NATIONS RESERVES
(formerly known as The Capitol Mutual Funds)
Statement of Additional Information
NATIONS CASH RESERVES
NATIONS MONEY MARKET RESERVES
NATIONS TREASURY RESERVES
NATIONS GOVERNMENT RESERVES
NATIONS MUNICIPAL RESERVES
NATIONS CALIFORNIA TAX-EXEMPT RESERVES
NATIONS ASSET ALLOCATION FUND
NATIONS CAPITAL INCOME FUND
NATIONS CALIFORNIA MUNICIPAL BOND FUND
NATIONS INTERMEDIATE BOND FUND
NATIONS BLUE CHIP FUND
CAPITAL, ADVISER, LIQUIDITY, MARKET, INVESTOR, SERVICE, DAILY, TRUST, INVESTOR
A, INVESTOR B, INVESTOR C, PRIMARY A, PRIMARY B, MARSICO AND SEAFIRST SHARES
AUGUST 1, 1999
This Statement of Additional Information (the "SAI") is not a prospectus. It is
intended to provide additional information regarding the eleven series of
Nations Reserves (the "Trust") and should be read in conjunction with the
Trust's prospectuses dated August 1, 1999, as supplemented (each a "Prospectus"
and collectively, the "Prospectuses"). All terms used in this SAI that are
defined in the Prospectuses will have the same meanings as assigned in the
Prospectuses. Copies of the Prospectuses may be obtained without charge by
writing Nations Funds c/o the Distributor, Stephens Inc., One Bank of America
Plaza, 33rd Floor, Charlotte, North Carolina 28255, or by calling Nations Funds
at (800) 321-7854.
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TABLE OF CONTENTS
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HISTORY OF THE TRUST......................................................................... 1
DESCRIPTION OF THE TRUST AND THE INVESTMENTS AND RISKS
OF ITS FUNDS ................................................................................ 1
General.............................................................................. 1
Investment Limitations .............................................................. 2
Permissible Fund Investments......................................................... 8
Asset-Backed Securities.............................................................. 9
Borrowings........................................................................... 14
Commercial Instruments............................................................... 14
Combined Transactions................................................................ 15
Convertible Securities............................................................... 15
Corporate Debt Securities............................................................ 16
Custodial Receipts................................................................... 16
Currency Swaps....................................................................... 16
Delayed Delivery Transactions........................................................ 17
Dollar Roll Transactions ............................................................ 17
Equity Swap Contracts ............................................................... 17
Foreign Currency Transactions ....................................................... 18
Futures, Options and Other Derivative
Instruments.................................................................... 19
Risk Factors Associated with Futures and Options Transactions........................ 25
Guaranteed Investment Contracts...................................................... 35
Insured Municipal Securities ........................................................ 35
Interest Rate Transactions .......................................................... 35
Lower Rated Debt Securities.......................................................... 36
Municipal Securities ................................................................ 37
Options on Currencies................................................................ 49
Other Investment Companies........................................................... 49
Participation Interests and Company Receipts......................................... 50
Real Estate Investment Trusts........................................................ 50
Repurchase Agreements ............................................................... 50
Reverse Repurchase Agreements ....................................................... 50
Securities Lending................................................................... 51
Short Sales.......................................................................... 51
Special Situations................................................................... 51
Stand-by Commitments ................................................................ 52
Stripped Securities.................................................................. 52
U.S. and Foreign Bank Obligations.................................................... 53
U.S. Government Obligations.......................................................... 54
Use of Segregated and Other Special Accounts......................................... 54
Variable and Floating Rate Instruments .............................................. 54
Warrants............................................................................. 55
When-Issued Purchases and Forward Commitments ...................................... 55
Portfolio Turnover................................................................... 56
Investment Risks..................................................................... 56
MANAGEMENT OF THE TRUST...................................................................... 57
Nations Funds Retirement Plan........................................................ 62
Nations Funds Deferred Compensation Plan............................................. 62
Shareholder and Trustee Liability.................................................... 64
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INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY,
TRANSFER AGENCY, OTHER SERVICE PROVIDERS, SHAREHOLDER SERVICING AND
DISTRIBUTION AGREEMENTS ..................................................................... 65
Investment Adviser and Sub-Advisers.................................................. 65
Co-Administrators and Sub-Administrator.............................................. 70
Distribution Plans and Shareholder Servicing
Arrangements for
Liquidity Class.................................................................. 73
Market Class..................................................................... 75
Adviser Class.................................................................... 76
Trust Class...................................................................... 78
Daily Class...................................................................... 78
Service Class.................................................................... 80
Investor Class................................................................... 81
Investor A Shares................................................................ 82
Investor B Shares................................................................ 83
Investor C Shares................................................................ 84
Primary B Shares................................................................. 86
Marsico Shares................................................................... 86
Seafirst Shares.................................................................. 87
Expenses............................................................................. 88
Transfer Agents and Custodians....................................................... 89
Distributor.......................................................................... 89
Independent Accountant and Reports................................................... 90
Counsel.............................................................................. 91
FUND TRANSACTIONS AND BROKERAGE.............................................................. 91
General Brokerage Policy............................................................. 91
Brokerage Commissions................................................................ 93
Section 28(e) Standards.............................................................. 93
DESCRIPTION OF SHARES........................................................................ 94
Description of Shares of the Trust................................................... 94
Purchase and Redemption of Fund Shares............................................... 95
Exchanges............................................................................ 97
Determination of Net Asset Value..................................................... 97
Non-Money Market Funds............................................................... 98
ADDITIONAL INFORMATION CONCERNING TAXES...................................................... 99
General.............................................................................. 99
Excise Tax .......................................................................... 99
Taxation of Fund Investments......................................................... 99
Foreign Taxes ....................................................................... 101
Capital Gain Distributions........................................................... 101
Disposition of Fund Shares........................................................... 101
Federal Income Tax Rates............................................................. 102
Corporate Shareholders............................................................... 102
Foreign Shareholders................................................................. 102
New Regulations...................................................................... 102
Backup Withholding................................................................... 102
Additional Consideration for Nations Municipal Reserves, Nations California Tax-
Exempt Reserves and Nations California Municipal Bond Fund....................... 102
Additional Consideration for Nations California Tax-Exempt Reserves and
Nations California Municipal Bond Fund........................................... 103
Other Matters........................................................................ 104
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PERFORMANCE INFORMATION...................................................................... 104
General.............................................................................. 104
Money Market Funds................................................................... 104
Yield Calculations................................................................... 105
Total Return Calculations............................................................ 111
SCHEDULE A - Description of Ratings.......................................................... A-1
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HISTORY OF NATIONS RESERVES
Nations Reserves (formerly known as The Capitol Mutual Funds),(1)(referred to
herein as the "Trust") is an open-end registered investment company in the
Nations Funds family, which consists of the Trust, Nations Fund Trust, Nations
Fund, Inc., Nations Fund Portfolios, Inc., Nations LifeGoal Funds, Inc., Nations
Annuity Trust and Nations Master Investment Trust.
The Trust was organized as a Massachusetts business trust on January
22, 1990. It has a fiscal year end of March 31st.
DESCRIPTION OF THE TRUST AND
THE INVESTMENTS AND RISKS OF ITS FUNDS
GENERAL
The Agreement and Declaration of Trust under which the Trust was duly
established permits the Trust to offer separate series of units of beneficial
interest ("shares"). Each share of each series represents an equal proportionate
interest in that series. This Statement of Additional Information ("SAI")
relates to the Trust's Nations Cash Reserves, Nations Money Market Reserves,
Nations Treasury Reserves, Nations Government Reserves, Nations Municipal
Reserves and the Nations California Tax-Exempt Reserves (collectively referred
to as the "Money Market Funds"), and to the Trust's Nations Asset Allocation
Fund, Nations Capital Income Fund, Nations California Municipal Bond Fund,
Nations Intermediate Bond Fund and Nations Blue Chip Fund (collectively referred
to as the "Non-Money Market Funds," and, together with the Money Market Funds,
the "Funds").
Nations Intermediate Bond Fund and Nations Blue Chip Fund are sometimes
referred to herein as the "Feeder Funds." The Feeder Funds seek to achieve their
respective investment objectives by investing substantially all of their assets
in diversified investment portfolios having the same investment objective as the
Master Portfolios of Nations Master Investment Trust ("NMIT"), an open-end
management investment company. Nations Intermediate Bond Fund invests
substantially all of its assets in Nations Intermediate Bond Master Portfolio.
Nations Blue Chip Fund invests substantially all of its assets in Nations Blue
Chip Master Portfolio.
Each share of the Trust is without par value, represents an equal
proportionate interest in the related fund with other shares of the same class,
and is entitled to such dividends and distributions out of the income earned on
the assets belonging to such fund as are declared in the discretion of the
Trust's Board of Trustees. The Trust's Agreement and Declaration of Trust
authorizes the Board of Trustees to classify or reclassify any class of shares
into one or more series of shares.
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1 More specifically, Nations Reserves is the name under which The Capitol Mutual
Funds conducts business.
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Shareholders are entitled to one vote for each full share held and a
proportionate fractional vote for each fractional share held. Shareholders of
each fund of the Trust will vote in the aggregate and not by fund, and
shareholders of each fund will vote in the aggregate and not by class except as
otherwise expressly required by law or when the Board of Trustees determines
that the matter to be voted on affects only the interests of shareholders of a
particular fund or class. See the SAI for examples of when the 1940 Act requires
voting by fund.
As of August 1, 1999, Bank of America, N.A. ("Bank of America") and its
affiliates possessed or shared power to dispose or vote with respect to more
than 25% of the outstanding shares of the Trust and therefore could be
considered to be a controlling person of the Trust for purposes of the 1940 Act.
For more detailed information concerning the percentage of each class or series
of shares over which Bank of America and its affiliates possessed or shared
power to dispose or vote as of a certain date, see the SAI.
The Trust does not presently intend to hold annual meetings except as
required by the 1940 Act. Shareholders will have the right to remove Trustees.
The Trust's By-Laws provides that special meetings of shareholders shall be
called at the written request of the shareholders entitled to vote at least 10%
of the outstanding shares of the Trust entitled to be voted at such meeting.
NationsBanc Advisors, Inc. ("NBAI") is the investment adviser to the
Funds, except Nations Blue Chip Fund and Nations Intermediate Bond Fund. Chicago
Equity Partners Corporation ("Chicago Equity") is co-investment sub-adviser with
TradeStreet Investment Associates, Inc. ("TradeStreet") to Nations Asset
Allocation Fund. TradeStreet Investment Associates, Inc. ("TradeStreet") is the
investment sub-adviser to all other Funds, except Nations Blue Chip Fund and
Nations Intermediate Bond Fund. Nations Intermediate Bond Fund and Nations Blue
Chip Fund invest all of their assets in Nations Intermediate Bond Master
Portfolio and Nations Blue Chip Master Portfolio, respectively (each a "Master
Portfolio"). NBAI is the investment adviser, and TradeStreet is the investment
sub-adviser, to each Master Portfolio. On or about September 1, 1999, NBAI will
change its name to Banc of America Advisors, Inc. ("BAAI"). Accordingly, the
remainder of this SAI refers to the name of the investment adviser as BAAI. As
used herein the term "Adviser" shall mean BAAI, TradeStreet, and/or Chicago
Equity as the context may require.
This SAI is intended to furnish prospective investors with additional
information concerning the Companies and the Funds. Some of the information
required to be in this SAI is also included in the Funds' current Prospectuses,
and, in order to avoid repetition, reference will be made to sections of the
Prospectuses. Additionally, the Prospectuses and this SAI omit certain
information contained in the registration statement filed with the SEC. Copies
of the registration statement, including items omitted from the Prospectuses and
this SAI, may be obtained from the SEC by paying the charges prescribed under
its rules and regulations. No investment in the Funds' Shares should be made
without first reading the related Prospectuses.
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INVESTMENT LIMITATIONS
Information concerning each Fund's investment objective is set forth in
each Prospectus. There can be no assurance that the Funds will achieve their
objectives. The features of the Funds' principal investment strategies and the
principal risks associated with those investment strategies also are discussed
in the Prospectuses. The most significant investment restrictions applicable to
the Funds' investment programs are set forth below:
The following investment limitations are matters of fundamental policy
and may not be changed without the affirmative vote of the holders of a majority
of the Fund's outstanding shares. Other investment limitations that cannot be
changed without such a vote of shareholders are described in the SAI. In
addition,, each Fund is seeking or has obtained permission from the SEC to
borrow money from or lend money to other funds of the companies, and to other
investment companies that permit such transactions, and for which BAAI serves as
investment adviser.
Each Fund (except with respect to certain Funds whose restrictions are
enumerated separately) will not:
1. Borrow money or issue senior securities as defined in the Investment
Company Act of 1940, as amended (the "1940 Act") except that (a) a Fund
may borrow money from banks for temporary purposes in amounts up to
one-third of the value of such Fund's total assets at the time of
borrowing, provided that borrowings in excess of 5% of the value of
such Fund's total assets will be repaid prior to the purchase of
additional portfolio securities by such Fund, (b) a Fund may enter into
commitments to purchase securities in accordance with the Fund's
investment program, including delayed delivery and when-issued
securities, which commitments may be considered the issuance of senior
securities, and (c) a Fund may issue multiple classes of shares in
accordance with SEC regulations or exemptions under the 1940 Act. The
purchase or sale of futures contracts and related options shall not be
considered to involve the borrowing of money or issuance of senior
securities. Each Fund may enter into reverse repurchase agreements or
dollar roll transactions. The purchase or sale of futures contracts and
related options shall not be considered to involve the borrowing of
money or issuance of senior securities.
2. Purchase any securities on margin (except for such short-term credits
as are necessary for the clearance of purchases and sales of portfolio
securities) or sell any securities short (except against the box.) For
purposes of this restriction, the deposit or payment by the Fund of
initial or maintenance margin connection with futures contracts and
related options and options on securities is not considered to be the
purchase of a security on margin.
3. Underwrite securities issued by any other person, except to the extent
that the purchase of securities and the later disposition of such
securities in accordance with the Fund's investment program may be
deemed an underwriting. This restriction shall not limit a Fund's
ability to invest in securities issued by other registered investment
companies.
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4. Invest in real estate or real estate limited partnership interests. (A
Fund may, however, purchase and sell securities secured by real estate
or interests therein or issued by issuers which invest in real estate
or interests therein.) This restriction does not apply to real estate
limited partnerships listed on a national stock exchange (E.G., the New
York Stock Exchange).
5. Purchase or sell commodity contracts except that each Fund may, to the
extent appropriate under its investment policies, purchase publicly
traded securities of companies engaging in whole or in part in such
activities, may enter into futures contracts and related options, may
engage in transactions on a when-issued or forward commitment basis,
and may enter into forward currency contracts in accordance with its
investment policies.
Nations Cash Reserves, Nations Treasury Reserves, Nations Government Reserves
and Nations Municipal Reserves may not:
1. Acquire more than 10% of the voting securities of any one issuer.
2. Invest in companies for the purpose of exercising control.
3. Borrow money except for temporary or emergency purposes and then only
in an amount not exceeding one-third of the value of total assets. Any
borrowing will be done from a bank and to the extent that such
borrowing exceeds 5% of the value of the Fund's assets, asset coverage
of at least 300% is required. In the event that such asset coverage
shall at any time fall below 300%, the Fund shall, within three days
thereafter or such longer period as the SEC may prescribe by rules and
regulations, reduce the amount of its borrowings to such an extent that
the asset coverage of such borrowings shall be at least 300%. This
borrowing provision is included solely to facilitate the orderly sale
of portfolio securities to accommodate heavy redemption requests if
they should occur and is not for investment purposes. All borrowings
will be repaid before making additional investments and any interest
paid on such borrowings will reduce income.
4. Make loans, except that (a) a Fund may purchase or hold debt
instruments in accordance with its investment objective and policies;
(b) may enter into repurchase agreement 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 are
not to exceed, in the aggregate, 10% of the Fund's total assets and (c)
the Funds (except Nations Municipal Reserves) may engage in securities
lending as described in each prospectus and in this SAI.
5. Pledge, mortgage or hypothecate assets except to secure temporary
borrowings permitted by (3) above in aggregate amounts not to exceed
10% of total assets taken at current value at the time of the
incurrence of such loan, except as permitted with respect to securities
lending.
6. Purchase or sell real estate, real estate limited partnership
interests, commodities or commodities contracts.
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7. Make short sales of securities, maintain a short position or purchase
securities on margin, except that the Trust may obtain short-term
credits as necessary for the clearance of security transactions.
8. Act as an underwriter of securities of other issuers except as it may
be deemed an underwriter in selling a Fund security.
9. Purchase securities of other investment companies except as permitted
by the 1940 Act and the rules and regulations thereunder and may only
purchase securities of other money market funds. Under these rules and
regulations, the Funds are prohibited from acquiring the securities of
other investment companies if, as a result of such acquisition, the
Funds own more than 3% of the total voting stock of the company;
securities issued by any one investment company represent more than 5%
of the Fund's total assets; or securities (other than treasury stock)
issued by all investment companies represent more than 10% of the total
assets of the Fund. These investment companies typically incur fees
that are separate from those fees incurred directly by the Fund. A
Fund's purchase of such investment company securities results in the
layering of expenses, such that Shareholders would indirectly bear a
proportionate share of the operating expenses of such investment
companies, including advisory fees. It is the position of the
Securities and Exchange Commission's Staff that certain nongovernmental
issues of CMOs and REMICS constitute investment companies pursuant to
the 1940 Act and either (a) investments in such instruments are subject
to the limitations set forth above or (b) the issuers of such
instruments have received orders from the SEC exempting such
instruments from the definition of investment company.
10. Issue senior securities (as defined in the 1940 Act) except in
connection with permitted borrowings as described above or as permitted
by rule, regulation or order of the SEC.
11. Purchase or retain securities of an issuer if, to the knowledge of the
Trust, an officer, trustee, or partner of the Trust or Adviser of the
Trust owns beneficially more than 1/2 of 1% of the shares or securities
of such issuer and all such officers, trustees and partners owning more
than 1/2 of 1% of such shares or securities together own more than 5%
of such shares or securities.
12. Invest in interest in oil, gas or other mineral exploration or
development programs and oil, gas or mineral leases.
13. Write or purchase puts, calls or combinations thereof.
14. Invest in warrants valued at lower of cost or market exceeding 5% of
the Fund's net assets. Included in that amount but not to exceed 2% of
the Fund's net assets, may be warrants not listed on the New York Stock
Exchange or American Stock Exchange. Nations Money Market Reserves may
not:
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1. Purchase or sell real estate, except that the Fund may purchase
securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
2. Acquire any other investment company or investment company security
except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted by the 1940 Act.
3. Act as an underwriter of securities within the meaning of the 1933 Act
except to the extent that the purchase of obligations directly from the
issuer thereof in accordance with the Fund's investment objective,
policies and limitations may be deemed to be underwriting.
4. Write or sell put options, call options, straddles, spreads, or any
combination thereof, except for transactions in options on securities,
securities indices, futures contracts and options on futures contracts.
5. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation
shall not apply to the Fund's transactions in futures contracts and
related options, and (b) the Fund may obtain short-term credit as may
be necessary for the clearance of purchases and sales of portfolio
securities.
6. Purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs, except that the Fund may, to the
extent appropriate to its investment objective, purchase publicly
traded securities of companies engaging in whole or in part in such
activities and may enter into futures contracts and related options.
7. Make loans, except that the Fund may purchase and hold debt instruments
and enter into repurchase agreements in accordance with its investment
objective and policies and may lend portfolio securities.
8. Purchase securities of companies for the purpose of exercising control.
9. Purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or
certificates of deposit for any such securities) if, immediately after
such purchase, more than 15% of its total assets would be invested in
certificates of deposit or bankers' acceptances of any one bank, or
more than 5% of the value of the Fund's total assets would be invested
in other securities of any one bank or in the securities of any other
issuer, or more than 10% of the issuer's outstanding voting securities
would be owned by the Fund; except that up to 25% of the value of the
Fund's total assets may be invested without regard to the foregoing
limitations. For purposes of this limitation, a security is considered
to be issued by the entity (or entities) whose assets and revenues back
the security. A guarantee of a security shall not be deemed to be a
security issued by the guarantor when the value of all securities
issued and guaranteed by the guarantor, and owned by the Fund, does not
exceed 10% of the value of the Fund's total assets. In accordance with
the current regulations of the SEC, the Fund intends to limit its
investments in bankers' acceptances, certificates of deposit and other
securities of any one bank to not more than 5% of the Fund's total
assets at the time of purchase (rather than the 15% limitation set
forth above), provided that the Fund may invest up to 25% of its total
assets in the securities of any one issuer for a period of up to three
business days. This practice, which is not a fundamental policy of the
Fund, could be changed only in the event that such regulations of the
Securities and Exchange Commission are amended in the future.
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10. Purchase any securities which would cause 25% or more of the value of
the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no
limitation with respect to: (i) instruments issued or guarantee by the
United States, any state, territory or possession of the United States,
the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, (ii) instruments issued by
domestic branches of U.S. banks; and (iii) repurchase agreements
secured by the instruments described in clauses (i) and (ii); (b)
wholly-owned finance companies will be considered to be in the
industries of their parents if their activities are primarily related
to financing the activities of the parents; and (c) utilities will be
divided according to their services, for example, gas, gas
transmission, electric and gas, electric and telephone will each be
considered a separate industry. In construing Investment Limitation 10
in accordance with SEC policy, to the extent permitted, U.S. branches
of foreign banks will be considered to be U.S. banks where they are
subject to the same regulation as U.S. banks.
11. Borrow money or issue senior securities, except that the Fund may
borrow from banks and enter into reverse repurchase agreements for
temporary purposes in amounts up to one-third of the value of the total
assets at the time of such borrowing or mortgage, pledge or hypothecate
any assets, except in connection with any such borrowing and then in
amounts not in excess of one-third of the value of the Fund's total
assets at the time of such borrowing. The Fund will not purchase
securities while its borrowings (including reverse repurchase
agreements) in excess of 5% of its total assets are outstanding.
Securities held in escrow or separate accounts in connection with the
Fund's investment practices described in this SAI or in the
Prospectuses are not deemed to be pledged for purposes of this
limitation.
Although the foregoing investment limitations would permit Nations
Money Market Reserves to invest in options, futures contracts and options on
futures contracts, the Fund does not currently intend to trade in such
instruments during the next 12 months. Prior to making any such investments, the
Fund would notify its shareholders and add appropriate descriptions concerning
the instruments to the Prospectuses and this SAI.
As stated in the Prospectuses, securities subject to unconditional
demand features acquired by Nations Money Market Reserves must satisfy special
SEC diversification requirements. In particular, a security that has an
unconditional demand feature or other guarantee (as defined by SEC regulations)
which is issued by a person that, directly or indirectly, does not control, and
is not controlled by or under common control with, the issuer of the security
(an "Unconditional Demand Feature") is subject to the following diversification
requirements: Immediately after the acquisition of the security, Nations Money
Market Reserves may not have invested more than 10% of its total assets in
securities issued by or subject to Unconditional Demand Features from the same
person, except that the Fund may invest up to 25% of its total assets in
securities subject to Unconditional Demand Features of persons that are rated in
the highest rating category as determined by two NRSROs (or one NRSRO if the
security is rated by only one NRSRO).
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Nations California Tax-Exempt Reserves may not:
1. Borrow money, issue senior securities or mortgage, pledge or
hypothecate its assets except to the extent permitted under the 1940
Act.
2. Underwrite any issue of securities within the meaning of the 1933 Act,
except when it might be technically deemed to be an underwriter either
(a) in connection with the disposition of a portfolio security, or (b)
in connection with the purchase of securities directly from the issuer
thereof in accordance with its investment objective.
3. Purchase any securities which would cause 25% or more of the value of
its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no
limitation with respect to obligations issued or guaranteed by the U.S.
government, any state or territory of the United States, or any of
their agencies, instrumentalities or political subdivisions, and (b)
not withstanding this limitation or any other fundamental investment
limitation, assets may be invested in the securities of one or more
diversified management investment companies to the extent permitted by
the 1940 Act. Notwithstanding the above limitation, there is no
limitation with respect to investments by any of the Funds in
repurchase agreements, domestic bank obligations and certain bank
obligations considered to be issued by domestic banks purchase to
regulations or pronouncements of the Securities and Exchange Commission
or its staff.
4. Purchase or sell real estate, except a Fund may purchase securities of
issuers which deal or invest in real estate and may purchase securities
which are secured by real estate or interests in real estate.
5. Purchase or sell commodities, except that a Fund may, to the extent
consistent with its investment objective, invest in securities of
companies that purchase or sell commodities or which invest in such
programs, and purchase and sell options, forward contracts, future
contracts and options on future contracts. This limitation does not
apply to foreign currency transactions including without limitation
forward currency contracts.
6. Make loans, except to the extent permitted by the 1940 Act.
Nations Asset Allocation Fund, Nations Capital Income Fund, Nations California
Municipal Bond Fund, Nations Intermediate Bond Master Portfolio and Nations Blue
Chip Master Portfolio may not:
1. Underwrite any issue of securities within the meaning of the 1933 Act
except when it might technically be deemed to be an underwriter either
(a) in connection with the disposition of a portfolio security, or (b) in
connection with the purchase of securities directly from the issuer
thereof in accordance with its investment objective.
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2. Purchase or sell real estate, except a Fund may purchase securities of
issuers which deal or invest in real estate and may purchase securities
which are secured by real estate or interests in real estate.
3. Purchase or sell commodities, except that a Fund may to the extent
consistent with its investment objective, invest in securities of
companies that purchase or sell commodities or which invest in such
programs, and purchase and sell options, forward contracts, futures
contracts, and options on futures contracts. This limitation does not
apply to foreign currency transactions including without limitation
forward currency contracts.
4. Purchase any securities which would cause 25% or more of the value of its
total assets at the time of purchase to be invested in the securities of
one or more issuers conducting their principal business activities in the
same industry, provided that: (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. government, any state or
territory of the United States, or any of their agencies,
instrumentalities or political subdivisions, and (b) notwithstanding this
limitation or any other fundamental investment limitation, assets may be
invested in the securities of one or more diversified management
investment companies to the extent permitted by the 1940 Act and the
rules and regulations thereunder.
5. Make loans, except to the extent permitted by the 1940 Act.
6. Borrow money, issue senior securities or mortgage, pledge or hypothecate
its assets except to the extent permitted under the 1940 Act.
7. Purchase securities (except securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) of any one issuer if, as a
result, more than 5% of its total assets will be invested in the
securities of such issuer or it would own more than 10% of the voting
securities of such issuer, except that (a) up to 25% of its total assets
may be invested without regard to these limitations and (b) a Fund's
assets may be invested in the securities of one or more diversified
management investment companies to the extent permitted by the 1940 Act.
NON-FUNDAMENTAL INVESTMENT LIMITATIONS:
1. Nations Treasury Reserves may not write covered call options or purchase
put options as long as the Fund invests exclusively in U.S. Treasury
obligations, separately traded component parts of such obligations
transferable through the Federal book-entry system, and repurchase
agreements involving such obligations.
2. Nations California Tax-Exempt Reserves may not purchase the securities of
any issuer (except securities issued by the U.S. Government, its agencies
or instrumentalities) if as a result more than 5% of the value of the
Fund's total assets would be invested in the securities of such issuer
except that (a) up to 50% of the value of the Fund's total assets may be
invested without regard to this 5% limitation provided that no more than
25% of the value of the Fund's total assets are invested in the
securities of any one issuer; (b) a Fund's assets may be invested in the
securities of one or more diversified management investment companies to
the extent permitted by 1940 Act and (c) the 5% limitation may be
temporarily exceeded provided that the discrepancy is eliminated as the
end of the quarter or within 30 days thereafter.
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Notwithstanding the foregoing restriction, the California Tax-Exempt
Reserves invest without regard to 5% limitation in securities subject to
certain guarantees and certain money market Fund securities in accordance
with Rule 2a-7 under 1940 Act or any successor rule, and otherwise
permitted in accordance with Rule 2a-7 or any successor rule.
3. Nations Asset Allocation Fund, Nations Capital Income Fund, Nations
California Municipal Bond Fund, Nations Intermediate Bond Master
Portfolio and Nations Blue Chip Master Portfolio may not: sell securities
short, maintain a short position, or purchase securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions. For this purpose, a deposit or payment by a Fund for
initial or maintenance margin in connection with future contracts is not
considered to be the purchase or sale of a security on margin.
4. Nations Asset Allocation Fund, Nations Capital Income Fund, Nations
California Municipal Bond Fund, Nations Intermediate Bond Master
Portfolio and Nations Blue Chip Master Portfolio may not purchase
securities of other investment companies except as permitted by the 1940
Act.
5. Nations California Municipal Bond Fund may not purchase securities of
companies for the purpose of exercising control.
6. Nations Intermediate Bond Master Portfolio, Nations Blue Chip Master
Portfolio, Nations Asset Allocation Fund, Nations Capital Income Fund and
Nations California Municipal Bond Fund may not write or sell puts, calls,
straddles, spreads or combinations thereof except that a Fund may acquire
standby commitments and may enter into futures contracts and options in
accordance with their investment objectives.
The foregoing percentages will apply at the time of the purchase of a security
and shall not be considered violated unless an excess or deficiency occurs or
exists immediately after and as a result of a purchase of such security.
PERMISSIBLE FUND INVESTMENTS
In addition to the principal investment strategies for each Fund, which
are outlined in the Funds' prospectuses, each Fund also may invest in other
types of securities in percentages of less than 10% of its total assets (unless
otherwise indicated, E.G., most Funds may invest in money market instruments
without limit during temporary defensive periods). These types of securities are
listed below for each portfolio and then are described in more detail after this
sub-section.
Nations Asset Allocation Fund: In addition to the types of securities
described in the Fund's Prospectus, the Fund may invest in: certain specified
derivative securities, including: interest rate swaps, caps and floors for
hedging purposes; exchange-traded options; over-the-counter options executed
with primary dealers, including long calls and puts and covered calls to enhance
return; and CFTC-approved U.S. and foreign exchange-traded financial futures and
options thereon for market exposure risk-management. The Fund may lend its Fund
securities to qualified institutional investors and may invest in repurchase
agreements, restricted, private placement and other illiquid securities. The
Fund may engage in reverse repurchase agreements and dollar roll transactions.
Additionally, the Fund may purchase securities issued by other investment
companies, consistent with the Fund's investment objective and policies. The
Fund also may invest in instruments issued by trusts or certain partnerships
including pass-through certificates representing participations in, or debt
investments backed by, the securities and other assets owned by such trusts and
partnerships.
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Nations Blue Chip Fund: In addition to the types of securities
described in the Fund's Prospectus, the Blue Chip Master Portfolio (in which the
Fund invests all of its assets) may invest in: cash equivalents, which include
the following short-term interest rate bearing instruments--obligations issued
or guaranteed by the U.S. Government, its agencies and instrumentalities (some
of which may be subject to repurchase agreements), certificates of deposit,
bankers' acceptances, time deposits and other interest-bearing deposits issued
by domestic and foreign banks and foreign branches of U.S. banks, foreign
government securities and commercial papers issued by U.S. and foreign issuers
which is rated at the time of purchase at least Prime-2 by Moody's or A-2 by
S&P, Duff & Phelps and Fitch IBCA. For a description of ratings, see Appendix A
to this SAI. The Master Portfolio also may invest in certain specified
derivative securities including: exchange-traded options, over-the-counter
options executed with primary dealers, including long calls and puts and covered
calls to enhance return; and CFTC-approved U.S. and foreign exchange-traded
financial futures and options thereon for market exposure risk-management. The
Master Portfolio also may lend its portfolios securities to qualified
institutional investors and may invest in repurchase agreements, restricted,
private placement and other illiquid securities. It also may invest in real
estate investment trust securities, securities issued by other investment
companies, consistent with the Master Portfolio's investment objective and
policies.
Nations Capital Income Fund: In addition to the types of securities
described in the Fund's Prospectus, the Fund may invest in: Eurodollar
convertible securities, securities issued or guaranteed by the U.S. Government,
its agencies and instrumentalities, money market securities, investment grade
debt securities, cash equivalents, options, securities purchase on a
when-issued, forward-commitment or delayed-settlement basis. The Fund also may
invest in: certain specified derivative securities including: exchange-traded
options, over-the-counter options executed with primary dealers, including long
calls and puts and covered calls to enhance return; and CFTC-approved U.S. and
foreign exchange-traded financial futures and options thereon for market
exposure risk-management. The Fund also may lend its portfolios securities to
qualified institutional investors and may invest in repurchase agreements,
restricted, private placement and other illiquid securities. It also may invest
in real estate investment trust securities, securities issued by other
investment companies, consistent with the Fund's investment objective and
policies.
Nations Intermediate Bond Fund: In addition to the types of securities
described in the Fund's Prospectus, the Intermediate Bond Master Portfolio (in
which the Fund invests all of its assets) may invest in: municipal securities,
cash equivalents, certain specified derivative securities, including: interest
rate swaps, caps and floors for hedging purposes; exchange-traded options;
over-the-counter options executed with primary dealers, including long calls and
puts and covered calls to enhance return; and CFTC-approved U.S. and foreign
exchange-traded financial futures and options thereon for market exposure
risk-management. The Master Portfolio may lend its securities to qualified
institutional investors and may invest in repurchase agreements, restricted,
private placement and other illiquid securities. The Master Portfolio may engage
in reverse repurchase agreements and dollar roll transactions. Additionally, the
Master Portfolio may purchase securities issued by other investment companies,
consistent with its investment objective and policies. The Master Portfolio also
may invest in instruments issued by trusts or certain partnerships including
pass-through certificates representing participations in, or debt investments
backed by, the securities and other assets owned by such trusts and
partnerships.
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Nations California Municipal Bond Fund: below investment-grade
municipal securities, short-term taxable and non-taxable obligations, repurchase
agreements, private activity bonds, certain specified derivative securities,
including: interest rate swaps, caps and floors for hedging purposes;
exchange-traded options; over-the-counter options executed with primary dealers,
including long calls and puts and covered calls to enhance return; and
CFTC-approved U.S. and foreign exchange-traded financial futures and options
thereon for market exposure risk-management. The Fund may lend its Fund
securities to qualified institutional investors and may invest in repurchase
agreements, restricted, private placement and other illiquid securities. The
Fund may engage in reverse repurchase agreements and dollar roll transactions.
Additionally, the Fund may purchase securities issued by other investment
companies, consistent with the Fund's investment objective and policies. The
Fund also may invest in instruments issued by trusts or certain partnerships
including pass-through certificates representing participations in, or debt
investments backed by, the securities and other assets owned by such trusts and
partnerships.
Nations California Tax-Exempt Reserves: cash equivalents and taxable
obligations, during temporary defensive periods.
Nations Cash Reserves: In addition to the types of securities described
in the Prospectus, the Fund may lend its portfolios securities to qualified
institutional investors and may invest in reverse repurchase agreements.
Nations Treasury Reserves: In addition to the types of securities
described in the Prospectus, the Fund may lend its portfolios securities to
qualified institutional investors.
Nations Municipal Reserves: In addition to the types of securities
described in the Prospectus, the Fund may lend its portfolios securities to
qualified institutional investors and may invest in reverse repurchase
agreements.
Additional information on the particular types of securities in which
certain Funds may invest in is set forth below.
ASSET-BACKED SECURITIES
IN GENERAL. Asset-backed securities arise through the grouping by
governmental, government-related, and private organizations of loans,
receivables, or other assets originated by various lenders. Asset-backed
securities consist of both mortgage- and non-mortgage-backed securities.
Interests in pools of these assets may differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal paid at maturity or specified call dates. Conversely,
asset-backed securities provide periodic payments which may consist of both
interest and principal payments.
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The life of an asset-backed security varies depending upon the rate of
the prepayment of the underlying debt instruments. The rate of such prepayments
will be a function of current market interest rates, and other economic and
demographic factors. For example, falling interest rates generally result in an
increase in the rate of prepayments of mortgage loans while rising interest
rates generally decrease the rate of prepayments. An acceleration in prepayments
in response to sharply falling interest rates will shorten the security's
average maturity and limit the potential appreciation in the security's value
relative to a conventional debt security. Consequently, asset-backed securities
may not be as effective in locking in high, long-term yields. Conversely, in
periods of sharply rising rates, prepayments are generally slow, increasing the
security's average life and its potential for price depreciation.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent an
ownership interest in a pool of mortgage loans.
Mortgage pass-through securities may represent participation interests
in pools of residential mortgage loans originated by U.S. governmental or
private lenders and guaranteed, to the extent provided in such securities, by
the U.S. Government or one of its agencies, authorities or instrumentalities.
Such securities, which are ownership interests in the underlying mortgage loans,
differ from conventional debt securities, which provide for periodic payment of
interest in fixed amounts (usually semi-annually) and principal payments at
maturity or on specified call dates. Mortgage pass-through securities provide
for monthly payments that are a "pass-through" of the monthly interest and
principal payments (including any prepayments) made by the individual borrowers
on the pooled mortgage loans, net of any fees paid to the guarantor of such
securities and the servicer of the underlying mortgage loans.
The guaranteed mortgage pass-through securities in which a Fund may
invest may include those issued or guaranteed by Ginnie Mae, Fannie Mae or
Freddie Mac. Such Certificates are mortgage-backed securities which represent a
partial ownership interest in a pool of mortgage loans issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations. Such
mortgage loans may have fixed or adjustable rates of interest.
The average life of a mortgage-backed security is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities. Prepayments of principal by mortgagors and mortgage foreclosures
will usually result in the return of the greater part of principal invested far
in advance of the maturity of the mortgages in the pool.
The yield which will be earned on mortgage-backed securities may vary
from their coupon rates for the following reasons: (i) Certificates may be
issued at a premium or discount, rather than at par; (ii) Certificates may trade
in the secondary market at a premium or discount after issuance; (iii) interest
is earned and compounded monthly, which has the effect of raising the effective
yield earned on the Certificates; and (iv) the actual yield of each Certificate
is affected by the prepayment of mortgages included in the mortgage pool
underlying the Certificates and the rate at which principal so prepaid is
reinvested. In addition, prepayment of mortgages included in the mortgage pool
underlying a GNMA Certificate purchased at a premium may result in a loss to the
Fund.
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Mortgage-backed securities issued by private issuers, whether or not
such obligations are subject to guarantees by the private issuer, may entail
greater risk than obligations directly or indirectly guaranteed by the U.S.
Government.
Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities (collateral
collectively hereinafter referred to as "Mortgage Assets"). Multi-class
pass-through securities are interests in a trust composed of Mortgage Assets and
all references herein to CMOs will include multi-class pass-through securities.
Payments of principal of and interest on the Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distribution on the multi-class pass-through securities.
Moreover, principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates, resulting in a loss of all or part of the premium if any has
been paid. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semiannual basis.
The principal and interest payments on the Mortgage Assets may be
allocated among the various classes of CMOs in several ways. Typically, payments
of principal, including any prepayments, on the underlying mortgages are applied
to the classes in the order of their respective stated maturities or final
distribution dates, so that no payment of principal is made on CMOs of a class
until all CMOs of other classes having earlier stated maturities or final
distribution dates have been paid in full.
Stripped mortgage-backed securities ("SMBS") are derivative multi-class
mortgage securities. A Fund will only invest in SMBS that are obligations backed
by the full faith and credit of the U.S. Government. SMBS are usually structured
with two classes that receive different proportions of the interest and
principal distributions from a pool of mortgage assets. A Fund will only invest
in SMBS whose mortgage assets are U.S. Government obligations.
A common type of SMBS will be structured so that one class receives
some of the interest and most of the principal from the mortgage assets, while
the other class receives most of the interest and the remainder of the
principal. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, a Fund may fail to fully recoup its initial investment
in these securities. The market value of any class which consists primarily or
entirely of principal payments generally is unusually volatile in response to
changes in interest rates.
The average life of mortgage-backed securities varies with the
maturities of the underlying mortgage instruments. The average life is likely to
be substantially less than the original maturity of the mortgage pools
underlying the securities as the result of mortgage prepayments, mortgage
refinancings, or foreclosures. The rate of mortgage prepayments, and hence the
average life of the certificates, will be a function of the level of interest
rates, general economic conditions, the location and age of the mortgage and
other social and demographic conditions. Such prepayments are passed through to
the registered holder with the regular monthly payments of principal and
interest and have the effect of reducing future payments. Estimated average life
will be determined by the Adviser and used for the purpose of determining the
average weighted maturity and duration of the Funds.
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ADDITIONAL INFORMATION ON MORTGAGE-BACKED SECURITIES.
Mortgage-backed securities represent an ownership interest in a pool of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. The mortgagor's monthly
payments to his/her lending institution are "passed-through" to an investor.
Most issuers or poolers provide guarantees of payments, regardless of whether or
not the mortgagor actually makes the payment. The guarantees made by issuers or
poolers are supported by various forms of credit collateral, guarantees or
insurance, including individual loan, title, pool and hazard insurance purchased
by the issuer. There can be no assurance that the private issuers or poolers can
meet their obligations under the policies. Mortgage-backed securities issued by
private issuers or poolers, whether or not such securities are subject to
guarantees, may entail greater risk than securities directly or indirectly
guaranteed by the U.S. Government.
Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential mortgage loans, net of any fees paid. Additional payments are caused
by repayments resulting from the sale of the underlying residential property,
refinancing or foreclosure net of fees or costs which may be incurred. Some
mortgage-backed securities are described as "modified pass-through." These
securities entitle the holders to receive all interest and principal payments
owed on the mortgages in the pool, net of certain fees, regardless of whether or
not the mortgagors actually make the payments.
Residential mortgage loans are pooled by the Federal Home Loan Mortgage
Corporation (FHLMC). FHLMC is a corporate instrumentality of the U.S. Government
and was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. Its stock is owned by
the twelve Federal Home Loan Banks. FHLMC issues Participation Certificates
("PC's"), which represent interests in mortgages from FHLMC's national
portfolio. FHLMC guarantees the timely payment of interest and ultimate
collection of principal.
The Federal National Mortgage Association (FNMA) is a Government
sponsored corporation owned entirely by private stockholders. It is subject to
general regulation by the Secretary of Housing and Urban Development. FNMA
purchases residential mortgages from a list of approved sellers/servicers which
include state and federally-chartered savings and loan associations, mutual
savings banks, commercial banks and credit unions and mortgage bankers.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA.
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The principal Government guarantor of mortgage-backed securities is the
Government National Mortgage Association (GNMA). GNMA is a wholly-owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of the U.S.
Government, the timely payment of principal and interest on securities issued by
approved institutions and backed by pools of FHA-insured or VA-guaranteed
mortgages.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Pools
created by such non-governmental issuers generally offer a higher rate of
interest than Government and Government-related pools because there are no
direct or indirect Government guarantees of payments in the former pools.
However, timely payment of interest and principal of these pools is supported by
various forms of insurance or guarantees, including individual loan, title, pool
and hazard insurance purchased by the issuer. The insurance and guarantees are
issued by Governmental entities, private insurers, and the mortgage poolers.
There can be no assurance that the private insurers or mortgage poolers can meet
their obligations under the policies.
The Fund expects that Governmental or private entities may create
mortgage loan pools offering pass-through investments in addition to those
described above. The mortgages underlying these securities may be alternative
mortgage instruments, that is, mortgage instruments whose principal or interest
payment may vary or whose terms to maturity may be shorter than previously
customary. As new types of mortgage-backed securities are developed and offered
to investors, certain Funds will, consistent with their investment objective and
policies, consider making investments in such new types of securities.
Underlying Mortgages
Pools consist of whole mortgage loans or participations in loans. The
majority of these loans are made to purchasers of 1-4 family homes. The terms
and characteristics of the mortgage instruments are generally uniform within a
pool but may vary among pools. For example, in addition to fixed-rate,
fixed-term mortgages, a Fund may purchase pools of variable-rate mortgages
(VRM), growing equity mortgages (GEM), graduated payment mortgages (GPM) and
other types where the principal and interest payment procedures vary. VRM's are
mortgages which reset the mortgage's interest rate periodically with changes in
open market interest rates. To the extent that the Fund is actually invested in
VRM's, the Fund's interest income will vary with changes in the applicable
interest rate on pools of VRM's. GPM and GEM pools maintain constant interest
rates, with varying levels of principal repayment over the life of the mortgage.
These different interest and principal payment procedures should not impact the
Fund's net asset value since the prices at which these securities are valued
will reflect the payment procedures.
All poolers apply standards for qualification to local lending
institutions which originate mortgages for the pools. Poolers also establish
credit standards and underwriting criteria for individual mortgages included in
the pools. In addition, some mortgages included in pools are insured through
private mortgage insurance companies.
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Average Life
The average life of pass-through pools varies with the maturities of
the underlying mortgage instruments. In addition, a pool's term may be shortened
by unscheduled or early payments of principal and interest on the underlying
mortgages. The occurrence of mortgage prepayments is affected by factors
including the level of interest rates, general economic conditions, the location
and age of the mortgage, and other social and demographic conditions.
As prepayment rates of individual pools vary widely, it is not possible
to accurately predict the average life of a particular pool. For pools of
fixed-rated 30-year mortgages, common industry practice is to assume that
prepayments will result in a 12-year average life. Pools of mortgages with other
maturities or different characteristics will have varying assumptions for
average life.
Returns on Mortgage-Backed Securities
Yields on mortgage-backed pass-through securities are typically quoted
based on the maturity of the underlying instruments and the associated average
life assumption. Actual prepayment experience may cause the yield to differ from
the assumed average life yield.
Reinvestment of prepayments may occur at higher or lower interest rates
than the original investment, thus affecting the yields of the Fund. The
compounding effect from reinvestments of monthly payments received by the Fund
will increase its yield to shareholders, compared to bonds that pay interest
semi-annually.
NON-MORTGAGE ASSET-BACKED SECURITIES. Non-mortgage asset-backed
securities include interests in pools of receivables, such as motor vehicle
installment purchase obligations and credit card receivables. Such securities
are generally issued as pass-through certificates, which represent undivided
fractional ownership interests in the underlying pools of assets. Such
securities also may be debt instruments, which are also known as collateralized
obligations and are generally issued as the debt of a special purpose entity
organized solely for the purpose of owning such assets and issuing such debt.
Such securities also may include instruments issued by certain trusts,
partnerships or other special purpose issuers, including pass-through
certificates representing participations in, or debt instruments backed by, the
securities and other assets owned by such issuers.
Non-mortgage-backed securities are not issued or guaranteed by the U.S.
Government or its agencies or instrumentalities; however, the payment of
principal and interest on such obligations may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution (such as a bank or insurance company) unaffiliated with
the issuers of such securities.
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The purchase of non-mortgage-backed securities raises considerations
peculiar to the financing of the instruments underlying such securities. For
example, most organizations that issue asset-backed securities relating to motor
vehicle installment purchase obligations perfect their interests in their
respective obligations only by filing a financing statement and by having the
servicer of the obligations, which is usually the originator, take custody
thereof. In such circumstances, if the servicer were to sell the same
obligations to another party, in violation of its duty not to do so, there is a
risk that such party could acquire an interest in the obligations superior to
that of the holders of the Asset-backed Securities. Also, although most such
obligations grant a security interest in the motor vehicle being financed, in
most states the security interest in a motor vehicle must be noted on the
certificate of title to perfect such security interest against competing claims
of other parties. Due to the larger number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the obligations
underlying the Asset-backed Securities, usually is not amended to reflect the
assignment of the seller's security interest for the benefit of the holders of
the Asset-backed Securities. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on those securities. In addition, various state and Federal laws give
the motor vehicle owner the right to assert against the holder of the owner's
obligation certain defenses such owner would have against the seller of the
motor vehicle. The assertion of such defenses could reduce payments on the
related Asset-backed Securities. Insofar as credit card receivables are
concerned, credit card holders are entitled to the protection of a number of
state and Federal consumer credit laws, many of which give such holders the
right to set off certain amounts against balances owed on the credit card,
thereby reducing the amounts paid on such receivables. In addition, unlike most
other Asset-backed Securities, credit card receivables are unsecured obligations
of the card holder.
While the market for Asset-backed Securities is becoming increasingly
liquid, the market for mortgage-backed securities issued by certain private
organizations and non-mortgage-backed securities is not as well developed. As
stated above, the Adviser intends to limit its purchases of mortgage-backed
securities issued by certain private organizations and non-mortgage-backed
securities to securities that are readily marketable at the time of purchase.
BORROWINGS
NFT, NFI and NFP participate in an uncommitted line of credit provided
by The Bank of New York under a line of credit agreement (the "Agreement").
Advances under the Agreement are taken primarily for temporary or emergency
purposes, including the meeting of redemption requests that otherwise might
require the untimely disposition of securities. Interest on borrowings is
payable at the federal funds rate plus .50% on an annualized basis. The
Agreement requires, among other things, that each participating Fund maintain a
ratio of no less than 4 to 1 net assets (not including funds borrowed pursuant
to the Agreement) to the aggregate amount of indebtedness pursuant to the
Agreement. Specific borrowings by a Fund under the Agreement over the last
fiscal year, if any, can by found in the Funds' Annual Reports for the year
ended March 31, 1999.
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COMMERCIAL INSTRUMENTS
Commercial Instruments consist of short-term U.S. dollar-denominated
obligations issued by domestic corporations or issued in the U.S. by foreign
corporations and foreign commercial banks. The Prime Fund will limit purchases
of commercial instruments to instruments which: (a) if rated by at least two
Nationally Rated Statistical Rating Organizations ("NRSROs"), are rated in the
highest rating category for short-term debt obligations given by such
organizations, or if only rated by one such organization, are rated in the
highest rating category for short-term debt obligations given by such
organization; or (b) if not rated, are (i) comparable in priority and security
to a class of short-term instruments of the same issuer that has such rating(s),
or (ii) of comparable quality to such instruments as determined by NFI's Board
of Directors on the advice of the Adviser.
Investments by a Fund in commercial paper will consist of issues rated
in a manner consistent with such Fund's investment policies and objectives. In
addition, the Funds may acquire unrated commercial paper and corporate bonds
that are determined by the Adviser at the time of purchase to be of comparable
quality to rated instruments that may be acquired by such Funds as previously
described.
Variable-rate master demand notes are unsecured instruments that permit
the indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate. While some of these notes are not rated by credit rating
agencies, issuers of variable rate master demand notes must satisfy the Adviser
that similar criteria to that set forth above with respect to the issuers of
commercial paper purchasable by the Prime Fund are met. Variable-rate
instruments acquired by a Fund will be rated at a level consistent with such
Fund's investment objective and policies of high quality as determined by a
major rating agency or, if not rated, will be of comparable quality as
determined by the Adviser. See also the discussion of variable- and
floating-rate instruments in this SAI.
Variable- and floating-rate instruments are unsecured instruments that
permit the indebtedness thereunder to vary. While there may be no active
secondary market with respect to a particular variable or floating rate
instrument purchased by a Fund, a Fund may, from time to time as specified in
the instrument, demand payment of the principal or may resell the instrument to
a third party. The absence of an active secondary market, however, could make it
difficult for a Fund to dispose of an instrument if the issuer defaulted on its
payment obligation or during periods when a Fund is not entitled to exercise its
demand rights, and a Fund could, for these or other reasons, suffer a loss. A
Fund may invest in variable and floating rate instruments only when the Adviser
deems the investment to involve minimal credit risk. If such instruments are not
rated, the Adviser will consider the earning power, cash flows, and other
liquidity ratios of the issuers of such instruments and will continuously
monitor their financial status to meet payment on demand. In determining average
weighted portfolio maturity, an instrument will be deemed to have a maturity
equal to the longer of the period remaining to the next interest rate adjustment
or the demand notice period specified in the instrument.
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Certain Funds also may purchase short-term participation interests in
loans extended by banks to companies, provided that both such banks and such
companies meet the quality standards set forth above. In purchasing a loan
participation or assignment, the Fund acquires some or all of the interest of a
bank or other lending institution in a loan to a corporate borrower. Many such
loans are secured and most impose restrictive covenants which must be met by the
borrower and which are generally more stringent than the covenants available in
publicly traded debt securities. However, interests in some loans may not be
secured, and the Fund will be exposed to a risk of loss if the borrower
defaults. Loan participations also may be purchased by the Fund when the
borrowing company is already in default. In purchasing a loan participation, the
Fund may have less protection under the federal securities laws than it has in
purchasing traditional types of securities. The Fund's ability to assert its
rights against the borrower will also depend on the particular terms of the loan
agreement among the parties.
COMBINED TRANSACTIONS
Certain Funds may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple forward foreign
currency exchange contracts and any combination of futures, options and forward
foreign currency exchange contracts ("component" transactions), instead of a
single transaction, as part of a single hedging strategy when, in the opinion of
the Adviser, it is in the best interest of a Fund to do so and where underlying
hedging strategies are permitted by a Fund's investment policies. A combined
transaction, while part of a single hedging strategy, may contain elements of
risk that are present in each of its component transactions. (See above for the
risk characteristics of certain transactions.)
CONVERTIBLE SECURITIES
Certain Funds may invest in convertible securities, such as bonds,
notes, debentures, preferred stocks and other securities that may be converted
into common stock. All convertible securities purchased by the Fund will be
rated in the top two categories by an Nationally Recognized Statistical Rating
Organization ("NRSRO") or, if unrated, determined by the Adviser to be of
comparable quality. Investments in convertible securities can provide income
through interest and dividend payments, as well as, an opportunity for capital
appreciation by virtue of their conversion or exchange features.
The convertible securities in which a Fund may invest include
fixed-income and zero coupon debt securities, and preferred stock that may be
converted or exchanged at a stated or determinable exchange ratio into
underlying shares of common stock. The exchange ratio for any particular
convertible security may be adjusted from time to time due to stock splits,
dividends, spin-offs, other corporate distributions or scheduled changes in the
exchange ratio. Convertible debt securities and convertible preferred stocks,
until converted, have general characteristics similar to both debt and equity
securities. Although to a lesser extent than with debt securities, generally,
the market value of convertible securities tends to decline as interest rates
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion exchange feature, the market value of
convertible securities typically changes as the market value of the underlying
common stock changes, and, therefore, also tends to follow movements in the
general market for equity securities. A unique feature of convertible securities
is that as the market price of the underlying common stock declines, convertible
securities tend to trade increasingly on a yield basis, and so may not
experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the price
of a convertible security tends to rise as a reflection of the value of the
underlying common stock, although typically not as much as the price of the
underlying common stock. While no securities investments are without risk,
investments in convertible securities generally entail less risk than
investments in common stock of the same issuer.
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As debt securities, convertible securities are investments which
provide for a stream of income or, in the case of zero coupon securities,
accretion of income with generally higher yields than common stocks. Of course,
like all debt securities, there can be no assurance of income or principal
payments because the issuers of the convertible securities may default on their
obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion
exchange features. Convertible securities generally are subordinated to other
similar debt securities but not to non-convertible securities of the same
issuer. Convertible bonds, as corporate debt obligations, are senior in right of
payment to all equity securities, and convertible preferred stock is senior to
common stock, of the same issuer. However, convertible bonds and convertible
preferred stock typically have lower coupon rates than similar non-convertible
securities. Convertible securities may be issued as fixed income obligations
that pay current income or as zero coupon notes and bonds, including Liquid
Yield Option Notes ("LYONs"). Zero coupon securities pay no cash income and are
sold at substantial discounts from their value at maturity. When held to
maturity, their entire income, which consists of accretion of discount, comes
from the difference between the issue price and their value at maturity. Zero
coupon convertible securities offer the opportunity for capital appreciation
because increases (or decreases) in the market value of such securities closely
follow the movements in the market value of the underlying common stock. Zero
coupon convertible securities generally are expected to be less volatile than
the underlying common stocks because they usually are issued with short
maturities (15 years or less) and are issued with options and/or redemption
features exercisable by the holder of the obligation entitling the holder to
redeem the obligation and receive a defined cash payment.
CORPORATE DEBT SECURITIES
Certain Funds may invest in corporate debt securities of domestic
issuers of all types and maturities, such as bonds, debentures, notes and
commercial paper. Corporate debt securities may involve equity features, such as
conversion or exchange rights or warrants for the acquisition of stock of the
same or a different issuer, participation based on revenue, sales or profit, or
the purchase of common stock or warrants in a unit transaction (where corporate
debt obligations and common stock are offered as a unit). Each Fund may also
invest in corporate debt securities of foreign issuers.
The corporate debt securities in which the Funds will invest will be
rated investment grade by at least one NRSRO (E.G., BBB or above by Standard &
Poor's Corporation ("S&P") or Baa or above by Moody's Investors Services, Inc.
("Moody's")). Commercial paper purchased by the Funds will be rated in the top
two categories by a NRSRO. Corporate debt securities that are not rated may be
purchased by such Funds if they are determined by the Adviser to be of
comparable quality under the direction of the Board of Directors of the Company.
If the rating of any corporate debt security held by a Fund falls below such
ratings or if the Adviser determines that an unrated corporate debt security is
no longer of comparable quality, then such security shall be disposed of in an
orderly manner as quickly as possible. A description of these ratings is
attached as Schedule A to this Statement of Additional Information.
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CUSTODIAL RECEIPTS
Certain Funds may also acquire custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Government notes or bonds. Such notes and bonds are held in custody by a
bank on behalf of the owners. These custodial receipts are known by various
names, including "Treasury Receipts," "Treasury Investors Growth Receipts" and
"Certificates of Accrual on Treasury Securities." Although custodial receipts
are not considered U.S. Government securities, they are indirectly issued or
guaranteed as to principal and interest by the U.S. Government, its agencies,
authorities or instrumentalities. Custodial receipts will be treated as illiquid
securities.
CURRENCY SWAPS
Certain Funds also may enter into currency swaps for hedging purposes
and to seek to increase total return. In as much as swaps are entered into for
good faith hedging purposes or are offset by a segregated account as described
below, the Fund and the Adviser believe that swaps do not constitute senior
securities as defined in the 1940 Act and, accordingly, will not treat them as
being subject to the Fund's borrowing restrictions. The net amount of the
excess, if any, of the Fund's obligations over its entitlement with respect to
each currency swap will be accrued on a daily basis and an amount of cash or
liquid high grade debt securities (i.e., securities rated in one of the top
three ratings categories by an NRSRO, or, if unrated, deemed by the Adviser to
be of comparable credit quality) having an aggregate net asset value at least
equal to such accrued excess will be maintained in a segregated account by the
Fund's custodian. The Fund will not enter into any currency swap unless the
credit quality of the unsecured senior debt or the claims-paying ability of the
other party thereto is considered to be investment grade by the Adviser.
DELAYED DELIVERY TRANSACTIONS
In a delayed delivery transaction, the Fund relies on the other party
to complete the transaction. If the transaction is not completed, the Fund may
miss a price or yield considered to be advantageous. In delayed delivery
transactions, delivery of the securities occurs beyond normal settlement
periods, but a Fund would not pay for such securities or start earning interest
on them until they are delivered. However, when a Fund purchases securities on
such a delayed delivery basis, it immediately assumes the risk of ownership,
including the risk of price fluctuation. Failure by a counterparty to deliver a
security purchased on a delayed delivery basis may result in a loss or missed
opportunity to make an alternative investment. Depending upon market conditions,
a Fund's delayed delivery purchase commitments could cause its net asset value
to be more volatile, because such securities may increase the amount by which
the Fund's total assets, including the value of when-issued and delayed delivery
securities held by the Fund, exceed its net assets.
DOLLAR ROLL TRANSACTIONS
Certain Funds may enter into "dollar roll" transactions, which consist
of the sale by a Fund to a bank or broker/dealer (the "counterparty") of GNMA
certificates or other mortgage-backed securities together with a commitment to
purchase from the counterparty similar, but not identical, securities at a
future date, at the same price. The counterparty receives all principal and
interest payments, including prepayments, made on the security while it is the
holder. A Fund receives a fee from the counterparty as consideration for
entering into the commitment to purchase. Dollar rolls may be renewed over a
period of several months with a different repurchase price and a cash settlement
made at each renewal without physical delivery of securities. Moreover, the
transaction may be preceded by a firm commitment agreement pursuant to which the
Fund agrees to buy a security on a future date. If the broker/dealer to whom a
Fund sells the security becomes insolvent, the Fund's right to purchase or
repurchase the security may be restricted; the value of the security may change
adversely over the term of the dollar roll; the security that the Fund is
required to repurchase may be worth less than the security that the Fund
originally held, and the return earned by the Fund with the proceeds of a dollar
roll may not exceed transaction costs.
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The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Fund's right to purchase
from the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Fund is able to purchase them.
Similarly, the Fund may be required to purchase securities in connection with a
dollar roll at a higher price than may otherwise be available on the open
market. Since, as noted above, the counterparty is required to deliver a
similar, but not identical security to the Fund, the security that the Fund is
required to buy under the dollar roll may be worth less than an identical
security. Finally, there can be no assurance that the Fund's use of the cash
that it receives from a dollar roll will provide a return that exceeds borrowing
costs.
EQUITY SWAP CONTRACTS
Certain Funds may from time to time enter into equity swap contracts.
The counterparty to an equity swap contract will typically be a bank, investment
banking firm or broker/dealer. For example, the counterparty will generally
agree to pay a Fund the amount, if any, by which the notional amount of the
Equity Swap Contract would have increased in value had it been invested in the
stocks comprising the S&P 500 Index in proportion to the composition of the
Index, plus the dividends that would have been received on those stocks. A Fund
will agree to pay to the counterparty a floating rate of interest (typically the
London Inter Bank Offered Rate) on the notional amount of the Equity Swap
Contract plus the amount, if any, by which that notional amount would have
decreased in value had it been invested in such stocks. Therefore, the return to
a Fund on any Equity Swap Contract should be the gain or loss on the notional
amount plus dividends on the stocks comprising the S&P 500 Index less the
interest paid by the Fund on the notional amount. A Fund will only enter into
Equity Swap Contracts on a net basis, i.e., the two parties' obligations are
netted out, with the Fund paying or receiving, as the case may be, only the net
amount of any payments. Payments under the Equity Swap Contracts may be made at
the conclusion of the contract or periodically during its term.
If there is a default by the counterparty to an Equity Swap Contract, a
Fund will be limited to contractual remedies pursuant to the agreements related
to the transaction. There is no assurance that Equity Swap Contract
counterparties will be able to meet their obligations pursuant to Equity Swap
Contracts or that, in the event of default, a Fund will succeed in pursuing
contractual remedies. A Fund thus assumes the risk that it may be delayed in or
prevented from obtaining payments owed to it pursuant to Equity Swap Contracts.
A Fund will closely monitor the credit of Equity Swap Contract counterparties in
order to minimize this risk.
Certain Funds may from time to time enter into the opposite side of
Equity Swap Contracts (i.e., where a Fund is obligated to pay the increase (net
of interest) or receive the decrease (plus interest) on the contract to reduce
the amount of the Fund's equity market exposure consistent with the Fund's
objective. These positions are sometimes referred to as Reverse Equity Swap
Contracts.
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Equity Swap Contracts will not be used to leverage a Fund. A Fund will
not enter into any Equity Swap Contract or Reverse Equity Swap Contract unless,
at the time of entering into such transaction, the unsecured senior debt of the
counterparty is rated at least A by Moody's or S&P. Since the SEC considers
Equity Swap Contracts and Reverse Equity Swap Contracts to be illiquid
securities, a Fund will not invest in Equity Swap Contracts or Reverse Equity
Swap Contracts if the total value of such investments together with that of all
other illiquid securities which a Fund owns would exceed 15% of the Fund's total
assets.
The Adviser does not believe that a Fund's obligations under Equity
Swap Contracts or Reverse Equity Swap Contracts are senior securities and,
accordingly, the Fund will not treat them as being subject to its borrowing
restrictions. However, the net amount of the excess, if any, of a Fund's
obligations over its respective entitlements with respect to each Equity Swap
Contract and each Reverse Equity Swap Contract will be accrued on a daily basis
and an amount of cash, U.S. Government securities or other liquid high quality
debt securities having an aggregate market value at least equal to the accrued
excess will be maintained in a segregated account by the Fund's custodian.
FOREIGN CURRENCY TRANSACTIONS
Certain Funds may invest in foreign currency transactions. Foreign
securities involve currency risks. The U.S. dollar value of a foreign security
tends to decrease when the value of the U.S. dollar rises against the foreign
currency in which the security is denominated, and tends to increase when the
value of the U.S. dollar falls against such currency. A Fund may purchase or
sell forward foreign currency exchange contracts ("forward contracts") to
attempt to minimize the risk to the Fund from adverse changes in the
relationship between the U.S. dollar and foreign currencies. A Fund may also
purchase and sell foreign currency futures contracts and related options (see
"Purchase and Sale of Currency Futures Contracts and Related Options"). A
forward contract is an obligation to purchase or sell a specific currency for an
agreed price at a future date that is individually negotiated and privately
traded by currency traders and their customers.
Forward foreign currency exchange contracts establish an exchange rate
at a future date. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward foreign currency exchange contract generally has no
deposit requirement, and is traded at a net price without commission. A Fund
will direct its custodian to segregate high grade liquid assets in an amount at
least equal to its obligations under each forward foreign currency exchange
contract. Neither spot transactions nor forward foreign currency exchange
contracts eliminate fluctuations in the prices of a Fund's portfolio securities
or in foreign exchange rates, or prevent loss if the prices of these securities
should decline.
A Fund may enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of the security (a
"transaction hedge"). In addition, when the Adviser believes that a foreign
currency may suffer a substantial decline against the U.S. dollar, it may enter
into a forward sale contract to sell an amount of that foreign currency
approximating the value of some or all of the Fund's securities denominated in
such foreign currency, or when the Adviser believes that the U.S. dollar may
suffer a substantial decline against the foreign currency, it may enter into a
forward purchase contract to buy that foreign currency for a fixed dollar amount
(a "position hedge").
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A Fund may, however, enter into a forward contract to sell a different
foreign currency for a fixed U.S. dollar amount where the Adviser believes that
the U.S. dollar value of the currency to be sold pursuant to the forward
contract will fall whenever there is a decline in the U.S. dollar value of the
currency in which the fund securities are denominated (a "cross-hedge").
Foreign currency hedging transactions are an attempt to protect a Fund
against changes in foreign currency exchange rates between the trade and
settlement dates of specific securities transactions or changes in foreign
currency exchange rates that would adversely affect a portfolio position or an
anticipated portfolio position. Although these transactions tend to minimize the
risk of loss due to a decline in the value of the hedged currency, at the same
time they tend to limit any potential gain that might be realized should the
value of the hedged currency increase. The precise matching of the forward
contract amount and the value of the securities involved will not generally be
possible because the future value of these securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and date it matures.
The Fund's custodian will segregate cash, U.S. Government securities or
other high-quality debt securities having a value equal to the aggregate amount
of the Fund's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the segregated securities
declines, additional cash or securities will be segregated on a daily basis so
that the value of the segregated securities will equal the amount of the Fund's
commitments with respect to such contracts. As an alternative to segregating all
or part of such securities, the Fund may purchase a call option permitting the
Fund to purchase the amount of foreign currency being hedged by a forward sale
contract at a price no higher than the forward contract price or the Fund may
purchase a put option permitting the Fund to sell the amount of foreign currency
subject to a forward purchase contract at a price as high or higher than the
forward contract price.
The Funds are dollar-denominated mutual funds and therefore
consideration is given to hedging part or all of the portfolio back to U.S.
dollars from international currencies. All decisions to hedge are based upon an
analysis of the relative value of the U.S. dollar on an international purchasing
power parity basis (purchasing power parity is a method for determining the
relative purchasing power of different currencies by comparing the amount of
each currency required to purchase a typical bundle of goods and services to
domestic markets) and an estimation of short-term interest rate differentials
(which affect both the direction of currency movements and also the cost of
hedging).
FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS
FUTURES CONTRACTS IN GENERAL. A futures contract is an agreement
between two parties for the future delivery of fixed income securities or equity
securities or for the payment or acceptance of a cash settlement in the case of
futures contracts on an index of fixed income or equity securities. A "sale" of
a futures contract means the contractual obligation to deliver the securities at
a specified price on a specified date, or to make the cash settlement called for
by the contract. Futures contracts have been designed by exchanges which have
been designated "contract markets" by the Commodity Futures Trading Commission
("CFTC") and must be executed through a brokerage firm, known as a futures
commission merchant, which is a member of the relevant contract market. Futures
contracts trade on these markets, and the exchanges, through their clearing
organizations, guarantee that the contracts will be performed as between the
clearing members of the exchange. Presently, futures contracts are based on such
debt securities as long-term U.S. Treasury Bonds, Treasury Notes, GNMA modified
pass-through mortgage-backed securities, three-month U.S. Treasury Bills, bank
certificates of deposit, and on indices of municipal, corporate and government
bonds.
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While futures contracts based on securities do provide for the delivery
and acceptance of securities, such deliveries and acceptances are seldom made.
Generally, a futures contract is terminated by entering into an offsetting
transaction. A Fund will incur brokerage fees when it purchases and sells
futures contracts. At the time such a purchase or sale is made, a Fund must
provide cash or money market securities as a deposit known as "margin." The
initial deposit required will vary, but may be as low as 2% or less of a
contract's face value. Daily thereafter, the futures contract is valued through
a process known as "marking to market," and a Fund that engages in futures
transactions may receive or be required to pay "variation margin" as the futures
contract becomes more or less valuable. At the time of delivery of securities
pursuant to a futures contract based on securities, adjustments are made to
recognize differences in value arising from the delivery of securities with a
different interest rate than the specific security that provides the standard
for the contract. In some (but not many) cases, securities called for by a
futures contract may not have been issued when the contract was written.
Futures contracts on indices of securities are settled through the
making and acceptance of cash settlements based on changes in value of the
underlying rate or index between the time the contract is entered into and the
time it is liquidated.
FUTURES CONTRACTS ON FIXED INCOME SECURITIES AND RELATED INDICES. As
noted in their respective Prospectuses, certain Funds may enter into
transactions in futures contracts for the purpose of hedging a relevant portion
of their portfolios. A Fund may enter into transactions in futures contracts
that are based on U.S. Government obligations, including any index of government
obligations that may be available for trading. Such transactions will be entered
into where movements in the value of the securities or index underlying a
futures contract can be expected to correlate closely with movements in the
value of securities held in a Fund. For example, a Fund may sell futures
contracts in anticipation of a general rise in the level of interest rates,
which would result in a decline in the value of its fixed income securities. If
the expected rise in interest rates occurs, the Fund may realize gains on its
futures position, which should offset all or part of the decline in value of
fixed income fund securities. A Fund could protect against such decline by
selling fixed income securities, but such a strategy would involve higher
transaction costs than the sale of futures contracts and, if interest rates
again declined, the Fund would be unable to take advantage of the resulting
market advance without purchases of additional securities.
The purpose of the purchase or sale of a futures contract on government
securities and indices of government securities, in the case of the
above-referenced Funds, which hold or intend to acquire long-term debt
securities, is to protect a Fund from fluctuations in interest rates without
actually buying or selling long-term debt securities. For example, if long-term
bonds are held by a Fund, and interest rates were expected to increase, the Fund
might enter into futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling an equivalent value of the long-term
bonds held by the Fund. If interest rates did increase, the value of the debt
securities in the Fund would decline, but the value of the futures contracts to
the Fund would increase at approximately the same rate thereby keeping the net
asset value of the Fund from declining as much as it otherwise would have. When
a Fund is not fully invested and a decline in interest rates is anticipated,
which would increase the cost of fixed income securities that the Fund intends
to acquire, it may purchase futures contracts. In the event that the projected
decline in interest rates occurs, the increased cost of the securities acquired
by the Fund should be offset, in whole or part, by gains on the futures
contracts by entering into offsetting transactions on the contract market on
which the initial purchase was effected. In a substantial majority of
transactions involving futures contracts on fixed income securities, a Fund will
purchase the securities upon termination of the long futures positions, but
under unusual market conditions, a long futures position may be terminated
without a corresponding purchase of securities.
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Similarly, when it is expected that interest rates may decline, futures
contracts on fixed income securities and indices of government securities may be
purchased for the purpose of hedging against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of such futures
contracts should be similar to that of long-term bonds, a Fund could take
advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Fund's cash reserves could then be used to
buy long-term bonds in the cash market. Similar results could be accomplished by
selling bonds with long maturities and investing in bonds with short maturities
when interest rates are expected to increase. However, since the futures market
is more liquid than the cash market, the use of these futures contracts as an
investment technique allows a Fund to act in anticipation of such an interest
rate decline without having to sell its portfolio securities. To the extent a
Fund enters into futures contracts for this purpose, the segregated assets
maintained by a Fund will consist of cash, cash equivalents or high quality debt
securities of the Fund in an amount equal to the difference between the
fluctuating market value of such futures contract and the aggregate value of the
initial deposit and variation margin payments made by the Fund with respect to
such futures contracts.
STOCK INDEX FUTURES CONTRACTS. Certain Funds may sell stock index
futures contracts in order to offset a decrease in market value of its
securities that might otherwise result from a market decline. A Fund may do so
either to hedge the value of its portfolio as a whole, or to protect against
declines, occurring prior to sales of securities, in the value of securities to
be sold. Conversely, a Fund may purchase stock index futures contracts in order
to protect against anticipated increases in the cost of securities to be
acquired.
In addition, a Fund may utilize stock index futures contracts in
anticipation of changes in the composition of its portfolio. For example, in the
event that a Fund expects to narrow the range of industry groups represented in
its portfolio, it may, prior to making purchases of the actual securities,
establish a long futures position based on a more restricted index, such as an
index comprised of securities of a particular industry group. As such securities
are acquired, a Fund's futures positions would be closed out. A Fund may also
sell futures contracts in connection with this strategy, in order to protect
against the possibility that the value of the securities to be sold as part of
the restructuring of its portfolio will decline prior to the time of sale.
OPTIONS ON FUTURES CONTRACTS. An option on a futures contract gives the
purchaser (the "holder") the right, but not the obligation, to purchase a
position in the underlying futures contract (i.e., a purchase of such futures
contract) in the case of an option to purchase (a "call" option), or a "short"
position in the underlying futures contract (i.e., a sale of such futures
contract) in the case of an option to sell (a "put" option), at a fixed price
(the "strike price") up to a stated expiration date. The holder pays a
non-refundable purchase price for the option, known as the "premium." The
maximum amount of risk the purchase of the option assumes is equal to the
premium plus related transaction costs, although this entire amount may be lost.
Upon exercise of the option by the holder, the exchange clearing corporation
establishes a corresponding long position in the case of a put option. In the
event that an option is exercised, the parties will be subject to all the risks
associated with the trading of futures contracts, such as payment of variation
margin deposits. In addition, the writer of an option on a futures contract,
unlike the holder, is subject to initial and variation margin requirements on
the option position.
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OPTIONS ON FUTURES CONTRACTS ON FIXED INCOME SECURITIES AND RELATED
INDICES. Certain Funds may purchase put options on futures contracts in which
such Funds are permitted to invest for the purpose of hedging a relevant portion
of their portfolios against an anticipated decline in the values of portfolio
securities resulting from increases in interest rates, and may purchase call
options on such futures contracts as a hedge against an interest rate decline
when they are not fully invested. A Fund would write options on these futures
contracts primarily for the purpose of terminating existing positions.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS, OPTIONS ON STOCK INDICES AND
OPTIONS ON EQUITY SECURITIES. Certain Funds may purchase put options on stock
index futures contracts, stock indices or equity securities for the purpose of
hedging the relevant portion of their portfolio securities against an
anticipated market-wide decline or against declines in the values of individual
portfolio securities, and they may purchase call options on such futures
contracts as a hedge against a market advance when they are not fully invested.
A Fund would write options on such futures contracts primarily for the purpose
of terminating existing positions. In general, options on stock indices will be
employed in lieu of options on stock index futures contracts only where they
present an opportunity to hedge at lower cost. With respect to options on equity
securities, a Fund may, under certain circumstances, purchase a combination of
call options on such securities and U.S. Treasury bills. The Adviser believes
that such a combination may more closely parallel movements in the value of the
security underlying the call option than would the option itself.
Further, while a Fund generally would not write options on individual
portfolio securities, it may do so under limited circumstances known as
"targeted sales" and "targeted buys," which involve the writing of call or put
options in an attempt to purchase or sell portfolio securities at specific
desired prices. A Fund would receive a fee, or a "premium," for the writing of
the option. For example, where the Fund seeks to sell portfolio securities at a
"targeted" price, it may write a call option at that price. In the event that
the market rises above the exercise price, it would receive its "targeted"
price, upon the exercise of the option, as well as the premium income. Also,
where it seeks to buy portfolio securities at a "targeted" price, it may write a
put option at that price for which it will receive the premium income. In the
event that the market declines below the exercise price, a Fund would pay its
"targeted" price upon the exercise of the option. In the event that the market
does not move in the direction or to the extent anticipated, however, the
targeted sale or buy might not be successful and a Fund could sustain a loss on
the transaction that may not be offset by the premium received. In addition, a
Fund may be required to forego the benefit of an intervening increase or decline
in value of the underlying security.
OPTIONS AND FUTURES STRATEGIES. The Adviser may seek to increase the
current return of certain Funds by writing covered call or put options. In
addition, through the writing and purchase of options and the purchase and sale
of U.S. and certain foreign stock index futures contracts, interest rate futures
contracts, foreign currency futures contracts and related options on such
futures contracts, the Adviser may at times seek to hedge against a decline in
the value of securities included in the Fund or an increase in the price of
securities that it plans to purchase for the Fund. Expenses and losses incurred
as a result of such hedging strategies will reduce the Fund's current return. A
Fund's investment in foreign stock index futures contracts and foreign interest
rate futures contracts, and related options on such futures contracts, are
limited to only those contracts and related options that have been approved by
the CFTC for investment by U.S. investors. Additionally, with respect to a
Fund's investment in foreign options, unless such options are specifically
authorized for investment by order of the CFTC or meet the definition of trade
options as set forth in CFTC Rule 32.4, a Fund will not make these investments.
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The ability of a Fund to engage in the options and futures strategies
described below will depend on the availability of liquid markets in such
instruments. Markets in options and futures with respect to stock indices,
foreign government securities and foreign currencies are relatively new and
still developing. It is impossible to predict the amount of trading interest
that may exist in various types of options or futures. Therefore, no assurance
can be given that a Fund will be able to utilize these instruments effectively
for the purposes stated below. Furthermore, a Fund's ability to engage in
options and futures transactions may be limited by tax considerations. Although
a Fund will only engage in options and futures transactions for limited
purposes, these activities will involve certain risks which are described below
under "Risk Factors Associated with Futures and Options Transactions." A Fund
will not engage in options and futures transactions for leveraging purposes.
WRITING COVERED OPTIONS ON SECURITIES. Certain Funds may write covered
call options and covered put options on securities in which it is permitted to
invest from time to time as the Adviser determines is appropriate in seeking to
attain its objective. Call options written by a Fund give the holder the right
to buy the underlying securities from a Fund at a stated exercise price; put
options give the holder the right to sell the underlying security to the Fund at
a stated price.
A Fund may write only covered options, which means that, so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, a Fund will
maintain in a separate account cash or short-term U.S. Government securities
with a value equal to or greater than the exercise price of the underlying
securities. A Fund may also write combinations of covered puts and calls on the
same underlying security.
A Fund will receive a premium from writing a put or call option, which
increases the Fund's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price of the underlying security to the
exercise price of the option, the term of the option and the volatility of the
market price of the underlying security. By writing a call option, a Fund limits
its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, the Fund assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then current market
value, resulting in a potential capital loss if the purchase price exceeds the
market value plus the amount of the premium received, unless the security
subsequently appreciates in value.
A Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written. A Fund will realize a
profit or loss from such transaction if the cost of such transaction is less or
more than the premium received from the writing of the option. In the case of a
put option, any loss so incurred may be partially or entirely offset by the
premium received from a simultaneous or subsequent sale of a different put
option. Because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option is likely to be offset in whole
or in part by unrealized appreciation of the underlying security owned by a
Fund.
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PURCHASING PUT AND CALL OPTIONS ON SECURITIES. A Fund may purchase put
options to protect its portfolio holdings in an underlying security against a
decline in market value. Such hedge protection is provided during the life of
the put option since a Fund, as holder of the put option, is able to sell the
underlying security at the put exercise price regardless of any decline in the
underlying security's market price. In order for a put option to be profitable,
the market price of the underlying security must decline sufficiently below the
exercise price to cover the premium and transaction costs. By using put options
in this manner, a Fund will reduce any profit it might otherwise have realized
in its underlying security by the premium paid for the put option and by
transaction costs.
A Fund may also purchase call options to hedge against an increase in
prices of securities that it wants ultimately to buy. Such hedge protection is
provided during the life of the call option since the Fund, as holder of the
call option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, a Fund will reduce any
profit it might have realized had it bought the underlying security at the time
it purchased the call option by the premium paid for the call option and by
transaction costs.
PURCHASE AND SALE OF OPTIONS AND FUTURES ON STOCK INDICES. A Fund may
purchase and sell options on non-U.S. stock indices and stock index futures as a
hedge against movements in the equity markets.
Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specific price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of that stock index is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option expressed in dollars multiplied by a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike options on specific securities, all settlements
of options on stock indices are in cash and gain or loss depends on general
movements in the stocks included in the index rather than price movements in
particular stocks. A stock index futures contract is an agreement in which one
party agrees to deliver to the other an amount of cash equal to a specific
amount multiplied by the difference between the value of a specific stock index
at the close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of securities is made.
If the Adviser expects general stock market prices to rise, a Fund
might purchase a call option on a stock index or a futures contract on that
index as a hedge against an increase in prices of particular equity securities
it wants ultimately to buy. If in fact the stock index does rise, the price of
the particular equity securities intended to be purchased may also increase, but
that increase would be offset in part by the increase in the value of a Fund's
index option or futures contract resulting from the increase in the index. If,
on the other hand, the Adviser expects general stock market prices to decline, a
Fund might purchase a put option or sell a futures contract on the index. If
that index does in fact decline, the value of some or all of the equity
securities in a Fund may also be expected to decline, but that decrease would be
offset in part by the increase in the value of the Fund's position in such put
option or futures contract.
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PURCHASE AND SALE OF INTEREST RATE FUTURES. A Fund may purchase and
sell interest rate futures contracts on foreign government securities including,
but not limited to, debt securities of the governments and central banks of
France, Germany, Denmark and Japan for the purpose of hedging fixed income and
interest sensitive securities against the adverse effects of anticipated
movements in interest rates.
A Fund may sell interest rate futures contracts in anticipation of an
increase in the general level of interest rates. Generally, as interest rates
rise, the market value of the fixed income securities held by a Fund will fall,
thus reducing the net asset value of the Fund. This interest rate risk can be
reduced without employing futures as a hedge by selling long-term fixed income
securities and either reinvesting the proceeds in securities with shorter
maturities or by holding assets in cash. This strategy, however, entails
increased transaction costs to a Fund in the form of dealer spreads and
brokerage commissions.
The sale of interest rate futures contracts provides an alternative
means of hedging against rising interest rates. As rates increase, the value of
a Fund's short position in the futures contracts will also tend to increase,
thus offsetting all or a portion of the depreciation in the market value of a
Fund's investments that are being hedged. While a Fund will incur commission
expenses in selling and closing out futures positions (which is done by taking
an opposite position which operates to terminate the position in the futures
contract), commissions on futures transactions are lower than transaction costs
incurred in the purchase and sale of portfolio securities.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS AND INTEREST RATE FUTURES
CONTRACTS. A Fund may purchase and write call and put options on non-U.S. stock
index and interest rate futures contracts. A Fund may use such options on
futures contracts in connection with its hedging strategies in lieu of
purchasing and writing options directly on the underlying securities or stock
indices or purchasing and selling the underlying futures. For example, a Fund
may purchase put options or write call options on stock index futures, or
interest rate futures, rather than selling futures contracts, in anticipation of
a decline in general stock market prices or rise in interest rates,
respectively, or purchase call options or write put options on stock index or
interest rate futures, rather than purchasing such futures, to hedge against
possible increases in the price of equity securities or debt securities,
respectively, which the Fund intends to purchase.
PURCHASE AND SALE OF CURRENCY FUTURES CONTRACTS AND RELATED OPTIONS. In
order to hedge its portfolio and to protect it against possible variations in
foreign exchange rates pending the settlement of securities transactions, a Fund
may buy or sell currency futures contracts and related options. If a fall in
exchange rates for a particular currency is anticipated, a Fund may sell a
currency futures contract or a call option thereon or purchase a put option on
such futures contract as a hedge. If it is anticipated that exchange rates will
rise, a Fund may purchase a currency futures contract or a call option thereon
or sell (write) a put option to protect against an increase in the price of
securities denominated in a particular currency a Fund intends to purchase.
These futures contracts and related options thereon will be used only as a hedge
against anticipated currency rate changes, and all options on currency futures
written by a Fund will be covered.
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A currency futures contract sale creates an obligation by a Fund, as
seller, to deliver the amount of currency called for in the contract at a
specified future time for a special price. A currency futures contract purchase
creates an obligation by a Fund, as purchaser, to take delivery of an amount of
currency at a specified future time at a specified price. Although the terms of
currency futures contracts specify actual delivery or receipt, in most instances
the contracts are closed out before the settlement date without the making or
taking of delivery of the currency. Closing out of a currency futures contract
is effected by entering into an offsetting purchase or sale transaction. Unlike
a currency futures contract, which requires the parties to buy and sell currency
on a set date, an option on a currency futures contract entitles its holder to
decide on or before a future date whether to enter into such a contract. If the
holder decides not to enter into the contract, the premium paid for the option
is fixed at the point of sale.
The Fund will write (sell) only covered put and call options on
currency futures. This means that a Fund will provide for its obligations upon
exercise of the option by segregating sufficient cash or short-term obligations
or by holding an offsetting position in the option or underlying currency
future, or a combination of the foregoing. A Fund will, so long as it is
obligated as the writer of a call option on currency futures, own on a
contract-for-contract basis an equal long position in currency futures with the
same delivery date or a call option on stock index futures with the difference,
if any, between the market value of the call written and the market value of the
call or long currency futures purchased maintained by a Fund in cash, Treasury
bills, or other high grade short-term obligations in a segregated account with
its custodian. If at the close of business on any day the market value of the
call purchased by a Fund falls below 100% of the market value of the call
written by the Fund, a Fund will so segregate an amount of cash, Treasury bills
or other high grade short-term obligations equal in value to the difference.
Alternatively, a Fund may cover the call option through segregating with the
custodian an amount of the particular foreign currency equal to the amount of
foreign currency per futures contract option times the number of options written
by a Fund. In the case of put options on currency futures written by the Fund,
the Fund will hold the aggregate exercise price in cash, Treasury bills, or
other high grade short-term obligations in a segregated account with its
custodian, or own put options on currency futures or short currency futures,
with the difference, if any, between the market value of the put written and the
market value of the puts purchased or the currency futures sold maintained by a
Fund in cash, Treasury bills or other high grade short-term obligations in a
segregated account with its custodian. If at the close of business on any day
the market value of the put options purchased or the currency futures by a Fund
falls below 100% of the market value of the put options written by the Fund, a
Fund will so segregate an amount of cash, Treasury bills or other high grade
short-term obligations equal in value to the difference.
If other methods of providing appropriate cover are developed, a Fund
reserves the right to employ them to the extent consistent with applicable
regulatory and exchange requirements. In connection with transactions in stock
index options, stock index futures, interest rate futures, foreign currency
futures and related options on such futures, a Fund will be required to deposit
as "initial margin" an amount of cash or short-term government securities equal
to from 5% to 8% of the contract amount. Thereafter, subsequent payments
(referred to as "variation margin") are made to and from the broker to reflect
changes in the value of the futures contract.
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LIMITATIONS ON PURCHASE OF OPTIONS. The staff of the SEC has taken the
position that purchased over-the-counter options and assets used to cover
written over-the-counter options are illiquid and, therefore, together with
other illiquid securities, cannot exceed 15% of a Fund's assets. The Adviser
intends to limit a Fund's writing of over-the-counter options in accordance with
the following procedure. Each Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts which a Fund has in place with
such primary dealers will provide that the Fund has the absolute right to
repurchase an option it writes at any time at a price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by a Fund for writing the option, plus the
amount, if any, of the option's intrinsic value (i.e., the amount that the
option is in-the-money). The formula also may include a factor to account for
the difference between the price of the security and the strike price of the
option if the option is written out-of-the-money. A Fund will treat all or a
part of the formula price as illiquid for purposes of the 15% test imposed by
the SEC staff.
Risk Factors Associated with Futures and Options Transactions
The effective use of options and futures strategies depends on, among
other things, a Fund's ability to terminate options and futures positions at
times when its the Adviser deems it desirable to do so. Although a Fund will not
enter into an option or futures position unless the Adviser believes that a
liquid secondary market exists for such option or future, there is no assurance
that a Fund will be able to effect closing transactions at any particular time
or at an acceptable price. A Fund generally expects that its options and futures
transactions will be conducted on recognized U.S. and foreign securities and
commodity exchanges. In certain instances, however, a Fund may purchase and sell
options in the over-the-counter market. A Fund's ability to terminate option
positions established in the over-the-counter market may be more limited than in
the case of exchange-traded options and may also involve the risk that
securities dealers participating in such transactions would fail to meet their
obligations to the Fund.
Options and futures markets can be highly volatile and transactions of
this type carry a high risk of loss. Moreover, a relatively small adverse market
movement with respect to these types of transactions may result not only in loss
of the original investment but also in unquantifiable further loss exceeding any
margin deposited.
The use of options and futures involves the risk of imperfect
correlation between movements in options and futures prices and movements in the
price of securities which are the subject of the hedge. Such correlation,
particularly with respect to options on stock indices and stock index futures,
is imperfect, and such risk increases as the composition of a Fund diverges from
the composition of the relevant index. The successful use of these strategies
also depends on the ability of the Adviser to correctly forecast interest rate
movements, currency rate movements and general stock market price movements.
In addition to certain risk factors described above, the following sets
forth certain information regarding the potential risks associated with the
Funds' futures and options transactions.
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RISK OF IMPERFECT CORRELATION. A Fund's ability effectively to hedge
all or a portion of its portfolio through transactions in futures, options on
futures or options on stock indices depends on the degree to which movements in
the value of the securities or index underlying such hedging instrument
correlate with movements in the value of the relevant portion of the Fund's
securities. If the values of the securities being hedged do not move in the same
amount or direction as the underlying security or index, the hedging strategy
for a Fund might not be successful and the Fund could sustain losses on its
hedging transactions which would not be offset by gains on its portfolio. It is
also possible that there may be a negative correlation between the security or
index underlying a futures or option contract and the portfolio securities being
hedged, which could result in losses both on the hedging transaction and the
fund securities. In such instances, a Fund's overall return could be less than
if the hedging transactions had not been undertaken. Stock index futures or
options based on a narrower index of securities may present greater risk than
options or futures based on a broad market index, as a narrower index is more
susceptible to rapid and extreme fluctuations resulting from changes in the
value of a small number of securities. A Fund would, however, effect
transactions in such futures or options only for hedging purposes.
The trading of futures and options on indices involves the additional
risk of imperfect correlation between movements in the futures or option price
and the value of the underlying index. The anticipated spread between the prices
may be distorted due to differences in the nature of the markets, such as
differences in margin requirements, the liquidity of such markets and the
participation of speculators in the futures and options market. The purchase of
an option on a futures contract also involves the risk that changes in the value
of underlying futures contract will not be fully reflected in the value of the
option purchased. The risk of imperfect correlation, however, generally tends to
diminish as the maturity date of the futures contract or termination date of the
option approaches. The risk incurred in purchasing an option on a futures
contract is limited to the amount of the premium plus related transaction costs,
although it may be necessary under certain circumstances to exercise the option
and enter into the underlying futures contract in order to realize a profit.
Under certain extreme market conditions, it is possible that a Fund will not be
able to establish hedging positions, or that any hedging strategy adopted will
be insufficient to completely protect the Fund.
A Fund will purchase or sell futures contracts or options only if, in
the Adviser's judgment, there is expected to be a sufficient degree of
correlation between movements in the value of such instruments and changes in
the value of the relevant portion of the Fund's portfolio for the hedge to be
effective. There can be no assurance that the Adviser's judgment will be
accurate.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET. The ordinary spreads
between prices in the cash and futures markets, due to differences in the
natures of those markets, are subject to distortions. First, all participants in
the futures market are subject to initial deposit and variation margin
requirements. This could require a Fund to post additional cash or cash
equivalents as the value of the position fluctuates. Further, rather than
meeting additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the liquidity of the
futures or options market may be lacking. Prior to exercise or expiration, a
futures or option position may be terminated only by entering into a closing
purchase or sale transaction, which requires a secondary market on the exchange
on which the position was originally established. While a Fund will establish a
futures or option position only if there appears to be a liquid secondary market
therefor, there can be no assurance that such a market will exist for any
particular futures or option contract at any specific time. In such event, it
may not be possible to close out a position held by a Fund, which could require
the Fund to purchase or sell the instrument underlying the position, make or
receive a cash settlement, or meet ongoing variation margin requirements. The
inability to close out futures or option positions also could have an adverse
impact on a Fund's ability effectively to hedge its securities, or the relevant
portion thereof.
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The liquidity of a secondary market in a futures contract or an option
on a futures contract may be adversely affected by "daily price fluctuation
limits" established by the exchanges, which limit the amount of fluctuation in
the price of a contract during a single trading day and prohibit trading beyond
such limits once they have been reached. The trading of futures and options
contracts also is subject to the risk of trading halts, suspensions, exchange or
clearing house equipment failures, government intervention, insolvency of the
brokerage firm or clearing house or other disruptions of normal trading
activity, which could at times make it difficult or impossible to liquidate
existing positions or to recover excess variation margin payments.
RISK OF PREDICTING INTEREST RATE MOVEMENTS. Investments in futures
contracts on fixed income securities and related indices involve the risk that
if the Adviser's investment judgment concerning the general direction of
interest rates is incorrect, a Fund's overall performance may be poorer than if
it had not entered into any such contract. For example, if a Fund has been
hedged against the possibility of an increase in interest rates which would
adversely affect the price of bonds held in its portfolio and interest rates
decrease instead, the Fund will lose part or all of the benefit of the increased
value of its bonds which have been hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if a Fund has
insufficient cash, it may have to sell bonds from its portfolio to meet daily
variation margin requirements, possibly at a time when it may be disadvantageous
to do so. Such sale of bonds may be, but will not necessarily be, at increased
prices which reflect the rising market.
TRADING AND POSITION LIMITS. Each contract market on which futures and
option contracts are traded has established a number of limitations governing
the maximum number of positions which may be held by a trader, whether acting
alone or in concert with others. The Adviser does not believe that these trading
and position limits will have an adverse impact on the hedging strategies
regarding the Funds' investments.
REGULATIONS ON THE USE OF FUTURES AND OPTIONS CONTRACTS. Regulations of
the CFTC require that the Funds enter into transactions in futures contracts and
options thereon for hedging purposes only, in order to assure that they are not
deemed to be a "commodity pool" under such regulations. In particular, CFTC
regulations require that all short futures positions be entered into for the
purpose of hedging the value of investment securities held by a Fund, and that
all long futures positions either constitute bona fide hedging transactions, as
defined in such regulations, or have a total value not in excess of an amount
determined by reference to certain cash and securities positions maintained for
the Fund, and accrued profits on such positions. In addition, a Fund may not
purchase or sell such instruments if, immediately thereafter, the sum of the
amount of initial margin deposits on its existing futures positions and premiums
paid for options on futures contracts would exceed 5% of the market value of the
Fund's total assets.
When a Fund purchases a futures contract, an amount of cash or cash
equivalents or high quality debt securities will be segregated with the Fund's
custodian so that the amount so segregated, plus the initial deposit and
variation margin held in the account of its broker, will at all times equal the
value of the futures contract, thereby insuring that the use of such futures is
unleveraged.
The Funds' ability to engage in the hedging transactions described
herein may be limited by the current federal income tax requirement that a Fund
derive less than 30% of its gross income from the sale or other disposition of
stock or securities held for less than three months. The Funds may also further
limit their ability to engage in such transactions in response to the policies
and concerns of various Federal and state regulatory agencies. Such policies may
be changed by vote of the Board of Directors/Trustees.
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Additional Information on Futures and Options
As stated in the Prospectus, each Non-Money Market Fund, may enter into
futures contracts and options for hedging purposes. Such transactions are
described in this Schedule. During the current fiscal year, each of these Funds
intends to limit its transactions in futures contracts and options so that not
more than 5% of the Fund's net assets are at risk. Furthermore, in no event
would any Fund purchase or sell futures contracts, or related options thereon,
for hedging purposes if, immediately thereafter, the aggregate initial margin
that is required to be posted by the Fund under the rules of the exchange on
which the futures contract (or futures option) is traded, plus any premiums paid
by the Fund on its open futures options positions, exceeds 5% of the Fund's
total assets, after taking into account any unrealized profits and unrealized
losses on the Fund's open contracts and excluding the amount that a futures
option is "in-the-money" at the time of purchase. (An option to buy a futures
contract is "in-the-money" if the value of the contract that is subject to the
option exceeds the exercise price; an option to sell a futures contract is
"in-the-money" if the exercise Price exceeds the value of the contract that is
subject of the option.)
I.Interest Rate Futures Contracts.
Use of Interest Rate Futures Contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures market have tended to move generally in the aggregate
in concert with the cash market prices and have maintained fairly predictable
relationships. Accordingly, a Fund may use interest rate futures as a defense,
or hedge, against anticipated interest rate changes and not for speculation. As
described below, this would include the use of futures contract sales to protect
against expected increases in interest rates and futures contract purchases to
offset the impact of interest rate declines.
A Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Fund, through using futures contracts.
Description of Interest Rates Futures Contracts. An interest rate
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by the Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
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Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the Fund's entering
into a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment on
the floors of several exchanges-principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. A Fund would deal
only in standardized contracts on recognized changes. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury Bonds and
Notes; Government National Mortgage Association ("GNMA") modified pass-through
mortgage-backed securities; three-month United States Treasury Bills; and
ninety-day commercial paper. The Funds may trade in any futures contract for
which there exists a public market, including, without limitation, the foregoing
instruments.
Examples of Futures Contract Sale. A Fund would engage in an interest
rate futures contract sale to maintain the income advantage from continued
holding of a long-term bond while endeavoring to avoid part or all of the loss
in market value that would otherwise accompany a decline in long-term securities
prices. Assume that the market value of a certain security in a Fund tends to
move in concert with the futures market prices of long-term United States
Treasury bonds ("Treasury Bonds"). The Adviser wishes to fix the current market
value of this portfolio security until some point in the future. Assume the
portfolio security has a market value of 100, and the Adviser believes that,
because of an anticipated rise in interest rates, the value will decline to 95.
The Fund might enter into futures contract sales of Treasury bonds for an
equivalent of 98. If the market value of the portfolio securities does indeed
decline from 100 to 95, the equivalent futures market price for the Treasury
bonds might also decline from 98 to 93.
In that case, the five-point loss in the market value of the portfolio
security would be offset by the five-point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.
The Adviser could be wrong in its forecast of interest rates and the
equivalent futures market price could rise above 98. In this case, the market
value of the portfolio securities, including the portfolio security being
protected, would increase. The benefit of this increase would be reduced by the
loss realized on closing out the futures contract sale.
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If interest rate levels did not change, the Fund in the above example
might incur a loss of 2 points (which might be reduced by an offsetting
transaction prior to the settlement date). In each transaction, transaction
expenses would also be incurred.
Examples of Future Contract Purchase. A Fund would engage in an
interest rate futures contract purchase when it is not fully invested in
long-term bonds but wishes to defer for a time the purchase of long-term bonds
in light of the availability of advantageous interim investments, e.g.,
shorter-term securities whose yields are greater than those available on
long-term bonds. The Fund's basic motivation would be to maintain for a time the
income advantage from investing in the short-term securities; the Fund would be
endeavoring at the same time to eliminate the effect of all or part of an
expected increase in market price of the long-term bonds that the Fund may
purchase.
For example, assume that the market price of a long-term bond that the
Fund may purchase, currently yielding 10%, tends to move in concert with futures
market prices of Treasury bonds. The Adviser wishes to fix the current market
price (and thus 10% yield) of the long-term bond until the time (four months
away in this example) when it may purchase the bond. Assume the long-term bond
has a market price of 100, and the Adviser believes that, because of an
anticipated fall in interest rates, the price will have risen to 105 (and the
yield will have dropped to about 9-1/2%) in four months. The Fund might enter
into futures contracts purchases of Treasury bonds for an equivalent price of
98. At the same time, the Fund would assign a pool of investments in short-term
securities that are either maturing in four months or earmarked for sale in four
months, for purchase of the long-term bond at an assumed market price of 100.
Assume these short-term securities are yielding 15%. If the market price of the
long-term bond does indeed rise from 100 to 105, the equivalent futures market
price for Treasury bonds might also rise from 98 to 103. In that case, the
5-point increase in the price that the Fund pays for the long-term bond would be
offset by the 5-point gain realized by closing out the futures contract
Purchase.
The Adviser could be wrong in its forecast of interest rates; long-term
interest rates might rise to above 10%; and the equivalent futures market price
could fall below 98. If short-term rates at the same time fall to 10% or below,
it is possible that the Fund would continue with its purchase program for
long-term bonds. The market price of available long-term bonds would have
decreased. The benefit of this price decrease, and thus yield increase, will be
reduced by the loss realized on closing out the futures contract purchase.
If, however, short-term rates remained above available long-term rates,
it is possible that the Fund would discontinue its purchase program for
long-term bonds. The yield on short-term securities in the portfolio, including
those originally in the pool assigned to the particular long-term bond, would
remain higher than yields on long-term bonds. The benefit of this continued
incremental income will be reduced by the loss realized on closing out the
futures contract purchase.
In each transaction, expenses also would be incurred.
38
<PAGE>
II. Index Futures Contracts.
A stock or bond index assigns relative values to the stocks or bonds
included in the index, and the index fluctuates with changes in the market
values of the stocks or bonds included. Some stock index futures contracts are
based on broad market indices, such as the Standard & Poor's 500 or the New York
Stock Exchange Composite Index. In contract, certain exchanges offer futures
contracts on narrower market indices, such as the Standard & Poor's 100, the
Bond Buyer Municipal Bond Index, an index composed of 40 term revenue and
general obligation bonds, or indices based on an industry or market segment,
such as oil and gas stocks. Futures contracts are traded on organized exchanges
regulated by the Commodity Futures Trading Commission. Transactions on such
exchanges are cleared through a clearing corporation, which guarantees the
performance of the parties to each contract.
A Fund will sell index futures contracts in order to offset a decrease
in market value of its portfolio securities that might otherwise result from a
market decline. The Fund may do so either to hedge the value of its portfolio as
a whole, or to protect against declines, occurring prior to sales of securities,
in the value of the securities to be sold. Conversely, a Fund will purchase
index futures contracts in anticipation of purchases of securities. In a
substantial majority of these transactions, the Fund will purchase such
securities upon termination of the long futures position, but a long futures
position may be terminated without a corresponding purchase of securities.
In addition, a Fund may utilize index futures contracts in anticipation
of changes in the composition of its portfolio holdings. For example, in the
event that a Fund expects to narrow the range of industry groups represented in
its holdings it may, prior to making purchases of the actual securities,
establish a long futures position based on a more restricted index, such as an
index comprised of securities of a particular industry group. A Fund also may
sell futures contracts in connection with this strategy, in order to protect
against the possibility that the value of the securities to be sold as part of
the restructuring of the portfolio will decline prior to the time of sale.
The following are examples of transactions in stock index futures (net
of commissions and premiums, if any).
39
<PAGE>
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
<S> <C> <C>
Portfolio Futures
-Day Hedge is Placed
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Contract
Price = $2,500 Gain on Futures = $2,500
</TABLE>
HEDGING A STOCK PORTFOLIO: Sell the Future Hedge
Objective: Protect Against Declining (Value of the Portfolio)
Factors
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index - 1.0
<TABLE>
<CAPTION>
<S> <C> <C>
Portfolio Futures
-Day Hedge is Placed
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Gain on Futures = $40,000
Value = $40 000
</TABLE>
IF, HOWEVER, THE MARKET MOVED IN THE OPPOSITE DIRECTION, THAT IS, MARKET
VALUE DECREASED AND THE FUND HAD ENTERED INTO AN ANTICIPATORY PURCHASE HEDGE, OR
MARKET VALUE INCREASED AND THE FUND HAD HEDGED ITS STOCK PORTFOLIO, THE RESULTS
OF THE FUND'S TRANSACTIONS IN STOCK INDEX FUTURES WOULD BE AS SET FORTH BELOW.
40
<PAGE>
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
<S> <C> <C>
Portfolio Futures
-Day Hedge is Placed
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 120
Actual Cost = $60,000 Value of Futures = $60,000/Contract
Decrease in Purchase Loss on Futures = $2,500
Price = $2,500 Contract
</TABLE>
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index - 1.0
<TABLE>
<CAPTION>
<S> <C> <C>
Portfolio Futures
-Day Hedge is Placed
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Portfolio = $40,000 Loss of Futures = $40,000
Value = $40 000
</TABLE>
III. Margin Payments
Unlike when a Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to deposit with the broker or in a segregated account
with the Fund's Custodian an amount of cash or cash equivalents, the value, of
which may vary but is generally equal to 10% or less of the value of the
contract. This amount is known as initial margin. The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin is
in the nature of a performance bond or good faith deposit on the contract which
is returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying security or index fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking to the market. For example, when a Fund has purchased a futures contract
and the price of the contract has risen in response to a rise in the underlying
instruments, that position will have increased in value and the Fund will be
entitled to receive from the broker a variation margin payment equal to that
increase in value. Conversely, where a Fund has purchased a futures contract and
the price of the futures contract has declined in response to a decrease in the
underlying instruments, the position would be less valuable, the Fund would be
required to make a variation margin payment to the broker. At any time prior to
expiration of the futures contract, the Adviser may elect to close the position
by taking an opposite position, subject to the availability of a secondary
market, which will operate to terminate the Fund's position in the futures
contract. A final determination of variation margin is then made, additional
cash is required to be paid by or released to the Fund, and the Fund realizes a
loss or gain.
41
<PAGE>
IV. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by a Fund
as a hedging device. One risk arises because of the imperfect correlation
between movements in the price of the future and movements in the price of the
securities which are the subject of the hedge. The price of the future may move
more than or less than the price of the securities being hedged. If the price of
the future moves less than the price of the securities which are the subject of
the hedge, the hedge will not be fully effective but, if the price of securities
being hedged has moved in an unfavorable direction, the Fund would be in a
better position than if it had not hedged at Al. If the price of the securities
being hedged has moved in a favorable direction, this advance will be partially
offset by the loss on the future. If the price of the future moves more than the
price of the hedged securities, the Fund involved will experience either a loss
or gain on the future which will not be completely offset by movements in the
price of the securities which are the subject of the hedge.
To compensate for the imperfect correlation of movements in the price
of securities being hedged and movements in the price of futures contracts, a
Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the volatility over a particular
time period of the prices of such securities has been greater than the
volatility over such time period of the future, or if otherwise deemed to be
appropriate by the Adviser. Conversely, a Fund may buy or sell fewer futures
contracts if the volatility over a particular time period of the prices of the
securities being hedged is less than the volatility over such time period of the
futures contract being used, or if otherwise deemed to be appropriate by the
Adviser. It also is possible that, where a Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance, and the value
of securities held by the Fund may decline. If this occurred, the Fund would
lose money on the future and also experience a decline in value in its portfolio
securities.
Where futures are purchased to hedge against a possible increase in the
price of securities before a Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the Fund then concludes not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, the Fund will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In instances involving the purchase of futures contracts by a Fund, an
amount of cash and cash equivalents, equal to the market value of the futures
contracts, will be deposited in a segregated account with the Fund's Custodian
and/or in a margin account with a broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of Price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the Adviser still may not
result in a successful hedging transaction over a short time frame.
42
<PAGE>
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, a Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in
a futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions.
Successful use of futures by a Fund also is subject to the Adviser's
ability to predict correctly movements in the direction of the market. For
example, if a Fund has hedged against the possibility of a decline in the market
adversely affecting securities held in its portfolio and securities prices
increase instead, the Fund will lose part or all of the benefit to the increased
value of its securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the Fund
has insufficient cash, it may have to sell securities to meet daily variation
margin requirements. Such sales of securities may be, but will not necessarily
be, at increased prices which reflect the rising market. A Fund may have to sell
securities at a time when it may be disadvantageous to do so.
V. Options on Futures Contracts.
The Funds may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer or
seller of a futures contract, the holder, or writer, of an option has the right
to terminate its position prior to the scheduled expiration of the option by
selling, or purchasing, an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
of an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased. Depending on the pricing of the option compared to either the futures
contract upon which it is based, or upon the price of the securities being
hedged, an option may or may not be less risky than ownership of the futures
contract or such securities. In general, the market prices of options can be
expected to be more volatile than the market prices on the underlying futures
contract. Compared to the purchase or sale of futures contracts, however, the
purchase of call or put options on futures contracts may frequently involve less
potential risk to a Fund because the maximum amount at risk is the premium paid
for the options (plus transaction costs). Although permitted by their
fundamental investment policies, the Funds do not currently intend to write
future options, and will not do so in the future absent any necessary regulatory
approvals.
43
<PAGE>
Accounting Treatment.
---------------------
Accounting for futures contracts and options will be in accordance with
generally accepted accounting principles.
GUARANTEED INVESTMENT CONTRACTS
Guaranteed investment contracts, investment contracts or funding
agreements (each referred to as a "GIC") are investment instruments issued by
highly rated insurance companies. Pursuant to such contracts, a Fund may make
cash contributions to a deposit fund of the insurance company's general or
separate accounts. The insurance company then credits to a Fund guaranteed
interest. The insurance company may assess periodic charges against a GIC for
expense and service costs allocable to it, and the charges will be deducted from
the value of the deposit fund. The purchase price paid for a GIC generally
becomes part of the general assets of the issuer, and the contract is paid from
the general assets of the issuer.
A Fund will only purchase GICs from issuers which, at the time of
purchase, meet quality and credit standards established by the Adviser.
Generally, GICs are not assignable or transferable without the permission of the
issuing insurance companies, and an active secondary market in GICs does not
currently exist. Also, a Fund may not receive the principal amount of a GIC from
the insurance company on seven days' notice or less, at which point the GIC may
be considered to be an illiquid investment.
A Money Market Fund will acquire GlCs so that they, together with other
instruments in such Fund's portfolio which are not readily marketable, will not
exceed applicable limitations on such Fund's investments in illiquid securities.
A Money Market Fund will restrict its investments in GlCs to those having a term
of 397 days or less. In determining average weighted portfolio maturity, a GIC
will be deemed to have a maturity equal to the period of time remaining under
the next readjustment of the guaranteed interest rate.
INSURED MUNICIPAL SECURITIES
Certain of the Municipal Securities held by the Funds may be insured at
the time of issuance as to the timely payment of principal and interest. The
insurance policies will usually be obtained by the issuer of the Municipal
Securities at the time of its original issuance. In the event that the issuer
defaults with respect to interest or principal payments, the insurer will be
notified and will be required to make payment to the bondholders. There is,
however, no guarantee that the insurer will meet its obligations. In addition,
such insurance will not protect against market fluctuations caused by changes in
interest rates and other factors.
INTEREST RATE TRANSACTIONS
Among the strategic transactions into which certain Funds may enter are
interest rate swaps and the purchase or sale of related caps and floors. The
Funds expect to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio, to protect
against currency fluctuations, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. A Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by a Fund
with another party of their respective commitments to pay or receive interest,
e.g. an exchange of floating rate payments for fixed rate payments with respect
to a notional amount of principal. A currency swap is an agreement to exchange
cash flows on a notional amount of two or more currencies based on the relative
value differential among them and an index swap is an agreement to swap cash
flows on a notional amount based on changes in the values of the reference
indices. The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount.
44
<PAGE>
A Fund will usually enter into swaps on a net basis, I.E., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. In as much as these swaps, caps and
floors are entered into for good faith hedging purposes, the Adviser and the
Fund believe such obligations do not constitute senior securities under the 1940
Act and, accordingly, will not treat them as being subject to its borrowing
restrictions. A Fund will not enter into any swap, cap and floor transaction
unless, at the time of entering into such transaction, the unsecured long-term
debt of the counterparty, combined with any credit enhancements, is rated at
least "A" by Standard & Poor's Corporation or Moody's Investors Service, Inc. or
has an equivalent rating from a Nationally Recognized Statistical Rating
Organization ("NRSRO") or is determined to be of equivalent credit quality by
the Adviser. If there is a default by the counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps and floors are more recent innovations for which
standardized documentation has not yet been fully developed and, accordingly,
they are less liquid than swaps.
With respect to swaps, a Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high grade securities
having a value equal to the accrued excess. Caps and floors require segregation
of assets with a value equal to the Fund's net obligation, if any.
LOWER RATED DEBT SECURITIES
The yields on lower rated debt and comparable unrated fixed-income
securities generally are higher than the yields available on higher-rated
securities. However, investments in lower rated debt and comparable unrated
securities generally involve greater volatility of price and risk of loss of
income and principal, including the probability of default by or bankruptcy of
the issuers of such securities. Lower rated debt and comparable unrated
securities (a) will likely have some quality and protective characteristics
that, in the judgment of the rating organization, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (b) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. Accordingly,
it is possible that these types of factors could, in certain instances, reduce
the value of securities held in a Fund's portfolio, with a commensurate effect
on the value of the Fund's shares. Therefore, an investment in the Fund should
not be considered as a complete investment program and may not be appropriate
for all investors.
The market prices of lower rated securities may fluctuate more than
higher rated securities and may decline significantly in periods of general
economic difficulty which may follow periods of rising interest rates. During an
economic downturn or a prolonged period of rising interest rates, the ability of
issuers of lower quality debt to service their payment obligations, meet
projected goals, or obtain additional financing may be impaired.
Since the risk of default is higher for lower rated securities, the
Adviser will try to minimize the risks inherent in investing in lower rated debt
securities by engaging in credit analysis, diversification, and attention to
current developments and trends affecting interest rates and economic
conditions. The Adviser will attempt to identify those issuers of high-yielding
securities whose financial condition is adequate to meet future obligations,
have improved, or are expected to improve in the future.
Unrated securities are not necessarily of lower quality than rated
securities, but they may not be attractive to as may buyers. Each Fund's
policies regarding lower rated debt securities is not fundamental and may be
changed at any time without shareholder approval.
45
<PAGE>
While the market values of lower rated debt and comparable unrated
securities tend to react less to fluctuations in interest rate levels than the
market values of higher-rated securities, the market values of certain lower
rated debt and comparable unrated securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
higher-rated securities. In addition, lower rated debt securities and comparable
unrated securities generally present a higher degree of credit risk. Issuers of
lower rated debt and comparable unrated securities often are highly leveraged
and may not have more traditional methods of financing available to them so that
their ability to service their debt obligations during an economic downturn or
during sustained periods of rising interest rates may be impaired. The risk of
loss due to default by such issuers is significantly greater because lower rated
debt and comparable unrated securities generally are unsecured and frequently
are subordinated to the prior payment of senior indebtedness. A Fund may incur
additional expenses to the extent that it is required to seek recovery upon a
default in the payment of principal or interest on its portfolio holdings. The
existence of limited markets for lower rated debt and comparable unrated
securities may diminish a Fund's ability to (a) obtain accurate market
quotations for purposes of valuing such securities and calculating its net asset
value and (b) sell the securities at fair value either to meet redemption
requests or to respond to changes in the economy or in financial markets.
Fixed-income securities, including lower rated debt securities and
comparable unrated securities, frequently have call or buy-back features that
permit their issuers to call or repurchase the securities from their holders,
such as a Fund. If an issuer exercises these rights during periods of declining
interest rates, a Fund may have to replace the security with a lower yielding
security, thus resulting in a decreased return to a Fund.
The market for certain lower rated debt and comparable unrated
securities is relatively new and has not weathered a major economic recession.
The effect that such a recession might have on such securities is not known. Any
such recession, however, could disrupt severely the market for such securities
and adversely affect the value of such securities. Any such economic downturn
also could adversely affect the ability of the issuers of such securities to
repay principal and pay interest thereon.
MUNICIPAL SECURITIES
GENERALLY. The two principal classifications of municipal securities
are "general obligation" securities and "revenue" securities. General obligation
securities are secured by the issuer's pledge of its full faith, credit, and
taxing power for the payment of principal and interest. Revenue securities are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as the user of the facility being financed. Private
activity bonds held by a Fund are in most cases revenue securities and are not
payable from the unrestricted revenues of the issuer. Consequently, the credit
quality of private activity bonds is usually directly related to the credit
standing of the corporate user of the facility involved.
Municipal securities may include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which created
the issuer.
Municipal securities may include variable- or floating- rate
instruments issued by industrial development authorities and other governmental
entities. While there may not be an active secondary market with respect to a
particular instrument purchased by a Fund, a Fund may demand payment of the
principal and accrued interest on the instrument or may resell it to a third
party as specified in the instruments. The absence of an active secondary
market, however, could make it difficult for a Fund to dispose of the instrument
if the issuer defaulted on its payment obligation or during periods the Fund is
not entitled to exercise its demand rights, and the Fund could, for these or
other reasons, suffer a loss.
Some of these instruments may be unrated, but unrated instruments
purchased by a Fund will be determined by the Adviser to be of comparable
quality at the time of purchase to instruments rated "high quality" by any major
rating service. Where necessary to ensure that an instrument is of comparable
"high quality," a Fund will require that an issuer's obligation to pay the
principal of the note may be backed by an unconditional bank letter or line of
credit, guarantee, or commitment to lend.
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<PAGE>
Municipal securities may include participations in privately arranged
loans to municipal borrowers, some of which may be referred to as "municipal
leases." Generally such loans are unrated, in which case they will be determined
by the Adviser to be of comparable quality at the time of purchase to rated
instruments that may be acquired by a Fund. Frequently, privately arranged loans
have variable interest rates and may be backed by a bank letter of credit. In
other cases, they may be unsecured or may be secured by assets not easily
liquidated. Moreover, such loans in most cases are not backed by the taxing
authority of the issuers and may have limited marketability or may be marketable
only by virtue of a provision requiring repayment following demand by the
lender. Such loans made by a Fund may have a demand provision permitting the
Fund to require payment within seven days. Participations in such loans,
however, may not have such a demand provision and may not be otherwise
marketable.
Although lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate, and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds. In the case of a
"non-appropriation" lease, the Funds' ability to recover under the lease in the
event of non-appropriation or default will be limited solely to the repossession
of the leased property in the event foreclosure might prove difficult.
The Funds will not invest more than 5% of their total investment assets
in lease obligations that contain "non-appropriation" clauses where (1) the
nature of the leased equipment or property is such that its ownership or use is
essential to a governmental function of the municipality, (2) the lease payments
will commence amortization of principal at an early date resulting in an average
life of seven years or less for the lease obligation, (3) appropriate covenants
will be obtained from the municipal obligor prohibiting the substitution or
purchase of similar equipment if lease payments are not appropriated, (4) the
lease obligor has maintained good market acceptability in the past, (5) the
investment is of a size that will be attractive to institutional investors, and
(6) the underlying leased equipment has elements of probability and/or use that
enhance its marketability in the event foreclosure on the underlying equipment
were ever required. The Funds have not imposed any percentage limitations with
respect to their investment in lease obligations not subject to the
"non-appropriation" risk. To the extent municipal leases are illiquid, they will
be subject to each Fund's limitation on investments in illiquid securities.
Recovery of an investment in any such loan that is illiquid and payable on
demand may depend on the ability of the municipal borrower to meet an obligation
for full repayment of principal and payment of accrued interest within the
demand period, normally seven days or less (unless a Fund determines that a
particular loan issue, unlike most such loans, has a readily available market).
As it deems appropriate, the Adviser will establish procedures to monitor the
credit standing of each such municipal borrower, including its ability to meet
contractual payment obligations.
In evaluating the credit quality of a municipal lease obligation and
determining whether such lease obligation will be considered "liquid," the
Adviser for each Fund will consider: (1) whether the lease can be canceled; (2)
what assurance there is that the assets represented by the lease can be sold;
(3) the strength of the lessee's general credit (e.g., its debt, administrative,
economic, and financial characteristics); (4) the likelihood that the
municipality will discontinue appropriating funding for the leased property
because the property is no longer deemed essential to the operations of the
municipality (e.g., the potential for an "event of non-appropriation"); and (5)
the legal recourse in the event of failure to appropriate.
Municipal securities may include units of participation in trusts
holding pools of tax-exempt leases. Municipal participation interests may be
purchased from financial institutions, and give the purchaser an undivided
interest in one or more underlying municipal security. To the extent that
municipal participation interests are considered to be "illiquid securities,"
such instruments are subject to each Fund's limitation on the purchase of
illiquid securities. Municipal leases and participating interests therein, which
may take the form of a lease or an installment sales contract, are issued by
state and local governments and authorities to acquire a wide variety of
equipment and facilities. Interest payments on qualifying leases are exempt from
Federal income taxes.
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In addition, certain of the Funds may acquire "stand-by commitments"
from banks or broker/dealers with respect to municipal securities held in their
portfolios. Under a stand-by commitment, a dealer would agree to purchase at a
Fund's option specified Municipal Securities at a specified price. The Funds
will acquire stand-by commitments solely to facilitate portfolio liquidity and
do not intend to exercise their rights thereunder for trading purposes.
Although the Funds do not presently intend to do so on a regular basis,
each may invest more than 25% of its total assets in municipal securities the
interest on which is paid solely from revenues of similar projects if such
investment is deemed necessary or appropriate by the Adviser. To the extent that
more than 25% of a Fund's total assets are invested in Municipal Securities that
are payable from the revenues of similar projects, a Fund will be subject to the
peculiar risks presented by such projects to a greater extent than it would be
if its assets were not so concentrated.
There are, of course, variations in the quality of Municipal
Securities, both within a particular classification and between classifications,
and the yields on Municipal Securities depend upon a variety of factors,
including general money market conditions, the financial condition of the
issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of nationally recognized statistical rating organizations
represent their opinions as to the quality of Municipal Securities. It should be
emphasized, however, that these ratings are general and are not absolute
standards of quality, and Municipal Securities with the same maturity, interest
rate, and rating may have different yields while Municipal Securities of the
same maturity and interest rate with different ratings may have the same yield.
Subsequent to its purchase by a Fund, an issue of Municipal Securities may cease
to be rated, or its rating may be reduced below the minimum rating required for
purchase by that Fund. The Adviser will consider such an event in determining
whether a Fund should continue to hold the obligation.
Opinions relating to the validity of Municipal Securities and to the
exemption of interest thereon from regular Federal income tax or state income
tax are rendered by counsel to the issuer or bond counsel at the time of
issuance. Neither the Funds nor the Adviser will review the proceedings relating
to the issuance of Municipal Securities or the bases for opinions relating to
the validity of such issuance.
The payment of principal and interest on most securities purchased by a
Fund will depend upon the ability of the issuers to meet their obligations. Each
state, each of their political subdivisions, municipalities, and public
authorities, as well as the District of Columbia, Puerto Rico, Guam, and the
Virgin Islands are a separate "issuer" as that term is used in the Prospectuses
and this SAI. The non-governmental user of facilities financed by private
activity bonds is also considered to be an "issuer." An issuer's obligations
under its Municipal Securities are subject to the provisions of bankruptcy,
insolvency, and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Code, and laws, if any, which may be enacted by
Federal or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes. The power or
ability of an issuer to meet its obligations for the payment of interest on and
principal of its Municipal Securities may be materially adversely affected by
litigation or other conditions.
The following information relates specifically to the Nations
California Tax-Exempt Reserves and the California Municipal Bond Fund:
This summary does not purport to be a comprehensive description of all relevant
facts. Although the Trust has no reason to believe that the information
summarized herein is not correct in all material respects, this information has
not been independently verified for accuracy or thoroughness by the Trust.
Rather, the information presented herein has been culled from official
statements and prospectuses issued in connection with various securities
offerings of the State of California and local agencies in California, available
as of the date of this Statement of Additional Information. Further, the
estimates and projections presented herein should not be construed as statements
of fact. They are based upon assumptions which may be affected by numerous
factors and there can be no assurance that target levels will be achieved.
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ECONOMIC FACTORS
FISCAL YEARS PRIOR TO 1995-96. Pressures on the State's budget in the late
1980's and early l990's were caused by a combination of external economic
conditions and growth of the largest General Fund Program--K-14 education,
health, welfare and corrections--at rates faster than the revenue base. These
pressures could continue as the State's overall population and school age
population continue to grow, and as the State's corrections program responds to
a "Three Strikes" law enacted in 1994, which requires mandatory life prison
terms for certain third-time felony offenders. In addition, the State's health
and welfare programs are in a transition period as result of recent federal and
State welfare reform initiatives.
As a result of these factors and others, and especially because a severe
recession between 1990-94 reduced revenues and increased expenditures for social
welfare programs, from the late 1980's until 1992-93, the State had period of
significant budget imbalance. During this period, expenditures exceeded revenues
in four out of six years, and the State accumulated and sustained a budget
deficit in its budget reserve, the Special Fund for Economic Uncertainties
("SFEU") approaching $2.8 billion at its peak at June 30, 1993. Between the
1991-92 and 1994-95 Fiscal Years, each budget required multibillion dollar
actions to bring projected revenues and expenditures into balance, including
significant cuts in health and welfare program expenditures; transfers of
program responsibilities and funding from the State to local governments;
transfers of about $3.6 billion in annual local property tax revenues from other
local governments to local school districts, thereby reducing State funding for
schools under Proposition 98; and revenue increases (particularly in the 1991-92
Fiscal Year budget), most of which were for a short duration.
Despite these budget actions, as noted, the effects of the recession led to
large, unanticipated deficits in the SFEU, as compared to projected positive
balances. By the 1993-94 Fiscal Year, the accumulated deficit was so large that
it was impractical to budget to retire such deficits in one year, so a two-year
program was implemented, using the issuance of revenue anticipation warrants to
carry a portion of the deficit over to the end of the fiscal year. When the
economy failed to recover sufficiently in 1993-94, a second two-year Plan was
implemented in 1994-95, again using cross-fiscal year revenue anticipation
warrants to partly finance the deficit into the 1995-96 fiscal year.
Another consequence of the accumulated budget deficits, together with other
factors such as disbursement of funds to local school districts "borrowed" from
future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the State to
carry out its normal annual cash flow borrowing to replenish cash reserves, the
State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992, when the budget was adopted, the State Controller issued a total of
approximately $3.8 billion of registered warrants.
For several fiscal years during the recession, the State was forced to rely on
external debt markets to meet its cash needs, as a succession of notes and
revenue anticipation warrants were issued in the period from June 1992 to July
1994, often needed to pay previously maturing notes or warrants. These
borrowings were used also in part to spread out the repayment of the accumulated
budget deficit over the end of a fiscal year, as noted earlier. The last and
largest of these borrowings was $4.0 billion of revenue anticipation warrants
which were issued in July, 1994 and matured on April 25, 1996.
1995-96, 1996-97 AND 1997-98 FISCAL YEARS
With the end of the recession, and a growing economy beginning in 1994, the
State's financial condition improved markedly in the last two fiscal years, with
a combination of better than expected revenues, slowdown in growth of social
welfare programs, and continued spending restraint based on the actions taken in
earlier years. The last of the recession-induced budget deficits was repaid,
allowing the SFEU to post a positive cash balance for only the second time in
the l990's, totaling $1.8 billion as of June 30, 1998. The State's cash position
also returned to health, as cash flow borrowing was limited to $3 billion in
1996-97, and no deficit borrowing has occurred over the end of these last two
fiscal years.
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In each of these two fiscal years, the State budget contained the following
major features:
1. Expenditures for K-14 schools grew significantly, as new revenues were
directed to school spending under Proposition 98. These additional funds allowed
several new education initiatives to be funded, and raised K-14 per-pupil
spending to around $4,900 by Fiscal Year 1996-97. See "STATE FINANCES" -
Proposition 98".
2. The Budgets restrained health and welfare spending levels, holding to reduced
benefit levels enacted in earlier years, and attempted to reduce General Fund
spending by calling for greater support from the federal government. The State
also attempted to shift to the federal government a larger share of the cost of
incarceration and social services for illegal aliens. Some of these efforts were
successful, and federal welfare reform also helped, but as a whole the federal
support never reached the levels anticipated when the budgets were enacted.
These funding shortfalls were, however, filled by the strong revenue
collections, which exceeded expectations.
3. General Fund support for the University of California and the California
State University system grew by an average of 5.2 percent increase, 3.3 percent
and 6 percent per year, respectively, and there were no increases in student
fees.
4. General Fund support for the Department of Corrections grew as needed to meet
increased prison population. No new prisons were approved for construction,
however.
5. There were no tax increases, and starting January 1, 1997, there was a 5
percent cut in corporate taxes. The suspension of the Renter's Tax Credit, first
taken as a cost-saving measure during the recession, was continued.
As noted, the economy grew strongly during these fiscal years, and as a result,
the General Fund took in substantially greater tax revenues than were initially
planned when the budgets were enacted. These additional funds were largely
directed to school spending as mandated by Proposition 98, and to make up
shortfalls from reduced federal health and welfare aid. As a result, there was
no dramatic increase in budget reserves, although the accumulated budget deficit
from the recession years was finally eliminated in the past fiscal year.
1998-99 FISCAL YEAR
On January 9, 1998, the Governor projected General Fund revenues for the 1998-99
Fiscal Year of $55.4 billion, and proposed expenditures in the same amount. In
May 14, 1998, the Administration projected that revenues for the 1997-98 and
1998-99 Fiscal Years combined would be more than $4.2 billion higher than was
projected on January 9, 1998. The Governor proposed that most of this increased
revenue be dedicated to fund a 75% cut in the Vehicle License Fee ("VLF").
For the current fiscal year, the State legislature did not adhere to the
constitutional requirement that it adopt its budget for the upcoming fiscal year
by midnight of June 15th. On July 22, 1998, the Legislature unanimously passed
an $18.9 billion emergency-spending bill to cover the costs of, among others,
bond payments, paychecks for state workers, retirement pensions, prisons, school
and welfare programs from July 1st through August 5th. The Legislature passed
the Budget Bill on August 11, 1998.
FISCAL YEAR 1998-99 BUDGET ACT
On August 21, 1998, the Governor signed the Budget Act, but vetoed expenditures
of $1.360 billion from the General Fund, and $160 million from Special Funds. Of
this total, the Governor indicated that about $250 million of vetoed funds were
"set aside" to fund programs for education. Vetoed items included education
funds, salary increases and many individual resources and capital projects.
The Budget Act anticipated General Fund revenues and transfers of $57.0 billion
(after giving effect to various tax reductions enacted in 1997 and 1998), a 4.2%
increase from the revised 1997-98 figures. Special Fund revenues were estimated
at $14.3 billion. In May of 1999, the Governor released new projections for the
balance of the 1998-99 fiscal year (the "May Update"). The May Update showed
that the State's economy grew stronger in late 1998 and into 1999 than had been
anticipated. Most of the increase was reviewed from personal income taxes,
reflecting stronger wage employment than previously estimated, and additional
growth in capital gain realizations resulting from the stock market's rise.
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After giving effect to the Governor's vetoes, the Budget Act provides authority
for expenditures of $57.3 billion from the General Fund (a 7.3% increase from
1997-98), $14.7 billion from Special Funds, and $3.4 billion from bond funds.
The Budget Act projected a balance in the SFEU as of June 30, 1999 (but without
including the "set aside" veto amount) of $1.255 billion, a little more than 2%
of general fund revenues. The May update projects that the SFEU will have a
balance of almost $1.9 billion as of June 30, 1999. The Budget Act assumes the
State will carry out its normal intra-year cash flow borrowing in the amount of
$1.7 billion of revenue anticipation notes, which were issued on October 1,
1998.
The Budget Act provides that starting on January 1, 1999, the VLF will be
reduced by 25%, at a cost to the general fund of approximately $500 million in
the 1998-99 Fiscal year and about $1 billion annually thereafter. In addition to
the cut in VLF, the 1998-99 Budget includes both temporary and permanent
increases, in the personal income tax dependent credit ($612 million General
Fund cost in 1998-99, but less in future years), a nonrefundable renters tax
credit ($133 million), and various targeted business tax credits ($106 million).
The following were the major features of the 1998-99 Budget Act:
Proposition 98 funding for K-14 schools is increased by $1.7 billion in General
Fund moneys over revised 1997-98 levels, about $300 million higher than the
minimum Proposition 98 guaranty. An additional $600 million was appropriated to
"settle up" prior years' Proposition 98 entitlements, and was primarily devoted
to one-time uses such as block grants, deferred maintenance, and computer and
laboratory equipment. Of the 1998-99 funds, major new programs include money for
instructional and library materials, deferred maintenance, support for
increasing the school year to 180 days and reduction of class sizes in Grade 9.
The Governor held $250 million of education funds which were vetoed as set-aside
for enactment of additional reforms. Overall, per-pupil spending for K-14
schools under Proposition 98 is increased to $5,695, more than one-third higher
than the level in the last recession year of 1993-94. The 1998-99 Budget also
includes $250 million as repayment of prior years' loans to schools, as part of
the settlement of the CTA v. Gould lawsuit.
Funding for higher education increased substantially above the level called for
in the Governor's four-year compact. General Fund support was increased by $340
million (15.6%) for the University of California and $267 million (14.1%) for
the California State University system. In addition, Community Colleges received
a $300 million (6.6%) increase under Proposition 98.
The Budget Act includes increased funding for health, welfare and social
services programs. A 4.9% grant increase was included in the basic welfare
grants, the first increase in those grants in nine years. Future increases will
depend on sufficient general fund revenue to trigger the phased cuts in VLF
described above.
Funding for the judiciary and criminal justice programs increased by about 11%
over 1997-98, primarily to reflect increased State support for local trial
courts and rising prison population.
Various other highlights of the Budget included new funding for resources
projects, dedication of $376 million of general fund moneys for capital outlay
projects, funding of a three percent State employee salary increase, funding of
2,000 new Department of Transportation positions to accelerate transportation
construction projects, and funding of the Infrastructure and Economic
Development Bank ($50 million).
The State of California received approximately $167 million of federal
reimbursements to offset costs related to the incarceration of undocumented
alien felons for federal fiscal year 1997. The State anticipates receiving
approximately $195 million in federal reimbursements for federal fiscal year
1998.
After the Budget Act was signed, and prior to the close of the Legislative
session on August 31, 1998, the Legislature passed a variety of fiscal bills.
The Governor had until September 30, 1998 to sign or veto these bills. The bills
with the most significant fiscal impact which the Governor signed include $235
million for certain water system improvements in Southern California, $243
million for the State's share of the purchase of environmentally sensitive
forest lands, $178 million for state prisons, $160 million for housing
assistance, and $125 million for juvenile facilities. The Governor also signed
bills totaling $223 million for education programs which were part of the
Governor's $250 million veto "set aside," and $32 million for local governments'
fiscal relief. In addition, he signed a bill reducing by $577 million the
State's obligation to contribute to the State Teachers' Retirement System in the
1998-99 Fiscal Year.
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Although California's strong economy is producing additional revenues for the
State government, the State's budget continues to be under stress from mandated
spending on education and services. There can be no assurances that, if economic
conditions weaken in the United States or abroad, or other factors intercede,
the State will not experience gaps in the future.
PROPOSED 1999-2000 FISCAL YEAR BUDGET
On January 8, 1999, the Governor released his proposed budget for the 1999-2000
Fiscal Year (the "Proposed Budget"). The Proposed Budget estimates general fund
revenues and transfers in 1999-2000 of $60.3 billion, a 7.1% increase from
revised 1998-99 figures. The Governor proposes expenditures of $60.5 billion, a
3.8% increase from 1998-99. The Proposed Budget projects a balance in the SFEU
of $414.5 million on June 30, 2000 and is expanded to $42.8 billion, an increase
of $2.8 billion over 1998-99.
The Proposed Budget incorporates a proposal to obtain federal waiver and federal
funding for the current state-funded family planning program, titled Family
Planning, Access, Care and Treatment ("Family PACT"). The federal funding of
approximately $122 million will reduce General Fund expenditures for Medi-Cal by
a similar amount, $62 million of which savings will be used to assist in
balancing the 1999-2000 budget.
THE ORANGE COUNTY BANKRUPTCY. On December 6, 1994, Orange County, California and
its Investment Pool (the "Pool") filed for bankruptcy under Chapter 9 of the
United States Bankruptcy Code. The subsequent restructuring led to the sale of
substantially all of the Pool's portfolio and resulted in losses estimated to be
approximately $1.7 billion (or approximately 22% of amounts deposited by the
Pool investors). Approximately 187 California public entities -- substantially
all of which are public agencies within the county -- had various bonds, notes
or other forms of indebtedness outstanding. In some instances the proceeds of
such indebtedness were invested in the Pool.
In April, 1996, the County emerged from bankruptcy after closing on a $900
million recovery bond transaction. At that time, the County and its financial
advisors stated that the County had emerged from the bankruptcy without any
structural fiscal problems and assured that the County would not slip back into
bankruptcy. However, for many of the cities, schools and special districts that
lost money in the County portfolio, repayment remains contingent on the outcome
of litigation which is pending against investment firms and other finance
professionals. Thus, it is impossible to determine the ultimate impact of the
bankruptcy and its aftermath on these various agencies and their claims.
CONSTITUTIONAL, LEGISLATIVE AND OTHER FACTORS
Certain California constitutional amendments, legislative measures, executive
orders, administrative regulations and voter initiatives could produce the
adverse effects described below, among others.
REVENUE DISTRIBUTION. Certain Debt Obligations in Nations California Municipal
Bond Fund may be obligations of issuers which rely in whole or in part on
California State revenues for payment of these obligations. Property tax
revenues and a portion of the State's general fund surplus are distributed to
counties, cities and their various taxing entities and the State assumes certain
obligations theretofore paid out of local funds. Whether and to what extent a
portion of the State's general fund will be distributed in the future to
counties, cities and their various entities is unclear.
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HEALTH CARE LEGISLATION. Certain Debt Obligations in Nations California
Municipal Bond Fund may be obligations which are payable solely from the
revenues of health care institutions. Certain provisions under California law
may adversely affect these revenues and, consequently, payment on those Debt
Obligations.
The Federally sponsored Medicaid program for health care services to eligible
welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting is
made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or other factors. Other reductions or limitations may be
imposed on payment for services rendered to MediCal beneficiaries in the future.
Under this approach, in most geographical areas of California, only those
hospitals which enter into a MediCal contract with the State of California will
be paid for non-emergency acute inpatient services rendered to Medi-Cal
beneficiaries. The State may also terminate these contracts without notice under
certain circumstances and is obligated to make contractual payments only to the
extent the California legislature appropriates adequate funding therefor.
California enacted legislation in 1982 that authorizes private health plans and
insurers to contract directly with hospitals for services to beneficiaries on
negotiated terms. Some insurers have introduced plans known as "preferred
provider organizations" ("PPOs"), which offer financial incentives for
subscribers who use only the hospitals which contract with the plan. Under an
exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
These Debt Obligations may also be insured by the State of California pursuant
to an insurance program implemented by the Office of Statewide Health Planning
and Development for health facility construction loans. If a default occurs on
insured Debt Obligations, the State Treasurer will issue debentures payable out
of a reserve fund established under the insurance program or will pay principal
and interest on an unaccelerated basis from unappropriated State funds. At the
request of the Office of Statewide Health Planning and Development, Arthur D.
Little, Inc. prepared a study in December 1983, to evaluate the adequacy of the
reserve fund established under the insurance program and based on certain
formulations and assumptions found the reserve fund substantially underfunded.
In September of 1986, Arthur D. Little, Inc. prepared an update of the study and
concluded that an additional 10% reserve be established for "multi-level"
facilities. For the balance of the reserve fund, the update recommended
maintaining the current reserve calculation method. In March of 1990, Arthur D.
Little, Inc. prepared a further review of the study and recommended that
separate reserves continue to be established for "multi-level" facilities at a
reserve level consistent with those that would be required by an insurance
company.
MORTGAGES AND DEEDS. Certain Debt Obligations in Nations California Municipal
Bond Fund may be obligations which are secured in whole or in part by a mortgage
or deed of trust on real property. California has five principal statutory
provisions which limit the remedies of a creditor secured by a mortgage or deed
of trust. Two statutes limit the creditor's right to obtain a deficiency
judgment, one limitation being based on the method of foreclosure and the other
on the type of debt secured. Under the former, a deficiency judgment is barred
when the foreclosure is accomplished by means of a nonjudicial trustee's sale.
Under the latter, a deficiency judgment is barred when the foreclosed mortgage
or deed of trust secures certain purchase money obligations. Another California
statute, commonly known as the "one form of action" rule, requires creditors
secured by real property to exhaust their real property security by foreclosure
before bringing a personal action against the debtor. The fourth statutory
provision limits any deficiency judgment obtained by a creditor secured by real
property following a judicial sale of such property to the excess of the
outstanding debt over the fair value of the property at the time of the sale,
thus preventing the creditor from obtaining a large deficiency judgment against
the debtor as the result of low bids at a judicial sale. The fifth statutory
provision gives the debtor the right to redeem the real property from any
judicial foreclosure sale as to which a deficiency judgment may be ordered
against the debtor.
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Upon the default of a mortgage or deed of trust with respect to California real
property, the creditor's nonjudicial foreclosure rights under the power of sale
contained in the mortgage or deed of trust are subject to the constraints
imposed by California law upon transfers of title to real property by private
power of sale. During the three-month period beginning with the filing of a
formal notice of default, the debtor is entitled to reinstate the mortgage by
making any overdue payments. Under standard loan servicing procedures, the
filing of the formal notice of default does not occur unless at least three full
monthly payments have become due and remain unpaid. The power of sale is
exercised by posting and publishing a notice of sale for at least 20 days after
expiration of the three-month reinstatement period. The debtor may reinstate the
mortgage, in the manner described above, up to five business days prior to the
scheduled sale date. Therefore, the effective minimum period for foreclosing on
a mortgage could be in excess of seven months after the initial default. Such
time delays in collections could disrupt the flow of revenues available to an
issuer for the payment of debt service on the outstanding obligations if such
defaults occur with respect to a substantial number of mortgages or deeds of
trust securing an issuer's obligations.
In addition, a court could find that there is sufficient involvement of the
issuer in the nonjudicial sale of property securing a mortgage for such private
sale to constitute "state action," and could hold that the private right-of-sale
proceedings violate the due process requirements of the Federal or State
Constitutions, consequently preventing an issuer from using the nonjudicial
foreclosure remedy described above.
Certain Debt Obligations in Nations California Municipal Bond Fund may be
obligations which finance the acquisition of single family home mortgages for
low and moderate income mortgagors. These obligations may be payable solely from
revenues derived from the home mortgages, and are subject to California's
statutory limitations described above applicable to obligations secured by real
property. Under California antideficiency legislation, there is no personal
recourse against a mortgagor of a single family residence purchased with the
loan secured by the mortgage, regardless of whether the creditor chooses
judicial or nonjudicial foreclosure.
Under California law, mortgage loans secured by single-family owner-occupied
dwellings may be prepaid at any time. Prepayment charges on such mortgage loans
may be imposed only with respect to voluntary prepayments made during the first
five years during the term of the mortgage loan, and then only if the borrower
prepays an amount in excess of 20% of the original principal amount of the
mortgage loan in a 12-month period; a prepayment charge cannot in any event
exceed six months' advance interest on the amount prepaid during the 12-month
period in excess of 20% of the original principal amount of the loan. This
limitation could affect the flow of revenues available to an issuer for debt
service on the outstanding debt obligations which financed such home mortgages.
PROPOSITION 13. Certain of the Debt Obligations may be obligations of issuers
who rely in whole or in part on AD VALOREM real property taxes as a source of
revenue. On June 6, 1978, California voters approved an amendment to the
California Constitution known as Proposition 13, which added Article XIIIA to
the California Constitution. The effect of Article XIIIA was to limit AD VALOREM
taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues.
Section 1 of Article XIIIA, as amended, limits the maximum AD VALOREM tax on
real property to 1% of full cash value to be collected by the counties and
apportioned according to law. The 1% limitation does not apply to AD VALOREM
taxes or special assessments to pay the interest and redemption charges on any
bonded indebtedness for the acquisition or improvement of real property approved
by two-thirds of the votes cast by the voters voting on the proposition. Section
2 of Article XIIIA defines "full cash value" to mean "the County Assessor's
valuation of real property as shown on the 1975/76 tax bill under `full cash
value' or, thereafter, the appraised value of real property when purchased,
newly constructed, or a change in ownership has occurred after the 1975
assessment." The full cash value may be adjusted annually to reflect inflation
at a rate not to exceed 2% per year, or reduction in the consumer price index or
comparable local data, or reduced in the event of declining property value
caused by damage, destruction or other factors.
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Legislation enacted by the California Legislature to implement Article XIIIA
provides that notwithstanding any other law, local agencies may not levy any AD
VALOREM property tax except to pay debt service on indebtedness approved by the
voters prior to July 1, 1978, and that each county will levy the maximum tax
permitted by Article XIIIA.
PROPOSITION 9. On November 6, 1979, an initiative known as "Proposition 9" or
the "Gann Initiative" was approved by the California voters, which added Article
XIIIB to the California Constitution. Under Article XIIIB, State and local
governmental entities have an annual "appropriations limit" and are not allowed
to spend certain moneys called "appropriations subject to limitation" in an
amount higher than the "appropriations limit." Article XIIIB does not affect the
appropriation of moneys which are excluded from the definition of
"appropriations subject to limitation," including debt service on indebtedness
existing or authorized as of January 1, 1979, or bonded indebtedness
subsequently approved by the voters. In general terms, the "appropriations
limit" is required to be based on certain 1978/79 expenditures, and is to be
adjusted annually to reflect changes in consumer prices, population, and certain
services provided by these entities. Article XIIIB also provides that if these
entities' revenues in any year exceed the amounts permitted to be spent, the
excess is to be returned by revising tax rates or fee schedules over the
subsequent two years.
PROPOSITION 98. On November 8, 1988, voters of the State approved Proposition
98, a combined initiative constitutional amendment and statute called the
"Classroom Instructional Improvement and Accountability Act." Proposition 98
changed State funding of public education below the university level and the
operation of the State Appropriations Limit, primarily by guaranteeing K-14
schools a minimum share of General Fund revenues. Under Proposition 98 (modified
by Proposition 111 as discussed below), K-14 schools are guaranteed the greater
of (a) in general, a fixed percent of General Fund revenues ("Test 1"), (b) the
amount appropriated to K-14 schools in the prior year, adjusted for changes in
the cost of living (measured as in Article XIIIB by reference to State per
capita personal income) and enrollment ("Test 2"), or (c) a third test, which
would replace Test 2 in any year when the percentage growth in per capita
General Fund revenues from the prior year plus one half of one percent is less
than the percentage growth in State per capita personal income ("Test 3"). Under
Test 3, schools would receive the amount appropriated in the prior year adjusted
for changes in enrollment and per capita General Fund revenues, plus an
additional small adjustment factor. If Test 3 is used in any year, the
difference between Test 3 and Test 2 would become a "credit" to schools which
would be the basis of payments in future years when per capita General Fund
revenue growth exceeds per capita personal income growth.
Proposition 98 permits the Legislature -- by two-thirds vote of both houses,
with the Governor's concurrence -- to suspend the K-14 schools' minimum funding
formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIIIB limit to
K-14 schools.
During the recession years of the early 1990s, General Fund revenues for several
years were less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements, and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. In 1992, a lawsuit was filed, California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. During the
course of this litigation, a trial court determined that almost $2 billion in
"loans" which had been provided to school districts during the recession
violated the constitutional protection of support for public education. A
settlement was reached on April 12, 1996 which ensures that future school
funding will not be in jeopardy over repayment of these so-called loans.
PROPOSITION 111. On June 30, 1989, the California Legislature enacted Senate
Constitutional Amendment 1, a proposed modification of the California
Constitution to alter the spending limit and the education funding provisions of
Proposition 98. Senate Constitutional Amendment 1 -- on the June 5, 1990 ballot
as Proposition 111 -- was approved by the voters and took effect on July l,
1990. Among a number of important provisions, Proposition 111 recalculated
spending limits for the State and for local governments, allowed greater annual
increases in the limits, allowed the averaging of two years' tax revenues before
requiring action regarding excess tax revenues, reduced the amount of the
funding guarantee in recession years for school districts and community college
districts (but with a floor of 40.9 percent of State general fund tax revenues),
removed the provision of Proposition 98 which included excess moneys transferred
to school districts and community college districts in the base calculation for
the next year, limited the amount of State tax revenue over the limit which
would be transferred to school districts and community college districts, and
exempted increased gasoline taxes and truck weight fees from the State
appropriations limit. Additionally, Proposition 111 exempted from the State
appropriations limit funding for capital outlays.
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PROPOSITION 62. On November 4, 1986, California voters approved an initiative
statute known as Proposition 62. This initiative provided the following:
1. Requires that any tax for general governmental purposes imposed by local
governments be approved by resolution or ordinance adopted by a two-thirds vote
of the governmental entity's legislative body and by a majority vote of the
electorate of the governmental entity;
2. Requires that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction;
3. Restricts the use of revenues from a special tax to the purposes or for the
service for which the special tax was imposed;
4. Prohibits the imposition of AD VALOREM taxes on real property by local
governmental entities except as permitted by Article XIIIA;
5. Prohibits the imposition of transaction taxes and sales taxes on the sale of
real property by local governments;
6. Requires that any tax imposed by a local government on or after August 1,
1985 be ratified by a majority vote of the electorate within two years of the
adoption of the initiative;
7. Requires that, in the event a local government fails to comply with the
provisions of this measure, a reduction in the amount of property tax revenue
allocated to such local government occurs in an amount equal to the revenues
received by such entity attributable to the tax levied in violation of the
initiative; and
8. Permits these provisions to be amended exclusively by the voters of the State
of California.
In September 1988, the California Court of Appeal in City of Westminster v.
County of Orange, 204 Cal. App. 3d 623, 215 Cal. Rptr. 511 (Cal. Ct. App. 1988),
held that Proposition 62 is unconstitutional to the extent that it requires a
general tax by a general law city, enacted on or after August 1, 1985 and prior
to the effective date of Proposition 62, to be subject to approval by a majority
of voters. The Court held that the California Constitution prohibits the
imposition of a requirement that local tax measures be submitted to the
electorate by either referendum or initiative. It is impossible to predict the
impact of this decision on charter cities, on special taxes or on new taxes
imposed after the effective date of Proposition 62. The California Court of
Appeal in City of Woodlake v. Logan, 230 Cal. App.3d 1058, 282 Cal. Rptr. 27
(1991) , subsequently held that Proposition 62's popular vote requirements for
future local taxes also provided for an unconstitutional referenda. The
California Supreme Court declined to review both the City of Westminster and the
City of Woodlake decisions.
In Santa Clara Local Transportation Authority v. Guardino, 11 Cal. 4th 220
(1995), REH'G DENIED, MODIFIED [45 Cal. Rptr. 2d 204] (1995), the California
Supreme Court upheld the constitutionality of Proposition 62's popular vote
requirements for future taxes, and specifically disapproved of the City of
Woodlake decision as erroneous. The Court did not determine the correctness of
the City of Westminster decision, because that case appeared distinguishable,
was not relied on by the parties in Guardino, and involved taxes not likely to
still be at issue. It is impossible to predict the impact of the Supreme Court's
decision on charter cities or on taxes imposed in reliance on the City of
Woodlake case.
California Senate Bill 1590, introduced February 16, 1996, would make the
Guardino decision inapplicable to any tax first imposed or increased by an
ordinance or resolution adopted before December 14, 1995. The California State
Senate passed the Bill on May 16, 1996 and would be constitutional as a
non-voted amendment to Proposition 62 or as a non-voted change to Proposition
62's operative date.
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PROPOSITION 218. On November 5, 1996, the voters of the State of California
approved Proposition 218, a constitutional initiative, entitled the "Right to
Vote on Taxes Act." Proposition 218 adds Articles XIIIC and XIIID to the
California Constitution and contains a number of interrelated provisions
affecting the ability of local governments to levy and collect both existing and
future taxes, assessments, fees and charges. Proposition 218 became effective on
November 6, 1996. The Sponsors are unable to predict whether and to what extent
Proposition 218 may be held to be constitutional or how its terms will be
interpreted and applied by the courts. However, if upheld, Proposition 218 could
substantially restrict certain local governments' ability to raise future
revenues and could subject certain existing sources of revenue to reduction or
repeal, and increase local government costs to hold elections, calculate fees
and assessments, notify the public and defend local government fees and
assessments in court.
Article XIIIC of Proposition 218 requires majority voter approval for the
imposition, extension or increase of general taxes and two-thirds voter approval
for the imposition, extension or increase of special taxes, including special
taxes deposited into a local government's general fund. Proposition 218 also
provides that any general tax imposed, extended or increased without voter
approval by any local government on or after January 1, 1995 and prior to
November 6, 1996 shall continue to be imposed only if approved by a majority
vote in an election held within two years of November 6, 1996.
Article XIIIC of Proposition 218 also expressly extends the initiative power to
give voters the power to reduce or repeal local taxes, assessments, fees and
charges, regardless of the date such taxes, assessments, fees or charges were
imposed. This extension of the initiative power to some extent
constitutionalizes the 1995 California State Supreme Court decision in Rossi v.
Brown, 9 Cal. 4th 688 [38 Cal. Rptr. 2d 363] (1995), which upheld an initiative
that repealed a local tax and held that the State constitution does not preclude
the repeal, including the prospective repeal, of a tax ordinance by an
initiative, as contrasted with the State constitutional prohibition on
referendum powers regarding statutes and ordinances which impose a tax.
Generally, the initiative process enables California voters to enact legislation
upon obtaining requisite voter approval at a general election. Proposition 218
extends the authority stated in Rossi by expanding the initiative power to
include reducing or repealing assessments, fees and charges, which had
previously been considered administrative rather than legislative matters and
therefore beyond the initiative power.
The initiative power granted under Article XIIIC of Proposition 218, by its
terms, applies to all local taxes, assessments, fees and charges and is not
limited to local taxes, assessments, fees and charges that are property related.
Article XIIID of Proposition 218 adds several new requirements making it
generally more difficult for local agencies to levy and maintain "assessments"
for municipal services and programs. "Assessment" is defined to mean any levy or
charge upon real property for a special benefit conferred upon the real
property.
Article XIIID of Proposition 218 also adds several provisions affecting "fees"
and "charges" which are defined as "any levy other than an AD VALOREM tax, a
special tax, or an assessment, imposed by a local government upon a parcel or
upon a person as an incident of property ownership, including a user fee or
charge for a property related service." All new and, after June 30, 1997,
existing property related fees and charges must conform to requirements
prohibiting, among other things, fees and charges which (i) generate revenues
exceeding the funds required to provide the property related service, (ii) are
used for any purpose other than those for which the fees and charges are
imposed, (iii) are for a service not actually used by, or immediately available
to, the owner of the property in question, or (iv) are used for general
governmental services, including police, fire or library services, where the
service is available to the public at large in substantially the same manner as
it is to property owners. Further, before any property related fee or charge may
be imposed or increased, written notice must be given to the record owner of
each parcel of land affected by such fee or charges. The local government must
then hold a hearing upon the proposed imposition or increase of such property
based fee, and if written protests against the proposal are presented by a
majority of the owners of the identified parcels, the local government may not
impose or increase the fee or charge. Moreover, except for fees or charges for
sewer, water and refuse collection services, no property related fee or charge
may be imposed or increased without majority approval by the property owners
subject to the fee or charge or, at the option of the local agency, two-thirds
voter approval by the electorate residing in the affected area.
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PROPOSITION 87. On November 8, 1988, California voters approved Proposition 87.
Proposition 87 amended Article XVI, Section 16, of the California Constitution
by authorizing the California Legislature to prohibit redevelopment agencies
from receiving any of the property tax revenue raised by increased property tax
rates levied to repay bonded indebtedness of local governments which is approved
by voters on or after January 1, 1989.
OTHER INVESTMENT INFORMATION. The investment adviser believes that it is likely
that sufficient California Municipal Securities will be available to satisfy the
investment objective, policies and limitations of Nations California Municipal
Bond Fund, and to enable the Fund to invest at least 50% of its total assets in
California Municipal Securities at the close of each of its fiscal quarters. In
meeting this investment policy the Fund may invest in Municipal Securities which
are private activity bonds (including industrial development bonds under prior
law) the interest on which is subject to the 26% to 28% federal alternative
minimum tax applicable to individuals and the 20% federal alternative minimum
tax and the environmental tax applicable to corporations. The environmental tax
applicable to corporations is imposed at the rate of .12% on the excess of the
corporations modified federal alternative minimum taxable income over
$2,000,000. Investments in such securities, however, will not exceed under
normal market conditions 35% of the Fund's total assets when added together with
any taxable investments held by the Fund. Moreover, although the Fund does not
presently intend to do so on a regular basis, it may invest more than 25% of its
assets in Municipal Securities the interest on which is paid solely from
revenues of similar projects if such investment is deemed necessary or
appropriate by the Fund's investment adviser in light of the Fund's investment
objective and policies. To the extent that the Fund's assets are concentrated in
Municipal Securities payable from revenues on similar projects, the Fund will be
subject to the peculiar risks presented by such projects to a greater extent
than it would be if the Fund's assets were not so concentrated.
If the Trust's Board of Trustees, after consultation with the investment
adviser, should for any reason determine that it is impracticable to invest at
least 50% of the Fund's total assets in Nations California Tax-Exempt Reserves
and Nations California Municipal Bond Fund at the close of each quarter of the
Fund's taxable year, the Board would re-evaluate each Fund's investment
objective and policies and consider changes in its structure and name or
possible dissolution.
OPTIONS ON CURRENCIES
Certain Funds may purchase and sell options on currencies to hedge the
value of securities the Fund holds or intends to buy. Options on foreign
currencies may be traded on U.S. and foreign exchanges or over-the-counter.
OTHER INVESTMENT COMPANIES
In seeking to attain their investment objectives, certain Funds may
invest in securities issued by other investment companies within the limits
prescribed by the 1940 Act. Each Fund currently intends to limit its investments
so that, as determined immediately after a securities purchase is made: (a) not
more than 5% of the value of its total assets will be invested in the securities
of any one investment company; (b) not more than 10% of the value of its total
assets will be invested in the aggregate in securities of investment companies
as a group; and (c) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Fund or by the Company as a whole. As a
shareholder of another investment company, a Fund would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including Advisory fees. These expenses would be in addition to the Advisory and
other expenses that a Fund bears in connection with its own operations. The
Adviser has agreed to remit to the respective investing Fund fees payable to it
under its respective Investment Advisory Agreement with an affiliated money
market Fund to the extent such fees are based upon the investing Fund's assets
invested in shares of the affiliated money market fund.
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PARTICIPATION INTERESTS AND COMPANY RECEIPTS
The Government Bond Fund also may purchase from domestic financial
institutions and trusts created by such institutions participation interests and
trust receipts in high quality debt securities. A participation interest or
receipt gives the Fund an undivided interest in the security in the proportion
that the Fund's participation interest or receipt bears to the total principal
amount of the security. As to certain instruments for which the Fund will be
able to demand payment, the Fund intends to exercise its right to do so only
upon a default under the terms of the security, as needed to provide liquidity
or to maintain or improve the quality of its investment portfolio. It is
possible that a participation interest or trust receipt may be deemed to be an
extension of credit by the Fund to the issuing financial institution rather than
to the obligor of the underlying security and may not be directly entitled to
the protection of any collateral security provided by the obligor. In such
event, the ability of the Fund to obtain repayment could depend on the issuing
financial institution.
Participation interests and trust receipts may have fixed, floating or
variable rates of interest, and will have remaining maturities of thirteen
months or less (as defined by the SEC). If a participation interest or trust
receipt is unrated, the Adviser will have determined that the interest or
receipt is of comparable quality to those instruments in which the Fund may
invest pursuant to guidelines approved by the Board of Directors. For certain
participation interests or trust receipts the Fund will have the right to demand
payment, on not more than 30 days' notice, for all or any part of the Fund's
participation interest or trust receipt in the securities involved, plus accrued
interest.
REAL ESTATE INVESTMENT TRUSTS
A real estate investment trust ("REIT") is a managed portfolio of real
estate investments which may include office buildings, apartment complexes,
hotels and shopping malls. An equity REIT holds equity positions in real estate,
and it seeks to provide its shareholders with income from the leasing of its
properties, and with capital gain from any sales of properties. A mortgage REIT
specializes in lending money to developers of properties, and passes any
interest income it may earn to its shareholders.
REITs may be affected by changes in the value of the underlying
property owned or financed by the REIT, while Mortgage REITs also may be
affected by the quality of credit extended. Both equity and mortgage REITs are
dependent upon management skill and may not be diversified. REITs also may be
subject to heavy cash flow dependency, defaults by borrowers, self-liquidation,
and the possibility of failing to qualify for tax-free pass-through of income
under the Internal Revenue Code of 1986, as amended.
REPURCHASE AGREEMENTS
The repurchase price under any repurchase agreements described in the
Prospectuses generally equals the price paid by a Fund plus interest negotiated
on the basis of current short-term rates (which may be more or less than the
rate on the securities underlying the repurchase agreement). Securities subject
to repurchase agreements will be held by a Company's custodian in a segregated
account or in the Federal Reserve/Treasury book-entry system. Repurchase
agreements are considered to be loans by such Company under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS
At the time a Fund enters into a reverse repurchase agreement, it may
establish a segregated account with its custodian bank in which it will maintain
cash, U.S. Government securities or other liquid high grade debt obligations
equal in value to its obligations in respect of reverse repurchase agreements.
Reverse repurchase agreements involve the risk that the market value of the
securities the Funds are obligated to repurchase under the agreement may decline
below the repurchase price. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, the Funds' use
of proceeds of the agreement may be restricted pending a determination by the
other party, or its trustee or receiver, whether to enforce the Funds'
obligation to repurchase the securities. Reverse repurchase agreements are
speculative techniques involving leverage, and are subject to asset coverage
requirements if the Funds do not establish and maintain a segregated account (as
described above). In addition, some or all of the proceeds received by a Fund
from the sale of a portfolio instrument may be applied to the purchase of a
repurchase agreement. To the extent the proceeds are used in this fashion and a
common broker/dealer is the counterparty on both the reverse repurchase
agreement and the repurchase agreement, the arrangement might be recharacterized
as a swap transaction. Under the requirements of the 1940 Act, the Funds are
required to maintain an asset coverage (including the proceeds of the
borrowings) of at least 300% of all borrowings. Depending on market conditions,
the Funds' asset coverage and other factors at the time of a reverse repurchase,
the Funds may not establish a segregated account when the Adviser believes it is
not in the best interests of the Funds to do so. In this case, such reverse
repurchase agreements will be considered borrowings subject to the asset
coverage described above.
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SECURITIES LENDING
To increase return on portfolio securities, certain Funds may lend
their portfolio securities to broker/dealers and other institutional investors
pursuant to agreements requiring that the loans be continuously secured by
collateral equal at all times in value to at least the market value of the
securities loaned. Collateral for such loans may include cash, securities of the
U.S. Government, its agencies or instrumentalities, an irrevocable letter of
credit issued by (i) a U.S. bank that has total assets exceeding $1 billion and
that is a member of the Federal Deposit Insurance Corporation, or (ii) a foreign
bank that is one of the 75 largest foreign commercial banks in terms of total
assets, or any combination thereof. Such loans will not be made if, as a result,
the aggregate of all outstanding loans of the Fund involved exceeds 33% of the
value of its total assets which may include cash collateral received for
securities loaned. There may be risks of delay in receiving additional
collateral or in recovering the securities loaned or even a loss of rights in
the collateral should the borrower of the securities fail financially. However,
loans are made only to borrowers deemed by the Adviser to be of good standing
and when, in its judgment, the income to be earned from the loan justifies the
attendant risks. Pursuant to the securities loan agreement a Fund is able to
terminate the securities loan upon notice of not more than five business days
and thereby secure the return to the Fund of securities identical to the
transferred securities upon termination of the loan.
SHORT SALES
Certain Funds may from time to time enter into short sales
transactions. A Fund will not make short sales of securities nor maintain a
short position unless at all times when a short position is open, such Fund owns
an equal amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for securities of
the same issue as, and equal in amount to, the securities sold short. This is a
technique known as selling short "against the box." Such short sales will be
used by a Fund for the purpose of deferring recognition of gain or loss for
federal income tax purposes.
SPECIAL SITUATIONS
Certain Funds may invest in "special situations." A special situation
arises when, in the opinion of the Adviser, the securities of a particular
company will, within a reasonably estimable period of time, be accorded market
recognition at an appreciated value solely by reason of a development applicable
to that company, and regardless of general business conditions or movements of
the market as a whole. Developments creating special situations might include,
among others: liquidations, reorganizations, recapitalizations, mergers,
material litigation, technical breakthroughs and new management or management
policies. Although large and well known companies may be involved, special
situations more often involve comparatively small or unseasoned companies.
Investments in unseasoned companies and special situations often involve much
greater risk than is inherent in ordinary investment securities.
STAND-BY COMMITMENTS
Certain Funds may acquire "stand-by commitments" with respect to
Municipal Securities held in their portfolios. Under a "stand-by commitment," a
dealer agrees to purchase from a Fund, at a Fund's option, specified Municipal
Securities at a specified price. Stand-by commitments are exercisable by a Fund
at any time before the maturity of the underlying Municipal Securities, and may
be sold, transferred, or assigned by a Fund only with the underlying
instruments.
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The amount payable to a Tax-Free Bond Fund upon its exercise of a
stand-by commitment will normally be (i) the Fund's acquisition cost of the
Municipal Securities (excluding any accrued interest which a Tax-Free Bond Fund
paid on their acquisition), less any amortized market premium or plus any
amortized market or original issue discount during the period a Tax-Free Bond
Fund owned the securities, plus (ii) all interest accrued on the securities
since the last interest payment date during that period. Under normal market
conditions, in determining net asset value a Tax-Free Bond Fund values the
underlying Municipal Securities on an amortized cost basis. Accordingly, the
amount payable by a dealer upon exercise of a stand-by commitment will normally
be substantially the same as the portfolio value of the underlying Municipal
Securities.
A Fund's right to exercise stand-by commitments will be unconditional
and unqualified. A stand-by commitment will not be transferable by a Fund,
although the Fund could sell the underlying Municipal Securities to a third
party at any time. Until a Fund exercises its stand-by commitment, it owns the
securities in its portfolio which are subject to the stand-by commitment.
The Funds expect that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for the security being acquired
which will be subject to the commitment (thus reducing the yield to maturity
otherwise available for the same security). When a Fund pays any consideration
directly or indirectly for a stand-by commitment, its cost will be reflected as
unrealized depreciation for the period during which the commitment is held by
that Fund. The Tax-Free Bond Funds will not acquire a stand-by commitment unless
immediately after the acquisition not more than 5% of the Funds' total assets
will be subject to a demand feature, or in stand-by commitments, with the same
institution.
Each Fund intends to enter into stand-by commitments only with banks
and broker/dealers which, in the Adviser's opinion, present minimal credit
risks. In evaluating the credit worthiness of the issuer of a stand-by
commitment, the Adviser will review periodically the issuer's assets,
liabilities, contingent claims, and other relevant financial information.
The Funds would acquire stand-by commitments solely to facilitate
portfolio liquidity and do not intend to exercise their rights thereunder for
trading purposes. Stand-by commitments acquired by a Fund will be valued at zero
in determining net asset value. A Fund's reliance upon the credit of these
dealers, banks, and broker/dealers will be secured by the value of the
underlying Municipal Securities that are subject to the commitment. Thus, the
risk of loss to the Fund in connection with a "stand-by commitment" will not be
qualitatively different from the risk of loss faced by a person that is holding
securities pending settlement after having agreed to sell the securities in the
ordinary course of business.
STRIPPED SECURITIES
Certain Funds may purchase stripped securities issued or guaranteed by
the U.S. Government, where the principal and interest components are traded
independently under the Separate Trading of Registered Interest and Principal of
Securities program ("STRIPS"). Under STRIPS, the principal and interest
components are individually numbered and separately issued by the U.S. Treasury
at the request of depository financial institutions, which then trade the
component parts independently.
In addition, the Fund may purchase stripped mortgage-backed securities
("SMBS") issued by the U.S. Government (or a U.S. Government agency or
instrumentality) or by private issuers such as banks and other institutions. If
the underlying obligations experience greater than anticipated prepayments of
principal, the Fund may fail to fully recover its initial investment. The market
value of the class consisting entirely of principal payments can be extremely
volatile in response to changes in interest rates. The yields on a class of SMBS
that receives all or most of the interest are generally higher than prevailing
market yields on other mortgage-backed obligations because their cash flow
patterns are also volatile and there is a greater risk that the initial
investment will not be full recovered. SMBS issued by the U.S. Government (or a
U.S. Government agency or instrumentality) may be considered liquid under
guidelines established by the Company's Board of Directors if they can be
disposed of promptly in the ordinary course of business at a value reasonably
close to that used in the calculation of the Fund's per share net asset value.
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Although stripped securities may not pay interest to holders prior to
maturity, Federal income tax regulations require a Fund to recognize as interest
income a portion of the bond's discount each year. This income must then be
distributed to shareholders along with other income earned by the Fund. To the
extent that any shareholders in the Fund elect to receive their dividends in
cash rather than reinvest such dividends in additional Fund shares, cash to make
these distributions will have to be provided from the assets of the Fund or
other sources such as proceeds of sales of Fund shares and/or sales of portfolio
securities. In such cases, the Fund will not be able to purchase additional
income producing securities with cash used to make such distributions and its
current income may ultimately be reduced as a result.
U.S. AND FOREIGN BANK OBLIGATIONS
These obligations include negotiable certificates of deposit, banker's
acceptances and fixed time deposits. Each Fund limits its investments in
domestic bank obligations to banks having total assets in excess of $1 billion
and subject to regulation by the U.S. Government. Each Fund may also invest in
certificates of deposit issued by members of the Federal Deposit Insurance
Corporation ("FDIC") having total assets of less than $1 billion, provided that
the Fund will at no time own more than $100,000 principal amount of certificates
of deposit (or any higher principal amount which in the future may be fully
covered by FDIC insurance) of any one of those issuers. Fixed time deposits are
obligations which are payable at a stated maturity date and bear a fixed rate of
interest. Generally, fixed time deposits may be withdrawn on demand by a Fund,
but they may be subject to early withdrawal penalties which vary depending upon
market conditions and the remaining maturity of the obligation. Although fixed
time deposits do not have a market, there are no contractual restrictions on a
Fund's right to transfer a beneficial interest in the deposit to a third party.
Each Fund limits its investments in foreign bank obligations (i.e.,
obligations of foreign branches and subsidiaries of domestic banks, and domestic
and foreign branches and agencies of foreign banks) to obligations of banks
which at the time of investment are branches or subsidiaries of domestic banks
which meet the criteria in the preceding paragraphs or are branches or agencies
of foreign banks which (i) have more than $10 billion, or the equivalent in
other currencies, in total assets; (ii) in terms of assets are among the 75
largest foreign banks in the world; (iii) have branches or agencies in the
United States; and (iv) in the opinion of the Adviser, pursuant to the
established by the Board of Directors of the Company, are of an investment
quality comparable to obligations of domestic banks which may be purchased by a
Fund. These obligations may be general obligations of the parent bank in
addition to the issuing branch or subsidiary, but the parent bank's obligations
may be limited by the terms of the specific obligation or by governmental
regulation. Each Fund also limits its investments in foreign bank obligations to
banks, branches and subsidiaries located in Western Europe (United Kingdom,
France, Germany, Belgium, The Netherlands, Italy and Switzerland), Scandinavia
(Denmark and Sweden), Australia, Japan, the Cayman Islands, the Bahamas and
Canada. Each Fund will limit its investment in securities of foreign banks to
not more than 20% of total assets at the time of investment.
Each Fund may also make interest-bearing savings deposits in commercial
and savings banks in amounts not in excess of 5% of the total assets of the
Fund.
U.S. GOVERNMENT OBLIGATIONS
Each Fund may invest in U.S. Government obligations. Examples of the
types of U.S. Government obligations that may be held by the Funds include, in
addition to U.S. Treasury bonds, notes and bills, the obligations of the Federal
Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage Association,
Federal National Mortgage Association, General Services Administration, Student
Loan Marketing Association, Central Bank for Cooperatives, Federal Home Loan
Mortgage Corporation, Federal Intermediate Credit Banks, Tennessee Valley
Authority, Resolution Funding Corporation and Maritime Administration.
Obligations guaranteed as to principal or interest by the U.S. Government, its
agencies, authorities or instrumentalities are deemed to include: (a) securities
for which the payment of principal and interest is backed by an irrevocable
letter of credit issued by the U.S. Government, its agencies, authorities or
instrumentalities and (b) participations in loans made to foreign governments or
their agencies that are so guaranteed. The secondary market for certain of these
participations is limited. If such participations are illiquid they will not be
purchased.
62
<PAGE>
U.S. Government obligations include principal and interest components
of securities issued or guaranteed by the U.S. Treasury if the components are
traded independently under the Separate Trading of Registered Interest and
Principal of Securities program. Obligations issued or guaranteed as to
principal or interest by the U.S. Government, its agencies, authorities or
instrumentalities may also be acquired in the form of custodial receipts. These
receipts evidence ownership of future interest payments, principal payments or
both on certain notes or bonds issued by the U.S. Government, its agencies,
authorities or instrumentalities.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Options, futures and forward foreign currency contracts that obligate a
Fund to provide cash, securities or currencies to complete such transactions
will entail that Fund to either segregate assets in an account with, or on the
books of, the Company's custodian, or otherwise "covering" the transaction as
described below. For example, a call option written by a Fund will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or liquid assets
sufficient to meet the obligation by purchasing and delivering the securities if
the call is exercised. A call option written on an index will require that Fund
to have portfolio securities that correlate with the index. A put option written
by a Fund also will require that Fund to have available assets sufficient to
purchase the securities the Fund would be obligated to buy if the put is
exercised.
A forward foreign currency contract that obligates a Fund to provide
currencies will require the Fund to hold currencies or liquid securities
denominated in a foreign currency which will equal the Fund's obligations.
Such a contract requiring the purchase of currencies also requires segregation.
Unless a segregated account consists of the securities, cash or
currencies that are the subject of the obligation, a Fund will hold cash, U.S.
Government securities and other high grade liquid debt obligations in a
segregated account. These assets cannot be transferred while the obligation is
outstanding unless replaced with other suitable assets. In the case of an
index-based transaction, a Fund could own securities substantially replicating
the movement of the particular index.
In the case of a futures contract, a Fund must deposit initial margin
and variation margin, as often as daily, if the position moves adversely,
sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Similarly, options on futures contracts require a Fund to
deposit margin to the extent necessary to meet the Fund's commitments.
In lieu of such assets, such transactions may be covered by other means
consistent with applicable regulatory policies. A Fund may enter into
off-setting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
hedging transactions. For example, a Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by that Fund. Moreover, instead of segregating assets if a Fund held
a futures or forward contract, it could purchase a put option on the same
futures or forward contract with a strike price as high or higher than the price
of the contract held. Of course, the off-setting transaction must terminate at
the time of or after the primary transaction.
VARIABLE- AND FLOATING-RATE INSTRUMENTS
Certain Funds may purchase variable-rate and floating rate obligations.
If such instrument is not rated, the Adviser will consider the earning power,
cash flows, and other liquidity ratios of the issuers and guarantors of such
obligations and, if the obligation is subject to a demand feature, will monitor
their financial status to meet payment on demand. In determining average
weighted portfolio maturity, a variable-rate demand instrument issued or
guaranteed by the U.S. Government or an agency or instrumentality thereof will
be deemed to have a maturity equal to the period remaining until the obligations
next interest rate adjustment. Other variable-rate obligations will be deemed to
have a maturity equal to the longer of the period remaining to the next interest
rate adjustment or the time a Fund can recover payment of principal as specified
in the instrument. Variable-rate demand notes held by a Money Market Fund may
have maturities of more than 397 days, provided (i) the Fund is entitled to
payment principal on not more than 30 days' notice, or at specified intervals
not exceeding 397 days (upon not more than 30 days' notice), and (ii) the rate
of interest on such note is adjusted automatically at periodic intervals which
may extend up to 397 days.
63
<PAGE>
The variable- and-floating rate demand instruments that the Funds may
purchase include participations in Municipal Securities purchased from and owned
by financial institutions, primarily banks. Participation interests provide a
Fund with a specified undivided interest (up to 100%) in the underlying
obligation and the right to demand payment of the unpaid principal balance plus
accrued interest on the participation interest from the institution upon a
specified number of days' notice, not to exceed 30 days. Each participation
interest is backed by an irrevocable letter of credit or guarantee of a bank
that the Adviser has determined meets the prescribed quality standards for the
Funds. The bank typically retains fees out of the interest paid on the
obligation for servicing the obligation, providing the letter of credit, and
issuing the repurchase commitment.
WARRANTS
Certain Funds are permitted to invest in warrants. Warrants are
privileges issued by corporations enabling the owner to subscribe to and
purchase a specified number of shares of the corporation at a specified price
during a specified period of time. The prices of warrants do not necessarily
correlate with the prices of the underlying securities. The purchase of warrants
involves the risk that the purchaser could lose the purchase value of the
warrant if the right to subscribe to additional shares is not exercised prior to
the warrant's expiration. Also, the purchase of warrants involves the risk that
the effective price paid for the warrant added to the subscription price of the
related security may exceed the value of the subscribed security's market price
such as when there is no movement in the level of the underlying security.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS
A Fund may agree to purchase securities on a when-issued basis or enter
into a forward commitment to purchase securities. When a Fund engages in these
transactions, its custodian will segregate cash, U.S. government securities or
other high quality debt obligations equal to the amount of the commitment.
Normally, the custodian will segregate portfolio securities to satisfy a
purchase commitment, and in such a case a Fund may be required subsequently to
segregate additional assets in order to ensure that the value of the segregated
assets remains equal to the amount of the Fund's commitment. Because a Fund will
segregate cash or liquid assets to satisfy its purchase commitments in the
manner described, the Fund's liquidity and ability to manage its portfolio might
be adversely affected in the event its commitments to purchase when-issued
securities ever exceeded 25% of the value of its assets. In the case of a
forward commitment to sell portfolio securities, the Fund's custodian will hold
the portfolio securities themselves in a segregated account while the commitment
is outstanding.
A Fund will make commitments to purchase securities on a when-issued
basis or to purchase or sell securities on a forward commitment basis only with
the intention of completing the transaction and actually purchasing or selling
the securities. If deemed advisable as a matter of investment strategy, however,
a Fund may dispose of or renegotiate a commitment after it is entered into, and
may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a capital gain or loss.
When a Fund engages in when-issued and forward commitment transactions,
it relies on the other party to consummate the trade. Failure of such party to
do so may result in the Fund's incurring a loss or missing an opportunity to
obtain a price considered to be advantageous.
64
<PAGE>
The value of the securities underlying a when-issued purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their value, is taken into account when determining the net asset value of a
Fund starting on the date the Fund agrees to purchase the securities. The Fund
does not earn dividends on the securities it has committed to purchase until
they are paid for and delivered on the settlement date. When the Fund makes a
forward commitment to sell securities it owns, the proceeds to be received upon
settlement are included in the Fund's assets. Fluctuations in the value of the
underlying securities are not reflected in the Fund's net asset value as long as
the commitment remains in effect.
PORTFOLIO TURNOVER
Generally, the Equity Funds will purchase portfolio securities for
capital appreciation or investment income, or both, and not for short-term
trading profits. If a Fund's annual portfolio turnover rate exceeds 100%, it may
result in higher brokerage costs and possible tax consequences for the Portfolio
and its shareholders. For the Funds' portfolio turnover rates, see the
"Financial Highlights" in the Prospectus.
INVESTMENT RISKS
In addition to the risks identified in certain of the securities
descriptions above, there also are general investment risks associated with an
investment in any of the Funds.
Investments by a Fund in common stocks and other equity securities are
subject to stock market risks. The value of the stocks that the Fund holds, like
the broader stock market, may decline over short or even extended periods. The
U.S. stock market tends to be cyclical, with periods when stock prices generally
rise and periods when prices generally decline. As of the date of this
Prospectus, the stock market, as measured by the S&P 500 Index and other
commonly used indexes, was trading at or close to record levels. There can be no
guarantee that these levels will continue.
Nations California Tax-Exempt Reserves and Nations California Municipal
Bond Fund, as non-diversified funds, typically invest in California municipal
securities. Therefore, events affecting the State of California could have a
greater impact on the Fund's net asset value.
The value of a Fund's investments in debt securities, including U.S.
Government Obligations, will tend to decrease when interest rates rise and
increase when interest rates fall. In general, longer-term debt instruments tend
to fluctuate in value more than shorter-term debt instruments in response to
interest rate movements. In addition, debt securities that are not backed by the
United States Government are subject to credit risk, which is the risk that the
issuer may not be able to pay principal and/or interest when due. In addition,
obligations with the lowest investment grade rating (E.G., "BBB" by Standard &
Poor's Corporation ("S&P") or "Baa" by Moody's Investors Service, Inc.
("Moody's")) have speculative characteristics and changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade debt
obligations. Subsequent to its purchase by the Fund, an issue of securities may
cease to be rated or its rating may be reduced below the minimum rating required
for purchase by the Fund. The Adviser will consider such an event in determining
whether the Fund should continue to hold the obligation. Unrated obligations may
be acquired by the Fund if they are determined by the Adviser to be of
comparable quality at the time of purchase to rated obligations that may be
acquired.
Certain of the Funds' investments constitute derivative securities,
which are securities whose value is derived, at least in part, from an
underlying index or reference rate. There are certain types of derivative
securities that can, under certain circumstances, significantly increase a
purchaser's exposure to market or other risks. The Adviser, however, only
purchases derivative securities in circumstances where it believes such
purchases are consistent with such Fund's investment objective and do not unduly
increase the Fund's exposure to market or other risks. For additional risk
information regarding the Funds' investments in particular instruments, see
"Appendix A -- Fund Securities."
65
<PAGE>
Certain of the Funds may invest in securities of smaller and newer
issuers. Investments in such companies may present greater opportunities for
capital appreciation because of high potential earnings growth, but also present
greater risks than investments in more established companies with longer
operating histories and greater financial capacity.
MANAGEMENT OF THE TRUST
-----------------------
The business and affairs of the Trust are managed under the direction
of its Boards of Trustees. This SAI contains the names of and general background
information concerning each Trustee.
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 management and affairs of the Trust are supervised by the Trustees
under the laws governing business trusts in the Commonwealth of Massachusetts.
The Trustees and the officers of the Trust and their principal occupations for
the last five years are set forth below.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS
POSITION WITH AND CURRENT
NAME, ADDRESS, AND AGE THE TRUST DIRECTORSHIPS
- ---------------------- --------- -------------
<S> <C> <C> <C>
Edmund L. Benson, III, 62 Director Director, President and Treasurer, Saunders &
Saunders & Benson, Inc. Benson, Inc. (Insurance), Insurance Managers,
1510 Willow Lawn Drive Inc. (insurance); Trustee, Nations Reserves,
Suite 216 Master Investment Trust, Nations Annuity
Richmond, VA 23230 Trust and Nations Fund Trust; Director,
Nations Fund, Inc., Nations LifeGoal Funds,
Inc., and Nations Fund Portfolios, Inc.
James Ermer, 56 Director Retired Executive Vice President, Corporate
11511 Compass Point Drive Development and Planning - Land America
Ft. Meyers, FL 33908 (title insurance); Senior Vice President,
Finance - CSX Corporation (transportation and
natural resources); Director National Mine
Service (mining supplies), Lawyers Title
Corporation (title insurance), Nations Fund,
Inc., Nations Fund Portfolios, Inc. and
Nations LifeGoal Funds, Inc.; Trustee -
Nations Reserves, Nations Fund Trust, Nations
Annuity Trust and Nations Master Investment
Trust.
William H. Grigg, 66 Director Chairman Emeritus since July 1997, Chairman
Duke Power Co. and Chief Executive Officer from April 1994
16092A Reap Road to July 1997 - Duke Power Co.; Director - The
Albermarle, NC 28001 Shaw Group, Inc.; Director and Vice Chairman,
Aegis Insurance Services, Ltd. (a mutual
insurance company in Bermuda);
Director-Hatteras Income Securities, Inc.,
Nations Government Income Term Trust 2003,
Inc., Nations Government Income Term Trust
2004, Inc., Nations Balanced Target Maturity
Fund, Inc., Nations Fund, Inc., Nations Fund
Portfolios, Inc. and Nations LifeGoal Funds,
Inc.; Trustee - Nations Reserves, Nations
Fund Trust, Nations Annuity Trust and Nations
Master Investment Trust.
66
<PAGE>
PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS
POSITION WITH AND CURRENT
NAME, ADDRESS, AND AGE THE TRUST DIRECTORSHIPS
- ---------------------- --------- -------------
Thomas F. Keller, 67 Director R.J. Reynolds Industries Professor
Fuqua School of Business of Business Administration and
P.O. Box 90120 Former Dean - Fuqua School of
Duke University Business, Duke University; Director
Durham, NC 27708 - LADD Furniture, Inc. (furniture),
Wendy's International, Inc.
(restaurant operating and
franchising), American Business
Products, Inc. (printing services),
Dimon, Inc. (tobacco), Biogen, Inc.
(pharmaceutical biotechnology),
Hatteras Income Securities, Inc.,
Nations Government Income Term Trust
2003, Inc., Nations Government
Income Term Trust 2004, Inc.,
Nations Balanced Target Maturity
Fund, Inc., Nations Fund, Inc.,
Nations Fund Portfolios, Inc. and
Nations LifeGoal Funds, Inc.;
Trustee - The Mentor Funds, Mentor
Institutional Trust, Cash Reserve
Trust, Nations Reserves, Nations
Fund Trust, Nations Annuity Trust
and Nations Master Investment Trust.
Carl E. Mundy, Jr., 64 Director President and CEO - USO from May
USO World Headquarters 1996 to present; Commandant - United
Washington Navy Yard States Marine Corps from July 1991
Building 198 to July 1995; Director -
901 M Street, S.E. Shering-Plough (pharmaceuticals and
Washington, D.C. 20374-5096 health care products); General
Dynamics Corporation (defense
systems), Nations Fund, Inc.,
Nations Fund Portfolios, Inc. and
Nations LifeGoal Funds, Inc.;
Trustee - Nations Reserves, Nations
Fund Trust, Nations Annuity Trust
and Nations Master Investment Trust.
67
<PAGE>
PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS
POSITION WITH AND CURRENT
NAME, ADDRESS, AND AGE THE TRUST DIRECTORSHIPS
- ---------------------- --------- -------------
Dr. Cornelius J. Pings, 70* Director/Trustee President - Association of American
480 S. Orange Grove Blvd. Universities from February 1993 to June 1998;
Pasadena, CA 91105 Director - Farmers Group, Inc. (insurance
company), Nations Fund, Inc., Nations
LifeGoal Funds, Inc. and Nations Fund
Portfolios, Inc.; Trustee - Master Investment
Trust, Series I from 1995 to 1999, Master
Investment Trust, Series II from 1995 to
1997, Nations Reserves, Nations Fund Trust,
Nations Annuity Trust and Nations Master
Investment Trust.; Director/Trustee and
Chairman - Pacific Horizon Funds, Inc. and
Master Investment Trust, Series I, from
inception to May 1999; Director - Time
Horizon Funds and Pacific Innovations Trust.
James B. Sommers*, 60 Director President - NationsBank Trust from January
237 Cherokee Road 1992 to September 1996; Executive Vice
Charlotte, NC 28207 President - NationsBank Corporation from
January 1992 to May 1997; Chairman - Central
Piedmont Community College Foundation; Board
of Commissioners, Charlotte/ Mecklenberg
Hospital Authority; Director - Nations Fund,
Inc., Nations Fund Portfolios, Inc. and
Nations LifeGoal Funds, Inc.; Trustee -
Central Piedmont Community College; Mint
Museum of Art, Nations Reserves, Nations Fund
Trust, Nations Annuity Trust and Nations
Master Investment Trust.
A. Max Walker*, 77 President, Director and Independent Financial Consultant; Director
4580 Windsor Gate Court Chairman of the Board and Chairman of the Board - Hatteras Income
Atlanta, GA 30342 Securities, Inc., Nations Government Income
Term Trust 2003, Inc., Nations Government
Income Term Trust 2004, Inc., Nations
Balanced Target Maturity Fund, Inc.;
President, Director and Chairman of the Board
- Nations Fund, Inc., Nations LifeGoal Funds,
Inc. and Nations Fund Portfolios, Inc.;
President, Trustee and Chairman of the Board
- Nations Reserves, Nations Fund Trust,
Nations Annuity Trust and Nations Master
Investment Trust.
68
<PAGE>
PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS
POSITION WITH AND CURRENT
NAME, ADDRESS, AND AGE THE TRUST DIRECTORSHIPS
- ---------------------- --------- -------------
Charles B. Walker, 60 Director Director-Ethyl Corporation (chemical
Albermarle Corporation manufacturing); Vice Chairman and
Vice Chairman and CFO Chief Financial Officer - Albemarle
330 South Fourth Street Corporation (chemical
Richmond, VA 23219 manufacturing); Director - Nations
Fund, Inc., Nations Fund Portfolios,
Inc. and Nations LifeGoal Funds,
Inc.; Trustee - Nations Reserves,
Nations Fund Trust, Nations Annuity
Trust and Nations Master Investment
Trust.
Thomas S. Word, Jr.*, 61 Director Partner - McGuire, Woods, Battle & Boothe LLP
McGuire, Woods, Battle & Boothe LLP (law firm); Director - Vaughan-Bassett
One James Center Furniture Companies, Inc. (furniture),
8th Floor Nations Fund, Inc., Nations Fund Portfolios,
Richmond, VA 23219 Inc. and Nations LifeGoal Funds, Inc.;
Trustee - Nations Reserves, Nations Fund
Trust, Nations Annuity Trust and Nations
Master Investment Trust.
Richard H. Blank, Jr., 42 Secretary and Treasurer Senior Vice President since 1998, Vice
Stephens Inc. President from 1994 to 1998 and Manager from
111 Center Street 1990 to 1994 - Mutual Fund Services, Stephens
Little Rock, AR 72201 Inc.; Secretary since September 1993 and
Treasurer since November 1998 Nations Fund,
Inc., Nations Fund Portfolios, Inc., Nations
LifeGoal Funds, Inc., Nations Reserves,
Nations Fund Trust, Nations Annuity Trust and
Nations Master Investment Trust.
Michael W. Nolte, 38 Assistant Secretary Assistant Secretary - Nations Fund Trust,
Stephens Inc. Nations Fund, Inc., Nations Reserves, Nations
Fund Portfolios, Inc., Nations LifeGoal
Funds, Inc., Nations Annuity Trust and
Nations Master Investment Trust.
69
<PAGE>
PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS
POSITION WITH AND CURRENT
NAME, ADDRESS, AND AGE THE TRUST DIRECTORSHIPS
- ---------------------- --------- -------------
James E. Banks, 43 Assistant Secretary Assistant Secretary - Nations Fund Trust,
Stephens Inc. Nations Fund, Inc., Nations Reserves, Nations
Fund Portfolios, Inc., Nations LifeGoal
Funds, Inc., Nations Annuity Trust and
Nations Master Investment Trust.
</TABLE>
- --------------------
* James P. Sommers, A. Max Walker and Thomas S. Word, Jr. are considered
"interested persons" of the Trust for purposes of the 1940 Act.
Mr. Blank serves as Secretary, Treasurer, and Chief Operating Officer
to other investment companies for which Stephens Inc. serves as administrator.
Each Director of the Company is also a Director of Nations Fund, Inc.,
Nations LifeGoal Funds, Inc. Nations Fund Portfolios, Inc. and a Trustee of
Nations Fund Trust, Nations Annuity Trust, and Nations Master Investment Trust,
each an open-end registered investment company that is part of the Nations Funds
Family. Richard H. Blank, Jr., Michael W. Nolte and James E. Banks, Jr. are also
officers of Nations Fund, Inc., Nations Fund Trust, Nations Fund Portfolios,
Inc., Nations LifeGoal Funds, Inc., Nations Annuity Trust and Nations Master
Investment Trust and Nations Reserves.
Each Trustee receives (i) an annual retainer of $1,000 ($3,000 for the
Chairman of the Board) plus $500 for each Fund of the Trust, plus (ii) a fee of
$1,000 for attendance at each "in-person" meeting of the Board of Trustees (or
committee thereof) and $500 for each telephonic Board meeting attended. All
Trustees receive reimbursements for expenses related to their attendance at
meetings of the Board of Trustees. Officers receive no direct remuneration in
such capacity from the Trust. No person who is an officer, director, or employee
of Bank of America or its affiliates serves as an officer, Trustee, or employee
of the Trust. The Trustees and officers of Nations Funds own less than 1% of the
shares of the Trust.
The Trust has adopted a Code of Ethics which, among other things,
prohibits each access person of the Trust from purchasing or selling securities
when such person knows or should have known that, at the time of the
transaction, the security (i) was being considered for purchase or sale by a
Fund or (ii) was being purchased or sold by a Fund. For purposes of the Code of
Ethics, an access person means (i) a Trustee or officer of the Trust, (ii) any
employee of the Trust (or any company in a control relationship with the Trust)
who, in the course of his/her regular duties, obtains information about, or
makes recommendations with respect to, the purchase or sale of securities by the
Trust, and (iii) any natural person in a control relationship with the Trust who
obtains information concerning recommendations made to the Trust regarding the
purchase or sale of securities. Portfolio managers and other persons who assist
in the investment process are subject to additional restrictions, including a
requirement that they disgorge to the Trust any profits realized on short-term
trading (i.e., the purchase/sale or sale/purchase of securities within any
60-day period). The above restrictions do not apply to purchases or sales of
certain types of securities, including mutual fund shares, money market
instruments and certain U.S. Government securities. To facilitate enforcement,
the Code of Ethics generally requires that the Trust's access persons, other
than its "disinterested" Trustees, submit reports to the Trust's designated
compliance person regarding transactions involving securities which are eligible
for purchase by a Fund.
70
<PAGE>
NATIONS FUNDS RETIREMENT PLAN
Under the terms of the Nations Funds Retirement Plan for Eligible
Trustees (the "Retirement Plan"), each Trustee may be entitled to certain
benefits upon retirement from the Board of Trustees. Pursuant to the Retirement
Plan, the normal retirement date is the date on which the eligible Trustee has
attained age 65 and has completed at least five years of continuous service with
one or more of the open-end investment companies (the "Funds") advised by the
Adviser. If a Trustee retires before reaching age 65, no benefits are payable.
Each eligible Trustee is entitled to receive an annual benefit from the Funds
commencing on the first day of the calendar quarter coincident with or next
following his date of retirement equal to 5% of the aggregate Trustee's fees
payable by the Funds during the calendar year in which the Trustee's retirement
occurs multiplied by the number of years of service (not in excess of ten years
of service) completed with respect to any of the Funds. Such benefit is payable
to each eligible Trustee in quarterly installments for a period of no more than
five years. If an eligible Trustee dies after attaining age 65, the Trustee's
surviving spouse (if any) will be entitled to receive 50% of the benefits that
would have been paid (or would have continued to have been paid) to the Trustee
if he or she had not died. The Retirement Plan is unfunded. The benefits owed to
each Trustee are unsecured and subject to the general creditors of the Funds.
NATIONS FUNDS DEFERRED COMPENSATION PLAN
Under the terms of the Nations Funds Deferred Compensation Plan for
Eligible Trustees (the "Deferred Compensation Plan"), each Trustee may elect, on
an annual basis, to defer all or any portion of the annual board fees (including
the annual retainer and all attendance fees) payable to the Trustee for that
calendar year. An application was submitted to and approved by the SEC to permit
deferring Trustees to elect to tie the rate of return on fees deferred pursuant
to the Deferred Compensation Plan to one or more of certain investment
portfolios of certain Funds. Distributions from the deferring Trustees' deferral
accounts will be paid in cash, in generally equal quarterly installments over a
period of five years beginning on the date the deferring Trustee's retirement
benefits commence under the Retirement Plan. The Board of Trustees, in its sole
discretion, may accelerate or extend such payments after a Trustee's termination
of service. If a deferring Trustee dies prior to the commencement of the
distribution of amounts in his or her deferral account, the balance of the
deferral account will be distributed to his or her designated beneficiary in a
lump sum as soon as practicable after the Trustee's death. If a deferring
Trustee dies after the commencement of such distribution, but prior to the
complete distribution of his or her deferral account, the balance of the amounts
credited to his or her deferral account will be distributed to his or her
designated beneficiary over the remaining period during which such amounts were
distributable to the Trustee. Amounts payable under the Deferred Compensation
Plan are not funded or secured in any way and deferring Trustees have the status
of unsecured creditors of the Funds from which they are deferring compensation.
Director Compensation Through July 1, 1999
------------------------------------------
<TABLE>
<CAPTION>
COMPENSATION TABLE
PENSION OR
AGGREGATE RETIREMENT ESTIMATED ANNUAL
COMPENSATION BENEFITS ACCRUED BENEFITS UPON TOTAL COMPENSATION
NAME OF PERSON FROM AS PART OF FUND RETIREMENT FROM REGISTRANT
POSITION (1) REGISTRANT (2) EXPENSES PLAN & FUND COMPLEX(3)(4)
- ------------ --------------- --------------- ----------------- --------------
<S> <C> <C> <C> <C>
Edmund L. Benson, III $10,875 $944 $35,000 $77,378
Trustee
James Ermer $8,875 $944 $35,000 $65,375
Trustee
William H. Grigg $9,875 $944 $35,000 $90,875
Trustee
71
<PAGE>
PENSION OR
AGGREGATE RETIREMENT ESTIMATED ANNUAL
COMPENSATION BENEFITS ACCRUED BENEFITS UPON TOTAL COMPENSATION
NAME OF PERSON FROM AS PART OF FUND RETIREMENT FROM REGISTRANT
POSITION (1) REGISTRANT (2) EXPENSES PLAN & FUND COMPLEX(3)(4)
- ------------ --------------- ---------------- ----------------- --------------
Thomas F. Keller $10,875 $944 $35,000 $94,875
Trustee
A. Max Walker $12,875 $944 $40,000 $110,875
Chairman of the Board
Charles B. Walker $9,875 $944 $35,000 $71,375
Trustee
Thomas S. Word $10,875 $944 $35,000 $77,375
Trustee
James P. Sommers $9,875 $944 $35,000 $73,375
Trustee
Carl E. Mundy, Jr. $10,377 $944 $35,000 $74,377
Trustee
Dr. Cornelius Pings $0 $0 $0 $0
Trustee
Totals: $94,377 $8,496 $329,000 $735,880
</TABLE>
(1) All Trustees receive reimbursements for expenses related to their attendance
at meetings of the Board of Trustees. Officers of the Trust receive no direct
remuneration in such capacity from the Trust.
(2) For current fiscal year and includes estimated future payments. Each Trustee
receives (i) an annual retainer of $1,000 ($3,000 for the Chairman of the
Board) plus $500 for each Fund of the Trust, Nations Fund, Inc., Nations Fund
Portfolios, Inc., Nations Fund Trust, Nations Annuity Trust, Nations Master
Investment Trust and Nations LifeGoal Funds, Inc., plus (ii) a fee of $1,000
for attendance at each in-person board meeting attended and $500 for each
telephonic board meeting attended. The Trust also reimburses expenses incurred
by the Trustees in attending such meetings.
(3) Messrs. Grigg, Keller and A.M. Walker receive compensation from ten
investment companies, including Nations Fund, Inc., Nations Fund Portfolios,
Inc., Nations Fund Trust, Nations Annuity Trust, Nations Master Investment
Trust and Nations LifeGoal Funds, Inc., that are deemed to be part of the
Nations Fund "fund complex," as that term is defined under Rule 14a-101 of the
Securities Exchange Act of 1934, as amended. Messrs. Benson, Ermer, C. Walker,
Mundy and Word receive compensation from six investment companies, including
Nations Fund, Inc., Nations Fund Portfolios, Inc., Nations Fund Trust, Nations
Annuity Trust and Nations LifeGoal Funds, Inc. deemed to be part of the Nations
Funds complex.
72
<PAGE>
(4) Total compensation amounts include deferred compensation payable to or
accrued for the following Trustees: Edmund L. Benson, III $35,188; William H.
Grigg $66,375; Thomas F. Keller $70,375; and Thomas S. Word $70,375.
Director Compensation After July 1, 1999
The Board of Trustees of the Company along with the Boards of
Directors/Trustees of the other open-end registered investment companies in the
Nations Funds family approved a new compensation structure for the Board
members, effective July 1, 1999. The new structure compensates the Board members
for their services to the Nations Funds family on a flat rate basis, and not on
a per registered investment company or per fund basis. The Nations Funds family
currently consists of Nations Fund Trust, Nations Fund, Inc., Nations Fund
Portfolios, Inc., Nations Reserves, Nations Annuity Trust, Nations LifeGoal
Funds, Inc. and Nations Master Investment Trust.
Under the new structure, each Board member would receive a base
retainer fee in the amount of $65,000 per year, in addition to $5,000 for each
in-person meeting attended; in addition to $1,000 for each telephonic meeting
attended. Each Board member would be compensated only for a maximum of six
in-person meetings per calendar year. In addition, the Chairman of the Boards,
currently A. Max Walker, would receive an additional fee of 20% of the base
retainer fee; the Chairman of the Audit Committees would receive an additional
fee of 10% of the base retainer fee. The members of the Nominating Committees
will receive additional compensation at the rate of $1,000 per meeting
attended.
SHAREHOLDER AND TRUSTEE LIABILITY
The Agreement and Declaration of Trust provides that a Trustee shall be
liable only for his own willful defaults and, if reasonable care has been
exercised in the selection of officers, agents, employees or investment
advisers, shall not be liable for any neglect or wrongdoing of any such person.
The Agreement and Declaration of Trust also provides that the Trust will
indemnify its Trustees and officers against liabilities and expenses incurred in
connection with actual or threatened litigation in which they may be involved
because of their offices with the Trust unless it is determined in the manner
provided in the Agreement and Declaration of Trust that they have not acted in
good faith in the reasonable belief that their actions were in the best
interests of the Trust. However, nothing in the Agreement and Declaration of
Trust shall protect or indemnify a Trustee against any liability for his willful
misfeasance, bad faith, gross negligence or reckless disregard of his duties.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust could,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. Even if, however, the Trust were held to be a
partnership, the possibility of the shareholders' incurring financial loss for
that reason appears remote because the Trust's Agreement and Declaration of
Trust contains an express disclaimer of shareholder liability for obligations of
the Trust and requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by or on behalf of
the Trust or the Trustees, and because the Agreement and Declaration of Trust
provides for indemnification out of the Trust property for any shareholder held
personally liable for the obligations of the Trust.
INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY,
TRANSFER AGENCY, OTHER SERVICE PROVIDERS, SHAREHOLDER SERVICING AND
DISTRIBUTION AGREEMENTS
-----------------------
INVESTMENT ADVISER AND SUB-ADVISERS
As noted in "Description of the Trust and the Investments and Risks of
its Funds--General" in this SAI, NationsBanc Advisors, Inc. ("NBAI") investment
adviser to the Funds, except the Feeder Funds, and the Master Portfolios, will
change its name to Banc of America Advisors, Inc. ("BAAI"), on or about
September 1, 1999. Accordingly, this SAI refers the investment adviser as BAAI.
73
<PAGE>
BAAI serves as investment adviser to the Funds, except the Feeder
Funds, pursuant to an investment advisory agreement (the "Investment Advisory
Agreement") dated January 1, 1996, as amended December 2, 1998. Chicago Equity
Partners Corporation ("Chicago Equity") serves as co-investment sub-adviser with
TradeStreet Investment Associates, Inc. ("TradeStreet") to Nations Asset
Allocation Fund pursuant to a co-investment sub-advisory agreement dated May 21,
1999 (the "Co-Investment Sub-Advisory Agreement"). TradeStreet serves as
investment sub-adviser to all other Funds except the Feeder Funds, pursuant to
an investment sub-advisory agreement dated January 1, 1996, as amended December
2, 1998 (the "Sub-Advisory Agreement," and together with the Co-Investment
Sub-Advisory Agreement, the "Sub-Advisory Agreements"). Nations Intermediate
Bond Fund and Nations Blue Chip Fund invest 100% of their net investable assets
in the Nations Intermediate Bond Master Portfolio and the Nations Blue Chip
Master Portfolio (the "Master Portfolios"), respectively, which are portfolios
of Nations Master Investment Trust (the "Master Trust"), an open-end management
investment company in the Nations Fund Family, and therefore do not have a
direct investment adviser. BAAI serves as the investment adviser to the Master
Portfolios. TradeStreet serves as the investment sub-adviser to the Nations
Intermediate Bond Master Portfolio and Chicago Equity Partners Corporation
("Chicago Equity") services as investment sub-adviser to Nations Blue Chip
Master Portfolio.
BAAI also serves as the investment adviser to the portfolios of Nations
Fund Trust, Nations Fund, Inc., Nations Fund Portfolios, Inc., Nations Annuity
Trust, Nations LifeGoal Funds, Inc., each a registered investment company that
is part of the Nations Funds Family. In addition, BAAI serves as the investment
advisor to Hatteras Income Securities, Inc., Nations Government Income Term
Trust 2003, Inc., Nations Government Income Term Trust 2004, Inc. and Nations
Balanced Target Maturity Fund, Inc., each a closed-end diversified management
investment company traded on the New York Stock Exchange. TradeStreet also
serves as the investment sub-adviser to Nations Fund Trust, Nations Fund, Inc.,
Nations Annuity Trust, Nations LifeGoal Funds, Inc., Nations Master Investment
Trust, Nations Government Income Term Trust 2003, Inc., Nations Government
Income Term Trust 2004, Inc., Nations Balanced Target Maturity Fund, Inc., and
Hatteras Income Securities, Inc.
BAAI, TradeStreet and Chicago Equity are each wholly owned subsidiaries
of Bank of America, which in turn is a wholly owned banking subsidiary of Bank
of America Corporation, a bank holding company organized as a Delaware
corporation.
The Investment Advisory Agreement provides that in the absence of
willful misfeasance, bad faith, negligence or reckless disregard of obligations
or duties thereunder on the part of BAAI or any of its officers, Trustees,
employees or agents, BAAI shall not be subject to liability to the Trust or to
any shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services thereunder or for any losses that may be
sustained in the purchase, holding or sale of any security.
The Investment Advisory Agreement became effective with respect to a
Fund when approved by the Trustees of the Trust, and thereafter continues from
year to year, provided that such continuation of the Agreement is specifically
approved at least annually by (a) (i) the Trust's Board of Trustees or (ii) the
vote of "a majority of the outstanding voting securities" of a Fund (as defined
in Section 2(a)(42) of the 1940 Act), and (b) the affirmative vote of a majority
of the Trust's Trustees who are not parties to such Agreement or "interested
persons" (as defined in the 1940 Act) of a party to such Agreement (other than
as Trustees of the Trust), by votes cast in person at a meeting specifically
called for such purpose. The continuation of the Investment Advisory and
Sub-Advisory Agreement with TradeStreet was last approved by the Board of
Trustees at the November 5-6, 1998 Board of Trustees meeting and the amendment
to the Investment Advisory and the Sub-Advisory Agreement with TradeStreet was
approved by the Board of Trustees at the December 2, 1998 Board of Trustees
meeting.
The Investment Advisory Agreement will terminate automatically in the
event of its assignment, and is terminable with respect to a Fund at any time
without penalty by the Trust (by vote of the Board of Trustees or by vote of a
majority of the outstanding voting securities of the Fund) or by BAAI on 60
days' written notice.
74
<PAGE>
The Sub-Advisory Agreements provide that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of obligations or
duties thereunder on the part of TradeStreet and/or Chicago Equity or any of
their officers, Trustees, employees or agents, TradeStreet and/or Chicago Equity
shall not be subject to liability to BAAI or to the Trust for any act or
omission in the course of, or connected with, rendering services thereunder or
for any losses that may be sustained in the purchase, holding or sale of any
security.
The Sub-Advisory Agreements became effective with respect to each Fund
as of their execution date and, unless sooner terminated, continue in full force
and effect for one year, and may be continued with respect to each Fund
thereafter, provided that the continuation of the Agreements are specifically
approved at least annually by (a) (i) the Trust's Board of Trustees or (ii) the
vote of "a majority of the outstanding voting securities" of a Fund (as defined
in Section 2(a)(42) of the 1940 Act), and (b) the affirmative vote of a majority
of the Trust's Trustees who are not parties to such Agreements or "interested
persons" (as defined in the 1940 Act) of a party to such Agreements (other than
as Trustees of the Trust), by votes cast in person at a meeting specifically
called for such purpose.
The Sub-Advisory Agreements will terminate automatically in the event
of their assignment, and are terminable with respect to a Fund at any time
without penalty by the Trust (by vote of the Board of Trustees or by vote of a
majority of the outstanding voting securities of the Fund), or by BAAI,
TradeStreet or Chicago Equity on 60 days' written notice.
The Funds, in any advertisement or sales literature, may advertise the
names, experience and/or qualifications of the portfolio manager(s) of any Fund,
or if a Fund is managed by team or committee, such Fund may advertise the names,
experience and/or qualifications of any such team or committee member.
For the 11-month fiscal period from May 1, 1998 to March 31, 1999 (the
Trust changed its fiscal year end from April 30th to March 31st), Nations Cash
Reserves, Nations Treasury Reserves, Nations Government Reserves and Nations
Municipal Reserves paid Advisory fees to BAAI as follows:
<TABLE>
<CAPTION>
Net Net Fees Reimb. by
Fees Paid Fees Waived BAAI
1999 1999 1999
---- ---- ----
<S> <C> <C> <C>
Nations Cash Reserves $10,651,186 $9,394,814 $0
Nations Treasury Reserves 2,472,643 3,152,121 31,236
Nations Government Reserves 757,681 982,319 0
Nations Municipal Reserves 343,134 505,210 114,656
For the fiscal year from May 1, 1997 to April 30, 1998 Nations Cash Reserves,
Nations Treasury Reserves, Nations Government Reserves and Nations Municipal
Reserves paid Advisory fees to BAAI as follows:
Net Net Fees Reimb. by
Fees Paid Fees Waived BAAI
Nations Cash Reserves $5,755,496 $5,510,631 $0
Nations Treasury Reserves 1,317,229 1,539,732 0
Nations Government Reserves 660,333 757,134 0
Nations Municipal Reserves 306,303 429,881 0
75
<PAGE>
For the fiscal year from May 1, 1996 to April 30, 1997 Nations Cash Reserves,
Nations Treasury Reserves, Nations Government Reserves and Nations Municipal
Reserves paid Advisory fees to BAAI as follows:
Net Net Fees Reimb. by
Fees Paid Fees Waived BAAI
Nations Cash Reserves $2,357,981.18 $2,797,837.24 $0
Nations Treasury Reserves 780,877.72 1,033,412.10 0
Nations Government Reserves 277,002.18 556,881.07 0
Nations Municipal Reserves 137,642.13 437,536.71 0
For the 11-month fiscal period from May 1, 1998 to March 31, 1999 (the Trust
changed its fiscal year end from April 30th to March 31st), BAAI paid
Sub-Advisory fees to TradeStreet as follows:
Net Net Fees Reimb. by
Fees Paid Fees Waived Adviser
1999 1999 1999
---- ---- ----
Nations Cash Reserves $2,205,087 $ 0 $0
Nations Treasury Reserves 230,492 0 0
Nations Government Reserves 582,930 0 0
Nations Municipal Reserves 105,670 0 0
For the fiscal year from May 1, 1997 to April 30, 1998 BAAI paid Sub-Advisory
fees to TradeStreet as follows:
Net Net Fees Reimb. by
Fees Paid Fees Waived Adviser
Nations Cash Reserves $1,214,726 $ 0 $0
Nations Treasury Reserves 290,220 0 0
Nations Government Reserves 146,691 0 0
Nations Municipal Reserves 77,922 0 0
For the fiscal year from May 1, 1996 to April 30, 1997 BAAI paid Sub-Advisory
fees to TradeStreet as follows:
Net Net Fees Reimb. by
Fees Paid Fees Waived Adviser
Nations Cash Reserves $567,140 $0 $0
Nations Treasury Reserves 199,572 0 0
Nations Government Reserves 91,727 0 0
Nations Municipal Reserves 32,121 0 0
Barnett Capital Advisors, Inc. ("Barnett") assumed the responsibilities
as investment adviser for the Emerald Prime Advantage Institutional Fund (the
predecessor portfolio to Nations Money Market Reserves) on June 29, 1996 and
assumed sole responsibility for the Fund under a new advisory agreement on
December 1, 1996.
For the fiscal period from May 16, 1998 to March 31, 1999 the Nations Money
Market Reserves paid Advisory fees to BAAI as follows:
Net Net Fees Reimb. by
Fees Paid Fees Waived BAAI
1999 1999 1999
---- ---- ----
Nations Money Market Reserves $672,666 $1,448,334 $0
For the fiscal period from December 1, 1997 to May 16, 1998 the Emerald Prime
Advantage Institutional Fund paid Advisory fees to Barnett as follows:
76
<PAGE>
Net Net Fees Reimb. by
Fees Paid Fees Waived Barnett
Emerald Prime Advantage Institutional Fund $44,692 $0 $19,626
For the fiscal year from December 1, 1996 to November 30, 1997 the Emerald Prime
Advantage Institutional Fund paid Advisory fees to Barnett as follows:
Net Net Fees Reimb. by
Fees Paid Fees Waived Barnett
Emerald Prime Advantage Institutional Fund $89,737 $0 $55,159
For the fiscal period from May 16, 1998 to March 31, 1999 the Nations Money
Market Reserves paid Sub-Advisory fees to TradeStreet as follows:
Net Net Fees Reimb. by
Fees Paid Fees Waived TradeStreet
1999 1999 1999
---- ---- ----
Nations Money Market Reserves $226,797 $0 $0
</TABLE>
Prior to May 15, 1999, Bank of America National Trust and Savings
Association ("Bank of America Adviser") was the investment adviser to the
Pacific Horizon California Tax-Exempt Money Market Fund (the predecessor to
Nations California Tax-Exempt Reserves), the Pacific Horizon Asset Allocation
Fund (the predecessor to Nations Asset Allocation Fund), Pacific Horizon Capital
Income Fund (the predecessor to Nations Capital Income Fund) and the Pacific
Horizon California Municipal Bond Fund (the predecessor to Nations California
Municipal Bond Fund). Prior to May 15, 1999, Bank of America Adviser was also
the investment adviser to the Pacific Horizon Investment Grade Bond Master
Portfolio (the predecessor to Nations Intermediate Bond Master Portfolio) and
the Pacific Horizon Blue Chip Master Portfolio (the predecessor to Nations Blue
Chip Master Portfolio).
For the fiscal year from March 1, 1998 to February 28, 1999, the
Pacific Horizon California Tax-Exempt Money Market Fund, the Pacific Horizon
Asset Allocation Fund, the Pacific Horizon Capital Income Fund, the Pacific
Horizon California Municipal Bond Fund, the Pacific Horizon Investment Grade
Bond Master Portfolio, the Pacific Horizon Blue Chip Master Portfolio, and the
Pacific Horizon Blue Chip (Feeder) Fund paid Advisory fees to Bank of America
Adviser as follows:
<TABLE>
<CAPTION>
Fees Reimb. by
Net Net Bank of America
Fees Paid Fees Waived Adviser
1999 1999 1999
---- ---- ----
<S> <C> <C> <C>
Pacific Horizon California Tax-Exempt Money $1,548,799 $0 $0
Market Fund
Pacific Horizon Asset Allocation Fund 1,089,007 0 0
Pacific Horizon Capital Income Fund 1,740,699 0 0
Pacific Horizon California Municipal Bond 687,688 0 0
Fund
Pacific Horizon Investment Grade Bond Master 295,046 133,952 0
Portfolio
Pacific Horizon Blue Chip Master Portfolio 4,147,169 0 0
Pacific Horizon Blue Chip (Feeder) Fund N/A N/A 38,230
For the fiscal year from March 1, 1997 to February 28, 1998, the
Pacific Horizon California Tax-Exempt Money Market Fund, the Pacific Horizon
Asset Allocation Fund (Pacific Horizon Asset Allocation Master Portfolio prior
to June 23, 1997), the Pacific Horizon Capital Income Fund, the Pacific Horizon
California Municipal Bond Fund, the Pacific Horizon Investment Grade Bond Master
Portfolio and the Pacific Horizon Blue Chip Master Portfolio paid Advisory fees
to Bank of America Adviser as follows:
Net Net Fees Reimb. by
Fees Paid Fees Waived Bank of America
Adviser
Pacific Horizon California Tax-Exempt Money $1,149,877 $0 $0
Market Fund
Pacific Horizon Asset Allocation Fund 0 650,191 0
Pacific Horizon Capital Income Fund 1,637,658 0 0
Pacific Horizon California Municipal Bond 828,272 194,717 0
Fund
Pacific Horizon Investment Grade Bond Master 217,339 248,915 0
Portfolio
Pacific Horizon Blue Chip Master Portfolio 3,099,522 262,519 0
For the fiscal year from March 1, 1996 to February 28, 1997, the
Pacific Horizon California Tax-Exempt Money Market Fund, the Pacific Horizon
Asset Allocation Master Portfolio, the Pacific Horizon Capital Income Fund, the
Pacific Horizon California Municipal Bond Fund, the Pacific Horizon Investment
Grade Bond Master Portfolio and the Pacific Horizon Blue Chip Master Portfolio
paid Advisory fees to Bank of America Adviser as follows:
77
<PAGE>
Net Net Fees Reimb. by
Fees Paid Fees Waived Bank of America
Adviser
Pacific Horizon California Tax-Exempt Money $849,799 $0 $0
Market Fund
Pacific Horizon Asset Allocation Master 310,609 735,797 31,598
Portfolio
Pacific Horizon Capital Income Fund 1,220,622 0 0
Pacific Horizon California Municipal Bond 857,206 244,720 0
Fund
Pacific Horizon Investment Grade Bond Master 171,848 256,439 146,716
Portfolio
Pacific Horizon Blue Chip Master Portfolio 1,740,647 961,001 0
</TABLE>
CO-ADMINISTRATORS AND SUB-ADMINISTRATOR
Stephens Inc. and BAAI (the "Co-Administrators") serve as co
administrators of each Fund.
The Co-Administrators serve under a co-administration agreement
("Co-Administration Agreement"), which was approved by the Board of Trustees on
November 5-6, 1998. The Co-Administrators receive, as compensation for their
services rendered under the Co-Administration Agreement, administration fees,
computed daily and paid monthly, at the indicated annual rate of the following
Funds' average daily net assets: 0.10% of each Money Market Fund; 0.22% of each
fixed income Fund; and 0.23% of each equity Fund.
Pursuant to the Co-Administration Agreement, Stephens has agreed to,
among other things, (i) maintain office facilities for the Funds, (ii) furnish
statistical and research data, data processing, clerical, and internal executive
and administrative services to the Trust, (iii) furnish corporate secretarial
services to the Trust, including coordinating the preparation and distribution
of materials for Board of Trustees meetings, (iv) coordinate the provision of
legal advice to the Trust with respect to regulatory matters, (v) coordinate the
preparation of reports to the Trust's shareholders and the SEC, including annual
and semi-annual reports, (vi) coordinating the provision of services to the
Trust by the Transfer Agent, Sub-Transfer Agent and the Custodian, and (vii)
generally assist in all aspects of the Trust's operations. Stephens bears all
expenses incurred in connection with the performance of its services.
Also, pursuant to the Co-Administration Agreement, BAAI has agreed to,
among other things, (i) provide accounting and bookkeeping services for the
Funds, (ii) compute each Fund's net asset value and net income, (iii) accumulate
information required for the Trust's reports to shareholders and the SEC, (iv)
prepare and file the Trust's federal and state tax returns, (v) perform monthly
compliance testing for the Trust, and (vi) prepare and furnish the Trust monthly
broker security transaction summaries and transaction listings and performance
information. BAAI bears all expenses incurred in connection with the performance
of its services.
The Co-Administration Agreement may be terminated by a vote of a
majority of the Board of Trustees, by Stephens or by BAAI, respectively, on 60
days' written notice without penalty. The Co-Administration Agreement is not
assignable without the written consent of the other party. Furthermore, the
Co-Administration Agreement provides that Stephens and BAAI shall not be liable
to the Funds or to their shareholders except in the case of Stephens' or BAAI's,
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
78
<PAGE>
BNY serves as sub-administrator for the Funds pursuant to a
sub-administration agreement. Pursuant to its terms, BNY assists Stephens and
BAAI in supervising, coordinating and monitoring various aspects of the Funds'
administrative operations. For providing such services, BNY is entitled to
receive a monthly fee which is paid by BAAI from the management fees they
receive from the Funds.
The table set forth below states the net combined Administration fees
paid to Stephens and waived for the fiscal years ended April 30, 1997 and 1998
under the previous administration arrangements. As of December 1, 1998, the
administration arrangements have been revised. Accordingly, the fees set forth
below are shown for the periods, May 1, 1998 through November 30, 1998 and from
December 1, 1998 through March 31, 1999. For the fiscal years ended April 30,
1997, 1998, and March 31, 1999 the Funds paid combined administrative fees as
follows:
<TABLE>
<CAPTION>
Net Net Fees Net Net Fees Net Net Fees
Fees Paid Waived Fees Paid Waived Fees Paid Waived
1997 1997 1998 1998 1999 1999
-------- -------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Nations Cash
Reserves $206,640 $1,511,966 $444,739 $3,310,637 $922,159 $5,759,841
Nations Treasury
Reserves
67,964 536,800 112,671 839,649 281,755 1,603,245
Nations
Government
Reserves 33,788 244,173 55,996 416,493 87,380 492,620
Nations
Municipal
Reserves 23,309 168,418 29,152 216,243 48,585 272,415
Nations Money
Market Reserves 0 0 0 0 121,254 585,746
</TABLE>
The table set forth below states the net Administration fees paid to
Stephens and waived for the fiscal period May 1, 1998 through November 30, 1998.
<TABLE>
<CAPTION>
ADMINISTRATION FEES
-------------------
<S> <C> <C> <C> <C> <C> <C>
Fees Paid Fees Waived
Nations Cash Reserves $390,477 $3,654,043
Nations Treasury Reserves 112,205 1,030,887
Nations Government Reserves 33,897 311,090
Nations Money Market Reserves 22,143 100,249
Nations Municipal Reserves 18,438 365,740
The table set forth below states the net Co-Administration fees paid to
First Data and waived for the fiscal period May 1, 1998 through November 30,
1998.
CO-ADMINISTRATION FEES
----------------------
Fees Paid Fees Waived
Nations Cash Reserves $39,734 $0
Nations Treasury Reserves 11,370 0
Nations Government Reserves 3,441 0
Nations Money Market Reserves 1,991 0
Nations Municipal Reserves 1,860 0
79
<PAGE>
The table set forth below states the net Sub-Administration fees paid to
BAAI and waived for the fiscal period May 1, 1998 through November 30, 1998.
SUB-ADMINISTRATION FEES
-----------------------
Fees Paid Fees Waived
Nations Cash Reserves $0 $0
Nations Treasury Reserves 0 0
Nations Government Reserves 0 0
Nations Money Market Reserves 0 0
Nations Municipal Reserves 0 0
The table set forth below states the net Co-Administration fees paid to
BAAI and waived for the fiscal period December 1, 1998 through March 31, 1999.
CO-ADMINISTRATION FEES
----------------------
Fees Paid Fees Waived
Nations Cash Reserves $0 $0
Nations Treasury Reserves 0 0
Nations Government Reserves 0 0
Nations Money Market Reserves 0 0
Nations Municipal Reserves 0 0
The table set forth below states the net Co-Administration fees paid to
Stephens and waived for the fiscal period December 1, 1998 through March 31,
1999.
CO-ADMINISTRATION FEES
----------------------
Fees Paid Fees Waived
Nations Cash Reserves $225,030 $2,105,798
Nations Treasury Reserves 62,306
Nations Government Reserves 19,781 572,358
Nations Money Market Reserves 38,026
Nations Municipal Reserves 11,090 181,530
172,166
220,006
The table set forth below states the net Sub-Administration fees paid to
BNY and waived for the fiscal period December 1, 1998 through March 31, 1999.
SUB-ADMINISTRATION FEES
-----------------------
Fees Paid Fees Waived
Nations Cash Reserves $266,918 $0
Nations Treasury Reserves 95,874 0
Nations Government Reserves 30,261 0
Nations Money Market Reserves 59,094 0
Nations Municipal Reserves 17,197 0
</TABLE>
80
<PAGE>
DISTRIBUTION AND SHAREHOLDER SERVICING PLANS
LIQUIDITY CLASS
The Trust has adopted a distribution plan (the "Liquidity Class
Distribution Plan" or the "Distribution Plan") for the Liquidity Class Shares of
the Funds in accordance with the provisions of Rule 12b-1 under the 1940 Act
which regulates circumstances under which an investment company may directly or
indirectly bear expenses relating to the distribution of its shares. Continuance
of the Distribution Plan must be approved annually by a majority of the Trustees
of the Trust and by a majority of the Trustees who are not "interested persons"
(as defined in the 1940 Act) of the Trust and who have no direct or indirect
financial interest in the operation of the plan or in any agreements thereunder
(the "Qualified Trustees"). The Distribution Plan requires that quarterly
written reports of amounts spent under such Distribution Plan and the purposes
of such expenditures be furnished to and reviewed by the Trustees. The Liquidity
Class Plan may not be amended to increase materially the amount which may be
spent thereunder without approval by a majority of the outstanding Liquidity
Class Shares of the Trust. All material amendments of the Distribution Plan will
require approval by a majority of the Trustees and of the Qualified Trustees.
Liquidity Class Shares of each Fund bear the costs of their
distribution fees as provided in a budget approved annually and reviewed
quarterly by the Trustees of the Trust, including those Trustees who are not
interested persons and have no financial interest in the Liquidity Class Plan or
any related agreements. The budget will be in an amount not to exceed .30% of
the average daily net assets of Liquidity Class Shares of each Fund and the
Distributor will be reimbursed only for its actual expenses incurred during a
fiscal year. The Distributor will also receive an additional fee of up to .30%
of the average daily net assets of Liquidity Class Shares of each Fund (.35%
with respect to Nations Treasury Reserves) which the Distributor can use to
compensate certain financial institutions which provide administrative and/or
distribution related services to Liquidity Class shareholders. These services
may include establishing and maintaining customer accounts and records;
aggregating and processing purchase and redemption requests from customers;
placing net purchase and redemption orders with the Distributor or transfer
agent; automatically investing customer account cash balances; providing
periodic statements to customers; arranging for wires; answering customer
inquiries concerning their investments; assisting customers in changing dividend
options, account designations, and addresses; performing sub-accounting
functions; processing dividend payments from a Trust on behalf of customers; and
forwarding shareholder communications from the Trust (such as proxies,
shareholder reports, and dividend distribution, and tax notices) to these
customers with respect to investments in the Trust. It is possible that an
institution may offer different classes of Shares to its customers and thus
receive different compensation with respect to different classes of Shares.
In addition, the Trustees have approved a shareholder servicing plan
with respect to Liquidity Class Shares of the Funds (the "Liquidity Class
Servicing Plan" or the "Servicing Plan"). Pursuant to the Servicing Plan, a Fund
may compensate or reimburse banks, broker/dealers or other financial
institutions that have entered into Shareholder Servicing Agreements with the
Trust ("Servicing Agents") for certain activities or expenses of the Servicing
Agents in connection with shareholder services that are provided by the
Servicing Agents. The Servicing Plan provides that payments under the Servicing
Plan will be calculated daily and paid monthly at a rate or rates set from time
to time by the Board of Trustees, provided that the annual rate may not exceed
0.25% of the average daily net asset value of the Liquidity Class Shares of each
Fund.
The fees payable under the Servicing Plan are used primarily to
compensate or reimburse Servicing Agents for shareholder services provided, and
related expenses incurred, by such Servicing Agents. The shareholder services
provided by Servicing Agents under the Servicing Plan may include: (i)
aggregating and processing purchase and redemption requests for shares from
customers and transmitting promptly net purchase and redemption orders to the
Distributor or transfer agent; (ii) providing customers with a service that
invests the assets of their accounts in shares pursuant to specific or
pre-authorized instructions; (iii) processing dividend and distribution payments
from the Trust on behalf of customers; (iv) providing information periodically
to customers showing their positions in shares; (v) arranging for bank wires;
(vi) responding to customers' inquiries concerning their investment in shares;
(vii) providing sub-accounting with respect to shares beneficially owned by
customers or providing the information to the Trust necessary for
sub-accounting; (viii) if required by law, forwarding shareholder communications
from the Trust (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to customers;
(ix) forwarding to customers proxy statements and proxies containing any
proposals regarding the Servicing Plan or related agreements; (x) providing
general shareholder liaison services; and (xi) providing such other similar
services as the Trust may reasonably request to the extent such Servicing Agents
are permitted to do so under applicable statutes, rules or regulations.
81
<PAGE>
The fees payable under the Liquidity Class Distribution Plan and
Liquidity Class Servicing Plan (together, the "Liquidity Class Plans") are
treated by the Funds as an expense in the year they are accrued. At any given
time, a Selling Agent and/or Servicing Agent may incur expenses in connection
with services provided pursuant to its agreements with the Distributor and/or
the Trust under the Liquidity Class Plans which exceed the total of the payments
made to the Selling Agents and/or Servicing Agents by the Distributor or the
Trust and reimbursed by the Funds pursuant to the Liquidity Class Plans. Any
such excess expenses may be recovered in future years, so long as the Liquidity
Class Plans are in effect. Because there is no requirement under the Liquidity
Class Plans that the Distributor be paid or the Selling Agents and Servicing
Agents be compensated or reimbursed for all their expenses or any requirement
that the Liquidity Class Plans be continued from year to year, such excess
amount, if any, does not constitute a liability to a Fund, or the Distributor,
or the Trust. Although there is no legal obligation for the Fund to pay expenses
incurred by the Distributor, a Selling Agent or a Servicing Agent in excess of
payments previously made to the Distributor under the Liquidity Class Plans if
for any reason the Liquidity Class Plans are terminated, the Trustees will
consider at that time the manner in which to treat such expenses.
For the fiscal year ended March 31, 1999, the Funds paid 12b-1 fees to
Stephens, and shareholder servicing fees to Bank of America for Liquidity Class+
Shares in the following amounts:
<TABLE>
<CAPTION>
NET NET SHAREHOLDER
12B-1 FEES SERVICING PLAN FEES
LIQUIDITY PAID TO PAID TO BANK OF
CLASS SHARES STEPHENS AMERICA NET FEES WAIVED NET FEES PAID
- ------------ ---------- ------------------ --------------- -------------
<S> <C> <C> <C> <C>
Nations Cash Reserves $0 $1,853,098 $8,631,902 $1,853,098
Nations Treasury Reserves 0 506,105 2,536,895 506,105
Nations Government Reserves 0 66,377 309,623 66,377
Nations Municipal Reserves 0 78,579 367,421 78,579
Nations Money Market 0 $1,149 5,851 1,149
Reserves
</TABLE>
Such distribution expenses for each Fund were attributable to the cost of
marketing the Funds.
MARKET CLASS
The Trust has adopted a distribution plan (the "Market Class
Distribution Plan" or the "Distribution Plan") for the Market Class Shares of
the Funds in accordance with the provisions of Rule 12b-1 under the 1940 Act
which regulates circumstances under which an investment company may directly or
indirectly bear expenses relating to the distribution of its shares. Continuance
of the Distribution Plan must be approved annually by a majority of the Trustees
of the Trust and by a majority of the Trustees who are not "interested persons"
(as defined in the 1940 Act) of the Trust and who have no direct or indirect
financial interest in the operation of the plan or in any agreements thereunder
(the "Qualified Trustees"). The Distribution Plan requires that quarterly
written reports of amounts spent under such Distribution Plan and the purposes
of such expenditures be furnished to and reviewed by the Trustees, and the
Distribution Plan may not be amended to increase materially the amount which may
be spent thereunder without approval by a majority of the outstanding Market
Class Shares of the Trust. All material amendments of the Distribution Plan will
require approval by a majority of the Trustees and of the Qualified Trustees.
82
<PAGE>
Pursuant to the Distribution Plan, a Fund may compensate or reimburse
the Distributor for any activities or expenses primarily intended to result in
the sale of a Fund's Market Class Shares, including for sales related services
provided by banks, broker/dealers or other financial institutions that have
entered into a Sales Support Agreement relating to the Market Class Shares with
the Distributor ("Selling Agents"). Payments under a Fund's Market Class Plan
will be calculated daily and paid monthly at a rate or rates set from time to
time by the Board of Trustees provided that the annual rate may not exceed 0.20%
of the average daily net asset value of each Fund's Market Class Shares.
The fees payable under the Market Class Distribution Plan are used
primarily to compensate or reimburse the Distributor for distribution services
provided by it, and related expenses incurred, including payments by the
Distributor to compensate or reimburse Selling Agents, for sales support
services provided, and related expenses incurred, by such Selling Agents.
Payments under the Market Class Plan may be made with respect to (i)
preparation, printing and distribution of prospectuses, sales literature and
advertising materials by the Distributor or, as applicable, Selling Agents,
attributable to distribution or sales support activities, respectively; (ii)
commissions, incentive compensation or other compensation to, and expenses of,
account executives or other employees of the Distributor or Selling Agents,
attributable to distribution or sales support activities, respectively; (iii)
overhead and other office expenses of the Distributor or Selling Agents,
attributable to distribution or sales support activities, respectively; (iv)
opportunity costs relating to the foregoing (which may be calculated as a
carrying charge in the Distributor's or Selling Agents' unreimbursed expenses
incurred in connection with distribution or sales support activities,
respectively); and (v) any other costs and expenses relating to distribution or
sales support activities. The overhead and other office expenses referenced
above may include, without limitation, (i) the expenses of operating the
Distributor's or Selling Agents' offices in connection with the sale of Fund
shares, including lease costs, the salaries and employee benefit costs of
administrative, operations and support personnel, utility costs, communication
costs and the costs of stationery and supplies, (ii) the costs of client sales
seminars and travel related to distribution and sales support activities, and
(iii) other expenses relating to distribution and sales support activities.
In addition, the Trustees have approved a shareholder servicing plan
with respect to Market Class Shares of the Funds (the "Market Class Servicing
Plan" or the Servicing Plan"). Pursuant to the Servicing Plan, a Fund may
compensate or reimburse banks, broker/dealers or other financial institutions
that have entered into Shareholder Servicing Agreements with the Trust for
certain activities or expenses of the Servicing Agents in connection with
shareholder services that are provided by the Servicing Agents. The Servicing
Plan provides that payments under the Servicing Plan will be paid at a rate or
rates set from time to time by the Board of Trustees, provided that the annual
rate may not exceed 0.25% of the average daily net asset value of the Market
Class Shares beneficially owned by the Servicing Agents' clients.
The fees payable under the Servicing Plan are used primarily to
compensate or reimburse Servicing Agents for shareholder services provided, and
related expenses incurred, by such Servicing Agents. The shareholder services
provided by Servicing Agents under the Servicing Plan may include: (i)
aggregating and processing purchase and redemption requests for shares from
customers and transmitting promptly net purchase and redemption orders to the
Distributor or transfer agent; (ii) providing customers with a service that
invests the assets of their accounts in shares pursuant to specific or
pre-authorized instructions; (iii) processing dividend and distribution payments
from the Trust on behalf of customers; (iv) providing information periodically
to customers showing their positions in shares; (v) arranging for bank wires;
(vi) responding to customers' inquiries concerning their investment in shares;
(vii) providing sub-accounting with respect to shares beneficially owned by
customers or providing the information to the Trust necessary for
sub-accounting; (viii) if required by law, forwarding shareholder communications
from the Trust (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to customers;
(ix) forwarding to customers proxy statements and proxies containing any
proposals regarding the Servicing Plan or related agreements; (x) providing
general shareholder liaison services; and (xi) providing such other similar
services as the Trust may reasonably request to the extent such Servicing Agents
are permitted to do so under applicable statutes, rules or regulations.
83
<PAGE>
The shareholder servicing plan with respect to the Market Class
Distribution Plan and the Market Class Servicing Plan (collectively, the
"Plans") will continue in effect only so long as such continuance is approved at
least annually by (i) a majority of the Board of Trustees, and (ii) a majority
of the Qualified Trustees, pursuant to a vote cast in person at a meeting called
for the purpose of voting on the Plan. Each Plan may not be amended to increase
materially the amount which may be spent thereunder without approval of a
majority of the outstanding Shares of such Fund. All material amendments to a
Plan require the approval of a majority of the Board of Trustees and the
Qualified Trustees. The Plans require that quarterly written reports of the
amounts spent under the Plans and the purposes of such expenditures be furnished
to, and reviewed by, the Trustees.
For the fiscal year ended March 31, 1999, the Funds paid 12b-1 fees to
Stephens, and shareholder servicing fees to Bank of America for Market Class
Shares in the following amounts:
<TABLE>
<CAPTION>
NET
NET SHAREHOLDER
12B-1 FEES PAID SERVICING PLAN FEES
MARKET TO PAID TO BANK OF
CLASS SHARES STEPHENS AMERICA NET FEES WAIVED NET FEES PAID
- ------------ -------- ------- --------------- -------------
<S> <C> <C> <C> <C>
Nations Cash Reserves $0 $4,323,627 $394,373 $4,323,627
Nations Treasury Reserves 0 3,332,510 212,490 3,332,510
Nations Government Reserves 0 1,154,876 123,124 1,154,876
Nations Municipal Reserves 0 488,195 48,805 488,195
Nations Money Market 0 2,069,945 0 2,069,945
Reserves
</TABLE>
ADVISER CLASS
Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a
Shareholder Servicing Plan for the Adviser Class Shares of each Fund (the
"Adviser Class Servicing Plan"). Under the Adviser Class Servicing Plan, the
Trust may enter into Shareholder Servicing Agreements with broker/dealers, banks
and other financial institutions ("Servicing Agents") pursuant to which the
Servicing Agents will provide shareholder support services to their customers
who beneficially own Adviser Class Shares in the Funds. The Adviser Class
Servicing Plan permits the Trust to pay Servicing Agents a fee not exceeding
0.25% of the average daily net asset value of the Adviser Class Shares
beneficially owned by the Servicing Agents' clients.
The shareholder support services provided by Servicing Agents under the
Adviser Class Servicing Plan may include: (i) aggregating and processing
purchase and redemption requests for such Adviser Class Shares from customers
and transmitting promptly net purchase and redemption orders to the Distributor
or transfer agent; (ii) providing customers with a service that invests the
assets of their accounts in such Adviser Class Shares pursuant to specific or
pre-authorized instructions; (iii) processing dividend and distribution payments
from the Trust on behalf of customers; (iv) providing information periodically
to customers showing their positions in such Adviser Class Shares; (v) arranging
for bank wires; (vi) responding to customers' inquiries concerning their
investment in such Adviser Class Shares; (vii) providing sub-accounting with
respect to such Adviser Class Shares beneficially owned by customers or the
information necessary for sub-accounting; (viii) if required by law, forwarding
shareholder communications (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
customers; (ix) forwarding to customers proxy statements and proxies containing
any proposals regarding the Adviser Class Servicing Plan or related agreements;
(x) general shareholder liaison services; and (xi) providing such other similar
services as the Trust reasonably request to the extent the Servicing Agents are
permitted to do so under applicable statutes, rules or regulations.
84
<PAGE>
The Adviser Class Servicing Plan also provides that to the extent any
portion of the fees payable under such 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 pursuant to the Servicing Plan and in accordance with
Rule 12b-1 under the 1940 Act.
For the fiscal year ended March 31, 1999, the Funds paid 12b-1 fees to
Stephens, and shareholder servicing fees to Bank of America for Adviser Class
Shares in the following amounts:
<TABLE>
<CAPTION>
NET
NET SHAREHOLDER
12B-1 FEES PAID SERVICING PLAN FEES
ADVISER TO PAID TO BANK OF
CLASS SHARES STEPHENS AMERICA NET FEES WAIVED NET FEES PAID
- ------------ -------- ------- --------------- -------------
<S> <C> <C> <C> <C>
Nations Cash Reserves $0 $1,790,000 $0 $1,790,000
Nations Treasury Reserves 0 725,787 0 725,787
Nations Government Reserves 0 229,673 0 229,673
Nations Municipal Reserves 0 127,558 0 127,558
Nations Money Market 0 9,000 0 9,000
Reserves
</TABLE>
The Adviser Class Servicing Plan will continue in effect only so long
as such continuance is approved at least annually by (i) a majority of the Board
of Trustees, and (ii) a majority of the Qualified Trustees, pursuant to a vote
cast in person at a meeting called for the purpose of voting on the Adviser
Class Servicing Plan. The Adviser Class Servicing Plan may not be amended to
increase materially the amount which may be spent thereunder without approval of
a majority of the outstanding Adviser Class Shares of such Fund. All material
amendments to the Adviser Class Servicing Plan require the approval of a
majority of the Board of Trustees and the Qualified Trustees. The Adviser Class
Servicing Plan requires that quarterly written reports of the amounts spent
under the Adviser Class Servicing Plan and the purposes of such expenditures be
furnished to, and reviewed by, the Trustees.
TRUST CLASS
The Trust has adopted a Shareholder Servicing Plan for the Trust Class
Shares of each Fund (the "Trust Class Servicing Plan"). Under the Trust Class
Servicing Plan, the Trust may enter into Shareholder Servicing Agreements with
broker/dealers, banks and other financial institutions ("Servicing Agents")
pursuant to which the Servicing Agents will provide shareholder support services
to their customers who beneficially own Trust Class Shares in the Funds. The
Trust Class Servicing Plan permits the Trust to pay Servicing Agents a fee not
exceeding 0.10% of the average daily net asset value of the Trust Class Shares
beneficially owned by the Servicing Agents' clients.
85
<PAGE>
The shareholder support services provided by Servicing Agents under the
Trust Class Servicing Plan may include: (i) aggregating and processing purchase
and redemption requests for such Trust Class Shares from customers and
transmitting promptly net purchase and redemption orders to the Distributor or
transfer agent; (ii) providing customers with a service that invests the assets
of their accounts in such Trust Class Shares pursuant to specific or
pre-authorized instructions; (iii) processing dividend and distribution payments
from the Trust on behalf of customers; (iv) providing information periodically
to customers showing their positions in such Trust Class Shares; (v) arranging
for bank wires; (vi) responding to customers' inquiries concerning their
investment in such Trust Class Shares; (vii) providing sub-accounting with
respect to such Trust Class Shares beneficially owned by customers or the
information necessary for sub-accounting; (viii) if required by law, forwarding
shareholder communications (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
customers; (ix) forwarding to customers proxy statements and proxies containing
any proposals regarding the Trust Class Servicing Plan or related agreements;
(x) general shareholder liaison services; and (xi) providing such other similar
services as the Trust reasonably request to the extent the Servicing Agents are
permitted to do so under applicable statutes, rules or regulations.
The Trust Class Servicing Plan will continue in effect only so long as
such continuance is approved at least annually by (i) a majority of the Board of
Trustees, and (ii) a majority of the Qualified Trustees, pursuant to a vote cast
in person at a meeting called for the purpose of voting on the Trust Class
Servicing Plan. The Trust Class Servicing Plan may not be amended to increase
materially the amount which may be spent thereunder without approval of a
majority of the outstanding Trust Class Shares of such Fund. All material
amendments to the Trust Class Servicing Plan require the approval of a majority
of the Board of Trustees and the Qualified Trustees. The Trust Class Servicing
Plan requires that quarterly written reports of the amounts spent under the
Trust Class Servicing Plan and the purposes of such expenditures be furnished
to, and reviewed by, the Trustees.
DAILY CLASS
The Trust has adopted a distribution plan (the "Daily Class
Distribution Plan" or the "Distribution Plan") for the Daily Class Shares of the
Funds in accordance with the provisions of Rule 12b-1 under the 1940 Act which
regulates circumstances under which an investment company may directly or
indirectly bear expenses relating to the distribution of its shares. Continuance
of the Distribution Plan must be approved annually by a majority of the Trustees
of the Trust and by a majority of the Trustees who are not "interested persons"
(as defined in the 1940 Act) of the Trust and who have no direct or indirect
financial interest in the operation of the plan or in any agreements thereunder
(the "Qualified Trustees"). The Distribution Plan requires that quarterly
written reports of amounts spent under such Distribution Plan and the purposes
of such expenditures be furnished to and reviewed by the Trustees, and the
Distribution Plan may not be amended to increase materially the amount which may
be spent thereunder without approval by a majority of the outstanding Daily
Class Shares of the Trust. All material amendments of the Distribution Plan will
require approval by a majority of the Trustees and of the Qualified Trustees.
Pursuant to the Distribution Plan, a Fund may compensate or reimburse
the Distributor for any activities or expenses primarily intended to result in
the sale of a Fund's Daily Class Shares, including for sales related services
provided by banks, broker/dealers or other financial institutions that have
entered into a Sales Support Agreement relating to the Daily Class Shares with
the Distributor ("Selling Agents"). Payments under a Fund's Daily Class Plan
will be calculated daily and paid monthly at a rate or rates set from time to
time by the Board of Trustees provided that the annual rate may not exceed 0.35%
of the average daily net asset value of each Fund's Daily Class Shares.
The fees payable under the Daily Class Distribution Plan are used
primarily to compensate or reimburse the Distributor for distribution services
provided by it, and related expenses incurred, including payments by the
Distributor to compensate or reimburse Selling Agents, for sales support
services provided, and related expenses incurred, by such Selling Agents.
Payments under the Daily Class Plan may be made with respect to (i) preparation,
printing and distribution of prospectuses, sales literature and advertising
materials by the Distributor or, as applicable, Selling Agents, attributable to
distribution or sales support activities, respectively; (ii) commissions,
incentive compensation or other compensation to, and expenses of, account
executives or other employees of the Distributor or Selling Agents, attributable
to distribution or sales support activities, respectively; (iii) overhead and
other office expenses of the Distributor or Selling Agents, attributable to
distribution or sales support activities, respectively; (iv) opportunity costs
relating to the foregoing (which may be calculated as a carrying charge in the
Distributor's or Selling Agents' unreimbursed expenses incurred in connection
with distribution or sales support activities, respectively); and (v) any other
costs and expenses relating to distribution or sales support activities. The
overhead and other office expenses referenced above may include, without
limitation, (i) the expenses of operating the Distributor's or Selling Agents'
offices in connection with the sale of Fund shares, including lease costs, the
salaries and employee benefit costs of administrative, operations and support
personnel, utility costs, communication costs and the costs of stationery and
supplies, (ii) the costs of client sales seminars and travel related to
distribution and sales support activities, and (iii) other expenses relating to
distribution and sales support activities.
86
<PAGE>
In addition, the Trustees have approved a shareholder servicing plan
with respect to Daily Class Shares of the Funds (the "Daily Class Servicing
Plan" or the Servicing Plan"). Pursuant to the Servicing Plan, a Fund may
compensate or reimburse banks, broker/dealers or other financial institutions
that have entered into Shareholder Servicing Agreements with the Trust for
certain activities or expenses of the Servicing Agents in connection with
shareholder services that are provided by the Servicing Agents. The Servicing
Plan provides that payments under the Servicing Plan will be paid at a rate or
rates set from time to time by the Board of Trustees, provided that the annual
rate may not exceed 0.25% of the average daily net asset value of the Daily
Class Shares beneficially owned by the Servicing Agents' clients.
The fees payable under the Servicing Plan are used primarily to
compensate or reimburse Servicing Agents for shareholder services provided, and
related expenses incurred, by such Servicing Agents. The shareholder services
provided by Servicing Agents under the Servicing Plan may include: (i)
aggregating and processing purchase and redemption requests for shares from
customers and transmitting promptly net purchase and redemption orders to the
Distributor or transfer agent; (ii) providing customers with a service that
invests the assets of their accounts in shares pursuant to specific or
pre-authorized instructions; (iii) processing dividend and distribution payments
from the Trust on behalf of customers; (iv) providing information periodically
to customers showing their positions in shares; (v) arranging for bank wires;
(vi) responding to customers' inquiries concerning their investment in shares;
(vii) providing sub-accounting with respect to shares beneficially owned by
customers or providing the information to the Trust necessary for
sub-accounting; (viii) if required by law, forwarding shareholder communications
from the Trust (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to customers;
(ix) forwarding to customers proxy statements and proxies containing any
proposals regarding the Servicing Plan or related agreements; (x) providing
general shareholder liaison services; and (xi) providing such other similar
services as the Trust may reasonably request to the extent such Servicing Agents
are permitted to do so under applicable statutes, rules or regulations.
The shareholder servicing plan with respect to the Daily Class
Distribution Plan and the Daily Class Servicing Plan (collectively, the "Plans")
will continue in effect only so long as such continuance is approved at least
annually by (i) a majority of the Board of Trustees, and (ii) a majority of the
Qualified Trustees, pursuant to a vote cast in person at a meeting called for
the purpose of voting on the Plan. Each Plan may not be amended to increase
materially the amount which may be spent thereunder without approval of a
majority of the outstanding Shares of such Fund. All material amendments to a
Plan require the approval of a majority of the Board of Trustees and the
Qualified Trustees. The Plans require that quarterly written reports of the
amounts spent under the Plans and the purposes of such expenditures be furnished
to, and reviewed by, the Trustees.
SERVICE CLASS
The Trust has adopted a distribution plan (the "Service Class
Distribution Plan" or the "Distribution Plan") for the Service Class Shares of
the Funds in accordance with the provisions of Rule 12b-1 under the 1940 Act
which regulates circumstances under which an investment company may directly or
indirectly bear expenses relating to the distribution of its shares. Continuance
of the Distribution Plan must be approved annually by a majority of the Trustees
of the Trust and by a majority of the Trustees who are not "interested persons"
(as defined in the 1940 Act) of the Trust and who have no direct or indirect
financial interest in the operation of the plan or in any agreements thereunder
(the "Qualified Trustees"). The Distribution Plan requires that quarterly
written reports of amounts spent under such Distribution Plan and the purposes
of such expenditures be furnished to and reviewed by the Trustees, and the
Distribution Plan may not be amended to increase materially the amount which may
be spent thereunder without approval by a majority of the outstanding Service
Class Shares of the Trust. All material amendments of the Distribution Plan will
require approval by a majority of the Trustees and of the Qualified Trustees.
87
<PAGE>
Pursuant to the Distribution Plan, a Fund may compensate or reimburse
the Distributor for any activities or expenses primarily intended to result in
the sale of a Fund's Service Class Shares, including for sales related services
provided by banks, broker/dealers or other financial institutions that have
entered into a Sales Support Agreement relating to the Service Class Shares with
the Distributor ("Selling Agents"). Payments under a Fund's Service Class Plan
will be calculated daily and paid monthly at a rate or rates set from time to
time by the Board of Trustees provided that the annual rate may not exceed 0.75%
of the average daily net asset value of each Fund's Service Class Shares.
The fees payable under the Service Class Distribution Plan are used
primarily to compensate or reimburse the Distributor for distribution services
provided by it, and related expenses incurred, including payments by the
Distributor to compensate or reimburse Selling Agents, for sales support
services provided, and related expenses incurred, by such Selling Agents.
Payments under the Service Class Plan may be made with respect to (i)
preparation, printing and distribution of prospectuses, sales literature and
advertising materials by the Distributor or, as applicable, Selling Agents,
attributable to distribution or sales support activities, respectively; (ii)
commissions, incentive compensation or other compensation to, and expenses of,
account executives or other employees of the Distributor or Selling Agents,
attributable to distribution or sales support activities, respectively; (iii)
overhead and other office expenses of the Distributor or Selling Agents,
attributable to distribution or sales support activities, respectively; (iv)
opportunity costs relating to the foregoing (which may be calculated as a
carrying charge in the Distributor's or Selling Agents' unreimbursed expenses
incurred in connection with distribution or sales support activities,
respectively); and (v) any other costs and expenses relating to distribution or
sales support activities. The overhead and other office expenses referenced
above may include, without limitation, (i) the expenses of operating the
Distributor's or Selling Agents' offices in connection with the sale of Fund
shares, including lease costs, the salaries and employee benefit costs of
administrative, operations and support personnel, utility costs, communication
costs and the costs of stationery and supplies, (ii) the costs of client sales
seminars and travel related to distribution and sales support activities, and
(iii) other expenses relating to distribution and sales support activities.
In addition, the Trustees have approved a shareholder servicing plan
with respect to Service Class Shares of the Funds (the "Service Class Servicing
Plan" or the "Servicing Plan"). Pursuant to the Servicing Plan, a Fund may
compensate or reimburse banks, broker/dealers or other financial institutions
that have entered into Shareholder Servicing Agreements with the Trust for
certain activities or expenses of the Servicing Agents in connection with
shareholder services that are provided by the Servicing Agents. The Servicing
Plan provides that payments under the Servicing Plan will be paid at a rate or
rates set from time to time by the Board of Trustees, provided that the annual
rate may not exceed 0.25% of the average daily net asset value of the Service
Class Shares beneficially owned by the Servicing Agents' clients.
The fees payable under the Servicing Plan are used primarily to
compensate or reimburse Servicing Agents for shareholder services provided, and
related expenses incurred, by such Servicing Agents. The shareholder services
provided by Servicing Agents under the Servicing Plan may include: (i)
aggregating and processing purchase and redemption requests for shares from
customers and transmitting promptly net purchase and redemption orders to the
Distributor or transfer agent; (ii) providing customers with a service that
invests the assets of their accounts in shares pursuant to specific or
pre-authorized instructions; (iii) processing dividend and distribution payments
from the Trust on behalf of customers; (iv) providing information periodically
to customers showing their positions in shares; (v) arranging for bank wires;
(vi) responding to customers' inquiries concerning their investment in shares;
(vii) providing sub-accounting with respect to shares beneficially owned by
customers or providing the information to the Trust necessary for
sub-accounting; (viii) if required by law, forwarding shareholder communications
from the Trust (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to customers;
(ix) forwarding to customers proxy statements and proxies containing any
proposals regarding the Servicing Plan or related agreements; (x) providing
general shareholder liaison services; and (xi) providing such other similar
services as the Trust may reasonably request to the extent such Servicing Agents
are permitted to do so under applicable statutes, rules or regulations.
88
<PAGE>
The shareholder servicing plan with respect to the Service Class
Distribution Plan and the Service Class Servicing Plan (collectively, the
"Plans") will continue in effect only so long as such continuance is approved at
least annually by (i) a majority of the Board of Trustees, and (ii) a majority
of the Qualified Trustees, pursuant to a vote cast in person at a meeting called
for the purpose of voting on the Plan. Each Plan may not be amended to increase
materially the amount which may be spent thereunder without approval of a
majority of the outstanding Shares of such Fund. All material amendments to a
Plan require the approval of a majority of the Board of Trustees and the
Qualified Trustees. The Plans require that quarterly written reports of the
amounts spent under the Plans and the purposes of such expenditures be furnished
to, and reviewed by, the Trustees.
INVESTOR CLASS
The Trust has adopted a distribution plan (the "Investor Class
Distribution Plan" or the "Distribution Plan") for the Investor Class Shares of
the Funds in accordance with the provisions of Rule 12b-1 under the 1940 Act
which regulates circumstances under which an investment company may directly or
indirectly bear expenses relating to the distribution of its shares. Continuance
of the Distribution Plan must be approved annually by a majority of the Trustees
of the Trust and by a majority of the Trustees who are not "interested persons"
(as defined in the 1940 Act) of the Trust and who have no direct or indirect
financial interest in the operation of the plan or in any agreements thereunder
(the "Qualified Trustees"). The Distribution Plan requires that quarterly
written reports of amounts spent under such Distribution Plan and the purposes
of such expenditures be furnished to and reviewed by the Trustees, and the
Distribution Plan may not be amended to increase materially the amount which may
be spent thereunder without approval by a majority of the outstanding Investor
Class Shares of the Trust. All material amendments of the Distribution Plan will
require approval by a majority of the Trustees and of the Qualified Trustees.
Pursuant to the Distribution Plan, a Fund may compensate or reimburse
the Distributor for any activities or expenses primarily intended to result in
the sale of a Fund's Investor Class Shares, including for sales related services
provided by banks, broker/dealers or other financial institutions that have
entered into a Sales Support Agreement relating to the Investor Class Shares
with the Distributor ("Selling Agents"). Payments under a Fund's Investor Class
Plan will be calculated daily and paid monthly at a rate or rates set from time
to time by the Board of Trustees provided that the annual rate may not exceed
0.10% of the average daily net asset value of each Fund's Investor Class Shares.
The fees payable under the Investor Class Distribution Plan are used
primarily to compensate or reimburse the Distributor for distribution services
provided by it, and related expenses incurred, including payments by the
Distributor to compensate or reimburse Selling Agents, for sales support
services provided, and related expenses incurred, by such Selling Agents.
Payments under the Investor Class Plan may be made with respect to (i)
preparation, printing and distribution of prospectuses, sales literature and
advertising materials by the Distributor or, as applicable, Selling Agents,
attributable to distribution or sales support activities, respectively; (ii)
commissions, incentive compensation or other compensation to, and expenses of,
account executives or other employees of the Distributor or Selling Agents,
attributable to distribution or sales support activities, respectively; (iii)
overhead and other office expenses of the Distributor or Selling Agents,
attributable to distribution or sales support activities, respectively; (iv)
opportunity costs relating to the foregoing (which may be calculated as a
carrying charge in the Distributor's or Selling Agents' unreimbursed expenses
incurred in connection with distribution or sales support activities,
respectively); and (v) any other costs and expenses relating to distribution or
sales support activities. The overhead and other office expenses referenced
above may include, without limitation, (i) the expenses of operating the
Distributor's or Selling Agents' offices in connection with the sale of Fund
shares, including lease costs, the salaries and employee benefit costs of
administrative, operations and support personnel, utility costs, communication
costs and the costs of stationery and supplies, (ii) the costs of client sales
seminars and travel related to distribution and sales support activities, and
(iii) other expenses relating to distribution and sales support activities.
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In addition, the Trustees have approved a shareholder servicing plan
with respect to Investor Class Shares of the Funds (the "Investor Class
Servicing Plan" or the Servicing Plan"). Pursuant to the Servicing Plan, a Fund
may compensate or reimburse banks, broker/dealers or other financial
institutions that have entered into Shareholder Servicing Agreements with the
Trust for certain activities or expenses of the Servicing Agents in connection
with shareholder services that are provided by the Servicing Agents. The
Servicing Plan provides that payments under the Servicing Plan will be paid at a
rate or rates set from time to time by the Board of Trustees, provided that the
annual rate may not exceed 0.25% of the average daily net asset value of the
Investor Class Shares beneficially owned by the Servicing Agents' clients.
The fees payable under the Servicing Plan are used primarily to
compensate or reimburse Servicing Agents for shareholder services provided, and
related expenses incurred, by such Servicing Agents. The shareholder services
provided by Servicing Agents under the Servicing Plan may include: (i)
aggregating and processing purchase and redemption requests for shares from
customers and transmitting promptly net purchase and redemption orders to the
Distributor or transfer agent; (ii) providing customers with a service that
invests the assets of their accounts in shares pursuant to specific or
pre-authorized instructions; (iii) processing dividend and distribution payments
from the Trust on behalf of customers; (iv) providing information periodically
to customers showing their positions in shares; (v) arranging for bank wires;
(vi) responding to customers' inquiries concerning their investment in shares;
(vii) providing sub-accounting with respect to shares beneficially owned by
customers or providing the information to the Trust necessary for
sub-accounting; (viii) if required by law, forwarding shareholder communications
from the Trust (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to customers;
(ix) forwarding to customers proxy statements and proxies containing any
proposals regarding the Servicing Plan or related agreements; (x) providing
general shareholder liaison services; and (xi) providing such other similar
services as the Trust may reasonably request to the extent such Servicing Agents
are permitted to do so under applicable statutes, rules or regulations.
The shareholder servicing plan with respect to the Investor Class
Distribution Plan and the Investor Class Servicing Plan (collectively, the
"Plans") will continue in effect only so long as such continuance is approved at
least annually by (i) a majority of the Board of Trustees, and (ii) a majority
of the Qualified Trustees, pursuant to a vote cast in person at a meeting called
for the purpose of voting on the Plan. Each Plan may not be amended to increase
materially the amount which may be spent thereunder without approval of a
majority of the outstanding Shares of such Fund. All material amendments to a
Plan require the approval of a majority of the Board of Trustees and the
Qualified Trustees. The Plans require that quarterly written reports of the
amounts spent under the Plans and the purposes of such expenditures be furnished
to, and reviewed by, the Trustees.
INVESTOR A SHARES
The Trust has adopted an Amended and Restated Shareholder Servicing and
Distribution Plan (the "Investor A Plan" or the "Distribution Plan") pursuant to
Rule 12b-1 under the 1940 Act with respect to each Fund's Investor A Shares.
Rule 12b-1 regulates circumstances under which an investment company may
directly or indirectly bear expenses relating to the distribution of its shares.
Continuance of the Distribution Plan must be approved annually by a majority of
the Trustees of the Trust and by a majority of the Trustees who are not
"interested persons" (as defined in the 1940 Act) of the Trust and who have no
direct or indirect financial interest in the operation of the plan or in any
agreements thereunder (the "Qualified Trustees"). The Distribution Plan requires
that quarterly written reports of amounts spent under such Distribution Plan and
the purposes of such expenditures be furnished to and reviewed by the Trustees,
and the Distribution Plan may not be amended to increase materially the amount
which may be spent thereunder without approval by a majority of the outstanding
Investor A Shares of the Trust. All material amendments of the Distribution Plan
will require approval by a majority of the Trustees and of the Qualified
Trustees.
The Investor A Plan provides that each Fund may pay the Distributor or
banks, broker/dealers or other financial institutions that offer shares of the
Fund and that have entered into a Sales Support Agreement with the Distributor
("Selling Agents") or a Shareholder Servicing Agreement with the Trust,
("Servicing Agents"), up to 0.25% (on an annualized basis) of the average daily
net asset value of the Funds.
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Payments under the Investor A Plan may be made to the Distributor for
providing the distribution-related services described in (i) above or to
Servicing Agents that have entered into a Shareholder Servicing Agreement with
the Trust for providing shareholder support services to their Customers which
hold of record or beneficially Investor A Shares of a Fund. Such shareholder
support services provided by Servicing Agents to holders of Investor A Shares of
the Funds may include (i) aggregating and processing purchase and redemption
requests for Investor A Shares from their Customers and transmitting promptly
net purchase and redemption orders to our distributor or transfer agent; (ii)
providing their Customers with a service that invests the assets of their
accounts in Investor A Shares pursuant to specific or pre-authorized
instructions; (iii) processing dividend and distribution payments from the Trust
on behalf of their Customers; (iv) providing information periodically to their
Customers showing their positions in Investor A Shares; (v) arranging for bank
wires; (vi) responding to their Customers' inquiries concerning their investment
in Investor A Shares; (vii) providing sub-accounting with respect to Investor A
Shares beneficially owned by their Customers or the information necessary to us
for sub-accounting; (viii) if required by law, forwarding shareholder
communications from the Trust (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
their Customers (ix) forwarding to their Customers proxy statements and proxies
containing any proposals regarding the Shareholder Servicing Agreement; (x)
providing general shareholder liaison services; and (xi) providing such other
similar services as the Trust may reasonably request to the extent the Selling
Agent is permitted to do so under applicable statutes, rules or regulations.
Expenses incurred by the Distributor pursuant to the Investor A Plan in
any given year may exceed the sum of the fees received under the Investor A
Plan. Any such excess may be recovered by the Distributor in future years so
long as the Investor A Plan is in effect. If the Investor A Plan were terminated
or not continued, a Fund would not be contractually obligated to pay the
Distributor for any expenses not previously reimbursed by the Fund.
Expenses incurred by the Distributor pursuant to the Investor A Plan in
any given year may exceed the sum of the fees received under the Investor A
Plan. Any such excess may be recovered by the Distributor in future years so
long as the Investor A Plan is in effect. If the Investor A Plan were terminated
or not continued, a Fund would not be contractually obligated to pay the
Distributor for any expenses not previously reimbursed by the Fund.
INVESTOR B SHARES
The Trustees of the Trust have approved a Distribution Plan (the
"Investor B Distribution Plan" or the "Distribution Plan") with respect to
Investor B Shares of the Funds. Rule 12b-1 regulates circumstances under which
an investment company may directly or indirectly bear expenses relating to the
distribution of its shares. Continuance of the Distribution Plan must be
approved annually by a majority of the Trustees of the Trust and by a majority
of the Trustees who are not "interested persons" (as defined in the 1940 Act) of
the Trust and who have no direct or indirect financial interest in the operation
of the plan or in any agreements thereunder (the "Qualified Trustees"). The
Distribution Plan requires that quarterly written reports of amounts spent under
such Distribution Plan and the purposes of such expenditures be furnished to and
reviewed by the Trustees, and the Distribution Plan may not be amended to
increase materially the amount which may be spent thereunder without approval by
a majority of the outstanding Investor B Shares of the Trust. All material
amendments of the Distribution Plan will require approval by a majority of the
Trustees and of the Qualified Trustees.
Pursuant to the Investor B Distribution Plan, a Fund may compensate or
reimburse the Distributor for any activities or expenses primarily intended to
result in the sale of the Fund's Investor B Shares, including for sales related
services provided by banks, broker/dealers or other financial institutions that
have entered into a Sales Support Agreement relating to the Investor B Shares
with the Distributor ("Selling Agents"). Payments under a Fund's Investor B
Distribution Plan will be calculated daily and paid monthly at a rate or rates
set from time to time by the Board of Trustees provided that the annual rate may
not exceed 0.75% of the average daily net asset value of each Fund's Investor B
Shares.
The fees payable under the Investor B Distribution Plan are used
primarily to compensate or reimburse the Distributor for distribution services
provided by it, and related expenses incurred, including payments by the
Distributor to compensate or reimburse Selling Agents, for sales support
services provided, and related expenses incurred, by such Selling Agents.
Payments under the Investor B Distribution Plan may be made with respect to
preparation, printing and distribution of prospectuses, sales literature and
advertising materials by the Distributor or, as applicable, Selling Agents,
attributable to distribution or sales support activities, respectively,
commissions, incentive compensation or other compensation to, and expenses of,
account executives or other employees of the Distributor or Selling Agents,
attributable to distribution or sales support activities, respectively; overhead
and other office expenses of the Distributor relating to the foregoing (which
may be calculated as a carrying charge in the Distributor's or Selling Agents'
unreimbursed expenses), incurred in connection with distribution or sales
support activities. The overhead and other office expenses referenced above may
include, without limitation, (i) the expenses of operating the Distributor's or
Selling Agents' offices in connection with the sale of Fund shares, including
lease costs, the salaries and employee benefit costs of administrative,
operations and support personnel, utility costs, communication costs and the
costs of stationery and supplies, (ii) the costs of client sales seminars and
travel related to distribution and sales support activities, and (iii) other
expenses relating to distribution and sales support activities.
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The fees payable under the Investor B Distribution Plan are treated by
the Funds as an expense in the year they are accrued. At any given time, a
Selling Agent and/or Servicing Agent may incur expenses in connection with
services provided pursuant to its agreements with the Distributor under the
Investor B Distribution Plan which exceed the total of (i) the payments made to
the Selling Agents and Servicing Agents by the Distributor or the Trust and
reimbursed by the Fund pursuant to the Investor B Distribution Plan, and (ii)
the proceeds of contingent deferred sales charges paid to the Distributor and
reallowed to the Selling Agent, upon the redemption of their Customers' Investor
B Shares. Any such excess expenses may be recovered in future years, so long as
the Investor B Distribution Plan is in effect. Because there is no requirement
under the Investor B Distribution Plan that the Distributor be paid or the
Selling Agents and Servicing Agents be compensated or reimbursed for all their
expenses or any requirement that the Investor B Distribution Plan be continued
from year to year, such excess amount, if any, does not constitute a liability
to a Fund or the Distributor. Although there is no legal obligation for the Fund
to pay expenses incurred by the Distributor, a Selling Agent or a Servicing
Agent in excess of payments previously made to the Distributor under the
Investor B Distribution Plan or in connection with contingent deferred sales
charges, if for any reason the Investor B Distribution Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
INVESTOR C SHARES
The Trustees of the Trust have approved an Amended and Restated
Distribution Plan in accordance with Rule 12b-1 under the 1940 Act for the
Investor C Shares of the Funds (the "Investor C Plan" or the "Distribution
Plan"). Rule 12b-1 regulates circumstances under which an investment company may
directly or indirectly bear expenses relating to the distribution of its shares.
Continuance of the Distribution Plan must be approved annually by a majority of
the Trustees of the Trust and by a majority of the Trustees who are not
"interested persons" (as defined in the 1940 Act) of the Trust and who have no
direct or indirect financial interest in the operation of the plan or in any
agreements thereunder (the "Qualified Trustees"). The Distribution Plan requires
that quarterly written reports of amounts spent under such Distribution Plan and
the purposes of such expenditures be furnished to and reviewed by the Trustees,
and the Distribution Plan may not be amended to increase materially the amount
which may be spent thereunder without approval by a majority of the outstanding
Investor C Shares of the Trust. All material amendments of the Distribution Plan
will require approval by a majority of the Trustees and of the Qualified
Trustees.
Pursuant to the Investor C Plan, each Fund may pay the Distributor for
certain expenses that are incurred in connection with the distribution of
shares. Payments under the Investor C Plan will be calculated daily and paid
monthly at a rate set from time to time by the Board of Trustees provided that
the annual rate may not exceed 0.75% of the average daily net asset value of
Investor C Shares of a Fund. Payments to the Distributor pursuant to the
Investor C Plan will be used (i) to compensate banks, other financial
institutions or a securities broker/dealer that have entered into a Sales
Support Agreement with the Distributor ("Selling Agents") for providing sales
support assistance relating to Investor C Shares, for promotional activities
intended to result in the sale of or Investor C Shares such as to pay for the
preparation, printing and distribution of prospectuses to other than current
shareholders, and (iii) to compensate Selling Agents for providing sales support
services with respect to their Customers who are, from time to time, beneficial
and record holders of Investor C Shares. Currently, substantially all fees paid
pursuant to the Investor C Plan are paid to compensate Selling Agents for
providing the services described in (i) and (iii) above, with any remaining
amounts being used by the Distributor to partially defray other expenses
incurred by the Distributor in distributing Investor C Shares. Fees received by
the Distributor pursuant to the Investor C Plan will not be used to pay any
interest expenses, carrying charges or other financing costs (except to the
extent permitted by the SEC) and will not be used to pay any general and
administrative expenses of the Distributor.
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Pursuant to the Investor C Plan, the Distributor may enter into Sales
Support Agreements with Selling Agents for providing sales support services to
their Customers who are the record or beneficial owners of Investor C Shares of
the Funds. Such Selling Agents will be compensated at the annual rate of up to
0.75% of the average daily net asset value of the Investor C Shares of the Funds
held of record or beneficially by such Customers. The sales support services
provided by Selling Agents may include providing distribution assistance and
promotional activities intended to result in the sales of shares such as paying
for the preparation, printing and distribution of prospectuses to other than
current shareholders.
Fees paid pursuant to the Investor C Plan are accrued daily and paid
monthly, and are charged as expenses of the relevant shares of a Fund as
accrued. Expenses incurred by the Distributor pursuant to the Investor C Plan in
any given year may exceed the sum of the fees received under the Investor C Plan
and payments received pursuant to contingent deferred sales charges. Any such
excess may be recovered by the Distributor in future years so long as the
Investor C Plan is in effect. If the Investor C Plan were terminated or not
continued, a Fund would not be contractually obligated to pay the Distributor
for any expenses not previously reimbursed by the Fund or recovered through
contingent deferred sales charges.
In addition, the Trustees have approved an Amended and Restated
Shareholder Servicing Plan ("Servicing Plan") with respect to the Investor C
Shares of the Funds (the "Investor C Servicing Plan"). Pursuant to the Investor
C Servicing Plan, each Fund may pay banks, broker/dealers or other financial
institutions that have entered into a Shareholder Servicing Agreement with
Nations Funds ("Servicing Agents") for certain expenses that are incurred by the
Servicing Agents in connection with shareholder support services that are
provided by the Servicing Agents. Payments under the Investor C Servicing Plan
will be calculated daily and paid monthly at a rate set from time to time by the
Board of Trustees, provided that the annual rate may not exceed 0.25% of the
average daily net asset value of the Funds' Investor C Shares. The shareholder
services provided by the Servicing Agents may include (i) aggregating and
processing purchase and redemption requests for such Investor C Shares from
Customers and transmitting promptly net purchase and redemption orders to our
distributor or transfer agent; (ii) providing Customers with a service that
invests the assets of their accounts in such Investor C Shares pursuant to
specific or pre-authorized instructions; (iii) dividend and distribution
payments from the Trust on behalf of Customers; (iv) providing information
periodically to Customers showing their positions in such Investor C Shares; (v)
arranging for bank wires; (vi) responding to Customers' inquiries concerning
their investment in such Investor C Shares; (vii) providing sub-accounting with
respect to such Investor C Shares beneficially owned by Customers or providing
the information to us necessary for sub-accounting; (viii) if required by law,
forwarding shareholder communications from the Trust (such as proxies,
shareholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to Customers; (ix) forwarding to Customers proxy
statements and proxies containing any proposals regarding the Shareholder
Servicing Agreement; (x) providing general shareholder liaison services; and
(xi) providing such other similar services as the Trust may reasonably request
to the extent the Servicing Agent is permitted to do so under applicable
statutes, rules or regulations.
The shareholder servicing plan with respect to the Investor C Plan and
the Investor C Servicing Plan (collectively, the "Plans") will continue in
effect only so long as such continuance is approved at least annually by (i) a
majority of the Board of Trustees, and (ii) a majority of the Qualified
Trustees, pursuant to a vote cast in person at a meeting called for the purpose
of voting on the Plan. Each Plan may not be amended to increase materially the
amount which may be spent thereunder without approval of a majority of the
outstanding Shares of such Fund. All material amendments to a Plan require the
approval of a majority of the Board of Trustees and the Qualified Trustees. The
Plans require that quarterly written reports of the amounts spent under the
Plans and the purposes of such expenditures be furnished to, and reviewed by,
the Trustees.
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PRIMARY B SHARES
As stated in the Prospectus for the Funds' Primary B Shares, the Trust
has a Shareholder Administration Plan (the "Administration Plan") with respect
to such shares. Pursuant to the Administration Plan, the Trust may enter into
agreements ("Administration Agreements") with broker/dealers, banks and other
financial institutions that are dealers of record or holders of record or which
have a servicing relationship with the beneficial owners of Primary B Shares of
the Funds ("Servicing Agents"). The Administration Plan provides that pursuant
to the Administration Agreements, Servicing Agents shall provide the shareholder
support services as set forth therein to their customers who may from time to
time own of record or beneficially Primary B Shares ("Customers") in
consideration for the payment of up to 0.60% (on an annualized basis) of the net
asset value of such shares. Such services may include: (i) aggregating and
processing purchase, exchange and redemption requests for Primary B Shares from
Customers and transmitting promptly net purchase and redemption orders with the
Distributor or the transfer agents; (ii) providing Customers with a service that
invests the assets of their accounts in Primary B Shares pursuant to specific or
pre-authorized instructions; (iii) processing dividend and distribution payments
from the Trust on behalf of Customers; (iv) providing information periodically
to Customers showing their positions in Primary B Shares; (v) arranging for bank
wires; (vi) responding to Customer inquiries concerning their investment in
Primary B Shares; (vii) providing sub-accounting with respect to Primary B
Shares beneficially owned by Customers or the information necessary for
sub-accounting; (viii) if required by law, forwarding shareholder communications
(such as proxies, shareholder reports annual and semi-annual financial
statements and dividend, distribution and tax notices) to Customers; (ix)
forwarding to Customers proxy statements and proxies containing any proposals
regarding an Administration Agreement; (x) employee benefit plan recordkeeping,
administration, custody and trustee services; (xi) general shareholder liaison
services and (xii) providing such other similar services as may reasonably be
requested to the extent permitted under applicable statutes, rules, or
regulations.
MARSICO SHARES
As stated in the Prospectus for the Funds' Marsico Shares, the Trust
has a Shareholder Administration Plan (the "Administration Plan") with respect
to such shares. Pursuant to the Administration Plan, the Trust may enter into
agreements ("Administration Agreements") with broker/dealers, banks and other
financial institutions that are dealers of record or holders of record or which
have a servicing relationship with the beneficial owners of Marsico Shares of
the Funds ("Servicing Agents"). The Administration Plan provides that pursuant
to the Administration Agreements, Servicing Agents shall provide the shareholder
support services as set forth therein to their customers who may from time to
time own of record or beneficially Marsico Shares ("Customers") in consideration
for the payment of up to 0.10% (on an annualized basis) of the net asset value
of such shares. Such services may include: (i) aggregating and processing
purchase, exchange and redemption requests for Marsico Shares from Customers and
transmitting promptly net purchase and redemption orders with the Distributor or
the transfer agents; (ii) providing Customers with a service that invests the
assets of their accounts in Marsico Shares pursuant to specific or
pre-authorized instructions; (iii) processing dividend and distribution payments
from the Trust on behalf of Customers; (iv) providing information periodically
to Customers showing their positions in Primary B Shares; (v) arranging for bank
wires; (vi) responding to Customer inquiries concerning their investment in
Marsico Shares; (vii) providing sub-accounting with respect to Marsico Shares
beneficially owned by Customers or the information necessary for sub-accounting;
(viii) if required by law, forwarding shareholder communications (such as
proxies, shareholder reports annual and semi-annual financial statements and
dividend, distribution and tax notices) to Customers; (ix) forwarding to
Customers proxy statements and proxies containing any proposals regarding an
Administration Agreement; (x) employee benefit plan recordkeeping,
administration, custody and trustee services; (xi) general shareholder liaison
services and (xii) providing such other similar services as may reasonably be
requested to the extent permitted under applicable statutes, rules, or
regulations.
The Trust has also adopted a Shareholder Servicing Plan for the Marsico
Class Shares of each Fund (the "Marsico Class Servicing Plan"). Under the
Marsico Class Servicing Plan, the Trust may enter into Shareholder Servicing
Agreements with broker/dealers, banks and other financial institutions
("Servicing Agents") pursuant to which the Servicing Agents will provide
shareholder support services to their customers who beneficially own Marsico
Class Shares in the Funds. The Marsico Class Servicing Plan permits the Trust to
pay Servicing Agents a fee not exceeding 0.25% of the average daily net asset
value of the Marsico Class Shares beneficially owned by the Servicing Agents'
clients.
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The shareholder support services provided by Servicing Agents under the
Marsico Class Servicing Plan may include: (i) aggregating and processing
purchase and redemption requests for such Marsico Class Shares from customers
and transmitting promptly net purchase and redemption orders to the Distributor
or transfer agent; (ii) providing customers with a service that invests the
assets of their accounts in such Marsico Class Shares pursuant to specific or
pre-authorized instructions; (iii) processing dividend and distribution payments
from the Trust on behalf of customers; (iv) providing information periodically
to customers showing their positions in such Marsico Class Shares; (v) arranging
for bank wires; (vi) responding to customers' inquiries concerning their
investment in such Marsico Class Shares; (vii) providing sub-accounting with
respect to such Marsico Class Shares beneficially owned by customers or the
information necessary for sub-accounting; (viii) if required by law, forwarding
shareholder communications (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
customers; (ix) forwarding to customers proxy statements and proxies containing
any proposals regarding the Marsico Class Servicing Plan or related agreements;
(x) general shareholder liaison services; and (xi) providing such other similar
services as the Trust reasonably request to the extent the Servicing Agents are
permitted to do so under applicable statutes, rules or regulations.
The Marsico Class Servicing Plan will continue in effect only so long
as such continuance is approved at least annually by (i) a majority of the Board
of Trustees, and (ii) a majority of the Qualified Trustees, pursuant to a vote
cast in person at a meeting called for the purpose of voting on the Marsico
Class Servicing Plan. The Marsico Class Servicing Plan may not be amended to
increase materially the amount which may be spent thereunder without approval of
a majority of the outstanding Marsico Class Shares of such Fund. All material
amendments to the Marsico Class Servicing Plan require the approval of a
majority of the Board of Trustees and the Qualified Trustees. The Marsico Class
Servicing Plan requires that quarterly written reports of the amounts spent
under the Marsico Class Servicing Plan and the purposes of such expenditures be
furnished to, and reviewed by, the Trustees.
SEAFIRST SHARES
Seafirst Shares of the Acquiring Funds do not pay any fees under a
Distribution Plan. The Acquiring Funds have adopted a Shareholder Servicing Plan
with regard to the Seafirst Shares of the Acquiring Funds. The Shareholder
Servicing Plan provides that each Fund may pay Servicing Agents that have
entered into a Shareholder Servicing Agreement with the Acquiring Funds up to
0.25% (on an annual basis) of the average daily net asset value of the Seafirst
Shares of the Acquired Funds.
The Trustees have adopted a Shareholder Servicing Plan ("Servicing
Plan") with respect to the Seafirst Shares of the Funds (the "Seafirst Servicing
Plan"). Pursuant to the Seafirst Servicing Plan, each Fund may pay banks,
broker/dealers or other financial institutions that have entered into a
Shareholder Servicing Agreement with Nations Funds ("Servicing Agents") for
certain expenses that are incurred by the Servicing Agents in connection with
shareholder support services that are provided by the Servicing Agents. Payments
under the Seafirst Servicing Plan will be calculated daily and paid monthly at a
rate set from time to time by the Board of Trustees, provided that the annual
rate may not exceed 0.25% of the average daily net asset value of the Funds'
Seafirst Shares. The shareholder services provided by the Servicing Agents may
include (i) aggregating and processing purchase and redemption requests for such
Seafirst Shares from Customers and transmitting promptly net purchase and
redemption orders to our distributor or transfer agent; (ii) providing Customers
with a service that invests the assets of their accounts in such Seafirst Shares
pursuant to specific or pre-authorized instructions; (iii) dividend and
distribution payments from the Trust on behalf of Customers; (iv) providing
information periodically to Customers showing their positions in such Seafirst
Shares; (v) arranging for bank wires; (vi) responding to Customers' inquiries
concerning their investment in such Seafirst Shares; (vii) providing
sub-accounting with respect to such Seafirst Shares beneficially owned by
Customers or providing the information to us necessary for sub-accounting;
(viii) if required by law, forwarding shareholder communications from the Trust
(such as proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to Customers; (ix)
forwarding to Customers proxy statements and proxies containing any proposals
regarding the Shareholder Servicing Agreement; (x) providing general shareholder
liaison services; and (xi) providing such other similar services as the Trust
may reasonably request to the extent the Servicing Agent is permitted to do so
under applicable statutes, rules or regulations.
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The Seafirst Servicing Plan will continue in effect only so long as
such continuance is approved at least annually by (i) a majority of the Board of
Trustees, and (ii) a majority of the Qualified Trustees, pursuant to a vote cast
in person at a meeting called for the purpose of voting on the Seafirst
Servicing Plan. The Seafirst Servicing Plan may not be amended to increase
materially the amount which may be spent thereunder without approval of a
majority of the outstanding Shares of such Fund. All material amendments to the
Seafirst Servicing Plan require the approval of a majority of the Board of
Trustees and the Qualified Trustees. The Seafirst Servicing Plan requires that
quarterly written reports of the amounts spent under the Seafirst Servicing Plan
and the purposes of such expenditures be furnished to, and reviewed by, the
Trustees.
EXPENSES
The Administrator furnishes, without additional cost to the Trust and
the other registered investment companies in the Nations Funds Family
(altogether, the "Companies"), the services of the Treasurer and Secretary of
the Companies and such other personnel (other than the personnel of the Adviser)
as are required for the proper conduct of each Company's affairs. The
Distributor bears the incremental expenses of printing and distributing
prospectuses used by the Distributor or furnished by the Distributor to
investors in connection with the public offering of the Companies' shares and
the costs of any other promotional or sales literature, except that to the
extent permitted under the Plans relating to the Investor A, Investor B or
Investor C Shares of each Fund, sales-related expenses incurred by the
Distributor may be reimbursed by the Companies.
The Companies pay or causes to be paid all other expenses of each
Company, including, without limitation: the fees of the Adviser, the
Administrator and Co-Administrator; the charges and expenses of any registrar,
any custodian or depository appointed by each Company for the safekeeping of its
cash, fund securities and other property, and any stock transfer, dividend or
accounting agent or agents appointed by each Company; brokerage commissions
chargeable to each Company in connection with fund securities transactions to
which each Company is a party; all taxes, including securities issuance and
transfer taxes; corporate fees payable by each Company to federal, state or
other governmental agencies; all costs and expenses in connection with the
registration and maintenance of registration of each Company and its shares with
the SEC and various states and other jurisdictions (including filing fees, legal
fees and disbursements of counsel); the costs and expenses of typesetting
prospectuses and statements of additional information of each Company (including
supplements thereto) and periodic reports and of printing and distributing such
prospectuses and statements of additional information (including supplements
thereto) to each Company's shareholders; all expenses of shareholders' and
directors' meetings and of preparing, printing and mailing proxy statements and
reports to shareholders; fees and travel expenses of directors or director
members of any advisory board or committee; all expenses incident to the payment
of any dividend or distribution, whether in shares or cash; charges and expenses
of any outside service used for pricing of each Company's shares; fees and
expenses of legal counsel and of independent auditors in connection with any
matter relating to each Company; membership dues of industry associations;
interest payable on Company borrowings; postage and long-distance telephone
charges; insurance premiums on property or personnel (including officers and
directors) of each Company which inure to its benefit; extraordinary expenses
(including, but not limited to, legal claims and liabilities and litigation
costs and any indemnification related thereto); and all other charges and costs
of each Company's operation unless otherwise explicitly assumed by the Adviser),
the Administrator or Co-Administrator.
Expenses of each Company which are not directly attributable to the
operations of any class of shares or Fund are pro-rated among all classes of
shares or Fund of each Company based upon the relative net assets of each class
or Fund. Expenses of each Company which are not directly attributable to a
specific class of shares but are directly attributable to a specific Fund are
prorated among all the classes of shares of such Fund based upon the relative
net assets of each such class of shares. Expenses of each Company which are
directly attributable to a class of shares are charged against the income
available for distribution as dividends to such class of shares.
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The Advisory Agreement, the Sub-Advisory Agreements, and the
Co-Administration Agreement require BAAI, TradeStreet, and the Co-Administrators
to reduce their fees to the extent required to satisfy any expense limitations
which may be imposed by the securities laws or regulations thereunder of any
state in which a Fund's shares are registered or qualified for sale, as such
limitations may be raised or lowered from time to time, and the aggregate of all
such investment advisory, sub-advisory, and administration fees shall be reduced
by the amount of such excess. The amount of any such reduction to be borne by
BAAI, TradeStreet, or the Co-Administrators shall be deducted from the monthly
investment advisory and administration fees otherwise payable to BAAI,
TradeStreet, and the Co-Administrators during such fiscal year. If required
pursuant to such state securities regulations, BAAI, TradeStreet and the
Co-Administrators will reimburse the Companies no later than the last day of the
first month of the next succeeding fiscal year, for any such annual operating
expenses (after reduction of all investment advisory and administration fees in
excess of such limitation).
TRANSFER AGENTS AND CUSTODIANS
First Data is located at One Exchange Place, 53 State Street, Boston,
Massachusetts 02109, and acts as transfer agent for each Companies Primary
Shares and Investor Shares. Under the transfer agency agreements, the transfer
agent maintains shareholder account records for the Company, handles certain
communications between shareholders and the Companies, and distributes dividends
and distributions payable by the Companies to shareholders, and produces
statements with respect to account activity for the Companies and its
shareholders for these services. The transfer agent receives a monthly fee
computed on the basis of the number of shareholder accounts that it maintains
for each Company during the month and is reimbursed for out-of-pocket expenses.
Bank of America serves as sub-transfer agent for each Fund's Primary
Shares.
The Bank of New York ("BONY") 90 Washington Street, New York, N.Y.
10286 serves as custodian for the Funds' assets. As custodian, BONY maintains
the Funds' securities cash and other property, delivers securities against
payment upon sale and pays for securities against delivery upon purchase, makes
payments on behalf of such Funds for payments of dividends, distributions and
redemptions, endorses and collects on behalf of such Funds all checks, and
receives all dividends and other distributions made on securities owned by such
Funds.
The SEC has amended Rule 17f-5 under the 1940 Act to permit boards to
delegate certain foreign custody matters to foreign custody managers and to
modify the criteria applied in the selection process. Accordingly, BONY serves
as Foreign Custody Manager, pursuant to a Foreign Custody Manager Agreement,
under which the Boards of Directors/Trustees retain the responsibility for
selecting foreign compulsory depositories, although BONY agrees to make certain
findings with respect to such depositories and to monitor such depositories.
DISTRIBUTOR
Stephens Inc. (the "Distributor") serves as the principal underwriter
and distributor of the shares of the Funds.
Pursuant to a distribution agreement (the "Distribution Agreement"),
the Distributor, as agent, sells shares of the Funds on a continuous basis and
transmits purchase and redemption orders that its receives to the Companies or
the Transfer Agent. Additionally, the Distributor has agreed to use appropriate
efforts to solicit orders for the sale of shares and to undertake such
advertising and promotion as it believes appropriate in connection with such
solicitation. Pursuant to the Distribution Agreement, the Distributor, at its
own expense, finances those activities which are primarily intended to result in
the sale of shares of the Funds, including, but not limited to, advertising,
compensation of underwriters, dealers and sales personnel, the printing of
prospectuses to other than existing shareholders, and the printing and mailing
of sales literature. The Distributor, however, may be reimbursed for all or a
portion of such expenses to the extent permitted by a distribution plan adopted
by the Companies pursuant to Rule 12b-1 under the 1940 Act.
The Distribution Agreement will continue year to year as long as such
continuance is approved at least annually by (i) the Board of Directors/Trustees
or a vote of the majority (as defined in the 1940 Act) of the outstanding voting
securities of the Fund and (ii) a majority of the directors who are not parties
to the Distribution Agreement or "interested persons" of any such party by a
vote cast in person at a meeting called for such purpose. The Distribution
Agreement is not assignable and is terminable with respect to a Fund, without
penalty, on 60 days' notice by the Board of Trustees, the vote of a majority (as
defined in the 1940 Act) of the outstanding voting securities of the Fund, or by
the Distributor.
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INDEPENDENT ACCOUNTANTS AND REPORTS
The Trust issues unaudited financial information semi-annually and
audited financial statements annually. The Trust furnishes proxy statements and
other shareholder reports to shareholders of record.
The annual financial statements will be audited by the Trust's
independent accountant. The Board of Trustees has selected
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, as the Trust's independent accountant to audit the Trust's books and
review the Trust's tax returns for the Funds' fiscal year ended March 31, 2000.
PricewaterhouseCoopers LLP, with offices at 1177 Avenue of the Americas, New
York, New York 10036 was the independent accountants for Nations Cash Reserves,
Nations Treasury Reserves, Nations Government Reserves, Nations Municipal
Reserves for the period ended March 31, 1999, and for the Pacific Horizon
California Tax-Exempt Money Market Fund (the predecessor to Nations California
Tax-Exempt Reserves), the Pacific Horizon Asset Allocation Fund (the predecessor
to Nations Asset Allocation Fund), Pacific Horizon Capital Income Fund (the
predecessor to Nations Capital Income Fund), Pacific Horizon California
Municipal Bond Fund (the predecessor to Nations California Municipal Bond Fund),
Pacific Horizon Intermediate Bond Fund (the predecessor to Nations Intermediate
Bond Fund) and Pacific Horizon Blue Chip Fund (the predecessor to Nations Blue
Chip Fund) for the fiscal year ended February 28, 1999, and the period ended May
14, 1999. KPMG LLP, Two Nationwide Plaza, Columbus, Ohio 43215 was the
independent auditor for the Emerald Prime Advantage Institutional Fund
(predecessor to Nations Money Market Reserves) for the fiscal period December 1,
1997 through May 15, 1998, and for the fiscal year ended November 30, 1997.
Certain financial information which appears in the Prospectuses and in the
financial statements has been audited by the accountants.
The Annual Report for Nations Cash Reserves, Nations Treasury Reserves,
Nations Government Reserves and Nations Municipal Reserves for the period ended
March 31, 1999, is hereby incorporated by reference in this SAI. The Annual
Report for the Emerald Prime Advantage Institutional Fund (the predecessor to
Nations Money Market Reserves) for the fiscal period December 1, 1997 through
May 15, 1998 and for the fiscal year ended November 30, 1997 is also
incorporated herein by reference. The Annual Reports for the Pacific Horizon
California Tax-Exempt Money Market Fund (the predecessor to Nations California
Tax-Exempt Reserves), Pacific Horizon Asset Allocation Fund (the predecessor to
Nations Asset Allocation Fund), Pacific Horizon Capital Income Fund (the
predecessor to Nations Capital Income Fund), Pacific Horizon California
Municipal Bond Fund (the predecessor to Nations California Municipal Bond Fund),
Pacific Horizon Intermediate Bond Fund (the predecessor to Nations Intermediate
Bond Fund) and the Pacific Horizon Blue Chip Fund (the predecessor to Nations
Blue Chip Fund) for the fiscal year ended February 28, 1999, and for the period
ended May 14, 1999, are also incorporated herein by reference. These Annual
Reports will be sent free of charge with this SAI to any shareholder who
requests this SAI.
COUNSEL
Morrison & Foerster LLP serves as legal counsel to the Companies. Their
address is 2000 Pennsylvania Avenue, N.W., Washington, D.C. 20006.
Morrison & Foerster LLP, counsel to the Trust and special counsel to
Bank of America has advised the Trust and Bank of America that Bank of America
and its affiliates may perform the services contemplated by the Investment
Advisory Agreement and this Prospectus without violation of the Glass-Steagall
Act. Such counsel has pointed out, however, that there are no controlling
judicial or administrative interpretations or decisions and that future judicial
or administrative interpretations of, or decisions relating to, present federal
or state statutes, including the Glass-Steagall Act, and regulations relating to
the permissible activities of banks and their subsidiaries or affiliates, as
well as future changes in such federal or state statutes, regulations and
judicial or administrative decisions or interpretations, could prevent such
entities from continuing to perform, in whole or in part, such services. If any
such entity were prohibited from performing any of such services, it is expected
that new agreements would be proposed or entered into with another entity or
entities qualified to perform such services.
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FUND TRANSACTIONS AND BROKERAGE
GENERAL BROKERAGE POLICY
Subject to policies established by the Board of Trustees of the Trust,
the Adviser is responsible for decisions to buy and sell securities for each
Fund, for the selection of broker/dealers, for the execution of such Fund's
securities transactions, and for the allocation of brokerage fees in connection
with such transactions. The Adviser's primary consideration in effecting a
security transaction is to obtain the best net price and the most favorable
execution of the order. Purchases and sales of securities on a securities
exchange are effected through brokers who charge a negotiated commission for
their services. Orders may be directed to any broker to the extent and in the
manner permitted by applicable law.
In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without
stated commissions, although the price of a security usually includes a profit
to the dealer. In underwritten offerings, securities are purchased at a fixed
price that includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. On occasion, certain
money market instruments may be purchased directly from an issuer, in which case
no commissions or discounts are paid.
In placing orders for portfolio securities of a Fund, the Adviser is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Adviser will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable in the circumstances. In seeking
such execution, the Adviser will use its best judgment in evaluating the terms
of a transaction, and will give consideration to various relevant factors,
including, without limitation, the size and type of the transaction, the nature
and character of the market for the security, the confidentiality, speed and
certainty of effective execution required for the transaction, the general
execution and operational capabilities of the broker-dealer, the reputation,
reliability, experience and financial condition of the firm, the value and
quality of the services rendered by the firm in this and other transactions and
the reasonableness of the spread or commission, if any. In addition, the Adviser
will consider research and investment services provided by brokers or dealers
who effect or are parties to portfolio transactions of a Fund, the Adviser or
its other clients. Such research and investment services are those which
brokerage houses customarily provide to institutional investors and include
statistical and economic data and research reports on particular companies and
industries. Such services are used by the Adviser in connection with all of its
investment activities, and some of such services obtained in connection with the
execution of transactions for a Fund may be used in managing other investment
accounts. Conversely, brokers furnishing such services may be selected for the
execution of transactions of such other accounts, whose aggregate assets are far
larger than those of a Fund. Services furnished by such brokers may be used by
the Adviser in providing investment advisory and investment management services
for the Trust.
Commission rates are established pursuant to negotiations with the
broker based on the quality and quantity of execution services provided by the
broker in the light of generally prevailing rates. The allocation of orders
among brokers and the commission rates paid are reviewed periodically by the
Trustees of the Trust. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Transactions on foreign
stock exchanges involve payment of brokerage commissions which are generally
fixed. Transactions in both foreign and domestic over-the-counter markets are
generally principal transactions with dealers, and the costs of such
transactions involve dealer spreads rather than brokerage commissions. With
respect to over-the-counter transactions, the Adviser, where possible, will deal
directly with dealers who make a market in the securities involved except in
those circumstances in which better prices and execution are available
elsewhere.
In certain instances there may be securities which are suitable for
more than one Fund as well as for one or more of the other clients of the
Adviser. Investment decisions for each Fund and for the Adviser's other clients
are made with the goal of achieving their respective investment objectives. It
may happen that a particular security is bought or sold for only one client even
though it may be held by, or bought or sold for, other clients. Likewise, a
particular security may be bought for one or more clients when one or more other
clients are selling that same security. Some simultaneous transactions are
inevitable when several clients receive investment advice from the same
investment adviser, particularly when the same security is suitable for the
investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security in a particular transaction as far
as a Fund is concerned. The Trust believes that over time its ability to
participate in volume transactions will produce superior executions for the
Funds.
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The portfolio turnover rate for each Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the reporting period by
the monthly average value of the portfolio securities owned during the reporting
period. The calculation excludes all securities, including options, whose
maturities or expiration dates at the time of acquisition are one year or less.
Portfolio turnover may vary greatly from year to year as well as within a
particular year, and may be affected by cash requirements for redemption of
shares and by requirements which enable the Funds to receive favorable tax
treatment.
The Funds may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group. A
Fund will engage in this practice, however, only when the Adviser, in its sole
discretion, believes such practice to be otherwise in the Fund's interests.
The Trust will not execute portfolio transactions through, or purchase
or sell portfolio securities from or to the distributor, the Adviser, the
administrator, the co-administrator or their affiliates, acting as principal
(including repurchase and reverse repurchase agreements), except to the extent
permitted by applicable law. In addition, the Trust will not give preference to
correspondents of Bank of America or its affiliates, with respect to such
transactions or securities. (However, the Adviser is authorized to allocate
purchase and sale orders for portfolio securities to certain financial
institutions, including, in the case of agency transactions, financial
institutions which are affiliated with Bank of America or its affiliates, and to
take into account the sale of Fund shares if the Adviser believes that the
quality of the transaction and the commission are comparable to what they would
be with other qualified brokerage firms.) In addition, a Fund will not purchase
securities during the existence of any underwriting or selling group relating
thereto of which the distributor, the Adviser, the administrator, or the
co-administrator, or any of their affiliates, is a member, except to the extent
permitted by the SEC. Under certain circumstances, the Funds may be at a
disadvantage because of these limitations in comparison with other investment
companies which have similar investment objectives but are not subject to such
limitations.
Certain affiliates of Bank of America Corporation and its subsidiary
banks may have deposit, loan or commercial banking relationships with the
corporate users of facilities financed by industrial development revenue bonds
or private activity bonds purchased by Nations California Municipal Bond Fund.
Bank of America Corporation or certain of its affiliates may serve as trustee,
tender agent, guarantor, placement agent, underwriter, or in some other
capacity, with respect to certain issues of municipal securities. Under certain
circumstances, Nations California Municipal Bond Fund may purchase municipal
securities from a member of an underwriting syndicate in which an affiliate of
Bank of America Corporation is a member. The Trust has adopted procedures
pursuant to Rule 10f-3 under the 1940 Act, and intends to comply with the
requirements of Rule 10f-3, in connection with any purchases of municipal
securities that may be subject to such Rule.
Under the 1940 Act, persons affiliated with the Trust are prohibited
from dealing with the Trust as a principal in the purchase and sale of
securities unless an exemptive order allowing such transactions is obtained from
the SEC. Each of the Funds may purchase securities from underwriting syndicates
of which Bank of America or any of its affiliates is a member under certain
conditions, in accordance with the provisions of a rule adopted under the 1940
Act and any restrictions imposed by the Board of Governors of the Federal
Reserve System.
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Investment decisions for each Fund are made independently from those
for the Trust's other investment portfolios, other investment companies, and
accounts advised or managed by the Adviser. Such other investment portfolios,
investment companies, and accounts may also invest in the same securities as the
Funds. When a purchase or sale of the same security is made at substantially the
same time on behalf of one or more of the Funds and another investment
portfolio, investment company, or account, the transaction will be averaged as
to price and available investments allocated as to amount, in a manner which the
Adviser believes to be equitable to each Fund and such other investment
portfolio, investment company or account. In some instances, this investment
procedure may adversely affect the price paid or received by a Fund or the size
of the position obtained or sold by the Fund. To the extent permitted by law,
the Adviser may aggregate the securities to be sold or purchased for the Funds
with those to be sold or purchased for other investment portfolios, investment
companies, or accounts in executing transactions.
BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
- ------------------------------------- ------------------------ ------------------------- --------------------------
<S> <C> <C> <C>
FUND* FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
FEBRUARY 28, 1999 FEBRUARY 28, 1998 FEBRUARY 28, 1997
- ------------------------------------- ------------------------ ------------------------- --------------------------
Nations Capital Income Fund $235,157 $296,651 $225,515
- ------------------------------------- ------------------------ ------------------------- --------------------------
Nations Asset Allocation Fund+ $213,085 $125,211 $152,270
- ------------------------------------- ------------------------ ------------------------- --------------------------
Nations Blue Chip Master Portfolio $925,630 $748,649 $637,281
- ------------------------------------- ------------------------ ------------------------- --------------------------
</TABLE>
SECTION 28(E) STANDARDS
Under Section 28(e) of the Securities Exchange Act of 1934, the Adviser
shall not be "deemed to have acted unlawfully or to have breached its fiduciary
duty" solely because under certain circumstances it has caused the account to
pay a higher commission than the lowest available. To obtain the benefit of
Section 28(e), the Adviser must make a good faith determination that the
commissions paid are "reasonable in relation to the value of the brokerage and
research services provided ...viewed in terms of either that particular
transaction or its overall responsibilities with respect to the accounts as to
which it exercises investment discretion and that the services provided by a
broker provide an adviser with lawful and appropriate assistance in the
performance of its investment decision making responsibilities." Accordingly,
the price to a Fund in any transaction may be less favorable than that available
from another broker/dealer if the difference is reasonably justified by other
aspects of the portfolio execution services offered.
Broker/dealers utilized by the Adviser may furnish statistical,
research and other information or services which are deemed by the Adviser to be
beneficial to the Funds' investment programs. Research services received from
brokers supplement the Adviser's own research and may include the following
types of information: statistical and background information on industry groups
and individual companies; forecasts and interpretations with respect to U.S. and
foreign economies, securities, markets, specific industry groups and individual
companies; information on political developments; fund management strategies;
performance information on securities and information concerning prices of
securities; and information supplied by specialized services to the Adviser and
to the Trust's Trustees with respect to the performance, investment activities
and fees and expenses of other mutual funds. Such information may be
communicated electronically, orally or in written form. Research services may
also include the providing of equipment used to communicate research
information, the arranging of meetings with management of companies and the
providing of access to consultants who supply research information.
- ------------------------
* The information in this chart reflects brokerage commissions paid by the
Pacific Horizon Capital Income Fund (the predecessor to Nations Capital Income
Fund), the Pacific Horizon Asset Allocation Fund (the predecessor to Nations
Asset Allocation Fund) and the Pacific Horizon Blue Chip Master Portfolio (the
predecessor to Nations Blue Chip Master Portfolio).
+ Until June 23, 1997, Pacific Horizon Asset Allocation Fund (the predecessor to
Nations Asset Allocation Fund) invested all of its assets in the Asset
Allocation Master Portfolio. Information contained in the chart above includes
brokerage commissions paid by the Asset Allocation Master Portfolio.
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The outside research assistance is useful to the Adviser since the
brokers utilized by the Adviser as a group tend to follow a broader universe of
securities and other matters than the Adviser's staff can follow. In addition,
this research provides the Adviser with a diverse perspective on financial
markets. Research services which are provided to the Adviser by brokers are
available for the benefit of all accounts managed or advised by the Adviser. In
some cases, the research services are available only from the broker providing
such services. In other cases, the research services may be obtainable from
alternative sources in return for cash payments. The Adviser is of the opinion
that because the broker research supplements rather than replaces its research,
the receipt of such research does not tend to decrease its expenses, but tends
to improve the quality of its investment advice. However, to the extent that the
Adviser would have purchased any such research services had such services not
been provided by brokers, the expenses of such services to the Adviser could be
considered to have been reduced accordingly. Certain research services furnished
by broker/dealers may be useful to the Adviser with clients other than the
Funds. Similarly, any research services received by the Adviser through the
placement of fund transactions of other clients may be of value to the Adviser
in fulfilling its obligations to the Funds. The Adviser is of the opinion that
this material is beneficial in supplementing its research and analysis; and,
therefore, it may benefit the Trust by improving the quality of the Adviser's
investment advice. The advisory fees paid by the Trust are not reduced because
the Adviser receives such services.
Some broker/dealers may indicate that the provision of research
services is dependent upon the generation of certain specified levels of
commissions and underwriting concessions by the Adviser's clients, including the
Funds.
DESCRIPTION OF SHARES
---------------------
DESCRIPTION OF THE SHARES OF THE TRUST
Net investment income for the Funds for dividend purposes consists of
(i) interest accrued and original issue discount earned on a Fund's assets, (ii)
plus the amortization of market discount and minus the amortization of market
premium on such assets, (iii) less accrued expenses directly attributable to the
Fund and the general expenses of the Trust prorated to a Fund on the basis of
its relative net assets, plus dividend or distribution income on a Fund's
assets.
Prior to purchasing shares in one of the Funds, the impact of dividends
or distributions which are expected to be or have been declared, but not paid,
should be carefully considered. Any dividend or distribution declared shortly
after a purchase of such shares prior to the record date will have the effect of
reducing the per share net asset value by the per share amount of the dividend
or distribution. All or a portion of such dividend or distribution, although in
effect a return of capital, may be subject to tax.
Shareholders receiving a distribution in the form of additional shares
will be treated as receiving an amount equal to the fair market value of the
shares received, determined as of the reinvestment date.
The Agreement and Declaration of Trust authorizes the issuance of an
unlimited number of shares of the Funds and different classes of each Fund. Each
Money Market Fund currently offers Capital Class Shares, Liquidity Class Shares,
Adviser Class Shares, Market Class Shares, Daily Class Shares, Service Class
Shares, Investor Class Shares and Trust Class Shares. Nations Cash Reserves also
offers Marsico Class Shares to investors and prospective investors of the
portfolios of The Marsico Investment Fund (currently consisting of Marsico Focus
Fund and Marsico Growth & Income Fund). Each Non-Money Market Fund offers
Investor A Shares, Investor B Shares, Investor C Shares and Primary A Shares.
Nations Asset Allocation Fund, Nations Intermediate Bond Fund and Nations Blue
Chip Fund also offer Seafirst Shares. Nations Asset Allocation Fund and Nations
Blue Chip Fund also offer Primary B Shares. Except for differences between
classes of a Fund pertaining to distribution arrangements, each share of a Fund
represents an equal proportionate interest in that Fund with each other share.
Shares are entitled upon liquidation to a pro rata share in the net assets of
the Funds. Shareholders have no preemptive rights. The Agreement and Declaration
of Trust provides that the Trustees of the Trust may create additional Funds or
classes of shares. All consideration received by the Trust for shares of any
additional series and all assets in which such consideration is invested would
belong to that Fund and would be subject to the liabilities related thereto.
Share certificates representing shares will not be issued.
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The Funds use the so-called "equalization accounting method" to
allocate a portion of earnings and profits to redemption proceeds. This method
permits a fund to achieve more balanced distributions for both continuing and
departing shareholders. Continuing shareholders should realize tax savings or
deferrals through this method, and departing shareholders will not have their
tax obligations change. Although using this method will not affect a Fund's
total returns, it may reduce the amount that otherwise would be distributable to
continuing shareholders by reducing the effect of redemptions on dividend and
distribution amounts.
Each Fund or class of a Fund will vote separately on matters pertaining
solely to such Fund or class. Such matters include matters relating to a Fund's
investment advisory agreement or a class' distribution plan. All Funds will vote
as a whole on matters affecting all Funds such as the election of Trustees and
the appointment of the Trust's independent accountant.
PURCHASE AND REDEMPTION OF SHARES
MONEY MARKET FUNDS. Purchases and redemptions of Money Market Funds may
be effected on days on which the Federal Reserve Bank of New York is open for
business (a "Business Day"). Purchases will be effected only when federal funds
are available for investment on the Business Day the purchase order is received
by the Distributor, the Transfer Agent or their respective agents. A purchase
order for a Money Market Fund must be received by the Distributor, the Transfer
Agent or their respective agents, by 3:00 p.m., Eastern time (12:00 noon,
Eastern time, with respect to Nations Municipal Reserves and Nations California
Tax-Exempt Reserves and 5:00 p.m., Eastern time, with respect to certain classes
of Nations Treasury Reserves, Nations Cash Reserves and Nations Money Market
Reserves). A purchase order for a Money Market Fund 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 (the "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 the Distributor, the
Transfer Agent or their respective agents.
Redemption orders for Money Market Funds must be received on a Business
Day before 3:00 p.m., Eastern time (12:00 noon, Eastern time, with respect to
Nations Municipal Reserves and Nations California Tax-Exempt Reserves), and
payment will normally be wired the same day. The Trust reserves the right to
wire redemption proceeds within five Business Days after receiving a redemption
order if, in the judgment of the Bank of America, an earlier payment could
adversely impact a Fund. Redemption orders will not be accepted by the
Distributor, the Transfer Agent or their respective agents after 3:00 p.m.,
Eastern time (12:00 noon, Eastern time, with respect to Nations Municipal
Reserves and Nations California Tax-Exempt 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 the Distributor, the
Transfer Agent or their respective agents.
NON-MONEY MARKET FUNDS. Purchases and redemptions of Non-Money Market
Funds may be effected on any Business Day. Purchase orders for a Non-Money
Market Fund which are received by the Distributor, the Transfer Agent or their
respective agents before the close of regular trading on the Exchange (currently
4:00 p.m., Eastern time) on any Business Day are priced according to the net
asset value determined on that day. In the event that the Exchange closes early,
purchase orders received prior to the closing will be priced as of the time the
Exchange closes and purchase orders received after the Exchange closes will be
deemed received on the next Business Day and priced according to the net asset
value determined on the next Business Day. Purchase orders are not executed
until 4:00 p.m., Eastern time, on the Business Day on which immediately
available funds in payment of the purchase price are received by the Fund's
Custodian. Such payment must be received no later than 4:00 p.m., Eastern time,
by the third Business Day following the receipt of the order, as determined
above.
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Redemption orders for Non-Money Market Funds which are received by
Stephens, the Transfer Agent or their respective agents before the close of
regular trading on the Exchange on any Business Day are priced according to the
net asset value next determined after acceptance of the order, less any
applicable Contingent Deferred Sales Charge ("CDSC"). In the event that the
Exchange closes early, redemption orders received prior to closing will be
priced as of the time the Exchange closes and redemption orders received after
the Exchange closes will be deemed received on the next Business Day and priced
according to the net asset value determined on the next Business Day.
Redemption proceeds are normally sent by mail or wired within three
Business Days after receipt of the order by the Fund. Redemption proceeds are
normally remitted in federal funds wired to the redeeming Agent or investor
within three Business Days after receipt of the order by Stephens, the Transfer
Agent or their respective agents. Redemption orders are effected at the net
asset value per share next determined after receipt of the order by the Fund,
Stephens, the Transfer Agent or their respective agents, as the case may be,
less any applicable CDSC. The Agents are responsible for transmitting redemption
orders to Stephens, the Transfer Agent or their respective agents and for
crediting their Customer's account with the redemption proceeds on a timely
basis. Redemption proceeds for shares purchased by check may not be remitted
until at least 15 days after the date of purchase to ensure that the check has
cleared; a certified check, however, is deemed to be cleared immediately. No
charge for wiring redemption payments is imposed by Nations Funds. Except for
any CDSC which may be applicable, there is no redemption charge.
The right of redemption for the Non-Money Market Funds may be suspended
or the date of payment postponed when (a) trading on the New York Stock Exchange
is restricted, as determined by applicable rules and regulations of the SEC, (b)
the New York Stock Exchange is closed for other than customary weekend and
holiday closings, (c) the SEC has by order permitted such suspension, or (d) an
emergency as determined by the SEC exists making disposal of portfolio
securities or the valuation of the net assets of a Fund of a Company not
reasonably practicable. The Exchange is closed for business on New Years Day,
Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Veterans Day, Thanksgiving Day and Christmas Day.
The Federal Reserve Bank observes the following holidays: New Years Day, Martin
Luther King Jr's Birthday, Presidents Day, Memorial Day, Independence Day, Labor
Day, Columbus Day, Veteran's Day, Thanksgiving Day and Christmas Day.
ALL FUNDS. The Trust is required to redeem for cash all full and
fractional shares of the Trust. The redemption price is the net asset value per
share of each Fund next determined after receipt by the Distributor of the
redemption order.
The Trust reserves the right to reject a purchase order when the
Distributor determines that it is not in the best interest of the Trust and/or
shareholder(s) to accept such purchase order. The Trust reserves the right to
suspend the right of redemption and/or to postpone the date of payment upon
redemption for any period during which trading on the Exchange is restricted, or
during the existence of an emergency (as determined by the SEC by rule or
regulation) as a result of which disposal or valuation of the portfolio
securities is not reasonably practicable, or for such other periods as the SEC
has by order permitted. The Trust also reserves the right to suspend sales of
shares of a Fund for any period during which the Exchange, Bank of America, the
Distributor, the Administrator, the Co-Administrator, and/or the Custodian are
not open for business.
EXCHANGES
By use of the exchange privilege, the shareholder authorizes the
transfer agent or the shareholder's financial institution to rely on telephonic
instructions from any person representing himself to be the investor and
reasonably believed to be genuine. The transfer agent's or a financial
institution's records of such instructions are binding. Exchanges are taxable
transactions for Federal income tax purposes; therefore, a shareholder will
realize a capital gain or loss depending on whether the shares being exchanged
have a value which is more or less than their adjusted cost basis.
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The Trust may limit the number of times the exchange privilege may be
exercised by a shareholder within a specified period of time. Also, the exchange
privilege may be terminated or revised at any time by the Trust upon such notice
as may be required by applicable regulatory agencies (presently sixty days for
termination or material revision), provided that the exchange privilege may be
terminated or materially revised without notice under certain unusual
circumstances.
The Prospectuses for each class of each Fund describe the exchange
privileges available to holders of such class of shares.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Money Market Funds will be
determined as of 3:00 p.m., Eastern time (1:00 p.m., Eastern time, with respect
to Nations Municipal Reserves and Nations California Tax-Exempt Reserves and
5:00 p.m., Eastern time, with respect to Nations Treasury Reserves, Nations Cash
Reserves and Nations Money Market Reserves), on each day the Exchange is open
for business.
Net asset value per share of each Money Market Fund is calculated by
adding the value of its securities and other assets, subtracting its liabilities
and dividing by the number of outstanding shares. Securities will be valued by
the amortized cost method pursuant to Rule 2a-7 under the 1940 Act, which
involves valuing a security at its cost on the date of purchase and thereafter
(absent unusual circumstances) assuming a constant amortization to maturity of
any discount or premium, regardless of the impact of fluctuations in general
market rates of interest on the value of the instrument. While this method
provides certainty in valuation, it may result in periods during which value, as
determined by this method, is higher or lower than the price each Money Market
Fund would receive if it sold the instrument. During periods of declining
interest rates, the daily yield of each Money Market Fund may tend to be higher
than a like computation made by a company with identical investments utilizing a
method of valuation based upon market prices and estimates of market prices for
all of its portfolio securities. Thus, if the use of amortized cost by each
Money Market Fund resulted in a lower aggregate portfolio value on a particular
day, a prospective investor in each Money Market Fund would be able to obtain a
somewhat higher yield than would result from investment in a company utilizing
solely market values, and existing investors in each Money Market Fund would
experience a lower yield. The converse would apply in a period of rising
interest rates.
The Money Market Funds use of amortized cost and the maintenance of the
Money Market Funds net asset value at $1.00 are permitted by regulations
promulgated by the SEC under the 1940 Act, provided that certain conditions are
met. The Trust will maintain a dollar-weighted average maturity in the Money
Market Funds of 90 days or less, will not purchase any instrument having a
remaining maturity of more than 397 days, and will limit its investments to
those U.S. dollar-denominated instruments which are permitted investments under
SEC regulations. The regulations also require the Trustees to establish
procedures which are reasonably designed to stabilize the net asset value per
share at $1.00 for the Money Market Funds. Such procedures include the
determination of the extent of deviation, if any, of the Money Market Funds
current net asset value per share calculated using available market quotations
from the Money Market Funds amortized cost price per share at such intervals as
the Trustees deem appropriate and reasonable in light of market conditions and
periodic reviews of the amount of the deviation and the methods used to
calculate such deviation. In the event that such deviation exceeds 1/2 of 1%,
the Trustees are required to consider promptly what action, if any, should be
initiated, and, if the Trustees believe that the extent of any deviation may
result in material dilution or other unfair results to Shareholders, the
Trustees are required to take such corrective action as they deem appropriate to
eliminate or reduce such dilution or unfair results to the extent reasonably
practicable. Such actions may include the sale of portfolio instruments prior to
maturity to realize capital gain or loss or to shorten average portfolio
maturity; withholding dividends; redeeming shares in kind; or establishing a net
asset value per share by using available market quotations. In addition, if the
Money Market Funds incur a significant loss or liability, the Trustees have the
authority to reduce pro rata the number of shares of the Money Market Funds in
each Shareholder's account and to offset each Shareholder's pro rata portion of
such loss or liability from the Shareholder's accrued but unpaid dividends or
from future dividends while each other Money Market Fund must annually
distribute at least 90% of its investment company taxable income.
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NON-MONEY MARKET FUNDS
With respect to the Non-Money Market Funds, a security listed or traded
on an exchange is valued at its last sales price on the exchange where the
security is principally traded or, lacking any sales on a particular day, the
security is valued at the mean between the closing bid and asked prices on that
day. Each security traded in the over-the-counter market (but not including
securities reported on the NASDAQ National Market System) is valued at the mean
between the last bid and asked prices based upon quotes furnished by market
makers for such securities. Each security reported on the NASDAQ National Market
System is valued at the last sales price on the valuation date. With respect to
Nations Intermediate Bond Master Portfolio and Nations California Municipal Bond
Fund, securities may be valued on the basis of prices provided by an independent
pricing service. Prices provided by the pricing service may be determined
without exclusive reliance on quoted prices, and may reflect appropriate factors
such as yield, type of issue, coupon rate maturity and seasoning differential.
Securities for which prices are not provided by the pricing service are valued
at the mean between the last bid and asked prices based upon quotes furnished by
market makers for such securities.
With respect to the Non-Money Market Funds, securities for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the supervision of the Trust's officers in a manner
specifically authorized by the Board of Trustees of the Trust. Short-Term
obligations having 60 days or less to maturity are valued at amortized cost,
which approximates market value.
Generally, trading in foreign securities, as well as U.S. Government
securities, money market instruments and repurchase agreements, is substantially
completed each day at various times prior to the close of the New York Stock
Exchange. The values of such securities used in computing the net asset value of
the shares of the Fund are determined as of such times. Foreign currency
exchange rates are also generally determined prior to the close of the New York
Stock Exchange. Occasionally, events affecting the value of such securities and
such exchange rates may occur between the times at which they are determined and
the close of the New York Stock Exchange, which will not be reflected in the
computation of net asset value. If during such periods events occur which
materially affect the value of such securities, the securities will be valued at
their fair market value as determined in good faith by the Trustees.
For purposes of determining the net asset value per share of the Funds
that invest in foreign securities or engage in Foreign Currency Transactions,
all assets and liabilities of the Funds initially expressed in foreign
currencies will be converted into U.S. dollars at the mean between the bid and
offer prices of such currencies against U.S. dollars quoted by a major bank that
is a regular participant in the foreign exchange market or on the basis of a
pricing service that takes into account the quotes provided by a number of such
major banks.
The Trust may redeem shares involuntarily to reimburse the Funds for
any loss sustained by reason of the failure of a shareholder to make full
payment for shares purchased by the shareholder or to collect any charge
relating to a transaction effected for the benefit of a shareholder which is
applicable to such shares as provided in the related Prospectuses from time to
time. The Trust also may make payment for redemptions in readily marketable
securities or other property if it is appropriate to do so in light of the
Trust's responsibilities under the 1940 Act.
Under the 1940 Act, the Funds may suspend the right of redemption or
postpone the date of payment for shares of the Funds during any period when (a)
trading on the Exchange is restricted by applicable rules and regulations of the
SEC; (b) the Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC. (The Funds may also suspend or
postpone the recordation of the transfer of their shares upon the occurrence of
any of the foregoing conditions.)
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
The following information supplements and should be read in conjunction
with Prospectuses. The Prospectuses of the Funds describes generally the tax
treatment of distributions by the Funds. This section of the SAI includes
additional information concerning income taxes.
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GENERAL
The Trust intends to continue to qualify each Fund as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code") as long as such qualification is in the best interest of
the Fund's shareholders. Each Fund will be treated as a separate entity for
Federal income tax purposes and, thus the provisions of the Code applicable to
regulated investment companies will generally be applied separately to each
Fund, rather than to the Trust as a whole. In addition, net capital gain, net
investment income, and operating expenses will be determined separately for each
Fund. As a regulated investment company, each Fund will not be taxed on its net
investment income and capital gain distributed to its shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) each Fund derive at least 90% of its
annual gross income from dividends, interest, certain payments with respect to
securities loans, gain from the sale or other disposition of stock or securities
or foreign currencies (to the extent such currency gains are directly related to
the regulated investment company's principal business of investing in stock or
securities) and other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies; and (b) the Fund diversify its holdings
so that, at the end of each quarter of the taxable year, (i) at least 50% of the
market value of the Fund's assets is represented by cash, government securities
and other securities limited in respect of any one issuer to an amount not
greater than 5% of the Fund's assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than U.S. Government
obligations and the securities of other regulated investment companies), or in
two or more issuers which the Fund controls and which are determined to be
engaged in the same or similar trades or businesses.
In addition, for tax years beginning on or before August 7, 1997, a
regulated investment company must, in general, have derived less than 30% of its
gross income from the sale or other disposition of securities or options thereon
held for less than three months.
The Funds must also distribute or be deemed to distribute to their
shareholders at least 90% of their net investment income (including, for this
purpose, net short-term capital gain) earned in each taxable year. In general,
these distributions must actually or be deemed to be made in the taxable year.
However, in certain circumstances, such distributions may be made in the 12
months following the taxable year. The Funds intend to pay out substantially all
of their net investment income and net capital gain (if any) for each year.
EXCISE TAX
A 4% nondeductible excise tax will be imposed on each Fund (other than
to the extent of its tax-exempt interest income) to the extent it does not meet
certain minimum distribution requirements by the end of each calendar year. Each
Fund intends to actually or be deemed to distribute substantially all of its net
investment income and net capital gain by the end of each calendar year and,
thus, expects not to be subject to the excise tax.
TAXATION OF FUND INVESTMENTS
Except as provided herein, gain and loss on the sale of portfolio
securities by a Fund will generally be capital gain and loss. Such gain and loss
will ordinarily be long-term capital gain and loss if the securities have been
held by the Fund for more than 12 months at the time of disposition of the
securities (however, see "Capital Gain Distributions" below).
Gain recognized on the disposition of a debt obligation purchased by
the Fund at a market discount (generally at a price less than its principal
amount) will be treated as ordinary income to the extent of the portion of
market discount which accrued, but was not previously recognized pursuant to an
available election, during the term the Fund held the debt obligation.
If an option granted by a Fund lapses or is terminated through a
closing transaction, such as a repurchase by the Fund of the option from its
holder, the Fund will realize a short-term capital gain or loss, depending on
whether the premium income is greater or less than the amount paid by the Fund
in the closing transaction. Some realized capital loss may be deferred if they
result from a position which is part of a "straddle," discussed below. If
securities are sold by a Fund pursuant to the exercise of a call option written
by it, the Fund will add the premium received to the sale price of the
securities delivered in determining the amount of gain or loss on the sale. If
securities are purchased by a Fund pursuant to the exercise of a put option
written by it, the Fund will subtract the premium received from its cost basis
in the securities purchased.
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The amount of any gain or loss realized by a Fund on closing out a
"Section 1256 contract" generally will result in a realized capital gain or loss
for Federal income tax purposes. "Section 1256 contracts" include regulated
futures contracts, certain foreign currency contracts and nonequity options.
Section 1256 contracts held at the end of each fiscal year will be required to
be "marked to market" for Federal income tax purposes pursuant to Section 1256
of the Code. In this regard, they will be deemed to have been sold at market
value. Sixty percent (60%) of any net gain or loss recognized on these deemed
sales and sixty percent (60%) of any net realized gain or loss from any actual
sales, will generally be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss. Transactions that
qualify as designated hedges are excepted from the "mark-to-market" rule and the
"60%/40%" rule.
Under Section 988 of the Code, a Fund will generally recognize ordinary
income or loss to the extent gain or loss realized on the disposition of
portfolio securities is attributable to changes in foreign currency exchange
rates. In addition, gain or loss realized on the disposition of a foreign
currency forward contract, futures contract, option or similar financial
instrument, or of foreign currency itself, will generally be treated as ordinary
income or loss. The Funds will attempt to monitor Section 988 transactions,
where applicable, to avoid adverse tax impact.
Offsetting positions held by a Fund involving certain financial
forward, futures or options contracts may be considered, for tax purposes, to
constitute "straddles." "Straddles" are defined to include "offsetting
positions" in actively traded personal property. The tax treatment of
"straddles" is governed by Section 1092 of the Code which, in certain
circumstances, overrides or modifies the provisions of Section 1256 of the Code.
If a Fund were treated as entering into "straddles" by engaging in certain
financial forward, futures or option contracts, such straddles could be
characterized as "mixed straddles" if the futures, forwards, or options
comprising a part of such straddles were governed by Section 1256 of the Code.
The Fund may make one or more elections with respect to "mixed straddles."
Depending upon which election is made, if any, the results with respect to the
Fund may differ. Generally, to the extent the straddle rules apply to positions
established by the Fund, loss realized by the Fund may be deferred to the extent
of unrealized gain in any offsetting positions. Moreover, as a result of the
straddle and the conversion transaction rules, short-term capital loss on
straddle positions may be recharacterized as long-term capital loss, and
long-term capital gain may be characterized as short-term capital gain or
ordinary income.
If a Fund enters into a "constructive sale" of any appreciated position
in stock, a partnership interest, or certain debt instruments, the Fund must
recognize gain (but not loss) with respect to that position. For this purpose, a
constructive sale occurs when the Fund enters into one of the following
transactions with respect to the same or substantially identical property: (i) a
short sale; (ii) an offsetting notional principal contract; or (iii) a futures
or forward contract.
If a Fund purchases shares in a "passive foreign investment company"
("PFIC"), the Fund may be subject to Federal income tax and an interest charge
imposed by the IRS upon certain distributions from the PFIC or the Fund's
disposition of its PFIC shares. If the Fund invests in a PFIC, the Fund intends
to make an available election to mark-to-market its interest in PFIC shares.
Under the election, the Fund will be treated as recognizing at the end of each
taxable year the difference, if any, between the fair market value of its
interest in the PFIC shares and its basis in such shares. In some circumstances,
the recognition of loss may be suspended. The Fund will adjust its basis in the
PFIC shares by the amount of income (or loss) recognized. Although such income
(or loss) will be taxable to the Fund as ordinary income (or loss)
notwithstanding any distributions by the PFIC, the Fund will not be subject to
Federal income tax or the interest charge with respect to its interest in the
PFIC under the election.
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FOREIGN TAXES
Income and dividends received by a Fund from sources within foreign
countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. In certain circumstances, a regulated investment
company is eligible to file an election with the IRS pursuant to which the
regulated investment company may pass-through to its shareholders foreign taxes
paid by the regulated investment company, which may be claimed either as a
credit or deduction by the shareholders. None of the Funds expects to qualify
for the election.
CAPITAL GAIN DISTRIBUTIONS
Distributions which are designated by a Fund as capital gain
distributions will be taxed to shareholders as long-term term capital gain (to
the extent such dividends do not exceed the Fund's actual net capital gain for
the taxable year), regardless of how long a shareholder has held Fund shares.
Such distributions will be designated as capital gain distributions in a written
notice mailed by the Fund to the shareholders not later than 60 days after the
close of the Fund's taxable year.
DISPOSITION OF FUND SHARES
A disposition of Fund shares pursuant to redemption (including a
redemption in-kind) or exchanges will ordinarily result in a taxable capital
gain or loss, depending on the amount received for the Shares (or are deemed to
receive in the case of an exchange) and the cost of your Shares.
If a shareholder exchanges or otherwise disposes of Fund shares within
90 days of having acquired such shares and if, as a result of having acquired
those shares, the shareholder subsequently pays a reduced sales charge or load
on a new purchase of shares of the Fund or a different regulated investment
company, the sales charge or load previously incurred acquiring the Fund's
shares shall not be taken into account (to the extent such previous sales charge
or load does not exceed the reduction in sales charge or load on the new
purchase) for the purpose of determining the amount of gain or loss on the
disposition, but will be treated as having been incurred in the acquisition of
such other shares. Also, any loss realized on a redemption or exchange of shares
of the Fund will be disallowed to the extent that substantially identical shares
are acquired within the 61-day period beginning 30 days before and ending 30
days after the shares are disposed of.
If a shareholder holds Fund shares for six months or less, any loss on
the sale or exchange of those shares will be disallowed to the extent of the
amount of exempt-interest dividends (described below) received with respect to
the shares. The Treasury Department is authorized to issue regulations reducing
the six months holding requirement to a period of not less than the greater of
31 days or the period between regular dividend distributions where a Fund
regularly distributes at least 90% of its net tax-exempt interest, if any. No
such regulations have been issued as of the date of this SAI. In addition, if a
shareholder receives a capital gain distribution with respect to any Fund share
and such Fund share is held for six months or less, then (unless otherwise
disallowed) any loss on the sale or exchange of that Fund share will be treated
as a long-term capital loss to the extent of the capital gain distribution. The
foregoing recharacterization and disallowance rules do not apply to loss
realized under a periodic redemption plan.
FEDERAL INCOME TAX RATES
As of the printing of this SAI, the maximum individual tax rate
applicable to ordinary income is 39.6% (marginal tax rates may be higher for
some individuals to reduce or eliminate the benefit of exemptions and
deductions); the maximum individual marginal tax rate generally applicable to
net capital gain is 20%; and the maximum corporate tax rate applicable to
ordinary income and net capital gain is 35% (marginal tax rates may be higher
for some corporations to reduce or eliminate the benefit of lower marginal
income tax rates). Naturally, the amount of tax payable by an individual or
corporation will be affected by a combination of tax laws covering, for example,
deductions, credits, deferrals, exemptions, sources of income and other matters.
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CORPORATE SHAREHOLDERS
Corporate shareholders of the Funds may be eligible for the
dividends-received deduction on distributions attributable to a Fund's dividends
received from domestic corporations, which, if received directly by the
corporate shareholder, would qualify for such deduction. A distribution by a
Fund attributable to dividends of a domestic corporation will only qualify for
the dividends-received deduction if (i) the corporate shareholder generally
holds the Fund shares upon which the distribution is made for at least 46 days
during the 90 day period beginning 45 days prior to the date upon which the
shareholder becomes entitled to the distribution; and (ii) the Fund generally
holds the shares of the domestic corporation producing the dividend income for
at least 46 days during the 90 day period beginning 45 days prior to the date
upon which the Fund becomes entitled to such dividend income.
FOREIGN SHAREHOLDERS
Under the Code, distributions of net investment income by the Fund to a
nonresident alien individual, foreign trust (I.E., trust which a U.S. court is
able to exercise primary supervision over administration of that trust and one
or more U.S. persons have authority to control substantial decisions of that
trust), foreign estate (I.E., the income of which is not subject to U.S. tax
regardless of source), foreign corporation, or foreign partnership (each, a
"foreign shareholder") will be subject to Federal withholding tax (at a rate of
30% or, if an income tax treaty applies, at the lower treaty rate, if any). Such
tax withheld generally is not refundable. Withholding will not apply if a
distribution paid by the Fund to a foreign shareholder is "effectively
connected" with a U.S. trade or business (or, if an income tax treaty applies,
is attributable to a U.S. permanent establishment of the foreign shareholder),
in which case the reporting and withholding requirements applicable to U.S.
persons will apply. Distributions of net capital gain are generally not subject
to tax withholding.
NEW REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the backup withholding,
U.S. income tax withholding and information reporting rules applicable to
foreign shareholders. The New Regulations will generally be effective for
payments made after December 31, 2000, subject to certain transition rules.
Among other things, the New Regulations will permit the Funds to estimate the
portion of their distributions qualifying as capital gain distributions for
purposes of determining the portion of such distributions paid to foreign
shareholders which will be subject to U.S. income tax withholding. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
BACKUP WITHHOLDING
The Trust may be required to withhold, subject to certain exemptions,
at a rate of 31% ("backup withholding") on dividends, capital gain
distributions, and redemption proceeds (including proceeds from exchanges and
redemptions in-kind) paid or credited to an individual Fund shareholder, unless
a shareholder certifies that the Taxpayer Identification Number ("TIN") provided
is correct and that the shareholder is not subject to backup withholding, or the
IRS notifies the Trust that the shareholder's TIN is incorrect or the
shareholder is subject to backup withholding. Such tax withheld does not
constitute any additional tax imposed on the shareholder, and may be claimed as
a tax payment on the shareholder's Federal income tax return. An investor must
provide a valid TIN upon opening or reopening an account. Failure to furnish a
valid TIN to the Trust could subject the investor to penalties imposed by the
IRS.
ADDITIONAL CONSIDERATIONS FOR NATIONS MUNICIPAL RESERVES, NATIONS CALIFORNIA
TAX-EXEMPT RESERVES AND NATIONS CALIFORNIA MUNICIPAL BOND FUND
If at least 50% of the value of a regulated investment company's total
assets at the close of each quarter of its taxable years consists of obligations
the interest on which is exempt from Federal income tax, it will qualify under
the Code to pay "exempt-interest dividends." Nations Municipal Reserves, Nations
California Tax-Exempt Reserves and Nations California Municipal Bond Fund (the
"Tax-Exempt Funds") intend to so qualify and are designed to provide investors
with a high level of income exempt from Federal income tax.
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The portion of total dividends paid by a Tax-Exempt Fund with respect
to any taxable year that constitutes exempt-interest dividends will be the same
for all shareholders receiving dividends during such year. Distributions of
capital gain or from net investment income not attributable to interest on the
Fund's tax-exempt obligations will not constitute exempt-interest dividends and
will be taxable to its shareholders. The exemption of interest income derived
from investments in tax-exempt obligations for Federal income tax purposes may
not result in a similar exemption under the laws of a particular state or local
taxing authority.
Not later than 60 days after the close of its taxable year, each
Tax-Exempt Fund will notify its shareholders of the portion of the dividends
paid with respect to such taxable year which constitutes exempt-interest
dividends. The aggregate amount of dividends so designated cannot exceed the
excess of the amount of interest excludable from gross income under Section 103
of the Code received by the Tax-Exempt Fund during the taxable year over any
amounts disallowed as deductions under Sections 265 and 171(a)(2) of the Code.
Interest on indebtedness incurred to purchase or carry shares of a Tax-Exempt
Fund will not be deductible to the extent that the Fund's distributions are
exempt from federal income tax.
In addition, the Federal alternative minimum tax ("AMT") rules ensure
that at least a minimum amount of tax is paid by taxpayers who obtain
significant benefit from certain tax deductions and exemptions. Some of these
deductions and exemptions have been designated "tax preference items" which must
be added back to taxable income for purposes of calculating AMT. Among the tax
preference items is tax-exempt interest from "private activity bonds." To the
extent that a Tax-Exempt Fund invests in private activity bonds, its
shareholders who pay AMT will be required to report that portion of Fund
dividends attributable to income from the bonds as a tax preference item in
determining their AMT. Shareholders will be notified of the tax status of
distributions made by a Tax-Exempt Fund. Persons who may be "substantial users"
(or "related persons" of substantial users) of facilities financed by private
activity bonds should consult their tax advisors before purchasing shares in a
Tax-Exempt Fund. Furthermore, shareholders will not be permitted to deduct any
of their share of Nations Municipal Reserves' expenses in computing their AMT.
With respect to a corporate shareholder of a Tax-Exempt Fund, exempt-interest
dividends paid by the Fund is included in the corporate shareholder's "adjusted
current earnings" as part of its AMT calculation, and may also affect its
Federal "environmental tax" liability. As of the printing of this SAI,
individuals are subject to an AMT at a maximum rate of 28% and corporations at a
maximum rate of 20%. Shareholders with questions or concerns about the AMT
should consult their tax advisors.
ADDITIONAL CONSIDERATIONS FOR NATIONS CALIFORNIA TAX-EXEMPT RESERVES AND NATIONS
CALIFORNIA MUNICIPAL BOND FUND
If, at the close of each quarter of its taxable year, at least 50% of
the value of the total assets of a regulated investment company consists of
obligations the interest on which, if held by an individual, is exempt from
taxation by California ("California Exempt Securities"), then the regulated
investment company will be qualified to pay dividends exempt from California
state personal income tax to its non-corporate shareholders (hereinafter
referred to as "California exempt-interest dividends"). For this purpose,
California Exempt Securities are generally limited to California municipal
securities and certain U.S. Government and U.S. Possession obligations. The
California Funds intends to qualify under the above requirements so that they
can pay California exempt-interest dividends. If the California Funds do not so
qualify, no part of their respective dividends to shareholders will be exempt
from the California state personal income tax.
Within sixty days after the close of its taxable year, the California
Funds will notify their respective shareholders of the portion of the dividends
paid by the respective Fund to each shareholder with respect to such taxable
year which is exempt from California state personal income tax. The total amount
of California exempt-interest dividends paid by the California Funds with
respect to any taxable year cannot exceed the excess of the amount of interest
received by the California Funds for such year on California Exempt Securities
over any amounts that, if the California Funds were treated as individuals,
would be considered expenses related to tax exempt income or amortizable bond
premium and would thus not be deductible under federal income or California
state personal income tax law. The percentage of total dividends paid for any
taxable year which qualifies as California exempt-interest dividends will be the
same for all shareholders receiving dividends from the Fund for such year.
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In cases where shareholders are "substantial users" or "related
persons" with respect to California Exempt Securities held by the California
Funds, such shareholders should consult their tax advisors to determine whether
California exempt-interest dividends paid by the Fund with respect to such
obligations retain California state personal income tax exclusion. In this
connection rules similar to those regarding the possible unavailability of
federal exempt-interest dividend treatment to "substantial users" are applicable
for California state tax purposes. Interest on indebtedness incurred by a
shareholder to purchase or carry the California Funds shares is not deductible
for California state personal income tax purposes if the California Funds
distribute California exempt-interest dividends during the shareholder's taxable
year.
The foregoing is only a summary of some of the important California
state personal income tax considerations generally affecting the California
Funds and their shareholders. No attempt is made to present a detailed
explanation of the California state personal income tax treatment of the
California Funds or their shareholders, and this discussion is not intended as a
substitute for careful planning. Further, it should be noted that the portion of
any California Funds dividends constituting California exempt-interest dividends
is excludable from income for California state personal income tax purposes
only. Any dividends paid to shareholders subject to California state franchise
tax or California state corporate income tax may therefore be taxable for such
purposes, notwithstanding that all or a portion of such dividends is exempt from
California state personal income tax. Accordingly, potential investors in the
California Funds, including, in particular, corporate investors which may be
subject to either California franchise tax or California corporate income tax,
should consult their own tax advisors with respect to the application of such
taxes to the receipt of the California Funds dividends and as to their own
California state tax situation, in general.
OTHER MATTERS
Investors should be aware that the investments to be made by the Funds
may involve sophisticated tax rules that may result in income or gain
recognition by the Fund without corresponding current cash receipts. Although
the Funds will seek to avoid significant noncash income, such noncash income
could be recognized by the Funds, in which case the Funds may distribute cash
derived from other sources in order to meet the minimum distribution
requirements described above.
The foregoing discussion and the discussions in the Prospectus
applicable to each shareholder address only some of the federal tax
considerations generally affecting investments in the Funds. Each investor is
urged to consult his or her tax advisor regarding specific questions as to
federal, state, local and foreign taxes.
PERFORMANCE INFORMATION
GENERAL
Yield information and other performance information for the Funds may
be obtained by calling the Trust at (800) 321-7854.
From time to time, a Fund's yield and total return may be quoted in
advertisements, shareholder reports, and other communications to shareholders.
Each Fund of the Trust also may quote information obtained from the Investment
Company Institute in its advertising materials and sales literature. In
addition, certain potential benefits of investing in world securities markets
may be discussed in promotional materials. Such benefits include, but are not
limited to: a) the expanded opportunities for investment in securities markets
outside the U.S.; b) the growth of securities markets outside the U.S. vis-a-vis
U.S. markets; c) the relative return associated with foreign securities markets
vis-a-vis U.S. markets; and d) a reduced risk of portfolio volatility resulting
from a diversified securities portfolio consisting of both U.S. and foreign
securities. Performance information is available by calling 1-800-321-7854.
MONEY MARKET FUNDS
From time to time the Money Market Funds may advertise the "current
yield" and "effective compound yield" of a class of shares of the respective
Money Market Fund. Nations Municipal Reserves and Nations California Tax-Exempt
Reserves may also advertise the "tax-equivalent yield" of a class of their
shares. Both yield figures are based on historical earnings and are not intended
to indicate future performance. The "yield" of the Money Market Funds refers to
the income generated by an investment in a Money Market Fund over a seven-day
period (which period will be stated in the advertisement). 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 a Money
Market 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.
112
<PAGE>
YIELD CALCULATIONS
The current yield of each class of the Money Market Funds will be
calculated daily based upon the seven days ending on the date of calculation
("base period"). The yield is computed by determining the net change (exclusive
of capital changes) in the value of a hypothetical pre-existing shareholder
account having a balance of one share at the beginning of the period,
subtracting a hypothetical charge reflecting deductions from shareholder
accounts, and dividing such net change by the value of the account at the
beginning of the same period to obtain the base period return and multiplying
the result by (365/7). Realized and unrealized gain and loss are not included in
the calculation of the yield. The effective compound yield of the Money Market
Funds is determined by computing the net change, exclusive of capital changes,
in the value of a hypothetical pre-existing account having a balance of one
share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then compounding the base period return by adding 1, raising
the sum to a power equal to 365 divided by 7, and subtracting 1 from the result,
according to the following formula:
Effective Yield = [(Base Period Return + 1) 365/7)]- 1.
The current and the effective yields reflect the reinvestment of net
income earned daily on portfolio assets.
The yield of these Money Market Funds fluctuates, and the annualization
of a week's dividend is not a representation by the Trust as to what an
investment in the Money Market Fund will actually yield in the future. Actual
yields will depend on such variables as asset quality, average asset maturity,
the type of instruments the Money Market Fund invests in, changes in interest
rates on money market instruments, changes in the expenses of the Money Market
Fund and other factors.
The "tax equivalent yield" of Nations Municipal Reserves and Nations
California Tax-Exempt Reserves 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 Money Market Fund's yield, assuming certain tax
brackets for a Shareholder. See "Additional Information Concerning Taxes -
Federal Income Tax Rates" below. This tax-exempt yield is then translated into
tax-equivalent yield according to the following formula:
TAX-EQUIVALENT YIELD = ( E ) + t
------------
1 - p
E = tax-exempt yield
p = stated income tax rate
t = taxable yield
Yields are one basis upon which investors may compare the Money Market
Funds with other money market funds; however, yield of other money market funds
and other investment vehicles may not be comparable because of the factors set
forth above and differences in the methods used in valuing portfolio
instruments.
Nations Cash Reserves and Nations Money Market Reserves may quote
actual return performance in advertising and other types of literature compared
to indices or averages of alternative financial products available to
prospective investors. The performance comparisons may include the average
return of various bank instruments, some of which may carry certain return
guarantees offered by leading banks and thrifts, as monitored by the Bank Rate
Monitor, and those of corporate and government security prices indices of
various durations prepared by Shearson Lehman Brothers and Salomon Brothers,
Inc. These indices are not managed for any investment goal.
113
<PAGE>
Each Money Market Fund may quote information obtained from the
Investment Company Institute, national financial publications, trade journals
and other industry sources in its advertising and sales literature. In addition,
the Money Market Funds also may use comparative performance information computed
by and available from certain industry and general market research and
publications, such as Lipper Analytical Services, Inc.
Statistical and performance information compiled and maintained by CDA
Technologies, Inc. and Interactive Data Corporation may also be used. CDA is a
performance evaluation service that maintains a statistical data base of
performance, as reported by a diverse universe of independently-managed mutual
funds. Interactive Data Corporation is a statistical access service that
maintains a data base of various industry indicators, such as historical and
current price/earning information and individual stock and fixed income price
and return information.
Current interest rate and yield information on governmental debt
obligations of various durations, as reported weekly by the Federal Reserve
(Bulletin H.15), may also be used. Also current rate information on municipal
debt obligations or various durations, as reported daily by the Bond Buyer, may
also be used. The Bond Buyer is published daily and is an industry accepted
source for current municipal bond market information.
Comparative information on the Consumer Price Index may also be
included. This index, as prepared by the U.S. Bureau of Labor Statistics, is the
most commonly used measure of inflation. It indicates the cost fluctuations of a
representative group of consumer goods. It does not represent a return on
investment.
Tax equivalent yield assumes a Federal Tax Rate of 39.6%.
The yield of the Liquidity Class, Adviser Class, Market Class Shares,
Investor Class Shares, Service Class Shares, Daily Class Shares and Trust Class
Shares of the Money Market Funds will normally be lower than the yield of the
Capital Class Shares because Liquidity Class, Adviser Class, Market Class
Shares, Investor Class Shares, Service Class Shares, Daily Class Shares and
Trust Class Shares are subject to distribution and/or shareholder servicing
expenses not charged to Capital Class Shares.
For the 7-day period ended March 31, 1999, the yield of each Fund was as
follows:
<TABLE>
<CAPTION>
EFFECTIVE TAX TAX EQUIV.
YIELD W/O EFFECTIVE YIELD W/O EQUIV. YIELD W/O
YIELD WAIVERS YIELD WAIVERS YIELD WAIVERS
----- ------- ----- ------- ----- -------
NATIONS CASH RESERVES
<S> <C> <C> <C> <C> <C> <C>
Capital Class 4.90% 4.67% 5.02% 4.79% N/A N/A
Liquidity Class 4.75% 3.82% 4.87% 3.94% N/A N/A
Adviser Class 4.65% 4.42% 4.76% 4.53% N/A N/A
Market Class 4.45% 4.18% 4.55% 4.28% N/A N/A
Investor Class N/A N/A N/A N/A N/A N/A
Service Class N/A N/A N/A N/A N/A N/A
Daily Class N/A N/A N/A N/A N/A N/A
Trust Class N/A N/A N/A N/A N/A N/A
114
<PAGE>
NATIONS MONEY MARKET RESERVES
Capital Class 4.85% 4.59% 4.96% 4.70% N/A N/A
Liquidity Class 4.70% 3.74% 4.81% 3.85% N/A N/A
Adviser Class 4.60% 4.34% 4.70% 4.44% N/A N/A
Market Class 4.40% 4.14% 4.49% 4.23% N/A N/A
Investor Class N/A N/A N/A N/A N/A N/A
Service Class N/A N/A N/A N/A N/A N/A
Daily Class N/A N/A N/A N/A N/A N/A
Trust Class N/A N/A N/A N/A N/A N/A
NATIONS TREASURY RESERVES
Capital Class 4.74% 4.49% 4.85% 4.60% N/A N/A
Liquidity Class 4.59% 3.59% 4.69% 3.69% N/A N/A
Adviser Class 4.49% 4.24% 4.59% 4.34% N/A N/A
Market Class 4.29% 4.01% 4.38% 4.10% N/A N/A
Investor Class N/A N/A N/A N/A N/A N/A
Service Class N/A N/A N/A N/A N/A N/A
Daily Class N/A N/A N/A N/A N/A N/A
Trust Class N/A N/A N/A N/A N/A N/A
NATIONS GOVERNMENT RESERVES
Capital Class 4.88% 4.64% 5.00% 4.76% N/A N/A
Liquidity Class 4.73% 3.79% 4.84% 3.90% N/A N/A
Adviser Class 4.63% 4.39% 4.74% 4.50% N/A N/A
Market Class 4.43% 4.15% 4.53% 4.25% N/A N/A
Investor Class N/A N/A N/A N/A N/A N/A
Service Class N/A N/A N/A N/A N/A N/A
Daily Class N/A N/A N/A N/A N/A N/A
Trust Class N/A N/A N/A N/A N/A N/A
NATIONS MUNICIPAL RESERVES
Capital Class 2.88% 2.60% 2.92% 2.64% 4.77% 4.49%
Liquidity Class 2.73% 1.75% 2.77% 1.79% 4.52% 3.54%
Adviser Class 2.63% 2.35% 2.67% 2.39% 4.35% 4.07%
Market Class 2.43% 2.11% 2.46% 2.14% 4.02% 3.70%
Investor Class N/A N/A N/A N/A N/A N/A
Service Class N/A N/A N/A N/A N/A N/A
Daily Class N/A N/A N/A N/A N/A N/A
Trust Class N/A N/A N/A N/A N/A N/A
115
<PAGE>
NATIONS CALIFORNIA TAX-EXEMPT
RESERVES*
Capital Class N/A N/A N/A N/A N/A N/A
Liquidity Class N/A N/A N/A N/A N/A N/A
Adviser Class 2.20% 2.20% 2.25% 2.25% N/A N/A
Market Class N/A N/A N/A N/A N/A N/A
Investor Class 2.15% 2.15% 2.17% 2.17% N/A N/A
Service Class N/A N/A N/A N/A N/A N/A
Daily Class 1.92% 1.92% 1.94% 1.94% N/A N/A
Trust Class N/A N/A N/A N/A N/A N/A
</TABLE>
* The yield for Nations California Tax-Exempt Reserves is for the 7-day period
ended March 31, 1999.
NON-MONEY MARKET FUNDS
Yield is calculated separately for the Investor A, Investor C, Investor
B, Primary A, Primary B and Seafirst Shares of a Non-Money Market Fund by
dividing the net investment income per share for a particular class or series of
shares (as described below) earned during a 30-day period by the maximum
offering price per share on the last day of the period (for Primary A and
Primary B Shares, maximum offering price per share is the same as the net asset
value per share) and annualizing the result on a semi-annual basis by adding one
to the quotient, raising the sum to the power of six, subtracting one from the
result and then doubling the difference. For a class or series of shares in a
Fund, net investment income per share earned during the period is based on the
average daily number of shares outstanding during the period entitled to receive
dividends and includes dividends and interest earned during the period minus
expenses accrued for the period, net of reimbursements. This calculation can be
expressed as follows:
Yield = 2 [(a-b+ 1)6 - 1]
--------------------------
cd
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that were entitled
to receive dividends.
d = maximum offering price per share on the last
day of the period (again, for Primary A and
Primary B Shares, this is equivalent to net asset
value per share).
For the purpose of determining net investment income earned during the
period (variable- "a" in the formula), dividend income on equity securities held
by a Fund is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is in the portfolio. Each Fund calculates
interest earned on any debt obligations held in its portfolio by computing the
yield to maturity of each obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest) and dividing
the result by 360 and multiplying the quotient by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. For purposes of this calculation, it is assumed
that each month contains 30 days. The maturity of an obligation with a call
provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. With respect to debt
obligations purchased at a discount or premium, the formula generally calls for
amortization of the discount or premium. The amortization schedule will be
adjusted monthly to reflect changes in the market values of such debt
obligations.
Nations California Municipal Bond Fund calculates interest gained on
tax-exempt obligations issued without original issue discount and having a
current market discount by using the coupon rate of interest instead of the
yield to maturity. In the case of tax-exempt obligations that are issued with
original issue discount, where the discount based on the current market value
exceeds the then-remaining portion of original issue discount, the yield to
maturity is the imputed rate based on the original issue discount calculation.
Conversely, where the discount based on the current market value is less than
the remaining portion of the original issue discount, the yield to maturity is
based on the market value.
116
<PAGE>
Expenses accrued for the period (variable "b" in the formula) include
recurring fees charged by Nations Funds to shareholder accounts in proportion to
the length of the base period. Undeclared earned income will be subtracted from
the maximum offering price per share (which for Primary A and Primary B Shares
is net asset value per share) (variable "d" in the formula). Undeclared earned
income is the net investment income which, at the end of the base period, has
not been declared as a dividend, but is reasonably expected to be and is
declared as a dividend shortly thereafter. A Fund's maximum offering price per
share for purposes of the formula includes the maximum sales charge, if any,
imposed by the Fund, as reflected in the Fund's prospectus.
The Funds may provide additional yield calculations in communications
(other than advertisements) to the holders of Investor A, Investor C or Investor
B Shares. These may be calculated based on the Investor A, Investor C or
Investor B Shares' net asset values per share (rather than their maximum
offering prices) on the last day of the period covered by the yield
computations. That is, some communications provided to the holders of Investor
A, Investor C or Investor B Shares may also include additional yield
calculations prepared for the holders of Primary A or Primary B Shares. Such
additional quotations, therefore, will not reflect the effect of the sales
charges mentioned above. Based on the foregoing calculations, the yield, taking
into account fee waivers and/or expense reimbursements, and the yield without
fee waivers and/or expense reimbursements for the 30-day period ended February
28, 1998 were as follows:
THIRTY DAY YIELD FOR THE PERIOD ENDED FEBRUARY 28, 1999
-------------------------------------------------------
<TABLE>
<CAPTION>
Tax
Yield Tax Equivalent
Without Equivalent Yield Without
Yield Fee Waivers Yield Fee Waivers
----- ----------- ----- -----------
<S> <C> <C> <C> <C>
Nations California Municipal Bond Fund
Investor A Shares 3.46% 3.46% 6.32% 6.32%
Investor B Shares 2.96% 2.96% 5.40% 5.40%
Investor C Shares N/A N/A N/A N/A
Primary A Shares N/A N/A N/A N/A
Nations Intermediate Bond Fund
Investor A Shares 4.88% 4.83% 8.08% 8.00%
Investor B Shares N/A N/A N/A N/A
Investor C Shares 4.53% 4.21% 7.50% 6.97%
Primary A Shares N/A N/A N/A N/A
Seafirst Shares 5.04% 4.99% 8.34% 8.26%
</TABLE>
The "tax-equivalent" yield is computed by: (a) dividing the portion of the yield
(calculated as above) that is exempt from Federal income tax by (b) one minus a
stated Federal income tax rate. The Federal income tax rate used in calculating
the "tax-equivalent" yield 39.6%. The state income tax rate used in calculating
the "tax-equivalent" yield of Nations California Municipal Bond Fund is 9.3%.
Hypothetical examples showing the level of taxable yield needed to
produce on after-tax equivalent to an assumed tax-free yield may be provided to
shareholders. Provided is such an illustration:
117
<PAGE>
For Nations California Municipal Bond Fund:
<TABLE>
<CAPTION>
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Single Return $25,351-$61,400 $61,401-$128,100 $128,101-$278,450
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Joint Return $42,351-$102,300 $102,301-$155,950 $155,951-$278,450
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
To match a
tax-free
yield of: A taxable investment would have to pay you:
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
4% 5.56% 5.80% 6.25%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
5% 6.94% 7.25% 7.81%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
6% 8.33% 8.70% 9.38%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
7% 9.72% 10.14% 10.94%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
8% 11.11% 11.59% 12.50%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
</TABLE>
The tax-free yields used here are hypothetical and no assurance can be
made that the Funds will obtain any particular yield. A fund's yield fluctuates
as market conditions change. The tax brackets and the related yield calculations
are based on the 1998 Federal (28%, 31%, 36%) and California (9.3%) tax rates
and assume a Federal tax benefit for the state and local taxes. Note the highest
1998 marginal Federal tax rate may be higher than 36% due to the phase-out of
allowable itemized deductions and personal exemptions for certain taxpayers.
This schedule does not take into account the 39.6% Federal tax rate applied to
taxable income in excess of $278,450.
There can be no assurance that all of a yield quoted by one of these
Funds will be tax-free since these Funds may invest in short-term taxable
obligations for temporary defensive periods as described in the Prospectuses.
Also, the above hypothetical examples are for illustration only. Tax laws and
regulations may be changed at any time by legislative or administrative actions
and such changes may make the information contained in such examples obsolete.
During the period for which certain yield quotations are given above,
Bank of America Adviser, the investment adviser and administrator to the Pacific
Horizon California Municipal Bond Fund (the predecessor of Nations California
Municipal Bond Fund) voluntarily waived fees or reimbursed certain expenses of
such shares, thereby increasing yield figures. Such waivers or expense
reimbursements may be discontinued at any time.
TOTAL RETURN CALCULATIONS
Total return measures both the net investment income generated by, and
the effect of any realized or unrealized appreciation or depreciation of the
underlying investments in a Non-Money Market Fund. The Non-Money Market Funds'
average annual and cumulative total return figures are computed in accordance
with the standardized methods prescribed by the SEC. Average annual total return
figures are computed by determining the average annual compounded rates of
return over the periods indicated in the advertisement, sales literature or
shareholders' report that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending
redeemable value
at the end of the
period of a
hypothetical
$1,000 payment
made at the
beginning of such
period.
118
<PAGE>
This calculation (i) assumes all dividends and distributions are reinvested at
net asset value on the appropriate reinvestment dates as described in the
Prospectuses, and (ii) deducts (a) the maximum sales charge from the
hypothetical initial $1,000 investment, and (b) all recurring fees, such as
advisory and administrative fees, charged as expenses to all shareholder
accounts.
The following figures, for the period ended February 28, 1999, reflect the
deduction of sales charges, if any, that would have been deducted from a sale of
shares.
<TABLE>
<CAPTION>
INCEPTION THROUGH INCEPTION THROUGH 2/28/99
2/28/99 WITHOUT SALES INCLUDING SALES
AVERAGE ANNUAL TOTAL RETURNS CHARGES (IN %) CHARGES (IN %)
---------------------------- -------------- --------------
<S> <C> <C>
Nations Capital Income Fund
Investor A Shares 14.48 13.89%
Investor B Shares 14.37 14.37
Investor C Shares 14.45 14.45
Nations Asset Allocation Fund
Investor A Shares 15.81 14.47
Investor B Shares 15.73 15.73
Investor C Shares 15.52 14.48
Seafirst Shares 13.40 13.40
Nations California Municipal Bond Fund
Investor A Shares 8.14 7.00
Investor B Shares 8.10 7.46
Nations Intermediate Bond Fund
Investor A Shares 5.40 4.71
Investor C Shares 5.24 4.29
Seafirst Shares 7.25 7.25
Nations Blue Chip Fund
Investor A Shares 22.97 21.55
Investor B Shares 22.88 22.88
Investor C Shares 22.66 21.56
Seafirst Shares 17.92 17.92
</TABLE>
The performance figures of the Funds as described above will vary from
time to time depending upon market and economic conditions, the composition of
their portfolios and operating expenses. These factors should be considered when
comparing the performance figures of the Funds with those of other investment
companies and investment vehicles.
Each Fund may quote information obtained from the Investment Company
Institute, national financial publications, trade journals and other industry
sources in its advertising and sales literature. In addition, the Funds may
compare the performance and yield of a class or series of shares to those of
other mutual funds with similar investment objectives and to other relevant
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For example,
the performance and yield of a class of shares in a Fund may be compared to data
prepared by Lipper Analytical Services, Inc. Performance and yield data as
reported in national financial publications such as Money Magazine, Forbes,
Barron's, The Wall Street Journal, and The New York Times, or in publications of
a local or regional nature, also may be used in comparing the performance of a
class of shares in a Fund.
119
<PAGE>
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
ONE
YEAR 10 YEAR PERIOD
PERIOD 5-YEAR ENDED 2/28/99
ENDED PERIOD ENDING OR INCEPTION
2/28/99 2/28/99 THROUGH 2/28/99
------- ------- ---------------
<S> <C> <C> <C>
Nations Capital Income Fund
Investor A Shares 4.64% 12.38% 15.92%
Investor B Shares 4.33% 12.31% 15.89%
Investor C Shares* 4.29% 12.13% 15.79%
Nations Asset Allocation Fund
Investor A Shares 14.72% 16.46% 15.81%
Investor B Shares 14.33% 16.38% 15.73%
Investor C Shares* 14.23% 16.16% 15.52%
Seafirst Shares 14.76% 16.37% 13.60%
Nations California Municipal Bond Fund
Investor A Shares 5.94% 5.92% 7.53%
Investor B Shares 5.25% 5.78% 7.46%
Nations Intermediate Bond Fund
Investor A Shares 4.89% 5.75% 5.40%
Investor C Shares* 4.76% 5.58% 5.24%
Seafirst Shares 4.88% 5.41% 7.33%
Nations Blue Chip Fund
Investor A Shares 18.58% 23.69% 22.97%
Investor B Shares 18.14% 23.60% 22.88%
Investor C Shares* 17.96% 23.37% 22.66%
Seafirst Shares 18.89% 23.75% 18.08%
</TABLE>
* Performance prior to October 21, 1996, February 28, 1997, November
20, 1996, November 11, 1996 and November 11, 1996 is represented by performance
of the A Shares (the predecessor to Investor A Shares) of the Capital Income,
California Municipal Bond, Intermediate Bond, Blue Chip and Asset Allocation
Funds, respectively. On the foregoing dates, K Shares (the predecessor to
Investor C Shares) of the above-listed Funds commenced operations. K shares,
unlike A shares, were sold without a front-end sales load but had a .75%
distribution or administrative service fee which would have reduced performance
if reflected.
120
<PAGE>
<TABLE>
<CAPTION>
AGGREGATE ANNUAL TOTAL RETURN
5-Year 5-Year
period period Inception Inception
FYE FYE ending ending through through
2/28/99 2/28/99 2/28/99 2/28/99 2/28/99 2/28/99
Without Including Without Including Without Including
Sales Sales Sales Sales Sales Sales
Charges Charges Charges Charges Charges Charges
------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Nations Capital Income Fund
Investor A Shares 4.64% -1.36% 79.22% 68.93% 342.88% 369.77%
Investor B Shares 4.29% 4.29% 77.22% 77.22% 333.25% 333.25%
Investor C Shares* 4.33% 4.33% 78.70% 78.70% 364.53% 364.53%
Nations Asset Allocation Fund
Investor A Shares 14.72% 8.11% 114.22% 101.84% 111.93% 99.68%
Investor B Shares 14.33% 14.33% 113.48% 113.48% 111.20% 111.20%
Investor C Shares* 14.23% 14.23% 111.49% 111.49% 109.23% 109.23%
Seafirst Shares 14.76% 14.76% 113.87% 113.87% 297.96% 297.96%
Nations California Municipal Bond
Fund
Investor A Shares 5.94% 0.92% 33.32% 27.04% 206.59% 219.72%
Investor B Shares 5.25% 5.25% 32.46% 32.46% 105.25% 105.25%
Nations Intermediate Bond Fund
Investor A Shares 4.89% 1.44% 32.25% 27.94% 30.79% 26.49%
Investor C Shares* 4.76% 4.76% 31.19% 31.19% 29.74% 29.74%
Seafirst Shares 4.88% 4.88% 30.16% 30.16% 115.69% 115.69%
Nations Blue Chip Fund
Investor A Shares 18.58% 11.78% 189.55% 172.95% 188.97% 172.27%
Investor B Shares 18.14% 18.14% 188.48% 188.48% 187.90% 187.90%
Investor C Shares* 17.96% 17.96% 185.77% 185.77% 185.20% 185.20%
Seafirst Shares 18.89% 18.89% 190.23% 190.23% 511.30% 511.30%
</TABLE>
* Performance prior to October 21, 1996, February 28, 1997, November 20, 1996,
November 11, 1996 and November 11, 1996 is represented by performance of the A
Shares (the predecessor to Investor A Shares) of the Capital Income, California
Municipal Bond, Intermediate Bond, Blue Chip and Asset Allocation Funds,
respectively. On the foregoing dates, K Shares (the predecessor to Investor C
Shares) of the above-listed Funds commenced operations. K shares, unlike A
shares, were sold without a front-end sales load but had a .75% distribution or
administrative service fee which would have reduced performance if reflected.
Fee waivers and/or expense reimbursements were in effect for the periods
presented. Primary B Shares were not offered during the period described above.
From time to time, the yields of each class of shares of a Money Market
Fund may be compared to the respective averages compiled by Donoghue's Money
Fund Report, a widely recognized independent publication that monitors the
performance of money market funds, or to the average yields reported by the Bank
Rate Monitor for money market deposit accounts offered by the 50 leading banks
and thrift institutions in the top five metropolitan statistical areas.
121
<PAGE>
Each Fund may quote information obtained from the Investment Company
Institute, national financial publications, trade journals and other industry
sources in its advertising and sales literature. In addition, the Funds may
compare the performance and yield of a class or series of shares to those of
other mutual funds with similar investment objectives and to other relevant
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For example,
the performance and yield of a class of shares in a Fund may be compared to data
prepared by Lipper Analytical Services, Inc. The performance and yield of a
class of shares in Nations Blue Chip Fund, Nations Capital Income Fund and
Nations Asset Allocation Fund may be compared to the Standard & Poor's 500 Stock
Index, an unmanaged index of a group of common stocks, the Consumer Price Index,
or the Dow Jones Industrial Average, a recognized unmanaged index of common
stocks of 30 industrial companies listed on the Exchange. The performance and
yield of a class of shares in Nations Intermediate Bond Fund may be compared to
the Shearson Lehman Intermediate Government Bond Index, an unmanaged index of
intermediate government securities. Performance and yield data as reported in
national financial publications such as Money Magazine, Forbes, Barron's, The
Wall Street Journal, and The New York Times, or in publications of a local or
regional nature, also may be used in comparing the performance of a class of
shares in a Fund.
Each Fund may quote information obtained from the Investment Company
Institute in its advertising materials and sales literature.
IBBOTSON DATA. Ibbotson Associates of Chicago, Illinois, ("Ibbotson")
provides historical returns of the capital markets in the United States. The
Funds may compare the performance of their share classes or series to the
long-term performance of the U.S. capital markets in order to demonstrate
general long-term risk versus reward investment scenarios. Performance
comparisons could also include the value of a hypothetical investment in common
stocks, long-term bonds or treasuries.
The capital markets tracked by Ibbotson are common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, Treasury Bills, and the U.S. rate of
inflation. These capital markets are based on the returns of several different
indices. For common stocks, the S&P is used. For small capitalization stocks,
return is based on the return achieved by Dimensional Fund Advisors (DFA) Small
Company Fund. This fund is a market-value-weighted index of the ninth and tenth
deciles of the Exchange, plus stocks listed on the American Stock Exchange and
over-the-counter with the same or less capitalization as the upperbound of the
Exchange ninth docile. At year-end 1995, the DFA Small Company Fund contained
approximately 2,663 stocks, with a weighted average market capitalization of
$165.75 million. The unweighted average market capitalization was $82.97
million, while the median was $56.0 million.
Unlike an investment in a common stock mutual fund, an investment in
bonds that are held to maturity provides a fixed and stated rate of return.
Bonds have a senior priority in liquidation or bankruptcy to common stocks, and
interest on bonds is generally paid from assets of the corporation before any
distributions to common shareholders. Bonds rated in the two highest rating
categories are considered high quality and to present minimal risks of default.
See Schedule A for a more complete explanation of these ratings of corporate
bonds. An advantage of investing in government bonds is that, in many cases,
they are backed by the credit and taxing power of the United States government,
and therefore, such securities may present little or no risk of default.
Although government securities fluctuate in price, they are highly liquid and
may be purchased and sold with relatively small transaction costs (direct
purchase of Treasury securities can be made with no transaction costs).
Long-term corporate bond returns are based on the performance of the
Salomon Brothers Long-Term-High-Grade Corporate Bond Index and include nearly
all "Aaa-" and "Aa-" rated bonds. Returns on intermediate-term government bonds
are based on a one-bond portfolio constructed each year, containing a bond which
is the shortest noncallable bond available with a maturity not less than 5
years. This bond is held for the calendar year and returns are recorded. Returns
on long-term government bonds are based on a one-bond portfolio constructed each
year, containing a bond that meets several criteria, including having a term of
approximately 20 years. The bond is held for the calendar year and returns are
recorded. Returns on U.S. Treasury Bills are based on a one-bill portfolio
constructed each month, containing the shortest-term bill having not less than
one month to maturity. The total return on the bill is the month end price
divided by the previous month-end price, minus one. Data up to 1976 is from the
U.S. Government Bond file at the University of Chicago's Center for Research in
Security Prices; the Wall Street Journal is the source thereafter. Inflation
rates are based on the CPI. Ibbotson calculates total returns in the same method
as the Funds.
122
<PAGE>
Cumulative total return is computed by finding the cumulative
compounded rate of return over the period indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
CTR = (ERV-P) 100
-----------------
P
Where: CTR = Cumulative total return
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period
P = initial payment of $1,000.
This calculation (i) assumes all dividends and distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectuses, and (ii) deducts (a) the maximum sales charge from the
hypothetical initial $1,000 investment, and (b) all recurring fees, such as
advisory and administrative fees, charged as expenses to all shareholder
accounts.
<TABLE>
<CAPTION>
Cumulative Total Return
-----------------------
10 Year Period 10 Year Period
Ended 2/28/99 Ended 2/28/99
or Inception or Inception
FYE FYE 5 Year Period 5 Year Period through through
2/28/99 2/28/99 Ended 2/28/99 Ended 2/28/99 2/28/99 2/28/99
Without Including Without Including Without Including
Sales Sales Sales Sales Sales Sales
Charges Charges Charges Charges Charges Charges
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Nations Capital Income Fund
Investor A Shares 4.64% -1.36% 79.22% 68.93% 338.14% 312.85%
Investor B Shares 4.29% 4.29% 77.22% 77.22% 333.25% 333.25%
Investor C Shares 4.33% 4.33% 78.70% 78.70% 336.86% 336.86%
Nations Asset Allocation
Fund
Investor A Shares 14.72% 8.11% 114.22% 101.84% 111.93% 99.68%
Investor B Shares 14.33% 14.33% 113.48% 113.48% 111.20% 111.20%
Investor C Shares 14.23% 14.23% 111.49% 111.49% 109.23% 109.23%
Seafirst Shares 14.76% 14.76% 113.87% 113.87% 257.86% 257.86%
Nations California
Municipal Bond Fund
Investor A Shares 5.94% .92% 33.32% 27.04% 106.58% 96.77%
Investor B Shares 5.25% 5.25% 32.46% 32.46% 105.25% 105.25%
123
<PAGE>
Nations Intermediate Bond
Fund
Investor A Shares 4.89% 1.44% 32.25% 27.94% 30.79% 26.49%
Investor C Shares 4.76% 4.76% 31.19% 31.19% 29.74% 29.74%
Seafirst Shares 4.88% 4.88% 30.16% 30.16% 102.87% 102.87%
Nations Blue Chip Fund
Investor A Shares 18.58% 11.78% 189.55% 172.95% 188.97% 172.27%
Investor B Shares 18.14% 18.14% 188.48% 188.48% 187.90% 187.90%
Investor C Shares 17.96% 17.96% 185.77% 185.77% 185.20% 185.20%
Seafirst Shares 18.89% 18.89% 190.23% 190.23% 427.16% 427.16%
</TABLE>
* Primary A Shares of the Trust do not carry a sales charge.
The Primary Shares and Investor A, B and C Shares of the Funds may also
quote their distribution rates, which express the historical amount of income
dividends paid to their shareholders during a one-month or a three-month period
as a percentage of the maximum offering price per share on the last day of such
period. The performance figures of the Funds as described above will vary from
time to time depending upon market and economic conditions, the composition of
their portfolios and operating expenses. These factors should be considered when
comparing the performance figures of the Funds with those of other investment
companies and investment vehicles.
The "yield" and "effective yield" of each class of shares of a Money
Market Fund may be compared to the respective averages compiled by DONOGHUE'S
MONEY FUND REPORT, a widely recognized independent publication that monitors the
performance of money market funds, or to the average yields reported by the BANK
RATE MONITOR for money market deposit accounts offered by the 50 leading banks
and thrift institutions in the top five metropolitan statistical areas. Each
Fund may quote information obtained from the Investment Company Institute,
national financial publications, trade journals and other industry sources in
its advertising and sales literature. In addition, the Funds also may compare
the performance and yield of a class or series of shares to those of other
mutual funds with similar investment objectives and to other relevant indices or
to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance and yield of a class of shares in a Fund may be compared to data
prepared by Lipper Analytical Services, Inc. Performance and yield data as
reported in national financial publications such as MONEY MAGAZINE, FORBES,
BARRON'S, THE WALL STREET JOURNAL, and THE NEW YORK TIMES, OR in publications of
a local or regional nature, also may be used in comparing the performance of a
class of shares in a Fund.
5% SHAREHOLDERS
The following table sets forth certain information concerning each
person who, to the Trust's knowledge, is a record owner of 5% or more of the
Shares of a class of a Fund. Information is given as of July 20, 1999.
<TABLE>
<CAPTION>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
<S> <C> <C> <C> <C>
Asset Allocation Fund Paco Primary A 74.07% 1.64%
Attn: Mutual Funds Unit #38615 256,217.348;
PO Box 513577 record
Los Angeles, CA 90051-1577
Paco - Cash Account Primary A 16.06% 0.36%
Attn: Mutual Funds Unit #38615 55,553.060;
PO Box 513577 record
Los Angeles, CA 90051-1577
Bank of America Trst Cherry Primary A 6.08% 0.13%
Deferred Compensation Trust 21,041.940;
DTD 1/25/96 A/C 01-002-0008437 record
Attn Kate Long Rm 03
231 La Salle
Chicago, IL 60604-1407
Stephens Inc Primary B 100% 0.01%
Attn: Cindy Cole 1.072; record
111 Center Street
Little Rock, AR 72201
Vanguard Fiduciary Trust Investor A 5.16% 0.85%
Company 133,146.321;
FBO Kirkland & Ellis Def record
Contribution Retirement Plan
91926
PO Box 2600
Valley Forge, PA 19482-2600
State Street Bank & Trust Co Investor C 97.50% 0.52%
TTEE 80,750.710;
FBO, Coastgear & Company record
Attn: Kevin Smith
105 Rosemont Ave
Westwood, MA 02090
Seafirst Bank Seafirst Class; 100%
FBO Retirement Services record
PO Box 84248
Seattle, WA 98124-5548
Blue Chip Fund Paco - Cash Account Primary A 38.26% 1.26%
Attn: Mutual Funds Unit #38615 331,977.554;
PO Box 513577 record
Los Angeles, CA 90051-1577
Paco Primary A 33.31% 1.09%
Attn: Mutual Funds Unit #38615 289,007.977;
PO Box 513577 record
Los Angeles, CA 90051-1577
Bank of America NA Primary A 18.24% 0.60%
Attn Tony Farrer (B Shares) 158,282.192;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Bank of America NA Investor A 6.1330% 2.46%
The Private Bank 649,449.576;
Attn Common Trust Funds Unit record
38329
PO Box 3577
Los Angeles, CA 90051-1577
State Street Bank & Trust Co Investor C 85.80% 1.00%
TTEE 264,468.474;
FBO, Coastgear & Company record
Attn: Kevin Smith
105 Rosemont Ave
Westwood, MA 02090
124
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Corelink Financial Inc Investor C 6.13% 0.07%
PO Box 4054 18,885.721;
Concord, CA 94524-4054 record
Seafirst Bank Seafirst Class 100% 52.52%
FBO Retirement Services 13,866,672.392;
PO Box 84248 record
Seattle, WA 98124-5548
California Municipal Paco - Cash Account Primary A 52.89% 2.76%
Bond Fund Attn: Mutual Funds Unit #38615 727,732.310;
PO Box 513577 record
Los Angeles, CA 90051-1577
Paco Primary A 33.87% 1.77%
Attn: Mutual Funds Unit #38615 466,020.169;
PO Box 513577 record
Los Angeles, CA 90051-1577
Bank of America NA Primary A 9.00% 0.47%
Attn Tony Farrer 123,783.347;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Stephens Inc Investor C 100% 0.01%
Attn: Cindy Cole 3.337; record
111 Center Street
Little Rock, AR 72201
BA Investment Services, Inc. Investor B 8.31% 0.13%
FBO 405015951 34,199.726;
185 Berry St. record
3rd Floor #12640
San Francisco, CA 94107
BA Investment Services, Inc. Investor B 8.12% 1.26%
FBO 436339241 33,422.460;
185 Berry St. record
3rd Floor #12640
San Francisco, CA 94107
BA Investment Services, Inc. Investor B 6.46% 0.10%
FBO 404377331 26,590.419;
185 Berry St. record
3rd Floor #12640
San Francisco, CA 94107-1729
BA Investment Services, Inc. Investor B 5.76% 0.09%
FBO 435242481 23,695.774;
185 Berry St. record
3rd Floor #12640
San Francisco, CA 94107-1729
125
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
BA Investment Services, Inc. Investor B 5.19% 0.08%
FBO 428124871 21,366.415;
185 Berry St. record
3rd Floor #12640
San Francisco, CA 94107-1729
California BA Investment Services Inc Advisor; 80.61% 19.13%
Tax-Exempt Reserves for the Benefit of Customers 330,361,140.560;
Attn H David Jones III record
PO Box 7042
San Francisco, CA 94120-7042
Stephens Inc Daily; 25.060; 100% 0.00%
Attn: Cindy Cole record
111 Center Street
Little Rock, AR 72201
Stephens Inc Capital; 100% 0.00%
Attn: Cindy Cole 25.250; record
111 Center Street
Little Rock, AR 72201
National Financial for the Investor; 48.40% 16.03%
Exclusive Benefit of our 276,898,841.770;
Customers record
200 Liberty St
1 World Financial Ctr
Attn Mutual Funds 5th Flr
New York, NY 10281
BA Investment Services Inc Investor; 45.91% 15.21%
for the Benefit of Customers 262,667,899.600;
Unit 17852 Attn H David Jones record
3rd
PO Box 7042
San Francisco, CA 94120
Stephens Inc Market; 25.060; 100% 0.00 %
Attn: Cindy Cole record
111 Center Street
Little Rock, AR 72201
Stephens Inc Liquidity; 100% 0.00 %
Attn: Cindy Cole 25.060
111 Center Street
Little Rock, AR 72201
Bank of America NA Trst/Cus Trust; 99.96% 21.88%
Attn Common Tr FDS Unit 38329 378,004,155.810;
Terminal Anex record
PO Box 513577
Los Angeles, CA 90051-1577
Cash Reserves Security Pacific Cash Advisor; 27.47% 3.21%
Management 854,362,100.000;
c/o Bank of America-GPO M/C record
5533 Attn Regina Olsen
1850 Gateway Blvd # 5533
Concord,CA 94520-3275
Bankers Trust FBO Advisor 8.83% 5.21%
Tenneco Salary - 193024 90,046,127.760;
PO Box 9014 record
Church Street Station
New York, NY 10008
126
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
BA Investment Services Inc Daily; 49.87% 10.34%
for the Benefit of Customers 2,748,154,422.950
Unit 17852 Attn H David Jones
3rd
PO Box 7042
San Francisco, CA 94120
National Financial for the Daily; 23.60% 4.89%
Exclusive Benefit of our 1,300,564,893.070;
Customers record
200 Liberty St
1 World Financial Ctr
Attn Mutual Funds 5th Flr
New York, NY 10281
Bank of America NA Capital; 11.20% 1.22%
Private Bank 325,089,215.210;
Attn Common Tr Fds Unit 38329 record
Terminal Annex
PO Box 513577
Los Angeles, CA 90051-1577
The Anschutz Corporation Capital; 10.38% 1.13%
Attn Thomas G Kundert 301,282,494.040;
555 Seventeenth Street record
Suite 2400
Denver, CO 80202
General Motors Acceptance Corp Capital; 6.89% 0.75%
Attn E Wayne Crawford 200,000,000.000;
3031 W Grand Blvd Ste 695 record and
M/C 482-206-695 beneficial
Detroit, MI 48202
Hare & Co, Bank of New York Capital; 5.63% 0.61%
Attn Stif/Master Note 163,529,099.840;
One Wall Street 2nd Fl record
New York, NY 10286
BA Investment Services Inc Investor; 59.65% 8.07%
for the Benefit of Customers 2,147,225,460.340;
Unit 17852 Attn H David Jones record
3rd
PO Box 7042
San Francisco, CA 94120
Silicon Valley Bank Investor; 20.61% 2.79%
Attn: Jess R Gutierrez 741,825,568.880;
3003 Tasman Drive Mshg 110 record and
Santa Clara, CA 95054 beneficial
National Financial for the Investor; 10.63% 1.44%
Exclusive Benefit of our 382,742,123.430;
Customers record
200 Liberty St
1 World Financial Ctr
Attn Mutual Funds 5th Flr
New York, NY 10281
NationsBank SWP Disbursement NC Service Shares 100% 0.04%
NationsBank Sweep/Autoborrow 11,000,000.00;
First Citizens Bldg record
128 S Tryon St NC1-006-08-03
Charlotte, NC 28255
127
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
BA Investment Services Inc Service; 12.24%
for the Benefit of Customers 380,650,624.500;
Attn H David Jones III record
PO Box 7042
San Francisco, CA 94120-7042
Bank of America NA Trust Shares 99.39% 6.51%
Financial Mgmt & Trust Services 1,731,854,059.930;
Attn Common Tr FDS Unit 38329 record
Terminal Annex
PO Box 513577
Los Angeles, CA 90051-1577
NationsBank SWP Disbursement NC Market Class 100% 6.84%
NationsBank Sweep/Autoborrow 1,820,000,000.000;
First Citizens Bldg record
128 S Tryon St NC 01-006-08-03
Charlotte, NC 28255
The Bank of New York as Agent Capital Class 15.70% 2.80%
for its Securities Lending 745,000,000.000;
Customers record
101 Barclay Street
New York, NY 10286
Bank of America NA Capital Class 13.96% 2.49%
Attn: David Thayer 662,378,021.120;
1401 Elm Street 11th Floor record
Dallas, TX 75202
Charter Communications Capital Class 11.59% 2.06%
Operating LLC 550,000,000.000;
Attn Ralph Kelly record and
12444 Powerscourt Dr Ste 100 beneficial
Saint Louis, MO 63131-3617
Bank of America NA Agent FBO Liquidity Class 30.27% 0.20%
Global Finance Sweep Customers 554,479,620.440;
Attn Steven Edwards record
1201 Main Street TX1-609-21-04
Dallas, TX 75202
Hans-Werner Hector Liquidity Class 6.68% 0.46%
33-B Eugenia Avenue 122,270,694.160;
Kiawah Island, SC 29455-5608 record and
beneficial
Olen Commercial Realty Corp Liquidity Class 5.41% 0.37%
PO Box 7069 99,012,870.830;
Newport Beach, CA 92658-7069 record and
beneficial
Lennar Land Partners Liquidity Class 4.91% 0.33%
Investments 90,000,000.000;
Attn Wayneright Malcolm record and
700 NW 107th Ave beneficial
Miami, FL 33172
Bank of America NA Agent FBO Liquidity Class 40.00% 0.31%
Global Finance Sweep Customers 82,988,902.990;
Attn Steven Edwards record
1201 Main Street TX1-609-21-04
Dallas, TX 75202
128
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
ECT Securities LTD Partnership Liquidity Class 19.77% 0.17%
c/o Enron Corp 45,580,681.440;
Attn Donna Lowry EB 2881 record and
P O Box 1188 beneficial
Houston, TX 77251-1188
Janet Sue Beck Liquidity Class 8.47% 0.07%
Separate Property 19,515,599.270;
6211 Raintree Ct record and
Dallas, TX 75240 beneficial
Nations Capital Paco - Cash Account Primary A 52.00% 0.89%
Income Fund Attn: Mutual Funds Unit #38615 167,083.271;
PO Box 513577 record and
Los Angeles, CA 90051-1577 beneficial
Paco Primary A 44.18% 0.75%
Attn: Mutual Funds Unit #38615 141,955.442;
PO Box 513577 record and
Los Angeles, CA 90051-1577 benfeficial
State Street Bank & Trust Co Investor C 79.41% 0.45%%
TTEE 84,804.867;
FBO, Coastgear & Company record
Attn: Kevin Smith
105 Rosemont Ave
Westwood, MA 02090
Corelink Financial Inc Investor C 8.08% 0.04%
PO Box 4054 8,631.107;
Concord, CA 94524-4054 record
Government Reserves BA Investment Services Inc Advisor; 7.18% 1.50%
for the Benefit of Customers 22,941,090.740;
Attn H David Jones III record
PO Box 7042
San Francisco, CA 94120-7042
Guilford Glazer TTEE Advisor; 6.21% 1.30%
9440 Santa Monica Blvd Ste 610 19,846,762.590;
Beverly Hills, CA 90210-4619 record and
beneficial
National Financial for the Daily; 100% 1.55%
Exclusive Benefit of our 23,596,460.820;
Customers record
200 Liberty St
1 World Financial Ctr
Attn Mutual Funds 5th Flr
New York, NY 10281
Chase Manhattan Bank Capital; 38.77% 3.23%
FBO Global Trust 49,130,402.860;
Attn Dave Sturman record
450 W 33rd St Fl 15
New York, NY 10001-2603
Lone Star Technologies Inc Capital; 16.63% 1.38%
Attn Charles J Keszler 21,070,175.750;
PO Box 803546 record and
Dallas, TX 75380-3546 beneficial
129
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
U S Bank Trust NA Capital; 10.96% 0.91%
ESCR Kaiser Aluminum Corp/Dol 13,883,754.640;
Attn Corp Trust Srvcs record
601 Union St Ste 2120
Seattle, WA 98101-2331
Skinner Corporation Capital; 7.23% 0.60%
Attn Debbie Sokvitne 9,163,659.190;
1326 5th Ave Ste 711 record and
Seattle, WA 98101-2640 beneficial
Bank of America NA Capital; 5.51% 0.45%
Trst Financial Mgmnt & Trust 6,978,016.860;
Svcs record
Attn Common Tr FDS Unit 38329
Terminal Annex
PO Bxo 513577
Los Angeles, CA 90051-1577
Collins & 194th Associates Ltd Adviser Class 15.77% 0.47%
DBA Ocean 1 Condominium 7,164,994.310;
Corporate record and
19250 Collins Ave beneficial
N Miami Beach, FL 33160
Ocean Two by Chicago Title Adviser Class 10.75% 0.32%
Insurance Co as Escrow Agent 4,886,184.830;
File #309900567 record
Attn Team Acctg
1818 S Australian Ave
West Palm Beach, FL 33409
L Frank Pitts DBA Pitts Oil Adviser Class 6.72% 0.20%
Company 3,055,744.510;
4600 Greenville Ave Ste 200 record and
Dallas, TX 75206 beneficial
Geneva Assoc Merchant Banking Adviser Class 5.61% 0.16%
Partners I LLC 2,549,859.550;
Attn Maggie Styers record and
PO Box 21962 beneficial
Greensboro, NC 27420-1962
Collins & 194th Associates Ltd Adviser Class 5.37% 0.16%
by Chicago Title Insurance Co 2,439,882.300;
as Escrow Agent record and
c/o State Accounting beneficial
1818 S Australian Ave Suite 210
West Palm Beach, FL 33409
North Kansas City Hospital Adviser Class 5.04% 0.15%
Attn Mike Wright 2,290,103.270;
2800 Clay Edwards Dr record and
No Kansas City, MO 64116 beneficial
130
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
BA Investment Services Inc Investor; 63.90% 12.47%
for the Benefit of Customers 189,509,978.870;
Unit 17852 Attn H David Jones record
3rd
PO Box 7042
San Francisco, CA 94120
National Financial for the Investor; 23.43% 4.57%
Exclusive Benefit of Our 69,479,710.090;
Customers record
200 Liberty St
1 World Financial Ctr
Attn Mutual Funds 5th Flr
New York, NY 10281
Hare & Co, Bank of New York Investor; 6.63% 1.29%
Attn Stif/Master Note 19,664,381.380;
One Wall Street 2nd Fl record
New York, NY 10286
Bank of America SWP Market Class 100% 23.06%
Disbursement NC Bank of 350,500,000.000;
America Sweep/Autoborrow record
First Citizens Bldg
128 S Tryon St NC1-006-08-03
Charlotte, NC 28255
Stephens Inc. Daily Shares 100% 0.00%
Attn: Cindy Cole 10.000; record
111 Center Street
Little Rock, AR 72201
Bank of America SWP Service Shares 100% 0.03%
Disbursement NC Bank of 500,000.000;
America Sweep/Autoborrow record
First Citizens Bldg
128 S Tryon St NC1-006-08-03
Charlotte, NC 28255
Stephens Inc. Investor Class 100% 0.00%
Attn: Cindy Cole 10.000; record
111 Center Street
Little Rock, AR 72201
Bank of America NA Trust Shares 100% 10.96%
Financial Mgmt & Trust Services 166,598,173.250;
Attn Common Tr FDS Unit 38329 record
Terminal Annex
PO Box 513577
Los Angeles, CA 90051-1577
Flagler Co Board of Capital Class 29.26% 2.54%
Commissioners #1 Fund 38,699,900.840;
PO Box 787 record and
201 East Moody Blvd beneficial
Bunnel, FL 32110
Reese M Rowling Capital Class 24.62% 2.14%
500 N Water St Suite 1100N 32,553,248.210;
Corpus Christi, TX 78471-0000 record and
beneficial
Cannan Communications Inc Capital Class 15.26% 1.32%
City National Bldg 20,184,615.710;
807 8th Street Ste 503 record and
Wichita Falls, TX 76301-3304 beneficial
131
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Orbital Imaging Corporation Capital Class 7.79% 0.67%
Attn Martha Darden 10,299,359.330;
21700 Atlanta Blvd record and
Dulles, VA 20166-6801 beneficial
Novabus of America Inc Capital Class 5.46% 0.47%
General Account 7,225,420.830;
Dan Alexander A/S record and
PO Box 5670 beneficial
Roswell, MN 88202-5670
Norwest Bank as TTEE for Pace Liquidity Class 17.00% 0.64%
Academy 9,778,412.330;
6 St Marquette Avenue record
Minneapolis, MN 55479
Comptrust AGC Liquidity Class 15.75% 0.59%
Workers Comp Trust Fund SC 9,055,663.930;
Attn Vicky Petit record
P O Box 30277
Charlotte, NC 28230
J&E Oil Inc Liquidity Class 15.50% 0.58%
300 E Edinburg 8,917,434.470;
Elsa, TX 78543 record and
beneficial
SQL Financials Inc Liquidity Class 12.17% 0.04%
Attn Bill Fielder 6,999,848.310;
3950 Johns Creek Ct Ste 100 record and
Suwanee, GA 30024 beneficial
Comptrust AGC Liquidity Class 11.98% 0.45%
Workers Comp Trust Fund NC 6,887,663.440;
Attn Vicky Petit record and
P O Box 30277 beneficial
Charlotte, NC 28230
Texas New Mexico Power Company Liquidity Class 11.66% 0.44%
Attn Cash Manager 6,708,278.560;
PO Box 2943 record and
Fort Worth, TX 76113 beneficial
Municipal Reserves BA Investment Services Inc Advisor; 50.21% 1.52%
for the Benefit of Customers 24,808,484.550;
Attn H David Jones III record
PO Box 7042
San Francisco, CA 94120-7042
Black Hills Energy Resources Advisor; 10.23% 0.31%
Inc 5,056,628.270;
2323 S Shepherd Dr Ste 1150 record and
Houston, TX 77019-7022 beneficial
Jack Kirk Advisor; 6.60% .20%
1533 NW Blue Ridge Dr 3,259,694.330;
Seattle, WA 98177-5418 record and
beneficial
132
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
The Lynn E Barr Advisor; 5.58% 0.16%
and Linda D. Barr 2,755,563.140;
Trst as Amended and Restated in record and
PO Box 2000 beneficial
Benicia, CA 94510-0809
National Financial for the Daily; 72.12% 9.21%
Exclusive Benefit of our 149,622,265.300;
Customers record
200 Liberty St
1 World Financial Ctr
Attn Mutual Funds 5th Flr
New York, NY 10281
BA Investment Services Inc Daily; 27.88% 1.71%
for the Benefit of Customers 57,840,018.350;
Unit 17852 Attn H David Jones record
3rd
PO Box 7042
San Francisco, CA 94120
BA Investment Services Inc Daily; 99.98% 22.58%
for the Benefit of Customers 366,589,273.260;
Unit 17852 Attn H David Jones record
3rd
PO Box 7042
San Francisco, CA 94120
The Anschutz Corporation Capital; 98.52% 3.08%
Attn Thomas G Kundert 50,046,805.050;
555 Seventeenth Street record and
Suite 2400 beneficial
Denver, CO 80202
BA Investment Services Inc Investor; 97.63% 9.55%
for the Benefit of Customers 155,085,857.290;
Unit 17852 Attn H David Jones record
3rd
PO Box 7042
San Francisco, CA 94120
Phil McDaniel Adviser Class 16.64% 0.36%
51 Water Street 5,952,628.760;
St Augustine, FL 32084-0000 record and
beneficial
Timothy A Braswell Adviser Class 15.05% 0.33%
17925 S E Village Circle 5,384,562.490;
Tequesta, FL 33469 record and
beneficial
Addlestone International Adviser Class 10.04% 0.22%
Attn Nathan Addlestone 3,593,897.440;
PO Box 979 record and
Charleston, SC 29402-0979 beneficial
Heritage Bag Company Adviser Class 10.01% 0.22%
1648 Diplomat Drive 3,579,869.300;
Carrollton, TX 75006-6847 record and
beneficial
Bank of America SWP Market Class 100% 10.13%
Disbursement NC Bank of 164,500,000.000;
America Sweep/Autoborrow record
First Citizens Bldg
128 S Tryon St NC1-006-08-03
Charlotte, NC 28255
133
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Stephens Inc. Daily Shares 100% 0.00%
Attn: Cindy Cole 10.000; record
111 Center Street
Little Rock, AR 72201
Stephens Inc. Service Shares 100% 0.00%
Attn: Cindy Cole 10.000; record
111 Center Street
Little Rock, AR 72201
Stephens Inc. Investor Class 100% 0.00%
Attn: Cindy Cole 10.000; record
111 Center Street
Little Rock, AR 72201
Bank of America FM & TS Oper CA Trust Shares 100% 37.65%
Attn Common Tr FDS Unit 38329 611,268,616.610;
Terminal Annex record
PO Box 513577
Los Angeles, CA 90051-1577
Bank of America NA Capital Class 56.34% 6.31%
Attn David Thayer 102,556,077.870;
1401 Elm Street 11th Floor record
Dallas, TX 75202
Daniel R Harper TTEE Capital Class 16.08% 1.80%
Daniel R Harper Revocable 29,266,046.950;
Living Trust record and
U/A DTD 7/13/90 beneficial
14860 Six Mile Cypress Pkwy
Ft Myers, FL 33912-4406
Michael S. Egan Liquidity Class 29.48% 2.96%
Attn Robin Segaul 48,094,557.630;
333 East Las Olas Blvd record and
Ft Lauderdale, FL 33301 beneficial
W Ray Wallace Liquidity Class 15.00% 1.51%
P O Box 568887 24,461,283.200;
Dallas, TX 75356 record and
beneficial
Vintec Company Liquidity Class 11.28% 1.13%
1501 Malloy Ln 18,398,045.570;
P O Box 1258 record and
Murfreesboro, TN 37133 beneficial
Sheldon H Solow Liquidity Class 10.11% 1.02%
Personal & Confidential 16,485,500.000;
9 W 57th St record and
New York, NY 10019-2701 beneficial
WRW Equities LTD Liquidity Class 6.10% 0.61%
5500 Preston Rd #220 9,957,958.340;
Dallas, TX 75205 record and
beneficial
134
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Johnson Ezell Corporation Liquidity Class 6.01% 0.60%
FBO Neil Ezell 9,803,968.090;
18167 US Highway 19 N Ste 660 record and
Clearwater, FL 33764-6569 beneficial
Money Market Reserves MSP Acquisition Corp Liquidity Class 49.37% 0.28%
314 Main St Ste 300 4,644,464.830;
Fort Worth, TX 76102-7407 record and
beneficial
Micro Craft Inc Liquidity Class 24.02% 0.13%
Attn Tom Headlee 2,259,371.500;
P O Box 370 record and
Tullahoma, TN 37388 beneficial
Undiscovered Managers LLC Liquidity Class 18.07% 0.10%
Attn James Vetter 1,700,000.000;
700 N Pearl Ste 2400 LB342 record and
Dallas, TX 75201-2832 beneficial
Volunteers of America Inc Liquidity Class 8.19% 0.05%
Attn Accounting 770,774.600;
110 S Union St record and
Alexandria, VA 22314-3351 beneficial
Central Carolina Bank Advisors Class 48.96% 0.19%
Attn Cash Management 3,190,089.090;
111 Corcoran Street 2nd Flr MO record
2-1
Durham, NC 27701
Town of Smithfield Bond Fund Advisors Class 27.40% 0.11%
Attn Suzanne Pittman 1,785,475.040;
310 Institute St record and
Smithfield, VA 23430-1114 beneficial
Ottenheimer Equipment Co Inc Advisors Class 9.25% 0.04%
Attn Mark Ottenheimer 602,702.110;
2607 N Rolling Rd Ste 210 record and
Baltimore, MD 21244 beneficial
Dolphin Mall Associates LP Advisors Class 7.27% 0.03%
Wage Program 473,721.770;
Attn Marie Ammatteo record and
200 S Park Rd Ste 200 beneficial
Hollywood, FL 33021-8541
Bank of America SWP Market Class 100% 49.01%
Disbursement NC Bank of 821,000,000.000;
America Sweep/Autoborrow record
First Citizens Bldg
128 S Tryon St NC1-006-08-03
Charlotte, NC 28255
Stephens Inc. Daily Shares 100% 0.00%
Attn: Cindy Cole 10.000; record
111 Center Street
Little Rock, AR 72201
Bank of America SWP Service Shares 100% 0.15%
Disbursement NC Ban k of 2,500,000.000;
America Sweep/Autoborrow record
135
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
First Citizens Bldg
128 S Tryon St NC1-006-08-03
Charlotte, NC 28255
Stephens Inc. Investor Class 100% 0.00%
Attn: Cindy Cole 10.000; record
111 Center Street
Little Rock, AR 72201
Stephens Inc. Trust Shares 100% 0.00%
Attn Cindy Cole 10.000; record
111 Center Street
Little Rock, AR 72201
Arkansas State Treasury Capital Class 11.89% 5.93%
Attn Treasury Management 99,300,857.160;
State Capitol Building Rm 220 record and
Little Rock, AR 72201 beneficial
Bank of America NA Capital Class 9.43% 4.70%
Attn David Thayer 78,760,713.970;
1401 Elm Street 11th Floor record
Dallas, TX 75202
Dallas ISD General Fund Capital Class 7.92% 3.95%
Attn Dick Williams Room 218C 66,150,560.610;
3700 Ross Avenue record and
Dallas, TX 75204 beneficial
Cendant Corporation Capital Class 7.01% 3.50%
Attn Kim Sanborn 58,522,835.220;
6 Sylvan Way record and
Parsippany, NJ 07054 beneficial
Agrium U S Inc Capital Class 5.54% 2.76%
Attn Treasury Department 46,251,255.080;
13131 Lake FraserDrive SE record and
Calgary AB Canada T2J 7E8 beneficial
Treasury Reserves National Financial for the Daily; 8.30% 0.90%
Exclusive Benefit of our 51,346,149.790;
Customers record
200 Liberty St
1 World Financial Ctr
Attn Mutual Funds 5th Flr
New York, NY 10281
National Rv Holdings Inc Daily; 5.06% 0.50%
Attn Kenneth Ashley 31,308,281.140;
3411 N Perris Blvd record and
Perris, CA 92571-3100 beneficial
Clark County Public 8,846,161.340; 7.82% 0.10%
Administration record and
Attn Jared E Shafer beneficial
1700 Pinto Ln
Las Vegas, NV 89106-4102
Los Angeles Department of Capital; 19.54% 1.00%
Airports 61,050,961.690;
Attn Sandee Parks record and
515 S Flower St beneficial
Los Angeles, CA 90071-2201
136
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Hare & Co, Bank of New York Capital; 8.60% 0.50%
Attn Stif/Master Note 26,860,046.930;
One Wall Street 2nd Fl record
New York, NY 10286
E D Fund Capital; 8.45% 0.40%
Attn Duane Hill 26,404,719.940;
3300 Zinfandel Dr record and
Rancho Cordova, CA 95670-6043 beneficial
CDO Capital LLC Capital; 7.51% 0.40%
Cash Reserve Account 23,469,019.900;
Attn Tom Gohde record
6111 N River Rd
Rosemont, IL 60018-5158
California Independent System Capital; 6.48% 0.30%
Operator 20,249,711.240;
Attn Chief Financial Officer record
151 Blue Ravine Rd
Folsom, CA 95630-4704
Save Mart Supermarkets Capital; 6.08% 0.30%
Attn Linda Kline 19,000,000.000;
PO Box 4278 record
Modesto, CA 95352-4278
BA Investment Services Inc Investor; 53.04% 2.60%
for the Benefit of Customers 155,539,577.330;
Unit 17852 Attn H David Jones record
3rd
PO Box 7042
San Francisco, CA 94120
Hare & Co, Bank of New York 100,613,314.580; 34.31% 1.70%
Attn Stif/Master Note record
One Wall Street 2nd Fl
New York, NY 10286
Hare & Co, Bank of New York Adviser Class 16.70% 3.53%
Attn Stif/Master Note 59,161,080.800;
One Wall Street 2nd Fl record
New York, NY 10286
Central Carolina Bank Adviser Class 10.67% 2.26%
Attn Cash Management 37,800,111.220;
111 Corcoran Street 2nd Flr MO record and
2-1 beneficial
Durham, NC 27701
Primus Telecommunications Adviser Class 5.63% 1.19%
International Inc 19,944,679.880;
Attn Andy Dolan record and
1700 Old Meadow Road Suite 300 beneficial
McLean, VA 22102
Stephens Inc Daily Shares 100% 0.00%
Attn: Cindy Cole 10.000; record
111 Center Street
Little Rock, AR 72201
137
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Bank of America SWP Market Class 100% 0.00%
Disbursement NC Bank of 1,331,500,000.000;
America Sweep/Autoborrow record
First Citizens Bldg
128 S Tryon St NC1-006-08-03
Charlotte, NC 28255
Bank of America SWP Service Shares 100% 0.15%
Disbursement NC Bank of 2,500,000.000;
America Sweep/Autoborrow record
First Citizens Bldg
128 S Tryon St NC1-006-08-03
Charlotte, NC 28255
Stephens Inc. Investor Class 100% 0.00%
Attn: Cindy Cole 10.000; record
111 Center Street
Little Rock, AR 72201
Bank of America NA Trust Shares 100% 38.10%
Financial Mgmt & Trust Services 638,299,127.360;
Attn Common Tr FDS Unit 38329 record
Terminal Annex
PO Box 513577
Los Angeles, CA 90051-1577
Mindspring Enterprises Inc Capital Class 47.1119% 22.54%
1430 W Peachtree St NW 377,638,847.380;
Atlanta, GA 30309 record and
beneficial
Bank of America NA Capital Class 19.6530% 9.40%
Attn: David Thayer 157,534,168.790
1401 Elm Street 11th Floor
Dallas, TX 75202
Banc of America LLC Capital Class 8.64% 4.13%
Attn Mutual Funds 69,235,962.290;
600 Montgomery St record
San Francisco, CA 94111
Commercial Financial Svcs Inc Capital Class 5.18% 2.48%
Operating Account 41,503,176.430;
Attn Accounting Department record
2448 E 81st St Ste 5200
Tulsa, OK 74137-4248
Nations Intermediate Paco - Cash Account Primary A 85.10% 8.85%
Bond Fund Attn: Mutual Funds Unit #38615 773,710.492;
PO Box 513577 record
Los Angeles, CA 90051-1577
Paco Primary A 14.9004% 1.55%
Attn: Mutual Funds Unit #38615 135,472.483;
PO Box 513577 record
Los Angeles, CA 90051-1577
Nations Intermediate Corelink Financial Inc Investor C 99.95% 0.08%
Bond Fund PO Box 4054 7,201.550;
Concord, CA 94524-4054 record
138
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Nations Intermediate Seafirst Bank Seafirst Class 100% 33.68%
Bond Fund FBO Retirement Services 2,943,694.026;
PO Box 84248 record
Seattle, WA 98124-5548
Nations Intermediate Bank of America NA Investor A 75.02% 42.82%
Bond Fund The Private Bank 3,742,327.004;
Attn Common Trust Funds Unit record
38329
PO Box 3577
Los Angeles, CA 90051-1577
Union Bank Trust Nominee Investor A 5.90% 3.37%
FBO Angelus Sanitary 294,321.649;
Can Machine Co record
Emp Welfare BP 610001305-00
PO Box 85484
San Diego, CA 92186-5484
</TABLE>
As of August 1998, Bank of America Corporation and its affiliates owned
of record more than 25% of the outstanding shares of the companies acting as
agent, fiduciary, or custodian for its customers and may be deemed a controlling
person of such companies under the 1940 Act.
139
<PAGE>
SCHEDULE A
----------
DESCRIPTION OF RATINGS
The following summarizes the highest six ratings used by Standard &
Poor's Corporation ("S&P") for corporate and municipal bonds. The first four
ratings denote investment-grade securities.
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest
and repay principal.
AA - Debt rated AA is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in a
small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for those
in higher-rated categories.
BB, B - Bonds rated BB and B are regarded, on balance as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. Debt
rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay
principal.
To provide more detailed indications of credit quality, the AA, A and
BBB, BB and B ratings may be modified by the addition of a plus or minus sign to
show relative standing within these major rating categories.
The following summarizes the highest six ratings used by Moody's
Investors Service, Inc. ("Moody's") for corporate and municipal bonds. The first
four denote investment grade securities.
Aaa - Bonds that are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term
risks appear somewhat larger than in Aaa securities.
A - Bonds that are rated A possess many favorable investment
attributes and are to be considered upper medium grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa - Bonds that are rated Baa are considered medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
A-1
<PAGE>
Ba - Bonds that are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not as well safeguarded during both good times and bad times over
the future. Uncertainty of position characterizes bonds in this class.
B - Bond that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Moody's applies numerical modifiers (1, 2 and 3) with respect to
corporate bonds rated Aa through B. The modifier 1 indicates that the bond being
rated ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the bond ranks
in the lower end of its generic rating category. With regard to municipal bonds,
those bonds in the Aa, A and Baa groups which Moody's believes possess the
strongest investment attributes are designated by the symbols Aal, A1 or Baal,
respectively.
The following summarizes the highest four ratings used by Duff & Phelps
Credit Rating Co. ("D&P") for bonds, each of which denotes that the securities
are investment grade.
AAA - Bonds that are rated AAA are of the highest credit quality.
The risk factors are considered to be negligible, being only slightly more
than for risk-free U.S. Treasury debt.
AA - Bonds that are rated AA are of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
A - Bonds that are rated A have protection factors which are
average but adequate. However risk factors are more variable and greater
in periods of economic stress.
BBB - Bonds that are rated BBB have below average protection
factors but still are considered sufficient for prudent investment.
Considerable variability in risk exists during economic cycles.
To provide more detailed indications of credit quality, the AA, A and
BBB ratings may modified by the addition of a plus or minus sign to show
relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch
Investors Service, Inc. ("Fitch") for bonds, each of which denotes that the
securities are investment grade:
AAA - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA - Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because
bonds rated in the AAA and AA categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
generally rated F-1+.
A - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
A-2
<PAGE>
To provide more detailed indications of credit quality, the AA, A and
BBB ratings may be modified by the addition of a plus or minus sign to show
relative standing within these major rating categories.
The following summarizes the two highest ratings used by Moody's for
short-term municipal notes and variable-rate demand obligations:
MIG-1/VMIG-1 -- Obligations bearing these designations are of the best
quality, enjoying strong protection from established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2 -- Obligations bearing these designations are of high
quality, with ample margins of protection although not so large as in the
preceding group.
The following summarizes the two highest ratings used by S&P for
short-term municipal notes:
SP-1 - Indicates very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety characteristics
are given a "plus" (+) designation.
SP-2 - Indicates satisfactory capacity to pay principal and interest.
The three highest rating categories of D&P for short-term debt, each of
which denotes that the securities are investment grade, are D-1, D-2, and D-3.
D&P employs three designations, D-1+, D-1 and D-1-, within the highest rating
category. D-1+ indicates highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is judged to be "outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations." D-1 indicates very high
certainty of timely payment. Liquidity factors are excellent and supported by
good fundamental protection factors. Risk factors are considered to be minor.
D-1 indicates high certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2 indicates good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small. D-3 indicates satisfactory liquidity and other protection factors which
qualify the issue as investment grade. Risk factors are larger and subject to
more variation. Nevertheless, timely payment is expected.
The following summarizes the two highest rating categories used by
Fitch for short-term obligations each of which denotes that the securities are
investment grade:
F-1+ securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
F-1 securities possess very strong credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in degree than
issues rated F-1+.
F-2 securities possess good credit quality. Issues carrying this rating
have a satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned the F-1+ and F-1 ratings.
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted A-1+. Capacity for timely payment on
commercial paper rated A-2 is satisfactory, but the relative degree of safety is
not as high as for issues designated A-1.
A-3
<PAGE>
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of senior short-term
promissory obligations. Issuers rated Prime-2 (or related supporting
institutions) are considered to have a strong capacity for repayment of senior
short-term promissory obligations. This will normally be evidenced by many of
the characteristics of issuers rated Prime-1, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
For commercial paper, D&P uses the short-term debt ratings described
above.
For commercial paper, Fitch uses the short-term debt ratings described
above.
Thomson BankWatch, Inc. ("BankWatch") ratings are based upon a
qualitative and quantitative analysis of all segments of the organization
including, where applicable, holding company and operating subsidiaries.
BankWatch ratings do not constitute a recommendation to buy or sell securities
of any of these companies. Further, BankWatch does not suggest specific
investment criteria for individual clients.
BankWatch long-term ratings apply to specific issues of long-term debt
and preferred stock. The long-term ratings specifically assess the likelihood of
untimely payment of principal or interest over the term to maturity of the rated
instrument. The following are the four investment grade ratings used by
BankWatch for long-term debt:
AAA - The highest category; indicates ability to repay principal
and interest on a timely basis is extremely high.
AA - The second highest category; indicates a very strong ability
to repay principal and interest on a timely basis with limited incremental
risk versus issues rated in the highest category.
A - The third highest category; indicates the ability to repay
principal and interest is strong. Issues rated "A" could be more
vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
BBB - The lowest investment grade category; indicates an acceptable
capacity to repay principal and interest. Issues rated "BBB" are, however,
more vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
Long-term debt ratings may include a plus (+) or minus (-) sign to
indicate where within a category the issue is placed.
The BankWatch short-term ratings apply to commercial paper, other
senior short-term obligations and deposit obligations of the entities to which
the rating has been assigned. The BankWatch short-term ratings specifically
assess the likelihood of an untimely payment of principal or interest.
TBW-1 The highest category; indicates a very high
likelihood that principal and interest will be paid
on a timely basis.
TBW-2 The second highest category; while the degree of
safety regarding timely repayment of principal and
interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1".
TBW-3 The lowest investment grade category; indicates that
while more susceptible to adverse developments (both
internal and external) than obligations with higher
ratings, capacity to service principal and interest
in a timely fashion is considered adequate.
A-4
<PAGE>
TBW-4 The lowest rating category; this rating is regarded
as non-investment grade and therefore speculative.
The following summarizes the four highest long-term debt ratings used
by IBCA Limited and its affiliate, IBCA Inc. (collectively "IBCA"):
AAA - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial such that adverse changes in business, economic
or financial conditions are unlikely to increase investment risk
significantly.
AA - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions may increase investment risk albeit not very
significantly.
A - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
BBB - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment
risk than for obligations in other categories.
A plus or minus sign may be appended to a rating below AAA to denote
relative status within major rating categories.
The following summarizes the two highest short-term debt ratings used by
IBCA:
A1+ When issues possess a particularly strong credit feature, a
rating of A1+ is assigned.
A1 - Obligations supported by the highest capacity for timely
repayment.
A2 - Obligations supported by a good capacity for timely repayment.
A-5
