<PAGE> 1
NATIONS GOVERNMENT INCOME
TERM TRUST 2004, INC.
S E M I
A N N U A L
R E P O R T
For the Period Ended June 30, 1996
--------------------
NATIONS
--------------------
--------------------
GOVERNMENT
--------------------
--------------------
INCOME TERM
--------------------
--------------------
TRUST 2004
--------------------
<PAGE> 2
- --------------------------------------------------------------------------------
NOT MAY LOSE VALUE
FDIC-
INSURED NO BANK GUARANTEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 AND ITS AFFILIATES PROVIDE INVESTMENT ADVISORY AND OTHER SERVICES TO
THE COMPANY, FOR WHICH THEY ARE COMPENSATED.
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<PAGE> 3
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
DEAR SHAREHOLDER:
We welcome this opportunity to provide you with the semiannual report for
Nations Government Income Term Trust 2004, Inc. (the "Company") for the six
month period ending June 30, 1996, and to share our outlook for the near term.
INVESTMENT OBJECTIVE
The Company is a closed-end investment company, and its shares are traded
on the New York Stock Exchange under the symbol "NGF." The Company's investment
objectives are to seek to provide a high level of current income and to return
$10 per share (the initial public offering price per share) on or about February
28, 2004.
PORTFOLIO PERFORMANCE*
For the six month period ending June 30, 1996, the Company distributed net
investment income of $0.3228 per share. As of June 30, 1996, a monthly dividend
in the amount of $0.0538 per share was paid. This dividend rate equates to an
annualized yield of 6.46% based upon the initial offering price of $10.00 per
share. In addition, the dividend rate of $0.0538 per share per month translates
into a current annualized yield of 8.19% based upon the closing market price of
$7.875 per share on June 30, 1996.
The net asset value of the Company's shares increased during the six month
period, from $8.86 to $9.04. This reflects both the contribution of assets
(which is described below) and the Company's stock repurchase program.
MARKET ENVIRONMENT
The fixed income markets experienced rising interest rates and declining
prices during the first six months of 1996. We entered the year with a low rate
of economic growth and a general expectation for interest rate cuts by the
Federal Reserve Board (the "Fed"). However, the market environment quickly
shifted, changing from a prognosis of moderating economic expansion in the
winter months to a recognition of re-accelerating growth and job creation during
the spring. Though the economy did pick up some steam, inflation continued to be
benign as the economic acceleration was not sufficient to generate broad pricing
pressures. The outlook at this time is positive, framed by continued moderate
growth and good news on the inflation front over the next six months.
With this increase in interest rates, the price of fixed income securities
generally declined. For example, the price of a 5-year U.S. Treasury note
declined 4.1% during the period as its yield increased from 5.37% to 6.46%.
Similarly, the price of a 10-year U.S. Treasury bond declined 7.9% during the
period as its yield increased from 5.57% to 6.71%. During this same period, the
interest rate spread between mortgage-backed securities, which constitute a
large portion of the Company's assets, and U.S. Treasuries decreased, which was
reflected in the better relative price performance for the mortgage-backed
securities sector.
MARKET OUTLOOK
Looking ahead, we believe the prospects for the bond market are positive.
We have come through a period of greater than expected economic growth, but have
yet to see any material acceleration from inflation. The Fed has demonstrated
its ability to act proactively against the threat of inflation, and there are
signs that the economy will slow over the next six months. Recent growth has
been led by the consumer, and demand should decrease from the current relatively
high and unsustainable level. The one area for concern is wage
- ---------------
*Past performance is no guarantee of future results.
1
<PAGE> 4
pressure, which could assert itself given the low current unemployment rate.
Prospects for this occurrence appear muted at this juncture, however, due to the
continued strength in corporate productivity and the pending slowdown in
consumer demand we are forecasting.
CONTRIBUTION IN CONNECTION WITH CLASS ACTION SETTLEMENT
On May 8, 1996, NationsBank Corporation, on its behalf and on behalf of
certain of its affiliates (collectively, "NationsBank"), paid approximately $8.8
million into a "contribution fund" for the benefit of the Company in connection
with a court-approved settlement of a class action lawsuit brought by certain
shareholders and former shareholders of the Company (among others) against
NationsBank. WE WOULD LIKE TO POINT OUT THAT THE COMPANY WAS NOT NAMED AS A
DEFENDANT IN THE LAWSUIT. The contribution fund amount was used to purchase U.S.
Treasury securities for the Company's portfolio and had the effect of increasing
the net asset value of the Company's shares.
CONCLUSION
The Company continues to pursue its dual objective of high current income
and returning $10 per share to investors upon termination of the Company.
Sincerely,
/s/ Mark H. Williamson
Mark H. Williamson
President
2
<PAGE> 5
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
<TABLE>
- ----------------------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS JUNE 30, 1996 (UNAUDITED)
- ----------------------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE-BACKED SECURITIES -- 76.8%
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) -- 24.4%
REMIC:
$ 3,585,198 Series 1489 VB, CMO, Inverse Floater, 7.150% 10/15/07**............ $3,009,631
4,000,000 Series 1544 SA, CMO, TAC, Inverse Floater, 7.800% 07/15/08**....... 3,308,280
1,861,171 Series 1550 SD, CMO, TAC, Inverse Floater, 6.000% 07/15/08**....... 1,395,617
5,115,354 Series 1693 SC, CMO, TAC, Inverse Floater, 6.100% 03/15/09**....... 3,399,255
10,000,000 Series 1720 E, CMO, VADM, 7.500% 12/15/09.......................... 9,793,500
6,563,096 Series 1688 M, CMO, SEQ, 6.000% 08/15/13........................... 6,224,374
2,936,000 Series 1437 W, CMO, PAC, Inverse Floater, 8.750% 11/15/19**........ 2,420,585
1,547,004 Series 1644 NB, PAC, Inverse Floater, 6.100% 12/15/23**............ 1,284,555
----------
30,835,797
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- 45.3%
REMIC:
10,000,000 Certificate 93-12 ED, CMO, VADM, 7.500% 02/25/06................... 10,064,500
10,000,000 Certificate 92-193 HD, CMO, PAC, 7.000% 11/25/07................... 9,697,400
3,543,737 Certificate 93-214 SP, CMO, PAC, Inverse Floater, 4.732%
12/25/08**....................................................... 2,917,701
1,750,725 Certificate 93-231 SA, CMO, Inverse Floater, 6.094% 12/25/08**..... 1,440,934
10,000,000 Certificate 94-82 B, CMO, TAC, 8.000% 03/25/17..................... 10,335,100
10,000,000 Certificate 93-2 G, CMO, PAC, 7.000% 01/25/18...................... 9,867,400
3,432,596 Certificate 91-162 SA, PAC, Inverse Floater, 10.802% 04/25/20**.... 3,436,234
5,493,593 Certificate 93-247 SK, CMO, TAC, Inverse Floater,
10.434% 02/25/23**............................................. 5,405,805
2,986,036 Certificate 93-179 SG, TAC, Inverse Floater, 5.588% 10/25/23**..... 2,595,463
1,779,223 Certificate 93-202 VB, PAC, Inverse Floater, 5.629% 11/25/23**..... 1,428,858
----------
57,189,395
----------
OTHER -- 7.1%
5,000,000 General Electric Capital Mortgage Services Inc., CMO, TAC,
Series 1994-13, Class A-8, 6.500% 04/25/24....................... 4,555,450
4,730,303 Residential Funding Mortgage, CMO, TAC,
Series 1993-S48, Class A-8, 6.500% 12/25/08...................... 4,429,598
----------
8,985,048
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TOTAL MORTGAGE-BACKED SECURITIES (Cost $99,651,683).................. 97,010,240
==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
3
<PAGE> 6
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
<TABLE>
- ---------------------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED) JUNE 30, 1996 (UNAUDITED)
- ---------------------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 1)
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
MUNICIPAL BONDS -- 9.8%
$3,340,000 Conroe, Texas, Independent School District, 5.500% 02/01/04***..... $ 2,240,338
2,000,000 Kentucky State Turnpike Authority, Development Revenue,
5.034% 01/01/04***............................................. 1,364,280
2,080,000 Lower Colorado River Authority, Texas, Series B,
5.450% 01/01/04***............................................. 1,418,851
2,500,000 San Antonio, Texas, Electric and Gas Revenue, 5.037% 02/01/04***... 1,676,900
3,165,000 Texas State Capital Appreciation, 5.160% 04/01/04***............... 2,104,440
3,845,000 University of Illinois, Revenue Auxiliary, 5.050% 04/01/04***...... 2,537,316
1,500,000 Washington State Public Power Supply, 5.300% 07/01/04***........... 970,620
------------
TOTAL MUNICIPAL BONDS (Cost $12,428,182)........................... 12,312,745
============
U.S. TREASURY OBLIGATIONS -- 12.8%
U.S. TREASURY BILLS -- 1.8%
200,000 5.149% 08/29/96+................................................. 198,362
2,095,000 5.192% 09/05/96+................................................. 2,075,524
------------
2,273,886
------------
U.S. TREASURY NOTE -- 7.0%
9,220,000 5.875% 02/15/04.................................................. 8,810,909
------------
U.S. TREASURY STRIP -- 4.0%
7,200,000 6.138% 11/15/01***............................................... 5,102,352
------------
TOTAL U.S. TREASURY OBLIGATIONS (Cost $16,162,853)................. 16,187,147
============
TOTAL INVESTMENTS (Cost $128,242,718*)................................. 99.4% 125,510,132
OTHER ASSETS AND LIABILITIES (NET)..................................... 0.6 770,145
----- ------------
NET ASSETS............................................................. 100.0% $126,280,277
===== ============
<FN>
- ---------------
* Aggregate cost for Federal tax purposes.
** Current coupon rate at June 30, 1996.
*** Zero Coupon Security. The rate shown is the effective yield at date of
purchase.
+ The rate shown is the effective yield at date of purchase.
ABBREVIATIONS:
CMO Collateralized Mortgage Obligation
PAC Planned Amortization Class
REMIC Real Estate Mortgage Investment Conduit
SEQ Sequential Payment Class
TAC Targeted Amortization Class
VADM Very Accurately Defined Maturity
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE> 7
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
<TABLE>
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STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1996 (UNAUDITED)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments, at value (Cost $128,242,718) (Note 1)
See accompanying schedule.................................. $125,510,132
Cash......................................................... 122,366
Interest receivable.......................................... 682,326
Prepaid expenses............................................. 16,077
Unamortized organization costs (Note 5)...................... 4,800
------------
Total Assets............................................ 126,335,701
LIABILITIES:
Transfer agent fees payable (Note 2)......................... $16,183
Administration fee payable (Note 2).......................... 4,167
Custodian fees payable (Note 2).............................. 2,311
Accrued expenses and other payables.......................... 32,763
-------
Total Liabilities....................................... 55,424
------------
NET ASSETS........................................................ $126,280,277
============
NET ASSETS consist of: (Note 7)
Undistributed net investment income.......................... $ 288,364
Accumulated net realized loss on investments sold............ (3,537,753)
Net unrealized depreciation of investments................... (2,732,586)
Common Stock at par value (Note 4)........................... 13,971
Paid-in capital in excess of par value....................... 132,248,281
------------
Total Net Assets........................................ $126,280,277
============
NET ASSET VALUE PER SHARE:
($126,280,277 / 13,970,766 shares of common stock
outstanding)................................................. $ 9.04
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE> 8
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
<TABLE>
- ----------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- ----------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME:
Interest.................................................... $ 5,019,863
-----------
EXPENSES:
Investment advisory fee (Note 2)............................ $ 305,914
Administration fee (Note 2)................................. 152,956
Transfer agent fees (Note 2)................................ 59,006
Legal and audit fees........................................ 48,934
Custodian fees (Note 2)..................................... 17,973
Directors' fees and expenses (Note 2)....................... 4,259
Amortization of organization costs (Note 5)................. 900
Other....................................................... 50,143
---------
640,085
Fees waived by investment adviser and
administrator (Note 2).................................... (433,870)
Fees reduced by credits allowed by the custodian (Note 2)... (3,713)
---------
Total Expenses......................................... 202,502
-----------
NET INVESTMENT INCOME............................................ 4,817,361
-----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(NOTES 1 AND 3):
Net realized gain on investments sold during the year....... 24,277
Net change in unrealized depreciation of investments
during the year........................................... (6,669,959)
-----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS.................. (6,645,682)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS............. $(1,828,321)
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE> 9
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
<TABLE>
- ---------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS
ENDED YEAR
06/30/96 ENDED
(UNAUDITED) 12/31/95
=========================
<S> <C> <C>
Net investment income............................................. $ 4,817,361 $ 9,320,258
Net realized gain on investments.................................. 24,277 3,686,058
Net change in unrealized appreciation/(depreciation) of
investments..................................................... (6,669,959) 13,470,219
------------ ------------
Net increase/(decrease) in net assets resulting from operations... (1,828,321) 26,476,535
Distributions to shareholders from net investment income.......... (4,528,997) (8,941,274)
Distributions to shareholders in excess of net investment
income.......................................................... -- (121,758)
Net increase/(decrease) in net assets from Fund share transactions
(Note 4)........................................................ (551,320) 34,702
Increase due to capital contribution (Note 7)..................... 8,800,880 --
------------ ------------
Net increase in net assets........................................ 1,892,242 17,448,205
NET ASSETS:
Beginning of period............................................... 124,388,035 106,939,830
------------ ------------
End of period (including undistributed net investment income of
$288,364 and $0, respectively).................................. $126,280,277 $124,388,035
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE> 10
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
<TABLE>
- --------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<CAPTION>
SIX MONTHS
ENDED YEAR PERIOD
06/30/96+++ ENDED ENDED
(UNAUDITED) 12/31/95 12/31/94*
=========== ======== =========
<S> <C> <C> <C>
Operating performance:
Net asset value, beginning of period................ $ 8.86 $ 7.62 $ 9.45#
-------- -------- --------
Net investment income............................... 0.34 0.66 0.57
Net realized and unrealized gain/(loss) on
investments....................................... (0.51) 1.23 (1.85)
-------- -------- --------
Net increase/(decrease) in net assets resulting from
investment operations............................. (0.17) 1.89 (1.28)
Distributions to shareholders:
Dividends from net investment income................ (0.32) (0.64) (0.55)
Distributions in excess of net investment income.... -- (0.01) --
-------- -------- --------
Total distributions................................. (0.32) (0.65) (0.55)
Increase in net assets from repurchase of common
shares (Note 4)................................... 0.04 -- --
Increase due to capital contribution (Note 7)....... 0.63 -- --
-------- -------- --------
Net asset value, end of period...................... $ 9.04 $ 8.86 $ 7.62
======== ======== ========
Market value, end of period......................... $ 7.875 $ 8.000 $ 6.875
======== ======== ========
Total return++...................................... 2.48% 26.29% (22.12)%
======== ======== ========
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's)................ $126,280 $124,388 $106,940
Ratio of operating expenses to average net assets... 0.33%+ 0.56% 0.95%+
Ratio of net investment income to average net
assets............................................ 7.88%+ 7.97% 8.27%+
Portfolio turnover rate............................. 3% 88% 259%
Ratio of operating expenses to average net assets
without fees reduced by credits allowed by the
custodian......................................... 0.34%+(a) 0.57%(a) --
Ratio of operating expenses to average net assets
without waivers, reimbursements and/or fees
reduced by credits allowed by the custodian....... 1.05%+ 1.09% N/A
Net investment income per share without waivers,
reimbursements and/or fees reduced by credits
allowed by the custodian.......................... $ 0.31 $ 0.62 N/A
<FN>
- ---------------
* The Nations Government Income Term Trust 2004, Inc. commenced operations
on February 28, 1994.
+ Annualized.
++ Total return represents aggregate total return for the period based on
market value at period end.
+++ 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 by credits allowed by
the custodian.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE> 11
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES.
Nations Government Income Term Trust 2004, Inc. (the "Company") was
incorporated under the laws of the State of Maryland on November 3, 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 February 28, 1994. 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 policies described below are
followed by the Company in the preparation of its financial statements and are
in accordance with generally accepted accounting principles.
Portfolio Valuation: The Company's securities are valued using broker
quotations or on the basis of prices provided by a pricing service. Certain
securities are valued using broker quotations which are 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 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.
Dollar Roll Transactions: The Company may enter into dollar roll
transactions with financial institutions. Dollar roll transactions consist of
the sale by the Company of mortgage-backed or other asset-backed securities,
together with a commitment to purchase similar, but not identical, securities at
a future date, at the same price. In addition, the Company is paid a fee as
consideration for entering into the commitment to purchase. This fee is accrued
as income over the life of the dollar roll contract. If the broker/dealer to
whom the Company sells the security becomes insolvent, the Company'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
Company is required to repurchase may be worth less than the security that the
Company originally held, and the return earned by the Company with the proceeds
of a dollar roll may not exceed transaction costs.
Securities Transactions and Investment Income: Securities transactions are
accounted for on a trade date basis. Realized gains or losses are computed 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 settlement date and is recorded on the accrual
basis. Discount on zero coupon securities is accreted under the effective yield
method.
Securities purchased or sold on a when-issued or delayed-delivery basis may
be settled a month or more after trade date. The Company establishes a
segregated account with its custodian bank in which it will maintain cash or
U.S. government securities or other high grade debt securities 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.
Dividend and Distributions to Shareholders: It is the policy of the
Company to pay monthly distributions from net investment income to shareholders.
The Company intends to elect to retain net long-term gains (and pay corporate
income tax thereon) and to retain, until the final liquidating distribution,
9
<PAGE> 12
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
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. Permanent differences incurred for the six months period ended
June 30, 1996, resulting from differences in book and tax accounting for capital
contributions, have been reclassified to reflect an increase to accumulated net
realized gain/loss of $8,800,880 and a decrease to paid-in capital of
$8,800,880.
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.
Effective January 1, 1996, the Company entered into an investment advisory
agreement (the "Advisory Agreement") with NationsBanc Advisors, Inc. ("NBAI"), a
wholly-owned subsidiary of NationsBank, N.A. 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 June 30,
1996, NBAI voluntarily waived fees of $305,914. Prior to January 1, 1996,
NationsBank, N.A. acted as investment adviser. The investment advisory fee under
the new Investment Advisory Agreement is the same as those under the prior
agreement.
The Company and NBAI have entered into a Sub-Advisory Agreement with
TradeStreet Investment Associates, Inc. ("TradeStreet"), a wholly-owned
subsidiary of NationsBank, N.A. Under the terms of the Sub-Advisory Agreement,
TradeStreet is entitled to receive from NBAI a sub-advisory fee equal to an
annual rate of 0.15% of the Company's average weekly net assets. For the period
ended June 30, 1996, TradeStreet voluntarily waived all of its sub-advisory
fees.
NationsBank, N.A. is the Company's Administrator. Pursuant to an
administration agreement with NationsBank, N.A. (the "Administration
Agreement"), the Company has retained NationsBank, N.A. 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, N.A. 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 requires 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, N.A., the Company
pays NationsBank, N.A. a monthly fee equal to an annual rate of 0.25% to the
Company's average weekly net assets. For the six months ended June 30, 1996,
NationsBank, N.A. voluntarily waived fees of $127,956.
NationsBank, N.A. has entered into a Sub-Administration Agreement with
First Data Investor Services Group, Inc., a wholly-owned subsidiary of First
Data Corporation (the "Sub-Administrator"), pursuant to which the
Sub-Administrator provides certain administrative services in support of the
operations of the Company. The fees of the Sub-Administrator are paid by
NationsBank, N.A. out of the fees paid to it pursuant to the Administration
Agreement.
No officer, director or employee of NationsBank, N.A., NBAI, TradeStreet or
First Data Investor Services Group, Inc., or any affiliate thereof, receives any
compensation from the Company for serving as a
10
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NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
Director or officer of the Company. The Company pays each 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.
Mellon Trust serves as the custodian of the Company's assets. The Company
accrues a credit on daily cash balances held at Mellon Trust. The earnings
credit is applied to the monthly custody fee. For the six months ended June 30,
1996, the earnings credit was $3,713.
First Data Investor Services Group, Inc. serves as the transfer agent and
dividend disbursing agent for the Company.
3. SECURITIES TRANSACTIONS.
For the six months ended June 30, 1996, the cost of purchases and proceeds
from sales of long-term U.S. government securities aggregated $8,677,605 and
$3,390,035, respectively.
At June 30, 1996, gross unrealized appreciation and depreciation for tax
purposes was $829,967 and $3,562,553, respectively.
4. COMMON STOCK.
At June 30, 1996, 1,000,000,000 shares of common stock, $.001 par value,
were authorized.
The Board of Directors of the Company has approved a 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 June 30, 1996, the Company repurchased 69,900 shares of its common
stock in the open market at a cost of $551,320 and an average discount of
approximately 12% from its net asset value. All shares repurchased have been
retired.
<TABLE>
Common stock transactions were as follows:
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
6/30/96 12/31/95
------------------- ----------------
SHARES AMOUNT SHARES AMOUNT
=================== ================
<S> <C> <C> <C> <C>
Issued as reinvestment of dividends....................... -- -- 4,209 $34,702
Shares repurchased by the Company......................... (69,900) $(551,320) -- --
------- --------- ------ -------
Total increase/(decrease)................................. (69,900) $(551,320) 4,209 $34,702
======= ========= ====== =======
</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, 1995, the Company had available for Federal income tax
purposes a capital loss carryforward of $3,390,630 expiring in the year 2002.
11
<PAGE> 14
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
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NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
7. CAPITAL CONTRIBUTION.
On May 8, 1996, the Company received $8,800,880, after plaintiffs' legal
fees, from NationsBank Corporation in connection with a court-approved
settlement of a class action lawsuit brought by certain 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
5.875% and a maturity date of February 15, 2004.
12
<PAGE> 15
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
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DIVIDEND REINVESTMENT PLAN
- --------------------------------------------------------------------------------
THE PLAN
The Company's Dividend Reinvestment Plan (the "Plan") offers you 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 instructed First Data Investor Services Group, Inc. (the "Plan Agent"),
acting as agent for each participant in the Plan, in writing otherwise. 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 Investor
Services Group, Inc. 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 day 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, as agent for
all participants, 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 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.
13
<PAGE> 16
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
- --------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN (CONTINUED)
- --------------------------------------------------------------------------------
If the net asset value per share is higher than the closing market price
per share of the capital stock on the Exchange plus estimated brokerage
commissions on such record date, the Plan Agent will elect 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.
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
All correspondence (including notifications) should be directed to: Nations
Government Income Term Trust 2004, Inc., Dividend Reinvestment Plan, c/o First
Data Investor Services Group, Inc., P.O. Box 34602, Charlotte, NC 28234, (800)
982-2271.
14
<PAGE> 17
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
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STOCK REPURCHASE PROGRAM
- --------------------------------------------------------------------------------
STOCK REPURCHASE PROGRAM
The Board of Directors of the Company has approved a 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.
15
<PAGE> 18
============
BULK RATE
U.S. POSTAGE
PO Box 34602 PAID
Charlotte, NC 28234-4602 BOSTON, MA
Toll Free 1-800-982-2271 PERMIT NO.
54201
============
SA04 696
