<PAGE> 1
SUPPLEMENT DATED FEBRUARY 27, 1998
TO PROSPECTUS DATED FEBRUARY 28, 1997
FINANCIAL HORIZONS INVESTMENT TRUST
--GROWTH FUND
--MUNICIPAL BOND FUND
--GOVERNMENT BOND FUND
--CASH RESERVE FUND
1. The date of the prospectus is hereby changed to February 27, 1997.
2. On February 16, 1998, Shareholders of the series of Financial Horizons
Investment Trust (the "Trust") approved an Agreement and Plan of Reorganization,
dated as of November 24, 1997, as amended as of December 30, 1997 (the "Plan")
between the Trust and Nationwide Investing Foundation III ("NIF III"), an Ohio
business trust. Pursuant to the Plan and as listed in the chart below, a series
of NIF III (each, an "Acquiring Fund") will acquire all of the assets of each
current series of the Trust (each, a "Fund") in exchange for the assumption of
all of the Fund's liabilities and a number of full and fractional shares of the
Acquiring Fund having an aggregate net asset value equal to the Fund's net
assets (the transactions which have been approved by shareholders are hereafter
referred as the "Reorganization"). The Plan also requires the distribution of
the Acquiring Fund shares received to the shareholders of each of the Funds. For
each of the Funds, except the Cash Reserve Fund, the shareholders will receive
Class D shares of the Acquiring Fund. The shareholders of the Cash Reserve Fund
will receive shares of the NIF III Money Market Fund which are without class
designation.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE ACQUIRING FUNDS (NIF III) THE FUNDS
- ----------------------------- ---------
<S> <C>
Nationwide Mid Cap Growth Fund Growth Fund
Nationwide Tax-Free Income Fund Municipal Bond Fund
Nationwide Long-Term U. S. Government Bond Fund Government Bond Fund
Nationwide Money Market Fund Cash Reserve Fund
</TABLE>
- --------------------------------------------------------------------------------
Completion of the Reorganization is planned for on or about May 9, 1998;
however, the Reorganization may be effected on such earlier or later date as may
be determined. When the Reorganization is completed, all shareholders will
receive a new prospectus for the Acquiring Funds of NIF III.
3. The third sentence of the first paragraph following the Table of Contents on
the cover page of the Prospectus is hereby deleted and replaced with the
following:
A Statement of Additional Information, dated February 27, 1998, has
been filed with the Securities and Exchange Commission.
4. The last two lines on the cover pages of the Prospectus are hereby deleted
and replaced with the following:
THE STATEMENT OF ADDITIONAL INFORMATION, DATED
FEBRUARY 27, 1998, IS INCORPORATED HEREIN BY REFERENCE.
<PAGE> 2
5. The information under the heading "SUMMARY OF TRUST EXPENSES"--ANNUAL FUND
OPERATING EXPENSES" on page 2 of the Prospectus, is deleted in its entirety and
replaced with the following:
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS,
AFTER EXPENSE REIMBURSEMENTS)
The expenses and fees in the following table and the example that follows are
based on actual fees and expenses incurred for the fiscal year ended October 31,
1997:
<TABLE>
<CAPTION>
CASH GOVERNMENT MUNICIPAL
RESERVE BOND BOND GROWTH
------- ---------- --------- ------
<S> <C> <C> <C> <C>
Management Fees 0.40% 0.65% 0.65% 0.65%
12b-1 Fees* 0.00% 0.00% 0.00% 0.00%
Other Expenses 0.29% 0.20% 0.20% 0.31%
---- ---- ---- ----
Total Fund Operating
Expenses** 0.69% 0.85% 0.85% 0.96%
==== ==== ==== ====
</TABLE>
* As of November 8, 1996 and until further written notice to shareholders,
Nationwide Advisory Services, Inc. ("NAS") has agreed to waive all of the 0.75%
12b-1 fee on the Government Bond, Municipal Bond and Growth Funds.
** During the year ended October 31, 1997, total operating expenses if no
expenses were waived would have been 1.60%, 1.59% and 1.70%, respectively, on
the Government Bond, Municipal Bond, and Growth Fund.
EXAMPLE:
The following example illustrates the expenses you would pay on a $1,000
investment over various time periods assuming: (1) a 5% annual return, (2)
redemption at the end of each time period:
<TABLE>
<CAPTION>
CASH GOVERNMENT MUNICIPAL
RESERVE BOND BOND GROWTH
------- ---------- --------- ------
<S> <C> <C> <C> <C>
1 Year $ 7 $ 59 $ 59 $ 60
3 Years $ 22 $ 67 $ 67 $ 71
5 Years $ 38 $ 67 $ 67 $ 73
10 Years $ 86 $105 $105 $118
</TABLE>
You would pay the following expenses on the same investment, assuming no
redemption:
<TABLE>
<CAPTION>
CASH GOVERNMENT MUNICIPAL
RESERVE BOND BOND GROWTH
------- ---------- --------- ------
<S> <C> <C> <C> <C>
1 Year $ 7 $ 9 $ 9 $ 10
3 Years $ 22 $ 27 $ 27 $ 31
5 Years $ 38 $ 47 $ 47 $ 53
10 Years $ 86 $105 $105 $118
</TABLE>
The expenses and fees in the following table and example that follows have
been restated to reflect fees shareholders the Funds will bear completion after
the Reorganization:
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
MID
CAP TAX-FREE LONG-TERM MONEY
GROWTH INCOME U.S. GOV'T MARKET
------ -------- ---------- ------
<S> <C> <C> <C> <C>
Maximum Sales Charge
Imposed on
Purchase* (as a
percentage of
offering price)
offering price) 4.50% 4.50% 4.50% None
Redemption Fee** (as
a percentage of
amount redeemed, if
applicable) None None None None
</TABLE>
* Lower sales charges are available as the amount of the investment increases.
To receive even greater sales charge discounts, investors may also include the
value of Class D shares held in certain other accounts (including household
family members' accounts).
** A $5 fee will be deducted from the proceeds of any redemptions wired to your
bank. A fee also will be charged if you utilize Western Union's Quick Cash
service: this fee is $9.50 per $10,000 redeemed.
2
<PAGE> 3
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
MID
CAP TAX-FREE LONG-TERM MONEY
GROWTH INCOME U.S. GOV'T MARKET
------ -------- ---------- ------
<S> <C> <C> <C> <C>
Management Fees 0.60% 0.50% 0.50% 0.40%
12b-1 Fees None None None None
Other Expenses 0.38% 0.19% 0.27% 0.20%
----- ----- ----- -----
Total Fund Operating
Expenses 0.98% 0.69% 0.77% 0.60%
===== ===== ===== =====
</TABLE>
EXAMPLE:
The following example illustrates the expenses you would pay on a $1,000
investment over various time periods assuming: (1) a 5% annual return, (2)
redemption at the end of each time period, and (3) payment of the maximum
applicable sales charge. There are no contingent deferred sales charges imposed
on Class D or Money Market shares of NIF III.
<TABLE>
<CAPTION>
MID
CAP TAX-FREE LONG-TERM MONEY
GROWTH INCOME U.S. GOV'T MARKET
------ -------- ---------- ------
<S> <C> <C> <C> <C>
1 Year $ 55 $ 52 $ 53 $ 6
3 Years $ 75 $ 66 $ 68 $ 19
5 Years $ 97 $ 82 $ 86 $ 33
10 Years $160 $128 $136 $ 75
</TABLE>
The above examples should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
3
<PAGE> 4
6. The information under "Financial Highlights" on page 3 of the Prospectus is
hereby updated as to each Fund for the fiscal year ended October 31, 1997, with
the following:
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD ENDED OCTOBER 31, 1997)
<TABLE>
<CAPTION>
CASH GOVERNMENT MUNICIPAL
RESERVE BOND BOND GROWTH
------- ---------- --------- -------
<S> <C> <C> <C> <C>
Net Asset Value -- Beginning of Period $ 1.00 $ 10.92 $ 10.77 $ 19.47
------ ------- ------- -------
Net investment Income .05 .66 .53 .04
Net realized gain (loss) and unrealized appreciation
(depreciation) -- .27 .35 4.38
------ ------- ------- -------
Total from investment operations .05 .93 .88 4.42
Dividends from net investment income (.05) (.66) (.53) (.03)
Distributions from net realized gains on investment
transactions -- -- -- (.99)
------ ------- ------- -------
Total distributions (.05) (.66) (.53) (1.02)
------ ------- ------- -------
Net Asset Value -- End of Period $ 1.00 $ 11.19 $ 11.12 $ 22.87
====== ======= ======= =======
Total Return (excluding sales charges) 4.93% 8.84% 8.37% 23.66%
$4,051 $48,549 $16,821 $ 9,541
Ratio of expense to average net assets .69% .85% .85% .96%
Ratio of expense to average net assets* .69% 1.60% 1.59% 1.70%
Ratio of net investment income to average net assets 4.82% 6.04% 4.85% 0.20%
Ratio of net investment income (loss) to average net
assets* 4.82% 5.29% 4.11% (0.54%)
Portfolio turnover -- 52.10% 14.09% 40.69%
Average commission rate paid -- -- -- 5.8006c
</TABLE>
* Ratios calculated as if no expenses were waived.
** Represents the total amount of commissions paid in portfolio equity
transactions divided by the total number of shares purchased and sold by the
Fund for which commissions were charged.
The information in the Financial Highlights has been audited by KPMG Peat
Marwick LLP, independent auditors whose report thereon together with the
financial statements which are incorporated by reference in the Statement of
Additional Information from the Annual Report. The Statement of Additional
Information and the Annual Report for the Funds which contain further
information about the Funds' performance including Management's Discussion of
Fund Performance may be obtained free of charge by calling 1 (800) 848-0920.
4
<PAGE> 5
7. The paragraph under "Management's Discussion of Fund's Performance" on page
9 of the Prospectus is replaced in its entirety by the following:
The Annual Report for the fiscal year ended October 31, 1997 contains
management's discussion of each Fund's performance including narrative
discussions by each Fund's portfolio managers and line graphs comparing the
performance of each Fund since its inception to an appropriate market index
over the same periods. Copies of this Annual Report can be obtained free of
charge by writing the Funds or by calling 1-800-848-0920, toll free.
8. On page 15 of the Prospectus under the section entitled "TAX STATUS--Federal
Taxes", the fourth paragraph is hereby deleted in its entirety and replaced by
the following:
The Taxpayer Relief Act of 1997 has substantially changed the manner
in which the income tax on net long-term capital gains is computed for
individuals. For corporations, net long-term capital gains are taxed at the
same rates as ordinary income. The following is a summary of the new rules
for the taxation of net long-term capital gains, which are applicable to
individuals but not corporations, for sales and exchanges after May 6,
1997.
For investments held for more than 18 months (12 months if the
investment was sold after May 6 and before July 29, 1997), the top net
long-term capital gain rate is 20%. For taxpayers who are in the 15%
regular tax bracket for 1997, the top long-term capital gain rate is 10%.
Commencing with sales after July 28, 1997, gain from assets that are
held for more than 12 months but not more than 18 months is treated as
mid-term gain. The top rate for mid-term gains is 28%.
If the investor's regular tax rate is lower than the top long-term
capital gain rate, the tax is computed using the regular tax rates.
9. The information pertaining to Legal Counsel on page 20 of the Prospectus
should read "Druen, Dietrich, Reynolds & Koogler, One Nationwide Plaza,
Columbus, Ohio 43215."
10. This supplement supersedes in their entirety the prospectus Supplements
dated November 28, 1997 and December 8, 1997.
THIS SUPPLEMENT SHOULD BE RETAINED
WITH THE PROSPECTUS FOR FUTURE REFERENCE.
FHT-11-4
5
<PAGE> 6
PART B. STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 27, 1998
FINANCIAL HORIZONS INVESTMENT TRUST
- CASH RESERVE FUND
- GOVERNMENT BOND FUND
- MUNICIPAL BOND FUND
- GROWTH FUND
This Statement of Additional Information is not a prospectus. It contains
information in addition to and more detailed than set forth in the Prospectus
and should be read in conjunction with the Trust's Prospectus, dated February
28, 1997 as supplemented February 27, 1998. The Prospectus may be obtained from
Nationwide Advisory Services, Inc., P.O. Box 1492, Three Nationwide Plaza,
Columbus, Ohio 43216, or by calling 1-800-848-0920.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
GENERAL INFORMATION AND HISTORY 1
ADDITIONAL INFORMATION AS TO
INVESTMENT OBJECTIVES AND POLICIES 1
ADDITIONAL INFORMATION AS TO
INVESTMENT TECHNIQUES 2
INVESTMENT RESTRICTIONS 3
MAJOR SHAREHOLDERS 5
TRUSTEES AND OFFICERS OF THE TRUST 5
CALCULATING YIELD - CASH RESERVE FUND 6
CALCULATING YIELD AND TOTAL RETURN
- NON-CASH RESERVE FUNDS 6
INVESTMENT ADVISER AND OTHER SERVICES 7
DISTRIBUTION AGREEMENT 8
PURCHASES, REDEMPTIONS AND PRICING OF SHARES 9
SHAREHOLDERS' RIGHTS 10
CUSTODIAN 11
BROKERAGE ALLOCATION 11
TAX STATUS 12
FINANCIAL STATEMENTS 13
APPENDIX 13
</TABLE>
GENERAL INFORMATION AND HISTORY
Financial Horizons Investment Trust ("Trust") is an open-end, diversified
investment company organized under the laws of Massachusetts, by a Declaration
of Trust, dated May 9, 1988. The Trust offers shares in four separate series
("Funds"), each with its own investment objective.
ADDITIONAL INFORMATION AS TO INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of the Funds' investment
objectives and policies discussed in the Prospectus.
The types of permitted investments described in the
Prospectus may be changed without prior approval by, or notice to, the
shareholders. There is no guarantee that the objectives will be realized. The
investment restrictions, set forth herein and in the prospectus, cannot be
changed without the approval of shareholders.
1
<PAGE> 7
- - RISKS AFFECTING FIXED INVESTMENTS
The net asset value of the shares of open-end investment companies such as the
Government Fund and the Municipal Fund, which invest in fixed income securities,
changes as the general levels of interest rates fluctuate. When interest rates
decline, the value of a portfolio invested at higher yields can be expected to
rise. Conversely, when interest rates rise, the value of a portfolio invested at
lower yields can be expected to decline. Although changes in the value of
securities subsequent to their acquisition are reflected in the net asset value
of shares of a Fund, such changes will not affect the income received by that
Fund from such securities. However, since available yields and yield
differentials vary over time, no specific level of income or yield differential
can ever be assured. Also, the dividends paid by a Fund, if any, will increase
or decrease in relation to the income received by that Fund from its investments
which would, in any case, be reduced by that Fund's expenses before it is
distributed to shareholders.
Although the mortgage loans in a GNMA pool will have maturities of up to 30
years, the actual average life of the GNMA certificates typically will be
substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Prepayment rates vary widely
and may be affected by changes in market interest rates. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening the
actual average life of the GNMA certificates. Conversely, when interest rates
are rising, the rate of prepayment tends to decrease, thereby lengthening the
actual average life of the GNMA certificates. Accordingly, it is not possible to
accurately predict the average life of a particular pool. Reinvestment of
prepayments may occur at higher or lower rates than the original yield on the
certificates. Due to the prepayment feature and the need to reinvest prepayments
of principal at current rates, GNMA certificates can be less effective than
typical bonds of similar maturities at "locking in" yields during periods of
declining interest rates, although they may have comparable risks of decline in
value during periods of rising interest rates. Because prepayments are made at
par value, losses could be sustained on prepayments of GNMA certificates which
had been purchased at prices above their par values.
ADDITIONAL INFORMATION AS TO INVESTMENT TECHNIQUES
- - REPURCHASE AGREEMENT
Repurchase agreements (Repos) are agreements between a seller and a buyer,
usually of U.S. Government securities, whereby the seller agrees to repurchase
the securities at an agreed upon price and, usually, at a stated time. Repos,
also called RPs or buybacks, are widely used both as a money market investment
vehicle and as an instrument of Federal Reserve Monetary Policy. Where a
repurchase agreement is used as a short-term investment, a government securities
dealer, usually a bank, borrows from an investor (for instance, a mutual fund)
with excess cash, to finance its inventory, using the securities as collateral.
Such RPs may have a fixed maturity date or be Open Repos, callable at any time.
Rates are negotiated directly by the parties involved, but are generally lower
than rates on collateralized loans made by New York banks. The attraction of
repos is the flexibility of maturities that makes them an ideal place to invest
excess funds on a temporary basis. The Trust will only invest in repurchase
agreements which are fully collateralized and monitored on a continuous basis by
the Investment Adviser and have been affirmed by the Board of Trustees. The
Trust will only enter into repos involving securities in which it would
otherwise invest and with selected banks and securities dealers whose financial
condition is evaluated regularly.
2
<PAGE> 8
- - WHEN-ISSUED SECURITIES
The Government Fund and Municipal Fund may purchase securities on a
"when-issued" or on a "forward delivery basis. It is expected that under normal
circumstances a Fund purchasing securities on a "when-issued" basis will take
delivery of such securities. When a Fund commits to purchase a security on a
"when-issued" or on a "forward-delivery" basis, it will follow procedures
consistent with Securities and Exchange Commission policies. Since those
policies currently recommend that an amount of a Fund's assets equal to the
amount of the purchase be held aside or segregated to be used to pay for the
commitment, a Fund will always have cash or high quality debt securities
sufficient to cover any commitments or to limit any potential risk. However,
although none of the Funds intends to make such purchases for speculative
purposes and each Fund intends to adhere to the provisions of Securities and
Exchange Commission policies, purchases of securities on such bases may involve
more risk than other types of purchases. For example, a Fund may have to sell
assets which have been set aside in order to meet redemptions. Also, if a Fund
determines it is advisable as a matter of investment strategy to sell the
"when-issued" or "forward delivery" securities before delivery, that Fund may
incur a loss because of market fluctuations since the time the commitment to
purchase such securities was made and any gain or loss would not be tax-exempt.
When the time comes to pay for "when-issued" or "forward delivery" securities, a
Fund will meet its obligations from the then available cash flow or the sale of
securities, or, although it would not normally expect to do so, from the sale of
the "when-issued" or "forward delivery" securities themselves (which may have a
value greater or less than a Fund's payment obligation).
INVESTMENT RESTRICTIONS
The Trust has adopted the following restrictions as fundamental policies which
cannot be changed without the approval of the holders of a majority of the
shares of the Fund for which the change is proposed and which apply to all four
Funds of the Trust, unless otherwise stated. All percentage limitations
expressed are measured immediately after the relevant transaction is made.
Each Fund may not:
1. Invest for the purpose of making short-term trading profits or for the
purpose of exercising control of management or deal with the Trustees in the
purchase and sale of securities.
2. Invest more than 5% of its total assets (excluding cash and cash items) in
the securities of any one issuer or own more than 10% of any class of voting or
non-voting securities of any issuer (except the U.S. Government, its agencies
and instrumentalities).
(a) For the Cash Reserve Fund, 25% of the Fund's total assets may be
invested in any class of voting or non-voting securities of commercial banks.
(b) For the Cash Reserve Fund, up to 10% of its assets may be invested
in any one issuer in First Tier Securities, as defined in the Investment Company
Act of 1940, as amended, for a period of up to three business days after the
purchase, provided the Fund may not make more than one such investment at a
time.
3. Make loans to others except for the purchase of the debt securities listed
above or the entering into repurchase agreements listed above.
3
<PAGE> 9
4. Act as underwriter except to the extent that, in conjunction with the
disposition of portfolio securities, the Fund may be deemed as underwriter under
certain federal securities laws.
5. Pledge more than 10% of its assets and then only to secure temporary
borrowings from banks.
6. Invest in puts, calls, straddles, spreads or any combination thereof or in
oil, gas or other mineral leases, rights or royalty contracts.
7. Invest more than 5% of its total assets taken at cost in securities whose
issuers or guarantor of principal and interest, including any predecessors, has
been in operation for less than three years.
8. Issue any senior securities.
9. Purchase securities on margin, but a Fund may obtain such credits as may be
necessary for the clearance of purchases and sales of securities.
10. Invest more than 5% of a Fund's assets in companies, including their
predecessors, which have a record of less than three years' continuous operation
or in securities for which market quotations are not readily available.
11. Sell securities short or invest in securities, the disposition of which is
restricted under federal securities laws and which may not be publicly sold
without registration under the Securities Act of 1933, if as a result, more than
5% of the net assets of a Fund would be invested in such securities.
12. Invest 25% or more of each Fund's total assets in the securities of issuers
in the same industry, except each Fund may invest more than 25% of the value of
its assets in municipal notes, bonds and obligations issued, escrowed in or
guaranteed by the U.S. Government, its agencies or instrumentalities.
(a) Electric, natural gas distribution, natural gas pipeline, combined
electric and natural gas and telephone utilities are considered separate
industries for this purpose.
(b) Captive borrowing conduit, equipment finance, premium finance,
leasing finance, consumer sales finance and other finance are considered
separate industries for this purpose.
(c) For the Cash Reserve Fund, more than 25% of its assets, if deemed
advisable, may be invested in obligations of domestic branches of U.S.
commercial banks.
13. Borrow money, except under the following circumstances:
(a) A Fund may borrow an amount not in excess of 33 1/3% of the value
of the Fund's total assets (calculated when the loan is made) from banks for
temporary purposes to facilitate the orderly sale of portfolio securities to
accommodate unusually heavy redemption requests, if they should occur. This
borrowing provision is not intended for investment purposes, nor will the Funds
purchase portfolio securities during periods of borrowings outstanding;
(b) A Fund may borrow an amount equal to no more than 5% of the value
of each of the Funds' total assets (calculated when the loan is made) for
temporary, emergency purposes, or for the clearance of transactions, to provide
the investment manager additional flexibility in the execution of routine daily
transactions, and
4
<PAGE> 10
allow for more efficient cash management. This borrowing provision will not be
used to leverage the funds or to borrow for extended periods of time.
14. Purchase or sell securities of other investment companies, as defined in the
Investment Company Act of 1940, as amended, (except in connection with real
estate, real estate mortgage loans, commodities or futures contracts).
15. For the Government Fund, invest more than 35% of its total assets in
mortgage backed securities.
For purposes of the first restriction set forth in the heading "Investment
Restrictions," in the prospectus, the Municipal Fund will regard the entity
which has the ultimate responsibility for the payment of interest and principal
as the issuer.
MAJOR SHAREHOLDERS
As of January 31, 1998, Nationwide Life Insurance Company of Columbus, Ohio, had
sole voting and investment power over 3,057,882 shares of the Cash Reserve Fund
(73.6%), 127,937 shares of the Government Bond Fund (3.1%), 55,918 shares of
the Municipal Bond Fund (3.8%) and 26,696 shares of the Growth Fund (5.4%). The
Trustees and Officers of the Trust owned less than 1% of the outstanding shares.
5
<PAGE> 11
TRUSTEES AND OFFICERS OF THE TRUST
TRUSTEES AND OFFICERS
The principal occupations of the Trustees and Officers during the last five
years and their affiliations are:
ROBERT M. DUNCAN, Trustee, Age 70
1397 Haddon Road,
Columbus, Ohio 43209.
Mr. Duncan is Vice President & Secretary Emeritus of the Ohio State University.
He was formerly a Partner in the law firm of Jones, Day, Reavis & Pogue in
Columbus. He was formerly U.S. District Court Judge, Southern District of Ohio.
DIMON R. MCFERSON, Trustee*, Age 60
One Nationwide Plaza,
Columbus, Ohio 43216.
Mr. McFerson is President and Chief Executive Officer of the Nationwide
Insurance Enterprise. He was formerly President and General Manager of the
Nationwide Insurance Enterprise. He is a Director of Nationwide Advisory
Services, Inc.
DR. JOHN C. BRYANT, Trustee, Age 61
44 Faculty Place,
Wilmington, Ohio 45177.
Dr. Bryant is Executive Director of the Cincinnati Youth Collaborative. He was
formerly Professor of Education, Wilmington College.
DR. THOMAS J. KERR, IV, Trustee, Age 64
4890 Smoketalk Lane,
Westerville, Ohio 43081.
Dr. Kerr is President Emeritus of Kendall College. He was formerly President of
Grant Hospital Development Foundation.
JAMES F. LAIRD, Jr., Treasurer
Three Nationwide Plaza,
Columbus, Ohio 43216.
Mr. Laird is Vice President-General Manager of Nationwide Advisory Services,
Inc., the Distributor and Investment Manager.
CHRISTOPHER A. CRAY, Assistant Treasurer.
Three Nationwide Plaza,
Columbus, Ohio 43216.
Mr. Cray is Treasurer of Nationwide Advisory Services, Inc., the Distributor
and Investment Manager. Prior to that he was Director of Corporate Accounting
for Nationwide Insurance Enterprise.
* A Trustee who is an "interested person" of the Trust as defined in the
Investment Company Act of 1940.
Officers and interested Trustees will not be paid by the Trust in their capacity
as officers. All Trustees and Officers of the Trust own less than 1% of the
outstanding shares. The Trustees receive fees and reimbursement for expenses of
attending board
6
<PAGE> 12
meetings for the Trust. The Compensation Table on the next page sets forth the
total compensation to the Trustees from the Trust and from all funds in the
Nationwide Fund Complex during the fiscal year ended October 31, 1997.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR TOTAL
AGGREGATE RETIREMENT BENEFITS ESTIMATED COMPENSATION
COMPENSATION ACCRUED AS PART ANNUAL BENEFITS FROM THE
NAME OF PERSON, POSITION FROM THE TRUST OF FUND EXPENSES UPON RETIREMENT FUND COMPLEX*
<S> <C> <C> <C> <C>
John C. Bryant, Trustee $5,000 -0- -0- $16,000
Robert M. Duncan, Trustee $5,000 -0- -0- $16,000
Thomas J. Kerr, IV, Trustee $5,000 -0- -0- $16,000
Dimon R. McFerson, Trustee -0- -0- -0- -0-
</TABLE>
- ---------------
* The Fund Complex includes six business trusts comprised of thirty-one
investment portfolios.
CALCULATING YIELD--CASH RESERVE FUND
Any current money market fund yield quotation, subject to Rule 482 under the
Securities Act of 1933, shall consist of seven calendar day historical yield,
carried at least to the nearest hundredth of a percent. The yield shall be
calculated by determining the net change, excluding realized and unrealized
gains and losses, in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, dividing the net change in
account value by the value of the account at the beginning of the base period to
obtain the base period return, and multiplying the base period return by 365/7.
For purposes of this calculation, the net change in account value reflects the
value of additional shares purchased with dividends from the original share, and
dividends declared on both the original share and any such additional shares.
The Cash Reserve Fund's effective yield represents an annualization of the
current seven day return with all dividends reinvested. As of October 31, 1997,
the Fund's seven-day current yield was 4.74%.
The effective yield was 4.85%.
The Cash Reserve Fund's yield will fluctuate daily. Actual yields will depend on
factors such as the type of instruments in the Cash Reserve Fund's portfolio,
portfolio quality and average maturity, changes in interest rates, and the Cash
Reserve Fund's expenses. There is no assurance that the yield quoted on any
given occasion will remain in effect for any period of time and there is no
guarantee that the net asset value will remain constant. It should be noted that
a shareholder's investment in the Cash Reserve Fund is not guaranteed or
insured. Yields of other money market funds may not be comparable if a different
base period or another method of calculation is used.
CALCULATING YIELD AND TOTAL RETURN - NON CASH RESERVE FUNDS
The non Cash Reserve Funds may from time to time advertise historical
performance, subject to Rule 482 under the Securities Act of 1933. An investor
should keep in mind that any return or yield quoted represents past performance
and is not a guarantee of future results. The investment return and principal
value of investments will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost.
All performance advertisements shall include average annual total return
quotations for the most recent one, five and ten year periods (or life, if a
fund has been in operation less than one of the prescribed periods). Average
annual total return represents the rate required each year for an initial
investment to equal the redeemable value at the end of the quoted period. It is
calculated in a uniform
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<PAGE> 13
manner by dividing the ending redeemable value of a hypothetical initial payment
of $1,000 for a specified period of time, by the amount of the initial payment,
assuming reinvestment of all dividends and distributions. The one, five and ten
year (or Life) periods are calculated based on periods that end on the last day
of the calendar quarter preceding the date on which an advertisement is
submitted for publication.
The Government and Municipal Funds may also from time to time advertise a
uniformly calculated yield quotation. This yield is calculated by dividing the
net investment income per share earned during a thirty-day base period by the
maximum offering price per share on the last day of the period, assuming
reinvestment of all dividends and distributions. This yield formula uses the
average number of shares entitled to receive dividends, provides for semi-annual
compounding of interest and includes a modified market value method for
determining amortization. The yield will fluctuate and there is no assurance
that the yield quoted on any given occasion will remain in effect for any period
of time.
The Government and Municipal Bond Funds' yields for the 30-day period ended
October 31, 1997 were 5.93% and 4.86%, respectively.
The Government Bond, Municipal Bond and Growth Funds average annual total
returns reflecting maximum sales charges for the one year, five year and Life of
the funds ended October 31, 1997, are listed below:
<TABLE>
<CAPTION>
1 YEAR 5 YEAR LIFE*
------ ------ -----
<S> <C> <C> <C>
Government Bond 3.84% 6.76% 9.12%
Municipal Bond 3.37 6.16 7.19
Growth 18.66 16.86 13.36
</TABLE>
- --------------
* Period from 12/19/88 (commencement of operations) through 10/31/97.
INVESTMENT ADVISER AND OTHER SERVICES
INVESTMENT MANAGEMENT AGREEMENT
Under the terms of the Investment Management Agreement, Nationwide Advisory
Services, Inc. ("NAS") manages the investment of the assets of the Trust in
accordance with the policies and procedures established by the Trustees,
administers and manages the affairs of the Trust and furnishes office
facilities, equipment and personnel to the Trust. The Agreement also provides
that NAS shall reimburse the Trust for the compensation of the Trustees who are
"interested persons" of NAS. The Trust pays NAS fees based on average net assets
of the Funds at the rate of .65% per annum for the Growth Fund, Municipal Bond
Fund and Government Bond Fund and .40% per annum for the Cash Reserve Fund.
During the fiscal years ended October 31, 1997, 1996, and 1995, the Investment
Manager earned fees of $17,011, $16,666, and $16,571, respectively for the Cash
Reserve Fund; $343,259, $414,415, and $447,894, respectively for the Government
Bond Fund; $121,837, $150,996, and $171,005, respectively for the Municipal Bond
Fund; and $63,883, $54,053, and $46,886, respectively for the Growth Fund.
NAS, an Ohio corporation, is a wholly owned subsidiary of Nationwide Life
Insurance Company, which is owned by 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 of
the outstanding Class B Common Stock) to control NFS. Nationwide Corporation, is
also a holding company in the Nationwide Insurance Enterprise.
DISTRIBUTION AGREEMENT
NAS also acts as Distributor of the Trust's shares pursuant to the Distribution
Agreement with the Trust. Pursuant to the Distribution Agreement, NAS is
responsible for distributing the Trust's securities in a continuous offering.
The Distributor pays commissions to salespersons, the cost of printing and
mailing prospectuses to potential investors and any sales promotional expenses
incurred by them in connection with their distribution of Trust shares.
The Distribution Agreement provides that it shall terminate automatically if
assigned and that it may be terminated without penalty by either party upon not
more than sixty days' nor less than thirty days' written notice.
To compensate the Distributor for the services it provides and for the expenses
it bears under the Distribution Agreement, the Trust has adopted a Plan of
Distribution (the "Plan") under Rule 12b-1 under the Investment Company Act.
Under the Plan, the Trust pays the Distributor compensation accrued daily and
paid monthly at the annual rate of .75% of the average daily net assets of the
Growth Fund, Municipal Bond Fund
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<PAGE> 14
and Government Bond Fund. Prior to February 29, 1994, the distribution fee was
also charged on the Cash Reserve Fund. The Distributor also receives the
proceeds of contingent deferred sales charges imposed on certain redemptions of
shares.
During the fiscal year ended October 31, 1997, 1996 and 1995, NAS received
distribution fees of $0, $0 and $39,930, respectively, for the Government Bond
Fund, $2,239, $116,152 and $131,542, respectively, for the Municipal Bond Fund
and $1,012, $41,580 and $36,069, respectively, for the Growth Fund. During the
fiscal years ended October 31, 1997, 1996, and 1995, the Distributor waived fees
of $396,061, $476,865, and $476,865, respectively, for the Government Bond Fund;
$137,225, $58,074, and $65,771, respectively, for the Municipal Bond Fund; and
$72,700, $20,790, and $18,033, respectively, for the Growth Fund. The
Distributor also receives the proceeds of contingent deferred sales charges
imposed on certain redemptions of shares (see "How to Redeem Shares" in the
Prospectus). In the fiscal year ended October 31, 1997, 1996, and 1995, such
charges were $23,417, $36,566, and $75,240, respectively, for the Government
Bond Fund; $41,532, $118,289, and $97,848, respectively for the Municipal Bond
Fund; and $10,832, $12,788, and $28,961, respectively, for the Growth Fund.
Pursuant to the Plan, at least quarterly, the Distributor shall provide the
Trust a written report for review by the Trustees of the amounts expended under
the Plan and the purpose for which such expenditures were made.
The Plan shall remain in effect until the earlier of one year after the
respective date of execution or the first meeting of shareholders after the
effective date of the Trust's Prospectus. If approved at such meeting by a vote
of a majority of the outstanding voting securities of the Trust, the Plan shall
continue in effect thereafter, provided such continuance is approved annually by
a vote of the Trustees of the Trust, including a majority of the Trustees who
are not interested persons of the Trust and who have no direct or indirect
financial interest in the operation of the Plan, cast in person at a meeting
called for the purpose of voting on such Plan. The Plan may not be amended to
increase materially the amount to be spent for the services described therein
without approval of the shareholders and all material amendments of the Plan
must also be approved by the Trustees in the manner described above. The Plan
may be terminated at any time without payment of any penalty by vote of a
majority of the Trustees who are not interested persons of the Trust and who
have no direct or indirect financial interest in the operations of the Plan or
by a vote of a majority of the outstanding voting securities of the Trust (as
defined in the Investment Company Act) on not more than thirty days' written
notice to any other party to the Plan. The Plan will automatically terminate in
the event of its assignment (as defined in the Investment Company Act). So long
as the Plan is in effect, the election and nomination of Trustees who are not
interested persons of the Trust shall be committed to the discretion of the
Trustees who are not such interested persons. The Trustees have determined that,
in their judgment, there is a reasonable likelihood that the Plan will benefit
the Trust and its shareholders. In the Trustees' review of the Plan, they will
consider the continued appropriateness and the level of compensation provided
therein.
PURCHASES, REDEMPTIONS AND PRICING OF SHARES
All investments of the Trust are credited to the shareholders' accounts in the
form of full and fractional shares of the designated Fund (rounded to the
nearest 1/1,000 of a share). The Trust does not issue share certificates.
For orders placed after 4:00 p.m. Eastern Time or on a day on which the Exchange
is not open for trading, the offering price is based upon net asset value
adjusted by applicable sales charges at 4:00 p.m. Eastern Time on the next day
thereafter on which the Exchange is open for trading. The net asset value of a
share of a Fund on which offering and redemption prices are based is the net
asset value of a Fund, divided by the number of shares outstanding, the result
being adjusted to the nearest cent.
The net asset value per share of each Fund of the Trust is determined by NAS, as
agent appointed by the Trustees, once daily as of the close of the New York
Stock Exchange (usually 4:00 p.m. Eastern Time) on days when the New York Stock
Exchange ("Exchange") is open or on any other day during which there is a
sufficient degree of trading in a Fund's portfolio securities that the net asset
value of the Fund is materially affected by changes in the value of portfolio
securities. The Trust will not compute net asset value on customary national
business holidays, including the following: Christmas, New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day
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<PAGE> 15
Independence Day, Labor Day and Thanksgiving. The net asset value per share of
each Fund is calculated by adding the value of all securities and other assets
of a Fund, deducting its liabilities and dividing by the number of shares
outstanding.
The value of portfolio securities of the Cash Reserve Fund is determined on the
basis of the amortized cost valuation in accordance with Rule 2a-7 of the
Investment Company Act of 1940. This involves valuing a security at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value as determined by amortized cost is
higher or lower than the price the Cash Reserve Fund would receive if it sold
the instrument. During periods of declining interest rates, the daily yield on
shares of the Cash Reserve Fund computed by dividing the annualized daily income
of the Cash Reserve Fund by the net asset value computed as described above, may
tend to be higher than a like computation by a fund with identical investments
utilizing a method of valuation based upon market prices and estimates of market
prices for all of its portfolio securities.
The Trustees have adopted procedures whereby the extent of deviation, if any, of
the current net asset value per share calculated using available market
quotations from the Cash Reserve Funds amortized cost price per share, will be
determined at such intervals as the Trustees deem appropriate and are reasonable
in light of current market conditions. In the event such deviation from the Cash
Reserve Funds' amortized cost price per share exceeds 1/2 of 1 percent, the
Trustees will consider appropriate action which might include a reevaluation of
all or an appropriate portion of the Cash Reserve Fund's assets based upon
current market factors.
The Trustees, in supervising the Cash Reserve Fund's operations and delegating
special responsibilities involving portfolio management to the Cash Reserve
Fund's Investment Manager, have undertaken, as a particular responsibility
within their overall duty of care owed to the Cash Reserve Fund's shareholders,
to assure, to the extent reasonably practicable, taking into account current
market conditions affecting the Cash Reserve Fund's investment objectives, that
the Cash Reserve Fund's net asset value per share, rounded to the nearest 1
cent, will not deviate from $1.00. Pursuant to its objective of maintaining a
stable net asset value per above, the Cash Reserve Fund will not purchase
instruments with a remaining maturity of greater than 397 days and will maintain
a dollar weighted average portfolio maturity of 90 days or less.
The net income of the Cash Reserve Fund is determined once daily as of the time
and on the days referenced above. All the net income of the Cash Reserve Fund,
so determined, is declared in shares as a dividend to shareholders of record at
the time of such determination. (Shares purchased become entitled to dividends
declared as of the first day following the date of investment.) Dividends are
distributed in the form of additional shares of the Cash Reserve Fund on the
last business day of each month at the rate of one share (and fraction thereof)
of the Cash Reserve Fund for each $1 (and fraction thereof) of dividend income.
An investment in the Cash Reserve Fund is neither insured nor guaranteed by the
U.S. government and there can be no assurance that it will be able to maintain a
stable net asset value of $1.00 per share.
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<PAGE> 16
For this purpose, the net income of the Cash Reserve Fund (from the time of the
immediately preceding determination thereof) shall consist of: (a) all interest
income accrued on the portfolio assets of the Cash Reserve Fund, (b) less all
actual and accrued expenses determined in accordance with generally accepted
accounting principles and (c) plus or minus net realized gains and losses on the
assets of the Cash Reserve Fund. Interest income shall include discount earned
(including both original issue and market discount) on discount paper accrued
ratably to the date of maturity. Securities are valued at amortized cost which
the Trustees have determined in good faith constitutes fair value for the
purposes of complying with the Investment Company Act of 1940.
Because the net income of the Cash Reserve Fund is declared as a dividend each
time the net income is determined, the net asset value per share (i.e., the
value of the net assets of the Cash Reserve Fund divided by the number of shares
outstanding) remains at $1 per share immediately after each such determination
and dividend declaration. Any increase in the value of a shareholder's
investment in the Cash Reserve Fund, representing the reinvestment of dividend
income, is reflected by an increase in the number of shares of the Cash Reserve
Fund in its account.
The Trust may suspend the right of redemption only under the following unusual
circumstances: (a) when the New York Stock Exchange is closed (other than
weekends and holidays) or trading is restricted, (b) when an emergency exists,
making disposal of portfolio securities or the valuation of net assets not
reasonably practicable or (c) during any period when the Securities and Exchange
Commission has by order permitted a suspension of redemption for the protection
of shareholders.
SHAREHOLDERS' RIGHTS
It is the Trust's belief that no shareholder shall be subject to any personal
liability to any person in connection with Trust property or the acts,
obligations or affairs of the Trust. No Trustee, officer, employee or agent of
the Trust shall be subject to any personal liability whatsoever to any person,
other than the Trust or its shareholders, in connection with Trust property or
the affairs of the Trust, save only that arising from bad faith, willful
misfeasance, gross negligence or reckless disregard for his duty to such person
and all such persons shall look solely to the Trust property for satisfaction of
claims of any nature arising in connection with the affairs of the Trust. If any
shareholder of the Trust is made a party to any suit or proceeding to enforce
any such liability, he shall not, on account thereof, be held to any personal
liability. The Trust shall indemnify and hold each shareholder harmless from and
against all claims and liabilities to which such shareholder may become subject
by reason of his being or having been a shareholder and shall reimburse such
shareholder for all legal and other expenses reasonably incurred by him in
connection with any such claim or liability. Such rights accruing to a
shareholder shall not exclude any other right to which such shareholder may be
lawfully entitled nor shall anything herein contained restrict the right of the
Trust to indemnify or reimburse a shareholder in any appropriate situation even
though not specifically provided herein.
CUSTODIAN
The Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, Ohio 45263, is the
custodian for the Financial Horizons Investment Trust Funds.
TRANSFER AGENT AND
DIVIDEND DISBURSEMENT
Nationwide Investors Services, Inc. (NIS) is the Transfer and Dividend
Disbursing Agent for the Funds. NIS, a wholly-owned subsidiary of NAS received
fees for transfer agent services during the year ended October 31, 1997, 1996
and 1995 of $11,300, $11,898, and $12,323 from the Growth Fund, $11,000,
$14,136, and $16,662 from the Municipal Bond Fund, $41,500, $57,100, and $51,384
from the Government Bond Fund and $1,001, $966, and $1,104 from the Cash Reserve
Fund. Management believes the charges for the services performed are comparable
to fees charged by other companies performing similar services.
BROKERAGE ALLOCATION
During the years ended October 31, 1997, 1996, and 1995, brokerage commissions
paid by the Growth Fund totaled $8,480, $1,928, and $5,943 respectively. During
the years ended October 31, 1997, 1996, and 1995, the Cash Reserve Fund,
Government Bond Fund, and Municipal Bond Fund paid no brokerage commissions.
There is no commitment to
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<PAGE> 17
place orders with any particular broker/dealer or group of broker/dealers.
Orders for the purchases and sales of portfolio securities of each Fund are
placed where, in the judgment of the Investment Adviser, the best executions can
be obtained. In allocating orders among brokers for execution on an agency
basis, in addition to price considerations, the usefulness of the brokers'
overall services is also considered. Services to be provided by brokerage firms
may include handling of orders, analyses of corporations, industries and the
economy, statistical reports and other related services for which no charge is
made by the broker over and above negotiated brokerage commissions. The Trust
and the Investment Adviser believe that these services and information, which in
many cases would be otherwise unavailable to the Investment Adviser, will be of
significant value to the Investment Adviser. The Investment Adviser does not
believe that the receipt of such services and information will materially reduce
the Investment Adviser's expense.
No formula, method or criteria other than as stated above is planned to be used
in the allocation of orders among any firms. In the case of securities traded in
the over-the-counter market, the Trust plans to deal with the marketmakers for
such securities unless better prices can be obtained through brokers.
In its capacity as investment manager for various portfolios, NAS regularly
evaluates all research service received and available to determine whether
services should be continued or eliminated. In the management of the Funds, NAS
does not intend to specifically search out or employ any new or additional
research services.
TAX STATUS
FEDERAL TAXES--The Funds intend to qualify for treatment under subchapter M of
the Internal Revenue Code of 1986, as amended, and, therefore, must distribute
substantially all of its net investment income and capital gains to shareholders
annually. In general, if a Fund distributes all of its net investment income, it
is not required to pay any federal income taxes. In addition to federal income
tax, if a Fund fails to distribute the required portion of such investment
income or capital gains in any year, it will be subject to a non-deductible 4%
excise tax on the amount which it has failed to distribute. The Funds intend to
make distributions in amounts sufficient to avoid the imposition of this excise
tax.
Dividends paid by the Municipal Bond Fund will be exempt from federal income
tax to the extent that the income of the Fund is derived from bonds which
qualify for such exemption. Some portion of the income from the Tax-Free Income
Fund may be taxable annually. The taxable portion of each distribution will be
based on the ratio, each year, between the Fund's taxable income and total
income. Such ratio shall be determined within 60 days following the close of the
taxable year. The annual ratio may differ significantly from the ratio for the
period actually covered by each distribution.
Dividends paid by the Government Bond Fund are taxable as income to the
shareholder for federal income tax purposes. For corporate shareholders, the
appropriate portion of each year's distribution is eligible for the corporate
dividend received deduction.
Income itself exempt from Federal income taxation may be considered in
addition to the taxable income when determining whether Social Security
payments received by a shareholder are subject to Federal income taxation.
Shareholders not subject to tax on their income will not have to pay tax on
amounts distributed to them.
The Funds will annually report to each shareholder that shareholder's portion of
the net income and capital gain of the Funds for inclusion in the shareholder's
income.
Individual and corporate shareholders may be subject to the Alternative Minimum
Tax ("AMT") if their Alternative Minimum Taxable Income ("AMTI") exceeds the
exemption amounts set forth in Section 55 of the Code. The AMT, at rates as high
as 28% for individuals and 20% for corporations, is reduced by the regular tax
due for the year. AMTI is the taxpayer's taxable income for the year for regular
tax purposes, increased by the tax preferences described in Section 57 of the
Code and adjusted as described in Section 56 of the Code. Preferences include
interest from Specified Private Activity Bonds, a type of state or local
government bond described in Section 57 (a) (5) (C) of the Code. Bonds of this
type may be held for one or more of the Funds from time to time.
A shareholder may be subject to federal backup withholding at a rate of 31% of
each distribution if the shareholder fails to certify that the taxpayer
identification number given is correct and that the shareholder is not subject
to such withholding because of underreporting of income (or if the Internal
Revenue Service gives notice that such certifications are not accurate).
STATE AND LOCAL TAXES--Distributions to shareholders of the Funds may
be subject to state and local taxes, even if not subject to federal income
taxes. These laws vary, and you are advised to consult a tax adviser regarding
such taxes.
FINANCIAL STATEMENTS
The Report of Independent Auditors and Financial Statements of the Funds for the
period ended October 31, 1997 are incorporated herein by reference to the
Trust's Annual Report. Copies of the Annual Report are available without charge
upon request by writing to the Trust or by calling 1-800-848-0920.
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<PAGE> 18
APPENDIX
DESCRIPTION OF NRSRO RATINGS
SHORT-TERM RATINGS (including commercial paper, senior short-term obligations
and deposit obligations). Issues rated Duff 2 by Duff & Phelps, Inc. (D&P) have
good certainty of timely payments, Liquidity factors and company fundamentals
are sound. Although ongoing internal funds needs may enlarge total financing
requirements, access to capital markets is good. Risk factors are very small.
Relative strengths or weaknesses of the above factors determines whether the
issuer's commercial paper is rated Duff 1+, Duff 1, or Duff 1-.
Issues assigned F2 by Fitch/IBCA Information Services, Inc. (Fitch/IBCA) have a
strong capacity for timely repayment, however the relative degree of risk is
slightly higher than for issues classified as F1. Issues assigned the
rating of F1 are regarded as having the strongest degree of assurance for
timely repayment. Where issues possess a particularly strong credit feature, a
"+" is added to the assigned rating.
Among the factors considered by Moody's Investors Service, Inc. (Moody's) in
assigning ratings are the following: (1) quality of management; (2) industry
strengths and risks; (3) vulnerability to business cycles; (4) competitive
position; (5) liquidity measurements; (6) debt structure; (7) operating trends;
and (8) access to capital markets. Relative strength or weakness of the above
factors determines whether the issuer's commercial paper is rated P-1 or P-1.
Issues rated by Standard & Poor's (S&P) as A-1, the highest category, indicates
that the degree of safety regarding timely payment is strong. Liquidity ratios
are adequate to meet cash requirements. Long-term senior debt is rated AA or
better. The issuer has access to at least two additional channels of borrowing.
Basic earning and cash flow have an upward trend with allowance made for unusual
circumstances. Typically the issuer's industry is well established and the
issuer has a strong position within the industry. The reliability and quality of
management are unquestioned. Relative strength or weakness of the above factors
determine whether the issuer's commercial paper is rated A-1+, A-1 or A-2.
Issues rated TBW-2 by Thomson Bank Watch (Thomson) have a strong degree of
safety regarding timely repayment of principal and interest. The relative degree
of safety is not quite as high as an issues with a TBW-1 rating.
Thomson issues ratings on bank holding companies, U.S. banks, international
banks, investment banks, and savings and loan associations. Issues rated TBW1
are obligations that indicate a very high degree of likelihood that principal
and interest will be paid on a timely basis. A TBW2 rating indicates that the
relative
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<PAGE> 19
degree of safety is not quite as high as an issue with a TBW1 rating.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
S&P'S RATINGS
A note rating by S&P reflects the liquidity concerns and market access risks
unique to notes. Notes due in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating or bond. The following criteria will be used in making that
assessment.
- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely it will be treated as a note).
- Source of Payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
S&P note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
(+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
MOODY'S RATINGS
MIG 1 This designation denotes best quality. There is present strong protection
by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2 This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
MIG 3 This designation denotes favorable quality. All security elements are
accounted for, but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
DESCRIPTION OF BOND RATINGS
The ratings of S&P and Moody's represent their opinions as to the quality of
various debt instruments. It should be emphasized, however, that ratings are not
absolute standards of quality. Consequently, debt instruments with the same
maturity, coupon and rating may have different yields while debt instruments of
the same maturity and coupon with different ratings may have the same yield.
S&P'S RATINGS
AAA Debt rated "AAA" has the highest rating assigned by S&P. 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 highest rated issues only in small degree.
14
<PAGE> 20
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 than debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Note: The ratings from AA to BBB may be modified by the addition of a plus (+)
or minus (-) sign to show the relative standing within the major rating
categories.
MOODY'S RATINGS
Aaa Bonds which are 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 which are 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 fluctuations 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 which are 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 which are 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.
Note: Moody's applies numerical modifiers 1,2, and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the issue 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 category.
BOND RATINGS
Bonds rated AA or AAA by D&P are deemed to be high quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
Bonds rated AA or AAA by Fitch/IBCA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong.
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Bonds rated AA or AAA by Thomson indicates ability to repay principal and
interest on a timely basis. Bonds rated AA may have limited incremental risk
versus AAA issues.
16
