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PROSPECTUS
JULY 23, 1998
LOCAL FUND SHARES
NATIONWIDE S&P 500 INDEX FUND
FOR INFORMATION AND ASSISTANCE
CALL TOLL FREE 1 (800) 848-0920
Nationwide S&P 500 Index Fund (the "Fund") is a non-diversified portfolio of
Nationwide Investing Foundation III (the "Trust"). The Trust is an open-end
management investment company organized as a business trust under the laws of
the State of Ohio, by a Declaration of Trust dated October 30, 1997. The Trust
currently offers shares in nine additional separate portfolios or series, each
with its own investment objective. This Prospectus relates to the Local Fund
Shares of the Nationwide S&P 500 Index Fund, the only class of Fund Shares
currently offered. The shares of the Fund are sold to other open-end investment
companies created by Nationwide Advisory Services, Inc., ("NAS" or the
"Adviser"), the Fund's investment adviser, as well as to life insurance company
separate accounts to fund the benefits of variable life insurance policies and
annuity contracts. Certain annuity contracts are offered to governmental
entities as an investment option under their deferred compensation plans.
The Fund's investment objective is to provide investment results that correspond
to the price and yield performance of publicly traded common stocks as
represented by the Standard & Poor's 500 Composite Stock Price Index (the
"Index"). The Fund attempts to be fully invested at all times in the stocks that
comprise the Index.
This Prospectus provides you with the basic information you should know before
investing in the Fund. You should read it and keep it for future reference. A
Statement of Additional Information dated July 23, 1998 has been filed with the
Securities and Exchange Commission. You may obtain a copy without charge by
calling (800) 848-0920, or writing Nationwide Advisory Services, Three
Nationwide Plaza, Columbus, Ohio 43215.
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.
THE STATEMENT OF ADDITIONAL INFORMATION FOR THE TRUST DATED JULY 23, 1998, IS
INCORPORATED HEREIN BY REFERENCE.
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SALE OF FUND SHARES
Shares of the Fund may be sold to to other open-end investment companies (each a
"Fund of Funds") created by NAS, as well as well as to life insurance company
separate accounts (the "Accounts") to fund the benefits of variable life
insurance policies or annuity contracts ("Contracts") issued by life insurance
companies. The Accounts purchase shares of the Fund in accordance with variable
account allocation instructions received from the owners of the Contracts. The
Fund then uses the proceeds to buy securities for its portfolio. Each Fund of
Funds and Account, as a shareholder, has an ownership interest in the Fund's
investments. The Fund also offers to buy back (redeem) its shares from the Fund
of Funds or the Accounts at any time at net asset value.
SUMMARY OF EXPENSES
Shareholder Transaction Expenses None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees .13%
12b-1 Fees .07%
Other Expenses (after waiver)(1) .15%
----
Total Operating Expenses (after waiver)(2) .35%
This summary is provided to assist investors in understanding the various costs
and expenses that an investor in the Fund will bear directly or indirectly.
Example:
<TABLE>
<CAPTION>
1 year 3 years
------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period. $ 4 $ 11
</TABLE>
- --------
(1) "Other Expenses" are based upon estimates for the fiscal year ending
October 31, 1998.
(2) Until further written notice to Shareholders, the Adviser has agreed
with the Trust to waive management fees or to reimburse expenses
incurred by the Fund to the extent necessary to limit the total expense
ratio of the Fund to a maximum of .35% of the average net assets of the
Fund. Without fee waivers or expense reimbursements, it is estimated
that other expenses and total operating expenses would be .21% and
.41%, respectively.
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THE EXAMPLE SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
For more information on Fund expenses, see "MANAGEMENT OF THE TRUST" below.
FINANCIAL HIGHLIGHTS
Financial highlights are not available for the Fund, because the Fund has not
yet commenced operations.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide investment results that correspond
to the price and yield performance of publicly traded common stocks, as
represented by the Standard & Poor's 500 Composite Stock Price Index.***
The Fund attempts to duplicate the investment results of the Index, which is
composed of 500 selected common stocks, most of which are listed on the New York
Stock Exchange. Standard & Poor's ("S&P") chooses the stocks to be included in
the Index based on a number of criteria including industry group
representations, market value, economic sector and operating/financial
condition. The Fund attempts to be fully invested at all times in the stocks
that comprise the Index and stock index futures as described below, and in any
event, at least 80% of the Fund's net assets will be invested in stocks
comprising the Index. Inclusion of a stock in the Index in no way implies an
opinion by S&P as to its attractiveness as an investment. The Fund uses the
Index as the standard performance comparison because it represents approximately
70% of the total market value of all common stocks and is well known to
investors. An investment in the Fund involves risks similar to those of
investing in stocks, i.e., the possibility that stock prices in general will
decline over short or even extended periods of time.
The weightings of stocks in the Index are based on each stock's relative total
market capitalization; that is, its market price per share times the number of
shares outstanding. Because of this weighting, as of July 14, 1998,
approximately 56% of the Index was composed of the 50 largest companies. The
Fund's subadviser generally select stocks for the Fund's portfolio in the order
of their weightings in the Index beginning with the heaviest weighted stocks.
With respect to the Fund's assets invested in the stocks in the Index, the
percentage of such assets invested in each stock is approximately the same as
the percentage it represents in the Index.
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***"Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard & Poor's 500", and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use by the Fund. The Fund is not sponsored, endorsed, sold or promoted by
Standard & Poor's and Standard & Poor's makes no representation regarding the
advisability of investing in the Fund. For further information regarding the
trademark licenses, see the Statement of Additional Information.
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No attempt is made to manage the Fund in the traditional sense using economic,
financial and market analysis. The Fund is managed using a computer program to
determine which stocks are to be purchased or sold to replicate the Index to the
extent feasible. From time to time, administrative adjustments may be made in
the Fund's portfolio because of changes in the composition of the Index, but
such changes should be infrequent.
The Fund believes that the indexing approach described above is an effective
method of substantially duplicating percentage changes in the Index. It is a
reasonable expectation that there will be a close correlation between the Fund's
performance and that of the Index in both rising and falling markets. The Fund
will attempt to achieve a correlation between the performance of its portfolio
and that of the Index of at least 0.95, without taking into account expenses. A
correlation of 1.00 would indicate perfect correlation, which would be achieved
when the Fund's net asset value, including the value of its dividends and
capital gains distributions, increases or decreases in exact proportion to
changes in the Index. The Fund's ability to correlate its performance with the
Index, however may be affected by, among other things, changes in securities
markets, the manner in which the Index is calculated by S&P and the timing of
purchases and redemptions. In the future, the Trust's Board of Trustees may
select another index if such a standard of comparison is deemed to be more
representative of the performance of common stocks.
The Fund's ability to duplicate the performance of the Index also depends to
some extent on the size of the Fund's portfolio and the size of cash flows into
and out of the Fund. Investment changes to accommodate these cash flows are made
to maintain the similarity of the Fund's portfolio to the Index to the maximum
practicable extent.
From time to time to increase its income, the Fund may lend securities from its
portfolio. When the Fund has cash reserves, the Fund may invest in money market
instruments consisting of U.S. government securities, time deposits,
certificates of deposit, bankers' acceptances, high-grade commercial paper, and
repurchase agreements. See the Statement of Additional Information for a
description of these instruments. The Fund also may purchase stock index futures
in anticipation of taking a market position when, in the opinion of the Fund's
subadviser, available cash balances do not permit an economically efficient
trade in the cash market. The Fund also may sell (write) stock index futures to
terminate existing positions it may have as a result of its purchases of stock
index futures. See also "INVESTMENT TECHNIQUES, CONSIDERATIONS AND RISK FACTORS"
below.
There can be no guarantee that the Fund's objective will be achieved. The
investment objective of the Fund is fundamental and shareholder approval is
required to change the Fund's investment objective.
MANAGEMENT OF THE FUND
The Adviser provides investment management evaluation services to the Fund in
initially selecting and monitoring on an ongoing basis the performance of a
subadviser to manage the Fund's portfolio.
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The Adviser has selected The Dreyfus Corporation to be the subadviser (the
"Subadviser") of the Fund. See "MANAGEMENT OF THE TRUST - MANAGEMENT OF THE
FUND-THE SUBADVISER" below for further information.
INVESTMENT TECHNIQUES, CONSIDERATIONS AND RISK FACTORS
GENERAL - The Fund's net asset value per share should be expected to fluctuate.
Investors should consider the Fund as a supplement to an overall investment
program and should invest only if they are willing to undertake the risks
involved.
EQUITY SECURITIES - Equity securities fluctuate in value, often based on factors
unrelated to the value of the issuer of the securities, and such fluctuations
can be pronounced. Changes in the value of the Fund's investments will result in
changes in the value of its shares and thus the Fund's total return to
investors.
FOREIGN SECURITIES - Since the stocks of some foreign issuers are included in
the Index, the Fund's portfolio may contain securities of such foreign issuers
which may subject the Fund to additional investment risks with respect to those
securities that are different in some respects from those incurred by a fund
which invests only in securities of domestic issuers. Such risks include
possible adverse political and economic developments, seizure or nationalization
of foreign deposits or adoption of governmental restrictions which might
adversely affect the payment of principal and interest on the foreign securities
or restrict the payment of principal and interest to investors located outside
the country of the issuer, whether from currency blockage or otherwise.
USE OF DERIVATIVES - The Fund may invest, to a limited extent, in derivatives
("Derivatives"). Derivative instruments are securities or agreements whose value
is based on the value of some underlying asset (e.g., a security or currency) or
the level of a reference index. Options, futures, and options on futures
transactions are considered derivative transactions. Derivatives generally have
investment characteristics that are based on either forward contracts (under
which one party is obligated to buy and the other party is obligated to sell an
underlying asset at a specific price on a specified date) or option contracts
(under which the holder of the option has the right but not the obligation to
buy or sell an underlying asset at a specified price on or before a specified
date). Consequently, the change in the value of a forward-based derivative
generally is roughly proportional to the change in value of the underlying
asset. In contrast, the buyer of an option-based derivative generally will
benefit from favorable movements in the price of the underlying asset but is not
exposed to the corresponding losses that result form adverse movements in the
value of the underlying asset. The seller of an option-based derivative
generally will receive fees or premiums but generally is exposed to losses
resulting form changes in the value of the underlying asset. Derivative
transactions may include elements of leverage and, accordingly, the fluctuation
of the value of the derivative transaction in relation to the underlying asset
may be magnified. While Derivatives can be used effectively in furtherance of
the Fund's investment objective, under certain market conditions, they can
increase the volatility of the Fund's net asset value, can decrease the
liquidity of the Fund's portfolio and make more difficult the accurate pricing
of the Fund's portfolio.
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Although the Fund will not be a commodity pool, Derivatives subject the Fund to
the rules of the Commodity Futures Trading Commission, which limit the extent to
which the Fund can invest in certain derivatives. The Fund may invest in stock
index futures contracts and related options for hedging purposes without limit,
but it is anticipated that the Fund's investments in stock index futures and
related options and other derivatives will not exceed 20% of the Fund's total
assets. However, the Fund may not invest in such contracts for other purposes if
the sum of the amount of initial margin deposits, other than for bona fide
hedging purposes, exceeds 5% of the liquidation value of the Fund's assets,
after taking into account unrealized profits and unrealized losses on such
contracts.
Derivative instruments may be exchange-traded or traded in OTC transactions
between private parties. OTC transactions are subject to the credit risk of the
counterparty to the instrument and are less liquid than exchange-traded
derivatives since they often can only be closed out with the other party to the
transaction. When required by guidelines of the Securities and Exchange
Commission, the Fund will set aside permissible liquid assets in a segregated
account to secure its obligations under derivative transactions. Segregated
assets cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. As a result, there
is a possibility that segregation of a large percentage of the Fund's assets
could impede portfolio management or the Fund's ability to meet redemption
requests or other current obligations. In order to maintain its required cover
for a derivative transaction, the Fund may need to sell portfolio securities at
disadvantageous prices or times, since it may not be possible to liquidate a
derivative position.
The successful use of a derivative transactions by the Fund is dependent upon
the Subadviser's ability to correctly anticipate trends in the underlying asset.
Hedging transactions are subject to risks; if the Subadviser incorrectly
anticipates trends in the underlying asset, the Fund may be in a worse position
than if no hedging had occurred. In addition, there may be imperfect correlation
between the Fund's derivative transaction and the instrument being hedged.
BORROWING MONEY - The Fund is permitted to borrow money only for temporary or
emergency (not leveraging) purposes, in an amount up to 5% of the value of its
total assets (including the amount borrowed) valued at the lesser of cost or
market, less liabilities (not including the amount borrowed) at the time the
borrowing is made.
LENDING PORTFOLIO SECURITIES - The Fund may lend securities from its portfolio
to brokers, dealers and other financial institutions needing to borrow
securities to complete certain transactions. The Fund continues to be entitled
to payments in amounts equal to the interest, dividends or other distributions
payable on the loaned securities which affords the Fund an opportunity to earn
interest on the amount of the loaned and income on the loaned securities'
collateral. Loans of portfolio securities may not exceed 30% of the value of the
Fund's total assets, and the Fund will receive collateral consisting of cash,
U.S. Government securities or irrevocable letters of credit which will be
maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. Such loans are terminable by the Fund at
any time upon specified notice. The
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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.
NON-DIVERSIFIED STATUS - The classification of the Fund as a "non-diversified"
portfolio means that the proportion of the Fund's assets that may be invested in
the securities of a single issuer is not limited by the Investment Company Act
of 1940 Act, as amended (the "1940 Act"). A "diversified" investment company is
required by the 1940 Act generally, with respect to 75% of its total assets, to
invest not more than 5% of such assets in the securities of a single issuer. The
Fund is not so limited. Since a relatively high percentage of the Fund's assets
may be invested in the securities of a limited number of issuers, some of which
may be within the same economic sector, the Fund's portfolio may be more
sensitive to the changes in market value of a single issuer or sector. However,
to meet Federal tax requirements, at the close of each quarter the Fund may not
have more than 25% of its total assets invested in any one issuer and, with
respect to 50% of total assets, not more than 5% of its total assets invested in
any one issuer. These limitations do not apply to U.S. Government Securities.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The business and 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. Unless so
required by the Trust's Declaration of Trust or By-Laws or by Ohio law, at any
given time, all of the Trustees may not have been elected by the Shareholders of
the Trust. The Trust will be managed by the Trustees in accordance with the laws
of Ohio governing business trusts. The Trustees, in turn, elect the officers of
the Trust to supervise its day-to-day operations.
MANAGEMENT OF THE FUND
THE ADVISER - Under the terms of the Investment Advisory Agreement, NAS, Three
Nationwide Plaza, Columbus, Ohio 43215, oversees the investment of the assets
for the Fund and supervises the daily business affairs of the Fund. Subject to
the supervision and direction of the Trustees, the Adviser also evaluates and
monitors the performance of the subadviser. The Adviser is also authorized to
select and place portfolio investments on behalf of the Fund, however the
Adviser does not intend to do so at this time.
The Adviser and the Trust have received from the Securities and Exchange
Commission an exemptive order for the multi-manager structure which allows the
Adviser to hire, replace or terminate subadvisers without the approval of
shareholders; the order also allows the Adviser to revise a subadvisory
agreement without shareholder approval. If a new subadviser is hired, the change
will be communicated to shareholders within 90 days of such changes, and all
changes will
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be approved by the Trust's Board of Trustees, including a majority of the
Trustees who are not interested persons of the Trust or the Adviser. The order
is intended to facilitate the efficient operation of the Fund and afford the
Trust increased management flexibility. The Adviser provides to the Fund
investment management evaluation services principally by performing initial due
diligence on prospective Subadvisers for the Fund and thereafter monitoring the
performance of the Subadviser through quantitative and qualitative analysis as
well as periodic in-person, telephonic and written consultations with the
Subadviser. The Adviser has responsibility for communicating performance
expectations and evaluations to the Subadviser and ultimately recommending to
the Trust's Board of Trustees whether the Subadviser's contract should be
renewed, modified or terminated however, the Adviser does not expect to
recommend frequent changes of subadvisers. The Adviser will regularly provide
written reports to the Board of Trustees regarding the results of its evaluation
and monitoring functions. Although the Adviser will monitor the performance of
the Subadviser, there is no certainty that the Subadviser or the Fund will
obtain favorable results at any given time.
The Adviser, 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
the outstanding Class B Common Stock) to control NFS. Nationwide Corporation is
also a holding company in the Nationwide Insurance Enterprise. The Fund pays the
Adviser a fee at the annual rate of .13% of the Fund's average daily net assets.
The Adviser may from time to time waive some or all of its investment advisory
fee or other fees. The waiver of such fees will cause the total return and yield
of the Fund to be higher than they would otherwise be in the absence of such a
waiver.
THE SUBADVISER - Subject to the supervision of the Adviser and the Board of
Trustees, the Subadviser manages the Fund's assets in accordance with the Fund's
investment objective and policies. The Subadviser shall make investment
decisions for the Fund, and in connection with such investment decisions shall
place purchase and sell orders for securities. For the investment management
services it provides to the Fund, the Subadviser receives an annual fee from the
Adviser in the following amounts:
.07% on assets up to $250 million
.06% on assets of $250 million up to $500 million
.05% on assets of $500 million up to $1 billion
.04% on assets of $1 billion and more.
Below is a brief description of the Subadviser.
THE DREYFUS CORPORATION ("DREYFUS"), 200 Park Avenue, New York, N.Y. 10166,
which was formed in 1947 and is registered under the Investment Advisers Act of
1940, serves as subadviser
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to the Fund pursuant to a Subadvisory Agreement dated July 23, 1998. Dreyfus is
a wholly-owned subsidiary of Mellon Bank, N.A., which is a wholly-owned
subsidiary of Mellon Bank Corporation. As of March 31, 1998, Dreyfus managed or
administered approximately $100 billion in assets for approximately 1.7 million
investor accounts nationwide.
DISTRIBUTION PLAN
The Trust has adopted a Distribution Plan (the "Plan") under Rule 12b-1 of the
Investment Company Act of 1940 which permits the Fund to compensate the
Distributor, Nationwide Advisory Services, Inc. ("NAS") for expenses associated
with distribution of its shares. Under the Plan, the Fund pays NAS compensation
accrued daily and paid monthly at a maximum rate of .07% of the Fund's average
daily net assets. Distribution expenses paid by NAS may include the costs of
printing and mailing prospectuses and sales literature to prospective investors,
advertising, and compensation to sales personnel and broker-dealers.
OTHER SERVICES
Under the terms of the Fund Administration Agreement, the Adviser also provides
various administrative and accounting services, including daily valuation of the
Fund's shares, preparation of financial statements, tax returns 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 0.05% on assets up to $1 billion and
0.04% on assets of $1 billion and more.
The Distributor, Nationwide Advisory Services, Inc. is located at Three
Nationwide Plaza, Columbus, Ohio 43215.
The Transfer and Dividend Disbursing Agent, Nationwide Investor Services, Inc.
("NISI"), Three Nationwide Plaza, Columbus, Ohio 43215, serves as transfer agent
and dividend disbursing agent for the Trust. The Fund pays NISI a fee for such
services at the annual rate of 0.01% of the Fund's average daily net assets.
NISI is a wholly owned subsidiary of the Adviser.
INVESTMENT IN FUND SHARES
An insurance company may purchase shares of the Fund using purchase payments
received on Contracts issued by Accounts. These Accounts are funded by shares of
the Fund. Funds of Funds may also purchase shares of the Fund for their
portfolios. There is no sales charge, and all shares are sold at net asset
value.
Shares of the Fund are currently sold only to separate accounts of Nationwide
Life Insurance Company and its wholly owned subsidiary Nationwide Life and
Annuity Insurance Company to fund the benefits under the Contract and to
affiliated Fund of Funds created by NAS. The addresses for each of these
entities is One Nationwide Plaza, Columbus, Ohio 43215.
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All investments in the Fund are credited to the shareholder's account in the
form of full and fractional shares of the Fund (rounded to the nearest 1/1000 of
a share). The Trust does not issue share certificates. Initial and subsequent
purchase payments allocated to the Fund are subject to the limits applicable to
the Contracts.
SHARE REDEMPTION
Redemptions are processed on any day on which the Trust is open for business and
are effected at net asset value next determined after the redemption orders are
received from a Fund of Funds or from Nationwide Life Insurance Company or
Nationwide Life and Annuity Company by the Trust's transfer agent, NISI. The net
asset value per share for the Fund is determined once daily, as of the close of
regular trading on the New York Stock Exchange (generally 4:00 P.M. Eastern
Time), on each business day the New York Stock Exchange is open for regular
trading, on such other days as the Board determines and on any other day during
which there is a sufficient degree of trading in the 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.'s Birthday, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, and Thanksgiving Day. The net asset
value per share is calculated by adding the value of all securities and other
assets of the Fund, deducting its liabilities, and dividing by the number of
shares outstanding.
In determining net asset value, portfolio securities listed on national
exchanges are valued at the last sales price on the principal exchange. If the
securities are traded only in the over-the-counter market, they are valued at
the last quoted bid price. Other portfolio securities are valued at the quoted
prices obtained from an independent pricing organization which employs a
combination of methods, including among others, the obtaining and comparison of
market valuations from dealers who make markets and deal in such securities and
the comparison of valuations with those of other comparable securities in a
matrix of such securities. The pricing service activities and results are
reviewed by an officer of the Trust. Securities for which market quotations are
not readily available, if any, are valued at fair value in accordance with
procedures adopted by the Board of Trustees. Expenses and fees are accrued
daily.
The Trust may suspend the right of redemption only under the following unusual
circumstances:
o when the New York Stock Exchange is closed (other than weekends and
holidays) or trading is restricted;
o when an emergency exists, making disposal of portfolio securities or
the valuation of net assets not reasonably practicable; or
o during any period when the Securities and Exchange Commission has by
order permitted a suspension of redemption for the protection of
shareholder.
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NET INCOME AND DISTRIBUTIONS
Substantially all of the net investment income, if any, of the Fund will be
declared and paid as dividends quarterly. Net realized capital gains, of the
Fund, if any, will be distributed at least annually.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES - The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of the
Fund and to divide or combine such shares into a greater or lesser number of
shares without thereby changing the proportionate beneficial interests in the
Trust. Each share of the Fund represents an equal proportionate interest in the
Fund with each other share. The Trust reserves the right to create and issue
shares of a number of different portfolios or series. In that case, the shares
of each fund would participate equally in the earnings, dividends, and assets of
the particular portfolio or series, but shares of all funds would vote together
in the election of Trustees. Upon liquidation of a portfolio or series, its
shareholders are entitled to share pro rata in the net assets of such portfolio
or series available for distribution to shareholders.
VOTING RIGHTS - Shareholders of each class of shares have one vote for each
share held and a proportionate fractional vote for any proportional share held.
An annual or special meeting of shareholders to conduct necessary business is
not required in the Declaration of Trust, the 1940 Act or other authority
except, under certain circumstances, to amend the Declaration of Trust, the
Investment Management Agreement, fundamental investment objectives, investment
policies, investment 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, or change of 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. 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 the Trustees will call a
special meeting of shareholders for purposes of considering the removal of one
or more Trustees upon written request therefor from shareholders holding not
less than 10% of 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.
SHAREHOLDER INQUIRIES - All inquiries regarding the Fund should be directed to
the Trust at the telephone number or address shown on the cover page of this
Prospectus.
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PERFORMANCE ADVERTISING FOR THE FUND
The Fund may use historical performance in advertisements, sales literature, and
the prospectus. Such figures will include quotations of average annual total
return for the most recent one, five and ten year periods, or the life of the
Fund if less. Average annual total return represents the rate required each year
for an initial investment to equal the redeemable value at the end of the
specific period. Average annual total return reflects reinvestment of all
distributions.
TAX STATUS
The Trust's policy is to cause each fund to qualify as a regulated investment
company and to meet the requirements of Subchapter M of the Internal Revenue
Code (the "Code"). The Fund intends to distribute or substantially all, of its
taxable net investment income and capital gains to shareholders; therefore it is
expected that the Fund will not be required to pay any federal income taxes on
its investment income.
Because each portfolio or series of the Trust is treated as a separate entity
for purposes of the regulated investment company provisions of the Code, the
assets, income and distributions of the Fund are considered separately for
purposes of determining whether or not the Fund qualifies as a regulated
investment company. The Fund intends to comply with the diversification
requirements currently imposed by the Internal Revenue Service on separate
accounts of insurance companies as a condition of maintaining the tax-deferred
status of the Contracts. See the Statement of Additional Information for more
specific information.
The tax treatment of payments made by an Account to a Contractholder is
described in the separate account prospectus.
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CONTENTS
Sale of Fund Shares 2
Summary of Expenses 2
Financial Highlights 3
Investment Objective and Policies 3
Management of the Fund 4
Investment Techniques, Considerations and Risk Factors 4
Management of the Trust 7
Investment in Fund Shares 9
Share Redemption 10
Net Income and Distributions 11
Additional Information 11
Performance Advertising for the Fund 11
Tax Status 12
INVESTMENT ADVISER AND ADMINISTRATOR
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc.
Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
Two Nationwide Plaza
Columbus, Ohio 43215
LEGAL COUNSEL
Druen, Dietrich, Reynolds & Koogler
One Nationwide Plaza
Columbus, Ohio 43215
CUSTODIAN
The Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45263
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PART B:
STATEMENT OF ADDITIONAL INFORMATION JULY 23, 1998
NATIONWIDE INVESTING FOUNDATION III
NATIONWIDE S&P 500 INDEX 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 for the Nationwide S&P 500 Index Fund and should be read in
conjunction with that prospectus dated July 23, 1998. The prospectus may be
obtained from Nationwide Advisory Services, Inc. (NAS), P.O. Box 1492, Three
Nationwide Plaza, Columbus, Ohio 43216.
Terms not defined in this Statement of Additional Information have the
meanings assigned to them in the Prospectus.
TABLE OF CONTENTS
General Information and History 1
Investment Objectives and Policies 1
Investment Restrictions 10
Trustees and Officers of the Trust 11
Investment Advisory and Other Services 13
Brokerage Allocation 17
Calculating Yield and Total Return 17
Nonstandard Returns 18
Additional Information 18
Additional General Tax Information 19
Financial Statement 22
Independent Auditors' Report 24
GENERAL INFORMATION AND HISTORY
Nationwide Investing Foundation III (NIF III) is an open-end management
investment company, created under the laws of Ohio by a Declaration of Trust
dated as of October 30, 1997.
INVESTMENT OBJECTIVES AND POLICIES
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES
The following information supplements the discussion of the Fund's investment
objectives and policies discussed in the Prospectus. The investment objective is
fundamental and may not be changed without shareholder approval. The investment
policy and types of permitted investments described here may be changed without
approval by the shareholders. There is no guarantee that the Fund's investment
objective will be realized.
MONEY MARKET INSTRUMENTS. The Fund may invest in certain types of money market
instruments which may include the following types of instruments:
-- obligations with remaining maturities of 13 months or less issued or
guaranteed as to interest and principal by the U.S. Government, its
agencies, or instrumentalities, or any federally chartered corporation, and
for the Money Market Fund's, obligations of the Canadian government and
their provinces, their agencies and instrumentalities;
-- repurchase agreements;
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-- certificates of deposit, time deposits and bankers' acceptances issued
by domestic banks (including their branches located outside the United
States (Eurodollars) and subsidiaries located in Canada), domestic branches
of foreign banks (Yankees dollars), savings and loan associations and
similar institutions;
-- commercial paper, which are short-term unsecured promissory notes issued
by corporations in order to finance their current operations. Generally the
commercial paper will be rated within the top two rating categories by an
NRSRO, or if not rated, is issued and guaranteed as to payment of principal
and interest by companies which at the date of investment have outstanding
debt issue with a high quality rating;
-- adjustable and variable rate instruments including callable notes;
-- short-term (maturing in 397 days or less) corporate obligations rated
within the top two categories by an NRSRO;
-- bank loan participation agreements representing obligations of
corporations and banks having a high quality short-term rating, at the date
of investment, and under which the Fund will look to the creditworthiness
of the lender bank, which is obligated to make payments of principal and
interest on the loan, as well as to creditworthiness of the borrower.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
certain banks or non-bank dealers. In connection with the purchase of a
repurchase agreement by the Fund, the Fund's custodian, or a subcustodian, will
have custody of, and will hold in a segregated account, securities acquired by
the Fund under a repurchase agreement. Repurchase agreements are contracts under
which the buyer of a security simultaneously commits to resell the security to
the seller at an agreed-upon price and date. Repurchase agreements are
considered by the staff of the Securities and Exchange Commission (the "SEC") to
be loans by the Fund. Repurchase agreements may be entered into with respect to
securities of the type in which the Fund may invest or government securities
regardless of their remaining maturities. The Fund will require that additional
securities be deposited with its custodian if the value of the securities
purchased should decrease below resale price. Repurchase agreements involve
certain risks in the event of default or insolvency by the other party,
including possible delays or restrictions upon the Fund's ability to dispose of
the underlying securities, the risk of a possible decline in the value of the
underlying securities during the period in which the Fund seeks to assert its
rights to the securities, the risk of incurring expenses associated with
asserting those rights and the risk of losing all or part of the income from the
repurchase agreement.
LENDING PORTFOLIO SECURITIES. The Fund may lend its portfolio securities to
brokers, dealers and other financial institutions, provided it receives cash
collateral which at all times is maintained in an amount equal to at least 100%
of the current market value of the securities loaned. By lending its portfolio
securities, the Fund can increase its income through the investment of the cash
collateral. For the purposes of this policy, the Fund considers U.S. Government
securities or letters of credit issued by banks whose securities meet the
standards for investment by the Fund to be the equivalent of cash. From time to
time, the Fund may return to the borrower or a third party which is unaffiliated
with it, and which is acting as a "placing broker," a part of the interest
earned from the investment of collateral received for securities loaned.
The SEC currently requires that the following conditions must be met
whenever portfolio securities are loaned: (1) the Fund must receive from the
borrower at least 100% collateral of the type discussed in the preceding
paragraph; (2) the
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borrower must increase such collateral whenever the market value of the
securities loaned rises above the level of such collateral; (3) the Fund must be
able to terminate the loan at any time; (4) the Fund must receive reasonable
interest on the loan, as well as any dividends, interest or other distributions
payable on the loaned securities, and any increase in market value; (5) the Fund
may pay only reasonable custodian fees in connection with the loan; and (6)
while any voting rights on the loaned securities may pass to the borrower, the
Trust's Board of Trustees must be able to terminate the loan and regain the
right to vote the securities if a material event adversely affecting the
investment occurs. These conditions may be subject to future modification. Loan
agreements involve certain risks in the event of default or insolvency of the
other party including possible delays or restrictions upon the Fund's ability to
recover the loaned securities or dispose of the collateral for the loan.
RESTRICTED, NON-PUBLICLY TRADED AND ILLIQUID SECURITIES. The Fund may not invest
more than 15% of its net assets, in the aggregate, in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
time deposits maturing in more than seven days and securities that are illiquid
because of the absence of a readily available market or legal or contractual
restrictions on resale. At this time the Fund does not intend to invest more
than 5% of its net assets in illiquid securities. Repurchase agreements subject
to demand are deemed to have a maturity equal to the notice period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Investment companies do not typically hold a significant
amount of these restricted or other illiquid securities because of the potential
for delays on resale and uncertainty in valuation. Limitations on resale may
have an adverse effect on the marketability of portfolio securities, and the
Fund might be unable to dispose of restricted or other illiquid securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemptions within seven days. The Fund might also have to register
such restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including foreign securities, municipal securities and corporate bonds and
notes. Institutional investors depend on an efficient institutional market in
which the unregistered security can be readily resold or on an issuer's ability
to honor a demand for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain institutions may not
be indicative of the liquidity of such investments.
The SEC has adopted Rule 144A under the Securities Act which allows for
a broader institutional trading market for securities otherwise subject to
restriction on resale to the general public. Rule 144A establishes a "safe
harbor" from the registration requirements of the Securities Act for resales of
certain securities to qualified institutional buyers. It is anticipated that the
market for certain restricted securities such as institutional commercial paper
will expand further as a result of this regulation and use of automated systems
for the trading, clearance and settlement of unregistered securities of domestic
and foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc.
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Any such restricted securities will be considered to be illiquid for
purposes of such the Fund's limitations on investments in illiquid securities
unless, pursuant to procedures adopted by the Board of Trustees of the Trust,
NAS has determined such securities to be liquid because such securities are
eligible for resale pursuant to Rule 144A and are readily saleable. To the
extent that qualified institutional buyers may become uninterested in purchasing
Rule 144A securities, the Fund's level of illiquidity may increase.
The Fund may buy or sell over-the-counter ("OTC") options and, in
connection therewith, segregate assets or cover its obligations with respect to
OTC options written by the Fund. The assets used as cover for OTC options
written by the Fund will be considered illiquid unless the OTC options are sold
to qualified dealers who agree that the Fund may repurchase any OTC option it
writes at a maximum price to be calculated by a formula set forth in the option
agreement. The cover for an OTC option written subject to this procedure would
be considered illiquid only to the extent that the maximum repurchase price
under the formula exceeds the intrinsic value of the option.
NAS will monitor the liquidity of restricted securities in the Fund. In
reaching liquidity decisions, NAS may consider the following factors: (A) the
unregistered nature of the security; (B) the frequency of trades and quotes for
the security; (C) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (D) dealer undertakings to make a
market in the security and (E) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer).
BORROWING. The Fund may borrow money from banks, limited by the Fund's
fundamental investment restriction to 33-1/3% of its total assets (including the
amount borrowed). In addition, the Fund may borrow up to an additional 5% of its
total assets from banks for temporary or emergency purposes. The Fund will not
purchase securities when bank borrowings exceed 5% of the Fund's total assets.
The Fund expects that its borrowings will be on a secured basis. In
such situations, either the custodian will segregate the pledged assets for the
benefit of the lender or arrangements will be made with a suitable subcustodian,
which may include the lender. The Fund has established a line-of-credit ("LOC")
with its custodian by which it may borrow for temporary or emergency purposes.
The Fund intends to use the LOC to meet large or unexpected redemptions that
would otherwise force the Fund to liquidate securities under circumstances which
are unfavorable to the Fund's remaining shareholders.
DERIVATIVE INSTRUMENTS. As discussed in the Prospectuses, NAS or a Subadviser
may use a variety of derivative instruments, including options, futures
contracts (sometimes referred to as "futures"), options on futures contracts,
stock index options and forward currency contracts to hedge the Fund's portfolio
or for risk management. Derivations are financial instruments whose value and
performance are based on the value and performance of another security,
financial instrument or index.
The use of these instruments is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they may be
traded, and the Commodity Futures Trading Commission ("CFTC").
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Special Risks Of Derivative Instruments. The use of derivative
instruments involves special considerations and risks as described below. Risks
pertaining to particular instruments are described in the sections that follow.
(1) Successful use of most of these instruments depends upon NAS's
ability to predict movements of the overall securities and currency markets,
which requires different skills than predicting changes in the prices of
individual securities. There can be no assurance that any particular strategy
adopted will succeed.
(2) There might be imperfect correlation, or even no correlation,
between price movements of an instrument and price movements of investments
being hedged. For example, if the value of an instrument used in a short hedge
(such as writing a call option, buying a put option, or selling a futures
contract) increased by less than the decline in value of the hedged investment,
the hedge would not be fully successful. Such a lack of correlation might occur
due to factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which these instruments are
traded. The effectiveness of hedges using instruments on indices will depend on
the degree of correlation between price movements in the index and price
movements in the investments being hedged, as well as how similar the index is
to the portion of the Fund's assets being hedged in terms of securities
composition.
(3) Hedging strategies, if successful, can reduce the risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can also
reduce opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if the Fund entered into a
short hedge because NAS or the Subadviser projected a decline in the price of a
security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the instrument. Moreover, if the price of the instrument
declined by more than the increase in the price of the security, the Fund could
suffer a loss.
(4) As described below, the Fund might be required to maintain assets
as "cover," maintain segregated accounts, or make margin payments when it takes
positions in these instruments involving obligations to third parties (i.e.,
instruments other than purchased options). If the Fund were unable to close out
its positions in such instruments, it might be required to continue to maintain
such assets or accounts or make such payments until the position expired or
matured. The requirements might impair the Fund's ability to sell a portfolio
security or make an investment at a time when it would otherwise be favorable to
do so, or require that the Fund sell a portfolio security at a disadvantageous
time. The Fund's ability to close out a position in an instrument prior to
expiration or maturity depends on the existence of a liquid secondary market or,
in the absence of such a market, the ability and willingness of the other party
to the transaction ("counter party") to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to the Fund.
For a discussion of the Federal income tax treatment of the Fund's
derivative instruments, see "Additional General Tax Information".
Options. The Fund may purchase or write put and call options on
securities and indices, and may purchase options on foreign currencies, and
enter into closing transactions with respect to such options to terminate an
existing position. A call option gives the purchaser the right to buy, and the
writer the obligation to sell, the underlying security at the agreed upon
exercise (or "strike") price during the option period. A put option gives the
purchaser the right to sell, and the writer the obligation to buy, the
underlying security at the strike price during the option
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period. Purchasers of options pay an amount, known as a premium, to the option
writer in exchange for the right under the option contract. Option contracts may
be written with terms which would permit the holder of the option to purchase or
sell the underlying security only upon the expiration date of the option. The
initial purchase or sale of an option contract is an "opening transaction". In
order to close out an option position, the Fund may enter into a "closing
transaction", the sale or purchase, as the case may be, of an option contract on
the same security with the same exercise price and expiration date as the option
contract originally opened. The purchase of call options serves as a long hedge,
and the purchase of put options serves as a short hedge. Writing put or call
options can enable the Fund to enhance income by reason of the premiums paid by
the purchaser of such options. Writing call options serves as a limited short
hedge because declines in the value of the hedged investment would be offset to
the extent of the premium received for writing the option. However, if the
security appreciates to a price higher than the exercise price of the call
option, it can be expected that the option will be exercised, and the Fund will
be obligated to sell the security at less than its market value or will be
obligated to purchase the security at a price greater than that at which the
security must be sold under the option. All or a portion of any assets used as
cover for OTC options written by the Fund would be considered illiquid to the
extent described under "Restricted and Illiquid Securities" above. Writing put
options serves as a limited long hedge because increases in the value of the
hedged investment would be offset to the extent of the premium received for
writing the option. However, if the security depreciates to a price lower than
the exercise price of the put option, it can be expected that the put option
will be exercised, and the Fund will be obligated to purchase the security at
more than its market value.
The value of an option position will reflect, among other things, the
historical price volatility of the underlying investment, the current market
value of the underlying investment, the time remaining until expiration of the
option, the relationship of the exercise price to the market price of the
underlying investment, and general market conditions. Options that expire
unexercised have no value. Options used by the Fund may include European-style
options, which can only be exercised at expiration. This is in contrast to
American-style options which can be exercised at any time prior to the
expiration date of the option.
The Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, the Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, the Fund may terminate a position in a put or call
option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit the Fund to
realize the profit or limit the loss on an option position prior to its exercise
or expiration.
The Fund may purchase or write both OTC options and options traded on
foreign and U.S. exchanges. Exchange-traded options are issued by a clearing
organization affiliated with the exchange on which the option is listed that, in
effect, guarantees completion of every exchange-traded option transaction. OTC
options are contracts between the Fund and the counterparty (usually a
securities dealer or a bank) with no clearing organization guarantee. Thus, when
the Fund purchases or writes an OTC option, it relies on the counter party to
make or take delivery of the underlying investment upon exercise of the option.
Failure by the counter party to do so would result in the loss of any premium
paid by the fund as well as the loss of any expected benefit of the transaction.
The Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The Fund
intends to purchase or write only those exchange-traded options for which there
appears to be a liquid
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secondary market. However, there can be no assurance that such a market will
exist at any particular time. Closing transactions can be made for OTC options
only by negotiating directly with the counterparty, or by a transaction in the
secondary market if any such market exists. Although the Fund will enter into
OTC options only with counterparties that are expected to be capable of entering
into closing transactions with the Fund, there is no assurance that the Fund
will in fact be able to close out an OTC option at a favorable price prior to
expiration. In the event of insolvency of the counter party, the Fund might be
unable to close out an OTC option position at any time prior to its expiration.
If the Fund is unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by the Fund could cause material losses because the Fund would be unable
to sell the investment used as a cover for the written option until the option
expires or is exercised.
Transactions using OTC options expose the Fund to certain risks. To the
extent required by SEC guidelines, the Fund will not enter into any such
transactions unless it owns either (1) an offsetting ("covered") position in
securities, other options, or futures or (2) cash and liquid obligations with a
value sufficient at all times to cover its potential obligations to the extent
not covered as provided in (1) above. The Fund will also set aside cash and/or
appropriate liquid assets in a segregated custodial account if required to do so
by the SEC and CFTC regulations. Assets used as cover or held in a segregated
account cannot be sold while the position in the corresponding option or futures
contract is open, unless they are replaced with similar assets. As a result, the
commitment of a large portion of the Fund's assets to segregated accounts as a
cover could impede portfolio management or the Fund's ability to meet redemption
requests or other current obligations.
The Fund may engage in options transactions on indices in much the same
manner as the options on securities discussed above, except that index options
may serve as a hedge against overall fluctuations in the securities markets in
general. Index options (or options on securities indices) are similar in many
respects to options on securities except that an index option gives the holder
the right to receive, upon exercise, cash instead of securities, if the closing
level of the securities index upon which the option is based is greater than, in
the case of a call , or less than, in the case of a put, the exercise price of
the option. Price movements in securities in which the Fund owns or intends to
purchase probably will not correlate perfectly with movements in the level of an
index and, therefore, the Fund bears the risk of a loss on an index option that
is not completely offset by movements in the price of such securities. Because
index options are settled in cash, a call writer cannot determine the amount of
its settlement obligations in advance and, unlike call writing on specific
securities, cannot provide in advance for, or cover, its potential settlement
obligations acquiring and holding the underlying securities. The Fund will be
required to segregate assets and/or provide an initial margin to cover index
options that would require it to pay cash upon exercise.
The writing and purchasing of options is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. Imperfect correlation between
the options and securities markets may detract from the effectiveness of
attempted hedging.
Futures Contracts. The Fund may enter into futures contracts, including
interest rate, index, and currency futures and purchase and write (sell) related
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options. The purchase of futures or call options thereon can serve as a long
hedge, and the sale of futures or the purchase of put options thereon can serve
as a short hedge. Writing covered call options on futures contracts can serve as
a limited short hedge, and writing covered put options on futures contracts can
serve as a limited long hedge, using a strategy similar to that used for writing
covered options in securities. The Fund's hedging may include purchases of
futures as an offset against the effect of expected increases in securities
prices or currency exchange rates and sales of futures as an offset against the
effect of expected declines in securities prices or currency exchange rates. The
Fund may write put options on futures contracts while at the same time
purchasing call options on the same futures contracts in order to create
synthetically a long futures contract position. Such options would have the same
strike prices and expiration dates. The Fund will engage in this strategy only
when NAS or a Subadviser believes it is more advantageous to the Fund than is
purchasing the futures contract.
To the extent required by regulatory authorities, the Fund will only
enter into futures contracts that are traded on U.S. or foreign exchanges or
boards of trade approved by the CFTC and are standardized as to maturity date
and underlying financial instrument. These transactions may be entered into for
"bona fide hedging" purposes as defined in CFTC regulations and other
permissible purposes including increasing return and hedging against changes in
the value of portfolio securities due to anticipated changes in interest rates,
currency values and/or market conditions. The ability of the Fund to trade in
futures contracts may be limited by the requirements of the Code applicable to a
regulated investment company.
The Fund will not enter into futures contracts and related options for
other than "bona fide hedging" purposes for which the aggregate initial margin
and premiums required to establish positions exceed 5% of the Fund's net asset
value after taking into account unrealized profits and unrealized losses on any
such contracts it has entered into. There is no overall limit on the percentage
of the Fund's assets that may be at risk with respect to futures activities.
Although techniques other than sales and purchases of futures contracts could be
used to reduce the Fund's exposure to market, currency, or interest rate
fluctuations, the Fund may be able to hedge its exposure more effectively and
perhaps at a lower cost through using futures contracts.
A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., debt security) or currency for a specified price at a
designated date, time, and place. An index futures contract is an agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to a specified multiplier times the difference between the value of
the index at the close of the last trading day of the contract and the price at
which the index futures contract was originally written. Transactions costs are
incurred when a futures contract is bought or sold and margin deposits must be
maintained. A futures contract may be satisfied by delivery or purchase, as the
case may be, of the instrument, the currency, or by payment of the change in the
cash value of the index. More commonly, futures contracts are closed out prior
to delivery by entering into an offsetting transaction in a matching futures
contract. Although the value of an index might be a function of the value of
certain specified securities, no physical delivery of those securities is made.
If the offsetting purchase price is less than the original sale price, the Fund
realizes a gain; if it is more, the Fund realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The transaction costs
must also be included in these calculations. There can be no assurance, however,
that the Fund will be able to enter into an offsetting transaction with respect
to a particular futures contract at a particular time. If the Fund is not
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able to enter into an offsetting transaction, the Fund will continue to be
required to maintain the margin deposits on the futures contract.
No price is paid by the Fund upon entering into a futures contract.
Instead, at the inception of a futures contract, the Fund is required to deposit
in a segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of cash,
U.S. Government securities or other liquid obligations, in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call or put option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather is in the
nature of a performance bond or good-faith deposit that is returned to the Fund
at the termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, the
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a call or put option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous. Purchasers and sellers of futures positions and
options on futures can enter into offsetting closing transactions by selling or
purchasing, respectively, an instrument identical to the instrument held or
written. Positions in futures and options on futures may be closed only on an
exchange or board of trade on which they were entered into (or through a linked
exchange). Although the Fund intends to enter into futures transactions only on
exchanges or boards of trade where there appears to be an active market, there
can be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or option on a futures contract
can vary from the previous day's settlement price; once that limit is reached,
no trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses, because it would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the future or option or to maintain cash or securities
in a segregated account.
Certain characteristics of the futures market might increase the risk
that movements in the prices of futures contracts or options on futures
contracts might not correlate perfectly with movements in the prices of the
investments being hedged. For example, all participants in the futures and
options on futures contracts markets are subject to daily variation margin calls
and might be compelled
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to liquidate futures or options on futures contracts positions whose prices are
moving unfavorably to avoid being subject to further calls. These liquidations
could increase price volatility of the instruments and distort the normal price
relationship between the futures or options and the investments being hedged.
Also, because initial margin deposit requirements in the futures markets are
less onerous than margin requirements in the securities markets, there might be
increased participation by speculators in the future markets. This participation
also might cause temporary price distortions. In addition, activities of large
traders in both the futures and securities markets involving arbitrage, "program
trading" and other investment strategies might result in temporary price
distortions.
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.
THE FUND:
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, leasing finance, consumer finance
and other finance.
In addition, the Fund may not purchase securities of one issuer, other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, if at the end of each fiscal quarter, (a) more than 5% of the
Fund's total assets (taken at current value) would be invested in such issuer
(except that up to 50% of the Fund's total assets may be invested without regard
to
10
<PAGE> 24
such 5% limitation), and (b) more than 25% of its total assets (taken at current
value) would be invested in securities of a single issuer. 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. The following are the non-fundamental operating policies of
the Funds 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%
(10% with respect to the Money Market Fund) 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.
TRUSTEES AND OFFICERS
OF THE TRUST
TRUSTEES AND OFFICERS
The principal occupation of the Trustees and Officers during the last five
years, their ages and their affiliations are:
JOHN C. BRYANT, Trustee*, Age 62
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 57
North Walnut and West College Avenue, Westerville, Ohio
Dr. DeVore is President of Otterbein College.
SUE A. DOODY, Trustee, Age 63
169 East Beck Street, Columbus, Ohio
Ms. Doody is President of Lindey's Restaurant, Columbus, Ohio. She is an active
member of the Greater Columbus Area Chamber of Commerce Board of Trustees.
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<PAGE> 25
ROBERT M. DUNCAN, Trustee*, Age 70
1397 Haddon Road, Columbus, Ohio
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 66
600 South Washington Street, Butler, Pennsylvania
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 64
4890 Smoketalk Lane, Westerville, Ohio
Dr. Kerr is President Emeritus of Kendall College. He was formerly President of
Grant Hospital Development Foundation.
DOUGLAS F. KRIDLER, Trustee, Age 42
55 E. State Street, Columbus, Ohio
Mr. Kridler is President of the Columbus Association of Performing Arts.
DIMON R. MCFERSON, Trustee*+, Age 61
One Nationwide Plaza, Columbus, Ohio
Mr. McFerson is President and Chief Executive Officer of the Nationwide
Insurance Enterprise.
NANCY C. THOMAS, Trustee+, Age 64
10835 Georgetown Road, NE, Louisville, Ohio
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 65
14282 King Road, Bowling Green, Ohio
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 49
11495 Sunset Hills Rd - Suite #210, Reston, Virginia
Mr. Wetmore is the Managing Director of The Updata Capital, a venture capital
firm.
JAMES F. LAIRD, JR., Treasurer
Three Nationwide Plaza, Columbus, Ohio
Mr. Laird is Vice President and General Manager of Nationwide Advisory Services,
Inc., the Distributor and Investment Manager.
CHRISTOPHER A. CRAY, Assistant Treasurer
Three Nationwide Plaza, Columbus, Ohio
Mr. Cray is Treasurer of Nationwide Advisory Services, Inc., the Distributor and
Investment Manager. Prior to that he was Director - Corporate Accounting of
Nationwide Insurance Enterprise.
DAVID E. SIMAITIS, Secretary
Three Nationwide Plaza, Columbus, Ohio
Mr. Simaitis 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.
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<PAGE> 26
*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.
All Trustees and Officers of the Trust own less than 1% of its outstanding
shares.
The Trustees receive fees and reimbursement for expenses of attending board
meetings from the Trust. NAS 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 to be paid to the Trustees of the Trust,
before reimbursement, for the fiscal period ending October 31, 1998. In
addition, the table sets forth the total compensation to be 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.
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-- 15,500
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-- 15,500
</TABLE>
**The Fund Complex includes Trusts comprised of twenty nine investment company
portfolios.
INVESTMENT ADVISORY AND OTHER SERVICES
Under the terms of the Investment Advisory Agreement dated May 9, 1998,
Nationwide Advisory Services, Inc. ("NAS") manages the investment of the assets
of the Funds in accordance with the policies and procedures established by the
Trustees.
The Adviser pays the compensation of the Trustees and officers affiliated with
the Adviser. The Adviser also furnishes, at its own expense, all necessary
administrative services, office space, equipment, and clerical personnel for
servicing the investments of the Trust and maintaining its investment advisory
facilities, and executive and supervisory personnel for managing the investments
and effecting the portfolio transactions of the Trust.
The Investment Advisory Agreement also specifically provides that the Adviser,
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
Trust, 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
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<PAGE> 27
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 that Fund, or by either party, on not less than
60 days written notice. The Agreement further provides that the Adviser may
render similar services to others.
The Trust pays the compensation of the Trustees who are not affiliated with the
Adviser and all expenses (other than those assumed by the Adviser), 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.
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.
ADVISORY SERVICES FOR THE S&P 500 INDEX FUND
Under the terms of the Investment Advisory Agreement, NAS oversees the
investment of the assets for the S&P 500 Index Fund. Subject to the supervision
and direction of the Trustees, the Adviser also evaluates and monitors the
performance of the subadviser. The Adviser is also authorized to select and
place portfolio investments on behalf of the Fund, however the Adviser does not
intend to do so at this time.
The Adviser and the Trust have received from the Securities and Exchange
Commission an exemptive order for the multi-manager structure which allows the
Adviser to hire, replace or terminate subadvisers without the approval of
shareholders; the order also allows the Adviser to revise a subadvisory
agreement without shareholder approval. If a new subadviser is hired, the change
will be communicated to shareholders within 90 days of such changes, and all
changes will be approved by the Trust's Board of Trustees, including a majority
of the Trustees who are not interested persons of the Trust or the Adviser. The
order is intended to facilitate the efficient operation of the Fund and afford
the Trust increased management flexibility.
The Adviser provides to the Fund investment management evaluation services
principally by performing initial due diligence on prospective Subadvisers for
the Fund and thereafter monitoring the performance of the Subadviser through
quantitative and qualitative analysis as well as periodic in-person, telephonic
and written consultations with the Subadviser. The Adviser has responsibility
for communicating performance expectations and evaluations to the Subadviser and
ultimately recommending to the Trust's Board of Trustees whether the
Subadviser's contract should be renewed, modified or terminated; however, the
Adviser does not
14
<PAGE> 28
expect to recommend frequent changes of subadvisers. The Adviser will regularly
provide written reports to the Trust's Board of Trustees regarding the results
of its evaluation and monitoring functions. Although the Adviser will monitor
the performance of the Subadvisers, there is no certainty that the Subadviser or
the Fund will obtain favorable results at any given time.
The S&P 500 Index Fund pays the Adviser a fee at the annual rate of .13% of the
Fund's average daily net assets for investment advisory services.
The Adviser may from time to time waive some or all of its investment advisory
fee or other fees. The waiver of such fees will cause the total return and yield
of the Fund to be higher than they would otherwise be in the absence of such a
waiver.
The Subadviser - Subject to the supervision of the Adviser and the Trust's Board
of Trustees, The Dreyfus Corporation manages the S&P 500 Index Fund's assets in
accordance with such Fund's investment objective and policies. The Subadviser
shall make investment decisions for the S&P 500 Index Fund, and in connection
with such investment decisions shall place purchase and sell orders for
securities. For the investment management services it provides to the Fund, the
Subadviser receives an annual fee from the Adviser in the following amounts:
.07% on the first $250 million in assets
.06% on the next $250 million in assets
.05% on the next $500 million in assets
.04% over $1 billion in assets.
Below is a brief description of the Subadviser.
The Dreyfus Corporation ("Dreyfus"), 200 Park Avenue, New York, N.Y. 10166,
which was formed in 1947 and is registered under the Investment Advisers Act of
1940, serves as subadviser to the Fund pursuant to a Subadvisory Agreement dated
July 23, 1998. Dreyfus is a wholly-owned subsidiary of Mellon Bank, N.A., which
is a wholly-owned subsidiary of Mellon Bank Corporation.
DISTRIBUTOR
NAS serves as agent for the Fund in the distribution of its Shares pursuant to
an Underwriting Agreement dated as of May 9, 1998 (the "Underwriting
Agreement"). Unless otherwise terminated, the Underwriting Agreement will
continue in effect until May 9, 2000, and year to year thereafter for successive
annual periods, if, as to each Fund, such continuance is approved at least
annually by (i) the Trust's Board of Trustees or by the vote of a majority of
the outstanding shares of that Fund, and (ii) the vote of a majority of the
Trustees of the Trust who are not parties to the Underwriting Agreement or
interested persons (as defined in the 1940 Act) of any party to the Underwriting
Agreement, cast in person at a meeting called for the purpose of voting on such
approval. The Underwriting Agreement may be terminated in the event of any
assignment, as defined in the 1940 Act.
In its capacity as Distributor, NAS solicits orders for the sale of
Shares, advertises and pays the costs of advertising, office space and the
personnel involved in such activities. NAS receives no compensation under the
Underwriting Agreement with the Trust, but may retain all or a portion of the
sales charge imposed upon sales of Shares of each of the Funds.
DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan (the "Plan") under Rule 12b-1 of the
1940 Act which permits the Fund to compensate NAS as the Fund's Distributor, for
expenses associated with distribution of shares. Although actual distribution
expenses may
15
<PAGE> 29
be more or less, under the Plan the Fund shall pay an annual fee not exceeding
.07% of the average daily net assets of the Local Fund Shares of the Nationwide
S&P 500 Index Fund to NAS. Distribution expenses paid by NAS may include the
costs of marketing, printing and mailing prospectuses and sales literature to
prospective investors, advertising, and compensation to sales personnel and
broker-dealers.
As required by Rule 12b-1, the Plan was approved by the initial Shareholder of
the Fund and by the Board of Trustees, including a majority of the Trustees who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the operation of the Plan (the "Independent Trustees").
The Plan was approved by the Board of Trustees on November 7, 1997 and amended
and approved by the Board of Trustees on May 8, 1998. The Plan may be terminated
by vote of a majority of the Independent Trustees, or by vote of majority of the
outstanding shares of the Fund. Any change in the Plan that would materially
increase the distribution cost to the Fund requires Shareholder approval. The
Trustees review quarterly a written report of such costs and the purposes for
which such costs have been incurred. The Plan may be amended by the vote of the
Trustees including a majority of Independent Trustees, cast in person at a
meeting called for that purpose. For so long as the Plan is in effect, selection
and nomination of those Trustees who are not interested persons of the Trust
shall be committed to the discretion of such disinterested persons. All
agreements with any person relating to the implementation of the Plan may be
terminated at any time on 60 days' written notice without payment of any
penalty, by vote of a majority of the Independent Trustees or by a vote of the
majority of the outstanding Shares of the Fund. The Plan will continue in effect
for successive one-year periods, provided that each such continuance is
specifically approved (i) by the vote of a majority of the Independent Trustees,
and (ii) by a vote of a majority of the entire Board of Trustees cast in person
at a meeting called for that purpose. The Board of Trustees has a duty to
request and evaluate such information as may be reasonably necessary for them to
make an informed determination of whether the Plan should be implemented or
continued. In addition the Trustees in approving the Plan must determine that
there is a reasonable likelihood that the Plan will benefit the Fund and its
Shareholders.
The Board of Trustees of the Trust believes the Plan is in the best
interest of the Fund since it encourages Fund growth and maintenance of Fund
assets. As the Fund grows in size, certain expenses, and therefore total
expenses per Share, may be reduced and overall performance per Share may be
improved.
The Fund has entered into a licensing agreement which authorizes the Fund to use
the trademarks of the McGraw-Hill Companies, Inc. (1)
(1) Standard & Poor's 500 and S&P 500(R) are trademarks of The McGraw-Hill
Companies, Inc. The Fund is not sponsored, endorsed, sold or promoted by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc.("S&P").
S&P makes no representation or warranty, expressed or implied, to the
shareholders of the Fund or any member of the public regarding the
advisability of investing in securities generally or in the Fund
particularly or the ability of the S&P 500 Index to track general stock
market performance. S&P's only relationship to the Fund or the Adviser is
the licensing of certain trademarks and trade names of S&P and of the S&P
500 index which is determined, composed and calculated by S&P without regard
to the Fund. S&P has no obligation to take the needs of the Fund or its
shareholders into consideration in determining, composing or calculating the
S&P 500 Index. S&P is not responsible for or has not participated in the
determination of the prices and amount of the Fund shares or the timing of
the issuance or sale of Fund shares or in the determination or calculation
of the equation by which Fund shares are redeemed. S&P has no obligation or
liability in connection with the administration, marketing or trading
16
<PAGE> 30
of the Fund. S&P does not guarantee the accuracy makes no warranty,
expressed or implied as to the results to be obtained by the Fund,
shareholders of the Fund, or any other person or entity from the use of
the S&P 500 Index or any data included therein. Without limiting any of
the foregoing, in no event shall S&P 500 Index have any liability for any
special, punitive, indirect, or consequential damages, including lost
profits even if notified of the possibility of such damages.
NAS may enter into, from time to time, Rule 12b-1 Agreements with
selected dealers pursuant to which such dealers will provide certain services in
connection with the distribution of the Fund's Shares including, but not limited
to, those discussed above.
OTHER SERVICES FOR THE FUND
Under a separate Fund Administration Agreement dated May 9, 1998, NAS also
provides various administrative and accounting services, including daily
valuation of the Fund's shares and preparation of financial statements, tax
returns and regulatory reports. For these services the Fund pays NAS an annual
fee in the amount of 0.05% on assets up to $1 billion and 0.04% on assets of $1
billion and more.
Nationwide Investors Services, Inc. ("NISI") is the Transfer and Dividend
Disbursing Agent for all Nationwide Funds. NISI, a wholly-owned subsidiary of
NAS will receive fees for transfer agent services to the Fund in the amount of
.01% annually of average daily net assets of the S&P 500 Index Fund. Management
believes the charges for the services performed are comparable to fees charged
by other companies performing similar services.
The Fifth Third Bank ("Fifth Third"), 38 Fountain Square Plaza, Cincinnati, OH
45263, is the custodian for the Fund and makes all receipts and disbursements
under a Custody Agreement. Fifth Third performs no managerial or policy making
functions for the Funds.
KPMG Peat Marwick LLP, Two Nationwide Plaza, Columbus, OH 43215, serves as
the independent auditors for the Trust.
BROKERAGE ALLOCATION
ALLOCATION OF PORTFOLIO BROKERAGE -- There is no commitment by NAS to place
orders with any particular broker/dealer or group of broker/dealers. Orders for
the purchases and sales of portfolio securities of the Fund are placed where, in
the judgment of NAS or the Subadviser, the best executions can be obtained. None
of the firms with whom orders are placed are engaged in the sale of shares of
the Fund. 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 provided by brokerage firms include
efficient handling of orders, useful analyses of corporations, industries and
the economy, statistical reports and other related services for which no charge
is made by the broker above the negotiated brokerage commissions. The Fund and
NAS believe that these services and information, which in many cases would be
otherwise unavailable to NAS, are of significant value to NAS, but it is not
possible to place an exact dollar value thereon. NAS does not believe that the
receipt of such services and information tends to reduce materially NAS'
expense.
In the case of securities traded in the over-the-counter market, the Fund will
normally deal with the market makers for such securities unless better prices
can be obtained through brokers.
CALCULATING YIELD AND TOTAL RETURN
The Funds may from time to time advertise historical performance, subject to
Rule 482 under the Securities Act. An investor should keep in mind that any
return or yield
17
<PAGE> 31
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 (compound)
total return quotations for the most recent one, five, and ten-year periods (or
life if the Fund has been in operation less than one of the prescribed periods).
Average annual (compound) total return represents redeemable value at the end of
the quoted period. It is calculated in a uniform manner by dividing the ending
redeemable value of a hypothetical initial payment of $1,000 minus the maximum
sales charge, for a specified period of time, by the amount of the initial
payment, assuming reinvestment of all dividends and distributions. In
calculating the standard total returns, the current maximum applicable sales
charge is deducted from the initial investment. The one, five, and ten-year
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.
NONSTANDARD RETURNS
The Fund may also choose to show nonstandard returns including total return, and
simple average total return. Nonstandard returns may or may not reflect
reinvestment of all dividends and capital gains; in addition, sales charge
assumptions will vary. Sales charge percentages decrease as amounts invested
increase as outlined in the prospectus; therefore, returns increase as sales
charges decrease.
Total return represents the cumulative percentage change in the value of an
investment over time, calculated by subtracting the initial investment from the
redeemable value and dividing the result by the amount of the initial
investment. The simple average total return is calculated by dividing total
return by the number of years in the period, and unlike average annual
(compound) total return, does not reflect compounding.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES - The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of the
Fund and to divide or combine such shares into a greater or lesser number of
shares without thereby changing the proportionate beneficial interests in the
Trust. Each share of the Fund represents an equal proportionate interest in the
Fund with each other share. The Trust reserves the right to create and issue
shares of a number of different portfolios or series. In that case, the shares
of each fund would participate equally in the earnings, dividends, and assets of
the particular portfolio or series, but shares of all funds would vote together
in the election of Trustees. Upon liquidation of a portfolio or series, its
shareholders are entitled to share pro rata in the net assets of such portfolio
or series available for distribution to shareholders.
VOTING RIGHTS--Shareholders of each class of shares have one vote for each share
held and a proportionate fractional vote for any fractional share 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, fundamental investment objectives, investment policies,
investment 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 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 class
fund affected by the proposal.
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<PAGE> 32
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 the Trustees will call a special meeting of shareholders for
purposes of considering the removal of one or more Trustees upon written request
therefor 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.
ADDITIONAL GENERAL TAX INFORMATION
Each of the nine Funds of the Trust 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 that 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; 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; and, in taxable years beginning on or before August
5, 1997, derive less than 30% of its gross income from the sale or other
disposition of stock, securities, options, future contracts or foreign
currencies held less than three months. In addition, to utilize the tax
provisions specially applicable to regulated investment companies, the Fund must
distribute to its shareholders at least 90% of its investment company taxable
income for the year. In general, the Fund's investment company taxable income
will be its taxable income subject to certain adjustments and excluding the
excess of any net mid-term or 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 each 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, 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 each Fund will distribute annually to shareholders
all or substantially all of that 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 that Fund and not in cash.
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Distribution by the Fund of the excess of net mid-term or net long-term
capital gain over net short-term capital loss, if any, is taxable to
shareholders as mid-term or long-term capital gain, respectively, 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).
Mid-term capital gains of individuals are subject to tax at the same rates
applicable to ordinary income; however, the tax rate on mid-term capital gains
of individuals cannot exceed 28%. 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 mid-term capital gains is
more than one year but not more than eighteen months; the holding period for
long-term capital gains is more than eighteen months.
Federal taxable income of corporations in excess of $75,000 up to $10
million is subject to a 34% tax rate; however, because the benefit of lower tax
rates on a corporation's taxable income of less than $75,000 is phased out for
corporations with income in excess of $100,000 but lower than $335,000, a
maximum marginal tax rate of 39% may result. Federal taxable income of
corporations in excess of $10 million is subject to a tax rate of 35%. Further,
a corporation's federal taxable income in excess of $15 million is subject to an
additional tax equal to 3% of taxable income over $15 million, but not more than
$100,000.
Capital gains of corporations are subject to tax at the same rates
applicable to ordinary income. Capital losses may be used only to offset capital
gains and excess net capital loss may be carried back three years and forward
five years.
Certain corporations are entitled to a 70% dividends received deduction
for distributions from certain domestic corporations. Each 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 that
Fund for its taxable year that qualifies for the dividends received deduction.
Because all of the Money Market Fund's and each of the Bond 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 such Funds 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
any 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 that 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,
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<PAGE> 34
resulting in additional gain or loss to such 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 such Fund will be deferred to the extent of unrealized gain
in any offsetting positions. Moreover, as a result of the straddle and
conversion transaction rules, short-term capital losses on straddle positions
may be recharacterized as long-term capital losses and long-term capital gains
may be recharacterized as short-term capital gain or ordinary income.
Investment by the Fund in securities issued at a discount or providing
for deferred interest or for payment of interest in the form of additional
obligations could, under special tax rules, affect the amount, timing and
character of distributions to Shareholders. For example, the Fund could be
required to take into account annually a portion of the discount (or deemed
discount) at which such securities were issued and to distribute such portion in
order to maintain its qualification as a regulated investment company. In that
case, that 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.
Each 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) under-reports dividend
or interest income, or (3) fails to certify to the Fund that he or she is not
subject to such withholding. An individual's taxpayer identification number is
his or her Social Security number.
Information set forth in the Prospectuses and this 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 Funds. No attempt has been made to present a detailed
explanation of the Federal income tax treatment of the Funds or their
shareholders and this discussion is not intended as a substitute for careful tax
planning. Accordingly, potential purchasers of shares of the Fund are urged to
consult their tax advisers with specific reference to their own tax situation.
In addition, the tax discussion in the prospectuses and this Statement of
Additional Information is based on tax laws and regulations which are in effect
on the date of the prospectuses and this 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.
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<PAGE> 35
NATIONWIDE INVESTING FOUNDATION III
NATIONWIDE S&P 500 INDEX FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 23, 1997
ASSETS
Cash $100,000
--------
NET ASSETS $100,000
========
REPRESENTED BY;
Capital $100,000
--------
NET ASSETS $100,000
========
Shares outstanding (unlimited number
of shares authorized) 10,000
========
Net asset value per share $ 10.00
========
See accompanying notes to financial statements.
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<PAGE> 36
NATIONWIDE INVESTING FOUNDATION III
NATIONWIDE S&P 500 INDEX FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 23, 1997
1. ORGANIZATION
The Nationwide S&P 500 Index Fund (the "Fund") is a non-diversified portfolio of
Nationwide Investing Foundation III (the "Trust"). The Trust is an open-end
management investment company organized as a business trust under the laws of
the State of Ohio, by a Declaration of Trsut dated as of October 30, 1997. The
Trust offers nine separate portfolios or series, each with its own investment
objectives and each are registered under the Investment Company Act of 1940, as
amended. The accompanying financial statements relate only to the Nationwide
S&P 500 Index Fund. The Fund had no operations other than those actions relating
to organizational matters and the initial purchase of 10,000 units of beneficial
interest in the Fund. As of December 23, 1997, all outstanding shares of the
Fund are owned by Nationwide Advisory Services, Inc. (NAS), an Ohio corporation.
2. RELATED PARTY TRANSACTIONS
Nationwide Advisory Services, Inc., an affiliated company, serves as the Fund's
investment advisor. Under the terms of the Investment Advisory Agreement, NAS
oversees the investment of the assets for the Fund and supervises its daily
business affairs. As the Fund's adviser, NAS receives fees at an annual rate of
.13% of the Fund's average daily net assets.
The Dreyfus Corporation ("Dreyfus") serves as investment sub-advisor. For its
services, Dreyfus receives an annual fee from NAS in the following amounts:
.07% on average daily net assets up to $250 million
.06% on average daily net assets of $250 million up to $500 million
.05% on average daily net assets of $500 million up to $1 billion
.04% on average daily net assets of $1 billion and more
NAS also receives fees for distribution pursuant to a Rule 12b-1 distribution
Plan approved by the Board of Trustees. The Fund pays NAS an annual rate of .07%
of the Fund's average daily net assets, accrued daily and paid monthly. NAS will
use these fees for the distribution and marketing of the Fund.
Under the terms of the Fund Administration Agreement, NAS also provides various
administrative and accounting services. For these services, the fund pays NAS
based on the Fund's average daily net assets in the amount of .05% on assets up
to $1 billion and .04% on assets of $1 billion and more.
Nationwide Investors Services, Inc. (NISI) acts as transfer and dividend
disbursing agent for the funds. For these services, the Fund pays NISI at an
annual rate of .01% of the Fund's average daily net assets. NISI is a wholly
owned subsidiary of NAS.
Except as otherwise provided below, all fees and expenses incurred by a party in
connection with the Agreement and Plan of Reorganization will be paid by the
party directly incurring such costs. NAS will pay 50% of the costs associated
with the Reorganization. Each Acquiring Fund will bear its own organizational
costs.
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[KPMG PEAT MARWICK LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Shareholder and Trustees of
Nationwide Investing Foundation III:
We have audited the accompanying statement of assets and liabilities of the
Nationwide Investing Foundation III--Nationwide S&P 500 Index Fund (the Fund) as
of December 23, 1997. This financial statement is the responsibility of the
Fund's management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of the Fund as of December 23,
1997 in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
---------------------------------
KPMG Peat Marwick LLP
Columbus, Ohio
December 23, 1997
24
