NATIONS RESERVES
Registration Nos. 33-33144; 811-6030
CERTIFICATE PURSUANT TO
Rule 306 of Regulation S-T
The undersigned hereby certifies, pursuant to Rule 306 of
Regulation S-T, on behalf of Nations Reserves (the "Trust") that the form of
Prospectus for the Trust that is being filed pursuant to 17 C.F.R. 230.497(c) is
a fair and accurate English translation of the Spanish and Chinese prospectus.
IN WITNESS WHEREOF, the Trust has caused this certificate to
be executed and witnessed in its name and on its behalf by the undersigned on
the 5th day of October, 2000.
Witness: NATIONS RESERVES
/s/ Natasha McMinn /s/ Richard H. Blank, Jr.
--------------------------- -------------------------
Richard H. Blank, Jr.
Secretary
<PAGE>
[GRAPHIC]
Money
Market Funds
Prospectus -- Daily Class Shares
August 1, 2000
Nations
Cash Reserves
Nations
Treasury Reserves
Nations Government Reserves
Nations
Municipal Reserves
Nations
California
Tax-Exempt Reserves
The Securities and Exchange Commission (SEC) has not approved or disapproved
these securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
------------------------
Not FDIC Insured
------------------------
May Lose Value
------------------------
No Bank Guarantee
------------------------
[Nations Funds Logo]
<PAGE>
An overview of the Funds
--------------------------------------------------------------------------------
[GRAPHIC]
Terms used in this prospectus
In this prospectus, we, us and our refer to the Nations Funds
family (Nations Funds or Nations Funds Family). Some other
important terms we've used may be new to you. These are printed in
italics where they first appear in a section and are described in
Terms used in this prospectus.
[GRAPHIC]
You'll find Terms used in this prospectus on page 38.
Your investment in these Funds is not a bank deposit and is not
insured or guaranteed by Bank of America, N.A. (Bank of America),
the Federal Deposit Insurance Corporation (FDIC) or any other
government agency. Your investment may lose money.
Affiliates of Bank of America are paid for the services they
provide to the Funds.
This booklet, which is called a prospectus, tells you about some Nations Funds
Money Market Funds. Please read it carefully, because it contains information
that's designed to help you make informed investment decisions.
This prospectus offers Daily Class Shares of the Funds. This class of shares is
designed primarily for financial institutions and intermediaries for their own
accounts, and for certain of their client accounts. Please turn to page 24 for
more information about who is eligible to buy this class of shares.
About the Funds
The Money Market Funds seek to provide income while protecting the principal of
your original investment by investing in money market instruments.
Money market instruments include short-term debt securities that are U.S.
government issued or guaranteed or have relatively low risk. Your original
investment and your return aren't guaranteed, however, and returns will vary as
short-term interest rates change. Over time, the return on money market funds
may be lower than the return on other kinds of mutual funds or investments.
Are these Funds right for you?
Not every Fund is right for every investor. When you're choosing a Fund to
invest in, you should consider things like your investment goals, how much risk
you can accept and how long you're planning to hold your investment.
The Money Market Funds may be suitable for you if:
o you're looking for a relatively low risk investment with stability of
principal
o you have short-term income needs
They may not be suitable for you if:
o you're looking for higher returns
o you're more comfortable with bank deposits that are FDIC-insured
You'll find a discussion of each Fund's principal investments, strategies and
risks in the Fund descriptions that start on page 4.
For more information
If you have any questions about the Funds, please call us at 1.800.626.2275 if
you're an institutional investor, or 1.800.321.7854 if you're an individual
investor. You can also contact your investment professional.
You'll find more information about the Funds in the Statement of Additional
Information (SAI). The SAI includes more detailed information about each Fund's
investments, policies, performance and management, among other things. Please
turn to the back cover to find out how you can get a copy.
2
<PAGE>
What's inside
--------------------------------------------------------------------------------
[GRAPHIC]
Banc of America Advisors, Inc.
Banc of America Advisers, Inc. (BAAI) is the investment adviser to
each of the Funds. BAAI is responsible for the overall management
and supervision of the investment management of each Fund. BAAI and
Nations Funds have engaged a sub-adviser -- Banc of America Capital
Management, Inc. (BACAP), which is responsible for the day-to-day
investment decisions for each of the Funds.
[GRAPHIC]
You'll find more about BAAI and BACAP starting on page 22.
[GRAPHIC]
About the Funds
<TABLE>
<CAPTION>
<S> <C>
Nations Cash Reserves 4
Sub-adviser: BACAP
----------------------------------------------------------
Nations Treasury Reserves 7
Sub-adviser: BACAP
----------------------------------------------------------
Nations Government Reserves 10
Sub-adviser: BACAP
----------------------------------------------------------
Nations Municipal Reserves 13
Sub-adviser: BACAP
----------------------------------------------------------
Nations California Tax-Exempt Reserves 17
Sub-adviser: BACAP
----------------------------------------------------------
Other important information 21
----------------------------------------------------------
How the Funds are managed 22
</TABLE>
[GRAPHIC]
About your investment
<TABLE>
<CAPTION>
<S> <C>
Information for investors
Buying, selling and exchanging shares 24
How selling and servicing agents are paid 31
Distributions and taxes 32
----------------------------------------------------------
Financial highlights 34
----------------------------------------------------------
Terms used in this prospectus 38
----------------------------------------------------------
Where to find more information back cover
</TABLE>
3
<PAGE>
[GRAPHIC]
About the sub-adviser
BACAP is this Fund's sub-adviser. BACAP's Taxable Money Market
Management Team makes the day-to-day investment decisions for the
Fund.
[GRAPHIC]
You'll find more about BACAP on page 23.
This Fund, like all money market funds, is subject to certain
investment limitations. These are described in Other important
information.
The Fund is listed on the National Association of Insurance
Commissioners' Approved List of Money Market Mutual Funds.
[GRAPHIC]
First-tier securities
A first-tier security is a short-term debt security that's an
eligible investment for money market funds. It's "first-tier"
because it's been given the highest credit rating by a nationally
recognized statistical rating organization or is considered to be
of comparable quality.
Nations Cash Reserves
[GRAPHIC]
Investment objective
The Fund seeks to preserve principal value and maintain a high degree of
liquidity while providing current income.
[GRAPHIC]
Principal investment strategies
The Fund pursues its objective by generally investing in a diversified
portfolio of high quality money market instruments that, at the time of
investment, are considered to have remaining maturities of 397 days or
less.
The Fund will only buy first-tier securities. These securities include
primarily:
o commercial paper
o bank obligations
o short-term debt securities, including instruments issued by certain trusts,
partnerships or other special purpose issuers, like pass-through
certificates representing participations in, or instruments backed by, the
securities and other assets owned by these issuers
o short-term taxable municipal securities
o repurchase agreements secured by first-tier securities or U.S. government
obligations
The Fund may also invest in other money market funds, consistent with its
investment objective and strategies. When the team believes market conditions
warrant, the Fund may invest more than 25% of its assets in U.S. dollar
denominated bank obligations, including obligations of U.S. banks, foreign
branches of U.S. banks and U.S. branches of foreign banks,
The team tries to maintain a constant net asset value of $1.00 per share for
the Fund. The team uses extensive research, including economic, technical and
security analysis to select individual investments.
o Economic analysis includes evaluating national and global economic
conditions, as well as interest rate movements.
o Technical analysis includes identifying categories of money market
instruments that offer the highest yields and assessing the market for
potential investments.
o Security analysis includes evaluating the credit quality of an instrument.
Securities are normally held to maturity, but the team may sell a security
before it matures to meet cash flow needs, to manage the portfolio's maturity,
if the team determines that the security is no longer a suitable investment,
and for other reasons.
4
<PAGE>
[GRAPHIC]
You'll find more about other risks of investing in this Fund
starting on page 21 and in the SAI.
[GRAPHIC]
Risks and other things to consider
Nations Cash Reserves has the following risks:
o Investment strategy risk - Although the Fund tries to maintain a share
price of $1.00, an investment in the Fund may lose money. An
investment in this Fund is not a bank deposit and is not insured or
guaranteed by Bank of America, the FDIC or any other government
agency.
o Income/principal payment risk - The Fund's ability to pay
distributions depends on the creditworthiness of the issuers of the
securities the Fund holds. The Fund may not be able to pay
distributions, or could lose money, if the issuer of a security is
unable to pay interest or repay principal when it's due.
[GRAPHIC]
Many things affect a Fund's performance, including market
conditions, the composition of the Fund's holdings, and Fund
expenses.
The returns shown are for a class not offered in this prospectus
that has similar annual returns because the shares are invested in
the same portfolio of securities. The annual returns differ only to
the extent that the classes do not have the same expenses.
For the Fund's current 7-day yield, please call us at
1.800.626.2275 if you're an institutional investor, or
1.800.321.7854 if you're an individual investor. You can also
contact your investment professional.
[GRAPHIC]
A look at the Fund's performance
The following bar chart and table show you how the Fund has performed in
the past, and can help you understand the risks of investing in the
Fund. A Fund's past performance is no guarantee of how it will perform
in the future.
Year by year total return (%) as of December 31 each year*
The bar chart shows you how the performance of the Fund's Market Class
Shares has varied from year to year. These returns do not reflect
deductions of sales charges or account fees, if any, and would be lower
if they did.
[BAR CHART APPEARS HERE WITH THE FOLLOWING PLOT POINTS]
5.25% 5.19% 4.75%
1997 1998 1999
*Year-to-date return as of June 30, 2000: 2.80%
Best and worst quarterly returns during this period
<TABLE>
<CAPTION>
<S> <C>
Best: 3rd & 4th quarter 1999: 1.32%
Worst: 2nd quarter 1999: 1.09%
</TABLE>
Average annual total return as of December 31, 1999
<TABLE>
<CAPTION>
Since
1 year inception*
<S> <C> <C>
Market Class Shares 4.75% 5.06%
</TABLE>
* The inception date of Market Class Shares is May 3, 1996.
5
<PAGE>
[GRAPHIC]
There are two kinds of fees -- shareholder fees you pay directly,
and annual fund operating expenses that are deducted from a fund's
assets.
Total net expenses are actual expenses paid by the Fund after
waivers and/or reimbursements.
[GRAPHIC]
What it costs to invest in the Fund
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<TABLE>
<CAPTION>
Shareholder fees
(Fees paid directly from your investment) Daily Class Shares
<S> <C>
Maximum sales charge (load) imposed on purchases none
Maximum deferred sales charge (load) none
Annual Fund operating expenses(1)
(Expenses that are deducted from the Fund's assets)
Management fees 0.15%
Distribution (12b-1) and shareholder servicing fees 0.60%
Other expenses 0.13%
------
Total annual Fund operating expenses 0.88%
Fee waivers and/or reimbursements (0.08)%
------
Total net expenses(2) 0.80%
======
</TABLE>
(1)The figures contained in the above table are based on amounts incurred
during the Fund's most recent fiscal year and have been adjusted, as
needed, to reflect current service provider fees.
(2)The Fund's investment adviser and/or some of its other service
providers have agreed to waive fees and/or reimburse expenses until
July 31, 2001. The figure shown here is after waivers and/or
reimbursements. There is no guarantee that these waivers and/or
reimbursements will continue after this date.
[GRAPHIC]
This is an example only. Your actual costs could be higher or
lower, depending on the amount you invest, and on the Fund's actual
expenses and performance.
Example
This example is intended to help you compare the cost of investing in
this Fund with the cost of investing in other mutual funds.
This example assumes:
o you invest $10,000 in Daily Class Shares of the Fund for the time
periods indicated and then sell all of your shares at the end of those
periods
o you reinvest all dividends and distributions in the Fund
o your investment has a 5% return each year
o the Fund's operating expenses remain the same as shown in the table
above
o the waivers and/or reimbursements shown above expire July 31, 2001 and
are not reflected in the 3, 5 and 10 year examples
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Daily Class Shares $82 $273 $480 $1,077
</TABLE>
6
<PAGE>
[GRAPHIC]
About the sub-adviser
BACAP is this Fund's sub-adviser. BACAP's Taxable Money Market
Management Team makes the day-to-day investment decisions for the
Fund.
[GRAPHIC]
You'll find more about BACAP on page 23.
This Fund, like all money market funds, is subject to certain
investment limitations. These are described in Other important
information.
The Fund is listed on the National Association of Insurance
Commissioners' Approved List of Money Market Mutual Funds.
[GRAPHIC]
First-tier securities
A first-tier security is a short-term debt security that's an
eligible investment for money market funds. It's "first-tier"
because it's been given the highest credit rating by a nationally
recognized statistical rating organization or is considered to be
of comparable quality.
Nations Treasury Reserves
[GRAPHIC]
Investment objective
The Fund seeks to preserve principal value and maintain a high degree of
liquidity while providing current income.
[GRAPHIC]
Principal investment strategies
The Fund pursues its objective by generally investing in a diversified
portfolio of high quality money market instruments that, at the time of
investment, are considered to have remaining maturities of 397 days or
less.
The Fund will only buy first-tier securities. These securities include
primarily:
o U.S. Treasury obligations
o repurchase agreements and reverse repurchase agreements secured by U.S.
Treasury obligations
o obligations whose principal and interest are backed by the U.S. government
The Fund may invest in other money market funds that invest in these
instruments, consistent with its investment objective and strategies.
The Fund normally invests at least 65% of its assets in U.S. Treasury
obligations, and repurchase agreements secured by U.S. Treasury obligations.
The team tries to maintain a constant net asset value of $1.00 per share for
the Fund. The team uses extensive research, including economic, technical and
security analysis to select individual investments.
o Economic analysis includes evaluating national and global economic
conditions, as well as interest rate movements.
o Technical analysis includes identifying categories of money market
instruments that offer the highest yields and assessing the market for
potential investments.
o Security analysis includes evaluating the credit quality of an instrument.
Securities are normally held to maturity, but the team may sell a security
before it matures to meet cash flow needs, to manage the portfolio's maturity,
if the team determines that the security is no longer a suitable investment,
and for other reasons.
7
<PAGE>
[GRAPHIC]
You'll find more about other risks of investing in this Fund
starting on page 21 and in the SAI.
[GRAPHIC]
Risks and other things to consider
Nations Treasury Reserves has the following risks:
o Investment strategy risk - Although the Fund tries to maintain a share
price of $1.00, an investment in the Fund may lose money. An
investment in this Fund is not a bank deposit and is not insured or
guaranteed by Bank of America, the FDIC or any other government
agency.
o Income/principal payment risk - The Fund's ability to pay
distributions depends on the creditworthiness of the issuers of the
securities the Fund holds. The Fund may not be able to pay
distributions, or could lose money, if the issuer of a security is
unable to pay interest or repay principal when it's due.
[GRAPHIC]
Many things affect a Fund's performance, including market
conditions, the composition of the Fund's holdings, and Fund
expenses.
The returns shown are for a class not offered in this prospectus
that has similar annual returns because the shares are invested in
the same portfolio of securities. The annual returns differ only to
the extent that the classes do not have the same expenses.
For the Fund's current 7-day yield, please call us at
1.800.626.2275 if you're an institutional investor, or
1.800.321.7854 if you're an individual investor. You can also
contact your investment professional.
[GRAPHIC]
A look at the Fund's performance
The following bar chart and table show you how the Fund has performed in
the past, and can help you understand the risks of investing in the
Fund. A Fund's past performance is no guarantee of how it will perform
in the future.
Year by year total return (%) as of December 31 each year*
The bar chart shows you how the performance of the Fund's Market Class
Shares has varied from year to year. These returns do not reflect
deductions of sales charges or account fees, if any, and would be lower
if they did.
[BAR CHART APPEARS HERE WITH THE FOLLOWING PLOT POINTS]
5.11% 4.97% 4.46%
1997 1998 1999
*Year-to-date return as of June 30, 2000: 2.64%
Best and worst quarterly returns during this period
<TABLE>
<CAPTION>
<S> <C>
Best: 4th quarter 1997: 1.29%
Worst: 1st & 2nd quarter 1999: 1.04%
</TABLE>
Average annual total return as of December 31, 1999
<TABLE>
<CAPTION>
Since
1 year inception*
<S> <C> <C>
Market Class Shares 4.46% 4.86%
</TABLE>
* The inception date of Market Class Shares is May 3, 1996.
8
<PAGE>
[GRAPHIC]
There are two kinds of fees -- shareholder fees you pay directly,
and annual fund operating expenses that are deducted from a fund's
assets.
Total net expenses are actual expenses paid by the Fund after
waivers and/or reimbursements.
[GRAPHIC]
What it costs to invest in the Fund
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<TABLE>
<CAPTION>
Shareholder fees
(Fees paid directly from your investment) Daily Class Shares
<S> <C>
Maximum sales charge (load) imposed on purchases none
Maximum deferred sales charge (load) none
Annual Fund operating expenses(1)
(Expenses that are deducted from the Fund's assets)
Management fees 0.15%
Distribution (12b-1) and shareholder servicing fees 0.60%
Other expenses 0.12%
------
Total annual Fund operating expenses 0.87%
Fee waivers and/or reimbursements (0.07)%
------
Total net expenses(2) 0.80%
======
</TABLE>
(1)The figures contained in the above table are based on amounts incurred
during the Fund's most recent fiscal year and have been adjusted, as
needed, to reflect current service provider fees.
(2)The Fund's investment adviser and/or some of its other service
providers have agreed to waive fees and/or reimburse expenses until
July 31, 2001. The figure shown here is after waivers and/or
reimbursements. There is no guarantee that these waivers and/or
reimbursements will continue after this date.
[GRAPHIC]
This is an example only. Your actual costs could be higher or
lower, depending on the amount you invest, and on the Fund's actual
expenses and performance.
Example
This example is intended to help you compare the cost of investing in
this Fund with the cost of investing in other mutual funds.
This example assumes:
o you invest $10,000 in Daily Class Shares of the Fund for the time
periods indicated and then sell all of your shares at the end of those
periods
o you reinvest all dividends and distributions in the Fund
o your investment has a 5% return each year
o the Fund's operating expenses remain the same as shown in the table
above
o the waivers and/or reimbursements shown above expire July 31, 2001 and
are not reflected in the 3, 5 and 10 year examples
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Daily Class Shares $82 $271 $475 $1,066
</TABLE>
9
<PAGE>
[GRAPHIC]
About the sub-adviser
BACAP is this Fund's sub-adviser. BACAP's Taxable Money Market
Management Team makes the day-to-day investment decisions for the
Fund.
[GRAPHIC]
You'll find more about BACAP on page 23.
This Fund, like all money market funds, is subject to certain
investment limitations. These are described in Other important
information.
[GRAPHIC]
First-tier securities
A first-tier security is a short-term debt security that's an
eligible investment for money market funds. It's "first-tier"
because it's been given the highest credit rating by a nationally
recognized statistical rating organization or is considered to be
of comparable quality.
Nations Government Reserves
[GRAPHIC]
Investment objective
The Fund seeks to preserve principal value and maintain a high degree of
liquidity while providing current income.
[GRAPHIC]
Principal investment strategies
The Fund pursues its objective by generally investing in a diversified
portfolio of high quality money market instruments that, at the time of
investment, are considered to have remaining maturities of 397 days or
less.
The Fund will only buy first-tier securities. These securities include
primarily U.S. government obligations and U.S. Treasury obligations, the
interest on which is generally free from state income tax.
The team tries to maintain a constant net asset value of $1.00 per share for
the Fund. The team uses extensive research, including economic, technical and
security analysis to select individual investments.
o Economic analysis includes evaluating national and global economic
conditions, as well as interest rate movements.
o Technical analysis includes identifying categories of money market
instruments that offer the highest yields and assessing the market for
potential investments.
o Security analysis includes evaluating the credit quality of an instrument.
Securities are normally held to maturity, but the team may sell a security
before it matures to meet cash flow needs, to manage the portfolio's maturity,
if the team determines that the security is no longer a suitable investment,
and for other reasons.
10
<PAGE>
[GRAPHIC]
You'll find more about other risks of investing in this Fund
starting on page 21 and in the SAI.
[GRAPHIC]
Risks and other things to consider
Nations Government Reserves has the following risks:
o Investment strategy risk - Although the Fund tries to maintain a share
price of $1.00, an investment in the Fund may lose money. An
investment in this Fund is not a bank deposit and is not insured or
guaranteed by Bank of America, the FDIC or any other government
agency.
o Income/principal payment risk - The Fund's ability to pay
distributions depends on the creditworthiness of the issuers of the
securities the Fund holds. The Fund may not be able to pay
distributions, or could lose money, if the issuer of a security is
unable to pay interest or repay principal when it's due.
o Tax considerations - Most of the distributions paid by the Fund come
from interest on U.S. government and U.S. Treasury securities, which
is generally free from state income tax, but may be subject to federal
income, local and other taxes. Any portion of a distribution that
comes from income paid on other kinds of securities or from realized
capital gains is generally subject to federal, state and local taxes.
You should consult with your tax adviser to determine whether the
distributions from the Fund are exempt from state income or local
taxation in your own state.
[GRAPHIC]
Many things affect a Fund's performance, including market
conditions, the composition of the Fund's holdings, and Fund
expenses.
The returns shown are for a class not offered in this prospectus
that has similar annual returns because the shares are invested in
the same portfolio of securities. The annual returns differ only to
the extent that the classes do not have the same expenses.
For the Fund's current 7-day yield, please call us at
1.800.626.2275 if you're an institutional investor, or
1.800.321.7854 if you're an individual investor. You can also
contact your investment professional.
[GRAPHIC]
A look at the Fund's performance
The following bar chart and table show you how the Fund has performed in
the past, and can help you understand the risks of investing in the
Fund. A Fund's past performance is no guarantee of how it will perform
in the future.
Year by year total return (%) as of December 31 each year*
The bar chart shows you how the performance of the Fund's Market Class
Shares has varied from year to year. These returns do not reflect
deductions of sales charges or account fees, if any, and would be lower
if they did.
[BAR CHART APPEARS HERE WITH THE FOLLOWING PLOT POINTS]
5.13% 5.03% 4.56%
1997 1998 1999
*Year-to-date return as of June 30, 2000: 2.74%
Best and worst quarterly returns during this period
<TABLE>
<CAPTION>
<S> <C>
Best: 4th quarter 1997: 1.29%
Worst: 2nd quarter 1999: 1.05%
</TABLE>
Average annual total return as of December 31, 1999
<TABLE>
<CAPTION>
Since
1 year inception*
<S> <C> <C>
Market Class Shares 4.56% 4.91%
</TABLE>
* The inception date of Market Class Shares is May 3, 1996.
11
<PAGE>
[GRAPHIC]
There are two kinds of fees -- shareholder fees you pay directly,
and annual fund operating expenses that are deducted from a fund's
assets.
Total net expenses are actual expenses paid by the Fund after
waivers and/or reimbursements.
[GRAPHIC]
What it costs to invest in the Fund
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<TABLE>
<CAPTION>
Shareholder fees
(Fees paid directly from your investment) Daily Class Shares
<S> <C>
Maximum sales charge (load) imposed on purchases none
Maximum deferred sales charge (load) none
Annual Fund operating expenses(1)
(Expenses that are deducted from the Fund's assets)
Management fees 0.15%
Distribution (12b-1) and shareholder servicing fees 0.60%
Other expenses 0.13%
------
Total annual Fund operating expenses 0.88%
Fee waivers and/or reimbursements (0.08)%
------
Total net expenses(2) 0.80%
======
</TABLE>
(1)The figures contained in the above table are based on amounts incurred
during the Fund's most recent fiscal year and have been adjusted, as
needed, to reflect current service provider fees.
(2)The Fund's investment adviser and/or some of its other service
providers have agreed to waive fees and/or reimburse expenses until
July 31, 2001. The figure shown here is after waivers and/or
reimbursements. There is no guarantee that these waivers and/or
reimbursements will continue after this date.
[GRAPHIC]
This is an example only. Your actual costs could be higher or
lower, depending on the amount you invest, and on the Fund's actual
expenses and performance.
Example
This example is intended to help you compare the cost of investing in
this Fund with the cost of investing in other mutual funds.
This example assumes:
o you invest $10,000 in Daily Class Shares of the Fund for the time
periods indicated and then sell all of your shares at the end of those
periods
o you reinvest all dividends and distributions in the Fund
o your investment has a 5% return each year
o the Fund's operating expenses remain the same as shown in the table
above
o the waivers and/or reimbursements shown above expire July 31, 2001 and
are not reflected in the 3, 5 and 10 year examples
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Daily Class Shares $82 $273 $480 $1,077
</TABLE>
12
<PAGE>
[GRAPHIC]
About the sub-adviser
BACAP is this Fund's sub-adviser. BACAP's Tax-Exempt Money Market
Management Team makes the day-to-day investment decisions for the
Fund.
[GRAPHIC]
You'll find more about BACAP on page 23.
This Fund, like all money market funds, is subject to certain
investment limitations. These are described in Other important
information.
[GRAPHIC]
First-tier securities
A first-tier security is a short-term debt security that's an
eligible investment for money market funds. It's "first-tier"
because it's been given the highest credit rating by a nationally
recognized statistical rating organization or is considered to be
of comparable quality.
Nations Municipal Reserves
[GRAPHIC]
Investment objective
The Fund seeks to preserve principal value and maintain a high degree of
liquidity while providing current income exempt from federal income
taxes.
[GRAPHIC]
Principal investment strategies
The Fund pursues its objective by generally investing in a diversified
portfolio of high quality money market instruments that, at the time of
investment, are considered to have remaining maturities of 397 days or
less.
The Fund will only buy first-tier securities. The Fund normally invests at
least 80% of its assets in municipal securities, which pay interest that is
free from federal income and alternative minimum taxes. The Fund invests in
municipal securities that, at the time of investment, are considered by the
portfolio management team to have minimal credit risk and to be of high
quality.
The Fund may invest up to 20% of its assets in:
o municipal securities that finance private projects, called private activity
bonds
o money market instruments, including repurchase agreements
The Fund may also invest in 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 these issuers. The Fund may invest in other money
market funds, consistent with its investment objective and strategies.
The team tries to maintain a constant net asset value of $1.00 per share for
the Fund. The team uses extensive research, including economic, technical and
security analysis to select individual investments.
o Economic analysis includes evaluating national and global economic
conditions, as well as interest rate movements.
o Technical analysis includes identifying categories of money market
instruments that offer the highest yields and assessing the market for
potential investments.
o Security analysis includes evaluating the credit quality of an instrument,
and structural analysis, which includes evaluating the arrangements between
the municipality and others involved in the issue of an instrument.
Securities are normally held to maturity, but the team may sell a security
before it matures to meet cash flow needs, to manage the portfolio's maturity,
if the team determines that the security is no longer a suitable investment,
and for other reasons.
13
<PAGE>
[GRAPHIC]
You'll find more about other risks of investing in this Fund
starting on page 21 and in the SAI.
[GRAPHIC]
Risks and other things to consider
Nations Municipal Reserves has the following risks:
o Investment strategy risk - Although the Fund tries to maintain a share
price of $1.00, an investment in the Fund may lose money. An
investment in this Fund is not a bank deposit and is not insured or
guaranteed by Bank of America, the FDIC or any other government
agency.
o Income/principal payment risk - The Fund's ability to pay
distributions depends on the creditworthiness of the issuers of the
securities the Fund holds. The Fund may not be able to pay
distributions, or could lose money, if the issuer of a security is
unable to pay interest or repay principal when it's due.
o Holding cash - The Fund may hold cash while it's waiting to make an
investment, as a temporary defensive strategy, or if the team believes
that attractive tax-exempt investments are not available. Any
uninvested cash the Fund holds does not earn income.
o Tax considerations - Most of the distributions paid by the Fund come
from interest on municipal securities, which is generally free from
federal income tax but may be subject to state and local taxes. Any
portion of a distribution that comes from income from non-exempt
sources such as income from other kinds of securities or from realized
capital gains is generally subject to federal, state and local taxes.
Distributions paid to you from the Fund's interest on private activity
bonds may be subject to the federal alternative minimum tax. Shares of
Nations Municipal Reserves would not be suitable investments for
tax-deferred plans and tax-exempt investors.
14
<PAGE>
[GRAPHIC]
Many things affect a Fund's performance, including market
conditions, the composition of the Fund's holdings, and Fund
expenses.
The returns shown are for a class not offered in this prospectus
that has similar annual returns because the shares are invested in
the same portfolio of securities. The annual returns differ only to
the extent that the classes do not have the same expenses.
For the Fund's current 7-day yield, please call us at
1.800.626.2275 if you're an institutional investor, or
1.800.321.7854 if you're an individual investor. You can also
contact your investment professional.
[GRAPHIC]
A look at the Fund's performance
The following bar chart and table show you how the Fund has performed in
the past, and can help you understand the risks of investing in the
Fund. A Fund's past performance is no guarantee of how it will perform
in the future.
Year by year total return (%) as of December 31 each year*
The bar chart shows you how the performance of the Fund's Market Class
Shares has varied from year to year. These returns do not reflect
deductions of sales charges or account fees, if any, and would be lower
if they did.
[BAR CHART APPEARS HERE WITH THE FOLLOWING PLOT POINTS]
3.24% 3.00% 2.69%
1997 1998 1999
*Year-to-date return as of June 30, 2000: 1.69%
Best and worst quarterly returns during this period
<TABLE>
<CAPTION>
<S> <C>
Best: 2nd quarter 1997: 0.86%
Worst: 3rd quarter 1999: 0.65%
</TABLE>
Average annual total return as of December 31, 1999
<TABLE>
<CAPTION>
Since
1 year inception*
<S> <C> <C>
Market Class Shares 2.69% 3.00%
</TABLE>
* The inception date of Market Class Shares is May 3, 1996.
15
<PAGE>
[GRAPHIC]
There are two kinds of fees -- shareholder fees you pay directly,
and annual fund operating expenses that are deducted from a fund's
assets.
Total net expenses are actual expenses paid by the Fund after
waivers and/or reimbursements.
[GRAPHIC]
What it costs to invest in the Fund
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<TABLE>
<CAPTION>
Shareholder fees
(Fees paid directly from your investment) Daily Class Shares
<S> <C>
Maximum sales charge (load) imposed on purchases none
Maximum deferred sales charge (load) none
Annual Fund operating expenses(1)
(Expenses that are deducted from the Fund's assets)
Management fees 0.15%
Distribution (12b-1) and shareholder servicing fees 0.60%
Other expenses 0.14%
------
Total annual Fund operating expenses 0.89%
Fee waivers and/or reimbursements (0.09)%
------
Total net expenses(2) 0.80%
======
</TABLE>
(1)The figures contained in the above table are based on amounts incurred
during the Fund's most recent fiscal year and have been adjusted, as
needed, to reflect current service provider fees.
(2)The Fund's investment adviser and/or some of its other service
providers have agreed to waive fees and/or reimburse expenses until
July 31, 2001. The figure shown here is after waivers and/or
reimbursements. There is no guarantee that these waivers and/or
reimbursements will continue after this date.
[GRAPHIC]
This is an example only. Your actual costs could be higher or
lower, depending on the amount you invest, and on the Fund's actual
expenses and performance.
Example
This example is intended to help you compare the cost of investing in
this Fund with the cost of investing in other mutual funds.
This example assumes:
o you invest $10,000 in Daily Class Shares of the Fund for the time
periods indicated and then sell all of your shares at the end of those
periods
o you reinvest all dividends and distributions in the Fund
o your investment has a 5% return each year
o the Fund's operating expenses remain the same as shown in the table
above
o the waivers and/or reimbursements shown above expire July 31, 2001 and
are not reflected in the 3, 5 and 10 year examples
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Daily Class Shares $82 $275 $484 $1,088
</TABLE>
16
<PAGE>
[GRAPHIC]
About the sub-adviser
BACAP is this Fund's sub-adviser. BACAP's Tax-Exempt Money Market
Management Team makes the day-to-day investment decisions for the
Fund.
[GRAPHIC]
You'll find more about BACAP on page 23.
This Fund, like all money market funds, is subject to certain
investment limitations. These are described in Other important
information.
Nations California Tax-Exempt Reserves
[GRAPHIC]
Investment objective
The Fund seeks current income exempt from federal income tax and
California state personal income tax, a stable share price, and daily
liquidity.
[GRAPHIC]
Principal investment strategies
The Fund pursues its objective by generally investing in a portfolio of
high quality money market instruments that, at the time of investment,
are considered to have remaining maturities of 397 days or less.
The Fund normally invests at least 80% of its assets in securities that pay
interest that is free from federal income tax and California state personal
income tax. These securities are issued by or on behalf of the State of
California, its political subdivisions, agencies, instrumentalities and
authorities, and other qualified issuers.
The Fund may invest up to 20% of its assets in:
o municipal securities that finance private projects, called private activity
bonds
o money market instruments, including repurchase agreements
The Fund may also invest in 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 these issuers. The Fund may invest in other money
market funds, consistent with its investment objective and strategies.
The team tries to maintain a constant net asset value of $1.00 per share for
the Fund. The team uses extensive research, including economic, technical and
security analysis to select individual investments.
o Economic analysis includes evaluating local, national and global economic
conditions, as well as interest rate movements.
o Technical analysis includes identifying categories of money market
instruments that offer the highest yields and assessing the market for
potential investments.
o Security analysis includes evaluating the credit quality of an instrument,
and structural analysis, which includes evaluating the arrangements between
the municipality and others involved in the issue of an instrument.
Securities are normally held to maturity, but the team may sell a security
before it matures to meet cash flow needs, to manage the portfolio's maturity,
if the team determines that the security is no longer a suitable investment,
and for other reasons.
17
<PAGE>
[GRAPHIC]
You'll find more about other risks of investing in this Fund
starting on page 21 and in the SAI.
[GRAPHIC]
Risks and other things to consider
Nations California Tax-Exempt Reserves has the following risks:
o Investment strategy risk - This Fund is considered to be
non-diversified because it invests most of its assets in securities
that pay interest that is free from personal income tax in one state.
The value of the Fund and the amount of interest it pays could also be
affected by the financial conditions of the state, its public
authorities and local governments. Although the Fund tries to maintain
a share price of $1.00, an investment in the Fund could lose money. An
investment in this Fund is not a bank deposit and is not insured or
guaranteed by Bank of America, the FDIC or any other government
agency.
o Income/principal payment risk - The Fund's ability to pay
distributions depends on the creditworthiness of the issuers of the
securities the Fund holds. The Fund may not be able to pay
distributions, or could lose money, if the issuer of a security is
unable to pay interest or repay principal when it's due.
o Holding cash - The Fund may hold cash while it's waiting to make an
investment, as a temporary defensive strategy, or if the team believes
that attractive tax-exempt investments are not available. Any
uninvested cash the Fund holds does not earn income.
o Tax considerations - Most of the distributions paid by the Fund come
from interest on municipal securities, which is generally free from
federal income tax and California state personal income tax, but may
be subject to other state and local taxes and the federal alternative
minimum tax. Any portion of a distribution that comes from income from
non-exempt sources such as income from other kinds of securities or
from realized capital gains is generally subject to federal, state and
local taxes. Distributions paid to you from the Fund's interest on
private activity bonds may be subject to the federal alternative
minimum tax. Shares of Nations California Tax-Exempt Reserves would
not be suitable investments for tax-deferred plans and tax-exempt
investors.
18
<PAGE>
[GRAPHIC]
Many things affect a Fund's performance, including market
conditions, the composition of the Fund's holdings, and Fund
expenses.
Call us at 1.800.626.2275 or contact your financial adviser for the
Fund's current 7-day yield.
For the Fund's current 7-day yield, please call us at
1.800.626.2275 if you're an institutional investor, or
1.800.321.7854 if you're an individual investor. You can also
contact your investment professional.
[GRAPHIC]
A look at the Fund's performance
The following bar chart and table show you how the Fund has performed in
the past, and can help you understand the risks of investing in the
Fund. A Fund's past performance is no guarantee of how it will perform
in the future.
Year by year total return (%) as of December 31 each year*
The bar chart shows you how the performance of the Fund's Daily Class
Shares has varied from year to year. These returns do not reflect
deductions of sales charges or account fees, if any, and would be lower
if they did.
[BAR CHART APPEARS HERE WITH THE FOLLOWING PLOT POINTS]
2.84% 2.51% 2.26%
1997 1998 1999
*Year-to-date return as of June 30, 2000: 1.32%
Best and worst quarterly returns during this period
<TABLE>
<CAPTION>
<S> <C>
Best: 2nd quarter 1997: 0.75%
Worst: 1st quarter 1999: 0.48%
</TABLE>
Average annual total return as of December 31, 1999
<TABLE>
<CAPTION>
Since
1 year inception*
<S> <C> <C>
Daily Class Shares 2.26% 2.56%
</TABLE>
* The inception date of Daily Class Shares is October 2, 1996.
19
<PAGE>
[GRAPHIC]
There are two kinds of fees -- shareholder fees you pay directly,
and annual fund operating expenses that are deducted from a fund's
assets.
Total net expenses are actual expenses paid by the Fund after
waivers and/or reimbursements.
[GRAPHIC]
What it costs to invest in the Fund
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<TABLE>
<CAPTION>
Shareholder fees
(Fees paid directly from your investment) Daily Class Shares
<S> <C>
Maximum sales charge (load) imposed on purchases none
Maximum deferred sales charge (load) none
Annual Fund operating expenses(1)
(Expenses that are deducted from the Fund's assets)
Management fees 0.15%
Distribution (12b-1) and shareholder servicing fees 0.60%
Other expenses 0.13%
------
Total annual Fund operating expenses 0.88%
Fee waivers and/or reimbursements (0.08)%
------
Total net expenses(2) 0.80%
======
</TABLE>
(1)The figures contained in the above table are based on amounts incurred
during the Fund's most recent fiscal year and have been adjusted, as
needed, to reflect current service provider fees.
(2)The Fund's investment adviser and/or some of its other service
providers have agreed to waive fees and/or reimburse expenses until
July 31, 2001. The figure shown here is after waivers and/or
reimbursements. There is no guarantee that these waivers and/or
reimbursements will continue after this date.
[GRAPHIC]
This is an example only. Your actual costs could be higher or
lower, depending on the amount you invest, and on the Fund's actual
expenses and performance.
Example
This example is intended to help you compare the cost of investing in
this Fund with the cost of investing in other mutual funds.
This example assumes:
o you invest $10,000 in Daily Class Shares of the Fund for the time
periods indicated and then sell all of your shares at the end of those
periods
o you reinvest all dividends and distributions in the Fund
o your investment has a 5% return each year
o the Fund's operating expenses remain the same as shown in the table
above
o the waivers and/or reimbursements shown above expire July 31, 2001 and
are not reflected in the 3, 5 and 10 year examples
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Daily Class Shares $82 $273 $480 $1,077
</TABLE>
20
<PAGE>
[GRAPHIC]
Other important information
You'll find specific information about each Fund's principal investments,
strategies and risks in the descriptions starting on page 4. The following are
some other risks and information you should consider before you invest:
o Special rules for money market funds - Money market funds must comply
with Rule 2a-7 under the Investment Company Act of 1940 (1940 Act).
Rule 2a-7 sets out certain limits on investments, which are designed
to help protect investors from risk of loss. These limits apply at the
time an investment is made. The Funds, like all money market funds:
o may only invest in securities with a remaining maturity of 397 days
or less, or that have maturities longer than 397 days but have
demand, interest rate reset features or guarantees that are 397 days
or less
o must maintain an average dollar-weighted maturity of 90 days or less
o may normally invest no more than 5% of their assets in a single
security, other than U.S. government securities; however, they may
invest up to 25% of their assets in a first-tier security for up to
three business days (except for Nations California Tax-Exempt
Reserves)
o may generally only invest in U.S. dollar denominated instruments
that are determined to have minimal credit risk and are first-tier
securities, except for Nations California Tax-Exempt Reserves, which
also may invest in second-tier securities
o Changing investment objectives and policies - The investment objective
and certain investment policies of any Fund cannot be changed without
shareholder approval (except for Nations California Tax-Exempt
Reserves).
o Investing defensively - A Fund may temporarily hold investments that
are not part of its investment objective or its principal investment
strategies to try to protect it during a market or economic downturn
or because of political or other conditions. A Fund may not achieve
its investment objective while it is investing defensively. Any cash a
Fund holds for defensive or other reasons does not earn income.
21
<PAGE>
[GRAPHIC]
How the Funds are managed
[GRAPHIC]
Banc of America Advisors, Inc.
One Bank of America Plaza
Charlotte, North Carolina 28255
Investment adviser
BAAI is the investment adviser to over 60 mutual fund portfolios in the Nations
Funds Family, including the Money Market Funds described in this prospectus.
BAAI is a registered investment adviser. It's a wholly-owned subsidiary of Bank
of America, which is owned by Bank of America Corporation.
Nations Funds pays BAAI an annual fee for its investment advisory services. The
fee is calculated as a percentage of the average daily net assets of each Fund
and is paid monthly. BAAI uses part of this money to pay investment
sub-advisers for the services they provide to each Fund.
BAAI has agreed to waive fees and/or reimburse expenses for certain Funds until
July 31, 2001. You'll find a discussion of any waiver and/or reimbursement in
the Fund descriptions. There is no assurance that BAAI will continue to waive
and/or reimburse any fees and/or expenses after this date.
The following chart shows the maximum advisory fees BAAI can receive, along
with the actual advisory fees it received during the Funds' last fiscal year,
after waivers and/or reimbursements:
Annual investment advisory fee, as a % of average daily net assets
<TABLE>
<CAPTION>
Maximum Actual fee
advisory paid last
fee(1) fiscal year
<S> <C> <C>
Nations Cash Reserves 0.15% 0.16%
Nations Treasury Reserves 0.15% 0.16%
Nations Government Reserves 0.15% 0.15%
Nations Municipal Reserves 0.15% 0.14%
Nations California Tax-Exempt Reserves 0.15% 0.15%
</TABLE>
(1)These fees are the current contract levels, which in most cases have been
reduced from the contract levels that were in effect during the last fiscal
year.
22
<PAGE>
Investment sub-adviser
Nations Funds and BAAI have engaged an investment sub-adviser to provide
day-to-day portfolio management for the Funds. This sub-adviser functions under
the supervision of BAAI and the Board of Trustees of Nations Funds.
[GRAPHIC]
Banc of America
Capital Management, Inc.
One Bank of America Plaza
Charlotte, North Carolina 28255
Banc of America Capital Management, Inc.
BACAP, the successor to TradeStreet Investment Associates, Inc., is a
registered investment adviser and a wholly-owned subsidiary of Bank of America.
Its management expertise covers all major domestic asset classes, including
equity and fixed income securities, and money market instruments.
Currently managing more than $120 billion, BACAP has over 200 institutional
clients and is sub-adviser to more than 50 mutual funds in the Nations Funds
Family. BACAP takes a team approach to investment management. Each team has
access to the latest technology and analytical resources.
BACAP is the investment sub-adviser to the Funds shown in the table below. The
table also tells you which internal BACAP asset management team is responsible
for making the day-to-day investment decisions for each Fund.
<TABLE>
<CAPTION>
<S> <C>
Fund BACAP Team
Nations Cash Reserves Taxable Money Market Management Team
Nations Treasury Reserves Taxable Money Market Management Team
Nations Government Reserves Taxable Money Market Management Team
Nations Municipal Reserves Tax-Exempt Money Market Management Team
Nations California Tax-Exempt Reserves Tax-Exempt Money Market Management Team
</TABLE>
[GRAPHIC]
Stephens Inc.
111 Center Street
Little Rock, Arkansas 72201
Other service providers
The Funds are distributed and co-administered by Stephens Inc., a registered
broker/dealer. Stephens may pay distribution (12b-1) and shareholder servicing
fees and/or other compensation to companies for selling shares and providing
services to investors.
BAAI is also co-administrator of the Funds, and assists in overseeing the
administrative operations of the Funds. The Funds pay BAAI and Stephens a
combined fee of 0.10% for their services, plus certain out-of-pocket expenses.
The fee is calculated as an annual percentage of the average daily net assets
of the Funds, and is paid monthly.
[GRAPHIC]
PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
PFPC Inc. (PFPC) is the transfer agent for the Funds' shares. Its
responsibilities include processing purchases, sales and exchanges, calculating
and paying distributions, keeping shareholder records, preparing account
statements and providing customer service.
23
<PAGE>
About your investment
--------------------------------------------------------------------------------
[GRAPHIC]
When you sell shares of a mutual fund, the fund is effectively
"buying" them back from you. This is called a redemption.
[GRAPHIC]
Buying, selling and exchanging shares
This prospectus offers Daily Class Shares of the Funds. Here are some general
rules about this class of shares:
o Daily Class Shares are available on a direct basis or through financial
institutions and intermediaries for their own accounts, and for certain
client accounts for which they may provide automated cash management or
other services. These include:
o Bank of America and certain of its affiliates
o certain other financial institutions and intermediaries
o The minimum initial investment is $1,000. There is no minimum for additional
investments.
o The minimum initial investment is $100 using the Systematic Investment Plan.
The minimum for additional investments under this plan is $100.
o There are no sales charges for buying, selling or exchanging these shares.
You'll find more information about buying, selling and exchanging Daily Class
Shares on the pages that follow. You should also ask your financial institution
or intermediary about its limits, fees and policies for buying, selling and
exchanging shares, which may be different from those described here, and about
its related services and programs.
The Funds also offer other classes of shares, with different features and
expense levels, which you may be eligible to buy. If you have questions about
buying, selling or exchanging, or you need help placing an order, please call
us at 1.800.626.2275 if you're an institutional investor, or 1.800.321.7854 if
you're an individual investor. You can also contact your investment
professional.
24
<PAGE>
<TABLE>
<CAPTION>
Ways to
buy, sell or How much you can buy,
exchange sell or exchange Other things to know
----------------- -------------------------------------- ---------------------------------------------------
<S> <C> <C> <C>
Buying shares In a lump sum minimum initial investment: There is no limit to the amount you can invest
o $1,000 in Daily Class Shares.
minimum additional investment:
o none
----------------- -------------------------------------- ---------------------------------------------------
Using our minimum initial investment: You can buy shares monthly, twice a month or
Systematic o $100 quarterly, using automatic transfers from your
Investment Plan minimum additional investment: bank account.
o $100
----------------- -------------------------------------- ---------------------------------------------------
Selling shares In a lump sum o you can sell up to $50,000 of your We usually send you the sale proceeds on the
shares by telephone, otherwise there same day that we receive your order.
are no limits to the amount you can
sell
o other restrictions may apply to If you paid for your shares with a check that
withdrawals from retirement plan wasn't certified, we'll hold the sale proceeds
accounts when you sell those shares for at least 15 days
after the trade date of the purchase, or until the
check has cleared.
----------------- -------------------------------------- ---------------------------------------------------
Using our free o minimum $250 per check You can write checks for free. You can only use
checkwriting checks to make partial withdrawals from a
service Fund. You can't use a check to make a full
withdrawal from a Fund.
----------------- -------------------------------------- ---------------------------------------------------
Using our o minimum $25 per withdrawal Your account balance must be at least $10,000
Automatic to set up the plan. You can make withdrawals
Withdrawal Plan monthly, twice a month or quarterly. We'll send
your money by check or deposit it directly to
your bank account.
----------------- -------------------------------------- ---------------------------------------------------
Exchanging shares In a lump sum o minimum $1,000 per exchange You can exchange Daily Class shares of a Fund
for Daily Class Shares of any other Nations
Reserves Money Market Fund.
----------------- -------------------------------------- ---------------------------------------------------
</TABLE>
25
<PAGE>
[GRAPHIC]
A business day is any day that the Federal Reserve Bank of New York
is open. The Money Market Funds reserve the right to close early on
business days preceding national holidays, if the primary
government securities dealers have closed early and/or if the Bond
Market Association recommends that the securities markets close
early.
The Federal Reserve Bank of New York is closed on weekends and on
the following national holidays: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Memorial Day, Independence Day,
Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and
Christmas Day.
How shares are priced
All transactions are based on the price of a Fund's shares -- or its net asset
value per share. We calculate net asset value per share at the following times
(unless the Fund closes early):
o 5:00 p.m. Eastern time each business day for each share class of Nations
Cash Reserves and Nations Treasury Reserves
o 12:00 noon Eastern time each business day for each share class of Nations
Government Reserves and Nations Municipal Reserves
o 10:30 a.m. Eastern time each business day for each share class of Nations
California Tax-Exempt Reserves
First, we calculate the net asset value for each class of a Fund by determining
the value of the Fund's assets in the class and then subtracting its
liabilities. Next, we divide this amount by the number of shares that investors
are holding in the class.
Although we try to maintain a net asset value per share of $1.00 for the Funds,
we can't guarantee that we will be able to do so.
Valuing securities in a Fund
The value of a Fund's assets is based on the total market value of all of the
securities it holds. We use the amortized cost method, which approximates
market value, to value the assets in the Money Market Funds.
How orders are processed
Orders to buy, sell or exchange shares are processed on business days. Orders
received by Stephens, PFPC or their agents by the following times on a business
day (unless the Fund closes early) will receive that day's net asset value per
share:
o 5:00 p.m. Eastern time for Nations Cash Reserves and Nations Treasury
Reserves, except:
o Orders must be received for Nations Treasury Reserves by 3:00 p.m. Eastern
time on the last business day of each calendar quarter and business days
that precede the national holidays observed by these Funds
o Orders must be received for Nations Cash Reserves by 3:00 p.m. Eastern
time on the last business day of the calendar year
o 12:00 noon Eastern time for Nations Government Reserves and Nations
Municipal Reserves
o 10:30 a.m. Eastern time for Nations California Tax-Exempt Reserves
Investors are encouraged to place orders to sell as early in the day as
possible. Orders received after these times will receive the next business
day's net asset value per share. The business day that applies to an order is
also called the trade date. We may refuse any order to buy or exchange shares.
If this happens, we'll return any money we've received.
26
<PAGE>
Telephone orders
You can place orders to buy, sell or exchange by telephone if you complete the
telephone authorization section of our account application and send it to us.
Here's how telephone orders work:
o If you sign up for telephone orders after you open your account, you
must have your signature guaranteed.
o Telephone orders may not be as secure as written orders. You may be
responsible for any loss resulting from a telephone order.
o We'll take reasonable steps to confirm that telephone instructions are
genuine. For example, we require proof of your identification before
we will act on instructions received by telephone and may record
telephone conversations. If we and our service providers don't take
these steps, we may be liable for any losses from unauthorized or
fraudulent instructions.
o Telephone orders may be difficult to complete during periods of
significant economic or market change.
[GRAPHIC]
Buying shares
Here are some general rules for buying shares:
o Investors buy Daily Class Shares at net asset value per share.
o We must receive payment by the following times on the business day
Stephens, PFPC or their agents receive the order (unless the Fund
closes early):
o 5:00 p.m. Eastern time for Nations Cash Reserves, Nations Money
Market Reserves and Nations Treasury Reserves, except:
o Payment must be received for Nations Treasury Reserves by 4:00
p.m. Eastern time on the last business day of each calendar
quarter and business days that precede the national holidays
observed by these Funds
o Payment must be received for Nations Cash Reserves by 4:00 p.m.
Eastern time on the last business day of the calendar year
o 4:00 p.m. Eastern time for Nations Governments Reserves, Nations
Municipal Reserves and Nations California Tax-Exempt Reserves
If we receive payment after these times, we'll refuse the order. We'll
return any payment received for orders that we refuse. We can change
these times under certain circumstances, for example, when there's
more wiring activity than normal.
o Financial institutions and intermediaries are responsible for sending
us orders for their clients and for ensuring that we receive payment
on time.
o Shares purchased are recorded on the books of the Fund. We don't issue
certificates.
27
<PAGE>
Systematic Investment Plan
You can make regular purchases of $100 or more using automatic transfers from
your bank account to the Funds you choose. You can contact your financial
adviser or us to set up the plan.
Here's how the plan works:
o You can buy shares twice a month, monthly or quarterly.
o You can choose to have us transfer your money on or about the 15th or
the last day of the month.
o Some exceptions may apply to employees of Bank of America and its
affiliates, and to plans set up before August 1, 1997. For details,
please contact your financial adviser.
[GRAPHIC]
Selling shares
Here are some general rules for selling shares:
o We normally send the sale proceeds by federal funds wire on the same
business day that Stephens, PFPC or their agents receive the order.
o Investors that qualify for telephone orders can sell up to $50,000
in shares by telephone.
o If shares were paid for with a check that wasn't certified, we'll
hold the sale proceeds when those shares are sold for at least 15
days after the trade date of the purchase, or until the check has
cleared, whichever is later.
o Financial institutions and intermediaries are responsible for
sending us orders for their clients and for depositing the sale
proceeds to their accounts on time.
o Shares that are held in certificate form must be signed (or
accompanied by a signed stock power) and sent to PFPC. The
investor's signature must be guaranteed, unless other arrangements
have been made with us. We may ask for any other information we need
to prove that the order is properly authorized.
o Under certain circumstances allowed under the 1940 Act, we can pay
investors in securities or other property when they sell shares.
o We can delay payment of the sale proceeds for up to seven days.
o Other restrictions may apply to retirement plan accounts. For more
information about these restrictions please contact your retirement
plan administrator.
We may sell shares:
o if the value of an investor's account falls below $500. We'll
provide 30 days notice in writing if we're going to do this
o if a financial institution or intermediary tells us to sell the
shares for a client under arrangements it has made with its clients
o under certain other circumstances allowed under the 1940 Act
28
<PAGE>
Checkwriting service
You can withdraw money from the Funds using our free checkwriting service. You
can contact your financial adviser or us to set up the service.
Here's how the service works:
o Each check you write must be for $250 or more.
o You can only use checks to make partial withdrawals. You can't use a
check to make a full withdrawal of the shares you hold in a Fund.
o Shares you sell by writing a check are eligible to receive distributions
up to the day our custodian receives the check for payment.
o We can change or cancel the service by giving you 30 days notice in
writing
Automatic Withdrawal Plan
The Automatic Withdrawal Plan lets you withdraw $25 or more every month, every
quarter or every year. You can contact your financial adviser or us to set up
the plan.
Here's how the plan works:
o Your account balance must be at least $10,000 to set up the plan.
o If you set up the plan after you've opened your account, your
signature must be guaranteed.
o You can choose to have us transfer your money on or about the 15th or
the 25th of the month.
o We'll send you a check or deposit the money directly to your bank
account.
o You can cancel the plan by giving your financial adviser or us 30 days
notice in writing.
It's important to remember that if you withdraw more than your investment in
the Fund is earning, you'll eventually use up your original investment.
29
<PAGE>
[GRAPHIC]
You should make sure you understand the investment objectives and
policies of the Fund you're exchanging into. Please read its
prospectus carefully.
[GRAPHIC]
Exchanging shares
Investors can sell shares of a Fund to buy shares of another Nations
Fund. This is called an exchange, and may be appropriate if investment
goals or tolerance for risk change.
Here's how exchanges work:
o Investors can exchange Daily Class Shares of a Fund for Daily Class
Shares of any other Nations Reserves Money Market Fund.
o Investors must exchange at least $1,000 at a time.
o The rules for buying shares of a Fund, including any minimum
investment requirements, apply to exchanges into that Fund.
o Exchanges can only be made into a Fund that is legally sold in the
investor's state of residence.
o Exchanges can generally only be made into a Fund that is accepting
investments.
o We may limit the number of exchanges that can be made within a
specified period of time.
o We may change or cancel the right to make an exchange by giving the
amount of notice required by regulatory authorities (generally 60
days for a material change or cancellation).
o Shares that are held in certificate form cannot be exchanged until
PFPC has received the certificate and deposited the shares to the
investor's account.
30
<PAGE>
[GRAPHIC]
How selling and servicing agents are paid
[GRAPHIC]
The financial institution or intermediary that buys shares for you
is also sometimes referred to as a selling agent.
The distribution fee is often referred to as a "12b-1" fee because
it's paid through a plan approved under Rule 12b-1 of the 1940 Act.
The selling agent may charge other fees for services provided to
your account.
Selling and servicing agents usually receive compensation based on your
investment in the Funds. The kind and amount of the compensation depends on the
share class in which you invest. Selling agents typically pay a portion of the
compensation they receive to their investment professionals.
Distribution (12b-1) and shareholder servicing fees
Stephens and selling and servicing agents are compensated for selling shares
and providing services to investors under distribution and shareholder
servicing plans.
Stephens may be reimbursed for distribution-related expenses up to an annual
maximum of 0.35% of the average daily net assets of Daily Class Shares of the
Funds, some or all of which may be paid to selling agents.
Servicing agents may receive a maximum annual shareholder servicing fee of
0.25% of the average daily net assets of Daily Class Shares of the Funds.
Fees are calculated daily and deducted monthly. Because these fees are paid out
of the Funds' assets on an ongoing basis, over time they will increase the cost
of your investment, and may cost you more than any sales charges you may pay.
The Funds pay these fees to eligible selling and servicing agents for as long
as the plans continue. We may reduce or discontinue payments at any time.
Other compensation
Selling and servicing agents may also receive:
o a bonus, incentive or other compensation relating to the sale, promotion and
marketing of the Funds
o an additional amount of up to 0.50% of the net asset value per share on all
sales of Daily Class Shares to retirement plans
o non-cash compensation like trips to sales seminars, tickets to sporting
events, theater or other entertainment, opportunities to participate in golf
or other outings and gift certificates for meals or merchandise
This compensation which is not paid by the Funds, is discretionary and may be
available only to selected selling and servicing agents. For example, Stephens
sometimes sponsors promotions involving Banc of America Investment Services,
Inc., an affiliate of BAAI, and certain other selling or servicing agents.
Selected selling and servicing agents may also receive compensation for opening
a minimum number of accounts. Stephens may cancel any compensation program at
any time.
BAAI and Stephens may pay amounts from their own assets to selling or servicing
agents of the Funds for services they provide.
31
<PAGE>
[GRAPHIC]
Distributions and taxes
[GRAPHIC]
The power of compounding
Reinvesting your distributions buys you more shares of a Fund --
which lets you take advantage of the potential for compound growth.
Putting the money you earn back into your investment means it, in
turn, may earn even more money. Over time, the power of compounding
has the potential to significantly increase the value of your
investment. There is no assurance, however, that you'll earn more
money if you reinvest your distributions.
About distributions
A mutual fund can make money two ways:
o It can earn income. Examples are interest paid on bonds and dividends paid
on common stocks.
o A fund can also have capital gains if the value of its investments
increases. If a fund sells an investment at a gain, the gain is realized. If
a fund continues to hold the investment, any gain is unrealized.
A mutual fund is not subject to income tax as long as it distributes its net
investment income and realized capital gains to its shareholders. The Funds
intend to pay out a sufficient amount of their income and capital gains to
their shareholders so the Funds won't have to pay any income tax. When a Fund
makes this kind of a payment, it's split equally among all shares, and is
called a distribution.
Although the Funds do not expect to realize any capital gains, any capital
gains realized by a Fund will be distributed at least once a year.
The Funds declare distributions of net investment income each business day and
pay them on the first business day of each month.
The distribution you receive is paid based on the number of shares you hold on
the record date which is usually the day the distribution is declared (daily
dividend Funds) or the day before the distribution is declared (all other
Funds). Shares are eligible to receive distributions from the settlement date
(daily dividend Funds) or the trade date (all other Funds) of the purchase up
to and including the day before the shares are sold.
Different share classes of a Fund usually pay different distribution amounts,
because each class has different expenses.
We'll automatically reinvest distributions in additional shares of the same
Fund unless you tell us you want to receive your distributions in cash. You can
do this by writing to us at the address on the back cover, or by calling us at
1.800.626.2275 if you're an institutional investor, or 1.800.321.7854 if you're
an individual investor.
32
<PAGE>
[GRAPHIC]
This information is a summary of how federal income taxes may
affect your investment in the Funds. It is not intended as a
substitute for careful tax planning. You should consult with your
own tax adviser about your situation, including any foreign, state
and local taxes that may apply.
[GRAPHIC]
For more information about taxes, please see the SAI.
How taxes affect your investment
Distributions of net investment income and any excess of net short-term capital
gain over net long-term capital loss generally are taxable to you as ordinary
income.
Although the Funds do not expect to realize any capital gains, any
distributions of net capital gain (generally the excess of net long-term
capital gain over net short-term capital loss) generally are taxable to you as
net capital gain.
In general, all distributions are taxable to you when paid, whether they are
paid in cash or automatically reinvested in additional shares of the Fund.
However, any distributions declared in October, November or December of one
year and distributed in January of the following year will be taxable as if
they had been paid to you on December 31 of the first year.
We'll send you a notice every year that tells you how much you've received in
distributions during the year and their federal tax status. Foreign, state and
local taxes may also apply to these distributions.
Nations Municipal Reserves, Nations California Tax-Exempt Reserves
Distributions that come from Nations Municipal Reserves' tax-exempt interest
income are generally free from federal income tax, but may be subject to state
or local tax.
Distributions that come from Nations California Tax-Exempt Reserves' tax-exempt
interest income are generally free from federal income tax and California state
personal income tax, but may be subject to other state and local taxes.
Any distributions that come from taxable income or realized capital gains are
generally subject to tax.
A portion of the distributions from these Funds may also be subject to the
federal alternative minimum tax.
U.S. government obligations
If you invest in U.S. government obligations directly, interest on those
obligations is free from state and local and personal income taxes.
Distributions you receive that come from interest a Fund earns from U.S.
government obligations may not be exempt from these taxes. Please consult with
your tax adviser.
33
<PAGE>
Withholding tax
We're required by federal law to withhold tax of 31% on any distributions and
redemption proceeds paid to you (including amounts to be paid for in securities
or other property and exchanges) if:
o you haven't given us a correct Taxpayer Identification Number (TIN) and
haven't certified that the TIN is correct and withholding doesn't apply
o the Internal Revenue Service (IRS) has notified us that the TIN listed on
your account is incorrect according to its records
o the IRS informs us that you are otherwise subject to backup withholding
The IRS may also impose penalties against you if you don't give us a correct
TIN.
Amounts we withhold are applied to your federal income tax liability. You may
receive a refund from the IRS if the withholding tax results in an overpayment
of taxes.
We're also normally required by federal law to withhold tax (at a rate of 30%,
or a lower rate if a treaty applies) on distributions paid to foreign
shareholders.
Taxation of redemptions and exchanges
As long as a Fund continually maintains a $1.00 net asset value per share, you
ordinarily will not recognize a taxable gain or loss on the redemption or
exchange of your shares of the Fund.
[GRAPHIC]
Financial highlights
The financial highlights table is designed to help you understand how the Funds
have performed for the past five years or, if shorter, the period of the Fund's
operations. Certain information reflects financial results for a single Fund
share. The total investment return line indicates how much an investment in the
Fund would have earned, assuming all dividends and distributions had been
reinvested.
This information has been audited by PricewaterhouseCoopers LLP. The
independent accountants' report and Nations Funds financial statements are
incorporated by reference into the SAI. Please see the back cover to find out
how you can get a copy.
34
<PAGE>
Nations Cash Reserves For a Share outstanding throughout the period
<TABLE>
<CAPTION>
Period ended
Daily Class Shares 03/31/00*
<S> <C>
Net asset value, beginning of period $ 1.00
Income from investment operations:
Net investment income 0.0459
Less distributions:
Dividends from net investment income (0.0459)
Net asset value, end of period $ 1.00
Total return++ 4.69%
============================================ =======
Ratio to average net assets/supplemental data:
Net assets, end of period (in 000's) $9,753,000
Ratio of operating expenses to average net
assets 0.80%+**(a)
Ratio of net investment income to average
net assets 4.77%+
Ratio of operating expenses to average net
assets without waivers and/or expense
reimbursements 0.89%+(a)
</TABLE>
* Cash Reserves Daily Class Shares commenced
operations on April 12, 1999.
** The effect of interest expense on the operating
expense ratio was less than 0.01%.
+ Annualized.
++ Total return represents aggregate total return for
the period indicated, assumes reinvestment of all
distributions, and does not reflect the deduction of
any applicable sales charges.
(a) The effect of the custodial expense offset on the
operating expense ratio, with and without waivers
and/or expense reimbursements, was less than 0.01%.
Nations Treasury Reserves For a Share outstanding throughout the period
<TABLE>
<CAPTION>
Period ended
Daily Class Shares 03/31/00*
<S> <C>
Net asset value, beginning of period $ 1.00
Income from investment operations:
Net investment income 0.0431
Less distributions:
Dividends from net investment income (0.0431)
Net asset value, end of period $ 1.00
Total return++ 4.40%
============================================ =======
Ratio to average net assets/supplemental data:
Net assets, end of period (in 000's) $847,775
Ratio of operating expenses to average net
assets 0.80%+**(a)
Ratio of net investment income to average
net assets 4.46%+
Ratio of operating expenses to average net
assets without waivers and/or expense
reimbursements 0.88%+(a)
</TABLE>
* Treasury Reserves Daily Class Shares commenced
operations on April 12, 1999.
** The effect of interest expense on the operating
expense ratio was less than 0.01%.
+ Annualized.
++ Total return represents aggregate total return for
the period indicated, assumes reinvestment of all
distributions, and does not reflect the deduction of
any applicable sales charges.
(a) The effect of the custodial expense offset on the
operating expense ratio, with and without waivers
and/or expense reimbursements, was less than 0.01%.
35
<PAGE>
Nations Government Reserves For a Share outstanding throughout the period
<TABLE>
<CAPTION>
Period ended
Daily Class Shares 03/31/00*
<S> <C>
Net asset value, beginning of period $ 1.00
Income from investment operations:
Net investment income 0.0443
Less distributions:
Dividends from net investment income (0.0443)
Net asset value, end of period $ 1.00
Total return++ 4.52%
============================================ =======
Ratio to average net assets/supplemental data:
Net assets, end of period (in 000's) $171,521
Ratio of operating expenses to average net
assets 0.80%+**(a)
Ratio of net investment income to average
net assets 4.66%+
Ratio of operating expenses to average net
assets without waivers and/or expense
reimbursements 0.89%+(a)
</TABLE>
* Government Reserves Daily Class Shares commenced
operations on April 12, 1999.
** The effect of interest expense on the operating
expense ratio was less than 0.01%.
+ Annualized.
++ Total return represents aggregate total return for
the period indicated, assumes reinvestment of all
distributions, and does not reflect the deduction of
any applicable sales charges.
(a) The effect of the custodial expense offset on the
operating expense ratio, with and without waivers
and/or expense reimbursements, was less than 0.01%.
Nations Municipal Reserves For a Share outstanding throughout the period
<TABLE>
<CAPTION>
Period ended
Daily Class Shares 03/31/00*
<S> <C>
Net asset value, beginning of period $ 1.00
Income from investment operations:
Net investment income 0.0262
Less distributions:
Dividends from net investment income (0.0262)
Net asset value, end of period $ 1.00
Total return++ 2.65%
============================================ =========
Ratio to average net assets/supplemental data:
Net assets, end of period (in 000's) $429,644
Ratio of operating expenses to average net
assets 0.80%+
Ratio of net investment income to average
net assets 2.69%+
Ratio of operating expenses to average net
assets without waivers and/or expense
reimbursements 0.90%+
</TABLE>
* Municipal Reserves Daily Class Shares commenced
operations on April 12, 1999.
+ Annualized.
++ Total return represents aggregate total return for
the period indicated, assumes reinvestment of all
distributions, and does not reflect the deduction of
any applicable sales charges.
36
<PAGE>
Nations California Tax-Exempt
Reserves For a Share outstanding throughout each period
<TABLE>
<CAPTION>
Period ended Period ended
Daily Class Shares 03/31/00 05/14/99*
<S> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00
Income from investment operations:
Net investment income 0.0201 0.0045
Less distributions:
Dividends from net investment income (0.0201) (0.0045)
Net asset value, end of period $ 1.00 $ 1.00
Total return++ 2.01% 0.45%
==================================================== ========= =========
Ratio to average net assets/supplemental data:
Net assets, end of period (in 000's) $699,689 $334,000
Ratio of operating expenses to average net assets 0.80%+ 0.80%+
Ratio of net investment income to average net
assets 2.20%+ 2.21%+
Ratio of operating expenses to average net assets
without waivers and/or expense reimbursements 0.88%+ 0.82%+
<CAPTION>
Year ended Year ended Period ended
Daily Class Shares 02/28/99 02/28/98 02/28/97**
<S> <C> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00
Income from investment operations:
Net investment income 0.0238 0.0279 0.0107
Less distributions:
Dividends from net investment income (0.0238) (0.0279) (0.0107)
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00
Total return++ 2.41% 2.83% 1.09%
==================================================== ========= ========= =======
Ratio to average net assets/supplemental data:
Net assets, end of period (in 000's) $336,000 $172,000 $29,000
Ratio of operating expenses to average net assets 0.79%(a) 0.80%(a) 0.80%+(a)
Ratio of net investment income to average net
assets 2.35% 2.80% 2.66%+
Ratio of operating expenses to average net assets
without waivers and/or expense reimbursements 0.79%(a) 0.80%(a) 0.80%+(a)
</TABLE>
* The financial information for the fiscal periods
through May 14, 1999 reflect the financial
information for the Pacific Horizon California
Tax-Exempt Money Market Fund, S and X Shares, which
were reorganized into the California Tax Exempt
Reserves Daily Class, as of May 21, 1999. Prior to
May 21, 1999, the Fund's investment adviser was Bank
of America National Trust and Savings Association.
Effective May 21, 1999, its investment adviser became
Banc of America Advisors, Inc. and its investment
sub-adviser became Banc of America Capital
Management, Inc.
** California Tax Exempt Reserves Daily Class Shares
commenced operations on October 2, 1996.
+ Annualized.
++ Total return represents aggregate total return for
the period indicated, assumes reinvestment of all
distributions, and does not reflect the deduction of
any applicable sales charges.
(a) The effect of the custodial expense offset on the
operating expense ratio, with and without waivers
and/or expense reimbursements, was less than 0.01%.
37
<PAGE>
[GRAPHIC]
This glossary includes explanations of the important terms that may
be used in this Prospectus. Some of the terms explained may apply
to Nations Funds not included in this Prospectus.
[GRAPHIC]
Terms used in this prospectus
Bank obligation - a money market instrument issued by a bank, including
certificates of deposit, time deposits and bankers' acceptances.
Capital gain or loss - the difference between the purchase price of a security
and its selling price. You realize a capital gain when you sell a security for
more than you paid for it. You realize a capital loss when you sell a security
for less than you paid for it.
Commercial paper - a money market instrument issued by a large company.
Debt security - when you invest in a debt security, you are typically lending
your money to a governmental body or company (the issuer) to help fund their
operations or major projects. The issuer pays interest at a specified rate on a
specified date or dates, and repays the principal when the security matures.
Short-term debt securities include money market instruments such as treasury
bills. Long-term debt securities include fixed income securities such as
government and corporate bonds, and mortgage-backed and asset-backed
securities.
First-tier security - under Rule 2a-7 under the 1940 Act, a debt security that
is an eligible investment for money market funds and has the highest short-term
rating from a nationally recognized statistical rating organization (NRSRO) or
if unrated, is determined by the fund's portfolio management team to be of
comparable quality, or is a money market fund issued by a registered investment
company, or is a government security.
Fixed income security - an intermediate to long-term debt security that matures
in more than one year.
Guaranteed investment contract - an investment instrument issued by a rated
insurance company in return for a payment by an investor.
High quality - includes municipal securities that are rated in the top two
highest short-term debt categories according to NRSROs such as S&P and Moody's.
The portfolio management team may consider an unrated municipal security if it
is determined to be of comparable quality, based upon guidelines approved by
the Fund's Board of Trustees. Please see the SAI for more information about
credit ratings.
Money market instrument - a short-term debt security that is considered to
mature in 13 months or less. Money market instruments include U.S. Treasury
obligations, U.S. government obligations, certificates of deposit, bankers'
acceptances, commercial paper, repurchase agreements and certain municipal
securities.
38
<PAGE>
Municipal security (obligation) - a debt security issued by state or local
governments or governmental authorities to pay for public projects and
services. "General obligations" are typically backed by the issuer's full
taxing and revenue-raising powers. "Revenue securities" depend on the income
earned by a specific project or authority, like road or bridge tolls, user fees
for water or revenues from a utility. Interest income from these securities is
exempt from federal income taxes and is generally exempt from state taxes if
you live in the state that issued the security. If you live in the municipality
that issued the security, interest income may also be exempt from local taxes.
Non-diversified - a fund that holds securities of fewer issuers or kinds of
issuers than other kinds of funds. Non-diversified funds tend to have greater
price swings than more diversified funds because events affecting one or more
of its securities may have a disproportionately large effect on the fund.
Participation - a pass-through certificate representing a share in a pool of
debt obligations or other instruments.
Pass-through certificate - securitized mortgages or other debt securities with
interest and principal paid by a servicing intermediary shortly after interest
payments are received from borrowers.
Private activity bond - a municipal security that is used to finance private
projects or other projects that aren't qualified for tax purposes. Private
activity bonds are generally taxable, unless their use is specifically
exempted, or may be treated as tax preference items.
Repurchase agreement - a short-term (often overnight) investment arrangement.
The investor agrees to buy certain securities from the borrower and the
borrower promises to buy them back at a specified date and price. The
difference between the purchase price paid by the investor and the repurchase
price paid by the borrower represents the investor's return. Repurchase
agreements are popular because they provide very low-risk return and can
virtually eliminate credit difficulties.
Reverse repurchase agreement - a repurchase agreement in which an investor
sells a security to another party, like a bank or dealer, in return for cash,
and agrees to buy the security back at a specified date and price.
Second-tier security - under Rule 2a-7 under the 1940 Act, a debt security that
is an eligible investment for money market funds, but is not a first-tier
security.
Settlement date - the date on which an order is settled either by payment or
delivery of securities.
Special purpose issuer - an entity organized solely to issue asset-backed
securities on a pool of assets it owns.
Trade date - the effective date of a purchase, sale or exchange transaction, or
other instructions sent to us. The trade date is determined by the day and time
we receive the order or instructions in a form that's acceptable to us.
39
<PAGE>
U.S. government obligations - a wide range of debt securities issued or
guaranteed by the U.S. government or its agencies, authorities or
instrumentalities.
U.S. Treasury obligation - a debt security issued by the U.S. Treasury.
40
<PAGE>
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<PAGE>
[GRAPHIC]
Where to find more information
You'll find more information about the Money Market Funds in the following
documents:
Annual and semi-annual reports
The annual and semi-annual reports contain information about Fund
investments and performance, the financial statements and the
independent accountants' reports.
[GRAPHIC]
Statement of Additional Information
The SAI contains additional information about the Funds and their
policies. The SAI is legally part of this prospectus (it's incorporated
by reference). A copy has been filed with the SEC.
You can obtain a free copy of these documents, request other information
about the Funds and make shareholder inquiries by contacting Nations
Funds:
By telephone: 1.800.626.2275 (Institutional Investors)
1.800.321.7854 (Individual Investors)
By mail:
Nations Funds
c/o Stephens Inc.
One Bank of America Plaza
33rd Floor
Charlotte, NC 28255
On the Internet: www.nations-funds.com
Information about the Funds can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. Information on the operation
of the Public Reference Room may be obtained by calling the SEC at
1-202-942-8090. The reports and other information about the Funds are
available on the EDGAR Database on the SEC's Internet site at
http://www.sec.gov, and copies of this information may be obtained,
after paying a duplicating fee, by electronic request at the following
E-mail address: [email protected], or by writing the SEC's Public
Reference Section, Washington, D.C. 20549-0102.
SEC file number:
Nations Reserves, 811-6030
DAILY-SP-8/00
[Nations Funds Logo]
<PAGE>
Statement of Additional Information
NATIONS RESERVES
Nations Cash Reserves
Nations Treasury Reserves
Nations Government Reserves
Nations Municipal Reserves
Nations California Tax-Exempt Reserves
Daily Shares
August 1, 2000
This Statement of Additional Information ("SAI") provides supplementary
information pertaining to the classes of shares representing interests in the
above listed investment portfolios of Nations Reserves (individually, a "Fund"
and collectively, the "Funds"). The financial statements for the Funds contained
in their annual reports dated March 31, 2000, are hereby incorporated into this
SAI by reference. 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,
2000, (each a "Prospectus"). 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
1.800.321.7854 and 1.800.626.2275 (for institutional money market investors).
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
HISTORY OF NATIONS RESERVES...........................................................................1
DESCRIPTION OF THE COMPANY AND THE INVESTMENTS RISKS OF ITS FUNDS.....................................1
General...............................................................................................1
Investment Limitations................................................................................2
Fundamental Policy Restrictions.......................................................................2
Non-Fundamental Policy Restrictions...................................................................4
Permissible Fund Investments..........................................................................6
Asset-Backed Securities...............................................................................6
Borrowings...........................................................................................12
Commercial Instruments...............................................................................12
Combined Transactions................................................................................13
Corporate Debt Securities............................................................................13
Dollar Roll Transactions.............................................................................14
Guaranteed Investment Contracts......................................................................14
Insured Municipal Securities.........................................................................15
Municipal Securities.................................................................................15
Other Investment Companies...........................................................................27
Repurchase Agreements................................................................................27
Reverse Repurchase Agreements........................................................................27
Securities Lending...................................................................................28
Stand-By Commitments.................................................................................28
Stripped Securities..................................................................................29
U.S. and Foreign Bank Obligations....................................................................30
U.S. Government Obligations..........................................................................31
Use of Segregated and Other Special Accounts.........................................................31
Variable- and Floating-Rate Instruments..............................................................32
When-Issued Purchases and Forward Commitments........................................................33
Investment Risks and Considerations..................................................................33
MANAGEMENT OF THE COMPANY............................................................................34
Nations Funds Retirement Plan........................................................................38
Nations Funds Deferred Compensation Plan.............................................................38
Board Member Compensation Arrangement................................................................39
Shareholder and Trustee Liability....................................................................41
INVESTMENT ADVISORY, ADMINISTRATION, CUSTODY, TRANSFER AGENCY, OTHER SERVICE PROVIDERS, SHAREHOLDER
SERVICING AND DISTRIBUTION AGREEMENTS................................................................41
Investment Adviser and Sub-Advisers..................................................................41
Co-Administrators and Sub-Administrator..............................................................45
Distribution Plans and Shareholder Servicing Arrangements............................................48
Transfer Agents and Custodians.......................................................................51
Distributor..........................................................................................51
Independent Accountants and Reports..................................................................52
Counsel..............................................................................................52
FUND TRANSACTIONS AND BROKERAGE......................................................................52
General Brokerage Policy.............................................................................52
Brokerage Commissions................................................................................55
Securities of Regular Broker/Dealers.................................................................55
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Directed Brokerage...................................................................................55
Monies Paid to Broker/Dealers from the Adviser's Profit..............................................55
Section 28(e) Standards..............................................................................55
DESCRIPTION OF SHARES................................................................................56
Description of Shares of the Company.................................................................57
Net Asset Value Determination........................................................................58
ADDITIONAL INFORMATION CONCERNING TAXES..............................................................59
General..............................................................................................59
Excise Tax...........................................................................................59
Private Letter Ruling................................................................................60
Taxation of Fund Investments.........................................................................60
Foreign Taxes........................................................................................61
Capital Gain Distributions...........................................................................61
Other Distributions..................................................................................61
Disposition of Fund Shares...........................................................................62
Federal Income Tax Rates.............................................................................62
Corporate Shareholders...............................................................................62
Foreign Shareholders.................................................................................62
Backup Withholding...................................................................................63
New Regulations......................................................................................63
Tax-Deferred Plans...................................................................................63
Special Tax Considerations Pertaining to Municipal Reserves and
California Reserves..................................................................................63
Special Tax Considerations Pertaining to California Reserves.........................................64
ADDITIONAL INFORMATION ON PERFORMANCE................................................................65
Yield Calculations...................................................................................69
MISCELLANEOUS........................................................................................70
Certain Record and Beneficial Holders................................................................70
SCHEDULE A - Description Of Ratings...................................................................1
</TABLE>
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HISTORY OF NATIONS RESERVES
Nations Reserves (formerly known as The Capitol Mutual Funds)(1) (the
"Company") is an open-end registered investment company in the Nations Funds
family of mutual funds (the "Nations Funds Family"), which consists of the
Company, Nations Fund, Inc., Nations Fund Trust, Nations Funds Trust, 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 $100 billion.
The Company was organized as a Massachusetts business trust on January
22, 1990. It has a fiscal year end of March 31.
DESCRIPTION OF THE COMPANY AND
THE INVESTMENTS RISKS OF ITS FUNDS
General
The Company currently consists of sixteen investment portfolios. The
Agreement and Declaration of Trust under which the Company was duly established
permits the Company to offer separate series of units of beneficial interest
("shares"). Each share of each series represents an equal proportionate interest
in that series. This SAI relates to: the Daily Shares of Nations Cash Reserves
("Cash 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 "Money Market Funds"). All of the
Funds are diversified, with the exception of the California Reserves.
Each share of the Company is without par value, represents an equal
proportionate interest in the related fund with other shares of the same class,
and is entitled to such dividends and distributions out of the income earned on
the assets belonging to such fund as are declared in the discretion of the
Company's Board of Trustees. The Company'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 the Company 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.
As of August 1, 2000, 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 the Company and, therefore, could be considered to be a
controlling person of the Company 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 and Beneficial
Holders. It is anticipated that the Company will not hold annual shareholder
meetings on a regular basis unless required by the Investment Company Act of
1940, as amended (the "1940 Act") or Massachusetts business trust law.
------------------------------
(1) More specifically, Nations Reserves is the name under which The Capitol
Mutual Funds conducts business.
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Banc of America Advisors, Inc. ("BAAI") is the investment adviser to
the Funds. Banc of America Capital Management, Inc. ("BACAP") is the investment
sub-adviser to the Funds. As used herein the term "Adviser" shall mean BAAI
and/or BACAP as the context may require.
This SAI is intended to furnish prospective investors with additional
information concerning the Company 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 United States
Securities and Exchange Commission (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 a Fund's investment objective is set forth in
the applicable Prospectus. There can be no assurance that the Funds will achieve
their objectives. The features of the Funds' principal investment strategies and
the principal risks associated with those investment strategies also are
discussed in the Prospectuses.
The fundamental and non-fundamental investment restrictions applicable
to the Funds' investment programs are set forth below. The investment
limitations that are matters of fundamental policy may not be changed without
the affirmative vote of a Fund's shareholders. The 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 invest in other Funds in the Nations Funds
family.
Fundamental Policy Restrictions
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
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<PAGE>
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.
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 SEC'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
Company, an officer, trustee, or partner of the Company or Adviser of
the Company 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.
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<PAGE>
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.
California 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 SEC 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.
Non-Fundamental Policy Restrictions
With respect to Treasury Reserves and California Reserves only:
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.
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
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<PAGE>
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 the 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.
California Reserves 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.
With respect to Treasury Reserves, Cash Reserves, Government Reserves, Municipal
Reserves and California Reserves, each may:
1. Invest in shares of other open-end management investment companies, subject
to the limitations of 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.
2. Not invest or hold more than 10% 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. Invest in futures or options contracts regulated by the CFTC for (i) bona
fide hedging purposes within the meaning of the rules of the CFTC and (ii)
for other purposes if, as a result, no more than 5% of a Fund's net assets
would be invested in initial margin and premiums (excluding amounts
"in-the-money") required to establish the contracts.
A Fund (i) will not hedge more than 50% of its total assets by selling
futures contracts, buying put options, and writing call options (so called
"short positions"), (ii) will not buy futures contracts or write put
options whose underlying value exceeds 25% of the Fund's total assets, and
(iii) will 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.
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<PAGE>
5. Not make investments for the purpose of exercising control of 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 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.
The foregoing percentages will apply at the time of the purchase of a
security and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of a purchase of such
security.
Permissible Fund Investments
In addition to the principal investment strategies for each Fund, which
are outlined in the Funds' Prospectuses, each Fund also may invest in other
types of securities in percentages of less than 10% of its total assets (unless
otherwise indicated, e.g., most Funds may invest in money market instruments
without limit during temporary defensive periods). These types of securities are
listed below for each portfolio and then are described in more detail after this
sub-section.
Government Reserves: In addition to the types of securities described
in the Prospectus, the Fund may also invest in repurchase agreements and
securities issued by other investment companies that invest in securities
consistent with the Fund's investment objective and policies.
California Reserves: In addition to the types of securities described
in the Prospectus, the Fund may also invest in cash equivalents and taxable
obligations, during temporary defensive periods.
Cash Reserves: In addition to the types of securities described in the
Prospectus, the Fund may lend its portfolios' securities to qualified
institutional investors and may invest in reverse repurchase agreements.
Treasury Reserves: In addition to the types of securities described in
the Prospectus, the Fund may lend its portfolios securities to qualified
institutional investors.
Municipal Reserves: In addition to the types of securities described in
the Prospectus, the Fund may lend its portfolios securities to qualified
institutional investors and may invest in reverse repurchase agreements.
Additional information on the particular types of securities in which
certain Funds may invest in is set forth below.
Asset-Backed Securities
In General. Asset-backed securities arise through the grouping by
governmental, government-related, and private organizations of loans,
receivables, or other assets originated by various lenders. Asset-backed
securities consist of both mortgage- and non-mortgage-backed securities.
Interests in pools of these assets may differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal paid at maturity or specified call dates. Conversely,
asset-backed securities provide periodic payments which may consist of both
interest and principal payments.
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
6
<PAGE>
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.
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<PAGE>
Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities (collateral
collectively hereinafter referred to as "Mortgage Assets"). Multi-class
pass-through securities are interests in a trust composed of Mortgage Assets and
all references herein to CMOs will include multi-class pass-through securities.
Payments of principal of and interest on the Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distribution on the multi-class pass-through securities.
Moreover, principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates, resulting in a loss of all or part of the premium if any has
been paid. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semiannual basis.
The principal and interest payments on the Mortgage Assets may be
allocated among the various classes of CMOs in several ways. Typically, payments
of principal, including any prepayments, on the underlying mortgages are applied
to the classes in the order of their respective stated maturities or final
distribution dates, so that no payment of principal is made on CMOs of a class
until all CMOs of other classes having earlier stated maturities or final
distribution dates have been paid in full.
Stripped mortgage-backed securities ("SMBS") are derivative multi-class
mortgage securities. A Fund will only invest in SMBS that are obligations backed
by the full faith and credit of the U.S. Government. SMBS are usually structured
with two classes that receive different proportions of the interest and
principal distributions from a pool of mortgage assets. A Fund will only invest
in SMBS whose mortgage assets are U.S. Government obligations.
A common type of SMBS will be structured so that one class receives
some of the interest and most of the principal from the mortgage assets, while
the other class receives most of the interest and the remainder of the
principal. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, a Fund may fail to fully recoup its initial investment
in these securities. The market value of any class which consists primarily or
entirely of principal payments generally is unusually volatile in response to
changes in interest rates.
The average life of mortgage-backed securities varies with the
maturities of the underlying mortgage instruments. The average life is likely to
be substantially less than the original maturity of the mortgage pools
underlying the securities as the result of mortgage prepayments, mortgage
refinancings, or foreclosures. The rate of mortgage prepayments, and hence the
average life of the certificates, will be a function of the level of interest
rates, general economic conditions, the location and age of the mortgage and
other social and demographic conditions. Such prepayments are passed through to
the registered holder with the regular monthly payments of principal and
interest and have the effect of reducing future payments. Estimated average life
will be determined by the Adviser and used for the purpose of determining the
average weighted maturity and duration of the Funds.
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,
8
<PAGE>
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 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.
9
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A 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 a Fund is actually invested in
VRM's, the Fund's interest income will vary with changes in the applicable
interest rate on pools of VRM's. GPM and GEM pools maintain constant interest
rates, with varying levels of principal repayment over the life of the mortgage.
These different interest and principal payment procedures should not impact the
Fund's net asset value since the prices at which these securities are valued
will reflect the payment procedures.
All poolers apply standards for qualification to local lending
institutions which originate mortgages for the pools. Poolers also establish
credit standards and underwriting criteria for individual mortgages included in
the pools. In addition, some mortgages included in pools are insured through
private mortgage insurance companies.
Average Life
The average life of pass-through pools varies with the maturities of
the underlying mortgage instruments. In addition, a pool's term may be shortened
by unscheduled or early payments of principal and interest on the underlying
mortgages. The occurrence of mortgage prepayments is affected by factors
including the level of interest rates, general economic conditions, the location
and age of the mortgage, and other social and demographic conditions.
As prepayment rates of individual pools vary widely, it is not possible
to accurately predict the average life of a particular pool. For pools of
fixed-rated 30-year mortgages, common industry practice is to assume that
prepayments will result in a 12-year average life. Pools of mortgages with other
maturities or different characteristics will have varying assumptions for
average life.
Returns on Mortgage-Backed Securities
Yields on mortgage-backed pass-through securities are typically quoted
based on the maturity of the underlying instruments and the associated average
life assumption. Actual prepayment experience may cause the yield to differ from
the assumed average life yield.
Reinvestment of prepayments may occur at higher or lower interest rates
than the original investment, thus affecting the yields of the Fund. The
compounding effect from reinvestments of monthly payments received by the Fund
will increase its yield to shareholders, compared to bonds that pay interest
semi-annually.
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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.
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Borrowings
Certain Funds participate in a committed line of credit agreement (the
"Committed Line") with The Bank of New York as administrative agent and
Commerzbank, A.G. and Grand Cayman Branches as syndication agents. The Committed
Line affords an open line of credit of up to $500,000,000 to the participating
Funds for emergency purposes or otherwise. Interest on borrowings is generally
payable at the federal funds rate plus .50% on an annualized basis. The
borrowing Funds are also charged an administrative fee by The Bank of New York
generally at a rate of 0.09% of the daily amount of the commitment under the
Committed Line, regardless of usage. Unless renewed by the Board of Trustees,
the Committed Line will expire on November 18, 2000. Specific borrowings by a
Fund under the Committed Line over the last fiscal year, if any, can by found in
the Funds' Annual Reports for the year ended March 31, 2000.
The Funds also participate in an uncommitted line of credit provided by
The Bank of New York under a line of credit agreement (the "Uncommitted Line").
Advances under the Uncommitted Line are taken primarily for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. Interest on borrowings is
payable at the federal funds rate plus .50% on an annualized basis. The
Agreement requires, among other things, that each participating Fund maintain a
ratio of no less than 4 to 1 net assets (not including funds borrowed pursuant
to the Agreement) to the aggregate amount of indebtedness pursuant to the
Agreement. Specific borrowings by a Fund under the Uncommitted Line over the
last fiscal year, if any, can by found in the Funds' Annual Reports for the year
ended March 31, 2000.
Commercial Instruments
Certain Funds may purchase 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.
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. 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
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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 shorter of the period remaining to the next
interest rate adjustment or the demand notice period specified in the
instrument.
Certain Funds also may purchase short-term participation interests in
loans extended by banks to companies, provided that both such banks and such
companies meet the quality standards set forth above. In purchasing a loan
participation or assignment, the Fund acquires some or all of the interest of a
bank or other lending institution in a loan to a corporate borrower. Many such
loans are secured and most impose restrictive covenants which must be met by the
borrower and which are generally more stringent than the covenants available in
publicly traded debt securities. However, interests in some loans may not be
secured, and the Fund will be exposed to a risk of loss if the borrower
defaults. Loan participations also may be purchased by the Fund when the
borrowing company is already in default. In purchasing a loan participation, the
Fund may have less protection under the federal securities laws than it has in
purchasing traditional types of securities. The Fund's ability to assert its
rights against the borrower will also depend on the particular terms of the loan
agreement among the parties.
Combined Transactions
Certain Funds may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple forward foreign
currency exchange contracts and any combination of futures, options and forward
foreign currency exchange contracts ("component" transactions), instead of a
single transaction, as part of a single hedging strategy when, in the opinion of
the Adviser, it is in the best interest of a Fund to do so and where underlying
hedging strategies are permitted by a Fund's investment policies. A combined
transaction, while part of a single hedging strategy, may contain elements of
risk that are present in each of its component transactions.
Corporate Debt Securities
Certain Funds may invest in corporate debt securities of domestic
issuers of all types and maturities, such as bonds, debentures, notes and
commercial paper. Corporate debt securities may involve equity features, such as
conversion or exchange rights or warrants for the acquisition of stock of the
same or a different issuer, participation based on revenue, sales or profit, or
the purchase of common stock or warrants in a unit transaction (where corporate
debt obligations and common stock are offered as a unit). Each Fund may also
invest in corporate debt securities of foreign issuers.
The corporate debt securities in which the Funds will invest will be
rated investment grade by at least one NRSRO (e.g., BBB or above by Standard &
Poor's Corporation ("S&P") or Baa or above by Moody's Investors Services,
Inc.("Moody's"). Commercial paper purchased by the Funds will be rated in the
top two categories by a NRSRO. Corporate debt securities that are not rated may
be purchased by such Funds if they are determined by the Adviser to be of
comparable quality under the direction of the Board of Trustees of the Company.
If the rating of any corporate debt security held by a Fund falls below such
ratings or if the Adviser determines
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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.
Dollar Roll Transactions
Certain Funds may enter into "dollar roll" transactions, which consist
of the sale by a Fund to a bank or broker/dealer (the "counterparty") of GNMA
certificates or other mortgage-backed securities together with a commitment to
purchase from the counterparty similar, but not identical, securities at a
future date, at the same price. The counterparty receives all principal and
interest payments, including prepayments, made on the security while it is the
holder. A Fund receives a fee from the counterparty as consideration for
entering into the commitment to purchase. Dollar rolls may be renewed over a
period of several months with a different repurchase price and a cash settlement
made at each renewal without physical delivery of securities. Moreover, the
transaction may be preceded by a firm commitment agreement pursuant to which the
Fund agrees to buy a security on a future date. If the broker/dealer to whom a
Fund sells the security becomes insolvent, the Fund's right to purchase or
repurchase the security may be restricted; the value of the security may change
adversely over the term of the dollar roll; the security that the Fund is
required to repurchase may be worth less than the security that the Fund
originally held, and the return earned by the Fund with the proceeds of a dollar
roll may not exceed transaction costs.
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.
Guaranteed Investment Contracts
Guaranteed investment contracts, investment contracts or funding
agreements (each referred to as a "GIC") are investment instruments issued by
highly rated insurance companies. Pursuant to such contracts, a Fund may make
cash contributions to a deposit fund of the insurance company's general or
separate accounts. The insurance company then credits to a Fund guaranteed
interest. The insurance company may assess periodic charges against a GIC for
expense and service costs allocable to it, and the charges will be deducted from
the value of the deposit fund. The purchase price paid for a GIC generally
becomes part of the general assets of the issuer, and the contract is paid from
the general assets of the issuer.
A Fund will only purchase GICs from issuers which, at the time of
purchase, meet quality and credit standards established by the Adviser.
Generally, GICs are not assignable or transferable without the permission of the
issuing insurance companies, and an active secondary market in GICs does not
currently exist. Also, a Fund may not receive the principal amount of a GIC from
the insurance company on seven days' notice or less, at which point the GIC may
be considered to be an illiquid investment.
A Money Market Fund will acquire GlCs so that they, together with other
instruments in such Fund's portfolio which are not readily marketable, will not
exceed applicable limitations on such Fund's investments in illiquid securities.
A Money Market Fund will restrict its investments in GlCs to those having a term
of 397 days or less. In determining average weighted portfolio maturity, a GIC
will be deemed to have a maturity equal to the period of time remaining under
the next readjustment of the guaranteed interest rate.
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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.
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 state or local government 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.
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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
municipal issuer to which the government's taxing power is pledged, a lease
obligation is ordinarily backed by the government'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 government 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 governmental borrower, (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 obligor prohibiting the substitution or
purchase of similar equipment if lease payments are not appropriated, (4) the
lease obligor has maintained good market acceptability in the past, (5) the
investment is of a size that will be attractive to institutional investors, and
(6) the underlying leased equipment has elements of probability and/or use that
enhance its marketability in the event foreclosure on the underlying equipment
were ever required. The Funds have not imposed any percentage limitations with
respect to their investment in lease obligations not subject to the
"non-appropriation" risk. To the extent municipal leases are illiquid, they will
be subject to each Fund's limitation on investments in illiquid securities.
Recovery of an investment in any such loan that is illiquid and payable on
demand may depend on the ability of the municipal borrower to meet an obligation
for full repayment of principal and payment of accrued interest within the
demand period, normally seven days or less (unless a Fund determines that a
particular loan issue, unlike most such loans, has a readily available market).
As it deems appropriate, the Adviser will establish procedures to monitor the
credit standing of each such 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
obligor/government borrower will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to its
operations (e.g., the potential for an "event of non-appropriation"); and (5)
the legal recourse in the event of failure to appropriate.
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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
excludability of interest thereon from Federal income tax or state income tax
are rendered by counsel to the issuer or bond counsel at the time of issuance.
Neither the Funds nor the Adviser will review the proceedings relating to the
issuance of Municipal Securities or the bases for opinions relating to the
validity of such issuance.
The payment of principal and interest on most securities purchased by a
Fund will depend upon the ability of the issuers to meet their obligations. Each
state, each of their political subdivisions, municipalities, and public
authorities, as well as the District of Columbia, Puerto Rico, Guam, and the
Virgin Islands are a separate "issuer" as that term is used in the Prospectuses
and this SAI. The non-governmental user of facilities financed by private
activity
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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.
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, Kansas, Maryland, North Carolina, South Carolina,
Tennessee, Texas, or Virginia issuers, the Company 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 California 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.
California. The following information relates specifically to
California Reserves: This summary does not purport to be a comprehensive
description of all relevant facts. Although the Company 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 Company. 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.
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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.
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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 1999-00 Budget Act
On June 16, 1999, the Governor signed the Budget Act. The final 1999
Budget Act estimated General Fund revenues and transfers of $63.0 billion, and
contained expenditures totaling $63.7 billion after the Governor vetoed certain
expenditures by $581 million (both General Fund and special fund). The 1999
Budget Act also contained expenditures of $16.1 billion from special funds and
$1.5 billion from bond funds. The Governor's staff estimated that the State's
budget reserve fund would have a balance at June 30, 2000, of about $880
million. Not included in this amount was an additional $300 million that after
vetoed items were deducted was reallocated to provide funds for employee salary
increases and other matters such as litigation expenses.
The following were the major features of the 1999-00 Budget Act:
Proposition 98 funding for K-12 schools was increased by $1.6 billion
in General Fund moneys over revised 1998-99 levels, approximately an additional
$108.6 million than the minimum Proposition 98 guarantee. The 1999-00 funds
allocated for major new programs included money for reading improvement, new
textbooks, school safety, improving teacher quality, funding bonuses for
teachers, providing greater accountability for school performance, increasing
preschool and after school care programs and funding deferred maintenance of
school facilities. The Budget includes $310 million for repayment of school
loans.
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Funding for higher education increased substantially above the 1998-99
level. General Fund support was increased by $184 million (7.3 percent) for the
University of California and $126 million (5.9 percent) for the California State
University system. In addition, Community Colleges funding increased by $324.3
million (6.6 percent).
The Budget included increased funding of nearly $600 million for health
and human services.
Additional funds including $800 million from the General Fund will be
directed toward infrastructure costs, including $425 million in additional
funding for an Infrastructure Bank, costs related to prison construction,
additional equipment for train and ferry service as well as deferred maintenance
expenses for state parks.
The Legislature also enacted a one-year additional reduction of 10
percent of the VLF for calendar year 2000, at a General Fund cost of about $250
million in each of Fiscal Year 1999-00 and 2000-01 to cover costs related to
lost funding to local governments.
Proposed 2000-01 Fiscal Year Budget
On January 10, 2000, the Governor released his proposed budget for
Fiscal Year 2000-01 (the "Proposed Budget"). The Proposed Budget generally
reflects that General Fund revenues for Fiscal Year 1999-00 will be higher than
projections made at the time of the 1999 Budget Act. The Proposed Budget also
reflects the latest estimated costs or savings as provided in various pieces of
legislation passed and signed after the 1999 Budget Act. Revised 1999-00
revenues are $65.2 billion or $2.2 billion higher than projections at the time
of the 1999 Budget Act. Revised 1999-00 expenditures are $65.9 billion or $2.1
billion higher than projections at the 1999 Budget Act.
The Proposed Budget projects General Fund revenues and transfers in
2000-01 of $68.2 billion. This includes anticipated payments from the tobacco
litigation settlement of $387.9 million and the receipt of one-time revenue from
the sale of assets.
The Proposed Budget provides for General Fund expenditures of $68.8
billion. Included in the Proposed Budget are set-asides of $500 million for
legal contingencies and $100 million for various one-time legislative
initiatives. At the time of the release of the Proposed Budget, the projected
budget reserve fund would have a balance of about $2.420 billion at June 30,
2000, compared to the amount of $880 million projected at the time the 1999
Budget Act was signed on June 29, 1999.
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
Reserves may be obligations of issuers which rely in whole or in part on
California State revenues for payment of these obligations. Property tax
revenues and a portion of the State's general fund surplus are distributed to
counties, cities and their various taxing entities and the State assumes certain
obligations theretofore paid out of local funds. Whether and to what extent a
portion of the State's general fund will be distributed in the future to
counties, cities and their various entities is unclear.
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Health Care Legislation. Certain Debt Obligations in the California
Reserves may be obligations which are payable solely from the revenues of health
care institutions. Certain provisions under California law may adversely affect
these revenues and, consequently, payment on those Debt Obligations.
The Federally sponsored Medicaid program for health care services to
eligible welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting is
made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or other factors. Other reductions or limitations may be
imposed on payment for services rendered to MediCal beneficiaries in the future.
Under this approach, in most geographical areas of California, only
those hospitals which enter into a MediCal contract with the State of California
will be paid for non-emergency acute inpatient services rendered to Medi-Cal
beneficiaries. The State may also terminate these contracts without notice under
certain circumstances and is obligated to make contractual payments only to the
extent the California legislature appropriates adequate funding therefor.
California enacted legislation in 1982 that authorizes private health
plans and insurers to contract directly with hospitals for services to
beneficiaries on negotiated terms. Some insurers have introduced plans known as
"preferred provider organizations" ("PPOs"), which offer financial incentives
for subscribers who use only the hospitals which contract with the plan. Under
an exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
These Debt Obligations may also be insured by the State of California
pursuant to an insurance program implemented by the Office of Statewide Health
Planning and Development for health facility construction loans. If a default
occurs on insured Debt Obligations, the State Treasurer will issue debentures
payable out of a reserve fund established under the insurance program or will
pay principal and interest on an unaccelerated basis from unappropriated State
funds. At the request of the Office of Statewide Health Planning and
Development, Arthur D. Little, Inc. prepared a study in December 1983, to
evaluate the adequacy of the reserve fund established under the insurance
program and based on certain formulations and assumptions found the reserve fund
substantially underfunded. In September of 1986, Arthur D. Little, Inc. prepared
an update of the study and concluded that an additional 10% reserve be
established for "multi-level" facilities. For the balance of the reserve fund,
the update recommended maintaining the current reserve calculation method. In
March of 1990, Arthur D. Little, Inc. prepared a further review of the study and
recommended that separate reserves continue to be established for "multi-level"
facilities at a reserve level consistent with those that would be required by an
insurance company.
Mortgages and Deeds. Certain Debt Obligations in the California
Reserves 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
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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 Reserves may be obligations
which finance the acquisition of single family home mortgages for low and
moderate income mortgagors. These obligations may be payable solely from
revenues derived from the home mortgages, and are subject to California's
statutory limitations described above applicable to obligations secured by real
property. Under California antideficiency legislation, there is no personal
recourse against a mortgagor of a single family residence purchased with the
loan secured by the mortgage, regardless of whether the creditor chooses
judicial or nonjudicial foreclosure.
Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years during the term of the mortgage loan, and then only
if the borrower prepays an amount in excess of 20% of the original principal
amount of the mortgage loan in a 12-month period; a prepayment charge cannot in
any event exceed six months' advance interest on the amount prepaid during the
12-month period in excess of 20% of the original principal amount of the loan.
This limitation could affect the flow of revenues available to an issuer for
debt service on the outstanding debt obligations which financed such home
mortgages.
Proposition 13. Certain of the Debt Obligations may be obligations of
issuers who rely in whole or in part on ad valorem real property taxes as a
source of revenue. On June 6, 1978, California voters approved an amendment to
the California Constitution known as Proposition 13, which added Article XIIIA
to the California Constitution. The effect of Article XIIIA was to limit ad
valorem taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues.
Section 1 of Article XIIIA, as amended, limits the maximum ad valorem
tax on real property to 1% of full cash value to be collected by the counties
and apportioned according to law. The 1% limitation does not apply to ad valorem
taxes or special assessments to pay the interest and redemption charges on any
bonded indebtedness for the acquisition or improvement of real property approved
by two-thirds of the votes cast by the voters voting on the proposition. Section
2 of Article XIIIA defines "full cash value" to mean "the County Assessor's
valuation of real property as shown on the 1975/76 tax bill under `full cash
value' or, thereafter, the appraised value of real property when purchased,
newly constructed, or a change in ownership has occurred after the 1975
assessment." The full cash value may be adjusted annually to reflect inflation
at a rate not to exceed 2% per year, or reduction in the consumer price index or
comparable local data, or reduced in the event of declining property value
caused by damage, destruction or other factors.
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.
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Proposition 9. On November 6, 1979, an initiative known as "Proposition
9" or the "Gann Initiative" was approved by the California voters, which added
Article XIIIB to the California Constitution. Under Article XIIIB, State and
local governmental entities have an annual "appropriations limit" and are not
allowed to spend certain moneys called "appropriations subject to limitation" in
an amount higher than the "appropriations limit." Article XIIIB does not affect
the appropriation of moneys which are excluded from the definition of
"appropriations subject to limitation," including debt service on indebtedness
existing or authorized as of January 1, 1979, or bonded indebtedness
subsequently approved by the voters. In general terms, the "appropriations
limit" is required to be based on certain 1978/79 expenditures, and is to be
adjusted annually to reflect changes in consumer prices, population, and certain
services provided by these entities. Article XIIIB also provides that if these
entities' revenues in any year exceed the amounts permitted to be spent, the
excess is to be returned by revising tax rates or fee schedules over the
subsequent two years.
Proposition 98. On November 8, 1988, voters of the State approved
Proposition 98, a combined initiative constitutional amendment and statute
called the "Classroom Instructional Improvement and Accountability Act."
Proposition 98 changed State funding of public education below the university
level and the operation of the State Appropriations Limit, primarily by
guaranteeing K-14 schools a minimum share of General Fund revenues. Under
Proposition 98 (modified by Proposition 111 as discussed below), K-14 schools
are guaranteed the greater of (a) in general, a fixed percent of General Fund
revenues ("Test 1"), (b) the amount appropriated to K-14 schools in the prior
year, adjusted for changes in the cost of living (measured as in Article XIIIB
by reference to State per capita personal income) and enrollment ("Test 2"), or
(c) a third test, which would replace Test 2 in any year when the percentage
growth in per capita General Fund revenues from the prior year plus one half of
one percent is less than the percentage growth in State per capita personal
income ("Test 3"). Under Test 3, schools would receive the amount appropriated
in the prior year adjusted for changes in enrollment and per capita General Fund
revenues, plus an additional small adjustment factor. If Test 3 is used in any
year, the difference between Test 3 and Test 2 would become a "credit" to
schools which would be the basis of payments in future years when per capita
General Fund revenue growth exceeds per capita personal income growth.
Proposition 98 permits the Legislature -- by two-thirds vote of both
houses, with the Governor's concurrence -- to suspend the K-14 schools' minimum
funding formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIIIB limit to
K-14 schools.
During the recession years of the early 1990s, General Fund revenues
for several years were less than originally projected, so that the original
Proposition 98 appropriations turned out to be higher than the minimum
percentage provided in the law. The Legislature responded to these developments
by designating the "extra" Proposition 98 payments in one year as a "loan" from
future years' Proposition 98 entitlements, and also intended that the "extra"
payments would not be included in the Proposition 98 "base" for calculating
future years' entitlements. In 1992, a lawsuit was filed, California Teachers'
Association v. Gould, which challenged the validity of these off-budget loans.
During the course of this litigation, a trial court determined that almost $2
billion in "loans" which had been provided to school districts during the
recession violated the constitutional protection of support for public
education. A settlement was reached on April 12, 1996 which ensures that future
school funding will not be in jeopardy over repayment of these so-called loans.
Proposition 111. On June 30, 1989, the California Legislature enacted
Senate Constitutional Amendment 1, a proposed modification of the California
Constitution to alter the spending limit and the education funding provisions of
Proposition 98. Senate Constitutional Amendment 1 -- on the June 5, 1990 ballot
as Proposition 111 -- was approved by the voters and took effect on July l,
1990. Among a number of important provisions, Proposition 111 recalculated
spending limits for the State and for local governments, allowed greater annual
increases in the limits, allowed the averaging of two years' tax revenues before
requiring action regarding excess tax revenues, reduced the amount of the
funding guarantee in recession years for school districts and community college
districts (but with a floor of 40.9 percent of State general fund tax revenues),
removed the provision of Proposition 98 which included excess moneys transferred
to school districts and community college districts in the base calculation for
the next year, limited the amount of State tax revenue over the limit which
would be transferred to school districts and community college districts, and
exempted increased gasoline taxes and truck weight fees from the State
appropriations limit. Additionally, Proposition 111 exempted from the State
appropriations limit funding for capital outlays.
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Proposition 62. On November 4, 1986, California voters approved an
initiative statute known as Proposition 62. This initiative provided the
following:
1. Requires that any tax for general governmental purposes imposed by
local governments be approved by resolution or ordinance adopted by a
two-thirds vote of the governmental entity's legislative body and by a
majority vote of the electorate of the governmental entity;
2. Requires that any special tax (defined as taxes levied for other than
general governmental purposes) imposed by a local governmental entity
be approved by a two-thirds vote of the voters within that
jurisdiction;
3. Restricts the use of revenues from a special tax to the purposes or for
the service for which the special tax was imposed;
4. Prohibits the imposition of ad valorem taxes on real property by local
governmental entities except as permitted by Article XIIIA;
5. Prohibits the imposition of transaction taxes and sales taxes on the
sale of real property by local governments;
6. Requires that any tax imposed by a local government on or after August
1, 1985 be ratified by a majority vote of the electorate within two
years of the adoption of the initiative;
7. Requires that, in the event a local government fails to comply with the
provisions of this measure, a reduction in the amount of property tax
revenue allocated to such local government occurs in an amount equal to
the revenues received by such entity attributable to the tax levied in
violation of the initiative; and
8. Permits these provisions to be amended exclusively by the voters of the
State of California.
In September 1988, the California Court of Appeal in City of
Westminster v. County of Orange, 204 Cal. App. 3d 623, 215 Cal. Rptr. 511 (Cal.
Ct. App. 1988), held that Proposition 62 is unconstitutional to the extent that
it requires a general tax by a general law city, enacted on or after August 1,
1985 and prior to the effective date of Proposition 62, to be subject to
approval by a majority of voters. The Court held that the California
Constitution prohibits the imposition of a requirement that local tax measures
be submitted to the electorate by either referendum or initiative. It is
impossible to predict the impact of this decision on charter cities, on special
taxes or on new taxes imposed after the effective date of Proposition 62. The
California Court of Appeal in City of Woodlake v. Logan, 230 Cal. App.3d 1058,
282 Cal. Rptr. 27 (1991) ,subsequently held that Proposition 62's popular vote
requirements for future local taxes also provided for an unconstitutional
referenda. The California Supreme Court declined to review both the City of
Westminster and the City of Woodlake decisions.
In Santa Clara Local Transportation Authority v. Guardino, 11 Cal. 4th
220 (1995), reh'g denied, modified [45 Cal. Rptr. 2d 204] (1995), the California
Supreme Court upheld the constitutionality of Proposition 62's popular vote
requirements for future taxes, and specifically disapproved of the City of
Woodlake decision as erroneous. The Court did not determine the correctness of
the City of Westminster decision, because that case appeared distinguishable,
was not relied on by the parties in Guardino, and involved taxes not likely to
still be at issue. It is impossible to predict the impact of the Supreme Court's
decision on charter cities or on taxes imposed in reliance on the City of
Woodlake case.
California Senate Bill 1590, introduced February 16, 1996, would make
the Guardino decision inapplicable to any tax first imposed or increased by an
ordinance or resolution adopted before December 14, 1995. The California State
Senate passed the Bill on May 16, 1996 and would be constitutional as a
non-voted amendment to Proposition 62 or as a non-voted change to Proposition
62's operative date.
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
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elections, calculate fees and assessments, notify the public and defend local
government fees and assessments in court.
Article XIIIC of Proposition 218 requires majority voter approval for
the imposition, extension or increase of general taxes and two-thirds voter
approval for the imposition, extension or increase of special taxes, including
special taxes deposited into a local government's general fund. Proposition 218
also provides that any general tax imposed, extended or increased without voter
approval by any local government on or after January 1, 1995 and prior to
November 6, 1996 shall continue to be imposed only if approved by a majority
vote in an election held within two years of November 6, 1996.
Article XIIIC of Proposition 218 also expressly extends the initiative
power to give voters the power to reduce or repeal local taxes, assessments,
fees and charges, regardless of the date such taxes, assessments, fees or
charges were imposed. This extension of the initiative power to some extent
constitutionalizes the 1995 California State Supreme Court decision in Rossi v.
Brown, 9 Cal. 4th 688 [38 Cal. Rptr. 2d 363] (1995), which upheld an initiative
that repealed a local tax and held that the State constitution does not preclude
the repeal, including the prospective repeal, of a tax ordinance by an
initiative, as contrasted with the State constitutional prohibition on
referendum powers regarding statutes and ordinances which impose a tax.
Generally, the initiative process enables California voters to enact legislation
upon obtaining requisite voter approval at a general election. Proposition 218
extends the authority stated in Rossi by expanding the initiative power to
include reducing or repealing assessments, fees and charges, which had
previously been considered administrative rather than legislative matters and
therefore beyond the initiative power.
The initiative power granted under Article XIIIC of Proposition 218, by
its terms, applies to all local taxes, assessments, fees and charges and is not
limited to local taxes, assessments, fees and charges that are property related.
Article XIIID of Proposition 218 adds several new requirements making
it generally more difficult for local agencies to levy and maintain
"assessments" for municipal services and programs. "Assessment" is defined to
mean any levy or charge upon real property for a special benefit conferred upon
the real property.
Article XIIID of Proposition 218 also adds several provisions affecting
"fees" and "charges" which are defined as "any levy other than an ad valorem
tax, a special tax, or an assessment, imposed by a local government upon a
parcel or upon a person as an incident of property ownership, including a user
fee or charge for a property related service." All new and, after June 30, 1997,
existing property related fees and charges must conform to requirements
prohibiting, among other things, fees and charges which (i) generate revenues
exceeding the funds required to provide the property related service, (ii) are
used for any purpose other than those for which the fees and charges are
imposed, (iii) are for a service not actually used by, or immediately available
to, the owner of the property in question, or (iv) are used for general
governmental services, including police, fire or library services, where the
service is available to the public at large in substantially the same manner as
it is to property owners. Further, before any property related fee or charge may
be imposed or increased, written notice must be given to the record owner of
each parcel of land affected by such fee or charges. The local government must
then hold a hearing upon the proposed imposition or increase of such property
based fee, and if written protests against the proposal are presented by a
majority of the owners of the identified parcels, the local government may not
impose or increase the fee or charge. Moreover, except for fees or charges for
sewer, water and refuse collection services, no property related fee or charge
may be imposed or increased without majority approval by the property owners
subject to the fee or charge or, at the option of the local agency, two-thirds
voter approval by the electorate residing in the affected area.
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
Reserves, 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
26
<PAGE>
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 Company'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 Municipal
Securities 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.
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. 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.
Each Fund is seeking or has obtained permission from the SEC to invest
in other Funds in the Nations Funds family.
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
27
<PAGE>
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.
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.
28
<PAGE>
The amount payable to a Tax-Free Bond Fund upon its exercise of a
stand-by commitment will normally be (i) the Fund's acquisition cost of the
Municipal Securities (excluding any accrued interest which a Tax-Free Bond Fund
paid on their acquisition), less any amortized market premium or plus any
amortized market or original issue discount during the period a Tax-Free Bond
Fund owned the securities, plus (ii) all interest accrued on the securities
since the last interest payment date during that period. Under normal market
conditions, in determining net asset value a Tax-Free Bond Fund values the
underlying Municipal Securities on an amortized cost basis. Accordingly, the
amount payable by a dealer upon exercise of a stand-by commitment will normally
be substantially the same as the portfolio value of the underlying Municipal
Securities.
A Fund's right to exercise stand-by commitments will be unconditional
and unqualified. A stand-by commitment will not be transferable by a Fund,
although the Fund could sell the underlying Municipal Securities to a third
party at any time. Until a Fund exercises its stand-by commitment, it owns the
securities in its portfolio which are subject to the stand-by commitment.
The Funds expect that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for the security being acquired
which will be subject to the commitment (thus reducing the yield to maturity
otherwise available for the same security). When a Fund pays any consideration
directly or indirectly for a stand-by commitment, its cost will be reflected as
unrealized depreciation for the period during which the commitment is held by
that Fund. The Tax-Free Bond Funds will not acquire a stand-by commitment unless
immediately after the acquisition not more than 5% of the Funds' total assets
will be subject to a demand feature, or in stand-by commitments, with the same
institution.
Each Fund intends to enter into stand-by commitments only with banks
and broker/dealers which, in the Adviser's opinion, present minimal credit
risks. In evaluating the credit worthiness of the issuer of a stand-by
commitment, the Adviser will review periodically the issuer's assets,
liabilities, contingent claims, and other relevant financial information.
The Funds would acquire stand-by commitments solely to facilitate
portfolio liquidity and do not intend to exercise their rights thereunder for
trading purposes. Stand-by commitments acquired by a Fund will be valued at zero
in determining net asset value. A Fund's reliance upon the credit of these
dealers, banks, and broker/dealers will be secured by the value of the
underlying Municipal Securities that are subject to the commitment. Thus, the
risk of loss to the Fund in connection with a "stand-by commitment" will not be
qualitatively different from the risk of loss faced by a person that is holding
securities pending settlement after having agreed to sell the securities in the
ordinary course of business.
Stripped Securities
Certain Funds may purchase stripped securities issued or guaranteed by
the U.S. Government, where the principal and interest components are traded
independently under the Separate Trading of Registered Interest and Principal of
Securities program ("STRIPS"). Under STRIPS, the principal and interest
components are individually numbered and separately issued by the U.S. Treasury
at the request of depository financial institutions, which then trade the
component parts independently.
In addition, the Fund may purchase stripped mortgage-backed securities
("SMBS") issued by the U.S. Government (or a U.S. Government agency or
instrumentality) or by private
29
<PAGE>
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 fully
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 Trustees if they can be disposed of promptly in the ordinary
course of business at a value reasonably close to that used in the calculation
of the Fund's per share net asset value.
Although stripped securities may not pay interest to holders prior to
maturity, Federal income tax regulations require a Fund to recognize as interest
income a portion of the bond's discount each year. This income must then be
distributed to shareholders along with other income earned by the Fund. To the
extent that any shareholders in the Fund elect to receive their dividends in
cash rather than reinvest such dividends in additional Fund shares, cash to make
these distributions will have to be provided from the assets of the Fund or
other sources such as proceeds of sales of Fund shares and/or sales of portfolio
securities. In such cases, the Fund will not be able to purchase additional
income producing securities with cash used to make such distributions and its
current income may ultimately be reduced as a result.
U.S. and Foreign Bank Obligations
These obligations include negotiable certificates of deposit, banker's
acceptances and fixed time deposits. Each Fund limits its investments in
domestic bank obligations to banks having total assets in excess of $1 billion
and subject to regulation by the U.S. Government. Each Fund may also invest in
certificates of deposit issued by members of the Federal Deposit Insurance
Corporation ("FDIC") having total assets of less than $1 billion, provided that
the Fund will at no time own more than $100,000 principal amount of certificates
of deposit (or any higher principal amount which in the future may be fully
covered by FDIC insurance) of any one of those issuers. Fixed time deposits are
obligations which are payable at a stated maturity date and bear a fixed rate of
interest. Generally, fixed time deposits may be withdrawn on demand by a Fund,
but they may be subject to early withdrawal penalties which vary depending upon
market conditions and the remaining maturity of the obligation. Although fixed
time deposits do not have a market, there are no contractual restrictions on a
Fund's right to transfer a beneficial interest in the deposit to a third party.
Each Fund limits its investments in foreign bank obligations (i.e.,
obligations of foreign branches and foreign 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
criteria established by the Board of Trustees 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
30
<PAGE>
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 25% 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.
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<PAGE>
A forward foreign currency contract that obligates a Fund to provide
currencies will require the Fund to hold currencies or liquid securities
denominated in a foreign currency which will equal the Fund's obligations. Such
a contract requiring the purchase of currencies also requires segregation.
Unless a segregated account consists of the securities, cash or
currencies that are the subject of the obligation, a Fund will hold cash, U.S.
Government securities and other high grade liquid debt obligations in a
segregated account. These assets cannot be transferred while the obligation is
outstanding unless replaced with other suitable assets. In the case of an
index-based transaction, a Fund could own securities substantially replicating
the movement of the particular index.
In the case of a futures contract, a Fund must deposit initial margin
and variation margin, as often as daily, if the position moves adversely,
sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Similarly, options on futures contracts require a Fund to
deposit margin to the extent necessary to meet the Fund's commitments.
In lieu of such assets, such transactions may be covered by other means
consistent with applicable regulatory policies. A Fund may enter into
off-setting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
hedging transactions. For example, a Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by that Fund. Moreover, instead of segregating assets if a Fund held
a futures or forward contract, it could purchase a put option on the same
futures or forward contract with a strike price as high or higher than the price
of the contract held. Of course, the off-setting transaction must terminate at
the time of or after the primary transaction.
Variable- and Floating-Rate Instruments
Certain Funds may purchase variable-rate and floating rate obligations.
If such instrument is not rated, the Adviser will consider the earning power,
cash flows, and other liquidity ratios of the issuers and guarantors of such
obligations and, if the obligation is subject to a demand feature, will monitor
their financial status to meet payment on demand. In determining average
weighted portfolio maturity, a variable-rate demand instrument issued or
guaranteed by the U.S. Government or an agency or instrumentality thereof will
be deemed to have a maturity equal to the period remaining until the obligations
next interest rate adjustment. Other variable-rate obligations will be deemed to
have a maturity equal to the shorter 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
32
<PAGE>
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.
When-Issued Purchases and Forward Commitments
A Fund may agree to purchase securities on a when-issued basis or enter
into a forward commitment to purchase securities. When a Fund engages in these
transactions, its custodian will segregate cash, U.S. Government securities or
other high quality debt obligations equal to the amount of the commitment.
Normally, the custodian will segregate portfolio securities to satisfy a
purchase commitment, and in such a case a Fund may be required subsequently to
segregate additional assets in order to ensure that the value of the segregated
assets remains equal to the amount of the Fund's commitment. Because a Fund will
segregate cash or liquid assets to satisfy its purchase commitments in the
manner described, the Fund's liquidity and ability to manage its portfolio might
be adversely affected in the event its commitments to purchase when-issued
securities ever exceeded 25% of the value of its assets. In the case of a
forward commitment to sell portfolio securities, the Fund's custodian will hold
the portfolio securities themselves in a segregated account while the commitment
is outstanding.
A Fund will make commitments to purchase securities on a when-issued
basis or to purchase or sell securities on a forward commitment basis only with
the intention of completing the transaction and actually purchasing or selling
the securities. If deemed advisable as a matter of investment strategy, however,
a Fund may dispose of or renegotiate a commitment after it is entered into, and
may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a capital gain or loss.
When a Fund engages in when-issued and forward commitment transactions,
it relies on the other party to consummate the trade. Failure of such party to
do so may result in the Fund's incurring a loss or missing an opportunity to
obtain a price considered to be advantageous.
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.
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.
California Reserves is a non-diversified fund, which means that it
typically invests in fewer issuers than diversified funds. Therefore,
appreciation or depreciation of an investment in a single issuer could have a
greater impact on the Fund's net asset value.
33
<PAGE>
The value of a Fund's investments in debt securities, including U.S.
Government Obligations, will tend to decrease when interest rates rise and
increase when interest rates fall. In general, longer-term debt instruments tend
to fluctuate in value more than shorter-term debt instruments in response to
interest rate movements. In addition, debt securities that are not backed by the
United States Government are subject to credit risk, which is the risk that the
issuer may not be able to pay principal and/or interest when due. In addition,
obligations with the lowest investment grade rating (e.g., "BBB" by S&P or "Baa"
by 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."
MANAGEMENT OF THE COMPANY
The business and affairs of the Company is managed under the direction
of its Boards of Trustees. This SAI contains the names of and general background
information concerning each Trustee.
The Trustees and executive officers of the 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 the Company (as defined in the
1940 Act) are indicated by an asterisk(*).
<TABLE>
<CAPTION>
Principal Occupations
During Past 5 Years
Position with and Current
Name, Address, and Age the Company Directorships
---------------------- ------------- ----------------------
<S> <C> <C>
Edmund L. Benson, III, 63 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.
William P. Carmichael, 56 Advisory Trustee Trustee - 231 Funds (investment
Succession Fund company) from 1993 to 1995, Time
The Wrigley Building Horizon Fund (investment company)
400 North Michigan Avenue from 1995 to 1999, Pacific
Suite 1016 Innovations Trust (investment
Chicago, IL 60611 company) from 1997 to 1999, Nations
Annuity Trust (investment company)
since
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
During Past 5 Years
Position with and Current
Name, Address, and Age the Company Directorships
---------------------- ------------- ----------------------
<S> <C> <C>
December 1999, Nations Master
Investment Trust investment
company) since December 1999,
and Nations Funds Trust
(investment company) since
December 1999; Director- The
Hain Food Group, Inc.
(specialty food products
distributor) until December
1998, Cobra Electronics
Corporation (electronic
equipment manufacturer), Opta
Food Ingredients, Inc. (food
ingredients manufacturer),
Golden Rule Insurance Company,
Nations LifeGoal Funds, Inc.
(investment company) since
December 1999.
James Ermer, 57 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, 67 Trustee Chairman Emeritus since July 1997,
Duke Power Co. Chairman and Chief Executive Officer
16092A Reap Road from April 1994 to July 1997 - Duke
Albermarle, NC 28001 Power Co.; Director - The Shaw
Group, 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.
Thomas F. Keller, 68 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., 65 Trustee President and CEO - USO from May
USO World Headquarters 1996 to
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
During Past 5 Years
Position with and Current
Name, Address, and Age the Company Directorships
---------------------- ------------- ----------------------
<S> <C> <C>
USO World Headquarters 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, 71* 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*, 61 Trustee 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.
A. Max Walker*, 78 President, Trustee 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, 61 Trustee 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
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
During Past 5 Years
Position with and Current
Name, Address, and Age the Company Directorships
---------------------- ------------- ----------------------
<S> <C> <C>
Portfolios, Inc.
through August, 1999.
Thomas S. Word, Jr.*, 62 Trustee 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, 39 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;
Assistant Secretary, Nations Fund
Portfolios, Inc. through August,
1999.
Carolyn Wyse, 37 Assistant Secretary and Assistant Secretary and Assistant
Stephens Inc. Assistant Treasurer Treasurer since August 1999- Nations
Fund Trust, Nations Fund, Inc.,
Nations Reserves, Nations LifeGoal
Funds, Inc., Nations Annuity Trust,
Nations Master Investment Trust and
Nations Funds Trust.
</TABLE>
Each Trustee is a board member of the other registered investment
companies in the Nations Funds Family, except William P. Carmichael, who is only
a board member of Nations Funds Trust, Nations Annuity Trust, Nations Master
Investment Trust and Nations LifeGoal Funds, Inc. Richard H. Blank, Jr., Michael
W. Nolte and Carolyn Wyse also are officers of the other registered investment
companies in the Nations Funds Family.
The Company, each Adviser and Stephens have adopted a code 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 amendments to Rule 17j-1
under the 1940 Act as set forth in the August 20, 1999 Release. Each code of
ethics, 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 the Company, (ii) any employee of the Company (or any company in a control
relationship with the 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 the Company, and (iii) any natural person in a
control relationship with the
37
<PAGE>
Company who obtains information concerning recommendations made to the 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 the 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 the Company's access
persons, other than its "disinterested" trustees, submit reports to the
Company's designated compliance person regarding transactions involving
securities which are eligible for purchase by a Fund. The codes of ethics for
the Company, Adviser and Stephens are on public file with, and are available
from, the SEC.
Nations Funds Retirement Plan
Under the terms of the Nations Funds Retirement Plan for Eligible
Trustees (the "Retirement Plan"), each Trustee may be entitled to certain
benefits upon retirement from the Board of Trustees. Pursuant to the Retirement
Plan, the normal retirement date is the date on which the eligible trustee has
attained age 65 and has completed at least five years of continuous service with
one or more of the open-end investment companies advised by the Adviser. If a
trustee retires before reaching age 65, no benefits are payable. Each eligible
trustee is entitled to receive an annual benefit from the Funds commencing on
the first day of the calendar quarter coincident with or next following his date
of retirement equal to 5% of the aggregate trustee's fees payable by the Funds
during the calendar year in which the trustee's retirement occurs multiplied by
the number of years of service (not in excess of ten years of service) completed
with respect to any of the Funds. Such benefit is payable to each eligible
trustee in quarterly installments for a period of no more than five years. If an
eligible trustee dies after attaining age 65, the trustee's surviving spouse (if
any) will be entitled to receive 50% of the benefits that would have been paid
(or would have continued to have been paid) to the trustee if he had not died.
The Retirement Plan is unfunded. The benefits owed to each 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 Trustees (the "Deferred Compensation Plan"), each trustee may elect, on
an annual basis, to defer all or any portion of the annual board fees (including
the annual retainer and all attendance fees) payable to the trustee for that
calendar year. An application was submitted to and approved by the SEC to permit
deferring trustees to elect to tie the rate of return on fees deferred pursuant
to the Deferred Compensation Plan to one or more of certain investment
portfolios of certain Funds. Distributions from the deferring trustees deferral
accounts will be paid in cash, in generally equal quarterly installments over a
period of five years beginning on the date the deferring director's/trustees'
retirement benefits commence under the Retirement Plan. The Board of Trustees,
in its sole discretion, may accelerate or extend such payments after a trustee's
termination of service. If a deferring trustee dies prior to the commencement of
the distribution of amounts in his deferral account, the balance of the deferral
account will be distributed to his designated beneficiary in a lump sum as soon
as practicable after the trustee's death. If a deferring director/trustee dies
after the commencement of such distribution, but prior to the complete
distribution of his deferral
38
<PAGE>
account, the balance of the amounts credited to his deferral account will be
distributed to his designated beneficiary over the remaining period during which
such amounts were distributable to the trustee. Amounts payable under the
Deferred Compensation Plan are not funded or secured in any way and deferring
trustees have the status of unsecured creditors of the Funds from which they are
deferring compensation.
Trustee Compensation
Trustees of the Company are compensated 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 as outlined in the following chart.
<TABLE>
<CAPTION>
Board Member Compensation Arrangement
------------------------------------------------- -------------------------------------------------------------
<S> <C>
Board Member Annual Retainer: $65,000
Board Chairman: Additional 20% of the base annual
retainer.
Payable in quarterly installments. Payable pro rata for
partial calendar year of service. Allocated across multiple
registrants. Meeting Fees: $5,000 per meeting for in-person
meetings (up to six meetings per calendar year) and $1,000
for telephone meetings. Allocated across multiple
registrants convened at meetings.
------------------------------------------------- -------------------------------------------------------------
Audit Committee Members Chairman: Additional 10% of the base annual retainer as
Board Member.
Meeting Fees: $1,000 per meeting if not held within one
calendar day before or after regularly scheduled Board
meetings. Allocated across multiple registrants convened
at meetings.
------------------------------------------------- -------------------------------------------------------------
Nominating Committee Members Meeting Fees: $1,000 per meeting if not held within one
calendar day before or after regularly scheduled Board
meetings. Allocated across multiple registrants convened
at meetings.
------------------------------------------------- -------------------------------------------------------------
</TABLE>
The following Compensation Table provides the compensation paid by the
Companies to the Directors/Trustees for the year ended March 31, 2000. From
April 1, 1999 to June 30, 1999 each Director/Trustee received (i) an annual
retainer of $1,000 ($3,000 for the Chairman of the Board) plus $500 for each
Series of each Company, plus (ii) a fee of $1,000 for attendance at each
"in-person" meeting of each respective Board (or Committee thereof) and $500 for
attendance at each other meeting of each respective Board (or Committee
thereof). Beginning July 1, 1999 the Trustees were compensated according to the
Compensation Arrangement as outlined above.
COMPENSATION TABLE
39
<PAGE>
<TABLE>
<CAPTION>
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)
------------ -------------- -------- --------------- --------------
<S> <C> <C> <C> <C>
Edmund L. Benson, III $76,708 $8,850 $48,000 $88,696
Trustee/Director
James Ermer 73,241 8,850 48,000 76,391
Trustee/Director
William H. Grigg 67,559 8,850 48,000 101,391
Trustee/Director
Thomas F. Keller 71,453 8,850 51,000 106,331
Trustee/Director
A. Max Walker 98,230 8,850 54,000 125,000
Chairman of the Board
Charles B. Walker 84,856 8,850 48,000 92,000
Trustee/Director
Thomas S. Word 67,009 8,850 48,000 84,391
Trustee/Director
James P. Sommers 89,856 8,850 48,000 93,000
Trustee/Director
Carl E. Mundy, Jr. 85,856 8,850 48,000 92,000
Trustee/Director
Dr. Cornelius Pings 83,606 8,850 48,000 92,000
Trustee/Director
William Carmichael -- -- 2,377 4,753
Justice/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
eleven 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 seven investment companies deemed to be
part of the Nations Funds complex.
(4) Total compensation amounts include deferred compensation payable to
or accrued for the following Directors/Trustees: Edmund L. Benson, III $40,456;
James Ermer $4,803; William H. Grigg $80,912; Thomas F. Keller $85,588; and
Thomas S. Word $79,954.
40
<PAGE>
Shareholder and Trustee Liability
The Company is a Massachusetts business trust. Under Massachusetts law,
shareholders of a business trust may, under certain circumstances, be held
personally liable as partners for the obligations of the trust. However, the
Company's Agreement and Declaration of Trust provides that shareholders shall
not be subject to any personal liability for the acts or obligations of the
Company and that every note, bond, contract, order, or other undertaking made by
the Company, shall contain a provision to the effect that the shareholders are
not personally liable thereunder. The Company's Agreement and Declaration of
Trust also provides for indemnification out of the trust property of any
shareholder held personally liable solely by reason of his being or having been
a shareholder and not because of his acts or omissions or some other reason. The
Company's Agreement and Declaration of Trust also provide that the Company,
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Company and shall satisfy any
judgment thereon. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the
Company itself would be unable to meet its obligations.
The Company's Agreement and Declaration of Trust states further that no
Trustee, officer, or agent of the Company shall be personally liable for or on
account of any contract, debt, tort, claim, damage, judgment, or decree arising
out of or connected with the administration or preservation of the trust estate
or the conduct of any business of the Company, nor shall any Trustee be
personally liable to any person for any action or failure to act except by
reason of his own bad faith, willful misfeasance, gross negligence, or reckless
disregard of his duties as Trustee. The Company's Agreement and Declaration of
Trust also provides that all persons having any claim against the Trustees or
the Company shall look solely to the trust property for payment.
With the exceptions stated, the Company'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 the Company 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. BACAP is the investment
sub-adviser to all of the Funds.
BAAI also serves as the investment adviser to Nations Fund, Inc.,
Nations Fund Trust, Nations Funds Trust, Nations Master Investment Trust,
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 adviser to Hatteras Income Securities, Inc., Nations
Government Income Term Trust 2003, Inc., Nations Government Income Term Trust
41
<PAGE>
2004, Inc. and Nations Balanced Target Maturity Fund, Inc., each a closed-end
diversified management investment company traded on the New York Stock Exchange.
BACAP 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 and BACAP are each wholly owned subsidiaries of Bank of America,
which in turn is a wholly owned banking subsidiary of Bank of America
Corporation, a bank holding company organized as a Delaware corporation.
The respective principal offices of BAAI and BACAP are located at One
Bank of America Plaza, Charlotte, N.C. 28255.
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 $90 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.
Investment Advisory and Sub-Advisory Agreements
Pursuant to the terms of the Company's Investment Advisory Agreement
and Sub-Advisory Agreement (at times, the "Advisory Agreements") with BAAI and
BACAP, and subject at all times to the control of the Company's Boards of
Trustees and conformity with the stated policies of the Company, BAAI and BACAP
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 the Company or to any shareholder of the Company for any
act or omission in the course of, or connected with, rendering services under
thereunder or for any losses that may be sustained in the purchase, holding or
sale of any security.
Each Advisory Agreement became effective with respect to a Fund after
approved by the Board of the 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 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 Trustees who are not parties to such Agreement or "interested persons"
(as defined in the 1940 Act) of a party to such Agreement (other than as
Trustees of the 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 the Company (by vote of the Board of
Trustees or by vote of a majority of the outstanding voting securities of the
Fund) or by BAAI on 60 days' written notice.
42
<PAGE>
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.
BAAI also may pay amounts from its own assets to Stephens or to selling
or servicing agents for services they provide. The investment advisory
agreements and the investment sub-advisory agreements for the Master Portfolios
are generally similar to the Advisory Agreements.
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, 2000.
<TABLE>
<CAPTION>
ADVISORY FEES
Net Amount Reimbursed
Amount Paid Waived by Adviser
----------- ------ ----------
<S> <C> <C> <C>
Cash Reserves 41,917,028 - -
Treasury Reserves 9,455,978 - -
Government Reserves 2,507,819 166,533 -
Municipal Reserves 1,809,661 223,731 -
California Reserves* 2,198,602 37,697 -
</TABLE>
* The amounts shown for this Fund represent fees for the fiscal period from May
16, 1999 to March 31, 2000
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:
43
<PAGE>
<TABLE>
<CAPTION>
Net Net Fees Reimb. by
Fees Paid Fees Waived BAAI
1999 1999 1999
---- ---- ----
<S> <C> <C> <C>
Cash Reserves $10,651,186 $9,394,814 $0
Treasury Reserves 2,472,643 3,183,357 0
Government Reserves 757,681 982,319 0
Municipal Reserves 343,134 619,866 0
</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>
Net Net Fees Reimb. by
Fees Paid Fees Waived BAAI
--------- ----------- ----
<S> <C> <C> <C>
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>
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 Reserves).
For the fiscal period from March 1, 1999 to May 14, 1999, the Pacific
Horizon California Tax-Exempt Money Market Fund paid Advisory fees to Bank of
America Adviser as follows:
<TABLE>
<CAPTION>
Fees Reimb. By Bank of
Net Fees Paid Net Fees Waived America Adviser
------------- --------------- ---------------
<S> <C> <C> <C>
Pacific Horizon California
Tax-Exempt Money Market Fund (60,767) - 384,798
</TABLE>
For the fiscal year from March 1, 1998 to February 28, 1999, the
Pacific Horizon California Tax-Exempt Money Market Fund paid Advisory fees to
Bank of America Adviser as follows:
<TABLE>
<CAPTION>
Fees Reimb. by
Net Net Bank of America
Fees Paid Fees Waived Adviser
1999 1999 1999
---- ---- ----
<S> <C> <C> <C>
Pacific Horizon California Tax-Exempt Money $1,548,799 $0 $0
Market Fund
</TABLE>
For the fiscal year from March 1, 1997 to February 28, 1998, the
Pacific Horizon California Tax-Exempt Money Market Fund paid Advisory fees to
Bank of America Adviser as follows:
44
<PAGE>
<TABLE>
<CAPTION>
Fees Reimb. by
Net Net Bank of America
Fees Paid Fees Waived Adviser
--------- ----------- -------
<S> <C> <C> <C>
Pacific Horizon California Tax-Exempt Money $1,149,877 $0 $0
Market Fund
</TABLE>
Co-Administrators and Sub-Administrator
Stephens Inc. and BAAI (the "Co-Administrators") serve as
co-administrators of the Company.
The Co-Administrators serve under co-administration agreements
("Co-Administration Agreements"), which were approved by the Board of Trustees
on November 5-6, 1998 for the Company. 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 average daily net assets of each Money Market Fund. BAAI also may
pay amounts from its own assets to Stephens or to selling or servicing agents
for services they provide.
Pursuant to the Co-Administration Agreement, Stephens has agreed to,
among other things, (i) maintain office facilities for the Funds, (ii) furnish
statistical and research data, data processing, clerical, and internal executive
and administrative services to the Company, (iii) furnish corporate secretarial
services to the Company, including coordinating the preparation and distribution
of materials for Board of Trustees meetings, (iv) coordinate the provision of
legal advice to the Company with respect to regulatory matters, (v) coordinate
the preparation of reports to the Company's shareholders and the SEC, including
annual and semi-annual reports, (vi) coordinating the provision of services to
the Company by the Transfer Agent, Sub-Transfer Agent and the Custodian, and
(vii) generally assist in all aspects of the Company's operations. Stephens
bears all expenses incurred in connection with the performance of its services.
Also, pursuant to the Co-Administration Agreement, BAAI has agreed to,
among other things, (i) provide accounting and bookkeeping services for the
Funds, (ii) compute each Fund's net asset value and net income, (iii) accumulate
information required for the Company's reports to shareholders and the SEC, (iv)
prepare and file the 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 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
45
<PAGE>
providing such services, BNY is entitled to receive a monthly fee from Stephens
and BAAI based on an annual rate 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 ended March 31, 2000.
<TABLE>
<CAPTION>
Co-Administration Fees
----------------------
Fees Paid to BAAI Waiver per expense ratio analysis
----------------- ---------------------------------
<S> <C> <C>
Cash Reserves 1,113,257 22,294,339
Treasury Reserves 227,937 4,791,723
Government Reserves 0 1,348,493
Municipal Reserves (199) 1,045,827
California Reserves* (49,171) 1,195,892
</TABLE>
---------------------------------
*The amounts shown for this Fund represent fees for the Fiscal period
from May 16, 1999 to March 31, 2000.
<TABLE>
<CAPTION>
Co-Administration Fees
----------------------
Fees Paid to Stephens Waiver per expense ratio analysis
--------------------- ---------------------------------
<S> <C> <C>
Cash Reserves 2,010,983 -
Treasury Reserves 448,018 -
Government Reserves 126,655 -
Municipal Reserves 98,213 -
California Reserves* 109,923 -
$-------------
</TABLE>
The table set forth below states the net Sub-Administration fees paid
to BNY and waived for the fiscal year ended March 31, 2000.
<TABLE>
<CAPTION>
Sub-Administration Fees
-----------------------
Fees Paid to BONY Waiver per expense ratio analysis
----------------- ---------------------------------
<S> <C> <C>
Cash Reserves 1,294,123 -
Treasury Reserves 650,728 -
Government Reserves 210,738 -
Municipal Reserves 163,412 -
California Reserves* 183,206 -
</TABLE>
---------------------------------
*The amounts shown for this Fund represent fees for the Fiscal period
from May 16, 1999 to March 31, 2000.
Bank of New York Co-Administration Fee Structure
------------------------------------------------
Money Market Funds
Breakpoints Rate
--------------------------------------- -------------------
< or equal to $3 billion 0.0125%
>$3 billion to $6 billion 0.0100%
> $6 billion to $8 billion 0.0050%
> $8 billion to $10 billion 0.0050%
In excess of $10 billion 0.0025%
46
<PAGE>
The table set forth below states the net combined Administration fees
paid to Stephens and waived for the fiscal year ended April 30, 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, 1998 and March 31,
1999 the Funds paid combined administrative fees as follows:
Net Net Fees Net Net Fees
Fees Paid Waived Fees Paid Waived
1998 1998 1999 1999
---- ---- ---- ----
Cash Reserves $444,739 $3,310,637 $922,159 $5,759,841
Treasury Reserves 112,671 839,649 281,755 1,603,245
Government
Reserves 55,996 416,493 87,380 492,620
Municipal
Reserves 29,152 216,243 48,585 272,415
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.
Administration Fees
-------------------
Fees Paid Fees Waived
Cash Reserves $390,477 $3,654,043
Treasury Reserves 112,205 1,030,887
Government Reserves 33,897 311,090
Municipal Reserves 18,438 365,740
The table set forth below states the net Co-Administration fees paid to
First Data and waived for the fiscal period May 1, 1998 through November 30,
1998.
Co-Administration Fees
----------------------
Fees Paid Fees Waived
Cash Reserves $39,734 $0
Treasury Reserves 11,370 0
Government Reserves 3,441 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.
Sub-Administration Fees
-----------------------
Fees Paid Fees Waived
Cash Reserves $0 $0
Treasury Reserves 0 0
Government Reserves 0 0
Municipal Reserves 0 0
47
<PAGE>
The table set forth below states the net Co-Administration fees paid to
BAAI and waived for the fiscal period December 1, 1998 through March 31, 1999.
Co-Administration Fees
----------------------
Fees Paid Fees Waived
Cash Reserves $0 $0
Treasury Reserves 0 0
Government Reserves 0 0
Municipal Reserves 0 0
The table set forth below states the net Co-Administration fees paid to
Stephens and waived for the fiscal period December 1, 1998 through March 31,
1999.
Co-Administration Fees
----------------------
Fees Paid Fees Waived
Cash Reserves $225,030 $2,105,798
Treasury Reserves 62,306 572,358
Government Reserves 19,781 181,530
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.
Sub-Administration Fees
-----------------------
Fees Paid Fees Waived
Cash Reserves $266,918 $0
Treasury Reserves 95,874 0
Government Reserves 30,261 0
Municipal Reserves 17,197 0
Distribution Plans and Shareholder Servicing Arrangements
Daily Shares
The Trustees have approved a Distribution Plan (the "Daily Distribution
Plan") with respect to Daily Shares of the Money Market Funds. Pursuant to the
Daily Distribution Plan, a Money Market Fund may compensate or reimburse the
Distributor for any activities or expenses primarily intended to result in the
sale of 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 0.35% of the
average daily net asset value of each Money Market Fund's Daily Shares.
48
<PAGE>
The fees payable under the Daily Distribution Plan are used primarily
to compensate or reimburse the Distributor for distribution services provided by
it, and related expenses incurred, including payments by the Distributor to
compensate or reimburse Selling Agents, for sales support services provided, and
related expenses incurred, by such Selling Agents. Payments under the Daily
Distribution Plan may be made with respect to preparation, printing and
distribution of prospectuses, sales literature and advertising materials by the
Distributor or, as applicable, Selling Agents, attributable to distribution or
sales support activities, respectively, commissions, incentive compensation or
other compensation to, and expenses of, account executives or other employees of
the Distributor or Selling Agents, attributable to distribution or sales support
activities, respectively; overhead and other office expenses of the Distributor
relating to the foregoing (which may be calculated as a carrying charge in the
Distributor's or Selling Agents' unreimbursed expenses), incurred in connection
with distribution or sales support activities. The overhead and other office
expenses referenced above may include, without limitation, (i) the expenses of
operating the Distributor's or Selling Agents' offices in connection with the
sale of Fund shares, including lease costs, the salaries and employee benefit
costs of administrative operations and support personnel, utility costs,
communication costs and the costs of stationery and supplies, (ii) the costs of
client sales seminars and travel related to distribution and sales support
activities, and (iii) other expenses relating to distribution and sales support
activities.
In addition, the Directors have approved a Shareholder Servicing Plan
with respect to Daily Shares of the Money Market Funds (the "Daily Servicing
Plan"). Pursuant to the Daily Servicing Plan, a Fund may compensate or reimburse
banks, broker/dealers or other financial institutions that have entered into a
Shareholder Servicing Agreement with the Company ("Servicing Agents") for
certain activities or expenses of the Servicing Agents in connection with
shareholder services that are provided by the Servicing Agents. Payments under
the Daily Servicing Plan will be calculated daily and paid monthly at a rate or
rates set from time to time by the Board of Trustees, provided that the annual
rate may not exceed 0.25% of the average daily net asset value of the Daily
Shares of the Money Market Funds.
The fees payable under the Daily Servicing Plan are used primarily to
compensate or reimburse Servicing Agents for shareholder services provided, and
related expenses incurred, by such Servicing Agents. The shareholder services
provided by Servicing Agents may include: (i) aggregating and processing
purchase and redemption requests for such Daily Shares from Customers and
transmitting promptly net purchase and redemption orders to the Distributor or
Transfer Agent; (ii) providing Customers with a service that invests the assets
of their accounts in such Daily Shares pursuant to specific or pre-authorized
instructions; (iii) processing dividend and distribution payments from the
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
49
<PAGE>
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. There were no unreimbursed expenses incurred under the
Daily Distribution Plans in the previous year to be carried over to the current
year from August 1, 2000 to August 1, 2001.
The Funds in the Nations Funds Family participate in joint distribution
activities with other Funds in the Nations Funds Family. The fees paid under
each Daily Distribution Plan adopted by a Fund may be used to finance the
distribution of the shares of other Funds in the Nations Funds Family. Such
distribution costs are allocated based on the relative net asset size of the
respective Funds.
During the fiscal period ended March 31, 2000, 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.
Information Applicable to Daily Shares.
The Daily Distribution Plan and the Daily Servicing Plan (each a "Plan"
and together 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 Daily 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 Trustees at least quarterly with a written report of the
amounts expended pursuant to the Plan and the purposes for which such
expenditures were made. The Board of Trustees reviews these reports in
connection with its decisions with respect to the Plans.
50
<PAGE>
The Plan with respect to the Daily Shares of the Money Market Funds was
initially approved on August 4, 1993. The Plan continues in effect as long as
such continuance is specifically approved at least annually by the Board of
Trustees, including a majority of the Qualified Directors. On October 12, 1996,
the Board of Trustees (including a majority of the Qualified Trustees) voted to
continue each Plan for an additional one year period.
<TABLE>
<CAPTION>
Fees Paid Pursuant to Shareholder Servicing/Distribution Plans
Daily Shares - Money Market Funds
---------------------------------------------------------------
Net Fees Paid
12B-1 Shareholder Svc TOTAL Waiver
---------------- ------------------------ ----------------------- ------------------
<S> <C> <C> <C> <C>
Cash Reserves 19,036,950 19,036,950 38,073,899 -
Treasury Reserves 1,867,151 1,867,151 3,734,301 -
Government Reserves 396,289 396,289 792,577 -
Municipal Reserves 804,807 804,807 1,609,613 -
CA Tax-Exempt Reserves 1,519,402 1,519,402 3,038,803 -
---------------- ------------------------ ----------------------- ------------------
</TABLE>
Transfer Agents and Custodians
PFPC Inc. is located at 400 Bellevue Parkway, Wilmington, Delaware
19809, 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
Company, and distributes dividends and distributions payable by the Company to
shareholders, and produces statements with respect to account activity for the
Company 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.
BNY is located at 100 Church Street, New York, N.Y. 10286, and serves
as custodian for the Funds' assets. As custodian, BNY maintains the Funds'
securities cash and other property, delivers securities against payment upon
sale and pays for securities against delivery upon purchase, makes payments on
behalf of such Funds for payments of dividends, distributions and redemptions,
endorses and collects on behalf of such Funds all checks, and receives all
dividends and other distributions made on securities owned by such Funds.
The SEC has amended Rule 17f-5 under the 1940 Act to permit boards to
delegate certain foreign custody matters to foreign custody managers and to
modify the criteria applied in the selection process. Accordingly, BNY serves as
Foreign Custody Manager, pursuant to a Foreign Custody Manager Agreement, under
which the Boards of Trustees retain the responsibility for selecting foreign
compulsory depositories, although BNY 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
51
<PAGE>
orders that its receives to the Company 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 Company pursuant to Rule 12b-1 under the 1940
Act.
The Distribution Agreement will continue year to year as long as such
continuance is approved at least annually by (i) the Board of Trustees or a vote
of the majority (as defined in the 1940 Act) of the outstanding voting
securities of the Fund and (ii) a majority of the directors who are not parties
to the Distribution Agreement or "interested persons" of any such party by a
vote cast in person at a meeting called for such purpose. The Distribution
Agreement is not assignable and is terminable with respect to a Fund, without
penalty, on 60 days' notice by the Board of Trustees, the vote of a majority (as
defined in the 1940 Act) of the outstanding voting securities of the Fund, or by
the Distributor.
Independent Accountants and Reports
The Company issues unaudited financial information semi-annually and
audited financial statements annually. The Company furnishes proxy statements
and other shareholder reports to shareholders of record.
The annual financial statements will be audited by the Company's
independent accountant. The Board of Trustees has selected
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, as the Company's independent accountant to audit the Company's books and
review the Company's tax returns for the Funds' fiscal year ended March 31,
2000. PricewaterhouseCoopers LLP was the independent public accountants for the
Funds for the period ended March 31, 1999.
The Financial Statements and Financial Highlights for the fiscal period
ended March 31, 2000 are hereby incorporated herein by reference in this SAI.
The Annual Reports for the fiscal period ended March 31, 1999 are hereby
incorporated herein by reference in this SAI. 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 Company. Their
address is 2000 Pennsylvania Avenue, N.W., Washington, D.C. 20006.
FUND TRANSACTIONS AND BROKERAGE
General Brokerage Policy
Subject to policies established by the Board of Trustees of the
Company, the Adviser is responsible for decisions to buy and sell securities for
each Fund, for the selection of
52
<PAGE>
broker/dealers, for the execution of such Fund's securities transactions, and
for the allocation of brokerage fees in connection with such transactions. The
Adviser's primary consideration in effecting a security transaction is to obtain
the best net price and the most favorable execution of the order. Purchases and
sales of securities on a securities exchange are effected through brokers who
charge a negotiated commission for their services. Orders may be directed to any
broker to the extent and in the manner permitted by applicable law.
In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without
stated commissions, although the price of a security usually includes a profit
to the dealer. In underwritten offerings, securities are purchased at a fixed
price that includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. On occasion, certain
money market instruments may be purchased directly from an issuer, in which case
no commissions or discounts are paid.
In placing orders for portfolio securities of a Fund, the Adviser is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Adviser will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable in the circumstances. In seeking
such execution, the Adviser will use its best judgment in evaluating the terms
of a transaction, and will give consideration to various relevant factors,
including, without limitation, the size and type of the transaction, the nature
and character of the market for the security, the confidentiality, speed and
certainty of effective execution required for the transaction, the general
execution and operational capabilities of the broker-dealer, the reputation,
reliability, experience and financial condition of the firm, the value and
quality of the services rendered by the firm in this and other transactions and
the reasonableness of the spread or commission, if any. In addition, the Adviser
will consider research and investment services provided by brokers or dealers
who effect or are parties to portfolio transactions of a Fund, the Adviser or
its other clients. Such research and investment services are those which
brokerage houses customarily provide to institutional investors and include
statistical and economic data and research reports on particular companies and
industries. Such services are used by the Adviser in connection with all of its
investment activities, and some of such services obtained in connection with the
execution of transactions for a Fund may be used in managing other investment
accounts. Conversely, brokers furnishing such services may be selected for the
execution of transactions of such other accounts, whose aggregate assets are far
larger than those of a Fund. Services furnished by such brokers may be used by
the Adviser in providing investment advisory and investment management services
for the Company.
Commission rates are established pursuant to negotiations with the
broker based on the quality and quantity of execution services provided by the
broker in the light of generally prevailing rates. The allocation of orders
among brokers and the commission rates paid are reviewed periodically by the
Trustees of the 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
53
<PAGE>
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 Company believes 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.
The Company 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 Company 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.
54
<PAGE>
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.
Brokerage Commissions
During the fiscal periods ended March 31, 1999, 1998 and 1997, the
Funds did not pay brokerage commissions to BAAI, BACAP or Stephens. In addition,
the Funds did not pay brokerage fees during the fiscal years ended March 31,
1999, 1998 and 1997.
Securities of Regular Broker/Dealers
As of March 31, 2000, none of the Funds owned securities of its
"regular brokers or dealers" or their parents, as defined in the 1940 Act.
Directed Brokerage
During the fiscal year ended March 31, 2000, the Funds did not direct
brokerage transactions to brokers because of research services provided.
Monies Paid to Broker/Dealers from the Adviser's Profit
There were no fees paid to any broker/dealers from the profits of the
Advisor for the last fiscal year (i.e., April 1, 1999 through March 31, 2000) of
the Funds. This information is provided in order to satisfy certain requirements
of Rule 10b-10 under the 1934 Act, which provides that broker/dealers must
provide information to customers regarding any remuneration that a broker
receives in connection with a sales transaction.
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
55
<PAGE>
and research services provided ...viewed in terms of either that particular
transaction or its overall responsibilities with respect to the accounts as to
which it exercises investment discretion and that the services provided by a
broker provide an adviser with lawful and appropriate assistance in the
performance of its investment decision making responsibilities." Accordingly,
the price to a Fund in any transaction may be less favorable than that available
from another broker/dealer if the difference is reasonably justified by other
aspects of the portfolio execution services offered.
Broker/dealers utilized by the Adviser may furnish statistical,
research and other information or services which are deemed by the Adviser to be
beneficial to the Funds' investment programs. Research services received from
brokers supplement the Adviser's own research and may include the following
types of information: statistical and background information on industry groups
and individual companies; forecasts and interpretations with respect to U.S. and
foreign economies, securities, markets, specific industry groups and individual
companies; information on political developments; fund management strategies;
performance information on securities and information concerning prices of
securities; and information supplied by specialized services to the Adviser and
to the Company's 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 Company by improving the quality of the Adviser's
investment advice. The advisory fees paid by the Company 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
---------------------
56
<PAGE>
Description of Shares of the Company
The Company' Boards of 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 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 under the 1940 Act. However,
the 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 the Company, shareholders of the 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 Company.
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
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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.
Shares in the Funds may be purchased pursuant to the policies outlined
in the Funds' prospectuses. In addition to the policies in such prospectuses the
following purchasing or buying policy shall also apply. The Funds will waive any
contingent deferred sales charge on the exchange or transfer of a shareholder's
investment in a Fund to any of the offshore funds in the Nations Funds family.
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 procedures adopted 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 (unless the Funds close earlier) as of 3:00 p.m., Eastern time (10:30
a.m., Eastern time, with respect to California Reserves; 12:00 noon, Eastern
time, with respect to the Government Reserves and Municipal Reserves; and 5:00
p.m., Eastern time, with respect to Treasury Reserves and Cash 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. The Company's
Board of Trustees has established procedures reasonably designed, taking into
account current market conditions and each Money Market Fund's investment
objective, to stabilize the net asset value per share of each Money Market Fund
for purposes of sales and redemptions at $1.00. These procedures include review
by the Board of Trustees, at such intervals as it deems appropriate, to
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
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deviation exceeds one-half of one percent, the Board of Trustees will promptly
consider what action, if any, should be initiated. If the Board of Trustees
believes that the extent of any deviation from a Fund's $1.00 amortized cost
price per share may result in material dilution or other unfair results to new
or existing investors, it has agreed to take such steps as it considers
appropriate to eliminate or reduce, to the extent reasonably practicable, any
such dilution or unfair results. These steps may include selling portfolio
instruments prior to maturity; shortening the average portfolio maturity;
withholding or reducing dividends; redeeming shares in kind; reducing the number
of a Fund's outstanding shares without monetary consideration; or utilizing a
net asset value per share determined by using available market quotations.
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 Company intends 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 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.
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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 Company has 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 Company paying different dividends or distributions on
the different classes of shares.
Taxation of Fund Investments
Except as provided herein, gains and losses on the sale of portfolio
securities by a Fund will generally be capital gains and losses. Such gains and
losses will ordinarily be long-term capital gains and losses if the securities
have been held by the Fund for more than one year at the time of disposition of
the securities.
Gains recognized on the disposition of a debt obligation (including a
tax-exempt obligation) purchased by a Fund at a market discount (generally at a
price less than its principal amount) will be treated as ordinary income to the
extent of the portion of market discount which accrued, but was not previously
recognized pursuant to an available election, during the term the Fund held the
debt obligation.
If an option granted by a Fund lapses or is terminated through a
closing transaction, such as a repurchase by the Fund of the option from its
holder, the Fund will realize a short-term capital gain or loss, depending on
whether the premium income is greater or less than the amount paid by the Fund
in the closing transaction. Some realized capital losses may be deferred if they
result from a position which is part of a "straddle," discussed below. If
securities are sold by a Fund pursuant to the exercise of a call option written
by it, the Fund will add the premium received to the sale price of the
securities delivered in determining the amount of gain or loss on the sale. If
securities are purchased by a Fund pursuant to the exercise of a put option
written by it, such Fund will subtract the premium received from its cost basis
in the securities purchased.
The amount of any gain or loss realized by a Fund on closing out a
regulated futures contract will generally result in a realized capital gain or
loss for Federal income tax purposes. Regulated futures contracts held at the
end of each fiscal year will be required to be "marked to market" for Federal
income tax purposes pursuant to Section 1256 of the Code. In this regard, they
will be deemed to have been sold at market value. Sixty percent (60%) of any net
gain or loss recognized on these deemed sales and sixty percent (60%) of any net
realized gain or loss from any actual sales, will generally be treated as
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss. Transactions that qualify as designated hedges are
excepted from the "mark-to-market" rule and the "60%/40%" rule.
Under Section 988 of the Code, a Fund will generally recognize ordinary
income or loss to the extent gain or loss realized on the disposition of
portfolio securities is attributable to changes in foreign currency exchange
rates. In addition, gain or loss realized on the disposition of a foreign
currency forward contract, futures contract, option or similar financial
instrument, or of foreign currency itself, will generally be treated as ordinary
income or loss. Each Fund will attempt to monitor Section 988 transactions,
where applicable, to avoid adverse tax impact.
Offsetting positions held by a Fund involving certain financial
forward, futures or options contracts may be considered, for tax purposes, to
constitute "straddles." "Straddles" are defined to include "offsetting
positions" in actively traded personal property. The tax treatment of
"straddles" is governed by Section 1092 of the Code which, in certain
circumstances, overrides or modifies the provisions of Section 1256. If a Fund
were treated as entering into "straddles" by engaging in certain financial
forward, futures or option contracts, such straddles could be characterized as
"mixed straddles" if the futures, forwards, or options comprising a part of such
straddles were governed by Section 1256 of the Code. A Fund may make one or more
elections with respect to "mixed straddles." Depending upon which election is
made, if any, the results with respect to the Fund may differ. Generally, to the
extent the straddle rules apply to positions established by the Fund, losses
realized by the Fund may be deferred to the extent of unrealized gain in any
offsetting positions. Moreover, as a result of the straddle and the conversion
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transaction rules, short-term capital loss on straddle positions may be
recharacterized as long-term capital loss, and long-term capital gain may be
characterized as short-term capital gain or ordinary income.
If a Fund enters into a "constructive sale" of any appreciated position
in stock, a partnership interest, or certain debt instruments, the Fund must
recognize gain (but not loss) with respect to that position. For this purpose, a
constructive sale occurs when the Fund enters into one of the following
transactions with respect to the same or substantially identical property: (i) a
short sale; (ii) an offsetting notional principal contract; or (iii) a futures
or forward contract.
If a Fund purchases shares in a "passive foreign investment company"
("PFIC"), the Fund may be subject to Federal income tax and an interest charge
imposed by the IRS upon certain distributions from the PFIC or the Fund's
disposition of its PFIC shares. If the Fund invests in a PFIC, the Fund intends
to make an available election to mark-to-market its interest in PFIC shares.
Under the election, the Fund will be treated as recognizing at the end of each
taxable year the difference, if any, between the fair market value of its
interest in the PFIC shares and its basis in such shares. In some circumstances,
the recognition of loss may be suspended. The Fund will adjust its basis in the
PFIC shares by the amount of income (or loss) recognized. Although such income
(or loss) will be taxable to the Fund as ordinary income (or loss)
notwithstanding any distributions by the PFIC, the Fund will not be subject to
Federal income tax or the interest charge with respect to its interest in the
PFIC under the election.
Foreign Taxes
Income and dividends received by a Fund from sources within foreign
countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. If more than 50% of the value of a Fund's total
assets at the close of its taxable year consists of securities of non-U.S.
corporations, the Fund will be eligible to file an election with the IRS
pursuant to which the regulated investment company may pass-through to its
shareholders foreign taxes paid by the regulated investment company, which may
be claimed either as a credit or deduction by the shareholders. Only the
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.
Other Distributions
For Federal income tax purposes, a Fund's earnings and profits will be
determined at the end of each taxable year and will be allocated pro rata over
the entire year. For Federal income tax purposes, only amounts paid out of
earnings and profits will qualify as dividends. Thus, if during a taxable year
the Fund's declared dividends exceed the Fund's net income (as determined at the
end of the year), only that portion of the year's distributions which equals the
year's earnings and profits (generally the Fund's net investment income and
capital gain) will be deemed to have constituted a dividend. Distributions in
excess of earnings and profits will first be treated as a return of capital up
to the amount of a shareholder's basis in its Fund shares and then capital gain.
It is expected that the Fund's net income, on an annual basis, will equal the
dividends declared during the year.
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Disposition of Fund Shares
A disposition of Fund shares pursuant to a redemption (including a
redemption in-kind) or an exchange will ordinarily result in a taxable capital
gain or loss, depending on the amount received for the shares (or are deemed to
be received in the case of an exchange) and the cost of the shares.
If a shareholder exchanges or otherwise disposes of Fund shares within
90 days of having acquired such shares and if, as a result of having acquired
those shares, the shareholder subsequently pays a reduced sales charge on a new
purchase of shares of the Fund or a different regulated investment company, the
sales charge previously incurred in acquiring the Fund's shares shall not be
taken into account (to the extent such previous sales charges do not exceed the
reduction in sales charges on the new purchase) for the purpose of determining
the amount of gain or loss on the disposition, but will be treated as having
been incurred in the acquisition of such other shares. Also, any loss realized
on a redemption or exchange of shares of the Fund will be disallowed to the
extent that substantially identical shares are acquired within the 61-day period
beginning 30 days before and ending 30 days after the shares are disposed of.
If a shareholder receives a 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
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., a trust
other than a 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
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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 Company 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.
New Regulations
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the backup withholding,
U.S. income tax withholding and information reporting rules applicable to
foreign shareholders. The New Regulations will generally be effective for
payments made after December 31, 2000, subject to certain transition rules.
Among other things, the New Regulations will permit the Funds to estimate the
portion of their distributions qualifying as capital gain distributions for
purposes of determining the portion of such distributions paid to foreign
shareholders that will be subject to federal income tax withholding. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
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 and California
Reserves (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 Reserves, California
individual income tax.
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.
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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. 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 Reserves
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.
California Reserves intends to qualify under the above requirements so that they
can pay California exempt-interest dividends. If California Reserves does 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
Reserves will notify its 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 California Reserves with respect to
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any taxable year cannot exceed the excess of the amount of interest received by
California Reserves for such year on California Exempt Securities over any
amounts that, if California Reserves 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 California
Reserves, 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 California Reserves shares is not deductible
for California state personal income tax purposes if California Reserves
distributes 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 California Reserves
and its shareholders. No attempt is made to present a detailed explanation of
the California state personal income tax treatment of the California Reserves or
its shareholders, and this discussion is not intended as a substitute for
careful planning. Further, it should be noted that the portion of California
Reserves 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 California Reserves, 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
California Reserves dividends and as to their own California state tax
situation, in general.
ADDITIONAL INFORMATION ON PERFORMANCE
Yield information and other performance information for the 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
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.
65
<PAGE>
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
66
<PAGE>
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 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.
67
<PAGE>
Ibbotson Data. Ibbotson Associates of Chicago, Illinois, ("Ibbotson")
provides historical returns of the capital markets in the United States. The
Funds may compare the performance of their share classes or series to the
long-term performance of the U.S. capital markets in order to demonstrate
general long-term risk versus reward investment scenarios. Performance
comparisons could also include the value of a hypothetical investment in common
stocks, long-term bonds or treasuries.
The capital markets tracked by Ibbotson are common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, Treasury Bills, and the U.S. rate of
inflation. These capital markets are based on the returns of several different
indices. For common stocks, the S&P is used. For small capitalization stocks,
return is based on the return achieved by Dimensional Fund Advisors (DFA) Small
Company Fund. This fund is a market-value-weighted index of the ninth and tenth
deciles of the Exchange, plus stocks listed on the American Stock Exchange
(AMEX) and over-the-counter (OTC) with the same or less capitalization as the
upperbound of the Exchange ninth docile. At year-end 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.
68
<PAGE>
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 March 31, 2000, (the "base period"), the current and
effective yields of the various shares of the Money Market Funds were as
follows:
For the 7-day period ended March 31, 2000, the yield of each Fund was
as follows:
<TABLE>
<CAPTION>
Effective Tax Equiv.
Yield w/o Effective Yield w/o Tax Equiv. Yield w/o
Yield Waivers Yield Waivers Yield Waivers
----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Cash Reserves
Daily Class 5.44% 5.30% 5.59% 5.45% N/A N/A
Treasury Reserves
Daily Class 5.20% 4.09% 5.34% 5.23% N/A N/A
Government Reserves
Daily Class 5.32% 5.22% 5.46% 5.36% N/A N/A
Municipal Reserves
Daily Class 3.07% 2.94% 3.11% 2.98% 5.08% 4.95%
California Reserves
Daily Class 2.44% 2.27% 2.47% 2.30% 4.51% 4.20%
</TABLE>
69
<PAGE>
MISCELLANEOUS
Certain Record and Beneficial 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 7, 2000 is:
<TABLE>
<CAPTION>
Class; Amount of Shares Percentage Percentage
Fund Name and Address Owned; Type of Ownership of Class of Fund
---- ---------------- ------------------------ -------- -------
<S> <C> <C> <C> <C>
Cash Reserves NATIONAL FINANCIAL SERVICES CORP Daily; 5,665,811,132.540; B 55.20 14.93
FBO OF OUR EXCULSIVE CUSTOMERS
ATTN MUTUAL FUND DEPT-5 TH FLR
ONE WORLD FINANCIAL CENTER
200 LIBERTY ST FL FLR
NEW YORK NY 10281
BA INVESTMENT SERVICES INC FOR THE Daily; 2,838,908,908.250; B 27.66 7.48
BENEFIT OF CUSTOMERS
UNIT 17852
ATTN H DAVID JONES 3RD
PO BOX 7042
SAN FRANCISCO CA 94120
Treasury Reserves NATIONAL FINANCIAL FOR THE Daily; 232,989,251.320; B 26.68 2.67
EXCLUSIVE BENEFIT OF OUR CUSTOMERS
200 LIBERTY ST
1 WORLD FINANCIAL CTR
ATTN MUTUAL FUNDS, 5TH FLR
NEW YORK NY 10281
DELL FINANCIAL SERVICES LP Daily; 53,670,566.510; R 6.15 0.61
ATTN GENEVA COCHRAN
14050 SUMMIT PARK DRIVE
STE 101
AUSTIN TEXAS 78728
Government NATIONAL FINANCIAL FOR THE EXCLUSIVE Daily; 183,549,857.300; B 100.00 8.96
Reserves BENEFIT OF OUR CUSTOMERS
200 LIBERTY ST
1 WORLD FINANCIAL CTR
ATTN MUTUAL FUNDS, 5TH FLR
NEW YORK NY 10281
Municipal Reserves NATIONAL FINANCIAL FOR THE Daily; 475,288,554.570; B 88.45 66.21
EXCLUSIVE BENEFIT OF OUR CUSTOMERS
200 LIBERTY ST
1 WORLD FINANCIAL CTR
ATTN MUTUAL FUNDS, 5TH FLR
NEW YORK NY 10281
BA INVESTMENT SERVICES INC Daily; 62,051,050.900; B 11.55 8.60
FOR THE BENEFIT OF CUSTOMERS
UNIT 17852
ATTN H DAVID JONES 3RD
PO BOX 7042
SAN FRANCISCO CA 94120
</TABLE>
70
<PAGE>
As of August 2000, Bank of America Corporation and its affiliates owned
of record more than 25% of the outstanding shares of the Company acting as
agent, fiduciary, or custodian for its customers and may be deemed a controlling
person of the Company under the 1940 Act.
71
<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
A-1
<PAGE>
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.
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:
A-2
<PAGE>
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.
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
A-3
<PAGE>
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-4
<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
A-5
<PAGE>
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-6
