<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, 1997
--------------------
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.
- --------------------------------------------------------------------------------
<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, 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 "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, 1997, the Company distributed net
investment income of $0.32 per share. The June dividend of $0.0494 per share
represents a slight reduction from the previous dividend. Over the last few
months, short-term interest rates have risen and the yield curve has flattened,
resulting in a reduction in the level of income generated by the Company. The
dividend was reduced to better reflect the level of income being generated by
the Company's portfolio. This dividend rate equates to an annualized yield of
5.93% based on the initial offering price of $10.00 per share. In addition, the
dividend rate of $0.0494 per month translates into a current annualized yield of
6.97% based upon the closing market price of $8.50 per share on June 30, 1997.
The net asset value of the Company's shares on June 30, 1997 was $9.38.
MARKET ENVIRONMENT
Economic themes of reasonable Gross Domestic Product (GDP) and jobs growth,
declining inflation, high productivity, and limited corporate pricing power have
contributed to an environment that continues to be supportive of fixed income
investments. The Federal Reserve Board did raise interest rates modestly (0.25%)
in March of 1997 as GDP moved briefly above its non-inflationary trend, and this
was perceived as an appropriate and timely preemptive strike against any threat
of inflation. The bond market has continued its range bound pattern, with yields
on the 10-year U.S. Treasury Note contained within a 6%-7% band for the period.
This low volatility market has been positive for fixed income securities, and
has contributed to portfolio performance.
MARKET OUTLOOK
Prospects for the bond market are good for the balance of the year. We
believe economic expansion should continue, but we don't look for excesses to
develop that would cause inflation concerns. Bond market yields have become
increasingly efficient at moving to offset the impact of any growth that appears
to be above or below the long-term non-inflationary trend. This has contributed
to a dampening of volatility of the business cycle, and we see nothing ahead
that would disrupt this pattern. This, in turn, suggests continued positive
prospects for the bond market in the year ahead.
Sincerely,
/s/ Mark H. Williamson
Mark H. Williamson
President
June 30, 1997
- ---------------
*PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
1
<PAGE> 4
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 1)
=============================================================================================
<S> <C> <C>
MORTGAGE-BACKED SECURITIES -- 80.3%
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) -- 26.8%
REMIC:
$ 3,585,198 Series 1489 VB, CMO, Inverse Floater, 6.686% 10/15/07**........... $ 3,220,673
4,000,000 Series 1544 SA, CMO, TAC, Inverse Floater, 7.150% 07/15/08**...... 3,691,689
1,861,171 Series 1550 SD, CMO, TAC, Inverse Floater, 5.571% 07/15/08**...... 1,597,559
5,115,354 Series 1693 SC, CMO, TAC, Inverse Floater, 5.60% 03/15/09**....... 3,997,880
10,000,000 Series 1720 E, CMO, VADM, 7.500% 12/15/09......................... 9,998,924
6,563,096 Series 1688 M, CMO, SEQ, 6.000% 08/15/13.......................... 6,124,714
2,936,000 Series 1437 W, CMO, PAC, Inverse Floater, 8.166% 11/15/19**....... 2,804,361
1,448,999 Series 1644 NB, PAC, Inverse Floater, 5.60% 12/15/23**............ 1,328,043
-----------
32,763,843
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- 46.1%
REMIC:
10,000,000 Certificate 93-12 ED, CMO, VADM, 7.500% 02/25/06.................. 10,285,510
10,000,000 Certificate 92-193 HD, CMO, PAC, 7.000% 11/25/07.................. 10,030,511
3,128,864 Certificate 93-214 SP, CMO, PAC, Inverse Floater, 4.274%
12/25/08**...................................................... 2,853,710
1,738,276 Certificate 93-231 SA, CMO, Inverse Floater, 5.344% 12/25/08**.... 1,478,349
10,000,000 Certificate 94-82 B, CMO, TAC, 8.000% 03/25/17.................... 10,141,167
10,000,000 Certificate 93-2 G, CMO, PAC, 7.000% 01/25/18..................... 10,024,036
2,547,595 Certificate 91-162 SA, PAC, Inverse Floater, 10.23% 04/25/20**.... 2,563,945
5,073,852 Certificate 93-247 SK, CMO, TAC, Inverse Floater, 9.559%
02/25/23**...................................................... 5,074,195
2,547,367 Certificate 93-179 SG, TAC, Inverse Floater, 5.036% 10/25/23**.... 2,313,233
1,713,261 Certificate 93-202 VB, PAC, Inverse Floater, 5.165% 11/25/23**.... 1,550,801
-----------
56,315,457
-----------
WHOLE LOAN COLLATERAL -- 7.4%
5,000,000 General Electric Capital Mortgage Services Inc., CMO, TAC,
Series 1994-13, Class A-8, 6.500% 04/25/24...................... 4,623,654
4,730,303 Residential Funding Mortgage, CMO, TAC,
Series 1993-S48, Class A-8, 6.500% 12/25/08..................... 4,460,991
-----------
9,084,645
-----------
TOTAL MORTGAGE-BACKED SECURITIES (Cost $98,789,246)............... 98,163,945
===========
MUNICIPAL BONDS -- 10.9%
3,340,000 Conroe, Texas, Independent School District, 5.500% 02/01/04***.... 2,418,828
2,000,000 Kentucky State Turnpike Authority, Development Revenue, 5.034%
01/01/04***..................................................... 1,463,580
2,080,000 Lower Colorado River Authority, Texas, Series B 5.450%
01/01/04***..................................................... 1,520,210
2,500,000 San Antonio, Texas, Electric and Gas Revenue, 5.037%
02/01/04***..................................................... 1,810,500
3,165,000 Texas State Capital Appreciation, 5.160% 04/01/04***.............. 2,273,451
3,845,000 University of Illinois, Revenue Auxiliary, 5.050% 04/01/04***..... 2,752,828
1,500,000 Washington State Public Power Supply, 5.300% 07/01/04***.......... 1,060,725
-----------
TOTAL MUNICIPAL BONDS (Cost $13,091,601).......................... 13,300,122
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
2
<PAGE> 5
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED) JUNE 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 1)
==============================================================================================
<S> <C> <C> <C>
U.S. TREASURY OBLIGATIONS -- 8.3%
U.S. TREASURY BILL -- 0.1%
$ 165,000 5.100% 09/25/97***................................................ $ 163,080
U.S. TREASURY NOTE -- 7.5%
9,220,000 5.875% 02/15/04................................................... 8,930,435
190,000 6.000% 11/30/97................................................... 190,327
U.S. TREASURY STRIP -- 0.7%
1,172,000 6.138% 11/15/01***................................................ 891,001
------------
TOTAL U.S. TREASURY OBLIGATIONS (Cost $9,995,666)................. 10,174,843
============
TOTAL INVESTMENTS (Cost $121,876,513*)................................. 99.5% 121,638,910
OTHER ASSETS AND LIABILITIES (NET)..................................... 0.5 634,835
----- ------------
NET ASSETS............................................................. 100.0% $122,273,745
===== ============
</TABLE>
- ---------------
* Aggregate cost for Federal tax purposes.
** Current coupon rate at June 30, 1997.
*** Zero Coupon Security. 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
SEE NOTES TO FINANCIAL STATEMENTS.
3
<PAGE> 6
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $121,876,513) (Note 1)
See accompanying schedule.................................. $121,638,910
Cash......................................................... 17,917
Interest receivable.......................................... 673,109
Receivable for investment securities sold.................... 35,200
Unamortized organization costs (Note 5)...................... 3,000
Prepaid expenses............................................. 2,508
------------
Total Assets............................................ 122,370,644
LIABILITIES:
Payable for repurchase of common shares (Note 4)............. $49,590
Accrued legal and audit fees................................. 21,955
Accrued shareholder reports expense.......................... 9,780
Transfer agent fees payable (Note 2)......................... 8,076
Custodian fees payable (Note 2).............................. 1,975
Administration fee payable (Note 2).......................... 3,333
Accrued directors' fees and expenses (Note 2)................ 750
Accrued expenses and other payables.......................... 1,440
-------
Total Liabilities....................................... 96,899
------------
NET ASSETS........................................................ $122,273,745
============
NET ASSETS consist of: (Note 7)
Undistributed net investment income.......................... $ 988,609
Accumulated net realized loss on investments sold............ (2,735,050)
Net unrealized depreciation of investments................... (237,603)
Common Stock at par value (Note 4)........................... 13,040
Paid-in capital in excess of par value....................... 124,244,749
------------
Total Net Assets........................................ $122,273,745
============
NET ASSET VALUE PER SHARE:
($122,273,745 / 13,040,106 shares of common stock
outstanding)................................................. $9.38
=====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE> 7
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest..................................................... $5,113,629
----------
EXPENSES:
Investment advisory fee (Note 2)............................. $ 304,341
Administration fee (Note 2).................................. 152,170
Transfer agent fees (Note 2)................................. 48,316
Legal and audit fees......................................... 32,036
Custodian fees (Note 2)...................................... 12,872
Directors' fees and expenses (Note 2)........................ 3,750
Amortization of organization costs (Note 5).................. 900
Other........................................................ 52,066
Fees waived by investment adviser and administrator (Note
2).......................................................... (436,511)
---------
Total Expenses.......................................... 169,940
Fees reduced by credits allowed by the custodian (Note 2).... (2,730)
---------
Net Expenses............................................ 167,210
----------
NET INVESTMENT INCOME............................................. 4,946,419
----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(NOTES 1 AND 3):
Net realized gain/(loss) on investments sold during the
period...................................................... (72,398)
Net change in unrealized appreciation/(depreciation) of
investments during the period............................... 455,743
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS................... 383,345
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............. $5,329,764
==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE> 8
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
06/30/97 ENDED
(UNAUDITED) 12/31/96
===========================
<S> <C> <C>
Net investment income............................................. $ 4,946,419 $ 9,977,175
Net realized gain/(loss) on investments sold...................... (72,398) 16,959
Net change in unrealized appreciation/(depreciation) of
investments..................................................... 455,743 (4,630,719)
------------ ------------
Net increase in net assets resulting from operations.............. 5,329,764 5,363,415
Distributions to shareholders from net investment income.......... (4,224,856) (8,973,253)
Net decrease in net assets from Company share transactions
(Note 4)........................................................ (4,404,380) (4,005,860)
Increase due to capital contribution (Note 7)..................... -- 8,800,880
------------ ------------
Net increase/(decrease) in net assets............................. (3,299,472) 1,185,182
NET ASSETS:
Beginning of period............................................... 125,573,217 124,388,035
------------ ------------
End of period (including undistributed net investment income of
$988,609 and $267,046 respectively)............................. $122,273,745 $125,573,217
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE> 9
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR YEAR PERIOD
06/30/1997+++ ENDED ENDED ENDED
(UNAUDITED) 12/31/96+++ 12/31/95 12/31/94*
============= =========== ======== =========
<S> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning of period...... $ 9.27 $ 8.86 $ 7.62 $ 9.45#
-------- -------- -------- --------
Net investment income..................... 0.37 0.72 0.66 0.57
Net realized and unrealized gain/(loss) on
investments............................. 0.02 (0.33) 1.23 (1.85)
-------- -------- -------- --------
Net increase/(decrease) in net assets
resulting from investment operations.... 0.39 0.39 1.89 (1.28)
Distributions to shareholders:
Dividends from net investment income...... (0.32) (0.65) (0.64) (0.55)
Distributions in excess of net investment
income.................................. -- -- (0.01) --
-------- -------- -------- --------
Total distributions....................... (0.32) (0.65) (0.65) (0.55)
Increase from repurchase of common shares
(Note 4)................................ 0.04 0.04 -- --
Increase due to capital contribution (Note
7)...................................... -- 0.63 -- --
-------- -------- -------- --------
Net increase/(decrease) in net assets..... 0.11 0.41 1.24 (1.83)
-------- -------- -------- --------
Net asset value, end of period............ $ 9.38 $ 9.27 $ 8.86 $ 7.62
======== ======== ======== ========
Market value, end of period............... $ 8.500 $ 8.000 $ 8.000 $ 6.875
======== ======== ======== ========
Total return++............................ 11.05% 8.27% 26.29% (22.12)%
======== ======== ======== ========
Ratios to average net assets/supplemental
data:
Net assets, end of period (in 000's)...... $122,274 $125,573 $124,388 $106,940
Ratio of operating expenses to average net
assets.................................. 0.27%+ 0.29% 0.56% 0.95%+
Ratio of net investment income to average
net assets.............................. 8.13%+ 8.01% 7.97% 8.27%+
Portfolio turnover rate................... 0% 4% 88% 259%
Ratio of operating expenses to average net
assets without fees reduced by credits
allowed by the custodian................ 0.28%+ 0.30% 0.57% --
Ratio of operating expenses to average net
assets without waivers, reimbursements
and/or fees reduced by credits allowed
by the custodian........................ 1.00%+ 1.01% 1.09% N/A
Net investment income per share without
waivers, reimbursements and/or fees
reduced by credits allowed by the
custodian............................... $ 0.34 $ 0.65 $ 0.62 N/A
</TABLE>
- ---------------
* 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.
+++ Per share amounts have been calculated using the monthly average shares
method.
# Initial offering price net of sales commissions of $0.55 per share.
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE> 10
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
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.
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.
Securities Transactions and Investment Income: Securities transactions are
accounted for on the trade date. 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 the accrual
basis.
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.
Dividend 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 elect 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.
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
8
<PAGE> 11
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
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 June 30,
1997, NBAI voluntarily waived fees of $304,341.
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 June 30, 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 June 30, 1997, NationsBank
voluntarily waived fees of $132,170.
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 of First Data are paid out of the fees paid
to NationsBank by the Company pursuant to the Administration Agreement.
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.
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 June 30, 1997, the earnings credit
was $2,730.
First Data also serves as the transfer agent and dividend disbursing agent
for the Company.
3. SECURITIES TRANSACTIONS.
For the six months ended June 30, 1997, the cost of purchases and proceeds
from sales of long-term U.S. government securities aggregated $425,814 and
$5,412,590, respectively.
9
<PAGE> 12
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
At June 30, 1997, gross unrealized appreciation and depreciation for tax
purposes was $1,825,206 and $2,062,809, respectively.
4. COMMON STOCK.
At June 30, 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 June 30, 1997, the Company repurchased 509,842 shares of its
common stock in the open market at a cost of $4,404,380 and an average discount
of approximately 9% 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
06/30/97 12/31/96
---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
====================== ======================
<S> <C> <C> <C> <C>
Issued as reinvestment of dividends.............. -- -- -- --
Shares repurchased by the Company................ (509,842) $(4,404,380) (490,718) $(4,005,860)
-------- ----------- -------- -----------
Total decrease................................... (509,842) $(4,404,380) (490,718) $(4,005,860)
======== =========== ======== ===========
</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 June 30, 1997 the Company had available for Federal income tax
purposes a capital loss carryforward of $3,257,997 expiring in the year 2002.
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 of February 15, 2004.
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
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 period ended June 30, 1997 the Company had
not borrowed under the Agreement.
10
<PAGE> 13
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
- --------------------------------------------------------------------------------
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 Investor Services Group, Inc. (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 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 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
11
<PAGE> 14
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
- --------------------------------------------------------------------------------
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 2004, Inc., Dividend
Reinvestment Plan, c/o First Data Investor Services Group, Inc., P.O. Box 34602,
Charlotte, NC 28234, (800) 982-2271.
12
<PAGE> 15
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
- --------------------------------------------------------------------------------
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.
13
<PAGE> 16
NATIONS GOVERNMENT INCOME TERM TRUST 2004, INC.
- --------------------------------------------------------------------------------
ANNUAL MEETING OF STOCKHOLDERS
- --------------------------------------------------------------------------------
ANNUAL MEETING OF STOCKHOLDERS
On June 6, 1997, the Company held its Annual Meeting of Stockholders in
Charlotte, North Carolina. A. Max Walker was re-elected as a Director of the
Company for an additional three-year term, to expire in 2000, by the following
votes: 9,874,392 For, and 104,745 Withheld. In the only other matter voted upon
at the Annual Meeting, the selection of Price Waterhouse LLP as the Company's
independent public accountant for the fiscal year ending December 31, 1997, was
ratified by the following votes: 9,743,080 For, 49,484 Against, and 186,573
Abstaining.
14
<PAGE> 17
============
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 6/97
