NATIONS INSTITUTIONAL RESERVES - 497
<PAGE>
Prospectus
Nations Institutional Reserves (formerly known as The Capitol Mutual Funds) (the
"Trust") is an open-end management investment company which seeks to provide a
convenient and economical means of investing in one or more professionally
managed funds. The Trust's funds offer multi Reserves ple classes of shares;
this Prospectus relates to the Adviser Class Shares of the following diversified
money market funds (each, a "Fund"): NATIONS CASH RESERVES, NATIONS TREASURY
RESERVES, NATIONS GOVERNMENT RESERVES AND NATIONS MUNICIPAL RESERVES.
The Trust's Adviser Class Shares are offered to
institutional investors that meet the $100,000 minimum initial investment
requirement and to NationsBank, N.A. ("NationsBank"), its affiliates and
correspondents, for the investment of their own funds or funds for which they
act in a fiduciary, agency or custodial capacity.
IT IS A FUNDAMENTAL POLICY OF EACH FUND TO USE ITS BEST EFFORTS TO MAINTAIN A
CONSTANT NET ASSET VALUE OF $1.00 PER SHARE.
AN INVESTMENT IN A FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE IS NO ASSURANCE THAT EACH FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus sets forth concisely the information about the Trust that a
prospective investor should know before investing. Investors are advised to read
this Prospectus and retain it for future reference. A Statement of Additional
Information ("SAI") dated August 31, 1996 has been filed with the Securities and
Exchange Commission ("SEC") and is available without charge by writing or
calling the Trust at the address or telephone number indicated in the column to
the right. The SAI is incorporated into this Prospectus by reference.
NationsBanc Advisors, Inc. ("NBAI") is the investment adviser to the Funds.
TradeStreet Investment Associates, Inc. ("TradeStreet") is investment
sub-adviser to the Funds. As used herein the "Adviser" shall mean NBAI and/or
TradeStreet as the context may require.
SHARES OF THE TRUST ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED,
ENDORSED OR GUARANTEED BY, NATIONSBANK OR ANY OF ITS AFFILIATES. SUCH SHARES ARE
NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN THE
FUNDS INVOLVES CERTAIN RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
NATIONSBANK AND CERTAIN OF ITS AFFILIATES PROVIDE CERTAIN OTHER SERVICES TO THE
TRUST, FOR WHICH THEY ARE COMPENSATED. STEPHENS INC., WHICH IS NOT AFFILIATED
WITH NATIONSBANK, IS THE SPONSOR AND ADMINISTRATOR AND SERVES AS THE DISTRIBUTOR
FOR THE TRUST.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Nations
Cash
Reserves
Nations Treasury
Reserves
Nations Government
Reserves
Nations Municipal
Reserves
Adviser Class
Shares
August 31, 1996
as Supplemented
on February 12,
1997
For Fund information call:
1-800-626-2275
or write:
Nations Institutional Reserves
c/o Stephens Inc.
One NationsBank Plaza
33rd Floor
Charlotte, NC 28255
(NationsFunds logo appears here)
60058 ADVISER 8/96A
<PAGE>
Table Of Contents
About The Prospectus Summary 3
Funds Expenses Summary 4
Financial Highlights 6
Objectives 10
How Objectives Are Pursued 10
General Investment Policies 12
How Performance Is Shown 14
How The Funds Are Managed 15
Organization And History 18
About Your How To Buy Shares 19
Investment How To Redeem Shares 20
How To Exchange Shares 20
Shareholder Servicing Plan 21
How The Funds Value Their Shares 22
How Dividends And Distributions Are Made; Tax
Information 22
Appendix A -- Portfolio Securities 24
Appendix B -- Description Of Ratings 31
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' SAIS
INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OFFERING MADE BY THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY NATIONS FUND OR ITS DISTRIBUTOR.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY NATIONS FUND OR BY THE
DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
2 60058A
<PAGE>
About The Funds
Prospectus Summary
(Bullet) TYPE OF COMPANY: Open-end management investment company.
(Bullet) INVESTMENT OBJECTIVES AND POLICIES:
(Bullet) Nations Cash Reserves' investment objective is to preserve
principal value and maintain a high degree of liquidity while
providing current income.
(Bullet) Nations Treasury Reserves' investment objective is to
preserve principal value and maintain a high degree of
liquidity while providing current income.
(Bullet) Nations Government Reserves' investment objective is to
preserve principal value and maintain a high degree of
liquidity while providing current income.
(Bullet) Nations Municipal Reserves' investment objective is to
preserve principal value and maintain a high degree of
liquidity while providing current income exempt from Federal
income taxes.
(Bullet) INVESTMENT ADVISER: NationsBanc Advisors, Inc. serves as the investment
adviser to the Funds. NBAI provides investment advice to more than 43
investment company portfolios in the Nations Fund Family. TradeStreet
Investment Associates, Inc. provides sub-advisory services to the
Funds. See "How The Funds Are Managed."
(Bullet) DIVIDENDS AND DISTRIBUTIONS: Nations Cash Reserves, Nations Treasury
Reserves, Nations Government Reserves and Nations Municipal Reserves
declare dividends daily and pay them monthly. Each Fund's net realized
capital gains, including net short-term capital gains are distributed
at least annually.
(Bullet) RISK FACTORS: Although the Adviser seeks to achieve the investment
objective of each Fund, there is no assurance that it will be able to
do so. Although each Fund seeks to maintain a stable net asset value of
$1.00 per share, there is no assurance that it will be able to do so.
Investments in a Fund are not insured against loss of principal. For a
discussion of these and other factors, see "How Objectives Are
Pursued -- Risk Considerations" and "Appendix A -- Portfolio
Securities."
(Bullet) MINIMUM PURCHASE: The minimum initial investment in Adviser Class
Shares is $100,000.
60058B 3
<PAGE>
Expenses Summary
Expenses are one of several factors to consider when investing in the Funds. The
following table summarizes operating expenses for Adviser Class Shares of the
Funds. There are no transaction fees imposed upon the purchase, redemption or
exchange of shares. The Examples show the cumulative expenses attributable to a
hypothetical $1,000 investment in Adviser Class Shares of the Funds over
specified periods.
ANNUAL OPERATING EXPENSES1
(as a percentage of average net assets)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Nations Nations Nations Nations
Cash Treasury Government Municipal
Reserves Reserves Reserves Reserves
Advisory Fees (Absent Fee Waivers) .15% .15% .15% .15%
Rule 12b-1 Fees (Shareholder Servicing Fees) .25% .25% .25% .25%
Other Expenses (After Expense Reimbursements) .05% .05% .05% .05%
Total Operating Expenses (Absent Fee Waivers and Expense
Reimbursements) .45% .45% .45% .45%
</TABLE>
(1) The adviser, investment sub-adviser, administrator and co-administrator of
the Trust have agreed voluntarily to waive a portion or all of their fees
and to reimburse certain expenses of the Funds, and the advisory fees and
other expenses shown reflect the voluntary waivers. The adviser, investment
sub-adviser, administrator and co-administrator of the Trust each reserves
the right to terminate its waiver or reimbursement at any time in its sole
discretion. Absent these waivers, the Advisory Fees, Other Expenses and
Total Operating Expenses for Nations Cash Reserves would be .30%, .21% and
.76% of average net assets, respectively; for Nations Treasury Reserves
would be .30%, .21% and .76% of average net assets, respectively; for
Nations Government Reserves would be .30%, .23% and .78% of average net
assets, respectively; and for Nations Municipal Reserves would be .30%, .28%
and .83% of average net assets, respectively. Additional operating expense
information may be found under "How The Funds Are Managed."
4 60058B
<PAGE>
EXAMPLES:
An investor would pay the following expenses on a $1,000 investment in Adviser
Class Shares of the indicated Fund assuming (1) a 5% annual return and (2)
redemption at the end of each time period.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
Nations Cash Reserves $5 $14 $25 $57
Nations Treasury Reserves $5 $14 $25 $57
Nations Government Reserves $5 $14 $25 $57
Nations Municipal Reserves $5 $14 $25 $57
</TABLE>
The examples should not be considered as a representation of past or future
expenses and actual expenses may be greater or less than those shown. The
purpose of this table is to assist an investor in understanding the various
costs and expenses that may be directly or indirectly borne by investors in the
Trust. Certain figures contained in the above tables are based on amounts
incurred during each Fund's most recent fiscal year and have been adjusted as
necessary to reflect current service provider fees and/or reimbursements. If
current fee waivers and/or reimbursements are discontinued, the amounts
contained in the "Examples" above may increase. The information set forth in the
foregoing table and examples relates only to the Adviser Class Shares. The Trust
also offers the Capital Class, Liquidity Class and Market Class Shares (formerly
Class A, Class B and Class D Shares, respectively) of the Funds. The "Other
Expenses" figures contained in the above tables are based on estimated amounts
for the Funds' current fiscal year and reflect anticipated fee waivers and/or
reimbursements. There is no assurance that any fee waivers and reimbursements
will continue at their present level beyond the current fiscal year. For more
complete descriptions of the Funds' operating expenses, see "How The Funds Are
Managed."
60058B 5
<PAGE>
Financial Highlights
The following information has been audited by Price Waterhouse LLP, independent
accountants, whose June 19, 1996 report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto appearing in the Trust's Annual Financial Report for the fiscal
year ended April 30, 1996, which is incorporated by reference into the SAI.
NATIONS CASH RESERVES ADVISER CLASS
For an Adviser Class Share outstanding throughout each period:
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR PERIOD
ENDED ENDED
ADVISER CLASS SHARES: 04/30/96 04/30/95*
Net asset value, beginning of period $ 1.00 $ 1.00
Net investment income 0.0545 0.0316
Dividends from net investment income (0.0545) (0.0316)
Net asset value, end of period $ 1.00 $ 1.00
Total Return++ 5.58% 3.20%
Ratios to average net assets/supplemental data:
Net assets, end of period (000's) $ 397,809 $ 47,682
Ratio of operating expenses to average net assets 0.45% 0.54%+
Ratio of net investment income to average net assets 5.28% 4.71%+
Ratio of operating expenses to average net assets without waivers 0.76% 0.77%+
Ratio of net investment income to average net assets without waivers 4.97% 4.48%+
Net investment income per share without waivers $ 0.0513 $ 0.0300
</TABLE>
* The Nations Cash Reserves Adviser Class Shares commenced operations on
September 22, 1994.
+ Annualized.
++ Total return represents aggregate total return for the period indicated.
6 60058B
<PAGE>
NATIONS TREASURY RESERVES ADVISER CLASS
For an Adviser Class Share outstanding throughout each period:
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR PERIOD
ENDED ENDED
04/30/96 04/30/95*
Net asset value, beginning of period $ 1.00 $ 1.00
Net investment income 0.0531 0.0308
Dividends from net investment income (0.0531) (0.0308)
Net asset value, end of period $ 1.00 $ 1.00
Total Return++ 5.45% 3.11%
Ratios to average net assets/supplemental data:
Net assets, end of period (000's) $ 175,691 $ 55,762
Ratio of operating expenses to average net assets 0.45% 0.45%+
Ratio of net investment income to average net assets 5.25% 4.54%+
Ratio of operating expenses to average net assets without waivers 0.76% 0.75%+
Ratio of net investment income to average net assets without waivers 4.94% 4.25%+
Net investment income per share without waivers $ 0.0500 $ 0.0288
</TABLE>
* The Nations Treasury Reserves Adviser Class Shares commenced operations on
September 22, 1994.
+ Annualized.
++ Total return represents aggregate total return for the period indicated.
60058B 7
<PAGE>
NATIONS GOVERNMENT RESERVES ADVISER CLASS
For an Adviser Class Share outstanding throughout each period:
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR PERIOD
ENDED ENDED
04/30/96 04/30/95*
Net asset value, beginning of period $ 1.00 $ 1.00
Net investment income 0.0527 0.0299
Dividends from net investment income (0.0527) (0.0299)
Net asset value, end of period $ 1.00 $ 1.00
Total Return++ 5.39% 3.04%
Ratios to average net assets/supplemental data:
Net assets, end of period (000's) $ 108,168 $ 99,246
Ratio of operating expenses to average net assets 0.45% 0.57%+
Ratio of net investment income to average net assets 5.23% 4.10%+
Ratio of operating expenses to average net assets without waivers 0.78% 0.79%+
Ratio of net investment income to average net assets without waivers 4.90% 3.88%+
Net investment income per share without waivers $ 0.0494 $ 0.0283
</TABLE>
* The Nations Government Reserves Adviser Class Shares commenced operations on
September 22, 1994.
+ Annualized.
++ Total return represents aggregate total return for the period indicated.
8 60058B
<PAGE>
NATIONS MUNICIPAL RESERVES ADVISER CLASS
For an Adviser Class Share outstanding throughout each period:
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR PERIOD
ENDED ENDED
04/30/96 04/30/95*
Net asset value, beginning of period $ 1.00 $ 1.00
Net investment income 0.0337 0.0199
Dividends from net investment income (0.0337) (0.0199)
Net asset value, end of period $ 1.00 $ 1.00
Total Return++ 3.43% 2.02%
Ratios to average net assets/supplemental data:
Net assets, end of period (000's) $ 55,511 $ 64,123
Ratio of operating expenses to average net assets 0.45% 0.48%+
Ratio of net investment income to average net assets 3.36% 3.11%+
Ratio of operating expenses to average net assets without waivers and/or expenses
reimbursed 0.83% 0.84%+
Ratio of net investment income to average net assets without waivers and/or
expenses reimbursed 2.98% 2.74%+
Net investment income per share without waivers and/or expenses reimbursed $ 0.0299 $ 0.0176
</TABLE>
* The Nations Municipal Reserves Adviser Class Shares commenced operations on
September 22, 1994.
+ Annualized.
++ Total return represents aggregate total return for the period indicated.
60058B 9
<PAGE>
Objectives
Each Money Market Fund endeavors to achieve its investment objective by
investing in a diversified portfolio of high quality money market instruments
with maturities of 397 days or less from the date of purchase. Securities
subject to repurchase agreements may bear longer maturities.
NATIONS CASH RESERVES: Nations Cash Reserves' investment objective is to
preserve principal value and maintain a high degree of liquidity while providing
current income.
NATIONS TREASURY RESERVES: Nations Treasury Reserves' investment objective is to
preserve principal value and maintain a high degree of liquidity while providing
current income.
NATIONS GOVERNMENT RESERVES: Nations Government Reserves' investment objective
is to preserve principal value and maintain a high degree of liquidity while
providing current income.
NATIONS MUNICIPAL RESERVES: Nations Municipal Reserves' investment objective is
to preserve principal value and maintain a high degree of liquidity while
providing current income exempt from Federal income taxes.
How Objectives Are Pursued
NATIONS CASH RESERVES
In pursuing its investment objective, the Fund will invest in obligations
denominated in U.S. dollars consisting of: (i) commercial paper; (ii)
obligations (including certificates of deposit, time deposits, and bankers'
acceptances) of thrift institutions, U.S. commercial banks (including foreign
branches of such banks), and U.S. and London branches of foreign banks, provided
that such institutions (or, in the case of a branch, the parent institution)
have total assets of $1 billion or more as shown on their last published
financial statements at the time of investment; (iii) short-term corporate
obligations of issuers of commercial paper whose commercial paper is eligible
for purchase by the Fund; (iv) instruments eligible for acquisition by Nations
Government Reserves (see below); and (v) repurchase agreements and reverse
repurchase agreements involving any of the foregoing obligations. The Fund also
may invest in guaranteed investment contracts and in securities issued by other
investment companies, consistent with its investment objective and policies. The
short-term obligations that may be purchased by the Fund include instruments
issued by 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.
The Fund reserves the freedom to concentrate its investments in U.S. dollar
denominated obligations of U.S. banks, foreign branches of U.S. banks and U.S.
branches of foreign banks. Concentration in this context means the investment of
more than 25% of the Fund's assets in such obligations.
For temporary defensive purposes during periods when the Adviser believes that
market conditions warrant, the Fund may invest up to 100% of its assets in
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities ("U.S. Government Obligations"), repurchase agreements and
cash.
10 60058C
<PAGE>
Nations Cash Reserves is listed on the National Association of Insurance
Commissioners' approved list of exempt money market funds.
NATIONS TREASURY RESERVES
In pursuing its investment objective, the Fund will invest in direct obligations
issued by the U.S. Treasury, separately traded component parts of such
obligations transferable through the Federal book-entry system (known as
Separately Traded Registered Interest and Principal Securities or "STRIPS"), and
repurchase agreements and reverse repurchase agreements involving such
obligations. The Fund also may invest in obligations the principal and interest
of which are backed by the full faith and credit of the United States
Government, provided that the Fund shall, under normal market conditions, invest
at least 65% of its total assets in U.S. Treasury bills, notes and bonds and
other instruments issued directly by the U.S. Government and repurchase
agreements secured by such obligations. The Fund also may lend its portfolio
securities to qualified institutional investors, and may invest in securities
issued by other investment companies, consistent with its investment objective
and policies.
The dealers selected for the Fund must meet criteria established by Standard &
Poor's Corporation ("S&P").
Nations Treasury Reserves is rated "AAAm" by S&P and "Aaa" by Moody's Investor
Services ("Moody's"). According to S&P, a "AAAm" rating signifies that safety is
excellent and indicates that the fund exhibits a superior capacity to maintain
principal value and limit exposure to loss. According to Moody's, "Aaa" money
market ratings are judged to be of the best quality. In addition, Nations
Treasury Reserves is listed on the National Association of Insurance
Commissioners' approved list of exempt money market funds.
NATIONS GOVERNMENT RESERVES
In pursuing its investment objective, the Fund will invest exclusively in
instruments eligible for acquisition by Nations Treasury Reserves and in U.S.
Government Obligations and repurchase agreements and reverse repurchase
agreements secured by such obligations.
NATIONS MUNICIPAL RESERVES
In pursuing its investment objective, the Fund will invest in U.S. dollar
denominated municipal securities of issuers located in all fifty states, the
District of Columbia, Puerto Rico and other U.S. territories and possessions
("Municipal Securities"). At least 80% of the Fund's total assets will be
invested in securities the interest on which is exempt from Federal income
taxes, based on opinions from bond counsel for the issuers.
Municipal Securities in which the Fund may invest consist of general obligation
notes, tax anticipation notes, revenue anticipation notes, bond anticipation
notes, certificates of indebtedness, demand notes and construction loan notes.
The Fund's investments in any of the Municipal Securities described above will
be limited to those obligations (i) where both principal and interest are backed
by the full faith and credit of the United States, (ii) which are rated MIG-1 or
VMIG-1 at the time of investment by Moody's, (iii) which are rated SP-1 at the
time of investment by S&P, or (iv) which, if not rated, are of comparable
quality in the judgment of the Adviser to obligations rated MIG-1, VMIG-1 or
SP-1. The Fund also may invest in securities issued by other investment
companies, consistent with its investment objective and policies.
The Fund invests in Municipal Securities which are determined to present minimal
credit risks and which at the time of purchase are considered to be of "high
quality" -- E.G., rated "AA" or higher by Duff & Phelps Credit Rating Co.
("D&P"), Fitch Investors Service, Inc. ("Fitch"),
60058C 11
<PAGE>
S&P, IBCA Limited or its affiliate IBCA Inc. (collectively, "IBCA") or Thomson
BankWatch, Inc. ("BankWatch") or "Aa" or higher by Moody's, in the case of
bonds; having a long-term rating of "A" or higher from D&P, Fitch, S&P, IBCA,
BankWatch or Moody's in the case of certain bonds which are unrated securities
(I.E., lacking a short-term rating from the requisite number of nationally
recognized statistical rating organizations); rated "D-1" or higher by D&P,
"F-1" or higher by Fitch, "SP-1" by S&P, or "MIG-1" by Moody's in the case of
notes; rated "D-1" or higher by D&P, "F-1" or higher by Fitch, or "VMIG-1" by
Moody's in the case of variable rate demand notes; or rated "D-1" or higher by
D&P, "F-1" or higher by Fitch, "A-1" or higher by S&P, or "Prime-1" by Moody's
in the case of tax-exempt commercial paper. D&P, Fitch, S&P, Moody's, IBCA and
BankWatch are the six nationally recognized statistical rating organizations
(collectively, "NRSROs"). Securities that are unrated at the time of purchase
will be determined to be of comparable quality by the Adviser pursuant to
guidelines approved by the Trust's Board of Trustees. The applicable Municipal
Securities ratings are described in "Appendix B".
The payment of principal and interest on most securities purchased by the Fund
will depend upon the ability of the issuers to meet their obligations. The
District of Columbia, each state, each of their political subdivisions,
agencies, instrumentalities and authorities and each multi-state agency of which
a state is a member is a separate "issuer" as that term is used in this
Prospectus and the SAI. The non-governmental user of facilities financed by
private activity bonds also is considered to be an "issuer."
The Adviser has discretion to invest up to 20% of the Fund's assets in taxable
money market instruments (consisting of U.S. Government Obligations and
repurchase agreements) and Municipal Securities of the type described above,
which are subject to the alternative minimum tax. However, the Fund generally
intends to be fully invested in federally tax-exempt securities.
RISK CONSIDERATIONS: Although the Adviser seeks to achieve the investment
objective of each Fund, there is no assurance that it will be able to do so. No
single Fund should be considered, by itself, to provide a complete investment
program for any investor. Investments in a Fund are not insured against loss of
principal.
General Investment Policies
For a description of the Funds' permitted investments see "Appendix A" and for
further information about ratings see "Appendix B."
Each Fund except Nations Municipal Reserves may lend the securities in which it
is invested pursuant to agreements requiring that the loan be continuously
secured by cash, securities of the U.S. Government or its agencies, or any
combination of cash and such securities. The Fund will continue to receive
interest on the securities loaned while simultaneously earning interest on the
investment of cash collateral in U.S. Government securities. Collateral is
marked to market daily to provide a level at least equal to the market value of
the securities loaned. There may be risks of delay in receiving additional
collateral or risks of delay in recovery of the securities or even loss of
rights in the collateral should the borrower of the securities fail financially.
However, loans will only be made to borrowers deemed by the Adviser to be of
good standing and when, in the judgment of the Adviser, the consideration which
can be earned currently from such securities loans justifies the attendant risk.
Any guaranty by the U.S. Government, its agencies or instrumentalities of the
securities in which any Fund invests guarantees only the
pay-
12 60058C
<PAGE>
ment of principal and interest on the guaranteed security and does not guarantee
the yield or value of that security or the yield or value of shares of that
Fund.
INVESTMENT LIMITATIONS: Each Fund may not:
1. Purchase securities of any issuer (except U.S. Government Obligations), if as
a result more than 5% of the total assets of the Fund would be invested in the
securities of such issuer. This restriction applies to 75% of each Fund's
assets.
2. Purchase any securities which would cause more than 25% of the total assets
of the Fund to be invested in the securities of one or more issuers conducting
their principal business activities in the same industry, provided that this
limitation does not apply (a) with respect to Nations Cash Reserves, Nations
Treasury Reserves and Nations Government Reserves, to investments in U.S.
Government Obligations; and (b) with respect to Nations Municipal Reserves, to
investments in tax-exempt securities issued by governments or political
subdivisions of governments.
3. Make loans, except that (a) a Fund may purchase or hold debt instruments in
accordance with its investment objective and policies; (b) a Fund may enter into
repurchase agreements and non-negotiable time deposits, provided that repurchase
agreements and non-negotiable time deposits maturing in more than seven days,
illiquid restricted securities and other securities which are not readily
marketable do not exceed, in the aggregate, 10% of the Fund's total assets; and
(c) each Fund except Nations Municipal Reserves may engage in securities lending
as described in this Prospectus and in the SAI.
The foregoing percentages will apply at the time of the purchase of a security.
Additional investment limitations are set forth in the SAI.
RESTRAINTS ON INVESTMENTS BY MONEY MARKET FUNDS: In order for the Funds to value
their investments on the basis of amortized cost, (see "How The Funds Value
Their Shares"), investments must be in accordance with the requirements of Rule
2a-7 under the Investment Company Act of 1940, as amended (the "1940 Act"), some
of which are described below. A money market fund is limited to acquiring
obligations with a remaining maturity of 397 days or less, or obligations with
greater maturities, provided such obligations are subject to demand features or
resets which are less than 397 days, and to maintaining a dollar-weighted
average portfolio maturity of 90 days or less. Quality requirements generally
limit investments to U.S. dollar denominated instruments determined to present
minimal credit risks which, at the time of acquisition, are rated in the first
or second rating categories (known as "first tier" and "second tier" securities,
respectively) by the required number of NRSROs (at least two or, if only one
NRSRO has rated the security, that one NRSRO) or, if unrated by any NRSRO, are
(i) comparable in priority and security to a class of short-term securities of
the same issuer that has the required rating, or (ii) determined to be
comparable in quality to securities having the required rating. The
diversification requirements provide generally that a money market fund may not
at the time of acquisition invest more than 5% of its assets in securities of
any one issuer except that up to 25% of total assets may be invested in the
first tier securities of a single issuer for three business days. Additionally,
(except for Nations Municipal Reserves) no more than 5% of total assets may be
invested, at the time of acquisition, in second tier securities in the
aggregate, and any investment in second tier securities of one issuer is limited
to the greater of 1% of total assets or one million dollars. Securities issued
by the U.S. Government, its agencies, authorities or instrumentalities are
exempt from the quality requirements, other than minimal credit risk. In the
event that a Fund's investment restrictions or permissible investments are more
restrictive than the requirements of Rule 2a-7, the Fund's own restrictions will
govern.
60058C 13
<PAGE>
FUNDAMENTAL POLICIES: The investment objective of each Fund and the investment
limitations described above are fundamental policies of each Fund. It is also a
fundamental policy of each Fund to seek to maintain a constant net asset value
of $1.00 per share. There is no assurance that the Funds will be able to
maintain a constant net asset value of $1.00 per share.
Fundamental policies cannot be changed with respect to a Fund without the
consent of the holders of a majority of that Fund's outstanding shares. The term
"majority of the outstanding shares" means the vote of (i) 67% or more of a
Fund's shares present at a meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy, or (ii) more
than 50% of the Fund's outstanding shares, whichever is less.
How Performance Is Shown
From time to time the Funds may advertise their "current yield" and "effective
compound yield." SUCH YIELD FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE. The "yield" of a Fund refers to the
income generated by an investment in the Fund over a stated seven-day period.
This income is then "annualized," that is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. The "effective yield" is
calculated similarly but, when annualized, the income earned by an investment in
the Fund is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed
reinvestment.
Nations Municipal Reserves also may advertise its "tax-equivalent yield," which
is calculated by determining the rate of return that would have to be achieved
on a fully taxable investment to produce the after-tax equivalent of the Fund's
yield, assuming certain tax brackets for Shareholders.
The yield of the Funds fluctuates, and the annualization of a week's dividend is
not a representation by the Trust as to what an investment in a Fund will
actually yield in the future. Performance quotations will be computed separately
for each class of a Fund's shares. Because of differences in the fees and
expenses borne by the Liquidity Class, the Adviser Class and the Market Class
Shares, the net yield on such shares can be expected, at any given time, to be
lower than the net yield on the Capital Class Shares. Each Fund's annual report
contains additional performance information and is available on request without
charge from Stephens Inc. ("Stephens").
In addition, a Fund from time to time may compare its performance to that of
other mutual funds tracked by mutual fund rating services, of broad groups of
comparable mutual funds or of unmanaged indices which may assume investment of
dividends but generally do not reflect deductions for administrative and
management costs.
14 60058C
<PAGE>
How The Funds Are Managed
The business and affairs of Nations Institutional Reserves are managed under the
direction of its Board of Trustees. The Trust's SAI contains the names of and
general background information concerning each Trustee of Nations Institutional
Reserves.
The Trust and the Adviser have adopted codes of ethics which contain policies on
personal securities transactions by "access persons," including portfolio
managers and investment analysts. These policies substantially comply in all
material respects with the recommendations set forth in the May 9, 1994 Report
of the Advisory Group on Personal Investing of the Investment Company Institute.
THE ADVISER: NationsBanc Advisors, Inc. serves as investment adviser to the
Funds. NBAI is a wholly owned subsidiary of NationsBank, which in turn is a
wholly owned banking subsidiary of NationsBank Corporation, a bank holding
company organized as a North Carolina corporation. NBAI has its principal
offices at One NationsBank Plaza, Charlotte, North Carolina 28255.
TradeStreet Investment Associates, Inc., with principal offices at One
NationsBank Plaza, Charlotte, North Carolina 28255, serves as investment
sub-adviser to the Funds. TradeStreet is a wholly owned subsidiary of
NationsBank. TradeStreet provides investment management services to individuals,
corporations and institutions.
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with each Fund's investment policies, the Adviser formulates
guidelines and lists of approved investments for each Fund, makes decisions with
respect to and places orders for each Fund's purchases and sales of portfolio
securities and maintains records relating to such purchases and sales. 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
which have sold shares in the Fund, if the Adviser believes the quality of the
transaction and the commission are comparable to what they would be with other
qualified brokerage firms. From time to time, to the extent consistent with its
investment objective, policies and restrictions, each Fund may invest in
securities of companies with which NationsBank has a lending relationship.
For the services provided and expenses assumed pursuant to the Investment
Advisory Agreement, NBAI is entitled to a fee, calculated daily and paid
monthly, at an annual rate of 0.30% of the average daily net assets of each
Fund. For the services provided and the expenses assumed pursuant to the
Sub-Advisory Agreement, NBAI will pay TradeStreet sub-advisory fees, computed
daily and paid monthly, at the annual rates of 0.033% of the average daily net
assets of each Fund.
NBAI, TradeStreet and the administrator and the co-administrator of the Funds
have voluntarily agreed to waive their fees (and reimburse the Funds for certain
expenses) in order to limit the total annualized operating expenses of the
Adviser Class Shares (exclusive of Rule 12b-1 fees) of the Funds (as a
percentage of average daily net assets) to 0.20%.
NBAI, TradeStreet, the administrator and the co-administrator each reserves the
right, in its sole discretion, to terminate this voluntary fee waiver at any
time. Shareholders will be notified in advance if and when the waiver is
terminated.
For the fiscal period from March 31, 1995 to December 31, 1995, after waivers,
the Funds paid
60058C 15
<PAGE>
NationsBank under a prior Advisory Agreement, an Advisory Fee at the indicated
rates of the Funds' average net assets: Nations Cash Reserves -- .04%; Nations
Treasury Reserves -- .04%; Nations Government Reserves -- .03%; and Nations
Municipal Reserves -- 0%.
For the fiscal period from January 1, 1996 to April 30, 1996, after waivers, the
Funds paid NBAI under the current Advisory Agreement, an Advisory Fee at the
indicated rates of the Funds' net assets: Nations Cash Reserves -- .03%; Nations
Treasury Reserves -- .03%; Nations Government Reserves -- .02%; and Nations
Municipal Reserves -- 0%.
For the fiscal period from January 1, 1996 to April 30, 1996, after waivers,
NBAI paid TradeStreet under the current Sub-Advisory Agreement, an Advisory Fee
at the indicated rates of the Funds' net assets: Nations Cash Reserves -- .033%;
Nations Treasury Reserves -- .033%; Nations Government Reserves -- .033%; and
Nations Municipal Reserves -- 0%.
Melinda Allen Crosby is a Product Manager, Municipal Fixed Income Management for
TradeStreet and is Portfolio Manager for Nations Municipal Reserves. She has
been Portfolio Manager for Nations Municipal Reserves since 1994. Prior to
assuming her position with TradeStreet, she was Vice President and Portfolio
Manager for the Investment Management Group at NationsBank. She has worked in
the investment community since 1973. Her past experience includes consulting and
municipal credit analysis for NationsBank Capital Markets. Ms. Crosby received a
B.A. in Business Administration from the University of North Carolina at
Charlotte and an M.B.A. from the McColl School of Business, Queens College. She
was a founding member and past president of the Southern Municipal Finance
Society and participated in the establishment of the National Federation of
Municipal Analysis.
Sandra L. Duck is a Product Manager, Money Market Management for TradeStreet and
is Portfolio Manager for Nations Treasury Reserves and Nations Government
Reserves. She has been Portfolio Manager for the Funds since 1994. Prior to
assuming her position with TradeStreet, she was Vice President and Portfolio
Manager for the Investment Management Group at NationsBank. Ms. Duck has worked
in the investment community since 1980. Her past experience includes product
management and trading for Interstate/Johnson Lane and First Charlotte
Corporation. Ms. Duck graduated from King's College.
Martha L. Sherman is a Senior Product Manager, Money Market Management for
TradeStreet and is Senior Portfolio Manager for Nations Cash Reserves. She has
been Portfolio Manager for Nations Cash Reserves since 1994. Prior to assuming
her position with TradeStreet, she was Vice President and Senior Portfolio
Manager for the Investment Management Group at NationsBank. Ms. Sherman has
worked in the investment community since 1981. Her past experience includes
investment research for William Lowry & Associates. Ms. Sherman received a B.S.
in Business Administration from the University of Texas at Dallas.
Morrison & Foerster LLP, counsel to Nations Fund and special counsel to
NationsBank, has advised Nations Fund and NationsBank that NationsBank and its
affiliates may perform the services contemplated by the Investment Advisory
Agreements and this Prospectus without violation of the Glass-Steagall Act. Such
counsel has pointed out, however, that there are no controlling judicial or
administrative interpretations or decisions and that future judicial or
administrative interpretations of, or decisions relating to, present federal or
state statutes, including the Glass-Steagall Act, and regulations relating to
the permissible activities of banks and their subsidiaries or affiliates, as
well as future changes in such statutes, regulations and
16 60058C
<PAGE>
judicial or administrative decisions or interpretations, could prevent such
entities from continuing to perform, in whole or in part, such services. If such
entity were prohibited from performing any such services, it is expected that
new agreements would be proposed or entered into with another entity or entities
qualified to perform such services.
OTHER SERVICE PROVIDERS: Stephens, with principal offices at 111 Center Street,
Little Rock, Arkansas 72201, serves as the administrator of the Trust pursuant
to an Administration Agreement. Pursuant to the terms of the Administration
Agreement, Stephens provides various administrative and corporate secretarial
services to the Funds, including providing general oversight of other service
providers, office space, utilities and various legal and administrative services
in connection with the satisfaction of various regulatory requirements
applicable to the Funds.
First Data Investor Services Group, Inc. ("First Data"), a wholly owned
subsidiary of First Data Corporation, with principal offices at One Exchange
Place, Boston, Massachusetts 02109, serves as the co-administrator of the Funds
pursuant to a Co-Administration Agreement. Under the Co-Administration
Agreement, First Data provides various administrative and accounting services to
the Funds, including performing calculations necessary to determine net asset
values and dividends, preparing tax returns and financial statements and
maintaining the portfolio records and certain general accounting records for the
Funds. For the services rendered pursuant to the Administration and
Co-Administration Agreements, Stephens and First Data are entitled to receive a
combined fee at the annual rate of up to 0.10% of each Fund's average daily net
assets.
For the fiscal year ended April 30, 1996, the Funds paid their administrator a
fee, after waivers, at the indicated rate of average net assets: Nations Cash
Reserves -- .05%; Nations Treasury Reserves -- .05%; Nations Government
Reserves -- .06%; and Nations Municipal Reserves -- .06%.
Shares of the Funds are sold on a continuous basis by Stephens, as the Funds'
sponsor and distributor. Stephens is a registered broker/dealer with principal
offices at 111 Center Street, Little Rock, Arkansas 72201. The Trust has entered
into a distribution agreement with Stephens which provides that Stephens has the
exclusive right to distribute shares of the Funds. No compensation is paid to
Stephens for distribution services for the Adviser Class Shares.
NationsBank of Texas, N.A. ("NationsBank of Texas" and, collectively with The
Bank of New York ("BONY"), called "Custodians") serves as custodian for the
assets of all Nations Funds, except the international portfolios. NationsBank of
Texas is located at 1401 Elm Street, Dallas, Texas 75202, and is a wholly owned
subsidiary of NationsBank Corporation. In return for providing custodial
services to the Nations Funds Family, NationsBank of Texas is entitled to
receive, in addition to out-of-pocket expenses, fees at the rate of (i) $300,000
per annum, to be paid monthly in payments of $25,000 for custodian services for
up to and including 50 Funds; and (ii) $6,000 per annum, to be paid in equal
monthly payments, for custodian services for each additional Fund above 50
Funds.
BONY has entered into an agreement with each of the Funds and NationsBank of
Texas whereby BONY will serve as sub-custodian ("Sub-Custodian") for the assets
of all Nations Funds except the international portfolios, for which BONY is
already serving as Custodian.
BONY is located at 90 Washington Street, New York, New York 10286. In return for
providing sub-custodial services, BONY receives, in addition to out of pocket
expenses, fees at the rate of (i) 3/4 of one basis point per annum on the
aggregate net assets of all Nations' Non-Money
Mar-
60058C 17
<PAGE>
ket Funds up to $10 billion; and (ii) 1/2 of one basis point on the excess.
First Data serves as transfer agent (the "Transfer Agent") for each Fund's
shares. The Transfer Agent is located at One Exchange Place, Boston,
Massachusetts 02109.
Price Waterhouse LLP serves as the independent accountant of the Trust. Its
address is 160 Federal Street, Boston, Massachusetts 02110.
EXPENSES: In addition, the Trust pays its other operating expenses, including
audit and legal expenses, expenses of preparing prospectuses, proxy solicitation
material and reports to shareholders, costs of custodial and transfer agency
services and registering shares under Federal and state securities laws and
insurance expenses and pays additional expenses including litigation and other
extraordinary expenses, brokerage costs, interest charges, taxes and
organization expenses.
Organization And History
Nations Institutional Reserves (formerly known as The Capitol Mutual Funds), is
an open-end management investment company established as a Massachusetts
business trust under a Declaration of Trust dated January 22, 1990. The Trust's
fiscal year end is April 30. The Trust is a member of the Nations Fund Family
which consists of Nations Fund Trust, Nations Fund, Inc., Nations Fund
Portfolios, Inc. and the Trust. The Declaration of Trust permits the Trust to
offer separate series of units of beneficial interest ("shares") and different
classes of each series. Each Fund is a series of the Trust. Except for
differences between classes of a Fund pertaining to distribution and shareholder
servicing arrangements, each share of each Fund represents an equal
proportionate interest in that Fund. This Prospectus relates to the Adviser
Class Shares of the Trust's Nations Cash Reserves, Nations Treasury Reserves,
Nations Government Reserves and Nations Municipal Reserves. NBAI is the
investment adviser and TradeStreet is the investment sub-adviser for each Fund.
In addition to the Adviser Class Shares, the Funds also offer the Capital Class,
the Liquidity Class and the Market Class Shares. Capital Class Shares, which do
not bear distribution or shareholder servicing fees, are offered to
institutional investors, including NationsBank, its affiliates and
correspondents, for the investment of their own funds or funds for which they
act in a fiduciary, agency or custodial capacity and which meet the $1,000,000
minimum initial investment requirement. The Liquidity Class Shares are offered
to institutional investors which meet the $500,000 minimum initial investment
requirement and to NationsBank and its affiliates and correspondents, for the
investment of their own funds or funds for which they act in a fiduciary, agency
or custodial capacity. The Liquidity Class Shares of the Funds bear aggregate
distribution and shareholder servicing fees of up to 0.85% of the class's
average daily net assets. The Market Class Shares are offered to institutional
investors, including NationsBank, its affiliates and correspondents, for which
they act in fiduciary, agency or custodial capacity and which meet the $250,000
minimum initial investment for such shares. The Market Class Shares bear
aggregate distribution and shareholder servicing fees of up to 0.45% of the
class's average net assets. A salesperson and any other person or entity
entitled to receive compensation for selling or servicing Fund shares may
receive different compensation with respect to one particular class of shares
over another in a Fund. Information regarding the Capital Class, the Liquidity
Class and the Market Class Shares of the Funds is contained in separate
prospectuses that may be obtained from the Trust's distributor. To obtain
additional
18 60058C
<PAGE>
information regarding the Funds' other classes of shares which may be available
to you, contact Nations Fund at 1-800-626-2275.
Each share held entitles the Shareholder of record to one vote. As a
Massachusetts business trust, the Trust is not required to hold annual meetings
but approval will be sought for certain changes in the operation of the Trust
and for the election of Trustees under certain circumstances. In addition, a
Trustee may be removed by the remaining Trustees or by Shareholders at a special
meeting called upon written request of Shareholders owning at least 10% of the
outstanding shares of the Trust. In the event that such a meeting is requested,
the Trust will provide appropriate assistance and information to the
Shareholders requesting the meeting.
The management and affairs of the Trust are supervised by the Trustees under the
laws of the Commonwealth of Massachusetts. The Trustees have approved contracts
under which, as described above, certain companies provide essential management
services to the Trust. Further information regarding individual Trustees may be
found in the SAI.
About Your Investment
How To Buy Shares
Adviser Class Shares are offered to institutional investors, including
NationsBank, its affiliates and correspondents, for the investment of their own
funds or funds for which they act in a fiduciary, agency or custodial capacity.
The minimum initial investment in Capital Class Shares is $100,000.
Purchases and redemptions may be effected on days on which the Federal Reserve
Bank of New York is open for business (a "Business Day"). Currently, the days on
which the Federal Reserve Bank of New York is closed (other than weekends) are:
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Memorial Day
(observed), Independence Day, Labor Day, Columbus Day, Thanksgiving Day and
Christmas Day. Purchases will be effected only when federal funds are available
for investment on the Business Day the purchase order is received by Stephens or
the Transfer Agent (as defined below). A purchase order must be received by
Stephens or the Transfer Agent by 3:00 p.m., Eastern time (12 noon, Eastern
time, with respect to Nations Municipal Reserves). A purchase order received
after such time will not be accepted; notice thereof will be given to the
institution placing the order and any funds received will be returned promptly
to the sending institution. If federal funds are not available by the close of
regular trading on the New York Stock Exchange (currently 4:00 p.m., Eastern
time), the order will be canceled. The purchase price is the net asset value per
share next determined after acceptance of the order by Stephens or the Transfer
Agent.
60058C 19
<PAGE>
How To Redeem Shares
Redemption orders must be received on a Business Day before 3:00 p.m., Eastern
time (12 noon, Eastern time, with respect to Nations Municipal Reserves), and
payment will normally be wired the same day. The Trust reserves the right to
wire redemption proceeds within three Business Days after receiving a redemption
order if, in the judgment of the Adviser, an earlier payment could adversely
impact a Fund. Redemption orders will not be accepted by Stephens or the
Transfer Agent after 3:00 p.m., Eastern time (12 noon, Eastern time, with
respect to Nations Municipal Reserves), for execution on that Business Day. The
redemption price is the net asset value per share next determined after
acceptance of the redemption order by Stephens or the Transfer Agent. Redeemed
shares are not entitled to dividends declared on the day the redemption order is
effective. A redemption will generally result in a gain or loss for Federal
income tax purposes.
Due to the high cost of maintaining Fund accounts with small balances, the Trust
reserves the right to redeem an investor's account and send the proceeds to such
investor if the balance falls below $50,000 because of a redemption. However,
investors will be given 30 days' notice to make an additional investment to
increase their account balance to $50,000 or more.
How To Exchange Shares
The exchange feature enables a Shareholder of Adviser Class Shares of a Fund to
acquire Adviser Class Shares of another Fund when that Shareholder believes that
a shift between Funds is an appropriate investment decision. An exchange of
Adviser Class Shares for Adviser Class Shares of another Fund is made on the
basis of the next calculated net asset value per share of each Fund after the
exchange order is received.
The Fund and each of the other funds of Nations Fund may limit the number of
times this exchange feature may be exercised by a Shareholder within a specified
period of time. Also, the exchange feature may be terminated or revised at any
time by Nations Fund upon such notice as may be required by applicable
regulatory agencies (presently 60 days for termination or material revision),
provided that the exchange feature may be terminated or materially revised
without notice under certain unusual circumstances.
The current prospectus for each fund of Nations Fund describes its investment
objective and policies, and Shareholders should obtain a copy and examine it
carefully before investing. Exchanges are subject to the minimum investment
requirement and any other conditions imposed by each fund. In the case of any
Shareholder holding a share certificate or certificates, no exchanges may be
made until all applicable share certificates have been received by the Transfer
Agent and deposited in the Shareholder's account. An exchange will be treated
for Federal income tax purposes the same as a redemption of shares. However, the
ability to deduct capital losses on an exchange may be limited in situations
where there is an exchange of shares within 90 days after the shares are
purchased.
Nations Fund reserves the right to reject any exchange request. Only shares that
may legally be sold in the state of the investor's residence may be acquired in
an exchange. Only shares of a class that is accepting investments generally may
be acquired in an exchange.
During periods of significant economic or market change, telephone exchanges may
be difficult to complete. In such event, shares may be exchanged by mailing your
request directly to the institution through which the original shares were
purchased.
20 60058C
<PAGE>
TELEPHONE TRANSACTIONS: Shareholders may effect purchases, redemptions and
exchanges by telephone. Shareholders should be aware that by electing the
telephone transaction feature, such shareholders may be giving up a measure of
security that they may have if they were to authorize written requests only. A
shareholder may bear the risk of any resulting losses from a telephone
transaction. Nations Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and if Nations Fund and its
service providers fail to employ such measures, they may be liable for any
losses due to unauthorized or fraudulent instructions. Nations Fund provides
written confirmation to Shareholders of each telephone share transaction. In
addition, Nations Fund reserves the right to record all telephone conversations.
Shareholder Servicing Plan
The Trustees have approved a Shareholder Servicing Plan (the "Servicing Plan")
with respect to Adviser Class Shares of the Funds. Pursuant to the Servicing
Plan, the Trust, on behalf of each Fund, may enter into shareholder servicing
agreements ("Servicing Agreements") with banks, broker/dealers and other
financial institutions, including certain affiliates of NationsBank ("Servicing
Agents"). Under the Servicing Agreements, the Servicing Agents will provide
various shareholder support services to their customers that are the owners of
Adviser Class Shares, including general shareholder liaison services; processing
purchase, exchange and redemption requests from customers and placing orders
with Stephens or the Transfer Agent; processing dividend and distribution
payments from the Funds on behalf of customers; providing information
periodically to customers showing their position in Adviser Class Shares;
arranging for bank wires; and providing such other similar services as may
reasonably be requested.
The Servicing Plan authorizes the Trust to pay the Servicing Agents a fee,
calculated daily and paid monthly, at a rate set from time to time by the Board
of Trustees, provided that the annual rate may not exceed 0.25% of the average
daily net asset value of the Funds' Adviser Class Shares. The Servicing Plan
also provides that, to the extent any portion of the fees payable under the
Servicing Plan is deemed to be for services primarily intended to result in the
sale of Fund shares, such fees are deemed approved and may be paid under the
Servicing Plan. Accordingly, the Servicing Plan was approved and will be
operated pursuant to Rule 12b-1 under the 1940 Act.
The Trust understands that Servicing Agents may charge fees to their Customers
who are the owners of Adviser Class Shares for additional services provided in
connection with their Customers' accounts. These fees would be in addition to
any amounts which may be received by Servicing Agents under their Servicing
Agreements with the Trust. The Servicing Agreements require Servicing Agents to
disclose to their Customers any compensation payable to the Servicing Agents by
the Trust and any other compensation payable by Customers in connection with the
investment of their assets in Adviser Class Shares. Customers should read this
Prospectus in light of the terms governing their accounts with their Servicing
Agents.
The Trust may suspend or reduce payments under the Servicing Plan at any time,
and payments are subject to the continuation of the Servicing Plan described
above and the terms of the Servicing Agreements. See the SAI for more details on
the Servicing Plan.
60058C 21
<PAGE>
How The Funds Value Their Shares
The net asset value of a share of each class of shares in the Funds is
calculated by dividing the total value of its assets, less liabilities, by the
number of shares in the class outstanding. Shares are valued as of 3:00 p.m.,
Eastern time (1:00 p.m., Eastern time, with respect to Nations Municipal
Reserves), on each Business Day.
The assets of each Fund are valued based upon the amortized cost method.
Although Nations Fund seeks to maintain the net asset value per share of these
Funds at $1.00, there can be no assurance that their net asset value per share
will not vary.
How Dividends And Distributions Are
Made; Tax Information
DIVIDENDS AND DISTRIBUTIONS: The net income of each Fund is determined and
declared on each Business Day as a dividend to Shareholders of record as of 3:00
p.m., Eastern time, (1:00 p.m., Eastern time, with respect to Nations Municipal
Reserves), on that day. Dividends are paid by each Fund in additional shares of
the same class, unless the Shareholder has elected to take such payment in cash,
on the first Business Day of each month. Shareholders may change their election
by providing written notice to the Transfer Agent at least 15 days prior to the
change.
The amount of dividends payable on the Capital Class Shares will be more than
the dividends payable on the Liquidity Class, the Adviser Class and the Market
Class Shares because of the distribution and/or shareholder servicing expenses
charged to such shares.
TAX INFORMATION: Each Fund is treated as a separate entity for Federal income
tax purposes and is not combined with the Trust's other portfolios. Each Fund
intends to qualify or to continue to qualify for the special tax treatment
afforded regulated investment companies as defined under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). As long as a Fund
qualifies for this special tax treatment, it will be relieved of Federal income
tax on that part of its net investment income (including, for this purpose, the
excess of net short-term capital gain over net long-term capital loss) and net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) that it distributes to Shareholders.
Each Fund intends to distribute substantially all of its net investment income
(and net capital gain) to Shareholders. Dividends declared by Nations Cash
Reserves, Nations Government Reserves and Nations Treasury Reserves from net
investment income will be taxable to Shareholders as ordinary income whether
received in cash or in additional shares and will not qualify for the corporate
dividends-received deduction. Nations Municipal Reserves may pay "exempt-
interest dividends" to its Shareholders if, at the close of each quarter of its
taxable year, at least 50% of the value of such Fund's assets consists of
obligations the interest on which is excludable from gross income.
Exempt-interest dividends constitute the portion of the aggregate dividends, as
designated by the Fund, equal to the excess of the excludable interest over
certain amounts disallowed as deductions. Exempt interest dividends are
excludable from a Shareholder's gross income for Federal income tax purposes,
but may have certain collateral
Fed-
22 60058C
<PAGE>
eral income tax consequences, as described in the SAI. Any dividends
attributable to Nations Municipal Reserve's taxable income will be taxable to
Shareholders as ordinary income whether received in cash or in additional shares
to the extent of the Fund's earnings and profits and will not qualify for the
corporate dividends-received deduction.
Any net capital gain will be distributed at least annually and will be taxed to
Shareholders as long-term capital gain, regardless of how long a Shareholder has
held shares. The Funds will make annual reports to Shareholders of the Federal
income tax status of all distributions.
Ordinarily, Shareholders will include in income all dividends declared by a Fund
in the year those dividends are paid. However, dividends declared by a Fund in
October, November or December of any year and payable to Shareholders of record
on a date in any of those months will be deemed to have been paid by the Fund
and received by the Shareholders on December 31st, if paid by the Fund during
the following January.
Income received on direct U.S. Government Obligations is exempt from tax at the
state level when received directly and may be exempt, depending on the state,
when received by a Shareholder from a Fund provided certain conditions are
satisfied. Interest received on repurchase agreements collateralized by U.S.
Government Obligations normally is not exempt from state taxation. Nations Cash
Reserves, Nations Government Reserves and Nations Treasury Reserves will inform
Shareholders annually of the percentage of income and distributions derived from
direct U.S. Government Obligations. Shareholders should consult their tax
advisors to determine whether any portion of the income dividends received from
a Fund is considered tax exempt in their particular states.
Federal law requires the Trust to withhold 31% from any dividends (other than
exempt-interest dividends) paid by the Trust and/or redemptions (including
exchange redemptions) that occur in certain individual Shareholder accounts if
the Shareholder has not properly furnished a certified correct Taxpayer
Identification Number or has not certified that withholding does not apply, or
if the Internal Revenue Service has notified the Trust that the Taxpayer
Identification Number listed on a shareholder account is incorrect according to
its records, or that the Shareholder is subject to backup withholding. Amounts
withheld are applied to the Shareholder's Federal tax liability, and a refund
may be obtained from the Internal Revenue Service if withholding results in
overpayment of taxes. Federal law also requires a Fund to withhold 30% or the
applicable tax treaty rate from dividends paid to certain nonresident alien,
non-U.S. partnership and non-U.S. corporation shareholder accounts.
The foregoing discussion is based on tax laws and regulations which were in
effect as of the date of this Prospectus and summarizes only some of the
important tax considerations generally affecting the Funds. It is not intended
as a substitute for careful tax planning; investors should consult their tax
advisors with respect to their specific tax situations. Further tax information
is contained in the SAI.
60058D 23
<PAGE>
Appendix A -- Portfolio Securities
The following are summary descriptions of certain types of instruments in which
a Fund may invest. The "How Objectives Are Pursued" section of this Prospectus
identifies each Fund's permissible investments, and the SAI contains more
information concerning such investments.
ASSET-BACKED SECURITIES: 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.
Mortgage-backed securities represent an ownership interest in a pool of
residential mortgage loans, the interest in which is in most cases issued and
guaranteed by an agency or instrumentality of the U.S. Government, though not
necessarily by the U.S. Government itself. Mortgage-backed securities include
mortgage pass-through securities, collateralized mortgage obligations ("CMOs"),
parallel pay CMOs, planned amortization class CMOs ("PAC Bonds") and stripped
mortgage-backed securities ("SMBS"), including interest-only and principal-only
SMBS. SMBS may be more volatile than other debt securities. For additional
information concerning mortgage-backed securities, see the SAI.
Non-mortgage-backed securities include interests in pools of receivables, such
as motor vehicle installment purchase obligations and credit card receivables.
Such securities are generally issued as pass-through certificates, which
represent undivided fractional ownership interests in the underlying pools of
assets. Such securities also may be debt instruments, which are also known as
collateralized obligations and are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt.
BANK INSTRUMENTS: Bank instruments consist mainly of certificates of deposit,
time deposits and bankers' acceptances. Nations Cash Reserves generally limits
investments in bank instruments to (a) U.S. dollar-denominated obligations of
U.S. banks which have total assets exceeding $1 billion and which are members of
the Federal Deposit Insurance Corporation (including obligations of foreign
branches of such banks) or of the 75 largest foreign commercial banks in terms
of total assets; or (b) U.S. dollar-denominated bank instruments issued by other
banks believed by the Adviser to present minimal credit risks. For purposes of
the foregoing, total assets may be determined on the basis of the bank's most
recent annual financial statements.
Eurodollar, Yankee dollar and other foreign obligations involve special
investment risks, including the possibility that liquidity could be impaired
because of future political and economic developments, the obligations may be
less marketable than comparable domestic obligations of domestic issuers, a
foreign jurisdiction might impose withholding taxes on interest income payable
on such obligations, deposits may be seized or nationalized, foreign
governmental restrictions such as exchange controls may be adopted which might
adversely affect the payment of principal of and interest on such obligations,
the selection of foreign obligations may be more difficult because there may be
less publicly available information concerning foreign issuers, there may be
difficulties in
enforc-
24 60058D
<PAGE>
ing a judgment against a foreign issuer or the accounting, auditing and
financial reporting standards, practices and requirements applicable to foreign
issuers may differ from those applicable to domestic issuers. In addition,
foreign banks are not subject to examination by U.S. Government agencies or
instrumentalities.
BORROWINGS: When a Fund borrows money, the net asset value of a share may be
subject to greater fluctuation until the borrowing is paid off. Reverse
repurchase agreements may be considered to be borrowings. The Funds may borrow
money from banks for temporary purposes in amounts of up to one-third of their
respective total assets, provided that borrowings in excess of 5% of the value
of the Funds' total assets must be repaid prior to the purchase of portfolio
securities. Pursuant to line of credit arrangements, certain of the Funds may
borrow primarily for temporary or emergency purposes, including the meeting of
redemption requests that otherwise might require the untimely disposition of
securities.
Reverse repurchase agreements may be considered to be borrowings. When a Fund
invests in a reverse repurchase agreement, it sells a portfolio security to
another party, such as a bank or broker/dealer, in return for cash, and agrees
to buy the security back at a future date and price. Reverse repurchase
agreements may be used to provide cash to satisfy unusually heavy redemption
requests without having to sell portfolio securities, or for other temporary or
emergency purposes. In addition, each of the Funds (except Nations Municipal
Reserves) may use reverse repurchase agreements for the purpose of investing the
proceeds in tri-party repurchase agreements. Generally, the effect of such a
transaction is that a Fund can recover all or most of the cash invested in the
portfolio securities involved during the term of the reverse repurchase
agreement, while it will be able to keep the interest income associated with
those portfolio securities. Such transactions are only advantageous if the
interest cost to the Fund of the reverse repurchase transaction is less than the
cost of obtaining the cash otherwise.
At the time a Fund enters into a reverse repurchase agreement, it may establish
a segregated account with its custodian bank in which it will maintain cash,
U.S. Government securities or other liquid high grade debt obligations equal in
value to its obligations in respect of reverse repurchase agreements. Reverse
repurchase agreements involve the risk that the market value of the securities
the Fund is obligated to repurchase under the agreement may decline below the
repurchase price. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, the Fund's use
of the proceeds of the agreement may be restricted pending a determination by
the other party, or its trustee or receiver, whether to enforce the Fund's
obligation to repurchase the securities. In addition, there is a risk of delay
in receiving collateral or securities or in repurchasing the securities covered
by the reverse repurchase agreement or even of a loss of rights in the
collateral or securities in the event the buyer of the securities under the
reverse repurchase agreement files for bankruptcy or becomes insolvent. The
Funds only enter into reverse repurchase agreements (and repurchase agreements)
with counterparties that are deemed by the Adviser to be credit worthy. Reverse
repurchase agreements are speculative techniques involving leverage, and are
subject to asset coverage requirements if a Fund does not establish and maintain
a segregated account (as described above). Under the requirements of the 1940
Act, a Fund is required to maintain an asset coverage (including the proceeds of
the borrowings) of at least 300% of all borrowings. Depending on market
conditions, a Fund's asset coverage and other factors at the time of a reverse
repurchase, a Fund may not establish a segregated account when the Adviser
believes it is not in the best interest of the Fund to do so. In this case, such
reverse repurchase agreements
60058D 25
<PAGE>
will be considered borrowings subject to the asset coverage described above.
Currently, Nations Treasury Reserves has entered into an arrangement whereby it
reinvests the proceeds of a reverse repurchase agreement in a tri-party
repurchase agreement and receives the net interest rate differential.
COMMERCIAL INSTRUMENTS: Commercial instruments consist of short-term U.S.
dollar-denominated obligations issued by domestic corporations or foreign
corporations and domestic and foreign commercial banks. Nations Cash Reserves
will limit purchases of commercial instruments to instruments which: (a) if
rated by at least two NRSROs are rated in the highest rating category for
short-term debt obligations given by such organizations, or if only rated by one
such organization, are rated in the highest rating category for short-term debt
obligations given by such organization; or (b) if not rated, are (i) comparable
in priority and security to a class of short-term instruments of the same issuer
that has such rating(s), or (ii) of comparable quality to such instruments as
determined by the Board of Trustees 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 objective. In
addition, a Fund may acquire unrated commercial paper and corporate bonds that
are determined by the Adviser at the time of purchase to be of comparable
quality to rated instruments that may be acquired by a Fund. Commercial
instruments include variable-rate master demand notes, which are unsecured
instruments that permit the indebtedness thereunder to vary and provide for
periodic adjustments in the interest rate, and variable- and floating-rate
instruments.
FOREIGN SECURITIES: Foreign securities include debt obligations (dollar
denominated) of foreign corporations and banks as well as obligations of foreign
governments and their political subdivisions (which will be limited to direct
government obligations and government-guaranteed securities). Such investments
may subject a Fund to special investment risks, including future political and
economic developments, the possible imposition of withholding taxes on interest
income, possible seizure or nationalization of foreign deposits, the possible
establishment of exchange controls, or the adoption of other foreign
governmental restrictions which might adversely affect the payment of principal
and interest on such obligations. In addition, foreign issuers in general may be
subject to different accounting, auditing, reporting, and record keeping
standards than those applicable to domestic companies, and securities of foreign
issuers may be less liquid and their prices more volatile than those of
comparable domestic issuers.
Investments in foreign securities may present additional risks, whether made
directly or indirectly, including the political or economic instability of the
issuer or the country of issue and the difficulty of predicting international
trade patterns. In addition, there may be less publicly available information
about a foreign company than about a U.S. company. Further, foreign securities
markets are generally not as developed or efficient as those in the U.S., and in
most foreign markets volume and liquidity are less than in the United States.
Fixed commissions on foreign securities exchanges are generally higher than the
negotiated commissions on U.S. exchanges, and there is generally less government
supervision and regulation of foreign securities exchanges, brokers, and
companies than in the United States. With respect to certain foreign countries,
there is a possibility of expropriation or confiscatory taxation, limitations on
the removal of funds or other assets, or diplomatic developments that could
affect investments within those countries. Because of these and other factors,
securities of foreign companies acquired by a Fund may be subject to
26 60058D
<PAGE>
greater fluctuation in price than securities of domestic companies.
GUARANTEED INVESTMENT CONTRACTS: Guaranteed investment contracts, investment
contracts or funding agreements (each referred to as a "GIC") are investment
instruments issued by highly rated insurance companies. Pursuant to such
contracts, a Fund may make cash contributions to a deposit fund of the insurance
company's general or separate accounts. The insurance company then credits to a
Fund guaranteed interest. The insurance company may assess periodic charges
against a GIC for expense and service costs allocable to it, and the charges
will be deducted from the value of the deposit fund. The purchase price paid for
a GIC generally becomes part of the general assets of the issuer, and the
contract is paid from the general assets of the issuer.
A Fund will only purchase GICs from issuers which, at the time of purchase, meet
quality and credit standards established by the Adviser. Generally, GICs are not
assignable or transferable without the permission of the issuing insurance
companies, and an active secondary market in GICs does not currently exist.
Also, a Fund may not receive the principal amount of a GIC from the insurance
company on seven days' notice or less, at which point the GIC may be considered
to be an illiquid investment.
ILLIQUID SECURITIES: Certain securities may be sold only pursuant to certain
legal restrictions, and may be difficult to sell. The Funds will not hold more
than 10% of the value of their respective net assets in securities that are
illiquid or such lower percentage as may be required by the states in which the
appropriate Fund sells its shares. Repurchase agreements, time deposits and GICs
that do not provide for payment to a Fund within seven days after notice, and
illiquid restricted securities are subject to the limitation on illiquid
securities. In addition, interests in privately arranged loans acquired by
Nations Cash Reserves may be subject to this limitation.
If otherwise consistent with their investment objectives and policies, certain
Funds may purchase securities that are not registered under the Securities Act
of 1933, as amended (the "1933 Act") but that can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the 1933 Act, or which
were issued under Section 4(2) of the 1933 Act. Any such security will not be
considered illiquid so long as it is determined by a Fund's Board of Trustees or
the Adviser, acting under guidelines approved and monitored by such Fund's
Board, after considering trading activity, availability of reliable price
information and other relevant information, that an adequate trading market
exists for that security. To the extent that, for a period of time, qualified
institutional or other buyers cease purchasing such restricted securities
pursuant to Rule 144A or otherwise, the level of illiquidity of a Fund holding
such securities may increase during such period.
INTEREST RATE TRANSACTIONS: In order to attempt to protect the value of their
portfolios from interest rate fluctuations, certain of the Funds may enter into
various hedging transactions, such as interest rate swaps and the purchase or
sale of interest rate caps and floors. 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. A
Fund will enter into a swap transaction on a net basis, I.E. the payment
obligations of the Fund and the counterparty will be netted out with the Fund
receiving or paying, as the case may be, only the net amount of the two payment
obligations. A Fund will segregate, on a daily basis, cash or liquid high
quality debt securities with a value at least equal to the Fund's net
obligations, if any, under a swap agreement.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive
60058D 27
<PAGE>
payments of interest on a notional principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor entitles the purchaser
to receive payments of interest on a notional principal amount from the party
selling such interest rate floor. The Adviser expects to enter into these
transactions on behalf of a Fund primarily to preserve a return or spread on a
particular investment or portion of its portfolio or to protect against any
increase in the price of securities the Fund anticipated purchasing at a later
date rather than for speculative purposes. A Fund will not sell interest rate
caps or floors that it does not own.
MONEY MARKET INSTRUMENTS: The term "money market instruments" refers to
instruments with remaining maturities of 397 days or less or obligations with
greater maturities, provided such obligations are subject to demand features or
resets which are less than 397 days. Money market instruments may include, among
other instruments, certain U.S. Treasury obligations, U.S. Government
Obligations, bank instruments, commercial instruments, repurchase agreements and
municipal securities. Such instruments are described in this Appendix A.
MUNICIPAL SECURITIES: The two principal classifications of Municipal Securities
are "general obligation" securities and "revenue" securities. General obligation
securities are secured by the issuer's pledge of its full faith, credit, and
taxing power for the payment of principal and interest. Revenue securities are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as the user of the facility being financed.
"Private activity bonds" held by a Fund are in most cases revenue securities and
are not payable from the unrestricted revenues of the issuer. Consequently, the
credit quality of private activity bonds is usually directly related to the
credit standing of the corporate user of the facility involved.
Municipal Securities may include "moral obligation" bonds, which are normally
issued by special purpose public authorities. If the issuer of moral obligation
bonds is unable to meet its debt service obligations from current revenues, it
may draw on a reserve fund, the restoration of which is a moral commitment but
not a legal obligation of the state or municipality which created the issuer.
Municipal Securities may include variable- or floating-rate instruments issued
by industrial development authorities and other governmental entities. While
there may not be an active secondary market with respect to a particular
instrument purchased by a Fund, a Fund may demand payment of the principal and
accrued interest on the instrument or may resell it to a third party as
specified in the instruments. The absence of an active secondary market,
however, could make it difficult for a Fund to dispose of the instrument if the
issuer defaulted on its payment obligation or during periods the Fund is not
entitled to exercise its demand rights, and the Fund could, for these or other
reasons, suffer a loss.
Some of these instruments may be unrated, but unrated instruments purchased by a
Fund will be determined by the Adviser to be of comparable quality at the time
of purchase to instruments rated "high quality" by any major rating service. 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 also may include municipal lease obligations, including
certificates of participation in municipal leases, and units of participation in
trusts holding pools of tax-exempt leases. A Fund may acquire municipal lease
obligations that may be assigned by the lessee to another party provided the
obligation continues to provide tax-exempt interest. Each Fund will not purchase
municipal lease obligations to the extent it holds municipal lease obligations
and
28 60058D
<PAGE>
illiquid securities in an amount exceeding 10% of its total assets unless the
Adviser determines that the municipal lease obligations are liquid pursuant to
guidelines established by the Funds' Boards. Pursuant to these guidelines, the
Adviser, in making this liquidity determination, will consider, among other
factors, the strength and nature of the secondary market for such obligations,
the prospect for its future marketability and whether such obligations are
rated. The Funds expect that they will only purchase rated municipal lease
obligations.
Municipal participation interests may be purchased from financial institutions,
and give the purchaser an undivided interest in one or more underlying Municipal
Securities. To the extent that municipal participation interests are considered
to be "illiquid securities" such instruments are subject to each Fund's
limitation on the purchase of illiquid securities.
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. A Fund will acquire
stand-by commitments solely to facilitate portfolio liquidity and without
intending to exercise its rights thereunder for trading purposes.
A Fund may invest in short-term securities, in commitments to purchase such
securities on a "when-issued" basis, and reserves the right to engage in "put"
transactions on a daily, weekly or monthly basis. Securities purchased on a
"when-issued" basis are subject to settlement within 45 days of the purchase
date. The interest rate realized on these securities is fixed as of the purchase
date and no interest accrues to the Fund before settlement. These securities are
subject to market fluctuation due to changes in market interest rates. The Funds
will only commit to purchase a security on a when-issued basis with the
intention of actually acquiring the security and will segregate sufficient
liquid assets to meet its purchase obligation.
A "put" feature permits a Fund to sell a security at a fixed price prior to
maturity. The underlying Municipal Securities subject to a put may be sold at
any time at the market rates. However, unless the put was an integral part of
the security as originally issued, it may not be marketable or assignable.
Therefore, the put would only have value to the Fund. In certain cases a premium
may be paid for put features. A premium paid will have the effect of reducing
the yield otherwise payable on the underlying security. The purpose of engaging
in transactions involving puts is to maintain flexibility and liquidity to
permit the Fund to meet redemptions and remain as fully invested as possible in
Municipal Securities. The Funds will limit their put transactions to
institutions which the Adviser believes present minimal credit risk, pursuant to
guidelines adopted by the Boards. Nations Municipal Reserves may invest more
than 40% of its portfolio in securities with put or demand features guaranteed
by banks and other financial institutions. Accordingly, changes in the credit
quality of these institutions could cause losses to the Fund and affect its
share price.
Although each Fund does not presently intend to do so on a regular basis, each
may invest more than 25% of its total assets in Municipal Securities that are
payable 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
Funds'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.
OTHER INVESTMENT COMPANIES: Each Fund may invest in securities issued by other
investment companies to the extent that such investments are consistent with the
Fund's investment objective and policies and permissible
60058D 29
<PAGE>
under the 1940 Act. 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 directly in
connection with its own operations.
REPURCHASE AGREEMENTS: A repurchase agreement involves the purchase of a
security by a Fund and a simultaneous agreement (generally with a bank or
broker/dealer) to repurchase that security from the Fund at a specified price
and date or upon demand. This technique offers a method of earning income on
uninvested cash. A risk associated with repurchase agreements is the failure of
the seller to repurchase the securities as agreed, which may cause a Fund to
suffer a loss if the market value of such securities declines before they can be
liquidated on the open market. Repurchase agreements with a duration of more
than seven days are considered illiquid securities and are subject to the limit
stated above. A Fund may enter into joint repurchase agreements jointly with
other investment portfolios of Nations Fund.
SECURITIES LENDING: To increase return on portfolio securities, the Funds may
lend their portfolio securities to broker/dealers and other institutional
investors pursuant to agreements requiring that the loans be continuously
secured by collateral equal at all times in value to at least the market value
of the securities loaned. There is a risk of delay in receiving 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 credit worthy and when, in its
judgment, the income to be earned from the loan justifies the attendant risks.
The aggregate of all outstanding loans of a Fund may not exceed 30% of the value
of its total assets.
SHORT-TERM TRUST OBLIGATIONS: Nations Cash Reserves may invest in short-term
obligations issued by special purpose trusts established to acquire specific
issues of government or corporate securities. Such obligations entitle the Fund
to a proportional fractional interest in payments received by a trust, either
from the underlying securities owned by the trust or pursuant to other
arrangements entered into by the trust. A trust may enter into a swap
arrangement with a highly rated investment firm, pursuant to which the trust
grants to the counterparty certain of its rights with respect to the securities
owned by the trust in exchange for the obligation of the counterparty to make
payments to the trust according to an established formula. The trust obligations
purchased by the Fund must satisfy the quality and maturity requirements
generally applicable to the Fund pursuant to Rule 2a-7 under the 1940 Act.
U.S. GOVERNMENT OBLIGATIONS: U.S. Government Obligations consist of marketable
securities and instruments issued or guaranteed by the U.S. Government or any of
its agencies, authorities or instrumentalities. Direct obligations are issued by
the U.S. Treasury and include all U.S. Treasury instruments. U.S. Treasury
obligations differ only in their interest rates, maturities and time of
issuance. Obligations of U.S. Government agencies, authorities and
instrumentalities are issued by government-sponsored agencies and enterprises
acting under authority of Congress. Although obligations of federal agencies,
authorities and instrumentalities are not debts of the U.S. Treasury, some are
backed by the full faith and credit of the U.S. Treasury, such as direct
pass-through certificates of the Government National Mortgage Association, some
are supported by the right of the issuer to borrow from the U.S. Government,
such as obligations of Federal Home Loan Banks, and some are backed only by the
credit of the issuer itself, such as obligations of the Federal National
Mortgage Association. No assurance can be given that the U.S. Government would
provide financial
30 60058D
<PAGE>
support to government-sponsored instrumentalities if it is not obligated to do
so by law.
The market value of U.S. Government Obligations may fluctuate due to
fluctuations in market interest rates. As a general matter, the value of debt
instruments, including U.S. Government Obligations, declines when market
interest rates increase and rises when market interest rates decrease. Certain
types of U.S. Government Obligations are subject to fluctuations in yield or
value due to their structure or contract terms.
VARIABLE- AND FLOATING-RATE INSTRUMENTS: Certain instruments issued, guaranteed
or sponsored by the U.S. Government or its agencies, state and local government
issuers, and certain debt instruments issued by domestic and foreign banks and
corporations may carry variable or floating rates of interest. Such instruments
bear interest rates which are not fixed, but which vary with changes in
specified market rates or indices, such as a Federal Reserve composite index. A
variable-rate demand instrument is an obligation with a variable or floating
interest rate and an unconditional right of demand on the part of the holder to
receive payment of unpaid principal and accrued interest. The Funds will invest
in securities with demand features where (a) the security or its issuer has
received a short-term rating from an NRSRO; and (b) the issuer of the demand
feature, or another institution, undertakes to notify promptly the holder of the
security in the event that the demand feature is substituted with a demand
feature provided by another issuer. (Note, however, that certain securities
first issued on or before June 3, 1996 are not subject to these rating and
notice requirements.) An instrument with a demand period exceeding seven days
may be considered illiquid if there is no secondary market for such security.
WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT SECURITIES: The purchase of
new issues of securities on a "when-issued," "delayed delivery" or "forward
commitment" basis occurs when the payment for and delivery of securities takes
place at a future date. Because actual payment for and delivery of such
securities generally take place 15 to 45 days after the purchase date,
purchasers of such securities bear the risk that interest rates on debt
securities at the time of delivery may be higher or lower than those contracted
for on the security purchased.
Appendix B -- Description Of Ratings
The following summarizes the highest three ratings used by S&P for corporate and
municipal bonds:
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.
To provide more detailed indications of credit quality, the AA and A ratings may
be modified by the addition of a plus or minus sign to show relative standing
within this major rating category.
60058E 31
<PAGE>
The following summarizes the highest three ratings used by Moody's for corporate
and municipal bonds:
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.
Moody's applies numerical modifiers (1, 2 and 3) with respect to corporate bonds
rated Aa and A. 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 and A groups which Moody's believes possess the strongest investment
attributes are designated by the symbols Aa1 and A1, respectively.
The following summarizes the highest three ratings used by D&P for bonds:
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.
To provide more detailed indications of credit quality, the AA and A ratings may
be modified by the addition of a plus or minus sign to show relative standing
within this major category.
The following summarizes the highest three ratings used by Fitch for bonds:
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+.
32 60058E
<PAGE>
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.
To provide more detailed indications of credit quality, the AA and A ratings may
be modified by the addition of a plus or minus sign to show relative standing
within this major rating category.
The following summarizes the two highest ratings used by Moody's for short-term
municipal notes and variable-rate demand obligations:
MIG-1/VMIG-1 -- Obligations bearing these designations are of the best
quality, enjoying strong protection from established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2 -- Obligations bearing these designations are of high quality,
with ample margins of protection although not so large as in the preceding
group.
The following summarizes the two highest ratings used by S&P for short-term
municipal notes:
SP-1 -- Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics are given
a "plus" (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest.
The two highest rating categories of D&P for short-term debt are D-1 and D-2.
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.
The following summarizes the two highest rating categories used by Fitch for
short-term obligations:
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+.
Commercial paper rated A-1 by S&P indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted A-1+. Capacity for timely payment on
commercial paper rated A-2 is satisfactory, but the relative degree of safety is
not as high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated Prime-1 (or related supporting institutions) are considered to
have a superior capacity for repayment of senior short-term promissory
obligations. Issuers rated Prime-2 (or related
support-
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ing 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.
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 three highest 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.
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".
The following summarizes the three highest long-term ratings used by 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.
34 60058E
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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+ -- Where issues possess a particularly strong credit feature.
A1 -- Obligations supported by the highest capacity for timely repayment.
A2 -- Obligations supported by a good capacity for timely repayment.
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