<PAGE> 1
NATIONS GOVERNMENT INCOME
TERM TRUST 2003, INC.
S E M I
A N N U A L
R E P O R T
For the Period Ended December 31, 1997
--------------------
NATIONS
--------------------
--------------------
GOVERNMENT
--------------------
--------------------
INCOME TERM
--------------------
--------------------
TRUST 2003
--------------------
<PAGE> 2
<TABLE>
<S> <C>
FDIC- NOT MAY LOSE VALUE
INSURED NO BANK GUARANTEE
</TABLE>
SHARES OF THE COMPANY ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED,
ENDORSED OR GUARANTEED BY NATIONSBANK, N.A. ("NATIONSBANK") OR ANY OF ITS
AFFILIATES. SUCH SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT
AGENCY. AN INVESTMENT IN THE COMPANY INVOLVES CERTAIN RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
NATIONSBANK AFFILIATES PROVIDE INVESTMENT ADVISORY AND OTHER SERVICES TO THE
COMPANY, FOR WHICH THEY ARE COMPENSATED.
<PAGE> 3
NATIONS GOVERNMENT INCOME TERM TRUST 2003, INC.
DEAR SHAREHOLDER:
We welcome this opportunity to provide you with the semi-annual report for
Nations Government Income Term Trust 2003, Inc. (the "Company") for the
six-month period ended December 31, 1997, and to share our outlook for the near
term.
INVESTMENT OBJECTIVES
The Company is a closed-end investment company, and its shares are traded
on the New York Stock Exchange under the symbol "NGI." The Company's investment
objectives are to seek a high level of current income and to return $10 per
share (the initial public offering price per share) on or about September 30,
2003.
PORTFOLIO PERFORMANCE*
For the six-month period ending December 31, 1997, the Company distributed
net investment income of $0.279 per share. The current dividend rate is $0.0465
per share, which equates to an annualized yield of 5.58% based on the initial
offering price of $10.00 per share and to an annualized yield of 6.42% based
upon the closing market price on December 31, 1997 of $8.6875 per share. The net
asset value of the Company's shares on December 31, 1997 was $9.60. The
Company's total return for the six-month period was 7.56% based on net asset
value.
MARKET ENVIRONMENT
The biggest economic story of the last six months has been the turmoil in
Southeast Asia. Declining rates of inflation resulting from devaluations of
Asian currencies and economic growth in the U.S., postponed any interest rate
hikes by the Federal Reserve Board. Gold, oil and industrial commodity prices
declined over the period, as falling inflation produced a positive backdrop for
bonds. Yields dropped steadily throughout the period, with the yield on the
10-year U.S. Treasury note dropping to 5.74% by year's end. The mortgage market
was buffeted by increased prepayment concerns, but remained stable due to its
widespread popularity.
MARKET OUTLOOK
Several factors provide reasons for optimism in the U.S. bond market in the
coming year. The good inflation news continues to put downward pressure on
nominal rates, and shows no sign of abating. The Asian turbulence enhances this
effect, and is driving more investment capital into the U.S. markets. The
Federal Reserve Board is signaling a neutral posture, but retains credibility as
an inflation fighter. Finally, there is the prospect for a Federal budget
surplus, which would reduce U.S. debt issuance and contribute to downward
pressure on interest rates. All in all, this is positive news for the bond
markets that we think will continue in the year ahead.
Sincerely,
/s/ Mark H. Williamson
- -----------------------------
Mark H. Williamson
President
December 31, 1997
- ---------------
* PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
1
<PAGE> 4
Nations Government Income Term Trust 2003, Inc.
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------
<C> <S> <C>
MORTGAGE-BACKED SECURITIES -- 78.5%
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) -- 39.8%
REMIC:
$ 4,332,394 Series 1489 VB, CMO, Inverse Floater, 5.989% 10/15/07**..... $ 4,174,338
4,500,000 Series 1544 SA, CMO, TAC, Inverse Floater, 6.175%
07/15/08**................................................ 4,451,061
2,274,764 Series 1550 SD, CMO, TAC, Inverse Floater, 4.929%
07/15/08**................................................ 2,122,579
6,205,511 Series 1693 SC, CMO, TAC, Inverse Floater, 4.850%
03/15/09**................................................ 5,478,589
3,589,000 Series 1437 W, CMO, PAC, Inverse Floater, 7.292%
11/15/19**................................................ 3,573,637
13,050,000 Series 1399 G, CMO, PAC, 7.000% 12/15/19.................... 13,344,469
20,000,000 Series 1435 G, CMO, PAC, 7.000% 12/15/21.................... 20,389,610
4,146,000 Series 1517 H, CMO, PAC, 7.000% 03/15/22.................... 4,234,605
1,277,498 Series 1644 NB, PAC, Inverse Floater, 4.850% 12/15/23**..... 1,239,222
------------
59,008,110
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- 26.3%
225,000 Discount Note, 02/04/98..................................... 223,810
300,000 Discount Note, 02/10/98..................................... 298,127
160,000 Discount Note, 02/25/98..................................... 158,656
REMIC:
10,000,000 Certificate 92-193 HD, CMO, PAC, 7.000% 11/25/07............ 10,273,322
2,727,491 Certificate 93-214 SP, CMO, PAC, Inverse Floater, 3.529%
12/25/08**................................................ 2,598,740
2,052,297 Certificate 93-231 SA, CMO, Inverse Floater, 4.125%
12/25/08**................................................ 1,889,291
10,000,000 Certificate 93-2 G, PAC, 7.000% 01/25/18.................... 10,053,350
2,482,311 Certificate 91-162 SA, PAC, Inverse Floater, 9.319%
04/25/20**................................................ 2,524,070
2,368 Certificate 92-16 SQ, Inverse Floater, 56.725% 03/25/22**... 402,930
5,930,882 Certificate 93-247 SK, CMO, TAC, Inverse Floater, 8.137%
02/25/23**................................................ 6,311,400
2,657,308 Certificate 93-179 SG, TAC, Inverse Floater, 4.139%
10/25/23**................................................ 2,532,684
1,819,343 Certificate 93-202 VB, PAC, Inverse Floater, 4.410%
11/25/23**................................................ 1,739,184
------------
39,005,564
------------
WHOLE LOAN COLLATERAL -- 12.4%
7,000,000 General Electric Capital Mortgage Services Inc., CMO, TAC,
Series 1994-13, Class A-8, 6.500% 04/25/24................ 6,644,964
Residential Funding Mortgage, CMO:
5,276,000 Series 1993-S48, PAC, Class A-7, 6.500% 12/25/08............ 5,207,762
6,622,424 Series 1993-D48, TAC, Class A-8, 6.500% 12/25/08............ 6,430,788
------------
18,283,514
------------
TOTAL MORTGAGE-BACKED SECURITIES (Cost $116,370,763)........ 116,297,188
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
2
<PAGE> 5
Nations Government Income Term Trust 2003, Inc.
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED) DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS -- 13.4%
$ 6,250,000 Clark County, Nevada, School District, Series B, 4.800%
06/01/03***............................................... $ 4,942,625
5,850,000 Houston, Texas, Independent School District, 4.800%
08/15/03***............................................... 4,572,653
2,870,000 Illinois Educational Facilities, Authority Revenue, 4.900%
07/01/03***............................................... 2,249,334
3,755,000 Maricopa County, Arizona, School District, 4.856%
07/01/03***............................................... 2,958,827
6,430,000 Tulsa, Oklahoma, Industrial Authority Hospital Revenue,
4.800% 12/01/03***........................................ 4,990,387
------------
TOTAL MUNICIPAL BONDS (Cost $19,270,510).................... 19,713,826
------------
U.S. TREASURY OBLIGATION -- 7.9%
U.S. TREASURY NOTE -- 7.9%
11,762,000 5.750% 08/15/03............................................. 11,773,027
------------
TOTAL U.S. TREASURY OBLIGATION (Cost $11,182,593)........... 11,773,027
------------
TOTAL INVESTMENTS (Cost $146,823,866*)...................... 99.8% 147,784,041
OTHER ASSETS AND LIABILITIES (NET).......................... 0.2 349,803
----- ------------
NET ASSETS.................................................. 100.0% $148,133,844
----- ------------
</TABLE>
- ---------------
* Aggregate cost for Federal tax purposes.
** Current coupon rate at December 31, 1997.
*** Zero Coupon Security. The rate shown is the effective yield at date of
purchase.
<TABLE>
<S> <C>
ABBREVIATIONS:
CMO Collateralized Mortgage Obligation
PAC Planned Amortization Class
REMIC Real Estate Mortgage Investment Conduit
TAC Targeted Amortization Class
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
3
<PAGE> 6
Nations Government Term Trust 2003
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $146,823,866) (Note 1) See
accompanying schedule................................. $147,784,041
Cash................................................... 22,509
Receivable for investment securities sold.............. 216
Interest receivable.................................... 785,148
Unamortized organization costs (Note 5)................ 2,295
Prepaid expenses....................................... 4,500
------------
Total Assets...................................... 148,598,709
------------
LIABILITIES:
Cost of Fund shares repurchased........................ 358,160
Accrued legal and audit fees........................... 35,643
Transfer agent fees payable (Note 2)................... 35,639
Custodian fees payable (Note 2)........................ 5,182
Administration fees payable (Note 2)................... 3,333
Accrued directors' fees and expenses (Note 2).......... 1,500
Accrued expenses and other payables.................... 25,408
------------
Total Liabilities................................. 464,865
------------
NET ASSETS.................................................. $148,133,844
------------
NET ASSETS consist of:
Undistributed net investment income.................... $ 2,810,953
Accumulated net realized loss on investments sold...... (3,365,243)
Unrealized appreciation of investments................. 960,175
Common Stock at par value (Note 4)..................... 15,438
Paid-in capital in excess of par value................. 147,712,521
------------
Total Net Assets.................................. $148,133,844
------------
NET ASSET VALUE: Net asset value, offering and redemption
price per share
($148,133,844 / 15,437,985 shares of beneficial interest
outstanding).............................................. $9.60
-----
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE> 7
Nations Government Term Trust 2003
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest............................................... $5,833,084
----------
EXPENSES:
Investment advisory fees (Note 2)...................... $ 375,642
Administration fees (Note 2)........................... 187,821
Transfer agent fees (Note 2)........................... 69,404
Legal and audit fees................................... 36,368
Custodian fees (Note 2)................................ 17,270
Directors' fees and expenses (Note 2).................. 5,250
Amortization of organization costs (Note 5)............ 765
Other.................................................. 34,755
Fees waived by investment adviser and administrator
(Note 2).............................................. (543,464)
---------
Total Expenses.................................... 183,811
Fees reduced by credits allowed by the custodian (Note
2).................................................... (2,246)
---------
Net Expenses...................................... 181,565
----------
NET INVESTMENT INCOME....................................... 5,651,519
----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTES 1
AND 3):
Net realized gain on investments sold.................. 401,788
Net change in unrealized appreciation/(depreciation) of
investments........................................... 3,682,399
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS............. 4,084,187
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $9,735,706
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE> 8
Nations Government Term Trust 2003
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
12/31/97 ENDED
(UNAUDITED) 06/30/97
---------------------------
<S> <C> <C>
Net investment income....................................... $ 5,651,519 $ 12,316,345
Net realized gain/(loss) on investments sold................ 401,788 (767,916)
Net change in unrealized appreciation/(depreciation) of
investments............................................... 3,682,399 4,244,347
------------ ------------
Net increase in net assets resulting from operations........ 9,735,706 15,792,776
Distributions to shareholders from net investment income.... (4,396,133) (10,307,662)
Net decrease in net assets from Fund share transactions
(Note 4).................................................. (5,921,030) (10,916,338)
------------ ------------
Net decrease in net assets.................................. (581,457) (5,431,224)
NET ASSETS:
Beginning of period......................................... 148,715,301 154,146,525
------------ ------------
End of period (including undistributed net investment income
of $2,810,954 and $1,555,567, respectively)............... $148,133,844 $148,715,301
------------ ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE> 9
Nations Government Income Term Trust 2003 Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR YEAR YEAR PERIOD
12/31/97 ENDED ENDED ENDED ENDED
(UNAUDITED) 06/30/97+++ 06/30/96+++ 06/30/95 06/30/94*
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning of
period........................... $ 9.22 $ 8.84 $ 8.32 $ 7.77 $ 9.45#
-------- -------- -------- -------- --------
Net investment income.............. 0.36 0.73 0.66 0.69 0.55
Net realized and unrealized
gain/(loss) on investments....... 0.26 0.20 (0.21) 0.51 (1.72)
-------- -------- -------- -------- --------
Net increase/(decrease) in net
assets resulting from investment
operations....................... 0.62 0.93 0.45 1.20 (1.17)
Dividends from net investment
income........................... (0.28) (0.61) (0.62) (0.65) (0.51)
Increase in net assets from
repurchase of common shares (Note
4)............................... .04 0.06 0.05 -- --
Increase due to capital
contribution (Note 7)............ -- -- 0.64 -- --
-------- -------- -------- -------- --------
Net increase/(decrease) in net
assets........................... 0.38 0.38 0.52 0.55 (1.68)
-------- -------- -------- -------- --------
Net asset value, end of period..... $ 9.60 $ 9.22 $ 8.84 $ 8.32 $ 7.77
-------------- -------- ----------- -------- --------
Market value, end of period........ $ 8.688 $ 8.375 $ 7.500 $ 7.500 $ 8.750
-------------- -------- ----------- -------- --------
Total return++..................... 6.36% 20.24% 8.12% (6.50)% (7.52)%
-------------- -------- ----------- -------- --------
Ratios to average net assets/
supplemental data:
Net assets, end of period (in
000's)........................... $148,134 $148,715 $154,147 $145,810 $134,589
Ratio of operating expenses to
average net assets............... 0.24%+ 0.24% 0.27% 0.90% 0.91%+
Ratio of net investment income to
average net assets............... 7.52%+ 8.10% 7.74% 9.00% 8.43%+
Portfolio turnover rate............ 9% 4% 46% 38% 212%
Ratio of operating expenses to
average net assets without fees
reduced by credits allowed by the
custodian........................ 0.24%+(a) 0.24% 0.28% -- --
Ratio of operating expenses to
average net assets without
waivers, reimbursements and/or
fees reduced by credits allowed
by the custodian................. 0.97%+ 0.96% 1.00% 0.96% 0.93%+
Net investment income per share
without waivers, reimbursements
and/or fees reduced by credits
allowed by the custodian......... $ 0.33 $ 0.67 $ 0.60 $ 0.69 $ 0.55
</TABLE>
- ---------------
* The Nations Government Income Term Trust 2003, Inc. commenced operations on
September 30, 1993.
+ Annualized.
++ Total return represents aggregate total return for the period based on
market value.
+++ Per share numbers have been calculated using the monthly average shares
method, which more appropriately represents the per share data for the
period, since the use of the undistributed income method did not accord with
the results of operations.
# Initial offering price net of sales commissions of $0.55 per share.
(a) The ratio includes custodian fees before reduction on credits allowed by the
custodian.
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE> 10
Nations Government Income Term Trust 2003, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 (UNAUDITED)
Nations Government Income Term Trust 2003, Inc. (the "Company") was
incorporated under the laws of the State of Maryland on July 26, 1993, and is
registered with the Securities and Exchange Commission as a diversified,
closed-end management investment company under the Investment Company Act of
1940, as amended. The Company commenced operations on September 30, 1993.
1. SIGNIFICANT ACCOUNTING POLICIES.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates. The following is a
summary of the significant accounting policies followed by the Company in the
preparation of its financial statements.
Securities Valuation: The Company's portfolio securities are valued using
prices provided by a pricing service, which may be based on a matrix system
which considers such factors as security prices, yields and maturities. The
value of mortgage-backed securities can be significantly affected by changes in
interest rates. Restricted securities, securities for which market quotations
are not readily available and other assets are valued at fair market value by
the investment adviser under the supervision of the Board of Directors. Certain
securities may be valued by one or more principal market makers. Short-term
investments that mature in 60 days or less are valued at amortized cost, which
approximates market value.
Securities Transactions and Investment Income: Securities transactions are
accounted for on a trade date basis. Realized gains or losses are computed based
on the specific identification of the securities sold. Interest income, adjusted
for amortization of discounts and premiums on investments using the effective
yield method, is earned from the settlement date and is recorded on an accrual
basis. Dividend income is recorded on the ex-dividend date.
Securities purchased or sold on a when-issued or delayed-delivery basis may
be settled a month or more after the trade date; interest income is not accrued
until settlement date. The Company instructs its custodian to establish a
segregated account in which it will maintain cash or U.S. government securities
or other high grade debt securities at least equal in value to its commitments
for such securities.
Inverse Floating Rate Obligations: Inverse floating rate obligations
("inverse floaters") are tranches of a REMIC or CMO with an interest rate that
moves inversely to a specified index. The interest rate, which is adjusted
periodically, is based on a formula incorporating a specific index times a
multiplier, plus or minus a spread over the index. The value and related
unrealized and realized gain or loss (due to changes in interest rates) on an
inverse floater can be much more volatile than other debt securities because of
the inverse floater's multiple to the index.
Dividends and Distributions to Shareholders: It is the policy of the
Company to declare and pay monthly distributions from net investment income to
shareholders. The Company intends to retain net long-term gains (and pay
corporate income tax thereon) and to retain, until the final liquidating
distribution, income in an amount approximately equal to the tax-exempt income
accrued on the zero coupon securities of municipal issuers or other municipal
securities in which it invests. Income and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Company, timing differences and differing characterization of
distributions made by the Company.
8
<PAGE> 11
Nations Government Income Term Trust 2003, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (UNAUDITED)
Federal Income Taxes: It is the policy of the Company to qualify as a
regulated investment company, if such qualification is in the best interest of
its shareholders, by complying with the requirements of the Internal Revenue
Code of 1986, as amended, applicable to regulated investment companies and by
distributing substantially all of its earnings to its shareholders. To the
extent that the Company does not distribute substantially all of its taxable
earnings, it will be subject to a 4% non-deductible excise tax.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND OTHER RELATED PARTY
TRANSACTIONS.
The Company has entered into an investment advisory agreement (the
"Advisory Agreement") with NationsBanc Advisors, Inc. ("NBAI"), a wholly-owned
subsidiary of NationsBank N.A., ("NationsBank"). Under the terms of the Advisory
Agreement, the Company pays NBAI a monthly fee equal to an annual rate of 0.50%
of the Company's average weekly net assets. For the six months ended December
31, 1997, NBAI voluntarily waived fees of $375,642.
The Company and NBAI have entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with TradeStreet Investment Associates, Inc.
("TradeStreet"), a wholly-owned subsidiary of NationsBank. Under the terms of
the Sub-Advisory Agreement, TradeStreet is entitled to receive from NBAI a
monthly fee equal to an annual rate of 0.15% of the Company's average weekly net
assets. For the six months ended December 31, 1997, TradeStreet voluntarily
waived all of its fees.
NationsBank is the Company's administrator. Pursuant to an administration
agreement (the "Administration Agreement"), the Company has retained NationsBank
to supervise the overall day-to-day operations of the Company and provide
various types of administrative services to the Company. Under the terms of the
Administration Agreement, NationsBank also maintains certain of the Company's
books and records and furnishes, at its own expense, clerical assistance,
bookkeeping and other administrative services as the Company may reasonably
require in the conduct of its business.
As full compensation for the administrative services furnished to the
Company and expenses of the Company assumed by NationsBank, the Company pays
NationsBank a monthly fee equal to an annual rate of 0.25% of the Company's
average weekly net assets. For the six months ended December 31, 1997,
NationsBank voluntarily waived administration fees of $167,821.
NationsBank has entered into a sub-administration agreement (the
"Sub-Administration Agreement") with First Data Investor Services Group,
Inc.("First Data"), a wholly-owned subsidiary of First Data Corporation,
pursuant to which First Data provides certain administrative services in support
of the operations of the Company. The fees to First Data are paid out of the
fees paid to NationsBank by the Company pursuant to the Administration
Agreement.
Boston Safe & Trust Company ("Boston Safe"), a subsidiary of Mellon Trust,
serves as the custodian of the Company's assets. The Company accrues a credit on
daily cash balances held at Boston Safe. The earnings credit is applied to the
monthly custody fee. For the six months ended December 31, 1997, the earnings
credit was $2,246.
First Data serves as the transfer agent and dividend disbursing agent for
the Company.
No officer, director or employee of NationsBank, NBAI, TradeStreet or First
Data, or any affiliate thereof, receives any compensation from the Company for
serving as a Director or Officer of the Company. The Company pays each
unaffiliated Director an annual fee of $1,000, plus an additional $500 for each
board meeting attended, plus reimbursement of expenses incurred in attending
such meetings.
9
<PAGE> 12
Nations Government Income Term Trust 2003, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (UNAUDITED)
3. SECURITIES TRANSACTIONS.
For the six months ended December 31, 1997, the cost of purchases and
proceeds from sales of long-term U.S. government securities aggregated
$12,692,452 and $18,477,502, respectively.
At December 31, 1997, gross unrealized appreciation and depreciation for
tax purposes was $3,102,064 and $2,141,889, respectively.
4. COMMON STOCK.
At December 31, 1997, 1,000,000,000 shares of common stock, $.001 par
value, were authorized.
The Board of Directors of the Company has approved a stock repurchase plan
that gives the Company the flexibility to engage in repurchases of its
outstanding common stock. Accordingly, shareholders are notified that from time
to time, the Company may purchase shares of its common stock in the open market
when management of the Company believes that such purchases are appropriate in
light of market conditions, including the presence of a market discount. For the
six months ended December 31, 1997, the Company repurchased 689,800 shares of
its common stock in the open market at a cost of $5,921,030 and an average
discount of approximately 9.72% from its net asset value. For the year ended
June 30, 1997, the Company repurchased 1,309,945 shares of its common stock in
the open market at a cost of $10,916,338 and an average discount of
approximately 8% from its net asset value. All repurchased shares have been
retired by the Company.
Common stock transactions were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
12/31/97 06/30/97
----------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
-------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Issued as reinvestment of dividends..... -- -- -- --
Shares repurchased by the Company....... (689,800) $(5,921,030) (1,309,945) $(10,916,338)
-------- ----------- ---------- ------------
Total decrease.......................... (689,800) $(5,921,030) (1,309,945) $(10,916,338)
-------- ----------- ---------- ------------
</TABLE>
5. ORGANIZATION COSTS.
The Company bears all costs in connection with its organization. All such
costs are being amortized on the straight-line method over a period of five
years from the commencement of operations for the Company.
6. CAPITAL LOSS CARRYFORWARD.
As of December 31, 1997, the Company had available for Federal income tax
purposes a capital loss carryforward of $5,111,708, expiring in the year 2003.
Under the current tax law, capital losses realized after October 31 may be
deferred and treated as occurring on the first day of the following fiscal year.
For the year ended June 30, 1997, the Company has elected to defer losses
occuring between November 1, 1996 and June 30, 1997 under these rules:
<TABLE>
<CAPTION>
POST-OCTOBER CAPITAL
- -------------------------------
SHORT TERM LONG TERM
(GAIN) DEFERRAL LOSS DEFERRAL
- --------------- -------------
<S> <C>
$(36,647) $731,239
</TABLE>
7. CAPITAL CONTRIBUTION.
On May 8, 1996, the Company received $11,201,120, after plaintiffs' legal
fees, from NationsBank Corporation in connection with a court-approved
settlement of a class action lawsuit brought by certain
10
<PAGE> 13
Nations Government Income Term Trust 2003, Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (UNAUDITED)
shareholders and former shareholders of the Company against NationsSecurities
and several other affiliates of NationsBank Corporation. The Company was not
named as a defendant in the lawsuit. In accordance with the settlement, the
proceeds of the settlement were used to purchase a U.S. Treasury Note, with a
coupon rate of 5.750% and a maturity of August 15, 2003.
8. LINE OF CREDIT.
The Company participates in an uncommitted line of credit provided by The
Bank of New York under a line of credit agreement dated February 28, 1997 (the
"Agreement"). Advances under the Agreement are taken primarily for temporary or
emergency purposes, including the repurchase of its outstanding common stock.
Under the Agreement, the Company may borrow up to the lesser of $5 million or
25% of its net assets. Interest on borrowings is payable at the Federal Funds
Rate plus 0.75% on an annualized basis. The Agreement requires, among other
things, that the Company maintain a ratio of no less than 4 to 1 net assets (not
including funds borrowed pursuant to the Agreement) to aggregate amount of
indebtedness pursuant to the Agreement. During the six months ended December 31,
1997, the Company had not borrowed under the Agreement.
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Nations Government Income Term Trust 2003, Inc.
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DIVIDEND REINVESTMENT PLAN
THE PLAN
The Company's Dividend Reinvestment Plan (the "Plan") offers an automatic
way to reinvest your dividends and capital gains distributions in shares of the
Company.
PARTICIPATION
Shareholders of record will receive their dividends in cash unless they
have otherwise instructed First Data (the "Plan Agent"), acting as agent for
each participant in the Plan, in writing. Such a notice must be received by the
Plan Agent not less than 5 business days prior to the record date for a dividend
or distribution in order to be effective with respect to that dividend or
distribution. A notice which is not received by that time will be effective only
with respect to subsequent dividends and distributions.
Shareholders who do not participate in the Plan will receive all
distributions by check mailed directly to the shareholder by First Data, as
dividend paying agent. For Federal income tax purposes, dividends are treated as
income or capital gains, regardless of whether they are received in cash or
reinvested in additional shares.
Participants may terminate their participation in the Plan by written
notice to the Plan Agent. If the written notice is received at least 5 business
days before the record date of any distribution, it will be effective
immediately. If received after that date, it will be effective as soon as
possible after the reinvestment of the dividend or distribution.
PRICING OF DIVIDENDS AND DISTRIBUTIONS
Whenever the Company's Board of Directors declares a dividend or other
distribution payable in cash or, at the option of the Plan Agent, in shares of
capital stock issued by the Company, the Plan Agent will elect, on behalf of the
participants, to receive the dividend in authorized but unissued shares of
capital stock if the net asset value per share (as determined by the investment
adviser of the Company as of the close of business on the record date for the
dividend or distribution) is equal to or less than 95% of the closing market
price per share of the capital stock of the Company on the New York Stock
Exchange (the "Exchange") on such record date plus estimated brokerage
commissions. The number of such authorized but unissued shares to be credited to
a participant's account will be determined as of the close of business on the
record date for the dividend, by valuing such shares at the greater of the net
asset value per share or 95% of the market price per share. The Plan Agent will
credit each participant's account with the number of shares corresponding in
value, as determined under the foregoing formula, to the amount such participant
would have received in cash had such participant not elected to participate in
this Plan.
If the net asset value per share is equal to or less than the closing
market price per share of the capital stock of the Company on the Exchange on
such record date plus estimated brokerage commissions but exceeds 95% of such
closing market price plus estimated brokerage commissions, the Plan Agent may
elect, on behalf of all participants (i) to take the dividend in cash and as
soon as practicable thereafter, consistent with obtaining the best price and
execution, proceed to purchase in one or more transactions the shares of capital
stock in the open market, at the then current price as hereinafter provided, and
will credit each participant's account with the number of shares corresponding
in value, as determined by the price actually paid on the open market for such
shares including brokerage expenses, to the amount such participant would have
received in cash had such participant not elected to participate in this Plan or
(ii) to receive the dividend in authorized but unissued shares of capital stock,
in which case the Plan Agent will credit each participant's account with the
number of shares corresponding in value (determined by valuing such shares at
the greater of the net asset value per share or 95% of the market price per
share, in each case as of the close of business on
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Nations Government Income Term Trust 2003, Inc.
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DIVIDEND REINVESTMENT PLAN (CONTINUED)
the record date for the dividend or distribution) to the amount such participant
would have received in cash had such participant not elected to participate in
this Plan.
If the net asset value per share is higher than the closing market price
per share of the capital stock on the Exchange, including estimated brokerage
commissions on such record date, the Plan Agent will elect to take the dividend
in cash as soon as practicable. Consistent with obtaining the best price and
execution, the Plan Agent will proceed to purchase in one or more transactions
the shares of capital stock in the open market, at the then current price as
hereinafter provided. Each participant's account will be credited with the
number of shares corresponding in value, as determined by the price actually
paid on the open market for such shares including brokerage expenses, to the
amount such participant would have received in cash had such participant not
elected to participate in this Plan. Under such circumstances, in anticipation
of receipt of a dividend in cash, the Plan Agent may purchase shares in the open
market during the period between the record date and the payable date for the
dividend or distribution. The Plan has been amended to specifically authorize
such anticipatory purchases.
If the Plan Agent elects to purchase shares in the open market, and if
before the Plan Agent has completed its purchases the market price exceeds the
net asset value per share, the average per share purchase price paid by the Plan
Agent may exceed the net asset value of the Company's shares, resulting in the
acquisition of fewer shares than if the dividend or distribution had been paid
in shares issued by the Company. During certain market conditions, it may be
impracticable or impossible to complete a market purchase program at prices that
are below or not substantially in excess of net asset value, and, in such event,
the Company may, in its discretion, issue the required shares.
NO SERVICE FEE TO REINVEST
There is no service fee charged to participants for reinvesting dividends
or distributions from net realized capital gains. The Plan Agent's fees for the
handling of the reinvestment of dividends and capital gains distributions will
be paid by the Company. There will be no brokerage commissions with respect to
shares issued directly by the Company as a result of dividends or capital gains
distributions payable either in stock or in cash. However, participants will pay
a pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of any
dividends or capital gains distributions payable only in cash.
PLAN AGENT ADDRESS AND TELEPHONE NUMBER
You may obtain more detailed information by requesting a copy of the Plan
from the Plan Agent. All correspondence (including notifications) should be
directed to: Nations Government Income Term Trust 2003, Inc., Dividend
Reinvestment Plan, c/o First Data Investors Services Group, Inc., P.O. Box
34602, Charlotte, NC 28234, (800) 982-2271.
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============
BULK RATE
U.S. POSTAGE
PO Box 34602 PAID
Charlotte, NC 28234-4602 BOSTON, MA
Toll Free 1-800-982-2271 PERMIT NO.
54201
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SA03 12/97
