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MORLEY CAPITAL ACCUMULATION FUND
SUPPLEMENT DATED SEPTEMBER 17, 1999
TO
PROSPECTUS DATED FEBRUARY 1, 1999
Effective September 1, 1999, the fund administration services previously
performed for The Morley Capital Accumulation Fund by Nationwide Advisory
Services, Inc. ("NAS") were transferred to Villanova SA Capital Trust ("VSA"),
an affiliate of NAS and an indirect subsidiary of Nationwide Financial Services,
Inc. After the transfer, there was no change in the fees charged to the Fund for
fund administration services.
VSA was organized in 1999 and has its principal offices at Three Nationwide
Plaza, Columbus, Ohio 43215.
All references in the Prospectus to Nationwide Advisory Services, Inc. in its
capacity as the Fund's administrator should be changed to Villanova SA Capital
Trust. Nationwide Advisory Services, Inc. remains the Fund's distributor.
INVESTORS SHOULD RETAIN THIS SUPPLEMENT WITH THE
PROSPECTUS FOR FUTURE REFERENCE
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STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 1, 1999 (REVISED SEPTEMBER 17, 1999)
NATIONWIDE MUTUAL FUNDS
(FORMERLY NATIONWIDE INVESTING FOUNDATION III)
MORLEY CAPITAL ACCUMULATION FUND
This Statement of Additional Information is not a prospectus. It
contains information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus, dated February
1, 1999, as supplemented September 17, 1999 for the Morley Capital Accumulation
Fund (the "Fund"). The Prospectus provides the basic information investors
should know before investing and may be obtained without charge by calling the
Transfer Agent at 1-800-848-0920.
This Statement of Additional Information is not an offer by the Fund to
an investor that has not received a Prospectus. No broker/dealer, sales
representative, or other person has been authorized to give any information or
to make any representations other than those contained in the Prospectus and
this Statement of Additional Information, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Fund. This Statement of Additional Information does not constitute an
offer or solicitation by anyone in any state in which such offer or solicitation
is not authorized, or in which the person making such offer or solicitation is
not qualified to do so, or to any person to whom it is unlawful to make such
offer or solicitation. Capitalized terms not otherwise defined in this Statement
of Additional Information have the meanings accorded to them in the Prospectus.
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<TABLE>
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Table of Contents
Page
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INVESTMENT OBJECTIVES AND POLICIES............................................................. 1
ADDITIONAL INFORMATION ABOUT FUND INVESTMENTS AND RISK CONSIDERATIONS.................. 1
INVESTMENT RESTRICTIONS................................................................ 11
PORTFOLIO TURNOVER..................................................................... 12
FUND TRANSACTIONS AND BROKERAGE ALLOCATION............................................. 12
MANAGEMENT OF THE FUND......................................................................... 14
TRUSTEES AND OFFICERS.................................................................. 14
INVESTMENT ADVISORY AND OTHER SERVICES................................................. 16
REDEMPTION OF FUND SHARES...................................................................... 20
TAXATION....................................................................................... 21
FINANCIAL STATEMENTS........................................................................... 24
PERFORMANCE INFORMATION........................................................................ 24
APPENDIX....................................................................................... 26
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Fund is to provide investors with a high
level of current income while preserving principal and maintaining a stable net
asset value per share. The Fund seeks to achieve its investment objectives by
investing its net investable assets in a diversified portfolio of investment
grade securities, money market instruments, options, futures and other
instruments ("Securities") and by entering into book value benefit responsive
agreements ("Wrapper Agreements") (together "Portfolio Securities") with large
financial institutions, such as banks and insurance companies. There can, of
course, be no assurance that the Fund will achieve its investment objectives.
The Fund is a separate series of Nationwide Mutual Funds (formerly Nationwide
Investing Foundation III) (the "Trust"), an open end management investment
company created as a business trust under the laws of Ohio by a Declaration of
Trust dated as of October 30, 1997, as subsequently amended.
ADDITIONAL INFORMATION ABOUT FUND INVESTMENTS AND RISK CONSIDERATIONS
The following is a discussion of certain investments of, and techniques
employed by, the Fund.
Financial Services Industry Obligations. The Fund may hold short-term
investments in each of the following obligations of the financial services
industry:
(1) Certificates of Deposit. Certificates of deposit are
negotiable certificates evidencing the indebtedness of a commercial bank
or a savings and loan association to repay funds deposited with it for a
definite period of time (usually from fourteen days to one year) at a
stated or variable interest rate.
(2) Time Deposits. Time deposits are non-negotiable deposits
maintained in a banking institution or a savings and loan association
for a specified period of time at a stated interest rate.
(3) Bankers' Acceptances. Bankers' acceptances are credit
instruments evidencing the obligation of a bank to pay a draft which has
been drawn on it by a customer, which instruments reflect the obligation
both of the bank and of the drawer to pay the face amount of the
instrument upon maturity.
In addition, the Fund may hold other short-term investments, such as commercial
paper, which are short-term (maturities of 270 days or less) unsecured
promissory notes issued by corporations.
Mortgage-Related Securities. Mortgage-related securities include
securities representing interests in a pool of mortgages. These securities,
which may be issued by FNMA, GNMA and FHLMC, provide investors with payments
consisting of both interest and principal as the mortgages in the underlying
mortgage pools are repaid. The Fund will invest in pools of mortgage loans
assembled for sale to investors by agencies or instrumentalities of the U.S.
Government and by non-governmental entities such as banks, mortgage lenders,
other financial institutions and special purpose vehicles thereof
("Non-Governmental Entities"). Unscheduled or early payments on the underlying
mortgages may shorten the securities' effective maturities.
Other types of securities representing interests in a pool of mortgage
loans are known as collateralized mortgage obligations ("CMOs") and real estate
mortgage investment conduits ("REMICS"). CMOs and REMICs are debt instruments
collateralized by pools of mortgage loans or other mortgage-backed securities.
Multi-class pass-through securities are equity interests in a trust composed of
mortgage loans or other
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mortgage-backed securities. Payments of principal and interest on underlying
collateral provides the funds to pay debt service or make scheduled
distributions on the multi-class pass-through securities. The Fund may invest in
CMOs, REMICs and multi-class pass-through securities (collectively, "CMOs"
unless the context indicates otherwise) issued by agencies or instrumentalities
of the U.S. Government (such as FHLMC) or by Non-Governmental Entities.
CMOs may be issued with a variety of classes or "tranches," which have
different maturities and are often retired in sequence. One or more tranches of
a CMO may have coupon rates which reset periodically at a specified increment
over an index such as the London Interbank Offered Rate. These "Floating Rate
CMOs" typically are issued with lifetime "caps" on their coupon rate, which
means that there is a ceiling beyond which the coupon rate may not be increased.
The coupon rate on some Floating Rate CMOs may change as a multiple of the
change in the relevant interest rate. As a result, any increase in the index
rate may cause a correspondingly greater increase in the coupon rate, and any
decrease in the index rate may cause a correspondingly greater decrease in the
coupon rate of such Floating Rate CMOs. Likewise, changes in the index rate will
have an increased effect on the market value of such Floating Rate CMOs,
although in the opposite direction from the change in the index rate.
REMICS, which have elected to be treated as such under the Code, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities. As with other CMOs, the mortgages which
collateralize the REMICs in which a Fund may invest include mortgages backed by
GNMA certificates or other mortgage pass-through securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities and by
Non-Governmental Entities.
The average life of securities representing interests in pools of
mortgage loans is likely to be substantially less than the original maturity of
the mortgage pools as a result of prepayments or foreclosures of such mortgages.
Prepayments are passed through to the registered holder with the regular monthly
payments of principal and interest, and have the effect of reducing future
payments. To the extent the mortgages underlying a security representing an
interest in a pool of mortgages are prepaid, the Fund may experience a loss (if
the price at which the security was acquired by the Fund was at a premium over
par, which represents the price at which the security will be redeemed upon
prepayment). In addition, prepayments of such securities held by the Fund will
reduce their par value.
Furthermore, the prices of mortgage-related securities can be
significantly affected by changes in interest rates. Prepayments may occur with
greater frequency in periods of declining mortgage rates because, among other
reasons, it may be possible for mortgagors to refinance their outstanding
mortgages at lower interest rates. In such periods, it is likely that any
prepayment proceeds would be reinvested by the Fund at lower rates of return.
However, rising mortgage rates will normally decrease the price of
mortgage-backed securities. In the case of floating rate CMOs issued with a
coupon rate cap, this decrease will usually accelerate as mortgage rates come
closer to the capped rate. Further, an increase in such rates may affect the
volatility of these securities since it is likely that the prepayment rate will
decrease. In that event, a security that was considered a short-term security at
the time of purchase could effectively be changed into a long-term security,
which generally fluctuates more widely in response to changes in interest rates
than short- or intermediate-term securities.
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STRIPS. The Federal Reserve creates STRIPS (Separate Trading of
Registered Interest and Principal of Securities) by separating the coupon
payments and the principal payment from an outstanding Treasury security and
selling them as individual securities. To the extent the Fund purchases the
principal portion of the STRIPS, the Fund will not receive regular interest
payments. Instead they are sold at a deep discount from their face value. The
Fund will accrue income on such STRIPS for tax and accounting purposes, in
accordance with applicable law, which income is distributable to shareholders.
Because no cash is received at the time such income is accrued, the Fund may be
required to liquidate other Securities to satisfy its distribution obligations.
Because the principal portion of the STRIP does not pay current income, its
price can be volatile when interest rates change. In calculating its dividend,
the Fund takes into account as income a portion of the difference between the
principal portion of the STRIP's purchase price and its face value.
When-Issued and Delayed Delivery Securities. The Fund may purchase
securities on a when-issued or delayed delivery basis, with delivery and payment
for the securities normally taking place 15 to 45 days after the date of the
transaction. Such an agreement to purchase securities is termed a "forward
commitment." The payment obligation and the interest rate that will be received
on the securities are each fixed at the time the buyer enters into the
commitment.
The Fund may enter into such forward commitments if the Fund holds, and
maintains until the settlement date in a segregated account or segregated on the
books of the Fund, cash or any security that is not considered restricted or
illiquid, equal to the value of the Fund's commitment and marked to market
daily. There is no percentage limitation on the Fund's total assets which may be
invested in forward commitments. The purchase of securities on a when-issued,
delayed delivery or forward commitment basis exposes the Fund to risk because
the securities may decrease in value prior to their delivery. Purchasing
securities on such a basis involves the additional risk that the return
available in the market when the delivery takes place will be higher than that
obtained in the transaction itself. There is also a risk that the securities may
not be delivered or that the Fund may incur a loss or will have lost the
opportunity to invest the amount segregated for such transaction. Although the
Fund will generally enter into forward commitments with the intention of
acquiring securities, the Fund may dispose of a commitment prior to settlement
if UBT deems it appropriate to do so. The Fund may realize short-term profits or
losses upon the sale of securities purchased on a forward commitment basis.
U.S. Government and Agency Obligations. The Fund may invest in
obligations issued or guaranteed by U.S. Government, its agencies or its
instrumentalities. U.S. Treasury bonds, notes, and bills and some agency
securities, such as those issued by the Federal Housing Administration and GNMA,
are backed by the full faith and credit of the U.S. Government as to payment of
principal and interest and are the highest quality government securities. Other
securities issued by U.S. Government agencies or instrumentalities, such as
securities issued by the Federal Home Loan Banks and FHLMC, are supported only
by the credit of the agency that issued them, and not by the U.S. Government.
Securities issued by the Federal Farm Credit System, the Federal Land Banks, and
FNMA are supported by the agency's right to borrow money from the U.S. Treasury
under certain circumstances, but are not backed by the full faith and credit of
the U.S.
Government.
Futures Contracts and Options on Futures Contracts -- General. The
successful use of these instruments draws upon UBT's skill and experience with
respect to such instruments and usually depends on its ability to forecast
interest rate movements correctly. If interest rates move in an unexpected
manner, the Fund may not achieve the anticipated benefits of futures contracts
or options thereon or may realize losses and thus will be in a
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worse position than if such strategies had not been used. In addition, the
correlation between movements in the price of futures contracts or options
thereon and movements in the price of the securities hedged or used for cover
will not be perfect and could produce unanticipated losses.
Futures Contracts. The Fund may enter into contracts for the purchase or
sale for future delivery of Fixed Income Securities or contracts based on
financial indices, including any index of U.S. Government securities, foreign
government securities or corporate debt securities. The Fund also may enter into
futures contracts based on debt securities that are backed by the full faith and
credit of the U.S. Government, such as long-term U.S. Treasury bonds, U.S.
Treasury notes, GNMA modified pass-through mortgage-backed securities and
three-month U.S. Treasury bills, and futures contracts that are based on bonds
issued by entities other than the U.S. Government.
A futures contract is an agreement to buy or sell a security (or deliver
a final cash settlement price in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contracts) for a set price in the future. Futures exchanges and trading in
futures are regulated by the Commodity Futures Trading Commission ("CFTC") under
the Commodity Exchange Act. Futures contracts trade on certain regulated
contracts markets.
When a futures contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("initial margin"). It is expected that
the initial margin will approximately equal 1% to 5% of a contract's face value.
Daily thereafter, the futures contract is valued, and the Fund may have to
provide additional margin or may receive back margin based upon declines or
increases in the contract's value ("variation margin").
Positions in the futures markets usually are not held until delivery or
cash settlement is required. Instead, those positions usually are liquidated by
buying (or selling, as the case may be) an offsetting position consisting of an
identical futures contract calling for delivery in the same month. Where it
appears economically beneficial to the Fund, however, the Fund may instead take
delivery of underlying securities. A clearing organization associated with the
exchange on which futures are traded assumes responsibility for closing-out
transactions and guarantees that, as between the clearing members of an
exchange, the sale and purchase obligations will be performed with regard to all
positions that remain open at the termination of the contract. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded,
the Fund will incur brokerage fees when it purchases or sells futures contracts.
The purpose of the Fund's acquisition or sale of a futures contract is
to attempt to establish more certainty with respect to the effective rate of
return on its Securities. For example, if interest rates were expected to
increase (which would cause the prices of debt securities to decline), the Fund
might enter into futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling an equivalent value of the debt
securities owned by the Fund. If interest rates did increase, the value of the
debt securities held by the Fund would decline, but the value of the futures
contracts to the Fund would increase at approximately the same rate. Moreover,
the Fund would be able to use the increase in the value of the futures contracts
to purchase additional interest-bearing instruments, thereby to some extent
reducing any difference that might otherwise develop between the Fund's current
yield and the yield on newly-issued instruments of similar duration and credit
quality.
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Similarly, when it is expected that interest rates may decline (thus
increasing the value of debt securities), the Fund may purchase futures
contracts for the acquisition of debt securities to attempt to hedge against
anticipated purchases of debt securities at higher prices. Since the
fluctuations in the value of futures contracts should be similar to those of the
underlying debt securities, the Fund could take advantage of the anticipated
rise in the value of debt securities without actually buying them until the
market had stabilized. To the extent the Fund enters into futures contracts for
this purpose, the assets in the segregated asset account maintained to cover the
Fund's obligations with respect to such futures contracts will consist of cash,
cash equivalents or liquid securities from its portfolio in an amount equal to
the difference between the fluctuating market value of such futures contracts
and the aggregate value of the initial and additional margin payments made by
the Fund with respect to such futures contracts.
The Fund could accomplish similar results by selling debt securities
with long maturities and investing in bonds with short maturities when interest
rates are expected to increase, and by buying debt securities with long
maturities and selling debt securities with short maturities when interest rates
are expected to decline. However, since the futures market may be more liquid
than the cash market, the use of futures contracts as a risk management
technique may enable the Fund to accomplish the same result more effectively and
perhaps at a lower cost.
As noted above, futures contracts entail risk. Although UBT believes
that the use of such contracts will benefit the Fund, if its investment judgment
about the general direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any such contract.
For example, if the Fund has hedged against the possibility of an increase in
interest rates and interest rates instead decrease, the Fund will lose part or
all of the benefit of the increased value of its debt securities that it has
hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Fund has insufficient cash to meet a daily
additional margin requirement, it may have to sell Securities at a time when it
would be disadvantageous to do so.
Options on Futures Contracts. The Fund may purchase and write (sell)
options on futures contracts for hedging purposes. These options are traded on
exchanges that are licensed and regulated by the CFTC for the purpose of options
trading. A call option on a futures contract gives the purchaser the right, in
return for the premium payment, to purchase a futures contract at a specified
price at any time before the option expires. A put option gives the purchaser
the right, in return for the premium paid, to sell a futures contract at a
specified exercise price at any time before the option expires.
Options on futures contracts can be used by the Fund to hedge the same
risks as might be addressed by the direct purchase or sale of the underlying
futures contracts themselves. Depending on the pricing of the option, compared
to either the futures contract upon which it is based or the price of the
underlying securities themselves, it may or may not be less risky than direct
ownership of the futures contracts or the underlying securities.
In contrast to a futures transaction, in which only transaction costs
are involved, benefits received by the Fund as a purchaser in an option
transaction will be reduced by the amount of the premium paid in addition to
transaction costs. In the event of an adverse market movement, however, the Fund
will not be subject to a risk of loss on the option transaction, other than loss
of the premium paid and transaction costs. Consequently, the
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Fund may benefit more from a favorable movement in the value of its Securities
than it would have benefited if the hedge had been effected through the use of
futures.
If the Fund writes call options on futures contracts, the Fund will
receive a premium but will assume a risk of adverse movement in the price of the
underlying futures contract comparable to that involved in holding a futures
position. If the option is not exercised, the Fund will realize a gain in the
amount of the premium, which may partially offset unfavorable changes in the
value of the securities held by, or to be acquired for, the Fund. If the option
is exercised, the Fund will incur a loss in the option transaction. This loss is
reduced by the amount of premium received and may be partially offset by
favorable changes in the value of its Securities.
While the purchaser or writer of an option on a futures contract may
normally terminate its position by selling or purchasing an offsetting option of
the same series, the Fund's ability to establish and close out options positions
at fairly established prices will depend on the existence of a liquid market.
The Fund will not purchase or write options on futures contracts unless, in
UBT's opinion, the market for such options has sufficient liquidity that the
risks associated with such options transactions are at acceptable levels.
The Fund will not enter into any futures contract or option on a futures
contract if immediately thereafter the amount of margin deposits on all the
futures contracts held by the Fund and premiums paid on outstanding options on
its futures contracts (other than those entered into for bona fide hedging
purposes) would exceed 5% of market value of the Fund's total assets.
Options on Securities. The Fund may purchase and write (sell) put and
call options. Such options have various types of underlying instruments,
including specific securities, indices of securities prices. By purchasing a put
option, the Fund obtains the right (but not the obligation) to sell the option's
underlying instrument at a fixed "strike" price. In return for this right, the
Fund pays the current market price of the option (known as the option premium).
The Fund may terminate its position in a put option it has purchased by allowing
it to expire or by exercising the option. If the option is allowed to expire,
the Fund will lose the entire premium it paid. If the Fund exercises the option,
it completes the sale of the underlying instrument at the "strike" price. The
Fund also may terminate a put option position by closing it out in the secondary
market at its current price, if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if
security prices fall substantially. However, if the underlying instrument's
price does not fall enough to offset the cost of purchasing the option, a put
buyer can expect to suffer a loss (limited to the amount of the premium paid,
plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's "strike"
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to suffer
a loss if the underlying prices do not rise sufficiently to offset the cost of
the option.
When the Fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
the Fund assumes the obligation to pay the "strike" price for the option's
underlying instrument if the other party to the option chooses to exercise it.
Therefore, the Fund will assume the risk of loss should the price of the
underlying instrument fall below the exercise price.
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Writing a call option obligates the Fund to sell or deliver the option's
underlying instrument, in return for the "strike" price, upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if the underlying prices remain the same or fall. Through receipt of
the option premium, a call writer mitigates the effects of a price decline. At
the same time, because a call writer must be prepared to deliver the underlying
instrument in return for the "strike" price, even if its current value is
greater, a call writer gives up some ability to participate in the underlying
price increases.
The Fund may purchase and write options in combination with other
options, or in combination with futures or forward contracts, to adjust the risk
and return characteristics of the overall position. For example, the Fund may
purchase a put option and write a call option on the same underlying instrument,
in order to construct a combined position whose risk and return characteristics
are similar to selling a futures contract. Another possible combined position
would involve writing a call option at one "strike" price and buying a call
option at a lower price, in order to reduce the risk of the written call option
in the event of a substantial price increase. Because combined options positions
involve multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
The Fund may write (sell) covered call and put options on its Securities
("covered options") to a limited extent in an attempt to increase income.
However, the Fund may forego the benefits of appreciation on securities sold or
may pay more than the market price on securities acquired pursuant to call and
put options it writes. A call option written by a Fund is "covered" if the Fund
owns the underlying security covered by the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or for additional cash consideration held in a segregated account by its
custodian) upon conversion or exchange of other securities held in its
portfolio. A call option is also covered, if the Fund holds a call option on the
same security and in the same principal amount as the written call option where
the exercise price of the call option so held (a) is equal to or less than the
exercise price of the written call option or (b) is greater than the exercise
price of the written call option if the difference is maintained by the Fund in
cash, U.S. Government securities and other high quality liquid securities in a
segregated account with its custodian.
If a covered call option expires unexercised, the Fund will realize
income in an amount equal to the premium received for writing the option. If the
option is exercised, a decision over which the Fund has no control, the Fund
must sell the underlying security to the option holder at the exercise price. By
writing a covered call option, the Fund foregoes, in exchange for the net
premium, the opportunity to profit during the option period from an increase in
the market value of the underlying security above the exercise price.
If a put option expires unexercised, the Fund will realize income in the
amount of the net premium received for writing the option. If the put option is
exercised, a decision over which the Fund has no control, the Fund must purchase
the underlying security from the option holder at the exercise price. By writing
a put option, the Fund, in exchange for the net premium, accepts the risk of a
decline in the market value of the underlying security below the exercise price.
The Fund will only write put options involving securities for which a
determination is made at the time the option is written that the Fund wishes to
acquire securities at the exercise price.
The writing of covered call options may be deemed to involve the pledge
of the securities against which
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the option is being written. Securities against which call options are written
will be segregated on the books of the custodian for the Fund.
The Fund may purchase call and put options on any securities in which it
may invest. The Fund would normally purchase a call option in anticipation of an
increase in the market value of such securities. The Fund would normally
purchase put options in anticipation of a decline in the market value of
securities in its portfolio ("protective puts") or securities of the type in
which it is permitted to invest. The purchase of protective puts is designed
merely to offset or hedge against a decline in the market value of the Fund's
holdings.
Put options also may be purchased by the Fund to seek to benefit from a
decline in the price of securities that the Fund does not own. The Fund would
ordinarily recognize a gain if the value of the securities decreased below the
exercise price sufficiently to cover the premium and would recognize a loss if
the value of the securities remained at or above the exercise price. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying Securities.
The Fund has adopted certain non-fundamental policies concerning option
transactions that are discussed below. The Fund's activities in options may also
be restricted by the requirements of the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. If the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying securities markets that will not
be reflected in the option markets. It is impossible to predict the volume of
trading that may exist in such options, and there can be no assurance that
viable exchange markets will develop or continue.
The Fund may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately ten
broker-dealers, including several of the largest primary dealers in U.S.
Government securities, make these markets. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions, because the predominant market is the issuing broker rather
than an exchange and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Fund will purchase such options only from broker-dealers who are primary U.S.
Government securities dealers recognized by the Federal Reserve Bank of New York
and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. UBT will monitor the
creditworthiness of dealers with whom the Fund enters into such options
transactions under the general supervision of the Trustees.
Correlation of Price Changes. Because there are a limited number of
types of exchange-traded options and futures contracts, it is likely that the
standardized contracts available will not match a Fund's current or anticipated
investments exactly. The Fund may invest in options and futures contracts based
on securities with different issuers, maturities, or other characteristics from
the securities in which it typically invests.
Options and futures prices also can diverge from the prices of their
underlying instruments even if the underlying instruments match the Fund's
investment well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and
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the time remaining until expiration of the contract, which may not affect the
security prices the same way. Imperfect correlation also may result from:
differing levels of demand in the options and futures markets and the securities
markets, structural differences in how options and futures and securities are
traded, or imposition of daily price fluctuation limits or trading halts. The
Fund may purchase or sell options and futures contracts with a greater or lesser
value than the securities it wishes to hedge or intends to purchase in order to
attempt to compensate for differences in volatility between the contract and the
securities, although this may not be successful in all cases. If price changes
in the Fund's options or futures positions are poorly correlated with its other
investments, the positions may fail to produce anticipated gains or result in
losses that are not offset by gains in other investments.
Liquidity of Options and Futures Contracts. There is no assurance a
liquid secondary market will exist for any particular options or futures
contract at any particular time. Options may have relatively low trading volume,
thereby impacting their liquidity. Additionally, options and futures contracts
are subject to price fluctuation limits. On volatile trading days when the price
fluctuation limit is reached or a trading halt is imposed, it may be impossible
for the Fund to enter into new positions or close out existing positions. If the
secondary market for a contract is not liquid because of price fluctuation
limits or otherwise, it could prevent prompt liquidation of unfavorable
positions, and potentially could require the Fund to continue to hold a position
until delivery or expiration regardless of changes in its value. As a result,
the Fund's access to other assets held to cover its options or futures positions
also could be impaired.
Swaps. A swap is an agreement to exchange the return generated by one
instrument for the return generated by another instrument. The payment streams
are calculated by reference to a specified index and agreed upon single or
periodic fixed amounts. Swaps may be based on fixed interest rates, price
indices, total return on interest rate indices, fixed income indices, stock
indices and commodity indices (as well as amounts derived from arithmetic
operations on these indices).
The Fund may engage in swaps under which one party pays a single or
periodic fixed amount or an amount based upon a specified index, and the other
party pays a periodic amount based on the movement of another specified index.
Swaps do not involve the delivery of securities, other underlying assets, or
principal. Accordingly, the risk of loss under a swap is limited to the net
amount of payments that the Fund is contractually obligated to make. If the
other party to a swap defaults, the Fund's risk of loss consists of the net
amount of payments that the Fund contractually is entitled to receive. If a swap
counterparty defaults, the Fund may have contractual remedies pursuant to the
agreements related to the transaction.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. As a result, the swap market
has become more liquid. Certain swap transactions involve more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than traditional swap
transactions.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Fund's obligations under a swap
agreement (offset against any amounts owing to the Fund) will be accrued daily.
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<PAGE> 13
Swaps are subject to the risk that the swap counterparty may not fulfill
its obligations under the swap agreement. Accordingly, the Board of Trustees has
established credit guidelines for the Fund governing the selection of swap
counterparties. These guidelines establish a minimum credit rating for each swap
counterparty and provide for certain credit enhancement techniques (for example,
collateralization of amounts due from swap counterparties) to limit exposure to
counterparties that have an S&P rating below A.
The use of swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
securities transactions. If UBT is incorrect in its forecasts of market values,
interest rates, and currency exchange rates, the investment performance of the
Fund would be less favorable than it would have been if this investment
technique were not used.
Asset Coverage for Swaps, Futures, and Options Positions. The Fund will
comply with guidelines established by the Securities and Exchange Commission
with respect to coverage of options and futures by mutual funds, and if the
guidelines so require, will segregate cash or U.S. Government securities or
other liquid securities in the amount prescribed. To the extent that any accrued
but unpaid net amounts are owed to a swap counterparty, the Fund may also
segregate assets as described above to cover such amounts and thereby avoid
potential leveraging of the Fund. To the extent that the Fund enters into swaps
for hedging purposes, the Fund believes that such obligations do not constitute
"senior securities" under the 1940 Act and, accordingly, will not treat them as
being subject to the Fund's borrowing restrictions. In the event a large percent
of the Fund's assets are segregated for coverage of swaps, futures and options
positions, the Fund's ability to meet redemption requests or other current
obligations could be adversely affected.
Foreign Securities. The Fund may invest in Fixed Income Securities which
are issued by foreign companies and debt obligations of foreign governments or
international organizations. However, purchases of foreign securities will be
limited to Yankee dollar obligations (U.S. dollar denominated obligations issued
by foreign companies and traded on U.S. markets) and Eurodollar obligations
(U.S. dollar denominated obligations issued by foreign companies and traded on
foreign markets).
Foreign government obligations in which the Fund will invest generally
consists of U.S. dollar denominated debt securities supported by national, state
or provincial governments or similar political units or governmental agencies.
Such obligations may or may not be backed by the national government's full
faith and credit and general taxing powers. Investments in foreign Fixed Income
Securities also include obligations issued by international organizations.
International organizations include entities designated or supported by
governmental entities to promote economic reconstruction or development as well
as international banking institutions and related government agencies. Examples
are the International Bank for Reconstruction and Development (the "World
Bank"), the European Coal and Steel Community, the Asian Development Bank and
the InterAmerican Development Bank.
There may be less information publicly available about a foreign company
or government than about a U.S. company, and foreign companies or governments
are not generally subject to accounting, auditing and financial reporting
standards and practices comparable to those in the U.S. Other risks associated
with investments in foreign Securities include changes in the administrations or
economic and monetary policies of foreign governments, the imposition of
exchange control regulations, the possibility of expropriation decrees and other
adverse foreign governmental action, the imposition of foreign taxes, less
liquid markets, less government supervision of exchanges, brokers and issuers,
difficulty in enforcing contractual obligations, delays
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<PAGE> 14
in settlement of securities transactions and greater price volatility. In
addition, investing in foreign Securities will generally result in higher
commissions than investing in similar domestic securities.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund which cannot
be changed without the authorization of the majority of the outstanding shares
of the Fund for which a change is proposed.
THE FUND:
o May not purchase securities of any one issuer, other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, if, immediately after such purchase, more than 5% of
the Fund's total assets would be invested in such issuer or the Fund
would hold more than 10% of the outstanding voting securities of the
issuer, except that 25% or less of the Fund's total assets may be
invested without regard to such limitations. There is no limit to the
percentage of assets that may be invested in U.S. Treasury bills, notes,
or other obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
o May not borrow money or issue senior securities, except that the Fund
may enter into reverse repurchase agreements and may otherwise borrow
money and issue senior securities as, and to the extent, permitted by
the 1940 Act or any rule, order or interpretation thereunder.
o May not act as an underwriter of another issuer's securities, except to
the extent that the Fund may be deemed an underwriter within the meaning
of the Securities Act in connection with the purchase and sale of
portfolio securities.
o May not purchase or sell real estate, except that the Fund may acquire
real estate through ownership of securities or instruments and may
purchase or sell securities issued by entities or investment vehicles
that own or deal in real estate (including interests therein) or
instruments secured by real estate (including interests therein).
o May not purchase or sell commodities or commodities contracts, except to
the extent disclosed in the current Prospectus of the Fund.
o May not lend any security or make any other loan, except that the Fund
may purchase or hold debt securities and lend portfolio securities in
accordance with its investment objective and policies, make time
deposits with financial institutions and enter into repurchase
agreements.
o May not purchase the securities of any issuer if, as a result, 25% or
more than (taken at current value) of the Fund's total assets would be
invested in the securities of issuers, the principal activities of which
are in the same industry. This limitation does not apply to securities
issued by the U.S. Government or its agencies or instrumentalities and
obligations issued by state, county or municipal governments. The
following industries are considered separate industries for purposes of
this investment restriction: electric, natural gas distribution, natural
gas pipeline, combined electric and natural gas, and telephone
utilities, captive borrowing conduit, equipment finance, premium
finance,
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<PAGE> 15
leasing finance, consumer finance and other finance.
The following are the non-fundamental operating policies of the Fund which may
be changed by the Board of Trustees of the Trust without shareholder approval:
The Fund may not:
o Sell securities short, unless the Fund owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short or
unless it covers such short sales as required by the current rules and
positions of the SEC or its staff, and provided that short positions in
forward currency contracts, options, futures contracts, options on
futures contracts, or other derivative instruments are not deemed to
constitute selling securities short.
o Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions;
and provided that margin deposits in connection with options, futures
contracts, options on futures contracts, transactions in currencies or
other derivative instruments shall not constitute purchasing securities
on margin.
o Purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid.
o Purchase securities of other investment companies except (a) in
connection with a merger, consolidation, acquisition, reorganization or
offer of exchange, or (b) to the extent permitted by the 1940 Act or any
rules or regulations thereunder or pursuant to any exemptions therefrom.
o Pledge, mortgage or hypothecate any assets owned by the Fund in excess
of 33 1/3% of the Fund's total assets at the time of such pledging,
mortgaging or hypothecating.
PORTFOLIO TURNOVER
The Fund will attempt to purchase securities with the intent of holding
them for investment but may purchase and sell portfolio securities whenever UBT
believes it to be in the best interest of the Fund. The Fund will not consider
portfolio turnover rate a limiting factor in making investment decisions
consistent with their investment objective and policies.
The annual portfolio turnover rate for the Fund is not expected to
exceed 50% of the Fund's portfolio. Higher turnover rates (i.e., 100% or more)
will generally result in higher transaction costs to the Fund, as well as higher
brokerage expenses and higher levels of capital gains. The portfolio turnover
rates of the Fund may vary greatly from year to year and within a particular
year.
FUND TRANSACTIONS AND BROKERAGE ALLOCATION
UBT is responsible for decisions to buy and sell securities and other
investments for the Fund, the selection of brokers and dealers to effect the
transaction and the negotiation of brokerage commissions, if any. In
transactions on stock and commodity exchanges in the United States, these
commissions are negotiated, whereas on foreign stock commodity exchanges these
commissions are generally fixed and are generally higher than brokerage
commissions in the United States. In the case of securities traded on the OTC
markets, there is
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<PAGE> 16
generally no commission, but the price includes a spread between the dealer's
purchase and sale price which makes up the dealer's profit. In underwritten
offerings, the price includes a disclosed, fixed commission or discount. Most
short term obligations and other debt obligations are normally traded on a
"principal" rather than agency basis. This may be done through a dealer (e.g.
securities firm or bank) who buys or sells for its own account rather than as an
agent for another client, or directly with the issuer. A dealer's profit, if
any, is the difference, or spread, between the dealer's purchase and sale price
for the obligation.
The primary consideration in portfolio security transactions is "best
price - best execution," i.e., execution at the most favorable prices and in the
most effective manner possible. UBT always attempts to achieve best price - best
execution, and it has complete freedom as to the markets in, and the
broker-dealers through which, it seeks this result. Subject to the requirement
of seeking best execution, securities may be bought from or sold to
broker-dealers who have furnished statistical, research, and other information
or services to UBT. In placing orders with such broker-dealers, UBT will, where
possible, take into account the comparative usefulness of such information. Such
information is useful to UBT even though its dollar value may be indeterminable,
and its receipt or availability generally does not reduce UBT's normal research
activities or expenses.
Fund portfolio transactions may be effected with the broker-dealers who
have assisted investors in the purchase of Contracts. However, neither such
assistance nor sale of other investment company shares is a qualifying or
disqualifying factor in a broker-dealer's selection, nor is the selection of any
broker-dealer based in the volume of shares sold.
There may be occasions when portfolio transactions for the Fund are
executed as part of concurrent authorizations to purchase or sell the same
security for trusts or other accounts served by affiliated companies of UBT.
Although such concurrent authorizations potentially could be either advantageous
or disadvantageous to the Fund, they are effected only when UBT believes that to
do so is on the best interest of the Fund. When such concurrent authorizations
occur, the executions will be allocated in an equitable manner.
The Trustees periodically review UBT's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Fund and review the commissions paid by the Fund over a
representative period of time to determine if they are reasonable in relation to
the benefits of the Fund.
In purchasing or selling investments for the Fund, it is the policy of
UBT to obtain best execution at the most favorable prices through responsible
broker-dealers. In selecting broker-dealers UBT will consider various relevant
factors, including, but not limited to, the size and type of the transaction;
the nature and character of the markets for the security or asset to be
purchased or sold; the execution efficiency, settlement capability, and
financial condition of the broker-dealer's firm; the broker-dealer's execution
services, rendered on a continuing basis; and the reasonableness of any
commissions.
UBT may cause the Fund to pay a broker-dealer who furnishes brokerage
and/or research services a commission that is in excess of the commission
another broker-dealer would have received for executing the transaction if it is
determined that such commission is reasonable in relation to the value of the
brokerage and/or research services (as defined in Section 28(e) of the
Securities and Exchange Act of 1934) which have been provided. Such research
services may include, among other things, analyses and reports concerning
issuers, industries, securities, economic factors and trends, and portfolio
strategy. And such research and other information provided by brokers to UBT is
considered to be in addition to and not in lieu of services required to be
performed by UBT and its subsidiary agreement. The fees to UBT pursuant to its
subsidiary agreement are not reduced by reason of its receiving any brokerage
and research services. The research services provided by broker-dealers can be
useful to the Advisers in serving its other clients of UBT affiliates. Subject
to the policy
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<PAGE> 17
of UBT to obtain best execution at the most favorable prices through responsible
broker-dealers,UBT also may consider the broker-dealer's sale of shares of any
fund for which UBT serves as investment adviser or administrator.
Under the 1940 Act, "affiliated persons" of a Fund are prohibited from
dealing with it as a principal in the purchase and sale of securities unless and
exemptive order allowing such transactions is obtained from the SEC. However,
the Fund may purchase securities from underwriting syndicates of which UBT or
any of its affiliates as defined in the 1940 Act, is a member under certain
conditions, in accordance with Rule 10f-3 under the 1940 Act.
The Fund contemplates that, consistent with the policy of obtaining best
results, brokerage transactions may be conducted through "affiliated
broker/dealer," as defined in the 1940 Act. Under the 1940 Act, commissions paid
by a Fund to an "affiliated broker/dealer" in connection with a purchase or sale
of securities offered on a securities exchange may not exceed the usual and
customary broker's commission. Accordingly, it is the Fund's policy that the
commissions to be paid to an affiliated broker-dealer must, in its judgment, be
(1) at least as favorable as those that would be charged by other brokers having
comparable execution capability and (2) at least as favorable as commissions
contemporaneously charged by such broker/dealer on comparable transactions for
its most favored unaffiliated customers, except for accounts for which the
affiliated broker/dealer acts as a clearing broker for another brokerage firm
and customers of an affiliated broker/dealer considered by a majority of the
independent trustees not to be comparable to the Fund. The Fund does not deem it
practicable and in it best interests to solicit competitive bids for commissions
on each transaction. However, consideration regularly is given to information
concerning the prevailing level of commissions charged on comparable
transactions by other brokers during comparable periods of time.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
OF THE TRUST
The principal occupation of the Trustees and Officers during the last five
years, their ages and their affiliations are:
JOHN C. BRYANT, Trustee*, Age 63
411 Oak St., Suite 306, Cincinnati, Ohio 45219
Dr. Bryant is Executive Director, Cincinnati Youth Collaborative, a partnership
of business, government, schools and social service agencies to address the
educational needs of students. He was formerly Professor of Education,
Wilmington College.
C. BRENT DEVORE, Trustee, Age 58
Otterbein College, Westerville, Ohio 43081
Dr. DeVore is President of Otterbein College.
SUE A. DOODY, Trustee, Age 64
169 East Beck Street, Columbus, Ohio 43206
Ms. Doody is President of Lindey's Restaurant, Columbus, Ohio. She is an active
member of the Greater Columbus Area Chamber of Commerce Board of Trustees.
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<PAGE> 18
ROBERT M. DUNCAN, Trustee*, Age 71
1397 Haddon Road, Columbus, Ohio 43209
Mr. Duncan is a member of the Ohio Elections Commission. He was formerly
Secretary to the Board of Trustees of The Ohio State University. Prior to that,
he was Vice President and General Counsel of The Ohio State University.
THOMAS J. KERR, IV, Trustee*, Age 65
4890 Smoketalk Lane, Westerville, Ohio 43081
Dr. Kerr is President Emeritus of Kendall College. He was formerly President of
Grant Hospital Development Foundation.
DOUGLAS F. KRIDLER, Trustee, Age 43
55 E. State Street, Columbus, Ohio 43212
Mr. Kridler is President of the Columbus Association of Performing Arts.
DIMON R. MCFERSON, Trustee*+, Age 61
One Nationwide Plaza, Columbus, Ohio 43215
Mr. McFerson is President and Chief Executive Officer of the Nationwide
Insurance Enterprise.
NANCY C. THOMAS, Trustee+, Age 64
1733A Westwood Avenue, Alliance, Ohio, 44601
Ms. Thomas is a farm owner and operator. She is also a Director of the
Nationwide Insurance Companies and associated companies.
DAVID C. WETMORE, Trustee, Age 50
11495 Sunset Hills Rd - Suite #210, Reston, Virginia 20190
Mr. Wetmore is the Managing Director of The Updata Capital, a venture capital
firm.
JAMES F. LAIRD, JR., Treasurer, Age 42
Three Nationwide Plaza, Columbus, Ohio 43215
Mr. Laird is Vice President and General Manager of Nationwide Advisory Services,
Inc. ("NAS"), the Distributor.
CHRISTOPHER A. CRAY, Assistant Treasurer, Age 40
Three Nationwide Plaza, Columbus, Ohio 43215
Mr. Cray is Treasurer of NAS. Prior to that he was Director - Corporate
Accounting of Nationwide Insurance Enterprise.
ELIZABETH A. DAVIN, Secretary, Age 34
Three Nationwide Plaza, Columbus, Ohio 43215
Ms. Davin is a member of Dietrich, Reynolds & Koogler, the Trust's legal
counsel.
+ A Trustee who is an "interested person" of the Trust as defined in the
Investment Company Act.
* Members of the Executive Committee. Mr. McFerson is Chairman. The Executive
Committee has the authority to act for the Board of Trustees except as provided
by law and except as specified in the Trust's Bylaws.
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<PAGE> 19
Gasper, Bryant, Doody, DeVore, Duncan, Kerr, Kridler, Wetmore and Woodward are
also Trustees, and Laird, Cray and Davin are also officers of the Nationwide
Separate Account Trust and Nationwide Asset Allocation Trust, registered
investment companies in the Nationwide fund complex.
All Trustees and Officers of the Trust own less than 1% of its outstanding
shares.
The Trustees receive fees as described below and reimbursement for expenses of
attending board meetings from the Trust. NAS and UBT, each paying a pro rata
share for the funds for which it acts as investment adviser, reimburses the
Trust for fees and expenses paid to Trustees who are interested persons of the
Trust. The Compensation Table below sets forth the total compensation paid to
the Trustees of the Trust, before reimbursement, for the fiscal period ended
October 31, 1998. In addition, the table sets forth the total compensation paid
to the Trustees from all funds in the Nationwide Fund Complex, including the
predecessor investment companies to the Trust, for the fiscal year ended October
31, 1998. Trust officers receive no compensation from the Trust in their
capacity as officers.
<TABLE>
COMPENSATION TABLE
<CAPTION>
PENSION
RETIREMENT
AGGREGATE BENEFITS ANNUAL TOTAL
COMPENSATION ACCRUED AS BENEFITS COMPENSATION
NAME OF PERSON, FROM PART OF FUND UPON FROM THE FUND
POSITION THE TRUST EXPENSES RETIREMENT COMPLEX**
<S> <C> <C> <C> <C>
John C. Bryant, Trustee $10,000 --0-- --0-- $21,000
C. Brent DeVore, Trustee 10,000 --0-- --0-- 12,250
Sue A. Doody, Trustee 10,000 --0-- --0-- 21,000
Robert M. Duncan, Trustee 10,000 --0-- --0-- 21,000
Thomas J. Kerr, IV, Trustee 10,000 --0-- --0-- 21,000
Douglas F. Kridler, Trustee 10,000 --0-- --0-- 21,000
Dimon R. McFerson, Trustee --0-- --0-- --0-- --0--
Nancy C. Thomas, Trustee 10,000 --0-- --0-- 10,000
David C. Wetmore, Trustee 10,000 --0-- --0-- 12,250
</TABLE>
** The Fund Complex includes Trusts comprised of thirty investment company
portfolios.
INVESTMENT ADVISORY AND OTHER SERVICES
General. Under the terms of the Trust's investment advisory agreement
with UBT (the "Investment Advisory Agreement"), UBT manages the Fund subject to
the supervision and direction of the Board of Trustees. UBT will: (i) act in
strict conformity with the Declaration of Trust and the 1940 Act, as the same
may from time to time be amended; (ii) manage the Fund in accordance with the
Fund's investment objectives, restrictions and policies; (iii) make investment
decisions for the Fund; and (iv) place purchase and sale orders for securities
and other financial instruments on behalf of the Fund.
As of December 31, 1998 the Fund had not commenced investment operations
and had not incurred investment advisory fees.
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<PAGE> 20
UBT has informed the Fund that, in making its investment decisions, it
does not obtain or use material inside information in its possession or in the
possession of any of its affiliates. In making investment recommendations for
the Fund, UBT will not inquire or take into consideration whether an issuer of
securities proposed for purchase or sale by the Fund is a customer of UBT, its
parent or its affiliates and, in dealing with its customers, UBT, its parent and
affiliates will not inquire or take into consideration whether securities of
such customers are held by any fund managed by UBT or any such affiliate.
Control and Management of Investment Adviser. Morley Financial Services,
Inc. ("MFS") owns 100% of the issued and outstanding voting securities of UBT.
MFS, an Oregon corporation, is a wholly owned subsidiary of Villanova Capital,
Inc., a holding company which is primarily owned by Nationwide Financial
Services, Inc. ("NFS"), also a holding company, with two classes of common stock
outstanding with different voting rights enabling Nationwide Corporation (the
holder of all of the outstanding Class B common stock) to control NFS.
Nationwide Corporation is also a holding company in the Nationwide Insurance
Enterprise.
UBT is the investment adviser to the Fund. UBT is a state bank and trust
company chartered in 1913 and reorganized under the laws of the state of Oregon
in 1992.
UBT provides a range of investment and fiduciary services to
institutional clients. UBT maintains and manages common and pooled trust funds
invested primarily in fixed income assets whose principal value is relatively
stable. UBT currently has approximately $1.0 billion under management. UBT also
acts as custodian with respect to similar fixed income assets.
Investment Advisory Agreement. Under the terms of the Investment
Advisory Agreement dated February 1, 1999, UBT manages the investment of the
assets of the Fund in accordance with the policies and procedures established by
the Trustees.
UBT pays the Fund's pro rata share of the compensation of the Trustees who are
interested persons of the Trust and officers and employees of UBT. UBT also
furnishes, at its own expense, all necessary administrative services, office
space, equipment, and clerical personnel for servicing the investments of the
Fund and maintaining its investment advisory facilities, and executive and
supervisory personnel for managing the investments and effecting the portfolio
transactions of the Fund.
The Investment Advisory Agreement also specifically provides that UBT, including
its directors, officers, and employees, shall not be liable for any error of
judgment, or mistake of law, or for any loss arising out of any investment, or
for any act or omission in the execution and management of the Fund, except for
willful misfeasance, bad faith, or gross negligence in the performance of its
duties, or by reason of reckless disregard of its obligations and duties under
the Agreement. The Agreement will continue in effect for an initial period of
two years and thereafter shall continue automatically for successive annual
periods provided such continuance is specifically approved at least annually by
the Trustees, or by vote of a majority of the outstanding voting securities of
the Trust, and, in either case, by a majority of the Trustees who are not
parties to the Agreement or interested persons of any such party. The Agreement
terminates automatically in the event of its "assignment", as defined under the
1940 Act. It may be terminated as to the Fund without penalty by vote of a
majority of the outstanding voting securities of the Fund, or by either party,
on not less than 60 days written notice. The Agreement further provides that UBT
may render similar services to others.
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<PAGE> 21
Subject to the Fund's Expense Limitation Agreement the Trust pays the
compensation of the Trustees who are not interested persons of the Trust and all
expenses (other than those assumed by UBT), including governmental fees,
interest charges, taxes, membership dues in the Investment Company Institute
allocable to the Trust; fees under the Trust's Fund Administration Agreement;
fees and expenses of independent certified public accountants, legal counsel,
and any transfer agent, registrar, and dividend disbursing agent of the Trust;
expenses of preparing, printing, and mailing shareholders' reports, notices,
proxy statements, and reports to governmental offices and commissions; expenses
connected with the execution, recording, and settlement of portfolio security
transactions, insurance premiums, fees and expenses of the custodian for all
services to the Trust; and expenses of calculating the net asset value of shares
of the Trust, expenses of shareholders' meetings, and expenses relating to the
issuance, registration, and qualification of shares of the Trust.
As compensation for its services, the Fund is obligated to pay UBT a fee
computed and accrued daily and paid monthly at an annual rate of 0.35% of the
average daily net assets of the Fund. UBT has agreed voluntarily to waive 0.10%
of that fee until further written notice to shareholders. In addition, in the
interest of limiting the expenses of the Fund, UBT has entered into an expense
limitation agreement with the Fund ("Expense Limitation Agreement"). Pursuant to
the Expense Limitation Agreement, UBT has agreed to waive or limit its fees and
to assume other expenses (except for Rule 12b-1 Fees) to the extent necessary to
limit the total annual operating expenses of each Class of the Fund (expressed
as a percentage of average daily net assets and excluding Rule 12b-1 Fees) to no
more than 0.70% for ISC Shares, 0.55% for IC Shares and 0.70% for IRA Shares of
the Fund. Reimbursement by the Fund of the advisory fees waived or limited and
other expenses reimbursed by UBT pursuant to the Expense Limitation Agreement
may be made at a later date when the Fund has reached a sufficient asset size to
permit reimbursement to be made without causing the total annual operating
expense ratio of the Fund to exceed the limits set forth above. No reimbursement
will be made unless: (i) the Fund's assets exceed $50 million; (ii) the total
annual expense ratio of the Class making such reimbursement is less than the
limit set forth above; and (iii) the payment of such reimbursement is approved
by the Board of Trustees on a quarterly basis. Except as provided for in the
Expense Limitation Agreement, reimbursement of amounts previously waived or
assumed by UBT is not permitted.
Administrator. Under a Fund Administration Agreement, Villanova SA
Capital Trust ("VSA"), a wholly owned subsidiary of Villanova Capital, Inc.
provides various administrative and accounting services including daily
valuation of the Fund's shares and preparation of financial statements, tax
returns and regulatory reports.
Under the Fund Administration Agreement, VSA is entitled to an annual
fee of based on the Fund's average daily net assets in the amount of 0.07% up to
$250 million in assets, 0.05% on the next $750 million of assets and 0.04% on
assets of $1 billion and more subject to a minimum fee of $50,000 per year. As
of December 31, 1998, the Fund had not commenced investment operations and had
not incurred administration fees.
Prior to September 1, 1999, Nationwide Advisory Services, Inc. ("NAS")
provided fund administration services to the Fund. Effective September 1, 1999,
the fund administration services previously performed for the Fund by NAS were
transferred to VSA, an affiliate of NAS and an indirect subsidiary of Nationwide
Financial Services, Inc. In addition, BISYS Fund Services OHIO, Inc. began
performing certain fund administration services pursuant to a Sub-Administration
Agreement also effective September 1, 1999. After these changes were
implemented, there was no change in the fees charged for fund administration
services for each of the Funds.
Custodian. The Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati,
Ohio 45263, serves as Custodian for the Trust pursuant to the Custodian
Agreement. As Custodian, it holds the Fund's assets, collects
18
<PAGE> 22
all income and other payments with respect thereto, disburses funds at the
Fund's request and maintains records in connection with its duties.
Transfer Agent. Nationwide Investors Services, Inc. ("NISI"), a
wholly-owned subsidiary of VSA, acts as the Fund's transfer agent and, in such
capacity, maintains the records of each shareholder's account, answers
shareholders' inquiries concerning their accounts, processes purchases and
redemptions of the Fund's Shares, acts as dividend and distribution disbursing
agent and performs other accounting and shareholder service functions. In
addition, NISI provides the Fund with certain monthly reports, record-keeping
and other management-related services. For such services, NISI receives fees of
0.01% of average daily net assets of the Fund.
Counsel and Independent Accountants. Dietrich, Reynolds & Koogler, One
Nationwide Plaza, Columbus, Ohio 43215 serves as counsel to the Trust. KPMG LLP,
Two Nationwide Plaza, Columbus, Ohio, 43215 acts as independent public
accountants of the Trust.
Distributor. NAS (the "Distributor") shall serve as the exclusive agent
for distribution of shares of the Fund. Pursuant to an underwriting agreement
(the "Underwriting Agreement"), the Distributor will be obligated to sell the
shares of the Fund on a best efforts basis only against purchase orders for the
shares. Shares of the Fund are offered on a continuous basis.
The Underwriting Agreement is renewable annually. The Underwriting
Agreement may be terminated by the Distributor, by a majority vote of the
Trustees who are not interested persons and have no financial interest in the
Underwriting Agreement or by a majority vote of the outstanding securities of
the Fund upon not more than 60 days' written notice by either party or upon
assignment by the Distributor.
The Trust has adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 under the 1940 Act to enable the Fund to directly and indirectly bear
certain expenses relating to the distribution of each Class of the Fund's Shares
and/or the ongoing servicing or maintenance of existing shareholder accounts.
Pursuant to the Distribution Plan, the Fund will pay the Distributor a fee at
the aggregate annual rate of up to 0.25% of the Fund's average daily net assets
attributable to its ISC Shares and IRA Shares. Among other things, the
Distributor may use these fees to pay financial intermediaries, plan
fiduciaries, and investment professionals ("Service Providers") to compensate
them for providing to shareholders or the underlying beneficial owners of
Shares; distribution assistance and distribution support services. In addition,
the Distributor and UBT, out of their own assets, may pay for certain expenses
incurred in connection with the distribution of the Shares of the Fund or the
servicing and maintenance of existing shareholder accounts.
The Distributor shall prepare and deliver written reports to the Trust's
Board of Trustees on a regular basis (at least quarterly) setting forth the
payments made to the Distributor and Service Providers pursuant to the Plan, and
the purposes for which such expenditures were made, as well as any supplemental
reports as the Board of Trustees may from time to time reasonably request.
Except to the extent that the Distributor or UBT may benefit through
increased fees from an increase in the net assets of the Fund which may have
resulted in part from expenditures under the Plan, no interested person of the
Fund nor any Trustee of the Trust who is not an interested person in the Fund
had a direct or indirect financial interest in the operation of the Plan or any
related agreement.
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As of December 31, 1998, the Fund had not commenced investment
operations and had not incurred any obligation to pay the Distributor under the
Plan.
Administrative Services Plan. The Trust has adopted an Administrative Services
Plan (the "Services Plan") pursuant to which the Fund is authorized to pay
compensation to plan administrators, banks and other financial intermediaries
(each a "Service Organization"), which may include UBT, and its affiliates,
which agree to provide certain ministerial, record keeping, and/or
administrative support services for their customers or account holders
(collectively, "customers") who are the beneficial or record owner of Shares of
the Fund. In consideration for such services a Service Organization receives a
fee from the Fund, computed daily and paid monthly, at an annual rate of up to
0.15% of the average daily net assets attributable to ISC Shares and IRA Shares
of the Fund owned beneficially or of record by such Service Organization's
customers for whom the Service Organization provides such services.
The servicing agreements adopted under the Services Plan (the "Servicing
Agreements") require the Service Organizations receiving such compensation to
perform certain ministerial, record keeping and/or administrative support
services with respect to the beneficial or record owners of ISC Shares, such as
processing dividend and distribution payments from the Fund on behalf of
customers, providing periodic statements to customers showing their positions in
the Shares of the Fund, providing sub-accounting with respect to Shares
beneficially owned by such customers and/or providing customers with a service
that invests the assets of their accounts in Shares of the Fund pursuant to
specific or pre-authorized instructions.
Banking Regulatory Matters. UBT has been advised by its counsel that UBT
may perform the services for the Fund contemplated by the Advisory Agreement and
other activities for the Fund described in the Prospectus and this Statement of
Additional Information without violation of the Glass-Steagall Act or other
applicable banking laws or regulations. However, counsel has pointed out that
future changes in either Federal or state statutes and regulations concerning
the permissible activities of banks or trust companies, as well as future
judicial or administrative decisions or interpretations of present and future
statutes and regulations, might prevent UBT from continuing to perform those
services for the Fund. State laws on this issue may differ from the
interpretations of relevant Federal law and banks and financial institutions may
be required to register as dealers pursuant to state securities law. If the
circumstances described above should change, the Board of Trustees would review
the relationship with UBT and consider taking all actions necessary under the
circumstances.
REDEMPTION OF FUND SHARES
The Fund reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period during which trading
on the New York Stock Exchange is restricted, or during the existence of an
emergency (as determined by the SEC by rule or regulation) as a result of which
disposal or valuation of the Fund's Securities is not reasonably practicable, or
for such other periods as the SEC may permit. The Fund also reserves the right
to suspend sales of its shares for any period during which the New York Stock
Exchange, UBT, the Administrator, Transfer Agent and/or the Custodian are not
open for business.
The Fund intends that it usually will redeem its Shares for cash. The
Fund has elected to redeem shares with respect to any one shareholder during any
90-day period solely in cash up to the lesser of $250,000 or 1% of the NAV of
the Fund at the beginning of the period. In addition, the Fund intends to redeem
shares in cash for any requests of up to $1,000,000.
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<PAGE> 24
As described in the Prospectus, however, the Fund reserves the right, in
circumstances where in its sole discretion it determines that cash redemption
payments would be undesirable, to honor any request for redemption by making
payment wholly or partly in Securities and in Wrapper Agreements, as the same
may be chosen by UBT in its sole discretion (an "in kind redemption"). The
Trust, on behalf of the Fund, is seeking an exemptive order from the SEC with
respect to redemptions in kind made to shareholders who own 5% or more of the
Fund. Until such time as appropriate regulatory authorization is obtained, the
Fund will not make redemptions in kind to such shareholders.
Although the Fund will seek to maintain a stable net asset value per
Share, the value of the Shares on redemption may be more or less than the
shareholder's cost, depending upon the market value of the Fund's assets
(including the Wrapper Agreements) at the time of redemption.
TAXATION
The Fund is treated as a separate entity for Federal income tax purposes
and intends to qualify as a "regulated investment company" under the Code, for
so long as such qualification is in the best interest of the Fund's
shareholders. In order to qualify as a regulated investment company, the Fund
must, among other things: diversify its investments within certain prescribed
limits; and derive at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, and gains from the sale or other
disposition of securities or foreign currencies, or other income derived with
respect to its business of investing in such stock, securities, or currencies.
The Code also prohibits a regulated investment company from paying "preferential
dividends" to any shareholder, an issue that is especially relevant to any fund
which offers multiple classes of shares. In addition, to utilize the tax
provisions specially applicable to regulated investment companies, the Fund must
distribute to its shareholders at least 90% of its investment company taxable
income for the year. In general, the Fund's investment company taxable income
will be its taxable income subject to certain adjustments and excluding the
excess of any net long-term capital gain for the taxable year over the net
short-term capital loss, if any, for such year.
A non-deductible 4% excise tax is imposed on regulated investment
companies that do not distribute in each calendar year (regardless of whether
they otherwise have a non-calendar taxable year) an amount equal to 98% of their
ordinary income for the calendar year plus 98% of their capital gain net income
for the one-year period ending on October 31 of such calendar year. The balance
of such income must be distributed during the next calendar year. If
distributions during a calendar year were less than the required amount, the
Fund would be subject to a non-deductible excise tax equal to 4% of the
deficiency.
Although the Fund expects to qualify as a "regulated investment company"
and to be relieved of all or substantially all federal income taxes, depending
upon the extent of its activities in states and localities in which its offices
are maintained, in which its agents or independent contractors are located, or
in which it is otherwise deemed to be conducting business, the Fund may be
subject to the tax laws of such states or localities. In addition, the Code does
not provide definitive guidance with respect to all federal income tax issues
that may affect the Fund. For example, whether certain expenses may or may not
be charged to a class of shares individually or how such expenses (and related
income) should be characterized for federal income tax purposes is not clear in
all cases. If for any taxable year the Fund does not qualify for the special tax
treatment afforded regulated investment companies, all of its taxable income
will be subject to federal tax at regular corporate rates (without any deduction
for distributions to its shareholders). In such event, dividend distributions
would be taxable to shareholders to the extent of earnings and profits, and
would be
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eligible for the dividends received deduction for corporations.
It is expected that the Fund will distribute annually to shareholders
all or substantially all of the Fund's net ordinary income and net realized
capital gains and that such distributed net ordinary income and distributed net
realized capital gains will be taxable income to shareholders for federal income
tax purposes, even if paid in additional shares of the Fund and not in cash.
Distribution by the Fund of the excess of net long-term capital gain
over net short-term capital loss, if any, is taxable to shareholders as
long-term capital gain in the year in which it is received, regardless of how
long the shareholder has held the shares. Such distributions are not eligible
for the dividends-received deduction.
Federal taxable income of individuals is subject to graduated tax rates
of 15%, 28%, 31%, 36% and 39.6%. Further, the effective marginal tax rate may be
in excess of 39.6%, because adjustments reduce or eliminate the benefit of the
personal exemption and itemized deductions for individuals with gross income in
excess of certain threshold amounts.
Long-term capital gains of individuals are subject to a maximum tax rate
of 20% (10% for individuals in the 15% ordinary income tax bracket). Capital
losses may be used to offset capital gains. In addition, individuals may deduct
up to $3,000 of net capital loss each year to offset ordinary income. Excess net
capital loss may be carried forward and deducted in future years. The holding
period for long-term capital gains is more than twelve months.
Federal taxable income of corporations in excess of $75,000 up to $10
million is subject to a 34% tax rate; however, because the benefit of lower tax
rates on a corporation's taxable income of less than $75,000 is phased out for
corporations with income in excess of $100,000 but lower than $335,000, a
maximum marginal tax rate of 39% may result. Federal taxable income of
corporations in excess of $10 million is subject to a tax rate of 35%. Further,
a corporation's federal taxable income in excess of $15 million is subject to an
additional tax equal to 3% of taxable income over $15 million, but not more than
$100,000.
Capital gains of corporations are subject to tax at the same rates
applicable to ordinary income. Capital losses may be used only to offset capital
gains and excess net capital loss may be carried back three years and forward
five years.
Certain corporations are entitled to a 70% dividends received deduction
for distributions from certain domestic corporations. The Fund will designate
the portion of any distributions which qualify for the 70% dividends received
deduction. The amount so designated may not exceed the amount received by the
Fund for its taxable year that qualifies for the dividends received deduction.
Because the Fund's net investment income is expected to be derived from earned
interest and short term capital gains, it is anticipated that no distributions
from the Fund will qualify for the 70% dividends received deduction.
Foreign taxes may be imposed on the Fund by foreign countries with
respect to its income from foreign securities. Since less than 50% in value of
the Fund's total assets at the end of its fiscal year are expected to be
invested in stocks or securities of foreign corporations, such Fund will not be
entitled under the Code to pass through to its Shareholders their pro rata share
of the foreign taxes paid by the Fund. These taxes will be taken as a deduction
by the Fund.
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Under Section 1256 of the Code, gain or loss realized by the Fund from
certain financial futures and options transactions will be treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. Gain or
loss will arise upon exercise or lapse of such futures and options as well as
from closing transactions. In addition, any such futures and options remaining
unexercised at the end of the Fund's taxable year will be treated as sold for
their then fair market value, resulting in additional gain or loss to the Fund
characterized in the manner described above.
Offsetting positions held by the Fund involving certain futures
contracts or options transactions may be considered, for tax purposes, to
constitute "straddles." Straddles are defined to include "offsetting positions"
in actively traded personal property. The tax treatment of straddles is governed
by Sections 1092 and 1258 of the Code, which, in certain circumstances,
overrides or modifies the provisions of Section 1256. As such, all or a portion
of any short or long-term capital gain from certain straddle and/or conversion
transactions may be recharacterized as ordinary income.
If the Fund were treated as entering into straddles by reason of its
engaging in futures or options transactions, such straddles would be
characterized as "mixed straddles" if the futures or options comprising a part
of such straddles were governed by Section 1256 of the Code. The Fund may make
one or more elections with respect to mixed straddles. If no election is made,
to the extent the straddle rules apply to positions established by the Fund,
losses realized by the Fund will be deferred to the extent of unrealized gain in
any offsetting positions. Moreover, as a result of the straddle and conversion
transaction rules, short-term capital losses on straddle positions may be
recharacterized as long-term capital losses and long-term capital gains may be
recharacterized as short-term capital gain or ordinary income.
Investment by the Fund in securities issued at a discount or providing
for deferred interest or for payment of interest in the form of additional
obligations could, under special tax rules, affect the amount, timing and
character of distributions to Shareholders. For example, the Fund could be
required to take into account annually a portion of the discount (or deemed
discount) at which such securities were issued and to distribute such portion in
order to maintain its qualification as a regulated investment company. In that
case, the Fund may have to dispose of securities which it might otherwise have
continued to hold in order to generate cash to satisfy these distribution
requirements.
The Fund may be required by federal law to withhold and remit to the
U.S. Treasury 31% of taxable dividends, if any, and capital gain distributions
to any Shareholder, and the proceeds of redemption or the values of any
exchanges of Shares of the Fund, if such Shareholder (1) fails to furnish the
Fund with a correct taxpayer identification number, (2) underreports dividend or
interest income, or (3) fails to certify to the Fund that he or she is not
subject to such withholding, or if the IRS notifies the Fund that (4) the
taxpayer identification number furnished by the Shareholder is incorrect or (5)
the Fund is required to withhold against such redemptions. An individual's
taxpayer identification number is his or her Social Security number.
Information set forth in the Prospectus and the Statement of Additional
Information which relates to Federal taxation is only a summary of some of the
important Federal tax considerations generally affecting purchasers of Shares of
the Fund. No attempt has been made to present a detailed explanation of the
Federal income tax treatment of the Fund or its shareholders and this discussion
is not intended as a substitute for
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careful tax planning. Accordingly, potential purchasers of shares of a Fund are
urged to consult their tax advisers with specific reference to their own tax
situation. In addition, the tax discussion in the prospectus and the Statement
of Additional Information is based on tax laws and regulations which are in
effect on the date of the prospectus and the Statement of Additional
Information; such laws and regulations may be changed by legislative or
administrative action.
Information as to the federal income tax status of all distributions
will be mailed annually to each shareholder.
FINANCIAL STATEMENTS
Since the Fund did not begin operations until after December 31, 1998,
there are no financial statements for the Fund.
PERFORMANCE INFORMATION
Standard Performance Information. From time to time, quotations of the
Share's performance may be included in advertisements, sales literature or
shareholder reports. Performance information or advertisements may include
comparisons of the Shares' investment results to various unmanaged indices or
results of other mutual funds or investment or savings vehicles. From time to
time, the Shares' ranking may be quoted from various sources, such as Lipper
Analytical Services, Inc., Value Line, Inc. and Morningstar, Inc.
Unlike some bank deposits or other investments that pay a fixed yield
for a stated period of time, the total return of the Shares will vary depending
upon interest rates, the current market value of the securities held by the Fund
and the Wrapper Agreements and changes in the expenses of the Shares and the
Fund. In addition, during certain periods for which total return may be
provided, UBT may have voluntarily agreed to waive portions of its fees, or to
reimburse certain operating expenses of the Fund on a month-to-month basis. Such
waivers will have the effect of increasing the Shares' net income (and therefore
its yield and total return) during the period such waivers are in effect. These
performance figures are calculated in the following manner:
Yield: Yield refers to the income generated by an investment over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all stock and bond
mutual funds. Because this differs from other accounting methods, the quoted
yield may not equal the income actually paid to shareholders.
Total return: The Shares' average annual total return is calculated for
certain periods by determining the average annual compounded rates of return
over those periods that would cause an investment of $1,000 (made at the maximum
public offering price with all distributions reinvested) to reach the value of
that investment at the end of the periods. The Shares may also calculate total
return figures that represent aggregate performance over a period or
year-by-year performance.
Performance Results: Any performance information provided for the Shares
should not be considered as representative of its performance in the future,
because the NAV and public offering price of Shares will vary based not only on
the type, quality and maturities of the securities held by the Fund but also on
changes in the
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current value of such securities and on changes in the expenses of the Fund.
Total return reflects the performance of both principal and income.
Comparisons of Fund Performance. Comparison of the quoted
nonstandardized performance of various investments is valid only if performance
is calculated in the same manner. Since there are different methods of
calculating performance, investors should consider the effect of the methods
used to calculate performance when comparing performance of the Fund with
performance quoted with respect to other investment companies or types of
investment.
In connection with communicating its performance to current or
prospective shareholders, the Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
unmanaged indices that may assume reinvestment of dividends but generally do not
reflect deductions for administrative and management costs. Evaluations of the
Fund's performance made by independent sources may also be used in
advertisements concerning the Fund. Sources for the Fund's performance
information could include the following: Asian Wall Street Journal, Barron's,
Business Week, Changing Times, The Kiplinger Magazine, Consumer Digest,
Financial Times, Financial World, Forbes, Global Investor, Investor's Daily,
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, Money,
Morningstar, Inc., New York Times, Personal Investing News, Personal Investor,
Success, U.S. News and World Report, ValueLine, Wall Street Journal,
Weisenberger Investment Companies Services, Working Women and Worth.
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APPENDIX
DESCRIPTION OF RATING SERVICES
The ratings of rating services represent their opinions as to the quality of
securities that they undertake to rate. It should be emphasized, however, that
ratings are relative and subjective and are not absolute standards of quality.
Although these ratings are an initial criterion for selection of portfolio
investments, UBT also makes its own evaluation of these securities, subject to
review by the Board of Trustees. After purchase by the Fund, an obligation may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Fund. Neither event would require the Fund to eliminate the
obligation from its portfolio, but UBT will consider such an event in its
determination of whether the Fund should continue to hold the obligation. The
minimum rating required for an obligation to be purchased by the Fund is
"investment grade" which means a rating of Baa or better by Moody's, BBB or
better by S&P and BBB or better by Duff & Phelps. A description of the ratings
referred to herein and in the Prospectus is set forth below.
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
Aaa Bonds rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or
by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate
but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa Bonds rated Baa are considered as medium-grade obligations, i.e.
they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well.
Ba Bonds rated Ba are judged to have speculative elements. Their
future cannot be considered as well assured. Often the protection
of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this
class.
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B Bonds rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period
of time may be small.
Caa Bonds rated Caa are of poor standing. Such issues may be in
default or elements of danger may be present with respect to
principal or interest.
Ca Bonds rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other
marked short-comings.
C Bonds rated C are the lowest-rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:
AAA Debt rated AAA has the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay
principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher-rated issues only in
small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Although it usually exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to weakened
capacity to pay interest and repay principal for debt in this
category than in higher-rated categories.
BB Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments.
B Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions
will likely impair capacity or willingness to pay interest and
repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied
BB- rating.
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CCC Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and
repayment of principal. In the event of adverse business,
financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
CC Debt rated CC is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC debt rating.
C The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The
C rating may be used to cover a situation where a bankruptcy
petition has been filed but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest
is being paid.
D Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the
date due even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such
grace period. The D rating will also be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DUFF & PHELPS' LONG-TERM DEBT RATINGS:
AAA Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of
economic conditions.
A Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic
stress.
BBB Below-average protection factors but still considered sufficient
for prudent investment. Considerable variability in risk during
economic cycles.
BB Below investment grade but deemed likely to meet obligation when
due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes.
Overall quality may move up or down frequently within this
category.
B Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate
widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the
rating within this category or into a higher or lower rating
grade.
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CCC Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be
substantial with unfavorable economic/industry conditions, and/or
with unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rates Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
DESCRIPTION OF S&P SHORT-TERM ISSUER CREDIT RATINGS:
A-1 Strong capacity to meet financial commitments. Within this
category, certain obligors are designated with a plus sign (+).
This indicates that the obligor's capacity to meet its financial
commitments is extremely strong.
A-2 Satisfactory capacity to meet financial commitments. However, the
obligor is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligors in
the highest rating category.
A-3 Adequate capacity to meet financial obligations. However, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial
commitments.
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DESCRIPTION OF DUFF & PHELPS' COMMERCIAL PAPER RATINGS:
D-1+ Highest certainty of timely payment. Short term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk
free U.S. Treasury short term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors.
Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets
is good. Risk factors are small.
D-3 Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
DESCRIPTION OF MOODY'S INSURANCE FINANCIAL STRENGTH RATINGS:
Aaa Exceptional financial security. While the financial strength of
these companies is likely to change, such changes as can be
visualized are most unlikely to impair their fundamentally strong
position.
Aa Excellent financial security. Together with the Aaa group they
constitute what are generally known as high grade companies. They
are rated lower than Aaa companies because long-term risks appear
somewhat larger.
A Good financial security. However, elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Adequate financial security. However, certain protective elements
may be lacking or may be characteristically unreliable over any
great length of time.
Ba Questionable financial security. Often the ability of these
companies to meet policyholder obligations maybe very moderate
and thereby not well safeguarded in the future.
B Poor financial security. Assurance of punctual payment of
policyholder obligations over any long period of time is small.
Caa Very poor financial security. They may be in default on their
policyholder obligations or there may be present elements of
danger with respect to punctual payment of policyholder
obligations and claims.
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Ca Extremely poor financial security. Such companies are often in
default on their policyholder obligations or have other marked
shortcomings.
C Lowest rated class of insurance company. Such companies can be
regarded as having extremely poor prospects of ever offering
financial security.
Numeric modifiers: Numeric modifiers are used to refer to the ranking within the
group -- one being the highest and three being the lowest. However, the
financial strength of companies within a generic rating symbol (Aa, for example)
is broadly the same.
DESCRIPTION OF S&P CLAIMS PAYING ABILITY RATING DEFINITIONS:
Secure Range: AAA to BBB
AAA Superior financial security on an absolute and relative basis.
Capacity to meet policyholder obligations is overwhelming under a
variety of economic and underwriting conditions.
AA Excellent financial security. Capacity to meet policyholder
obligations is strong under a variety of economic and
underwriting conditions.
A Good financial security, but capacity to meet policyholder
obligations is somewhat susceptible to adverse economic and
underwriting conditions.
BBB Adequate financial security, but capacity to meet policyholder
obligations is susceptible to adverse economic and underwriting
conditions.
Vulnerable Range: BB to CCC
BB Financial security may be adequate, but capacity to meet
policyholder obligations, particularly with respect to long-term
or "long-tail" policies, is vulnerable to adverse economic and
underwriting conditions.
B Vulnerable financial security. Currently able to meet
policyholder obligations, but capacity to meet policyholder
obligations is particularly vulnerable to adverse economic and
underwriting conditions.
CCC Extremely vulnerable financial security. Continued capacity to
meet policyholder obligations is highly questionable unless
favorable economic and underwriting conditions prevail.
R Regulatory action. As of the date indicated, the insurer is under
supervision of insurance regulators following rehabilitation,
receivership, liquidation, or any other action that reflects
regulatory concern about the insurer's financial condition.
Information on this status is provided
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by the National Association of Insurance Commissioners and other
regulatory bodies. Although believed to be accurate, this
information is not guaranteed. The "R" rating does not apply to
insurers subject only to nonfinancial actions such as market
conduct violations.
Plus (+) or minus (-) Ratings from "AA" to "B" may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
DUFF & PHELPS' CLAIMS PAYING ABILITY RATINGS:
AAA Highest claims paying ability. Risk factors are negligible.
AA Very high claims paying ability. Protection Factors are strong.
Risk is modest, but may vary slightly over time due to economic
and/or underwriting conditions.
A High claims paying ability. Protection factors are average and
there is an expectation of variability in risk over time due to
economic and/or underwriting conditions.
BBB Adequate claims paying ability. Protection factors are adequate.
There is considerable variability in risk over time due to
economic and/or underwriting conditions.
BB Uncertain claims paying ability and less than investment grade
quality. However, the company is deemed likely to meet these
obligations when due. Protection factors will vary widely with
changes in economic and/or underwriting conditions.
B Possessing risk that policyholder and contractholder obligations
will not be paid when due. Protection factors will vary widely
with changes in economic and underwriting conditions or company
fortunes.
CCC There is substantial risk that policyholder and contractholder
obligations will not be paid when due. Company has been or is
likely to be placed under state insurance department supervision.
DD Company is under an order of liquidation.
[END OF STATEMENT OF ADDITIONAL INFORMATION]
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