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PROSPECTUS
February 1, 1999
MORLEY CAPITAL ACCUMULATION FUND
A Series of Nationwide Investing Foundation III
Three Nationwide Plaza
Columbus, Ohio 43215
For Information and Assistance
Call Toll-Free 1-800-848-0920
This Prospectus relates to the Morley Capital Accumulation Fund (the
"Fund"). Union Bond & Trust Company ("UBT") is the investment adviser for the
Fund. The 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 objective by investing
in a diversified portfolio of fixed income securities, money market instruments,
options, futures and other instruments. The Fund is not a money market fund, and
there can be no assurance that it will be able to maintain a stable net asset
value per share or otherwise achieve its investment objective.
The Fund offers three classes of shares: Institutional Service Class
("ISC Shares"), Institutional Class ("IC Shares") and IRA Class ("IRA Shares").
ISC and IC Shares are offered to employee benefit plans qualified under Section
401(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
"governmental plans" as defined in Section 414(d) of the Code, "eligible
deferred compensation plans" as defined in Section 457 of the Code, employee
benefit plans qualifying under Section 403(b) of the Code and to bank-maintained
collective investment funds that hold exclusively assets of U.S. employee
benefit plans qualified under Section 401(a) and tax exempt under Section 501(a)
of the Code, and other plans eligible to invest in bank-maintained collective
investment funds. ISC Shares are also sold to life insurance company separate
accounts to fund the benefits of variable life insurance policies and variable
annuity contracts ("Contracts"). ISC Shares are subject to both a Rule 12b-1 fee
and an administrative service fee which together authorize the Fund to pay
compensation to plan administrators, banks and other financial intermediaries
for distribution, ministerial, record-keeping and/or administrative shareholder
support services. IC Shares are generally sold directly to larger institutional
investors who do not require extensive shareholder or administrative services.
IRA Shares are offered to investors who desire to invest in the Fund through an
individual retirement account as defined in Section 408 and 408A of the Code
including a traditional IRA, SEP-IRA, ROTH-IRA, SIMPLE IRA, an Education IRA as
defined in Section 530 of the Code, or a plan maintained by a sole
proprietorship (also known as a KEOGH Plan) (such retirement vehicles are
collectively referred to as "IRAs" and such investors are collectively referred
to as "IRA Investors"). IRA Shares are subject to both a Rule 12b-1 fee and an
administrative service fee.
The Fund is a separate series of Nationwide Investing Foundation III
(the "Trust"), an open-end, management investment company created under the laws
of Ohio as an Ohio business trust as of October 30, 1997. The Trust currently
offers shares in fifteen separate series, including the Fund, each with its own
investment objective.
This Prospectus contains important information concerning the Fund that
a prospective investor should know before investing. Please read it before
investing and retain it for future reference. To learn more about the Fund,
investors can obtain a copy of the Fund's Statement of Additional Information
("SAI"), dated February 1, 1999, which has been filed with the Securities
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and Exchange Commission (the "SEC") and is incorporated herein by reference. For
a free copy of this document, please write to the Trust at the address given
above, or call the Trust at 1-800-848-0920.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
SHARES OF THE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, UBT, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY.
AN INVESTMENT IN THE FUND IS SUBJECT TO RISK THAT MAY CAUSE THE VALUE OF THE
INVESTMENT TO FLUCTUATE, AND WHEN THE INVESTMENT IS REDEEMED, THE VALUE MAY BE
HIGHER OR LOWER THAN THE AMOUNT ORIGINALLY INVESTED BY THE INVESTOR.
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TABLE OF CONTENTS
<TABLE>
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Page
<S> <C>
THE FUND........................................................................... 4
WHO MAY INVEST............................................................ 4
EXPENSE INFORMATION....................................................... 5
INVESTMENTS, INVESTMENT PRACTICES AND RELATED RISKS....................... 7
PURCHASE AND REDEMPTION OF FUND SHARES............................................. 20
CLASSES OF SHARES......................................................... 20
PURCHASE OF SHARES........................................................ 21
CONTRACT OWNER TRANSACTION................................................ 21
PLAN PARTICIPANT TRANSACTIONS............................................. 21
FUND DIRECT PURCHASES..................................................... 21
REDEMPTION OF SHARES...................................................... 22
VALUATION OF SHARES....................................................... 26
INVESTOR SERVICES......................................................... 27
ADDITIONAL INFORMATION............................................................. 27
BOARD OF TRUSTEES......................................................... 27
INVESTMENT ADVISORY AND OTHER SERVICES.................................... 27
DESCRIPTION OF SHARES..................................................... 30
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS.................................. 31
TAX CONSIDERATIONS........................................................ 32
PERFORMANCE ADVERTISING................................................... 32
PRIOR PERFORMANCE OF INSTITUTIONAL PRIVATE ACCOUNTS MANAGED BY UBT........ 33
</TABLE>
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THE FUND
The Fund's investment objective 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 objective by
investing in a diversified portfolio of investment grade fixed income
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. The Wrapper Agreements are
intended to stabilize the net asset value ("NAV") per share of the Fund
("Share"). The value of Securities in the Fund will generally fluctuate based
upon market conditions, interest rates, the credit quality of the issuer, and
economic and political events. In that regard, it is expected that under normal
circumstances, the value of the Wrapper Agreements will fluctuate in inverse
proportion to fluctuations in the value of the Securities. However, there can be
no assurance that the Fund will achieve its investment objective of a stable
NAV. The Fund will pay premiums to purchase Wrapper Agreements. These costs may
reduce the Fund's investment return as compared to the return on a direct
investment in Securities. In addition, the issuer of a Wrapper Agreement could
default on its obligations, or the Fund may be unable to obtain Wrapper
Agreements for all assets in the Fund, potentially resulting in a decline in
NAV. UBT may employ various investment strategies to hedge Fund results, but
there can be no assurance that these techniques will be effective. See
"INVESTMENTS, INVESTMENT PRACTICES AND RELATED RISKS" herein.
WHO MAY INVEST
The Fund offers three classes of shares: ISC, IC, and IRA. ISC and IC
Shares are offered to employee benefit plans qualified under Section 401(a) of
the Code, "governmental plans" as defined in Section 414(d) of the Code,
"eligible deferred compensation plans" as defined in Section 457 of the Code,
employee benefit plans qualifying under Section 403(b) of the Code (each, a
"Plan" and collectively, the "Plans") and to bank-maintained collective
investment funds that hold exclusively assets of U.S. employee benefit plans
qualified under Section 401(a) and tax exempt under Section 501(a) of the Code,
and other plans eligible to invest in bank-maintained collective investment
funds (each, a "Bank Collective Fund" and collectively, the "Bank Collective
Funds"). ISC Shares are also sold to life insurance company separate accounts to
fund the benefits of Contracts. ISC Shares are subject to both a Rule 12b-1 fee
and an administrative service fee which together authorize the Fund to pay
compensation to plan administrators, banks and other financial intermediaries
for distribution, ministerial, record-keeping and/or administrative shareholder
support services. IC Shares are generally sold directly to larger institutional
investors who do not require extensive shareholder or administrative services.
IRA Shares are offered to IRA Investors. A Plan, a Bank Collective Fund or a
life insurance company separate account desiring to invest in the Fund must
restrict participants in such Plan, employee benefit plans investing in the Bank
Collective Fund or participants in Contracts from transferring monies from the
Fund to a different fixed income investment option which has a targeted average
duration of three years or less or which seeks to maintain a stable value per
unit or share (a "Competing Fund"); provided, however, that transfers by
participants to a non-Competing Fund may, after a three-month period in such
non-Competing Fund, be transferred to a Competing Fund without such restriction.
See "EXPENSE INFORMATION" and "PURCHASE AND REDEMPTION OF FUND SHARES" herein.
The Fund is designed for investors seeking preservation and stability
of principal and a level of current income higher than money market mutual funds
over most time periods. Money
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market funds also attempt to maintain a stable NAV per share. Although the Fund
will purchase Wrapper Agreements with the intention of maintaining a stable NAV
per share, Shares may be worth more or less than their original cost upon
redemption. The Fund is not in itself a balanced investment plan. Investors
should consider their investment objectives and tolerance for risk when making
an investment decision. See "ADDITIONAL INFORMATION" herein.
EXPENSE INFORMATION
The Fund pays annual operating expenses out of the Fund's assets. An
investment advisory fee is paid by the Fund to UBT. The Fund incurs additional
expenses in connection with, among other things, purchasing Wrapper Agreements,
maintaining shareholder records, providing for distribution, and administrative
and shareholder services, furnishing shareholder statements and providing
semi-annual financial reports. The following tables are intended to assist
investors in understanding the expenses associated with investing in the Fund.
The expenses shown below are estimates for the first year of operations. "Other
expenses" are based on estimated amounts for the current fiscal year. The
following tables provide (i) a summary of expenses related to purchases and
redemptions (sales) of Shares, (ii) the anticipated aggregate annual operating
expenses of the Fund, expressed as a percentage of average daily net assets, and
(iii) an illustration of the dollar cost of such expenses on a hypothetical
$1,000 investment in the Fund.
Shareholder Transaction Expenses
ISC Shares IC Shares IRA Shares
Redemption Fee(1,2) 2.0% 2.0% 2.0%
(As a Percentage of the Amount Redeemed)
Estimated Annual Fund Operating Expenses (as a percentage of the Fund's average
daily net assets)
<TABLE>
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ISC Shares IC Shares IRA
Shares
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment advisory fee (after waiver)(3) 0.25% 0.25% 0.25%
- --------------------------------------------------------------------------------
Rule 12b-1 fee(4) 0.25% None 0.25%
- --------------------------------------------------------------------------------
Other expenses (after waiver)(5) 0.45% 0.30% 0.45%
- --------------------------------------------------------------------------------
Estimated Total Fund Operating Expenses 0.95% 0.55% 0.95%
(after waiver)(3)
================================================================================
</TABLE>
(1) Redemption fees may be incurred by a shareholder when the shareholder
redeems Shares. The 2% redemption fee will be applicable on any day the
"Fund Protection Trigger" ("Trigger") is "active" and will not be applicable
on any day the Trigger is "inactive." (See "REDEMPTION OF SHARES" for a
further discussion of how the Trigger operates.) The redemption fee will be
retained by the Fund to help minimize the impact such redemptions may have
on Fund performance and to support administrative costs associated with
redemptions from the Fund. Additionally, the redemption fee may discourage
market timing by those shareholders initiating redemptions to take advantage
of short-term movements in interest rates.
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(2) Redemption proceeds sent by wire or by Western Union are subject to an
additional processing fee of up to $20. See "REDEMPTION OF SHARES". Investors
effecting Share transactions through certain broker-dealers and other financial
institutions may be charged additional fees by the particular institution
effecting the transaction.
(3) Under the Investment Advisory Agreement, UBT is entitled to an Advisory Fee
of 0.35% of the Fund's average daily net assets. UBT has voluntarily agreed to
waive 0.10% of that fee. In addition, UBT has agreed to waive or limit its
advisory fees or to reimburse the Fund for other expenses (except for Rule 12b-1
fees) in an amount that operates to limit annual operating expenses of the Fund
(exclusive of Rule 12b-1 fees) to no more than 0.70% for ISC Shares, 0.55% for
IC Shares and 0.70% for IRA Shares (expressed as a percentage of average daily
net assets). Each waiver of Advisory Fees or assumptions of Other Expenses by
UBT is subject to a possible reimbursement by the Fund within three years of the
Fund's inception if such reimbursement can be achieved within the foregoing
annual expense limits. UBT may terminate its waiver of Advisory Fees and
reimbursement of other expenses at any time, in its sole discretion upon written
notice to shareholders. In the absence of such fee waivers and reimbursements,
it is estimated that "Estimated Total Fund Operating Expenses" would be 1.05%
for ISC Shares, 0.65% for IC Shares and 1.20% IRA Shares.
(4) ISC and IRA Shares are subject to a 0.25% Rule 12b-1 fee. As a result of the
accrual of Rule 12b-1 fees on ISC and IRA Shares, long-term shareholders of ISC
or IRA Shares may pay more than the economic equivalent of the maximum initial
sales charges permitted by the National Association of Securities Dealers, Inc.
See "PURCHASE AND REDEMPTION OF FUND SHARES" herein.
(5) "Other expenses" include Wrapper Agreement premiums, Fund Administration
Fee, administrative service fee and fees for certain additional services
provided to the Fund and are estimated for the current fiscal year. Without
waivers for the IRA Shares, "Other expenses" would have been 0.60%.
Example:
An investor would pay the following expenses on a $1,000 investment in
the Fund assuming (1) 5% annual return and (2) redemption at the end of each
time period. No Redemption Fee has been included because it is anticipated that
the Trigger will not generally be active.
ONE YEAR THREE YEARS
ISC Shares $10 $30
IC Shares $6 $18
IRA Shares $10 $30
THE EXAMPLES SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. ALSO, THE
EXAMPLES ASSUME A 5% ANNUAL RETURN; ACTUAL PERFORMANCE, HOWEVER, WILL VARY AND
MAY RESULT IN A RETURN OF GREATER OR LESS THAN 5%.
Because the Fund will not begin operations until after January 31,
1999, there are no Financial Highlights for the Fund.
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INVESTMENTS, INVESTMENT PRACTICES AND RELATED RISKS
The Fund's investment objective is to provide investors with a high
level of current income while preserving principal and maintaining a stable NAV
per Share. This objective is not a fundamental policy of the Fund and therefore
may be changed upon notice to, but without the approval of, the Fund's
shareholders. If there is a change in the Fund's investment objective,
shareholders should consider whether the Fund remains an appropriate investment
in light of their then-current needs. Shareholders of the Fund will receive 30
days' prior written notice with respect to any change in the investment
objective of the Fund.
The Fund seeks to achieve its investment objective by investing in
Securities and by entering into Wrapper Agreements. The Fund's rate of return is
expected to be higher than most money market mutual funds. However, there can be
no assurance that the Fund's investment objectives will be achieved or that the
Fund's rate of return will be higher than that of most money market mutual
funds.
Generally, the value of Securities will fluctuate based upon market
conditions, interest rates, credit quality of the issuer, and economic and
political events. For instance, normally the prices of some Securities, such as
fixed income securities, will fall when interest rates rise, and rise when
interest rates fall. Similarly, a worsening in the credit quality of an issuer
of a Security will generally result in a lower price, while an improved credit
quality normally will have the opposite effect. The Wrapper Agreements are
intended to stabilize the NAV per Share by offsetting fluctuations in the value
of the Securities under certain conditions. In most circumstances, the
combination of Securities and Wrapper Agreements held by the Fund is expected to
provide Fund shareholders with a stable NAV per Share.
The Fund will pay premiums to purchase Wrapper Agreements. These costs
may reduce the Fund's investment return as compared to the return on a direct
investment in Securities. Further, the Wrapper Agreements do not guarantee the
Fund against loss if an issuer of Securities defaults on payments of interest or
principal or if the credit rating of a Security is downgraded to a level that
makes it ineligible for coverage under a Wrapper Agreement. In addition, the
provider of a Wrapper Agreement (a "Wrap Provider") could default on its
obligations under the Wrapper Agreement or the Fund might be unable to obtain
Wrapper Agreements covering all of its Securities and cash assets. The value of
the Shares might decline in the event of either type of default or such a
downgrade or if the Fund is unable to obtain Wrapper Agreements covering all of
its Securities and cash assets. In addition, under procedures adopted by the
Board of Trustees, it may be determined, based on a lowering of the Wrap
Provider's credit rating or otherwise, that a Wrapper Agreement should be valued
at a lower value than would otherwise be sufficient to maintain the Fund's NAV
per Share. See "Wrapper Agreements -- Specific Risks of Wrapper Agreements"
herein.
The Fund expects to invest at least 65% of its total assets in fixed
income securities ("Fixed Income Securities"). The Fund will invest primarily in
Fixed Income Securities rated at the time of purchase in one of the top two
rating categories by Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Rating Services ("S&P"), or Duff & Phelps Credit Rating Co. ("Duff &
Phelps"), or comparably rated by another nationally recognized statistical
rating organization ("NRSRO"), or, if not rated by an NRSRO, of comparable
quality as determined by UBT. The Fund, however, from time to time may purchase
Fixed Income Securities with a lower rating, provided that such Fixed Income
Securities will be rated at least investment grade at the time of
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<PAGE> 8
purchase by Moody's, S&P, or Duff & Phelps, or comparably rated by another
NRSRO, or, if not rated by a NRSRO, of comparable quality as determined by UBT.
In the event a particular Fixed Income Security is downgraded subsequent to
purchase, UBT will review any Fixed Income Securities which are downgraded and
make a determination regarding maintaining or liquidating any positions in such
downgraded Fixed Income Securities. The Fund will not under any circumstances
maintain more than 5% of its assets in non-investment grade Fixed Income
Securities which are non-investment grade as a result of a downgrade.
The Fixed Income Securities purchased by the Fund will include
securities issued or guaranteed by the U.S. Government, or any agency or
instrumentality thereof; debt of domestic or foreign entities, including
corporate, sovereign or supranational entities; asset-backed securities issued
by domestic or foreign entities; mortgage pass-through securities issued by
governmental entities such as the Government National Mortgage Association
("GNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal
National Mortgage Association ("FNMA"); mortgage pass-through securities issued
by non-government entities such as mortgage lenders, banks, or other financial
institutions, including private label mortgage pass-through securities;
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduit securities ("REMICs"), which are mortgage-backed debt instruments that
make payments of principal and interest at a variety of intervals and are
collateralized by any of the aforementioned mortgage pass-through securities;
and other U.S. Government or agency obligations, including Treasury Receipts and
other zero coupon securities (securities consisting solely of the principal or
interest component of a U.S. Treasury bond).
In addition to the Fixed Income Securities, the Fund intends to invest
a certain percentage of its assets in liquid short-term investments, including
bankers' acceptances, commercial paper, time deposits, certificates of deposit,
and other instruments of foreign and domestic corporations, banks and thrift
institutions ("Cash Account Assets"). Short-term investments purchased by the
Fund will be rated, at the time of purchase, in one of the top two short-term
rating categories by an NRSRO or, if unrated, will be of comparable quality as
determined by UBT. The Fund may invest up to 35% of its total assets in such
short-term investments for purposes of liquidity and cash management and up to
100% of its total assets in such instruments for temporary defensive purposes.
The Fund may also invest in repurchase agreements, options, futures contracts,
and swap agreements, when-issued securities and delayed delivery securities and
Rule 144A securities (as defined below), in addition to utilizing certain
financing techniques such as reverse repurchase agreements and mortgage dollar
rolls.
In seeking to maintain a stable NAV per share, the Fund will enter into
Wrapper Agreements with respect to its Securities. As such Securities fluctuate
in value, under normal conditions the Wrapper Agreements are expected to
fluctuate in value in inverse proportion to fluctuations in the value of the
Securities. Therefore, as interest rates rise and the value of Securities
decrease, the value of the Wrapper Agreements increases. Alternatively, if
interest rates decrease and the value of the Securities rises, the value of the
Wrapper Agreements is expected to decrease proportionally and may have a
negative value and be a liability of the Fund.
Under normal market conditions, the average duration of the Fund will
range from 2.0 to 3.5 years. In general, duration incorporates the security's
yield, coupon interest payments, final maturity and call features into a single
measure. Duration is a measure of the expected life of a debt security on a
present value basis and reflects both principal and interest payments. Duration
takes
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the length of time intervals between the present time and the time that the
interest and principal payments are scheduled or, in the case of a callable
security, expected to be received, and weights them by the present values of
cash to be received at each future point in time. For any debt security with
interest payments occurring prior to the payment of principal, duration is
ordinarily less than maturity. In general, all other factors being the same, the
lower the stated or coupon rate of interest of a debt security, the longer the
duration of the security; conversely, the higher the stated or coupon rate of
interest of a debt security, the shorter the duration of the security.
The following is an example of duration calculation: a 5% coupon bond
that pays semi-annual interest, has four years to maturity and is priced at par,
would have a duration of approximately 3.7 years. Changes in the Fund's duration
will be accomplished primarily through the reinvestment of cash flows and
selective trading of Securities.
The Fund is not a money market fund as defined in Rule 2a-7 of the
Investment Company Act of 1940, as amended (the "1940 Act"). In that regard, it
is important to note the distinction between the Fund and short-term investments
such as money market funds. The Securities held by the Fund have a longer
average maturity than those of money market funds. Because a money market fund
has a shorter average maturity, its yield will track the direction of current
market rates of return more closely than the Fund. For example, in a rising
interest rate environment, money market fund yields may rise more quickly than
will the Fund's. In a falling interest rate environment, money market fund
yields may fall more quickly than the Fund's. Over the long-term, however,
intermediate term Fixed Income Securities such as those purchased by the Fund
have historically produced higher returns than short-term investments (e.g.
money market funds). For additional information on the investment objectives and
policies of the Fund, see "INVESTMENTS, INVESTMENT PRACTICES AND RELATED RISKS"
in the SAI for more information.
UBT, as adviser to the Fund, selects the Securities purchased by the
Fund. In that regard, UBT may use trading as a means of managing the Fund in
seeking to achieve its investment objectives. Purchases and sales of Securities
will occur when UBT believes that such transactions will be beneficial for the
Fund. Therefore, the Fund's ability to meet its investment objectives will
depend in part on UBT's ability to evaluate particular securities and anticipate
relevant market conditions, including interest rate trends.
The Fund may invest in various types of Securities. The following is a
description of the types of Securities in which the Fund intends primarily to
invest, together with a description of certain risks associated with such
securities. Investment in such types of Securities is not a fundamental policy
of the Fund, and therefore, changes in the types of such investments are not
subject to shareholder approval.
UBT may decide not to purchase all of the following types of
instruments or use all of the investment techniques described below to the full
extent permitted, unless it believes that doing so will help the Fund achieve
its goal. Current holdings will be described in the financial reports of the
Fund, which will be sent to shareholders twice annually.
Fixed Income Securities. Fixed Income Securities are subject to
interest rate, credit and reinvestment risk. The value of Fixed Income
Securities usually will fluctuate with changes in interest rates. As interest
rates rise, the value of a Fixed Income Security will generally decrease, and
when interest rates fall, the value usually increases. Generally, the shorter
the maturity of a Fixed Income Security, the lower its yield and the less
sensitive it is to interest rate changes. In
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order to help maintain an average portfolio duration of 2.0 to 3.5 years, the
Fund intends to invest primarily in Fixed Income Securities with short-term to
intermediate-term maturities.
Fixed Income Securities are also subject to the risk that the issuer
will become impaired or default on its obligations. In that regard, the Fund is
subject to the credit risk of each issuer of a Fixed Income Security. If the
issuer of a Fixed Income Security defaults on its obligations, the Fund's
interest income may be reduced or the Fund may incur a loss of principal. The
ratings and certain other requirements which apply to the Fund's permitted
investments, as described elsewhere in this Prospectus and the SAI, are intended
to limit the amount of credit risk undertaken by the Fund. In addition, to
minimize credit risk, UBT intends to diversify the Fund's investments, and to
analyze the creditworthiness of, and to monitor, each such investment.
U.S. Government and Agency Securities. The Fund may invest in bills,
notes, bonds and other debt securities issued by the U.S. Treasury which are
direct obligations and backed by the full faith and credit of the U.S.
Government. In addition, the Fund may invest in securities which are issued or
guaranteed by U.S. Government-sponsored enterprises and federal agencies.
Securities issued by some agencies and instrumentalities are supported by the
instrumentalities' right to borrow from the U.S. Treasury under certain
circumstances. Securities issued by certain other U.S. agencies or
instrumentalities are supported only by the credit of the entity that issued
them.
U.S. Dollar Denominated Foreign Government and Agency Fixed Income
Securities. Debt instruments issued or guaranteed by foreign governments or
agencies ("foreign debt obligations"), especially foreign debt obligations of
developing countries, may involve a high degree of risk. The issuer of the
obligation or the governmental authorities that control the repayment of the
debt may be unable or unwilling to repay principal and interest when due and may
require renegotiation or rescheduling of debt payments. In addition, prospects
for repayment of principal and interest may depend on political, as well as
economic factors. The Fund will not invest in Fixed Income Securities
denominated in a foreign currency.
Mortgage-Backed Securities. The Fund may purchase mortgage-backed
securities issued by the U.S. Government, its agencies or instrumentalities and
non-governmental entities such as banks, mortgage lenders and other financial
institutions. In general, mortgage-backed securities include mortgage-backed
bonds, mortgage pay-through securities and mortgage pass-through securities.
Mortgage-backed securities represent direct or indirect participation in, or are
secured by and payable from, mortgage loans secured by real property. A mortgage
pass-through security is a pro rata interest in a pool of mortgages where the
cash flow generated from the mortgage collateral is passed through to the
investors. Mortgage pay-through securities show characteristics of both
pass-through and mortgage-backed bonds. The mortgage pass-through securities
issued by non-governmental entities such as banks, mortgage lenders or other
financial institutions in which the Fund may invest include private label
mortgage pass-through securities. CMOs are mortgage pay-through securities
collateralized by mortgages or mortgage-backed securities. CMOs are generally
issued in classes and series that have different maturities and often are
retired in sequence. Mortgage-backed securities also include other debt
obligations secured by mortgages on residential or commercial real estate
properties.
The yield characteristics of mortgage-backed securities differ from
those of traditional debt obligations. Among the principal differences are that
interest and principal payments are made more frequently on mortgage-backed
securities, usually monthly, and that principal may be repaid
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at any time because the underlying mortgage loans or other assets generally may
be prepaid at any time. As a result, if a Fund purchases these securities at a
premium, a repayment rate that is higher than expected will reduce yield, while
a prepayment rate that is lower than expected will have the opposite effect of
increasing the yield. Conversely, if a Fund purchases these securities at a
discount, a prepayment rate that is faster than expected will increase yield,
while a prepayment rate that is slower than expected will reduce yield.
Accelerated prepayments on securities purchased by the Fund at a premium also
impose the risk of loss of principal because the premium may not have been fully
amortized by the time the principal is prepaid in full. In the past there have
been extended periods of cyclical increases in interest rates that have caused
significant declines in the price of bonds in general, particularly
mortgage-backed securities, and have caused the effective maturity of securities
with prepayment features to be extended, thus effectively converting short or
intermediate term securities (which tend to be less volatile in price) into
longer term securities (which tend to be more volatile in price).
Asset-Backed Securities. Asset-backed securities are securities issued
by special purpose entities whose primary assets consist of a pool of loans or
accounts receivable, such as motor vehicle installment sale contracts, other
installment sale contracts, home equity loans, leases of various types of real
and personal property and receivables from revolving credit agreements. These
securities may be in the form of a beneficial interest in a special purpose
trust, a limited partnership interest, or commercial paper or other debt
securities issued by a special purpose entity. Typically, payments or
distributions of principal and interest on asset-backed securities are
credit-enhanced or guaranteed up to certain amounts and for a certain time
period by a letter of credit or a pool insurance policy issued by a financial
institution unaffiliated with the special purpose entity.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Generally, these securities do not have the benefit
of the same type of security interest in the related collateral. For example,
credit card receivables are generally unsecured, and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to avoid payment of certain amounts owed on
the credit cards, thereby reducing the balance due. Additionally, there is the
risk in connection with automobile receivables that recoveries on repossessed
collateral may not, in some cases, be available to support payments on those
securities.
Zero Coupon Securities. The Fund may invest in zero coupon securities,
including Treasury Income Growth Receipts ("TIGRs"), Certificates of Accrual
Securities ("CATs") and Treasury Receipts ("TRs"). Zero coupon securities are
debt securities that pay no cash income but are sold at substantial discounts
from their value at maturity. When a zero coupon security is held to maturity,
its entire return, which consists of the amortization of discount, comes from
the difference between its purchase price and its maturity value. This
difference is known at the time of purchase, so that investors holding zero
coupon securities until maturity know at the time of their investment what the
expected return on their investment will be. Certain zero coupon securities also
are sold at substantial discounts from their maturity value and provide for the
commencement of regular interest payments at a deferred date. Zero coupon
securities may have conversion features.
Zero coupon securities tend to be subject to greater price fluctuations
in response to changes in interest rates than ordinary interest-paying debt
securities with similar maturities. The value of zero coupon securities
appreciates more during periods of declining interest rates and depreciates more
during periods of rising interest rates than ordinary interest-paying debt
securities with similar
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maturities. Zero coupon securities may be issued by a wide variety of corporate
and governmental issuers. Although these instruments are generally not traded on
a national securities exchange, they are widely traded by brokers and dealers
and, to such extent, will not be considered illiquid for the purposes of the
Fund's limitation on investments in illiquid securities.
Current Federal income tax law requires the holder of a zero coupon
security to accrue income with respect to these securities prior to receipt of
cash payments. Accordingly to avoid liability for Federal income and excise
taxes, the Fund may be required to distribute income accrued with respect to
these securities and may have to dispose of portfolio securities under
disadvantageous circumstances in order to generate cash to satisfy these
distribution requirements.
Wrapper Agreements. A Wrapper Agreement is a contract between the Fund
and a Wrap Provider such as a bank, insurance company or other financial
institution, under which the Wrap Provider agrees to make payments to the Fund
upon the occurrence of certain events. By purchasing Wrapper Agreements, the
Fund expects to be able to maintain a stable NAV per Share because under normal
circumstances, the value of the Fund's Wrapper Agreements is expected to vary
inversely with the value of the Fund's assets covered by such Wrapper Agreements
(the "Underlying Assets"). Therefore, when the value of the Underlying Assets is
less than their "Book Value" (essentially the purchase price of the Underlying
Assets plus any accrued net income thereon), the Wrapper Agreements will be
assets of the Fund with a value equal to such deficiency. Similarly, when the
value of the Underlying Assets is more than their Book Value, the Wrapper
Agreements will be liabilities of the Fund with a value equal to such excess.
Accordingly, under normal conditions, the sum of the total value of the Fund's
Wrapper Agreements plus the total value of all of the Fund's Underlying Assets
is expected to equal the purchase price of the Underlying Assets, plus interest
on the Underlying Assets at the rate determined in the Wrapper Agreements. The
Fund intends to enter into Wrapper Agreements with Wrap Providers that at the
time of agreement have a current long-term debt or claims paying ability rating
in one of the two highest rating categories by Moody's or S&P.
Description of Wrapper Agreements. Under a Wrapper Agreement, the Wrap
Provider agrees to make certain payments to the Fund in exchange for an annual
premium which is typically 0.10% to 0.25% per dollar of the Underlying Assets
covered by the Wrap Agreement. Annual premiums may be different for each class
of shares, and therefore will be allocated as an expense to each class as
charged by the Wrap Provider and as determined in good faith by the Board of
Trustees. Payments made by the Wrap Provider are designed to enable the Fund to
make redemption payments reflecting the purchase price of the Underlying Assets
rather than the market value of the Underlying Assets. Payments may be made
under a Wrapper Agreement when securities are sold because Shares are redeemed,
at termination of the Wrapper Agreement, or both. The payments are based upon
the Book Value of the Wrapper Agreement. Book Value is typically equal to the
sum of (i) the purchase price of the Underlying Assets, minus (ii) the sale
price of the Underlying Assets liquidated to fund Share redemptions, plus (iii)
interest accrued at the crediting rate. The crediting rate is the yield on the
Underlying Assets, adjusted to reflect the amortization of differences between
the market value of the Underlying Assets and Book Value over the duration of
such Underlying Assets, minus Wrap Provider fees and Fund expenses. The
crediting rate is reset at least quarterly. Therefore, among other things, the
crediting rate may be affected by defaulted securities and by increases and
decreases in the Underlying Assets as a result of purchases and redemptions of
Shares. In addition, since the crediting rate reflects the amortization of
unrealized and realized gains and losses on the Underlying Assets, such rate may
not reflect the
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actual returns achieved by the Underlying Assets. Further, such rate may be
significantly greater or less than current market interest rates; provided, that
under each Wrapper Agreement the crediting rate will never be less than zero.
If, to effectuate a redemption payment, the Fund is required to
liquidate Underlying Assets, the Wrap Provider may be obligated to pay the Fund
all or some of the difference between the fair market and corresponding Book
Value of such Underlying Assets (if fair market value is less than Book Value).
If, on the other hand, the market value of the liquidated Underlying Assets
exceeds the corresponding Book Value, the Fund may be obligated to pay all or
some of the difference to the Wrap Provider. The parties' respective obligations
under the Wrapper Agreements arising from the sale of Underlying Assets may be
paid immediately or may be netted against one another. Through such obligations,
the Wrapper Agreements should, under normal conditions, reduce the interest rate
risk associated with the Fund's investment in Securities.
Wrapper Agreements may be "participating," "non-participating," or a
hybrid combination of the two. Under a "participating" Wrapper Agreement, the
Fund will not receive any payments from the Wrap Provider until it has
liquidated all of the Underlying Assets. At that time, if there is any remaining
Book Value, the Wrap Provider will pay the Fund such remainder. Under a
"non-participating" agreement, if there is a difference between the value of the
Underlying Assets and Book Value, the Wrap Provider or the Fund will make a
payment to the other each time Underlying Assets are liquidated to fund Share
redemptions. If the value of the Underlying Assets is less than Book Value, the
Wrap Provider will make a payment to the Fund, while if the value of the
Underlying Assets is greater than Book Value, the Fund will make a payment to
the Wrap Provider. In either case, the payment will be equal to the difference
between (i) the amount necessary to fund the redemption, and (ii) the product of
the amount of the redemption multiplied by the ratio of the value of the
Underlying Assets to Book Value. Under a "hybrid" Wrapper Agreements a certain
percentage of payments are treated as "participating," with all remaining
payments being "non-participating."
Generally, payments under a Wrapper Agreement will be made within one
day after the Fund requests a payment. In addition, each Wrapper Agreement will
allow the Fund, in the Fund's discretion, to assign a portion of the Wrapper
Agreement to a shareholder as a payment in kind. See "PURCHASE AND REDEMPTION OF
FUND SHARES - REDEMPTION OF SHARES" herein.
Payment requests will be allocated among Wrap Providers on a pro-rata
basis, based upon the Book Value of each Wrapper Agreement. However, if a
portion of a Wrapper Agreement is to be assigned as a payment in kind to a
shareholder, the Fund will have the discretion to choose to allocate the payment
to a single Wrapper Agreement. In that circumstance, the Fund will address
subsequent requests for such assignments to a different Wrap Provider until each
Wrap Provider has made roughly its pro rata share of such assignments.
The terms of a Wrapper Agreement may require that the Underlying Assets
have a specified duration or maturity, consist of specified types of securities
or be of a specified credit quality. The Fund will purchase Wrapper Agreements
whose criteria in this regard are consistent with the Fund's investment
objectives and policies as set forth in this Prospectus and the SAI, although in
some cases the Wrapper Agreement may require more restrictive investment
objectives and policies than otherwise permitted by the Prospectus and SAI. The
Wrapper Agreement also may permit the Wrap Provider to terminate the Wrapper
Agreement if the Fund changes the investment objectives,
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<PAGE> 14
policies and restrictions set forth in this Prospectus and the SAI, without the
consent of the Wrap Provider. In the event of termination by a Wrap Provider,
the Fund may or may not be able to contract with a substitute Wrap Provider.
A Wrapper Agreement may mature on a specified date, and may be
terminable upon notice by the Fund or a default by either the Fund or Wrap
Provider. An "evergreen" Wrapper Agreement contains no maturity date. Under this
type of Wrapper Agreement, either the Fund or the Wrap Provider may elect to
terminate the Wrapper Agreement through a fixed maturity conversion. This means
that the Wrapper Agreement will terminate on a future date which is generally
determined by adding the duration of the Underlying Assets to the date either
party makes such election (e.g., if the election date is 1/1/2001 and the
duration of the Underlying Assets is 3 years, the Wrapper Agreement will
terminate on 1/1/2004). In addition, during the conversion period, the Fund may
be required to comply with certain restrictions with respect to certain
Underlying Assets deemed to be covered by the terminating Wrapper Agreement.
Such restrictions typically include a requirement that the duration of such
Underlying Assets approximately equal the remaining time until the termination
of the conversion period.
Generally, at termination of a Wrapper Agreement, the Wrap Provider
will be required to pay the Fund any excess in Book Value over the value of the
Underlying Assets. However, if the Wrapper Agreement terminates because of a
default by the Fund or upon written notice by the Fund (other than through fixed
maturity conversion), no such payment is made.
Specific Risks of Wrapper Agreements. The Fund expects that its use of
Wrapper Agreements will allow it to maintain a stable NAV per Share and to pay
dividends to shareholders which reflect the interest income and market value
gains and losses of the Underlying Assets less the expenses incurred by the Fund
and Wrap Provider fees. However, there can be no assurance that the Fund will
maintain such a stable NAV per Share, or that any shareholder will achieve the
same investment return as would be realized by directly investing in the
Underlying Assets. As the crediting rates under the Wrapper Agreements reflect
the amortization of realized and unrealized gains and losses on the Underlying
Assets, a shareholder could realize more or less than the actual investment
returns of the Underlying Assets depending upon the timing of the shareholder's
purchases and redemptions of Shares, as well as those of other shareholders. In
addition, the following risks are inherent in Wrapper Agreements, and could
prevent the Fund from achieving its investment objectives.
Failure to Obtain Replacement Wrapper Agreements. If a Wrapper
Agreement matures or terminates, the Fund may be unable to obtain a replacement
Wrapper Agreement or a Wrapper Agreement with substantially the same terms as
the maturing or terminating agreement. In that event, the Fund may not be able
to maintain a stable NAV per Share. If at such time the value of the Underlying
Assets is less than Book Value, the Fund may be required to reduce its NAV
accordingly. Likewise, if at such time the value of the Underlying Assets is
greater than Book Value, the Fund's NAV may increase. In either case,
shareholders may experience unexpected fluctuations in the value of their
Shares. Further, if the new Wrapper Agreement contains unfavorable terms, such
as a higher Wrap Provider fee, the returns of the Fund may be negatively
affected.
Unwrapped Fund Assets. It is currently contemplated that all of the
Securities will be covered by Wrapper Agreements. The Fund, however, may not be
able to purchase or maintain
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<PAGE> 15
Wrapper Agreements with respect to all Securities. Moreover, the Fund may
determine not to enter into Wrapper Agreements with respect to certain of its
Securities. Further, a large, sudden increase in the amount of Share purchases
could result in the Fund being unable to obtain sufficient Wrapper Agreements to
cover all its Underlying Assets. In that event, the Fund may not be able to
achieve its investment policy of maintaining a stable NAV per share, because
fluctuations in the market value of assets that are not covered by Wrapper
Agreements may affect the Fund's NAV per Share.
Valuation of Wrapper Agreements. The Board of Trustees shall in good
faith determine the value of each Wrapper Agreement, and shall establish
policies and procedures for valuing these instruments. In valuing the Wrapper
Agreements other fair valuation methodologies may be utilized in certain
circumstances. These circumstances include but are not limited to: (1) Wrap
Provider default under a Wrapper Agreement or other agreement; (2) insolvency of
a Wrap Provider; (3) credit rating downgrade; or (4) any other situation in
which the Board of Trustees determines that a Wrap Provider may no longer be
able to satisfy its obligations under a Wrapper Agreement. In any such case, the
fair value of the Wrapper Agreement(s) may be determined to be less than the
difference between Book Value and market value of the Underlying Assets to
reflect the uncertainty that the Wrap Provider will be able to meet its
obligations under the Wrapper Agreement. In these situations the Fund may not be
able to maintain a stable NAV per Share and may experience a decrease or
increase in its NAV per Share depending upon the value of the Underlying Assets
at the time of adjustment.
Credit Risk of Underlying Assets. Wrapper Agreements usually do not
require the Wrap Provider to assume the credit risk associated with the issuer
of any Underlying Asset. Therefore, defaults by, and downgrades below investment
grade of, the issuer of an Underlying Asset usually will cause such Underlying
Asset to be removed from the coverage of a Wrapper Agreement. In addition,
certain other downgrades of Underlying Assets will cause such Underlying Assets
to be removed from the coverage of a Wrapper Agreement unless and until such
Assets' credit rating is upgraded to its former level. In these situations, the
termination of the coverage of such Underlying Assets in most circumstances will
cause the value of the Wrapper Agreement to decrease by an amount essentially
equal to the difference between the purchase price and the fair market value of
such assets. In any such event, the Fund may suffer a decrease in its NAV and
may not be able to maintain a stable NAV per Share.
Dependence Upon a Limited Number of Wrap Providers. It is currently
intended that the Fund will maintain Wrapper Agreements with one or more Wrap
Providers. If the Fund maintains more than one Wrapper Agreement, coverage of
the Underlying Assets will be allocated among such Wrapper Agreements. However,
there is no guarantee that the Fund will be able to obtain more than one Wrapper
Agreement, and therefore, it is possible that the Fund may be totally dependent
upon one Wrap Provider for coverage of all of the Underlying Assets.
Liability of Wrap Providers. A Wrap Provider's payment obligation is
limited to the Book Value of its Wrapper Agreement. If the Fund enters into
Wrapper Agreements with more than one Wrap Provider, no Wrap Provider will be
jointly liable for the payment obligations of any other Wrap Provider.
Therefore, if a Wrap Provider defaults on its obligations under a Wrapper
Agreement, the Fund will not be able to look to any other Wrap Provider for
satisfaction of such obligations. In that event, the Fund may seek to promptly
replace that Wrap Provider with a substitute Wrap Provider. However, there can
be no guarantee that any such replacement will be feasible, or that any
substitute Wrap Provider will agree to the same terms as the original Wrap
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Provider. Further, if at the time of the replacement, the value of the
Underlying Assets is less than the Book Value of the defaulted Wrapper
Agreement, it may be more difficult or impossible for the Fund to obtain a
replacement Wrapper Agreement from a qualified Wrap Provider. In addition, the
fees charged by any such substitute Wrap Provider could be significantly greater
than those previously charged and could reduce the ultimate returns provided to
shareholders.
Illiquid Asset. Currently, there is no active trading market for
Wrapper Agreements and none is expected to develop. Accordingly, Wrapper
Agreements may not be able to be liquidated within seven days at fair market
value. Therefore, the Wrapper Agreements will be considered illiquid. As such,
at the time of purchase, the fair market value of the Fund's Wrapper Agreements,
together with the fair market value of all other illiquid assets, will not
exceed fifteen percent (15%) of the fair market value of the Fund's net assets.
In the event that the fair market value of all illiquid assets, including
Wrapper Agreements, exceeds 15% of the fair market value of the Fund's net
assets as the result of events other than the purchase of illiquid assets, there
exists the risk that the Fund will not be able to maintain a stable NAV, and the
Fund will take steps to reduce in an orderly manner the percentage of illiquid
assets in the Fund such that illiquid assets will not exceed 15% of the Fund.
See "INVESTMENTS, INVESTMENT PRACTICES AND RELATED RISKS - ILLIQUID AND
RESTRICTED SECURITIES " BELOW.
Derivatives. The Fund may invest in various instruments commonly known
as derivatives, including the Wrapper Agreements, as well as options, futures
contracts and swap agreements. Generally, a derivative is a financial
arrangement the value of which is based on, or "derived" from, a traditional
security, asset or market index. Some derivatives such as mortgage-related and
other asset-backed securities are in many respects like any other investment,
although they may be more volatile or less liquid than more traditional debt
securities. There are a range of risks associated with the use of derivatives.
There are a variety of instruments that can be used for risk management. Futures
contracts and options are commonly used for traditional hedging purposes to
attempt to protect an investor from exposure to changing interest rates,
securities prices or currency exchange rates and for cash management purposes as
a low cost method of gaining exposure to a particular securities market without
investing directly in those securities. However, some derivatives are used for
leverage, which tends to magnify the effect of an instrument's price changes as
market conditions change. Leverage involves the use of a small amount of money
to control a large amount of financial assets and can, in some circumstances,
lead to significant losses. UBT uses derivatives only in circumstances where it
believes they offer the most economic means of improving the risk/reward profile
of the Fund. Derivatives will not be used to increase portfolio risk above the
level that could be achieved using only traditional investment securities or to
acquire exposure to changes in the value of assets or indices that by themselves
would not be purchased for the Fund. The use of derivatives for non-hedging
purposes, which may include leveraging, may be considered speculative. A further
description of the derivatives that the Fund may use and some of their
associated risks is found in "INVESTMENTS, INVESTMENT PRACTICES AND RELATED
RISKS - Hedging Strategies" and "INVESTMENTS, INVESTMENT PRACTICES AND RELATED
RISKS - Leveraging" below.
Illiquid and Restricted Securities. The Fund may invest its net assets
in restricted or illiquid securities that may not have price quotations
immediately available. Investments may be illiquid because of the absence of an
active trading market and/or resale restrictions pursuant to the Securities Act
of 1933 (the "Securities Act"), or otherwise, making it difficult to sell such
securities promptly at an acceptable price. The Fund will not invest more than
15% of its net assets in illiquid
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securities, including Wrapper Agreements. The Fund may purchase securities
eligible for resale under Rule 144A of the Securities Act. This rule permits
otherwise restricted securities to be sold to certain institutional buyers.
Provided that such securities are determined to be liquid by the Board of
Trustees, or by UBT, pursuant to guidelines approved by the Board of Trustees,
these restricted securities are treated as exempt from the Fund's 15% limit on
illiquid securities. If institutional trading in Rule 144A securities held by
the Fund were to decline, the liquidity of the Fund could be adversely affected,
resulting in the possibility of undesirable delays in selling these securities
at prices representing fair value. In the event that the fair market value of
all illiquid assets, including Wrapper Agreements, exceeds 15% of the fair
market value of the Fund's net assets as the result of events other than the
purchase of illiquid assets, the Fund will take steps to reduce in an orderly
manner the percentage of illiquid assets in the Fund such that illiquid assets
will not exceed 15% of the Fund.
When-Issued and Delayed Delivery Securities. The Fund may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities may be delayed by a month or more after the date of the
purchase commitment. The value of when-issued and delayed delivery securities is
subject to market fluctuations during this period, thereby potentially creating
an unrealized gain or loss to the Fund. Also, no income accrues to the Fund with
respect to such securities until settlement takes place.
The greater the Fund's outstanding commitments for these securities,
the greater the exposure to potential fluctuations in the NAV of the Fund,
although it is anticipated that the Wrapper Agreements will minimize the effects
of these fluctuations. Purchasing when-issued securities may involve the
additional risk that the yield available in the market when the delivery occurs
may be higher or the market price lower than that obtained at the time of
commitment. Although the Fund may be able to sell these securities prior to the
delivery date, it will purchase when-issued securities for the purpose of
actually acquiring the securities, unless after entering into the commitment a
sale appears desirable for investment reasons. The Fund will set aside liquid
assets in a segregated account to secure its outstanding commitments for
when-issued securities.
Repurchase Agreements. In a repurchase agreement, the Fund purchases a
security at one price and simultaneously agrees to sell it back to the seller at
a higher price at a stated time. In the event of a bankruptcy or default of the
other party to the repurchase agreement, the Fund could experience costs and
delays in liquidating the underlying security, which is held as collateral, and
the Fund might incur a loss if the value of the collateral held declines during
this period. Also, if the other party becomes insolvent, a bankruptcy court may
determine that the securities do not belong to the Fund and order that the
securities be sold to pay off that party's debts.
Mortgage Dollar Rolls and Reverse Repurchase Agreements. The Fund may
engage in reverse repurchase agreements to facilitate portfolio liquidity, a
practice common in the mutual fund industry, or for arbitrage transactions
discussed below. In a reverse repurchase agreement, the Fund would sell a
security and enter into an agreement to repurchase the security at a specified
future date and price. The Fund generally retains the right to interest and
principal payments on the security. Since the Fund receives cash upon entering
into a reverse repurchase agreement, it may be considered a borrowing (see
"Borrowing" below). When required by guidelines of the SEC, the Fund will set
aside permissible liquid assets in a segregated account to secure its
obligations to repurchase the security.
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The Fund may also enter into mortgage dollar rolls, in which the Fund
would sell mortgage-backed securities for delivery in the current month and
simultaneously contract to purchase substantially similar securities on a
specified future date. While the Fund would forego principal and interest paid
on the mortgage-backed securities during the roll period, the Fund would be
compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the proceeds
of the initial sale. The Fund also could be compensated through the receipt of
fee income equivalent to a lower forward price. At the time the Fund would enter
into a mortgage dollar roll, it would set aside permissible liquid assets in a
segregated account to secure its obligation for the forward commitment to buy
mortgage-backed securities. Mortgage dollar roll transactions may be considered
a borrowing by the Fund. (See "INVESTMENTS, INVESTMENT PRACTICES AND RELATED
RISKS- Borrowing" below).
The mortgage dollar rolls and reverse repurchase agreements entered
into by the Fund may be used as arbitrage transactions in which the Fund will
maintain an offsetting position in investment grade debt obligations or
repurchase agreements that mature on or before the settlement date on the
related mortgage dollar rolls or reverse repurchase agreements. Since the Fund
will receive interest on the securities or repurchase agreements in which it
invests the transaction proceeds, such transactions may involve leverage.
However, since such securities or repurchase agreements will be high quality and
will mature on or before the settlement date of the mortgage dollar roll or
reverse repurchase agreement, UBT believes that such arbitrage transactions do
not present the risks to the Fund that are associated with other types of
leverage.
Lending Portfolio Securities. From time to time, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions which
need to borrow securities to complete certain transactions. In connection with
such loans, the Fund will receive collateral consisting of cash, U.S. Government
securities or irrevocable letters of credit. Such collateral will be maintained
at all times in an amount equal to at least 100% of the current market value of
the loaned securities. The Fund can increase its income through the investment
of such collateral. The Fund continues to be entitled to payments in amounts
equal to the interest, dividends or other distributions payable on the loaned
security and receives interest on the amount of the loan. Such loans will be
terminable at any time upon specified notice. The Fund might experience risk of
loss if the institution with which it has engaged in a portfolio loan
transaction breaches its agreement with the Fund. See "Borrowing" below and in
the Fund's SAI. If the Fund enters into transactions of this type, the Wrapper
Agreements will treat the cash proceeds of such transactions as Underlying
Assets but not the portfolio instruments transferred to another party until
possession of such instruments is returned to the Fund.
Short-Term Investments. The Fund's assets may be invested in cash or
high quality short-term investments with remaining maturities of 397 days or
less. Assets will be invested in such instruments to meet anticipated
redemptions, expenses for day-to-day operations, to allow an orderly investment
program to be carried out in accordance with the Fund's investment policies, and
when, in UBT's opinion, it is appropriate to adopt a temporary defensive
position because of unstable or adverse conditions affecting the respective
markets. Generally, short-term investments will result in lower long-term
returns than investments in other Fixed Income Securities.
Borrowing. The Fund may borrow money for any purpose in an amount
equal to no more than 1/3 of its total assets. Under the 1940 Act, the Fund is
required to maintain continuous asset coverage of 300% with respect to such
borrowings and to sell (within three days) sufficient portfolio holdings to
restore such coverage if it should decline to less than 300% due to market
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fluctuations or otherwise, even if such liquidation of the Fund's holdings may
be disadvantageous from an investment standpoint.
For purposes of these limitations, borrowings under Wrapper Agreements,
as well as reverse repurchase, securities lending and dollar roll transactions,
are considered to be borrowings by the Fund. See "INVESTMENTS, INVESTMENT
PRACTICES AND RELATED RISKS-Wrapper Agreements" and "INVESTMENTS, INVESTMENT
PRACTICES AND RELATED Risks-Mortgage Dollar Rolls and Reverse Repurchase
Agreements" herein.
Leveraging. Leveraging creates an opportunity for increased net income
but, at the same time, is considered a speculative technique that creates
special risk considerations. For example, leveraging may exaggerate changes in
the NAV per Share and in the yield on the Securities. Although the principal of
such borrowings will be fixed, the value of assets purchased or retained with
borrowed funds may change while the borrowing is outstanding. Leveraging will
create interest expenses which can exceed the income from the assets retained.
To the extent the income derived from securities purchased with borrowed funds
exceeds the interest on the borrowing, net income will be greater than if
leveraging were not used. Conversely, if the income from the assets retained
with borrowed funds is not sufficient to cover the cost of leveraging, net
income will be less than if leveraging were not used, and therefore the amount
available for distribution to shareholders will be reduced. UBT currently does
not intend to use leverage as a usual practice in the investment of the Fund's
assets.
Hedging Strategies. The Fund may use certain hedging techniques and
strategies designed to adjust the overall risk of its investment portfolio.
These hedging strategies may involve the use of futures contracts, options and
other similar instruments (collectively referred to as "hedging instruments"),
as more fully described in the SAI. New financial products and risk management
techniques are introduced continuously. The Fund may use such products and
techniques if they are consistent with the Fund's investment objective and
policies. Among other purposes, these hedging strategies may be used to seek to
maintain a desired portfolio duration or to protect against market risk if the
Fund changes its investments among different types of Fixed Income Securities.
The Fund might not use any hedging strategies and there can be no
assurance that the use of hedging instruments by the Fund will assist it in
achieving its investment objective. Risks inherent in the use of these
instruments include: (a) the risks that interest rates and securities prices
will not move in the direction anticipated; (b) the imperfect correlation
between the prices of hedging instruments and the prices of securities being
hedged; (c) the Fund's potential inability to purchase or sell portfolio
instruments at advantageous times due to the need for the Fund to maintain
"cover" or segregated securities; (d) the possibility that the Fund will be
unable to close or liquidate its hedged position; and (e) the fact that skills
needed to use these strategies are different from those needed to select
Securities.
Asset Coverage. The Fund will comply with guidelines established by
the SEC with respect to coverage of options and futures by mutual funds. The
Fund intends to cover such transactions, as required under applicable
interpretations of the SEC, either by owning the underlying securities or by
segregating cash or liquid securities with the Fund's custodian in an amount at
all times equal to or exceeding the Fund's commitment with respect to these
instruments or contracts. Assets that are segregated for purposes of providing
cover need not be physically segregated in a separate account provided that the
custodian notes on its books that such assets are
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segregated. The Fund will also cover its use of Wrapper Agreements to the extent
required to avoid creating a "senior security" (as defined in the 1940 Act) in
connection with its purchase of such agreements.
PURCHASE AND REDEMPTION OF FUND SHARES
CLASSES OF SHARES
The Fund offers three classes of Shares: ISC, IC, and IRA (each a
"Class"). No Class is subject to an initial sales charge or contingent deferred
sales charge. Pursuant to a distribution plan (the "Distribution Plan") adopted
by the Board of Trustees, ISC and IRA Shares are subject to distribution fees
("Rule 12b-1 Fees"). Along with the Distribution Plan, the Board of Trustees has
adopted an administrative services plan (the "Administrative Services Plan")
which includes fees for shareholder and administrative services for the ISC
Shares and IRA Shares ("Administrative Service Fees"). Collectively the fees are
as follows: (1) ISC Shares pay a Rule 12b-1 Fee at the annual rate of up to
0.25% of the average daily net assets attributable to the ISC Shares and an
Administrative Service Fee at the annual rate of up to 0.15% of the average
daily net assets attributable to the ISC Shares; (2) IC Shares are not subject
to either a Rule 12b-1 Fee or an Administrative Service Fee; and (3) IRA Shares
pay a Rule 12b-1 Fee at the annual rate of up to 0.25% of the average daily net
assets attributable to the IRA Shares and an Administrative Service Fee at the
annual rate of up to 0.15% of the average daily net assets attributable to the
IRA Shares.
The Rule 12b-1 Fees will be used by Nationwide Advisory Services
("NAS") ("the Distributor") for the purpose of financing any activity which is
primarily intended to result in the sale of shares of the Fund. For example,
such fees may be used by the Distributor: (a) to compensate broker-dealers,
including the Distributor and its registered representatives, for their sale of
the Shares, including the implementation of various incentive programs with
respect to broker-dealers, banks, and other financial institutions; and (b) to
pay other advertising and promotional expenses in connection with the
distribution of the Shares. These advertising and promotional expenses include,
for example, costs of prospectuses for other than current shareholders;
preparation and distribution of sales literature; advertising of any type; and
compensation paid to and expenses incurred by officers, employees or
representatives of the Distributor or of other broker-dealers, banks, or other
financial institutions, including travel, entertainment, and telephone expenses.
The Rule 12b-1 Fees are paid to the Distributor under a Rule 12b-1 Plan approved
by the Board of Trustees. Payments under the Rule 12b-1 Plan may exceed expenses
actually incurred by the Distributor.
The services provided in exchange for the Administrative Service Fees
may include establishing and maintaining shareholder accounts, processing
purchase and redemption transactions, arranging for bank wires, performing
shareholder sub-accounting, answering client inquiries regarding the Fund,
providing periodic statements showing the client's account balance and those of
participants in Plans, Bank Collective Funds or insurance company separate
accounts, transmitting proxy statements, periodic reports, updated prospectuses
and other communications to shareholders and, with respect to meetings of
shareholders, collecting, tabulating and forwarding to the Trust executed
proxies and obtaining such other information and performing such other services
as may reasonably be required.
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The investment advisory fee applicable to all Classes of Shares is the
same. The amount of dividends payable to ISC and IRA Shares will be less than
those payable to IC Shares by the amount of the difference between the expenses
borne by the ISC and IRA Shares and the IC Shares.
Shares are, under certain circumstances, subject to a redemption fee of
2% of the proceeds of the redemption. See "REDEMPTION OF SHARES" below.
PURCHASE OF SHARES
Shares are purchased at a price equal to the NAV per share. See "Valuation of
Shares."
CONTRACT OWNER TRANSACTIONS
An insurance company may purchase the shares of the Fund using purchase
payments received on Contracts issued by life insurance company separate
accounts. These separate accounts are funded by shares of the Fund.
Contract-directed purchases, exchanges and redemptions are handled in accordance
with terms of the Contracts, subject to Fund restrictions contained herein.
Since Contracts may have different provisions with respect to the timing and
method of purchases, exchanges and redemptions, Contract owners should contact
their designated financial intermediary directly for details concerning contract
transactions.
PLAN PARTICIPANT TRANSACTIONS
Plan Participant-directed purchases, exchanges and redemptions of
Shares are handled in accordance with each Plan's specific provisions, subject
to the Fund restrictions contained herein. Plans may have different provisions
with respect to the timing and method of purchases, exchanges and redemptions by
Plan Participants. Plan Participants should contact their Plan administrator for
details concerning how they may direct transactions in Shares. It is the
responsibility of the Bank Collective Fund's investment manager, Plan
administrator or other Plan service provider to forward instructions for these
transactions to the Distributor or Nationwide Investors Services, Inc. ("NISI"),
the Fund's transfer agent.
Plan Participants should contact their Plan administrator or the
organization that provides recordkeeping services if they have questions
concerning their account. Plan administrators and fiduciaries should call
1-800-848-0920 for information regarding a Plan's or Bank Collective Fund's
account with the Fund.
FUND DIRECT PURCHASES
For Fund direct purchases, you may invest in TWO convenient ways:
By Mail--Complete the application and mail with your check or other
negotiable bank draft payable to: Morley Capital Accumulation Fund, c/o NISI,
Three Nationwide Plaza, P.O. Box 1492, Columbus, Ohio 43216-1492. Purchases must
be made in U.S. dollars only. The share price you receive will be determined as
of the Valuation Time (see "VALUATION OF SHARES") on the day the properly
completed application is received by NISI in Columbus, Ohio. Checks or drafts
drawn on non-U.S. banks are not accepted. NISI reserves the right to refuse
certain third-party checks.
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By Wire--To avoid mail delays on initial and subsequent investments,
you can request that your bank transmit funds (Federal Funds) by wire to the
Fund's custodian bank. In order to use this method, you must call NISI by 11
A.M. Eastern Time, and the wire must be received by the custodian bank by 2 P.M.
Eastern Time. The share price you receive will be determined as of the Valuation
Time after your order is received. If NISI does not receive Federal Funds for
your order within 3 business days, your order will be cancelled. The bank that
wires your money may charge you a fee for this service. If you choose this
method to open your account, you must call our toll-free number before you wire
your investment. If this is an initial investment, you must then complete and
mail the application.
Minimum Investment. The minimum initial investment in the Fund in
connection with the purchase of ISC Shares is $100,000, and for IC Shares is $1
million. The minimum initial investment in the Fund for IRA Shares is $2,000
($500 for Education IRA accounts) with a minimum of $500 for subsequent
investments. The Fund may waive the minimum initial investment amounts at its
discretion. No minimum applies to subsequent purchases effected by dividend
reinvestment.
REDEMPTION OF SHARES
You can sell (redeem) all, or any part of, your shares at any time.
Shares are redeemed at the NAV next computed after receipt of the properly
completed request by NISI, at its offices in Columbus, Ohio, subject to payment
of a redemption fee as described below. Payment for shares redeemed typically is
made within 3 business days of receipt. The value of shares redeemed depends
upon the market value of the investments of the Fund at the time of redemption
and may be more or less than the shareholders' cost.
Payment of redemption proceeds may be delayed until the check
purchasing has cleared or up to twelve days from the date of purchase, whichever
occurs first. This is to assure that your check has cleared. To avoid this
possible delay, you may make your investment by wire (see "PURCHASE OF SHARES -
by Wire"). You will receive a confirmation each time a liquidation of shares is
requested. Redemptions may be suspended or the date of payment postponed when
the New York Stock Exchange is closed (other than customary weekend and holiday
closings listed in "VALUATION OF SHARES"), or if trading is restricted or if any
emergency exists. Redemptions will be made at the next determined Fund NAV after
the redemption request is received in good order and will be paid no later than
seven days following such receipt.
You can redeem in any of the following ways:
Customer Service Line--You can call the customer service line to make a
redemption request and a check payable to the shareholder of record can be
mailed to the address of record, unless you declined the telephone option in
your account application. Redemptions of $1,000 or more can be wired directly to
your account at a commercial bank (voided check must be attached to the
application). For additional information on Western Union, please see below.
Telephone redemptions are available upon receipt of the proper forms.
These redemptions will be subject to mandatory 10% Federal income tax
withholding, unless you elect out of withholding. For further information, or to
request these forms, please call our customer service line at 1-800-848-0920.
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The Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The Fund will not be liable for any loss,
injury, damage, or expense as a result of acting upon instructions communicated
by telephone reasonably believed to be genuine, and the Fund will be held
harmless from any loss, claims or liability arising from its compliance with
such instructions. These options are subject to the terms and conditions set
forth in this Prospectus and all telephone transaction calls may be tape
recorded. The Fund reserves the right to revoke this privilege at any time
without notice to shareholders and request the redemption in writing, signed by
all shareholders.
By Bank Wire--Your funds will be wired to your bank on the next
business day after your redemption order has been processed. A $20 fee will be
deducted from the proceeds for this service. Your financial institution may also
charge you a fee for receipt of the wire. (If elected, this authorization will
remain in effect until written notice of its termination is received by NISI.)
By Automated Clearing House ("ACH")--Your funds will be sent via ACH to
your bank account on the second business day after your redemption order has
been received by NISI. There is no fee to receive your funds via ACH. (If
elected, this authorization will remain in effect until written notice of its
termination is received by NISI.) Funds sent through the automated clearing
house should reach your bank in two business days.
By Western Union--With Western Union's Quick Cash(SM) service, you can
receive your redemptions the next business day across the United States or
throughout the world. If you have elected, you can phone in your request to
receive funds on the next business day at 24,000 locations, including major
supermarkets and mail-box type outlets, many of which are open 24 hours a day,
seven days a week. The fee for the Western Union Service is $10.50 per $10,000.
Funds being sent outside of the United States may be subject to a higher fee.
This fee is deducted from your account.
By Mail or FAX (No Minimum)--Write to Nationwide Investors Services,
Inc., Three Nationwide Plaza, P.O. Box 1492, Columbus, Ohio 43216-1492 or fax to
(614) 249-8705. Please be sure that your letter or facsimile is signed exactly
as your account is registered and that your account number is included. For an
IRA redemption, you must include date of birth. Also, you must indicate whether
or not you wish Federal income tax (not less than 10%) to be withheld from the
distribution. The distribution will be processed effective the date the signed
letter or fax is received. Fax requests received after 4 P.M. Eastern Time will
be processed as of the next business day. NISI reserves the right to require the
original document if you use the fax method.
Other Redemption Requirements. Redemption requests for ISC and IC
Shares from Plans with more than $1,000,000 in the Fund and which represent a
withdrawal of 5% or more of a Plan's assets on any business day must include or
be preceded by the following information: (i) the Plan name; (ii) a listing of
the Plan trustee(s); (iii) copies of Plan documents or summaries which describe
the investment options available to and restrictions imposed upon Plan
participants; (iv) a listing of the allocation of Plan assets across available
investment options; (v) for the three year period immediately preceding the
withdrawal, a monthly summary of cash flow activity for the investment option in
which the Shares are included, detailing contribution and benefit payment amount
and amounts transferred to and from other investment options; and (vi) in the
case of Plans
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<PAGE> 24
subject to ERISA, identification of a "Qualified Professional Asset Manager"
within the meaning of Department of Labor Prohibited Transaction Class Exemption
84-14 (March 8, 1984). The Fund may waive these requirements under some
circumstances.
Redemption Fees. Generally, redemption requests on all Shares will be
subject to a 2% redemption fee when the Trigger is "active". The redemption fee
will be retained by the Fund to help minimize the impact the redemptions may
have on Fund performance and to support administrative costs associated with
redemptions from the Fund. Additionally, the redemption fee may discourage
market timing by those shareholders initiating redemptions to take advantage of
short-term movements in interest rates.
The Trigger is active on any day that, as of two Business Days prior,
the "Gross Annual Effective Yield of the Fund"* is less than the current yield
on the Dealer Commercial Paper (90-day) Index. Once activated, the Trigger will
become inactive on any day that, as of two Business Days prior, the Gross Annual
Effective Yield of the Fund is greater than the current yield of the Dealer
Commercial Paper (90-day) Index plus 0.25%. The Fund will rely on the Dealer
Commercial Paper (90-day) Index found daily on the front page of the Money and
Investing section of the Wall Street Journal. If the Dealer Commercial Paper (90
day) Index is not available in the Wall Street Journal, the Fund may use
alternative sources of information for 90-day dealer commercial paper rates.
Redemptions of ISC or IC Shares by Participants in plans and Contract
Owners for reasons of death, disability, retirement, employment termination,
loans, hardship, and other Plan permitted withdrawals and investment transfers
to non-Competing Funds (each, a "Benefit Responsive Payment Event") are not
subject to a redemption fee. All other redemptions of Shares are subject to a 2%
redemption fee, payable to the Fund when the Trigger is active.
EXAMPLE
An IRA Class Shareholder decides to redeem shares in the amount of $5,000 from
the Fund on October 15th. Assume that as of October 13th the current yield on
the Dealer Commercial Paper (90-day) Index is 7.2% and the Gross Annual
Effective Yield of the Fund is 7.0%. Because the Gross Annual Effective Yield of
the Fund is less than the current yield on the Dealer Commercial Paper (90-day)
Index the Trigger is active, and the Shareholder will receive net proceeds of
$4,900 for the redemption. The Trigger will remain active until two Business
Days after the Gross Annual Effective Yield of the Fund exceeds the current
yield on the Dealer Commercial Paper (90-day) Index by 0.25%.
Information on the Trigger and the Gross Annual Effective Yield of the Fund can
be obtained by calling 1-800-848-0920.
- --------------------
* The "Gross Annual Effective Yield of the Fund" is a measure of one day's
investment income (before deduction for fees and expenses) expressed as an
annual compounded yield. It is calculated on each business day based on the
dividend declared for the previous day as follows:
[((1 + Previous Day's Gross Dividend Factor) 365) -1] / [NAV per Share]
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<PAGE> 25
The Fund reserves the right to modify its redemption fee and waiver policy in
whole or in part for certain shareholders upon 30 days written notice to such
shareholders.
Redemption in Kind. In certain circumstances, the Fund reserves the
right to honor a redemption request by making payment in whole or in part in
Securities or Securities and Wrapper Agreements, selected solely at the
discretion of UBT. The Fund will always redeem Shares in cash for redemption
requests up to the lesser of $250,000 or 1% of the net asset value of the Fund
pursuant to an election made by the Fund and filed with the SEC. In addition,
the Fund does not intend to do an in-kind redemption for any redemption requests
of less than $1,000,000. The Fund does not anticipate exercising its right to
redeem in-kind except in extraordinary circumstances as determined by the Fund
and never if a request for redemption is received in connection with a Benefit
Responsive Payment Event or for redemption of IRA Shares.
To the extent a payment in kind is made with Securities, you may incur
transaction expenses in holding and disposing of the Securities. Therefore, in
receiving Securities you may incur costs that may exceed your share of the
operating expenses incurred by the Fund. In addition, Wrapper Agreements
assigned to you as a payment in kind are illiquid and will require you to pay
fees directly to the Wrap Provider rather than through the Fund. Further, the
Wrapper Agreement may contain restrictions on the securities subject to such
Agreement, including, but not limited to the types, maturities, duration and
credit quality of each security. Therefore, to obtain the benefits of a Wrapper
Agreement, you may not be able to freely trade the securities underlying the
Agreement. Also, Wrapper Agreements assigned to you will not provide protection
against the credit risk associated with the issuer of any Underlying Assets (see
"Specific Risks of Wrapper Agreements").
To the extent that any such payment in kind includes a Wrapper
Agreement, the Fund will assign a portion of one or more Wrapper Agreements to
you. The economic terms and conditions of each assigned Wrapper Agreement will
be substantially similar to the Wrapper Agreements held by the Fund. By
purchasing Shares in the Fund, you agree to accept an assignment of a Wrapper
Agreement as part of an in-kind redemption, provided that at the time of the
redemption payment such assignment would not violate applicable law.
A Wrap Provider, prior to the assignment of a Wrapper Agreement to a
Class ISC or IC shareholder, may require you to represent and warrant that such
assignment does not violate any applicable laws. Moreover, the Wrap Provider may
require you to obtain at your own expense the services of a qualified
professional asset manager acceptable to the Wrap Provider to manage the
Securities distributed in kind in conformity with the Wrapper Agreement
provisions. In the event a Wrapper Agreement cannot be assigned to you, the Fund
in its discretion may satisfy the redemption request through (a) a cash payment,
(b) a redemption in-kind consisting entirely of Securities, or (c) a combination
of cash and Securities.
In the event a redemption is made in kind with a Wrapper Agreement, the
Fund will incur costs in obtaining such Wrapper Agreement and assigning it to
the shareholder. The Fund will examine the costs and benefits of obtaining a
Wrapper Agreement in making a determination to incur such costs. Typically,
these costs should not exceed $5,000 per issuance.
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<PAGE> 26
Accounts Falling Below Minimum Investment Requirements. Because of the high cost
of maintaining small accounts, the Fund may close any accounts which, as a
result of redemptions, have a value of less than $2,000 ($500 for Education
IRAs). However, you will be notified if your account value is less than the
required minimum, and you will be allowed 90 days to make additional investments
before the account is liquidated. Under some circumstances, additional
investments to IRAs may not be permitted by the Code.
Signature Guarantee (IRA Shares only). Based on the circumstances of each
transaction, NISI reserves the right to require that your signature be
guaranteed by an authorized agent of an "eligible guarantor institution", which
includes, but is not limited to, certain banks, credit unions, savings
associations, and member firms of national security exchanges. A signature
guarantee is designed to protect the shareholder by helping to prevent an
unauthorized person from redeeming shares and obtaining the proceeds. A notary
public is not an acceptable guarantor. In certain special cases (such as
corporate or fiduciary registrations), additional legal documents may be
required to ensure proper authorizations. If NISI decides to require signature
guarantees in all circumstances, shareholders will be notified in writing prior
to implementation of the policy.
VALUATION OF SHARES
The NAV per share for the Fund is determined as of the close of regular
trading on the New York Stock Exchange (usually 4 P.M. Eastern Time), each day
that the exchange is open and on such other days as the Board of Trustees
determines and on days in which there is sufficient trading in portfolio
securities of a Fund to materially affect the NAV of the Fund (the "VALUATION
TIME")
The Fund will not compute NAV on the customary business holidays,
including Christmas, New Year's Day, Martin Luther King, Jr. Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day and Thanksgiving.
The NAV per share of a class is computed by adding the value of all
securities and other assets in the Fund's portfolio allocable to such class,
deducting any liabilities allocable to such class and any other liabilities
charged directly to that class and dividing by the number of shares outstanding
in such class.
The Securities and other assets, other than the Wrapper Agreements, are
valued primarily on the basis of market quotations as obtained from an
independent pricing organization. Wrapper Agreements and securities, for which
market quotations are not available, and other assets, for which an independent
pricing agent does not provide a value that represents their value in the
judgment of NAS, are valued at fair value as determined in good faith and in
accordance with policies and procedures established by the Board of Trustees.
Pursuant to procedures adopted by the Board of Trustees, the fair value
of a Wrapper Agreement ("Wrapper Value") generally will be equal to the
difference between the Book Value and the market value of the applicable
Underlying Assets. In determining Wrapper Value, the Board of Trustees intends
to consider the credit quality and ability of a Wrap Provider to pay amounts due
under the Wrapper Agreement. If the Board of Trustees determines that a Wrap
Provider is unable to make such payments, Nationwide Advisory Services, Inc.
("NAS") may assign a Wrapper Value that is less than the difference between the
Book Value and the market value (plus accrued interest) of the applicable
Underlying Assets. In the event of such an occurrence, the Fund might be unable
to maintain a stable NAV.
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Under procedures adopted by the Board of Trustees, an NAV per Share
which is later determined to have been inaccurate for any reason will be
recalculated. Purchases and redemptions made at an NAV per Share determined to
have been inaccurate or incorrect will be adjusted; provided, however, that no
such adjustment will be required where the difference between the original NAV
per Share and the recalculated NAV per Share divided by the latter is 0.005 (1/2
of 1%) or less, or shareholder transactions are otherwise unsubstantially
affected.
INVESTOR SERVICES
TOLL-FREE INFORMATION AND ASSISTANCE--Customer service representatives are
available to answer questions regarding the Funds and your account(s) between
the hours of 8 A.M. and 5 P.M. Eastern Time. Call toll-free: 1-800-848-0920 or
contact NISI at our FAX telephone number (614) 249-8705.
SHAREHOLDER CONFIRMATIONS--You will receive a confirmation statement each time a
requested transaction is processed. However, no confirmations are mailed on
certain pre-authorized, systematic transactions. Instead, these will appear on
your next consolidated statement.
QUARTERLY STATEMENTS--Unless accounts are administered by a financial
intermediary, shareholders of the Fund will receive quarterly statements listing
their activity in the Fund. Please review your statement carefully and notify us
immediately if there is a discrepancy or error in your account.
SHAREHOLDER REPORTS--All shareholders will receive reports semi-annually
detailing the financial operations of the funds.
UNDELIVERABLE MAIL--If mail from NISI to a shareholder is returned as
undeliverable on three or more consecutive occasions, NISI will not send any
future mail to the shareholder unless it receives notification of a correct
mailing address for the shareholder.
ADDITIONAL INFORMATION
BOARD OF TRUSTEES
The business affairs of the Trust are managed under the direction of
its Board of Trustees. The Board of Trustees sets and reviews policies regarding
the operation of the Trust, whereas the officers perform the daily functions of
the Trust.
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Adviser. The Trust, on behalf of the Fund, has retained the
services of Union Bond & Trust Company ("UBT") as its investment adviser for the
Fund pursuant to an Investment Advisory Agreement between the Trust and UBT
dated February 1, 1999 (the "Investment Advisory Agreement"). UBT with principal
offices at 5665 S.W. Meadows Road, Suite 400, Lake Oswego, OR 97035, is a state
bank and trust company chartered in 1913 and reorganized in 1992 under the laws
of the state of Oregon.
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<PAGE> 28
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 believed to
be relatively stable. UBT also acts as custodian with respect to similar fixed
income assets.
UBT is a wholly owned subsidiary of Morley Financial Services, Inc.
("Morley Financial Services"), a holding company which also wholly owns Morley
Capital Management, Inc., Morley & Associates, Inc. and Portland Investment
Services, Inc. Morley Financial Services, Inc., is a wholly-owned subsidiary of
Nationwide Financial Services, Inc. (NFS). NFS, a holding company, has two
classes of common stock outstanding with different voting rights enabling
Nationwide Corporation (the holder of all outstanding Class B Common Stock) to
control NFS. Nationwide Corporation is also a holding company in the Nationwide
Insurance Enterprise. All of the Common Stock of Nationwide Corporation is held
by Nationwide Mutual Insurance Company (95.3%) and Nationwide Mutual Fire
Insurance Company (4.7%), each of which is a mutual company owned by its
policyholders.
UBT offers trust services for other institutional corporate accounts in
the investment market including clients of Morley Capital Management, Inc., an
affiliate of UBT. As of September 30, 1998, Morley Financial Services and its
subsidiaries had investment management or advisory responsibility for
approximately $9.4 billion of assets. Morley Capital Management, Inc. is a
registered investment adviser which manages money for corporate, government,
Taft-Hartley, and bank intermediary clients on a national basis. Morley &
Associates, Inc. is an insurance brokerage company which provides insurance
brokerage services for clients throughout the United States.
UBT, subject to the supervision and direction of the Board of Trustees,
manages the Fund in accordance with the Fund's investment objective and stated
investment policies, makes investment decisions for the Fund, places orders to
purchase and sell securities and other financial instruments on behalf of the
Fund and employs or otherwise engages professional investment managers and
securities analysts who provide research services to the Fund. UBT places orders
for investment transactions on behalf of the Fund with broker-dealers and other
financial intermediaries that it selects. UBT may use an affiliate in connection
with a purchase or sale of an investment for the Fund if UBT believes that the
affiliate's charge for the transaction does not exceed usual and customary
levels. The Fund may invest in the obligations of correspondents and customers
of UBT.
The Investment Advisory Agreement provides for the Fund to pay UBT a
fee, accrued daily and paid monthly, equal to 0.35% per year 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 voluntarily entered into an
expense limitation agreement with the Fund ("Expense Limitation Agreement")
pursuant to which UBT has agreed to waive or limit a portion of its fee
including the waiver described above and to assume other expenses (except for
Rule 12b-1 fees) in an amount necessary to limit total annual operating expenses
of the Fund (exclusive of Rule 12b-1 fees) to no more than 0.70% for ISC Shares,
0.55% for IC Shares, and 0.70% for IRA Shares (expressed as a percentage of
average daily net assets). Reimbursement by the Fund of the advisory fees waived
or limited and other expenses paid by UBT pursuant to the Expense Limitation
Agreement may be made within three years from the date of the Fund's inception
when the Fund has reached a sufficient asset size to permit reimbursement to be
made without causing the total annual operating expense ratio to exceed the
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<PAGE> 29
foregoing annual expense limits. Consequently, no reimbursement by the Fund will
be made unless: (i) the Fund's assets exceed $50 million; (ii) the total annual
operating expenses of the Class making reimbursement is less than the relevant
limit set forth above; and (iii) the payment of such reimbursement is approved
by the Board of Trustees on a quarterly basis.
UBT has been advised by its counsel that UBT currently may perform the
services for the Fund described in this Prospectus and the SAI without violation
of the Glass-Steagall Act or other applicable banking laws or regulations. 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.
Fund Management. Mr. Taylor E. Drake and Mr. Thomas F. Mitchell are
responsible for day-to-day management of the Fund.
Mr. Drake, Vice President and Portfolio Manager, co-manages the Fund.
Since joining Morley Capital Management, Inc., an affiliate of UBT, in 1995, he
has managed corporate stable value portfolios and has overseen the development,
implementation and management of new fixed income products, including the Fund.
Prior to joining Morley Capital Management, Inc., Mr. Drake worked in
international structured finance and investment management for Mellon Bank in
Tokyo until June 1994 when he took a position at US Bancorp as Associate
Director of Investment Banking He received his B.A. degree, cum laude, in
Economics and Japanese from Brigham Young University.
Mr. Mitchell, Senior Portfolio Manager and Director of Compliance,
co-manages the Fund. Mr. Mitchell has more than twenty years' experience with
taxable and tax-exempt securities. From 1978 to 1996 he managed investment
portfolios for various commercial bank affiliates of First Interstate Bancorp.
In 1997 and 1998, following First Interstate's merger with Wells Fargo & Co., he
was a fixed income trader with Wells Fargo's Institutional Securities Sales and
Trading Division. Mr. Mitchell holds as undergraduate degree from Stanford
University, a law degree from the University of Virginia, and an MBA from the
University of Oregon. He is a member of the District of Columbia Bar and joined
Morley Capital Management, Inc. in December 1998.
Distribution Plan. The Trust adopted a Distribution Plan under Rule
12b-1 of the 1940 Act which permits the Fund to compensate the Distributor, for
expenses associated with distribution of its shares. Under the Distribution
Plan, the Fund pays compensation accrued daily and paid monthly. The Fund shall
pay amounts not exceeding an annual maximum amount of 0.25% of the daily net
assets of ISC Shares and IVC Shares. Distribution expenses paid by the
Distributor may include the costs of printing and mailing prospectuses and sales
literature to prospective investors, advertising, and compensation to sales
personnel and broker-dealers.
Administrative Services Plan. As authorized by the Administrative
Services Plan, the Fund has entered into a Servicing Agreements, pursuant to
which Nationwide Financial Services, Inc. (through its subsidiaries) and
Nationwide Investment Services Corporation have each agreed to provide certain
administrative support services in connection with Shares of the Fund owned of
record or beneficially by its customers. Such administrative support services
may include, but are not limited to, those services described above. In
consideration of such services, the Fund has agreed to pay a fee, computed at
the annual rate of up to 0.15% of the average daily net assets
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<PAGE> 30
attributable to ISC Shares and IRA Shares of the Fund held during the period by
customers for whom Nationwide Financial Services, Inc. or Nationwide Investment
Services Corporation has provided services under the Servicing Agreement. In the
future the Fund may enter into similar servicing agreements with other entities,
including NAS.
Administrator. Under the terms of a Fund Administration Agreement, NAS
provides various administrative and accounting services, including daily
valuation of the Funds' shares and preparation of financial statements, tax
returns, and compliance and regulatory reports. For these services, the Fund
pays NAS an annual fee 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.
There is a minimum fee of $50,000 per year.
Distributor. NAS serves as the Fund's principal underwriter on a best
efforts basis.
Custodian. The Fifth Third Bank acts as custodian for the assets of the
Fund under a separate Custodian Agreement with the Trust.
Transfer and Dividend Disbursing Agent. NAS, through its wholly-owned
subsidiary, NISI, serves as transfer agent and dividend disbursing agent for the
Trust. For these services, NISI receives an annual fee from each class of the
Fund of .01% of average daily net assets.
DESCRIPTION OF SHARES
The Trust presently offers shares of beneficial interest, without par
value, in fifteen series, one of these series being the Fund. The shares of each
of the funds are offered in separate classes and you have an interest only in
the shares of the fund which you own. Except for certain differences in voting
rights and in expenses to which such Shares may be subjected, shares of a
particular class are equal in all respects to shares of the other classes of
that Fund. In the event of liquidation of the Fund, shares of the same class
will share pro rata in the distribution of the net assets of the Fund with all
other shares of that class. All shares are without par value when issued and
paid for, and are fully paid and nonassessable by the Trust. Shares may be
exchanged or converted as described above but will have no other preference,
conversion, exchange or preemptive rights.
Voting Rights. Shareholders of each class of shares have one vote for
each share held and a proportionate fractional vote for any fractional shares
held. An annual or special meeting of shareholders to conduct necessary business
is not required by the Declaration of Trust, the 1940 Act or other authority
except, under certain circumstances, to amend the Declaration of Trust, the
Investment Advisory Agreement, and fundamental investment objectives, policies,
and restrictions, to elect and remove Trustees, to reorganize the Trust or any
series or class thereof, and to act upon certain other business matters. In
regard to termination, sale of assets, the change of fundamental investment
objectives, policies and restrictions or the approval of an Investment Advisory
Agreement, the right to vote is limited to the holders of shares of the
particular Fund affected by the proposal. In addition, holders of a class of a
Fund in which a Rule 12b-1 fee is charged will vote as a class of that Fund with
respect to any action regarding the Distribution Plan.
To the extent that such a meeting is not required, the Trust does not
intend to have an annual or special meeting of shareholders. The Trust has
represented to the Commission that
30
<PAGE> 31
Trustees will call a special meeting of shareholders for purposes of considering
the removal of one or more Trustees upon written request therefore from
shareholders holding not less than 10% of the outstanding votes of the Trust and
the Trust will assist in communicating with other shareholders as required by
Section 16(c) of the 1940 Act. At such meeting, a quorum of shareholders
(constituting a majority of votes attributable to all outstanding shares of the
Trust), by majority vote, has the power to remove one or more Trustees.
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
The Fund intends to distribute all of its net investment income and net
capital gains, if any, to its shareholders on an annual basis. The Fund
currently declares dividends from net investment income daily and pays dividends
monthly. Distributions of net realized capital gains are made annually. An
additional annual distribution ("Additional Distribution") may be paid to
satisfy the tax requirements (outlined below) that the Fund distribute each year
substantially all of its investment company taxable income (see "TAX
CONSIDERATIONS").
Dividends and other distributions paid on each Class of Shares will be
calculated in the same manner, at the same time, on the same day, and will be in
the same amount, except that the per Share dividends on ISC and IRA Shares will
be lower than those of IC Shares (which have a lower total expense ratio).
Dividends paid on the three Classes also might be affected differently by the
allocation of other Class-specific expenses. Dividends and other distributions
are automatically reinvested in additional Shares of the distributing Class,
unless the shareholder sends a written request to the Fund directing otherwise.
The Fund may declare and pay dividends in amounts which are not equal
to the amount of the net investment income it actually earns. In the event
distributions exceed the income earned, the excess may be considered a return of
capital. In the event the income earned exceeds the amount of the dividends
distributed, the Fund may make an Additional Distribution of such excess amount.
The Board of Trustees, in an effort to maintain a stable NAV per Share in the
event of an Additional Distribution, may declare, effective on the
ex-distribution date of an Additional Distribution, a reverse split of the
Shares in an amount that will cause the total number of Shares held by each
shareholder, including Shares acquired on reinvestment of that distribution, to
remain the same as before that distribution was paid.
For example, if the Fund declares an Additional Distribution of ten
cents per Share when the NAV per Share is $10.00, a shareholder holding one
Share would receive 0.01 additional Shares on reinvestment of that distribution.
If no reverse split were declared, the NAV per Share would be approximately
$9.90 and the total value of the 1.01 shares held by the shareholder would be
$10.00. If a 1.01 to 1 reverse split were declared, however, the shareholder's
1.01 shares would be combined into one share having a NAV of $10.00. Thus, a
reverse share split would not affect the total value of the shareholder's
Shares.
31
<PAGE> 32
TAX CONSIDERATIONS
The Fund intends to qualify each year as a "regulated investment
company" under the Code. By so qualifying, the Fund will not be subject to
federal income taxes to the extent that it distributes all or substantially all
of its net investment income and any net realized capital gains. The Fund
intends to distribute to its shareholders all of its investment company taxable
income and net capital gain at least annually, if necessary through Additional
Distributions, and therefore does not anticipate incurring any federal income
tax liability.
For Plan Participants utilizing the Fund as an investment option under
their Plan and for other tax-deferred accounts, dividend and capital gain
distributions from the Fund generally will not be subject to current taxation,
but will accumulate on a tax-deferred basis. In general, Bank Collective Funds,
Plans, and IRAs are governed by a complex set of tax rules. Each Plan
Participant should consult with their Plan administrator, their Plan's Summary
Plan Description, and/or a professional tax adviser regarding the tax
consequences of their participation in their Plan and of any Plan contributors
or withdrawals. IRA Investors should consult with their professional tax adviser
regarding the tax consequences associated with an investment in the Fund.
PERFORMANCE ADVERTISING
The Fund from time to time may advertise certain investment performance
figures. Performance will be reported for each class of shares and will probably
vary from class to class due to a difference in class expenses. These figures
are based on historical earnings, and past performance data is not necessarily
indicative of future performance of the Fund. Quotations of yield will be in
conformance with current SEC guidelines.
Yield refers to the income generated by an investment in the Fund 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
funds. Because this differs from other accounting methods, the quoted yield may
not equal the income actually paid to shareholders.
The Fund may advertise its total return and its holding period return
for various periods of time. Total return is calculated by determining, over a
period of time, the average annual compounded rate of return that an investment
in the Fund earned over that period, assuming reinvestment of all distributions.
Holding period return refers to the percentage change in the value of an
investment in a Fund over a period of time assuming reinvestment of all
distributions.
Total return and holding period return differ from yield in that the
return figures include capital changes in an investment while yield measures the
rate of net income generated by a Fund. Total return differs from holding period
return principally in that total return is an average annual figure while
holding period return is a cumulative figure for the entire period.
Total return and holding period return and yields are based on past
results and are not an indication of future performance. Performance information
or advertisements may include comparisons of the Fund's investment results to
various unmanaged indices or results of other mutual funds with similar
investment objectives.
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<PAGE> 33
PRIOR PERFORMANCE OF INSTITUTIONAL PRIVATE ACCOUNTS MANAGED BY UBT
The Fund commenced operations on February 1, 1999 and therefore has no
operating history or performance record of its own. The following table sets
forth composite performance data relating to the historical performance of all
portfolios managed by UBT that have investment objectives and risks
substantially similar to those of the Fund. The composite data is provided to
illustrate the past performance of UBT in managing substantially similar
portfolios as measured against a specified market index. The performance data
presented was not prepared in accordance with AIMR standards because the
composite reflects a stable value investment which is not marked to market daily
as required by AIMR. IT DOES NOT REPRESENT THE PERFORMANCE OF THE FUND.
INVESTORS SHOULD NOT CONSIDER THIS PERFORMANCE DATA AS AN INDICATION OF FUTURE
PERFORMANCE OF THE FUND OR OF UBT.
All information set forth in the table below relies on data supplied by
UBT or in the case of the comparative indices from statistical services, reports
or other sources believed by UBT to be reliable. Except as otherwise indicated,
however, such comparative information has not been verified by the Fund and is
unaudited.
Investors should be aware that stable value investments are designed to
reduce volatility. This is accomplished through the purchase of Wrapper
Agreements which, under normal circumstances, fluctuate in value in inverse
proportion to market movements, thus allowing for the underlying assets in an
account to be effectively carried at book value. Investors should be aware of
this unique aspect of stable value in trying to draw direct comparisons between
stable value returns and market value indices, or comparing one stable value
account to another. In addition, returns on stable value portfolios can differ
depending upon portfolio-specific factors such as (1) the amount and timing of
cash flows, and (2) the general level of interest rates when those cash flows
occur. The composite performance data presented below represents the actual
returns of all accounts and funds with substantially similar investment
objectives, policies, and strategies managed by UBT.
All returns presented were calculated on a total return basis and
include all interest and accrued income credited to the portfolios. All are
presented net of all fees and expenses assessed by UBT including investment
management fees, administration fees, wrapper premiums, custodial fees,
recordkeeping fees, brokerage commissions and execution expenses associated with
the purchase and/or disposition of account assets. Quarterly returns of the
composites combine the individual accounts' returns by asset-weighing each
individual account's asset value as of the beginning of the quarter. The yearly
returns are computed by geometrically linking the returns of each quarter within
the calendar year. This calculation method differs from the SEC method of
calculating returns.
The portfolios included in the composites are not subject to the same
types of expenses to which the Fund is subject nor to the diversification
requirements, specific tax restrictions and investment limitations imposed on
the Fund by the 1940 Act or Subchapter M of the Code. Consequently, the
performance results for the composites could have been adversely affected if the
portfolios included in the composites had been regulated as investment companies
under the federal securities laws.
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<PAGE> 34
The results presented below may not necessarily be the same as the
return experienced by any particular investor as a result of the timing of
investments and redemptions. In addition, the effect of taxes on any investor
will depend on such person's tax status, and the results have not been reduced
to reflect any income tax which may have been payable.
The investment results presented below are not intended to predict or
suggest the returns that might be experienced by the Fund or an investor
investing in the Fund. Investors should also be aware that the use of a
methodology different from that used below to calculated performance could
result in different performance data.
Performance as of December 31, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Year Stable Value Composite(1) 90-day T-bills(2) 30-day commercial paper(2)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Last 1 Year 5.92% 5.23% 5.39%
- -----------------------------------------------------------------------------------------------------------------
Last 3 Years 5.98% 5.29% 5.46%
- -----------------------------------------------------------------------------------------------------------------
Last 5 Years 6.05% 5.22% 5.36%
- -----------------------------------------------------------------------------------------------------------------
1993 6.65% 3.18% 3.20%
- -----------------------------------------------------------------------------------------------------------------
1994 5.95% 4.18% 4.47%
- -----------------------------------------------------------------------------------------------------------------
1995 6.39% 6.03% 5.93%
- -----------------------------------------------------------------------------------------------------------------
1996 5.99% 5.31% 5.46%
- -----------------------------------------------------------------------------------------------------------------
1997 6.03% 5.33% 5.55%
- -----------------------------------------------------------------------------------------------------------------
1998 5.92% 5.23% 5.39%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The composite figures are net of all fees and expenses (including
wrapper premiums) assessed by UBT. The average fee over the five years,
excluding wrapper premiums, was 0.44% expressed as a percentage of
average daily net assets. Actual fund expenses for each class of shares
are expected to be higher than those of the composite.
(2) The returns on 90-day T-bills and 30-day commercial paper are often
used as benchmarks for stable value funds. Both of these benchmarks
exhibit very little price volatility. The returns for these two
benchmarks are listed gross of fees.
34
<PAGE> 35
ADVISER
Union Bond & Trust Company
5665 S.W. Meadows Rd., Suite 400
Lake Oswego, Oregon 97035
DISTRIBUTOR
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, Ohio 43215
INDEPENDENT AUDITORS
KPMG LLP
Two Nationwide Plaza
Columbus, Ohio 43215-2537
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT
Nationwide Investors Services, Inc.
Three Nationwide Plaza
Columbus, Ohio 43215
LEGAL COUNSEL
Dietrich, Reynolds & Koogler
One Nationwide Plaza
Columbus, Ohio 43215-2220
CUSTODIAN
The Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45263-0001
35
<PAGE> 36
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1999
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 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.
<PAGE> 37
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
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........................................ 17
REDEMPTION OF FUND SHARES.............................................................. 21
TAXATION............................................................................... 21
FINANCIAL STATEMENTS................................................................... 24
PERFORMANCE INFORMATION................................................................ 24
APPENDIX............................................................................... 26
</TABLE>
<PAGE> 38
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 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
1
<PAGE> 39
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.
2
<PAGE> 40
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
3
<PAGE> 41
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.
4
<PAGE> 42
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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<PAGE> 43
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 the option is being written. Securities against
which
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<PAGE> 45
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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<PAGE> 46
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> 47
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> 48
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> 49
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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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> 51
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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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.
CHARLES L. FUELLGRAF, JR., Trustee*+, Age 67
600 South Washington Street, Butler, Pennsylvania 16001
Mr. Fuellgraf is Chief Executive Officer of Fuellgraf Electric Company, an
electrical construction and engineering company. He is a Director of the
Nationwide Insurance Companies and associated companies.
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.
HAROLD W. WEIHL, Trustee+, Age 66
14282 King Road, Bowling Green, Ohio 43402
Mr. Weihl is a owner and operator of Weihl Farms. He 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 Administrator.
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<PAGE> 53
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 Counsel of Druen, 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. Mr. Fuellgraf is
the Alternate Member. 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.
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.
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<PAGE> 54
COMPENSATION TABLE
<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
Charles L. Fuellgraf, Jr, Trustee 10,000 --0-- --0-- 10,000
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
Harold W. Weihl, 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.
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 Nationwide
Financial Services, Inc. ("NFS"), 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.
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<PAGE> 55
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.
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
18
<PAGE> 56
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 an Administration Agreement, NAS 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 Administration Agreement, NAS 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.
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 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 NAS, 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
19
<PAGE> 57
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.
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
20
<PAGE> 58
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.
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
21
<PAGE> 59
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 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
22
<PAGE> 60
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.
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.
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<PAGE> 61
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 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
24
<PAGE> 62
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 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
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and claims.
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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