73.58% n/a 134.48% n/a
Investor B
Shares 13.53% 8.53% 14.14% 10.14% n/a n/a
Investor C Shares 7.04% n/a 7.04% n/a n/a n/a
</TABLE>
* Primary A Shares of the Company do not carry a sales charge.
The Primary Shares and Investor Shares of the Equity Income Fund,
Government Securities Fund and International Equity Fund may also quote their
distribution rates, which express the historical amount of income dividends paid
to their shareholders during a one-month (in the case of the Government
Securities Fund) or a three-month (in the case of the Equity Income Fund and
International Equity Fund) period as a percentage of the maximum offering price
per share on the last day of such period. The performance figures of the Funds
as described above will vary from time to time depending upon market and
economic conditions, the composition of their portfolios and operating expenses.
These factors should be considered when comparing the performance figures of the
Funds with those of other investment companies and investment vehicles.
The "yield" and "effective yield" of each class of shares of a Money
Market Fund may be compared to the respective averages compiled by DONOGHUE'S
MONEY FUND REPORT, a widely recognized independent publication that monitors the
performance of money market funds, or to the average yields reported by the BANK
RATE MONITOR for money market deposit accounts offered by 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 also may compare
the performance and yield of a class or series of shares to those of other
mutual funds with similar investment objectives and to other relevant indices or
to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance and yield of a class of shares in a Fund may be compared to data
prepared by Lipper Analytical Services, Inc. Performance and yield data as
reported in national financial publications such as MONEY MAGAZINE, FORBES,
BARRON'S, THE WALL STREET JOURNAL, and THE NEW YORK TIMES, OR in publications of
a local or regional nature, also may be used in comparing the performance of a
class of shares in a Fund.
In addition, the performance and yield of a class of shares in Nations
Equity Income Fund and Nations International Equity 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
134
<PAGE>
index of common stocks of 30 industrial companies listed on the New York Stock
Exchange. The performance and yield of a class of shares in the Nations
International Equity Fund may be compared to the Europe, Far East and Australia
Index, a recognized unmanaged index of international stocks. Any given
performance comparison should not be considered representative of a Fund's
performance for any future period.
MISCELLANEOUS
CERTAIN RECORD HOLDERS
James Sommers, a Trustee of NFI, owns 11.55% of Primary A Shares of the
North Carolina Intermediate Municipal Bond Fund.
The following indicates those persons who owned 5% or more of the
indicated class of shares as of August, 1998. Unless otherwise indicated, the
address for each recordholder of Primary Shares is 1401 Elm Street, 11th Floor,
Dallas, Texas 75202.
MISCELLANEOUS
CERTAIN RECORD HOLDERS
James Sommers, a Trustee of NFI, owns 11.55% of Primary A Shares of the
North Carolina Intermediate Municipal Bond Fund.
The following indicates those persons who owned 5% or more of the indicated
class of shares as of August, 1998. Unless otherwise indicated, the address for
each recordholder of Primary Shares is 1401 Elm Street, 11th Floor, Dallas,
Texas 75202.
NATIONS GOVERNMENT MONEY MARKET FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C>
E-Net Inc Investor A NationsBank of Texas NA Primary A
PO Box 100 25.0116% Attn: Adrian Castillo 99.8684%
Germantown, MD 20875 1401 Elm Street 11th Floor
Dallas, TX 75202-2911
National Financial For the Exclusive Investor A NationsBank of Texas NA Primary B
Benefit of Our Customer 6.7579% Attn: Adrian Castillo 100%
200 Liberty Street 1401 Elm Street 11th Floor
1 World Financial Center Dallas, Texas 75202-2911
Attn Mutual Funds 5th Floor
New York, NY 22043-0000
Ramon A. Alvarez Investor A National Financial For the Daily Shares
2116 Great Falls Street 6.1707% Exclusive Benefit Of 65.2428%
Falls Church, VA 22043-0000 Our Customers
200 Liberty Street
1 World Financial Center
Attn: Mutual Funds 5th Floor
New York, NY 10281
Norbert Dickman & Robert Dickson Investor B Jeffrey H. Schwartz Daily Shares
Trustees 12.9377% PO Box 20493 34.6099%
Barbara Fasken 1995 Trust Tampa, FL 33622-0493
303 West Wall Avenue Suite 1900
Midland, TX 79701
Robert N. Herman and Investor B John M. Meister and Investor C
Ann L. Herman 12.2759% Cheryl L. Meister 49.5964%
JTWROS JTTEN
9601 Eagle Ridge Drive 4 Sun Flare Court
Bethesda, MD 20817 Greer, SC 29650
Fasken Oil and Ranch LTD Investor B Beulah W. Kelsey Trustee Investor C
303 W. Wall Avenue Suite 1900 7.6842% Dated December 10, 1992 7.9594%
Midland, TX 79701 Beulah W. Klesey Revocable Trust
56 Freshwater Lane
Hilton Head, SC 29928
135
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Title Company of NC Inc. Trustee Investor B Roger Cabrera Investor C
For Level Associates LP(B) 7.1441% 8525 NW 166th Terrace 7.4104%
Attn: F. Alton Russell Miami, FL 33016
PO Box 2718
Raleigh, NC 27602
Hare & Co., Bank of New York Investor B Robert Stephen Heckard, Jr. Investor C
Attn: Stif/Master Note 6.8261% 4020 Glenn Landing Drive 7.05507%
One Wall Street 2nd Floor Winston Salem, NC 27107-3777
New York, NY 27602
Fasken LTD Investor B Juanita A. Ohanian and Investor C
303 W. Wall Avenue Suite 1900 6.758% Sarkish Ohanian JTTEN 6.3633%
Midland, TX 79701 10826 Nantucket Terrace
Potomac, MD 20854
American Woodmark Corp. Investor B
Attn: Mr. Glenn Eanes 6.064%
3102 Shawnee Drive
Winchester, VA 22602-4208
NATIONS VALUE FUND
MAC & CO A/C MSTF1002012 Investor A Roy R. Martine & Investor A
Mutual Fund Operations 6.4379% Kathleen H. Martine 8.4229%
PO Box 3198 JTWROS
Pittsburgh, PA 15230-3198 4009 Tottenham Court
Richmond, VA 23233-1771
NationsBank of Texas NA Primary A BNY Cust Investor A
Attn: Adrian Castillo 89.2518% Rollover IRA FBO 6.9354%
1401 Elm Street 11th Floor William D. Patterson
Dallas, TX 75202-2911 1742 Hilltop
Kingwood, TX 77339
Stephens Inc. Primary B J. David Dalton TTEE Lowcountry Investor A
Attn: Cindy Cole 100% Orthopedics Associates P/S/P 5.581%
111 Center Street Dated 08-05-87
Little Rock, AR 72201 9300 Medical Plaza Drive
Charleston, SC 29405
NATIONS MUNICIPAL INCOME FUND
NFSC FEBO #W52-000019 Investor A Linda Sloan Mundy TTEE Investor A
Frank B. Comfort 6.013% Carl and Anne Mundy Memorial 47.3618%
4912 Cedar Drive Education Trust U/A DTD 07/16/97
West Des Moines, IA 50266 R-1 Quarters MCB
Quantico, VA 22134
Denise Maxwell Investor C George Gray Investor A
45 Saddlebrook 27.5076% 1708 Riverside Drive 16.0478%
Houston, TX 11024 Holly Hill, FL 32117
College Park Partners LTD Investor C Kevin Carl Connor and Investor A
117 Spring Chase Circle 9.4969% Cynthia J. Pietsh JTWROS 10.8027%
Atlamonte Springs, FL 32714-6520 127 Dolores Court
Holly Hill, FL 32117
136
<PAGE>
Emmet David Gelhot Investor C Ronald W. Pietsch and Investor A
5630 Oleatha Avenue 5.1443% Carole J. Pietsch 10.4269
Saint Louis, MO 63139-1504 16811 Brushy Fork Road
Newar, OH 43056-0000
NationsBank of Texas NA Primary A Robert L. Derrick and Investor A
Attn: Adrian Castillo 99.9844% Carolyn K. Derrick JTTEN 5.2992%
1401 Elm Street 11th Floor 712 Woodside Trials Unit 201
Dallas, TX 75202-2911 Ballwin, MO 63021
Sid Meier Investor B
2 Sheepfold Lane 6.6225%
Hunt Valley, MD 21030-1113
NATIONS MD INTER. MUNICIPAL BOND FUND
Robert Gladstone and Investor A Kwok Luen Lee and Investor C
Leslie Gladstone JTTEN 20.8721% Patsy S. Lee JTTEN 5.0281%
2468 Belmont Road, NW 2705 Hardy Avenue
Washington, DC 20008-1610 Wheaton, MD 20902
Carol C. House & Investor A NationsBank of Texas NA Primary A
Peter W. House JTWROS 5.2253% Attn: Adrian Castillo 99.9451%
4210 Leeward Place 1401 Elm Street 11th Floor
Bethesda, MD 20816 Dallas, TX 75202-2911
Albert J. Robertazzi & Investor C Laurel R. G. Moreno Trustee Investor B
Susan E. Franks JTWROS 10.6919% U/Deed DTD 10/14/91 4.9446%
11564 West Hill Drive FBO Miro Gudelsky
Rockville, MD 20852-3721 10808 Riverwood Drive
Potomac, MD 20854-1334
James Lee Donaldson and Investor C Walter F. Engelhaupt & Investor A
Robert W. Donaldson JTTEN 8.2134% Vivian K. Engelhaupt & 67.8225%
PO Box 336 Stephen Engelhaupt JTTEN
Libertytown, MD 21702 3514 Hiss Avenue
Baltimore, MD 21234
Girard F. Stegner and Investor C Stephens Inc. Investor A
Betty C. Stegner JTTEN 6.865% Attn: Jim Clark 10.9648%
29 Consett Place Nationsbank NC1-002-33-31
Fredrick, MD 21702 101 South Tryon Street
Charlotte, NC 28255
Jessixa Udall Gil and Investor C Stephens Inc. Investor A
Milan D. Smith JTWROS 6.733% Attn: Jim Clark 8.679%
5619 Wisconsin Avenue Nationsbank NC1-002-33-31
Chevy Chase, MD 20815-4415 101 South Tryon Street
Charlotte, NC 28255
Mary S. Tilbury Investor C Stephens Inc. Investor A
19817 Greenside Terrace 6.7087% Attn: Jim Clark 7.112%
Gaithersburg, MD 20879 Nationsbank NC1-002-33-31
101 South Tryon Street
Charlotte, NC 28255
Frank Baker & Steven L. Baker & Investor C Stephens Inc. Investor A
Teresa L. Radi JTTEN 5.8054% Attn: Jim Clark 5.4218%
250 Wyngate Drive Nationsbank NC1-002-33-31
Frederick, MD 21701 101 South Tryon Street
Charlotte, NC 28255
137
<PAGE>
NATIONS SHORT INTER. GOVERNMENT FUND
Burgess Pigment CO Investor A NationsBank of Texas NA Primary A
PO Box 349 Deck Blvd 7.253% Attn: Adrian Castillo 96.3942%
Sandersville, GA 31082 1401 Elm Street 11th Floor
Dallas, TX 75202-2911
James Street Property Investors Investor A Reliance Trust Co. Primary B
600 Atlantic Avenue Suite 2000 5.3318% PO Box 48449 99.9961%
Boston, MA 02210 Atlanta, GA 30362
True Way Evangelistic Mission Investor C BNY Cust Rollover IRA FBO Investor A
Attn: Wilmure Burden 23.0216% Bernice Schneider 85.4317%
PO Box 61365 1623 NE 172 Street
Virginia Beach, VA 23466-1365 North Miami Beach, FL 33162-1430
Dean Witter Reynolds Cust Investor C Wilma F. Hamilton & Investor A
David E. Ellis 6.8137% James H. Hamilton & 13.3181%
IRA Standard DTD 8/17/94 James H. Hamilton JTTEN
Box 57 PO Box 281
Goodrich, TX 77335 Pine Level, NC 27568
Jeanne N. Levy and Investor C
Richard Levy and 5.1551%
James Levy JTWROS
900 North Taylor Street, Apt 708
Arlington, VA 22203-1864
NATIONS GA INTER. MUNICIPAL BOND FUND
Lyles W. Sanders & Investor A Edward J. Derst Jr. As Trustee Investor B
Mary C. Sanders JTTEN 15.1768% U/A of Edward J. Derst Jr. 36.8053%
2305 Welton Place Trust Agreement DTD 11/15/88
Dunwoody, GA 30338 258 Varn Drive
Savannah, GA 31405
Letty C. Cagle and Investor C Jan R. H. Moggre Investor A
Douglas Cagle JTTEN 64.6817% 9850 Terrace Lake Pointe 47.0721%
8592 Roswell Road Apt 318 Rosell, GA 30076
Atlanta, GA 30350
Charles Davidson and Investor C James F. Sowinski Investor A
Judith L. Davidson JTTEN 16.8766% C/O Serologicals Inc. 34.5601%
370b Rosalie Court 780 Park North Blvd #110
Alpharetta, GA 30202 Clarkson, GA 30021-0000
NationsBank of Texas NA Primary A Harold J. Tenoso Investor A
Attn: Adrian Castillo 99.7934% C/O Serologicals Inc. 16.1519%
1401 Elm Street 11th Floor 780 Park North Blvd #110
Dallas, TX 75202-2911 Clarkson, GA 30021-0000
NATIONS SC INTER. MUNICIPAL BOND FUND
James T. Pearce Investor A Rodney R. Monroe and Investor C
PO Box 1986 15.5496% Carole O. Monroe JTTEN 5.9019%
Greenville, SC 29602-1986 213 Westminster Avenue
Summerville, SC 29485-8010
138
<PAGE>
Helena B. Clark Investor C NationsBank of Texas NA Primary A
324 Broad River Drive 12.3508% Attn: Adrian Castillo 100%
Santee, SC 29142-9301 1401 Elm Street 11th Floor
Dallas, TX 75202-2911
Edward McCloud and Investor C Gustave J. Crispyn and Investor B
Elizabeth M. Robinson JTTEN 12.0012% Mildred Crispyn JTTEN 12.34%
523 Carpenter Street 2382 Cat Tail Pond Road
Charleston, SC 29412 Johns Island, SC 29455-6101
Diane Saari McCall and Investor C Jimmy Ruppe and Judy Ruppe Investor B
Mark J. McCall JTTEN 11.9437% JTTEN 7.3047%
12 Guerard Road 1505 Cherokee Avenue
Charleston, SC 29407-7549 Gaffney, SC 29340
The Hobart W. Griffen & Investor C C. Clarke Moore and Investor A
Frieda B. Griffen TR UAD 1-31-92 9.7829% Michael K. Neil TTEES 98.1807%
116 Dunbarton Circle C. W. F. Spencer Jr. Residual
Aiken, SC 2980-5422 Trust
U/A DTD 03/23/67
PO Box 230
Rock Hill, SC 29731
William L. Spadoni and Investor C
Julia S. Spadoni JTTEN 7.1017%
PO Box 1019
Myrtle Beach, SC 29578-1019
NATIONS INTERNATIONAL EQUITY FUND
Charles Schwab & Co Inc. Investor A E. Larry Fonts TTEE FBO Investor C
Special Custody Account 5.8082% Central Dallas Association 6.6754%
For Benefit of Customers Profit Sharing Plan
Attn: Mutual Funds 1201 Elm Street, Suite 5310
101 Montgomery Street Dallas, TX 75270
San Francisco, CA 94104
C. A. Porterfield & Investor C NationsBank Of Texas NA Primary A
Rosalee Moxley & 9.1623% Attn: Adrian Castillo 94.5106
Frank Minton TTEES 1401 Elm St 11th Floor
Starmount Company Dallas, TX 75202-2911
Capital Accumulation Plan
PO Box 10348
Greensboro, NC 27404-0349
C. A. Porterfield & Investor C Stephens Inc. Primary Class
Rosalee Moxley & 8.9453% Attn: Cindy Cole B
Frank Minton TTEES FBO 111 Center Street 100%
Starmount Company Employees Little Rock, AR 72201
Tax Deferree Savings Plan
PO Box 10349
Greensboro, NC 27404-0349
Tatsushi T. Kubo, Investor C Roy R. Martine & Investor A
Max W. Dahlgren & 7.79% Kathleen H. Maritine JTWROS 11.9072%
John Dahlgren TTEES FBO 4009 Tottenham Court
Epic Products International Richmond, VA 23233-1771
Corporation 401(k) Plan
2801 Randal Mill Road
Arlington, TX 76005
139
<PAGE>
Summerville Pediatrics PA Investor C BNY Cust Investor A
Money Purchase Pension Plan 6.9734% Rollover IRA FBO 7.8436%
312 Midland Parkway William D. Patterson
Summerville, SC 29485-8114 1742 Hilltop
Kingwood, TX 77339
H. Grayson Mitchell Jr. and Investor C
John Rawls TTEE FBO 6.9086%
Grayson Mitchell Inc. 410K Plan
PO Box 128
Emporia, VA 23847
Deeb Oweis and Investor C
Mohammad Oweis TTEES FBO 6.9025%
Amtec International Inc.
Profit Sharing Plan
1200 Woodruff Road A-2
Greenville, SC 29607
NATIONS GOVERNMENT SECURITIES FUND
Dodson Brothers Investor A Marvel N. Mustard Investor C
Exterminating Co. Inc. 6.2501% 289 Overholt Drive 5.7015%
Attn: H. P. Dawson Virginia Beach, VA 23462
PO Box 10249
Lynchburg, VA 24506
Dean Witter Reynolds Cust Investor C Joseph W. Crawford Investor C
David E. Ellis 22.1803% 705 Staley Drive 5.6379%
IRA Standard DTD 8/17/94 Murfreesboro, TN 37130
Box 57
Goodrich, TX 77335
Norbert E. Schulze Investor C NationsBank of Texas NA Primary A
508 Rosinante Road 12.4107% Attn: Adrian Castillo 66.1769%
El Paso, TX 79922 1401 Elm Street, 11th Floor
Dallas, TX 75202-2911
BNY Cust IRA FBO Investor C Stephens Inc. Primary B
Mary Jane Russo 9.0544% Attn: Cindy Cole 100%
8 Maybrook Court 111 Center Street
Glen Arm, MC 21057 Little Rock, AR 72201
NATIONS PRIME FUND
Barnett Bank, NA Jacksonville Investor A Maire W. Thomason and Investor C
Attn: Carolyn Pries 38.3576% James R. Thomason JTTEN 21.0562%
11th Fl 099000116 2911 Polo Club Road
50N Laura Street Nashville, TN 37221
Jacksonville, FL 32202
National Financial for the Exclusive Investor A Jim Celania Investor C
Benefit of Our Customers 5.6524% 2000 S Canterbury Road 18.8898%
200 Liberty Street Charlotte, NC 28211
1 World Financial Center
Attn: Mutual Funds 5th Floor
New York, NY 10281
140
<PAGE>
NationsBank of Texas NA Primary A Rebecca L. Layous Revocable Trust Investor C
Attn: Adrian Castillo 89.6239% Dated 3-5-92 15.7717%
1401 Elm Street 11th Floor Rebecca L. Layous Trustee
Dallas, TX 75202-2911 11500 Big Piney Way
Potomac, MD
Barnett Bank Primary A DWR Cust For Infoproducts Corp. Investor A
Attn: Bill Lendzian 8.3554% FBO Richard G. Grebner 27.2362%
PO Box 40200 FL9-100-03-09 VIP Plus PFT Sharing DTD 09/01/95
Jacksonville, FL 32203-0200 10220 Woodview Circle
Charlotte, NC 28277-8783
NationsBank of Texas NA Primary B Dean Witter Reynolds Cust for Investor A
Attn: Adrian Castillo 100% Franklin D. Buck 23.6359%
1401 Elm Street 11th Floor IRA Standard Dated 06/14/93
Dallas, TX 75202-2911 Rt. 1, Box 29
Rural Retreat, VA 24368
National Financial SVC Corp. Daily Dean Witter Reynolds Cust For Investor A
The Exclusive Benefit of Shares Jane S. Mollenhoff 10.4246%
Our Customers 86.5142% IRA Standard Dated 06/14/93
Church Street Station 5603 Boatwright Circle
PO Box 3752 Williamsburg, VA 23185
New York, NY 10008-3752
National Financial For the Exclusive Daily Dean Witter Reynolds Cust For Investor A
Benefit of Our Customers Shares J. Harold Courson 9.9318%
200 Liberty Street 12.3152% IRA Standard Dated 06/14/93
1 World Financial Center 3212 Carmel Bay Drive
Attn: Mutual Funds 5th Floor Mt. Pleasant, SC 29464-8512
New York, NY 10281
Ronald B. Beasley and Investor C Edwin C. Carter Investor A
Lynn J. Beasley JTTEN 9.3594% Rosia W. Carter Tencom 5.6841%
161-H W. Hartley Drive Route 5, Box 1
High Point, NC 27265-2866 Wytheville, VA 24382-9504
Dean Witter Reynolds Cust for Investor C BNY Cust Investor A
Andrew S. Starzecki 8.6087% Rollover IRA FBO 13.6435%
IRA Rollover Dated 07/22/93 William D. Patterson
5509 Sunningdale Drive 1742 Hilltop
Charlotte, NC 28277-2679 Kingwood, TX 77339
Dean Witter Reynolds Cust for Investor C BNY Cust IRA FBO Investor A
Max Elgan Clark 6.7933% James L. Bowen, Jr. 6.4855%
IRA Rollover Dated 08/26/93 195 Springhill Drive
PO Box 276 Tifton, GA 31794
Mineral Wells, TX 76068-0876
John Jones and Becky L. Jones Investor C J. David Dalton TTEE Investor A
JTTEN 5.5108% Lowcountry Orthopaedics Associates 5.4895%
4235 SW 111 Terrace P/S/P Dated 08-05-87
Davie, FL 33328-2111 9300 Medical Plaza Drive
Charleston, SC 29405
141
<PAGE>
Steven A. Franks & Investor C BNY Cust Rollover IRA FBO Investor A
Larry D. Johnson TTEES For 36.0665% James L. Payne 5.3368%
Fielder Electric Motor Repair Inc. Box 434
Pen Pln U/A DTD 10/1/82 Hemphill, TX 75948
104 Poplar Knob Road
Galax, VA 24333
NATIONS TREASURY FUND
Hare & Co., Bank of New York Investor A NationsBank SWP Disbursement Inc. Daily Shares
Attn: Stif/Master Note 64.2851% NationsBank Sweep/Autoborrow 34.1034%
One Wall Street 2nd Floor First Citizens Building
New York, NY 10286 128 S. Tryon Street
NC1-006-08-03
Charlotte, NC 28255
Barnett Bank, NA Jacksonville Investor A Lois H. Bohler Investor C
Attn: Carolyn Pries 27.4846% 6 Bransford Place 28.7058%
11th Floor 099000116 Augusta, GA 30904-6131
50 N. Laura Street
Jacksonville, FL 32202
Hare & Co., Bank of New York Investor B Kenneth E. Hester & Investor C
Attn: Stif/Master Note 38.7288% James R. Wren, Jr. 17.6712%
One Wall Street 2nd Floor Co-TTEES Danial J. Stowe
New York, NY 27602 Rev Trust DTD 3/4/97
PO Box 1046
Belmont, NC 28012-1046
NationsBank of Texas NA Primary A Joe Oden and Marcia Oden JTTEN Investor C
Attn: Adrian Castillo 77.3185% RT 2 Box 600 5.2129%
1401 Elm Street 11th Floor Normangee, TX 77891
Dallas, TX 75202-2911
Barnett Bank Primary A Dean Witter Reynolds Cust For Investor C
Attn: Bill Lendzian 21.6612% John P. Nicoson 81.2652%
PO Box 40200 FL9-100-03-09 IRA STD/Rollover DTD 01/31/95
Jacksonville, FL 32203-0200 13147 Ashvale Drive
Fairfax, VA 22033
NationsBank of Texas NA Primary B Dean Witter Reynolds Cust For Investor C
Attn: Adrian Castillo (B Shares) 100% James A. Cox 11.5779%
1401 Elm Street 11th Floor IRA Rollover Dated 02/22/94
Dallas, TX 75202-2911 2015 Ashton Pointe Drive
Dacula, GA 30211
National Financial For the Exclusive Daily Dean Witter Reynolds Cust For Investor C
Benefit of Our Customers Shares Susan Fishburn 7.1569%
200 Liberty Street 63.8369% IRA STD/Rollover-Spousal 01/31/95
1 World Financial Center 13147 Ashvale Drive
Attn: Mutual Funds 5th Floor Fairfax, VA 22033
New York, NY 10281
142
<PAGE>
NATIONS CAPITAL GROWTH FUND
DWR Cust For Kenneth L. Walgren Investor A NationsBank of Texas NA Primary A
MD 5.2172% Attn: Adrian Castillo 97.5765%
FBO Pooled Account 1401 Elm Street 11th Floor
VIP Plus PFT Sharing DTD 10/01/97 Dallas, TX 75202-2911
5959 Harry Hines #402 St Paul Prof
Dallas, TX 75235-6233
Howard Sodikoff TTEE FBO Investor C NationsBank of Texas NA Primary B
Oak Ridge Toyota Inc. 8.917% Attn: Adrian Castillo 99.9937%
Retirement Savings Plan 1401 Elm Street 11th Floor
PO Box 10247 Dallas, TX 75202-2911
Lynchburg, VA 24506
John M. Lewis & Investor C
Robert V. Dipauli & 8.4507%
St Joe Communications Inc.
Employees Salary Deferral Plan
502 Fifth Street
Port St Joe, FL 32456
NATIONS BALANCED ASSETS FUND
NFSC FEBO #279-053856 Investor A The Bank of New York TTEE Primary A
American Industriestrust Comp 7.9622% Hitachi Semiconductors Pension 8.9109%
American I Trust Company Ttee Plan
U/A 08/22/97 Attn: Stella Brown
5700 NW Central Drive One Wall Street 12th Floor
Houston, TX 77092-2037 New York, NY 10286
C.A. Porterfield & Investor C Barnett Banks Trust Company NA Primary A
Rosalee Moxley & 21.7528% F/Disability PL & Employee Barnett 8.0746%
Frank Minton TTEES FBO U/A/D 7/21/82
Starmount Company Employees Attn: Income Collections
Tax Deferred Savings Plan PO Box 40200
PO Box 10349 Jacksonville, FL 32203-0200
Greensboro, NC 27404-0349
C.A. Porterfield & Investor C NationsBank of Texas NA Primary A
Rosalee Moxley & 18.8263% Attn: Adrian Castillo 7.4097%
Frank Minton TTEES 1401 Elm Street 11th Floor
Starmount Company Employees Dallas, TX 75202-2911
Capital Accumulation Plan
PO Box 10349
Greensboro, NC 27404-0349
Stuart K. Colonna TTEE Investor C BBTC NA Primary A
Bayshore Concrette Products Corp. 12.384% BB of FL EMP Disability PL & TR 6.2722%
Retirement Savings Plan U/A/D 7/21/82
1 Bayshore Road PO Box 230 Attn: Income Collections
Cape Charles, VA 23310 PO Box 40200
Jacksonville, FL 32203-0200
BBTC N A Primary A Bankers Trust FBO Primary A
TR BBI & IT'S Affiliates 401H Plan 26.0499% Gardner Denver 192257 5.0261%
Succ Trust U/A/D 9/15/92 PO Box 9014
Attn: Income Collections Church Street Station
PO Box 40200 New York, NY 10008
Jacksonville, FL 32203-0200
143
<PAGE>
BBTC NA Primary A NationsBank of Texas NA Primary B
BB of FL EMP Disability PL & TR 15.6919% Attn: Adrian Castillo 99.9992%
U/A/D 7/21/82 1401 Elm Street 11th Floor
Attn: Income Collections Dallas, TX 75202-2911
PO Box 40200
Jacksonville, FL 32203-0200
NATIONS SHORT-TERM INCOME FUND
Bankers Trust CO Cust FBO Investor A NationsBank of Texas NA Primary A
Dimensions Health Corp 19.5343% Attn: Adrian Castillo 69.9567%
9200 Basil Court Suite 500 1401 Elm Street 11th Floor
Landover, MD 20785 Dallas, TX 75202-2911
Michael D. Shea Investor A Dean Witter Reynolds Cust For Investor B
4770 South Altanta Road 5.124% James R. Vaughn 7.6021%
Smyrna, GA 30080 IRA Standard DTD 6/18/93
234 Cureton Lane
Pickens, SC 29671-9306
BNY Cust IRA FBO Investor A West Anderson Rural Water and Investor B
James L. Bowen Jr. 28.168% Sewer Company Inc. 5.9095%
195 Springhill Drive 2767 Whitehall Road
Tifton, GA 31794 Barnwell, SC 29812-2609
Jean E. Kellogg and Investor A Dean Witter Reynolds Cust For Investor B
Thomas G. Kellogg 15.903% William B. Rogers Jr. 5.6408%
52109 Tara Drive IRA Rollover Dated 06/14/93
South Bend, IN 46628 PO Box 1025
Greer, SC 29652-1025
BNY Cust IRA FBO Investor A Stephens, Inc. Primary B
Mary M. Ryan 11.3496% Attn: Cindy Cole 100%
117 Great Oaks Lane 111 Center Street
Roswell, GA 30075 Little Rock, AR 72201
BNY Cust IRA FBO Investor A Alden Enterprises, Inc. Investor C
Cleveland H. White 10.7953% 5900 Gulf Blvd 31.5584%
133 George Lane St Pete Beach, FL 33706
Bonneau, SC 29431
BNY Cust IRA FBO Investor A The Lincolnshire Trust Investor C
Jermiah J. Leahy 10.6157% 5208 Lincolnshire 25.6605%
1101 N Elm Street #503 Dallas, TX 75287
Greebsboro, NC 27401
BNY Cust IRA FBO Investor A Erna M. Weidner Investor C
Carl Blanks 7.0493% 108 Lariat 9.4741%
3450 Evans Road Apt 120 A San Antonio, TX 78232-1004
Chamblee, GA 30341
Gerd W. Kraemer TTEE Investor A Dean Witter Reynolds Cust For Investor C
Gerd W. Kraemer Rev Trust 100% C. Ronald Murray 7.4296%
DTD 10/12/90 IRA Rollover Dated 06/14/93
425 Kings Bridge 5354 Curtisston Ct
Atlanta, GA 30329 Charleston, SC 29418-2035
BNY Cust Rollover IRA FBO Investor A
Milton E. Syring 97.4009%
4040 E Evans Road
San Antonio, TX 78259-1714
144
<PAGE>
NATIONS DIVERSIFIED INCOME FUND
Dean Witter Reynolds Cust For Investor A Jean E. Kellogg and Investor A
James T. Pearce 7.9474% Thomas G. Kellogg 5.0524%
IRA SEP Dated 06/14/93 52109 Tara Drive
PO Box 1986 South Bend, IN 46628
Greenville, SC 29602-1986
NationsBank of Texas NA Primary A Falcon Food Service CO Inc. Investor C
Attn: Adrian Castillo 98.3572% Attn: J. B. Kraft President 11.8195%
1401 Elm Street 11th Floor 12753 Pineacre Lane
Dallas, TX 75202-2911 West Palm Beach, FL 33414
Stephens Inc. Primary B Robert F. Fortin & Investor C
Attn: Cindy Cole 100% Donna J. Fortin JTTEN 6.8883%
111 Center Street 10600 Montclair Way
Little Rock, AR 72201 Duluth, GA 30155
BNY Cust Investor A Dean Witter Reynolds Cust for Investor C
Rollover IRA FBO 11.1938% Linda G. Walker 6.1567%
William D. Patterson IRA Rollover Dated 06/14/93
1742 Hilltop 7 Salley Street
Kingwood, TX 77339 Spartanburg, SC 29301-2403
BNY Cust IRA FBO Investor A Stuart K. Colonna TTEE Investor C
James L. Bowen Jr. 8.949% Bayshore Concrete Products Corp. 5.3948%
195 Springhill Drive Retirement Savings Plan
Tifton, GA 31794 1 Bayshore Road PO Box 230
Cape Charles, VA 23310
J. David Dalton TTEE Lowcountry Investor A
Orthopaedics Associates P/S/P 6.1418%
Dated 08-05-87
9300 Medical Plaza Drive
Charleston, SC 29405
NATIONS STRATEGIC FIXED INCOME FUND
Bankers Trust Co. Cust FBO Investor A Dean Witter Reynolds Cust For Investor B
Dimensions Health Corp 8.1986% Robert A. Pierce 6.3371%
9200 Basil Court Suite 500 IRA Rollover Dated 06/14/93
Landover, MD 20785 10 Lavington Court
Columbia, SC 29209-1944
Merchantile Safe Dep & Trust Co. Investor A Dean Witter Reynolds Cust for Investor B
Ttree 7.2555% Ira L. Allen 5.1675%
Case Communications Defined Benefit IRA Rollover Dated 02/06/98
Plan A/C #3400306 1008 Greeway Lane
U/A DTD 05/28/1984 Richmond, VA 23226-1515
766 Old Hammonds Ferry Road
Linthicum, MD 21090
Alden Enterprises Inc. Investor C Dean Witter Reynolds Cust for Investor B
5900 Gulf Blvd 20.0526% Drayton L. Nance Jr. Md 5.1576%
St Pete Beach, FL 33706 IRA Rollover Dated 08/15/97
7715 North Rd PO Box 98
North, SC 29112-0098
145
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Summerville Pediatrics PA Investor C BNY Cust Investor A
Money Purchase Pension Plan 10.6709% Rollover IRA FBO 32.6139%
312 Midland Parkway William D. Patterson
Summerville, SC 29485-8114 1742 Hilltop
Kingwood, TX 77339
John M. Lewis & Investor C BNY Cust Rollover IRA FBO Investor A
Robert V. Dipauli & 8.2859% James L. Payne 12.7572
John H. Vaughan TTEES FBO Box 434
St Joe Communications Inc. Hemphill, TX 75948
Employees Salary Deferral Plan
502 Fifth Street
Port St Joe, FL 32456
BNY Cust IRA FBO Investor C Anne Valcourt GDN FBO Danyel Investor A
James A. Blanchard 7.2802% Chaniequa Solange Valcourt 11.1014%
9 Las Brisas C/O H.R. Chaplin
Austin, TX 78746 9930 W. Broadview Drive
Bay Harbor Island, FL 33154
Carver Development Board Investor C BNY Cust Rollover IRA FBO Investor A
Capital Fund 7.0239% C. Broughton Williams Jr. 9.6787%
226 North Hackberry 2222 2nd Street, SE
San Antonio, TX 787202 Moultrie, GA 31768-0000
Erna M. Weidner Investor C BNY Cust Rollover IRA FBO Investor A
108 Lariat 6.0109% Helen M. Fulghum 6.6314%
San Antonio, TX 78232-1004 38656 Post Road
Winston, GA 30187
Summerville Pediatrics PA Investor C BNY Cust Rollover IRA FBO Investor A
Money Purchase Pension Plan 5.0688% Jean S. Ramey 5.31%
312 Midland Parkway 25 Templewood Drive
Summerville, SC 29485-8114 Greenville, SC 29611
NationsBank of Texas NA Primary A BNY Cust Rollover IRA FBO Investor A
Attn: Adrian Castillo 92.4447% Michael D. Turner 5.2531%
1401 Elm Street 11th Floor Box 927
Dallas, TX 75202-2911 Eden, TX 76837
Stephens Inc. Primary B
Attn: Cindy Cole 100%
111 Center Street
Little Rock, AR 72201
NATIONS EMERGING GROWTH FUND
NFSC FEBO #179-689050 Investor A Howard Sodikoff TTEE FBO Investor C
Douglas K. Higgins 6.5153% Oak Ridge Toyota Inc. 5.2826%
101 W. Randol Mill Rd Ste 150 Retirement Savings Plan
Arlington, TX 76011-5810 PO Box 10247
Lynchburg, VA 24506
Citicorp USA Inc Cust For Investor A NationsBank of Texas NA Primary A
Marlboro Equity Partners 5.2438% Attn: Adrian Castillo 92.6829%
One Sansome Street 24th Floor 1401 Elm Street 11th Floor
San Francisco, CA 94104 Dallas, TX 75202-2911
146
<PAGE>
Dave Respess & Investor C Barnett Bank NA Succ TTEE Primary A
William C. Myers & 11.128% Barnett Pension-Large Cap Equity 6.9292%
Greg Holmes & Lori Wallace & U/A DTD 9/19/79
James W. Clark TTEES FBO Attn: Mut FD Dept M/C 572-1270
Carver Machine Works 401(k) Plan PO Box 40200
129 Christian Camp Road Jacksonville, FL 32003-0200
Washington, DC 27889
John M. Lewis & Investor C Stephens Inc. Primary B
Robert V. Dipauli & 9.6707% Attn: Cindy Cole 100%
John H. Vaughan TTEES FBO 111 Center Street
St Joe Communications Inc. Little Rock, AR 72201`
Employees Salary Deferral Plan
502 Fifth Street
Port St Joe, FL 32456
Dan Denkarik TTEE for the Investor C BNY Cust Rollover IRA FBO Investor A
Lakeland Battery Profit Sharing 8.6111% Bernice Schneider 85.3806%
Plan DTD 7-1-84 1623 NE 172 Street
41840 S. Combee Road North Miami Beach, FL 33162-1430
Lakeland, FL 33801
C. A. Porterfield & Investor C Wilma F. Hamilton & Investor A
Rosalee Moxley & 7.4318% James H. Hamilton & 13.37%
Frank Minton TTEES FBO James H. Hamilton JTTEN
Starmount Company Employees PO Box 281
Tax Deferred Savings Plan Pine Level, NC 27568
PO Box 10349
Greensboro, NC 27404-0349
Tatsushi T. Kubo, Max W. Investor C
Dahlgren & John Dahlgren 7.3361%
TTEES FBO
Epic Products International
Corporation 401(k) Plan
2801 Randal Mill Road
Arlington, TX 76005
NATIONS FL INTER. MUNICIPAL BOND FUND
Joseph J. Jillson Investor A Sarah A. Barlow TTEE Investor A
3537 SW Corporate PKWY 54.0833% Sarah A. Barlow Trust 31.0531%
Palm City, FL 34990-8151 U/A DTD
07/19/1990 8400 Vamo Road Apt
664 Sarasota, FL 34231
Harry Singer Family LTD Investor A Selma Lifsher Trustee Investor A
A Colorado LTD Partnership 12.4165% Selma Lifsher Trust Dated 3-2-89 25.553%
2960 Wentworth 19355 Turnberry Way Apt PHA
Weston, FL 33332 Aventura, FL 33180
Doris R. Bomstein and Investor C Robert N. Parsell Jr. and Investor A
Stanford Bomstein TTEES 35.3114% Inez G. Parsell JTWROS 14.1646%
Doris R. Bomstein Trust 207 East 25th Street
U/A/D 8/20/91 Sanford, FL 32779-0000
3000 S Ocean Blvd Apt 1201
Boca Raton, FL 33432
147
<PAGE>
Lynn Fain Friedman Trust DTD Investor C Ben M. Turk and Linda A. Turk Investor A
7/5/94 29.4837% JTWROS 6.3104%
Lynn Fain Friedman TTEE 210 Crown Pointe Circle #100
5817 Midhill Street Longwood, FL 32779-0000
Bethesda, MD 20817
Sandford and Doris R. Bomstein Investor C Jerry Jacobs and Candice Jacobs Investor A
TTEES 28.0696% JTWROS 5.9781%
Sanford Bomstein Trust UAD 306 Brantley Harbor Drive
11/4/91 Longwood, FL 32779-0000
3000 South Ocean Blvd #1201
Boca Raton, FL 33431
NationsBank of Texas NA Primary A
Attn: Adrian Castillo 99.0439%
1401 Elm Street 11th Floor
Dallas, TX 75202-2911
NATIONS NC INTER. MUNICIPAL BOND FUND
James B. Sommers Investor A Donald H. Gabriel Investor C
237 Cherokee Road 11.8812% 3216 Champaign Street 5.4021%
Charlotte, NC 28207 Charlotte, NC 28210-0000
W. Frank Dowd, Jr. Investor A Roger W. Simmons and Investor C
PO Box 35430 6.9978 Mary R. Simmons JTTEN 5.3712%
Charlotte, NC 28235-5430 150 River Holl Drive
Advance, NC 27006
NFSC FEBO #042072 Investor A Ethel L. Clowes Investor C
Ron F. Robine & 6.2518% 3137 Burke Mill Court 5.2877%
Cathy G. Robine Winston Salem, NC 27103
18512 Square Sail Road
Cornelius, NC 28031
Barbara B. Coyner Investor C NationsBank of Texas NA Primary A
513 Lake Boone Trail 20.4711% Attn: Adrian Castillo 99.9448%
Raleigh, NC 27608-1027 1401 Elm Street 11th Floor
Dallas, TX 75202-2911
J. Robert Stout & Investor C Dorothy P. Stroud Investor A
Maggie S. Stout 14.7853% 155 HWY 58 South 36.0801%
TTEES FBO J. Robert Stout Kinston, NC 28504
Revocable
PO Box 35343
Greensboro, NC 27425
Anna B. Steele Investor C David C. Lavoie Cust Investor A
2041 Georgia Avenue 9.5558% Douglas K. Lavoie Utma NC 22.1728%
Winston-Salem, NC 27104 5410 McApline Farm Road
Charlotte, NC 28226
W. Joseph Selvia and Investor C David C. Lavoie Cust Investor A
Jay P. Selvia JTTEN 8.8047% Rebecca T. Lavoie Utma NC 22.1728%
5730 Phillips Bridge Road 5410 McApline Farm Road
Winston Salem, NC 27104-3323 Charlotte, NC 28226
William F. Cox Investor C Charles M. Gulledge Investor A
3225 Bermuda Village 8.7975 4600 Belvoir Court 8.9552%
Advance, NC 27006-9478 Charlotte, NC 28270
148
<PAGE>
Thomas H. Blount and Investor C Karen Elizabeth Ritchie Investor A
Doris J. Blount JT TEN 5.4146% 16029 Hollingbourne Road 7.1107%
207 W 11th Street Huntersville, NC 28078
Washington, DC 27889
NATIONS TX INTER. MUNICIPAL BOND FUND
Edith M. Thalman Trust Investor A NationsBank of Texas NA Primary A
U/A DTD 4/28/1998 29.0638% Attn: Adrian Castillo 100%
5710 E 106th Street 1401 Elm Street 11th Floor
Tulsa, OK 74137-7038 Dallas, TX 75202-2911
Orsinger Investments LTD Investor A James Robert Mallory and Investor B
2206 Camelback Drive 11.8379% Faith K. Mallory JTTEN 11.2838%
San Antonio, TX 78209-4262 2400 Winton Terrace East
Ft Worth, TX 76109
Motco Investor A Montine T. Wisdom Investor B
PO Box 17001-trust 10.5923% 6335 W. Northwest HWY #1318 11.043%
San Antonio, TX 78217 Dallas, TX 75225-3533
Plains National Bank Ttee Investor A Oliver Roofing Systems Investor B
Giles W. Dalby Mineral Trust #2 7.6092% PO Box 180191 8.1776%
PO Box 271 Austin, TX 78778
Lubbock, TX 79408
First National Huntsville Co Ttee Investor A A. G. Martin and Nellie L. Martin Investor B
L L Moore Family Key Trust 6.3954% JTTEB 7.4552%
PO Box 659 2011 32nd Street
Huntsville, TX 77342-0659 Lubbock, TX 79411
Orsinger Investments LTD Investor C Reggie D. Bradford & Investor A
2206 Camelback Drive 98.8117 Sharon A. Bradford 85.8037%
San Antonio, TX 78209-4262 3306 Oak Hill Drive
Garland, TX 75043
NATIONS TN INTER. MUNICIPAL BOND FUND
Bob G. Long Investor A Gustave J. Crispyn Trustee Investor B
PO Box 2666 16.6003% Joseph A. Crispyn Trust 8.3627%
Hermitage, TN 37076 Dated 07-21-97
2382 Cat Tail Pond Road
Johns Island, SC 29455-6101
Marshall T. Polk, III Investor A Mildred M. Crispyn TTEE Investor B
PO Box 90148 14.7803% Timothy J. Crispyn Trust 7.3761%
Nashville, TN 37209-0148 DTD 7-21-97
2382 Cat Tail Pond Road
Johns Island, SC 29455-6101
Joseph L. Dilorenzo Investor A Ellen Aston Paull Investor B
310 Watercress Drive 7.5563% 1407 N Weston Lane 6.9073%
Franklin, TN 37064 Austin, TX 78733
Ralph S. Graham Ttee Investor A Joanne B. Stegall Investor B
Ralph S. Graham Rev Liv Trust 7.1813% 517 Cameo Terrace 5.7712%
U/A DTD 08/14/1990 Chesapeake, VA 23320
PO Box 235
Big Sandy, TN 38221
149
<PAGE>
James R. Kellam III Investor A Donald W. Henderson Investor B
3605 Sycamore Lane 6.9136% 2919 Ft Campbell Blvd 5.0983%
Nashville, TN 37215-1937 Hopkinsville, KY 42240
Stephens Inc. Investor C Edward H. Waelterman & Mary L. Investor B
Attn: Cindy Cole 99.597% Ellersieck Cottees Edward H. & 5.0983%
111 Center Street Cornelia Waelterman Tr U/A
Little Rock, AR 72201 12/6/78
4 Count Fleet Circle
Florissant, MO 63033-2209
NationsBank of Texas NA Primary A Stephens Inc. Investor A
Attn: Adrian Castillo 100% Attn: Jim Clark 34.1682%
1401 Elm Street 11th Floor Nationsbank NC1-002-33-31
Dallas, TX 75202-2911 101 South Tryon Street
Charlotte, NC 28255
John O. Colton Investor B Stephens Inc. Investor A
6211 Jocelyn Hollow Road 22.8875% Attn: Jim Clark 26.9716%
Nashville, TN 37205-3213 Nationsbank NC1-002-33-31
101 South Tryon Street
Charlotte, NC 28255
Robert R. Hayes and Investor B Stephens Inc. Investor A
Vira E. Hayes JTTEN 14.0134% Attn: Jim Clark 22.0725%
400 Bryants Lane Nationsbank NC1-002-33-31
Woodbury, TN 37190-1641 101 South Tryon Street
Charlotte, NC 28255
Win Communication Corp Investor B Stephens Inc. Investor A
Attn: Bob Poole 12.8097% Attn: Jim Clark 16.7877%
6755 Jimmy Carter Blvd Nationsbank NC1-002-33-31
Norcross, GA 30071-1702 101 South Tryon Street
Charlotte, NC 28255
NATIONS INTERMEDIATE MUNICIPAL BOND FUND
NFSC FEBO #W52-000019 Investor A NationsBank of Texas NA Primary A
Frank B. Comfort 14.1138% Attn: Adrian Castillo 99.8823%
4912 Cedar Drive 1401 Elm Street 11th Floor
West Des Moines, IA 50266 Dallas, TX 75202-2911
Vatco Investor A Linda Sloan Mundy TTEE Investor A
C/O The Trust Company of Virginia Carl and Anne Mundy Memorial 44.7608%
6800 Paragon Place Suite 237 Education Trust U/A DTD 07/16/97
Richmond, VA 23230 R-1 Quarters MCB
Quantico, VA 22134
Enterprise Trust & Investments Co. Investor A George Gray Investor A
15425 Los Gatos Blvd #150 5.9688% 1708 Riverside Drive 16.2499%
Los Gatos, CA 95032 Holly Hill, FL 32117
Gerhard Kleinschmidt and Investor C Ronald W. Pietsch and Investor A
Gwendolyn Kleinschmidt JTWROS 32.9196% Carole J. Pietsch JTTEN 11.7314%
101 Oak Creek Trail 16811 Brushy Fork Road
Aledo, TX 76008 Newar, OH 43056-0000
Eugene R. Allspach and Investor C Kevin Carl Connor and Investor A
Joann M. Allspach JTWROS 26.2854% Cynthia J. Pietsh JTWROS 10.2094%
3760 Darcus Street 127 Dolores Court
Houston, TX 77005-3704 Holly Hill, FL 32117
150
<PAGE>
Charles W. Doolin Investor C Robert L. Derrick and Investor A
3508 Harvard Avenue 19.526% Carolyn K. Derrick JTTEN 5.9621%
Dallas, TX 75205-0000 712 Woodside Trails Unit 201
Ballwin, MO 63021
Neal S. Platzer and Investor C
Jack Crosby JTTEN 14.2207%
Special Account
1410 Lost Ridge Circle
Seabrook, TX 77586-4514
NATIONS SHORT TERM MUNICIPAL INCOME FUND
Robert E. Esrey Trust Investor A NFSC FEBO #w52-000019 Investor A
Robert E. Esrey Ttee U/A 11-30-94 18.8335% Frank B. Comfort 5.1411%
C/O Cohen Esrey Estate Co. 4912 Cedar Drive
4435 Main Street STE 100 West Des Moines, IA 50266
Kansas City, MO 64111-1856
Julius W. Erving Investor A Donald E. Steen & Investor C
Two Magic Place 7.5409% Trudy K. Steen JTWROS 56.0964%
Maitland, FL 32810 5715 Thames Court
Dallas, TX 75252
Edd Price Jr. and Lynn Price Jtten Investor A Christopher H. Williams Investor C
5600 Oakbrook Pkwy Suite 120 7.2854% 9531 Gadwell Terrace 27.9218%
Norcross, GA 30093 Cherterfield, VA 23838-5289
Thurman D. Kitchin Investor A Eugene R. Allspach and Investor C
PO Box 1479 7.0996% Joann M. Allspach JTWROS 12.3916%
Winter Park, FL 32790 3760 Darcus Street
Houston, TX 77005-3704
Henry F. Figon Trusthenry Investor A NationsBank of Texas NA Primary A
Frigon Tteedtd 03/23/98 5.8324% Attn: Adrian Castillo 99.7998%
Attn: Susan Riley 1401 Elm Street 11th Floor
PO Box 18 Dallas, TX 75202-2911
Maysville, MO 64469
NATIONS VA MUNICIPAL BOND FUND
NationsBanc Montgomery Secs Investor A Stephens Inc. Investor C
737-00016-17 54.6716% Attn: Cindy Cole 99.6455%
Attn: Mutual Funds - 4th Floor 111 Center Street
600 Mongomery Street Little Rock, AR 72201
San Francisco, CA 94111
Rodney M. Carlson and Investor A NationsBank of Texas NA Primary A
Joyce L. Carlson Jtten 8.3604% Attn: Adrian Castillo 100%
3608 South Creek Court 1401 Elm Street 11th Floor
Chesapeake, VA 23325 Dallas, TX 75202-2911
Rebecca C. Bell Investor A Roy R. Martine & Investor A
1092 Oaklawn Drive 7.1435% Kathleen H. Martine JTWROS 95.1388%
Culpeper, VA 22701 4009 Tottenham Court
Richmond, VA 23233-1771
151
<PAGE>
Jessie E. Spells Investor A
14927 Boydell Drive 6.2441%
Centreville, VA 22020-1534
NATIONS MD MUNICIPAL BOND FUND
Carol C. House & Investor A NFSC FEBO #W38-001570 Investor B
Frank W. House Jtwros 49.6874% William R. Gee 5.2654%
4210 Leeward Place Anne Duer Gee
Bethesda, MD 20816 15 Spyglass
Timonium, MD 21093
Charles E. Chlan Investor A Betty J. Hallmark TTEE Investor B
Sole Proprietorship 12.686% Betty J. Hallmark Rev Intervivos 5.1504%
7200 Bel Air Road Trust DTD 7-1-86
Baltimore, MD 21206 614 Old Country Road
Severna Park, MD 21146-4702
Raymond A. Turetsky and Investor A Walter F. Engelhaupt & Investor A
Bess H. Turetsky Jtten 12.4283% Vivian K. Engelhaupt & 69.7163%
11220 Woodson Avenue Stephen Engelhaupt JTTEN
Kensington, MD 20895-1427 3514 Hiss Avenue
Baltimore, MD 21234
Dona L. Lechliter and Investor A Stephens Inc. Investor A
Stephen C. Lechliter Jtten 6.6983% Attn: Jim Clark 9.9653%
4002 Saul Road Nationsbank NC1-002-33-31
Kensington, MD 20895 101 South Tryon Street
Charlotte, NC 28255
Richard E. Ireland and Investor A Stephens Inc. Investor A
Mary E. Ireland Jtten 5.8161% Attn: Jim Clark 8.328%
1423 Grouse Court Nationsbank NC1-002-33-31
Frederick, MD 21702 101 South Tryon Street
Charlotte, NC 28255
Stephens Inc. Investor C Stephens Inc. Investor A
Attn: Cindy Cole 99.4909% Attn: Jim Clark 7.3087%
111 Center Street Nationsbank NC1-002-33-31
Little Rock, AR 72201 101 South Tryon Street
Charlotte, NC 28255
NationsBank of Texas NA Primary A
Attn: Adrian Castillo 98.4282%
1401 Elm Street 11th Floor
Dallas, TX 75202-2911
NATIONS NC MUNICIPAL BOND FUND
NFSC FEBO #X68-102709 Investor A David C. Lavoie Cust Investor A
Edward John Moshy & 61.5601% Douglas K. Lavoie Utma NC 22.3728%
Virginia Moshy 5410 McApline Farm Road
221 Tennwood Court Charlotte, NC 28226
Durham, NC 27712
Stephens Inc. Investor C David C. Lavoie Cust Investor A
Attn: Cindy Cole 99.6411% Douglas K. Lavoie Utma NC 22.3728%
111 Center Street 5410 McApline Farm Road
Little Rock, AR 72201 Charlotte, NC 28226
152
<PAGE>
NationsBank of Texas NA Primary A Charles M. Gulledge Investor A
Attn: Adrian Castillo 95.6537% 4600 Belvoir Court 8.434%
1401 Elm Street 11th Floor Charlotte, NC 28270
Dallas, TX 75202-2911
Dorothy P. Stroud Investor A Karen Elizabeth Ritchie Investor A
155 HWY 58 South 36.4054% 16029 Hollingbourne Road 7.1749%
Kinston, NC 28504 Huntersville, NC 28078
NATIONS SC MUNICIPAL BOND FUND
Donna R. Cart Investor A Stephens Inc. Investor C
1140 Partridge Road 48.5334% Attn: Cindy Cole 6.7846%
Spartanburg, SC 29302-3328 111 Center Street
Little Rock, AR 72201
Cuppia Investments LP Investor A NationsBank of Texas NA Primary A
PO Drawer 22449 30.8709% Attn: Adrian Castillo 100%
Hilton Head Island, SC 29925-2386 1401 Elm Street 11th Floor
Dallas, TX 75202-2911
Charles J. Engelbach and Investor A C. Clarke Moore and Investor A
Mary A. Engelbach Jtten 5.1599% Michael K. Neil TTEES 98.2111%
PO Box 1006 C W F Spencer Jr Residual Trust
N Myrtle Beach, SC 29598 U/A DTD 03/23/67
PO Box 230
Rock Hill, SC 29731
Olga Weinstein Investor C
PO Box 31455 93.1902%
Charleston, SC 29417-1455
NATIONS FL MUNICIPAL BOND FUND
National Financial SVS Corp Investor A Selma Lifsher Trustee Investor A
For the Exclusive Benefit of Our 68.4849% Selma Lifsher Trust Dated 3-2-89 25.708%
Customers 19355 Turnberry Way Apt PHA
Church Street Station Aventura, FL 33180
PO Box 3908
New York, NY 10008-3908
Stephens Inc. Investor C Robert N. Parsell Jr. and Investor A
Attn: Cindy Cole 99.6414% Inez G. Parsell JTWROS 14.2505%
111 Center Street 207 East 25th Street
Little Rock, AR 72201 Sanford, FL 32779-0000
NationsBank of Texas NA Primary A Ben M. Turk and Linda A. Turk Investor A
Attn: Adrian Castillo 42.7262% JTWROS 6.3487%
1401 Elm Street 11th Floor 210 Crown Pointe Circle #100
Dallas, TX 75202-2911 Longwood, FL 32779-0000
Barnett Banks Trust Company NA Primary A Jerry Jacobs and Candice Jacobs Investor A
FBO Gene J. Dodson 5.1532% JTWROS 6.0144%
U/A 9/21/94 306 Brantley Harbor Drive
Attn: Income Collections Longwood, FL 32779-0000
PO Box 40200
Jacksonville, FL 32203-0200
153
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Sarah A. Barlow TTEE Investor A
Sarah A. Barlow Trust 31.2415%
U/A DTD 07/19/1990
8400 Vamo Road Apt 664
Sarasota, FL 34231
NATIONS GA MUNICIPAL BOND FUND
Hunter R. Hughes III Investor A Stephens Inc. Investor C
C/O Rogers and Hardin 64.843% Attn: Cindy Cole 99.6414%
2700 Cain International Tower 111 Center Street
Atlanta, GA 30327 Little Rock, AR 72201
Lucy M. Barrett Investor A NationsBank of Texas NA Primary A
4 Halfmoon Court 7.7627% Attn: Adrian Castillo 99.969%
Savannah, GA 31411-2218 1401 Elm Street 11th Floor
Dallas, TX 75202-2911
William P. Handley and Investor A Jan R. H. Moggre Investor A
Susan K. Handley Jtten 6.2827% 9850 Terrace Lake Pointe 51.3877%
6098 Lively Road Roswell, GA 30076
Cumming, GA 30040
Robert A. Solheim & Investor A James F. Sowinski Investor A
Dianne O. Solheim Jtten 6.2203% C/O Serologicals Inc. 31.6918%
44271 Loch Highland Parkway 780 Park North Blvd #110
Roswell, GA 30025 Clarkson, GA 30021-0000
Jerry D. Clements and Investor A Harold J. Tenoso Investor A
Elsie A. Clements Jtwros 5.4789% C/O Serologicals Inc. 14.8113%
1000 Applewood Drive Apt 184 780 Park North Blvd #110
Roswell, GA 30076-0000 Clarkson, GA 30021-0000
NATIONS TN MUNICIPAL BOND FUND
Jerry L. Benefield & Investor A Miriam R. Hildebrand Investor B
Evelyn S. Benefield Jtwros 73.0913% 884 Edmondson Pike 14.4325%
4036 Barfield Road Brentwood, TN 37027
Murfreesboro, TN 37129-4506
Allene Ellis & Joyce Rose Jtten Investor A Stephens Inc. Investor A
2544 Bearwallow Road 10.6939% Attn: Jim Clark 33.0733%
Ashland City, TN 37015-4506 Nationsbank NC1-002-33-31
101 South Tryon Street
Charlotte, NC 28255
Frank W. Condurelis and Investor C Stephens Inc. Investor A
Jane Condurelis JTTEN 93.4203% Attn: Jim Clark 27.4693%
806 Brentview Drive Nationsbank NC1-002-33-31
Bashville, TN 37220 101 South Tryon Street
Charlotte, NC 28255
Stephens Inc. Investor C Stephens Inc. Investor A
Attn: Cindy Cole 6.5556% Attn: Jim Clark 24.0709%
111 Center Street Nationsbank NC1-002-33-31
Little Rock, AR 72201 101 South Tryon Street
Charlotte, NC 28255
154
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NationsBank of Texas NA Primary A Stephens Inc. Investor A
Attn: Adrian Castillo 99.9446% Attn: Jim Clark 15.3865%
1401 Elm Street 11th Floor Nationsbank NC1-002-33-31
Dallas, TX 75202-2911 101 South Tryon Street
Charlotte, NC 28255
NATIONS TX MUNICIPAL BOND FUND
Edith M. Thalman Trust Investor A Jay L. Willmann and Investor C
U/A DTD 4/28/1998 56.5539% Catherine B. Willmann JTTEN 99.5566%
5720 E 106th Street 2918 Kassarine Pass
Tulsa, OK 74137-7038 Austin, TX 78704-4655
Motco Investor A NationsBank of Texas NA Primary A
PO Box 176001-Trust 23.9904% Attn: Adrian Castillo 99.9677%
San Antonio, TX 78204 1401 Elm Street 11th Floor
Dallas, TX 75202-2911
Liberto Investments LTD Investor A Reggie D. Bradford & Investor A
621 S Flores 6.2242% Sharon A. Bradford 86.8451%
San Antonio, TX 78204 3306 Oak Hill Drive
Garland, TX 75043
NATIONS DISCIPLINED EQUITY FUND
MAC & Co A/C MSTF 1002012 Investor A BBTC NA Primary A
Mutual Fund Operations 9.7183% TR Barnett Employee SVGS & Thrift 13.3628%
PO Box 3198 PL U/A/D 12/31/84
Pittsburgh, PA 15230-3198 Attn: Income Collections
PO Box 40200
Jacksonville, FL 32203-0200
Dan Denkarik TTEE For the Investor C Stephens Inc. Primary B
Lakeland Battery Profit Sharing 14.3644% Attn: Cindy Cole 100%
Plan DTD 7-1-24 111 Center Street
41840 S. Combee Road Little Rock, AR 72201
Lakeland, FL 33801
Summerville Pediatrics PA Investor C BNY Cust Investor A
Money Purchase Pension Plan 12.8936% Rollover IRA FBO 15.7058%
312 Midland Parkway William D. Patterson
Summerville, SC 29485-8114 1742 Hilltop
Kingwood, TX 77339
James B. Ford and Investor C BNY Cust Rollover IRA FBO Investor A
Joanne W. Ford JTTEN 7.4648% James L. Payne 6.1434%
25 Century Blvd Suite 605 Box 434
Nashville, TN 37214 Hemphill, TX 75948
Richard A. Royds TTEE Investor C J. David Dalton TTEE Lowcountry Investor A
Miller Family Trust 5.3554% Orthopaedics Associates P/S/P 5.9683%
2900 South Tower Pennzoil Place Dated 08-05-87
Houston, TX 77002 9300 Medical Plaza Drive
Charleston, SC 29405
NationsBank of Texas NA Primary A Anne Valcourt GDN FBO Danyel Investor A
Attn: Adrian Castillo 47.0631% Chaniequa Solange Valcourt 5.3461%
1401 Elm Street 11th Floor C/O H R Chaplin
Dallas, TX 75202-2911 9930 W. Broadview Drive
Bay Harbor Island, FL 33154
155
<PAGE>
BBTC NA Primary A
Retirmt PL & TR Of BBI & 18.462%
Affiliates
U/A/D 9/19/79
Attn: Income Collections
PO Box 40200
Jacksonville, FL 32203-0200
NATIONS EQUITY INDEX FUND
Barnett Bank Administrator Investor A NationsBank of Texas NA Primary A
Carnival Corp Retirement Plan 35.5834% Attn: Adrian Castillo 70.0126%
Attn: Lowell Zemnick 1401 Elm Street 11th Floor
3655 NW 87 Avenue Dallas, TX 75202-2911
Miami, FL 33178-2418
W. S. Avant Jr. Investor A NationsBank of Texas TTEE Primary A
7711 Louis Pasteur #810 7.7136% NB 401K Plan 22.8665%
San Antonio, TX 78229-0000 U/A DTD 01/01/1983
PO Box 2518
Houston, TX 77252-2518
Katherine Marie Ashby and Investor A Carn & Co #02174401 Primary B
James Lincoln Ashby Jtwros 6.004% Hobbs Group LLC 401K Plan 99.9862%
4016 Murphy Road Attn: Mutual Funds Star
Nashville, TN 37209-4911 PO Box 96211
Washington, DC 20090-6211
National Investor Services Corp Investor A Stephen Inc For the Exclusive Investor A
For the Exclusive Benefit of Our 5.8276% Benefit of Our Customers 100%
Customers 111 Center Street
55 Water Street 32nd Floor Little Rock, AR 72201
New York, NY 10041-3299
NATIONS MANAGED INDEX FUND
Charles Schwab & Co. Inc. Investor A Roy R. Martine & Investor A
Special Custody Account 13.699% Kathleen H. Martine JWROS 29.0351%
For Benefit of Customers 4009 Tottenham Court
Attn: Mutual Funds Richmond, VA 23233-1771
101 Montgomery Street
San Francisco, CA 94104
C.A. Porterfield & Investor C Sarah A. Barlow TTEE Investor A
Rosalee Moxley & 16.3994% Sarah A. Barlow Trust 9.7142%
Frank Minton TTEES FBO U/A DTD 07/19/1990
Starmount Company Employees 8400 Vamo Road, Apt 664
Tax Deferred Savings Plan Sarasota, FL 34231
PO Box 10349
Greensboro, NC 27404-0349
Rosemary H. Pettigrew and Investor C Selma Lifsher Trustee Investor A
June H. Tilghman Co-TTEES FBO 13.0125% Selma Lifsher Trust Dated 3-2-89 7.9936%
G Lester Hash Trust U/A/D 9-14-78 19355 Turnberry Way Apt PHA
250 Orlando Avenue Aventura, FL 33180
Indialantic, FL 32903-3421
156
<PAGE>
C.A. Porterfield & Investor C Jan R. H. Moggre Investor A
Rosalee Moxley & 11.1219% 9850 Terrace Lake Pointe 7.9295%
Frank Minton TTEES FBO Roswell, GA 30076
Starmount Company Employees
Capital Accumulation Plan
PO Box 10349
Greensboro, NC 27404-0349
NationsBank of Texas NA Primary A C. Clarke Moore and Investor A
Attn: Adrian Castillo 73.7455% Michael K. Neil TTEES 6.6035%
1401 Elm Street 11th Floor C W F Spencer Jr Residual Trust
Dallas, TX 75202-2911 U/A DTD 03/23/67
PO Box 230
Rock Hill, SC 29731
Barnett Bank NA Succ TTEE Primary A James F. Sowinski Investor A
Barnett Pension-Laerge Cap Equity 21.1512% C/O Serologicals Inc. 6.0242%
U/A DTD 9/19/79 780 Park North Blvd #110
Attn: Mut Fd Dept M/C 572-1270 Clarkson, GA 30021-0000
PO Box 40200
Jacksonville, FL 32203-0200
Pamela S. Keene and Primary B
William Steven Keene JTWROS 99.4547%
2016 Englewood Drive
Apex, NC 275002
NATIONS MANAGED SMALL CAP INDEX
Charles Schwab & Co Inc. Investor A Barnett Bank NA Succ TTEE Primary A
Special Custody Account 44.9497% Barnett Pension-Laerge Cap Equity 13.0881%
For Benefit of Customers U/A DTD 9/19/79
Attn: Mutual Funds Attn: Mut Fd Dept M/C 572-1270
101 Montgomery Street PO Box 40200
San Francisco, CA 94104 Jacksonville, FL 32203-0200
Dade Community Foundation Inc. Investor C Barnett Bank NA TTEE - Primary A
200 South Biscayne Blvd Ste 2780 21.8886% Barnett Employees Savings & 6.0699%
Miami, FL 33131-2343 Thrift Plan U/A DTD 12/31/1984 -
LFG BLD GR FD
Attn: Mut FD Dept M/C F19-100-03-
01
PO Box 40200
Jacksonville, FL 32203-0200
C.A. Porterfield & Investor C NationsBank of Texas NA Primary B
Rosalee Moxley & 11.587% Attn: Adrian Castillo 99.9928%
Frank Minton TTEES FBO 1401 Elm Street 11th Floor
Starmount Company Employees Dallas, TX 75202-2911
Capital Accumulation Plan
PO Box 10349
Greensboro, NC 27404-0349
C.A. Porterfield & Investor C Roy R. Martine & Investor A
Rosalee Moxley & 11.1106% Kathleen H. Martine JWROS 8.8718%
Frank Minton TTEES FBO 4009 Tottenham Court
Starmount Company Employees Richmond, VA 23233-1771
Tax Deferred Savings Plan
PO Box 10349
Greensboro, NC 27404-0349
157
<PAGE>
Dean Witter Reynolds Cust For Investor C BNY Cust Investor A
Timothy H. Maguire 5.7479% Rollover IRA FBO 8.3487%
IRA Rollover William D. Patterson
3825 Riverhollow Court 1742 Hilltop
Oviedo, FL 32765-9206 Kingwood, TX 77339
NationsBank of Texas NA Primary A J. David Dalton TTEE Lowcountry Investor A
Attn: Adrian Castillo 68.8926% Orthopaedics Associates P/S/P 5.0388%
1401 Elm Street 11th Floor Dated 08-05-87
Dallas, TX 75202-2911 9300 Medical Plaza Drive
Charleston, SC 29405
NATIONS EMERGING MARKETS FUND
Charles Schwab & Co Inc. Investor A Munawar H. Hidayatallah Investor C
Special Custody Account 12.0748% 1000 Louisiana Ste 5900 13.709%
For Benefit of Customers Houston, TX 77002-5014
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Robert Kadlec Investor A Summerville Pediatrics PA Investor C
380 Rector Place Apt 4H 5.3546% Money Purchase Pension Plan 7.9296%
New York, NY 10280 312 Midland Parkway
Summerville, SC 29485-8114
BNY Cust IRA Rollover FBO Investor A NationsBank of Texas NA Primary A
Steven W. Duff 5.3356% Attn: Adrian Castillo 99.9108%
1965 Broadway 1401 Elm Street 11th Floor
New York, NY 10023 Dallas, TX 75202-2911
Marcus J. Dash Investor C Obie & Co Primary B
4900 Northside Drive 37.6123% FBO Barron Orendaine P/S 99.9718%
Atlanta, GA 30327 #02096 2689500
Attn: Mutual Fund Unit (16 HCB
09)
PO Box 200547
Houston, TX 77216-0547
Hi-Tech Communications Inc. Investor C
401(k) Plan 26.7968%
PO Box 1569
League City, TX 77574-1569
NATIONS PACIFIC GROWTH FUND
Ron Underwood & Investor A Dean Witter Reynolds Cust For Investor C
David Brown Ttees 12.7107% Jean M. De Ru 8.953%
Dallas Heart Group IRA Standard DTD 06/14/93
401K Plan 2664 Sharondale Drive
11520 N Central Expwy #105 Atlanta, GA 30305-3858
Dallas, TX 75243
Walter J. Nott Investor A William D. Ratliff III Investor C
8320 Fulham Court 9.8516% 201 Main Street Suite 2200 8.917%
Richmond, VA 23227 Ft. Worth, TX 76102-0000
158
<PAGE>
Helen Goh & Investor A NationsBank of Texas NA Primary A
Jeffery M. Kadet Jtwros 5.6289% Attn: Adrian Castillo 97.8217%
Himonya Garden #9 1401 Elm Street 11th Floor
4-14-18 Himonya Dallas, TX 75202-2911
Merguro-Ku Tokyo 152 Japan
Deeb Oweis and Investor C Obie & Co Primary B
Mohammad Oweis TTEES FBO 49.6072% FBO Barron Orendaine P/S 99.9732%
Amtec International Inc. #02096 2689500
Profit Sharing Plan Attn: Mutual Fund Unit (16 HCB
1200 Woodruff Road A-2 09)
Greenville, SC 29607 PO Box 200547
Houston, TX 77216-0547
Stephens Inc for the Exclusive Investor C
Benefit of Our Customers 14.7102%
111 Center Street
Little Rock, AR 72201
NATIONS GLOBAL GOVERNMENT INCOME FUND
NationsBank Corporation Investor A Stephens Inc. Primary B
NC1-007-23-01 99.7095% Attn: Cindy Cole 100%
100 North Tryon Street 111 Center Street
Charlotte, NC 28255 Little Rock, AR 72201
Dean Witter Reynolds Cust For Investor C Dixie Restaurant Equipment Co Inc. Investor B
Linda G. Walker 83.8062% 2734 Spring Garden Road 80.4721
IRA Rollover Dated 06/14/93 Winston Salem, NC 27106-5714
7 Sally Street
Spartanburg, SC 29301-2403
Stephens Inc for the Exclusive Investor C Dean Witter Reynolds Cust For Investor B
Benefit of Our Customers 15.9767% Sandra D. Riggs 7.8018%
111 Center Street IRA Standard Dated 08/08/94
Little Rock, AR 72201 1608 Summerwood Trail
Hixson, TN 37343
NationsBank of Texas NA Primary A Stephens Inc. for the Exclusive Investor B
Attn: Adrian Castillo 99.3291% Benefit of our Customers 6.8472%
1401 Elm Street 11th Floor 111 Center Street
Dallas, TX 75202-2911 Little Rock, AR 72201
NATIONS INTERNATIONAL GROWTH FUND
Kleinwort Benson Invest MGT LTD Investor A Stephens Inc. Primary B
Client Account 7.1719% Attn: Cindy Cole 100%
Attn: Andy Poile 111 Center Street
PO Box 191 20 Fenchurch Little Rock, AR 72201
London England EC3P 3DB
BNY Cust IRA FBO Investor C William E. Prettyman Jr. Investor B
Richard E. Snowbarger 15.2863% 5393 Royal Mile Blvd 47.5473%
Box 3884 Salisbury, MD 21801
Telluride, CO 81435
Philworld Inc. Investor C Rafael G. Herrera and Investor B
DBA Waldo Pizza 6.1125% Patricia A. Herrera and 7.3056%
Attn: Phil Bourne Enrique M. Acevedo JTTEN
7433 Broadway Street 7880 San Felipe #130
Kansas City, MO 64114-1529 Houston, TX 77063-1626
159
<PAGE>
NationsBank of Texas NA Primary A Dean Witter Reynolds Cust for Investor B
Attn: Adrian Castillo 88.6645% Susan Iley 5.8012%
1401 Elm Street 11th Floor IRA STD/Rollover DTD 08/16/94
Dallas, TX 75202-2911 4656 East Grey Fox Circle
Gum Spring, VA 23065
Northern Trust Co TTEE Primary A
FBO Burlington Resources 6.3607%
A/C #22-46370
PO Box 92956
Chicago, IL 60675-2956
NATIONS U.S. GOVERNMENT BOND FUND
ISTCO Investor A Humphrey Farrington & McClain Investor C
A Partnership 24.4174% Money Purchase Pension Pla-Seg 18.7394%
PO Box 523 FBO Norman Humphrey
Belleville, IL 62222 PO Box 900
Independence, MO 64501-0900
Gable & Gotwals Inc Pension Plan Investor A Carla J. Worley Investor C
Segregated FBO Adwan 6.169% CNSV William Cody Worley 14.8844%
Bank of Oklahoma NA TTEE HC 62 Box 116
Attn: Trust Securities Salem, MO 65560-8705
PO Box 2180
Tulsa, OK 74101-2180
NationsBank of Texas NA Primary A Ruth Lee Parr Investor C
Attn: Adrian Castillo 99.8413 PO Box 102 14.7541%
1401 Elm Street 11th Floor Warsaw, IL 62379-0102
Dallas, TX 75202-2911
Stephens Inc. Primary B Dean Witter Reynolds Cust For Investor C
Attn: Cindy Cole 100% Mildred Deluca 9.0264%
111 Center Street PO Box 250 Church Street Station
Little Rock, AR 72201 New York, NY 10008-0250
Mary Louise Anderson Investor B BNY Cust IRA FBO Investor C
1412 Baldwin Mill Road 21.9222% Richard E. Snowbarger 5.1261%
Jarrettsville, MD 21084-1904 Box 3884
Telluride, CO 81435
Anna M. Zumas Investor B
8706 Roper Road 9.814%
Baltimore, MD 21234
NATIONS SMALL COMPANY GROWTH FUND
Wendel & Co Investor A NationsBank of Texas NA Primary A
C/O BNY MTL FD REORG DPT 12.533% Attn: Adrian Castillo 70.7435%
PO Box 1066 1401 Elm Street 11th Floor
New York, NY 10268-1066 Dallas, TX 75202-2911
Majorie McCarthy Robins TTEE of Investor C BBTC NA Primary A
the Majorie McCarthy Robins Rev 8.6217% Retirmt PL & TR Of BBI & 12.4858%
Liv Trust U/A DTD 5-30-1903 Affiliates
45 Loren Woods U/A/D 9/19/79
Saint Louis, MO 63124-1903 Attn: Income Collections
PO Box 40200
Jacksonville, FL 32203-0200
160
<PAGE>
Dale H. Wiewel Investor C Stephens Inc. Primary B
RR 1 7.4453% Attn: Cindy Cole 100%
Rowler, IL 62338-9801 111 Center Street
Little Rock, AR 72201
Dean Witter For the Benefit of Investor C
Members of Springdale Policemens 7.0765%
Pension and Relief Fund
Church St Station - PO Box 250
New York, NY 10277-1763
NATIONS MANAGED VALUE INDEX FUND
Charles Schwab & Co. Inc. Investor A Charles Schwab & Co. Inc. Primary A
Special Custody Account 55.4389% Special Custody Account 44.031%
For Benefit of Customers For Benefit of Customers
Attn: Mutual Funds Attn: Mutual Funds
101 Montgomery Street 101 Montgomery Street
San Francisco, CA 94104 San Francisco, CA 94104
NFSC FEBO #179-499730 Investor A NationsBank of Texas NA Primary A
John A. Fink 5.894% Attn: Adrian Castillo 14.4542%
831 Phaeton Way 1401 Elm Street 11th Floor
Auburn, IN 46706 Dallas, TX 75202-2911
Benjamin Bryson Turner Investor C Strafe & Co. Primary A
20920 Decora Drive 72.5031% FAO Melling Forging Co. UAW 7.8056%
Cornelius, NC 28031-6656 Acct #2835621514
PO Box 160
Westerville, OH 43086-0160
Dean Witter Reynolds Inc. C/F Investor C
Linda Crawford 27.3218%
Rothe Converted IRA Dated:
06/19/98
2644 Horseshoe Bend Road
Marietta, GA 30064-4416
NATIONS MANAGED SMALLCAP VALUE INDEX FUND
Charles Schwab & Co. Inc. Investor A NationsBank of Texas NA Primary A
Special Custody Account 87.5362% Attn: Adrian Castillo 22.5416%
For Benefit of Customers 1401 Elm Street 11th Floor
Attn: Mutual Funds Dallas, TX 75202-2911
101 Montgomery Street
San Francisco, CA 94104
Christian G. Scheurer and Investor C Michael Larkin TR Primary A
Janice F. Scheurer JTWROS 68.1554% UA 01-06-98 12.7243%
621 E 32nd Terrace Courtland P. Larkin &
Hutchinson, KS 67502-2907 Patricia R. Larkin
Irrev Family Trust
8665 Bay Colony Drive Apt 702
Naples, FL 341
Janet Beer Garrett TTEE Investor C Stephens, Inc. Primary B
Martin M. Beer Irrevocable 28.9492% Attn: Cindy Cole 100%
Educational Trust D 111 Center Street
U/A DTD 12/01/97 Little Rock, AR 72201
40 Deerhaven Lane
Asheville, NC 28803
161
<PAGE>
Charles Schwab & Co. Inc. Primary A
Special Custody Account 53.4757%
For Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
NATIONS MARSICO FOCUSED EQUITIES FUND
Charles Schwab & Co. Inc. Investor A Charles Schwab & Co. Inc. Primary A
Special Custody Account 46.5521% Special Custody Account 53.992%
For Benefit of Customers For Benefit of Customers
Attn: Mutual Funds Attn: Mutual Funds
101 Montgomery Street 101 Montgomery Street
San Francisco, CA 94104 San Francisco, CA 94104
Geneviene M. Galliford Investor C NationsBank of Texas NA Primary A
2325 Shore Sands Court #301 33.7419% Attn: Adrian Castillo 22.4672%
Virginia Beach, VA 23451-0000 1401 Elm Street 11th Floor
Dallas, TX 75202-2911
Dean Witter For the Benefit of the Investor C Stephens Inc Primary A
Friedman Liv Trust 13.9732% Attn: Cindy Cole 9.4655%
PO Box 250 Church Street Station 111 Center Street
New York, NY 10008-0250 Little Rock, AR 72201
Harvey A. Cook and Investor C FTC & Co. Primary A
Kathi W. Cook JTTEN 11.1109% Data Lynx House Acct 04/13/98 8.3874%
801 Ond Drive PO Box 173736
West Columbia, SC 29170-2521 Denver, CO 80217-3736
Gregg Freishtat Investor C
2078 Runfroe Lake Drive 9.2337%
Dunwoody, GA 30338
NATIONS MARSICO GROWTH & INCOME FUND
Charles Schwab & Co. Inc. Investor A Dean Witter For the Benefit of Investor C
Special Custody Account 54.3349% Berhard Von Ruecker 5.0006%
For Benefit of Customers PO Box 250 Church Street Station
Attn: Mutual Funds New York, NY 10008-0250
101 Montgomery Street
San Francisco, CA 94104
Edd Price Jr. and Investor A Charles Schwab & Co. Inc. Primary A
Lynn Price JTTEN 6.4849% Special Custody Account 65.6716%
5600 Oakbrook Pkwy, Suite 120 For Benefit of Customers
Norcross, GA 30093 Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Dean Witter For the Benefit of Investor C Stephens Inc. Primary A
Ramson Inc. 61.2996% Attn: Cindy Cole 19.5815%
PO Box 250 Church Street Station 111 Center Street
New York, NY 10008-0250 Little Rock, AR 72201
162
<PAGE>
Wallace J. Davis and Investor C
Connie S. Davis JTTEN 9.0757%
1418 E Sevier Avenue
Kingsport, TN 37664
NATIONS TAX EXEMPT FUND
Ronald Dozoretz Investor B Joann Beall Reisinger TTEE Investor C
240 Corporation Blvd 6.9787% Joann Beall Resinger Trust 16.0404%
Norfolk, VA 23502-0000 DTD 08/15/93
1730 Peartree Lane
Crofton, MD 21114
Hare & Co, Bank of New York Investor B Rollie Ted Phillips Investor C
Attn: Stif/Master Note 5.9024% 921 Cochran Court 100%
One Wall Street 2nd Floor Hillsville, VA 24343-1448
New York, NY 27602
Michele D. Snyder Investor B J. M. Tucker and Investor A
10001 Abbey Drive 5.6365% Juanita Tucker Ten 98.4455%
Potomac, MD 20854-5431 Com
109 Westpark Drive, Suite 400
Brentwood, TN 37027-5032
Alvin C. Copeland Investor B Roy R. Martine & Investor A
1405 Airline HWY 5.4257% Kathleen H. Martine JTWROS 26.4987%
Metairie, LA 70001 4009 Tottenham Court
Richmond, VA 23233-1771
NationsBank of Texas NA Primary A Sarah A. Barlow TTEE Investor A
Attn: Adrian Castillo 90.6369% Sarah A. Barlow Trust 8.8657%
1401 Elm Street 11th Floor U/A DTD 07/19/1990
Dallas, TX 75202-2911 8400 Vamo Road Apt 664
Sarasota, FL 34231
Barnett Bank Primary A James F. Sowinski Investor A
Attn: Bill Lendzian 5.9224% C/O Serologicals 7.4385%
PO Box 40200 FL9-100-03-09 780 Park North Blvd #110
Jacksonville, FL 32203-0200 Clarkston, GA 30021
NationsBank of Texas NA Primary B Selma Lifsher Trustee Investor A
Attn: Adrian Castillo 99.5194% Selma Lifsher Trust Dated 3-2-89 7.2954%
1401 Elm Street 11th Floor 19355 Turnberry Way Apt PHA
Dallas, TX 75202-2911 Aventura, FL 33180
National Financial For the Exclusive Daily Jan R. H. Moggre Investor A
Benefit of Our Customers Shares 9850 Terrace Lake Pointe 7.2369%
200 Liberty Street 99.002% Roswell, GA 30076
1 World Financial Center
Attn: Mutual Funds 5th Floor
New York, NY 10281
J. Douglas Perry and Investor C William L. Shaw Investor A
Patricia W. Perry JTTEN 13.8118% 12912 Shaw Place 6.4818%
4600 Ocean Front Avenue Silver Spring, MD 20904-3465
Virginia Beach, VA 23451-2521
163
<PAGE>
Calvin H. Price and Investor C C. Clark Moore and Investor A
Doroethy W. Price JTWROS 83.8315% Michael K. Neil TTEES 6.0266%
2900 Old Well Lane C W F Spenser Jr. Residual Trust
Gastonia, NC 28054-6626 U/A DTD 03-23-67
PO Box 230
Rock Hill, SC 29731
NATIONS VA INTER. MUNICIPAL BOND FUND
Frances C. Jarrett Investor C NationsBank of Texas NA Primary A
4704 Ocean Front 13.2144% Attn: Adrian Castillo 100%
Virginia Beach, VA 23451 1401 Elm Street 11th Floor
Dallas, TX 75202-2911
Ethel M. Crowe Investor C Roy R. Martine & Investor A
120 Falcon Drive 8.2842% Kathleen H. Martine JTWROS 94.3104%
Charlottesville, VA 22901 4009 Tottenham Court
Richmond, VA 23233-1771
NATIONS INTERNATIONAL VALUE FUND
BNY Cust IRA Rollover FBO Investor C NFSC FEBO #W23-000582 Investor B
Arved E. White 99.9393% Elizabeth A. Ezenna 14.8437%
14810 Forest Lodge Circle 915 Peachwood Bend
Houston, TX 77070 Houston, TX 77077
BBTC NA Primary A Nicholas E. Lansing & Investor B
Retirmt PL & TR Of BBI & 42.7604 Carla S. Lansing JTTEN 7.5732%
Affiliates RR 1 Box 212
U/A/D 9/19/79 Ursa, IL 62376-9801
Attn: Income Collections
PO Box 40200
Jacksonville, FL 32203-0200
NationsBank of Texas NA Primary A Mary Anna Montalbano Investor B
Attn: Adrian Castillo 9.7719% Separate Property 7.3955%
1401 Elm Street 11th Floor 6043 Crab Orchard
Dallas, TX 75202-2911 Houston, TX 77057
Stephens Inc. Primary B
Attn: Cindy Cole 100%
111 Center Street
Little Rock, AR 72201
NATIONS EQUITY INCOME FUND
NationsBank Of Texas NA Primary A BNY Cust Rollover IRA FBO Investor A
Attn: Adrian Castillo 96.9943% Bernice Schneider 85.3803%
1401 Elm St 11th Floor 1623 NE 172 Street
Dallas, TX 75202-2911 North Miami Beach, FL 33162-1430
Stephens Inc Primary B Wilma F. Hamilton & Investor A
Attn: Cindy Cole 100% James H. Hamilton & 13.3701
111 Center St James H. Hamilton JTTEN
Little Rock, AR 72201 PO Box 281
Pine Level, NC 27568
164
<PAGE>
NATIONS MANAGED VALUE FUND
Stephens Inc. Primary B
Attn: Cindy Cole 100%
111 Center Street
Little Rock, AR 72201
NATIONS GOVERNMENT MONEY MARKET FUND
Patricia Trout And Larry A. Trout Investor C Michael Johnson Custodian For Investor C
JTTEN 61.0873% April Johnson FL/UTMA 38.9127%
9510 Redbird Lane 445 NE 94th Street
Alpharetta, GA 302040 Miami, FL 331380
NATIONS SHORT-TERM MUNICIPAL INCOME FUND
Joseph Carter and Investor B Paragon Assets II Investor B
Diane Carter JTWROS 20.3155% 4520 King Street #205 5.3898%
3000 W 117th Street Alexandria, VA
22302-1302 Leawood, KS 66211-2923
NFSC FEBO #W15-000515 Investor B Walter V. Abbey Revocable Trust Investor A
William L. Spadoni 8.5262% Walter V. Abbey Trustee DTD 8-22- 100%
Julia S. Spadoni 90
PO Box 1019 430 Royal Palm Way
Myrtle Beach, SC 29578 Boca Raton, FL 33432
Irene K. Ritz Investor B Joe P. Simon & Michaelette Sanders Investor A
8211 Anita Road 8.4903% JTTEN 53.0122%
Baltimore, MD 21208-1939 38861 Kilimanjaro Dr
Palm Desert,CA 92211-7076
Edward W. Karrels Investor B Jerry W. Phillips Investor A
6 Abbeywood Court 8.2625% 2901 Wilkinsville Rd 46.9878%
Nashville, TN 37215 Gaffney, SC 29340
</TABLE>
As of August 1998, NationsBank Corporation and its affiliates owned of
record more than 25% of the outstanding shares of the Companies acting as agent,
fiduciary, or custodian for its customers and may be deemed a controlling person
of the Companies under the 1940 Act.
SUITABILITY OF NATIONS TREASURY FUND
FOR INVESTMENT BY MUNICIPAL INVESTORS
The Public Funds Investments Act (the "Act"), enacted by the Texas
legislature in 1987, as amended on June 14, 1989, and effective on August 28,
1989, permits Texas municipalities and certain other similar entities that hold
public funds to invest in certain types of financial instruments. These entities
include an incorporated city or town, a county, a public school district, a
district or authority created under Article III, Section 52(b) (i) or (2), or
Article XVI, Section 59 of the Texas Constitution, an institution of higher
education as defined by Section 61.003 of the Texas Education Code, a hospital
district, a fresh water supply district, or any nonprofit corporation or public
funds investment pool created under Chapter 791, Texas Government Code, acting
on behalf of any of such entities (the "Entities"). The Act permits Entities to
invest in U.S. Treasury securities, certain repurchase agreements related
thereto, and in certain mutual funds that invest in such securities. Special
counsel to NFT with respect to the Treasury Fund has rendered an opinion to the
effect that, assuming that an Entity complies with applicable law, and that
limitations in the Act with respect to the amount of funds in the control of the
Entity that can be invested in NFT are met, the Entity may invest in the
Treasury Fund of NFT when duly authorized by its governing body.
165
<PAGE>
SCHEDULE A
DESCRIPTION OF RATINGS
The following summarizes the highest six ratings used by Standard & Poor's
Corporation ("S&P") for corporate and municipal bonds. The first four ratings
denote investment-grade securities.
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay interest and repay principal.
AA - Debt rated AA is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in a small
degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher-rated
categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for those in
higher-rated categories.
BB, B - Bonds rated BB and B are regarded, on balance as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. Debt rated BB has less
near-term vulnerability to default than other speculative issues. However,
it faces major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to inadequate capacity
to meet timely interest and principal payments. Debt rated B has a greater
vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay interest and
repay principal.
To provide more detailed indications of credit quality, the AA, A and BBB,
BB and B ratings may be modified by the addition of a plus or minus sign to show
relative standing within these major rating categories.
The following summarizes the highest six ratings used by Moody's Investors
Service, Inc. ("Moody's") for corporate and municipal bonds. The first four
denote investment grade securities.
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A - Bonds that are rated A possess many favorable investment attributes
and are to be considered upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds that are rated Baa are considered medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but
A-1
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certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds that are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not as well
safeguarded during both good times and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bond that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Moody's applies numerical modifiers (1, 2 and 3) with respect to corporate
bonds rated Aa through B. The modifier 1 indicates that the bond being rated
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the bond ranks in the
lower end of its generic rating category. With regard to municipal bonds, those
bonds in the Aa, A and Baa groups which Moody's believes possess the strongest
investment attributes are designated by the symbols Aal, A1 or Baal,
respectively.
The following summarizes the highest four ratings used by Duff & Phelps
Credit Rating Co. ("D&P") for bonds, each of which denotes that the securities
are investment grade.
AAA - Bonds that are rated AAA are of the highest credit quality. The risk
factors are considered to be negligible, being only slightly more than for
risk-free U.S. Treasury debt.
AA - Bonds that are rated AA are of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
A - Bonds that are rated A have protection factors which are average but
adequate. However risk factors are more variable and greater in periods of
economic stress.
BBB - Bonds that are rated BBB have below average protection factors but
still are considered sufficient for prudent investment. Considerable
variability in risk exists during economic cycles.
To provide more detailed indications of credit quality, the AA, A and BBB
ratings may modified by the addition of a plus or minus sign to show relative
standing within these major categories.
The following summarizes the highest four ratings used by Fitch Investors
Service, Inc. ("Fitch") for bonds, each of which denotes that the securities are
investment grade:
AAA - Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA. Because bonds rated
in the AAA and AA categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated
F-1+.
A - Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
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circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
To provide more detailed indications of credit quality, the AA, A and BBB
ratings may be modified by the addition of a plus or minus sign to show relative
standing within these major rating categories.
The following summarizes the two highest ratings used by Moody's for
short-term municipal notes and variable-rate demand obligations:
MIG-1/VMIG-1 -- Obligations bearing these designations are of the best
quality, enjoying strong protection from established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2 -- Obligations bearing these designations are of high quality,
with ample margins of protection although not so large as in the preceding
group.
The following summarizes the two highest ratings used by S&P for short-term
municipal notes:
SP-1 - Indicates very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety characteristics
are given a "plus" (+) designation.
SP-2 - Indicates satisfactory capacity to pay principal and interest.
The three highest rating categories of D&P for short-term debt, each of
which denotes that the securities are investment grade, are D-1, D-2, and D-3.
D&P employs three designations, D-1+, D-1 and D-1-, within the highest rating
category. D-1+ indicates highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is judged to be "outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations." D-1 indicates very high
certainty of timely payment. Liquidity factors are excellent and supported by
good fundamental protection factors. Risk factors are considered to be minor.
D-1 indicates high certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2 indicates good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small. D-3 indicates satisfactory liquidity and other protection factors which
qualify the issue as investment grade. Risk factors are larger and subject to
more variation. Nevertheless, timely payment is expected.
The following summarizes the two highest rating categories used by Fitch
for short-term obligations each of which denotes that the securities are
investment grade:
F-1+ securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
F-1 securities possess very strong credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in degree than
issues rated F-1+.
F-2 securities possess good credit quality. Issues carrying this rating
have a satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned the F-1+ and F-1 ratings.
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted A-1+. Capacity for timely payment on
commercial paper rated A-2 is satisfactory, but the relative degree of safety is
not as high as for issues designated A-1.
A-3
<PAGE>
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of senior short-term
promissory obligations. Issuers rated Prime-2 (or related supporting
institutions) are considered to have a strong capacity for repayment of senior
short-term promissory obligations. This will normally be evidenced by many of
the characteristics of issuers rated Prime-1, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
For commercial paper, D&P uses the short-term debt ratings described above.
For commercial paper, Fitch uses the short-term debt ratings described
above.
Thomson BankWatch, Inc. ("BankWatch") ratings are based upon a qualitative
and quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries. BankWatch ratings do not
constitute a recommendation to buy or sell securities of any of these companies.
Further, BankWatch does not suggest specific investment criteria for individual
clients.
BankWatch long-term ratings apply to specific issues of long-term debt and
preferred stock. The long-term ratings specifically assess the likelihood of
untimely payment of principal or interest over the term to maturity of the rated
instrument. The following are the four investment grade ratings used by
BankWatch for long-term debt:
AAA - The highest category; indicates ability to repay principal and
interest on a timely basis is extremely high.
AA - The second highest category; indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category.
A - The third highest category; indicates the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher
ratings.
BBB - The lowest investment grade category; indicates an acceptable
capacity to repay principal and interest. Issues rated "BBB" are, however,
more vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
Long-term debt ratings may include a plus (+) or minus (-) sign to
indicate where within a category the issue is placed.
The BankWatch short-term ratings apply to commercial paper, other senior
short-term obligations and deposit obligations of the entities to which the
rating has been assigned. The BankWatch short-term ratings specifically assess
the likelihood of an untimely payment of principal or interest.
TBW-1 The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated
"TBW- 1".
TBW-3 The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external)
than obligations with higher ratings, capacity to service
principal and interest in a timely fashion is considered
adequate.
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TBW-4 The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
The following summarizes the four highest long-term debt ratings used by
IBCA Limited and its affiliate, IBCA Inc. (collectively "IBCA"):
AAA - Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly.
AA - Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions
may increase investment risk albeit not very significantly.
A - Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong, although
adverse changes in business, economic or financial conditions may lead to
increased investment risk.
BBB - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial
conditions are more likely to lead to increased investment risk than for
obligations in other categories.
A plus or minus sign may be appended to a rating below AAA to denote
relative status within major rating categories.
The following summarizes the two highest short-term debt ratings used by
IBCA:
A1+ When issues possess a particularly strong credit feature, a
rating of A1+ is assigned.
A1 - Obligations supported by the highest capacity for timely repayment.
A2 - Obligations supported by a good capacity for timely repayment.
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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 these Funds
intends to limit its transactions in futures contracts and options so that not
more than 5% of the Fund's net assets are at risk. Furthermore, in no event
would any Fund purchase or sell futures contracts, or related options thereon,
for hedging purposes if, immediately thereafter, the aggregate initial margin
that is required to be posted by the Fund under the rules of the exchange on
which the futures contract (or futures option) is traded, plus any premiums paid
by the Fund on its open futures options positions, exceeds 5% of the Fund's
total assets, after taking into account any unrealized profits and unrealized
losses on the Fund's open contracts and excluding the amount that a futures
option is "in-the-money" at the time of purchase. (An option to buy a futures
contract is "in-the-money" if the value of the contract that is subject to the
option exceeds the exercise price; an option to sell a futures contract is
"in-the-money" if the exercise Price exceeds the value of the contract that is
subject of the option.)
I. Interest Rate Futures Contracts.
Use of Interest Rate Futures Contracts. Bond prices are established in both
the cash market and the futures market. In the cash market, bonds are purchased
and sold with payment for the full purchase price of the bond being made in
cash, generally within five business days after the trade. In the futures
market, only a contract is made to purchase or sell a bond in the future for a
set price on a certain date. Historically, the prices for bonds established in
the futures market have tended to move generally in the aggregate in concert
with the cash market prices and have maintained fairly predictable
relationships. Accordingly, a Fund may use interest rate futures as a defense,
or hedge, against anticipated interest rate changes and not for speculation. As
described below, this would include the use of futures contract sales to protect
against expected increases in interest rates and futures contract purchases to
offset the impact of interest rate declines.
A Fund presently could accomplish a similar result to that which it hopes
to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Fund, through using futures contracts.
Description of Interest Rates Futures Contracts. An interest rate futures
contract sale would create an obligation by a Fund, as seller, to deliver the
specific type of financial instrument called for in the contract at a specific
future time for a specified price. A futures contract purchase would create an
obligation by the Fund, as purchaser, to take delivery of the specific type of
financial instrument at a specific future time at a specific price. The specific
securities delivered or taken, respectively, at settlement date, would not be
determined until at or near that date. The determination would be in accordance
with the rules of the exchange on which the futures contract sale or purchase
was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the Fund's entering
into a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
B-1
<PAGE>
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 Adviser wishes to fix the current market value of this
portfolio security until some point in the future. Assume the portfolio security
has a market value of 100, and the Adviser believes that, because of an
anticipated rise in interest rates, the value will decline to 95. The Fund might
enter into futures contract sales of Treasury bonds for an equivalent of 98. If
the market value of the portfolio securities does indeed decline from 100 to 95,
the equivalent futures market price for the Treasury bonds might also decline
from 98 to 93.
In that case, the five-point loss in the market value of the portfolio
security would be offset by the five-point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.
The Adviser could be wrong in its forecast of interest rates and the
equivalent futures market price could rise above 98. In this case, the market
value of the portfolio securities, including the portfolio security being
protected, would increase. The benefit of this increase would be reduced by the
loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example might
incur a loss of 2 points (which might be reduced by an offsetting transaction
prior to the settlement date). In each transaction, transaction expenses would
also be incurred.
Examples of Future Contract Purchase. A Fund would engage in an interest
rate futures contract purchase when it is not fully invested in long-term bonds
but wishes to defer for a time the purchase of long-term bonds in light of the
availability of advantageous interim investments, e.g., shorter-term securities
whose yields are greater than those available on long-term bonds. The Fund's
basic motivation would be to maintain for a time the income advantage from
investing in the short-term securities; the Fund would be endeavoring at the
same time to eliminate the effect of all or part of an expected increase in
market price of the long-term bonds that the Fund may purchase.
For example, assume that the market price of a long-term bond that the Fund
may purchase, currently yielding 10%, tends to move in concert with futures
market prices of Treasury bonds. The Adviser wishes to fix the current market
price (and thus 10% yield) of the long-term bond until the time (four months
away in this example) when it may purchase the bond. Assume the long-term bond
has a market price of 100, and the Adviser believes that, because of an
anticipated fall in interest rates, the price will have risen to 105 (and the
yield will have dropped to about 9-1/2%) in four months. The Fund might enter
into futures contracts purchases of Treasury bonds for an equivalent price of
98. At the same time, the Fund would assign a pool of investments in short-term
securities that are either maturing in four months or earmarked for sale in four
months, for purchase of the long-term bond at an assumed market price of 100.
Assume these short-term securities are yielding 15%. If the market price of the
long-term bond does indeed rise from 100 to 105, the equivalent futures market
price for Treasury bonds might also rise
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from 98 to 103. In that case, the 5- point increase in the price that the Fund
pays for the long-term bond would be offset by the 5-point gain realized by
closing out the futures contract Purchase.
The Adviser could be wrong in its forecast of interest rates; long-term
interest rates might rise to above 10%; and the equivalent futures market price
could fall below 98. If short-term rates at the same time fall to 10% or below,
it is possible that the Fund would continue with its purchase program for
long-term bonds. The market price of available long-term bonds would have
decreased. The benefit of this price decrease, and thus yield increase, will be
reduced by the loss realized on closing out the futures contract purchase.
If, however, short-term rates remained above available long-term rates, it
is possible that the Fund would discontinue its purchase program for long-term
bonds. The yield on short-term securities in the portfolio, including those
originally in the pool assigned to the particular long-term bond, would remain
higher than yields on long-term bonds. The benefit of this continued incremental
income will be reduced by the loss realized on closing out the futures contract
purchase.
In each transaction, expenses also would be incurred.
II. Index Futures Contracts.
A stock or bond index assigns relative values to the stocks or bonds
included in the index, and the index fluctuates with changes in the market
values of the stocks or bonds included. Some stock index futures contracts are
based on broad market indices, such as the Standard & Poor's 500 or the New York
Stock Exchange Composite Index. In contract, certain exchanges offer futures
contracts on narrower market indices, such as the Standard & Poor's 100, the
Bond Buyer Municipal Bond Index, an index composed of 40 term revenue and
general obligation bonds, or indices based on an industry or market segment,
such as oil and gas stocks. Futures contracts are traded on organized exchanges
regulated by the Commodity Futures Trading Commission. Transactions on such
exchanges are cleared through a clearing corporation, which guarantees the
performance of the parties to each contract.
A Fund will sell index futures contracts in order to offset a decrease in
market value of its portfolio securities that might otherwise result from a
market decline. The Fund may do so either to hedge the value of its portfolio as
a whole, or to protect against declines, occurring prior to sales of securities,
in the value of the securities to be sold. Conversely, a Fund will purchase
index futures contracts in anticipation of purchases of securities. In a
substantial majority of these transactions, the Fund will purchase such
securities upon termination of the long futures position, but a long futures
position may be terminated without a corresponding purchase of securities.
In addition, a Fund may utilize index futures contracts in anticipation of
changes in the composition of its portfolio holdings. For example, in the event
that a Fund expects to narrow the range of industry groups represented in its
holdings it may, prior to making purchases of the actual securities, establish a
long futures position based on a more restricted index, such as an index
comprised of securities of a particular industry group. A Fund also may sell
futures contracts in connection with this strategy, in order to protect against
the possibility that the value of the securities to be sold as part of the
restructuring of the portfolio will decline prior to the time of sale.
The following are examples of transactions in stock index futures (net of
commissions and premiums, if any).
B-3
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ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
-Day Hedge is Placed
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Contract
Price = $2,500 Gain on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future Hedge
Objective: Protect Against Declining (Value of the Portfolio)
Factors
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index - 1 0
Portfolio Futures
-Day Hedge is Placed
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Gain on Futures = $40,000
Value = $40 000
IF, HOWEVER, THE MARKET MOVED IN THE OPPOSITE DIRECTION, THAT IS, MARKET
VALUE DECREASED AND THE FUND HAD ENTERED INTO AN ANTICIPATORY PURCHASE HEDGE, OR
MARKET VALUE INCREASED AND THE FUND HAD HEDGED ITS STOCK PORTFOLIO, THE RESULTS
OF THE FUND'S TRANSACTIONS IN STOCK INDEX FUTURES WOULD BE AS SET FORTH BELOW.
B-4
<PAGE>
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
-Day Hedge is Placed
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 120
Actual Cost = $60,000 Value of Futures = $60,000/Contract
Decrease in Purchase Loss on Futures = $2,500
Price = $2,500 Contract
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index - 1 0
Portfolio Futures
-Day Hedge is Placed
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 130 Stock with Value = $1,040,000
Value of Futures = $1,040,000 Gain in Portfolio = $40,000 Loss of Futures =
$40,000
Value = $40 000
III. Margin Payments
Unlike when a Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to deposit with the broker or in a segregated account
with the Fund's Custodian an amount of cash or cash equivalents, the value, of
which may vary but is generally equal to 10% or less of the value of the
contract. This amount is known as initial margin. The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin is
in the nature of a performance bond or good faith deposit on the contract which
is returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent
B-5
<PAGE>
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying security or index fluctuates making
the long and short positions in the futures contract more or less valuable, a
process known as marking to the market. For example, when a Fund has purchased a
futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Fund will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where a Fund has purchased a
futures contract and the price of the futures contract has declined in response
to a decrease in the underlying instruments, the position would be less
valuable, the Fund would be required to make a variation margin payment to the
broker. At any time prior to expiration of the futures contract, the Adviser may
elect to close the position by taking an opposite position, subject to the
availability of a secondary market, which will operate to terminate the Fund's
position in the futures contract. A final determination of variation margin is
then made, additional cash is required to be paid by or released to the Fund,
and the Fund realizes a loss or gain.
IV. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by a Fund as
a hedging device. One risk arises because of the imperfect correlation between
movements in the price of the future and movements in the price of the
securities which are the subject of the hedge. The price of the future may move
more than or less than the price of the securities being hedged. If the price of
the future moves less than the price of the securities which are the subject of
the hedge, the hedge will not be fully effective but, if the price of securities
being hedged has moved in an unfavorable direction, the Fund would be in a
better position than if it had not hedged at Al. If the price of the securities
being hedged has moved in a favorable direction, this advance will be partially
offset by the loss on the future. If the price of the future moves more than the
price of the hedged securities, the Fund involved will experience either a loss
or gain on the future which will not be completely offset by movements in the
price of the securities which are the subject of the hedge.
To compensate for the imperfect correlation of movements in the price of
securities being hedged and movements in the price of futures contracts, a Fund
may buy or sell futures contracts in a greater dollar amount than the dollar
amount of securities being hedged if the volatility over a particular time
period of the prices of such securities has been greater than the volatility
over such time period of the future, or if otherwise deemed to be appropriate by
the Adviser. Conversely, a Fund may buy or sell fewer futures contracts if the
volatility over a particular time period of the prices of the securities being
hedged is less than the volatility over such time period of the futures contract
being used, or if otherwise deemed to be appropriate by the Adviser. It also is
possible that, where a Fund has sold futures to hedge its portfolio against a
decline in the market, the market may advance, and the value of securities held
by the Fund may decline. If this occurred, the Fund would lose money on the
future and also experience a decline in value in its portfolio securities.
Where futures are purchased to hedge against a possible increase in the
price of securities before a Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the Fund then concludes not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, the Fund will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
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
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delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of Price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the Adviser still may not
result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, a Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in a
futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions.
Successful use of futures by a Fund also is subject to the Adviser's
ability to predict correctly movements in the direction of the market. For
example, if a Fund has hedged against the possibility of a decline in the market
adversely affecting securities held in its portfolio and securities prices
increase instead, the Fund will lose part or all of the benefit to the increased
value of its securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the Fund
has insufficient cash, it may have to sell securities to meet daily variation
margin requirements. Such sales of securities may be, but will not necessarily
be, at increased prices which reflect the rising market. A Fund may have to sell
securities at a time when it may be disadvantageous to do so.
V. Options on Futures Contracts.
The Funds may purchase options on the futures contracts described above. A
futures option gives the holder, in return for the premium paid, the right to
buy (call) from or sell (put) to the writer of the option a futures contract at
a specified price at any time during the period of the option. Upon exercise,
the writer of the option is obligated to pay the difference between the cash
value of the futures contract and the exercise price. Like the buyer or seller
of a futures contract, the holder, or writer, of an option has the right to
terminate its position prior to the scheduled expiration of the option by
selling, or purchasing, an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss.
Investments in futures options involve some of the same considerations that
are involved in connection with investments in futures contracts (for example,
the existence of a liquid secondary market). In addition, the purchase of an
option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
Depending on the pricing of the option compared to either the futures contract
upon which it is based, or upon the price of the securities being hedged, an
option may or may not be less risky than ownership of the futures contract or
such securities. In general, the market prices of options can be expected to be
more volatile than the market prices on the underlying futures contract.
Compared to the purchase or sale of futures contracts, however, the purchase of
call or put options on futures contracts may frequently involve less potential
risk to a Fund because the maximum amount at risk is the premium paid for the
options (plus transaction costs).
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Although permitted by their fundamental investment policies, the Funds do not
currently intend to write future options, and will not do so in the future
absent any necessary regulatory approvals.
ACCOUNTING TREATMENT.
Accounting for futures contracts and options will be in accordance with
generally accepted accounting principles.
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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 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
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guarantees are issued by Governmental entities, private insurers, and the
mortgage poolers. There can be no assurance that the private insurers or
mortgage poolers can meet their obligations under the policies.
The Fund expects that Governmental or private entities may create mortgage
loan pools offering pass-through investments in addition to those described
above. The mortgages underlying these securities may be alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payment
may vary or whose terms to maturity may be shorter than previously customary. As
new types of mortgage-backed securities are developed and offered to investors,
certain Funds will, consistent with their investment objective and policies,
consider making investments in such new types of securities.
UNDERLYING MORTGAGES
Pools consist of whole mortgage loans or participations in loans. The
majority of these loans are made to purchasers of 1-4 family homes. The terms
and characteristics of the mortgage instruments are generally uniform within a
pool but may vary among pools. For example, in addition to fixed-rate,
fixed-term mortgages, a Fund may purchase pools of variable-rate mortgages
(VRM), growing equity mortgages (GEM), graduated payment mortgages (GPM) and
other types where the principal and interest payment procedures vary. VRM's are
mortgages which reset the mortgage's interest rate periodically with changes in
open market interest rates. To the extent that the Fund is actually invested in
VRM's, the Fund's interest income will vary with changes in the applicable
interest rate on pools of VRM's. GPM and GEM pools maintain constant interest
rates, with varying levels of principal repayment over the life of the mortgage.
These different interest and principal payment procedures should not impact the
Fund's net asset value since the prices at which these securities are valued
will reflect the payment procedures.
All poolers apply standards for qualification to local lending institutions
which originate mortgages for the pools. Poolers also establish credit standards
and underwriting criteria for individual mortgages included in the pools. In
addition, some mortgages included in pools are insured through private mortgage
insurance companies.
AVERAGE LIFE
The average life of pass-through pools varies with the maturities of the
underlying mortgage instruments. In addition, a pool's term may be shortened by
unscheduled or early payments of principal and interest on the underlying
mortgages. The occurrence of mortgage prepayments is affected by factors
including the level of interest rates, general economic conditions, the location
and age of the mortgage, and other social and demographic conditions.
As prepayment rates of individual pools vary widely, it is not possible to
accurately predict the average life of a particular pool. For pools of
fixed-rated 30-year mortgages, common industry practice is to assume that
prepayments will result in a 12-year average life. Pools of mortgages with other
maturities or different characteristics will have varying assumptions for
average life.
RETURNS ON MORTGAGE-BACKED SECURITIES
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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