STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
NATIONS FUND, INC. NATIONS FUND TRUST
Nations Prime Fund Nations Government Money Market Fund
Nations Treasury Fund Nations Tax Exempt Fund
Nations Equity Income Fund Nations Value Fund
Nations Government Securities Fund Nations Capital Growth Fund
Nations International Growth Fund Nations Emerging Growth Fund
Nations Small Company Growth Fund Nations Equity Index Fund
Nations U.S. Government Bond Fund Nations Managed Index Fund
Nations Managed SmallCap Index Fund
NATIONS RESERVES Nations Managed Value Index Fund
Nations Cash Reserves Nations Managed SmallCap Value Index Fund
Nations Money Market Reserves Nations Disciplined Equity Fund
Nations Treasury Reserves Nations Strategic Equity Fund
Nations Government Reserves Nations Balanced Assets Fund
Nations Municipal Reserves Nations Short-Intermediate Government Fund
Nations California Tax-Exempt Reserves Nations Short-Term Income Fund
Nations Asset Allocation Fund Nations Diversified Income Fund
Nations Capital Income Fund Nations Strategic Fixed Income Fund
Nations Emerging Markets Fund Nations Municipal Income Fund
Nations Marsico Growth & Income Fund Nations Short-Term Municipal Income Fund
Nations Marsico Focused Equities Fund Nations Intermediate Municipal Bond Fund
Nations California Municipal Bond Fund Nations Florida Intermediate Municipal Bond Fund
Nations Intermediate Bond Fund Nations Florida Municipal Bond Fund
Nations International Equity Fund Nations Georgia Intermediate Municipal Bond Fund
Nations International Value Fund Nations Georgia Municipal Bond Fund
Nations Blue Chip Fund Nations Maryland Intermediate Municipal Bond Fund
Nations Maryland Municipal Bond Fund
Nations North Carolina Intermediate Municipal Bond Fund
Nations North Carolina Municipal Bond Fund
Nations South Carolina Intermediate Municipal Bond Fund
Nations South Carolina Municipal Bond Fund
Nations Tennessee Intermediate Municipal Bond Fund
Nations Tennessee Municipal Bond Fund
Nations Texas Intermediate Municipal Bond Fund
Nations Texas Municipal Bond Fund
Nations Virginia Intermediate Municipal Bond Fund
Nations Virginia Municipal Bond Fund
</TABLE>
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, as supplemented on September 21, 1999, January 14, 2000 and
January 19, 2000
This Statement of Additional Information ("SAI") provides supplementary
information pertaining to the classes of shares representing interests in the
above listed fifty-nine investment portfolios of Nations Reserves, Nations Fund,
Inc., and Nations Fund Trust (individually, a "Fund" and collectively, the
"Funds"). This SAI is not a prospectus, and should be read only in conjunction
with the current prospectuses for the aforementioned Funds related to the class
or series of shares in which one is interested, dated August 1, 1999, as
supplemented (each a "Prospectus"). All terms used in this SAI that are defined
in the Prospectuses will have the same meanings assigned in the Prospectuses.
Copies of the Prospectuses may be obtained without charge by writing Nations
Funds c/o Stephens Inc., One Bank of America Plaza, 33rd Floor, Charlotte, North
Carolina 28255, or by calling Nations Funds at (800) 321-7854.
<PAGE>
TABLE OF CONTENTS
Page
-----
HISTORY OF NATIONS FUND TRUST, NATIONS FUND, INC. AND
NATIONS RESERVES ..................................................... 1
DESCRIPTION OF THE COMPANIES AND THE INVESTMENTS AND RISKS
OF THEIR FUNDS ....................................................... 1
General........................................................ 1
Investment Limitations ........................................ 4
NR Funds' Fundamental Policy Restrictions...................... 4
NR Funds' Non-Fundamental Policy Restrictions.................. 10
NFT and NFI Funds' Fundamental Policy Restrictions............. 11
NFT and NFI Funds' Non-Fundamental Policy Restrictions......... 13
Permissible Fund Investments................................... 14
Asset-Backed Securities........................................ 20
Borrowings..................................................... 24
Commercial Instruments......................................... 24
Combined Transactions.......................................... 25
Convertible Securities......................................... 25
Corporate Debt Securities...................................... 26
Custodial Receipts............................................. 26
Currency Swaps................................................. 27
Delayed Delivery Transactions.................................. 27
Dollar Roll Transactions ...................................... 27
Equity Swap Contracts ......................................... 28
Foreign Currency Transactions ................................. 28
Futures, Options and Other Derivative Instruments.............. 30
Guaranteed Investment Contracts................................ 43
Insured Municipal Securities .................................. 44
Interest Rate Transactions .................................... 44
Lower Rated Debt Securities.................................... 45
Municipal Securities .......................................... 46
Options on Currencies.......................................... 73
Other Investment Companies..................................... 73
Participation Interests and Company Receipts................... 73
Real Estate Investment Trusts.................................. 74
Repurchase Agreements ......................................... 74
Reverse Repurchase Agreements ................................. 74
Securities Lending............................................. 75
Short Sales.................................................... 75
Special Situations............................................. 75
Standard & Poor's Depositary Receipts.......................... 75
Stand-by Commitments .......................................... 76
Stripped Securities............................................ 76
U.S. and Foreign Bank Obligations.............................. 77
U.S. Government Obligations.................................... 77
Use of Segregated and Other Special Accounts................... 78
Variable and Floating Rate Instruments ........................ 78
Warrants....................................................... 79
When-Issued Purchases and Forward Commitments ................ 79
Portfolio Turnover............................................. 80
Investment Risks and Considerations............................ 80
i
<PAGE>
MANAGEMENT OF THE COMPANIES........................................... 81
Nations Funds Retirement Plan.................................. 85
Nations Funds Deferred Compensation Plan....................... 85
Shareholder and Trustee Liability.............................. 86
INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY,
TRANSFER AGENCY, OTHER SERVICE PROVIDERS, SHAREHOLDER SERVICING AND
DISTRIBUTION AGREEMENTS .............................................. 87
Investment Adviser and Sub-Advisers............................ 87
Co-Administrators and Sub-Administrator........................ 97
Distribution Plans and Shareholder Servicing Arrangements for
Investor A Shares.......................................... 111
Investor B/C Shares ....................................... 112
Investor C/B Shares........................................ 114
Daily Shares............................................... 116
Marsico Shares of the Prime Fund........................... 117
Primary B Shares - Money Market Funds...................... 124
Primary B Shares - Non-Money Market Funds.................. 124
Liquidity Class............................................ 125
Market Class............................................... 127
Adviser Class.............................................. 128
Trust Class................................................ 129
Service Class.............................................. 130
Investor Class............................................. 131
Marsico Shares............................................. 132
Seafirst Shares............................................ 133
Expenses................................................... 134
Transfer Agents and Custodians................................. 135
Distributor.................................................... 135
Independent Accountant and Reports............................. 136
Counsel........................................................ 137
FUND TRANSACTIONS AND BROKERAGE....................................... 137
General Brokerage Policy....................................... 137
BROKERAGE COMMISSIONS................................................. 139
Section 28(e) Standards........................................ 140
DESCRIPTION OF SHARES................................................. 141
Description of Shares of the Companies......................... 141
Net Asset Value Determination.................................. 142
ADDITIONAL INFORMATION CONCERNING TAXES............................... 144
General........................................................ 144
Excise Tax .................................................... 144
Private Letter Ruling.......................................... 144
Investment through Master Portfolios........................... 145
Taxation of Fund/Master Portfolio Investments.................. 145
Foreign Taxes ................................................. 146
Capital Gain Distributions..................................... 146
Disposition of Fund Shares..................................... 147
Federal Income Tax Rates....................................... 147
Corporate Shareholders......................................... 147
Foreign Shareholders........................................... 147
Backup Withholding............................................. 148
ii
<PAGE>
Tax-Deferred Plans............................................. 148
Special Tax Considerations Pertaining to Municipal Reserves, California
Tax-Exempt Reserves, California Municipal Bond Fund, Tax Exempt
Fund, Municipal Income Fund, Short-Term Municipal Income Fund,
Intermediate Municipal Bond Fund, Florida Intermediate Municipal
Bond Fund, Florida Municipal Bond Fund, Georgia Intermediate
Municipal Bond Fund, Georgia Municipal Bond Fund, Maryland
Intermediate Municipal Bond Fund, Maryland Municipal Bond Fund,
North Carolina Intermediate Municipal Bond Fund, North Carolina
Municipal Bond Fund, South Carolina Intermediate Municipal Bond
Fund, South Carolina Municipal Bond Fund, Tennessee Intermediate
Municipal Bond Fund, Tennessee Municipal Bond Fund, Texas
Intermediate Municipal Bond Fund, Texas Municipal Bond Fund,
Virginia Intermediate Municipal Bond Fund, and Virginia Municipal
Bond Fund ................................................ 148
Special Tax Considerations Pertaining to California Tax-Exempt Reserves
and California Municipal Bond Fund........................ 149
Special Tax Considerations Pertaining to Florida Intermediate Municipal
Bond Fund and Florida Municipal Bond Fund................. 150
Special Tax Considerations Pertaining to Georgia Intermediate Municipal
Bond Fund and Georgia Municipal Bond Fund................. 150
Special Tax Considerations Pertaining to Maryland Intermediate Municipal
Bond Fund and Maryland Municipal Bond Fund................ 151
Special Tax Considerations Pertaining to North Carolina Intermediate
Municipal Bond Fund and North Carolina Municipal Bond
Fund...................................................... 151
Special Tax Considerations Pertaining to South Carolina Intermediate
Municipal Bond Fund and South Carolina Municipal Bond
Fund...................................................... 151
Special Tax Considerations Pertaining to Tennessee Municipal Bond
Fund...................................................... 151
Special Tax Considerations Pertaining to Virginia Intermediate Municipal
Bond Fund and Virginia Municipal Bond Fund................ 152
Other Matters.................................................. 152
ADDITIONAL INFORMATION ON PERFORMANCE................................. 152
Yield Calculations............................................. 155
Total Return Calculations...................................... 166
MISCELLANEOUS ........................................................ 177
Certain Record Holders......................................... 177
SCHEDULE A - Description of Ratings................................... A-1
iii
<PAGE>
HISTORY OF NATIONS FUND TRUST, NATIONS FUND, INC. AND
-----------------------------------------------------
NATIONS RESERVES
-----------------
Nations Fund Trust ("NFT"), Nations Fund, Inc. ("NFI") and Nations
Reserves (formerly known as The Capitol Mutual Funds),(1) ("NR") (individually a
"Company", and collectively, the "Companies") are open-end registered investment
companies in the Nations Funds family, which consists of the Companies, Nations
LifeGoal Funds, Inc., Nations Annuity Trust and Nations Master Investment Trust.
The Nations Funds family currently has more than 70 distinct investment
portfolios and total assets in excess of $70 billion.
NFT was organized as a Massachusetts business trust on May 6, 1985. NFI
was organized as a Maryland corporation on December 13, 1983, but had no
operations prior to December 15, 1986. NR was organized as a Massachusetts
business trust on January 22, 1990. NFT, NFI and NR each have fiscal year ends
of March 31.
DESCRIPTION OF THE COMPANIES AND
---------------------------------
THE INVESTMENTS AND RISKS OF THEIR FUNDS
----------------------------------------
GENERAL.
NFT currently consists of thirty-six different investment portfolios.
This SAI pertains to: the Primary A, Investor A, Investor B and Investor C
Shares of Nations Strategic Equity Fund ("Strategic Equity Fund"); the Primary
A, Primary B, Investor A, Investor B, Investor C and Daily Shares of Nations
Government Money Market Fund ("Government Money Market Fund") and Nations Tax
Exempt Fund ("Tax Exempt Fund") (collectively, also referred to as the "NFT
Money Market Funds"); the Primary A, Primary B, Investor A and Investor B Shares
of Nations Managed Index Fund ("Managed Index Fund"), Nations Managed SmallCap
Index Fund ("Managed SmallCap Index Fund"), Nations Managed Value Index Fund
("Managed Value Index Fund"), Nations Managed SmallCap Value Index Fund
("Managed SmallCap Value Index Fund"); and the Primary A, Primary B, Investor A,
Investor B and Investor C Shares of Nations Value Fund ("Value Fund"), Nations
Capital Growth Fund ("Capital Growth Fund"), Nations Emerging Growth Fund
("Emerging Growth Fund"), Nations Equity Index Fund ("Equity Index Fund"),
Nations Disciplined Equity Fund ("Disciplined Equity Fund"), Nations Balanced
Assets Fund ("Balanced Assets Fund"), Nations Short-Intermediate Government Fund
("Short-Intermediate Government Fund"), Nations Short-Term Income Fund
("Short-Term Income Fund"), Nations Diversified Income Fund ("Diversified Income
Fund"), Nations Strategic Fixed Income Fund ("Strategic Fixed Income Fund"),
Nations Municipal Income Fund ("Municipal Income Fund"), Nations Short-Term
Municipal Income Fund ("Short-Term Municipal Income Fund"), Nations Intermediate
Municipal Bond Fund ("Intermediate Municipal Bond Fund"), Nations Florida
Intermediate Municipal Bond Fund ("Florida Intermediate Municipal Bond Fund"),
Nations Georgia Intermediate Municipal Bond Fund ("Georgia Intermediate
Municipal Bond Fund"), Nations Maryland Intermediate Municipal Bond Fund
("Maryland Intermediate Municipal Bond Fund"), Nations North Carolina
Intermediate Municipal Bond Fund ("North Carolina Intermediate Municipal Bond
Fund"), Nations South Carolina Intermediate Municipal Bond Fund ("South Carolina
Intermediate Municipal Bond Fund"), Nations Tennessee Intermediate Municipal
Bond Fund ("Tennessee Intermediate Municipal Bond Fund"), Nations Texas
Intermediate Municipal Bond Fund ("Texas Intermediate Municipal Bond Fund"),
Nations Virginia Intermediate Municipal Bond Fund ("Virginia Intermediate
Municipal Bond Fund"), Nations Florida Municipal Bond Fund ("Florida Municipal
Bond Fund"), Nations Georgia Municipal Bond Fund ("Georgia Municipal Bond
Fund"), Nations Maryland Municipal Bond Fund ("Maryland Municipal Bond Fund"),
Nations North Carolina Municipal Bond Fund ("North Carolina Municipal Bond
Fund"), Nations South Carolina Municipal Bond Fund ("South Carolina Municipal
Bond Fund"), Nations Tennessee Municipal Bond Fund ("Tennessee Municipal Bond
Fund"), Nations Texas Municipal Bond Fund ("Texas Municipal Bond Fund"), and
Nations Virginia Municipal Bond Fund ("Virginia Municipal Bond Fund"). The
Florida Intermediate Municipal Bond Fund, Georgia Intermediate Municipal Bond
Fund, Maryland Intermediate Municipal Bond Fund, North Carolina Intermediate
Municipal Bond Fund, South Carolina Intermediate Municipal Bond Fund, Tennessee
Intermediate Municipal Bond Fund, Texas Intermediate Municipal Bond Fund and
Virginia Intermediate Municipal Bond Fund are sometimes collectively referred to
herein as the "State Intermediate Municipal Bond Funds." The Florida Municipal
Bond Fund, Georgia Municipal Bond Fund, Maryland Municipal Bond Fund, North
Carolina Municipal Bond Fund, South Carolina Municipal Bond Fund, Tennessee
Municipal Bond Fund, Texas Municipal Bond Fund and Virginia Municipal Bond Fund
are sometimes collectively referred to
- --------
(1) More specifically, Nations Reserves is the name under which The Capitol
Mutual Funds conducts business.
1
<PAGE>
herein as the "State Municipal Bond Funds." All of the Funds of NFT are
diversified, with the exception of the State Intermediate Municipal Bond Funds
and the State Municipal Bond Funds.
Each share of NFT 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 NFT's
Board of Trustees. NFT's Declaration of Trust authorizes the Board of Trustees
to classify or reclassify any class of shares into one or more series of shares.
Shareholders are entitled to one vote for each full share held and a
proportionate fractional vote for each fractional share held. Shareholders of
each fund of NFT will vote in the aggregate and not by fund, and shareholders of
each fund will vote in the aggregate and not by class except as otherwise
expressly required by law or when the Board of Trustees determines that the
matter to be voted on affects only the interests of shareholders of a particular
fund or class. See the discussion on Investment Limitations and Description of
Shares for examples of when the Investment Company Act of 1940 (the "1940 Act")
requires voting by fund.
As of 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 NFT and therefore could be considered to
be a controlling person of NFT for purposes of the 1940 Act. For more detailed
information concerning the percentage of each class or series of shares over
which Bank of America and its affiliates possessed or shared power to dispose or
vote as of a certain date, see the discussion on Certain Record Holders.
NFT does not presently intend to hold annual meetings except as
required by the 1940 Act. Shareholders will have the right to remove Trustees.
NFT's Code of Regulations 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 NFT entitled to be voted at such meeting.
NFI currently consists of seven different investment portfolios. This
SAI pertains to the Primary A, Primary B, Investor A, Investor B, Investor C ,
Daily Shares and Marsico Shares of Nations Prime Fund (the "Prime Fund") and the
Primary A, Primary B, Investor A, Investor B, Investor C and Daily Shares of
Nations Treasury Fund (the "Treasury Fund") (collectively referred to as the
"NFI Money Market Funds"), and the Primary A, Primary B, Investor A, Investor B
and Investor C Shares of Nations Equity Income Fund (the "Equity Income Fund"),
Nations Government Securities Fund (the "Government Securities Fund"), Nations
Small Company Growth Fund (the "Small Company Growth Fund"), Nations U.S.
Government Bond Fund (the "U.S. Government Bond Fund") and Nations International
Growth Fund (the "International Growth Fund"). All of the Funds of NFI are
diversified.
As of the date of this SAI, the authorized capital stock of NFI
consists of 460,000,000,000 shares of common stock, par value of $.001 per
share, which are divided into series or funds each of which consists of separate
classes of shares. Shares of each fund and class have equal rights with respect
to voting, except that the holders of shares of a particular fund or class will
have the exclusive right to vote on matters affecting only the rights of the
holders of such fund or class. In the event of dissolution or liquidation,
holders of each class will receive pro rata, subject to the rights of creditors,
(a) the proceeds of the sale of that portion of the assets allocated to that
class held in the respective fund of NFI, less (b) the liabilities of NFI
attributable to the respective fund or class or allocated among the funds or
classes based on the respective liquidation value of each fund or class.
Shareholders of NFI do not have cumulative voting rights, and therefore
the holders of more than 50% of the outstanding shares of all funds voting
together for election of Directors may elect all of the members of the Board of
Directors of NFI. Meetings of shareholders may be called upon the request of 10%
or more of the outstanding shares of NFI. There are no preemptive rights
applicable to any of NFI's shares. NFI's shares, when issued, will be fully paid
and non-assessable.
As of August 1, 1999, Bank of America and its affiliates possessed or
shared power to dispose of or vote with respect to more than 25% of the
outstanding shares of NFI and therefore could be considered to be a controlling
person of NFI for purposes of the 1940 Act. For more detailed information
concerning the percentage of each class or series over which Bank of America and
its affiliates possessed or shared power to dispose or vote as of a certain
date, see the discussion on Certain Record Holders. It is anticipated that NFI
will not hold annual shareholder meetings on a regular basis unless required by
the 1940 Act or Maryland law.
NR currently consists of sixteen investment portfolios. The Agreement
and Declaration of Trust under which NR was duly established permits NR to offer
separate series of units of beneficial interest ("shares"). Each
2
<PAGE>
share of each series represents an equal proportionate interest in that series.
This SAI relates to: the Capital, Liquidity, Adviser, Market, Daily, Service,
Investor and Trust Shares of Nations Cash Reserves ("Cash Reserves"), Nations
Money Market Reserves ("Money Market Reserves"), Nations Treasury Reserves
("Treasury Reserves"), Nations Government Reserves ("Government Reserves"),
Nations Municipal Reserves ("Municipal Reserves") and Nations California
Tax-Exempt Reserves ("California Reserves") (collectively referred to as the "NR
Money Market Funds"); and to the Primary A, Investor A, Investor B, Investor C
and Seafirst Shares of Nations Asset Allocation Fund ("Asset Allocation Fund")
and Nations Intermediate Bond Fund ("Intermediate Bond Fund"); and to the
Primary A, Investor A, Investor B and Investor C Shares of Nations Capital
Income Fund ("Capital Income Fund"), Nations Marsico Focused Equities Fund,
Nations Marsico Growth & Income Fund, Nations International Equity Fund
("International Equity Fund"), Nations International Value Fund ("International
Value Fund") and Nations California Municipal Bond Fund ("California Bond
Fund"); and to the Primary A, Primary B, Investor A, Investor B, Investor C and
Seafirst Shares of Nations Blue Chip Fund ("Blue Chip Fund"); and to the Primary
A, Primary B, Investor A, Investor B and Investor C Shares of Nations Emerging
Markets Fund ("Emerging Markets Fund"). All of the Funds of NR are diversified,
with the exception of the Nations Marsico Focused Equities Fund, California
Reserves and the California Bond Fund.
The Intermediate Bond Fund, Blue Chip Fund, Nations Marsico Focused
Equities Fund, Nations Marsico Growth & Income Fund and the International Equity
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 corresponding master portfolios (each a
"Master Portfolio" and collectively, the "Master Portfolios") of Nations Master
Investment Trust ("NMIT"), an open-end management investment company. The
Intermediate Bond Fund invests substantially all of its assets in Nations
Intermediate Bond Master Portfolio. The Blue Chip Fund invests substantially all
of its assets in Nations Blue Chip Master Portfolio. The Nations Marsico Focused
Equities Fund invests substantially all of its assets in Nations Marsico Focused
Equities Master Portfolio. The Nations Marsico Growth & Income Fund invests
substantially all of its assets in Nations Marsico Growth & Income Master
Portfolio. The International Equity Fund invests substantially all of its assets
in Nations International Equity Master Portfolio.
Each share of NR 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 NR's
Board of Trustees. NR'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.
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 NR 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 and its affiliates possessed or
shared power to dispose of or vote with respect to more than 25% of the
outstanding shares of NR and, therefore, could be considered to be a controlling
person of NR for purposes of the 1940 Act. For more detailed information
concerning the percentage of each class or series over which Bank of America and
its affiliates possessed or shared power to dispose or vote as of a certain
date, see the discussion on Certain Record Holders. It is anticipated that NR
will not hold annual shareholder meetings on a regular basis unless required by
the 1940 Act or Massachusetts business trust law.
Because this SAI combines disclosures on three separate investment
companies, there is a possibility that one investment company could become
liable for a misstatement, inaccuracy or incomplete disclosure in this SAI
concerning another investment company. NFT, NFI and NR have entered into an
indemnification agreement that creates a right of indemnification from the
investment company responsible for any such misstatement, inaccuracy or
incomplete disclosure that may appear in this SAI.
The NFI Money Market Funds, NFT Money Market Funds and NR Money Market
Funds are collectively referred to herein as the "Money Market Funds". All other
Funds of NFI, NFT and NR are sometimes referred to as "Non-Money Market Funds".
3
<PAGE>
Banc of America Advisors, Inc. ("BAAI") is the investment adviser to
the Funds, except the Feeder Funds. BAAI is the investment adviser to the Master
Portfolios.
Chicago Equity Partners Corporation ("Chicago Equity") is co-investment
sub-adviser with TradeStreet Investment Associates, Inc. ("TradeStreet") to the
Asset Allocation Fund. Bank of America Investment Management ("BAIM") is the
investment sub-adviser to the Strategic Equity Fund. Gartmore Global Partners
("Gartmore") is the investment sub-adviser to the Emerging Markets Fund and the
International Growth Fund. Boatmen's Capital Management, Inc. ("Boatmen's") is
the investment sub-adviser to the U.S. Government Bond Fund. TradeStreet
Investment Associates, Inc. ("TradeStreet") is the investment sub-adviser to all
other Funds except the Feeder Funds. Brandes Investment Partners, L.P.
("Brandes") is the investment sub-adviser to the International Value Master
Portfolio. Marsico Capital Management, LLC ("Marsico Capital") is investment
sub-adviser to the Nations Marsico Focused Equities Master Portfolio and Nations
Marsico Growth & Income Master Portfolio. Gartmore, INVESCO Global Asset
Management (N.A.), Inc. ("INVESCO") and Putnam Investment Management, Inc.
("Putnam") are the co-investment sub-advisers to the International Equity Master
Portfolio. As used herein the term "Adviser" shall mean BAAI, Chicago Equity,
TradeStreet, Gartmore, INVESCO, Putnam, Boatmen's, Brandes and/or Marsico
Capital as the context may require.
This SAI is intended to furnish prospective investors with additional
information concerning the Companies and the Funds. Some of the information
required to be in this SAI is also included in the Funds' current Prospectuses,
and, in order to avoid repetition, reference will be made to sections of the
Prospectuses. Additionally, the Prospectuses and this SAI omit certain
information contained in the registration statement filed with the SEC. Copies
of the registration statement, including items omitted from the Prospectuses and
this SAI, may be obtained from the SEC by paying the charges prescribed under
its rules and regulations. No investment in the Funds' Shares should be made
without first reading the related Prospectuses.
INVESTMENT LIMITATIONS
Information concerning each Fund's investment objective is set forth in
each of the Prospectuses. There can be no assurance that the Funds will achieve
their objectives. The features of the Funds' principal investment strategies and
the principal risks associated with those investment strategies also are
discussed in the Prospectuses. The most significant investment restrictions
applicable to the Funds' investment programs are set forth below:
The following investment limitations that are matters of fundamental
policy may not be changed without the affirmative vote of a Fund's shareholders.
The following investment limitations that are matters of non-fundamental policy
may be changed without the affirmative vote of a Fund's shareholders.
In addition to the policies outlined below, each Fund is seeking or has
obtained permission from the SEC to borrow money from or lend money to other
funds of the companies, and to other investment companies that permit such
transactions, and for which BAAI serves as investment adviser.
NR FUNDS' FUNDAMENTAL POLICY RESTRICTIONS
-----------------------------------------
Each Fund (except with respect to certain Funds whose restrictions are
enumerated separately) may 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
4
<PAGE>
futures contracts and related options and options on securities is not
considered to be the purchase of a security on margin.
3. Underwrite securities issued by any other person, except to the extent
that the purchase of securities and the later disposition of such
securities in accordance with the Fund's investment program may be
deemed an underwriting. This restriction shall not limit a Fund's
ability to invest in securities issued by other registered investment
companies.
4. Invest in real estate or real estate limited partnership interests. (A
Fund may, however, purchase and sell securities secured by real estate
or interests therein or issued by issuers which invest in real estate
or interests therein.) This restriction does not apply to real estate
limited partnerships listed on a national stock exchange (E.G., the New
York Stock Exchange).
5. Purchase or sell commodity contracts except that each Fund may, to the
extent appropriate under its investment policies, purchase publicly
traded securities of companies engaging in whole or in part in such
activities, may enter into futures contracts and related options, may
engage in transactions on a when-issued or forward commitment basis,
and may enter into forward currency contracts in accordance with its
investment policies.
6. Purchase any securities which would cause more than 25% of the value of
any Fund's total assets at the time of such purchase to be invested in
the securities of one or more issuers conducting their principal
business activities in the same industry, provided that there is no
limitation with respect to investments in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities
and further provided that with respect to the Money Market Funds only,
there is no limitation with respect to investments in obligations by
banks.
Cash Reserves, Treasury Reserves, Government Reserves and 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 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.
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.
5
<PAGE>
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.
Money Market Reserves may not:
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.
6
<PAGE>
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.
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 guaranteed by the
United States, any state, territory or possession of the United States,
the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, (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 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 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, 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).
7
<PAGE>
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.
Asset Allocation Fund, Capital Income Fund, California Bond Fund, Intermediate
Bond Fund and Blue Chip Fund may not:
1. Underwrite any issue of securities within the meaning of the 1933 Act
except when it might technically be deemed to be an underwriter either
(a) in connection with the disposition of a portfolio security, or (b)
in connection with the purchase of securities directly from the issuer
thereof in accordance with its investment objective.
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.
8
<PAGE>
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.
Each of the Nations Marsico Focused Equities Fund, Nations Marsico Growth &
Income Fund, International Equity Fund, International Value Fund and Emerging
Markets Fund may not:
1. Underwrite any issue of securities within the meaning of the 1933 Act
except when it might technically be deemed to be an underwriter either
(a) in connection with the disposition of a portfolio security, or (b)
in connection with the purchase of securities directly from the issuer
thereof in accordance with its investment objective. This restriction
shall not limit the Fund's ability to invest in securities issued by
other registered investment companies.
2. Purchase or sell real estate, except a Fund may purchase securities of
issuers which deal or invest in real estate and may purchase securities
which are secured by real estate or interests in real estate.
3. Purchase or sell commodities, except that a Fund may to the extent
consistent with its investment objective, invest in securities of
companies that purchase or sell commodities or which invest in such
programs, and purchase and sell options, forward contracts, futures
contracts, and options on futures contracts. This limitation does not
apply to foreign currency transactions including without limitation
forward currency contracts.
4. Purchase any securities which would cause 25% or more of the value of
its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that: (a) there is no
limitation with respect to obligations issued or guaranteed by the U.S.
Government, any state or territory of the United States, or any of
their agencies, instrumentalities or political subdivisions, and (b)
notwithstanding this limitation or any other fundamental investment
limitation, assets may be invested in the securities of one or more
management investment companies to the extent permitted by the 1940
Act, the rules and regulations thereunder and any exemptive relief
obtained by the Funds.
5. Make loans, except to the extent permitted by the 1940 Act, the rules
and regulations thereunder and any exemptive relief obtained by the
Funds.
6. Borrow money, issue senior securities or mortgage, pledge or
hypothecate its assets except to the extent permitted by the 1940 Act,
the rules and regulations thereunder and any exemptive relief obtained
by the Funds.
7. Except for the Nations Marsico Focused Equities Fund, purchase
securities (except securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) of any one issuer if, as
a result, more than 5% of its total assets will be invested in the
securities of such issuer or it would own more than 10% of the voting
securities of such issuer, except that (a) up to 25% of its total
assets may be invested without regard to these limitations and (b) a
Fund's assets may be invested in the securities of one or more
management investment companies to the extent permitted by the 1940
Act. The Nations Marsico Focused Equities Fund may not purchase
securities of any one issuer (other than U.S. Government Obligations)
if, immediately after such purchase, more than 25% of the value of a
Fund's total assets would be invested in the securities of one issuer,
and with respect to 50% of such Fund's total assets, more than 5% of
its assets would be invested in the securities of one issuer.
NR FUNDS' NON-FUNDAMENTAL POLICY RESTRICTIONS
- ---------------------------------------------
1. 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.
9
<PAGE>
2. California 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.
Notwithstanding the foregoing restriction, California Reserves invests
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. Asset Allocation Fund, Capital Income Fund, California Bond Fund,
Intermediate Bond Fund and Blue Chip Fund 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. Asset Allocation Fund, Capital Income Fund, California Bond Fund,
Intermediate Bond Fund and Blue Chip Fund may not purchase securities
of other investment companies except as permitted by the 1940 Act.
5. California Bond Fund may not purchase securities of companies for the
purpose of exercising control.
6. Intermediate Bond Fund, Blue Chip Fund, Asset Allocation Fund, Capital
Income Fund and California 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.
Each of the Nations Marsico Focused Equities Fund, Nations Marsico Growth &
Income Fund, International Equity Fund, International Value Fund and Emerging
Markets Fund may:
1. Not invest in shares of other open-end management investment companies,
subject to the limitations of the Investment Company Act of 1940 (the
"1940 Act"), the rules thereunder, and any orders obtained thereunder
now or in the future. Funds in a master/feeder structure generally
invest in the securities of one or more open-end management investment
companies pursuant to various provisions of the 1940 Act, its rules and
regulations and any exemptive relief obtained by the Funds. Other
investment companies in which the Funds invest can be expected to
charge fees for operating expenses, such as investment advisory and
administration fees, that would be in addition to those charged by a
Fund.
2. Invest or hold more than 15% (10% in the case of a money market fund)
of the Fund's net assets in illiquid securities. For this purpose,
illiquid securities include, among others, (a) securities that are
illiquid by virtue of the absence of a readily available market or
legal or contractual restrictions on resale, (b) fixed time deposits
that are subject to withdrawal penalties and that have maturities of
more than seven days, and (c) repurchase agreements not terminable
within seven days.
3. Not hedge more than 50% of its total assets by selling futures
contracts, buying put options, and writing call options (so called
"short positions"), not buy futures contracts or write put options
whose underlying value exceeds 25% of the Fund's total assets, and not
buy call options with a value exceeding 5% of the Fund's total assets.
4. Lend securities from its portfolio to brokers, dealers and financial
institutions, in amounts not to exceed (in the aggregate) one-third of
the Fund's total assets. Any such loans of portfolio securities will be
fully collateralized based on values that are marked to market daily.
The Fund will not enter into any portfolio security lending arrangement
having a duration of longer than one year.
10
<PAGE>
5. Not make investments for the purpose of exercising control or
management. (Investments by the Fund in entities created under the laws
of foreign countries solely to facilitate investment in securities in
that country will not be deemed the making of investments for the
purpose of exercising control.)
6. Not purchase securities on margin (except for short-term credits
necessary for the clearance of transactions).
7. Not sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short
(short sales "against the box"), and provided that transactions in
futures contracts and options are not deemed to constitute selling
securities short.
8. Not purchase interests, leases, or limited partnership interests in
oil, gas, or other mineral exploration or development programs.
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.
NFT AND NFI FUNDS' FUNDAMENTAL POLICY RESTRICTIONS
- ---------------------------------------------------
Each Fund may not:
1. Purchase any securities which would cause 25% or more of the value of
the Fund's total assets at the time of such purchase to be invested in
the securities of one or more issuers conducting their principal
activities in the same industry, provided that this limitation does not
apply to investments in U.S. Government Obligations. In addition, this
limitation does not apply to investments by "money market funds" as
that term is used under the 1940 Act, in obligations of domestic banks.
2. Make loans, except that a Fund may purchase and hold debt instruments
(whether such instruments are part of a public offering or privately
placed), may enter into repurchase agreements and may lend portfolio
securities in accordance with its investment policies.
3. Purchase securities of any one issuer (other than U.S. Government
Obligations) if, immediately after such purchase, more than 5% of the
value of such Fund's total assets would be invested in the securities
of such issuer, except that up to 25% of the value of the Fund's total
assets may be invested without regard to these limitations and with
respect to 75% of such Fund's assets, such Fund will not hold more than
10% of the voting securities of any issuer.
4. Borrow money or issue senior securities as defined in the 1940 Act
except that (a) a Fund may borrow money from banks for temporary
purposes in amounts up to one-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.
5. 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.
6. 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
11
<PAGE>
underwriting. This restriction shall not limit a Fund's ability to
invest in securities issued by other registered investment companies.
7. 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).
8. 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.
The International Growth Fund may not:
Borrow money except as a temporary measure and then only in amounts not
exceeding 5% of the value of the Fund's total assets or from banks or in
connection with reverse repurchase agreements provided that immediately after
such borrowing, all borrowings of the Fund do not exceed one-third of the Fund's
total assets and no purchases of portfolio instruments will be made while the
Fund has borrowings outstanding in an amount exceeding 5% of its total assets.
Each of the Small Company Growth Fund and the U.S. Government Bond Fund may not:
Borrow money except as a temporary measure for extraordinary or
emergency purposes or except in connection with reverse repurchase agreements
and mortgage rolls; provided that the respective Fund will maintain asset
coverage of 300% for all borrowings.
If a percentage limitation has been met at the time an investment is
made, a subsequent change in that percentage that is the result of a change in
value of a Fund's portfolio securities does not mean that the limitation has
been violated.
In addition, the Small Company Growth Fund and the Government Bond Fund may not:
1. Purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalists or
certificates of deposit for any such securities) if, immediately after
such purchase, more than 5% of the value of the Fund's total assets
would be invested in the securities of such issuer, or more than 10% of
the issuer's outstanding voting securities would be owned by the Fund
or the Company; except that up to 25% of the value of a Fund's total
assets may be invested without regard to the foregoing limitations. For
purposes of this limitation, (a) a security is considered to be issued
by the entity (or entities) whose assets and revenues back the security
and (b) a guarantee of a security shall not be deemed to be a security
issued by the guarantor when the value of securities issued and
guaranteed by the guarantor, and owned by the Fund, does not exceed 10%
of the value of the Fund's total assets. Each Fund will maintain asset
coverage of 300% or maintain a segregated account with its custodian
bank in which it will maintain cash, U.S. Government Securities or
other liquid high grade debt obligations equal in value to its
borrowing.
2. Purchase any securities which would cause 25% or more of the value of
the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that: (a) there is no
limitation with respect to (i) instruments issued or guaranteed by the
United States, any state, territory or possession of the United States,
the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions and (ii) repurchase
agreements secured by the instruments described in clause (i); (b)
wholly-owned finance companies will be considered to be in the
industries of their parents if their activities are primarily related
to financing the activities of the parents; and (c) utilities will be
divided according to their services, for example, gas, gas
transmission, electric and gas, electric and telephone will each be
considered a separate industry or (iii) with respect to the Small
Company Growth Fund, instruments issued by domestic branches of U.S.
Banks. Purchase or sell real estate, except that the Fund may purchase
securities of issuers which deal in real estate and may purchase
securities which are secured by interest in real estate.
12
<PAGE>
The investment objective and policies of each Fund, unless otherwise
specified, are non-fundamental and may be changed without shareholder approval.
Shareholders of the International Growth Fund, Small Company Growth Fund and
U.S. Government Bond Fund, however, must receive at least 30 days' prior written
notice in the event an investment objective is changed. If the investment
objective or policies of a Fund change, shareholders should consider whether the
Fund remains an appropriate investment in light of their current position and
needs.
NFT AND NFI FUNDS' NON-FUNDAMENTAL POLICY RESTRICTIONS
- --------------------------------------------------------
In addition, certain non-fundamental investment restrictions are also
applicable to the Funds, including the following:
1. No Fund will purchase or retain the securities of any issuer if the
officers, or directors of the Company, its advisers, or managers owning
beneficially more than one half of one percent of the securities of
each issuer together own beneficially more than five percent of such
securities.
2. No Fund will purchase securities of unseasoned issuers, including their
predecessors, that have been in operation for less than three years, if
by reason thereof the value of such Fund's investment in such classes
of securities would exceed 5% of such Fund's total assets. For purposes
of this limitation, issuers include predecessors, sponsors, controlling
persons, general partners, guarantors and originators of underlying
assets which have less than three years of continuous operation or
relevant business experience.
3. No Fund will purchase puts, calls, straddles, spreads and any
combination thereof if by reason thereof the value of its aggregate
investment in such classes of securities will exceed 5% of its total
assets except that: (a) this restriction shall not apply to standby
commitments, (b) this restriction shall not apply to a Fund's
transactions in futures contracts and related options, and (c) a Fund
may obtain short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities.
4. No Fund will invest in warrants, valued at the lower of cost or market,
in excess of 5% of the value of such Fund's assets, and no more than 2%
of the value of the Fund's net assets may be invested in warrants that
are not listed on the New York or American Stock Exchange (for purposes
of this undertaking, warrants acquired by a Fund in units or attached
to securities will be deemed to have no value).
5. No Money Market Fund may purchase securities of any one issuer (other
than obligations issued or guaranteed by the U.S. Government, its
agencies, authorities or instrumentalities and repurchase agreements
fully collateralized by such obligations) if, immediately after such
purchase, more than 5% of the value of the Fund's assets would be
invested in the securities of such issuer. Notwithstanding the
foregoing, up to 25% of each Fund's total assets may be invested for a
period of three business days in the first tier securities of a single
issuer without regard to such 5% limitation.
6. No Fund will purchase securities of companies for the purpose of
exercising control.
7. No Money Market Fund will invest more than 10% of the value of its net
assets in illiquid securities, including repurchase agreements, time
deposits and GICs with maturities in excess of seven days, illiquid
restricted securities, and other securities which are not readily
marketable. For purposes of this restriction, illiquid securities shall
not include securities which may be resold under Rule 144A and Section
4(2) of the Securities Act of 1933 that the Board of Directors, or its
delegate, determines to be liquid, based upon the trading markets for
the specific security.
8. No Non-Money Market Fund will invest more than 15% of the value of its
net assets in illiquid securities, including repurchase agreements,
time deposits and GICs with maturities in excess of seven days,
illiquid restricted securities, and other securities which are not
readily marketable. For purposes of this restriction, illiquid
securities shall not include securities which may be resold under Rule
144A and Section 4(2) of the Securities Act of 1933 that the Board of
Directors, or its delegate, determines to be liquid, based upon the
trading markets for the specific security.
9. No Fund will mortgage, pledge or hypothecate any assets except to
secure permitted borrowings and then only in an amount up to one-third
of the value of the Fund's total assets at the time of borrowing. For
purposes of this limitation, collateral arrangements with respect to
the writing of options, futures contracts, options on futures
contracts, and collateral arrangements with respect to initial and
variation margin are not considered to be a mortgage, pledge or
hypothecation of assets.
13
<PAGE>
10. No Fund will invest in securities of other investment companies, except
as they may be acquired as part of a merger, consolidation or
acquisition of assets and except to the extent otherwise permitted by
the 1940 Act.
11. No Fund will purchase oil, gas or mineral leases or other interests (a
Fund may, however, purchase and sell the securities of companies
engaged in the exploration, development, production, refining,
transporting and marketing of oil, gas or minerals).
Small Company Growth Fund and Government Bond Fund may not:
Lend its securities if collateral values are not continuously maintained at
no less than 100% by market to market daily.
Government Bond Fund may not:
1. Purchase equity securities of issuers that are not readily marketable
if the value of a Fund's aggregate investment in such securities will
exceed 5% of its total assets.
2. Purchase securities of issuers restricted as to disposition if the
value of its aggregate investment in such classes of securities will
exceed 10% of its total assets.
The Tax Exempt Fund may not:
Purchase any securities other than obligations the interest on which is
exempt from Federal income tax and stand-by commitments with respect to such
obligations.
For purposes of the foregoing limitations, any limitation that involves
a maximum percentage shall not be considered violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition or
encumbrance of securities or assets of, or borrowings on behalf of, a Fund.
PERMISSIBLE FUND INVESTMENTS
In addition to the principal investment strategies for each Fund, which
are outlined in the Funds' prospectuses, each Fund also may invest in other
types of securities in percentages of less than 10% of its total assets (unless
otherwise indicated, E.G., most Funds may invest in money market instruments
without limit during temporary defensive periods). These types of securities are
listed below for each portfolio and then are described in more detail after this
sub-section.
THE EQUITY FUNDS
Value Fund: In addition to the types of securities described in its
Prospectus, the Fund may invest in: U.S. Treasury bills, notes and bonds and
other instruments issued directly by the U.S. Government ("U.S. Treasury
Obligations"), other obligations issued or guaranteed as to payment of principal
and interest by the U.S. Government, its agencies and instrumentalities
(together with U.S. Treasury Obligations, "U.S. Government Obligations");
investment grade debt securities of domestic companies; various money market
instruments and repurchase agreements.
Equity Income Fund: In addition to the types of securities described in
its Prospectus, the Fund may invest in convertible securities and also the
securities described in the General Section below.
Emerging Growth Fund: See General Section below.
Small Company Growth Fund: In addition to the types of securities
described in its Prospectus, the Fund may invest in debt securities, unless the
Fund assumes a temporary defensive position. Debt securities, if any, purchased
by the Fund will be rated "AA" or above by S&P or "Aa" or above by Moody's or,
if unrated, determined by the Adviser to be of comparable quality. For temporary
defensive purposes, the Fund may invest up to 100% of its assets in debt
securities, including short-term and intermediate-term obligations of
corporations, the U.S. and foreign governments and international organizations
such as the World Bank, and money market instruments. The Fund may invest in
common stocks (including convertible into common stocks) of foreign issuers and
rights to purchase common stock, options and futures contracts on securities,
securities indexes and foreign currencies, securities lending, forward foreign
exchange contracts and repurchase agreements.
Disciplined Equity Fund: In addition to the types of securities
described in its Prospectus, the Fund may invest in: a broad range of equity and
debt instruments, including preferred stocks, securities (debt and preferred
14
<PAGE>
stock) convertible into common stock, warrants and rights to purchase common
stocks, options, U.S. Government and corporate debt securities and various money
market instruments. The Fund's investments in debt securities, including
convertible securities, will be limited to securities rated investment grade
(E.G., securities rated in one of the top four investment categories by an NRSRO
or, if not rated, are of equivalent quality as determined by the Adviser). For
temporary defensive purposes if market conditions warrant, the Fund may invest
without limitation in preferred stocks, investment grade debt instruments, money
market instruments and repurchase agreements.
Capital Growth Fund: In addition to the types of securities described
in its Prospectus, the Fund may invest in: preferred stocks, securities (debt
and preferred stock) convertible into common stock, warrants and rights to
purchase common stocks, other types of securities having common stock
characteristics and various money market instruments, including repurchase
agreements. The Fund may invest in foreign securities, including common stocks
(including convertible into common stocks) of foreign issuers and rights to
purchase common stock, options and futures contracts on securities, securities
indexes and foreign currencies, securities lending, forward foreign exchange
contracts.
Nations Marsico Focused Equities Fund and Nations Marsico Growth &
Income Fund: In addition to the types of securities described in their
Prospectuses, the Master Portfolios (in which the Funds invests all of their
assets) may invest in: preferred stock, warrants, convertible securities and
debt securities; zero coupon, pay-in-kind and step coupon securities, and may
invest without limit in indexed/structured securities. The Master Portfolios
also may invest its assets in high-yield/high-risk securities, such as lower
grade debt securities, high-grade commercial paper, certificates of deposit, and
repurchase agreements, and may invest in short-term debt securities as a means
of receiving a return on idle cash.
The Master Portfolios may hold cash or cash equivalents and invest
without limit in U.S. Government Obligations and short-term debt securities or
money market instruments when the Adviser: (i) believes that the market
conditions are not favorable for profitable investing, (ii) is unable to locate
favorable investment opportunities, or (iii) determines that a temporary
defensive position is advisable or necessary to meet anticipated redemption
request. In other words, the Master Portfolios do not always stay fully invested
in stocks and bonds. The Master Portfolios also may use options, futures,
forward currency contracts and other types of derivatives for hedging purposes
or for non-hedging purposes such as seeking to enhance return. The Master
Portfolios also may purchase securities on a when-issued, delayed delivery or
forward commitment basis.
General: Notwithstanding that each Equity Fund (or Master Portfolio as
the case may be) may invest in each type of security listed above in percentages
of less than 10% of that Fund's total assets, each Equity Fund (except the
Nations Marsico Focused Equities Master Portfolios and the Nations Marsico
Growth & Income Master Portfolio) may invest up to 20% of its assets in foreign
securities. While each Equity Fund reserves the right to so invest, investing in
foreign securities is not considered a principal investment strategy of the
Equity Funds.
In addition, each Equity Fund discussed above also may invest in
certain specified derivative securities including: exchange-traded options;
over-the-counter options executed with primary dealers, including long calls and
puts and covered calls to enhance return; and U.S. and foreign exchange-traded
financial futures approved by the Commodity Futures Trading Commission ("CFTC")
and options thereon for market exposure risk management. Each Equity Fund may
lend its portfolio securities to qualified institutional investors and may
invest in repurchase agreements, restricted, private placement and other
illiquid securities. Each Equity Fund also may invest in real estate investment
trust securities. Each Equity Fund (except the Nations Marsico Funds) may invest
in Standard & Poor's Depositary Receipts ("SPDRs"). In addition, each Equity
Fund may invest in securities issued by other investment companies, consistent
with the Fund's investment objective and policies and repurchase agreements. The
Nations Marsico Focused Equities Master Portfolios and Nations Marsico Growth &
Income Master Portfolio may invest in forward foreign exchange contracts.
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
15
<PAGE>
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.
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.
THE INTERNATIONAL FUNDS
International Equity Fund: In addition to the types of securities
described in its Prospectus, the Master Portfolio (in which the Fund invests all
of its assets) may invest in: real estate investment trust securities and, for
temporary defensive purposes, substantially all of its assets in U.S. financial
markets or U.S. dollar-denominated instruments. The Master Portfolio also may
invest in convertible securities, preferred stocks, bonds, notes and other
fixed-income securities, including Eurodollar and foreign government securities.
International Growth Fund: In addition to the types of securities
described in its Prospectus, the Fund may invest in: options and futures
contracts on securities, securities lending, forward foreign exchange contracts
and repurchase agreements. The Fund also may invest in American Depositary
Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), European Depositary
Receipts ("EDRs") and American Depositary Shares ("ADSs"). For temporary
defensive purposes, the Fund may invest substantially all of its assets in U.S.
financial markets or U.S. dollar-denominated instruments.
International Value Fund: In addition to the types of securities
described in its Prospectus, the Fund may invest in: short-term debt
instruments; purchase and write covered call options on specific portfolio
securities and may purchase and write put and call options on foreign stock
indices listed on foreign and domestic exchanges options and futures contracts
on securities, securities lending, forward foreign exchange contracts and
repurchase agreements. The Fund also may invest in ADRs, GDRs, EDRs and ADSs and
invest in foreign currency exchange contracts to convert foreign currencies to
and from the U.S. dollar, and to hedge against changes in foreign currency
exchange rates.
Emerging Markets Fund: In addition to the types of securities described
in its Prospectus, the Fund may invest in: debt instruments; foreign investment
funds or trusts, real estate investment trust securities, ADRs, GDRs, EDRs and
ADSs. For temporary defensive purposes, substantially all of its assets in U.S.
financial markets or U.S. dollar-denominated instruments.
General: Each Fund also may invest in certain specified derivative
securities including: exchange-traded options; over-the-counter options executed
with primary dealers, including long calls and puts and covered calls to enhance
return; and U.S. and foreign exchange-traded financial futures approved by the
CFTC and options thereon for market exposure risk management. Each Fund may lend
its portfolio securities to qualified institutional investors and may invest in
repurchase agreements, restricted, private placement and other illiquid
securities. Each International Fund also may invest in real estate investment
trust securities. In addition, each International Fund may invest in securities
issued by other investment companies, consistent with the Fund's investment
objective and policies and repurchase agreements. Each Fund also may invest in
forward foreign exchange contracts.
THE INDEX FUNDS
16
<PAGE>
Managed Index Fund, Managed SmallCap Index Fund, Managed Value Index
Fund and Managed SmallCap Value Index Fund: In addition to the types of
securities described in their Prospectuses, the Funds may invest in:
high-quality short-term debt securities and money market instruments to meet
redemption requests. If the Adviser believes that market conditions warrant a
temporary defensive posture, the Funds may invest without limitation in
high-quality short-term debt securities and money market instruments, domestic
and foreign commercial paper, certificates of deposit, bankers' acceptances and
time deposits, U.S. Government Obligations and repurchase agreements. The Funds
also may invest in certain specified derivative securities including:
exchange-traded options; over-the-counter options executed with primary dealers,
including long calls and puts and covered calls to enhance return; and U.S.
exchange-traded financial futures approved by the CFTC and options thereon for
market exposure risk management. The Funds may lend their Fund securities to
qualified institutional investors and may invest in repurchase agreements,
restricted, private placement and other illiquid securities. The Funds also may
invest in Standard & Poor's Depositary Receipts ("SPDRs"). In addition, the
Funds may invest in other securities issued by other investment companies,
consistent with such Funds' investment objective and policies.
In addition, when consistent with such Funds' respective investment
objective, the Funds will employ various techniques to manage capital gain
distributions. These techniques include utilizing a share identification
methodology whereby the Fund will specifically identify each lot of shares of
Fund securities that it holds, which will allow the Funds to sell first those
specific shares with the highest tax basis in order to reduce the amount of
recognized capital gains as compared with a sale of identical Fund securities,
if any, with a lower tax basis. A Fund will sell first those shares with the
highest tax basis only when it is in the best interest of the Fund to do so, and
reserves the right to sell other shares when appropriate. In addition, the Funds
may, at times, sell Fund securities in order to realize capital losses. Such
capital losses would be used to offset realized capital gains thereby reducing
capital gain distributions. Additionally, the Adviser will, consistent with the
Fund construction process discussed above, employ a low Fund turnover strategy
designed to defer the realization of capital gains.
The Index Funds incur transaction (brokerage) costs in connection with
the purchase and sale of Fund securities. For some funds, these costs can have a
material negative impact on performance. With respect to the Funds, the Adviser
will attempt to minimize these transaction costs by utilizing program trades and
computerized exchanges called "crossing networks" which allow institutions to
execute trades at the midpoint of the bid/ask spread and at a reduced commission
rate.
BALANCED FUND
Balanced Assets Fund: In addition to the types of securities described
in its Prospectus, the Fund may invest in: foreign securities, 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 also may invest in
Standard & Poor's Depositary Receipts ("SPDRs"). 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.
FIXED-INCOME FUNDS
Short-Term Income Fund: In addition to the types of securities
described in its Prospectus, the Fund may invest in: foreign securities,
dollar-denominated debt obligations of foreign issuers, including foreign
corporations and foreign governments, real estate investment trust securities,
municipal securities rated by one nationally recognized statistical rating
organization ("NRSRO"), or if not so rated, determined by the Adviser to be of
comparable quality to instruments so rated, high quality money market
instruments, repurchase agreements and cash.
Short-Intermediate Government Fund: In addition to the types of
securities described in its Prospectus, the Fund may invest in: corporate
convertible and non-convertible debt obligations, including bonds, notes and
debentures rated investment grade at the time of purchase by one of the NRSROs,
or if not so rated, determined by the Adviser to be of comparable quality to
instruments so rated; dollar-denominated debt obligations of foreign issuers,
including foreign corporations and foreign governments; mortgage-related
securities of governmental issuers
17
<PAGE>
or of private issuers, including mortgage pass-through certificates,
collateralized mortgage obligations ("CMOs"), real estate investment trust
securities or mortgage-backed bonds; other asset-backed securities and municipal
securities rated by one of the NRSROs or if not so rated, determined by the
Adviser to be of comparable quality. The Fund also may invest in "high quality"
money market instruments, repurchase agreements and cash. Such obligations may
include those issued by foreign banks and foreign branches of U.S. banks.
Government Securities Fund: In addition to the types of securities
described in its Prospectus, the Fund may invest in: dollar-denominated debt
obligations of foreign issuers, including foreign corporations and foreign
governments; mortgage-related securities of governmental issuers or of private
issuers, including mortgage pass-through certificates, CMOs, real estate
investment trust securities and municipal securities rated by one of the NRSROs
or if not so rated, determined by the Adviser to be of comparable quality. The
Fund also may invest in "high quality" money market instruments, repurchase
agreements and cash. Such obligations may include those issued by foreign banks
and foreign branches of U.S. banks.
Strategic Fixed Income Fund: In addition to the types of securities
described in its Prospectus, the Fund may invest in: foreign securities,
corporate convertible and non-convertible debt obligations, including bonds,
notes and debentures rated investment grade at the time of purchase by one of
the NRSROs, or if not so rated, determined by the Adviser to be of comparable
quality to instruments so rated; dollar-denominated debt obligations of foreign
issuers, including foreign corporations and foreign governments;
mortgage-related securities of governmental issuers or of private issuers,
including mortgage pass-through certificates, CMOs, and real estate investment
trust securities. The Fund also may invest in "high quality" money market
instruments, repurchase agreements and cash. Such obligations may include those
issued by foreign banks and foreign branches of U.S. banks.
Diversified Income Fund: In addition to the types of securities
described in its Prospectus, the Fund may invest in: foreign securities,
asset-backed securities and municipal securities rated by one of the NRSROs, or
if not so rated, determined by the Adviser to be of comparable quality. The Fund
also may invest in "high quality" money market instruments, repurchase
agreements and cash. Such obligations may include those issued by foreign banks
and foreign branches of U.S. banks.
U.S. Government Bond Fund: In addition to the types of securities
described in its Prospectus, the Fund may invest in: CMOs issued or guaranteed
by a U.S. Government agency or instrumentality, ADRs, EDRs, cash equivalents,
futures contracts, interest rate swaps and options.
General: Each of the Fixed Income Funds discussed above may invest in
certain specified derivative securities, including: interest rate swaps, caps
and floors for hedging purposes, exchange-traded options, over-the-counter
options executed with primary dealers, including long term calls and puts and
covered calls, and U.S. and foreign exchange-traded financial futures and
options thereon approved by the CFTC for market exposure risk management. Each
of the Funds also may lend their portfolio securities to qualified institutional
investors and may invest in repurchase agreements, restricted, private placement
and other illiquid securities. Each of the Funds may engage in reverse
repurchase agreements and in dollar roll transactions. Additionally, each Fund
may purchase securities issued by other investment companies, consistent with
the Funds' investment objectives and policies. The Funds also may invest in
instruments issued by trusts or certain partnerships including pass-through
certificates representing participations in, or debt instruments backed by, the
securities and other assets owned by such trusts and partnerships.
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.
Intermediate Bond Fund: In addition to the types of securities
described in the Fund's Prospectus, the Master Portfolio (in which the Fund
invests all of its assets) may invest in: municipal securities, cash
equivalents,
18
<PAGE>
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.
NATIONAL MUNICIPAL BOND FUNDS
Short-Term Municipal Income Fund, Intermediate Municipal Income Fund
and Municipal Income Fund: In addition to the types of securities described in
their Prospectuses, the Funds may invest in certain specified derivative
securities, including interest rate swaps, caps and floors for hedging purposes;
exchange-traded options, over-the-counter options executed with primary dealers,
including long term calls and puts and covered calls; and U.S. and foreign
exchange-traded financial futures and options thereon approved by the CFTC for
market exposure risk management. Each of the Funds also may lend their portfolio
securities to qualified institutional investors and may invest in repurchase
agreements, restricted, private placement and other illiquid securities.
Additionally, each Fund may purchase securities issued by other investment
companies, consistent with the Funds' investment objectives and policies. The
Funds also may invest in instruments issued by trusts or certain partnerships
including pass-through certificates representing participations in, or debt
instruments backed by, the securities and other assets owned by such issuers.
STATE MUNICIPAL BOND FUNDS AND STATE INTERMEDIATE MUNICIPAL BOND FUNDS
Florida Intermediate Municipal Bond Fund, Georgia Intermediate
Municipal Bond Fund, Maryland Intermediate Municipal Bond Fund, North Carolina
Intermediate Municipal Bond Fund, South Carolina Intermediate Municipal Bond
Fund, Tennessee Intermediate Municipal Bond Fund, Texas Intermediate Municipal
Bond Fund, Virginia Intermediate Municipal Bond Fund, Florida Municipal Bond
Fund, Georgia Municipal Bond Fund, Maryland Municipal Bond Fund, North Carolina
Municipal Bond Fund, South Carolina Municipal Bond Fund, Tennessee Municipal
Bond Fund, Texas Municipal Bond Fund and Virginia Municipal Bond Fund: In
addition to the types of securities described in their Prospectuses, the Funds
may invest in: certain specified derivative securities, including interest rate
swaps, caps and floors for hedging purposes; exchange-traded options;
over-the-counter options executed with primary dealers, including long term
calls and puts and covered calls; and U.S. and foreign exchange-traded financial
futures and options thereon approved by the CFTC for market exposure risk
management. Each of the Funds also may lend their portfolio securities to
qualified institutional investors and may invest in repurchase agreements,
restricted, private placement and other illiquid securities. Additionally, each
Fund may purchase securities issued by other investment companies, consistent
with the Funds' investment objectives and policies. The Funds also may invest in
instruments issued by trusts or certain partnerships including pass-through
certificates representing participations in, or debt instruments backed by, the
securities and other assets owned by such issuers.
California Municipal Bond Fund: In addition to the types of securities
described in the Fund's Prospectus, the Fund may invest in: 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.
19
<PAGE>
Additional information on the particular types of securities in which
certain Funds may invest in is set forth below.
ASSET-BACKED SECURITIES
IN GENERAL. Asset-backed securities arise through the grouping by
governmental, government-related, and private organizations of loans,
receivables, or other assets originated by various lenders. Asset-backed
securities consist of both mortgage- and non-mortgage-backed securities.
Interests in pools of these assets may differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal paid at maturity or specified call dates. Conversely,
asset-backed securities provide periodic payments which may consist of both
interest and principal payments.
The life of an asset-backed security varies depending upon the rate of
the prepayment of the underlying debt instruments. The rate of such prepayments
will be a function of current market interest rates, and other economic and
demographic factors. For example, falling interest rates generally result in an
increase in the rate of prepayments of mortgage loans while rising interest
rates generally decrease the rate of prepayments. An acceleration in prepayments
in response to sharply falling interest rates will shorten the security's
average maturity and limit the potential appreciation in the security's value
relative to a conventional debt security. Consequently, asset-backed securities
may not be as effective in locking in high, long-term yields. Conversely, in
periods of sharply rising rates, prepayments are generally slow, increasing the
security's average life and its potential for price depreciation.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent an
ownership interest in a pool of mortgage loans.
Mortgage pass-through securities may represent participation interests
in pools of residential mortgage loans originated by U.S. Governmental or
private lenders and guaranteed, to the extent provided in such securities, by
the U.S. Government or one of its agencies, authorities or instrumentalities.
Such securities, which are ownership interests in the underlying mortgage loans,
differ from conventional debt securities, which provide for periodic payment of
interest in fixed amounts (usually semi-annually) and principal payments at
maturity or on specified call dates. Mortgage pass-through securities provide
for monthly payments that are a "pass-through" of the monthly interest and
principal payments (including any prepayments) made by the individual borrowers
on the pooled mortgage loans, net of any fees paid to the guarantor of such
securities and the servicer of the underlying mortgage loans.
The guaranteed mortgage pass-through securities in which a Fund may
invest may include those issued or guaranteed by Government National Mortgage
Association ("Ginnie Mae" or "GNMA"), Federal National Mortgage Association
("Fannie Mae" or "FNMA") or Federal Home Loan Mortgage Corporation ("Freddie
Mac" or "FHLMC"). Such Certificates are mortgage-backed securities which
represent a partial ownership interest in a pool of mortgage loans issued by
lenders such as mortgage bankers, commercial banks and savings and loan
associations. Such mortgage loans may have fixed or adjustable rates of
interest.
The average life of a mortgage-backed security is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities. Prepayments of principal by mortgagors and mortgage foreclosures
will usually result in the return of the greater part of principal invested far
in advance of the maturity of the mortgages in the pool.
The yield which will be earned on mortgage-backed securities may vary
from their coupon rates for the following reasons: (i) Certificates may be
issued at a premium or discount, rather than at par; (ii) Certificates may trade
in the secondary market at a premium or discount after issuance; (iii) interest
is earned and compounded monthly, which has the effect of raising the effective
yield earned on the Certificates; and (iv) the actual yield of each Certificate
is affected by the prepayment of mortgages included in the mortgage pool
underlying the Certificates and the rate at which principal so prepaid is
reinvested. In addition, prepayment of mortgages included in the mortgage pool
underlying a GNMA Certificate purchased at a premium may result in a loss to the
Fund.
Mortgage-backed securities issued by private issuers, whether or not
such obligations are subject to guarantees by the private issuer, may entail
greater risk than obligations directly or indirectly guaranteed by the U.S.
Government.
Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities (collateral
collectively hereinafter referred to as "Mortgage Assets"). Multi-class
20
<PAGE>
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.
ADDITIONAL INFORMATION ON MORTGAGE-BACKED SECURITIES.
-----------------------------------------------------
Mortgage-backed securities represent an ownership interest in a pool of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. The mortgagor's monthly
payments to his/her lending institution are "passed-through" to an investor.
Most issuers or poolers provide guarantees of payments, regardless of whether or
not the mortgagor actually makes the payment. The guarantees made by issuers or
poolers are supported by various forms of credit collateral, guarantees or
insurance, including individual loan, title, pool and hazard insurance purchased
by the issuer. There can be no assurance that the private issuers or poolers can
meet their obligations under the policies. Mortgage-backed securities issued by
private issuers or poolers, whether or not such securities are subject to
guarantees, may entail greater risk than securities directly or indirectly
guaranteed by the U.S. Government.
Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential mortgage loans, net of any fees paid. Additional payments are caused
by repayments resulting from the sale of the underlying residential property,
refinancing or foreclosure net of fees or costs which may be incurred. Some
mortgage-backed securities are described as "modified pass-through." These
securities entitle the holders to receive all interest and principal payments
owed on the mortgages in the pool, net of certain fees, regardless of whether or
not the mortgagors actually make the payments.
Residential mortgage loans are pooled by the FHLMC. FHLMC is a
corporate instrumentality of the U.S. Government and was created by Congress in
1970 for the purpose of increasing the availability of mortgage credit
21
<PAGE>
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.
FNMA is a Government sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases residential mortgages from a list of
approved sellers/servicers which include state and federally-chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA.
The principal Government guarantor of mortgage-backed securities is the
GNMA. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by approved institutions and backed by pools of
FHA-insured or VA-guaranteed mortgages.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Pools
created by such non-governmental issuers generally offer a higher rate of
interest than Government and Government-related pools because there are no
direct or indirect Government guarantees of payments in the former pools.
However, timely payment of interest and principal of these pools is supported by
various forms of insurance or guarantees, including individual loan, title, pool
and hazard insurance purchased by the issuer. The insurance and guarantees are
issued by Governmental entities, private insurers, and the mortgage poolers.
There can be no assurance that the private insurers or mortgage poolers can meet
their obligations under the policies.
The Fund expects that Governmental or private entities may create
mortgage loan pools offering pass-through investments in addition to those
described above. The mortgages underlying these securities may be alternative
mortgage instruments, that is, mortgage instruments whose principal or interest
payment may vary or whose terms to maturity may be shorter than previously
customary. As new types of mortgage-backed securities are developed and offered
to investors, certain Funds will, consistent with their investment objective and
policies, consider making investments in such new types of securities.
Underlying Mortgages
- --------------------
Pools consist of whole mortgage loans or participations in loans. The
majority of these loans are made to purchasers of 1-4 family homes. The terms
and characteristics of the mortgage instruments are generally uniform within a
pool but may vary among pools. For example, in addition to fixed-rate,
fixed-term mortgages, a Fund may purchase pools of variable-rate mortgages
(VRM), growing equity mortgages (GEM), graduated payment mortgages (GPM) and
other types where the principal and interest payment procedures vary. VRM's are
mortgages which reset the mortgage's interest rate periodically with changes in
open market interest rates. To the extent that the Fund is actually invested in
VRM's, the Fund's interest income will vary with changes in the applicable
interest rate on pools of VRM's. GPM and GEM pools maintain constant interest
rates, with varying levels of principal repayment over the life of the mortgage.
These different interest and principal payment procedures should not impact the
Fund's net asset value since the prices at which these securities are valued
will reflect the payment procedures.
All poolers apply standards for qualification to local lending
institutions which originate mortgages for the pools. Poolers also establish
credit standards and underwriting criteria for individual mortgages included in
the pools. In addition, some mortgages included in pools are insured through
private mortgage insurance companies.
Average Life
- ------------
The average life of pass-through pools varies with the maturities of
the underlying mortgage instruments. In addition, a pool's term may be shortened
by unscheduled or early payments of principal and interest on the underlying
mortgages. The occurrence of mortgage prepayments is affected by factors
including the level of interest rates, general economic conditions, the location
and age of the mortgage, and other social and demographic conditions.
As prepayment rates of individual pools vary widely, it is not possible
to accurately predict the average life of a particular pool. For pools of
fixed-rated 30-year mortgages, common industry practice is to assume that
22
<PAGE>
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.
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 NR 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.
23
<PAGE>
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.
COMMERCIAL INSTRUMENTS
Commercial Instruments consist of short-term U.S. dollar-denominated
obligations issued by domestic corporations or issued in the U.S. by foreign
corporations and foreign commercial banks. The Prime Fund will limit purchases
of commercial instruments to instruments which: (a) if rated by at least two
NRSROs are rated in the highest rating category for short-term debt obligations
given by such organizations, or if only rated by one such organization, are
rated in the highest rating category for short-term debt obligations given by
such organization; or (b) if not rated, are (i) comparable in priority and
security to a class of short-term instruments of the same issuer that has such
rating(s), or (ii) of comparable quality to such instruments as determined by
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.
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
24
<PAGE>
underlying hedging strategies are permitted by a Fund's investment policies. A
combined transaction, while part of a single hedging strategy, may contain
elements of risk that are present in each of its component transactions.
CONVERTIBLE SECURITIES
Certain Funds may invest in convertible securities, such as bonds,
notes, debentures, preferred stocks and other securities that may be converted
into common stock. All convertible securities purchased by the Fund will be
rated in the top two categories by an NRSRO or, if unrated, determined by the
Adviser to be of comparable quality. Investments in convertible securities can
provide income through interest and dividend payments, as well as, an
opportunity for capital appreciation by virtue of their conversion or exchange
features.
The convertible securities in which a Fund may invest include
fixed-income and zero coupon debt securities, and preferred stock that may be
converted or exchanged at a stated or determinable exchange ratio into
underlying shares of common stock. The exchange ratio for any particular
convertible security may be adjusted from time to time due to stock splits,
dividends, spin-offs, other corporate distributions or scheduled changes in the
exchange ratio. Convertible debt securities and convertible preferred stocks,
until converted, have general characteristics similar to both debt and equity
securities. Although to a lesser extent than with debt securities, generally,
the market value of convertible securities tends to decline as interest rates
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion exchange feature, the market value of
convertible securities typically changes as the market value of the underlying
common stock changes, and, therefore, also tends to follow movements in the
general market for equity securities. A unique feature of convertible securities
is that as the market price of the underlying common stock declines, convertible
securities tend to trade increasingly on a yield basis, and so may not
experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the price
of a convertible security tends to rise as a reflection of the value of the
underlying common stock, although typically not as much as the price of the
underlying common stock. While no securities investments are without risk,
investments in convertible securities generally entail less risk than
investments in common stock of the same issuer.
As debt securities, convertible securities are investments which
provide for a stream of income or, in the case of zero coupon securities,
accretion of income with generally higher yields than common stocks. Of course,
like all debt securities, there can be no assurance of income or principal
payments because the issuers of the convertible securities may default on their
obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion
exchange features. Convertible securities generally are subordinated to other
similar debt securities but not to non-convertible securities of the same
issuer. Convertible bonds, as corporate debt obligations, are senior in right of
payment to all equity securities, and convertible preferred stock is senior to
common stock, of the same issuer. However, convertible bonds and convertible
preferred stock typically have lower coupon rates than similar non-convertible
securities. Convertible securities may be issued as fixed income obligations
that pay current income or as zero coupon notes and bonds, including Liquid
Yield Option Notes ("LYONs"). Zero coupon securities pay no cash income and are
sold at substantial discounts from their value at maturity. When held to
maturity, their entire income, which consists of accretion of discount, comes
from the difference between the issue price and their value at maturity. Zero
coupon convertible securities offer the opportunity for capital appreciation
because increases (or decreases) in the market value of such securities closely
follow the movements in the market value of the underlying common stock. Zero
coupon convertible securities generally are expected to be less volatile than
the underlying common stocks because they usually are issued with short
maturities (15 years or less) and are issued with options and/or redemption
features exercisable by the holder of the obligation entitling the holder to
redeem the obligation and receive a defined cash payment.
CORPORATE DEBT SECURITIES
Certain Funds may invest in corporate debt securities of domestic
issuers of all types and maturities, such as bonds, debentures, notes and
commercial paper. Corporate debt securities may involve equity features, such as
conversion or exchange rights or warrants for the acquisition of stock of the
same or a different issuer, participation based on revenue, sales or profit, or
the purchase of common stock or warrants in a unit transaction (where corporate
debt obligations and common stock are offered as a unit). Each Fund may also
invest in corporate debt securities of foreign issuers.
The corporate debt securities in which the Funds will invest will be
rated investment grade by at least one NRSRO (E.G., BBB or above by Standard &
Poor's Corporation ("S&P") or Baa or above by Moody's Investors
25
<PAGE>
Services, Inc. ("Moody's")). Commercial paper purchased by the Funds will be
rated in the top two categories by a NRSRO. Corporate debt securities that are
not rated may be purchased by such Funds if they are determined by the Adviser
to be of comparable quality under the direction of the Board of Directors of the
Company. If the rating of any corporate debt security held by a Fund falls below
such ratings or if the Adviser determines that an unrated corporate debt
security is no longer of comparable quality, then such security shall be
disposed of in an orderly manner as quickly as possible. A description of these
ratings is attached as Schedule A to this Statement of Additional Information.
CUSTODIAL RECEIPTS
Certain Funds may also acquire custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Government notes or bonds. Such notes and bonds are held in custody by a
bank on behalf of the owners. These custodial receipts are known by various
names, including "Treasury Receipts," "Treasury Investors Growth Receipts" and
"Certificates of Accrual on Treasury Securities." Although custodial receipts
are not considered U.S. Government securities, they are indirectly issued or
guaranteed as to principal and interest by the U.S. Government, its agencies,
authorities or instrumentalities. Custodial receipts will be treated as illiquid
securities.
CURRENCY SWAPS
Certain Funds also may enter into currency swaps for hedging purposes
and to seek to increase total return. In as much as swaps are entered into for
good faith hedging purposes or are offset by a segregated account as described
below, the Fund and the Adviser believe that swaps do not constitute senior
securities as defined in the 1940 Act and, accordingly, will not treat them as
being subject to the Fund's borrowing restrictions. The net amount of the
excess, if any, of the Fund's obligations over its entitlement with respect to
each currency swap will be accrued on a daily basis and an amount of cash or
liquid high grade debt securities (I.E., securities rated in one of the top
three ratings categories by an NRSRO, or, if unrated, deemed by the Adviser to
be of comparable credit quality) having an aggregate net asset value at least
equal to such accrued excess will be maintained in a segregated account by the
Fund's custodian. The Fund will not enter into any currency swap unless the
credit quality of the unsecured senior debt or the claims-paying ability of the
other party thereto is considered to be investment grade by the Adviser.
DELAYED DELIVERY TRANSACTIONS
In a delayed delivery transaction, the Fund relies on the other party
to complete the transaction. If the transaction is not completed, the Fund may
miss a price or yield considered to be advantageous. In delayed delivery
transactions, delivery of the securities occurs beyond normal settlement
periods, but a Fund would not pay for such securities or start earning interest
on them until they are delivered. However, when a Fund purchases securities on
such a delayed delivery basis, it immediately assumes the risk of ownership,
including the risk of price fluctuation. Failure by a counterparty to deliver a
security purchased on a delayed delivery basis may result in a loss or missed
opportunity to make an alternative investment. Depending upon market conditions,
a Fund's delayed delivery purchase commitments could cause its net asset value
to be more volatile, because such securities may increase the amount by which
the Fund's total assets, including the value of when-issued and delayed delivery
securities held by the Fund, exceed its net assets.
DOLLAR ROLL TRANSACTIONS
Certain Funds may enter into "dollar roll" transactions, which consist
of the sale by a Fund to a bank or broker/dealer (the "counterparty") of GNMA
certificates or other mortgage-backed securities together with a commitment to
purchase from the counterparty similar, but not identical, securities at a
future date, at the same price. The counterparty receives all principal and
interest payments, including prepayments, made on the security while it is the
holder. A Fund receives a fee from the counterparty as consideration for
entering into the commitment to 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
26
<PAGE>
security that the Fund is required to repurchase may be worth less than the
security that the Fund originally held, and the return earned by the Fund with
the proceeds of a dollar roll may not exceed transaction costs.
The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Fund's right to purchase
from the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Fund is able to purchase them.
Similarly, the Fund may be required to purchase securities in connection with a
dollar roll at a higher price than may otherwise be available on the open
market. Since, as noted above, the counterparty is required to deliver a
similar, but not identical security to the Fund, the security that the Fund is
required to buy under the dollar roll may be worth less than an identical
security. Finally, there can be no assurance that the Fund's use of the cash
that it receives from a dollar roll will provide a return that exceeds borrowing
costs.
EQUITY SWAP CONTRACTS
Certain Funds may from time to time enter into equity swap contracts.
The counterparty to an equity swap contract will typically be a bank, investment
banking firm or broker/dealer. For example, the counterparty will generally
agree to pay a Fund the amount, if any, by which the notional amount of the
Equity Swap Contract would have increased in value had it been invested in the
stocks comprising the S&P 500 Index in proportion to the composition of the
Index, plus the dividends that would have been received on those stocks. A Fund
will agree to pay to the counterparty a floating rate of interest (typically the
London Inter Bank Offered Rate) on the notional amount of the Equity Swap
Contract plus the amount, if any, by which that notional amount would have
decreased in value had it been invested in such stocks. Therefore, the return to
a Fund on any Equity Swap Contract should be the gain or loss on the notional
amount plus dividends on the stocks comprising the S&P 500 Index less the
interest paid by the Fund on the notional amount. A Fund will only enter into
Equity Swap Contracts on a net basis, I.E., the two parties' obligations are
netted out, with the Fund paying or receiving, as the case may be, only the net
amount of any payments. Payments under the Equity Swap Contracts may be made at
the conclusion of the contract or periodically during its term.
If there is a default by the counterparty to an Equity Swap Contract, a
Fund will be limited to contractual remedies pursuant to the agreements related
to the transaction. There is no assurance that Equity Swap Contract
counterparties will be able to meet their obligations pursuant to Equity Swap
Contracts or that, in the event of default, a Fund will succeed in pursuing
contractual remedies. A Fund thus assumes the risk that it may be delayed in or
prevented from obtaining payments owed to it pursuant to Equity Swap Contracts.
A Fund will closely monitor the credit of Equity Swap Contract counterparties in
order to minimize this risk.
Certain Funds may from time to time enter into the opposite side of
Equity Swap Contracts (I.E., where a Fund is obligated to pay the increase (net
of interest) or receive the decrease (plus interest) on the contract to reduce
the amount of the Fund's equity market exposure consistent with the Fund's
objective. These positions are sometimes referred to as Reverse Equity Swap
Contracts.
Equity Swap Contracts will not be used to leverage a Fund. A Fund will
not enter into any Equity Swap Contract or Reverse Equity Swap Contract unless,
at the time of entering into such transaction, the unsecured senior debt of the
counterparty is rated at least A by Moody's or S&P. Since the SEC considers
Equity Swap Contracts and Reverse Equity Swap Contracts to be illiquid
securities, a Fund will not invest in Equity Swap Contracts or Reverse Equity
Swap Contracts if the total value of such investments together with that of all
other illiquid securities which a Fund owns would exceed any limitation imposed
by the SEC Staff.
The Adviser does not believe that a Fund's obligations under Equity
Swap Contracts or Reverse Equity Swap Contracts are senior securities and,
accordingly, the Fund will not treat them as being subject to its borrowing
restrictions. However, the net amount of the excess, if any, of a Fund's
obligations over its respective entitlements with respect to each Equity Swap
Contract and each Reverse Equity Swap Contract will be accrued on a daily basis
and an amount of cash, U.S. Government securities or other liquid high quality
debt securities having an aggregate market value at least equal to the accrued
excess will be maintained in a segregated account by the Fund's custodian.
27
<PAGE>
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").
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
28
<PAGE>
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 CFTC and must be executed through a
brokerage firm, known as a futures commission merchant, which is a member of the
relevant contract market. Futures contracts trade on these markets, and the
exchanges, through their clearing organizations, guarantee that the contracts
will be performed as between the clearing members of the exchange. Presently,
futures contracts are based on such debt securities as long-term U.S. Treasury
Bonds, Treasury Notes, GNMA modified pass-through mortgage-backed securities,
three-month U.S. Treasury Bills, bank certificates of deposit, and on indices of
municipal, corporate and government bonds.
While futures contracts based on securities do provide for the delivery
and acceptance of securities, such deliveries and acceptances are seldom made.
Generally, a futures contract is terminated by entering into an offsetting
transaction. A Fund will incur brokerage fees when it purchases and sells
futures contracts. At the time such a purchase or sale is made, a Fund must
provide cash or money market securities as a deposit known as "margin." The
initial deposit required will vary, but may be as low as 2% or less of a
contract's face value. Daily thereafter, the futures contract is valued through
a process known as "marking to market," and a Fund that engages in futures
transactions may receive or be required to pay "variation margin" as the futures
contract becomes more or less valuable. At the time of delivery of securities
pursuant to a futures contract based on securities, adjustments are made to
recognize differences in value arising from the delivery of securities with a
different interest rate than the specific security that provides the standard
for the contract. In some (but not many) cases, securities called for by a
futures contract may not have been issued when the contract was written.
Futures contracts on indices of securities are settled through the
making and acceptance of cash settlements based on changes in value of the
underlying rate or index between the time the contract is entered into and the
time it is liquidated.
FUTURES CONTRACTS ON FIXED INCOME SECURITIES AND RELATED INDICES. As
noted in their respective Prospectuses, certain Funds may enter into
transactions in futures contracts for the purpose of hedging a relevant portion
of their portfolios. A Fund may enter into transactions in futures contracts
that are based on U.S. Government obligations, including any index of government
obligations that may be available for trading. Such transactions will be entered
into where movements in the value of the securities or index underlying a
futures contract can be expected to correlate closely with movements in the
value of securities held in a Fund. For example, a Fund may sell futures
contracts in anticipation of a general rise in the level of interest rates,
which would result in a decline in the value of its fixed income securities. If
the expected rise in interest rates occurs, the Fund may realize gains on its
futures position, which should offset all or part of the decline in value of
fixed income fund securities. A Fund could protect against such decline by
selling fixed income securities, but such a strategy would involve higher
transaction costs than the sale of futures contracts and, if interest rates
again declined, the Fund would be unable to take advantage of the resulting
market advance without purchases of additional securities.
The purpose of the purchase or sale of a futures contract on government
securities and indices of government securities, in the case of the
above-referenced Funds, which hold or intend to acquire long-term debt
securities, is to protect a Fund from fluctuations in interest rates without
actually buying or selling long-term debt securities. For example, if long-term
bonds are held by a Fund, and interest rates were expected to increase, the Fund
might enter into futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling an equivalent value of the long-term
bonds held by the Fund. If interest rates did increase, the value of the debt
securities in the Fund would decline, but the value of the futures contracts to
the Fund would increase at approximately the same rate thereby keeping the net
asset value of the Fund from declining as much as it otherwise would have. When
a Fund is not fully invested and a decline in interest rates is anticipated,
which would increase the cost of fixed income securities that the Fund intends
to acquire, it may purchase futures contracts. In the event that the projected
decline in interest rates occurs, the increased cost of the securities acquired
by the Fund should be offset, in whole or part, by gains on the futures
contracts by entering into offsetting transactions on the contract
29
<PAGE>
market on which the initial purchase was effected. In a substantial majority of
transactions involving futures contracts on fixed income securities, a Fund will
purchase the securities upon termination of the long futures positions, but
under unusual market conditions, a long futures position may be terminated
without a corresponding purchase of securities.
Similarly, when it is expected that interest rates may decline, futures
contracts on fixed income securities and indices of government securities may be
purchased for the purpose of hedging against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of such futures
contracts should be similar to that of long-term bonds, a Fund could take
advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Fund's cash reserves could then be used to
buy long-term bonds in the cash market. Similar results could be accomplished by
selling bonds with long maturities and investing in bonds with short maturities
when interest rates are expected to increase. However, since the futures market
is more liquid than the cash market, the use of these futures contracts as an
investment technique allows a Fund to act in anticipation of such an interest
rate decline without having to sell its portfolio securities. To the extent a
Fund enters into futures contracts for this purpose, the segregated assets
maintained by a Fund will consist of cash, cash equivalents or high quality debt
securities of the Fund in an amount equal to the difference between the
fluctuating market value of such futures contract and the aggregate value of the
initial deposit and variation margin payments made by the Fund with respect to
such futures contracts.
STOCK INDEX FUTURES CONTRACTS. Certain Funds may sell stock index
futures contracts in order to offset a decrease in market value of its
securities that might otherwise result from a market decline. A Fund may do so
either to hedge the value of its portfolio as a whole, or to protect against
declines, occurring prior to sales of securities, in the value of securities to
be sold. Conversely, a Fund may purchase stock index futures contracts in order
to protect against anticipated increases in the cost of securities to be
acquired.
In addition, a Fund may utilize stock index futures contracts in
anticipation of changes in the composition of its portfolio. For example, in the
event that a Fund expects to narrow the range of industry groups represented in
its portfolio, it may, prior to making purchases of the actual securities,
establish a long futures position based on a more restricted index, such as an
index comprised of securities of a particular industry group. As such securities
are acquired, a Fund's futures positions would be closed out. A Fund may also
sell futures contracts in connection with this strategy, in order to protect
against the possibility that the value of the securities to be sold as part of
the restructuring of its portfolio will decline prior to the time of sale.
OPTIONS ON FUTURES CONTRACTS. An option on a futures contract gives the
purchaser (the "holder") the right, but not the obligation, to purchase a
position in the underlying futures contract (I.E., a purchase of such futures
contract) in the case of an option to purchase (a "call" option), or a "short"
position in the underlying futures contract (I.E., a sale of such futures
contract) in the case of an option to sell (a "put" option), at a fixed price
(the "strike price") up to a stated expiration date. The holder pays a
non-refundable purchase price for the option, known as the "premium." The
maximum amount of risk the purchase of the option assumes is equal to the
premium plus related transaction costs, although this entire amount may be lost.
Upon exercise of the option by the holder, the exchange clearing corporation
establishes a corresponding long position in the case of a put option. In the
event that an option is exercised, the parties will be subject to all the risks
associated with the trading of futures contracts, such as payment of variation
margin deposits. In addition, the writer of an option on a futures contract,
unlike the holder, is subject to initial and variation margin requirements on
the option position.
OPTIONS ON FUTURES CONTRACTS ON FIXED INCOME SECURITIES AND RELATED
INDICES. Certain Funds may purchase put options on futures contracts in which
such Funds are permitted to invest for the purpose of hedging a relevant portion
of their portfolios against an anticipated decline in the values of portfolio
securities resulting from increases in interest rates, and may purchase call
options on such futures contracts as a hedge against an interest rate decline
when they are not fully invested. A Fund would write options on these futures
contracts primarily for the purpose of terminating existing positions.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS, OPTIONS ON STOCK INDICES AND
OPTIONS ON EQUITY SECURITIES. Certain Funds may purchase put options on stock
index futures contracts, stock indices or equity securities for the purpose of
hedging the relevant portion of their portfolio securities against an
anticipated market-wide decline or against declines in the values of individual
portfolio securities, and they may purchase call options on such futures
contracts as a hedge against a market advance when they are not fully invested.
A Fund would write options on such
30
<PAGE>
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.
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
31
<PAGE>
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, the Fund assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then current market
value, resulting in a potential capital loss if the purchase price exceeds the
market value plus the amount of the premium received, unless the security
subsequently appreciates in value.
A Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written. A Fund will realize a
profit or loss from such transaction if the cost of such transaction is less or
more than the premium received from the writing of the option. In the case of a
put option, any loss so incurred may be partially or entirely offset by the
premium received from a simultaneous or subsequent sale of a different put
option. Because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option is likely to be offset in whole
or in part by unrealized appreciation of the underlying security owned by a
Fund.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES. A Fund may purchase put
options to protect its portfolio holdings in an underlying security against a
decline in market value. Such hedge protection is provided during the life of
the put option since a Fund, as holder of the put option, is able to sell the
underlying security at the put exercise price regardless of any decline in the
underlying security's market price. In order for a put option to be profitable,
the market price of the underlying security must decline sufficiently below the
exercise price to cover the premium and transaction costs. By using put options
in this manner, a Fund will reduce any profit it might otherwise have realized
in its underlying security by the premium paid for the put option and by
transaction costs.
A Fund may also purchase call options to hedge against an increase in
prices of securities that it wants ultimately to buy. Such hedge protection is
provided during the life of the call option since the Fund, as holder of the
call option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, a Fund will reduce any
profit it might have realized had it bought the underlying security at the time
it purchased the call option by the premium paid for the call option and by
transaction costs.
PURCHASE AND SALE OF OPTIONS AND FUTURES ON STOCK INDICES. A Fund may
purchase and sell options on non-U.S. stock indices and stock index futures as a
hedge against movements in the equity markets.
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.
32
<PAGE>
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.
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
33
<PAGE>
cash, Treasury bills or other high grade short-term obligations equal in value
to the difference. Alternatively, a Fund may cover the call option through
segregating with the custodian an amount of the particular foreign currency
equal to the amount of foreign currency per futures contract option times the
number of options written by a Fund. In the case of put options on currency
futures written by the Fund, the Fund will hold the aggregate exercise price in
cash, Treasury bills, or other high grade short-term obligations in a segregated
account with its custodian, or own put options on currency futures or short
currency futures, with the difference, if any, between the market value of the
put written and the market value of the puts purchased or the currency futures
sold maintained by a Fund in cash, Treasury bills or other high grade short-term
obligations in a segregated account with its custodian. If at the close of
business on any day the market value of the put options purchased or the
currency futures by a Fund falls below 100% of the market value of the put
options written by the Fund, a Fund will so segregate an amount of cash,
Treasury bills or other high grade short-term obligations equal in value to the
difference.
If other methods of providing appropriate cover are developed, a Fund
reserves the right to employ them to the extent consistent with applicable
regulatory and exchange requirements. In connection with transactions in stock
index options, stock index futures, interest rate futures, foreign currency
futures and related options on such futures, a Fund will be required to deposit
as "initial margin" an amount of cash or short-term government securities equal
to from 5% to 8% of the contract amount. Thereafter, subsequent payments
(referred to as "variation margin") are made to and from the broker to reflect
changes in the value of the futures contract.
LIMITATIONS ON PURCHASE OF OPTIONS. The staff of the SEC has taken the
position that purchased over-the-counter options and assets used to cover
written over-the-counter options are illiquid and, therefore, together with
other illiquid securities, cannot exceed 15% of a Fund's assets. The Adviser
intends to limit a Fund's writing of over-the-counter options in accordance with
the following procedure. Each Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts which a Fund has in place with
such primary dealers will provide that the Fund has the absolute right to
repurchase an option it writes at any time at a price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by a Fund for writing the option, plus the
amount, if any, of the option's intrinsic value (I.E., the amount that the
option is in-the-money). The formula also may include a factor to account for
the difference between the price of the security and the strike price of the
option if the option is written out-of-the-money. A Fund will treat all or a
part of the formula price as illiquid for purposes of any limitation on illiquid
securities imposed by the SEC staff.
Risk Factors Associated with Futures and Options Transactions
- -------------------------------------------------------------
The effective use of options and futures strategies depends on, among
other things, a Fund's ability to terminate options and futures positions at
times when its the Adviser deems it desirable to do so. Although a Fund will not
enter into an option or futures position unless the Adviser believes that a
liquid secondary market exists for such option or future, there is no assurance
that a Fund will be able to effect closing transactions at any particular time
or at an acceptable price. A Fund generally expects that its options and futures
transactions will be conducted on recognized U.S. and foreign securities and
commodity exchanges. In certain instances, however, a Fund may purchase and sell
options in the over-the-counter market. A Fund's ability to terminate option
positions established in the over-the-counter market may be more limited than in
the case of exchange-traded options and may also involve the risk that
securities dealers participating in such transactions would fail to meet their
obligations to the Fund.
Options and futures markets can be highly volatile and transactions of
this type carry a high risk of loss. Moreover, a relatively small adverse market
movement with respect to these types of transactions may result not only in loss
of the original investment but also in unquantifiable further loss exceeding any
margin deposited.
The use of options and futures involves the risk of imperfect
correlation between movements in options and futures prices and movements in the
price of securities which are the subject of the hedge. Such correlation,
particularly with respect to options on stock indices and stock index futures,
is imperfect, and such risk increases as the composition of a Fund diverges from
the composition of the relevant index. The successful use of these strategies
also depends on the ability of the Adviser to correctly forecast interest rate
movements, currency rate movements and general stock market price movements.
34
<PAGE>
In addition to certain risk factors described above, the following sets
forth certain information regarding the potential risks associated with the
Funds' futures and options transactions.
RISK OF IMPERFECT CORRELATION. A Fund's ability effectively to hedge
all or a portion of its portfolio through transactions in futures, options on
futures or options on stock indices depends on the degree to which movements in
the value of the securities or index underlying such hedging instrument
correlate with movements in the value of the relevant portion of the Fund's
securities. If the values of the securities being hedged do not move in the same
amount or direction as the underlying security or index, the hedging strategy
for a Fund might not be successful and the Fund could sustain losses on its
hedging transactions which would not be offset by gains on its portfolio. It is
also possible that there may be a negative correlation between the security or
index underlying a futures or option contract and the portfolio securities being
hedged, which could result in losses both on the hedging transaction and the
fund securities. In such instances, a Fund's overall return could be less than
if the hedging transactions had not been undertaken. Stock index futures or
options based on a narrower index of securities may present greater risk than
options or futures based on a broad market index, as a narrower index is more
susceptible to rapid and extreme fluctuations resulting from changes in the
value of a small number of securities. A Fund would, however, effect
transactions in such futures or options only for hedging purposes.
The trading of futures and options on indices involves the additional
risk of imperfect correlation between movements in the futures or option price
and the value of the underlying index. The anticipated spread between the prices
may be distorted due to differences in the nature of the markets, such as
differences in margin requirements, the liquidity of such markets and the
participation of speculators in the futures and options market. The purchase of
an option on a futures contract also involves the risk that changes in the value
of underlying futures contract will not be fully reflected in the value of the
option purchased. The risk of imperfect correlation, however, generally tends to
diminish as the maturity date of the futures contract or termination date of the
option approaches. The risk incurred in purchasing an option on a futures
contract is limited to the amount of the premium plus related transaction costs,
although it may be necessary under certain circumstances to exercise the option
and enter into the underlying futures contract in order to realize a profit.
Under certain extreme market conditions, it is possible that a Fund will not be
able to establish hedging positions, or that any hedging strategy adopted will
be insufficient to completely protect the Fund.
A Fund will purchase or sell futures contracts or options only if, in
the Adviser's judgment, there is expected to be a sufficient degree of
correlation between movements in the value of such instruments and changes in
the value of the relevant portion of the Fund's portfolio for the hedge to be
effective. There can be no assurance that the Adviser's judgment will be
accurate.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET. The ordinary spreads
between prices in the cash and futures markets, due to differences in the
natures of those markets, are subject to distortions. First, all participants in
the futures market are subject to initial deposit and variation margin
requirements. This could require a Fund to post additional cash or cash
equivalents as the value of the position fluctuates. Further, rather than
meeting additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the liquidity of the
futures or options market may be lacking. Prior to exercise or expiration, a
futures or option position may be terminated only by entering into a closing
purchase or sale transaction, which requires a secondary market on the exchange
on which the position was originally established. While a Fund will establish a
futures or option position only if there appears to be a liquid secondary market
therefor, there can be no assurance that such a market will exist for any
particular futures or option contract at any specific time. In such event, it
may not be possible to close out a position held by a Fund, which could require
the Fund to purchase or sell the instrument underlying the position, make or
receive a cash settlement, or meet ongoing variation margin requirements. The
inability to close out futures or option positions also could have an adverse
impact on a Fund's ability effectively to hedge its securities, or the relevant
portion thereof.
The liquidity of a secondary market in a futures contract or an option
on a futures contract may be adversely affected by "daily price fluctuation
limits" established by the exchanges, which limit the amount of fluctuation in
the price of a contract during a single trading day and prohibit trading beyond
such limits once they have been reached. The trading of futures and options
contracts also is subject to the risk of trading halts, suspensions, exchange or
clearing house equipment failures, government intervention, insolvency of the
brokerage firm or clearing house or other disruptions of normal trading
activity, which could at times make it difficult or impossible to liquidate
existing positions or to recover excess variation margin payments.
35
<PAGE>
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.
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,
36
<PAGE>
against anticipated interest rate changes and not for speculation. As described
below, this would include the use of futures contract sales to protect against
expected increases in interest rates and futures contract purchases to offset
the impact of interest rate declines.
A Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Fund, through using futures contracts.
Description of Interest Rates Futures Contracts. An interest rate
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by the Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the Fund's entering
into a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment on
the floors of several exchanges - principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. A Fund would deal
only in standardized contracts on recognized changes. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury Bonds and
Notes; GNMA modified pass-through mortgage-backed securities; three-month United
States Treasury Bills; and ninety-day commercial paper. The Funds may trade in
any futures contract for which there exists a public market, including, without
limitation, the foregoing instruments.
Examples of Futures Contract Sale. A Fund would engage in an interest
rate futures contract sale to maintain the income advantage from continued
holding of a long-term bond while endeavoring to avoid part or all of the loss
in market value that would otherwise accompany a decline in long-term securities
prices. Assume that the market value of a certain security in a Fund tends to
move in concert with the futures market prices of long-term United States
Treasury bonds ("Treasury Bonds"). The Adviser wishes to fix the current market
value of this portfolio security until some point in the future. Assume the
portfolio security has a market value of 100, and the Adviser believes that,
because of an anticipated rise in interest rates, the value will decline to 95.
The Fund might enter into futures contract sales of Treasury bonds for an
equivalent of 98. If the market value of the portfolio securities does indeed
decline from 100 to 95, the equivalent futures market price for the Treasury
bonds might also decline from 98 to 93.
In that case, the five-point loss in the market value of the portfolio
security would be offset by the five-point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.
The Adviser could be wrong in its forecast of interest rates and the
equivalent futures market price could rise above 98. In this case, the market
value of the portfolio securities, including the portfolio security being
37
<PAGE>
protected, would increase. The benefit of this increase would be reduced by the
loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example
might incur a loss of 2 points (which might be reduced by an offsetting
transaction prior to the settlement date). In each transaction, transaction
expenses would also be incurred.
Examples of Future Contract Purchase. A Fund would engage in an
interest rate futures contract purchase when it is not fully invested in
long-term bonds but wishes to defer for a time the purchase of long-term bonds
in light of the availability of advantageous interim investments, E.G.,
shorter-term securities whose yields are greater than those available on
long-term bonds. The Fund's basic motivation would be to maintain for a time the
income advantage from investing in the short-term securities; the Fund would be
endeavoring at the same time to eliminate the effect of all or part of an
expected increase in market price of the long-term bonds that the Fund may
purchase.
For example, assume that the market price of a long-term bond that the
Fund may purchase, currently yielding 10%, tends to move in concert with futures
market prices of Treasury bonds. The Adviser wishes to fix the current market
price (and thus 10% yield) of the long-term bond until the time (four months
away in this example) when it may purchase the bond. Assume the long-term bond
has a market price of 100, and the Adviser believes that, because of an
anticipated fall in interest rates, the price will have risen to 105 (and the
yield will have dropped to about 9-1/2%) in four months. The Fund might enter
into futures contracts purchases of Treasury bonds for an equivalent price of
98. At the same time, the Fund would assign a pool of investments in short-term
securities that are either maturing in four months or earmarked for sale in four
months, for purchase of the long-term bond at an assumed market price of 100.
Assume these short-term securities are yielding 15%. If the market price of the
long-term bond does indeed rise from 100 to 105, the equivalent futures market
price for Treasury bonds might also rise from 98 to 103. In that case, the
5-point increase in the price that the Fund pays for the long-term bond would be
offset by the 5-point gain realized by closing out the futures contract
Purchase.
The Adviser could be wrong in its forecast of interest rates; long-term
interest rates might rise to above 10%; and the equivalent futures market price
could fall below 98. If short-term rates at the same time fall to 10% or below,
it is possible that the Fund would continue with its purchase program for
long-term bonds. The market price of available long-term bonds would have
decreased. The benefit of this price decrease, and thus yield increase, will be
reduced by the loss realized on closing out the futures contract purchase.
If, however, short-term rates remained above available long-term rates,
it is possible that the Fund would discontinue its purchase program for
long-term bonds. The yield on short-term securities in the portfolio, including
those originally in the pool assigned to the particular long-term bond, would
remain higher than yields on long-term bonds. The benefit of this continued
incremental income will be reduced by the loss realized on closing out the
futures contract purchase.
In each transaction, expenses also would be incurred.
II. Index Futures Contracts.
A stock or bond index assigns relative values to the stocks or bonds
included in the index, and the index fluctuates with changes in the market
values of the stocks or bonds included. Some stock index futures contracts are
based on broad market indices, such as the Standard & Poor's 500 or the New York
Stock Exchange Composite Index. In contract, certain exchanges offer futures
contracts on narrower market indices, such as the Standard & Poor's 100, the
Bond Buyer Municipal Bond Index, an index composed of 40 term revenue and
general obligation bonds, or indices based on an industry or market segment,
such as oil and gas stocks. Futures contracts are traded on organized exchanges
regulated by the Commodity Futures Trading Commission. Transactions on such
exchanges are cleared through a clearing corporation, which guarantees the
performance of the parties to each contract.
A Fund will sell index futures contracts in order to offset a decrease
in market value of its portfolio securities that might otherwise result from a
market decline. The Fund may do so either to hedge the value of its portfolio as
a whole, or to protect against declines, occurring prior to sales of securities,
in the value of the securities to be sold. Conversely, a Fund will purchase
index futures contracts in anticipation of purchases of securities. In a
substantial majority of these transactions, the Fund will purchase such
securities upon termination of the long futures position, but a long futures
position may be terminated without a corresponding purchase of securities.
38
<PAGE>
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).
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
-Day Hedge is Placed
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures = $62,500/Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/Contract
Increase in Purchase Gain on Futures = $2,500
Price = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future Hedge
Objective: Protect Against Declining (Value of the Portfolio)
Factors
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index - 1.0
Portfolio Futures
-Day Hedge is Placed
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Gain on Futures = $40,000
Value = $40 000
IF, HOWEVER, THE MARKET MOVED IN THE OPPOSITE DIRECTION, THAT IS, MARKET
VALUE DECREASED AND THE FUND HAD ENTERED INTO AN ANTICIPATORY PURCHASE HEDGE, OR
MARKET VALUE INCREASED AND THE FUND HAD HEDGED ITS STOCK PORTFOLIO, THE RESULTS
OF THE FUND'S TRANSACTIONS IN STOCK INDEX FUTURES WOULD BE AS SET FORTH BELOW.
39
<PAGE>
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
-Day Hedge is Placed
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures = $62,500/Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 120
Actual Cost = $60,000 Value of Futures = $60,000/Contract
Decrease in Purchase Loss on Futures = $2,500/Contract
Price = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index - 1.0
Portfolio Futures
-Day Hedge is Placed
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Portfolio = $40,000 Loss of Futures = $40,000
Value = $40 000
III. Margin Payments
Unlike when a Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to deposit with the broker or in a segregated account
with the Fund's Custodian an amount of cash or cash equivalents, the value, of
which may vary but is generally equal to 10% or less of the value of the
contract. This amount is known as initial margin. The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin is
in the nature of a performance bond or good faith deposit on the contract which
is returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying security or index fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking to the market. For example, when a Fund has purchased a futures contract
and the price of the contract has risen in response to a rise in the underlying
instruments, that position will have increased in value and the Fund will be
entitled to receive from the broker a variation margin payment equal to that
increase in value. Conversely, where a Fund has purchased a futures contract and
the price of the futures contract has declined in response to a decrease in the
underlying instruments, the position would be less valuable, the Fund would be
required to make a variation margin payment to the broker. At any time prior to
expiration of the futures contract, the Adviser may elect to close the position
by taking an opposite position, subject to the availability of a secondary
market, which will operate to terminate the Fund's position in the futures
contract. A final determination of variation
40
<PAGE>
margin is then made, additional cash is required to be paid by or released to
the Fund, and the Fund realizes a loss or gain.
IV. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by a Fund
as a hedging device. One risk arises because of the imperfect correlation
between movements in the price of the future and movements in the price of the
securities which are the subject of the hedge. The price of the future may move
more than or less than the price of the securities being hedged. If the price of
the future moves less than the price of the securities which are the subject of
the hedge, the hedge will not be fully effective but, if the price of securities
being hedged has moved in an unfavorable direction, the Fund would be in a
better position than if it had not hedged at Al. If the price of the securities
being hedged has moved in a favorable direction, this advance will be partially
offset by the loss on the future. If the price of the future moves more than the
price of the hedged securities, the Fund involved will experience either a loss
or gain on the future which will not be completely offset by movements in the
price of the securities which are the subject of the hedge.
To compensate for the imperfect correlation of movements in the price
of securities being hedged and movements in the price of futures contracts, a
Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the volatility over a particular
time period of the prices of such securities has been greater than the
volatility over such time period of the future, or if otherwise deemed to be
appropriate by the Adviser. Conversely, a Fund may buy or sell fewer futures
contracts if the volatility over a particular time period of the prices of the
securities being hedged is less than the volatility over such time period of the
futures contract being used, or if otherwise deemed to be appropriate by the
Adviser. It also is possible that, where a Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance, and the value
of securities held by the Fund may decline. If this occurred, the Fund would
lose money on the future and also experience a decline in value in its portfolio
securities.
Where futures are purchased to hedge against a possible increase in the
price of securities before a Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the Fund then concludes not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, the Fund will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In instances involving the purchase of futures contracts by a Fund, an
amount of cash and cash equivalents, equal to the market value of the futures
contracts, will be deposited in a segregated account with the Fund's Custodian
and/or in a margin account with a broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of Price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the Adviser still may not
result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, a Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts
41
<PAGE>
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.
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
42
<PAGE>
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.
A Fund will usually enter into swaps on a net basis, I.E., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. In as much as these swaps, caps and
floors are entered into for good faith hedging purposes, the Adviser and the
Fund believe such obligations do not constitute senior securities under the 1940
Act and, accordingly, will not treat them as being subject to its borrowing
restrictions. A Fund will not enter into any swap, cap and floor transaction
unless, at the time of entering into such transaction, the unsecured long-term
debt of the counterparty, combined with any credit enhancements, is rated at
least "A" by Standard & Poor's Corporation or Moody's Investors Service, Inc. or
has an equivalent rating from an NRSRO or is determined to be of equivalent
credit quality by the Adviser. If there is a default by the counterparty, the
Fund may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps and floors are more recent innovations
for which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
With respect to swaps, a Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high grade securities
having a value equal to the accrued excess. Caps and floors require segregation
of assets with a value equal to the Fund's net obligation, if any.
43
<PAGE>
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 many buyers. Each Fund's
policies regarding lower rated debt securities are not fundamental and may be
changed at any time without shareholder approval.
While the market values of lower rated debt and comparable unrated
securities tend to react less to fluctuations in interest rate levels than the
market values of higher-rated securities, the market values of certain lower
rated debt and comparable unrated securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
higher-rated securities. In addition, lower rated debt securities and comparable
unrated securities generally present a higher degree of credit risk. Issuers of
lower rated debt and comparable unrated securities often are highly leveraged
and may not have more traditional methods of financing available to them so that
their ability to service their debt obligations during an economic downturn or
during sustained periods of rising interest rates may be impaired. The risk of
loss due to default by such issuers is significantly greater because lower rated
debt and comparable unrated securities generally are unsecured and frequently
are subordinated to the prior payment of senior indebtedness. A Fund may incur
additional expenses to the extent that it is required to seek recovery upon a
default in the payment of principal or interest on its portfolio holdings. The
existence of limited markets for lower rated debt and comparable unrated
securities may diminish a Fund's ability to (a) obtain accurate market
quotations for purposes of valuing such securities and calculating its net asset
value and (b) sell the securities at fair value either to meet redemption
requests or to respond to changes in the economy or in financial markets.
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.
44
<PAGE>
MUNICIPAL SECURITIES
GENERALLY. The two principal classifications of municipal securities
are "general obligation" securities and "revenue" securities. General obligation
securities are secured by the issuer's pledge of its full faith, credit, and
taxing power for the payment of principal and interest. Revenue securities are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as the user of the facility being financed. Private
activity bonds held by a Fund are in most cases revenue securities and are not
payable from the unrestricted revenues of the issuer. Consequently, the credit
quality of private activity bonds is usually directly related to the credit
standing of the corporate user of the facility involved.
Municipal securities may include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which created
the issuer.
Municipal securities may include variable- or floating- rate
instruments issued by industrial development authorities and other governmental
entities. While there may not be an active secondary market with respect to a
particular instrument purchased by a Fund, a Fund may demand payment of the
principal and accrued interest on the instrument or may resell it to a third
party as specified in the instruments. The absence of an active secondary
market, however, could make it difficult for a Fund to dispose of the instrument
if the issuer defaulted on its payment obligation or during periods the Fund is
not entitled to exercise its demand rights, and the Fund could, for these or
other reasons, suffer a loss.
Some of these instruments may be unrated, but unrated instruments
purchased by a Fund will be determined by the Adviser to be of comparable
quality at the time of purchase to instruments rated "high quality" by any major
rating service. Where necessary to ensure that an instrument is of comparable
"high quality," a Fund will require that an issuer's obligation to pay the
principal of the note may be backed by an unconditional bank letter or line of
credit, guarantee, or commitment to lend.
Municipal securities may include participations in privately arranged
loans to municipal borrowers, some of which may be referred to as "municipal
leases." Generally such loans are unrated, in which case they will be determined
by the Adviser to be of comparable quality at the time of purchase to rated
instruments that may be acquired by a Fund. Frequently, privately arranged loans
have variable interest rates and may be backed by a bank letter of credit. In
other cases, they may be unsecured or may be secured by assets not easily
liquidated. Moreover, such loans in most cases are not backed by the taxing
authority of the issuers and may have limited marketability or may be marketable
only by virtue of a provision requiring repayment following demand by the
lender. Such loans made by a Fund may have a demand provision permitting the
Fund to require payment within seven days. Participations in such loans,
however, may not have such a demand provision and may not be otherwise
marketable.
Although lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate, and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds. In the case of a
"non-appropriation" lease, the Funds' ability to recover under the lease in the
event of non-appropriation or default will be limited solely to the repossession
of the leased property in the event foreclosure might prove difficult.
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
45
<PAGE>
underlying equipment were ever required. The Funds have not imposed any
percentage limitations with respect to their investment in lease obligations not
subject to the "non-appropriation" risk. To the extent municipal leases are
illiquid, they will be subject to each Fund's limitation on investments in
illiquid securities. Recovery of an investment in any such loan that is illiquid
and payable on demand may depend on the ability of the municipal borrower to
meet an obligation for full repayment of principal and payment of accrued
interest within the demand period, normally seven days or less (unless a Fund
determines that a particular loan issue, unlike most such loans, has a readily
available market). As it deems appropriate, the Adviser will establish
procedures to monitor the credit standing of each such municipal borrower,
including its ability to meet contractual payment obligations.
In evaluating the credit quality of a municipal lease obligation and
determining whether such lease obligation will be considered "liquid," the
Adviser for each Fund will consider: (1) whether the lease can be canceled; (2)
what assurance there is that the assets represented by the lease can be sold;
(3) the strength of the lessee's general credit (E.G., its debt, administrative,
economic, and financial characteristics); (4) the likelihood that the
municipality will discontinue appropriating funding for the leased property
because the property is no longer deemed essential to the operations of the
municipality (E.G., the potential for an "event of non-appropriation"); and (5)
the legal recourse in the event of failure to appropriate.
Municipal securities may include units of participation in trusts
holding pools of tax-exempt leases. Municipal participation interests may be
purchased from financial institutions, and give the purchaser an undivided
interest in one or more underlying municipal security. To the extent that
municipal participation interests are considered to be "illiquid securities,"
such instruments are subject to each Fund's limitation on the purchase of
illiquid securities. Municipal leases and participating interests therein, which
may take the form of a lease or an installment sales contract, are issued by
state and local governments and authorities to acquire a wide variety of
equipment and facilities. Interest payments on qualifying leases are exempt from
Federal income taxes.
In addition, certain of the Funds may acquire "stand-by commitments"
from banks or broker/dealers with respect to municipal securities held in their
portfolios. Under a stand-by commitment, a dealer would agree to purchase at a
Fund's option specified Municipal Securities at a specified price. The Funds
will acquire stand-by commitments solely to facilitate portfolio liquidity and
do not intend to exercise their rights thereunder for trading purposes.
Although the Funds do not presently intend to do so on a regular basis,
each may invest more than 25% of its total assets in municipal securities the
interest on which is paid solely from revenues of similar projects if such
investment is deemed necessary or appropriate by the Adviser. To the extent that
more than 25% of a Fund's total assets are invested in Municipal Securities that
are payable from the revenues of similar projects, a Fund will be subject to the
peculiar risks presented by such projects to a greater extent than it would be
if its assets were not so concentrated.
There are, of course, variations in the quality of Municipal
Securities, both within a particular classification and between classifications,
and the yields on Municipal Securities depend upon a variety of factors,
including general money market conditions, the financial condition of the
issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of NRSROs represent their opinions as to the quality of
Municipal Securities. It should be emphasized, however, that these ratings are
general and are not absolute standards of quality, and Municipal Securities with
the same maturity, interest rate, and rating may have different yields while
Municipal Securities of the same maturity and interest rate with different
ratings may have the same yield. Subsequent to its purchase by a Fund, an issue
of Municipal Securities may cease to be rated, or its rating may be reduced
below the minimum rating required for purchase by that Fund. The Adviser will
consider such an event in determining whether a Fund should continue to hold the
obligation.
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
46
<PAGE>
that term is used in the Prospectuses and this SAI. The non-governmental user of
facilities financed by private activity bonds is also considered to be an
"issuer." An issuer's obligations under its Municipal Securities are subject to
the provisions of bankruptcy, insolvency, and other laws affecting the rights
and remedies of creditors, such as the Federal Bankruptcy Code, and laws, if
any, which may be enacted by Federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its Municipal Securities may be
materially adversely affected by litigation or other conditions.
Although the Municipal Income Fund and the State Municipal Bond Funds
invest primarily in Municipal Securities with long-term maturities, the
Intermediate Municipal Bond Fund and the State Intermediate Municipal Bond Funds
invest primarily in Municipal Securities with intermediate-term maturities, they
may also purchase short-term General Obligation Notes, Tax Anticipation Notes,
Bond Anticipation Notes, Revenue Anticipation Notes, Tax-Exempt Commercial
Paper, Construction Loan Notes, and other forms of short-term loans. Such
instruments are issued with a short-term maturity in anticipation of the receipt
of tax funds, the proceeds of bond placements, or other revenues. The State
Intermediate Municipal Bond Funds may also invest in long-term tax-exempt
instruments.
Certain types of Municipal Securities (private activity bonds) have
been or are issued to obtain funds to provide, among other things, privately
operated housing facilities, pollution control facilities, convention or trade
show facilities, mass transit, airport, port or parking facilities, and certain
local facilities for water supply, gas, electricity, or sewage or solid waste
disposal. Private activity bonds are also issued for privately held or publicly
owned corporations in the financing of commercial or industrial facilities. Most
governments are authorized to issue private activity bonds for such purposes in
order to encourage corporations to locate within their communities. The
principal and interest on these obligations may be payable from the general
revenues of the users of such facilities.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the Federal income tax exemption for
interest on Municipal Securities. Moreover, with respect to Municipal Securities
issued by Florida, Georgia, Maryland, North Carolina, South Carolina, Tennessee,
Texas, or Virginia issuers, NFT cannot predict which legislation, if any, may be
proposed in the state legislatures or which proposals, if any, might be enacted.
Such proposals, while pending or if enacted, might materially and adversely
affect the availability of Municipal Securities generally, or Florida, Georgia,
Maryland, North Carolina, South Carolina, Tennessee, Texas, or Virginia
Municipal Securities specifically, for investment by one of these Funds and the
liquidity and value of such portfolios. In such an event, a Fund impacted would
re-evaluate its investment objective and policies and consider possible changes
in its structure or possible dissolution.
The following information relates specifically to California 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.
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.
47
<PAGE>
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 on 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.
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.
48
<PAGE>
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.
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).
49
<PAGE>
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.
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
50
<PAGE>
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 the 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.
HEALTH CARE LEGISLATION. Certain Debt Obligations in the 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
51
<PAGE>
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 the 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.
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 the 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.
52
<PAGE>
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.
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.
53
<PAGE>
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.
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
54
<PAGE>
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.
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.
55
<PAGE>
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.
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 the 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 California Reserves and the
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.
The following information relating to the State Intermediate Municipal
Bond Funds and the State Municipal Bond Funds supplements information relevant
to each of those Funds in the related Prospectuses.
FLORIDA. Florida is the fourth most populous state with an estimated
1998 population of 15,000,000. By the year 2005, population will likely exceed
16 million. Population growth has historically been driven by retirement
migration with local economies weighted heavily in tourism and agriculture. Over
the past twenty years, retirement, agriculture and tourism have been
complemented by high technology jobs, service sector jobs and international
trade. In the meantime, the three traditional industries have taken on global
character. Trade and tourism have become international and this has fueled
foreign retirement migration.
56
<PAGE>
The health of the national economy plays an important role in Florida's
fiscal soundness and economic development. Today, as this country enters its
ninth year of economic expansion, population growth in Florida, since 1990, has
averaged in excess of 250,000 per year.
The emergence of Florida as one of the most populous states in the
United States has placed significant pressure on state and local government to
provide infrastructure and municipal and urban services. During the 1980's
growth was so rapid that a significant backlog of need emerged which today, is
still being filled. Across the state, construction of new highway systems,
airport expansions, local school and university systems, hospitals and jails are
being put in place. Much of this growth is being funded by bonded revenues
secured by the expanding real property tax base. As of 1998, real property
values exceeded $770 billion. Residential property values accounted for over
$481 billion in value. In addition to the rapid population growth and resulting
increases in improved residential properties, commercial and industrial
valuations have also grown consistently. Today these values account for 15
percent of Florida property values. There is now over $117 billion in improved
real property value in commercial and industrial properties in Florida.
One reason commercial and industrial values have increased is the
strategic nature of the industries that have located and grown in the State. The
Florida industrial base is concentrated in high technology industries such as
electronics, medical equipment, laser optics, computer simulation and space
travel. As a result, while defense contract spending has declined nationally by
over 25 percent, in real terms, from 1985 to 1998, Florida's value of defense
contracts has increased 11 percent to nearly $6 billion, through 1996.
With increasing demands for services and comparatively low taxes,
Florida has experienced a rapid growth in the volume of bond debt. Because of
rapid population growth however, per capita state debt remains well below the
national average. In 1997, the outstanding average state debt per capita, among
all states, was $1,706, compared with $1,093 per capita in Florida.
The Growth Management Act of 1985 and the concurrency rules promulgated
has affected Florida's economic growth and development in some regions of the
State and could continue to impact the economy in the future. Concurrency means
that the services and infrastructure caused by new development must be in place
on or before such new development is operational. In addition, the location of
new development will be more carefully scrutinized with the respect to
environmental sensitivity and natural resource limitations. Growth management
legislation will affect all areas of the State with varying degrees of impact
depending on the specific local conditions such as, existing infrastructure
capacity, local environmental constraints, and limitations on natural resources
such as potable water and habitat preservation. Having now experienced more than
ten years subject to growth management rules, it appears that the Growth
Management Act of 1985 has, on balance, been beneficial. Growth management has
helped improve quality of life, ease infrastructure shortfalls and focused the
State agenda on preserving quality of life through growth management regulation
and other funded environmental land preservation programs.
Within Florida, regional economies perform differently according to
their urban or rural qualities and level of economic diversification. The
spectrum of regional economies spans dense urban centers such as Miami and Tampa
to rural agricultural regions of citrus, cattle ranching and sugar cane
production.
Southeast Florida includes Miami, Fort Lauderdale, West Palm Beach, and
the Florida Keys. This area is highly urban and economically diverse. Tourism,
retirement, high technology computer manufacturing, medical industries,
international trade, winter vegetable crops and sugar cane production are the
prominent features of this regional economy. The area accounts for just under
one third of the state's population. Hurricane Andrew struck South Dade County
in Fall, 1992. Some 80,000 homes were destroyed along with local businesses and
Homestead Air Force Base. Since the hurricane, approximately 80 to 90 percent of
the homes have been restored. The restoration and rebuilding process is now
essentially complete. Over the long term, the effects of the hurricane may speed
the suburbanization of South Florida. However, in the interim, extensive
reinvestment and redevelopment is still needed. Other factors helping to
diminish agriculture locally include environmental preservations in sugarcane
lands, and the effect of foreign competition due to NAFTA on local winter fruit
and vegetable growers. In 1998, Florida led the nation in housing starts. The
demand for new single and multifamily homes should remain robust. Across the
State, new construction and renovations to existing structures is fueling the
construction industry. Redevelopment of the Orlando Naval Training Center and
the construction of Florida Gulf Coast University in Ft. Myers are worthy
examples of new infrastructure meeting the demands of increasing population.
In Broward and Palm Beach Counties, in particular, growth management's
concurrency requirements have
57
<PAGE>
played a significant role in limiting economic expansion as compared with other
regions of the State because of the lack of infrastructure capacity. Community
consensus based long range planning efforts recently have been undertaken in
northern Palm Beach County. These efforts are a recognition of the pause in
growth that has occurred and over time will help the area accommodate new
development. Recent property sales from the MacArthur Foundation land holdings
in northern Palm Beach County will also prompt new development there.
Southwest Florida has emerged as a strong growth market. Traditionally
very retirement oriented, the region's economy has begun to diversify through
increased employment opportunities and migration southward of citrus production.
Increased employment opportunity has occurred due to the overall size of the
market and improvements in infrastructure capacity. The improvement in
transportation access also has helped tourism and as a result indirectly buoyed
population growth rates by providing exposure and increased awareness of the
region as a retirement destination among visitors. The State of Florida has
opened Florida Gulf Coast University in Lee County, near the Fort Myers airport.
This is the State's 10th university in the public university higher education
system. Florida Gulf Coast University will accommodate 10,000 students within a
decade and provide opportunities for synergy between industry and education.
Central Florida is a premier world class resort/vacation destination.
The presence of Disney World, studio theme parks and other tourist oriented
recreational parks drives the central Florida economy. While the total size of
the market has grown rapidly, the economy is dependent on tourism and population
growth. Locally, the tourism industry has been more stable and seen better
growth over the past three decades than either the manufacturing or services
sectors. Two additional local industry concentrations, the laser/optical
research node and motion picture industries are helping to diversify the local
economy. Universal Studios has begun to expand its motion picture and theme park
facilities. Disney World has opened its fourth theme park, "Animal Kingdom,"
covering 500 acres. Disney's Celebration community of residential and commercial
activity is the fastest absorbing residential community in Central Florida.
Strong growth in tourism and large land areas available for expansion suggests
this region will lead the state in population growth in the near term.
International tourism has fueled the growth of an international retirement and
second home market throughout Florida. Today, in the tourist areas of the
market, one fifth of new homes built are sold to foreign retirees or vacation
homeowners. Places of origin include England, Germany, South America, and Puerto
Rico. International retirement markets are also growing in southwest and
Southeast Florida. There were over 38 million visitors to the Orlando market in
1998.
North Florida is rural in many areas. Jacksonville is the major city in
North Florida. The logging and paper industries, defense and retirement dominate
the local economy. The insurance industry also has a strong presence in
Jacksonville. Growth in North Florida peaked in the mid 1980's, coinciding with
the military defense buildup, prior to the full implementation of growth
management legislation. As urbanization and living costs increase in the south
and central parts of the State, population growth from national retirement
migration sources are increasing locally. Some large local land holders are
shifting focus away from forestry and agriculture to residential development of
land resources.
The Florida panhandle is quite rural with reliance on tourism, defense
and state government for employment opportunities. This area of the State has
the lowest per capita incomes and the smallest volume of population growth. With
the uncertainty of state budget funding in recent years and continuing defense
cutbacks, strong growth in this region of the State is not expected. Coastal
counties, however, remain attractive to continued economic development and
retirement migration because of the pristine beaches along the Gulf of Mexico.
In general, pursuant to the Florida Constitution and certain statutory
provisions, there are two basic types of obligations that may be issued in the
State of Florida: general obligation bonds and revenue bonds.
General obligation bonds are also known as full faith and credit bonds
because their repayment is based on the general credit and taxing power of the
borrowing government. The ad valorem tax is the most common source of revenue
pledged for the repayment of general obligation bonds. Being tax-supported,
general obligation bonds are typically used to finance the capital portion of
tax supported general purpose governmental projects, with public buildings,
roads, criminal justice facilities, and schools being the most common. Only
units of local government with taxing power can levy and collect ad valorem
taxes. The State of Florida has no ad valorem taxing power. General obligation
bonds payable from ad valorem taxes and maturing more than twelve months (other
than certain refunding bonds) after issuance may be issued to finance capital
projects authorized by law and only if the issuance of such bonds is approved by
the qualified electors.
58
<PAGE>
Revenue bonds are obligations of a unit of government payable solely
from the revenues of a particular enterprise, such as a water and sewer system,
or from the revenues derived from a particular facility or user, or from non-ad
valorem revenues, such as the sales tax, or from other special funds authorized
to be pledged as additional security. Revenue bonds may also be payable from
non-specific revenues budgeted each year by the issuer. Unlike general
obligation bonds, revenue bonds do not constitute a debt of the issuing unit or
a pledge of its faith and credit, and they are not backed by the issuer's taxing
power.
A test was developed by the Florida Supreme Court for analyzing the
constitutional ability of an issuer to issue revenue bonds where a significant
portion of the proceeds would be used for private or non-governmental benefit.
Generally, these types of securities are referred to as industrial revenue bonds
or private activity bonds. Unless a particular use for the proceeds of a private
activity bond has been constitutionally or legislatively sanctioned (such as
multifamily and single family housing revenue bonds) or tested in the courts, a
determination must be made that the project to be financed with the proceeds of
the private activity bond will serve a paramount public purpose. The paramount
public purpose doctrine is designed to protect public funds from being exploited
in assisting or promoting private ventures when the public would be, at the
most, only incidentally benefited. Generally, an issuer may pledge something
less than all of its available non-ad valorem revenues without voter approval,
subject to the parameters established by the Florida Supreme Court.
The Florida courts have validated debt obligations commonly referred to
as certificates of participation or "COPS." In a typical COPS transaction, the
issuer leases either real or personal property from a special purpose
corporation. The special purpose corporation assigns its rights to the lease
payments to a corporate trustee who in turn issues certificates evidencing an
undivided proportionate interest of the owners of such certificates to receive
the lease payments. The lease payments made by the issuer may be derived from
both ad valorem and non-ad valorem revenues of the issuer. Although ad valorem
taxes can be used to make the lease payments, the Florida Supreme Court has held
that a referendum is not required because the obligation to make lease payments
is an annual obligation subject to renewal each year. If the issuing body elects
not to renew its lease for the next succeeding year and therefore fails to
appropriate the necessary moneys to make lease payments, the holders of the COPS
would be limited to the remedies available under the lease. At least one Florida
court has upheld the right of a governmental unit to not exercise the annual
renewal option of its lease.
When a mortgage, with a right of foreclosure, on real or personal
property (owned by a unit of government) is given to secure a bond, the Florida
courts have held that a pledge of such mortgage requires voter approval. In
effect, ad valorem taxes are indirectly pledged because, as the Florida Supreme
Court reasoned, the legislative body affected by such foreclosure might feel
"morally compelled" to levy taxes to prevent the loss of assets through
foreclosure. As a result, the majority of revenue bonds issued in the State of
Florida are not additionally secured by a mortgage on the governmental property
being financed. This prohibition is applicable even if the issuer has no taxing
power.
In Florida, the Division of Bond Finance has authority over the
issuance of State bonds pledging the full faith and credit of the State and the
issuance of revenue bonds payable solely from funds derived from sources other
than State tax revenues or rents or fees paid from State tax revenues.
Pursuant to the Florida Constitution, moneys sufficient to pay debt
service on State bonds must be appropriated as the same become due. Furthermore,
to the extent necessary, all State tax revenues, other than trust funds, must be
available for such appropriation purposes.
At the November 1994 general election, voters in the State approved an
amendment to the Florida Constitution limiting the amount of taxes, fees,
licenses and charges imposed by the State and collected during any fiscal year
to the amount of revenues allowed for the prior fiscal year, plus an adjustment
for growth. Growth is defined as the amount equal to the average annual rate of
growth in Florida personal income over the most recent twenty quarters times the
State revenues allowed for the prior fiscal year. The revenues allowed for any
fiscal year can be increased by a two-thirds vote of the State Legislature. The
limit is effective starting with fiscal year 1995-1996. Any excess revenues
generated will be deposited in the budget stabilization fund until it is fully
funded and then refunded to taxpayers. Included among the categories of revenues
which are exempt from the proposed revenue limitation, however, are revenues
pledged to state bonds and charges for services imposed by local, regional or
school district governing bodies.
59
<PAGE>
The total outstanding principal of State bonds pledging the full faith
and credit of the State may not exceed fifty percent of the total tax revenues
of the State for the two preceding fiscal years, excluding any tax revenues held
in trust.
State bonds pledging the full faith and credit of the State, except
certain refunding bonds, generally may be issued only to finance or refinance
the cost of State fixed capital outlay projects subject to approval by a vote of
the electors. However, State bonds pledging the full faith and credit of the
State may be issued without a referendum to finance the construction of air and
water pollution control and abatement and solid waste disposal facilities to be
operated by a political subdivision of the State or by an agency of the State.
All forms of taxation other than ad valorem taxes are preempted to the
State, except as provided by general law. The State is prohibited from
collecting ad valorem taxes, which are taxes that are levied on real estate or
tangible personal property.
Revenue bonds may be issued by the State of Florida or its agencies
without voter approval only to finance or refinance the cost of state capital
projects payable solely from funds derived from sources other than state tax
revenues or rents or fees paid from state tax revenues.
Bonds issued pursuant to the State Bond Act must be validated in
accordance with Florida Statutes. Once an issuer decides to finance a project
with bonds issued pursuant to the State Bond Act, a bond validation proceeding
is held in circuit court to determine whether the proposed bond issuance
complies with Florida law. The court makes findings on the questions of whether
the issuing body had the power to incur bonded debt and whether it exercised
that power in accordance with the law. The court may not weigh the fiscal
feasibility of the proposed bonds in the validation determination. The circuit
court judgment is final on all matters, other than constitutional issues, raised
at the validation hearing after time for appeal to the Supreme Court of Florida
has elapsed. Refunding bonds and bonds issued to finance or refinance capital
outlay projects for the system of public education are not required to be
validated.
The legislature has the power to confer on political subdivisions the
power to issue bonds, notes and other forms of indebtedness, except as otherwise
restricted by State and federal constitutional provisions, and such power is
conferred on municipal corporations, cities, counties and a variety of other
specially created districts and authorities. The bond validation process
described above is also available to such units of local government. In most
cases, bond validations are not statutorily mandated and many general obligation
and revenue bond issues have not been validated.
Generally, the Florida Constitution and Florida Statutes require that
the budget of the State and that of the units of local government in the State
be kept in balance from currently available revenues during each fiscal year. If
revenues collected during a fiscal year are less than anticipated, expenditures
must be reduced in order to comply with the balanced budget requirement.
Florida Statutes provide for a statewide maximum bond interest rate
which is flexible with the bond market and from which are exempted bonds rated
in one of the three highest ratings by nationally recognized rating services.
Nevertheless, upon request of a governmental unit, the State Board of
Administration may authorize a rate of interest in excess of the maximum rate,
provided relevant financial data and information relating to the sale of the
bonds is submitted to the State Board.
The Florida Sunshine Law, among other things, precludes public
officials from meeting with respect to the issuance of bonds other than at duly
noticed public meetings of the governmental entity. These provisions apply to
all meetings of any board or commission of any State agency or authority, or of
any county, municipal corporation, or political subdivision. No resolution,
rule, or formal action is considered binding except as taken at such duly
noticed public meetings.
Georgia. The state government of Georgia has one of the lowest debt
levels, per capita, of all states in the United States, which is reflective of
the very conservative fiscal approach taken by elected state officials, even
though the state has enjoyed a strong economy over the past few years.
Typically, general obligation bonds of the state are issued pursuant to the
powers granted under Article VII, Section IV of the Constitution of the State of
Georgia (the "Georgia Constitution") which provides that the bonds are the
direct and general obligations of the state. The key language is provided under
Article V11 Section IV, Paragraph VI of the Georgia Constitution which provides
as follows:
60
<PAGE>
"The full faith, credit and taxing power of the state are hereby
pledged to the payment of all public debt incurred under this article
and all such debt and the interest on the debt shall be exempt from
taxation (emphasis added). Such debt may be validated by judicial
proceedings in the manner provided by law. Such validation shall be
incontestable and conclusive."
The Georgia Constitution further mandates that the General Assembly
"shall raise by taxation and appropriate each fiscal year ... such amounts as
are necessary to pay debt service requirements in such fiscal year on all
general obligation debt." The Georgia Constitution further provides for the
establishment of a special trust fund which is designated the "State of Georgia
General Obligation Debt Sinking Fund" which is used for the payment of annual
debt service requirements on all general obligation debt.
There are debt limitations provided under Article VII, Section IV,
Paragraph 11(b)-(e) of the Georgia Constitution which essentially provides that
the cumulative annual debt service for both general obligation debt and
guaranteed revenue debt shall not exceed 10% of the total revenue receipts, less
refunds paid to the state treasury in the fiscal year immediately preceding the
proposed issuance of any new debt. The Georgia Constitution prohibits state
departments and agencies from circumventing the debt limitation provisions by
not allowing such agencies to execute contracts which may be deemed to
constitute a security for bonds or other public obligations.
(See Article VII, Section IV, Paragraph IV of the Georgia Constitution.)
The State of Georgia may incur: "Public debt to supply a temporary
deficit in the state treasury in any fiscal year created by a delay in
collecting the taxes of that year. Such debt shall not exceed, in the aggregate,
5% of the total revenue receipts, less refunds, of the state treasury in the
fiscal year immediately preceding the year in which such debt is incurred." (See
Georgia Constitution, Article VII, Section IV, Paragraph I(b).) Since this
provision of the Constitution was enacted, there has been no temporary debt
incurred by the state.
Virtually all debt obligations represented by bonds issued by the State
of Georgia, counties or municipalities or other public subdivisions, and public
authorities require validation by a judicial proceeding prior to the issuance of
such obligation. The judicial validation makes these obligations incontestable
and conclusive, as provided under the Georgia Constitution.
The State of Georgia operates on a fiscal year beginning on July 1 and
ending on June 30. Each year the State Economist, the Governor and the State
Revenue Commissioner jointly prepare a revenue forecast upon which is based the
state budget which is considered, amended, and approved by the Georgia General
Assembly. On June 30, 1998 the state had a revenue shortfall reserve fund of
$351,545,470. Total net revenue collections for the fiscal year ended on June
30, 1998 were $11,090,776,896, which represented a 5.2% increase over fiscal
year 1997 collections of $10,543,106,460. Additionally, Georgia received
$555,000,072 in revenue from the Georgia Lottery Corporation in fiscal year
1998; all lottery revenues are earmarked for educational expenditures.
In recent years, the State of Georgia has enjoyed unprecedented growth
with a balanced economy that is not reliant upon one particular industry.
Georgia leads the world in carpet manufacturing in the northwest sector of the
state and has a significant textile and apparel industry. General Motors and
Ford both have major automobile assembly plants in the metropolitan Atlanta
area, which has virtually full employment. The real estate and construction
industry is booming, particularly in Atlanta with recent announcement of several
major new projects. The Georgia Department of Industry, Trade and Tourism has
been very active and very successful in recent years in attracting a wide
diversity of new manufacturing companies which have constructed major facilities
in the State and also new distribution centers, which have taken advantage of
the transportation infrastructure highlighted by Atlanta's Hartsfield
International Airport, which is now the busiest airport in the world.
As reported by the Attorney General's Office (in a May 12, 1999 letter
to the State Auditor) in accordance with and limited by the ABA Statement of
Policy Regarding Lawyers' Responses to Auditors' Request for Information
(December 1975), certain claims have been asserted against the State or its
departments or agencies:
ABBOTT LABORATORIES V. GEORGIA DEPARTMENT OF ADMINISTRATIVE SERVICES,
ET AL., Fulton Superior Court Civil Action No. 2999CV04360. The plaintiff is
seeking damages of approximately $8.5 million against the Department of
Administrative Services ("DOAS"), the Department of Human Resources, and the
Director of Purchasing of DOAS under breach of contract and promissory estoppel
theories. The case arises out of DOAS' issuance of a notice of award to Abbott
Laboratories, in connection with the federally-funded WIC Infant Formula Rebate
Program. The Director of State Purchasing subsequently ordered cancellation of
the notice of award and ordered rebidding because of conflicting information
that had created a contradiction in the initial bidding specifications.
61
<PAGE>
Discovery is ongoing in this matter. At present, the State intends to file a
motion for summary judgment at the close of discovery.
AGE INTERNATIONAL, INC. V. STATE (two cases), Fulton Superior Court
Civil Action No. E-3793 and Fulton Superior Court Civil Action No. E-25073. Two
suits for refund have been filed in state court against the State of Georgia by
out-of-state producers of alcoholic beverages. The first suit for refund seeks
$96 million in refunds of alcohol taxes, plus interest, imposed under Georgia's
post-BACCHUS (468 U.S. 263) statute, O.C.G.A. ss.3-4-60, I.e., as amended in
1985. These claims constitute 99% of all such taxes paid during the 3 years
preceding these claims. In addition, the claimants have filed a second suit for
refund for an additional $23 million, plus interest, for later time periods.
These two cases encompass all known or anticipated claims for refunds of such
type within the apparently applicable statute of limitations for the years in
question, I.E., 1989 through January, 1993. The trial court has granted the
State's motion for summary judgment, and 12 of the 23 claimants have appealed to
the Georgia Supreme Court. The total principal amount of the claims for refund
by the 12 Plaintiffs who did appeal now appears to be approximately $42 million.
The total principal dollar amount of the claims for refund by the 11 Plaintiffs
who did not appeal, which claims appear to be conclusively resolved in favor of
the State by virtue of the trial court's judgment, now appears to be
approximately $54 million.
DEKALB COUNTY, ET AL. V. STATE, ET AL., Fulton Superior Court Civil
Action No. E-67520 (filed March 13, 1998). This suit, against the State of
Georgia, the Department of Revenue, the Governor (in his official capacity), and
the Commissioner of the Department of Revenue (in his personal and official
capacities), alleges improper collection and distribution by the State and its
agencies of the Homestead Option Sales and Use Tax, a local option sales tax in
effect in DeKalb County since July, 1997. DeKalb's complaint, as amended, seeks
an accounting, mandamus, injunctive relief, declaratory judgment, unjust
enrichment, bailment, inverse condemnation, and a determination that O.C.G.A.
section 48-8-67 (a law enacted during the pendency of the lawsuit) is
unconstitutional. The complaint, as amended, seeks damages of $27.7 million.
Subsequently, DeKalb County has re-estimated its alleged damages variously as
$19, $15, and $12 million. DeKalb County's action was dismissed by the trial
court, and this dismissal was affirmed in part and reversed in part by the
Georgia Supreme Court in an order dated February 22, 1999. The Supreme Court's
decision remands to the trial court the accounting claim on the question of
whether the Department of Revenue made reasonable efforts to identify county tax
proceeds that have been determined by the Department to be unidentifiable to any
county. The defendants may seek reconsideration of this issue before the case is
remitted to the trial court.
ELLIS-DON CONSTRUCTION CLAIM. A contract claim has been made in the
amount of $6,600,000 against the Board of Regents of the University System of
Georgia in connection with construction at the University of Georgia
Biocontainment Research Center, Project C-85 administered through the Georgia
State Financing and Investment Commission Construction Division ("GSFIC"). The
claimant, Ellis-Don Construction, bases its claim upon the encountering of
extensive subsurface rock, delays allegedly caused by the Board of Regents (as
owner) and redesign overhead costs and time extensions. The total contract cost
is approximately $18,270,000. GSFIC, as project manager, has received the claim
and is hiring a consultant to evaluate the claim fully. GSFIC intends to defend
the claim vigorously on behalf of the Board of Regents. The Board of Regents
believes the claim to be grossly overstated and anticipates resolving any
legitimate portions of the claim for a substantially lesser sum than that
claimed.
GENERAL MOTORS ACCEPTANCE CORP. V. JACKSON, Fulton Superior Court Civil
Action No. 1999CV06252. This is the first suit in Georgia by a financial
institution for refund of sales taxes based upon alleged bad debts on
installment sales contracts purchased from motor vehicle dealers. The suit seeks
a refund of approximately $300,000. The total amount of all similar pending
administrative claims for refund (for the years 1991 - 1998) is approximately
$24,000,000. This case is in the discovery phase.
GEORGIA JACKSON, ET AL. V. GEORGIA LOTTERY CORPORATION, Fulton Superior
Court Civil Action No. E-50303, filed August 26, 1996. Plaintiffs sought a court
order declaring that two games sponsored by the Georgia Lottery Corporation,
"Quick Cash" and "Cash Three," are unconstitutional and enjoining the lottery
from further offering of these games. Plaintiffs also sought the return of all
monies played on these games during a specified period, approximately
$1,703,462,781. On an interlocutory appeal, the Georgia Court of Appeals ruled
that the Lottery Corporation does not have sovereign immunity but ruled for the
Corporation on the merits. The Plaintiffs petitioned for a writ of certiorari to
the Supreme Court of Georgia, and the Supreme Court denied the petition.
The remittitur of the Court of Appeals has been returned to the trial court.
62
<PAGE>
JAMES ANDREW COLEMAN V. UNITED STATES OF AMERICA, ET AL., Federal
District Court for the District of Columbia Case No. 1:98cv02559. This civil
action was filed against the United States, the "Executive Branch federal
defendant," William Jefferson Clinton, the State of Georgia, the State of
Mississippi, and the State of South Carolina. Currently, the State of Georgia
has not been legally served. The suit alleges that the United States
government's failure to enforce the purported terms of surrender ending the
Civil War has resulted in the inclusion in the Georgia state flag of a
Confederate battle flag, allegedly in violation of those terms of surrender. The
suit claims that said failure of enforcement violates various federal
constitutional and statutory provisions. The suit prays for relief in the form
of $40 billion in compensatory damages and $40 billion on punitive damages
against each named defendant. If the State of Georgia ever becomes a proper
party to the suit through legal service of process, the State intends to defend
vigorously. The State believes it has good and valid defenses, including but not
limited to Eleventh Amendment immunity.
RW ALLEN/BEERS CLAIM. A contract claim has been made in the amount of
$9,850,000 against the Board of Regents of the University System of Georgia in
connection with construction at the Children's Medical Center, Augusta, Georgia,
Project H-26, administered through Program Manager McDevitt-Street-Bovis. The
claimant, Construction Manager RW Allen/Beers bases the claim upon delays
allegedly caused by the Board of Regents (as owner) and redesign overhead costs
and time extensions. A subcontractor has filed suit for $5,000,000 on its claim
against the Construction Manager, which amount is a part of the Construction
Manager's contract claim against the Board of Regents. The total contract cost
is approximately $44,000,000. The Program Manager has received the claim and
will make its recommendations to Regents through the contract-based dispute
resolution (arbitration) process. The Board of Regents intends to defend the
claim vigorously through the dispute resolution process. The Board of Regents
believes that the claim is grossly overstated and anticipates resolving any
legitimate portions of the claim for a substantially lesser sum than that
claimed.
The above-referenced information is based on available public documents
and oral representations made by and information received from officials at the
state Attorney General's Office, Georgia Department of Revenue, and participants
in the pending cases.
MARYLAND. The public indebtedness of the State of Maryland and its
instrumentalities is divided into four basic categories. The State issues
general obligation bonds, to the payment of which the State ad valorem property
tax is exclusively pledged, for capital improvements and for various
State-sponsored projects. The Maryland Department of Transportation issues
limited, special obligation bonds for transportation purposes payable primarily
from specific, fixed-rate excise taxes and other revenues related mainly to
highway use. The Maryland Stadium Authority issues limited special obligation
bonds and votes for purposes of financing stadiums and conference centers
payable primarily from fixed rate financing of facility bonds using a
combination of variable rate refunding obligations and forward interest rate
exchange agreements. Certain authorities issue obligations payable solely from
specific non-tax, enterprise fund revenues, and for which the State has no
liability and has given no moral obligation assurance. The State and certain of
its agencies also have entered into a variety of lease purchase agreements to
finance the acquisition of capital assets. These lease agreements specify that
payments thereunder are subject to annual appropriation by the General Assembly.
At least since the end of the Civil War, the State has paid the
principal of and interest on its general obligation bonds when due. Neither the
Maryland Constitution nor the public general laws of Maryland impose any general
debt limit. Although the State has the authority to make short-term borrowings
in anticipation of taxes and other receipts up to a maximum of $100 million, the
State in the past has not issued short-term tax anticipation notes or made any
other similar short-term borrowings for cash flow purposes. The State has not
issued bond anticipation notes except in connection with a State program to
ameliorate the impact of the failure of certain State-chartered savings and loan
associations in 1985; all such notes were redeemed without the issuance of debt.
The State Constitution prohibits the contracting of State debt unless
authorized by a law providing for the collection of an annual tax or taxes
sufficient to pay the interest when due and to discharge the principal within 15
years of the date of debt issuance. The Constitution also provides that the
taxes levied for this purpose may not be repealed or applied to any other
purpose until the debt is fully discharged. As a matter of practice, general
obligation bonds, other than small denomination bonds and refunding bonds, are
issued to mature in serial installments designed to provide payment of interest
only during the first two years and an approximately level annual amortization
of principal and interest over the remaining years.
63
<PAGE>
The State has financed and expects to continue to finance the
construction and acquisition of various facilities and equipment through
conditional purchase, sale-leaseback, and similar transactions. All of the lease
payments under these arrangements are subject to annual appropriation by the
General Assembly. In the event that appropriations are not made, the State may
not be held contractually liable for the payments. These transactions are
subject to approval by the Board of Public Works.
1999 Budget--On April 7, 1998, the General Assembly approved the budget
for fiscal year 1997. The Budget includes, among other things: (i) sufficient
funds to meet all specific statutory funding requirements; (ii) sufficient funds
to meet the actuarial recommended contributions for the seven retirement
systems, determined on a basis consistent with prior years' practice; (iii)
sufficient general funds for the Annuity Bond Fund to maintain the State
property tax rate at $.21 per $100 of assessed valuation; (iv) $3.3 billion in
aid to local governments (reflecting a $169.1 million increase over fiscal year
1998); and (v) $75.5 million in general fund deficiency appropriations which
include $25 million for computer programming modifications to address the "Year
2000" problem.
The Budget incorporates the first full year of the five-year phase-in
of the 10% reduction in personal income taxes, accelerated by legislation
enacted by the 1998 General Assembly, estimated to result in a reduction of
revenues of approximately $300 million in fiscal year 1999. Legislation was also
enacted making the State's existing earned income tax credit refundable, with an
estimated reduction in fiscal 1999 revenues of $17.5 million. The reduction in
fiscal 1999 revenues resulting from the reductions in income taxes enacted by
the 1998 General Assembly will be mitigated by a transfer of $185.2 million to
the General Fund from the Revenue Stabilization Account of the State Reserve
Fund. The Budget includes $50 million for the funding to Baltimore City Public
Schools related to the consent decree and $61.5 million to provide funding for a
statewide public education proposal targeted primarily to at-risk students. The
Budget also includes $76 million ($29 million in general funds and $47 million
in federal funds) to provide medical coverage to low income children and
pregnant women currently without coverage.
The State's fiscal year 1999 capital budget is to be funded with $430
million general obligation bonds (net of $13 million of prior year
authorizations to be deauthorized), $156.7 million general funds appropriated in
the operating budget, $1,244.5 million in special and federal funds (of which
$572 million is appropriated to the Department of Transportation) and $46.5
million in revenue bonds. In the fiscal year 1999 general obligation bond
program, $21.8 million is reserved as an allotment for legislative initiatives,
private hospitals and independent colleges and universities.
Based on the 1999 Budget, it is estimated that the general fund surplus
on a budgetary basis at June 30, 1999, will be approximately $249.5 million. It
is also estimated that the balance in the Revenue Stabilization Account of the
State Reserve Fund at June 30, 1999, will be $635.8 million.
The Adviser believes that the information summarized above describes
some of the more significant matters relating to the Maryland Intermediate
Municipal Bond Fund and Maryland Municipal Bond Fund. The sources of the
information are the official statements of issuers located in Maryland, other
publicly available documents, and oral statements from various state agencies.
The Adviser has not independently verified any of the information contained in
the official statements, other publicly available documents, or oral statements
from various state agencies.
NORTH CAROLINA. The North Carolina Constitution requires that the total
expenditures of the State for the fiscal period covered by the budget not exceed
the total receipts during the fiscal period plus any surplus remaining in the
State Treasury at the beginning of the period. The State operates on a fiscal
year ending June 30th.
The State of North Carolina is the tenth most populous state. Its
economy is a combination of manufacturing, agriculture, services and tourism.
The State's seasonally adjusted unemployment rate in April 1999 was 2.6%. In
recent years, the State has moved from an agricultural economy to a service and
goods producing economy. The State leads the nation in the production of
textiles, tobacco products, furniture and fiberoptic cable and is among the
largest producers of pharmaceuticals, electronics and telecommunications
equipment. The principal agricultural products are poultry, pork and tobacco.
Charlotte is now the second largest financial center in the nation, based on the
assets of banks headquartered there.
The ending fund balance for the State's General Fund at June 30, 1998
was $1,662.0 million. The budget adopted by the North Carolina General Assembly
for the fiscal year ending June 30, 2000 projects an ending General
64
<PAGE>
Fund balance of approximately $992 million. However, no funds were appropriated
nor any bonds or bond referenda authorized by the North Carolina General
Assembly to fund approximately $7 billion in identified repairs and renovations
to facilities at the University of North Carolina's 16 campuses and at the
State's community colleges.
The following are cases pending in which the State faces the risk of
either a loss of revenue or an unanticipated expenditure. In the Opinion of the
Department of State Treasurer, however, any such loss of revenue or expenditure
would not materially adversely affect the State's ability to meet its financial
obligations.
Leandro, et al. v. State of North Carolina and State Board of
Education. On May 25, 1994, students and boards of education in five counties
filed suit requesting a declaration that the public education system of North
Carolina violates the State constitution by failing to provide adequate or
substantially equal education opportunities, and by denying due process of law.
The defendants' motion to dismiss was denied. However, the North Carolina
Supreme Court upheld the present funding system and remanded the case for trial
on the claim for relief based on the conclusion that the constitution guarantees
every child the opportunity to obtain a sound basic education. Five other
counties intervened and now allege claims for relief on behalf of their
students' rights to a sound basic education on the basis of the high proportion
of at-risk students in their counties' systems.
Francisco case. On August 10, 1994, a class action lawsuit was filed
against the Superintendent of Public Instruction and the State Board of
Education on behalf of a class of parents and their children who are
characterized as limited English proficient. The complaint alleges that the
State has failed to provide funding for the education of these students and has
failed to supervise local school systems in administering programs for them. The
complaint asks the Court to order the defendants to fund a comprehensive program
to ensure equal educational opportunities for limited English proficient
children.
Bailey-Emory-Patton cases. State and local government retirees filed a
class action suit in 1990 challenging repeal of the income tax exemptions of
State and local government retirement benefits, additional lawsuits were filed
reserving refund claims for later years and Federal retirees filed a class
action suit in 1995 seeking monetary relief for taxes paid on federal government
retirement benefits. In 1998, the North Carolina Supreme Court ruled that it was
unconstitutional for the State of North Carolina to collect taxes on the
pensions of retired Federal, State and local government employees. The required
refunds were estimated to be $1.1 billion. However, a settlement has been
reached and a Consent Order approved in which the State will pay a total of $799
million with $400 million paid in 1998 and the balance by July 1999. The balance
is reserved in the State's budget for the year ending June 30, 1999.
Smith-Shaver cases. These cases are class action intangibles tax refund
lawsuits relating to prior litigation in which the United States Supreme Court
in 1996 ruled unconstitutional the intangibles tax previously collected by the
State on shares of stock. Refunds have been made with interest to those
taxpayers who complied with the applicable State tax refund statutes. The North
Carolina Supreme Court held in 1998 that the taxpayers who paid the intangibles
tax but did not comply with the State tax refund statute were nonetheless
entitled to intangibles tax refunds which are estimated at approximately $360
million for 1991 through 1994. Additional class action lawsuits claim
approximately $105 million for intangibles taxes paid for 1990. A Settlement
Agreement was tentatively approved on July 8, 1999 providing for the payment of
$440 million by the State. The North Carolina General Assembly has appropriated
$200 million to be paid from reserves on October 1, 1999 with the balanced due
on July 10, 2000, although no appropriation has been adopted. A Fairness Hearing
is scheduled for September 24, 1999 where confirmation of the Settlement
Agreement will be considered.
Faulkenbury v. Teachers' and State Employees' Retirement System, Peele
v. Teachers' and State Employees' Retirement System, and Woodard v. Local
Governmental Employees' Retirement System. Plaintiffs are disability retirees
who brought class actions in state court challenging changes in the formula for
payment of disability retirement benefits and claiming impairment of contract
rights, breach of fiduciary duty, violation of other federal constitutional
rights and violation of state constitutional and statutory rights. The North
Carolina Court of Appeals and Supreme Court dismissed the fiduciary claims and
certain of the constitutional claims. The primary claim for unconstitutional
impairment of contract was tried in Superior Court in 1995, and the court issued
an order in favor of the plaintiffs. In 1997, the North Carolina Supreme Court
upheld the trial court's ruling. A determination of the actual amount of
liability and the payment process is being made by the parties. The plaintiffs
have submitted documentation to the court asserting that the cost and damages
and higher prospective benefit payments to the
65
<PAGE>
plaintiffs and class members would amount to $407 million. Calculations and
payments so far indicate that retroactive benefits will be significantly less
than estimated. Payments have been made of approximately $73 million and the
State estimates remaining liability will not exceed $42 million. All retroactive
and future benefit payments are payable from the funds of the State's retirement
systems.
N.C. School Boards Association case. In December 1998, plaintiffs,
including the school boards of six North Carolina counties, filed suit
requesting a declaration that certain payments to State administrative agencies
must be distributed to the public schools on the theory that such amounts are
fines which under the North Carolina Constitution must be paid to schools. The
plaintiffs allege that they are due approximately $84 million. The State
believes that sound legal arguments support the State's position that these
amounts may be retained by State administrative agencies.
The Adviser believes that the information summarized above describes
some of the more significant matters relating to the North Carolina Intermediate
Municipal Bond Fund and North Carolina Municipal Bond Fund. The sources of the
information are the official statements of the Department of State Treasurer of
North Carolina, other publicly available documents and oral statements from
various State agencies. The Adviser has not independently verified any of the
information contained in the official statements, other publicly available
documents, or oral statements from various State agencies.
SOUTH CAROLINA. The South Carolina Constitution mandates a balanced
budget. If a deficit appears likely, the State Budget and Control Board may
reduce appropriations during the current fiscal year as necessary to prevent the
deficit. If it is determined that a fiscal year has ended with an operating
deficit, the State Constitution requires that monies appropriated from the
Capital Reserve Fund must be reduced to the extent necessary and applied to the
year end operating deficit before withdrawing monies from the General Reserve
Fund for such purpose.
The State Constitution limits annual increases in State appropriations
to the average growth rate of the economy of the State and annual increases in
the number of State employees to the average growth of the population of the
State; provided, however, that these two limitations are subject to suspension
for any one fiscal year by a special vote in each House of the General Assembly.
The State Constitution requires a General Reserve fund that equals
three percent of General Fund Revenue for the latest completed fiscal year.
Funds may be withdrawn from the General Reserve Fund only for the purpose of
covering operating deficits. The State Constitution also requires a Capital
Reserve Fund equal to two percent of General Fund Revenue for the latest
completed fiscal year.
The State Constitution requires that the General Assembly provide that,
if revenue forecasts before March 1 project that revenues for the current fiscal
year will be less than expenditures authorized by appropriation for the current
fiscal year, the current fiscal year's appropriation to the Capital Reserve Fund
shall first be reduced to the extent necessary before any reduction is made in
operating appropriations.
After March 1, monies from the Capital Reserve Fund may be appropriated
by a special vote of the General Assembly to finance previously authorized
capital improvement bond projects, to retire principal or interest on bonds
previously issued, and to pay for capital improvements or other nonrecurring
purposes. Monies in the Capital Reserve Fund not appropriated or any
appropriation for a particular project or item that has been reduced due to
application of the monies to a year-end deficit must go back to the General
Fund.
The State operates on a fiscal year beginning July 1 and ending June
30. For the fiscal year ended June 30, 1998, the State had a budgetary surplus
of $254.9 million, and the Capital Reserve Fund and General Reserve Fund were
fully funded at the combined 5% level. The South Carolina General Assembly
passed the Fiscal Year 1998-99 Appropriations Act that enacted a balanced budget
where most of the new revenue was allocated to property tax relief, health and
human services and education.
Positive economic growth in South Carolina has been driven, in part, by
gains in tourism, business services and international trade. In 1998, the State
enjoyed the greatest economic gains of any state in the Southeast region. The
State's gross product rose by 6.2%, and unemployment fell to a near record low
of 3.5% as the State added 70,000 new jobs-nearly as many as it did in the
previous two years combined.
66
<PAGE>
Over the last two years, the State's unemployment rate has been below
the national rate with 1998 being almost a full percentage point below the
national average. In terms of personal income, South Carolina, in 1998, was the
nation's third fastest growing state.
A lawsuit, Glen E. Kennedy, et al vs. the South Carolina Retirement
System and South Carolina Budget and Control Board, has been filed against the
South Carolina Retirement Systems (Systems) by a group of retired participants
in the Systems which challenges the Systems' treatment of annual leave
calculation of participants' retirement payments. The Circuit Court determined
that the State has been providing retirement benefits to its members in
accordance with the law. The Circuit Court decision was appealed to the State
Supreme Court and on May 26, 1999 oral arguments were heard by the Supreme
Court. The State believes its position is meritorious, but it unable to predict
when the Supreme Court will rule or what the outcome will be. The Systems'
liability in the event of an unfavorable outcome is estimated to be
approximately $340 million for current retirees, and $800 million for current
active members of the South Carolina Retirement System and the Police Officers'
Retirement System.
In November 1998, a class action lawsuit was filed against the State
which challenges the taxation by the State of federal retiree's income. The
State estimates that its ultimate liability may exceed $170 million plus
interest in the event of an unfavorable outcome. This estimate does not include
the impact on future year's revenues. While the State is uncertain as to the
ultimate outcome of this case, it is vigorously defending its position.
The Adviser believes that the information summarized above describes
some of the more significant matters relating to the South Carolina Intermediate
Municipal Bond Fund and South Carolina Municipal Bond Fund. The sources of the
information are the official statements of issuers located in South Carolina,
other publicly available documents, or oral statements from various State
agencies. The adviser has not independently verified any of the information
contained in the official statements, other publicly available documents, or
oral statements from various state agencies.
TENNESSEE. The Constitution of the State of Tennessee forbids the
expenditure of the proceeds of any debt obligation for a purpose other than the
purpose for which it was authorized by statute. The Constitution also forbids
the authorization of any debt obligation, except as shall be repaid within the
fiscal year of issuance, for current operation of any state service or program.
Under Tennessee law, the term of the State's bonds cannot exceed the life of the
projects being financed. Furthermore, the amount of debt obligations of the
State of Tennessee cannot exceed the amount authorized by the Tennessee General
Assembly. The procedure for funding State of Tennessee debt is provided by
Chapter 9 of Title 9, Tennessee Code Annotated. The Funding Board of the State
of Tennessee is the entity authorized to issue general obligation indebtedness
of the State of Tennessee. Pursuant to Section 9-9-106, Tennessee Code
Annotated, the Funding Board of the State of Tennessee has a lien on the taxes,
fees and revenues from certain designated revenue sources for the full amount
required to service the State's general obligation indebtedness. Certain other
agencies and authorities in Tennessee issue obligations, payable solely from
specific non-tax enterprise fund revenues and which are not debts or liabilities
of the State of Tennessee nor is the full faith and credit pledged to the
payment thereof.
Under current state statutes, the State of Tennessee's general
obligation bonded debt issuance's are subject to an annual legal debt service
limitation based on a pledged portion of certain current year revenues. As of
June 30, 1998, the State of Tennessee's annual legal debt service limit of $414
million was well above the debt service required of $118 million, with a legal
debt service margin of $296 million. Debt per capita equaled $167, and the ratio
of net general long-term bonded debt to assessed property valuation was 1.52
percent.
The Constitution of the State of Tennessee requires a balanced budget.
As required by law, the legislature enacted a balanced budget for fiscal year
1997-98. During fiscal year 1998, Tennessee continued several programs that were
designed to position the State to remain competitive in attracting new jobs
while addressing several problem areas for the State. The State continued its
Basic Education Program which is designed to achieve salary equalization in
teachers' salaries and to provide funding for enrollment growth. The State also
extended coverage under Tenn Care to all Tennessee children who do not otherwise
have access to health insurance, enhanced all services to children under the
newly established Department of Children's Services and continued enhancement of
employment opportunities through development of adult basic education and
coordination of job retaining and job placement efforts. The State of Tennessee
created the Center for Effective Government and pursued other initiatives
designed to create a more effective and efficient State government.
67
<PAGE>
The economic outlook for Tennessee remains favorable. The State's
economic diversity has improved substantially over the last several years.
Investments announced in new and expanding business exceeded one billion dollars
in every year since 1983 and exceeded two billion in the last six years. This
growth created 19,543 new jobs in Tennessee for the year ended June 1998. As of
June 1998, the State's unemployment rate was 5.4% slightly higher than the
national average of 5.4%. Based on current projections, the State's overall
growth is expected to exceed the national average into the next century
according to the Comprehensive Annual Financial Report for the State of
Tennessee for the year ended June 1998.
Despite the economic growth, the State has predicted a $365 million
budget shortfall for the fiscal year 1999. The Administration considered a
number of tax proposals, including a State income tax, that would have raised
revenues for the State. Ultimately, the Tennessee Legislature passed the Tax
Revision and Reform Act of 1999 (the "Tax Act") which repealed the existing
franchise and excise tax and replaced it with a new excise and franchise tax.
While the Tax Act does raise revenues for the State, it is likely that even more
sweeping tax reform legislation will be needed to raise additional revenues to
continue the services currently provided by the State or a substantial reduction
in services will need to be implemented.
TEXAS. Except as specifically authorized, the Texas Constitution
generally prohibits the creation of debt by or on behalf of the State, with only
limited exceptions. In addition, the Constitution prohibits the Legislature from
lending the credit of the State to any person, including municipalities, or
pledging the credit of the State in any manner for the payment of the
liabilities of any individual, association of individuals, corporation or
municipality. The limitations of the Constitution do not prohibit the issuance
of revenue bonds, since the Texas courts (like the courts of most states) have
held that certain obligations do not create a "debt" within the meaning of the
Constitution. The State and various State agencies have issued revenue bonds
payable from the revenues produced by various facilities or from lease payments
appropriated by the Legislature. Furthermore, obligations which are payable from
funds expected to be available during the current budget period, do not
constitute "debt" within the meaning of the constitutional prohibition.
Texas Revised Civil Statutes Article 717k-7(8) prohibits the
Legislature from authorizing additional state debt payable from general
revenues, including authorized but unissued bonds and lease purchase contracts
in excess of $250,000 or for a term of greater than five years, if the resulting
annual debt service exceeds five percent of an amount equal to the average
amount of general revenue for the three immediately preceding years, excluding
revenues constitutionally dedicated for purposes other than payment of debt
service. Self-supporting general obligation bonds, although backed by the full
faith and credit of the State, are reasonably expected to be paid from other
revenue sources and are not expected to create a general revenue draw. On
November 4, 1997, Texas voters approved a constitutional amendment pursuant to
Proposition 11 in order to add the provisions of Article 717k-7(8) to the
Constitution, which provisions are now set forth in Article III, Section 49-j of
the Texas Constitution. The State has long been identified with the oil and gas
industry, but the Texas economy has diversified in recent years, particularly
with the growth of the computer and electronics industries. Oil and gas related
industries currently account for only 11% of the State's economy.
Service-producing sectors (which include transportation and public utilities;
finance and insurance and real estate; trade; services; and government) are the
major sources of job growth in Texas, although the rate of growth of
goods-producing jobs has been about the same as that of service-producing jobs
since 1994. Texas' location and transportation and accessibility have made it a
distribution center for the southwestern United States as well as a growing
international market for export trade. With leadership provided by a strong
high-technology sector and the growth of exports, manufacturing job growth is
expected to remain a significant part of Texas' economic future. The State
Comptroller of Public Accounts has predicted that the overall Texas economy will
slightly outpace national economic growth in the long term.
The State generally can be divided into six geo-economic regions. The
east region is a largely non-metropolitan region, in which the economy is
dependent on agricultural activities and the production and processing of coal,
petroleum and wood. The Dallas-Ft. Worth metroplex region is mostly
metropolitan, with diversified manufacturing, financial and commercial sectors.
The panhandle, Permian basin and Concho Valley regions are relatively populated
areas of the State, with an economy drawing heavily from petroleum production
and agriculture. The border region stretching from El Paso to Brownsville is
characterized by its economic ties to Mexico, tourism and agriculture. The Gulf
Coast region is the most populous region in the State and has an economy
centered on energy services, petro-chemical industries and commercial activities
resulting from agriculture and seaport trade. The economy of the central
corridor is based upon the public and private service sector, recreation/tourism
and high-
68
<PAGE>
technology manufacturing. Because the economic base is different from
region to region, economic developments, such as the strength of the U.S.
economy, shifting export markets or changes in oil prices or defense spending,
can be expected to affect the economy of each region differently.
In 1997, total nonfarm employment growth was 4.2%. By September 1998,
state nonfarm employment growth had moderated somewhat, in keeping with national
job growth patterns, but still expanded at 3.0%. Most new jobs created in the
past year have been in the service sector with most of the growth in the health,
business and miscellaneous services sectors. Employment during the period
between September 1997 through September 1998 also increased in the wholesale
and retail trade, government, transportation, communications, public utilities,
manufacturing and construction industries. The mix of job growth in Texas
provides a strong base for sustainable growth because the new jobs are largely
in industries with bright prospects for continued growth, such as
knowledge-based manufacturing and services. Per capita personal income has since
increased to approximately 93.5% of U.S. per capita income as of 1997.
The State's general revenue fund provides an indication of the State's
financial condition. Effective as of the beginning of fiscal 1994, numerous
state funds were merged into the general revenue fund providing for a one-time
gain of approximately $1.2 billion for the fund. In the fiscal year 1997, the
general revenue fund accounted for most of the state's net revenue. Due to the
state's expansion in Medicaid spending and other Health and Human Services
programs requiring federal matching revenues, federal receipts were the state's
number one source of income in fiscal 1998. Sales tax, which had been the main
source of revenue for the previous 12 years prior to fiscal 1993, was second.
Licenses, fees, fines and penalties are now the third largest source of revenue
to the state, with motor fuels taxes and motor vehicle sales/rental taxes
following as fourth largest and fifth largest, respectively. The remainder of
the state's revenues are derived primarily from interest and investment income,
lottery proceeds, cigarette and tobacco, franchise, oil and gas severance and
other taxes. The state has no personal or corporate income tax, although the
state does impose a corporate franchise tax based on the amount of a
corporation's capital and "earned surplus," which includes corporate net income
and officers' and directors' compensation. For each of the fiscal years ended
August 31, 1994, 1995, 1996, 1997, and 1998, the general revenue fund contained
a cash surplus of approximately $2.239 billion, $2.110 billion, $2.271 billion,
$2.685 billion and $3.330 billion, respectively.
VIRGINIA. Debt may be issued by or on behalf of the Commonwealth of
Virginia in accordance with the provisions of Article X, Section 9 of the
Virginia Constitution. Virginia counties, cities and towns may issue debt
pursuant to the provisions of Article VII, Section 10 of the Virginia
Constitution and the Public Finance Act of 1991 (Virginia Code Sections
15.2-2600 through 15.2-2663). In addition, certain types of debt, including
private activity bonds may be issued by various special purpose authorities,
including industrial development authorities created pursuant to the Industrial
Development and Revenue Bond Act (Virginia Code Sections 15.2-4900 through
15.2-4920).
Sections 9(a), (b) and (c) of Article X of the Virginia Constitution
provide for the issuance of debt to which the Commonwealth's full faith and
credit is pledged. Section 9(d) provides for the issuance of debt not secured by
the full faith and credit of the Commonwealth, but which may be supported by and
paid from Commonwealth tax collections. The Commonwealth and its localities may
also enter into leases and contracts that are not "debt" for constitutional
purposes, but are classified as long-term indebtedness on the issuer's financial
statements.
General obligation debt of the Commonwealth is authorized for various
purposes, including to meet emergencies, to redeem previous debt obligations,
and to pay the costs of certain capital projects. The Virginia Constitution
imposes certain restrictions on the amount of general obligation debt that may
be issued by the Commonwealth and, in some cases, such debt is subject to
approval in a state-wide election.
The restrictions applicable to general obligation debt of the
Commonwealth, including limitations on the outstanding amount that may be issued
by the Commonwealth do not apply to obligations issued by the Commonwealth or
any of its institutions, agencies or authorities if the full faith and credit of
the Commonwealth is not pledged to the payment of such obligations. Various
types of revenue bonds have been issued under Section 9(d) of Article X for
which the Commonwealth's full faith and credit is not pledged. These bonds may
be paid in whole or in part from revenues received as appropriations by the
General Assembly from general tax revenues or solely from revenues derived from
revenue-producing undertakings. The Commonwealth has also incurred numerous
obligations with respect to the leasing or installment purchase of buildings,
equipment and personal property. These
69
<PAGE>
agreements are for various terms and typically contain a nonappropriation clause
so that the continuation of any such lease or installment purchase agreement is
subject to funding by the General Assembly.
The Virginia Intermediate Municipal Bond Fund and Virginia Municipal
Bond Fund also invest in debt obligations issued by local governments. Local
government in the Commonwealth is comprised of approximately 95 counties, 41
incorporated cities, and 190 incorporated towns. The Commonwealth is unique in
that cities and counties are independent and their land areas do not overlap.
Cities and counties each levy and collect their own taxes and provide their own
services. Towns, which are units of local government and which continue to be
part of the counties in which they are located, levy and collect taxes for town
purposes but their residents are also subject to county taxes. Generally, the
largest expenditure by local governments in the Commonwealth is for public
education. Each county and city in the Commonwealth, with few exceptions,
constitutes a separate school district. Counties, cities and towns typically
also provide such services such as water and sewer services, police and fire
protection, and recreational facilities.
Local governments are authorized to issue general obligation debt and
debt secured by revenues of a revenue-producing undertaking under Article VII,
Section 10 of the Virginia Constitution. Generally, debt issued by a county
pledging the full faith and credit of the county is subject to voter approval
but is not limited as to outstanding amount. Debt pledging the full faith and
credit of a town or city is generally subject to a limit on the outstanding
amount of such debt equal to 10% of the assessed valuation of the real estate
subject to taxation in the city or town. Revenue bonds payable from revenues
derived from a revenue-producing undertaking and certain lease or installment
sale obligations that are subject to appropriation each year by the governing
body of the locality are not subject to such limit and are not subject to voter
approval in counties.
The primary sources of money available to localities to pay debt
service on general obligation bonds are real and personal property taxes, sales
tax and business license taxes. Virginia Code Section 15.2-2659, known as the
"state aid intercept provision" provides a mechanism for applying appropriations
to be made from the Commonwealth to any locality to any overdue debt service on
general obligation bonds issued by such locality.
Numerous obligations are also issued by industrial development
authorities, redevelopment and housing authorities, water and sewer authorities
and other issuers created and empowered to issue bonds by Virginia statute.
These issuers typically issue bonds payable from the revenues derived from a
particular undertaking and not secured by a pledge of the faith and credit of
the Commonwealth or any county, city or town. Typically these issuers do not
have taxing power.
The General Fund of the Commonwealth derives its revenues primarily
from individual and fiduciary income tax, corporation income tax, state sales
and use tax, public service corporations tax and taxes on premiums of insurance
companies. General Fund tax revenues grew at a rate of 11% from fiscal year 1997
to fiscal year 1998. Individual tax revenue grew by 14.3%. Certain other tax
revenues experienced more modest growth and in one instance a decline. Public
service corporation revenues declined by 19.4%, while corporate income tax
revenue grew at a rate of 4.3% and sales and use tax revenue at a rate of 5.1%.
Overall revenue grew by 8% mainly in individual income tax revenues, but non-tax
revenues declined by 3%. Overall expenditures grew at a rate of 6%, compared to
5.5% in fiscal year 1997. Education expenditures grew by $168.6 million, or 5.5
percent, while administration of justice expenditures grew by $137.6 million, or
10.3 percent. The large increase in revenues in fiscal year 1998 resulted in a
General Fund balance of $1,444.2 million, an increase of 54.1% over fiscal year
1997.
Historically, balances in the General Fund have decreased in some
years, for example in 1995, as a result of an increase in transfers from the
General Fund, and have increased at varying rates in other years, such as fiscal
years 1996 and 1997.
In 1997, the Commonwealth ranked 12th in population among the 50
states. The Commonwealth's 1997 population was approximately 6,737,500.
According to the U.S. Department of Commerce, Bureau of Economic Analysis and
University of Virginia, Weldon Cooper Center for Public Service, the 1996 per
capita income for the Commonwealth was $25,255. According to the U.S. Department
of Labor, Bureau of Labor Statistics, the unemployment rate of 4% in 1997
compared to 4.9% nationally. Assessed value of locally taxed property exceeded
$405 billion in 1997 according to the Virginia Department of Taxation.
Effective November 23, 1998, the Commonwealth joined leading United
States tobacco product manufacturers, 46 other states, the District of Columbia
and five territories in the National Tobacco Settlement. The Settlement will be
final on the earlier of (i) June 30, 2000 or (ii) when 80% of the settling
states approve the
70
<PAGE>
Settlement. The Settlement provides, among other things, that tobacco companies
will pay a total of $206 billion to the participating states by the year 2025.
The Commonwealth's share of the total amount paid to states would be
approximately $4 billion. During the 1999 General Assembly Session, legislation
was adopted to create the Tobacco Indemnification and Community Revitalization
Commission and Fund. 50% of the annual amount received by the Commonwealth from
the Settlement will be deposited into such Fund. Such Commission will determine
the appropriate recipients of money in the Fund and distribute moneys in the
Fund to (i) provide payments to tobacco farmers as compensation for the
elimination or decline in tobacco quota and (ii) promote economic growth and
development in tobacco dependent communities. Tobacco is Virginia's top cash
crop and it generated $191 million in revenues in 1997. In a separate Trust
Agreement between the four leading tobacco firms and 14 tobacco-growing states,
a $5.15 billion National Tobacco Community Trust Fund has been established to
help farms cope with the anticipated decline in sales resulting from the
Settlement. Although the Trust Agreement is not final, the four tobacco
companies are expected to make payments into the Trust Fund over a 12-year
period beginning in 2002.
The General Assembly approves a biannual budget for the Commonwealth.
The 1998-2000 Budget Bill presented about $2,242.1 million in operating
increases from the general fund above fiscal year 1998 appropriation levels. Of
this amount, $211.4 million was for deposit to the Revenue Stabilization Fund.
The remainder provided for increases in K-12 education ($874.2 million), higher
education ($345.5 million), public safety, economic development, health and
human resources, and natural resources. The 1998-2000 Budget Bill also provided
$350 million in funding for tax reductions, including $260 million for the first
installment of a proposal to eliminate the personal property tax on personal use
vehicles valued up to $20,000 and a proposal to eliminate the sales tax on
non-prescription drugs. In addition to increases to operating funds, the
1998-2000 Budget Bill provided $532.8 million in pay-as-you-go funding for
capital projects.
On January 26, 1998, the Governor submitted amendments to the
introduced 1998-2000 Budget Bill to fund his commitments to provide additional
teachers in K-12 class rooms ($35.1 million) and to eliminate the personal
property tax on personal use vehicles valued up to $20,000 ($233.2 million). The
Governor's amendments also made minor adjustments, many of them based on updated
information available after the 1998-2000 Budget Bill was introduced. Revenue
adjustments included a revised estimate of general fund revenue, a revised
accounting for interest earnings, and elimination of a Lottery Special Reserve
Fund.
The 1998-2000 Budget Bill enacted by the 1998 General Assembly in its
60-day Session, which began January 14, 1998, including $447 million for
personal property tax relief and $80.8 million for local school construction and
repair.
The Governor signed the 1998-2000 Budget Bill into law on April 14,
1998. The 1998-2000 Budget Bill became the 1998-2000 Appropriation Act (Chapter
464, 1998 Virginia Acts of Assembly). This Act was amended by action of a
Special Session of the 1998 General Assembly, which convened on April 23, 1998.
Amendments to the 1998-2000 Appropriation Act enacted during the 1998 Special
Session of the General Assembly, fully fund the $110 million program for public
school construction and effect personal property tax relief totaling $434.8
million. These amendments were signed into law by the Governor on May 20, 1998
(Chapter 1, Special Session I, 1998 Virginia Acts of Assembly). The 1998-2000
Appropriation Act, as amended, went into effect on July 1, 1998.
The 1999 Budget Bill contained a total of $864.6 million in new general
fund spending, including a payment of $79.1 million for the Revenue
Stabilization Fund, $732 million in new spending for operating expenses, and
$52.9 million for capital outlay. The 1999 Budget Bill provided for continued
tax relief for Virginians, with the continuation of the phased-in car tax
relief, a first step toward reducing the sales tax on food for home consumption,
and a military pay exclusion from state income tax of up to $15,000 of basic
pay. Other major new spending items proposed by the Governor included $364
million in aid to localities (funding for localities with police department,
dedication of lottery profits to K-12 education, and pay increases for local
sheriffs' deputies), funding to roll back tuition at state-supported colleges
and universities by 20 percent, funding for the Water Quality Improvement Fund
and other environment initiatives, and funding for improvements to the state's
mental health system.
The 1999 General Assembly Session ended on February 27, 1999. The 1999
Budget Bill, as amended by the General Assembly, was submitted to the Governor
for approval. The Governor signed the amended bill and returned it to the
General Assembly with thirteen item vetoes for action at its one-day reconvened
session held April 7, 1999. The General Assembly upheld all but three of the
Governor's item vetoes. The 1999 Budget Bill became law on April 7, 1999, as
Chapter 935 of the 1999 Virginia Acts of Assembly.
71
<PAGE>
The sources of the information described above include the statutes and
constitutional provisions referenced, to which reference is made for more
detailed information, and official statements of the Commonwealth and other
publicly available documents. Nations Funds have not independently verified any
of the information contained in these official statements or documents.
OPTIONS ON CURRENCIES
Certain Funds may purchase and sell options on currencies to hedge the
value of securities the Fund holds or intends to buy. Options on foreign
currencies may be traded on U.S. and foreign exchanges or over-the-counter.
OTHER INVESTMENT COMPANIES
In seeking to attain their investment objectives, certain Funds may
invest in securities issued by other investment companies within the limits
prescribed by the 1940 Act, its rules and regulations and any exemptive relief
obtained by the Funds. Other than the Feeder Funds, which invest all of their
assets in corresponding Master Portfolios, 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.
PARTICIPATION INTERESTS AND COMPANY RECEIPTS
The Government Bond Fund also may purchase from domestic financial
institutions and trusts created by such institutions participation interests and
trust receipts in high quality debt securities. A participation interest or
receipt gives the Fund an undivided interest in the security in the proportion
that the Fund's participation interest or receipt bears to the total principal
amount of the security. As to certain instruments for which the Fund will be
able to demand payment, the Fund intends to exercise its right to do so only
upon a default under the terms of the security, as needed to provide liquidity
or to maintain or improve the quality of its investment portfolio. It is
possible that a participation interest or trust receipt may be deemed to be an
extension of credit by the Fund to the issuing financial institution rather than
to the obligor of the underlying security and may not be directly entitled to
the protection of any collateral security provided by the obligor. In such
event, the ability of the Fund to obtain repayment could depend on the issuing
financial institution.
Participation interests and trust receipts may have fixed, floating or
variable rates of interest, and will have remaining maturities of thirteen
months or less (as defined by the SEC). If a participation interest or trust
receipt is unrated, the Adviser will have determined that the interest or
receipt is of comparable quality to those instruments in which the Fund may
invest pursuant to guidelines approved by the Board of Directors. For certain
participation interests or trust receipts the Fund will have the right to demand
payment, on not more than 30 days' notice, for all or any part of the Fund's
participation interest or trust receipt in the securities involved, plus accrued
interest.
REAL ESTATE INVESTMENT TRUSTS
A real estate investment trust ("REIT") is a managed portfolio of real
estate investments which may include office buildings, apartment complexes,
hotels and shopping malls. An equity REIT holds equity positions in real estate,
and it seeks to provide its shareholders with income from the leasing of its
properties, and with capital gains from any sales of properties. A mortgage REIT
specializes in lending money to developers of properties, and passes any
interest income it may earn to its shareholders.
REITs may be affected by changes in the value of the underlying
property owned or financed by the REIT, while Mortgage REITs also may be
affected by the quality of credit extended. Both equity and mortgage REITs are
dependent upon management skill and may not be diversified. REITs also may be
subject to heavy cash flow dependency, defaults by borrowers, self-liquidation,
and the possibility of failing to qualify for tax-free pass-through of income
under the Internal Revenue Code of 1986, as amended.
72
<PAGE>
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.
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
73
<PAGE>
recognition at an appreciated value solely by reason of a development applicable
to that company, and regardless of general business conditions or movements of
the market as a whole. Developments creating special situations might include,
among others: liquidations, reorganizations, recapitalizations, mergers,
material litigation, technical breakthroughs and new management or management
policies. Although large and well known companies may be involved, special
situations more often involve comparatively small or unseasoned companies.
Investments in unseasoned companies and special situations often involve much
greater risk than is inherent in ordinary investment securities.
STANDARD & POOR'S DEPOSITARY RECEIPTS ("SPDRS")
Certain Funds may purchase Standard & Poor's Depositary Receipts, or
SPDRs, which are interests in a unit investment trust holding a portfolio of
securities linked to the S&P 500 Index. Because a unit investment trust is an
investment company under the 1940 Act, a Fund's investments in SPDRs are subject
to the limitations set forth in Section 12(d)(1)(A) of the 1940 Act.
SPDRs closely track the underlying portfolio of securities, trade like
a share of common stock and pay periodic dividends proportionate to those paid
by the portfolio of stocks that comprise the S&P 500 Index. As a holder of
interests in a unit investment trust, a Fund would indirectly bear its ratable
share of that unit investment trust's expenses. At the same time the Fund would
continue to pay its own management and advisory fees and other expenses, as a
result of which the Fund and its shareholders in effect will be absorbing
duplicate levels of fees with respect to investments in such unit investment
trusts.
SPDRs are subject to the risks of an investment in a broadly based
portfolio of large-capitalization common stocks, including the risk that the
general level of stock prices may decline, thereby adversely affecting the value
of such investment. In addition, because individual investments in SPDRs are not
redeemable, except upon termination of the unit investment trust, the liquidity
of small holdings of SPDRs will depend upon the existence of a secondary market.
Large holdings of SPDRs are called "creation unit size" and are redeemable in
kind only and are not redeemable for cash from the unit investment trust. The
price of SPDRs is derived and based upon the securities held by the unit
investment trust. Accordingly, the level of risk involved in the purchase or
sale of a SPDR is similar to the risk involved in the purchase or sale of
traditional common stock, with the exception that the pricing mechanism for
SPDRs is based on a basket of stocks. Disruptions in the markets for the
securities underlying SPDRs purchased or sold by a Fund could result in losses
on SPDRs.
STAND-BY COMMITMENTS
Certain Funds may acquire "stand-by commitments" with respect to
Municipal Securities held in their portfolios. Under a "stand-by commitment," a
dealer agrees to purchase from a Fund, at a Fund's option, specified Municipal
Securities at a specified price. Stand-by commitments are exercisable by a Fund
at any time before the maturity of the underlying Municipal Securities, and may
be sold, transferred, or assigned by a Fund only with the underlying
instruments.
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
74
<PAGE>
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.
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
75
<PAGE>
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.
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.
76
<PAGE>
Unless a segregated account consists of the securities, cash or
currencies that are the subject of the obligation, a Fund will hold cash, U.S.
Government securities and other high grade liquid debt obligations in a
segregated account. These assets cannot be transferred while the obligation is
outstanding unless replaced with other suitable assets. In the case of an
index-based transaction, a Fund could own securities substantially replicating
the movement of the particular index.
In the case of a futures contract, a Fund must deposit initial margin
and variation margin, as often as daily, if the position moves adversely,
sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Similarly, options on futures contracts require a Fund to
deposit margin to the extent necessary to meet the Fund's commitments.
In lieu of such assets, such transactions may be covered by other means
consistent with applicable regulatory policies. A Fund may enter into
off-setting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
hedging transactions. For example, a Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by that Fund. Moreover, instead of segregating assets if a Fund held
a futures or forward contract, it could purchase a put option on the same
futures or forward contract with a strike price as high or higher than the price
of the contract held. Of course, the off-setting transaction must terminate at
the time of or after the primary transaction.
VARIABLE- AND FLOATING-RATE INSTRUMENTS
Certain Funds may purchase variable-rate and floating rate obligations.
If such instrument is not rated, the Adviser will consider the earning power,
cash flows, and other liquidity ratios of the issuers and guarantors of such
obligations and, if the obligation is subject to a demand feature, will monitor
their financial status to meet payment on demand. In determining average
weighted portfolio maturity, a variable-rate demand instrument issued or
guaranteed by the U.S. Government or an agency or instrumentality thereof will
be deemed to have a maturity equal to the period remaining until the obligations
next interest rate adjustment. Other variable-rate obligations will be deemed to
have a maturity equal to the longer of the period remaining to the next interest
rate adjustment or the time a Fund can recover payment of principal as specified
in the instrument.
Variable-rate demand notes held by a Money Market Fund may have maturities of
more than 397 days, provided (i) the Fund is entitled to payment principal on
not more than 30 days' notice, or at specified intervals not exceeding 397 days
(upon not more than 30 days' notice), and (ii) the rate of interest on such note
is adjusted automatically at periodic intervals which may extend up to 397 days.
The variable- and-floating rate demand instruments that the Funds may
purchase include participations in Municipal Securities purchased from and owned
by financial institutions, primarily banks. Participation interests provide a
Fund with a specified undivided interest (up to 100%) in the underlying
obligation and the right to demand payment of the unpaid principal balance plus
accrued interest on the participation interest from the institution upon a
specified number of days' notice, not to exceed 30 days. Each participation
interest is backed by an irrevocable letter of credit or guarantee of a bank
that the Adviser has determined meets the prescribed quality standards for the
Funds. The bank typically retains fees out of the interest paid on the
obligation for servicing the obligation, providing the letter of credit, and
issuing the repurchase commitment.
WARRANTS
Certain Funds are permitted to invest in warrants. Warrants are
privileges issued by corporations enabling the owner to subscribe to and
purchase a specified number of shares of the corporation at a specified price
during a specified period of time. The prices of warrants do not necessarily
correlate with the prices of the underlying securities. The purchase of warrants
involves the risk that the purchaser could lose the purchase value of the
warrant if the right to subscribe to additional shares is not exercised prior to
the warrant's expiration. Also, the purchase of warrants involves the risk that
the effective price paid for the warrant added to the subscription price of the
related security may exceed the value of the subscribed security's market price
such as when there is no movement in the level of the underlying security.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS
77
<PAGE>
A Fund may agree to purchase securities on a when-issued basis or enter
into a forward commitment to purchase securities. When a Fund engages in these
transactions, its custodian will segregate cash, U.S. Government securities or
other high quality debt obligations equal to the amount of the commitment.
Normally, the custodian will segregate portfolio securities to satisfy a
purchase commitment, and in such a case a Fund may be required subsequently to
segregate additional assets in order to ensure that the value of the segregated
assets remains equal to the amount of the Fund's commitment. Because a Fund will
segregate cash or liquid assets to satisfy its purchase commitments in the
manner described, the Fund's liquidity and ability to manage its portfolio might
be adversely affected in the event its commitments to purchase when-issued
securities ever exceeded 25% of the value of its assets. In the case of a
forward commitment to sell portfolio securities, the Fund's custodian will hold
the portfolio securities themselves in a segregated account while the commitment
is outstanding.
A Fund will make commitments to purchase securities on a when-issued
basis or to purchase or sell securities on a forward commitment basis only with
the intention of completing the transaction and actually purchasing or selling
the securities. If deemed advisable as a matter of investment strategy, however,
a Fund may dispose of or renegotiate a commitment after it is entered into, and
may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a capital gain or loss.
When a Fund engages in when-issued and forward commitment transactions,
it relies on the other party to consummate the trade. Failure of such party to
do so may result in the Fund's incurring a loss or missing an opportunity to
obtain a price considered to be advantageous.
The value of the securities underlying a when-issued purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their value, is taken into account when determining the net asset value of a
Fund starting on the date the Fund agrees to purchase the securities. The Fund
does not earn dividends on the securities it has committed to purchase until
they are paid for and delivered on the settlement date. When the Fund makes a
forward commitment to sell securities it owns, the proceeds to be received upon
settlement are included in the Fund's assets. Fluctuations in the value of the
underlying securities are not reflected in the Fund's net asset value as long as
the commitment remains in effect.
PORTFOLIO TURNOVER
Generally, the Equity Funds will purchase portfolio securities for
capital appreciation or investment income, or both, and not for short-term
trading profits. If a Fund's annual portfolio turnover rate exceeds 100%, it may
result in higher brokerage costs and possible tax consequences for the Portfolio
and its shareholders. For the Funds' portfolio turnover rates, see the
"Financial Highlights" in the Prospectus.
INVESTMENT RISKS AND CONSIDERATIONS
In addition to the investment risks and considerations identified in
certain of the securities descriptions above, there are additional investment
risks and considerations associated with an investment in certain of the Funds.
Investments by a Fund in common stocks and other equity securities are
subject to stock market risks. The value of the stocks that the Fund holds, like
the broader stock market, may decline over short or even extended periods. The
U.S. stock market tends to be cyclical, with periods when stock prices generally
rise and periods when prices generally decline. As of the date of this SAI, the
stock market, as measured by the S&P 500 Index and other commonly used indexes,
was trading at or close to record levels. There can be no guarantee that these
levels will continue.
The State Municipal Bond Funds, the State Intermediate Municipal Bond
Funds, California Reserves, the California Bond Fund and Nations Marsico Focused
Equities Fund, are non-diversified funds, which means that they typically invest
in fewer issuers than diversified funds. Therefore, appreciation or depreciation
of an investment in a single issuer could have a greater impact on these Funds'
net asset value. Nations Marsico Focused Equities Fund reserves the right to
become a diversified fund by limiting the investments in which more than 5% of
its total assets are invested.
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
78
<PAGE>
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."
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.
Master Feeder Structure. The Feeder Funds are open-end mutual funds
that seek to achieve their investment objectives by investing all of its
investable assets in corresponding Master Portfolios which have the same
investment objectives. The Feeder Funds may withdraw their investment in the
Master Portfolios at any time if the Board of Directors of appropriate Company
determines that it is in the best interest of such Feeder Fund to do so. Upon
such withdrawal, the Board of Directors would consider what action might be
taken, including the investment of all of the assets of the Fund in another
pooled investment entity having the same investment objective as the Feeder Fund
or the hiring of an investment adviser to manage the Feeder Fund's assets in
accordance with its investment policies.
The Master Portfolios are separate series of Nations Master Investment
Trust (the "Master Trust"), which is organized as a business trust under the
laws of Delaware. The Feeder Fund and other entities that may investment in the
Master Portfolios from time to time (E.G., other investment companies and
commingled trust funds) will each be liable for all obligations of the Master
Portfolios. However, the risk of the Feeder Fund's incurring financial loss on
account of such liability is limited to circumstances in which both inadequate
insurance exists and a Portfolio itself is unable to meet its obligations.
Accordingly, the Companies' Boards of Directors believe that neither a Feeder
Fund nor its shareholders will be adversely affected by reason of a Feeder
Fund's investing in a Master Portfolio. As with any mutual fund, other investors
in the Master Portfolios could control the results of voting at the Master
Portfolio level in certain instances (E.G., a change in fundamental policies by
the Master Portfolio which was not approved by the Fund's shareholders). This
could result in a Feeder Fund's withdrawal of its investment in the Master
Portfolio. Further, the withdrawal of other entities that may from time to time
invest in the Master Portfolios could have an adverse effect on the performance
of such Master Portfolios and the corresponding Feeder Fund, such as decreased
economies of scale, and increased per share operating expenses. In addition, the
total withdrawal by another investment company as an investor in a Master
Portfolio will cause the such Master Portfolio to terminate automatically in 120
days unless a Feeder Fund and any other investors in the Master Portfolio
unanimously agree to continue the business of the Master Portfolio. If unanimous
agreement is not reached to continue the Master Portfolio, the Board of
Directors of a Company would need to consider alternative arrangements for the
Feeder Fund, such as those described above. When the Fund is required to vote as
an interestholder of the Master Portfolio, current regulations provide that in
those circumstances the Feeder Fund may either seek instructions from its
security holders with regard to voting such proxies and vote such proxies in
accordance with such instructions or the Feeder Fund may vote its shares in the
Master Portfolio in the same proportion of all other security holders in the
Master Portfolio.
79
<PAGE>
There may also be other investment companies through which you can
invest in the Master Portfolio which may have higher or lower fees and expense
than those of its corresponding Fund and which may therefore have different
performance results than the Feeder Fund.
MANAGEMENT OF THE COMPANIES
The business and affairs of the Companies are managed under the
direction of their respective Boards of Directors/Trustees. This SAI contains
the names of and general background information concerning each Trustee/Director
of the Companies.
The Companies 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 Directors/Trustees and executive officers of each Company and their
principal occupations during the last five years are set forth below. The
address of each, unless otherwise indicated, is 111 Center Street, Little Rock,
Arkansas 72201. Those directors who are "interested persons" of a Company (as
defined in the 1940 Act) are indicated by an asterisk(*).
<TABLE>
<CAPTION>
<S> <C> <C>
PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS
POSITION WITH AND CURRENT
NAME, ADDRESS, AND AGE THE COMPANIES DIRECTORSHIPS
- ---------------------- ---------------- -------------
Edmund L. Benson, III, 62 Director/Trustee Director, President and Treasurer,
Saunders & Benson, Inc. Saunders & Benson, Inc. (Insurance),
1510 Willow Lawn Drive Insurance Managers, Inc.
Suite 216 (insurance); Trustee, Nations
Richmond, VA 23230 Reserves, Master Investment Trust,
Nations Annuity Trust and Nations
Fund Trust; Director, Nations Fund,
Inc., and Nations LifeGoal Funds,
Inc.; Director, Nations Fund
Portfolios, Inc. through August,
1999.
James Ermer, 56 Director/Trustee Retired Executive Vice President,
11511 Compass Point Drive Corporate Development and Planning -
Ft. Meyers, FL 33908 Land America (title insurance);
Senior Vice President, Finance - CSX
Corporation (transportation and
natural resources); Director National
Mine Service (mining supplies),
Lawyers Title Corporation (title
insurance); Trustee, Nations
Reserves, Nations Fund Trust, Nations
Annuity Trust and Nations Master
Investment Trust; Director, Nations
Fund, Inc. and Nations LifeGoal
Funds, Inc.; Director, Nations Fund
Portfolios, Inc. through August,
1999.
William H. Grigg, 66 Director/Trustee Chairman and Chief Executive Officer
Duke Power Co. from April 1994 to July 1997 - Duke
16092A Reap Road Power Co.; Director - The Shaw Group,
Albermarle, NC 28001 Inc.; Director and Vice Chairman,
Aegis Insurance Services, Ltd. (a
mutual insurance company in Bermuda);
Trustee, Nations Reserves, Nations
Fund Trust, Nations Annuity Trust and
Nations Master Investment Trust;
Director, Hatteras Income Securities,
Inc., Nations Government Income Term
Trust 2003, Inc., Nations Government
Income Term Trust 2004, Inc., Nations
Balanced Target Maturity Fund, Inc.,
Nations Fund, Inc. and Nations
LifeGoal Funds, Inc.; Director,
Nations Fund Portfolios, Inc. through
August, 1999.
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS
POSITION WITH AND CURRENT
NAME, ADDRESS, AND AGE THE COMPANIES DIRECTORSHIPS
- ---------------------- ---------------- -------------
<S> <C> <C>
Thomas F. Keller, 67 Director/Trustee R.J. Reynolds Industries Professor
Fuqua School of Business of Business Administration and
P.O. Box 90120 Former Dean - Fuqua School of
Duke University Business, Duke University; Director
Durham, NC 27708 - LADD Furniture, Inc. (furniture),
Wendy's International, Inc.
(restaurant operating and
franchising), American Business
Products, Inc. (printing services),
Dimon, Inc. (tobacco), Biogen, Inc.
(pharmaceutical biotechnology);
Trustee, The Mentor Funds, Mentor
Institutional Trust, Cash Reserve
Trust, Nations Reserves, Nations
Fund Trust, Nations Annuity Trust
and Nations Master Investment Trust;
Director, Hatteras Income
Securities, Inc., Nations Government
Income Term Trust 2003, Inc.,
Nations Government Income Term Trust
2004, Inc., Nations Balanced Target
Maturity Fund, Inc. and Nations
LifeGoal Funds, Inc.; Director,
Nations Fund Portfolios, Inc.
through August, 1999.
Carl E. Mundy, Jr., 64 Director/Trustee President and CEO - USO from May
USO World Headquarters 1996 to present; Commandant - United
Washington Navy Yard States Marine Corps from July 1991
Building 198 to July 1995; Director -
901 M Street, S.E. Shering-Plough (pharmaceuticals and
Washington, D.C. 20374-5096 health care products); General
Dynamics Corporation (defense
systems); Trustee, Nations Reserves,
Nations Fund Trust, Nations Annuity
Trust and Nations Master Investment
Trust; Director, Nations Fund, Inc.
and Nations LifeGoal Funds, Inc.;
Director, Nations Fund Portfolios,
Inc. through August, 1999.
Dr. Cornelius J. Pings, 70* Director/Trustee President - Association of American
480 S. Orange Grove Blvd. Universities from February 1993 to
Pasadena, CA 91105 June 1998; Director - Farmers Group,
Inc. (insurance company), Nations
Fund, Inc. and Nations LifeGoal
Funds, Inc.; Trustee, Master
Investment Trust, Series I from 1995
to 1999, Master Investment Trust,
Series II from 1995 to 1997, Nations
Reserves, Nations Fund Trust,
Nations Annuity Trust and Nations
Master Investment Trust.;
Director/Trustee and Chairman -
Pacific Horizon Funds, Inc. and
Master Investment Trust, Series I,
from inception to May 1999;
Director - Time Horizon Funds and
Pacific Innovations Trust; Director,
Nations Fund Portfolios, Inc.
through August, 1999.
James B. Sommers*, 60 Director President - NationsBank Trust from
237 Cherokee Road January 1992 to September 1996;
Charlotte, NC 28207 Executive Vice President -
NationsBank Corporation from January
1992 to May 1997; Chairman - Central
Piedmont Community College
Foundation; Board of Commissioners,
Charlotte/ Mecklenberg Hospital
Authority; Director - Nations Fund,
Inc. and Nations LifeGoal Funds,
Inc.; Trustee, Central Piedmont
Community College; Mint Museum of
Art, Nations Reserves, Nations Fund
Trust, Nations Annuity Trust and
Nations Master Investment Trust;
Director, Nations Fund Portfolios,
Inc. through August, 1999.
81
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
DURING PAST 5 YEARS
POSITION WITH AND CURRENT
NAME, ADDRESS, AND AGE THE COMPANIES DIRECTORSHIPS
- ---------------------- ---------------- -------------
<S> <C> <C>
A. Max Walker*, 77 President, Director and Independent Financial Consultant;
4580 Windsor Gate Court Chairman of the Board Director and Chairman of the Board -
Atlanta, GA 30342 Hatteras Income Securities, Inc.,
Nations Government Income Term Trust
2003, Inc., Nations Government Income
Term Trust 2004, Inc., Nations
Balanced Target Maturity Fund, Inc.;
President, Director and Chairman of
the Board - Nations Fund, Inc. and
Nations LifeGoal Funds, Inc.;
President, Trustee and Chairman of
the Board - Nations Reserves, Nations
Fund Trust, Nations Annuity Trust and
Nations Master Investment Trust;
Director, Nations Fund Portfolios,
Inc. through August, 1999.
Charles B. Walker, 60 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. and Nations LifeGoal
Funds, Inc.; Trustee, Nations
Reserves, Nations Fund Trust,
Nations Annuity Trust and Nations
Master Investment Trust; Director,
Nations Fund Portfolios, Inc.
through August, 1999.
Thomas S. Word, Jr.*, 61 Director Partner - McGuire, Woods, Battle &
McGuire, Woods, Battle & Boothe LLP Boothe LLP (law firm); Director -
One James Center Vaughan-Bassett Furniture Companies,
8th Floor Inc. (furniture), Nations Fund, Inc.
Richmond, VA 23219 and Nations LifeGoal Funds, Inc.;
Trustee, Nations Reserves, Nations
Fund Trust, Nations Annuity Trust
and Nations Master Investment Trust;
Director, Nations Fund Portfolios,
Inc. through August, 1999.
Richard H. Blank, Jr., 42 Secretary and Treasurer Senior Vice President since 1998,
Stephens Inc. Vice President from 1994 to 1998 and
111 Center Street Manager from 1990 to 1994 - Mutual
Little Rock, AR 72201 Fund Services, Stephens Inc.;
Secretary since September 1993 and
Treasurer since November 1998 Nations
Fund, Inc., Nations LifeGoal Funds,
Inc., Nations Reserves, Nations Fund
Trust, Nations Annuity Trust and
Nations Master Investment Trust.;
Secretary and Treasurer, Nations Fund
Portfolios, Inc. through August,
1999.
Michael W. Nolte, 38 Assistant Secretary Assistant Secretary - Nations Fund
Stephens Inc. Trust, Nations Fund, Inc., Nations
Reserves, Nations LifeGoal Funds,
Inc., Nations Annuity Trust and
Nations Master Investment Trust;
Assistnat Secretary, Nations Fund
Portfolios, Inc. through August,
1999.
James E. Banks, 43 Assistant Secretary Assistant Secretary - Nations Fund
Stephens Inc. Trust, Nations Fund, Inc., Nations
Reserves, Nations LifeGoal Funds,
Inc., Nations Annuity Trust and
Nations Master Investment Trust; ;
Director, Nations Fund Portfolios,
Inc. through August, 1999.
</TABLE>
82
<PAGE>
Each Director/Trustee is a board member of NFI, NFT, NR, Nations
Annuity Trust, Nations Master Investment Trust and Nations LifeGoal Funds, Inc.,
each a registered investment company that is part of the Nations Funds family.
Richard H. Blank, Jr., Michael W. Nolte, and James E. Banks. Jr. also are
officers of NFI, NFT, NR, Nations Annuity Trust, Nations Master Investment Trust
and Nations LifeGoal Funds, Inc.
Each Company has adopted a Code of Ethics which, among other things,
prohibits each access person of the Company from purchasing or selling
securities when such person knows or should have known that, at the time of the
transaction, the security (i) was being considered for purchase or sale by a
Fund, or (ii) was being purchased or sold by a Fund. For purposes of the Code of
Ethics, an access person means (i) a director or officer of a Company, (ii) any
employee of a Company (or any company in a control relationship with a Company)
who, in the course of his/her regular duties, obtains information about, or
makes recommendations with respect to, the purchase or sale of securities by a
Company, and (iii) any natural person in a control relationship with a Company
who obtains information concerning recommendations made to a Company regarding
the purchase or sale of securities. Portfolio managers and other persons who
assist in the investment process are subject to additional restrictions,
including a requirement that they disgorge to a Company any profits realized on
short-term trading (I.E., the purchase/sale or sale/purchase of securities
within any 60-day period). The above restrictions do not apply to purchases or
sales of certain types of securities, including mutual fund shares, money market
instruments and certain U.S. Government securities. To facilitate enforcement,
the Code of Ethics generally requires that a Company's access persons, other
than its "disinterested" directors or trustees, submit reports to a Company's
designated compliance person regarding transactions involving securities which
are eligible for purchase by a Fund.
NATIONS FUNDS RETIREMENT PLAN
Under the terms of the Nations Funds Retirement Plan for Eligible
Directors/Trustees (the "Retirement Plan"), each Director/Trustee may be
entitled to certain benefits upon retirement from the Board of
Directors/Trustees. Pursuant to the Retirement Plan, the normal retirement date
is the date on which the eligible director/trustee has attained age 65 and has
completed at least five years of continuous service with one or more of the
open-end investment companies advised by the Adviser. If a director/trustee
retires before reaching age 65, no benefits are payable. Each eligible
director/trustee is entitled to receive an annual benefit from the Funds
commencing on the first day of the calendar quarter coincident with or next
following his date of retirement equal to 5% of the aggregate
director's/trustee's fees payable by the Funds during the calendar year in which
the director's/trustee's retirement occurs multiplied by the number of years of
service (not in excess of ten years of service) completed with respect to any of
the Funds. Such benefit is payable to each eligible director/trustee in
quarterly installments for a period of no more than five years. If an eligible
director/trustee's dies after attaining age 65, the director's/trustees
surviving spouse (if any) will be entitled to receive 50% of the benefits that
would have been paid (or would have continued to have been paid) to the
director/trustee if he had not died. The Retirement Plan is unfunded. The
benefits owed to each director/trustee are unsecured and subject to the general
creditors of the Funds.
NATIONS FUNDS DEFERRED COMPENSATION PLAN
Under the terms of the Nations Funds Deferred Compensation Plan for
Eligible Directors/Trustees (the "Deferred Compensation Plan"), each
director/trustee may elect, on an annual basis, to defer all or any portion of
the annual board fees (including the annual retainer and all attendance fees)
payable to the director/trustee for that calendar year. An application was
submitted to and approved by the SEC to permit deferring directors/trustees to
elect to tie the rate of return on fees deferred pursuant to the Deferred
Compensation Plan to one or more of certain investment portfolios of certain
Funds. Distributions from the deferring directors'/trustees deferral accounts
will be paid in cash, in generally equal quarterly installments over a period of
five years beginning on the date the deferring director's/trustees' retirement
benefits commence under the Retirement Plan. The Board of Directors/Trustees, in
its sole discretion, may accelerate or extend such payments after a
director's/trustee's termination of service. If a deferring director/trustee
dies prior to the commencement of the distribution of amounts in his deferral
account, the balance of the deferral account will be distributed to his
designated beneficiary in a lump sum as soon as practicable after the
director's/trustee's death. If a deferring director/trustee dies after the
commencement of such distribution, but prior to the complete distribution of his
deferral account, the balance of the amounts credited to his deferral account
will be distributed to his designated beneficiary over the remaining period
during which such amounts were distributable to the director/trustee. Amounts
payable under the Deferred Compensation Plan are not funded or
83
<PAGE>
secured in any way and deferring directors/trustees have the status of unsecured
creditors of the Funds from which they are deferring compensation.
Director Compensation Through July 1, 1999
COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
PENSION OR
AGGREGATE RETIREMENT
COMPENSATION BENEFITS ACCRUED ESTIMATED ANNUAL TOTAL COMPENSATION
NAME OF PERSON FROM AS PART OF FUND BENEFITS UPON FROM REGISTRANT
POSITION (1) REGISTRANT (2) EXPENSES RETIREMENT PLAN & FUND COMPLEX(3)(4)
------------ -------------- -------- --------------- --------------
Edmund L. Benson, III $46,000 $8,889 $35,000 $77,377
Trustee/Director
James Ermer 44,000 8,889 35,000 65,375
Trustee/Director
William H. Grigg 47,000 8,889 35,000 90,375
Trustee/Director
Thomas F. Keller 50,000 8,889 35,000 94,875
Trustee/Director
A. Max Walker 56,000 8,889 35,000 110,875
Chairman of the Board
Charles B. Walker 47,000 8,889 35,000 71,375
Trustee/Director
Thomas S. Word 50,000 8,889 35,000 77,375
Trustee/Director
James P. Sommers 47,500 8,889 35,000 73,375
Trustee/Director
Carl E. Mundy, Jr. 48,500 8,889 35,000 74,377
Trustee/Director
Dr. Cornelius Pings 0 0 0 0
Trustee/Director
</TABLE>
(1)All directors/trustees receive reimbursements for expenses related
to their attendance at meetings of the Board of Directors/Trustees. Officers of
the Companies receive no direct remuneration in such capacity from the
Companies. As of the date of this SAI, the directors and officers of each
Company as a group owned less than 1% of the outstanding shares of each of the
Funds.
(2) For the twelve-month period ending March 31, 1999, each
Director/Trustee receives (i) an annual retainer of $1,000 ($3,000 for the
Chairman of the Board) plus $500 for each Fund of the Companies, plus (ii) a fee
of $1,000 for attendance at each "in-person" meeting of the Board of Trustees
(or committee thereof) and $500 for attendance at each other meeting of the
Board of Directors/Trustees (or Committee thereof).
(3) Messrs. Grigg, Keller and A.M. Walker receive compensation from ten
investment companies that are deemed to be part of the Nations Funds "fund
complex," as that term is defined under Rule 14a-101 of the Securities Exchange
Act of 1934, as amended. Messrs. Benson, Ermer, C. Walker, Sommers, Mundy and
Word receive compensation from six investment companies deemed to be part of the
Nations Funds complex.
(4) Total compensation amounts include deferred compensation (including
interest) payable to or accrued for the following Directors/Trustees: Edmund L.
Benson, III $35,188; William H. Grigg $66,375; Thomas F. Keller $70,375; and
Thomas S. Word $70,375.
Director Compensation After July 1, 1999
84
<PAGE>
The Board of Directors 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 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
NFT and NR are Massachusetts business trusts. Under Massachusetts law,
shareholders of a business trust may, under certain circumstances, be held
personally liable as partners for the obligations of the trust. However, NFT's
Declaration of Trust and NR's Agreement and Declaration of Trust provide that
shareholders shall not be subject to any personal liability for the acts or
obligations of NFT or NR, respectively, and that every note, bond, contract,
order, or other undertaking made by NFT and NR, respectively, shall contain a
provision to the effect that the shareholders are not personally liable
thereunder. NFT's Declaration of Trust and NR's Agreement and Declaration of
Trust also provide for indemnification out of the trust property of any
shareholder held personally liable solely by reason of his being or having been
a shareholder and not because of his acts or omissions or some other reason.
NFT's Declaration of Trust and NR's Agreement and Declaration of Trust also
provide that NFT and NR, respectively, shall, upon request, assume the defense
of any claim made against any shareholder for any act or obligation of NFT or NR
and shall satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which NFT or NR themselves would be unable to meet its
obligations.
NFT's Declaration of Trust and NR's Agreement and Declaration of Trust
state further that no Trustee, officer, or agent of NFT or NR, respectively,
shall be personally liable for or on account of any contract, debt, tort, claim,
damage, judgment, or decree arising out of or connected with the administration
or preservation of the trust estate or the conduct of any business of NFT or NR;
nor shall any Trustee be personally liable to any person for any action or
failure to act except by reason of his own bad faith, willful misfeasance, gross
negligence, or reckless disregard of his duties as Trustee. NFT's Declaration of
Trust and NR's Agreement and Declaration of Trust also provide that all persons
having any claim against the Trustees or NFT or NR shall look solely to the
trust property for payment.
With the exceptions stated, NFT's Declaration of Trust and NR's
Agreement and Declaration of Trust provides that a Trustee is entitled to be
indemnified against all liabilities and expenses reasonably incurred by him in
connection with the defense or disposition of any proceeding in which he may be
involved or with which he may be threatened by reason of his being or having
been a Trustee, and that the Trustees have the power, but not the duty, to
indemnify officers and employees of NFT or NR unless any such person would not
be entitled to indemnification had he or she been a Trustee.
INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY,
TRANSFER AGENCY, OTHER SERVICE PROVIDERS, SHAREHOLDER SERVICING AND
DISTRIBUTION AGREEMENTS
INVESTMENT ADVISER AND SUB-ADVISERS
Bank of America and its Investment Adviser and Sub-Adviser Affiliates
BAAI is the investment adviser to the Funds, except the Feeder Funds.
BAAI is also the investment adviser to the Master Portfolios.
85
<PAGE>
Chicago Equity is co-investment sub-adviser with TradeStreet to the
Asset Allocation Fund. BAIM is the investment sub-adviser to the Strategic
Equity Fund. Gartmore Global Partners ("Gartmore") is the investment sub-adviser
to the Emerging Markets Fund and the International Growth Fund. Boatmen's is the
investment sub-adviser to the U.S. Government Bond Fund. TradeStreet is the
investment sub-adviser to all other Funds except the Feeder Funds. Brandes is
the investment sub-adviser to the International Value Master Portfolio. Marsico
Capital is investment sub-adviser to the Nations Marsico Focused Equities Master
Portfolio and Nations Marsico Growth & Income Master Portfolio. Gartmore,
INVESCO and Putnam are the co-investment sub-advisers to the International
Equity Master Portfolio.
BAAI also serves as the investment adviser to the portfolios of Nations
Annuity Trust and 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 sub-investment adviser 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.
BAAI, TradeStreet, Boatmen's 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. BAIM is a division of Bank of America. Gartmore is a joint
venture structured as a Delaware general partnership between NB Partner Corp., a
wholly owned subsidiary of Bank of America and Gartmore U.S. Limited, an
indirect wholly owned subsidiary of Gartmore Investment Management plc
("Gartmore plc"), a publicly listed U.K. company. National Westminster Bank plc
and affiliated parties (collectively, "NatWest) own 100% of the equity of
Gartmore plc. Gartmore is a registered investment adviser in the United States
and a member of the Investment Management Regulatory Organization Limited, a
U.K. regulatory authority.
The respective principal offices of BAAI, TradeStreet and Gartmore are
located at One Bank of America Plaza, Charlotte, N.C. 28255. Chicago Equity is
located at 231 South LaSalle Street, Chicago, Illinois 60697. The principal
office of BAIM and Boatmen's is located at 100 North Broadway, St. Louis,
Missouri 63178.
Marsico Capital is located at 1200 17th Street, Suite 1300, Denver, CO
80202. Thomas F. Marsico is Chairman and Chief Executive Officer of Marsico
Capital. Prior to forming Marsico Capital in September 1997, Mr. Marsico had 18
years of experience as a securities analyst/portfolio manager. Bank of America
owns 50% of Marsico Capital.
Since 1874, Bank of America and its predecessors have been managing
money for foundations, universities, corporations, institutions and individuals.
Today, Bank of America affiliates collectively manage in excess of $100 billion,
including the more than $40 billion in mutual fund assets. It is a company
dedicated to a goal of providing responsible investment management and superior
service. Bank of America is recognized for its sound investment approaches,
which place it among the nation's foremost financial institutions. Bank of
America and its affiliates organization makes available a wide range of
financial services to its over 6 million customers through over 1700 banking and
investment centers.
Sub-Advisers Unaffiliated with BAAI
Brandes Investment Partners, Inc. owns a controlling interest in
Brandes Investment Partners, L.P. and serves as its General Partner. Charles
Brandes is the controlling shareholder of Brandes Investment Partners, Inc. The
principal offices of Brandes are located at 12750 High Bluff Drive, San Diego,
CA 92130.
INVESCO Global Asset Management (N.A.), Inc., with principal offices
located at 1315 Peachtree Street, N.E., Atlanta, Georgia 30309, was founded in
1997 as a division of INVESCO Global a publicly traded investment management
firm located in London, England, and a wholly owned subsidiary of AMVESCAP PLC,
a publicly traded UK financial holding company also located in London, England
that, through its subsidiaries, engages in international investment management.
The "management team" responsible for the day-to-day investment decisions for
INVESCO's managed portion of the assets of the International Equity Fund are:
John D. Rogers, CFA; W. Linsay Davidson; Michele T. Garren, CFA; Erik B.
Granade, CFA; Kent A. Stark; and Ingrid Baker, CFA.
86
<PAGE>
Putnam Investment Management, Inc., with principal offices located at
One Post Office Square, Boston, Massachusetts 02109, is a wholly owned
subsidiary of Putnam Investments, Inc., an investment management firm founded in
1937 which, except for shares held by employees is owned by Marsh & McLennan
Companies, a publicly traded professional services firm that engages, through
its subsidiaries in the business of insurance brokerage, investment management
and consulting. The "management team" responsible for the day-to-day investment
decisions for Putnam's managed portion of the assets of the International Equity
Fund are: Omid Kamshad, CFA; Mark D. Pollard, Justin M. Scott and Paul C. Warren
Investment Advisory and Sub-Advisory Agreements
Pursuant to the terms of the Companies' Investment Advisory Agreements
and Sub-Advisory Agreements (at times, the "Advisory Agreements") with BAAI,
TradeStreet, Gartmore, Chicago Equity, Boatman's, BAIM, Brandes, INVESCO, Putnam
and/or Marsico Capital, and subject at all times to the control of the
respective Companies' Boards of Directors/Trustees and conformity with the
stated policies of each Company, BAAI, TradeStreet, Chicago Equity, BAIM,
Gartmore, Boatman's, Brandes, INVESCO, Putnam and/or Marsico Capital each
selects and manages the investments of the Funds. Each such advisory entity
obtains and evaluates economic, statistical and financial information to
formulate and implement investment policies for the Funds that they advise.
The Advisory Agreements each provide that in the absence of willful
misfeasance, bad faith, negligence or reckless disregard of obligations or
duties thereunder on the part of an Adviser, respectively, or any of its
respective officers, directors, employees or agents, such Adviser shall not be
subject to liability to a Company or to any shareholder of the Company for any
act or omission in the course of, or connected with, rendering services under
thereunder or for any losses that may be sustained in the purchase, holding or
sale of any security.
Each Advisory Agreement became effective with respect to a Fund after
approved by the Board of a Company, and continues from year to year, provided
that such continuation of the Agreement is specifically approved at least
annually by (a) (i) a Company's Board of Directors/Trustees or (ii) the vote of
"a majority of the outstanding voting securities" of a Fund (as defined in
Section 2(a)(42) of the 1940 Act), and (b) the affirmative vote of a majority of
the Company's Directors/Trustees who are not parties to such Agreement or
"interested persons" (as defined in the 1940 Act) of a party to such Agreement
(other than as Directors of the Company), by votes cast in person at a meeting
specifically called for such purpose. The respective Advisory Agreement
terminates automatically in the event of its assignment, and is terminable with
respect to a Fund at any time without penalty by a Company (by vote of the Board
of Directors/Trustees or by vote of a majority of the outstanding voting
securities of the Fund) or by BAAI 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.
The Adviser may waive a portion of its fees; however, any such waiver
may be discontinued at any time. As discussed below," an Adviser will be
required to reduce its fees charged to the Funds, in direct proportion to the
fees payable by such Funds to an Adviser and the Administrator, if the expenses
of the Funds exceed the applicable expense limitation of any state in which the
Funds' shares are registered or qualified for sale.
Subject to reduction in accordance with the expense limitation
provisions which may be imposed by states in which the Funds' shares are
qualified for sale, BAAI received fees from the Funds for its services as
outlined in the following chart, which states the net advisory fees paid to
BAAI, the advisory fees waived and expense reimbursements where applicable for
the fiscal year ended March 31, 1999.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ADVISORY FEES
Net Amount Paid Amount Waived Reimbursed by Adviser
--------------- ------------- ---------------------
Prime Fund $12,225,631 $1,340,369 $0.00
Treasury Fund 4,286,160 1,248,840 0.00
Equity Income Fund 5,845,269 42,731 0.00
Government Securities Fund 837,334 180,666 0.00
International Equity Fund 7,491,086 0.00 0.00
International Growth Fund 2,317,553 170,447 0.00
International Value Fund 1,048,847 116,153 0.00
</TABLE>
87
<PAGE>
<TABLE>
<CAPTION>
Net Amount Paid Amount Waived Reimbursed by Adviser
--------------- ------------- ---------------------
<S> <C> <C> <C>
Small Company Growth Fund 2,742,154 1,024,846 0.00
U.S. Government Bond Fund 598,363 479,333 (25,696.00)
Government Money Market Fund 613,516 1,017,484 0.00
Tax Exempt Fund 4,507,216 6,378,784 0.00
Value Fund 17,721,908 0.00 0.00
Capital Growth Fund 6,256,638 0.00 0.00
Disciplined Equity Fund 3,580,240 0.00 0.00
Equity Index Fund 1,077,496 2,753,504 0.00
Emerging Growth Fund 2,082,133 0.00 0.00
Managed Index Fund 1,665,990 1,375,010 0.00
Managed SmallCap Index Fund 397,736 632,548 (5,284.00)
Managed Value Index Fund 0.00 166,154 (110,154.00)
Managed SmallCap Value Index Fund 0.00 148,556 (123,556.00)
Nations Marsico Growth & Income Fund 687,321 0.00 0.00
Nations Marsico Focused Equities Fund 1,951,845 0.00 0.00
Balanced Assets Fund 1,206,155 0.00 0.00
Short-Intermediate Gov't Fund 2,761,572 1,380,428 0.00
Short-Term Income Fund 1,290,670 1,290,330 0.00
Diversified Income Fund 1,914,951 383,049 0.00
Strategic Fixed Income Fund 9,334,703 1,867,297 0.00
Municipal Income Fund 2,651,245 1,131,755 0.00
Short-Term Municipal Income Fund 179,149 445,481 (33,630.00)
Intermediate Municipal Bond Fund 3,120,856 1,454,144 0.00
Florida Intermediate Municipal Bond Fund 750,898 419,102 0.00
Georgia Intermediate Municipal Bond Fund 446,861 333,011 (1,872.00)
Maryland Intermediate Municipal Bond Fund 512,685 397,315 0.00
North Carolina Intermediate Municipal Bond 626,613 379,387 0.00
Fund
South Carolina Intermediate Municipal Bond 900,188 451,812 0.00
Fund
Tennessee Intermediate Municipal Bond Fund 124,633 172,760 (37,393.00)
Texas Intermediate Municipal Bond Fund 1,350,723 620,277 0.00
Virginia Intermediate Municipal Bond Fund 849,701 485,299 0.00
Florida Municipal Bond Fund 552,208 340,792 0.00
Georgia Municipal Bond Fund 50,789 131,586 (54,375.00)
Maryland Municipal Bond Fund 76,086 135,665 (31,751.00)
North Carolina Municipal Bond Fund 113,404 143,226 (30,630.00)
South Carolina Municipal Bond Fund 59,273 129,724 (49,997.00)
Tennessee Municipal Bond Fund 9,144 100,514 (44,658.00)
Texas Municipal Bond Fund 32,331 105,269 (34,600.00)
Virginia Municipal Bond Fund 74,830 133,428 (44,258.00)
Emerging Markets Fund 324,702 66,505 (16,207.00)
Strategic Equity Fund 701,840 0.00 0.00
</TABLE>
BAAI received fees from the Funds for its services as outlined in the
following chart, which states the net advisory fees paid to BAAI, the advisory
fees waived and expense reimbursements where applicable for the fiscal year
ended March 31, 1998.
ADVISORY FEES
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net Amount Paid Amount Waived Reimbursed by Adviser
--------------- ------------- ---------------------
Prime Fund $9,639,804 $1,588,170 $0.00
Treasury Fund 5,843,938 843,672 0.00
Equity Income Fund 4,731,858 0.00 0.00
Government Securities Fund 606,485 160,648 0.00
International Equity Fund 9,260,334 0.00 0.00
International Growth Fund 4,491,759 145,205 0.00
International Value Fund 326,210 0.00 3,902.00
Small Company Growth Fund 959,096 419,890 0.00
U.S. Government Bond Fund 483,931 385,271 0.00
Government Money Market Fund 468,312 954,231 0.00
Tax Exempt Fund 3,482,525 5,239,935 0.00
Value Fund 15,618,802 49,168 0.00
Capital Growth Fund 5,717,424 0.00 0.00
Disciplined Equity Fund 1,236,280 0.00 0.00
Equity Index Fund 1,302,110 2,088,839 0.00
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net Amount Paid Amount Waived Reimbursed by Adviser
--------------- ------------- ---------------------
Emerging Growth Fund 2,836,719 0.00 0.00
Managed Index Fund 360,994 449,019 0.00
Managed SmallCap Index Fund 0.00 419,108 0.00
Managed Value Index Fund 670 11,025 0.00
Managed SmallCap Value Index Fund 193 5,901 0.00
Nations Marsico Growth & Income Fund 0.00 10,919 0.00
Nations Marsico Focused Equities Fund 27,032 0.00 0.00
Balanced Assets Fund 1,493,286 0.00 0.00
Short-Intermediate Gov't Fund 2,708,669 1,354,334 0.00
Short-Term Income Fund 1,006,049 1,006,049 0.00
Diversified Income Fund 1,440,010 288,002 0.00
Strategic Fixed Income Fund 7,389,298 1,760,101 0.00
Municipal Income Fund 1,495,049 865,120 0.00
Short-Term Municipal Income Fund 143,891 357,577 0.00
Intermediate Municipal Bond Fund 1,814,264 1,420,175 0.00
Florida Intermediate Municipal Bond Fund 414,266 371,186 0.00
Georgia Intermediate Municipal Bond Fund 305,490 267,367 0.00
Maryland Intermediate Municipal Bond Fund 216,531 251,773 0.00
North Carolina Intermediate Municipal Bond 350,910 325,600 0.00
Fund
South Carolina Intermediate Municipal Bond 532,494 471,252 0.00
Fund
Tennessee Intermediate Municipal Bond Fund 67,179 121,971 0.00
Texas Intermediate Municipal Bond Fund 688,008 601,927 0.00
Virginia Intermediate Municipal Bond Fund 631,227 484,093 0.00
Florida Municipal Bond Fund 144,492 123,106 0.00
Georgia Municipal Bond Fund 33,480 66,122 0.00
Maryland Municipal Bond Fund 25,999 82,546 0.00
North Carolina Municipal Bond Fund 83,208 94,452 0.00
South Carolina Municipal Bond Fund 42,805 72,257 0.00
Tennessee Municipal Bond Fund 1,873 57,822 0.00
Texas Municipal Bond Fund 26,062 72,988 0.00
Virginia Municipal Bond Fund 56,750 81,176 0.00
Emerging Markets Fund 988,113 0.00 0.00
</TABLE>
BAAI received fees from the Funds for its services as outlined in the following
chart, which states the net advisory fees paid to BAAI, the advisory fees waived
and expense reimbursements where applicable for the fiscal year ended March 31,
1997. The table below also states the advisory fees paid and waived by Barnett
Capital Advisers, Inc. with respect to the Emerald International Equity Fund
(predecessor to the International Value Fund) for the period ended December 1,
1996 through November 30, 1997.
89
<PAGE>
ADVISORY FEES
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net Amt. Amount Reimbsd.
Paid Waived by Advsr.
------------- ------------- ------------
Government Money Market Fund $ 595,369.00 $1,087,306.00 $ 0.00
Tax Exempt Fund 2,307,746.00 3,589,593.00 0.00
Value Fund 9,794,835.00 0.00 0.00
Capital Growth Fund 5,714,094.00 0.00 0.00
Disciplined Equity Fund 1,064,026.00 0.00 0.00
Equity Index Fund 678,564.00 1,534,132.00 0.00
Emerging Growth Fund 2,666,535.00 0.00 0.00
Managed Index Fund 12,069.00 86,414.00 22,720.00
Managed SmallCap Index Fund 13.00 44,990.00 18,619.00
Balanced Assets Fund 1,798,693.00 0.00 0.00
Short-Intermediate Gov't Fund 1,886,178.00 943,089.00 0.00
Short-Term Income Fund 600,834.00 601,326.00 0.00
Diversified Income Fund 1,000,615.00 200,123.00 0.00
Strategic Fixed Income Fund 4,757,641.00 951,528.00 0.00
Municipal Income Fund 323,476.00 305,497.00 0.00
Short-Term Municipal Income Fund 60,734.00 294,153.00 0.00
Intermediate Municipal Bond Fund 189,645.00 277,372.00 0.00
Florida Intermediate Municipal Bond Fund 104,662.00 161,773.00 0.00
Georgia Intermediate Municipal Bond Fund 124,834.00 165,879.00 0.00
Maryland Intermediate Municipal Bond Fund 260,093.00 227,212.00 0.00
North Carolina Intermediate Municipal Bond Fund 76,726.00 121,064.00 0.00
South Carolina Intermediate Municipal Bond Fund 152,937.00 197,205.00 0.00
Tennessee Intermediate Municipal Bond Fund 14,485.00 79,715.00 0.00
Texas Intermediate Municipal Bond Fund 54,898.00 104,929.00 0.00
Virginia Intermediate Municipal Bond Fund 614,014.00 520,946.00 0.00
Florida Municipal Bond Fund 112,099.00 117,651.00 0.00
Georgia Municipal Bond Fund 26,675.00 61,249.00 0.00
Maryland Municipal Bond Fund 15,208.00 67,979.00 0.00
North Carolina Municipal Bond Fund 80,159.00 92,926.00 0.00
South Carolina Municipal Bond Fund 40,452.00 67,297.00 0.00
Tennessee Municipal Bond Fund 2,763.00 47,192.00 3,159.00
Texas Municipal Bond Fund 35,113.00 69,111.00 0.00
Virginia Municipal Bond Fund 49,575.00 71,879.00 0.00
Emerging Markets Fund 661,747.00 0.00 0.00
Prime Fund 6,849,130.00 1,579,771.00 0.00
Treasury Fund 4,030,618.00 1,026,792.00 0.00
Equity Income Fund 2,632,510.00 0.00 0.00
International Equity Fund 8,870,691.00 0.00 0.00
International Value Fund 395,837.00 0.00 4,304.00
Government Securities Fund 568,081.00 156,808.00 0.00
The Pilot U.S. Government Fund (predecessor to the U.S. Government Bond
Fund) and the Pilot Small Capitalization Equity Fund (predecessor to the Pilot
Small Company Growth Fund) paid and waived the following advisory and
sub-advisory fees under a prior advisory agreement with Boatmen's during the
periods indicated.
ADVISORY AND SUB-ADVISORY FEES PAID
SEPTEMBER 1, 1996 - MAY 16, 1997
Advisory
Fee
Pilot US Government Fund
Advisory Fee $552,504
Advisory Waiver (125,674)
-----------
426,830
-----------
Pilot Small Capitalization Fund
Advisory Fee $731,622
Advisory Waiver (250,320)
-----------
481,302
-----------
</TABLE>
90
<PAGE>
The table below states the net sub-advisory fees paid to TradeStreet
for the fiscal periods indicated. No fees were waived or reimbursed by the
Adviser during this periods.
SUB-ADVISORY FEES
<TABLE>
<CAPTION>
<S> <C> <C>
Period Ending Period Ending
3/31/99 3/31/98
Net Amount Paid
---------------
Prime Fund $3,712,059 $2,959,571
Treasury Fund 1,514,431 1,763,574
Equity Income Fund 1,848,435 1,478,586
Government Securities Fund 251,074 181,945
Small Company Growth Fund 941,776 338,212
Government Money Market Fund 224,207 186,411
Tax Exempt Fund 1,496,795 1,199,059
Value Fund 5,907,376 5,222,656
Capital Growth Fund 2,085,548 1,905,808
Disciplined Equity Fund 1,193,414 412,093
Equity Index Fund 766,128 678,190
Emerging Growth Fund 694,042 945,572
Managed Index Fund 608,203 162,002
Managed SmallCap Index Fund 205,088 83,822
Managed Value Index Fund 11,167 2,505
Managed SmallCap Value Index Fund 4,902 1,410
Balanced Assets Fund 402,057 497,762
Short-Intermediate Gov't Fund 1,035,593 1,015,751
Short-Term Income Fund 645,337 503,025
Diversified Income Fund 574,485 432,003
Strategic Fixed Income Fund 2,800,433 2,287,350
Municipal Income Fund 441,332 275,353
Short-Term Municipal Income Fund 82,663 70,205
Intermediate Municipal Bond Fund 640,558 452,822
Florida Intermediate Municipal Bond Fund 163,780 109,963
Georgia Intermediate Municipal Bond Fund 108,963 80,200
Maryland Intermediate Municipal Bond Fund 127,375 65,563
North Carolina Intermediate Municipal Bond 140,804 94,711
Fund
South Carolina Intermediate Municipal Bond 189,337 140,524
Fund
Tennessee Intermediate Municipal Bond Fund 36,337 26,481
Texas Intermediate Municipal Bond Fund 275,982 180,591
Virginia Intermediate Municipal Bond Fund 186,964 156,145
Florida Municipal Bond Fund 104,208 31,220
Georgia Municipal Bond Fund 14,957 11,621
Maryland Municipal Bond Fund 20,994 12,663
North Carolina Municipal Bond Fund 26,344 20,727
South Carolina Municipal Bond Fund 16,161 13,424
Tennessee Municipal Bond Fund 7,594 6,964
Texas Municipal Bond Fund 12,015 11,556
Virginia Municipal Bond Fund 19,147 16,091
U.S. Government Bond Fund 263,059 ----
Strategic Equity Fund 233,947 ----
Period Ending
3/31/97
Net Amt.
Paid
----------------
Government Money Market Fund $ 231,367.00
Tax Exempt Fund 810,884.00
Value Fund 3,264,945.00
Capital Growth Fund 1,904,698.00
Disciplined Equity Fund 354,675.00
Equity Index Fund 442,539.00
Managed Index Fund 19,717.00
</TABLE>
91
<PAGE>
Period Ending
3/31/97
Net Amt.
Paid
----------------
Managed SmallCap Index Fund 9,001.00
Emerging Growth Fund 888,845.00
Balanced Assets Fund 599,564.00
Short-Intermediate Gov't Fund 707,317.00
Short-Term Income Fund 300,416.00
Diversified Income Fund 300,184.00
Strategic Fixed Income Fund 1,427,292.00
Municipal Income Fund 73,380.00
Short-Term Municipal Income Fund 49,684.00
Intermediate Municipal Bond Fund 65,382.00
Florida Intermediate Municipal Bond Fund 37,301.00
Georgia Intermediate Municipal Bond Fund 40,700.00
Maryland Intermediate Municipal Bond Fund 59,822.00
North Carolina Intermediate Municipal Bond 27,691.00
Fund
South Carolina Intermediate Municipal Bond 49,020.00
Fund
Tennessee Intermediate Municipal Bond Fund 13,188.00
Texas Intermediate Municipal Bond Fund 22,376.00
Virginia Intermediate Municipal Bond Fund 158,894.00
Florida Municipal Bond Fund 26,804.00
Georgia Municipal Bond Fund 10,258.00
Maryland Municipal Bond Fund 9,705.00
North Carolina Municipal Bond Fund 20,193.00
South Carolina Municipal Bond Fund 12,571.00
Tennessee Municipal Bond Fund 5,828.00
Texas Municipal Bond Fund 12,160.00
Virginia Municipal Bond Fund 14,170.00
Emerging Markets Fund 511,350.00
Prime Fund 2,296,435.00
Treasury Fund 1,377,806.00
Equity Income Fund 777,371.00
Government Securities Fund 170,424.00
The table below states the net sub-advisory fees paid to Gartmore for
the fiscal period indicated. No fees were waived or reimbursed by the Adviser
during those periods.
SUB-ADVISORY FEES
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Period Ending Period Ending Period Ending
3/31/999 3/31/98 3/31/97
International Equity Fund $5,826,400 $9,260,333.98 $6,899,426.00
International Growth Fund 1,935,481 4,331,994.06 n/a
Emerging Markets Fund 288,796 988,113.20 511,350.00
</TABLE>
The table below states the net sub-advisory fees paid to Marsico for
the fiscal year indicated. No fees were waived or reimbursed by the Adviser
during those periods.
SUB-ADVISORY FEES
<TABLE>
<CAPTION>
<S> <C> <C>
Period Ending Period Ending
3/31/999 3/31/98
Nations Marsico Focused Equities Fund $1,033,332 $ 14,311
Nations Marsico Growth & Income Fund 363,877 5,780
</TABLE>
92
<PAGE>
The table below states the net sub-advisory fees paid to Brandes for
the fiscal period indicated. No fees were waived or reimbursed by the Adviser
during these periods.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Period Ending Period Ending Period Ending
3/31/99 5/15/98 11/30/97
International Value Fund $570,822 $177,516.52 $212,631.72
</TABLE>
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), Cash Reserves,
Treasury Reserves, Government Reserves and Municipal Reserves paid Advisory fees
to BAAI as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net Net Fees Reimb. by
Fees Paid Fees Waived BAAI
1999 1999 1999
---- ---- ----
Cash Reserves $10,651,186 $9,394,814 $0
Treasury Reserves 2,472,643 3,152,121 31,236
Government Reserves 757,681 982,319 0
Municipal Reserves 343,134 505,210 114,656
</TABLE>
For the fiscal year from May 1, 1997 to April 30, 1998 Cash Reserves,
Treasury Reserves, Government Reserves and Municipal Reserves paid Advisory fees
to BAAI as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net Net Fees Reimb. by
Fees Paid Fees Waived BAAI
Cash Reserves $5,755,496 $5,510,631 $0
Treasury Reserves 1,317,229 1,539,732 0
Government Reserves 660,333 757,134 0
Municipal Reserves 306,303 429,881 0
</TABLE>
For the fiscal year from May 1, 1996 to April 30, 1997 Cash Reserves,
Treasury Reserves, Government Reserves and Municipal Reserves paid Advisory fees
to BAAI as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net Net Fees Reimb. by
Fees Paid Fees Waived BAAI
Cash Reserves $2,357,981.18 $2,797,837.24 $0
Treasury Reserves 780,877.72 1,033,412.10 0
Government Reserves 277,002.18 556,881.07 0
Municipal Reserves 137,642.13 437,536.71 0
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net Net Fees Reimb. by
Fees Paid Fees Waived Adviser
1999 1999 1999
---- ---- ----
Cash Reserves $2,205,087 $0 $0
Treasury Reserves 230,492 0 0
Government Reserves 582,930 0 0
</TABLE>
93
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
Cash Reserves $1,214,726 $0 $0
Treasury Reserves 290,220 0 0
Government Reserves 146,691 0 0
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
Cash Reserves $567,140 $0 $0
Treasury Reserves 199,572 0 0
Government Reserves 91,727 0 0
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 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 Money Market
Reserves paid Advisory fees to BAAI as follows:
Net Net Fees Reimb. by
Fees Paid Fees Waived BAAI
1999 1999 1999
---- ---- ----
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:
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
</TABLE>
94
<PAGE>
For the fiscal period from May 16, 1998 to March 31, 1999 Money Market
Reserves paid Sub-Advisory fees to TradeStreet as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net Net Fees Reimb. by
Fees Paid Fees Waived TradeStreet
1999 1999 1999
---- ---- ----
Money Market Reserves $226,797 $0 $0
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
California Tax-Exempt Reserves), the Pacific Horizon Asset Allocation Fund (the
predecessor to Asset Allocation Fund), Pacific Horizon Capital Income Fund (the
predecessor to The Capital Income Fund) and the Pacific Horizon California
Municipal Bond Fund (the predecessor to The 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 The Intermediate Bond Master Portfolio) and the Pacific Horizon Blue Chip
Master Portfolio (the predecessor to The 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:
<CAPTION>
<S> <C> <C> <C>
Fees Reimb. by
Net Net Bank of America
Fees Paid Fees Waived Adviser
1999 1999 1999
---- ---- ----
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
</TABLE>
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:
95
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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:
<CAPTION>
<S> <C> <C> <C>
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 Company.
The Co-Administrators serve under co-administration agreements
("Co-Administration Agreements"), which were approved by the Boards of
Directors/Trustees on November 5-6, 1998. The Co-Administrators receive, as
compensation for their services rendered under the Co-Administration Agreements,
administration fees, computed daily and paid monthly, at the annual rate of:
0.10% of the money market Funds; 0.12% of the fixed income and international
Funds; and 0.13% of the domestic equity Funds, of the average daily net assets
of each such Fund.
Pursuant to the Co-Administration Agreement, Stephens has agreed to,
among other things, (i) maintain office facilities for the Funds, (ii) furnish
statistical and research data, data processing, clerical, and internal executive
and administrative services to each Company, (iii) furnish corporate secretarial
services to each Company, including coordinating the preparation and
distribution of materials for Board of Directors/Trustees meetings, (iv)
coordinate the provision of legal advice to each Company with respect to
regulatory matters, (v) coordinate the preparation of reports to each Company's
shareholders and the SEC, including annual and semi-annual reports, (vi)
coordinating the provision of services to each Company by the Transfer Agent,
Sub-Transfer Agent and the Custodian, and (vii) generally assist in all aspects
of each Company's operations. Stephens bears all expenses incurred in connection
with the performance of its services.
96
<PAGE>
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 Company's reports to shareholders and the SEC, (iv)
prepare and file each Company's federal and state tax returns, (v) perform
monthly compliance testing for the Company, and (vi) prepare and furnish the
Company monthly broker security transaction summaries and transaction listings
and performance information. 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 respective Board of Directors/Trustees, by Stephens or by BAAI,
respectively, on 60 days' written notice without penalty. The Co-Administration
Agreements are not assignable without the written consent of the other party.
Furthermore, the Co-Administration Agreements provide that Stephens and BAAI
shall not be liable to the Funds or to their shareholders except in the case of
Stephens' or BAAI's, willful misfeasance, bad faith, gross negligence or
reckless disregard of duty.
BNY serves as sub-administrator for the Funds pursuant to
sub-administration agreements. Pursuant to their terms, BNY assists Stephens and
BAAI in supervising, coordinating and monitoring various aspects of the Funds'
administrative operations. For providing such services, BNY is entitled to
receive a monthly fee from Stephens and BAAI based on an annual rate of 0.01% of
the Funds' average daily net assets.
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.
<TABLE>
<CAPTION>
CO-ADMINISTRATION FEES
----------------------
Fees Paid Fees Waived
--------- -----------
<S> <C> <C>
Prime Fund $224,770 0
Treasury Fund 83,137 0
Equity Income Fund 26,068 0
Government Securities Fund 5,693 0
International Equity Fund 26,254 0
International Growth Fund 7,126 0
International Value Fund 4,657 0
Small Company Growth Fund 12,417 0
U.S. Government Bond Fund 4,095 0
Government Money Market Fund 18,715 0
Tax Exempt Fund 92,397 0
Value Fund 77,026 0
Capital Growth Fund 27,883 0
Disciplined Equity Fund 17,500 0
Equity Index Fund 30,267 0
Emerging Growth Fund 7,974 0
Managed Index Fund 23,116 0
Managed SmallCap Index Fund 7,330 0
Managed Value Index Fund 328 0
Managed SmallCap Value Index Fund 180 0
Nations Marsico Growth & Income Fund 4,686 0
Nations Marsico Focused Equities Fund 13,634 0
Balanced Assets Fund 5,289 0
Short-Intermediate Gov't Fund 22,020 0
Short-Term Income Fund 14,084 0
Diversified Income Fund 13,321 0
Strategic Fixed Income Fund 61,222 0
Municipal Income Fund 22,441 0
Short-Term Municipal Income Fund 4,056 0
Intermediate Municipal Bond Fund 31,012 0
Florida Intermediate Municipal Bond Fund 8,212 0
Georgia Intermediate Municipal Bond Fund 5,394 0
Maryland Intermediate Municipal Bond Fund 6,862 0
North Carolina Intermediate Municipal Bond Fund 6,825 0
South Carolina Intermediate Municipal Bond Fund 8,946 0
Tennessee Intermediate Municipal Bond Fund 1,803 0
Texas Intermediate Municipal Bond Fund 13,204 0
Virginia Intermediate Municipal Bond Fund 9,640 0
Florida Municipal Bond Fund 5,342 0
</TABLE>
97
<PAGE>
Fees Paid Fees Waived
--------- -----------
Georgia Municipal Bond Fund 780 0
Maryland Municipal Bond Fund 1,144 0
North Carolina Municipal Bond Fund 1,360 0
South Carolina Municipal Bond Fund 801 0
Tennessee Municipal Bond Fund 361 0
Texas Municipal Bond Fund 569 0
Virginia Municipal Bond Fund 907 0
Emerging Markets Fund 501 0
Strategic Equity Fund 7,172 0
Total: 968,521
-------
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.
<TABLE>
<CAPTION>
CO-ADMINISTRATION FEES
----------------------
Fees Paid Fees Waived
--------- -----------
<S> <C> <C>
Prime Fund $1,786,232 $449,540
Treasury Fund 644,316 166,276
Equity Income Fund 157,132 ---
Government Securities Fund 31,535 ---
International Equity Fund 97,425 ---
International Growth Fund 26,598 ---
International Value Fund 17,477 ---
Small Company Growth Fund 75,409 ---
U.S. Government Bond Fund 22,681 ---
Government Money Market Fund 145,044 37,431
Tax Exempt Fund 716,080 184,796
Value Fund 561,488 ---
Capital Growth Fund 168,052 ---
Disciplined Equity Fund 105,027 ---
Equity Index Fund 183,645 ---
Emerging Growth Fund 47,253 ---
Managed Index Fund 140,297 ---
Managed SmallCap Index Fund 44,531 ---
Managed Value Index Fund 1,995 ---
Managed SmallCap Value Index Fund 1,091 ---
Nations Marsico Growth & Income Fund 28,322 ---
Nations Marsico Focused Equities Fund 82,370 ---
Balanced Assets Fund 32,122 ---
Short-Intermediate Gov't Fund 121,946 ---
Short-Term Income Fund 78,018 ---
Diversified Income Fund 73,849 ---
Strategic Fixed Income Fund 372,610 ---
Municipal Income Fund 124,746 44,881
Short-Term Municipal Income Fund 22,854 8,113
Intermediate Municipal Bond Fund 172,364 62,025
Florida Intermediate Municipal Bond Fund 45,671 16,423
Georgia Intermediate Municipal Bond Fund 29,968 10,787
Maryland Intermediate Municipal Bond Fund 38,131 13,725
North Carolina Intermediate Municipal Bond Fund 37,951 13,647
South Carolina Intermediate Municipal Bond Fund 50,278 17,891
Tennessee Intermediate Municipal Bond Fund 10,131 3,603
Texas Intermediate Municipal Bond Fund 74,216 26,408
Virginia Intermediate Municipal Bond Fund 54,229 19,280
Florida Municipal Bond Fund 29,669 10,686
Georgia Municipal Bond Fund 4,337 1,560
Maryland Municipal Bond Fund 6,359 2,285
North Carolina Municipal Bond Fund 7,559 2,719
South Carolina Municipal Bond Fund 4,508 1,602
Tennessee Municipal Bond Fund 2,023 720
Texas Municipal Bond Fund 3,195 1,138
Virginia Municipal Bond Fund 5,104 1,817
Emerging Markets Fund 1,034 ---
Strategic Equity Fund 43,466 ---
</TABLE>
98
<PAGE>
Fees Paid Fees Waived
--------- -----------
Total: 6,530,338 1,097,353
--------- ---------
The table set forth below states the net Sub-Administration fees paid
to BNY and waived for the fiscal year period December 1, 1998 through March 31,
1999.
SUB-ADMINISTRATION FEES
-----------------------
<TABLE>
<CAPTION>
Fees Paid Fees Waived
--------- -----------
<S> <C> <C>
Prime Fund $238,058 $0
Treasury Fund 104,546 ---
Equity Income Fund 99,504 ---
Government Securities Fund 13,627 ---
International Equity Fund 141,937 ---
International Growth Fund 35,926 ---
International Value Fund 25,331 ---
Small Company Growth Fund 47,608 ---
U.S. Government Bond Fund 9,779 ---
Government Money Market Fund 23,373 ---
Tax Exempt Fund 160,022 ---
Value Fund 199,844 ---
Capital Growth Fund 109,532 ---
Disciplined Equity Fund 69,020 ---
Equity Index Fund 120,888 ---
Emerging Growth Fund 29,998 ---
Managed Index Fund 91,320 ---
Managed SmallCap Index Fund 27,811 ---
Managed Value Index Fund 1,058 ---
Managed SmallCap Value Index Fund 694 ---
Nations Marsico Growth & Income Fund 22,432 ---
Nations Marsico Focused Equities Fund 66,100 ---
Balanced Assets Fund 20,228 ---
Short-Intermediate Gov't Fund 52,627 ---
Short-Term Income Fund 33,736 ---
Diversified Income Fund 32,296 ---
Strategic Fixed Income Fund 112,350 ---
Municipal Income Fund 55,722 ---
Short-Term Municipal Income Fund 11,595 ---
Intermediate Municipal Bond Fund 76,838 ---
Florida Intermediate Municipal Bond Fund 20,539 ---
Georgia Intermediate Municipal Bond Fund 13,341 ---
Maryland Intermediate Municipal Bond Fund 16,968 ---
North Carolina Intermediate Municipal Bond Fund 17,041 ---
South Carolina Intermediate Municipal Bond Fund 24,764 ---
Tennessee Intermediate Municipal Bond Fund 5,015 ---
Texas Intermediate Municipal Bond Fund 36,575 ---
Virginia Intermediate Municipal Bond Fund 26,442 ---
Florida Municipal Bond Fund 13,099 ---
Georgia Municipal Bond Fund 1,950 ---
Maryland Municipal Bond Fund 2,886 ---
North Carolina Municipal Bond Fund 3,389 ---
South Carolina Municipal Bond Fund 2,252 ---
Tennessee Municipal Bond Fund 989 ---
Texas Municipal Bond Fund 1,579 ---
Virginia Municipal Bond Fund 2,511 ---
Emerging Markets Fund 2,648 ---
Strategic Equity Fund 30,044 ---
Total: 2,255,832
---------
</TABLE>
The table set forth below states the net Co-Administration fees paid to
First Data Investor Services, Inc. ("First Data") and waived for the fiscal
period December 1, 1998 through March 31, 1999, under the previous
co-administration arrangements. The amounts paid and waived are for the time
period to the end of the conversion to The Bank of New York. The conversion
dates are as follows: January 4, 1999 for Marsico Focused Equities Fund
99
<PAGE>
and Marisco Growth and Income Fund; January 14, 1999 for Balanced Assets,
Capital Growth, Disciplined Equity, Emerging Growth, Equity Income, Equity
Index, Managed Index, Managed SmallCap Index, Managed SmallCap Value Index,
Managed Value Index, Small Company Growth, Strategic Equity, and Value; January
26, 1999 for Short Term Municipal, South Carolina Intermediate Municipal Bond,
South Carolina Municipal Bond, Tennessee Intermediate Municipal Bond, Tennessee
Municipal Bond, Texas Intermediate Municipal Bond, Texas Municipal Bond,
Virginia Intermediate Municipal Bond, and Virginia Municipal Bond; February 2,
1999 for Municipal Income, Intermediate Municipal Bond, Florida Intermediate
Municipal Bond, Florida Municipal Bond, Georgia Intermediate Municipal Bond,
Georgia Municipal Bond, Maryland Intermediate Bond, Maryland Municipal Bond,
North Carolina Intermediate Municipal Bond, and North Carolina Municipal Bond;
and February 3, 1999 for Diversified Income, Government Securities, Short
Intermediate Government, Short Term Income, Strategic Fixed Income and U.S.
Government Bond.
<TABLE>
<CAPTION>
ADMINISTRATION FEES
-------------------
Fees Paid
Total
-----
<S> <C>
Prime Fund --
Treasury Fund --
Equity Income Fund 28,525
Government Securities Fund 11,769
International Equity Fund 36,158
International Growth Fund 9,941
International Value Fund 6,011
Small Company Growth Fund 13,005
U.S. Government Bond Fund 8,485
Government Money Market Fund -
Tax Exempt Fund -
Value Fund 81,131
Capital Growth Fund 29,132
Disciplined Equity Fund 18,589
Equity Index Fund 29,435
Emerging Growth Fund 9,726
Managed Index Fund 22,948
Managed SmallCap Index Fund 7,791
Managed Value Index Fund 424
Managed SmallCap Value Index Fund 186
Nations Marsico Growth & Income Fund 2,795
Nations Marsico Focused Equities Fund 7,708
Balanced Assets Fund 5,546
Short-Intermediate Gov't Fund 45,565
Short-Term Income Fund 29,076
Diversified Income Fund 27,213
Strategic Fixed Income Fund 126,271
Municipal Income Fund 44,763
Short-Term Municipal Income Fund 6,885
Intermediate Municipal Bond Fund 62,000
Florida Intermediate Municipal Bond Fund 16,273
Georgia Intermediate Municipal Bond Fund 10,822
Maryland Intermediate Municipal Bond Fund 13,746
North Carolina Intermediate Municipal Bond Fund 13,539
South Carolina Intermediate Municipal Bond Fund 15,768
Tennessee Intermediate Municipal Bond Fund 3,157
Texas Intermediate Municipal Bond Fund 23,244
Virginia Intermediate Municipal Bond Fund 16,760
Florida Municipal Bond Fund 10,787
Georgia Municipal Bond Fund 1,548
Maryland Municipal Bond Fund 2,245
North Carolina Municipal Bond Fund 2,702
South Carolina Municipal Bond Funds 1,386
Tennessee Municipal Bond Fund 640
Texas Municipal Bond Fund 1,000
Virginia Municipal Bond Fund 1,603
Emerging Markets Fund 1,539
Strategic Equity Fund 6,368
Total 814,205
-------
</TABLE>
100
<PAGE>
The table set forth below states the net Administration fees paid to
Stephens and waived for the fiscal period April 1, 1998 through November 30,
1998, under the previous administration arrangements. The administration
arrangements have been revised and the fees set forth below are not reflective
of those changes. The new arrangements appointing Stephens and BAAI as
Co-Administrators and BNY as Sub-Administrator were effective on December 1,
1998.
<TABLE>
<CAPTION>
ADMINISTRATION FEES
-------------------
Fees Paid Fees Waived
--------- -----------
<S> <C> <C>
Prime Fund $3,867,209 $900,323
Treasury Fund 1,654,837 384,444
Equity Income Fund 417,585 --
Government Securities Fund 59,181 --
International Equity Fund 179,847 --
International Growth Fund 68,148 --
International Value Fund 20,181 --
Small Company Growth Fund 159,748 --
U.S. Government Bond Fund 73,538 --
Government Money Market Fund 190,129 44,099
Tax Exempt Fund 1,545,156 359,494
Value Fund 1,009,530 --
Capital Growth Fund 347,733 --
Disciplined Equity Fund 183,239 --
Equity Index Fund 294,366 --
Emerging Growth Fund 120,329 --
Managed Index Fund 238,669 --
Managed SmallCap Index Fund 83,393 --
Managed Value Index Fund 4,997 --
Managed SmallCap Value Index Fund 1,960 --
Marsico Growth & Income Fund 21,106 --
Marsico Focused Equities Fund 58,002 --
Balanced Assets Fund 68,260 --
Short-Intermediate Gov't Fund 254,040 --
Short-Term Income Fund 155,386 --
Diversified Income Fund 134,498 --
Strategic Fixed Income Fund 676,515 --
Municipal Income Fund 217,522 81,215
Short-Term Municipal Income Fund 41,725 15,506
Intermediate Municipal Bond Fund 326,173 120,993
Florida Intermediate Municipal Bond Fund 81,828 30,370
Georgia Intermediate Municipal Bond Fund 54,784 20,345
Maryland Intermediate Municipal Bond Fund 60,219 22,669
North Carolina Intermediate Municipal Bond Fund 71,685 26,583
South Carolina Intermediate Municipal Bond Fund 97,730 36,206
Tennessee Intermediate Municipal Bond Fund 18,283 6,779
Texas Intermediate Municipal Bond Fund 141,467 52,443
Virginia Intermediate Municipal Bond Fund 91,890 34,139
Florida Municipal Bond Fund 50,506 19,089
Georgia Municipal Bond Fund 7,300 2,712
Maryland Municipal Bond Fund 9,956 3,712
North Carolina Municipal Bond Fund 12,927 4,808
South Carolina Municipal Bond Fund 8,113 3,015
Tennessee Municipal Bond Fund 3,915 1,449
Texas Municipal Bond Fund 6,191 2,296
Virginia Municipal Bond Fund 9,842 3,653
Emerging Markets Fund 3,220 --
Strategic Equity Fund 13,355 --
------------------ -----------------
Total 13,216,213 2,176,342
================== =================
</TABLE>
The table set forth below states the net Co-Administration fees paid to
First Data Investor Services, Inc. ("First Data") and waived for the fiscal
period April 1, 1998 through November 30, 1998, under the previous
co-administration arrangements.
101
<PAGE>
<TABLE>
<CAPTION>
CO-ADMINISTRATION FEES
----------------------
Fees Paid Fees Waived
--------- -----------
<S> <C> <C>
Prime Fund 284,797 $0
Treasury Fund 121,786 --
Equity Income Fund 198,370 --
Government Securities Fund 42,490 --
International Equity Fund 348,548 --
International Growth Fund 123,149 --
International Value Fund 39,973 --
Small Company Growth Fund 72,787 --
U.S. Government Bond Fund 51,881 --
Government Money Market Fund 14,031 --
Tax Exempt Fund 114,181 --
Value Fund 466,814 --
Capital Growth Fund 167,156 --
Disciplined Equity Fund 93,854 --
Equity Index Fund 133,941 --
Emerging Growth Fund 63,781 --
Managed Index Fund 108,909 --
Managed SmallCap Index Fund 38,005 --
Managed Value Index Fund 2,281 --
Managed SmallCap Value Index Fund 897 --
Marsico Growth & Income Fund 9,838 --
Marsico Focused Equities Fund 27,007 --
Balanced Assets Fund 31,160 --
Short-Intermediate Gov't Fund 181,172 --
Short-Term Income Fund 111,375 --
Diversified Income Fund 96,188 --
Strategic Fixed Income Fund 483,249 --
Municipal Income Fund 156,232 --
Short-Term Municipal Income Fund 29,854 --
Intermediate Municipal Bond Fund 233,013 --
Florida Intermediate Municipal Bond Fund 58,485 --
Georgia Intermediate Municipal Bond Fund 39,175 --
Maryland Intermediate Municipal Bond Fund 43,548 --
North Carolina Intermediate Municipal Bond Fund 51,196 --
South Carolina Intermediate Municipal Bond Fund 69,741 --
Tennessee Intermediate Municipal Bond Fund 13,055 --
Texas Intermediate Municipal Bond Fund 101,011 --
Virginia Intermediate Municipal Bond Fund 65,729 --
Florida Municipal Bond Fund 36,636 --
Georgia Municipal Bond Fund 5,224 --
Maryland Municipal Bond Fund 7,143 --
North Carolina Municipal Bond Fund 9,256 --
South Carolina Municipal Bond Fund 5,805 --
Tennessee Municipal Bond Fund 2,793 --
Texas Municipal Bond Fund 4,422 --
Virginia Municipal Bond Fund 7,036 --
Emerging Markets Fund 24,047 --
Strategic Equity Fund 6,331 --
------------------ -----------------
4,397,352 --
================== =================
The table set forth below states the net Sub-Administration fees paid
to BAAI (or its predecessor) and waived for the fiscal period April 1, 1998
through November 30, 1998, under the previous sub-administration arrangements.
<CAPTION>
SUB-ADMINISTRATION FEES
-----------------------
Fees Paid Fees Waived
--------- -----------
<S> <C> <C>
Prime Fund $ 349,604 $ 0
Treasury Fund 145,599 --
Equity Income Fund 47,576 --
Government Securities Fund 8,778 --
International Equity Fund 41,411 --
</TABLE>
102
<PAGE>
<TABLE>
<CAPTION>
Fees Paid Fees Waived
--------- -----------
<S> <C> <C>
International Growth Fund 13,950 --
International Value Fund 6,468 --
Small Company Growth Fund 19,999 --
U.S. Government Bond Fund 8,998 --
Government Money Market Fund 16,333 --
Tax Exempt Fund 138,133 --
Value Fund 116,337 --
Capital Growth Fund 40,508 --
Disciplined Equity Fund 25,274 --
Equity Index Fund 35,149 --
Emerging Growth Fund 13,771 --
Managed Index Fund 29,454 --
Managed SmallCap Index Fund 10,373 --
Managed Value Index Fund 615 --
Managed SmallCap Value Index Fund 247 --
Nations Marsico Growth & Income Fund 3,058 --
Nations Marsico Focused Equities Fund 8,279 --
Balanced Assets Fund 8,508 --
Short-Intermediate Gov't Fund 35,005 --
Short-Term Income Fund 22,627 --
Diversified Income Fund 19,103 --
Strategic Fixed Income Fund 95,000 --
Municipal Income Fund 32,318 --
Short-Term Municipal Income Fund 5,952 --
Intermediate Municipal Bond Fund 45,778 --
Florida Intermediate Municipal Bond Fund 11,540 --
Georgia Intermediate Municipal Bond Fund 7,764 --
Maryland Intermediate Municipal Bond Fund 9,579 --
North Carolina Intermediate Municipal Bond Fund 10,031 --
South Carolina Intermediate Municipal Bond Fund 13,556 --
Tennessee Intermediate Municipal Bond Fund 2,553 --
Texas Intermediate Municipal Bond Fund 19,744 --
Virginia Intermediate Municipal Bond Fund 13,073 --
Florida Municipal Bond Fund 8,298 --
Georgia Municipal Bond Fund 1,044 --
Maryland Municipal Bond Fund 1,466 --
North Carolina Municipal Bond Fund 1,854 --
South Carolina Municipal Bond Fund 1,157 --
Tennessee Municipal Bond Fund 542 --
Texas Municipal Bond Fund 866 --
Virginia Municipal Bond Fund 1,392 --
Emerging Markets Fund 1,702 --
Strategic Equity Fund 2,188 --
------------------ -----------------
Total; 1,452,554 --
================== =================
The table set forth below states the net Administration fees paid to
Stephens and waived for the fiscal year ended March 31, 1998, under the previous
administration arrangements.
ADMINISTRATION FEES
-------------------
<CAPTION>
Net Fees Paid Fees Waived
------------- -----------
<S> <C> <C>
Prime Fund 4,056,997 1,110,297
Treasury Fund 2,423,641 664,082
Equity Income Fund 494,468 0.00
Government Securities Fund 71,126 0.00
International Equity Fund 405,314 0.00
International Growth Fund 230,311 0.00
International Value Fund n/a n/a
Small Company Growth Fund 96,976 0.00
U.S. Government Bond Fund 89,058 0.00
Government Money Market Fund 259,300 71,128
Tax Exempt Fund 1,591,584 436,123
Value Fund 1,408,801 0.00
Capital Growth Fund 503,034 0.00
</TABLE>
103
<PAGE>
<TABLE>
<CAPTION>
Net Fees Paid Fees Waived
------------- -----------
<S> <C> <C>
Disciplined Equity Fund 101,504 0.00
Equity Index Fund 458,619 0.00
Emerging Growth Fund 246,308 0.00
Managed Index Fund 111,133 0.00
Managed SmallCap Index Fund 61,116 0.00
Managed Value Index Fund 1,630 0.00
Managed SmallCap Value Index Fund 848 0.00
Nations Marsico Growth & Income Fund 898 0.00
Nations Marsico Focused Equities Fund 2,227 0.00
Balanced Assets Fund 134,032 0.00
Short-Intermediate Gov't Fund 401,570 0.00
Short-Term Income Fund 203,225 0.00
Diversified Income Fund 173,538 0.00
Strategic Fixed Income Fund 903,615 0.00
Municipal Income Fund 153,482 78,672
Short-Term Municipal Income Fund 38,788 20,059
Intermediate Municipal Bond Fund 254,780 129,378
Florida Intermediate Municipal Bond Fund 61,898 31,419
Georgia Intermediate Municipal Bond Fund 44,811 22,914
Maryland Intermediate Municipal Bond Fund 36,010 26,201
North Carolina Intermediate Municipal Bond Fund 53,527 27,061
South Carolina Intermediate Municipal Bond Fund 79,235 40,150
Tennessee Intermediate Municipal Bond Fund 14,824 7,566
Texas Intermediate Municipal Bond Fund 102,899 51,598
Virginia Intermediate Municipal Bond Fund 85,542 44,703
Florida Municipal Bond Fund 17,169 8,920
Georgia Municipal Bond Fund 6,369 3,320
Maryland Municipal Bond Fund 6,978 3,619
North Carolina Municipal Bond Fund 11,379 5,922
South Carolina Municipal Bond Funds 7,376 3,836
Tennessee Municipal Bond Fund 3,826 1,990
Texas Municipal Bond Fund 6,334 3,301
Virginia Municipal Bond Fund 8,843 4,598
Emerging Markets Fund 21,266 0.00
The table below sets forth the total co-administration fees paid to
First Data Investor Services Group, Inc. ("First Data") and waived by First Data
for the fiscal year ended March 31, 1998. First Data was the co-administrator
under the previous administration arrangements.
CO-ADMINISTRATION FEES
----------------------
<CAPTION>
Net Fees Paid Fees Waived
------------- -----------
<S> <C> <C>
Prime Fund 384,193 0.00
Treasury Fund 232,691 0.00
Equity Income Fund 244,825 0.00
Government Securities Fund 50,171 0.00
International Equity Fund 623,612 0.00
International Growth Fund 306,814 0.00
International Value Fund n/a n/a
Small Company Growth Fund 43,762 0.00
U.S. Government Bond Fund 59,434 0.00
Government Money Market Fund 25,208 0.00
Tax Exempt Fund 152,908 0.00
Value Fund 680,262 0.00
Capital Growth Fund 259,289 0.00
Disciplined Equity Fund 63,108 0.00
Equity Index Fund 214,846 0.00
Emerging Growth Fund 131,921 0.00
Managed Index Fund 50,870 0.00
Managed SmallCap Index Fund 22,706 0.00
Managed Value Index Fund 709 0.00
Managed SmallCap Value Index Fund 371 0.00
Nations Marsico Growth & Income Fund 387 0.00
</TABLE>
104
<PAGE>
<TABLE>
<CAPTION>
Net Fees Paid Fees Waived
------------- -----------
<S> <C> <C>
Nations Marsico Focused Equities Fund 953 0.00
Balanced Assets Fund 65,073 0.00
Short-Intermediate Gov't Fund 275,597 0.00
Short-Term Income Fund 132,125 0.00
Diversified Income Fund 114,464 0.00
Strategic Fixed Income Fund 621,285 0.00
Municipal Income Fund 161,207 0.00
Short-Term Municipal Income Fund 41,447 0.00
Intermediate Municipal Bond Fund 262,730 0.00
Florida Intermediate Municipal Bond Fund 63,773 0.00
Georgia Intermediate Municipal Bond Fund 46,846 0.00
Maryland Intermediate Municipal Bond Fund 31,450 0.00
North Carolina Intermediate Municipal Bond Fund 54,714 0.00
South Carolina Intermediate Municipal Bond Fund 81,364 0.00
Tennessee Intermediate Municipal Bond Fund 15,440 0.00
Texas Intermediate Municipal Bond Fund 103,490 0.00
Virginia Intermediate Municipal Bond Fund 92,909 0.00
Florida Municipal Bond Fund 18,511 0.00
Georgia Municipal Bond Fund 6,911 0.00
Maryland Municipal Bond Fund 7,494 0.00
North Carolina Municipal Bond Fund 12,309 0.00
South Carolina Municipal Bond Fund 7,965 0.00
Tennessee Municipal Bond Fund 4,133 0.00
Texas Municipal Bond Fund 6,873 0.00
Virginia Municipal Bond Fund 9,547 0.00
Emerging Markets Fund 67,559 0.00
The table set forth below states the net Sub-Administration fees paid
and waived to Bank of America, or its affiliate BAAI (or their predecessors),
for the fiscal year ended March 31, 1998.
<CAPTION>
SUB-ADMINISTRATION FEES
-----------------------
<S> <C> <C>
Net Fees Paid Fees Waived
------------- -----------
Prime Fund $555,149 $0
Treasury Fund 332,041 --
Equity Income Fund 73,929 --
Government Securities Fund 12,130 --
International Equity Fund 102,893 --
International Growth Fund 55,097 --
International Value Fund 0 --
Small Company Growth Fund 14,378 --
U.S. Government Bond Fund 15,227 --
Government Money Market Fund 35,564 --
Tax Exempt Fund 218,062 --
Value Fund 208,906 --
Capital Growth Fund 76,232 --
Disciplined Equity Fund 16,484 --
Equity Index Fund 67,819 --
Emerging Growth Fund 37,823 --
Managed Index Fund 16,200 --
Managed SmallCap Index Fund 8,382 --
Managed Value Index Fund 250 --
Managed SmallCap Value Index Fund 141 --
Nations Marsico Growth & Income Fund 128 --
Nations Marsico Focused Equities Fund 318 --
Balanced Assets Fund 19,910 --
Short-Intermediate Gov't Fund 67,717 --
Short-Term Income Fund 33,535 --
Diversified Income Fund 28,800 --
Strategic Fixed Income Fund 152,490 --
Municipal Income Fund 39,336 --
Short-Term Municipal Income Fund 10,029 --
Intermediate Municipal Bond Fund 64,689 --
Florida Intermediate Municipal Bond Fund 15,709 --
Georgia Intermediate Municipal Bond Fund 11,457 --
</TABLE>
105
<PAGE>
<TABLE>
<CAPTION>
Net Fees Paid Fees Waived
------------- -----------
<S> <C> <C>
Maryland Intermediate Municipal Bond Fund 9,366 --
North Carolina Intermediate Municipal Bond Fund 13,530 --
South Carolina Intermediate Municipal Bond Fund 20,075 --
Tennessee Intermediate Municipal Bond Fund 3,783 --
Texas Intermediate Municipal Bond Fund 25,799 --
Virginia Intermediate Municipal Bond Fund 22,306 --
Florida Municipal Bond Fund 4,460 --
Georgia Municipal Bond Fund 1,660 --
Maryland Municipal Bond Fund 1,809 --
North Carolina Municipal Bond Fund 2,961 --
South Carolina Municipal Bond Fund 1,918 --
Tennessee Municipal Bond Fund 995 --
Texas Municipal Bond Fund 1,651 --
Virginia Municipal Bond Fund 2,299 --
Emerging Markets Fund 8,983 --
The table set forth below states the net Administration fees paid to
Stephens and waived for the fiscal year ended March 31, 1997.
<CAPTION>
ADMINISTRATION FEES
-------------------
Net Fees Paid Fees Waived
------------- -----------
<S> <C> <C>
Government Money Market Fund $281,893.00 $39,867.00
Tax Exempt Fund 995,984.00 151,529.00
Value Fund 792,002.00 0.00
Capital Growth Fund 463,687.00 0.00
Disciplined Equity Fund 81,365.00 0.00
Equity Index Fund 270,994.00 0.00
Managed Index Fund 12,195.00 0.00
Managed SmallCap Index Fund 1,626.00 0.00
Emerging Growth Fund 211,748.00 0.00
Balanced Assets Fund 146,269.00 0.00
Short-Intermediate Government Fund 252,303.00 0.00
Short-Term Income Fund 104,245.00 0.00
Diversified Income Fund 103,988.00 0.00
Strategic Fixed Income Fund 510,826.00 0.00
Municipal Income Fund 46,849.00 10,434.00
Short-Term Municipal Income Fund 31,084.00 7,479.00
Intermediate Municipal Bond Fund 40,902.00 9,878.00
Florida Intermediate Municipal Bond Fund 23,525.00 5,513.00
Georgia Intermediate Municipal Bond Fund 25,682.00 5,977.00
Maryland Intermediate Municipal Bond Fund 38,122.00 2,519.00
North Carolina Intermediate Municipal Bond Fund 17,628.00 3,971.00
South Carolina Intermediate Municipal Bond Fund 31,091.00 7,071.00
Tennessee Intermediate Municipal Bond Fund 8,422.00 1,869.00
Texas Intermediate Municipal Bond Fund 14,310.00 3,130.00
Virginia Intermediate Municipal Bond Fund 101,774.00 22,264.00
Florida Municipal Bond Fund 17,082.00 3,824.00
Georgia Municipal Bond Fund 6,500.00 1,497.00
Maryland Municipal Bond Fund 6,151.00 1,408.00
North Carolina Municipal Bond Fund 12,881.00 2,857.00
South Carolina Municipal Bond Fund 7,923.00 1,846.00
Tennessee Municipal Bond Fund 3,695.00 847.00
Texas Municipal Bond Fund 7,747.00 1,724.00
Virginia Municipal Bond Fund 8,995.00 2,043.00
Prime Fund 3,775,833.00 419,503.00
Treasury Fund 2,254,616.00 250,485.00
Equity Income Fund 388,686.00 0.00
International Equity Fund 985,632.00 0.00
Government Securities Fund 113,616.00 0.00
Emerging Markets Fund 60,159.00 0.00
</TABLE>
106
<PAGE>
The table below sets forth the total sub-administration fees paid to
First Data and waived by First Data for the fiscal year ended March 31, 1997.
<TABLE>
<CAPTION>
CO-ADMINISTRATION FEES
----------------------
Net Fees Paid Fees Waived
------------- -----------
<S> <C> <C>
Government Money Market Fund $ 98,906.00 $ 0.00
Tax Exempt Fund 326,822.00 0.00
Value Fund 513,976.00 0.00
Capital Growth Fund 298,193.00 0.00
Disciplined Equity Fund 60,505.00 0.00
Equity Index Fund 171,545.00 0.00
Managed Index Fund 7,522.00 0.00
Managed SmallCap Index Fund 7,375.00 0.00
Emerging Growth Fund 143,790.00 0.00
Balanced Assets Fund 93,557.00 0.00
Short-Intermediate Government Fund 219,240.00 0.00
Short-Term Income Fund 96,033.00 0.00
Diversified Income Fund 96,135.00 0.00
Strategic Fixed Income Fund 440,702.00 0.00
Municipal Income Fund 47,546.00 0.00
Short-Term Municipal Income Fund 32,415.00 0.00
Intermediate Municipal Bond Fund 42,623.00 0.00
Florida Intermediate Municipal Bond Fund 24,249.00 0.00
Georgia Intermediate Municipal Bond Fund 26,483.00 0.00
Maryland Intermediate Municipal Bond Fund 38,819.00 0.00
North Carolina Intermediate Municipal Bond Fund 17,960.00 0.00
South Carolina Intermediate Municipal Bond Fund 31,867.00 0.00
Tennessee Intermediate Municipal Bond Fund 8,549.00 0.00
Texas Intermediate Municipal Bond Fund 14,526.00 0.00
Virginia Intermediate Municipal Bond Fund 102,954.00 0.00
Florida Municipal Bond Fund 17,385.00 0.00
Georgia Municipal Bond Fund 6,657.00 0.00
Maryland Municipal Bond Fund 6,306.00 0.00
North Carolina Municipal Bond Fund 13,109.00 0.00
South Carolina Municipal Bond Fund 8,189.00 0.00
Tennessee Municipal Bond Fund 3,784.00 0.00
Texas Municipal Bond Fund 7,900.00 0.00
Virginia Municipal Bond Fund 9,205.00 0.00
The table set forth 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:
<CAPTION>
Net Net Net Fees Net Net Fees
Fees Paid Net Fees Fees Paid Waived Fees Paid Waived
1997 Waived 1997 1998 1998 1999 1999
---- ----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Cash Reserves $206,640 $1,511,966 $444,739 $3,310,637 $922,159 $5,759,841
Treasury Reserves
67,964 536,800 112,671 839,649 281,755 1,603,245
Government
Reserves 33,788 244,173 55,996 416,493 87,380 492,620
Municipal
Reserves 23,309 168,418 29,152 216,243 48,585 272,415
</TABLE>
107
<PAGE>
<TABLE>
<CAPTION>
Net Net Net Fees Net Net Fees
Fees Paid Net Fees Fees Paid Waived Fees Paid Waived
1997 Waived 1997 1998 1998 1999 1999
---- ----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Money Market
Reserves 0 0 0 0 121,254 585,746
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.
<CAPTION>
ADMINISTRATION FEES
-------------------
Fees Paid Fees Waived
--------- -----------
<S> <C> <C>
Cash Reserves $390,477 $3,654,043
Treasury Reserves 112,205 1,030,887
Government Reserves 33,897 311,090
Money Market Reserves 22,143 100,249
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.
<CAPTION>
CO-ADMINISTRATION FEES
----------------------
Fees Paid Fees Waived
<S> <C> <C>
Cash Reserves $39,734 $0
Treasury Reserves 11,370 0
Government Reserves 3,441 0
Money Market Reserves 1,991 0
Municipal Reserves 1,860 0
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.
<CAPTION>
SUB-ADMINISTRATION FEES
-----------------------
Fees Paid Fees Waived
<S> <C> <C>
Cash Reserves $0 $0
Treasury Reserves 0 0
Government Reserves 0 0
Money Market Reserves 0 0
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.
<CAPTION>
CO-ADMINISTRATION FEES
----------------------
Fees Paid Fees Waived
<S> <C> <C>
Cash Reserves $0 $0
Treasury Reserves 0 0
Government Reserves 0 0
Money Market Reserves 0 0
Municipal Reserves 0 0
</TABLE>
108
<PAGE>
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.
<TABLE>
<CAPTION>
CO-ADMINISTRATION FEES
----------------------
Fees Paid Fees Waived
<S> <C> <C>
Cash Reserves $225,030 $2,105,798
Treasury Reserves 62,306 572,358
Government Reserves 19,781 181,530
Money Market Reserves 38,026 172,166
Municipal Reserves 11,090 220,006
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.
<CAPTION>
SUB-ADMINISTRATION FEES
-----------------------
Fees Paid Fees Waived
<S> <C> <C>
Cash Reserves $266,918 $0
Treasury Reserves 95,874 0
Government Reserves 30,261 0
Money Market Reserves 59,094 0
Municipal Reserves 17,197 0
</TABLE>
DISTRIBUTION PLANS AND SHAREHOLDER SERVICING ARRANGEMENTS
INVESTOR A SHARES
-----------------
Each Company has adopted an Amended and Restated Shareholder Servicing
and Distribution Plan (the "Investor A Plan") pursuant to Rule 12b-1 under the
1940 Act with respect to each Fund's Investor A Shares. The Investor A Plan
provides that each Fund may pay the Distributor or banks, broker/dealers or
other financial institutions that offer shares of the Fund and that have entered
into a Sales Support Agreement with the Distributor ("Selling Agents") or a
Shareholder Servicing Agreement with the respective Company, ("Servicing
Agents"), up to 0.10% (on an annualized basis) of the average daily net asset
value of Investor A Shares of the Money Market Funds and up to 0.25% (on an
annualized basis) of the average daily net asset value of the Non-Money Market
Funds.
With respect to the Money Market Funds, such payments may be made to
(i) the Distributor for reimbursements of distribution-related expenses actually
incurred by the Distributor, including, but not limited to, expenses of
organizing and conducting sales seminars, printing of prospectuses and
statements of additional information (and supplements thereto) and reports for
other than existing shareholders, preparation and distribution of advertising
material and sales literature and costs of administering the Investor A Plan, or
(ii) Selling Agents that have entered into a Sales Support Agreement with the
Distributor for providing sales support assistance in connection with the sale
of Investor A Shares of the Money Market Funds. The sales support assistance
provided by a Selling Agent under a Sales Support Agreement may include
forwarding sales literature and advertising provided by the Companies or the
Distributor to their customers and providing such other sales support assistance
as may be requested by the Distributor from time to time. Currently,
substantially all fees paid by the Money Market Funds pursuant to the Investor A
Plan are paid to compensate Selling Agents for providing sales support services,
with any remaining amounts being used by the Distributor to partially defray
other expenses incurred by the Distributor in distributing Investor A Shares.
Fees received by the Distributor pursuant to the Investor A Plan will not be
used to pay any interest expenses, carrying charges or other financing costs
(except to the extent permitted by the SEC) and will not be used to pay any
general and administrative expenses of the Distributor.
With respect to the Non-Money Market Funds, (except the Short-Term
Income Fund and the Short-Term Municipal Income Fund) payments under the
Investor A Plan may be made to the Distributor for providing the
distribution-related services described in (i) above or to Servicing Agents that
have entered into a Shareholder Servicing Agreement with each Company for
providing shareholder support services to their Customers which hold
109
<PAGE>
of record or beneficially Investor A Shares of a Non-Money Market Fund. Such
shareholder support services provided by Servicing Agents to holders of Investor
A Shares of the Non-Money Market Funds may include (i) aggregating and
processing purchase and redemption requests for Investor A Shares from their
Customers and transmitting promptly net purchase and redemption orders to our
distributor or transfer agent; (ii) providing their Customers with a service
that invests the assets of their accounts in Investor A Shares pursuant to
specific or pre-authorized instructions; (iii) processing dividend and
distribution payments from the Company on behalf of their Customers; (iv)
providing information periodically to their Customers showing their positions in
Investor A Shares; (v) arranging for bank wires; (vi) responding to their
Customers' inquiries concerning their investment in Investor A Shares; (vii)
providing sub-accounting with respect to Investor A Shares beneficially owned by
their Customers or the information necessary to us for sub-accounting; (viii) if
required by law, forwarding shareholder communications from each Company (such
as proxies, shareholder reports, annual and semi-annual financial statements and
dividend, distribution and tax notices) to their Customers (ix) forwarding to
their Customers proxy statements and proxies containing any proposals regarding
the Shareholder Servicing Agreement; (x) providing general shareholder liaison
services; and (xi) providing such other similar services as each Company may
reasonably request to the extent the Selling Agent is permitted to do so under
applicable statutes, rules or regulations. The Money Market Funds, the
Short-Term Income Fund and the Short-Term Municipal Income Fund may not pay for
personal services and/or maintenance of shareholder accounts, as such terms are
interpreted by the NASD, under the Investor A Plan.
Expenses incurred by the Distributor pursuant to the Investor A Plan in
any given year may exceed the sum of the fees received under the Investor A
Plan. Any such excess may be recovered by the Distributor in future years so
long as the Investor A Plan is in effect. If the Investor A Plan were terminated
or not continued, a Fund would not be contractually obligated to pay the
Distributor for any expenses not previously reimbursed by the Fund.
In addition, NFI and NR have adopted an Amended and Restated
Shareholder Servicing Plan for the Investor A Shares of the Money Market Funds
(the "Money Market Investor A Servicing Plan"). Pursuant to the Money Market
Investor A Servicing Plan, which became effective on March 28, 1993, each Money
Market Fund may pay banks, broker/dealers or other financial institutions that
have entered into a Shareholder Servicing Agreement with the Company ("Servicing
Agents") up to 0.25% (on an annualized basis) of the average daily net asset
value of the Investor A Shares of each Money Market Fund for providing
shareholder support services. Such shareholder support services provided by
Servicing Agents may include those shareholder support services discussed above
with respect to the Investor A Shares of the Non-Money Market Funds. Fees paid
pursuant to the Money Market Investor A Servicing Plan are calculated daily and
paid monthly.
In addition, NFT has adopted an Amended and Restated Shareholder
Servicing Plan for the Investor A Shares of NFT's Money Market Funds, the
Short-Term Income Fund and the Short-Term Municipal Income Fund (the "Investor A
Servicing Plan"). Pursuant to the Investor A Servicing Plan, each such Fund may
pay banks, broker/dealers or other financial institutions that have entered into
a Shareholder Servicing Agreement with NFT ("Servicing Agents") up to 0.25% (on
an annualized basis) of the average daily net asset value of the Investor A
Shares of each Fund for providing shareholder support services. Such shareholder
support services provided by Servicing Agents may include those shareholder
support services discussed above with respect to the Investor A Plan. Fees paid
pursuant to the Investor A Servicing Plan are calculated daily and paid monthly.
During the fiscal years ended March 31,1997, 1998 and 1999, the
Distributor received the following amount from Rule 12b-1 fees in connection
with Investor A Shares of NFT and NFI's Money Market Funds: $0. Of this amount,
the Distributor retained $0.
Expenses incurred by the Distributor pursuant to the Investor A Plan in
any given year may exceed the sum of the fees received under the Investor A
Plan. Any such excess may be recovered by the Distributor in future years so
long as the Investor A Plan is in effect. If the Investor A Plan were terminated
or not continued, a Fund would not be contractually obligated to pay the
Distributor for any expenses not previously reimbursed by the Fund.
INVESTOR B SHARES OF THE MONEY MARKET FUNDS AND INVESTOR C SHARES OF
THE NON-MONEY MARKET FUNDS.
The Directors/Trustees of the Companies have approved an Amended and
Restated Distribution Plan in accordance with Rule 12b-1 under the 1940 Act for
the Investor B Shares of Money Market Funds and Investor C Shares of the
Non-Money Market Funds (the "Investor B/C Plan"). Pursuant to the Investor B/C
Plan, each Fund may pay the Distributor for certain expenses that are incurred
in connection with the distribution of shares. Payments under the Investor B/C
Plan will be calculated daily and paid monthly at a rate set from time to time
by the
110
<PAGE>
Board of Directors provided that the annual rate may not exceed 0.75% of the
average daily net asset value of Investor C Shares of a Non-Money Market Fund
and 0.10% of the average daily net asset value of Investor B Shares of a Money
Market Fund. Payments to the Distributor pursuant to the Investor B/C Plan will
be used (i) to compensate banks, other financial institutions or a securities
broker/dealer that have entered into a Sales Support Agreement with the
Distributor ("Selling Agents") for providing sales support assistance relating
to Investor B or Investor C Shares, for promotional activities intended to
result in the sale of Investor B or Investor C Shares such as to pay for the
preparation, printing and distribution of prospectuses to other than current
shareholders, and (ii) to compensate Selling Agents for providing sales support
services with respect to their Customers who are, from time to time, beneficial
and record holders of Investor B or Investor C Shares. Currently, substantially
all fees paid pursuant to the Investor B/C Plan are paid to compensate Selling
Agents for providing the services described in (i) and (ii) above, with any
remaining amounts being used by the Distributor to partially defray other
expenses incurred by the Distributor in distributing Investor B or Investor C
Shares. Fees received by the Distributor pursuant to the Investor B/C Plan will
not be used to pay any interest expenses, carrying charges or other financing
costs (except to the extent permitted by the SEC) and will not be used to pay
any general and administrative expenses of the Distributor.
Pursuant to the Investor B/C Plan, the Distributor may enter into Sales
Support Agreements with Selling Agents for providing sales support services to
their Customers who are the record or beneficial owners of Investor B Shares of
the Money Market Funds and Investor C Shares of the non-Money Market Funds. Such
Selling Agents will be compensated at the annual rate of up to 0.75% of the
average daily net asset value of the Investor C Shares of the Non-Money Market
Funds, and up to 0.10% of the average daily net asset value of the Investor B
Shares of the Money Market Funds held of record or beneficially by such
Customers. The sales support services provided by Setting Agents may include
providing distribution assistance and promotional activities intended to result
in the sales of shares such as paying for the preparation, printing and
distribution of prospectuses to other than current shareholders.
Fees paid pursuant to the Investor B/C Plan are accrued daily and paid
monthly, and are charged as expenses of the relevant shares of a Fund as
accrued. Expenses incurred by the Distributor pursuant to the Investor B/C Plan
in any given year may exceed the sum of the fees received under the Investor B/C
Plan and payments received pursuant to contingent deferred sales charges. Any
such excess may be recovered by the Distributor in future years so long as the
Investor B/C Plan is in effect. If the Investor B/C Plan were terminated or not
continued, a Fund would not be contractually obligated to pay the Distributor
for any expenses not previously reimbursed by the Fund or recovered through
contingent deferred sales charges.
In addition, the Directors have approved an Amended and Restated
Shareholder Servicing Plan ("Servicing Plan") with respect to the Investor B
Shares of the Money Market Funds and Investor C Shares of the Non-Money Market
Funds (the "Investor B/C Servicing Plan"). Pursuant to the Investor B/C
Servicing Plan, each Fund may pay banks, broker/dealers or other financial
institutions that have entered into a Shareholder Servicing Agreement with
Nations Funds ("Servicing Agents") for certain expenses that are incurred by the
Servicing Agents in connection with shareholder support services that are
provided by the Servicing Agents. Payments under the Investor B/C Servicing Plan
will be calculated daily and paid monthly at a rate set from time to time by the
Board of Directors, provided that the annual rate may not exceed 0.25% of the
average daily net asset value of the Money Market Funds' Investor B Shares and
the Non-Money Market Funds' Investor C Shares. The shareholder services provided
by the Servicing Agents may include (i) aggregating and processing purchase and
redemption requests for such Investor B or Investor C Shares from Customers and
transmitting promptly net purchase and redemption orders to our distributor or
transfer agent; (ii) providing Customers with a service that invests the assets
of their accounts in such Investor B or Investor C Shares pursuant to specific
or pre-authorized instructions; (iii) dividend and distribution payments from
the Company on behalf of Customers; (iv) providing information periodically to
Customers showing their positions in such Investor B or Investor C Shares; (v)
arranging for bank wires; (vi) responding to Customers' inquiries concerning
their investment in such Investor B or Investor C Shares; (vii) providing
sub-accounting with respect to such Investor B or Investor C Shares beneficially
owned by Customers or providing the information to us necessary for
sub-accounting; (viii) if required by law, forwarding shareholder communications
from the Company (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to Customers;
(ix) forwarding to Customers proxy statements and proxies containing any
proposals regarding the Shareholder Servicing Agreement; (x) providing general
shareholder liaison services; and (xi)
111
<PAGE>
providing such other similar services as the Company may reasonably request to
the extent the Servicing Agent is permitted to do so under applicable statutes,
rules or regulations.
During the fiscal year ended March 31,1997, the Distributor received
the following amount from Rule 12b-1 fees in connection with Investor B Shares
of the NFI Money Market Funds: $4,403,155.44. Of this amount, the Distributor
retained $302.33.
During the fiscal year ended March 31,1997, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor C Shares of the NFI Non-Money Market Funds: $38,342.90 and $587.17,
respectively. Of these amounts, the Distributor retained $4,441.52 and $587.17,
respectively.
During the fiscal year ended March 31,1997, the Distributor received
the following amount from Rule 12b-1 fees in connection with Investor B Shares
of the NFT Money Market Funds: $488,455.68. Of this amount, the Distributor
retained $369.80.
During the fiscal year ended March 31,1997, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor C Shares of the NFT Non-Money Market Funds: $252,094.80 and $6,716.67,
respectively. Of these amounts, the Distributor retained $43,497.58 and
$6,716.67, respectively.
During the fiscal year ended March 31,1998, the Distributor received
the following amount from Rule 12b-1 fees in connection with Investor B Shares
of the NFI Money Market Funds: $3,466,866.65. Of this amount, the Distributor
retained $7,743.41.
During the fiscal year ended March 31,1998, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor C Shares of the NFI Non-Money Market Funds: $98,350.80 and $18,143.54
respectively. Of these amounts, the Distributor retained $33,051.16 and
$18,143.54, respectively.
During the fiscal year ended March 31,1998, the Distributor received
the following amount from Rule 12b-1 fees in connection with Investor B Shares
of the NFT Money Market Funds: $562,681.69. Of this amount, the Distributor
retained $730.94.
During the fiscal year ended March 31,1998, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor C Shares of the NFT Non-Money Market Funds: $369,785.35 and $18,619.52,
respectively. Of these amounts, the Distributor retained $148,710.43 and
$18,619.52, respectively.
During the fiscal year ended March 31,1999, the Distributor received
the following amount from Rule 12b-1 fees in connection with Investor B Shares
of the NFI Money Market Funds: $2,583,885. Of this amount, the Distributor
retained $0.
During the fiscal year ended March 31,1999, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor C Shares of the NFI Non-Money Market Funds: $105,900 and $35,425,
respectively. Of these amounts, the Distributor retained $30,890 and $35,425,
respectively.
During the fiscal year ended March 31,1999, the Distributor received
the following amount from Rule 12b-1 fees in connection with Investor B Shares
of the NFT Money Market Funds: $757,547. Of this amount, the Distributor
retained $0.
During the fiscal year ended March 31,1999, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor C Shares of the NFT Non-Money Market Funds: $363,700 and $32,180,
respectively. Of these amounts, the Distributor retained $196,144 and $32,180,
respectively.
INVESTOR C SHARES OF THE MONEY MARKET FUNDS AND INVESTOR B SHARES OF
THE NON-MONEY MARKET FUNDS.
The Directors/Trustees of each Company have approved a Distribution
Plan (the "Investor B Distribution Plan") with respect to Investor B Shares of
the Non-Money Market Funds. Pursuant to the Investor B Distribution Plan, a
Non-Money Market Fund may compensate or reimburse the Distributor for any
activities or expenses primarily intended to result in the sale of the Fund's
Investor B Shares, including for sales related services provided by banks,
broker/dealers or other financial institutions that have entered into a Sales
Support Agreement relating to the Investor B Shares with the Distributor
("Selling Agents"). Payments under a Fund's Investor B Distribution Plan will be
calculated daily and paid monthly at a rate or rates set from time to time by
the Board of Directors provided
112
<PAGE>
that the annual rate may not exceed 0.75% of the average daily net asset value
of each Non-Money Market Fund's Investor B Shares.
The fees payable under the Investor B Distribution Plan are used
primarily to compensate or reimburse the Distributor for distribution services
provided by it, and related expenses incurred, including payments by the
Distributor to compensate or reimburse Selling Agents, for sales support
services provided, and related expenses incurred, by such Selling Agents.
Payments under the Investor B Distribution Plan may be made with respect to
preparation, printing and distribution of prospectuses, sales literature and
advertising materials by the Distributor or, as applicable, Selling Agents,
attributable to distribution or sales support activities, respectively,
commissions, incentive compensation or other compensation to, and expenses of,
account executives or other employees of the Distributor or Selling Agents,
attributable to distribution or sales support activities, respectively; overhead
and other office expenses of the Distributor relating to the foregoing (which
may be calculated as a carrying charge in the Distributor's or Selling Agents'
unreimbursed expenses), incurred in connection with distribution or sales
support activities. The overhead and other office expenses referenced above may
include, without limitation, (i) the expenses of operating the Distributor's or
Selling Agents' offices in connection with the sale of Fund shares, including
lease costs, the salaries and employee benefit costs of administrative,
operations and support personnel, utility costs, communication costs and the
costs of stationery and supplies, (ii) the costs of client sales seminars and
travel related to distribution and sales support activities, and (iii) other
expenses relating to distribution and sales support activities.
In addition, the Directors/Trustees have approved a Shareholder
Servicing Plan with respect to Investor C Shares of the Money Market Funds and
Investor B Shares of the Non-Money Market Funds ("Investor C/B Servicing Plan").
Pursuant to the Investor C/B Servicing Plan, a Fund may compensate or reimburse
banks, broker/dealers or other financial institutions that have entered into a
Shareholder Servicing Agreement with the Company ("Servicing Agents") for
certain activities or expenses of the Servicing Agents in connection with
shareholder services that are provided by the Servicing Agents. Payments under
the Investor C/B Servicing Plan will be calculated daily and paid monthly at a
rate or rates set from time to time by the Board of Directors/Trustees, provided
that the annual rate may not exceed 0.25% of the average daily net asset value
of the Investor C Shares of the Money Market Funds and Investor B Shares of the
Non-Money Market Funds.
The fees payable under the Investor C/B Servicing Plan are used
primarily to compensate or reimburse Servicing Agents for shareholder services
provided, and related expenses incurred, by such Servicing Agents. The
shareholder services provided by Servicing Agents may include: (i) aggregating
and processing purchase and redemption requests for such Investor C or Investor
B Shares from Customers and transmitting promptly net purchase and redemption
orders to the Distributor or Transfer Agent; (ii) providing Customers with a
service that invests the assets of their accounts in such Investor C or Investor
B Shares pursuant to specific or pre-authorized instructions; (iii) processing
dividend and distribution payments from the Companies on behalf of Customers;
(iv) providing information periodically to Customers showing their positions in
such Investor C or Investor B Shares; (v) arranging for bank wires; (vi)
responding to Customers' inquiries concerning their investment in such Investor
C or Investor B Shares; (vii) providing sub-accounting with respect to such
Investor C or Investor B Shares beneficially owned by Customers or providing the
information to us necessary for sub-accounting; (viii) if required by law,
forwarding shareholder communications from the Companies (such as proxies,
shareholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to Customers; (ix) forwarding to Customers proxy
statements and proxies containing any proposals regarding the Investor C
Servicing Plan or related agreements; (x) providing general shareholder liaison
Services; and (xi) providing such other similar services as the Companies may
reasonably request to the extent such Servicing Agent is permitted to do so
under applicable statutes, rules or regulations.
The fees payable under the Investor B Distribution Plan and Investor
C/B Servicing Plan (together, the "Investor C/B Plans") are treated by the Funds
as an expense in the year they are accrued. At any given time, a Selling Agent
and/or Servicing Agent may incur expenses in connection with services provided
pursuant to its agreements with the Distributor under the Investor C/B Plans
which exceed the total of (i) the payments made to the Selling Agents and
Servicing Agents by the Distributor or the Company and reimbursed by the Fund
pursuant to the Investor C/B Plans, and (ii) the proceeds of contingent deferred
sales charges paid to the Distributor and reallowed to the Selling Agent, upon
the redemption of their Customers' Investor C Shares. Any such excess expenses
may be recovered in future years, so long as the Investor C/B Plans are in
effect. Because there is no requirement under the Investor C/B Plans that the
Distributor be paid or the Selling Agents and Servicing Agents be compensated or
113
<PAGE>
reimbursed for all their expenses or any requirement that the Investor C/B Plans
be continued from year to year, such excess amount, if any, does not constitute
a liability to a Fund or the Distributor. Although there is no legal obligation
for the Fund to pay expenses incurred by the Distributor, a Selling Agent or a
Servicing Agent in excess of payments previously made to the Distributor under
the Investor C/B Plans or in connection with contingent deferred sales charges,
if for any reason the Investor C/B Plans are terminated, the Directors will
consider at that time the manner in which to treat such expenses.
During the fiscal year ended March 31, 1997, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor B Shares of the Non-Money Market Funds of NFI: $0 and $0, respectively.
Of these amounts, the Distributor retained $0 and $0, respectively.
During the fiscal year ended March 31,1997, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor B Shares of the Non-Money Market Funds of NFT: $0 and $0, respectively.
Of these amounts, the Distributor retained $0 and $0, respectively.
During the fiscal year ended March 31, 1998, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor B Shares of the Non-Money Market Funds of NFI: $0 and $0, respectively.
Of these amounts, the Distributor retained $0 and $0, respectively.
During the fiscal year ended March 31,1998, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor B Shares of the Non-Money Market Funds of NFT: $0 and $0, respectively.
Of these amounts, the Distributor retained $0 and $0, respectively.
During the fiscal period ended March 31, 1999, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor B Shares of the Non-Money Market Funds of NFI: $1,329,398 and $455,023,
respectively. Of these amounts, the prior distributor retained $0 and $0,
respectively.
During the fiscal period ended March 31, 1999, the Distributor received
the following amounts from Rule 12b-1 fees and CDSC fees in connection with
Investor B Shares of the Non-Money Market Funds of NFT: $5,531,784 and
$1,763,011, respectively. Of these amounts, the Distributor retained $0 and $0,
respectively.
DAILY SHARES
------------
The Directors/Trustees have approved a Distribution Plan (the "Daily
Distribution Plan") with respect to Daily Shares of the Money Market Funds.
Pursuant to the Daily Distribution Plan, a Money Market Fund may compensate or
reimburse the Distributor for any activities or expenses primarily intended to
result in the sale of the Fund's Daily Shares, including for sales related
services provided by banks, broker/dealers or other financial institutions that
have entered into a Sales Support Agreement relating to the Daily Shares with
the Distributor ("Selling Agents"). Payments under a Fund's Daily Distribution
Plan will be calculated daily and paid monthly at a rate or rates set from time
to time by the Board of Directors provided that the annual rate may not exceed
0.45 % of the average daily net asset value of each Money Market Fund's Daily
Shares.
The fees payable under the Daily Distribution Plan are used primarily
to compensate or reimburse the Distributor for distribution services provided by
it, and related expenses incurred, including payments by the Distributor to
compensate or reimburse Selling Agents, for sales support services provided, and
related expenses incurred, by such Selling Agents. Payments under the Daily
Distribution Plan may be made with respect to preparation, printing and
distribution of prospectuses, sales literature and advertising materials by the
Distributor or, as applicable, Selling Agents, attributable to distribution or
sales support activities, respectively, commissions, incentive compensation or
other compensation to, and expenses of, account executives or other employees of
the Distributor or Selling Agents, attributable to distribution or sales support
activities, respectively; overhead and other office expenses of the Distributor
relating to the foregoing (which may be calculated as a carrying charge in the
Distributor's or Selling Agents' unreimbursed expenses), incurred in connection
with distribution or sales support activities. The overhead and other office
expenses referenced above may include, without limitation, (i) the expenses of
operating the Distributor's or Selling Agents' offices in connection with the
sale of Fund shares, including lease costs, the salaries and employee benefit
costs of administrative operations and support personnel, utility costs,
communication costs and the costs of stationery and supplies, (ii) the costs of
client sales seminars and travel related to distribution and sales support
activities, and (iii) other expenses relating to distribution and sales support
activities.
114
<PAGE>
In addition, the Directors have approved a Shareholder Servicing Plan
with respect to Daily Shares of the Money Market Funds (the "Daily Servicing
Plan"). Pursuant to the Daily Servicing Plan, a Fund may compensate or reimburse
banks, broker/dealers or other financial institutions that have entered into a
Shareholder Servicing Agreement with the Company ("Servicing Agents") for
certain activities or expenses of the Servicing Agents in connection with
shareholder services that are provided by the Servicing Agents. Payments under
the Daily Servicing Plan will be calculated daily and paid monthly at a rate or
rates set from time to time by the Board of Directors, provided that the annual
rate may not exceed 0.25% of the average daily net asset value of the Daily
Shares of the Money Market Funds.
The fees payable under the Daily Servicing Plan are used primarily to
compensate or reimburse Servicing Agents for shareholder services provided, and
related expenses incurred, by such Servicing Agents. The shareholder services
provided by Servicing Agents may include: (i) aggregating and processing
purchase and redemption requests for such Daily Shares from Customers and
transmitting promptly net purchase and redemption orders to the Distributor or
Transfer Agent; (ii) providing Customers with a service that invests the assets
of their accounts in such Daily Shares pursuant to specific or pre-authorized
instructions; (iii) processing dividend and distribution payments from the
Company on behalf of Customers; (iv) providing information periodically to
Customers showing their positions in such Daily Shares; (v) arranging for bank
wires; (vi) responding to Customers' inquiries concerning their investment in
such Daily Shares; (vii) providing sub-accounting with respect to such Daily
Shares beneficially owned by Customers or providing the information to us
necessary for sub-accounting; (viii) if required by law, forwarding shareholder
communications from the Company (such as proxies, shareholder reports, annual
and semi-annual financial statements and dividend, distribution and tax notices)
to Customers; (ix) forwarding to Customers proxy statements and proxies
containing any proposals regarding the Daily Servicing Plan or related
agreements; (x) providing general shareholder liaison services; and (xi)
providing such other similar services as the Company may reasonably request to
the extent such Servicing Agent is permitted to do so under applicable statutes,
rules or regulations.
The fees payable under the Daily Distribution Plan and Daily Servicing
Plan (together, the "Daily Plans") are treated by the Funds as an expense in the
year they are accrued. At any given time, a Selling Agent and/or Servicing Agent
may incur expenses in connection with services provided pursuant to its
agreements with the Distributor under the Daily Plans which exceed the total of
(i) the payments made to the Selling Agents and Servicing Agents by the
Distributor or the Company and reimbursed by the Fund pursuant to the Daily
Plans, and (ii) the proceeds of contingent deferred sales charges paid to the
Distributor and reallowed to the Selling Agent, upon the redemption of their
Customers' Daily Shares. Any such excess expenses may be recovered in future
years, so long as the Daily Plans are in effect. Because there is no requirement
under the Daily Plans that the Distributor be paid or the Selling Agents and
Servicing Agents be compensated or reimbursed for all their expenses or any
requirement that the Daily Plans be continued from year to year, such excess
amount, if any, does not constitute a liability to a Fund or the Distributor.
Although there is no legal obligation for the Fund to pay expenses incurred by
the Distributor, a Selling Agent or a Servicing Agent in excess of payments
previously made to the Distributor under the Daily Plans or in connection with
contingent deferred sales charges, if for any reason the Daily Plans are
terminated, the Directors will consider at that time the manner in which to
treat such expenses.
During the fiscal year ended March 31, 1997, the Distributor received
$0 from Rule 12b-1 fees in connection with Daily Shares of the Money Market
Funds. Of this amount, the Distributor retained $0.
During the fiscal year ended March 31, 1998, the Distributor received
$0 from Rule 12b-1 fees in connection with Daily Shares of the Money Market
Funds. Of this amount, the Distributor retained $0.
During the fiscal period ended March 31, 1999, the Distributor received
the following amounts from Rule 12b-1 fees in connection with Daily Shares of
the Money Market Funds: $0 and $0, respectively. Of these amounts, the prior
Distributor retained $0 and $0, respectively.
MARSICO SHARES OF THE PRIME FUND. In addition, the Directors have
approved a Shareholder Servicing Plan with respect to the Marsico Shares of the
Prime Fund (the "Marsico Servicing Plan"). Pursuant to the Marsico Servicing
Plan, a Fund may compensate or reimburse banks, broker/dealers or other
financial institutions that have entered into a Shareholder Servicing Agreement
with the Company ("Servicing Agents") for certain activities or expenses of the
Servicing Agents in connection with shareholder services that are provided by
the Servicing Agents. Payments under the Marsico Servicing Plan will be
calculated daily and paid monthly at a rate or rates set from time to
115
<PAGE>
time by the Board of Directors, provided that the annual rate may not exceed
0.25% of the average daily net asset value of the Marsico Shares of the Prime
Fund.
The fees payable under the Marsico Servicing Plan are used primarily to
compensate or reimburse Servicing Agents for shareholder services provided, and
related expenses incurred, by such Servicing Agents. The shareholder services
provided by Servicing Agents may include: (i) aggregating and processing
purchase and redemption requests for such Marsico 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 Shares pursuant to specific or pre-authorized
instructions; (iii) processing dividend and distribution payments from the
Company on behalf of Customers; (iv) providing information periodically to
Customers showing their positions in such Marsico Shares; (v) arranging for bank
wires; (vi) responding to Customers' inquiries concerning their investment in
such Marsico Shares; (vii) providing sub-accounting with respect to such Daily
Shares beneficially owned by Customers or providing the information to us
necessary for sub-accounting; (viii) if required by law, forwarding shareholder
communications from the Company (such as proxies, shareholder reports, annual
and semi-annual financial statements and dividend, distribution and tax notices)
to Customers; (ix) forwarding to Customers proxy statements and proxies
containing any proposals regarding the Daily Servicing Plan or related
agreements; (x) providing general shareholder liaison services; and (xi)
providing such other similar services as the Company may reasonably request to
the extent such Servicing Agent is permitted to do so under applicable statutes,
rules or regulations.
During the fiscal period ended March 31, 1999, the Servicing Agents
received the following amounts from Rule 12b-1 fees in connection with the
Marsico Shares of the Prime Fund: $0 and $0 respectively. Of these amounts, the
Servicing Agents retained $0 and $0, respectively.
INFORMATION APPLICABLE TO INVESTOR A, INVESTOR B, INVESTOR C AND DAILY
SHARES.
The Investor A Plan, the Money Market Investor A Servicing Plan, the
Investor B/C Plan, the Investor B/C Servicing Plan, the Investor C Plan, the
Daily Distribution Plan, the Daily Servicing Plan and the Investor C/B Servicing
Plan (each a "Plan" and collectively the "Plans") may only be used for the
purposes specified above and as stated in each such Plan. Compensation payable
to Selling Agents or Servicing Agents for shareholder support services under the
Investor A Plan, the Money Market Investor A Servicing Plan, the Investor B/C
Servicing Plan, Daily Servicing Plan and the Investor C/B Servicing Plan is
subject to, among other things, the National Association of Securities Dealers,
Inc. ("NASD") Rules of Conduct governing receipt by NASD members of shareholder
servicing plan fees from registered investment companies (the "NASD Servicing
Plan Rule"), which became effective on July 7, 1993. Such compensation shall
only be paid for services determined to be permissible under the NASD Servicing
Plan Rule.
Each Plan requires the officers of the Company or the Distributor to
provide the Board of Directors at least quarterly with a written report of the
amounts expended pursuant to the Plan and the purposes for which such
expenditures were made. The Board of Directors reviews these reports in
connection with its decisions with respect to the Plans.
As required by Rule 12b-1 under the 1940 Act, each Plan was approved by
the Board of Directors, including a majority of the directors who are not
"interested persons" (as defined in the 1940 Act) of the Company and who have no
direct or indirect financial interest in the operation of the Plan or in any
agreements related to the Plan ("Qualified Directors") on February 6, 1997, with
respect to the Investor C Shares of the Money Market Funds, on March 22, 1991,
with respect to the Investor A Shares of the Equity Income and Government
Securities Funds, on June 24, 1992 with respect to the Investor A Shares of the
International Equity Fund, and on March 19, 1992, with respect to the Investor C
Shares of the Non-Money Market Funds. Additionally, each Plan with respect to
the Investor B Shares of the Money Market Funds and with respect to the Investor
B Shares of all the Non-Money Market Funds was approved by the Board of
Directors, including a majority of the Qualified Directors, on February 3, 1993.
The Plan with respect to the Investor C Shares of the Money Market Funds was
initially approved on August 4, 1993. The Plan with respect to the Daily Shares
of the Money Market Funds was initially approved on August 4, 1993. The Plans
continue in effect as long as such continuance is specifically approved at least
annually by the Board of Directors, including a majority of the Qualified
Directors. On October 12, 1996, the Board of Directors (including a majority of
the Qualified Directors) voted to continue each Plan for an additional one year
period.
116
<PAGE>
In approving the Plans in accordance with the requirements of Rule
12b-1, the directors considered various factors and determined that there is a
reasonable likelihood that each Plan will benefit the respective Investor A,
Investor B, Investor C Shares or Investor B Shares and the holders of such
shares. The Investor A Plan was approved by the Shareholders of the Investor A
Shares of each of the Funds except the International Equity Fund on September 6,
1991, and the Investor B/C Plan applicable to Investor C Shares of the
International Equity and Equity Income Funds and the Investor A Plan applicable
to Investor A Shares of the International Equity Fund were approved on September
22, 1992 by the Investor C Shareholders of the respective International Equity
and Equity Income Funds with respect to the Investor B/C Plan and by the
Investor A Shareholders of the International Equity Fund with respect to the
Investor A Plan. The Plans applicable to the Investor B Shares of the Money
Market Funds and Investor B Shares of the Non-Money Market Funds were approved
by such Funds' initial shareholder of Investor B and Investor B Shares.
The Investor A Shares' Plans with respect to the Money Market Funds
originally became effective on December 4, 1989, and were amended February
12,1990, March 19, 1992 and February 3, 1993. The Investor A Shares' Plan with
respect to the Equity Income and Government Securities Funds became effective on
March 22, 1991, and was amended March 19, 1992. The Investor A Shares' Plan with
respect to the International Equity Fund became effective September 6, 1991 and
was amended March 19, 1992 and February 3, 1993.
The Investor A Plan, Investor B/C Plan and Investor C/B Plan may be
terminated with respect to their respective shares by vote of a majority of the
Qualified Directors, or by vote of a majority of the holders of the outstanding
voting securities of the Investor A, Investor B or Investor C, as appropriate.
Any change in such a Plan that would increase materially the distribution
expenses paid by the Investor A, Investor B or Investor C Shares requires
shareholder approval; otherwise, each Plan may be amended by the directors,
including a majority of the Qualified Directors, by vote cast in person at a
meeting called for the purpose of voting upon such amendment. The Money Market
Investor A Servicing Plan, the Investor B/C Servicing Plan and the Investor C/N
Servicing Plan may be terminated by a vote of a majority of the Qualified
Directors. As long as a Plan is in effect, the selection or nomination of the
Qualified Directors is committed to the discretion of the Qualified Directors.
Conflict of interest restrictions may apply to the receipt by Selling and/or
Servicing Agents of compensation from the Company in connection with the
investment of fiduciary assets in Investor Shares. Selling and/or Servicing
Agents, including banks regulated by the Comptroller of the Currency, the
Federal Reserve Board, or the Federal Deposit Insurance Corporation, and
investment advisers and other money managers subject to the jurisdiction of the
SEC, the Department of Labor, or state securities commissions, are urged to
consult their legal advisers before investing such assets in Investor Shares.
FEES PAID PURSUANT TO SHAREHOLDER SERVICING/DISTRIBUTION PLANS
--------------------------------------------------------------
INVESTOR A SHARES
<TABLE>
<CAPTION>
NET FEES PAID (SHAREHOLDER
NET FEES PAID (12B-1 COMPONENT) SERVICING COMPONENT)
FUND YEAR ENDED 3/31/99 YEAR ENDED 3/31/99 NET FEES PAID
- ---- ------------------ ------------------ -------------
<S> <C> <C> <C>
Prime Fund $ 1,748,661 $ 4,371,958 $ 6,120,619
Treasury Fund 1,506,882 3,767,468 5,274,350
Equity Income Fund 162,472 -- 162,472
International Equity Fund 39,141 -- 39,141
Government Securities Fund 52,251 -- 52,251
Small Company Growth Fund 42,982 -- 42,982
U.S. Government Bond Fund 6,517 -- 6,517
International Growth Fund 60,698 -- 60,698
International Value Fund 12,282 -- 12,282
Emerging Markets Fund 1,904 -- 1,904
Value Fund 399,157 -- 399,157
Capital Growth Fund 127,702 -- 127,702
Emerging Growth Fund 56,378 -- 56,378
Equity Index Fund 20,255 -- 20,255
</TABLE>
117
<PAGE>
<TABLE>
<CAPTION>
NET FEES PAID (SHAREHOLDER
NET FEES PAID (12B-1 COMPONENT) SERVICING COMPONENT)
FUND YEAR ENDED 3/31/99 YEAR ENDED 3/31/99 NET FEES PAID
- ---- ------------------ ------------------ -------------
<S> <C> <C> <C>
Managed Index Fund 90,380 -- 90,380
Managed SmallCap Index Fund 28,353 -- 28,353
Managed Value Index Fund 8,413 -- 8,413
Managed SmallCap Value Index Fund 6,828 -- 6,828
Disciplined Equity Fund 166,141 -- 166,141
Nations Marsico Focused Equities Fund 144,518 -- 144,518
Nations Marsico Growth & Income Fund 42,482 -- 42,282
Balanced Assets Fund 66,729 -- 66,729
Short-Intermediate Government Fund 103,329 -- 103,329
Short-Term Income Fund -- 36,877 36,877
Diversified Income Fund 37,912 -- 37,912
Strategic Fixed Income Fund 76,543 -- 76,543
Municipal Income Fund 50,814 -- 50,814
Short-Term Municipal Income Fund -- 91,654 91,654
Intermediate Municipal Bond Fund 25,402 -- 25,402
FL Intermediate Municipal Fund 29,231 -- 29,231
FL Municipal Bond Fund 126,858 -- 126,858
GA Intermediate Municipal Fund 35,872 -- 35,872
GA Municipal Bond Fund 3,536 -- 3,536
MD Intermediate Municipal Fund 33,199 -- 33,199
MD Municipal Bond Fund 4,600 -- 4,600
NC Intermediate Municipal Fund 19,767 -- 19,767
NC Municipal Bond Fund 3,113 -- 3,113
SC Intermediate Municipal Fund 35,287 -- 35,287
SC Municipal Bond Fund 3,739 -- 3,739
TN Intermediate Municipal Fund 18,421 -- 18,421
TN Municipal Bond Fund 1,604 -- 1,604
TX Intermediate Municipal Fund 8,449 -- 8,449
TX Municipal Bond Fund 995 -- 995
VA Intermediate Municipal Fund 118,364 -- 118,364
VA Municipal Bond Fund 2,937 -- 2,937
Government Money Market Fund 21,122 52,809 73,931
Tax Exempt Fund 129,245 323,135 452,380
Total: 5,681,465 8,643,901 14,325,366
FEES PAID PURSUANT TO DISTRIBUTION PLANS
----------------------------------------
INVESTOR B SHARES - MONEY MARKET FUNDS
INVESTOR C SHARES - NON-MONEY MARKET FUNDS
<CAPTION>
NET FEES PAID (SHAREHOLDER
NET FEES PAID (12B-1 COMPONENT) SERVICING COMPONENT)
FUND YEAR ENDED 3/31/99 YEAR ENDED 3/31/99 NET FEES PAID
- ---- ------------------ ------------------ -------------
<S> <C> <C> <C>
Prime Fund $ -- $ 1,757,890 $ 1,757,890
Treasury Fund -- 825,995 825,995
Equity Income Fund 1,165,248 388,416 1,553,664
</TABLE>
118
<PAGE>
<TABLE>
<CAPTION>
NET FEES PAID (SHAREHOLDER
NET FEES PAID (12B-1 COMPONENT) SERVICING COMPONENT)
FUND YEAR ENDED 3/31/99 YEAR ENDED 3/31/99 NET FEES PAID
- ---- ------------------ ------------------ -------------
<S> <C> <C> <C>
International Equity Fund 253,359 84,453 337,812
Government Securities Fund 233,565 97,311 330,876
Small Company Growth Fund 39,700 13,233 52,933
U.S. Government Bond Fund 21,803 9,084 30,887
International Growth Fund 6,553 2,184 8,737
International Value Fund 15,184 5,061 20,245
Emerging Markets Fund 6,813 2,271 9,084
Value Fund 1,352,049 450,683 1,802,732
Capital Growth Fund 494,863 164,954 659,817
Emerging Growth Fund 306,640 102,213 408,853
Equity Index Fund -- -- --
Managed Index Fund -- -- --
Managed SmallCap Index Fund -- -- --
Managed Value Index Fund -- -- --
Managed SmallCap Value Index Fund -- -- --
Disciplined Equity Fund 355,444 118,481 473,925
Nations Marsico Focused Equities Fund 955,914 318,638 1,274,552
Nations Marsico Growth & Income Fund 336,117 112,039 448,156
Balanced Assets Fund 699,898 233,299 933,197
Short-Intermediate Government Fund 68,547 31,158 99,705
Short-Term Income Fund 5,932 14,830 20,762
Diversified Income Fund 463,956 193,299 657,255
Strategic Fixed Income Fund 22,688 10,313 33,001
Municipal Income Fund 109,549 45,641 155,190
Short-Term Municipal Income Fund 14,076 35,193 49,269
Intermediate Municipal Bond Fund 15,865 7,211 23,076
FL Intermediate Municipal Fund 29,411 13,369 42,780
FL Municipal Bond Fund 120,857 50,353 171,210
GA Intermediate Municipal Fund 55,000 25,000 80,000
GA Municipal Bond Fund 74,388 30,992 105,380
MD Intermediate Municipal Fund 38,423 17,465 55,888
MD Municipal Bond Fund 91,295 38,037 129,332
NC Intermediate Municipal Fund 48,847 22,203 71,050
NC Municipal Bond Fund 177,700 74,035 251,735
SC Intermediate Municipal Fund 51,578 23,444 75,022
SC Municipal Bond Fund 74,504 31,041 105,545
TN Intermediate Municipal Fund 20,961 9,528 30,489
TN Municipal Bond Fund 33,460 13,941 47,401
TX Intermediate Municipal Fund 15,432 7,015 22,447
TX Municipal Bond Fund 56,947 23,726 80,673
VA Intermediate Municipal Fund 72,048 32,749 104,797
VA Municipal Bond Fund 94,114 39,211 133,325
Government Money Market Fund -- 247,038 247,038
Tax Exempt Fund -- 510,512 510,512
Total: 7,998,728 6,233,509 14,232,237
========= ========= ==========
</TABLE>
NOTE:All fees paid under the Investor A and Investor C/B Shares Distribution
Plans were accrued as payments to broker/dealers and financial institutions
offering such shares to their customers.
INVESTOR B SHARES - NON-MONEY MARKET FUNDS
119
<PAGE>
<TABLE>
<CAPTION>
INVESTOR C SHARES - MONEY MARKET FUNDS
NET FEES PAID (SHAREHOLDER
NET FEES PAID (12B-1 COMPONENT) SERVICING COMPONENT)
FUND YEAR ENDED 3/31/99 YEAR ENDED 3/31/99 NET FEES PAID
- ---- ------------------ ------------------ -------------
<S> <C> <C> <C>
Prime Fund $ -- $ 137,935 $ 137,935
Treasury Fund -- 9,159 9,159
Equity Income Fund 46,659 15,553 62,212
International Equity Fund 6,788 2,263 9,051
Government Securities Fund 2,135 712 2,847
Small Company Growth Fund 13,529 4,510 18,039
U.S. Government Bond Fund 6,649 2,216 8,865
International Growth Fund 3,360 1,120 4,480
International Value Fund 522 174 696
Emerging Markets Fund 1,100 367 1,467
Value Fund 71,650 23,883 95,533
Capital Growth Fund 30,228 10,076 40,304
Emerging Growth Fund 12,613 4,204 16,817
Equity Index Fund -- -- --
Managed Index Fund 11,139 11,139 22,278
Managed SmallCap Index Fund 2,236 2,236 4,472
Managed Value Index Fund 26 26 52
Managed SmallCap Value Index Fund 216 216 432
Disciplined Equity Fund 10,223 3,408 13,631
Nations Marsico Focused Equities Fund 19,789 6,596 26,385
Nations Marsico Growth & Income Fund 7,885 2,628 10,513
Balanced Assets Fund 12,435 4,145 16,580
Short-Intermediate Government Fund 5,604 1,868 7,472
Short-Term Income Fund 2,073 691 2,764
Diversified Income Fund 10,647 3,549 14,196
Strategic Fixed Income Fund 5,929 1,976 7,905
Municipal Income Fund 11,918 3,973 15,891
Short-Term Municipal Income Fund 10,582 3,527 14,109
Intermediate Municipal Bond Fund 6,246 2,082 8,328
FL Intermediate Municipal Fund 7,774 2,591 10,365
FL Municipal Bond Fund 57 19 76
GA Intermediate Municipal Fund 5,487 1,829 7,316
GA Municipal Bond Fund 36 12 48
MD Intermediate Municipal Fund 3,769 1,256 5,025
MD Municipal Bond Fund 18 6 24
NC Intermediate Municipal Fund 981 327 1,308
NC Municipal Bond Fund 19 6 25
SC Intermediate Municipal Fund 11,717 3,906 15,623
SC Municipal Bond Fund 329 110 439
TN Intermediate Municipal Fund 20 7 27
TN Municipal Bond Fund 291 97 388
TX Intermediate Municipal Fund 957 319 1,276
TX Municipal Bond Fund 541 180 721
VA Intermediate Municipal Fund 7,242 2,414 9,656
VA Municipal Bond Fund 19 6 25
Government Money Market Fund -- 3,221 3,221
Tax Exempt Fund -- 94,950 94,950
</TABLE>
120
<PAGE>
<TABLE>
<CAPTION>
NET FEES PAID (SHAREHOLDER
NET FEES PAID (12B-1 COMPONENT) SERVICING COMPONENT)
FUND YEAR ENDED 3/31/99 YEAR ENDED 3/31/99 NET FEES PAID
- ---- ------------------ ------------------ -------------
<S> <C> <C> <C>
Total: 351,438 371,488 722,926
------- ------- -------
DAILY SHARES - MONEY MARKET FUNDS
<CAPTION>
NET FEES PAID
NET FEES PAID (12B-1 (SHAREHOLDER
FUND COMPONENT) SERVICING COMPONENT) NET FEES PAID
- ---- YEAR ENDED 3/31/99 YEAR ENDED 3/31/99 -------------
------------------ ------------------
<S> <C> <C> <C>
Prime Fund $ 3,581,606 $ 3,581,606 $ 7,163,212
Treasury Fund 454,853 454,853 909,706
Government Money Market Fund 88,313 88,313 176,626
Tax-Exempt Fund 456,264 456,264 912,528
Total: 4,581,036 4,581,036 9,162,072
--------- --------- ---------
MARSICO SHARES - MONEY MARKET FUNDS
<CAPTION>
(SHAREHOLDER SERVICING)
FUND YEAR ENDED 3/31/99
------------------------------ ------------------------------------
Prime Fund $4,560.00
FEES PAID PURSUANT TO THE ADMINISTRATION PLAN
---------------------------------------------
<CAPTION>
PRIMARY B SHARES
NET ADMIN
FEES PAID NET ADMIN
YEAR ENDED 3/31/99 FEES WAIVED
------------------ -----------
<S> <C> <C>
Prime Fund $ 51,551 $ --
Treasury Fund 36,527 --
Equity Income Fund -- --
International Equity Fund 7 --
Government Securities Fund -- --
Small Company Growth Fund -- --
U.S. Government Bond Fund -- --
International Growth Fund -- --
International Value Fund -- --
Emerging Markets Fund 92 --
Value Fund -- --
Capital Growth Fund 772 --
Emerging Growth Fund 12 --
Equity Index Fund 844 --
Managed Index Fund 17 --
Managed SmallCap Index Fund 466 --
Managed Value Index Fund -- --
Managed SmallCap Value Index Fund -- --
</TABLE>
121
<PAGE>
<TABLE>
<CAPTION>
NET ADMIN
FEES PAID NET ADMIN
YEAR ENDED 3/31/99 FEES WAIVED
------------------ -----------
<S> <C> <C>
Disciplined Equity Fund -- --
Nations Marsico Focused Equities Fund -- --
Nations Marsico Growth & Income Fund -- --
Balanced Assets Fund 6,069 1,931
Short-Intermediate Government Fund 945 1,055
Short-Term Income Fund -- --
Diversified Income Fund -- --
Strategic Fixed Income Fund -- --
Municipal Income Fund -- --
Short-Term Municipal Income Fund -- --
Intermediate Municipal Bond Fund -- --
FL Intermediate Municipal Fund -- --
FL Municipal Bond Fund -- --
GA Intermediate Municipal Fund -- --
GA Municipal Bond Fund -- --
Kansas Intermediate Municipal Fund -- --
MD Intermediate Municipal Fund -- --
MD Municipal Bond Fund -- --
NC Intermediate Municipal Fund -- --
NC Municipal Bond Fund -- --
SC Intermediate Municipal Fund -- --
SC Municipal Bond Fund -- --
TN Intermediate Municipal Fund -- --
TN Municipal Bond Fund -- --
TX Intermediate Municipal Fund -- --
TX Municipal Bond Fund -- --
VA Intermediate Municipal Fund -- --
VA Municipal Bond Fund -- --
Government Money Market Fund 4,040 --
Tax Exempt Fund 22,002 --
Total: 123,344 2,986
------- ------
</TABLE>
Primary B Shares - Money Market Funds
-------------------------------------
As stated in the Prospectuses for the Money Market Funds' Primary B
Shares NFI, NFT and NR have separate Shareholder Servicing Plans. Pursuant to
the Shareholder Servicing Plans, NFI, NFT and NR each have entered into separate
agreements with certain banks pertaining to the provision of administrative
services to their customers who may from time to time own of record or
beneficially Primary B Shares ("Customers") in consideration for the payment of
up to 0.25% (on an annualized basis) of the net asset value of such shares. Such
services may include: (i) aggregating and processing purchase, exchange and
redemption requests for Primary B Shares from Customers and transmitting
promptly net purchase and redemption orders with the Distributor or the transfer
agents; (ii) providing Customers with a service that invests the assets of their
accounts in Primary B Shares pursuant to specific or pre-authorized
instructions; (iii) processing dividend and distribution payments from the
Company on behalf of Customers; (iv) providing information periodically to
Customers showing their positions in Primary B Shares; (v) arranging for bank
wires; (vi) responding to Customer inquiries concerning their investment in
Primary B Shares; (vii) providing sub-accounting with respect to Primary B
Shares beneficially owned by Customers or the information necessary for
sub-accounting; (viii) if required by law, forwarding shareholder communications
(such as proxies, shareholder reports annual and semi-annual financial
statements and dividend, distribution and tax notices) to Customers; (ix)
forwarding to Customers proxy statements and proxies containing any proposals
122
<PAGE>
regarding the Shareholder Servicing Agreements or Shareholder Serving Plan; and
(x) providing such other similar services as may reasonably be requested to the
extent permitted under applicable statutes, rules, or regulations.
Such plan shall continue in effect as long as the Board of
Directors/Trustees, including a majority of the Qualified Directors,
specifically approves the plan at least annually.
Primary B Shares - Non-Money Market Funds
-----------------------------------------
As stated in the Prospectus for the Non-Money Market Funds' Primary B
Shares, each Company has a separate Shareholder Administration Plan (the
"Administration Plan") with respect to such shares. Pursuant to the
Administration Plan, each Company may enter into agreements ("Administration
Agreements") with broker/dealers, banks and other financial institutions that
are dealers of record or holders of record or which have a servicing
relationship with the beneficial owners of Non-Money Market Fund Primary B
Shares ("Servicing Agents"). The Administration Plan provides that pursuant to
the Administration Agreements, Servicing Agents shall provide the shareholder
support services as set forth therein to their customers who may from time to
time own of record or beneficially Primary B Shares ("Customers") in
consideration for the payment of up to 0.60% (on an annualized basis) of the net
asset value of such shares. Such services may include: (i) aggregating and
processing purchase, exchange and redemption requests for Primary B Shares from
Customers and transmitting promptly net purchase and redemption orders with the
Distributor or the transfer agents; (ii) providing Customers with a service that
invests the assets of their accounts in Primary B Shares pursuant to specific or
pre-authorized instructions; (iii) processing dividend and distribution payments
from the Company on behalf of Customers; (iv) providing information periodically
to Customers showing their positions in Primary B Shares; (v) arranging for bank
wires; (vi) responding to Customer inquiries concerning their investment in
Primary B Shares; (vii) providing sub-accounting with respect to Primary B
Shares beneficially owned by Customers or the information necessary for
sub-accounting; (viii) if required by law, forwarding shareholder communications
(such as proxies, shareholder reports annual and semi-annual financial
statements and dividend, distribution and tax notices) to Customers; (ix)
forwarding to Customers proxy statements and proxies containing any proposals
regarding an Administration Agreement; (x) employee benefit plan recordkeeping,
administration, custody and trustee services; (xi) general shareholder liaison
services and (xii) providing such other similar services as may reasonably be
requested to the extent permitted under applicable statutes, rules, or
regulations.
LIQUIDITY CLASS
NR 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 NR
and by a majority of the Trustees who are not "interested persons" (as defined
in the 1940 Act) of NR 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 NR.
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 NR, 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 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
123
<PAGE>
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 NR (such as proxies, shareholder
reports, and dividend distribution, and tax notices) to these customers with
respect to investments in NR. 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 NR
("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 NR 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 NR necessary for sub-accounting; (viii) if
required by law, forwarding shareholder communications from NR (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 NR may reasonably request to the extent
such Servicing Agents are permitted to do so under applicable statutes, rules or
regulations.
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 NR
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 NR 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 NR.
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
CLASS SHARES STEPHENS OF AMERICA NET FEES WAIVED NET FEES PAID
- ------------ -------- ---------- --------------- -------------
<S> <C> <C> <C> <C>
Cash Reserves $0 $1,853,098 $8,631,902 $1,853,098
</TABLE>
124
<PAGE>
<TABLE>
<CAPTION>
NET NET SHAREHOLDER
12B-1 FEES SERVICING PLAN FEES
LIQUIDITY PAID TO PAID TO BANK
CLASS SHARES STEPHENS OF AMERICA NET FEES WAIVED NET FEES PAID
- ------------ -------- ---------- --------------- -------------
<S> <C> <C> <C> <C>
Treasury Reserves 0 506,105 2,536,895 506,105
Government Reserves 0 66,377 309,623 66,377
Municipal Reserves 0 78,579 367,421 78,579
Money Market Reserves 0 $1,149 5,851 1,149
</TABLE>
Such distribution expenses for each Fund were attributable to the cost of
marketing the Funds.
MARKET CLASS
NR 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 NR
and by a majority of the Trustees who are not "interested persons" (as defined
in the 1940 Act) of NR 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 NR. 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 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.
125
<PAGE>
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 NR 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 NR 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 NR necessary for sub-accounting; (viii) if
required by law, forwarding shareholder communications from NR (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 NR 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 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 SERVICING PLAN FEES
MARKET PAID TO PAID TO BANK OF
CLASS SHARES STEPHENS AMERICA NET FEES WAIVED NET FEES PAID
- ------------ -------- ------- --------------- -------------
<S> <C> <C> <C> <C>
Cash Reserves $0 $4,323,627 $394,373 $4,323,627
Treasury Reserves 0 3,332,510 212,490 3,332,510
Government Reserves 0 1,154,876 123,124 1,154,876
Municipal Reserves 0 488,195 48,805 488,195
Money Market Reserves 0 2,069,945 0 2,069,945
</TABLE>
ADVISER CLASS
Pursuant to Rule 12b-1 under the 1940 Act, NR 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, NR may enter into
Shareholder Servicing Agreements with broker/dealers, banks and other financial
institutions ("Servicing
126
<PAGE>
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 NR 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 NR 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 NR reasonably request to the extent the Servicing Agents are
permitted to do so under applicable statutes, rules or regulations.
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 SERVICING PLAN FEES
ADVISER PAID TO PAID TO BANK OF
CLASS SHARES STEPHENS AMERICA NET FEES WAIVED NET FEES PAID
- ------------ -------- ------- --------------- -------------
<S> <C> <C> <C> <C>
Cash Reserves $0 $1,790,000 $0 $1,790,000
Treasury Reserves 0 725,787 0 725,787
Government Reserves 0 229,673 0 229,673
Municipal Reserves 0 127,558 0 127,558
Money Market Reserves 0 9,000 0 9,000
</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
NR has adopted a Shareholder Servicing Plan for Trust Class Shares of
each Fund (the "Trust Class Servicing Plan"). Under the Trust Class Servicing
Plan, NR 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 NR 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.
127
<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 NR 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 NR 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.
SERVICE CLASS
NR 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 NR
and by a majority of the Trustees who are not "interested persons" (as defined
in the 1940 Act) of NR 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 NR.
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 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
128
<PAGE>
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 NR 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 NR 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 NR necessary for sub-accounting; (viii) if
required by law, forwarding shareholder communications from NR (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 NR 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 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
NR 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 NR
and by a majority of the Trustees who are not "interested persons" (as defined
in the 1940 Act) of NR 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 NR.
All material amendments of the Distribution Plan will require approval by a
majority of the Trustees and of the Qualified Trustees.
129
<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 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.
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 NR 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 NR 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 NR necessary for sub-accounting; (viii) if
required by law, forwarding shareholder communications from NR (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 NR 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
130
<PAGE>
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.
MARSICO SHARES
As stated in the Prospectus for the Funds' Marsico Shares, NR and NFI
have a Shareholder Administration Plan (the "Administration Plan") with respect
to such shares. Pursuant to the Administration Plan, NR 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 NR and/or NFI 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.
NR and NFI have 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, NR and NFI 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 NR and/or
NFI 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.
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 NR and NFI 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 NR 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.
131
<PAGE>
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.
NR has 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 NR 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 NR (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 NR may reasonably request to the extent the Servicing Agent
is permitted to do so under applicable statutes, rules or regulations.
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 each Company,
the services of the Treasurer and Secretary of each Company and such other
personnel (other than the personnel of the Adviser) as are required for the
proper conduct of each Company's affairs. The Distributor bears the incremental
expenses of printing and distributing prospectuses used by the Distributor or
furnished by the Distributor to investors in connection with the public offering
of each Company's shares and the costs of any other promotional or sales
literature, except that to the extent permitted under the Plans relating to the
Investor A, Investor B or Investor C Shares of each Fund, sales-related expenses
incurred by the Distributor may be reimbursed by each Company.
Each Company pays or causes to be paid all other expenses of each
Company, including, without limitation: the fees of the Adviser, the
Administrator and Co-Administrator; the charges and expenses of any registrar,
any custodian or depository appointed by each Company for the safekeeping of its
cash, fund securities and other property, and any stock transfer, dividend or
accounting agent or agents appointed by each Company; brokerage commissions
chargeable to each Company in connection with fund securities transactions to
which each Company is a party; all taxes, including securities issuance and
transfer taxes; corporate fees payable by each Company to federal, state or
other governmental agencies; all costs and expenses in connection with the
registration and
132
<PAGE>
maintenance of registration of each Company and its shares with the SEC and
various states and other jurisdictions (including filing fees, legal fees and
disbursements of counsel); the costs and expenses of typesetting prospectuses
and statements of additional information of each Company (including supplements
thereto) and periodic reports and of printing and distributing such prospectuses
and statements of additional information (including supplements thereto) to each
Company's shareholders; all expenses of shareholders' and directors' meetings
and of preparing, printing and mailing proxy statements and reports to
shareholders; fees and travel expenses of directors or director members of any
advisory board or committee; all expenses incident to the payment of any
dividend or distribution, whether in shares or cash; charges and expenses of any
outside service used for pricing of each Company's shares; fees and expenses of
legal counsel and of independent auditors in connection with any matter relating
to each Company; membership dues of industry associations; interest payable on
Company borrowings; postage and long-distance telephone charges; insurance
premiums on property or personnel (including officers and directors) of each
Company which inure to its benefit; extraordinary expenses (including, but not
limited to, legal claims and liabilities and litigation costs and any
indemnification related thereto); and all other charges and costs of each
Company's operation unless otherwise explicitly assumed by the Adviser), the
Administrator or Co-Administrator.
Expenses of each Company which are not directly attributable to the
operations of any class of shares or Fund are pro-rated among all classes of
shares or Fund of each Company based upon the relative net assets of each class
or Fund. Expenses of each Company which are not directly attributable to a
specific class of shares but are directly attributable to a specific Fund are
prorated among all the classes of shares of such Fund based upon the relative
net assets of each such class of shares. Expenses of each Company which are
directly attributable to a class of shares are charged against the income
available for distribution as dividends to such class of shares.
The Advisory Agreement, the Sub-Advisory Agreements, and the
Administration Agreement require BAAI, TradeStreet, Gartmore, and the
Administrator to reduce their fees to the extent required to satisfy any expense
limitations which may be imposed by the securities laws or regulations
thereunder of any state in which a Fund's shares are registered or qualified for
sale, as such limitations may be raised or lowered from time to time, and the
aggregate of all such investment advisory, sub-advisory, and administration fees
shall be reduced by the amount of such excess. The amount of any such reduction
to be borne by BAAI, TradeStreet, Gartmore or the Administrator shall be
deducted from the monthly investment advisory and administration fees otherwise
payable to BAAI, TradeStreet, Gartmore and the Administrator during such fiscal
year. If required pursuant to such state securities regulations, BAAI,
TradeStreet, Gartmore and the Administrator will reimburse the Company no later
than the last day of the first month of the next succeeding fiscal year, for any
such annual operating expenses (after reduction of all investment advisory and
administration fees in excess of such limitation).
TRANSFER AGENTS AND CUSTODIANS
First Data is located at One Exchange Place, 53 State Street, Boston,
Massachusetts 02109, and acts as transfer agent for each Fund's Shares. Under
the transfer agency agreements, the transfer agent maintains shareholder account
records for the 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 A
and Primary B Shares.
The Bank of New York ("BONY") 90 Washington Street, New York, N.Y.
10286 serves as custodian for the Funds' assets. As custodian, BONY maintains
the Funds' securities cash and other property, delivers securities against
payment upon sale and pays for securities against delivery upon purchase, makes
payments on behalf of such Funds for payments of dividends, distributions and
redemptions, endorses and collects on behalf of such Funds all checks, and
receives all dividends and other distributions made on securities owned by such
Funds.
The Bank of New York ("BONY"), Avenue des Arts, 35 1040 Brussels,
Belgium serves as custodian for the assets of the international Funds.
The SEC has amended Rule 17f-5 under the 1940 Act to permit boards to
delegate certain foreign custody matters to foreign custody managers and to
modify the criteria applied in the selection process. Accordingly, BONY serves
as Foreign Custody Manager, pursuant to a Foreign Custody Manager Agreement,
under which the Boards of
133
<PAGE>
Directors/Trustees retain the responsibility for selecting foreign compulsory
depositories, although BONY agrees to make certain findings with respect to such
depositories and to monitor such depositories.
DISTRIBUTOR
Stephens Inc. (the "Distributor") serves as the principal underwriter
and distributor of the shares of the Funds.
Pursuant to a distribution agreement (the "Distribution Agreement"),
the Distributor, as agent, sells shares of the Funds on a continuous basis and
transmits purchase and redemption orders that its receives to the Companies or
the Transfer Agent. Additionally, the Distributor has agreed to use appropriate
efforts to solicit orders for the sale of shares and to undertake such
advertising and promotion as it believes appropriate in connection with such
solicitation. Pursuant to the Distribution Agreement, the Distributor, at its
own expense, finances those activities which are primarily intended to result in
the sale of shares of the Funds, including, but not limited to, advertising,
compensation of underwriters, dealers and sales personnel, the printing of
prospectuses to other than existing shareholders, and the printing and mailing
of sales literature. The Distributor, however, may be reimbursed for all or a
portion of such expenses to the extent permitted by a distribution plan adopted
by the Companies pursuant to Rule 12b-1 under the 1940 Act.
The Distribution Agreement will continue year to year as long as such
continuance is approved at least annually by (i) the Board of Directors/Trustees
or a vote of the majority (as defined in the 1940 Act) of the outstanding voting
securities of the Fund and (ii) a majority of the directors who are not parties
to the Distribution Agreement or "interested persons" of any such party by a
vote cast in person at a meeting called for such purpose. The Distribution
Agreement is not assignable and is terminable with respect to a Fund, without
penalty, on 60 days' notice by the Board of Directors/Trustees, the vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the Fund, or by the Distributor.
INDEPENDENT ACCOUNTANTS AND REPORTS
The Companies issue unaudited financial information semi-annually and
audited financial statements annually. The Companies furnish proxy statements
and other shareholder reports to shareholders of record.
The annual financial statements will be audited by each Company's
independent accountant. The Board of Directors/Trustees has selected
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, as each Company's independent accountant to audit each Company's books
and review each Company's tax returns for the Funds' fiscal year ended March 31,
2000. PricewaterhouseCoopers LLP was the independent public accountants for the
Funds (except the International Value Fund) for the period ended March 31, 1999.
KPMG LLP, Two Nationwide Plaza, Columbus, Ohio 43215 were the independent
auditors for the Emerald International Equity Fund (predecessor to the
International Value Fund) for the fiscal period December 1, 1997 through May 15,
1998 and for the fiscal year ended November 30, 1997.
The Annual Reports for the fiscal period ended March 31, 1999 are
hereby incorporated herein by reference in this SAI. The Annual Reports for the
Emerald International Equity Fund (the predecessor to the International Value
Fund) for the fiscal period ended May 15, 1998 and for the fiscal year ended
November 30, 1997 are also incorporated herein by reference. These Annual
Reports will be sent free of charge with this SAI to any shareholder who
requests this SAI.
134
<PAGE>
PricewaterhouseCoopers LLP, with offices at 1177 Avenue of the
Americas, New York, New York 10036 was the independent accountants for Cash
Reserves, Treasury Reserves, Government Reserves, Municipal Reserves for the
period ended March 31, 1999, and for the Pacific Horizon California Tax-Exempt
Money Market Fund (the predecessor to California Tax-Exempt Reserves), the
Pacific Horizon Asset Allocation Fund (the predecessor to the Asset Allocation
Fund), Pacific Horizon Capital Income Fund (the predecessor to the Capital
Income Fund), Pacific Horizon California Municipal Bond Fund (the predecessor to
The California Municipal Bond Fund), Pacific Horizon Intermediate Bond Fund (the
predecessor to The Intermediate Bond Fund) and Pacific Horizon Blue Chip Fund
(the predecessor to The 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 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 Cash Reserves, Treasury Reserves, Government
Reserves and 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 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 California Tax-Exempt Reserves), Pacific Horizon Asset Allocation
Fund (the predecessor to the Asset Allocation Fund), Pacific Horizon Capital
Income Fund (the predecessor to the Capital Income Fund), Pacific Horizon
California Municipal Bond Fund (the predecessor to the California Municipal Bond
Fund), Pacific Horizon Intermediate Bond Fund (the predecessor to the
Intermediate Bond Fund) and the Pacific Horizon Blue Chip Fund (the predecessor
to the 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 Companies and special counsel
to Bank of America has advised the Companies and Bank of America that Bank of
America and its affiliates may perform the services contemplated by the
Investment Advisory Agreement and this Prospectus without violation of the
Glass-Steagall Act. Such counsel has pointed out, however, that there are no
controlling judicial or administrative interpretations or decisions and that
future judicial or administrative interpretations of, or decisions relating to,
present federal or state statutes, including the Glass-Steagall Act, and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as future changes in such federal or state
statutes, regulations and judicial or administrative decisions or
interpretations, could prevent such entities from continuing to perform, in
whole or in part, such services. If any such entity were prohibited from
performing any of such services, it is expected that new agreements would be
proposed or entered into with another entity or entities qualified to perform
such services.
FUND TRANSACTIONS AND BROKERAGE
-------------------------------
GENERAL BROKERAGE POLICY
Subject to policies established by the Board of Directors/Trustees of
each Company, the Adviser is responsible for decisions to buy and sell
securities for each Fund, for the selection of broker/dealers, for the execution
of such Fund's securities transactions, and for the allocation of brokerage fees
in connection with such transactions. The Adviser's primary consideration in
effecting a security transaction is to obtain the best net price and the most
favorable execution of the order. Purchases and sales of securities on a
securities exchange are effected through brokers who charge a negotiated
commission for their services. Orders may be directed to any broker to the
extent and in the manner permitted by applicable law.
In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without
stated commissions, although the price of a security usually includes a profit
to the dealer. In underwritten offerings, securities are purchased at a fixed
price that includes an amount of
135
<PAGE>
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 Companies.
Commission rates are established pursuant to negotiations with the
broker based on the quality and quantity of execution services provided by the
broker in the light of generally prevailing rates. The allocation of orders
among brokers and the commission rates paid are reviewed periodically by the
Directors/Trustees of the respective Company. On exchanges on which commissions
are negotiated, the cost of transactions may vary among different brokers.
Transactions on foreign stock exchanges involve payment of brokerage commissions
which are generally fixed. Transactions in both foreign and domestic
over-the-counter markets are generally principal transactions with dealers, and
the costs of such transactions involve dealer spreads rather than brokerage
commissions. With respect to over-the-counter transactions, the Adviser, where
possible, will deal directly with dealers who make a market in the securities
involved except in those circumstances in which better prices and execution are
available elsewhere.
In certain instances there may be securities which are suitable for
more than one Fund as well as for one or more of the other clients of the
Adviser. Investment decisions for each Fund and for the Adviser's other clients
are made with the goal of achieving their respective investment objectives. It
may happen that a particular security is bought or sold for only one client even
though it may be held by, or bought or sold for, other clients. Likewise, a
particular security may be bought for one or more clients when one or more other
clients are selling that same security. Some simultaneous transactions are
inevitable when several clients receive investment advice from the same
investment adviser, particularly when the same security is suitable for the
investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security in a particular transaction as far
as a Fund is concerned. The Companies believe that over time their ability to
participate in volume transactions will produce superior executions for the
Funds.
The portfolio turnover rate for each Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the reporting period by
the monthly average value of the portfolio securities owned during the reporting
period. The calculation excludes all securities, including options, whose
maturities or expiration dates at the time of acquisition are one year or less.
Portfolio turnover may vary greatly from year to year as well as within a
particular year, and may be affected by cash requirements for redemption of
shares and by requirements which enable the Funds to receive favorable tax
treatment.
The Funds may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group. A
Fund will engage in this practice, however, only when the Adviser, in its sole
discretion, believes such practice to be otherwise in the Fund's interests.
136
<PAGE>
The Companies will not execute portfolio transactions through, or
purchase or sell portfolio securities from or to the distributor, the Adviser,
the administrator, the co-administrator or their affiliates, acting as principal
(including repurchase and reverse repurchase agreements), except to the extent
permitted by applicable law. In addition, the Companies will not give preference
to correspondents of 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 the Tax Exempt Fund, the Municipal Income
Fund, the Short-Term Municipal Income Fund, the Intermediate Municipal Bond
Fund, the State Intermediate Municipal Bond Funds and the State Municipal Bond
Funds (the "Tax-Free Bond Funds"). Bank of America or certain of its affiliates
may serve as trustee, tender agent, guarantor, placement agent, underwriter, or
in some other capacity, with respect to certain issues of municipal securities.
Under certain circumstances, the Tax-Free Bond Funds may purchase municipal
securities from a member of an underwriting syndicate in which an affiliate of
Bank of America is a member. NFT has adopted procedures pursuant to Rule 10f-3
under the 1940 Act, and intends to comply with the requirements of Rule 10f-3,
in connection with any purchases of municipal securities that may be subject to
such Rule.
Under the 1940 Act, persons affiliated with a Company are prohibited
from dealing with such Company as a principal in the purchase and sale of
securities unless an exemptive order allowing such transactions is obtained from
the SEC. Each of the Funds may purchase securities from underwriting syndicates
of which Bank of America or any of its affiliates is a member under certain
conditions, in accordance with the provisions of a rule adopted under the 1940
Act and any restrictions imposed by the Board of Governors of the Federal
Reserve System.
Investment decisions for each Fund are made independently from those
for each Company's other investment portfolios, other investment companies, and
accounts advised or managed by the Adviser. Such other investment portfolios,
investment companies, and accounts may also invest in the same securities as the
Funds. When a purchase or sale of the same security is made at substantially the
same time on behalf of one or more of the Funds and another investment
portfolio, investment company, or account, the transaction will be averaged as
to price and available investments allocated as to amount, in a manner which the
Adviser believes to be equitable to each Fund and such other investment
portfolio, investment company or account. In some instances, this investment
procedure may adversely affect the price paid or received by a Fund or the size
of the position obtained or sold by the Fund. To the extent permitted by law,
the Adviser may aggregate the securities to be sold or purchased for the Funds
with those to be sold or purchased for other investment portfolios, investment
companies, or accounts in executing transactions.
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS
FUND FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED MARCH
MARCH 31, 1999 MARCH 31, 1998 31, 1997
<S> <C> <C> <C>
Managed SmallCap Index $ 375,659 $ 143,732 $ 54,486.18
Disciplined Equity 283,016 152,295 288,643.86
Equity Index 92,695 208,604 115,828.91
Emerging Growth 431,473 477,588 554,981.41
Capital Growth Fund 1,102,071 1,392,418 1,584,909.43
Managed Index 313,849 119,677 24,684.19
Value 2,871,137 3,142,078 1,784,504.83
Balanced Assets 522,389 1,207,000 1,965,293.04
Emerging Markets 35,689 284,328 207,518.87
Equity Income 1,472,491 1,111,460 1,083,187.32
</TABLE>
137
<PAGE>
<TABLE>
<CAPTION>
FUND FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED MARCH
MARCH 31, 1999 MARCH 31, 1998 31, 1997
<S> <C> <C> <C>
International Equity 2,201,631 2,421,975 1,738,165.19
International Growth 212,788 1,054,454 0
Managed Small Cap Value Index 16,486 5,469 0
Nations Marsico Focused Equities 830,511 25,934 0
Nations Marsico Growth & Income 265,230 9,903 0
Small Company Growth 596,033 184,948 0
Strategic Equity 96,069 0 0
Managed Value Index 15,461 0 0
International Value 45,493 0 0
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
FEBRUARY 28, 1999 FEBRUARY 28, 1998 FEBRUARY 28, 1997
Capital Income Fund $235,157 $296,651 $225,515
Asset Allocation Fund+ $213,085 $125,211 $152,270
Blue Chip Master Portfolio $925,630 $748,649 $637,281
</TABLE>
Brokerage Commissions Paid to Affiliates
----------------------------------------
During the fiscal periods ended March 31, 1999, 1998, and 1997, NFT and
its Funds, NR and its Funds, and NFI and its Funds, did not pay brokerage
commissions to Banc of America Investments, Inc. (the Funds' investment adviser)
(or its predecessors), Banc of America Capital Markets, Inc. (a broker/dealer
subsidiary of Bank of America) (or its predecessors), or Stephens.
NFT did pay brokerage commissions to Nations Montgomery Securities LLC
(a securities underwriting affiliate of Bank of America Corporation) ("NMS")
during the fiscal year ended March 31, 1999, for Nations Marsico Focused
Equities Fund, in the amount of $56,267.46, which is 6.77% of the total
commissions paid for the Fund. NFT did pay brokerage commissions to Westminster
Research Clearing NMS (a securities underwriting affiliated of Bank of America
Corporation) during the fiscal year ended March 31, 1999, for Nations Marsico
Focused Equities Fund, in the amount of $1,361.74, which is 0.16% of the total
commissions paid for the Fund. NFT did pay brokerage commissions to NMS during
the fiscal year ended March 31, 1999, for Nations Marsico Growth & Income Fund,
in the amount of $16,886.60, which is 6.36% of the total commissions paid for
the Fund. NFT did pay brokerage commissions to Westminster Research Clearing NMS
during the fiscal year ended March 31, 1999, for Nations Marsico Growth & Income
Fund, in the amount of $1,310.65, which is 0.49% of the total commissions paid
for the Fund.
NFI did pay brokerage commissions to NMS during the fiscal year ended
March 31, 1999, for the Small Company Growth Fund, in the amount of $7,212.00,
which is 1.21% of the total commissions paid for the Fund.
NFT did pay $2,368.03 to Nations Montgomery Securities LLC during the
fiscal year ended March 31, 1998.
No other Funds of NR, NFI or NFT paid brokerage fees during the fiscal
years ended March 31, 1999, 1998 and 1997.
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
- ------------------------
+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.
138
<PAGE>
available from another broker/dealer if the difference is reasonably justified
by other aspects of the portfolio execution services offered.
Broker/dealers utilized by the Adviser may furnish statistical,
research and other information or services which are deemed by the Adviser to be
beneficial to the Funds' investment programs. Research services received from
brokers supplement the Adviser's own research and may include the following
types of information: statistical and background information on industry groups
and individual companies; forecasts and interpretations with respect to U.S and
foreign economies, securities, markets, specific industry groups and individual
companies; information on political developments; fund management strategies;
performance information on securities and information concerning prices of
securities; and information supplied by specialized services to the Adviser and
to the Company's Directors/Trustees with respect to the performance, investment
activities and fees and expenses of other mutual funds. Such information may be
communicated electronically, orally or in written form. Research services may
also include the providing of equipment used to communicate research
information, the arranging of meetings with management of companies and the
providing of access to consultants who supply research information.
The outside research assistance is useful to the Adviser since the
brokers utilized by the Adviser as a group tend to follow a broader universe of
securities and other matters than the Adviser's staff can follow. In addition,
this research provides the Adviser with a diverse perspective on financial
markets. Research services which are provided to the Adviser by brokers are
available for the benefit of all accounts managed or advised by the Adviser. In
some cases, the research services are available only from the broker providing
such services. In other cases, the research services may be obtainable from
alternative sources in return for cash payments. The Adviser is of the opinion
that because the broker research supplements rather than replaces its research,
the receipt of such research does not tend to decrease its expenses, but tends
to improve the quality of its investment advice. However, to the extent that the
Adviser would have purchased any such research services had such services not
been provided by brokers, the expenses of such services to the Adviser could be
considered to have been reduced accordingly. Certain research services furnished
by broker/dealers may be useful to the Adviser with clients other than the
Funds. Similarly, any research services received by the Adviser through the
placement of fund transactions of other clients may be of value to the Adviser
in fulfilling its obligations to the Funds. The Adviser is of the opinion that
this material is beneficial in supplementing its research and analysis; and,
therefore, it may benefit the Companies by improving the quality of the
Adviser's investment advice. The advisory fees paid by the Companies are not
reduced because the Adviser receives such services.
Some broker/dealers may indicate that the provision of research
services is dependent upon the generation of certain specified levels of
commissions and underwriting concessions by the Adviser's clients, including the
Funds.
DESCRIPTION OF SHARES
---------------------
DESCRIPTION OF SHARES OF THE COMPANIES
The Companies' Boards of Directors/Trustees have authorized the
issuance of the classes of shares of the Funds indicated above and may, in the
future, authorize the creation of additional investment portfolios or classes of
shares.
The Boards may classify or reclassify any unissued shares of a Company
into shares of any class, classes or Fund in addition to those already
authorized by setting or changing in any one or more respects, from time to
time, prior to the issuance of such shares, the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption, of such shares and,
pursuant to such classification or reclassification to increase or decrease the
number of authorized shares of any Fund or class. Any such classification or
reclassification will comply with the provisions of the 1940 Act. Fractional
shares shall have the same rights as full shares to the extent of their
proportionate interest.
All shares of a Fund have equal voting rights and will be voted in the
aggregate, and not by series, except where voting by a series is required by law
or where the matter involved only affects one series. For example, a change in a
Fund's fundamental investment policy would be voted upon only by shareholders of
the Fund involved. Additionally, approval of an advisory contract is a matter to
be determined separately by Fund. Approval by the shareholders of one Fund is
effective as to that Fund whether or not sufficient votes are received from the
shareholders of the other Funds to approve the proposal as to those Portfolios.
As used in the Prospectus and in this SAI, the term "majority," when referring
to approvals to be obtained from shareholders of a Fund, means the vote of
139
<PAGE>
the lesser of (i) 67% of the shares of the Fund represented at a meeting if the
shareholders of more than 50% of the outstanding interests of the Fund are
present in person or by proxy, or (ii) more than 50% of the outstanding shares
of the Fund. The term "majority," when referring to the approvals to be obtained
from shareholders of a Company as a whole, means the vote of the lesser of (i)
67% of the Company's shares represented at a meeting if the shareholders of more
than 50% of the Company's outstanding shares are present in person or by proxy,
or (ii) more than 50% of the Company's outstanding shares. Shareholders are
entitled to one votE for each full share held and fractional votes for
fractional shares held.
Each Company may dispense with an annual meeting of shareholders in any
year in which it is not required to elect Trustees/Directors under the 1940 Act.
However, each Company has undertaken to hold a special meeting of its
shareholders for the purpose of voting on the question of removal of a Board
member, if requested in writing by the shareholders of at least 10% of the
Company's outstanding voting shares, and to assist in communicating with other
shareholders as required by Section 16(c) of the 1940 Act.
Each share of a Fund represents an equal proportional interest in the
Fund with each other share and is entitled to such dividends and distributions
out of the income earned on the assets belonging to the Fund, as are declared in
the discretion of the Board members. In the event of the liquidation or
dissolution of a Company, shareholders of that Company's Funds are entitled to
receive the assets attributable to the Fund that are available for distribution,
and a distribution of any general assets not attributable to a particular Fund
that are available for distribution in such manner and on such basis as the
Board members in their sole discretion may determine.
Shareholders are not entitled to any preemptive rights. All shares,
when issued, will be fully paid and non-assessable by the Companies.
Net investment income for the Funds for dividend purposes consists of
(i) interest accrued and original issue discount earned on a Fund's assets, (ii)
plus the amortization of market discount and minus the amortization of market
premium on such assets, (iii) less accrued expenses directly attributable to the
Fund and the general expenses of the Company prorated to a Fund on the basis of
its relative net assets, plus dividend or distribution income on a Fund's
assets.
Prior to purchasing shares in one of the Funds, the impact of dividends
or distributions which are expected to be or have been declared, but not paid,
should be carefully considered. Any dividend or distribution declared shortly
after a purchase of such shares prior to the record date will have the effect of
reducing the per share net asset value by the per share amount of the dividend
or distribution. All or a portion of such dividend or distribution, although in
effect a return of capital, may be subject to tax.
Shareholders receiving a distribution in the form of additional shares
will be treated as receiving an amount equal to the fair market value of the
shares received, determined as of the reinvestment date.
The Funds use the so-called "equalization accounting method" to
allocate a portion of earnings and profits to redemption proceeds. This method
permits a fund to achieve more balanced distributions for both continuing and
departing shareholders. Continuing shareholders should realize tax savings or
deferrals through this method, and departing shareholders will not have their
tax obligations change. Although using this method will not affect a Fund's
total returns, it may reduce the amount that otherwise would be distributable to
continuing shareholders by reducing the effect of redemptions on dividend and
distribution amounts.
NET ASSET VALUE DETERMINATION
Money Market Funds
------------------
The Money Market Funds use the amortized cost method of valuation to
value their shares in such Funds. Pursuant to this method, a security is valued
at its cost initially and thereafter a constant amortization to maturity of any
discount or premium is assumed, regardless of the impact of fluctuating interest
rates on the market value of the security. Where it is not appropriate to value
a security by the amortized cost method, the security will be valued either by
market quotations or by fair value as determined by the Board of Trustees. This
method may result in periods during which value, as determined by amortized
cost, is higher or lower than the price the Fund would receive if it sold the
security.
The net asset value per share of the Money Market Funds will be
determined as of 3:00 p.m., Eastern time (10:30 a.m., Eastern time, with respect
to California Tax-Exempt Reserves; 12:00 noon, Eastern time, with respect to
140
<PAGE>
the Government Money Market Fund, the Tax-Exempt Fund, Government Reserves and
Municipal Reserves; and 5:00 p.m., Eastern time, with respect to Treasury
Reserves, Cash Reserves and Money Market Reserves), on each day the Exchange is
open for business.
Each of the Money Market Funds invests only in high quality instruments
and maintains a dollar-weighted average portfolio maturity appropriate to its
objective of maintaining a stable net asset value per share, provided that a
Fund will neither purchase any security deemed to have a remaining maturity of
more than 397 days within the meaning of the 1940 Act nor maintain a
dollar-weighted average portfolio maturity which exceeds 90 days. NR's and NFI's
Board of Directors and NFT's Board of Trustees each have established procedures
reasonably designed, taking into account current market conditions and each
Money Market Fund's investment objective, to stabilize the net asset value per
share of each Money Market Fund for purposes of sales and redemptions at $1.00.
These procedures include review by the Board of Directors/Trustees, at such
intervals as it deems appropriate, to determine the extent, if any, to which the
net asset value per share of each Money Market Fund calculated by using
available market quotations deviates from $1.00 per share. In the event such
deviation exceeds one-half of one percent, the Board of Directors/Trustees will
promptly consider what action, if any, should be initiated. If the Board of
Directors/Trustees believes that the extent of any deviation from a Fund's $1.00
amortized cost price per share may result in material dilution or other unfair
results to new or existing investors, it has agreed to take such steps as it
considers appropriate to eliminate or reduce, to the extent reasonably
practicable, any such dilution or unfair results. These steps may include
selling portfolio instruments prior to maturity; shortening the average
portfolio maturity; withholding or reducing dividends; redeeming shares in kind;
reducing the number of a Fund's outstanding shares without monetary
consideration; or utilizing a net asset value per share determined by using
available market quotations.
Non-Money Market Funds
----------------------
With respect to the Non-Money Market Funds, a security listed or traded
on an exchange is valued at its last sales price on the exchange where the
security is principally traded or, lacking any sales on a particular day, the
security is valued at the mean between the closing bid and asked prices on that
day. Each security traded in the over-the-counter market (but not including
securities reported on the NASDAQ National Market System) is valued at the mean
between the last bid and asked prices based upon quotes furnished by market
makers for such securities. Each security reported on the NASDAQ National Market
System is valued at the last sales price on the valuation date. With respect to
the Bond Funds, securities may be valued on the basis of prices provided by an
independent pricing service. Prices provided by the pricing service may be
determined without exclusive reliance on quoted prices, and may reflect
appropriate factors such as yield, type of issue, coupon rate maturity and
seasoning differential. Securities for which prices are not provided by the
pricing service are valued at the mean between the last bid and asked prices
based upon quotes furnished by market makers for such securities.
With respect to the Non-Money Market Funds, securities for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the supervision of the Company's officers in a manner
specifically authorized by the Board of Directors/Trustees of the Company.
Short-Term obligations having 60 days or less to maturity are valued at
amortized cost, which approximates market value.
Generally, trading in foreign securities, as well as U.S. Government
securities, money market instruments and repurchase agreements, is substantially
completed each day at various times prior to the close of the New York Stock
Exchange. The values of such securities used in computing the net asset value of
the shares of the Fund are determined as of such times. Foreign currency
exchange rates are also generally determined prior to the close of the New York
Stock Exchange. Occasionally, events affecting the value of such securities and
such exchange rates may occur between the times at which they are determined and
the close of the New York Stock Exchange, which will not be reflected in the
computation of net asset value. If during such periods events occur which
materially affect the value of such securities, the securities will be valued at
their fair market value as determined in good faith by the directors/trustees.
For purposes of determining the net asset value per share of the
International Funds, all assets and liabilities of the International Funds
initially expressed in foreign currencies will be converted into U.S. dollars at
the mean between the bid and offer prices of such currencies against U.S.
dollars quoted by a major bank that is a regular participant in the foreign
exchange market or on the basis of a pricing service that takes into account the
quotes provided by a number of such major banks.
141
<PAGE>
A Company may redeem shares involuntarily to reimburse the Funds for
any loss sustained by reason of the failure of a shareholder to make full
payment for Investor Shares purchased by the shareholder or to collect any
charge relating to a transaction effected for the benefit of a shareholder which
is applicable to Investor Shares as provided in the related Prospectuses from
time to time. A Company also may make payment for redemptions in readily
marketable securities or other property if it is appropriate to do so in light
of such Company's responsibilities under the 1940 Act.
Under the 1940 Act, the Funds may suspend the right of redemption or
postpone the date of payment for Shares during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC. (The Funds may also suspend or postpone the
recordation of the transfer of their shares upon the occurrence of any of the
foregoing conditions.)
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
The following information supplements and should be read in conjunction
with the Prospectuses. The Prospectuses of the Funds describe generally the tax
treatment of distributions by the Funds. This section of the SAI includes
additional information concerning Federal income taxes.
GENERAL
The Companies intend to qualify each Fund as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), as long as such qualification is in the best interest of the Fund's
shareholders. Each Fund will be treated as a separate entity for tax purposes
and, thus, the provisions of the Code applicable to regulated investment
companies generally will be applied to each Fund, rather than to a Company as a
whole. In addition, net capital gain, net investment income, and operating
expenses will be determined separately for each Fund. As a regulated investment
company, each Fund will not be taxed on its net investment income and capital
gains distributed to shareholders.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) each Fund derive at least 90% of its
annual gross income from dividends, interest, certain payments with respect to
securities loans, gains from the sale or other disposition of stock or
securities or foreign currencies (to the extent such currency gains are directly
related to the regulated investment company's principal business of investing in
stock or securities) and other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; and (b) the Fund diversify
its holdings so that, at the end of each quarter of the taxable year, (i) at
least 50% of the market value of the Fund's assets is represented by cash,
government securities and other securities limited in respect of any one issuer
to an amount not greater than 5% of the Fund's assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government obligations and the securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
determined to be engaged in the same or similar trades or businesses.
Each Fund also must distribute or be deemed to distribute to its
shareholders at least 90% of its net investment income which, for this purpose,
includes net short-term capital gains and certain other items earned in each
taxable year. In general, these distributions must actually or be deemed to be
made in the taxable year. However, in certain circumstances, such distributions
may be made in the 12 months following the taxable year. Furthermore,
distributions declared in October, November or December of one taxable year and
paid by January 31 of the following taxable year will be treated as paid by
December 31 the first taxable year. The Funds intend to pay out substantially
all of their net investment income and net capital gain (if any) for each year.
EXCISE TAX
A 4% nondeductible excise tax will be imposed on each Fund (other than
to the extent of its tax-exempt
142
<PAGE>
interest income) to the extent it does not meet certain minimum distribution
requirements of its by the end of each calendar year. Each Fund intends to
actually or be deemed to distribute substantially all of its income and gains by
the end of each calendar year and, thus, expects not to be subject to the excise
tax.
PRIVATE LETTER RULING
In order for a Fund to maintain regulated investment company status
under the Code, its dividends, including--for this purpose--capital gain
distributions, must not constitute "preferential dividends," within the meaning
of Section 562(c) of the Code. The Companies have received a private letter
ruling from the Internal Revenue Service ("IRS") generally to the effect that
the following will not give rise to preferential dividends: differing fees
imposed on the different classes of shares with respect to servicing,
distribution and administrative support services, and transfer agency
arrangements; differing sales charges on purchases and redemptions of such
shares; and conversion features resulting in the Companies paying different
dividends or distributions on the different classes of shares.
INVESTMENT THROUGH MASTER PORTFOLIOS
Management of the Master Portfolios corresponding to each of the Feeder
Funds intends for each Master Portfolio to be treated as a partnership (or, in
the event that a Feeder Fund is the sole investor in a Master Portfolio, as
disregarded from the Feeder Fund) for Federal income tax purposes rather than as
a regulated investment company or a corporation under the Code. Under the rules
applicable to a partnership (or a disregarded entity), a proportionate share of
any interest, dividends, gains and losses of a Master Portfolio will be deemed
to have been realized (i.e., "passed-through") to its investors, regardless of
whether any amounts are actually distributed by the Master Portfolio. Each
investor in a Master Portfolio will be taxed on its shares (as determined in
accordance with the governing instruments of the particular Master Portfolio) of
the Master Portfolio's income and gains in determining its Federal income tax
liability. The determination of such share will be made in accordance with the
Code and regulations promulgated thereunder. It is intended that each Master
Portfolio's assets, income and distributions will be managed in such a way that
an investor in a Master Portfolio will be able to qualify as a regulated
investment company by investing substantially all of its assets through the
Master Portfolio.
TAXATION OF FUND/MASTER PORTFOLIO INVESTMENTS
Except as provided herein, gains and losses on the sale of portfolio
securities by a Fund or Master Portfolio ("Fund/Master Portfolio") will
generally be capital gains and losses. Such gains and losses will ordinarily be
long-term capital gains and losses if the securities have been held by the
Fund/Master Portfolio for more than one year at the time of disposition of the
securities.
Gains recognized on the disposition of a debt obligation (including a
tax-exempt obligation) purchased by a Fund/Master Portfolio 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/Master Portfolio held the debt obligation.
If an option granted by a Fund/Master Portfolio lapses or is terminated
through a closing transaction, such as a repurchase by the Fund/Master Portfolio
of the option from its holder, the Fund/Master Portfolio will realize a
short-term capital gain or loss, depending on whether the premium income is
greater or less than the amount paid by the Fund in the closing transaction.
Some realized capital losses may be deferred if they result from a position
which is part of a "straddle," discussed below. If securities are sold by a
Fund/Master Portfolio pursuant to the exercise of a call option written by it,
the Fund/Master Portfolio 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/Master Portfolio pursuant to the exercise of
a put option written by it, such Fund/Master Portfolio will subtract the premium
received from its cost basis in the securities purchased.
The amount of any gain or loss realized by a Fund/Master Portfolio on
closing out a regulated futures contract will generally result in a realized
capital gain or loss for Federal income tax purposes. Regulated futures
contracts held at the end of each fiscal year will be required to be "marked to
market" for Federal income tax purposes pursuant to Section 1256 of the Code. In
this regard, they will be deemed to have been sold at market
143
<PAGE>
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/Master Portfolio 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. Each Fund/Master Portfolio will attempt to monitor
Section 988 transactions, where applicable, to avoid adverse tax impact.
Offsetting positions held by a Fund/Master Portfolio involving certain
financial forward, futures or options contracts may be considered, for tax
purposes, to constitute "straddles." "Straddles" are defined to include
"offsetting positions" in actively traded personal property. The tax treatment
of "straddles" is governed by Section 1092 of the Code which, in certain
circumstances, overrides or modifies the provisions of Section 1256. If a
Fund/Master Portfolio 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. A
Fund/Master Portfolio 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/Master Portfolio may differ. Generally, to the extent the
straddle rules apply to positions established by the Fund/Master Portfolio,
losses realized by the Fund/Master Portfolio 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/Master Portfolio enters into a "constructive sale" of any
appreciated position in stock, a partnership interest, or certain debt
instruments, the Fund/Master Portfolio must recognize gain (but not loss) with
respect to that position. For this purpose, a constructive sale occurs when the
Fund/Master Portfolio 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/Master Portfolio purchases shares in a "passive foreign
investment company" ("PFIC"), the Fund/Master Portfolio may be subject to
Federal income tax and an interest charge imposed by the IRS upon certain
distributions from the PFIC or the Fund/Master Portfolio's disposition of its
PFIC shares. If the Fund/Master Portfolio invests in a PFIC, the Fund/Master
Portfolio intends to make an available election to mark-to-market its interest
in PFIC shares. Under the election, the Fund/Master Portfolio 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/Master Portfolio 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/Master Portfolio as ordinary income (or loss) notwithstanding any
distributions by the PFIC, the Fund/Master Portfolio will not be subject to
Federal income tax or the interest charge with respect to its interest in the
PFIC under the election.
144
<PAGE>
FOREIGN TAXES
Income and dividends received by a Fund/Master Portfolio from sources
within foreign countries may be subject to withholding and other taxes imposed
by such countries. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. If more than 50% of the value of a
Fund's total assets at the close of its taxable year consists of securities of
non-U.S. corporations, the Fund will be eligible to file an election with the
IRS pursuant to which the regulated investment company may pass-through to its
shareholders foreign taxes paid by the regulated investment company, which may
be claimed either as a credit or deduction by the shareholders. Only the
International Funds expect to qualify for the election. However, even if a Fund
qualifies for the election, foreign taxes will only pass-through to a Fund
shareholder if (i) the shareholder holds the Fund shares for at least 16 days
during the 30 day period beginning 15 days prior to the date upon which the
shareholder becomes entitled to receive Fund distributions corresponding with
the pass-through of the foreign taxes paid by the Fund, and (ii) with respect to
foreign source dividends received by the Fund on shares giving rise to foreign
tax, the Fund holds the shares for at least 16 days during the 30 day period
beginning 15 days prior to the date upon which the Fund becomes entitled to the
dividend.
An individual with $300 or less of creditable foreign taxes generally
is exempt from foreign source income and certain other limitations imposed by
the Code on claiming a credit for such taxes. The $300 amount is increased to
$600 for joint filers.
CAPITAL GAIN DISTRIBUTIONS
Distributions which are designated by a Fund as capital gain
distributions will be taxed to shareholders as long-term term capital gain (to
the extent such distributions equal or exceed the Fund's actual net capital
gains for the taxable year), regardless of how long a shareholder has held Fund
shares. Such distributions will be designated as capital gain distributions in a
written notice mailed by the Fund to its shareholders not later than 60 days
after the close of the Fund's taxable year.
DISPOSITION OF FUND SHARES
A disposition of Fund shares pursuant to a redemption (including a
redemption in-kind) or an exchange will ordinarily result in a taxable capital
gain or loss, depending on the amount received for the shares (or are deemed to
be received in the case of an exchange) and the cost of the shares.
If a shareholder exchanges or otherwise disposes of Fund shares within
90 days of having acquired such shares and if, as a result of having acquired
those shares, the shareholder subsequently pays a reduced sales charge on a new
purchase of shares of the Fund or a different regulated investment company, the
sales charge previously incurred in acquiring the Fund's shares shall not be
taken into account (to the extent such previous sales charges do not exceed the
reduction in sales charges on the new purchase) for the purpose of determining
the amount of gain or loss on the disposition, but will be treated as having
been incurred in the acquisition of such other shares. Also, any loss realized
on a redemption or exchange of shares of the Fund will be disallowed to the
extent that substantially identical shares are acquired within the 61-day period
beginning 30 days before and ending 30 days after the shares are disposed of.
If a shareholder receives a capital gain distribution with respect to
any Fund share and such Fund share is held for six months or less, then (unless
otherwise disallowed) any loss on the sale or exchange of that Fund share will
be treated as a long-term capital loss to the extent of the capital gain
distribution. In addition, if a shareholder holds Fund shares for six months or
less, any loss on the sale or exchange of those shares will be disallowed to the
extent of the amount of exempt-interest dividends (defined 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 distributions where a
Fund regularly distributes at least 90% of its net tax-exempt interest, if any.
No such regulations have been issued as of the date of this SAI. The loss
disallowance rules described in this paragraph do not apply to losses realized
under a periodic redemption plan.
FEDERAL INCOME TAX RATES
145
<PAGE>
As of the printing of this SAI, the maximum individual tax rate
applicable to ordinary income is 39.6% (marginal tax rates may be higher for
some individuals to reduce or eliminate the benefit of exemptions and
deductions); the maximum individual marginal tax rate applicable to net capital
gain is 20%; and the maximum corporate tax rate applicable to ordinary income
and net capital gain is 35% (marginal tax rates may be higher for some
corporations to reduce or eliminate the benefit of lower marginal income tax
rates). Naturally, the amount of tax payable by an individual or corporation
will be affected by a combination of tax laws covering, for example, deductions,
credits, deferrals, exemptions, sources of income and other matters.
CORPORATE SHAREHOLDERS
Corporate shareholders of the Funds may be eligible for the
dividends-received deduction on distributions attributable to dividends received
from domestic corporations, which, if received directly by the corporate
shareholder, would qualify for such deduction. A distribution by a Fund
attributable to dividends of a domestic corporation will only qualify for the
dividends-received deduction if (i) the corporate shareholder generally holds
the Fund shares upon which the distribution is made for at least 46 days during
the 90 day period beginning 45 days prior to the date upon which the shareholder
becomes entitled to the distribution; and (ii) the Fund generally holds the
shares of the domestic corporation producing the dividend income for at least 46
days during the 90 day period beginning 45 days prior to the date upon which the
Fund becomes entitled to such dividend income.
FOREIGN SHAREHOLDERS
Under the Code, distributions attributable to income on taxable
investments, net short-term capital gain and certain other items realized by a
Fund and paid to a nonresident alien individual, foreign trust (i.e., trust
which a U.S. court is able to exercise primary supervision over administration
of that trust and one or more U.S. persons have authority to control substantial
decisions of that trust), foreign estate (i.e., the income of which is not
subject to U.S. tax regardless of source), foreign corporation, or foreign
partnership (each, a "foreign shareholder") will be subject to U.S. withholding
tax (at a rate of 30% or a lower treaty rate, if applicable). Withholding will
not apply if a distribution paid by 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. Capital gain distributions generally are
not subject to tax withholding.
BACKUP WITHHOLDING
The Companies may be required to withhold, subject to certain
exemptions, at a rate of 31% ("backup withholding") on all distributions and
redemption proceeds (including proceeds from exchanges and redemptions in-kind)
paid or credited to an individual Fund shareholder, unless the 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 Company that the shareholder's TIN is incorrect or that the
shareholder is subject to backup withholding. Such tax withheld does not
constitute any additional tax imposed on the shareholder, and may be claimed as
a tax payment on the shareholder's Federal income tax return. An investor must
provide a valid TIN upon opening or reopening an account. Failure to furnish a
valid TIN to the Company also could subject the investor to penalties imposed by
the IRS.
TAX-DEFERRED PLANS
The Funds are available for a variety of tax-deferred retirement and other
plans, including Individual Retirement Accounts ("IRA"), Simplified Employee
Pension Plans ("SEP-IRA"), Savings Incentive Match Plans for Employees ("SIMPLE
plans"), Roth IRAs, and Education IRAs, which permit investors to defer some of
their income from taxes.
SPECIAL TAX CONSIDERATIONS PERTAINING TO MUNICIPAL RESERVES, CALIFORNIA
TAX-EXEMPT RESERVES, CALIFORNIA MUNICIPAL BOND FUND, TAX EXEMPT FUND, MUNICIPAL
INCOME FUND, SHORT-TERM MUNICIPAL INCOME FUND, INTERMEDIATE MUNICIPAL BOND FUND,
FLORIDA INTERMEDIATE MUNICIPAL BOND FUND, FLORIDA MUNICIPAL BOND FUND, GEORGIA
INTERMEDIATE MUNICIPAL BOND FUND, GEORGIA MUNICIPAL BOND FUND, MARYLAND
INTERMEDIATE MUNICIPAL BOND FUND, MARYLAND MUNICIPAL BOND FUND, NORTH CAROLINA
INTERMEDIATE MUNICIPAL BOND FUND,
146
<PAGE>
NORTH CAROLINA MUNICIPAL BOND FUND, SOUTH CAROLINA INTERMEDIATE MUNICIPAL BOND
FUND, SOUTH CAROLINA MUNICIPAL BOND FUND, TENNESSEE INTERMEDIATE MUNICIPAL BOND
FUND, TENNESSEE MUNICIPAL BOND FUND, TEXAS INTERMEDIATE MUNICIPAL BOND FUND,
TEXAS MUNICIPAL BOND FUND, VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND, AND
VIRGINIA MUNICIPAL BOND FUND (THE "TAX-EXEMPT FUNDS")
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." 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, and, with respect to California Tax-Exempt Reserves and
California Municipal Bond Fund, Florida Intermediate Municipal Bond Fund and
Florida Municipal Bond Fund, Georgia Intermediate Municipal Bond Fund and
Georgia Municipal Bond Fund, Maryland Intermediate Municipal Bond Fund and
Maryland Municipal Bond Fund, North Carolina Intermediate Municipal Bond Fund
and North Carolina Municipal Bond Fund, South Carolina Intermediate Municipal
Bond Fund and South Carolina Municipal Bond Fund, Tennessee Intermediate
Municipal Bond Fund and Tennessee Municipal Bond Fund, and Virginia Intermediate
Municipal Bond Fund and Virginia Municipal Bond Fund, California individual
income tax, Florida state intangibles tax, and the Georgia, Maryland, North
Carolina, South Carolina, Virginia individual income tax, and the Tennessee Hall
Income Tax on unearned income, respectively. Florida and Texas do not presently
impose any income tax but Florida currently imposes a state intangibles tax on
intangible personal property.
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 gains or 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 a Tax-Exempt Fund's 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 own their tax advisors.
Shares of a Tax-Exempt Fund would not be suitable investments for
tax-deferred plans and tax-exempt investors.
SPECIAL TAX CONSIDERATIONS PERTAINING TO CALIFORNIA TAX-EXEMPT RESERVES AND
CALIFORNIA MUNICIPAL BOND FUND (THE "CALIFORNIA TAX-EXEMPT FUNDS")
147
<PAGE>
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 generally are limited to California municipal
securities and certain U.S. government and U.S. possession obligations. The
California Tax-Exempt Funds intend to qualify under the above requirements so
that they can pay California exempt-interest dividends. If the California
Tax-Exempt 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
Tax-Exempt 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
Tax-Exempt Funds with respect to any taxable year cannot exceed the excess of
the amount of interest received by the California Tax-Exempt Funds for such year
on California Exempt Securities over any amounts that, if the California
Tax-Exempt 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.
In cases where shareholders are "substantial users" or "related
persons" with respect to California Exempt Securities held by the California
Tax-Exempt 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
Tax-Exempt Funds shares is not deductible for California state personal income
tax purposes if the California Tax-Exempt 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
Tax-Exempt Funds and their shareholders. No attempt is made to present a
detailed explanation of the California state personal income tax treatment of
the California Tax-Exempt 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 Tax-Exempt Fund distributions constituting
California exempt-interest dividends is excludable from income for California
state personal income tax purposes only. Any distributions paid to shareholders
subject to California state franchise tax or California state corporate income
tax may be taxable for such purposes. Accordingly, potential investors in the
California Tax-Exempt 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 Tax-Exempt Funds dividends and as to
their own California state tax situation, in general.
SPECIAL TAX CONSIDERATIONS PERTAINING TO FLORIDA INTERMEDIATE MUNICIPAL BOND
FUND AND FLORIDA MUNICIPAL BOND FUND (THE "FLORIDA TAX-EXEMPT FUNDS")
Florida does not impose a personal income tax. Thus individual
shareholders of the Funds will not be subject to any Florida income tax on
distribution received from the Funds. However, Florida does impose an income tax
on corporations. Florida also imposes an annual intangible personal property tax
on intangible personal property (including but not limited to stocks or shares
of business trusts or mutual funds) held by persons domiciled in the State of
Florida, regardless of where such property is kept. Florida counsel has,
however, advised the Companies that shares in the Florida Tax-Exempt Funds shall
not be subject to Florida's intangible personal property tax if on January 1 of
each tax year at least 90 percent of the net assets of the portfolio of such
Fund consists of obligations of the government of the United States of America,
its agencies, instrumentalities, the Commonwealth of Puerto Rico, the government
of Guam, the government of American Samoa, the government of the Northern
Mariana Islands, the State of Florida, its political subdivisions,
municipalities or other taxing districts.
148
<PAGE>
The Florida Tax-Exempt Funds anticipate that at least 90 percent of the
net assets of the portfolio will contain assets that are exempt from Florida's
intangible personal property tax on January 1 of each tax year. If the portfolio
of the Fund did not, however, meet this 90 percent test, the only the portion of
the net asset value of the portfolio which is made up of direct obligations of
the United States of America, its agencies, territories and possessions (as
described above) may be removed from the net asset value for purposes of
computing the intangible personal property tax. The remaining net asset value of
the portfolio and hence a portion of the net asset value of the shares in the
Florida Tax-Exempt Funds would be subject to the intangible personal property
tax. Notice as to the tax status of your shares will be mailed to you annually.
Shareholders of a Florida Tax-Exempt Funds should consult their own tax advisors
with specific reference to their own tax situation if advised that a portion of
the portfolio of such Funds consisted on January 1 of any year of assets which
are not exempt from Florida's annual intangible personal property tax. Such
annual intangible personal property tax, if any, is due and payable on June 30
of such year in which the tax liability arises.
SPECIAL TAX CONSIDERATIONS PERTAINING TO GEORGIA INTERMEDIATE MUNICIPAL BOND
FUND AND GEORGIA MUNICIPAL BOND FUND (THE "GEORGIA TAX-EXEMPT FUNDS")
The portion of Nations Funds Georgia Intermediate Municipal Bond Fund
and the Nations Georgia Municipal Bond Fund (the "Georgia Funds') exempt
interest dividends paid to Georgia investors from interest received by the
Georgia Funds from tax-exempt obligations of the State of Georgia or its
political subdivisions or authorities and dividend distributions attributable to
interest received from U.S. Government obligations will be exempt from Georgia
personal and corporate income taxes. There is no Georgia intangibles tax or
other personal property tax applicable to the shares of the Georgia Funds owned
by investors residing in Georgia. The Georgia intangibles tax was repealed by
the Georgia General Assembly on March 21, 1996, further ratified by a
Constitutional Amendment approved in the November 1996 General Election (GA. L
1996, P.130 ss. 9). The Georgia intangibles tax was repealed for taxable years
beginning after Janaury 1, 1996. Distributions attributable to capital gains
realized from the sale of Georgia municipal bonds and U.S. government
obliagtions will be subject to the State of Georgia short-term or long-term
capital gains tax, which follows the federal income tax treatment. Interest
received by a Georgia resident received from non-Georgia municipal state bonds
and dividends or distributions received from mutual funds that derive income
from non-Georgia municipal or state bonds will be subject to Georgia income tax.
SPECIAL TAX CONSIDERATIONS PERTAINING TO MARYLAND INTERMEDIATE MUNICIPAL BOND
FUND AND MARYLAND MUNICIPAL BOND FUND (THE "MARYLAND TAX-EXEMPT FUNDS")
The portion of a Maryland Tax-Exempt Fund's exempt-interest dividends
paid from interest received by such Funds from tax-exempt obligations of the
state of Maryland or its political subdivisions or authorities, or obligations
issued by the government of Puerto Rico, the U.S. Virgin Islands or Guam or
their authorities ("Maryland Municipal Bonds") and distributions attributable to
gains from Maryland Municipal Bonds (other than obligations issued by U.S.
possessions) or interest on U.S. Government obligations will be exempt from
Maryland personal and corporate income taxes; any other dividends from a
Maryland Tax-Exempt Fund will be subject to Maryland income tax. However,
shareholders of a Maryland Tax-Exempt Fund that are financial institutions
otherwise subject to Maryland financial institution franchise taxes will be
subject to such taxes on distributions received from the Fund (including
exempt-interest dividends). Shareholders will be informed annually regarding the
portion of a Maryland Tax-Exempt Fund's distributions that constitutes
exempt-interest dividends and the portion that is exempt from Maryland income
taxes. Maryland presently includes in Maryland taxable income a portion of
certain items of tax preference as defined in the Code. Interest paid on certain
private activity bonds constitutes such a tax preference if the bonds (i) are
not Maryland Municipal Bonds or (ii) are Maryland Municipal Bonds issued by U.S.
possessions. Accordingly, up to 50% of any distributions from a Maryland
Tax-Exempt Fund attributable to interest on such private activity bonds may not
be exempt from Maryland state and local individual income taxes. Shares of a
Maryland Tax-Exempt Fund will not be subject to the Maryland personal property
tax.
SPECIAL TAX CONSIDERATIONS PERTAINING TO NORTH CAROLINA INTERMEDIATE MUNICIPAL
BOND FUND AND NORTH CAROLINA MUNICIPAL BOND FUND (THE "NORTH CAROLINA TAX-EXEMPT
FUNDS")
The North Carolina intangibles tax was repealed by Ch. 41, 1995 N.C.
Sess. Laws, effective for taxable years beginning on or after January 1, 1995.
Although capital gain distributions generally are subject to tax in North
149
<PAGE>
Carolina, individual shareholders of a North Carolina Tax-Exempt Fund may deduct
the amount of capital gain distributions (if any) attributable to the sale of
certain obligations issued before July 1, 1995 from their federal taxable income
for purposes of determining their North Carolina taxable income.
SPECIAL TAX CONSIDERATIONS PERTAINING TO SOUTH CAROLINA INTERMEDIATE MUNICIPAL
BOND FUND AND SOUTH CAROLINA MUNICIPAL BOND FUND
Although any net capital gain recognized with respect to the sale or exchange of
shares of a Fund may be subject to the South Carolina state income tax,
individuals, estates and trusts are entitled to a deduction for South Carolina
taxable income purposes equal to 44% of the net capital gain recognized from the
sale or exchange of an asset which has been held for a period of two or more
years. In the case of estates or trusts, the deduction is applicable only to
income taxed to the estate or trust or individual beneficiaries and not income
passed through to nonindividual beneficiaries.
SPECIAL TAX CONSIDERATIONS PERTAINING TO TENNESSEE MUNICIPAL BOND FUND
The Tennessee Hall Income Tax imposes a tax on income received by way
of dividends from stock or interest on bonds. Dividends from a qualified
regulated investment company are exempt from the Hall Income Tax, but only to
the extent attributable to interest on bonds or securities of the U.S.
Government or any agency or instrumentality thereof or on bonds of the State of
Tennessee or any county or any municipality or political subdivision thereof,
including any agency, board, authority or commission of any of the above.
SPECIAL TAX CONSIDERATIONS PERTAINING TO VIRGINIA INTERMEDIATE MUNICIPAL BOND
FUND AND VIRGINIA MUNICIPAL BOND FUND (THE "VIRGINIA TAX-EXEMPT FUNDS")
Distributions will not be subject to Virginia income tax if the
Viriginia Intermediate Municipal Bond Fund and the Virginia Municipal Bond Fund
pay distributuions to Shareholders that they derived from (i) interest on debt
obligations of Virginia or its political subdivisions, (ii) debt obligations of
the United States excludable from Virginia income tax under the laws of the
United States, or (iii) debt obligations of Puerto Rico, Guam, or the Virgin
islands, that are backed by the full faith and credit of the borrowing
government.
OTHER MATTERS
Investors should be aware that the investments to be made by the Funds
may involve sophisticated tax rules that may result in income or gain
recognition by a Fund without corresponding current cash receipts. Although the
Funds will seek to avoid significant noncash income, such noncash income could
be recognized by a Fund, in which case the Fund may distribute cash derived from
other sources in order to meet the minimum distribution requirements described
above.
The foregoing discussion and the discussions in the Prospectus
applicable to each shareholder address only some of the Federal tax
considerations generally affecting investments in the Fund. Each investor is
urged to consult his or her tax advisor regarding specific questions as to
Federal, state, local or foreign taxes.
ADDITIONAL INFORMATION ON PERFORMANCE
-------------------------------------
Yield information and other performance information for each Company's
Funds may be obtained by calling (800) 321-7854. From time to time, the yield
and total return of a Fund's Shares may be quoted in advertisements, shareholder
reports, and other communications to shareholders. Quotations of yield and total
return reflect only the performance of a hypothetical investment in a Fund or
class of shares during the particular time period shown. Yield and total return
vary based on changes in the market conditions and the level of a Fund's
150
<PAGE>
expenses, and no reported performance figure should be considered an indication
of performance which may be expected in the future.
Standardized performance for the Funds, i.e., that required in both
form and content by Form N-1A, is shown below and may be advertised by the
Funds. The main purpose of standardized performance is to allow an investor to
review the performance of a Fund's class of shares and compare such performance
with that of investment alternatives, including other mutual funds.
Non-standardized performance also may be advertised by the Funds. One
purpose of providing non-standardized performance to an investor is to provide
that investor with a different snapshot of a Fund's performance that may not be
captured by standardized performance. The non-standardized performance of a
Fund's class of shares, however, may not be directly comparable to the
performance of investment alternatives because of differences in certain
variables (such as the length of time over which performance is shown and the
exclusion of certain charges or expenses) and methods used to value portfolio
securities, compute expenses and calculate performance. Non-standardized
performance may include, but is not limited to, performance for non-standardized
periods, including year-to-date and other periods less than a year, performance
not reflecting the deduction of certain charges, fees and/or expenses, and
performance reflecting the deduction of applicable state or federal taxes.
After-tax returns are generally calculated using the same methodology as that
used in calculating total return, except that such after-tax returns reflect the
deduction of taxes according to applicable federal income and capital gain tax
rates attributable to dividends, distributions and an investor's redemptions. Of
course, after-tax returns for individual investors will vary as the tax rates
applicable to such investors vary. In addition, the Funds may also advertise
their tax efficiency ratios and compare those ratios with other mutual funds. A
tax efficiency ratio is intended to let an investor know how tax efficient a
fund has been over a period of time, and is typically related to its portfolio
turnover rate. That is, an investor could expect that the higher a Fund's
portfolio turnover rate, the greater the percentage of its gains that would have
been realized and consequently, the less tax efficient it was over a given
period of time.
In general, comparisons to other mutual funds or investment
alternatives may be useful to investors who wish to compare past performance of
the Funds or a class with that of competitors. Of course, past performance
cannot be a guarantee of future results.
Each Fund may quote information obtained from the Investment Company
Institute, national financial publications, trade journals and other industry
sources in its advertising and sales literature. In addition, the Funds also may
compare the performance and yield of a class or series of shares to those of
other mutual funds with similar investment objectives and to other relevant
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For example,
the performance and yield of a class of shares in a Fund may be compared to data
prepared by Lipper Analytical Services, Inc. Performance and yield data as
reported in national financial publications such as MONEY MAGAZINE, FORBES,
BARRON'S, THE WALL STREET JOURNAL, and THE NEW YORK TIMES, OR in publications of
a local or regional nature, also may be used in comparing the performance of a
class of shares in a Fund. The "yield" and "effective yield" of each class of
shares of a Money Market Fund may be compared to the respective averages
compiled by DONOGHUE'S MONEY FUND REPORT, a widely recognized independent
publication that monitors the performance of money market funds, or to the
average yields reported by the BANK RATE MONITOR for money market deposit
accounts offered by leading banks and thrift institutions in the top five
metropolitan statistical areas.
The Funds also may use the following information in advertisements and
other types of literature, only to the extent the information is appropriate for
the Fund: (i) the Consumer Price Index may be used to assess the real rate of
return from an investment in a Fund; (ii) other government statistics,
including, but not limited to, The Survey of Current Business, may be used to
illustrate investment attributes of a Fund or the general economic, business,
investment, or financial environment in which a Fund operates; (iii) the effect
of tax-deferred compounding on the investment returns of a Fund, or on returns
in general, may be illustrated by graphs, charts, etc., where such graphs or
charts would compare, at various points in time, the return from an investment
in a Fund (or returns in general) on a tax-deferred basis (assuming reinvestment
of capital gains and dividends and assuming one or more tax rates) with the
return on a taxable basis; and (iv) the sectors or industries in which a Fund
invests may be compared to relevant indices of stocks or surveys (e.g., S&P
Industry Surveys) to evaluate a Fund's historical performance or current or
potential value with respect to the particular industry or sector. In addition,
the performance of a Fund's class of shares may be compared to the Standard &
Poor's 500 Stock Index, an unmanaged index of a group of common
151
<PAGE>
stocks, the Consumer Price Index, the Dow Jones Industrial Average, a recognized
unmanaged index of common stocks of 30 industrial companies listed on the New
York Stock Exchange, the Europe, Far East and Australia Index, a recognized
unmanaged index of international stocks, or any similar recognized index. The
performance of a Fund's class of shares also may be compared to a composite
index prepared by the Adviser, an affiliate of the Adviser, or an unaffiliated
party to the Adviser.
In addition, the Funds also may use, in advertisements and other types
of literature, information and statements: (1) showing that bank savings
accounts offer a guaranteed return of principal and a fixed rate of interest,
but no opportunity for capital growth; and (2) describing Bank of America, and
its affiliates and predecessors, as one of the first investment managers to
advise investment accounts using asset allocation and index strategies. The
Funds also may include in advertising and other types of literature information
and other data from reports and studies prepared by the Tax Foundation,
including information regarding federal and state tax levels and the related
"Tax Freedom Day."
The Funds also may discuss in advertising and other types of literature
that a Fund has been assigned a rating by an NRSRO, such as Standard & Poor's
Corporation. Such rating would assess the creditworthiness of the investments
held by the Fund. The assigned rating would not be a recommendation to purchase,
sell or hold the Fund's shares since the rating would not comment on the market
price of the Fund's shares or the suitability of the Fund for a particular
investor. In addition, the assigned rating would be subject to change,
suspension or withdrawal as a result of changes in, or unavailability of,
information relating to the Fund or its investments. The Funds may compare a
Fund's performance with other investments which are assigned ratings by NRSROs.
Any such comparisons may be useful to investors who wish to compare the Fund's
past performance with other rated investments.
The Funds also may disclose in sales literature the distribution rate
on the shares of a Fund. Distribution rate, which may be annualized, is the
amount determined by dividing the dollar amount per share of the most recent
dividend by the most recent NAV or maximum offering price per share as of a date
specified in the sales literature. Distribution rate will be accompanied by the
standard 30-day yield as required by the SEC.
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.
The Short-Intermediate Government Fund seeks to provide higher current
yields than money market funds and short-term treasury obligations. The
Short-Intermediate Government Fund also seeks to maintain greater price
stability than higher yielding long-term bond funds. Therefore, in its
advertisements and sales materials, the Short-Intermediate Government Fund may
compare performance of the Short-Intermediate Government Fund to money market
indices, such as those compiled by IBC/Donoghue, Inc. and Bank Rate Monitor. In
such advertising and sales materials, the Short-Intermediate Government Fund may
also compare the price stability of the Short-Intermediate Government Fund, or
indices of funds with similar investment objectives, to indices of long term
government bond funds such as those compiled by Salomon Brothers and Shearson
Lehman Brothers Inc. The Short-Intermediate Government Fund is not meant to be a
substitute for a money market fund which seeks to maintain a fixed net asset
value of $1.00 per share.
IBBOTSON DATA. Ibbotson Associates of Chicago, Illinois, ("Ibbotson")
provides historical returns of the capital markets in the United States. The
Funds may compare the performance of their share classes or series to the
long-term performance of the U.S. capital markets in order to demonstrate
general long-term risk versus reward investment scenarios. Performance
comparisons could also include the value of a hypothetical investment in common
stocks, long-term bonds or treasuries.
The capital markets tracked by Ibbotson are common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, Treasury Bills, and the U.S. rate of
inflation. These capital markets are based on the returns of several different
indices. For common stocks, the S&P is used. For small capitalization stocks,
return is based on the return achieved by Dimensional Fund Advisors (DFA) Small
Company Fund. This fund is a market-value-weighted index of the ninth and tenth
deciles of the Exchange, plus stocks listed on the American Stock Exchange
(AMEX) and over-the-counter (OTC) with the same
152
<PAGE>
or less capitalization as the upperbound of the Exchange ninth docile. At
year-end 199, the DFA Small Company Fund contained approximately 2,663 stocks,
with a weighted average market capitalization of $16.7 million. The unweighted
average market capitalization was $82.97 million, while the median was $6.0
million.
Unlike an investment in a common stock mutual fund, an investment in
bonds that are held to maturity provides a fixed and stated rate of return.
Bonds have a senior priority in liquidation or bankruptcy to common stocks, and
interest on bonds is generally paid from assets of the corporation before any
distributions to common shareholders. Bonds rated in the two highest rating
categories are considered high quality and to present minimal risks of default.
See Schedule A for a more complete explanation of these ratings of corporate
bonds. An advantage of investing in government bonds is that, in many cases,
they are backed by the credit and taxing power of the United States government,
and therefore, such securities may present little or no risk of default.
Although government securities fluctuate in price, they are highly liquid and
may be purchased and sold with relatively small transaction costs (direct
purchase of Treasury securities can be made with no transaction costs).
Long-term corporate bond returns are based on the performance of the
Salomon Brothers Long-Term-High-Grade Corporate Bond Index and include nearly
all "Aaa-" and "Aa-" rated bonds. Returns on intermediate-term government bonds
are based on a one-bond portfolio constructed each year, containing a bond which
is the shortest noncallable bond available with a maturity not less than 5
years. This bond is held for the calendar year and returns are recorded. Returns
on long-term government bonds are based on a one-bond portfolio constructed each
year, containing a bond that meets several criteria, including having a term of
approximately 20 years. The bond is held for the calendar year and returns are
recorded. Returns on U.S. Treasury Bills are based on a one-bill portfolio
constructed each month, containing the shortest-term bill having not less than
one month to maturity. The total return on the bill is the month end price
divided by the previous month-end price, minus one. Data up to 1976 is from the
U.S. Government Bond file at the University of Chicago's Center for Research in
Security Prices; the Wall Street Journal is the source thereafter. Inflation
rates are based on the CPI. Ibbotson calculates total returns in the same method
as the Funds.
YIELD CALCULATIONS
Income calculated for the purposes of calculating a Fund's yield
differs from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed in
yield calculations, the yield quoted for a Fund may differ from the rate of
distributions a Fund paid over the same period or the rate of income reported in
the Funds' financial statements.
MONEY MARKET FUNDS. The "yield" and "effective yield" of shares of the
Money Market Funds are computed separately as described below according to
formulas prescribed by the SEC. The standardized seven-day yield is computed by
determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account in the particular Fund involved having a
balance of one share of the class or series involved at the beginning of the
period, dividing the net change in account value by the value of the account at
the beginning of the base period to obtain the base period return, and
multiplying the base period return by (365/7). The net change in the value of an
account in each Fund includes the value of additional shares purchased with
dividends from the original share, and dividends declared on both the original
share and any such additional shares; and all fees, other than nonrecurring
account or sales charges, that are charged to shareholder accounts in proportion
to the length of the base period and the Fund's average account size. The
capital changes to be excluded from the calculation of the net change in account
value are realized gains and losses from the sale of securities and unrealized
appreciation and depreciation. The effective annualized yield for a class or
series of shares in a Fund is computed by compounding the unannualized base
period return (calculated as above) by adding 1 to the base period return,
raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the
result.
In addition, the "tax-equivalent yield" of the Shares of the Tax Exempt
Fund is computed by: (a) dividing the portion of the yield that is exempt from
Federal income tax by one minus a stated Federal income tax rate; and (b) adding
the figure resulting from (a) above to that portion, if any, of the yield that
is not exempt from Federal income tax.
The effective yield quotations for the Shares of the Money Market Funds
are computed by compounding the unannualized seven-day base period return as
follows: 1 is added to the base period return and this sum is then raised to a
power equal to (5/7), and 1 is then subtracted from the result. Based on the
seven-day period ended
153
<PAGE>
March 31, 1999, (the "base period"), the current and effective yields of the
various shares of the Money Market Funds were as follows:
<TABLE>
<CAPTION>
Seven Day Yield
---------------
Effective
Yield Tax Tax Equivalent
Yield Without Effective Without Fee Equivalent Yield w/o
Yield Fee Waivers Yield Waivers Yield Waivers
----- ----------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Prime Fund
- ----------
Primary A Shares 4.82% 4.78% 4.94% 4.90% n/a n/a
Primary B Shares 4.57% 4.53% 4.68% 4.64% n/a n/a
Investor A Shares 4.47% 4.43% 4.57% 4.53% n/a n/a
Investor B Shares 4.57% 4.43% 4.68% 4.64% n/a n/a
Investor C Shares 4.58% 4.54% 4.68% 4.64% n/a n/a
Daily Shares 4.32% 4.08% 4.41% 4.17% n/a n/a
Marsico Shares 4.57% 4.53% 4.68% 4.64% n/a n/a
Treasury Fund
- -------------
Primary A Shares 4.66% 4.61% 4.77% 4.72% n/a n/a
Primary B Shares 4.41% 4.38% 4.50% 4.45% n/a n/a
Investor A Shares 4.31% 4.26% 4.40% 4.35% n/a n/a
Investor B Shares 4.41% 4.26% 4.50% 4.35% n/a n/a
Investor C Shares 4.41% 4.36% 4.50% 4.45% n/a n/a
Daily Shares 4.16% 3.91% 4.24% 3.99% n/a n/a
Seven Day Yield For the Year Ended 3/31/99
------------------------------------------
Tax Equivalent Yields @ 39.6%
<CAPTION>
Tax
Effective Equivalent
Yield Yield Tax Yield
Without Effective Without Equivalent Without
Yield Fee Waivers Yield Fee Waivers Yield Fee Waivers
----- ----------- ----- ----------- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
Government Money Market Fund
- ----------------------------
Primary A Shares 4.76% 4.48% 4.88% 4.60% n/a n/a
Primary B Shares 4.51% 4.23% 4.61% 4.33% n/a n/a
Investor A Shares 4.41% 4.13% 4.51% 4.23% n/a n/a
Investor B Shares 4.51% 4.13% 4.61% 4.23% n/a n/a
Investor C Shares 4.50% 4.22% 4.61% 4.33% n/a n/a
Daily Shares 4.26% 3.78% 4.35% 3.87% n/a n/a
Tax Exempt Fund
- ---------------
Primary A Shares 2.84% 2.69% 2.88% 2.63% 4.70% 4.29%
Primary B Shares 2.59% 2.34% 2.62% 2.37% 4.29% 3.87%
Investor A Shares 2.49% 2.24% 2.52% 2.27% 4.12% 3.71%
Investor B Shares 2.64% 2.24% 2.67% 2.27% 4.37% 3.71%
Investor C Shares 2.59% 2.34% 2.62% 2.37% 4.29% 3.87%
Daily Shares 2.34% 1.89% 2.36% 1.91% 3.87% 3.13%
</TABLE>
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.
154
<PAGE>
For the 7-day period ended March 31, 1999, the yield of each Fund was as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Effective Tax Equiv.
Yield w/o Effective Yield w/o Tax Equiv. Yield w/o
Yield Waivers Yield Waivers Yield Waivers
----- ------- ----- ------- ----- -------
Nations Cash Reserves
- ---------------------
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
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
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>
155
<PAGE>
NON-MONEY MARKET FUNDS. Yield is calculated separately for the Investor
A, Investor C, Investor B, Primary A and Primary B Shares of a Non-Money Market
Fund by dividing the net investment income per share for a particular class or
series of shares (as described below) earned during a 30-day period by the
maximum offering price per share on the last day of the period (for Primary A
and Primary B Shares, maximum offering price per share is the same as the net
asset value per share) and annualizing the result on a semi-annual basis by
adding one to the quotient, raising the sum to the power of six, subtracting one
from the result and then doubling the difference. For a class or series of
shares in a Fund, net investment income per share earned during the period is
based on the average daily number of shares outstanding during the period
entitled to receive dividends and includes dividends and interest earned during
the period minus expenses accrued for the period, net of reimbursements. This
calculation can be expressed as follows:
Yield = 2 [(a-b+ 1)(6) - 1]
---
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = maximum offering price per share on the last day
of the period (again, for Primary A and Primary B
Shares, this is equivalent to net asset value per
share).
For the purpose of determining net investment income earned during the
period (variable- "a" in the formula), dividend income on equity securities held
by a Fund is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is in the portfolio. Each Fund calculates
interest earned on any debt obligations held in its portfolio by computing the
yield to maturity of each obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest) and dividing
the result by 360 and multiplying the quotient by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. For purposes of this calculation, it is assumed
that each month contains 30 days. The maturity of an obligation with a call
provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. With respect to debt
obligations purchased at a discount or premium, the formula generally calls for
amortization of the discount or premium. The amortization schedule will be
adjusted monthly to reflect changes in the market values of such debt
obligations. The California Municipal Bond Fund, Municipal Income Fund,
Short-Term Municipal Income Fund, Intermediate Municipal Bond Fund, the State
Intermediate Municipal Bond Funds and the State Municipal Bond Funds calculate
interest gained on tax-exempt obligations issued without original issue discount
and having a current market discount by using the coupon rate of interest
instead of the yield to maturity. In the case of tax-exempt obligations that are
issued with original issue discount, where the discount based on the current
market value exceeds the then-remaining portion of original issue discount, the
yield to maturity is the imputed rate based on the original issue discount
calculation. Conversely, where the discount based on the current market value is
less than the remaining portion of the original issue discount, the yield to
maturity is based on the market value.
Expenses accrued for the period (variable "b" in the formula) include
recurring fees charged by Nations Funds to shareholder accounts in proportion to
the length of the base period. Undeclared earned income will be subtracted from
the maximum offering price per share (which for Primary A and Primary B Shares
is net asset value per share) (variable "d" in the formula). Undeclared earned
income is the net investment income which, at the end of the base period, has
not been declared as a dividend, but is reasonably expected to be and is
declared as a dividend shortly thereafter. A Fund's maximum offering price per
share for purposes of the formula includes the maximum sales charge, if any,
imposed by the Fund, as reflected in the Fund's prospectus.
The Funds may provide additional yield calculations in communications
(other than advertisements) to the holders of Investor A, Investor C or Investor
B Shares. These may be calculated based on the Investor A, Investor C
156
<PAGE>
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.
Thirty Day Yield For The Period Ended February 28, 1999
-------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Tax
Yield Tax Equivalent
Without Equivalent Yield Without
Yield Fee Waivers Yield Fee Waivers
----- ----------- ----- -----------
Nations California Municipal Bond Fund
- --------------------------------------
Investor A Shares 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%
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 an after-tax equivalent to an assumed tax-free yield may be provided to
shareholders. Provided is such an illustration:
<CAPTION>
For Nations California Municipal Bond Fund:
<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
</TABLE>
To match a
tax-free
yield of: A taxable investment would have to pay you:
4% 5.56% 5.80% 6.25%
5% 6.94% 7.25% 7.81%
6% 8.33% 8.70% 9.38%
7% 9.72% 10.14% 10.94%
8% 11.11% 11.59% 12.50%
The tax-free yields used here are hypothetical and no assurance can be
made that the Funds will obtain any particular yield. A fund's yield fluctuates
as market conditions change. The tax brackets and the related yield calculations
are based on the 1998 Federal (28%, 31%, 36%) 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,
157
<PAGE>
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.
Thirty Day Yield For The Period Ended 3/31/99
---------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Tax
Equivalent
Yield Tax Yield
Without Equivalent Without
Yield Fee Waivers Yield Fee Waivers
----- ----------- ----- -----------
Short-Intermediate Government Fund
- ----------------------------------
Primary A Shares 5.17% 4.97% n/a n/a
Primary B Shares 4.82% 4.37% n/a n/a
Investor A Shares 4.97% 4.72% n/a n/a
Investor B Shares 4.37% 3.97% n/a n/a
Investor C Shares 4.58% 4.14% n/a n/a
Short-Term Income Fund
- ----------------------
Primary A Shares 5.69% 5.39% n/a n/a
Primary B Shares n/a n/a n/a n/a
Investor A Shares 5.49% 5.14% n/a n/a
Investor B Shares 5.35% 4.40% n/a n/a
Investor C Shares 4.69% 3.90% n/a n/a
Diversified Income Fund
- -----------------------
Primary A Shares 6.27% 6.17% n/a n/a
Primary B Shares n/a n/a n/a n/a
Investor A Shares 6.02% 5.92% n/a n/a
Investor B Shares 5.42% 5.17% n/a n/a
Investor C Shares 5.27% 5.03% n/a n/a
Strategic Fixed Income Fund
- ---------------------------
Primary A Shares 5.89% 5.79% n/a n/a
Primary B Shares 0.78% 0.78% n/a n/a
Investor A Shares 5.69% 5.54% n/a n/a
Investor B Shares 5.08% 4.78% n/a n/a
Investor C Shares 5.24% 4.86% n/a n/a
Municipal Income Fund
- ---------------------
Primary A Shares 4.73% 4.53% 7.83% 7.50%
Investor A Shares 4.53% 4.28% 7.50% 7.09%
Investor B Shares 3.88% 3.53% 6.42% 5.84%
Investor C Shares 3.96% 2.52% 6.56% 4.17%
Short-Term Municipal Income Fund
- --------------------------------
Primary A Shares 4.07% 3.67% 6.74% 6.08%
Investor A Shares 3.87% 3.42% 6.41% 5.66%
Investor B Shares 3.72% 2.67% 6.16% 4.42%
Investor C Shares 3.07% 2.10% 5.08% 3.48%
Intermediate Municipal Bond Fund
- --------------------------------
Primary A Shares 4.56% 4.38% 7.55% 7.25%
Investor A Shares 4.36% 4.13% 7.22% 6.84%
Investor B Shares 3.76% 3.38% 6.23% 5.60%
Investor C Shares 4.06% 3.59% 6.72% 5.94%
Florida Intermediate Municipal Bond Fund
- ----------------------------------------
Primary A Shares 4.60% 4.38% 7.62% 7.25%
Investor A Shares 4.40% 4.13% 7.28% 6.84%
</TABLE>
158
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Tax
Equivalent
Yield Tax Yield
Without Equivalent Without
Yield Fee Waivers Yield Fee Waivers
----- ----------- ----- -----------
Investor B Shares 3.80% 3.38% 6.29% 5.60%
Investor C Shares 3.60% 3.24% 5.96% 5.36%
Georgia Intermediate Municipal Bond Fund
- ----------------------------------------
Primary A Shares 4.57% 4.34% 8.05% 7.65%
Investor A Shares 4.37% 4.09% 7.70% 7.20%
Investor B Shares 3.77% 3.34% 6.64% 5.88%
Investor C Shares 3.56% 3.14% 6.27% 5.53%
Maryland Intermediate Municipal Bond Fund
- -----------------------------------------
Primary A Shares 4.50% 4.26% 7.83% 7.41%
Investor A Shares 4.30% 4.01% 7.48% 6.98%
Investor B Shares 3.70% 3.26% 6.44% 5.68%
Investor C Shares 3.50% 3.08% 6.09% 5.36%
North Carolina Intermediate Municipal Bond Fund
- -----------------------------------------------
Primary A Shares 4.52% 4.31% 8.11% 7.74%
Investor A Shares 4.32% 4.06% 7.75% 7.28%
Investor B Shares 3.73% 3.32% 6.70% 5.96%
Investor C Shares 3.52% 3.12% 6.32% 5.60%
South Carolina Intermediate Municipal Bond Fund
- -----------------------------------------------
Primary A Shares 4.77% 4.58% 8.49% 8.15%
Investor A Shares 4.57% 4.33% 8.14% 7.71%
Investor B Shares 3.97% 3.58% 7.06% 6.38%
Investor C Shares 3.73% 3.36% 6.65% 5.98%
Tennessee Intermediate Municipal Bond Fund
- ------------------------------------------
Primary A Shares 4.45% 4.10% 7.84% 7.22%
Investor A Shares 4.25% 3.85% 7.49% 6.78%
Investor B Shares 3.65% 3.10% 6.43% 5.46%
Investor C Shares 4.73% 3.99% 8.33% 7.03%
Texas Intermediate Municipal Bond Fund
- --------------------------------------
Primary A Shares 4.66% 4.48% 7.72% 7.42%
Investor A Shares 4.45% 4.22% 7.37% 6.99%
Investor B Shares 3.86% 3.48% 6.39% 5.76%
Investor C Shares 3.74% 3.39% 6.19% 5.61%
Virginia Intermediate Municipal Bond Fund
- -----------------------------------------
Primary A Shares 4.47% 4.27% 7.85% 7.50%
Investor A Shares 4.27% 4.02% 7.50% 7.07%
Investor B Shares 3.67% 3.27% 6.45% 5.74%
Investor C Shares 3.47% 3.11% 6.10% 5.46%
Florida Municipal Bond Fund
- ---------------------------
Primary A Shares 4.81% 4.56% 7.96% 7.55%
Investor A Shares 4.61% 4.31% 7.63% 7.14%
Investor B Shares 3.96% 3.56% 6.56% 5.89%
Investor C Shares 3.80% 3.48% 6.29% 5.76%
Georgia Municipal Bond Fund
- ---------------------------
Primary A Shares 4.47% 3.89% 7.87% 6.85%
Investor A Shares 4.27% 3.64% 7.52% 6.41%
Investor B Shares 3.62% 2.89% 6.37% 5.09%
Investor C Shares 3.47% 2.78% 6.12% 4.89%
Maryland Municipal Bond Fund
- ----------------------------
Primary A Shares 4.28% 3.81% 7.45% 6.63%
Investor A Shares 4.08% 3.56% 7.10% 6.19%
Investor B Shares 3.42% 2.80% 5.95% 4.88%
Investor C Shares 3.19% 2.59% 5.55% 4.51%
</TABLE>
159
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Tax
Equivalent
Yield Tax Yield
Without Equivalent Without
Yield Fee Waivers Yield Fee Waivers
----- ----------- ----- -----------
North Carolina Municipal Bond Fund
- ----------------------------------
Primary A Shares 4.65% 4.25% 8.35% 7.63%
Investor A Shares 4.45% 4.00% 7.99% 7.18%
Investor B Shares 3.80% 3.25% 6.82% 5.83%
Investor C Shares 3.68% 3.15% 6.60% 5.66%
South Carolina Municipal Bond Fund
- ----------------------------------
Primary A Shares 4.60% 4.02% 8.19% 7.16%
Investor A Shares 4.40% 3.77% 7.83% 6.71%
Investor B Shares 3.75% 3.01% 6.68% 5.35%
Investor C Shares 3.59% 2.85% 6.39% 5.08%
Tennessee Municipal Bond Fund
- -----------------------------
Primary A Shares 4.57% 3.62% 8.05% 6.37%
Investor A Shares 4.36% 3.36% 7.68% 5.91%
Investor B Shares 3.72% 2.62% 6.55% 4.62%
Investor C Shares 3.52% 2.43% 6.20% 4.28%
Texas Municipal Bond Fund
- -------------------------
Primary A Shares 4.63% 3.98% 7.67% 6.59%
Investor A Shares 4.42% 3.72% 7.32% 6.16%
Investor B Shares 3.78% 2.98% 6.26% 4.93%
Investor C Shares 3.62% 2.83% 6.99% 4.69%
Virginia Municipal Bond Fund
- ----------------------------
Primary A Shares 4.75% 4.24% 8.34% 7.45%
Investor A Shares 4.54% 3.98% 7.98% 6.99%
Investor B Shares 3.89% 3.23% 6.83% 5.68%
Investor C Shares 3.53% 2.87% 6.20% 5.04%
The "tax-equivalent" yield is computed by: (a) dividing the portion of the yield
(calculated as above) that is exempt from Federal income tax by (b) one, minus
(i) a stated Federal income tax rate, and, for the State Intermediate Municipal
Bond Funds, (ii) a state income tax rate multiplied by one minus the stated
Federal income tax rate. The Federal income tax rate used in calculating the
"tax-equivalent" yield 39.6%. The state income tax rate used in calculating the
"tax-equivalent" yield of the State Intermediate Municipal Bond Funds is as
follows: Florida --0%; Georgia --6%; Maryland --4.875%; North Carolina --7.75%;
South Carolina --7%; Tennessee 6%; Texas --0%; and Virginia --5.75%.
Hypothetical examples showing the level of taxable yield needed to
produce an after-tax equivalent to an assumed tax-free yield may be provided to
shareholders. Provided below are such illustrations:
For the Georgia Intermediate Municipal Bond Fund and Georgia Municipal
Bond Fund:
<CAPTION>
<S> <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% 5.91% 6.17% 6.65%
5% 7.39% 7.71% 8.31%
6% 8.87% 9.25% 9.97%
7% 10.34% 10.79% 11.64%
8% 11.82% 12.33% 13.30%
</TABLE>
160
<PAGE>
The tax-free yields used here are hypothetical and no assurance can be made that
the Funds will obtain any particular yield. A fund's yield fluctuates as market
conditions change. The tax brackets and the related yield calculations are based
on the 1998 Federal (28%, 31%, 36%) and Georgia (6%) tax rates and assume a
Federal tax benefit for the state and local taxes. Note the highest 1998
marginal Federal tax rate may be higher than 36% due to the phase-out of
allowable itemized deductions and personal exemptions for certain taxpayers.
This schedule does not take into account the 39.6% Federal tax rate applied to
taxable income in excess of $278,450.
<TABLE>
<CAPTION>
For the Maryland Intermediate Municipal Bond Fund and Maryland Municipal Bond Fund:
<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% 6.00% 6.26% 6.75%
5% 7.50% 7.82% 8.43%
6% 9.00% 9.39% 10.12%
7% 10.50% 10.95% 11.81%
8% 12.00% 12.52% 13.50%
The tax-free yields used here are hypothetical and no assurance can be made that
the Funds will obtain any particular yield. A fund's yield fluctuates as market
conditions change. The tax brackets and the related yield calculations are based
on the 1998 Federal (28%, 31%, 36%), Maryland (4.875%) and local county (which,
for purposes of the above table is approximately 2.5%) tax rates and assume a
Federal tax benefit for the state and local taxes. Note the highest 1998
marginal Federal tax rate may be higher than 36% due to the phase-out of
allowable itemized deductions and personal exemptions for certain taxpayers.
This schedule does not take into account the 39.6% Federal tax rate applied to
taxable income in excess of $278,450.
<CAPTION>
For the North Carolina Intermediate Municipal Bond Fund and North Carolina Municipal Bond Fund:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single Return $25,351-$60,000 $60,001-$61,400 $61,401-$128,100 $128,101-$278,450
(28%, 7%) (28%, 7.75%) (31%, 7.75%) (36%, 7.75%)
Joint Return $42,351-$100,000 $100,001-$102,300 $102,301-$155,950 $155,951-$278,450
(28%, 7%) (28%,7.75%) (31%, 7.75%) (36%, 7.75%)
</TABLE>
To match a
tax-free
yield of: A taxable investment would have to pay you:
4% 6.12% 6.28% 6.78% 7.18%
5% 7.53% 7.86% 8.47% 8.97%
6% 9.07% 9.43% 10.46% 10.77%
7% 10.54% 11.00% 11.86% 12.54%
8% 12.04% 12.52% 13.55% 14.36%
The tax-free yields used here are hypothetical and no assurance can be made that
the Funds will obtain any particular yield. A fund's yield fluctuates as market
conditions change. The tax brackets and the related yield calculations are based
on the 1998 Federal (28%, 31% 36%) and North Carolina (7%, 7.75%) tax rates and
assume a Federal tax benefit for the state and local taxes. Note that the
highest 1998 marginal Federal tax rate may be higher than 36% due to the
phase-out of allowable itemized deductions and personal exemptions for certain
taxpayers. This schedule does not take into account the 39.6% Federal tax rate
imposed on taxable income in excess of $278,450.
For the South Carolina Intermediate Municipal Bond Fund and South Carolina
Municipal Bond Fund:
161
<PAGE>
Single Return $25,351-$61,400 $61,401-$128,100 $128,101-$278,450
(28%, 7%) (31%, 7%) (36%, 7%)
Joint Return $42,351-$102,300 $102,301-$155,950 $155,951-$278,450
(28%, 7%) (31%, 7%) (36%, 7%)
To match a
tax-free
yield of: A taxable investment would have to pay you:
4% 5.97% 6.23% 6.72%
5% 7.47% 7.79% 8.40%
6% 8.96% 9.35% 10.08%
7% 10.45% 10.91% 11.76%
8% 11.95% 12.47% 13.44%
The tax-free yields used here are hypothetical and no assurance can be made that
the Funds will obtain any particular yield. A fund's yield fluctuates as market
conditions change. The tax brackets and the related yield calculations are based
on the 1998 Federal (28%, 31%, 36%) and South Carolina (7%) tax rates and assume
a Federal tax benefit for the state and local taxes. Note that the highest 1998
marginal Federal tax rate may be higher than 36% due to the phase-out of
allowable itemized deductions and personal exemptions for certain taxpayers.
This schedule does not take into account the 39.6% Federal tax rate imposed on
taxable income in excess of $278,450.
For the Tennessee Intermediate Municipal Bond Fund and Tennessee Municipal Bond
Fund:
<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% 5.91% 6.17% 6.65%
5% 7.39% 7.71% 8.31%
6% 8.87% 9.25% 9.97%
7% 10.34% 10.79% 11.64%
8% 11.82% 12.33% 13.30%
The tax-free yields used here are hypothetical and no assurance can be made that
the Funds will obtain any particular yield. A fund's yield fluctuates as market
conditions change. The tax brackets and the related yield calculations are based
on the 1998 Federal (28%, 31%, 36%) and Tennessee (6%) tax rates and assume a
Federal tax benefit for the state and local taxes. Note that the highest 1998
marginal Federal tax rate may be higher than 36% due to the phase-out of
allowable itemized deductions and personal exemptions for certain taxpayers.
This schedule does not take into account the 39.6% Federal tax rate imposed on
taxable income in excess of $278,450.
For the Virginia Intermediate Municipal Bond Fund and Virginia Municipal Bond
Fund:
<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
</TABLE>
To match a
tax-free
yield of: A taxable investment would have to pay you:
162
<PAGE>
4% 5.89% 6.15% 6.63%
5% 7.37% 7.69% 8.29%
6% 8.84% 9.23% 9.95%
7% 10.32% 10.76% 11.60%
8% 11.79% 12.30% 13.26%
The tax-free yields used here are hypothetical and no assurance can be made that
the Funds will obtain any particular yield. A fund's yield fluctuates as market
conditions change. The tax brackets and the related yield calculations are based
on the 1998 Federal (28%, 31%, 36%) and Virginia (5.75%) tax rates and assume a
Federal tax benefit for the state and local taxes. Note that the highest 1998
marginal Federal tax rate may be higher than 36% due to the phase-out of
allowable itemized deductions and personal exemptions for certain taxpayers.
This schedule does not take into account the 39.6% Federal tax rate imposed on
taxable income in excess of $278,450.
For the Municipal Income Fund, Short-Term Municipal Income Fund, the
Intermediate Municipal Bond Fund, the Florida Intermediate Municipal Bond Fund,
Florida Municipal Bond Fund, the Texas Intermediate Municipal Bond Fund and
Texas Municipal Bond Fund:
<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 $42,352-$102,300 $102,301-$155,950 $155,951-$278,450
</TABLE>
To match a
tax-free
yield of: A taxable investment would have to pay you:
4% 5.56% 5.80% 6.25%
5% 6.94% 7.25% 7.81%
6% 8.33% 8.70% 9.38%
7% 9.72% 10.14% 10.94%
8% 11.11% 11.59% 12.50%
The tax-free yields used here are hypothetical and no assurance can be made that
the Funds will obtain any particular yield. A fund's yield fluctuates as market
conditions change. The tax brackets and the related yield calculations are based
on the 1998 Federal (28%, 31%, 36%) tax rates. This analysis does not take into
account any state or local taxes imposed, although, with respect to the Florida
Intermediate Municipal Bond Fund, the Florida Municipal Bond Fund, the Texas
Intermediate Municipal Bond Fund and the Texas Municipal Bond Fund, neither
Florida nor Texas impose a personal income tax. Note that the highest 1998
marginal Federal tax rate may be higher than 36% due to the phase-out of
allowable itemized deductions and personal exemptions for certain taxpayers.
This schedule does not take into account the 39.6% Federal tax rate imposed on
taxable income in excess of $278,450.
There can be no assurance that all of a yield quoted by one of these
Funds will be tax-free since these Funds may invest in short-term taxable
obligations for temporary defensive periods as described in the Prospectuses.
Also, the above hypothetical examples are for illustration only. Tax laws and
regulations may be changed at any time by legislative or administrative actions
and such changes may make the information contained in such examples obsolete.
Thirty Day Yield
----------------
Yield Without Fee
Government Securities Fund Yield Waivers
-------------------------- ----- -------
Primary A Shares 5.69% 5.39%
Primary B Shares n/a n/a
Investor A Shares 5.49% 5.14%
Investor B Shares 5.35% 4.40%
Investor C Shares 4.69% 3.90%
163
<PAGE>
During the period for which certain yield quotations are given above,
Bank of America and the Administrator voluntarily waived fees or reimbursed
certain expenses of such shares, thereby increasing yield figures. Such waivers
or expense reimbursements may be discontinued at any time.
TOTAL RETURN CALCULATIONS
Total return measures both the net investment income generated by, and
the effect of any realized or unrealized appreciation or depreciation of the
underlying investments in a Non-Money Market Fund. The Non-Money Market Funds'
average annual and cumulative total return figures are computed in accordance
with the standardized methods prescribed by the SEC. Average annual total return
figures are computed by determining the average annual compounded rates of
return over the periods indicated in the advertisement, sales literature or
shareholders' report that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1 + T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period.
This calculation (i) assumes all dividends and distributions are
reinvested at net asset value on the appropriate reinvestment dates, and (ii)
deducts (a) the maximum sales charge from the hypothetical initial $1,000
investment, and (b) all recurring fees, such as advisory and administrative
fees, charged as expenses to all shareholder accounts. All performance
calculations for the period ended March 31, 1999, reflect the deduction of sales
charges, if any, that would have been deducted from a sale of shares.
Cumulative total return is based on the overall percentage change in
value of a hypothetical investment in the Fund, assuming all Fund dividends and
capital gain distributions are reinvested, without reflecting the effect of any
sales charge that would be paid by an investor, and is not annualized.
Cumulative total return is computed by finding the cumulative
compounded rate of return over the period indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
CTR = (ERV-P) 100
P -----
Where: CTR = Cumulative total return
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period
P = initial payment of $1,000.
This calculation (i) assumes all dividends and distributions are
reinvested at net asset value on the appropriate reinvestment dates, and (ii)
deducts (a) the maximum sales charge from the hypothetical initial $1,000
investment, and (b) all recurring fees, such as advisory and administrative
fees, charged as expenses to all shareholder accounts.
<TABLE>
<CAPTION>
<S> <C> <C>
Inception Through 3/31/99
Without Inception Through 3/31/99
Average Annual Total Returns Sales Charges Including Sales Charges
---------------------------- ------------- -----------------------
Emerging Markets Fund
---------------------
</TABLE>
164
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Inception Through 3/31/99
Without Inception Through 3/31/99
Average Annual Total Returns Sales Charges Including Sales Charges
---------------------------- ------------- -----------------------
Primary A. Shares -4.57% -4.57%
Primary B Shares -8.68% -8.68%
Investor A Shares -4.83% -6.32%
Investor B Shares -5.52% -6.28%
Investor C Shares -5.35% -5.35%
<CAPTION>
<S> <C> <C>
Inception Through 2/28/99
Inception Through 2/28/99 Including Sales Charges
------------------------- -----------------------
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%
<CAPTION>
<S> <C> <C>
5 Year Period Ended 3/31/99 or
One Year Inception
Period Ended 3/31/99 through 3/31/99
-------------------- ---------------
Equity Income Fund
------------------
Primary A Shares -9.40% 14.85%
Primary B -11.24% 11.37%
Investor A -9.87% 14.51%
Investor B 10.49% 13.85%
Investor C -10.28% 13.91%
International Equity Fund
-------------------------
Primary A 3.68% 7.60%
Primary B 3.71% 6.37%
Investor A 3.59% 7.37%
Investor B 2.65% 6.60%
Investor C 2.63% 6.64%
Government Securities Fund
--------------------------
Primary A 5.41% 6.04%
Primary B 2.09% 5.39%
Investor A 5.16% 5.78%
Investor B 4.53% 5.29%
Investor C 4.52% 5.30%
</TABLE>
165
<PAGE>
<TABLE>
<CAPTION>
One 10 Year Period
Year Ended 3/31/99
Period 5-year or Inception
Ended period ending through
3/31/99 3/31/99 3/31/99
------- ------- -------
<S> <C> <C> <C>
Value Fund
- ----------
Primary A Shares 4.15% 19.39% 15.26%
Primary B Shares 3.66% -- 19.14%
Investor A Shares 3.96% 19.14% 15.41%
Investor B Shares 3.11% 18.44% 16.95%
Investor C Shares 3.39% 18.50% 16.58%
Capital Growth Fund
- -------------------
Primary A Shares 14.99% 22.08% 18.77%
Primary B Shares 14.59% -- 25.67%
Investor A Shares 14.70% 21.82% 18.52%
Investor B Shares 13.86% 20.89% 18.79%
Investor C Shares 13.76% 21.09% 17.77%
Emerging Growth Fund
- --------------------
Primary A Shares -7.21% 15.25% 13.54%
Primary B Shares -4.25% -- 9.62%
Investor A Shares -7.41% 15.01% 13.55%
Investor B Shares -8.10% 14.14% 13.90%
Investor C Shares -8.08% 14.30% 12.85%
Managed Index Fund
- ------------------
Primary A Shares 15.25% -- 30.76%
Primary B Shares 14.78% -- 30.34%
Investor A Shares 14.97% -- 30.50%
Managed SmallCap Index Fund
- ---------------------------
Primary A Shares -20.50% -- 6.16%
Primary B Shares -21.05% -- 5.61%
Investor A Shares -20.67% -- 5.90%
Managed Value Index Fund
- ------------------------
Primary A Shares 3.06% -- 12.54%
Primary B Shares 3.10% -- 12.57%
Investor A Shares 2.97% -- 12.39%
Managed SmallCap Value Index Fund
- ---------------------------------
Primary A Shares -20.11% -- -6.17
Primary B Shares -20.22% -- -6.27%
Investor A Shares -20.23% -- -6.32%
Disciplined Equity Fund
- -----------------------
Primary A Shares 15.74% 21.44% 25.33%
Primary B Shares 16.37% -- 27.11%
Investor A Shares 15.49% 21.22% 20.32%
Investor B Shares 14.69% -- 22.15%
Investor C Shares 14.64% -- 25.59%
Equity Index Fund
- -----------------
Primary A Shares 18.26% 25.84% 23.50%
Primary B Shares 17.63% -- 27.81%
Investor A Shares 18.00% -- 27.41%
Balanced Assets Fund
- --------------------
Primary A Shares -1.20% 13.62% 12.03%
Primary B Shares -2.18% -- 12.57%
Investor A Shares -1.36% 13.38% 11.80%
Investor B Shares -2.13% 12.71% 11.22%
Investor C Shares -2.17% 12.68% 11.08%
Short-Intermediate Government Fund
- ----------------------------------
</TABLE>
166
<PAGE>
<TABLE>
<CAPTION>
One 10 Year Period
Year Ended 3/31/99
Period 5-year or Inception
Ended period ending through
3/31/99 3/31/99 3/31/99
------- ------- -------
<S> <C> <C> <C>
Primary A Shares 4.97% 5.63% 6.44%
Primary B Shares 4.61% -- 6.03%
Investor A Shares 4.76% 5.42% 6.27%
Investor B Shares 4.14% 4.94% 4.43%
Investor C Shares 4.05% 5.01% 4.89%
Short-Term Income Fund
- ----------------------
Primary A Shares 6.07% 6.04% 5.54%
Primary B Shares 0.30% -- 3.40%
Investor A Shares 5.85% 5.83% 5.30%
Investor B Shares 5.70% 5.66% 5.25%
Investor C Shares 5.64% 5.65% 5.11%
Diversified Income Fund
- -----------------------
Primary A Shares 5.00% 7.50% 8.14%
Primary B Shares -0.24% -- 5.09%
Investor A Shares 4.74% 7.23% 7.86%
Investor B Shares 4.11% 6.66% 6.23%
Investor C Shares 4.09% 6.74% 7.47%
Strategic Fixed Income Fund
- ---------------------------
Primary A Shares 5.61% 6.66% 6.61%
Primary B Shares 0.92% -- 4.76%
Investor A Shares 5.40% 6.44% 6.41%
Investor B Shares 4.76% 5.92% 5.24%
Investor C Shares 4.90% 6.06% 6.01%
Municipal Income Fund
- ---------------------
Primary A Shares 5.42% 7.69% 7.78%
Investor A Shares 5.21% 7.47% 7.61%
Investor B Shares 4.53% 6.85% 5.65%
Investor C Shares 4.64% 6.96% 6.58%
Short-Term Municipal Income Fund
- --------------------------------
Primary A Shares 4.71% 4.85% 4.44%
Investor A Shares 4.50% 4.64% 4.30%
Investor B Shares 4.34% 4.48% 4.08%
Investor C Shares 4.29% -- 4.57%
Intermediate Municipal Bond Fund
- --------------------------------
Primary A Shares 5.33% 6.23% 5.51%
Investor A Shares 5.12% 6.02% 5.14%
Investor B Shares 4.49% 5.61% 4.72%
Investor C Shares 4.80% -- 6.85%
Florida Intermediate Municipal Bond Fund
- ----------------------------------------
Primary A Shares 4.95% 6.17% 5.98%
Investor A Shares 4.74% 5.96% 5.80%
Investor B Shares 4.11% 5.54% 4.91%
Investor C Shares 4.10% 5.54% 5.34%
Georgia Intermediate Municipal Bond Fund
- ----------------------------------------
Primary A Shares 5.20% 6.14% 6.35%
Investor A Shares 4.99% 5.93% 6.21%
Investor B Shares 4.37% 5.50% 4.84%
Investor C Shares 4.35% 5.50% 5.53%
Maryland Intermediate Municipal Bond Fund
- -----------------------------------------
Primary A Shares 5.18% 5.92% 6.55%
Investor A Shares 4.97% 5.71% 6.39%
Investor B Shares 4.34% 5.29% 4.60%
</TABLE>
167
<PAGE>
<TABLE>
<CAPTION>
One 10 Year Period
Year Ended 3/31/99
Period 5-year or Inception
Ended period ending through
3/31/99 3/31/99 3/31/99
------- ------- -------
<S> <C> <C> <C>
Investor C Shares 4.32% 5.28% 5.08%
North Carolina Intermediate Municipal Bond Fund
- -----------------------------------------------
Primary A Shares 5.03% 6.12% 5.87%
Investor A Shares 4.82% 5.91% 5.66%
Investor B Shares 4.20% 5.49% 4.81%
Investor C Shares 4.18% 5.48% 5.21%
South Carolina Intermediate Municipal Bond Fund
- -----------------------------------------------
Primary A Shares 5.22% 6.15% 6.15%
Investor A Shares 5.01% 5.94% 6.04%
Investor B Shares 4.39% 5.52% 4.91%
Investor C Shares 4.36% 5.52% 5.44%
Tennessee Intermediate Municipal Bond Fund
- ------------------------------------------
Primary A Shares 5.18% 6.07% 5.36%
Investor A Shares 4.97% 5.86% 5.25%
Investor B Shares 4.34% 5.44% 4.80%
Investor C Shares 4.28% -- 6.64%
Texas Intermediate Municipal Bond Fund
- --------------------------------------
Primary A Shares 4.98% 5.98% 5.59%
Investor A Shares 4.77% 5.77% 5.14%
Investor B Shares 4.15% 5.35% 4.57%
Investor C Shares 4.14% -- 6.40%
Virginia Intermediate Municipal Bond Fund
- -----------------------------------------
Primary A Shares 5.21% 5.88% 6.38%
Investor A Shares 5.00% 5.67% 6.22%
Investor B Shares 4.38% 5.25% 4.62%
Investor C Shares 4.36% 5.25% 5.13%
Florida Municipal Bond Fund
- ---------------------------
Primary A Shares 4.90% 7.38% 5.39%
Investor A Shares 4.69% 7.16% 5.07%
Investor B Shares 4.01% 6.55% 4.42%
Investor C Shares 4.01% -- 8.45%
Georgia Municipal Bond Fund
- ---------------------------
Primary A Shares 5.89% 7.39% 5.39%
Investor A Shares 5.68% 7.13% 5.23%
Investor B Shares 5.00% 6.55% 4.60%
Investor C Shares 4.97% -- 8.71%
Maryland Municipal Bond Fund
- ----------------------------
Primary A Shares 4.93% -- 7.62%
Investor A Shares 4.72% 6.85% 5.20%
Investor B Shares 4.04% 6.23% 4.18%
Investor C Shares 4.02% -- 8.24%
North Carolina Municipal Bond Fund
- ----------------------------------
Primary A Shares 5.40% 7.23% 5.21%
Investor A Shares 5.20% 7.02% 5.18%
Investor B Shares 4.53% 6.40% 4.50%
Investor C Shares 4.50% -- 8.60%
South Carolina Municipal Bond Fund
- ----------------------------------
Primary A Shares 5.13% 7.28% 5.77%
Investor A Shares 4.92% 7.07% 5.85%
Investor B Shares 4.25% 6.45% 4.96%
Investor C Shares 4.23% -- 8.39%
</TABLE>
168
<PAGE>
<TABLE>
<CAPTION>
One 10 Year Period
Year Ended 3/31/99
Period 5-year or Inception
Ended period ending through
3/31/99 3/31/99 3/31/99
------- ------- -------
<S> <C> <C> <C>
Tennessee Municipal Bond Fund
- -----------------------------
Primary A Shares 5.53% 7.53% 6.65%
Investor A Shares 5.32% 7.32% 5.79%
Investor B Shares 4.64% 6.70% 4.92%
Investor C Shares 4.62% -- 8.64%
Texas Municipal Bond Fund
- -------------------------
Primary A Shares 5.41% 7.44% 5.40%
Investor A Shares 5.20% 7.22% 5.36%
Investor B Shares 4.53% 6.60% 4.58%
Investor C Shares 4.51% -- 8.67%
Virginia Municipal Bond Fund
- ----------------------------
Primary A Shares 5.18% 7.45% 5.25%
Investor A Shares 4.98% 7.23% 5.36%
Investor B Shares 4.30% 6.61% 4.41%
Investor C Shares 4.21% -- 8.68%
<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.
169
<PAGE>
AGGREGATE OR CUMULATIVE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
5-Year period 5-Year period Inception Inception
FYE FYE ending ending through through
3/31/99 3/31/99 3/31/99 3/31/99 3/31/99 3/31/99
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>
Value Fund
- ----------
Primary A Shares 4.15% 4.15% 142.54% 142.54% 287.08% 287.08%
Primary B Shares 3.66% 3.66% -- -- 62.05% 62.05%
Investor A Shares 3.96% -2.04% 140.03% 126.21% 279.99% 258.23%
Investor B Shares 3.11% -1.44% 133.03% 131.03% 148.54% 147.54%
Investor C Shares 3.39% 2.48% 133.70% 133.70% 183.15% 183.15%
Capital Growth Fund
- -------------------
Primary A Shares 14.99% 14.99% 171.17% 171.17% 205.86% 205.86%
Primary B Shares 14.59% 14.59% -- -- 87.70% 87.70%
Investor A Shares 14.70% 8.09% 168.26% 152.80% 201.46% 184.13%
Investor B Shares 13.86% 9.42% 158.24% 156.24% 172.12% 171.12%
Investor C Shares 13.76% 12.87% 160.36% 160.36% 189.24% 189.24%
Emerging Growth Fund
- --------------------
Primary A Shares -7.21% -7.21% 103.30% 103.30% 123.13% 123.13%
Primary B Shares -4.25% -4.25% -- -- 28.79% 28.79%
Investor A Shares -7.41% -12.72% 101.19% 89.60% 122.79% 110.02%
Investor B Shares -8.10% -12.04% 93.69% 91.69% 113.16% 112.16%
Investor C Shares -8.08% -8.87% 95.12% 95.12% 113.74% 113.74%
Managed Index Fund
- ------------------
Primary A Shares 15.25% 15.25% -- -- 104.42% 104.42%
Primary B Shares 14.78% 14.78% -- -- 102.68% 102.68%
Investor A Shares 14.97% 14.97% -- -- 103.31% 103.31%
Managed SmallCap Index Fund
- ---------------------------
Primary A Shares -20.50% -20.50% -- -- 15.82% 15.82%
Primary B Shares -21.05% -21.05% -- -- 14.34% 14.34%
Investor A Shares -20.67% -20.67% -- -- 15.13% 15.13%
Managed Value Index Fund
- ------------------------
Primary A Shares 3.06% 3.06% 17.36% 17.26%
Primary B Shares 3.10% 3.10% 17.30% 17.30%
Investor A Shares 2.97% 2.97% 17.06% 17.06%
Managed SmallCap Value Index Fund
- ---------------------------------
Primary A Shares -20.11% -20.11% -- -- -8.22% -8.22%
Primary B Shares -20.22% -20.22% -- -- -8.35% -8.35%
Investor A Shares -20.23% -20.23% -- -- -8.43% -8.43%
Disciplined Equity Fund
- -----------------------
Primary A Shares 15.74% 15.74% 164.10% 164.10% 333.37% 333.37%
Primary B Shares 16.37% 16.37% -- -- 93.69% 91.69%
Investor A Shares 15.49% 8.84% 161.70% 146.66% 185.93% 169.51%
Investor B Shares 14.69% 9.69% -- -- 164.58% 162.58%
Investor C Shares 14.64% 13.64% -- -- 142.83% 142.83%
Equity Index Fund
- -----------------
Primary A Shares 18.26% 18.26% 215.52% 215.52% 205.46% 205.46%
Primary B Shares 17.63% 17.63% -- -- 96.67% 96.67%
Investor A Shares 18.00% 18.00% -- -- 132.01% 132.01%
Balanced Assets Funds
- ---------------------
Primary A Shares -1.20% -1.20% 89.35% 89.35% 109.26% 109.26%
Primary B Shares -2.18% -2.18% -- -- 38.58% 38.58%
Investor A Shares -1.36% -7.04% 87.33% 76.53% 106.30% 94.44%
Investor B Shares -2.13% -6.65% 81.92% 79.97% 85.52% 84.54%
</TABLE>
170
<PAGE>
<TABLE>
<CAPTION>
5-Year period 5-Year period Inception Inception
FYE FYE ending ending through through
3/31/99 3/31/99 3/31/99 3/31/99 3/31/99 3/31/99
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>
Investor C Shares -2.17% -3.07% 81.67% 81.67% 97.81% 97.81%
Short-Intermediate Government Fund
- ----------------------------------
Primary A Shares 4.97% 4.97% 31.53% 31.53% 61.33% 61.33%
Primary B Shares 4.61% 4.61% -- -- 17.50% 17.50%
Investor A Shares 4.76% 1.32% 30.21% 25.94% 59.24% 54.23%
Investor B Shares 4.14% 1.15% 27.24% 27.24% 28.67% 28.67%
Investor C Shares 4.05% 3.06% 27.66% 27.66% 38.24% 38.24%
Short-Term Income Fund
- ----------------------
Primary A Shares 6.07% 6.07% 34.05% 34.05% 41.98% 41.98%
Primary B Shares 0.30% 0.30% -- -- 9.66% 9.66%
Investor A Shares 5.85% 4.78% 32.74% 31.40% 39.84% 38.45%
Investor B Shares 5.70% 5.70% 31.72% 31.72% 34.65% 38.65%
Investor C. Shares 5.64% 4.64% 31.63% 31.63% 38.17% 38.17%
Diversified Income Fund
- -----------------------
Primary A Shares 5.00% 5.00% 43.54% 43.54% 65.24% 65.24%
Primary B Shares -0.24% -0.24% -- -- 14.67% 14.67%
Investor A Shares 4.74% -0.27% 41.76% 35.05% 61.67% 53.98%
Investor B Shares 4.11% -0.77% 38.04% 36.04% 42.11% 41.13%
Investor C Shares 4.09% 3.12% 38.57% 38.57% 58.46% 58.46%
Strategic Fixed Income Fund
- ---------------------------
Primary A Shares 5.61% 5.61% 38.01% 38.01% 50.83% 50.83%
Primary B Shares 0.92% 0.92% -- -- 13.67% 13.67%
Investor A Shares 5.40% 1.94% 36.63% 32.18% 48.45% 43.56%
Investor B Shares 4.76% 1.79% 33.30% 33.30% 34.59% 34.59%
Investor C Shares 4.90% 3.91% 34.23% 34.23% 45.05% 45.05%
Municipal Income Fund
- ---------------------
Primary A Shares 5.42% 5.42% 44.82% 44.82% 84.33% 84.33%
Investor A Shares 5.21% 0.23% 43.38% 36.55% 81.99% 73.32%
Investor B Shares 4.53% 0.53% 39.30% 38.30% 37.64% 37.64%
Investor C Shares 4.64% 3.64% 40.02% 40.02% 54.14% 54.14%
Short-Term Municipal Income Fund
- --------------------------------
Primary A Shares 4.71% 4.71% 26.69% 26.69% 26.87% 26.87%
Investor A Shares 4.50% 3.47% 25.46% 24.20% 25.58% 24.33%
Investor B Shares 4.34% 4.34% 24.50% 24.50% 24.43% 24.43%
Investor C Shares 4.29% 3.29% -- -- 24.27% 24.27%
Intermediate Municipal Bond Fund
- --------------------------------
Primary A Shares 5.33% 5.33% 35.31% 35.31% 35.51% 35.51%
Investor A Shares 5.12% 1.66% 33.97% 29.57% 32.52% 28.20%
Investor B Shares 4.49% 1.49% 31.39% 31.39% 27.84% 27.84%
Investor C Shares 4.80% 3.80% -- -- 33.90% 33.90%
Florida Intermediate Municipal Bond
- -----------------------------------
Fund
- ----
Primary A Shares 4.95% 4.95% 34.92% 34.92% 44.21% 44.21%
Investor A Shares 4.74% 1.35% 33.58% 29.22% 42.63% 37.93%
Investor B Shares 4.11% 1.11% 30.94% 30.94% 32.11% 32.11%
Investor C Shares 4.10% 3.10% 30.92% 30.92% 38.70% 38.70%
Georgia Intermediate Municipal Bond
- -----------------------------------
Fund
- ----
Primary A Shares 5.20% 5.20% 34.69% 34.69% 54.62% 54.62%
Investor A Shares 4.99% 1.55% 33.35% 28.98% 51.56% 46.57%
Investor B Shares 4.37% 1.37% 30.72% 30.72% 31.60% 31.60%
Investor C Shares 4.35% 3.35% 30.70% 30.70% 44.06% 44.06%
</TABLE>
171
<PAGE>
<TABLE>
<CAPTION>
5-Year period 5-Year period Inception Inception
FYE FYE ending ending through through
3/31/99 3/31/99 3/31/99 3/31/99 3/31/99 3/31/99
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>
Maryland Intermediate Municipal
- -------------------------------
Bond Fund
- ---------
Primary A Shares 5.18% 5.18% 33.33% 33.33% 72.34% 72.34%
Investor A Shares 4.97% 1.56% 32.01% 27.76% 70.16% 64.57%
Investor B Shares 4.34% 1.34% 29.38% 29.38% 29.90% 29.90%
Investor C Shares 4.32% 3.32% 29.36% 29.36% 40.00% 40.00%
North Carolina Intermediate Municipal
- -------------------------------------
Bond Fund
- ---------
Primary A Shares 5.03% 5.03% 34.56% 34.56% 43.22% 43.22%
Investor A Shares 4.82% 1.41% 33.23% 28.86% 41.37% 36.73%
Investor B Shares 4.20% 1.20% 30.61% 30.61% 31.39% 31.39%
Investor C Shares 4.18% 3.18% 30.59% 30.59% 37.66% 37.66%
South Carolina Intermediate Municipal
- -------------------------------------
Bond Fund
- ---------
Primary A Shares 5.22% 5.22% 34.80% 34.80% 53.98% 53.98%
Investor A Shares 5.01% 1.62% 33.48% 29.18% 49.91% 44.97%
Investor B Shares 4.39% 1.39% 30.83% 30.83% 32.15% 32.15%
Investor C Shares 4.36% 3.36% 30.79% 30.79% 43.29% 43.29%
Tennessee Intermediate Municipal Bond
- -------------------------------------
Fund
- ----
Primary A Shares 5.18% 5.18% 34.28% 34.28% 36.53% 36.53%
Investor A Shares 4.97% 1.55% 32.95% 28.62% 35.88% 31.41%
Investor B Shares 4.34% 1.34% 30.32% 30.32% 31.31% 31.31%
Investor C Shares 4.28% 3.28% -- -- 32.74% 32.74%
Texas Intermediate Municipal Bond 4.98% 4.98% 33.69% 33.69% 40.24% 40.24%
- ----------------------------------
Fund
- ----
Primary A Shares
Investor A Shares 4.77% 1.39% 32.36% 28.09% 36.09% 31.68%
Investor B Shares 4.15% 1.16% 29.76% 29.76% 29.44% 29.44%
Investor C Shares 4.14% 3.14% - - 31.44% 31.44%
Virginia Intermediate Municipal Bond
- ------------------------------------
Fund
- ----
Primary A Shares 5.21% 5.21% 33.06% 33.06% 80.33% 80.33%
Investor A Shares 5.00% 1.56% 31.76% 27.49% 75.50% 69.78%
Investor B Shares 4.38% 1.38% 29.15% 29.15% 30.05% 30.05%
Investor C Shares 4.36% 3.36% 29.12% 29.12% 40.47% 40.47%
Florida Municipal Bond Fund
- ---------------------------
Primary A Shares 4.90% 4.90% 42.76% 42.76% 32.07% 32.07%
Investor A Shares 4.69% -0.30% 41.31% 34.61% 29.97% 23.77%
Investor B Shares 4.01% 0.01% 37.31% 36.31% 26.51% 26.51%
Investor C Shares 4.01% 3.01% -- -- 42.94% 42.94%
Georgia Municipal Bond Fund
- ---------------------------
Primary A Shares 5.89% 5.89% 42.80% 42.80% 31.49% 31.49%
Investor A Shares 5.68% 0.65% 41.13% 34.50% 30.66% 24.43%
Investor B Shares 5.00% 1.00% 37.34% 36.34% 27.75% 27.75%
Investor C Shares 4.97% 3.97% -- -- 44.45% 44.45%
Maryland Municipal Bond Fund
- ----------------------------
Primary A Shares 4.93% 4.93% -- - 39.45% 39.45%
Investor A Shares 4.72% -0.29% 39.30% 32.70% 31.52% 25.25%
Investor B Shares 4.04% 0.04% 35.28% 34.28% 24.93% 24.93%
</TABLE>
172
<PAGE>
<TABLE>
<CAPTION>
5-Year period 5-Year period Inception Inception
FYE FYE ending ending through through
3/31/99 3/31/99 3/31/99 3/31/99 3/31/99 3/31/99
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>
Investor C Shares 4.02% 3.02% - - 41.71% 41.71%
North Carolina Municipal Bond Fund
- ----------------------------------
Primary A Shares 5.40% 5.40% 41.79% 41.79% 30.33% 30.33%
Investor A Shares 5.20% 0.19% 40.37% 33.65% 31.45% 25.17%
Investor B Shares 4.53% 0.53% 36.37% 35.37% 27.06% 27.06%
Investor C Shares 4.50% 3.50% -- -- 43.82% 43.82%
South Carolina Municipal Bond Fund
- ----------------------------------
Primary A Shares 5.13% 5.13% 42.12% 42.12% 34.31% 34.31%
Investor A Shares 4.92% -0.04% 40.70% 33.96% 35.88% 29.46%
Investor B Shares 4.25% 0.25% 36.68% 35.68% 30.15% 30.15%
Investor C Shares 4.23% 3.23% -- -- 42.62% 42.62%
Tennessee Municipal Bond Fund
- -----------------------------
Primary A Shares 5.53% 5.53% 43.77% 43.77% 38.70% 38.70%
Investor A Shares 5.32% 0.31% 42.34% 35.57% 35.57% 29.17%
Investor B Shares 4.64% 0.64% 38.29% 37.29% 29.89% 29.89%
Investor C Shares 4.62% 3.62% -- -- 44.08% 44.08%
Texas Municipal Bond Fund
- -------------------------
Primary A Shares 5.41% 5.41% 43.14% 43.14% 31.10% 31.10%
Investor A Shares 5.20% 0.21% 41.72% 35.04% 31.79% 25.58%
Investor B Shares 4.53% 0.53% 37.67% 36.67% 27.56% 27.56%
Investor C Shares 4.51% 3.51% - - 44.22% 44.22%
Virginia Municipal Bond Fund
- ----------------------------
Primary A Shares 5.18% 5.18% 43.20% 43.20% 30.57% 30.57%
Investor A Shares 4.98% -0.05% 41.77% 35.03% 32.49% 26.20%
Investor B Shares 4.30% 0.30% 37.72% 36.72% 26.49% 26.49%
Investor C Shares 4.21% 3.21% -- -- 44.31% 44.31%
Fee waivers and/or expense reimbursements were in effect for the periods
presented. Primary B Shares were not offered during the period described above.
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
10 Year Period 10 Year Period
Ended 3/31/99 Ended 3/31/99
or Inception or Inception
FYE FYE Year Period Year Period through through
3/31/99 3/31/99 Ended 3/31/99 Ended 3/31/99 3/31/99 3/31/99
Without Including Without Including Without Including
Sales Sales Sales Sales Sales Sales
Charges Charges Charges Charges Charges Charges
------- ------- ------- ------- ------- -------
Equity Income Fund
- ------------------
Primary A Shares -9.40% -9.40% 99.87% 99.87% 173.45% 173.45%
Primary B Shares -11.24% -11.24% -- -- 34.56% 34.56%
Investor A Shares -9.87% -15.07% 96.89% 85.54% 165.91% 150.68%
Investor B Shares -10.49% -14.57% 91.28% 89.28% 95.79% 94.85%
Investor C Shares -10.28% -11.10% 91.75% 91.75% 124.23% 124.23%
International Equity Fund
- -------------------------
Primary A Shares 3.68% 3.68% 44.25% 44.25% 73.43% 73.43%
Primary B Shares 3.71% 3.71% -- -- 18.57% 18.57%
Investor A Shares 3.59% -2.34% 42.70% 34.54% 63.50% 54.15%
Investor B Shares 2.65% -2.07% 37.68% 35.68% 53.85% 52.85%
Investor C Shares 2.63% 1.69% 37.94% 37.94% 60.20% 60.20%
</TABLE>
173
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Government Securities Fund
- --------------------------
Primary A Shares 5.41% 5.41% 34.08% 34.08% 64.96% 64.96%
Primary B Shares 2.09% 2.09% -- -- 15.55% 15.55%
Investor A Shares 5.16% 0.20% 32.43% 26.11% 61.88% 54.18%
Investor B Shares 4.53% 0.55% 29.39% 28.40% 28.91% 28.91%
Investor C Shares 4.52% 3.52% 29.46% 29.46% 36.48% 36.48%
International Growth Fund
- -------------------------
Primary A Shares 6.16% 6.16% 53.77% 53.77% 79.47% 79.47%
Primary B Shares 6.55% 6.55% -- -- 18.66% 18.66%
Investor A Shares 5.89% -0.18% 51.92% 43.17% 2,970.17% 2,795.01%
Investor B Shares 5.11% 1.18% -- -- 19.96% 17.40%
Investor C Shares 5.56% 4.76% -- -- 13.17% 13.17%
* Primary A Shares of the Company do not carry a sales charge.
<CAPTION>
AGGREGATE ANNUAL TOTAL RETURN
5-Year period 5-Year 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.
174
<PAGE>
<TABLE>
<CAPTION>
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%
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.
MISCELLANEOUS
-------------
CERTAIN RECORD HOLDERS
The name, address and percentage of ownership of each person who is
known by the Registrant to have owned of record or beneficially five percent or
more of any of the Funds as of July 20, 1999 is:
<TABLE>
<CAPTION>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
<S> <C> <C>
Prime Fund Bank of America NA Primary A 97.86% 44.08%
Attn Tony Farrer 2,548,300,292.27;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Bank of America NA Primary B 100% .23%
Attn Tony Farrer (B Shares) 13,136,085.23;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
175
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
National Financial For the Investor A 73.43% 9.44%
Exclusive Benefit of our 545,820,012.38;
Customers record
200 Liberty Street
1 World Financial Center
Attn Mutual Funds 5th Flr
New York, NY 10281
BNY Cust IRA FBO Investor A 10.55% 0%
James L Bowen Jr 20,981.45;
195 Springhill Dr record
Tifton, GA 31794
J David Dalton TTEE Lowcountry Investor A 9.36% 0%
Orthopaedics Associates P/S/P 18,624.05;
Dated 08-05-87 record and
9313 Medical Plaza Drive Suite beneficial
302
Charleston, SC 29406
BNY Cust Rollover IRA FBO Investor A 8.78% 0%
James L Payne 17,469.28;
Box 434 record
Hemphill, TX 75948
Anne Valcourt Gdn FBO Danyel Investor A 7.61% 0%
Chaniequa Solange Valcourt 15,148.89;
c/o H R Chaplin record and
9930 W Broadview Dr beneficial
Bay Harbor Island, FL 33154
Jean E Kellogg and Investor A 5.21% 0%
Thomas G Kellogg JTTEN 10,373.79;
52109 Tara Dr record and
South Bend, IN 46628 beneficial
National Financial for the Daily Shares 99.07% 28.55%
Exclusive Benefit of our 1,650,881,769.69;
Customers record
200 Liberty St
1 World Financial Ctr
Attn Mutual Funds 5th Flr
New York, NY 10281
Sunstone Financial Group Inc Marsico Class 100% .47%
as Agt 28,146,272.74;
for Marisco Funds Inc. record
207 E Buffalo Ste 400
Milwaukee, WI 53202
Treasury Fund Bank of America NA Primary A 98.84% 30.51%
Attn Tony Farrer 644,048,073.72;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Bank of America NA Primary B 100% .65%
Attn Tony Farrer (B Shares) 13,779,548.960;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
176
<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 Investor A 93.27% 46.33%
Attn STIF/Master Note 977,932,242.08;
One Wall Street 2nd FL record
New York, NY 10286
Hare & Co, Bank of New York Investor B 42.04% 4.42%
Attn Stif/Master Note 93,249,284.110;
One Wall Street 2nd Fl record
New York, NY 10286
Cleburne Texas Isd Investor B 5.53% .58%
General Fund 12,258,876.60;
103 South Walnut record and
Cleburne, TX 76031 beneficial
NFSC FEBO # W13-635901 Investor C 35.10% 0%
NFSC/FMTC IRA 71,890.910;
FBO John P Nicoson record and
13147 Ashvale Dr beneficial
Fairfax, VA 22033
NFSC FEBO # W52-725021 Investor C 24.73% 0%
NFSC/FMTC IRA 50,641.010;
FBO Retha C Whitehead record and
5226 Garfield Av beneficial
Kansas City, MO 64130
NFSC FEBO # W32-608246 Investor C 8.58% 0%
NFSC/FMTC IRA 17,563.630;
FBO Donald E Paul record and
3407 Shadowod Dr beneficial
Valrico, FL 33594
NFSC FEBO W68-959634 Investor C 6.60% 0%
NFSC FMTC IRA 13,523.950;
FBO Thomas J Schultz record and
1110 Sycamore Street beneficial
Lake Placid, FL 33852-8333
NFSC FEBO # W13-643629 Investor C; 5.86% 0%
NFSC/FMTC IRA 11,997.800;
FBO Maureen D Matricardi record and
8004 Carrleigh Pkwy beneficial
Springfield, VA 22152
NFSC FEBO # W13-643637 Investor C 5.86% 0%
NFSC/FMTC IRA 11,997.800;
FBO Edmund A Matricardi Jr record and
8004 Carrleigh Pkwy beneficial
Springfield, VA 22152
NFSC FEBO # W14-607207 Investor C 5.10% 0%
NFSC/FMTC IRA Rollover 10,436.800;
FBO James A Cox record and
2015 Ashton Pointe Dr beneficial
Dacula, GA 30019
National Financial for the Daily Shares 64.15% 5.31%
Exclusive Benefit of our 112,127,199.000;
Customers record
200 Liberty St
1 World Financial Ctr
Attn Mutual Funds 5th Flr
New York, NY 10281
177
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Bank of America SWP Daily Shares 35.19% 2.91%
Disbursement Inc Bank of 61,500,000.000;
America Sweep/Autoborrow record
First Citizens Bldg
128 S Tryon St NC1-006-08-03
Charlotte, NC 28255
Equity Income Fund Bank of America NA Primary A 99.27% 77.39%
Attn Tony Farrer 45,515,158.582;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Stephens Inc Primary B 100% 0%
Attn: Cindy Cole 1.240; record
111 Center Street
Little Rock, AR 72201
Government Bank of America NA Primary A 97.95% 52.22%
Securities Fund Attn Tony Farrer 12,196,720.398;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Stephens Inc Primary B 100% 0%
Attn: Cindy Cole 1.061; record
111 Center Street
Little Rock, AR 72201
BA Investment Services, Inc. Investor C 31.15% .04%
FBO 435728581 10,460.251;
185 Berry St. record
3rd Floor #12640
San Francisco, CA 94107
Corelink Financial Inc Investor C 18.83% .03%
PO Box 4054 6,321.228;
Concord, CA 94524-4054 record
BNY Cust IRA FBO Investor C 9.49% .01%
Mary Jane Russo 3,187.553;
8 Maybrook Ct record
Glen Arm, MD 21057
Banc of America Investment Investor C 9.36% .01%
Services 3,141.361;
FBO 436566931 record
3rd Floor #12640
San Francisco, CA 94107
International Equity Bank of America NA Primary A 90.81% 84.67%
Fund Attn Tony Farrer 48,132,227.524;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Stephens Inc Primary B; 100% 0%
Attn: Cindy Cole 0.894; record
111 Center Street
Little Rock, AR 72201
178
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Bank of America NA Investor A 24.89% .73%
The Private Bank 412,936.745;
Attn Common Trust Funds Unit record
38329
PO Box 3577
Los Angeles, CA 90051-1577
H Grayson Mitchell Jr and Investor C 10.78% .01%
John Rawls TTEE FBO 6,994.999;
Grayson Mitchell Inc 401K Plan record and
P O Box 128 beneficial
Emporia, VA 23847
C A Porterfield & Rosalee Investor C 10.27% .01%
Moxley & Frank Minton TTEES 6,660.171;
Starmount Company record and
Capital Accumulation Plan beneficial
PO Box 10349
Greensboro, NC 27404-0349
C A Porterfield & Rosalee Investor C 10.17% .01%
Moxley & Frank Minton TTEES 6,600.192;
Starmount Company Employees record and
Tax Deferred Savings Plan beneficial
PO Box 10349
Greensboro, NC 27404-0349
E Larry Fonts TTEE FBO Investor C 9.02% .01%
Central Dallas Association 5,851.765;
Profit Sharing Plan record and
1201 Elm Street Suite 5310 beneficial
Dallas, TX 75270
Tatsushi T Kubo, Max W Investor C 8.56% .01%
Dahlgren, & John Dahlgren 5,553.362;
TTEES FBO record and
EPIC Products International beneficial
Corporation 401(K) Plan
PO Box 5808
Arlington, TX 76005-5808
Corel Ink Financial Inc Investor C 6.20% .01%
PO Box 4054 4,019.169;
Concord, CA 94524-4054 record
NFSC FEBO # W17-662682 Investor C 6.19% .01%
NFSC/FMTC IRA Rollover 4,016.225;
FBO Linda G Walker record and
7 Sally St beneficial
Spartanburg, SC 29301
Donald R Atkins and Investor C 5.37% .01%
David R Morgan TTEES 3,480.722;
Lyndon Steel 401K Profit record and
Sharing Pl beneficial
1947 Union Cross Road
Winston-Salem, NC 27107
179
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
International Growth Bank of America NA Primary A 96.77% 81.90%
Fund Attn Tony Farrer 9,284,952.814;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Stephens Inc Primary B 100% 0%
Attn: Cindy Cole 1.355; record
111 Center Street
Little Rock, AR 72201
Kleinwort Benson Invest Mgt Ltd Investor A 7.70% .99%
Client Account 112,522.717;
Att Andy Poile record
PO Box 191 20 Fenchurch St
London, England EC3P 3DB
NFSC FEBO # W52-006904 Investor C 17.31% .04%
NFSC/FMTC IRA Rollover 4,750.323;
FBO Richard E Snowbarger record and
PO Box 3884 beneficial
Telluride, CO 81435
Jean F Baechlin Investor C 6.03% .01%
3775 Modoc Rd #226 1,655.966;
Santa Barbara, CA 93105 record and
beneficial
Philworld Inc Investor C 5.40% .01%
Dba Waldo Pizza 1,480.952;
Attn Phil Bourne record and
7433 Broadway St beneficial
Kansas City, MO 64114-1529
Dean Witter Reynolds Cust Investor C 5.11% .01%
IRA Rollover FBO 1,403.215;
Evelyn L Baker record
847 Aztec Dr
Independence, MO 64056
International Value Bank of America NA Primary A 74.87% 65.06%
Fund Attn Tony Farrer 9,859,632.501;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
PH Investments LLC Primary A 9.31% 8.09%
The Pilot House Lewis Wharf 1,225,490.196;
Boston, MA 02110 record and
beneficial
Charles Schwab & Co Inc Primary A 7.05% 6.13%
Special Custody Account 928,327.273;
for Benefit of Customers record
Attn Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Stephens Inc Primary B 100% 0%
Attn Cindy Cole 1.068; record
111 Center Street
Little Rock, AR 72201
180
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
FTC & Co Investor A 31.08% 2.27%
Attn: Dat Alynx #010 344,627.383;
P O Box 173736 record and
Denver, CO 80217-3736 beneficial
Charles Schwab & Co Inc Investor A 24.69% 1.81%
Special Custody Account 273,775.432;
for Benefit of Customers record
Attn Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
State Street Bank & Trust Co Investor C 62.58% .38%
TTEE 56,845.152;
FBO Coastgear & Company record
Attn: Kevin Smith
105 Rosemont Ave
Westwood, MA 02090
Merrill Lynch, Pierce, Fenner Investor C 16.28% .10%
& Smith Inc for the Sole 14,791.191;
Benefit of its Customers record
Attention Service Team
4800 Deer Lake Drive East 3rd
Floor
Jacksonville, Fl 32246
Small Company Growth Bank of America NA Primary A 91.3451% 63.99%
Fund Attn Tony Farrer 25,738,255.153;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Stephens Inc Primary B 100.0000% 0%
Attn: Cindy Cole 1.138; record
111 Center Street
Little Rock, AR 72201
Roy R Martine & Investor A 19.4547% .03%
Kathleen H Martine JTWROS 10,893.595;
4009 Tottenham Court record and
Richmond, VA 23233-1771 beneficial
Sarah A Barlow TTEE Investor A 6.4973% .01%
Sarah A Barlow Trust 3,638.117;
U/A Dtd 07/19/1990 record and
8400 Vamo Rd Apt 664 beneficial
Sarasota, FL 34231
Selma Lifsher Trustee Investor A 5.3458% .01%
Selma Lifsher Trust Dated 2,993.372;
3-2-89 record and
19355 Turnberry Way Apt PHA beneficial
Aventura, FL 33180
J David Dalton TTEE Lowcountry Investor A; 5.3035% .01%
Orthopedics Associates P/S/P 2,969.664;
Dated 08-05-87 record and
9313 Medical Plaza Drive Suite beneficial
302
Charleston, SC 29406
Corelink Financial Inc Investor C 9.2933% .04%
PO Box 4054 16,528.212
Concord, CA 94524-4054
181
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
NFSC FEBO # W50-724580 Investor C 7.4139% .03%
Members of Springdale 13,185.670;
Policemens record and
Pension & Relief Fund beneficial
c/o Ollen Stepp
201 Spring St
Springdale, AR 72764
NFSC FEBO #W53-641308 Investor C 5.2254% .02%
Dale H Wiewel 9,293.410;
200 Liberty Street record and
1 World Financial Cntr beneficial
New York, NY 10281
U. S. Government Bank of America NA Primary A 100% 89.15%
Bond Fund Attn Tony Farrer 10,045,256.255;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Stephens Inc Primary B 100% 0%
Attn: Cindy Cole 1.116; record
111 Center Street
Little Rock, AR 72201
ISTCO Investor A 16.39% .44%
a Partnership 49,418.791;
PO Box 523 record
Belleville, IL 62222
Virginia United Methodist Investor A 7.13% .19%
Homes Inc 21,485.958;
7113 Three Chopt Rd Ste 300 record and
Richmond, VA 23226 beneficial
Gable & Gotwals Inc Profit Investor A 6.98% .19%
Sharing 21,032.371;
Plan Segregated FBO Adwan record and
Bank of Oklahoma NA TTEE beneficial
PO Box 2180
Tulsa, OK 74101
BA Investment Services, Inc. Investor A 6.78% .18%
FBO 583543251 20,437.445;
185 Berry St. record
3rd Floor #12640
San Francisco, CA 94107
BA Investment Services, Inc. Investor A 5.11% .14%
FBO 721753261 15,392.570;
185 Berry St. record
3rd Floor #12640
San Francisco, CA 94107
Commerce Bank N A Investor C 16.79% .21%
FBO Humphrey Farrington M/P 23,973.943;
Attn Mutual Fund Operations record
P O Box 13366 TBTS-2 Kansas City, MO 64199-3366
NFSC FEBO # W53-678562 Investor C 13.22% .17%
Ruth Lee Paar 18,875.364;
P O Box 102 record and
Warsaw, IL 62379 beneficial
182
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Carla J Worley Investor C 12.86% .16%
CNSV William Cody Worley 18,363.028;
HC 62 Box 116 record and
Salem, MO 65560-8705 beneficial
NFSC FEBO # W52-004448 Investor C 8.01% .10%
Rodger N Lindgren TTEE 11,439.957;
Roger N Lindgren Revocable Tru record and
U/A 10/8/98 beneficial
1203 Geneva
Kearney, MO 64060
NFSC FEBO # W53-710237 Investor C 7.96% .10%
NFSC/FMTC IRA 11,370.151;
FBO Mildred Deluca record and
5512 Columbia Av beneficial
Saint Louis, MO 63139
NFSC FEBO # W65-054593 Investor C 7.21% .09%
Art Nachbar 10,287.742;
Gloria Nachbar record and
PO Box 6789 beneficial
Winter Springs, FL 32719
Government Money Bank of America NA Primary A 95.89% 63.88%
Market Fund Attn Tony Farrer 237,776,143.300;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Bank of America NA Primary B 100% .32%
Attn Tony Farrer 1,183,256.940;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
National Financial For the Investor A 62.54% 2.02%
Exclusive Benefit of our 7,534,113,260;
Customers record
200 Liberty Street
1 World Financial Center
Attn Mutual Funds 5th Floor
New York, NY 10281
Bear Stearns Securities Corp. Investor A 17.13% .55%
FBO 101-47604-23 2,063,872.600;
1 Metrotech Center North record
Brooklyn, NY 11201-3859
Bear Stearns Securities Corp. Investor A 8.82% .29%
FBO 101-47604-23 1,062,588.640;
1 Metrotech Center North record
Brooklyn, NY 11201-3859
Fasken Ltd Investor B 20.56% 5.03%
303 W Wall Ave Ste 1900 18,716,644.720;
Midland, TX 79701 record and
beneficial
Fasken Oil and Ranch Ltd Investor B 12.40% 3.03%
303 W Wall Ave Ste 1900 11,286,225.200;
Midland, TX 79701 record and
beneficial
183
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Norbert Dickman & Investor B 9.87% 2.41%
Robert Dickson Trustees 8,983,167.280;
Barbara Fasken 1995 Trust record and
303 West Wall Ave Ste 1900 beneficial
Midland, TX 79701
Robert N Herman and Investor B 7.75% 1.90%
Ann L Herman JTWROS 7,059,295.960;
9601 Eagle Ridge Drive record and
Bethesda, MD 20817 beneficial
Columbia County Capital Investor B 6.82% 1.67%
Project Fund 6,213,425.910;
Attn Judy Lewis record and
PO Box 1529 beneficial
Lake City, FL 32056
American Woodmark Corp Investor B 5.62% 1.38%
Attn Laurie Logue 5,113,355.610;
3102 Shawnee Drive record and
Winchester, VA 22601 beneficial
Columbia County General Fund Investor B 5.02% 1.23%
Attn Judy Lewis 4,572,186.000;
PO Box 1529 record and
Lake City, FL 32056-0000 beneficial
NFSC FEBO # W69-008842 Investor C 93.95% .11%
NFSC/FMTC IRA Rollover 422,056.870;
FBO Thomas S. Spadaro record and
6409 Spyglass Lane beneficial
Bradenton, FL 34202
National Financial for the Daily; 97.25% 5.11%
Exclusive Benefit of our 19,011,524.930;
Customers record
200 Liberty St
1 World Financial Ctr
Attn Mutual Funds 5th Flr
New York, NY 10281
Tax Exempt Fund Bank of America NA Primary A 99.27% 82.23%
Attn Tony Farrer 1,984,615,440.120;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Bank of America NA Primary B 99.21% .44%
Attn Tony Farrer (B Shares) 10,574,347.220;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
National Financial For the Investor A 86.49% 1.69%
Exclusive Benefit of our 40,698,328.120;
Customers record
200 Liberty Street
1 World Financial Center
Attn Mutual Funds 5th Floor
New York, NY 10281
184
<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 Investor B 6.50% .51%
Attn Stif/Master Note 12,296,102.270;
One Wall Street 2nd Fl record
New York, NY 10286
Michele D Snyder Investor B 6.21% .49%
c/o Susan Johnston 11,751,320.600;
US Trust Company of New York record and
114 West 47th St beneficial
New York, NY 10036-1532
NFSC FEBO # W16-625205 Investor C 93.02% .01%
Calvin H Price 202,539.930;
Dorothy W Price record and
2900 Old Well Lane beneficial
Gastonia, NC 28054
NFSC FEBO # W67-609994 Investor C 6.98% 0%
Ricardo Serra 15,209.000;
Rua Prof Vital Palmae Silva 78 record and
Sao Paulo/Sp Brazil 25 beneficial
Brazil
National Financial for the Daily; 99.68% 6.90%
Exclusive Benefit of our 166,429,817.880;
Customers record
200 Liberty St
1 World Financial Ctr
Attn Mutual Funds 5th Flr
New York, NY 10281
Value Fund Bank of America NA Primary A 90.07% 76.73%
Attn Tony Farrer 92,063,115.941;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Bank of America TTEE Primary A 5.59% 4.76%
NB 401K Plan 5,714,344.834;
U/A DTD 01/01/1983 record
P O Box 2518
Houston, TX 77252-2518
Stephens Inc Primary B 100% 0%
Attn: Cindy Cole 0.958; record
111 Center Street
Little Rock, AR 72201
Roy R Martine & Investor A 23.63% .01%
Kathleen H Martine Jtwros 7,312.692;
4009 Tottenham Court record and
Richmond, VA 23233-1771 beneficial
Sarah A Barlow TTEE Investor A 7.89% 0%
Sarah A Barlow Trust 2,442.178;
U/A DTD 07/19/1990 record and
8400 Vamo Rd Apt 664 beneficial
Sarasota, FL 34231
BNY Cust IRA FBO Investor A 7.26% 0%
James L Bowen Jr 2,247.191;
195 Springhill Dr record
Tifton, GA 31794
185
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Selma Lifsher Trustee Investor A 6.49% 0%
Selma Lifsher Trust Dated 2,009.376;
3-2-89 record and
19355 Turnberry Way Apt PHA beneficial
Aventura, FL 33180
BNY Cust Rollover IRA FBO Investor A 6.05% 0%
James L Payne 1,870.965;
Box 434 record
Hemphill, TX 75948
Anne Valcourt GDN FBO Danyel Investor A 5.24% 0%
Chaniequa Solange Valcourt 1,622.451;
c/o H R Chaplin record and
9930 W Broadview Dr beneficial
Bay Harbor Island, FL 33154
Capital Growth Fund Bank of America NA Primary A 98.01% 83.52%
Attn Tony Farrer 58,161,517.450;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Stephens Inc Primary B 100% 0%
Attn: Cindy Cole 1.657; record
111 Center Street
Little Rock, AR 72201
NFSC FEBO #W18-006289 Investor A 5.32% .31%
200 Liberty Street 218,745.572;
1 World Financial Cntr record
New York, NY 10281
Robert Roberson TTEE FBO Investor C 5.54% .03%
Quality Brands Inc 19,626.556;
Employees 401K Plan record and
680 Main St beneficial
Lake Helen, FL 32744
E Larry Fonts TTEE FBO Investor C 5.41% .03%
Central Dallas Association 19,166.961;
Profit Sharing Plan record and
1201 Elm Street Suite 5310 beneficial
Dallas, TX 75270
NFSC FEBO # W16-719625 Investor C 5.41% .03%
NFSC/FMTC IRA 19,143.747;
FBO James A Hullender record and
211 Bluebird Rd beneficial
Lake Lure, NC 28746
Emerging Growth Fund Bank of America NA Primary A 98.11% 76.64%
Attn Tony Farrer 12,437,664.868;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
186
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Stephens Inc Primary B 100% 0%
Attn: Cindy Cole 1.030; record
111 Center Street
Little Rock, AR 72201
Sheryle Isaacs TTEE Investor A 5.29% .29%
Good Buy Sportswear 46,693.181;
401K Saving Plan record and
2400 31st St S beneficial
St Petersburg, FL 33712
Mountain Star Partners Limited Investor A 5.25% .29%
Partnership 46,398.979;
c/o Telluride Management Corp record and
PO Box 5430 beneficial
Incline Village, NY 89450-5430
C A Porterfield & Rosalee Investor C 12.35% .09%
Moxley 13,878.412;
& Frank Minton TTEES FBO record and
Starmount Company Employees beneficial
Tax Deferred Savings Plan
PO Box 10349
Greensboro, NC 27404-0349
Tatsushi T Kubo, Max W Investor C 11.37% .08%
Dahlgren, & John Dahlgren 12,770.436;
TTEES FBO record and
Epic Products International beneficial
Corporation 401(K) Plan
PO Box 5808
Arlington, TX 76005-5808
NFSC FBO # W17-613169 Investor C 7.92% .05%
The Robbins Brick & Block Inc 8,899.937;
Em record and
Phillip C Robbins TTEE beneficial
Dtd 11011984
3862 US Hwy 221 S
Forest City, NC 28043
Summerville Pediatrics PA Investor C 6.79% .05%
Profit Sharing Plan 7,631.017;
312 Midland Parkway record and
Summerville, SC 29485-8114 beneficial
H Grayson Mitchell Jr and Investor C 6.68% .05%
John Rawls TTEE FBO 7,501.869;
Grayson Mitchell Inc 401K Plan record and
P O Box 128 beneficial
Emporia, VA 23847
C A Porterfield & Rosalee Investor C 6.22% .04%
Moxley & Frank Minton TTEES 6,993.590;
Starmount Company record and
Capital Accumulation Plan beneficial
PO Box 10349
Greensboro, NC 27404-0349
Greg Zakarian and Investor C 5.29% .04%
V M Esposito TTEES FBO 5,943.762;
Antex Biologics Inc record and
Employee 401(K) Plan beneficial
300 Professional Drive
Gaithersburg, MD 20879
187
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Anthony M Sfreddo TTEE Investor C 5.25% .04%
Triple S Termite & Pest 5,901.350;
Control 401(K) Plan record and
7416 Ceatreville Rd beneficial
Manassas, VA 20111
Equity Index Fund Bank of America NA Primary A 77.11% 75.76%
Attn Tony Farrer 29,911,542.123;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Bank of America TTEE Primary A 21.79% 21.40%
NB 401K Plan 8,450,442.185;
U/A DTD 01/01/1983 record
P O Box 2518
Houston, TX 77252-2518
Stephens Inc Primary B 100% 0%
Attn: Cindy Cole 0.818; record
111 Center Street
Little Rock, AR 72201
NFSC FEBO # W67-635626 Investor A 22.72% .38%
The Carnival Corp Ret Plan TTEE 150,730.914;
First Union record
Attn: Lowell Zemnick
3655 NW 87 Av
Miami, FL 33178
BA Investment Services, Inc. Investor A 6.31% .11%
FBO 883003631 41,852.279;
185 Berry St. record
3rd Floor #12640
San Francisco, CA 94107
Managed Index Fund Bank of America NA Primary A 91.96% 85.51%
Attn Tony Farrer 31,791,559.881;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Pamela S Keene and Primary B 99.55% 0%
William Steven Keene Jtwros 231.264; record
2016 Englewood Dr and beneficial
Apex, NC 27502
Charles Schwab & Co Inc Investor A 6.94% .48%
Special Custody Account 179,636.281;
for Benefit of Customers record
Attn Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Muir & Co Investor A 5.95% .41%
c/o Frost National Bank 154,169.851;
PO Box 2479 record and
San Antonio, TX 78298-2479 beneficial
188
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Managed SmallCap Bank of America NA Primary A 87.10% 82.97%
Index Fund Attn Tony Farrer 14,283,455.381;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Bank of America NA TTEE Primary A 6.87% 6.55%
NB 401K Plan 1,127,155.875;
U/A DTD 01/01/1983 record
P O Box 2518
Houston, TX 77252-2518
Stephens Inc Primary B 100% 0%
Attn: Cindy Cole 1.039; record
111 Center Street
Little Rock, AR 72201
Charles Schwab & Co Inc Investor A 48.02% 2.27%
Special Custody Account 390,069.921;
for Benefit of Customers record
Attn Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Dade Community Foundation Inc Investor A 5.28% .25%
200 South Biscayne Blvd Ste 42,899.498;
2780 record and
Miami, FL 33131-2343 beneficial
Charles Schwab & Co Inc Investor A 63.83% .75%
Special Custody Account 129,531.558;
for Benefit of Customers record
Attn Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
National Investor Services Corp Investor A 6.65% .08%
for the Exclusive Benefit of 13,489.990;
our Customers record
55 Water Street 32nd Fl
New York, NY 10041-3299
Managed Value Index Charles Schwab & Co Inc Primary A 51.66% 34.70%
Fund Special Custody Account 220,234.397;
for Benefit of Customers record
Attn Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Bank of America NA Primary A 33.93% 22.79%
Attn Tony Farrer 144,629.516;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Donaldson Lufkin Jenrette Primary A 5.39% 3.62%
Securities Corporation Inc. 22,964.070;
P.O. Box 2052 record
Jersey City, NJ 07303-9998
189
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Stephens Inc Primary B 100% 0%
Attn: Cindy Cole 1.066; record
111 Center Street
Little Rock, AR 72201
Charles Schwab & Co Inc Investor A 48.66% 15.99%
Special Custody Account 101,506.651;
for Benefit of Customers record
Attn Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Donaldson Lufkin Jenrette Investor A 6.55% 2.15%
Securities Corporation Inc. 13,656.752;
P. O. Box 2052 record
Jersey City, NJ 07303-9998
NFSC FEBO # W55-629405 Investor A 5.14% 1.69%
Connie L Shelton 10,724.760;
4242 N Capistrano #217 record and
Dallas, TX 75287 beneficial
Managed SmallCap Charles Schwab & Co Inc Primary A 57.86% 36.30%
Value Index Fund Special Custody Account 197,656.922;
for Benefit of Customers record
Attn Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Bank of America NA Primary A 16.47% 10.33%
Attn Tony Farrer 56,268.690;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Michael Larkin Tr Primary A 5.79% 3.63%
UA 01-06-98 19,782.552;
Courtland P Larkin & Patricia record and
F Larkin Irrev Family Trust beneficial
8665 Bay Colony Dr Apt 702
Naples, FL 34108
Stephens Inc Primary B 100% 0%
Attn: Cindy Cole 1.017; record
111 Center Street
Little Rock, AR 72201
Nations Marsico Bank of America NA Primary A 46.25% 9.85%
Growth & Income Fund Attn Tony Farrer 1,687,498.262;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Charles Schwab & Co Inc Primary A 23.61% 5.03%
Special Custody Account 861,424.997;
for Benefit of Customers record
Attn Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
190
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
FTC & Co Primary A 17.51% 3.73%
Data Lynx House Acct 04/13/98 639,029.562;
P O Box 173736 record and
Denver, CO 80217-3736 beneficial
Stephens Inc Primary B 100% 0%
Attn: Cindy Cole 1.002; record
111 Center Street
Little Rock, AR 72201
Merrill Lynch, Pierce, Fenner Investor A 52.37% 11.88%
& Smith Inc for the Sole 2,035,133.674;
Benefit of its Customers record
Attention Service Team
4800 Deer Lake Drive East 3rd
Floor
Jacksonville, FL 32246
Charles Schwab & Co Inc Investor A 9.88% 2.24%
Special Custody Account 383,826.942;
for Benefit of Customers record
Attn Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Merrill Lynch, Pierce, Fenner Investor C 35.03% 1.13%
& Smith Inc for the Sole 193,955.889;
Benefit of its Customers record
Attention Service Team
4800 Deer Lake Drive East 3rd
Floor
Jacksonville, FL 32246
Nations Marsico Bank of America NA Primary A 57.52% 8.85%
Focused Equities Fund Attn Tony Farrer 4,982,086.184;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Charles Schwab & Co Inc Primary A 34.78% 5.35%
Special Custody Account 3,012,311.771;
for Benefit of Customers record
Attn Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Stephens Inc Primary B 100% 0%
Attn: Cindy Cole 1.012; record
111 Center Street
Little Rock, AR 72201
Charles Schwab & Co Inc Investor A 17.66% 5.77%
Special Custody Account 3,250,906.913;
for Benefit of Customers record
Attn Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
191
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Merrill Lynch, Pierce, Fenner Investor A 12.68% 4.15%
& Smith Inc for the Sole 2,334,255.954;
Benefit of its Customers record
Attention Service Team
4800 Deer Lake Drive East 3rd
Floor
Jacksonville, FL 32246
Merrill Lynch, Pierce, Fenner Investor B 5.35% 2.51%
& Smith Inc for the Sole 1,411,308.495;
Benefit of its Customers record
Attention Service Team
4800 Deer Lake Drive East 3rd
Floor
Jacksonville, FL 32246
Merrill Lynch, Pierce, Fenner Investor C 49.51% 2.30%
& Smith Inc for the Sole 1,294,556.944;
Benefit of its Customers record
Attention Service Team
4800 Deer Lake Drive East 3rd
Floor
Jacksonville, FL 32246
Disciplined Equity Bank of America NA Primary A 85.17% 65.78%
Fund Attn Tony Farrer 15,477,791.647;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Bank of America TTEE Primary A 13.50% 10.43%
NB 401K Plan 2,453,651.259;
U/A DTD 01/01/1983 record
P O Box 2518
Houston, TX 77252-2518
Stephens Inc Primary B 100% 0%
Attn: Cindy Cole 0.889; record
111 Center Street
Little Rock, AR 72201
Wendel & Co Investor A 5.61% .68%
c/o Bny Mtl Rd Reorg Dpt 160,069.991;
PO Box 1066 Wall Street Station record
New York, NY 10286
NFSC FEBO # W32-632465 Investor C 11.72% .04%
Tom Standifer P/Adm 9,911.299;
Lakeland Batteries Inx P/S/P record and
Tr Dtd 07011984 beneficial
1840 S Combee Rd
Lakeland, FL 33801
Summerville Pediatrics Pa Investor C 10.26% .04%
Profit Sharing Plan 8,672.579;
312 Midland Parkway record and
Summerville, SC 29485-8114 beneficial
James B Ford and Investor C 5.94% .02%
Joanne W Ford Jtten 5,021.041;
25 Century Blvd Suite 605 record and
Nashville, TN 37214 beneficial
192
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
NFSC FEBO # W19-659355 Investor C 5.29% .02%
Falcon Food Svc Co Inc 4,469.464;
12753 Pineacre Lane record and
West Palm Bch, FL 33414 beneficial
Strategic Equity Fund Bank of America NA Primary A 99.74% 99.76%
Attn Tony Farrer (B Shares) 24,377,409.091;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Balanced Assets Fund Bank of America NA Primary A 87.87% 28.18%
Attn Tony Farrer 3,575,841.552;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
The Bank of New York TTEE Primary A 6.73% 2.16%
Hitachi Semiconductors Pension 273,744.559;
Plan record
Attn: Stella Brown
One Wall Street 12th Floor
New York, NY 10286
Stephens Inc Primary B 100% 0%
Attn: Cindy Cole 1.359; record
111 Center Street
Little Rock, AR 72201
C A Porterfield & Rosalee Investor C 22.01% .26%
Moxley 33,326.831;
& Frank Minton TTEES FBO record and
Starmount Company Employees beneficial
Tax Deferred Savings Plan
PO Bxo 10349
Greensboro, NC 27404-0349
C A Porterfield & Rosalee Investor C 21.83% .26%
Moxley 33,060.949;
& Frank Minton TTEES FBO record and
Starmount Company beneficial
Capital Accumulation Plan
PO Box 10349
Greensboro, NC 27404-0349
Stuart K Colonna TTEE Investor C 13.38% .16%
Bayshore Concrete Products Corp 20,256.327;
Retirement Savings Plan record and
1 Bayshore Rd P O Box 230 beneficial
Cape Charles, VA 23310
Short-Intermediate Bank of America NA Primary A 97.63% 86.46%
Government Fund Attn Tony Farrer 131,495,874.557;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Reliance Trust Co Primary B 99.99% .04%
PO Box 48449 67,539.096;
Atlanta, GA 30362 record and
beneficial
193
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Bank of America NA Investor A 23.55% 2.26%
The Private Bank 3,443,576.868;
Attn Common Trust Funds Unit record
38329
PO Box 3577
Los Angeles CA 90051-1577
NFSC FEBO #W14-610208 Investor A 6.17% .59%
Burgess Pigment Co 902,351.843;
PO Box 349 Deck Blvd record and
Sandersville, GA 31082 beneficial
NFSC FEBO # W17-718840 Investor B 7.96% .13%
Rental of Florence P/Adm 197,886.631;
Rntl of Florence Pft Shring record and
PO Box 12410 beneficial
Florence, SC 29504
NFSC FEBO # W26-653705 Investor C 25.51% .04%
True Way Evangelisticmission 62,661.158;
Attn: Wilmure Burden record and
PO Box 61365 beneficial
Virginia Bch, VA 23466
BA Investment Services, Inc. Investor C 19.15% .03%
FBO 435649131 47,045.023;
185 Berry St. record
3rd Floor #12640
San Francisco, CA 94107
Dorothy L Edwards Investor C 6.72% .01%
3400 Kim Court SW A25 16,498.306;
Roanoke, VA 24018 record and
beneficial
Short-Term Income Bank of America NA Primary A 94.77% 90.32%
Fund Attn Tony Farrer 38,964,844.054;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Stephens Inc Primary B 100% 0%
Attn: Cindy Cole 1.032; record
111 Center Street
Little Rock, AR 72201
NFSC FEBO #W38-013528 Investor A 7.12% .24%
Kenneth D Pezzulla TTEE 103,021.916;
PATS Inc Empl Stock Ownership record and
U/A 7/1/94 beneficial
401 Washington Ave Suite 301
Towson, MD 21204
Michael D Shea Investor A 7.01% .23%
4770 South Atlanta Road 101,356.781;
Smyrna, GA 30080 record and
beneficial
Southern Gas Association Investor A 6.27% .21%
Investment Fund 90,722.121;
Attn Dotty Thornhill record and
3030 LBJ Freeway #1300 LB 60 beneficial
Dallas, TX 75234
194
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
NFSC FEBO #W17-656283 Investor A 5.59% .19%
Dr George B Richardson 80,823.300;
516 Azalea Lane record and
Florence, SC 29501 beneficial
Gator Broadcasting Corporation Investor A 5.28% .18%
Attn DavidGregg 111 76,321.190;
2200 Claredon St record and
Arlington, VA 22201-3331 beneficial
NFSC FEBO # W17-731269 Investor B 9.99% .09%
West Anderson Rural Water & 40,758.093;
Sewer Co Inc record and
2767 Whitehall Rd beneficial
Anderson, SC 29625
NFSC FEBO # W17-730858 Investor B 6.44% .06%
NFSC/FMTC IRA 26,268.375;
FBO James R Vaughn record and
234 Cureton Lane beneficial
Pickens, SC 29671
NFSC FEBO # W17-731277 Investor B 5.93% .06%
W Anderson Rural Water & Sewer 24,170.344;
Reserve Fund record and
2767 Whitehall Rd beneficial
Anderson, SC 29625
Alden Enterprises Inc Investor C 19.45% .06%
5900 Gulf Blvd 25,588.536;
St Pete Beach, FL 33706 record and
beneficial
NFSC FEBO # W62-019461 Investor C 15.50% .05%
Nations Bank Collateral Acct 20,387.360;
FBO C Louise Wilson record and
2945 Froitzhem Sreet beneficial
Callahan, FL 32011
The Lincolnshire Trust Investor C 13.08% .04%
5208 Lincolnshire 17,211.104;
Dallas, TX 75287 record and
beneficial
James B Clement Investor C 9.21% .03%
P O Box 5C 12,109.606;
Lafayette, LA 70505-6003 record and
beneficial
Erna M Weidner Investor C 6.15% .02%
108 Lariat 8,084.500;
San Antonio, TX 78232-1004 record and
beneficial
BA Investment Services, Inc. Investor C 6.06% .02%
FBO 435996951 7,972.973;
185 Berry St. record
3rd Floor #12640
San Francisco, CA 94107
195
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
BNY Cust IRA FBO Investor C 5.04% .02%
Don E Bastian 6,623.932;
1920 Barron Ct record
Charlottesville, VA 22911-7584
Diversified Income Bank of America NA Primary A 91.80% 51.60%
Fund Attn Tony Farrer 12,572,954.727;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Stephens Inc Primary B 100% 0%
Attn: Cindy Cole 1.063; record
111 Center Street
Little Rock, AR 72201
BNY Cust IRA FBO Investor A 14.55% .05%
James L Bowen Jr. 12,664.419;
195 Springhill Dr record
Tifton, GA 31794
J David Dalton TTEE Lowcountry Investor A 8.61% .03%
Orthopedics Associates P/S/P 7,493.283;
Dated 08-05-87 record and
9313 Medical Plaza Drive Suite beneficial
302
Charleston, SC 29406
Jean E. Kellogg and Investor A 7.19% .03%
Thomas G. Kellogg JTTEN 6,261.685;
52109 Tara Dr record and
South Bend, IN 46628 beneficial
BNY Cust Rollover IRA FBO Investor A 6.06% .02%
James L. Payne 5,272.125;
Box 434 record
Hemphill, TX 75948
BNY Cust IRA FBO Investor A 5.48% .02%
Jeremiah J. Leahy 4,772.866;
1101 N Elm St #503 record
Greensboro, NC 27401
BNY Cust IRA FBO Investor A 5.33% .02%
Cleveland H White 4,652.747;
133 George Ln record
Bonneau, SC 29431
Anne Valcourt GDN FBO Danyel Investor A 5.25% .02%
Chaniequa Solange Valcourt 4,571.845;
C/O H R Chaplin record and
9930 W Broadview Dr beneficial
Bay Harbor Island, FL 33154
Bank of America NA Investor A 6.49% .97%
The Private Bank 236,861.105;
Attn Common Trust Funds Unit record and
38329 beneficial
PO Box 3577
Los Angeles, CA 90051-1577
196
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
BA Investment Services, Inc. Investor C 11.76% .07%
FBO 300181211 18,205.192;
185 Berry St. record
3rd Floor #12640
San Francisco, CA 94107
NFSC FEBO # W17-662682 Investor C 9.96% .06%
NFSC/FMTC IRA Rollover 15,425.100;
FBO Linda G Walker record and
7 Sally St beneficial
Sprartanburg, SC 29301
Stuart K Colonna TTEE Investor C 6.62% .04%
Bayshore Concrete Products Corp 10,246.662;
Retirement Savings Plan record and
1 Bayshore Rd P O Box 230 beneficial
Cape Charles, VA 23310
NFSC FEBO # W15-001520 Investor C 6.19% .04%
Clarence G Boehm 9,587.622;
136 E Edgewater Dr record and
Charleston, SC 29407 beneficial
NFSC FEBO # W15-005630 Investor C 5.73% .04%
Rita C Cook 8,875.156;
8405 E Saddlebrook Dr record and
Charleston, SC 29420 beneficial
Strategic Fixed Bank of America NA Primary A 95.51% 93.59%
Income Fund Attn Tony Farrer 175,940,400.921;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Stephens Inc Primary B 100% 0%
Attn: Cindy Cole 1.050; record
111 Center Street
Little Rock, AR 72201
Mercantile Safe Dep & Trust Co Investor A 7.59% .12%
TTEE 222,311.538;
Case Communications Defined record
Benefit Plan A/C# 3400306
U/A DTD 05/28/1984
766 Old Hammonds Ferry Road
Linthicum, MD 21090
Alden Enterprises Inc Investor C 21.56% .01%
5900 Gulf Blvd 25,172.293;
St Pete Beach, FL 33706 record and
beneficial
Summerville Pediatrics Pa Investor C 17.59% .01%
Profit Sharing Plan 20,537.281;
312 Midland Parkway record and
Summerville, SC 29485-8114 beneficial
BNY Cust IRA FBO Investor C 8.24% .01%
James A Blanchard 9,616.933;
9 Las Brisas record
Austin, TX 78746
197
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Carver Development Board Investor C 6.96% 0%
Endowment Fund 8,130.824;
226 N Hackberry St record and
San Antonio, TX 78202 beneficial
Dorothy L Edwards Investor C 5.85% 0%
3400 Kim Court SW A25 6,827.791;
Roanoke, VA 24018 record and
beneficial
Erna M Weidner Investor C 5.21% 0%
108 Lariat 6,087.443;
San Antonio, TX 78232-1004 record and
beneficial
Municipal Income Fund Bank of America NA Primary A 99.73% 91.11%
Attn Tony Farrer 54,774,310.248;
1401 Elm Street 11th Floor record and
Dallas, TX 75202-2911 beneficial
NFSC FEBO # W38-676063 Investor B 6.60% .13%
Sid Meier 78,253.956;
2 Sheepfold La record and
Hunt Valley, MD 21030 beneficial
Denise Maxwell Investor C 21.99% .08%
45 Sallebrook 46,055.756;
Houston, TX 77024 record and
beneficial
NFSC FEBO # W53-715107 Investor C 8.43% .03%
Rosalie Chod TTEE 17,644.084;
The Rosalie Chod Rev Tr record and
U/A 8/25/89 beneficial
286 Hewlett Ct
Saint Louis, MO 63141
NFSC FEBO # W65-633313 Investor C 5.87% .02%
College Park Partners Ltd 12,291.077;
a Partnership record and
117 Spring Chase Circle beneficial
Atlamonte Springs, FL 32714
Emmet David Gelhot Investor C 5.05% .02%
5630 Oleatha Avenue 10,578.066
Saint Louis, MO 63139-1504
Harry Singer Family LTD Investor A 8.90% .19%
A Colorado LTD Partnership 112,324.561;
2960 Wentworth record and
Weston, FL 33332 beneficial
NFSC FEBO #W65-028193 Investor A 7.40% .16%
Thurman D Kitchin 93,419.025;
P O Box 1479 record and
Winter Park, FL 32790 beneficial
Short Term Bank of America NA Primary A 98.89% 57.37%
Municipal Income Attn Tony Farrer 6,574,680.212;
Fund 1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
198
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Balsa & Co Investor A 17.89% 5.34%
c/o Chase Manhattan Bank 612,417.268;
PO Box 1768 Grand Central record
Station
New York, NY 10163-1768
Robert Sunderland Investor A 9.16% 2.74%
PO Box 25900 313,715.126;
Shawnee Mission, KS 66225-5900 record and
beneficial
J Michael Nixon Investor A 6.40% 1.91%
621 SW Baypoint Circle 219,122.511;
Palm City, FL 34990-1753 record and
beneficial
NFSC FEBO # W52-000035 Investor A 5.83% 1.74%
Fred J Nesbit 199,401.795;
Linda M Nesbit record and
415 45th St beneficial
Des Moines, IA 50312
NFSC FEBO # W52-686921 Investor A 5.33% 1.59%
Robert E Esrey TR 182,426.388;
Robert E Esrey TTEE record and
U/A 11/30/94 beneficial
4435 Main St Ste 1000
Kansas City, MO 64111
NFSC FEBO # W52-600571 Investor B 22.13% 2.04%
Joseph Carter 233,712.038;
Diana Carter record and
3000 W 117th St beneficial
Leawood, KS 66211
NFSC FEBO # W15-000515 Investor B 10.58% .97%
William L Spadoni 111,692.622;
Julia S Spadoni record and
PO Box 1019 beneficial
Myrtle Beach, SC 29578
NFSC FEBO # W13-629138 Investor B 6.69% .62%
Paragon Assets II 70,605.322;
4520 King Street #205 record and
Alexandria, VA 22302 beneficial
NFSC FEBO # W27-709450 Investor B 5.90% .54%
James D Yopp Jr 62,279.218;
1095 Fieldwood Lane record and
Winston Salem, NC 27106 beneficial
NFSC FEBO # W26-783200 Investor B 5.07% .47%
James H Sparks 53,542.645;
Karen M Sparks record and
4006 N Witchduck Rd beneficial
Virginia Bch, VA 23455
199
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Donald E Steen & Investor C 38.31% .95%
Trudy K Steen Jtwros 108,365.595;
5715 Thames Ct record and
Dallas, TX 75252 beneficial
Christopher H Williams Investor C 26.17% .65%
10 Hampton Hills Lane 74,025.169;
Richmond, VA 23226 record and
beneficial
NFSC FEBO # W14-689122 Investor C 9.66% .24%
Dr Cecil J Waylan 27,330.684;
Karen S Waylan record and
9275 Chandler Bluff beneficial
Alpharetta, GA 30022
NFSC FEBO # W52-686450 Investor C 7.10% .18%
Henry F Frigon 20,090.089;
Henry F. Frigon TTEE record and
U/A 03/23/90 beneficial
PO Box 18
Maysville, MO 64469
NFSC FEBO # W26-018473 Investor C 5.28% .13%
H William Coogan Jr 14,933.839;
Susan C Coogan record and
4712 Charmian Road beneficial
Richmond, VA 23226
Intermediate Bank of America NA Primary A 99.66% 96.76%
Municipal Bond Fund Attn Tony Farrer 87,916,274.555;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Warren Montouri Investor A 17.95% .42%
2440 Virginia Ave NW 385,569.792;
Washington, DC 20037-2601 record and
beneficial
Hometown Bank & Company Investor A 14.52% .34%
PO Box 2887 311,904.773;
Wilson, NC 27894-2887 record and
beneficial
VATCO Investor A 6.03% .14%
c/o The Trust Company of 129,482.949;
Virginia record and
9030 Stony Point Pkway Ste 300 beneficial
Richmond, VA 23235
NFSC FEBO # W52-000019 Investor A 5.85% .14%
Frank B Comfort 125,552.732;
4912 Cedar Drive record and
West Des Moines, IA 50266 beneficial
200
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
NFSC FEBO # W18-738263 Investor A 5.18% .12%
Edelweiss Corp 111,199.566;
Attn: Mary Tyler Labhart record and
1445 Ross @ Field Ste 1500 beneficial
Dallas, TX 75202
NFSC FEBO # W14-884685 Investor B 9.36% .03%
Win Communication Corp 28,310.447;
Attn: Bob Poole record and
6755 Jimmy Carter Blvd beneficial
Norcross, GA 30071
NFSC FEBO # W15-626244 Investor B 8.37% .03%
Robert J Evans 25,321.240;
Ollie P Evans record and
Mary Helen Schulte beneficial
255 Weatherly Club Dr
Alabaster, AL 35007
NFSC FEBO # W15-649406 Investor B 5.89% .02%
Gustave J Crispyn TTEE 17,804.347;
Joseph A Crispyn Tr record and
U/A 7/21/97 beneficial
2382 Cat Tail Pound Rd
Johns Island, SC 29455
NFSC FEBO # W15-649414 Investor B 5.88% .02%
Mildred M Crispyn TTEE 17,798.304;
Timothy J Crispyn Tr record and
U/A 7/21/97 beneficial
2382 Cat Tail Pond Rd
Johns Island, SC 29455
NFSC FEBO # W41-673196 Investor B 5.17% 17.20%
Ellen Aston Paull 15,625,000;
1407 N Weston Lane record and
Austin, TX 78733 beneficial
Gerhard Kleinschmidt and Investor C 33.21% .07%
Gwendolyn Kleinschmidt Jtwros 62,061.681;
101 Oak Creek Trail record and
Aledo, TX 76008 beneficial
Eugene R Allspach and Investor C 27.79% .06%
Joann M Allspach Jtwros 51,924.795;
3760 Darcus St record and
Houston, TX 77005-3704 beneficial
Charles W. Doolin Investor C 20.64% .04%
3508 Harvard Ave 38,572.130;
Dallas, TX 75205-0000 record and
beneficial
NFSC FEBO # W23-627305 Investor C 12.33% .03%
Neal S Platzer 23,043.818;
Jack W Crosby record and
Special AC beneficial
1410 Lost Ridge Cir
Seabrook, TX 77586
201
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Florida Municipal Bank of America NA Primary A 99.87% 49.96%
Bond Fund Attn Tony Farrer 7,694,560.720;
1401 Elm Street 11th Floor record and
Dallas, TX 75202-2911 beneficial
National Financial Svs Corp Investor A 65.82% 26.42%
for the Exclusive Benefit of 4,068,852.341;
our Customers record and
Church Street Station beneficial
PO Box 3908
New York, NY 10008-3908
NFSC FEBO # W64-048550 Investor C 87.48% .01%
Thomas W Brown 2,019.621;
Rt 20 Box 2130 record and
Lake City, FL 32055 beneficial
Florida Intermediate Bank of America NA Primary A 99.92% 91.88%
Municipal Bond Fund Attn Tony Farrer 21,375,342.786;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
NFSC FEBO # W52-739600 Investor B 5.03% .10%
Sally Ann Batz TTEE 23,930.213;
of The Sally Ann Batz Living Tr record and
U/A 10/15/91 beneficial
88 NE Alice St
Jensen Beach, FL 34957
NFSC FEBO # W60-190306 Investor C 74.38% .35%
Ming J Wu and 81,352.549;
Fen Fen Wu Jtwros record and
3371 Hickory Wood Way beneficial
Tarpon Springs, FL 34689
Doris R Bomstein and Sanford Investor C 8.84% .04%
Sanford Bomstein TTEES 9,672.647;
Doris R Bomstein Trust record and
U/A/D 08/20/91 beneficial
3000 S Ocean Blvd Apt 1201
Boca Raton, FL 33432
NFSC FEBO # W19-654655 Investor C 8.54% .04%
Moshe Ezratti 9,336.140;
Rosa Ezratti record and
1401 University Dr 200 beneficial
Coral Springs, FL 33071
Sanford and Doris R Bomstein Investor C 7.03% .03%
TTEES 7,688.941;
Sanford Bomstein Trust UAD record and
11/4/91 beneficial
3000 South Ocean Blvd #1201
Boca Raton, FL 33431
Georgia Intermediate Bank of America NA Primary A 99.99% 82.48%
Municipal Bond Fund Attn Tony Farrer 12,048,455.809;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
202
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
The Crumpler Investment LP Investor A 23.05% 2.73%
Crumpler Investment Mgt Co 399,157.804;
LLC/GP record and
50 Old Vermont Pl beneficial
Atlanta, GA 30328-0000
Wachovia Securities, Inc. Investor A 8.49% 1.01%
FBO 402-08416-17 147,075.290;
P.O. Box 1220 record
Charlotte, NC 28201-1220
NFSC FEBO #W14-004162 Investor A 7.69% .91%
Alice Hinton Ray 133,188.372;
P O Box 415 record and
Dacula, GA 30019 beneficial
NFSC FEBO #W14-007528 Investor A 5.39% .64%
John W Wilcox Jr 93,406.520;
2551 Potomac Ave NE record and
Atlanta, GA 30305 beneficial
NFSC FEBO # W14-009636 Investor B 34.32% 1.74%
Derst Investments LP 254,882.288;
a Partnership record and
258 Varn Drive beneficial
Savannah, GA 31405
NFSC FEBO # W14-652571 Investor C 63.88% .35%
Letty C Cagle 51,641.107;
Douglas Cagle record and
Apt 318 8592 Roswell Rd beneficial
Atlanta, GA 30350
NFSC FEBO # W14-853925 Investor C 11.81% .07%
Charles D Davidson 9,544.726;
Judith L Davidson record and
580 Glen Hampton Dr beneficial
Alpharetta, GA 30004
Georgia Municipal Bank of America NA Primary A 99.97% 41.70%
Bond Fund Attn Tony Farrer 992,558.228;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
NFSC FEBO # W14-004162 Investor A 64.22% 6.05%
Alice Hinton Ray 143,972.542;
P O Box 415 record and
Dacula, GA 30019 beneficial
NFSC FEBO # W14-749877 Investor A 12.18% 1.15%
Hunter R Hughes III 27,312.209;
c/o Rogers & Hardin record and
229 Peachtree St NW beneficial
2700 Cain International Tower
Atlanta, GA 30327
203
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
NFSC FEBO # W14-725382 Investor A 11.19% 1.05%
Edd Price 25,080.278;
Lynn Price record
AAA Tank Testers
5600 Oakbrook Pkwy Suite 120
Norcross, GA 30093
Stephens Inc Investor C 100% .01%
Attn: Cindy Cole 287.975; record
111 Center Street
Little Rock, AR 72201
Maryland Bank of America NA Primary A 100% 88.69%
Intermediate Attn Tony Farrer 16,786,883.917;
Municipal Bond Fund 1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
NFSC FEBO #W13-061581 Investor A 20.53% 1.66%
Robert Gladstone 314,858.836;
Leslie Gladstone record and
2468 Belmont Rd NW beneficial
Washington, DC 20008
NFSC FEBO #W38-007404 Investor A 5.95% .48%
Vincent L. Salvatori 91,178.519;
Carol H Salvatori record and
2652 Greenbriar Rd beneficial
Annapolis, MD 21401
NFSC FEBO #W13-640379 Investor A 5.38% .44%
Carol C House 82,501.641;
Peter W House record and
4210 Leeward Pl beneficial
Bethesda, MD 20816
NFSC FEBO # W13-622168 Investor C 13.51% .03%
Donald J Kunkoski 6,446.650;
Eileen M. Kunkoski record and
2180 W March Ct beneficial
Frederick, MD 21702
NFSC FEBO # W13-633313 Investor C 11.45% .03%
Albert J Robertazzi 5,461.084;
Susan E Franks record and
11564 W Hill Dr beneficial
Rockville, MD 20852
NFSC FEBO # W13-680141 Investor C 8.79% .02%
James Lee Donaldson 4,195.166;
Robert W Donaldson record and
12604 Farnell Dr beneficial
Wheaton, MD 20906
NFSC FEBO # W13-661058 Investor C 7.85% .02%
Girard F Stegner 3,745.467;
Betty C Stegner record and
29 Consett Pl beneficial
Frederick, MD 21703
204
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Jessica Udall Gil 3,316.201;
Milan D Smith Jr record and
5610 Wisconsin Av beneficial
Chevy Chase, MD 20815
NFSC FEBO # W13-697036 Investor C 6.78% .02%
Frank Baker 3,236.448;
Steven L Baker record and
Teresa L Radi beneficial
250 Wyngate Dr
Frederick, MD 21701
NFSC FEBO # W13-699381 Investor C 5.38% .01%
Kwok Luen Lee 2,568.220;
Patsy S Lee record and
2705 Hardy Av beneficial
Wheaton, MD 20902
Maryland Municipal Bank of America NA Primary A 99.98% 48.71%
Bond Fund Attn Tony Farrer 1,798,369.080;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
NFSC FEBO # W13-640379 Investor A 58.88% 2.82%
Carol C House 104,033.033;
Peter W House record and
4210 Leeward Pl beneficial
Bethesda, MD 20816
NFSC FEBO # W13-634760 Investor A 13.31% .64%
Raymond A Turetsky 23,517.554;
Bess H Turetsky record and
11220 Woodson Av beneficial
Kensington, MD 20895
NFSC FEBO # W13-6567097 Investor A 7.47% .36%
Dona L Lechliter 13,202.752;
Stephen C Lechliter record and
4102 Madison Street beneficial
Hyattsville, MD 20781
NFSC FEBO # W13-770442 Investor A 6.49% .31%
Richard E Ireland 11,463.769;
Mary E Ireland record and
1423 Grouse Ct beneficial
Frederick, MD 21703
NFSC FEBO # W38-028541 Investor C 98.62% .56%
Elizabeth Gregory 20,549.684;
PO Box 2327 record and
Ocean City, MD 21843 beneficial
North Carolina Bank of America NA Primary A 99.73% 91.87%
Intermediate Attn Tony Farrer 18,217,203.650;
Municipal Bond Fund 1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
205
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
NFSC FEBO #X68-061336 Investor A 10.10% .48%
Julia E Clark 95,615.783;
4600 Troy's Mtn LN record and
Durham, NC 27705 beneficial
NFSC FEBO #W16-714542 Investor A 7.18% .34%
W Frank Dowd Jr. 67,966.953;
P O Box 35430 record and
Charlotte,NC 28235 beneficial
NFSC FEBO # W26-656267 Investor A 6.30% .30%
Eileen M Friars 59,646.179;
3516 Foxcroft Road record and
Charlotte, NC 28211 beneficial
NFSC FEBO # PSA-042072 Investor A 6.25% .30%
Ron F Robine 59,191.434;
Cathy G Robine record and
18512 Square Sail Road beneficial
Cornelius, NC 28031
NFSC FEBO # W27-002879 Investor B 5.86% .18%
Jack Cartwright 35,348.838;
1040 Cantering Rd record and
High Point, NC 27262 beneficial
NFSC FEBO # W27-734004 Investor C 26.00% .01%
Barbara B Coyner 2,334.746;
513 Lake Boone Trail record and
Raleigh, NC 27608 beneficial
NFSC FEBO # W27-682217 Investor C 18.78% .01%
J Robert Stout Revocab Tr 1,686.289;
J Robert Stout record and
U/A 02/19/97 beneficial
PO Box 35343
Greensboro, NC 27425
NFSC FEBO # W27-747360 Investor C 12.14% .01%
Anna B Steele 1,089.840;
2041 Georgia Avenue record and
Winston Salem, NC 27104 beneficial
NFSC FEBO # W27-745472 Investor C 11.18% .01%
W Joseph Selvia 1,004.177;
Jay P Selvia record and
4041 Max Dr beneficial
Winston Salem, NC 27106
NFSC FEBO # W27-740810 Investor C 6.88% 0%
Thomas H Blount 617.550; record
Doris J Blount and beneficial
207 W 11th St
Washington, NC 27889
206
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
NFSC FEBO # W27-002720 Investor C 6.82% 0%
Roger W Simmons 612.591; record
Mary R Simmons and beneficial
150 River Hill Drive
Advance, NC 27006
North Carolina Bank of America NA Primary A 99.98% 39.75%
Municipal Bond Fund Attn Tony Farrer 1,702,978.888;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
South Carolina Bank of America NA Primary A 100% 88.09%
Intermediate Attn Tony Farrer 22,571,450.616;
Municipal Bond Fund 1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
NFSC FEBO #W15-635901 Investor A 11.31% .84%
James T Pearce 215,016.960;
P O Box 1986 record and
Greenville, SC 29602 beneficial
NFSC FEBO #W15-620629 Investor A 9.92% .74%
J C Bernard 188,517.286;
Merna D Bernard record and
110 Dolphin Point Dr beneficial
Beaufort, SC 29902
James Markham Investor A 5.08% .38%
99 Birdsong Way 96,557.940;
Hilton Head Island, SC 29926 record and
beneficial
NFSC FEBO # W15-645788 Investment B 9.54% .31%
Gustave J Crispyn 79,899.553;
Mildred M Crispyn record and
2382 Cat Tail Pond Rd beneficial
Johns Island, SC 29455
NFSC FEBO # W17-681547 Investor B 5.67% .19%
Jimmy Ruppe 47,497.048;
Judy Ruppe record and
1505 Cherokee Av beneficial
Gaffney, SC 29340
NFSC FEBO # W15-645583 Investor C 36.44% .44%
Berchtold Corp 112,082.887;
1950 Hanahan Rd record and
Charleston, SC 29406 beneficial
NFSC FEBO # W15-659860 Investor C 6.95% .08%
Diane Saari Mccall 21,377.772;
Mark J Mccall record and
12 Guerard Rd beneficial
Charleston, SC 29407
NFSC FEBO # W15-654680 Investor C 6.23% .07%
Edward Mccloud 19,155.748;
Elizabeth M. Robinson record and
523 Carpenter St beneficial
Charleston, SC 29412
207
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
NFSC FEBO # W15-624438 Investor C 5.98% .07%
Tracy S Harvey 18,402.911;
Susan C Harvey record and
5033 Stone Plantation Dr beneficial
Meggell, SC 29449
South Carolina Bank of America NA Primary A 100% 53.34%
Municipal Bond Fund Attn Tony Farrer 1,314,561.532;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
NFSC FEBO # W17-656208 Investor A 45.40% 2.05%
Donna R Cart 50,417.339;
1140 Partridge Rd record and
Spartanburg, SC 29302 beneficial
NFSC FEBO # W18-693910 Investor A 28.88% 1.30%
Cuppia Investments LP 32,069.220;
P O Drawer 22449 record and
Hilton Head Island, SC 29925 beneficial
Wachovia Bank NA Investment Mgr Investor A 7.94% .36%
Charles D. Erb TTEE for 8,819.040;
Charles D Erb Trust U/A Dtd record
10/4/88
PO Box 3073
M/C NC-31057
Winston-Salem, NC 27150
Tennessee Bank of America NA Primary A 100% 78.38%
Intermediate Attn Tony Farrer 4,129,466.991;
Municipal Bond Fund 1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
NFSC FEBO #W25-680427 Investor A 15.45% 2.49%
Bob G Long 131,222.706;
PO Box 266 record and
Hermitage, TN 37076 beneficial
NFSC FEBO #W25-683256 Investor A 13.76% 2.22%
Marshall T Polk III 116,836.192;
PO Box 90148 record and
Nashville, TN 37209 beneficial
SunTrust Bank Chattanooga NA Investor A 7.16% 1.15%
H Clay Evans Johnson Rev Trust 60,784.510;
U/A Dtd 5/9/85 A/C 40E55700 record and
Attn: Mutual Funds beneficial
PO Box 105870 Center 3144
Atlanta, GA 30348
NFSC FEBO #W25-684716 Investor A 6.85% 1.10%
James R. Kellam III 58,176.257;
3605 Sycamore Lane record and
Nashville, TN 37215 beneficial
Ralph S Graham TTEE Investor A 6.69% 1.08%
Ralph S Graham Rev Liv Trust 56,767.294;
U/A Dtd 08/14/1990 record and
PO Box 235 beneficial
Big Sandy, TN 38221
208
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
NFSC FEBO #W25-683388 Investor A 5.75% .93%
Glenn Huff 48,839.773;
Honor Huff record and
509 Mansion Dr beneficial
Brentwood, TN 37027
NFSC FEBO #W25-680419 Investor A 5.33% .86%
Joseph L Dilorenzo 45,251.980;
310 Watercress Drive record and
Franklin, TN 37064 beneficial
NFSC FEBO # W25-683043 Investor B 22.21% 1.22%
John O Colton 64,399.438;
6211 Jocelyn Hollow Road record and
Nashville, TN 37205 beneficial
NFSC FEBO # W25-684570 Investor B 13.60% .75%
Robert R Hayes 39,430.054;
Vira E Hayes record and
400 Bryants Lane beneficial
Woodbury, TN 37190
NFSC FEBO # W25-008028 Investor B 5.88% .32%
David A Lockmiller 17,056.616;
Carlotta E Lockmiller record and
4343 Lebanon Rd Apt#1711 beneficial
Hermitage, TN 37076
Tennessee Municipal Bank of America NA Primary A 99.95% 52.38%
Bond Fund Attn Tony Farrer 568,064.620;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
NFSC FEBO # W25-002658 Investor A 41.94% 2.63%
William W Pugh Jr 28,524.330;
106 Orchard Circle record and
Oak Ridge, TN 37830 beneficial
NFSC FEBO # W25-682101 Investor A 17.78% 1.11%
Allene Ellis 12,089.764;
Joyce Rose record and
2544 Bearwallow Rd beneficial
Ashland City, TN 37015
NFSC FEBO # EMP-050393 Investor A 7.55% .47%
Louise E Cole 5,131.742;
Clifford E Cole record and
1501 Gale Lane beneficial
Nashville, TN 37212
NFSC FEBO # W25-673358 Investor A 7.40% .46%
Billie L Martin 5,035.198;
227 Deer Park Circle record and
Nashville, TN 37205 beneficial
209
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
NFSC FEBO # W25-605786 Investor A 7.21% .45%
Billy Joe Davis 4,905.129;
PO Box 487 record and
Lake City, TN 37769 beneficial
NFSC FEBO # W25-682357 Investor A 6.17% .39%
Theodore J Novak 4,196.009;
3860 West Trace Creek Road record and
Waverly, TN 37185 beneficial
NFSC FEBO # W25-684350 Investor B 15.46% 6.29%
Miriam F Hildebrand 68,241.749;
884 Edmondson Pike record and
Brentwood, TN 37027 beneficial
NFSC FEBO # W25-617954 Investor C 60.81% .37%
Frank W Condurelis 4,023.391;
Jane E Condurelis record and
806 Brentview Dr beneficial
Nashville, TN 37220
NFSC FEBO # W25-009660 Investor C 34.92% .21%
Donald J Southard Sr 2,310.268;
Barbara C Southard record and
278 Joe Byrd Ln beneficial
Clinton, TN 37716
Texas Intermediate Bank of America NA Primary A 100% 97.65%
Municipal Bond Fund Attn Tony Farrer 37,413,724.971;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
NFSC FEBO # W40-678880 Investor B 15.03% .08%
James Robert Mallory 31,172.216;
Faith K Mallory record and
2400 Winton Terr E beneficial
Fort Worth, TX 76109
NFSC FEBO # W18-719404 Investor B 10.96% .06%
Montine T Wisdom 22,726.776;
6335 W Northwest Hwy #1318 record and
Dallas, TX 75225 beneficial
NFSC FEBO # W41-600997 Investor B 8.46% .05%
Oliver Roofing Systems 17,558.892;
PO Box 180191 record and
Austin, TX 78718 beneficial
NFSC FEBO # W40-682470 Investor B 7.72% .04%
A G Martin 16,007.825;
Nellie L Martin record and
2011 32nd St beneficial
Lubbock, TX 79411
210
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Stephens Inc Investor C 100% 0%
Attn: Cindy Cole 253.066; record
111 Center Street
Little Rock, AR 72201
Texas Municipal Bond Bank of America NA Primary A 99.97% 54.45%
Fund Attn Tony Farrer 856,091.141;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Motco Investor A 59.83% 1.46%
P O Box 17001-Trust 22,935.780;
San Antonio, TX 78217 record and
beneficial
National Investor Services Corp Investor A 13.05% .32%
for the Exclusive Benefit of 5,002.051;
our Customers record
55 Water Street 32nd Fl
New York, NY 10041-3299
Edward D Jones & Co Investor A 7.44% .18%
FBO Adolph F Schmidt & 2,852.800;
Elvira H Schmidt FM 466 record and
EDJ# 5120611313 beneficial
P O Box 2500 Maryland Heights, MO
63043-8500
NFSC FEBO # W40-650790 Investor A 7.15% .17%
Seth W Lehmberg 2,742.706;
Rose Mary Lehmberg record and
2201 Meadow Lane beneficial
Taylor, TX 76574
Shirley A Wagner Investor A 6.69% .16%
3002 San Paula 2,565.948;
Dallas, TX 75228-0000 record and
beneficial
NFSC FEBO # W40-609048 Investor B 5.99% 2.55%
Jane M Mccarver Ex 40,050.599;
E/O A G Mccarver record and
901 W Indianna Ste A beneficial
Midland, TX 79701
NFSC FEBO # W41-617733 Investor C 96.57% .52%
Jay L Willmann 8,104.120;
Catherine B Willmann record and
2918 Kassarine Pass beneficial
Austin, TX 78704
Virginia Bank of America NA Primary A 100% 78.15%
Intermediate Attn Tony Farrer 21,010,064.166;
Municipal Bond Fund 1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Roy R Martine & Investor A 94.87% .12%
Kathleen H Martine Jtwros 32,074.758;
4009 Tottenham Court record and
Richmond, VA 23233-1771 beneficial
211
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Dorothy Lee Walshe Investor C 12.48% .03%
5801 Mill Spring Rd 9,351.771;
Midlothian, VA 23112 record and
beneficial
NFSC FEBO # W26-644269 Investor C 5.30% .01%
Richard W Coates 3,973.958;
3012 Woodlawn Drive record and
Suffolk, VA 23434 beneficial
Virginia Municipal Bank of America NA Primary A 100% 50.59%
Bond Fund Attn Tony Farrer 1,444,119.904;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Roy R Martine & Investor A 94.96% 1.24%
Kathleen H Martine JTWROS 35,317.835;
4009 Tottenham Court record and
Richmond, VA 23233-1771 beneficial
NFSC FEBO # W26-643866 Investor A 5.10% .11%
Esmond L Dominick Jr 3,061.508;
4014 Tanglewood Trail record and
Chesapeake, VA 23325 beneficial
Stephens Inc Investor C 100% .01%
Attn: Cindy Cole 291.741; record
111 Center Street
Little Rock, AR 72201
Merrill Lynch, Pierce, Fenner Investor A 26.67% .56%
& Smith Inc for the Sole 16,000.000;
Benefit of its customers record
Attention Service Team
4800 Deer Lake Drive East 3rd
Floor
Jacksonville, FL 32246
Rodney M Carlson and Investor A 13.35% .28%
Joyce L Carson JTTEN 8,010.000;
3608 South Creek Ct record and
Chesapeake, VA 23325 beneficial
Rebecca C Bell Investor A 11.41% .24%
1092 Oaklawn Dr 6,844.881;
Culpeper, VA 22701 record and
beneficial
Jessie E Spells Investor A 9.97% .21%
1518 Dogwood Road 5,983.121;
St Leonard, MD 20685-2710 record and
beneficial
NFSC FEBO # W26-636398 Investor A 9.80% .21%
Creola M Shearin 5,879.172;
2205 Parkside Ave record and
Richmond, VA 23228 beneficial
212
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
NFSC FEBO #W68-011398 Investor A 8.46% .18%
Gerald H Moulton Jr and 5,075.445;
Virginia H Moulton record and
200 Liberty Street beneficial
1 World Financial Cntr
New York, NY 10281
NFSC FEBO # W13-652342 Investor A 6.13% .13%
Jeffery W Hale 3,676.356;
Diane A Hale record and
8618 Woodbine Lane beneficial
Annandale, VA 22003
Emerging Markets Fund Bank of America NA Primary A 99.60% 86.75%
Attn Tony Farrer 2,105,932.400;
1401 Elm Street 11th Floor record
Dallas, TX 75202-2911
Stephens Inc Primary B 100% 0%
Attn: Cindy Cole 1.804; record
111 Center Street
Little Rock, AR 72201
Walter J Nott Investor A 7.29% .32%
8320 Fulham Ct 7,871.049;
Richmond, VA 23227 record and
beneficial
Hi-Tech Communications Inc Investor C 67.93% .29%
401(K) Plan 7,136.720;
PO Box 1569 record and
League City, TX 77574-1569 beneficial
Stephens Inc for the Exclusive Investor C 14.70% .06%
Benefit of our Customers 1,544.754;
111 Center Street record
Little Rock, AR 72201
NFSC FEBO # W17-648345 Investor C 5.72% .02%
NFSC/FMTC IRA 600.743; record
FBO Carroll L Terrell and beneficial
6502 Woodrow Terr
Richmond, VA 23228
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
213
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
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
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
214
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
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
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
215
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
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
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
216
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
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 record
Attn H David Jones 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
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
217
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
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
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
218
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
Capital Income Fund Paco - Cash Account Primary A 52.00% 0.89%
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
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
219
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
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
BA Investment Services Inc Investor; 63.90% 12.47%
for the Benefit of Customers 189,509,978.870;
Unit 17852 record
Attn H David Jones 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
220
<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% 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
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
221
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
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
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 record
Attn H David Jones 3rd
PO Box 7042
San Francisco, CA 94120
222
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
BA Investment Services Inc Daily; 99.98% 22.58%
for the Benefit of Customers 366,589,273.260;
Unit 17852 record
Attn H David Jones 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 record
Attn H David Jones 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
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
223
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
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
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
224
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
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 record
2nd Flr MO 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 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
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
225
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
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
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
226
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
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 record
Attn H David Jones 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 record and
2nd Flr MO 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
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
227
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
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
Intermediate Bond Paco - Cash Account Primary A 85.10% 8.85%
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
Corelink Financial Inc Investor C 99.95% 0.08%
PO Box 4054 7,201.550;
Concord, CA 94524-4054 record
Seafirst Bank Seafirst Class 100% 33.68%
FBO Retirement Services 2,943,694.026;
PO Box 84248 record
Seattle, WA 98124-5548
Bank of America NA Investor A 75.02% 42.82%
The Private Bank 3,742,327.004;
Attn Common Trust Funds Unit record
38329
PO Box 3577
Los Angeles, CA 90051-1577
228
<PAGE>
Class; Amount
of Shares
Owned; Type of Percentage Percentage
Fund Name and Address Ownership of Class of Fund
---- ---------------- --------- -------- -------
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 1999, NationsBank Corporation and its affiliates owned of
record more than 25% of the outstanding shares of the Companies acting as agent,
fiduciary, or custodian for its customers and may be deemed a controlling person
of the Companies under the 1940 Act.
229
<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.
Ba - Bonds that are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not as well safeguarded during both good times and bad times over
the future. Uncertainty of position characterizes bonds in this class.
A-1
<PAGE>
B - Bond that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Moody's applies numerical modifiers (1, 2 and 3) with respect to
corporate bonds rated Aa through B. The modifier 1 indicates that the bond being
rated ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the bond ranks
in the lower end of its generic rating category. With regard to municipal bonds,
those bonds in the Aa, A and Baa groups which Moody's believes possess the
strongest investment attributes are designated by the symbols Aal, A1 or Baal,
respectively.
The following summarizes the highest four ratings used by Duff & Phelps
Credit Rating Co. ("D&P") for bonds, each of which denotes that the securities
are investment grade.
AAA - Bonds that are rated AAA are of the highest credit quality.
The risk factors are considered to be negligible, being only slightly more
than for risk-free U.S. Treasury debt.
AA - Bonds that are rated AA are of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
A - Bonds that are rated A have protection factors which are
average but adequate. However risk factors are more variable and greater
in periods of economic stress.
BBB - Bonds that are rated BBB have below average protection
factors but still are considered sufficient for prudent investment.
Considerable variability in risk exists during economic cycles.
To provide more detailed indications of credit quality, the AA, A and
BBB ratings may modified by the addition of a plus or minus sign to show
relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch
Investors Service, Inc. ("Fitch") for bonds, each of which denotes that the
securities are investment grade:
AAA - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA - Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because
bonds rated in the AAA and AA categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
generally rated F-1+.
A - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
To provide more detailed indications of credit quality, the AA, A and
BBB ratings may be modified by the addition of a plus or minus sign to show
relative standing within these major rating categories.
The following summarizes the two highest ratings used by Moody's for
short-term municipal notes and variable-rate demand obligations:
MIG-1/VMIG-1 -- Obligations bearing these designations are of the best
quality, enjoying strong protection from established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2 -- Obligations bearing these designations are of high
quality, with ample margins of protection although not so large as in the
preceding group.
A-2
<PAGE>
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.
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.
A-3
<PAGE>
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.
TBW-4 The lowest rating category; this rating is regarded
as non-investment grade and therefore speculative.
The following summarizes the four highest long-term debt ratings used
by IBCA Limited and its affiliate, IBCA Inc. (collectively "IBCA"):
AAA - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial such that adverse changes in business, economic
or financial conditions are unlikely to increase investment risk
significantly.
AA - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions may increase investment risk albeit not very
significantly.
A - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
BBB - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment
risk than for obligations in other categories.
A plus or minus sign may be appended to a rating below AAA to denote
relative status within major rating categories.
The following summarizes the two highest short-term debt ratings used by
IBCA:
A1+ When issues possess a particularly strong credit feature, a
rating of A1+ is assigned.
A1 - Obligations supported by the highest capacity for timely
repayment.
A2 - Obligations supported by a good capacity for timely repayment.
A-4
